Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Andres Viroslav – VP and Director, Corporate Communications

Scott Schaeffer – CEO

Jack Salmon – CFO and Treasurer

Analysts

Gabe Poggi – FBR

David Fick – Stifel Nicolaus

RAIT Financial Trust (RAS) Q4 2009 Earnings Call Transcript February 19, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 RAIT Financial Trust earnings conference call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr Andres Viroslav, Vice President and Director of Corporate Communications. You may proceed, sir.

Andres Viroslav

Thank you, Jasmine, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s fourth quarter and fiscal 2009 financial results. On the call with me today are Scott Schaeffer, Chef Executive Officer; and Jack Salmon, RAIT’s Chief Financial Officer.

This morning’s call is being webcast on our Web site at www.raitft.com. There will be a replay of the call available via webcast on our Web site 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 39100645.

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 from the material from what RAIT has projected. Such statements are made in good faith pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Please refer to RAIT’s press release and filings with the SEC for factors that could affect the accuracy of our expectations or cause our future results to differ materially from those expectations.

Participants may discuss non-GAAP financial measures in this call. A copy of RAIT’s press release containing financial information, other statistical information and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is attached to RAIT’s most recent current report on Form 8-K available at RAIT’s Web site 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 with respect to matters described herein, except as may be required by law.

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

Scott Schaeffer

Thank you very much, Andres, and thank all of you for joining us this morning as we present RAIT’s fourth quarter and fiscal 2009 results.

As the press release indicates, we have accomplished a lot during 2009, which was clearly a transition year for RAIT. That transition continues into 2010 as we continue to adapt our business to current economic conditions. We have provided a lot of information in the press release, however I would like to take a moment and go through some of the highlights.

During the year, we restructured the balance sheet by aggressively selling non-core portfolios. We sold our residential mortgage portfolio and we sold our equity in and deconsolidated (inaudible) securitizations, which removed risk from our balance sheet and volatility from our financial results.

Towards the end of 2009, we also began two new business initiatives, RAIT Securities LLC, which provides real estate related fixed income trading services to the market, and we launched RAIT Advisory, which offers the knowledge and expertise within our vertically integrated commercial real estate platform to holders and investors of commercial real estate related assets. Though in their infancy, both initiatives complement RAIT’s core commercial real estate focus. Looking forward, these businesses will take time to develop and we expect to see a meaningful contribution to our operating results later this year.

At the corporate level, we lowered our overheads and further reduced our outstanding recourse indebtedness. We have been executing on our strategy to build equity within the portfolio as we manage through the cycle. During 2009, we took back a number of properties to direct investment to real estate. At the end of the year, our investments in real estate totalled $738 million, which is broken down as follows

67% multi-family, 25% office, 5% retail and 3% other types of property. It is important to note that when we originally underwrote the loans against these properties, we understood and were comfortable with the reality of potentially owning them one day and we remain comfortable with our current valuations.

RAIT investment in Jupiter Communities, our multi-family property manager, a forward subsidiary building to manage our multi-family portfolio directly, which we believe is a key component to creating value. We are not looking to sell our properties given the current environment but instead we will continue to manage the portfolio to maintain ultimate flexibility until liquidity returns in both the equity and debt capital markets. In our experience, the first year after taking control of the property is typically a transition year. We are encouraged by recent leasing activity and resulting increase in the occupational level at our multi-family and office properties, which comprise 92% of our owned portfolio. The multi-family portfolio should also benefit once the government removes the incentives to the first time homebuyers and we will continue to actively manage and invest in this portfolio to maximise equity value over the long term for RAIT.

We are starting to see some positive developments in the commercial real estate lending market. Within our loan portfolio, we are seeing more loan repayments in the first quarter of 2010. Any such repayments will provide the capital necessary to take advantage of new, profitable commercial real estate lending opportunities at wider spreads and lower leverage. In addition, many of the larger banks are restarting their commercial loan securitization businesses, which will bring much needed liquidity to the commercial real estate market.

We will continue to manage through this challenging market, a market characterized by higher employment, a lack of liquidity, minimal capital market activities, and government intervention, which to this point has not helped the commercial real estate market. We remain patient and optimistic about the future. During 2010, we will use all available options and strategies towards the following goals

focusing our resources on building and managing portfolios of commercial real estate properties and loans, create value through investing in our own commercial real estate assets, and implementing portfolio wide cost saving programs such as green initiatives to help maximize property value over time. We will further reduce RAIT’s outstanding indebtedness, grow our business initiatives, and potentially invest in RAIT’s common equity through open market purchases previously authorized by RAIT force.

I believe the economy is now in a slowly shaped recovery however market factors including job growth and access to liquidity for commercial real estate will play a major role in the timing and speed of the recovery. The offer by signing (inaudible) properties to purchase CDP is certainly a positive sign and we all know that only real estate is a good hedge against inflation risks. Ultimately long-term success in commercial real estate lending and investment comes down to the same power [ph] and are continued ability to manage through the cycle. RAIT’s seasoned management team has seen and successfully managed through a number of success market and we will continue to manage through this one.

With that strategic overview of RAIT, I would like to turn the call over to Jack to go through the financial results.

Jack Salmon

Thanks Scott. I will review the financial results for the fourth quarter and for the year ended December 31, 2009.

Now as Scott has indicated, 2009 was a transitional year during which we converted $500 million of our commercial real estate loans into directly owned real estate. We sold off $3.6 billion of our residential mortgage-backed securities portfolio and we significantly reduced our convertible debt securities portfolio through dispositions and asset write-offs. These major transactions make it difficult to compare 2009 versus 2008 financial results since we disposed the underperforming asset portfolios during the first six months of the year while diversifying our revenue generated from our commercial real estate lending and our direct ownership of real estate and the incremental fee income activities I will describe.

Highlights of the key operating results for 2009 are as follows. Our total revenues for 2009 were $206 million of which 61% was derived from net interest margin, 26% was derived from rental income and 13% from free and other income. Now, in comparison, 84% of our 2008 total revenue was from net interest margin while only 77% was from rental income, and 9% was from free and other income. These changes reflect both our increasing direct ownership of commercial real estate and the disposition of the entire RMBS portfolio in the third quarter of 2009, and four of the TruPS portfolios at the end of the second quarter. As a result of these dispositions, we recorded $375 million of losses on sales of assets, which represents 85% of our net loss for the entire year.

If you notice 2009 mark-to-market adjustments for the change in fair values of financial instruments was $1.5 million. This is an improvement of over $550 million in comparison to 2008. This change demonstrates the reduced volatility in our remaining debt securities portfolios going forward. The total provision for loan losses in 2009 was $227 million. This was $54 million higher than in 2008. However, $97 million of this total was a provision that was non-recurring as it pertained to the sold-off RMBS portfolio. We also recorded a $46 million non-cash asset impairment charge during the second quarter, which was primarily related to our ownership interests in our two European securitizations.

Next, I will review our three primary investment portfolios. First, is our commercial real estate loan portfolio. End of December 31, 2009, 50% of our consolidated assets are in our commercial real estate loan portfolio, which has long-term (inaudible) non-recourse financing. We have $70 million of restricted cash in our two CRE securitizations, we had $32 million of the $70 million that is for future funding commitments. The balance $38 million represent net funding capacity, which together with expected loan repayments this year will provide capital to increase funding for new CRE loans. Both of our CRE loan securitizations are meeting all of their interest coverage and all the collateralization coverage requirements as in the most recent payment cycle. The most stringent OC test was at 118% versus a trigger of 116% in CRE 1, and 115% versus a trigger of 112% in CRE 2. The CRE loan portfolio continues to generate the core cash flows for our business.

Our second portfolio is our CRE-owned portfolio. There are $738 million of assets in the CRE-owned portfolio comprising 25% of our consolidated assets at year-end. During the fourth quarter, we converted five loans with an aggregate fair value of $97 million. For the whole year, we added 26 properties at an aggregate value of $400 million after applying $95 million against our CRE loan loss reserves. These assets generated rental income in 2009 of $53 million as compared to $19 million during 2008 from $15 [ph] million properties. It is important to know that the rental income represents a partial year since the properties were added during the year. Moreover, we acquired these properties from distressed sponsors, accordingly many of the properties will need time before reaching a level of stabilized operations. We finance this portfolio through a combination of $82 million of debt provided by financial institutions, and $629 million of debt in our internally owned CRE securitizations. Our total weighted average cost of financing this portfolio is 6.2%.

The third portfolio is our debt securities portfolio. The majority of our debt securities portfolio representing 25% of our consolidated assets is comprised of trusts and other debt securities owned by Taberna VIII and IX are two remaining owned debt securitizations. He $695 million of investments and the related non-recourse debt financing are both recorded under the fair value accounting methods. Included in our $10.1 billion of total assets under management are $6.6 billion of managed collaterals in nine non-owned debt securitization entities [ph]. So in total we received $14 million of collateral management fees from this portfolio during 2009.

I would like to spend a few minutes discussing major transactions and recent events. During December, we completed the public tender offer to exchange $34 million of our senior convertible debt for 8.1 million shares of our common stock, and $3.1 million of cash over an overall exchange ratio of 41% of the par value of the retired convertible debt. This exchange resulted in a $19 million gain upon cancellation of debt. For the year, we reduced the amount of convertible debt outstanding to $246 million, which will enable us to save $9.5 million of annual interest expense on a go-forward basis.

We completed agreements with our commercial banks to extend our $15 million of secured line of credit facilities into 2011. As of year-end, we have $24 million of recourse debt within one year and $420 million of total recourse debt outstanding. This compares to $55 million of short-term recourse debt and $517 million of total recourse debt outstanding as of 12/31/2008. Included in the $24 million of recourse debt coming due in 2010 is a $17 million first mortgage on an office setting which we fully expect to refinance and $6 million of normal principal amortization on a secured bank line of credit. And in 2011, $43 million of recourse debt is scheduled to mature.

During 2009, in addition to reduce the amount of convertible debt outstanding by $138 million, we repaid $27 million of other recourse indebtedness and we issued $43 million of new senior secured debt. We continued to repurchase other consolidated debt at significant discounts and in total we recorded $150 million of gains upon cancellation of debt during 2009. In 2010, we will seek other sources of debt and equity capital as we continue to deleverage our balance sheet. Our total debt-to-equity ratio was 3.0 at year-end as compared to a ratio of 5.4 last year. And as of December 31, 2009, I am happy to report we are in compliance with all of our debt covenants.

Turning to other information and key statistics we provided to you, the press release contains several key statistics indicative of our streamlined operations under these initiatives. Looking back over the last year, you will see that non-accrual CRE loans peeked at $246 million or 15.6% of our CRE loan portfolio in September 2009. At year-end, the non-accrual loans were $171 million representing 11.6% of the CRE loan portfolio. At current level of CRE loan loss reserves, $87 million at year end compared to $118 million at year end 2008 and (inaudible) reductions in the level of loan loss provisions which were $22.5 million for the most recent quarter as compared to $71.5 million for the fourth quarter of 2008 are encouraging indicators of our overall credit performance.

As a result of achieving all the above initiatives, we generated $0.24 of GAAP earnings per common share during the fourth quarter. Our first positive quarter of earnings is the credit pricing that severely impacted our financial results. All of this information will be more fully discussed in our Form 10-K, which we will be filing in the near future.

And with that, I would like to return the call to Scott.

Scott Schaeffer

Thank you Jack. Before opening the call up for questions, I would like to ask our shareholders to please be patient. We made good progress in repositioning the company for future growth in a commercial real estate market full of opportunity and believe the equity markets have not yet recognized these improvements in our stock price. The recovery process has been slow and I expect it will continue to be slow, yet until there are clear signs of a market recovery at and a more positive outlook for commercial real estate, the volatility and uncertainty will likely remain over the sector. I do expect us to manage through this cycle and I look forward to RAIT’s participation in the commercial real estate recovery.

Operator, it is okay to open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Gabe Poggi with FBR. You may proceed.

Gabe Poggi – FBR

Good morning guys, it is Gabe from FBR.

Scott Schaeffer

Good morning, Gabe.

Jack Salmon

Good morning, Gabe.

Gabe Poggi – FBR

Nice job, things seem to be more streamlined and stabilizing to a degree. I just wanted to get some general comments on what your thoughts are, you guys have mentioned the big lenders are beginning to ramp up securitization efforts, there is talk of potentially in 2Q, some conduits are small obviously but conduit CMBS getting done and more traction, just your general commentary on the CMBS market, you know CRE – what is kind of your outlook is going forward? And then Jack, I don’t know if you mentioned this or not, maybe I missed it, but do you have any details on the REO location wise, where that stuff is primarily located, if you can provide that, it will be great.

Scott Schaeffer

Gabe, this is Scott, to answer the first part of your question, following the diversified deal that was done last year, there seems to be significant activity in new securitization (inaudible). Everyone was encouraged by the fact that – besides these diversified, there were a number of other transaction that were done, and they were done without any government support or help which in the beginning was unexpected. But what it showed was that there was an appetite for the bond within these securitizations. So we have been in discussions with a number of the larger banks who are actually out originating loans to ramp up portfolios that they then can take through their CMBS pipeline. Most of these loans will be on the office and retail sectors because no one is going to be able to continue with the agencies while they are still funding multi-family loans.

Gabe Poggi – FBR

Right, okay that is helpful.

Jack Salmon

And Gabe, your question on the proposition of our real estate owned portfolio, as Scott said, 67% of the portfolio is in the multi-family sector, 25% is in office, and the rest is in other and retail. From a geographic breakdown, approximately 37% is in the Central region, 22% is in the South East, 36% is in the West coast, and the balance is spread across the country. We will be deriving a state price save analysis in our 10-K, so you will have more detail on the geographic location of each property owned.

Gabe Poggi – FBR

Great, thanks. Thanks very much.

Scott Schaeffer

Thank you.

Operator

Your next question comes from the line of David Fick with Stifel Nicolaus. You may proceed.

David Fick – Stifel Nicolaus

Good morning gentlemen.

Scott Schaeffer

Good morning David.

David Fick – Stifel Nicolaus

You have a financial market share for REM outstanding and yet you are now talking about share repurchases, I am sure that market volatility might change which of those you would exercise on any given day, but can you tell us how many shares you have issued so far this quarter under that new program?

Scott Schaeffer

David, the asset market program you described which we announced in January, we have not issued any shares yet to date, quarter to date on that program. It provides us the opportunity to do so over a two-year period.

David Fick – Stifel Nicolaus

Okay and can you just give us a little bit of your thought process on where you might think about buying back not dollar wise but sort of how you make that decision versus issuing?

Scott Schaeffer

I think it all relates David to the market price of the shares. We continue obviously to monitor it and as capital permits, we are looking at the best way to deploy it. We have been buying back our debt at significant discounts, we think that stock at the current levels is undervalued but the board has given us the authority to do it, and depending on where the future goes, we have that flexibility to make buybacks as needed or as desired.

David Fick – Stifel Nicolaus

Okay. Can you walk us through on where you stand with your CDO tests at this point, any triggers that are there?

Scott Schaeffer

David, I think you are referring mostly to our CRE CDOs?

David Fick – Stifel Nicolaus

Yes.

Jack Salmon

As you know, there are two types of tests that we have to monitor other than the tests that we look at every month, but the two key tests from a performance standpoint are the interest coverage test and the over-collateralization test. And our OC test is more significant and we have been able to maintain from inception both of our securitizations compliant with all levels of the OC test, all of these level of debt that we need to show coverage for. So we have about a dozen, a dozen and a half assets that are in the non-performing category in those two CDOs. The threshold for those tests are still being net even with our performance and if it is a home loan, it has one discount as the (inaudible) is virtually a period of a year for the purposes of both tests. So we continue to monitor it. I think our credit capability will raise up of keeping tabs on not only current performance but the near term outlook, and we keep a very careful look at these tests on a month-to-month basis.

David Fick – Stifel Nicolaus

Is there a limit within those CDOs as to how much actual real estate can reside there?

Jack Salmon

Not really, these are loan securitizations, the classification of assets typically is hyper-collateral, a percentage of this class versus – a multi-family versus retail and others, there is geographic limits that we have to comply with, there is fixed versus floating financial limits to the asset classes, as I said there are probably three dozen test but the two most significant from a performance standpoint are really the interest coverage and the over-collateralization requirements.

David Fick – Stifel Nicolaus

Okay and then lastly, what is the coupon on the secured facilities that were extended and are there any amortization requirements or other cash flow factors we should know about?

Jack Salmon

On one facility there is principal amortization, on the other two there are not and the weighted average coupon is in the 4 to 5, 5.5% range on all three.

David Fick – Stifel Nicolaus

And what should we assume about the amortization requirement in terms of your use of funds?

Jack Salmon

As I mentioned, there are $6 million of principal amortization scheduled for 2010 on those securities, on those security-backed bonds and all three lines have been extended into 2011 for the principal maturities.

David Fick – Stifel Nicolaus

Okay, great, thank you. Good to hear you back on all sense of the business.

Jack Salmon

Thanks David.

Scott Schaeffer

Thanks David.

Operator

At this time, there are no further questions, I would like to turn the call to Mr Scott Schaeffer. You may proceed.

Scott Schaeffer

Thank you for joining us today. We look forward to speaking with you to report our first quarter results in the coming months. Thanks.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for attending, you may now disconnect. Have a great day.

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

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

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

Source: RAIT Financial Trust Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts