Resource Capital Corp. (NYSE:RSO)
Q4 2009 Earnings Call
March 3, 2010 8:30 am ET
Jonathan Cohen - President and CEO
David Bloom - Senior Vice President Real Estate
David Bryant - Chief Financial Officer
Purvi Kamdar - Director of Investor Relations
Steve Delaney – JMP Securities
Gabe Poggi – FBR
(Operator Instructions) Welcome to the Fourth Quarter 2009 Resource Capital Corp. Earnings Conference Call. I would now like to turn presentation over to your host for today’s call, Mr. Jonathan Cohen, President and CEO of Resource Capital Corp.
Thank you for joining the Resource Capital Corp. conference call for the fourth quarter and fiscal year end 2009. I am 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.
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 could 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 filed with the SEC, including its reports on Forms 8-K, 10-Q and 10-K, and in particular, Item 1 on the Form 10-K report under 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.
With that, I will turn it back to Jonathan.
First a few highlights, net operating income for the three months and year ended December 31, 2009, was $9.2 million or $0.32 per share diluted and $36.1 million or $1.42 per share diluted respectively as compared to $11 million or $0.44 per share diluted and $42.3 million or $1.71 per share diluted for the three months and year ended December 31, 2008, respectively.
We announced a dividend of $0.25 per common share for the quarter ended December 31, 2009, or $9.2 million in aggregate paid on January 26, 2010, to stockholders of record as of December 31, 2009. Our economic book value, a non-GAAP measure was $7.91 per common share as of December 31, 2009. GAAP book value was $6.26 per common share as of December 31, 2009.
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, and David Bryant, our Chief Financial Office, as well as Purvi Kamdar, our Director of Investor Relations.
We are very pleased with where we ended 2009, unlike most or all other financial REITs certainly our star competitors and comparables, we not only survived 2009 but delivered good value in our opinion to our shareholders. We paid a cash dividend of $1.15 per share and we also conservatively positioned our balance sheet by first, paying down all our short term debt, second, raising equity and de-leveraging our balance sheet and third, stockpiling cash both on an unrestricted basis as well as within our managed securitizations.
We ended the year with over $228 million of book value, no short term debt, all five of our securitizations in compliance on all significant terms, free cash of $52 million, good long term liabilities of $1.5 billion at a blended rate of 1%, yes 1%, and a full team in tact to exploit the opportunities generated by the great credit crisis. We see opportunities in commercial real estate but right now our focused mostly on de-leveraging and buying ourselves ultimate gains as values eventually return in our portfolio.
Now let’s discuss our buyback program and de-leveraging. We bought over $55.5 million of notes in 2009 at a blended discount to par of 80%, in other words, for $0.20 on the dollar. Including the repurchase in the fourth quarter with the use of some of the net proceeds from our $43 million offering in December, subsequent to offering we bought $33.5 million of bonds at a 74% discount to par or $0.26 on the dollar. In the first quarter, in addition, we have already purchased an additional $20 million of bonds bringing it to $53.5 million after the offering, and are seeking to add another $40 to $60 million before our next call.
While the stock offering and the impairment of CMBS and loan loss reserves did diminish book value somewhat mostly due to dilution, we are now poised to grow book value as well as to deliver the $1.00 dividend per share that we have projected for 2010. We have over $60 million of discount that will accrete into book value over the next few years due to the purchase of discounted and distressed at the time, CMBS mostly AAA and bank loans. This figure, by the way, is not included in our economic book value.
In addition, as the corporate loan world continues to heal, we may determine that we are over reserved for losses on our bank loan portfolio where we feel we have been very conservative. Our leveraged loan assets, or our bank loan assets, improved markedly, moving from an approximately $79 weighted average price at June 30, 2009, to $90 at December 31, 2009.
We continue to see price appreciation this quarter as the portfolio has moved to an approximate value of $800 million. This improvement has led to our ability to increase our cushion to our over-collateralization test as well as upgrade tremendously, in my opinion, the quality of our loan book. This in turn helps us keep the cash flow machine going.
As for real estate, the market is truly one for the history books. We are seeing the cycle play out while in 2009 we saw borrowers that were tired and very downbeat. We now see borrowers who see some; yes I say some, light at the end of the tunnel. If lenders are willing to work with them, want to hold on to their properties. They no longer seem to think they are catching a falling knife. Properties are still hard to value but shorter term operating properties like hotel and multi-family seem to us, at least, to be starting to stabilize.
While the property in CMBS markets do seem to be improving, we did take impairments and reserves totaling $23 million, we took a $7.9 million reserve against the residual of a portfolio in San Francisco that has been substantially liquidated, and added $5.6 million to our general reserves. We also took impairments on CMBS bonds that were bought in 2007 and had ratings below investment grade and are in payment default at this time.
Now I will ask Dave Bloom to comment on the real estate side of our business.
RCCs commercial mortgage portfolio has a current committed balance of approximately $725 million across a granular pool of 43 separate loans. Our portfolio of commercial mortgage positions is in components as follows: 64% whole loans, 25% mezzanine loans, 11% B-notes. The collateral base underlying the portfolio continues to be spread across the major asset categories and geographically diverse markets, with a portfolio breakdown of 26% multi-family, 24% office, 31% hotel, 12% retail, and 7% other such as flex office, industrial or self-storage.
As of December 31, we continue to have one $7 million multi-family loan comprised of three buildings that is involved in a contested foreclosure process. However, in recent weeks, we have reached a settlement with the borrower that will give us title to two buildings and a payoff on the third for $2.5 million. The settlement is currently being documented and we remain confident about the ultimate recovery of principal in this situation because even the distressed valuation of the assets exceeds our outstanding loan balance.
In addition to the one loan in foreclosure, as of January, we have a $10.5 million mezzanine loan that went into default and has not paid principal and interest when due. We have access to current appraisals for the property securing the loan which shows our loan bases to be well below the value of the properties. We are in discussions with the borrower, other mezzanine participants, and the special servicer to resolve this situation. All parties are aligned in the efforts to bring the loan current. With the exception of the loans I have highlighted, our portfolio of commercial real estate loans continue to be current.
Despite the low level of delinquencies in our portfolio we remain extremely concerned about market fundamentals in general, as commercial real estate tends to lag behind other sectors of the economy and the impact of the weak economy on our portfolio may yet to have been fully realized. As you’ve repeatedly heard from me on previous calls, during this period of lower transaction volumes, our primary efforts have been focused on asset management activities.
We continue to have borrowers who are delayed in the business plans for their properties and in addition we have borrowers who have completed business plans but have come under pressure and since lost tenants. In order to effectuate the lease up or repositioning of assets we have worked with borrowers and made modifications to their loans to carry them through this period. In exchange for modifications, we are receiving principal pay downs, fresh equity contributions, additional exit fees and other structural enhancements to the loans.
In the instances where we have seen borrowers missing targets, we have been proactive in our approach and have worked with borrowers to understand and address issues facing their asset plans. We remain willing to work with borrowers who continue to demonstrate a commitment to their properties and are in need of assistance as a result of delays or other property issues brought on by broader economic conditions.
In instances where borrowers don’t meet extension or future advance services, but are able to demonstrate that their assets specifics plans remain viable we continue to do what we can to make accommodations that allow the borrowers to pursue the completion of their business plans. That said, we require evidence of a borrowers contingent commitment and the best evidence in this regard is a fresh equity infusion to the property by the borrower.
As I’ve mentioned, relief from extension hurdles or covenants are accompanied by structural enhancements to the loans such as elements of recourse or tighter cash management protocols as well as increased spread and additional or increased extension and exit fees. We’ve modified a number of loans across the portfolio and in every instance our goal was to work with the borrower to provide adequate time to see their business plan through and reach a capital event that will payoff our loan, which in the majority of the cases is a sale.
The senior members of the RCC commercial market’s team have continued with multiple in-person meetings with borrowers and property tours which allow us ample opportunity to get out in front of anything that might be burdening a loan position. We continue to face unique and very challenging market but we remain fully engaged and continue to benefit from a deep bench of experienced real estate professionals we push forward through continued choppy markets.
Despite tough market conditions, we are working through issues well in advance and we are doing the best job we can in actively and aggressively managing our portfolio. As I’ve noted before, the majority of our borrowers are IRR driven investors who look to sell properties when they are done with their value add plans. When property business plans are complete, many borrowers are likely to sell at a market price rather than hold out for the last possible dollar.
The real estate debt markets are beginning to thaw and we have been both sale and financing activity picking up. Since many of the asset specific business plans have been implemented by our borrowers and their plans for value creation have been realized, as transaction volumes continue to pick up we anticipate payoffs across the portfolio.
With that I’ll turn it back to Jonathan and then rejoin for Q&A at the end of the call.
I will now give you some statistics on our corporate bank loan portfolio. We have $800 million of bank loans encompassing over 30 industries. Our top industries are healthcare, diversified, broadcasting and entertainment, chemicals, and printing and publishing. As of the end of December our average loan asset yields 2.64% over Libor and our liabilities are costing us 47 basis points. We have been able to buy loans at a substantial discount over the last several months although this discount is slowly going away.
Now I will ask Dave Bryant, our Chief Financial Officer to walk us through the financials.
Our estimated REIT taxable income for the fourth quarter 2009 was $9.7 million or $0.34 per common share. Our Board declared a dividend for the fourth quarter including the December 2009 offering shares of $0.25 per common share for a total of $9.2 million. This brings our full year results to $31.5 million of REIT taxable income or $1.23 on the weighted average number of common shares outstanding. We paid all of our REIT income in cash dividends.
At December 31, 2009, Recourse Capital’s investment portfolio was financed with approximately $1.5 billion of total indebtedness that included $1.5 billion of CDO senior notes and $51.5 million sourced from our unsecured junior subordinated diventures related to our two TRUPs issuances in 2006. We ended the period with $228.8 million in bulk equity. RCCs borrowings of $1.5 billion had a weighted average interest rate of 1.02% at December 31, a reflection of extremely low Libor in today’s market.
After paying off our three year term facility in full during 2009, and consistent with our stated philosophy of maximizing match funding, our investment portfolio is now completed match funded by long term borrowings, thus we have no short term debt.
Of note, we continue to pass all of our critical interest coverage and over-collateralization tests in our two real estate CDOs and three bank loan CLOs. Each of the structures continued to perform and generated stable cash flow to our RCC in 2009. The commercial real estate CDOs produced over $33.7 million and bank loan CLOs generated over $20.5 million of cash flow in 2009 respectively to the REIT.
Of note, as of February 28th we have in excess of $80 million in investable cash comprised of $32 million and $48 million in our bank and loan and real estate deals respectively. This cash is available for reinvestment in our CLOs and CDOs to build collateral and strengthen our positions in each structure.
As an example, during the year ended December 31, we bought investment grade CMBS of $51.7 million at par for a weighted average price of $52.56, the resulting discount of $24.5 million improved the collateralization in our real estate CDOs and these CMBS purchases provided a cash on cash yield of approximately 10.7%.
We consider leverage ratio from two positions, as Jon noted earlier, economic book value after adjusting for unrealized losses and our CMBS portfolio and unrealized losses in our cash flow hedges is $7.91 per common share at December 31. Our leveraged based on our economic book value is 5.3 times. When we consider our TRUPs issuances which have a remaining term of 27 years as equity we see our leverage drop to 4.4 times.
Focusing on real estate, we began the year 3.4 times levered on our CRE CDOs and after giving effect to the debt repurchases of 2009 we ended the year 2.3 times levered. After taking into account the 2010 bonds purchased as noted in Jon’s remarks, we see our real estate leverage drop down to 2.1 times in the first quarter of 2010. We’re well on our way to reducing the real estate leverage to the 1.7 times target as projected in our December 2009 offering road show.
Our GAAP book value per common share was $6.26 at December 31, as compared to $6.80 at September 30, 2009. This fourth quarter decrease in GAAP book value of $0.54 is primarily due to the dilution from our common stock offering in the December 2009 offering of 10 million shares. All set by improvements in mark to market adjustments reflected in other comprehensive income and undistributed net income. To wit, the new stock dilution cost us approximately $0.78 per share, improvements in other comprehensive income were $0.16 per share and net income less the dividend was another $0.08 a share improvement to arrive at the net change of $0.54 per share.
At December 31, 2009, our equity is allocated as follows:
Commercial real estate loans and CMBS - 76.5%
Commercial bank loans - 23.2%
Direct financing leases and notes - 0.3%
Diving into the detail, here’s a recap of our sources and uses of funds for 2009. We sourced and used approximately $300 million for the 12 months ended December 31. Our major categories of sources include:
Repayments on and disposal of our leasing portfolio - $100.4 million
Net loan repayments - $57 million
Gains on extinguishment of debt - $44.5 million
Stock offering proceeds - $43.4 million
Net operating income - $36.1 million
Dividend reinvestment plan proceeds - $9 million
Working capital - $6.6 million
Margin collateral returned - $3.1 million
Total sources $300.1 million
Our major uses during the 12 months were:
Payments on and transfer of our secured term facility
related to our leasing portfolio - $95.7 million
Net reduction in our borrowings - $71.6 million
Increase to unrestricted cash - $37.4 million
Dividends paid - $31.8 million
CDO reinvestment - $27.9 million
Purchase of new CMBS - $15.3 million
Asset impairments - $13.4 million
Repurchase of common stock early in 2009 - $5 million
Investment in our real estate joint venture - $2 million
Total uses $300.1 million
With that, my prepared remarks are completed and I turn the call back to Jon Cohen.
Just one correction before we go on, when I was speaking about corporate bank loan portfolio, I just want to give actual statistics, I said $800 million I meant we have about $827 million of market value, $896 million of amortized costs. I wanted to clarify that.
Thanks to the two Dave’s and Purvi. As I said last quarter, management’s recommendation is that unlike other REITs which have paid out stock as part of their dividends, we pay our dividend in cash. We are committed to earning and paying the $1.00 dividend as projected in 2010. With that I think we’re going to continue to build cash, position ourselves defensively to protect our book value but also try to grow our book value through de-leveraging. Certainly try to maintain and grow our cash flow.
I want to thank everybody for participating in the call. Now I will open the call up to any questions.
(Operator Instructions) Your first question comes from Steve Delaney – JMP Securities
Steve Delaney – JMP Securities
I had a question about the cash position which ties to your last remark, Jonathan. You were at $52 million at the end of the year and of course the dividend that you paid, the $0.25 would take a little over $9 million off of that. That leaves us at $43 million post dividend. In the release you’re indicating that as of February 28 you were carrying $29 million of cash. I’m just curious is there anything you could say, let’s just talk about now the difference between the $43 million and the $29 million of about $14 million. Can we assume that you have been able to continue to find CDO debt to acquire as you did in the fourth quarter when you invested a little over $8 million?
We have been able to find bonds in the first quarter as well, which I said we bought $20 million of bonds already. We bought $20 million and we’re targeting $40 to $60 million before the next call.
Steve Delaney – JMP Securities
The $20 million was actually your cost basis or the face?
That’s the face; I’m being subtly ambiguous here because I’m still buying in that class I don’t want to talk about. We’re very, very pleased. I also want to mention that the bonds that we’ve been buying, for the most part are off the capital structure from AAA down to A for the most part. We feel like we’re getting a nice position on the top of the capital stack.
Steve Delaney – JMP Securities
Your ultimate goal then $20 million and you think you have another $40 million to go you said?
We bought today $55 million including the $20 million that we bought this quarter. Its $33 million plus $20 million after.
It was $33 million in the quarter, $55 million total for 2009.
We bought another $20 million, about $53, $54 million we have about another $60 million that we’re targeting before the next $40 to $60 million before the next call. Then we’ll continue, we think we’ll bring that up another $20 or $30 million. We want to take our time and be smart about it. We have a broader strategy around managing our securitized vehicles that we’re pretty excited about but it takes a little bit more patience.
Steve Delaney – JMP Securities
I want to reconcile, you gave us a summary of two impaired or problem commercial real estate assets, the two loans totaling $17.5 million. I’m looking at the table on the loan loss reserve on page 12 of the press release and it’s showing total impaired loans and leases of approximately $90 million. Can you tell me about of that $90 million how much of that is CRE loans versus bank loans? I’m trying to reconcile your $17.5 million that you cited.
The $7 million is something that defaulted quarters ago that we’re now coming to a conclusion on a negotiated settlement there; we’ll actually get back probably all of the $7 million. The defaulted loan that he talked about $10 million is the same thing they just defaulted but we’re in negotiations and we’re well covered in value. We don’t expect to have a loss from that $10 million.
The total for the bank loans in that number is about $12.7 million. The real estate is made up of two loans, the one $7 million position that Dave spoke about which is being worked out and about $66.8 million in a multi-family position that we really reserved heavily for in 2009 and then restructured and modified the loan in early 2010. It’s sort of gone from Dave’s mind because now the balance of that loan is fully supportable by the property cash flow. The rest of that number is about $2.6 million in our legacy leasing portfolio.
Steve Delaney – JMP Securities
It’s fair to say of your 43 commercial real estate loans internal you’ve only currently only have two of those 43 loans classified as impaired and subject to specific reserve, is that accurate?
Correct, and one of those happened in 2010 for which Dave mentioned he has the appraisal showing us money good.
This gets very detailed. If you’d like to go into more detail just give Dave Bryant or Dave Bloom or myself a call.
Your next question comes from Gabe Poggi – FBR
Gabe Poggi – FBR
I don’t know if you guys are willing to talk about this or give a number, but can you provide some semblance of where you think book value may shake out at the end of the quarter including the $20 million of purchases you guys have already made? Additional purchases you said by the 1Q10 conference call do you think that $40 to $60 million will be in the first quarter or second quarter, just more timing as that $40 to $60 million purchases.
We’re probably uncomfortable guessing where book value will be so that’s a difficult one; we haven’t planned to talk about that, a lot of moving parts. We’re buying these at substantial discounts and we’re pretty excited about where we’re finding value here on the $20 million. As far as the $40 to $60 million, as I said, it by the next call which would probably mean that some of it will fall, a good amount will fall into March quarter and then some into the April/May timetable.
Gabe Poggi – FBR
How’s the purchase process been, obviously without saying too much because of who’s listening, have you been able to define what you were looking for?
I would say that since we went out and did a public offering we probably pushed prices up a little bit just by doing that. We probably just generally CMBS has moved up considerably. We found things, as you can see from our stated purchases already, which by the way we’re higher up in the capital structure for the most part. We’re finding really, really good value and we’re really excited about it. We have strategies around what we’re doing and that we think are pretty good strategies that we’re taking our time to find the right bonds. It’s not as though I couldn’t go out and build book value by buying bonds.
Gabe Poggi – FBR
Can you give a refresher in the CRE book loan maturities you have coming this year? I think you had four or five that you guys had already worked to extend and what the 2011 maturities look like?
We do have maturities coming in 2010; we have worked to extend all but one which we’re in the process of now. 2011 it’s a little bit early to stark, people are just now.
We’ve got to deal with 2010 first.
I’ll say that we’re looking to hit that one more in 2010 as far as the extension goes.
At this moment I’m showing there are no questions in queue.
We want to thank everybody, our long term shareholders as well as some of the new people who entrusted us with their capital. Thank you and we will speak with you in a few months.
Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect.
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