RAIT Financial Trust Q1 2010 Earnings Call Transcript

| About: RAIT Financial (RAS)

RAIT Financial Trust (NYSE:RAS)

Q1 2010 Earnings Call

April 29, 2010 10:00 AM ET


Andres Viroslav – Vice President, Director, Corporate Communications

Scott Schaeffer – Chief Executive Officer

Jack Salmon – Chief Financial Officer.


Gabe Poggi – FBR Capital Markets


Good day, ladies and gentlemen. And welcome to the First Quarter 2010 RAIT Financial Trust Earnings Conference Call. My name is Christie, and I’ll be your coordinator for today. At this time, all participants are in 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 hand the call over to your host for today, Mr. Andres Viroslav, Vice President, Director of Corporate Communications. Sir, please proceed.

Andres Viroslav

Thank you, Christie, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s first quarter 2010 financial results. On the call with me today are Scott Schaeffer, Chief Executive Officer; and Jack Salmon, RAIT’s Chief Financial Officer.

This morning’s call is being webcast on our website at www.raitft.com. There will be a replay of the call available via webcast on our website and telephonically beginning at approximately 1 PM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 93479995.

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 views 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 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 measure 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’d 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 first quarter 2010 results. RAIT generated $0.41 per share in GAAP earnings for the quarter, our second consecutive quarter of positive earnings. Jack will detail the financial results for our quarter shortly.

RAIT’s progress continues as we further adapt our business to the current market environment while taking the necessary steps to return to our core competency, commercial real estate lending. The success of this strategy for us as for others is in our ability to access capital for lending. We’re currently pursuing joint ventures and other strategies to enable this business to go forward.

On a corporate level, I’m pleased with the progress we’ve made since the beginning of the year. During the first quarter, we continued the deleveraging process by exchanging $55 million of senior convertible notes at a discount for a combination of cash, equity and new senior secured notes.

These exchange transactions, which decreased recourse indebtedness, reduced interest costs and extended maturities are a long-term positive for our shareholders. When analyzed together the transactions were accretive to book value. We expect to continue the deleveraging process throughout 2010.

Subsequent to quarter end, we announced the sale of our collateral management rights on eight unconsolidated Taberna securitizations to an affiliate of Fortress Investment Group for approximately $16.5 million.

In addition, RAIT will realize ongoing cost savings resulting from a reduction in associated expenses. We continue to manage approximately $4.1 billion of assets after this transaction.

During the quarter, we took back six properties, which served as collateral for our loan. As a reminder, we chose this strategy because of our experience and capabilities to effectively manage the transition of these assets in order to create value for RAIT overtime. We actively manage these properties through our in-house asset and property management team, which provides RAIT with flexibility as we continue various value creating strategies.

Our portfolio of directly held commercial real estate assets totaled $796 million at March 31, 2010. Before I turn the call over to Jack, I’d like to make some brief comments on our capabilities in the market.

Today, RAIT has a commercial real estate lending platform capable of sourcing, underwriting, closing, asset managing and servicing loans for our account and for others. RAIT has committed revolving low-cost capital in its two commercial real estate securitizations, which provide capital for RAIT to re-lend as repayments occur. RAIT is also actively pursuing new third-party sources of capital for investing. We continue to see opportunities to originate loans into the strengthening commercial real estate market at wider spreads and lower leverage.

With this, I’d like to turn the call over to Jack to go through our financial results. Jack?

Jack Salmon

Thanks, Scott. The financial results and highlights for the quarter ended March 31st include the following. The $55 million reduction on our convertible debt outstanding, compared to year end 2009.

GAAP earnings per share on a diluted basis from continuing operations of $31.2 million or $0.41 per share, as compared to the fourth quarter 2009 earnings of $0.24 per share and a loss of $2.22 per share in the first quarter of 2009. And third, the quarter-over-quarter increases in rental income and fee and other income, which I’ll discuss briefly.

These results reflect our ongoing efforts to deleverage the balance sheet to diversify our revenue generated from our core CRE lending and direct ownership of real estate and to implement cost savings.

I’ll now review some of the key trends. Total revenue was $45.1 million, of which 39% was derived from net interest margin, 41% was derived from rental income and 20% from fee and other income.

The total revenue increased 4%, as compared to the fourth quarter of 2009. Rental income increases reflect quarter-over-quarter increases in occupancy of 3% in the multifamily, 1% in office and 2% in retail owned assets.

During the quarter, we converted four multifamily loans with an unpaid principal balance of $52 million into directly owned investments in real estate. We also recorded a provision for loan losses of $17.3 million during the quarter, as compared to $61.6 million in the same quarter of 2009, and $22.5 million in the last quarter of 2009.

A reference is made to the trend data included in our press release filed today. These improving trends reflect reduction in non-performing loans from $177 million at March 31, 2009, to $133 million at March 31, 2010, which represents approximately 9% of the outstanding unpaid balance.

Our allowance for loan losses of $76.8 million at March 31, 2010, represents approximately 58% of the non-performing loans balance totally outstanding.

On our debt portfolio, the fair value mark-to-market adjustment was $15.4 million favorable, representing estimated improvements in the credit risk of the underlying assets and slight changes in the pricing related non-recourse debt of related interest rate hedges.

Now I’ll review our three primary investment portfolios. Our first portfolio is our commercial real estate loan portfolio, in that 45% of our consolidated assets are included in that portfolio, which features long-term, match-funded, non-recourse financing.

At quarter end, we had $73 million of restricted cash in our two CRE securitizations, of which $34 million is dedicated for future funding commitments. The $39 million of net funding capacity together with our expected loan repayments will provide capital to fund new CRE loans in these transactions.

During the first quarter, we saw an increase in loan repayments totaling $25 million, an encouraging sign of some liquidity returning to the CRE sector in our borrower universe. Both of our CRE loan securitizations are meeting all of their interest coverage and over collaboration tests as of the most recent payment cycle.

The most stringent OC test was at 120% versus a trigger of 116% in CRE1 and 115% versus a trigger of 112% in CRE2. We continue to focus on monitoring and enhancing the performance of these structures.

Our second portfolio is our commercial real estate owned portfolio. This has $796 million of assets, representing 26% of our consolidated assets. The owned portfolio asset categories include 67% multifamily assets, 26% in office and 7% retail and other types of real estate. The owned assets generated rental income of $18.5 million, as compared to $15.6 million during the fourth quarter of 2009, a 19% increase quarter-over-quarter.

Since we acquired most of these properties through distressed sponsors, we believe that many of the properties will need time before reaching a level of stabilized operations. We financed this portfolio through a combination of $98 million of debt provided by financial institutions and $688 million of debt provided by our CRE securitizations.

The total weighted average cost of financing this portfolio is approximately 6%. We will continue to seek ways to upgrade operating performance, refinance the debt and generate shareholder returns from this portfolio.

Our third investment portfolio is our debt securities portfolio. The majority of the debt securities portfolio, representing 21% of our consolidated assets, is comprised of trusts and other debt securities owned by Taberna VIII and Taberna IX, our two remaining debt securitizations. There are $650 million of investments and related non-recourse debt financing, both of which are reported with a fair value accounting method.

Now, as a reminder, RAIT holds all the equity and some of the debt securities need two debt securitizations. Currently, most of the quarterly cash flows are being applied to pay down the most senior rated debt tranches and RAIT receives only the senior portion of our collateral management fees.

Given the current credit performance of the underlying issuers, it is uncertain when the cash flows will be sufficient to pay other levels of the capital structure, including RAIT ventures.

I’d now like to comment briefly on major transactions and events that have occurred recently. During March, we completed two private transactions for a total of $55 million of our senior convertible debt, which was in exchange for 3.2 million shares of common stock, $22 million of a new senior secured debt instrument, which is due in 2014, and $6.9 million of cash, equating to effective exchange ratios ranging from 56% to 66% of the par value of the convertible debt at surrender. These exchanges resulted in a gain on debt extinguishment of $18.4 million during the quarter.

As of March 31st, we have reduced the amount of convertible debt outstanding to $191 million, which will enable us to save $1.5 million of net annual interest expense going forward, compared to the run rate of interest expense at the end of 2009.

We continue to work with our commercial bank lenders to extend our secured line of credit facilities further into 2011 and beyond. Currently, we have $10.9 million of recourse debt due within one year and $372 million of total recourse debt outstanding, including the convertible debt.

We recently refinanced an office building that had $17.5 million of recourse debt maturing in April 2010, with $15 million of it amortizing first mortgage payable in April 2012.

We believe that these steps provide a window of opportunity to reduce our other debt obligations over the next 18 months. 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 2.8 times at quarter end, compared to a ratio of 6 times at March 31, 2009, leading to significant interest cost savings on an annual basis. As of March 31, 2010, we’re in compliance with all of our debt covenants.

As of March 31, 2010, assets under management included $6.5 billion of collateral managed in unconsolidated debt securitization entities. The April 22nd transaction with Fortress related to management contracts on $5.9 billion of assets under management.

We received $2.7 million of collateral management fee income during -- from these contracts during the first quarter. And we’re in the process of transferring the day-to-day activities associated with managing these assets and reducing the related G&A costs. We will use the net proceeds, representing approximately 24 months of future fee income, to reinvest in our core CRE business, to reduce our debt for general corporate purposes.

As a REIT, we’re required to make distributions of at least 90% of our annual REIT taxable income. For the first quarter, we are reporting an estimated REIT taxable loss of approximately $3 million. There can be no assurance that this estimate will be typical of the results expected for the full year.

The Board of Trustees has declared preferred dividends for the second quarter to be paid on June 30, 2010. As previously discussed, the board will assess whether any common dividend is warranted once it can determine whether we will have REIT taxable income for the full year.

So as a result of achieving all of the above initiatives, we generated $0.41 of GAAP earnings per common share during the quarter, our second consecutive positive quarter of earnings. We’re encouraged by these results. We expect to continue to reduce our debt exposures throughout 2010, so we can invest capital into new asset origination activities.

To accomplish these objectives, we will continue to seek new sources of capital while reducing our indebtedness through exchanges, repayments, refinancing, asset sales and other strategic action steps.

With that, I return the call back over to Scott.

Scott Schaeffer

Thank you, Jack. Christie, let’s open the call for questions at this time.

Question-and-Answer Session


(Operator Instructions) And your first question comes from Mr. Gabe Poggi of FBR Capital Markets. Sir, please proceed.

Gabe Poggi – FBR Capital Markets

Good morning, guys.

Scott Schaeffer

Hi, Gabe.

Gabe Poggi – FBR Capital Markets

Couple questions. On the CRE portfolio, your two CDOs, the two REIT CDOs starts to earn, what’s the cash flow coming off of those right now? Do you have a free cash number coming from those two CDOs?

Scott Schaeffer

Are you talking on an annualized basis, Gabe?

Gabe Poggi – FBR Capital Markets

Yeah. Sure. Just, yeah, ballpark annualized as of 1Q.

Scott Schaeffer

Yeah. Well, it’s roughly $9 million a quarter.

Gabe Poggi – FBR Capital Markets

Okay. That works. And then was there any book value impact from the Taberna, Fortress transaction?

Scott Schaeffer

Well, the transaction just closed last week. We would expect to report a gain from the transaction, which will be disclosed in the quarter 10-Q filing next week.

Gabe Poggi – FBR Capital Markets

Okay. And then on the second portfolio, the REO portfolio, the real estate owned, when do you guys expect, you said, you’re going to make progress in getting that up to a level that you, sustainable level. When do you think you can get to that breakeven level or when do you think that you’ll get stability there? Do you have a timeline, obviously, it’s a grind in CRE, but just kind of internally, what are you guys hoping, projecting for on that portfolio?

Scott Schaeffer

Well, the portfolio continues to perform better every quarter, Gabe. Jack reported that and I’ll focus on the multifamily because it’s the largest.

Gabe Poggi – FBR Capital Markets


Scott Schaeffer

Talking about portfolio but the same property, occupancy quarter-over-quarter increased, I think a little in excess of 3%, and that trend is continuing into the second quarter. We’re constantly looking at it and considering our options on how to create value for REIT and for REIT CDOs through that portfolio.

And, as far as, it being at stabilization or getting to stabilization, many of the properties are stabilized. Some that we have taken more recently are in the process of being stabilized. We are working towards stabilization. So it’s really hard to say, discuss, I should say, the portfolio as a whole.

Gabe Poggi – FBR Capital Markets

Got you. Okay. And then last question is, regarding the exchanges, is there a -- it’s kind of a one-off question. Is there a time table when you’d like to get more of that done as compared to, I mean, obviously you have time. You’ve been successful in getting stuff done and clearly, I assume, you’d like to get all of that recourse debt off the books. But is there a time period where you’d be more aggressive, are you going to be more aggressive in 2010 relatively speaking?

Scott Schaeffer

Well, again, it’s not just up to us. The convert holders have to want to either accept the payment or exchange offered and we’re looking at it opportunistically for the company. We are considering our cash position. We’re considering our stock price, which is an equity exchange?

Gabe Poggi – FBR Capital Markets


Scott Schaeffer

And of course, we’d like to have it all gone.

Gabe Poggi – FBR Capital Markets


Scott Schaeffer

You know, over the last year, I think we’ve reduced it from an excess of $400 million down to about $190 million.

Gabe Poggi – FBR Capital Markets


Scott Schaeffer

Made great progress and we expect to make more progress for the remainder of the year.

Gabe Poggi – FBR Capital Markets

Great. Thanks a lot, guys.

Scott Schaeffer

Thanks, Gabe.


There are no other questions at this time. This concludes today’s question-and-answer session. Mr. Scott Schaeffer, please proceed with closing remarks.

Scott Schaeffer

Well, thank you for joining us this morning. And we look forward to speaking with you again when we report our second quarter results. Thanks.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a good day.

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