Andres Viroslav - Managing Director of Corporate Communications
Scott Schaeffer - CEO
Jim Sebra - CFO
Jason Stewart - Compass Point
RAIT Financial Trust (RAS) Q4 2013 Earnings Conference Call February 20, 2014 9:00 AM ET
Good day, ladies and gentlemen, and welcome to the Q4 2013 RAIT Financial Trust earnings conference call. My name is Glenn 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, Managing Director, Corporate Communications; please proceed sir.
Thank you, Glenn, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust's fourth quarter and fiscal 2013 financial results. On the call with me today are Scott Schaeffer, Chief Executive Officer; and Jim Sebra, RAIT's Chief Financial Officer.
This morning's call is being webcast on our website at www.raitft.com. There will a replay of 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 98992922.
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 maybe required by the law.
Now, I'd like to turn the call over to RAIT's Chief Executive Officer, Scott Schaeffer. Scott?
Thanks Andres, and thank you all for joining our call today. We are pleased to report another solid year of growth. Our results this year when compared to 2012, demonstrate the strength and effectiveness of our commercial real estate platform.
I would like to start with some highlights. Total revenues for the year increased 23% to $247 million. Operating income increased to 113% to $65 million. Fee and other income increased 125% to $29 million and AFFO for the year increased 64% to $88 million. We are reporting growth in all revenue categories; net interest margin, rental revenue and fee income. This growth when combined with stable credit performance within our existing portfolio remains the key drivers of our performance.
Gross loan production was up over 60% in 2013 as we met our goals for generating over $600 million of loans, $170 million was funded during the fourth quarter. As you look forward, we expect loan origination volumes especially in our shorter term floating rate bridge landing business to increase significantly from 2013 levels.
Our goal for 2014 is for total loan originations to exceed $1 billion effectively doubling 2013’s loan production. At this point we expect to originate more floating rate bridge loans in 2014 than fixed-rate conduit loans. We recently announced the new facility with UBS to support the growth in our floating rate bridge lending business and we are currently aggregating loans for our second floating rate securitization which should close early in the second quarter.
We then expect a follow-up with another floating rate securitization in the third quarter of this year. We currently have in excess of 250 million of loans consisting of 206 million floating rate bridge loans, 53 million fixed-rate conduit loans and $2 million mez loans which should close by end of first quarter.
During 2013 we sold 407 million conduit loans into ten different CMBS transactions generating $18.4 million of fee income. Looking forward and as expected, competition in the fixed-rate conduit lending at securitization market has quickly increased. We expect this competition will resolve in tighter splits and lower profitability than we historically experienced on a loan-by-loan basis. In response to this additional competition we are focused on increasing loan volumes in our floating rate bridge lending business well risk adjusted returns remains long.
Our own real estate continues to provide stability to the overall portfolio. The multifamily properties continue to perform well and experienced year-over-year same-store rent growth 5%. Our subsidiary independent Realty trust and apartment property equity REIT which we externally advice and consolidate recently completed a secondary offering of common stock racing gross proceeds of $67 million. We expect to deploy all of the capital from this offering by the end of the first quarter.
RAIT currently owns approximately 7 million shares representing 39% of IRTs outstanding common stock. As a result of the performance across our core businesses in 2013, RAIT's board announced our sixth consecutive quarterly common dividend increase to $0.16 per share for the fourth quarter of 2013. During 2013, RAIT declared $0.56 of common dividend per share, representing a 60% increase from the 2012 common dividend of $0.35 per common share. The stock also performed well in 2013 increasing 59%.
At this point, I'd like to turn the call over to Jim to go through the financial results in more detail. Jim?
Thank you, Scott. AFFO for the fourth quarter was $0.34 per share or $24.1, up $7.3 million or 43% from the fourth quarter of 2012. Revenues increased $12.7 million quarter to quarter as lending continue to grow and we continue to grow our rental income, additional property ownership and occupancy and rental rate improvement. This revenue growth was offset by $5.9 million of additional expenses leading to operating income growth of $6.8 million quarter-to-quarter, a 60% increase over 2012.
We did report a GAAP net loss for the fourth quarter of 2013 of $134.5 million or $1.90 per share due primarily to $144 million of non-cash fair value adjustments in the legacy Taberna portfolios.
Now let’s turn to the annual results. For the year AFFO was $87.7 million up $34.3 million or 64% from fiscal year 2012. AFFO per share increased 17% to $1.29 for 2013, up from $1.10 for the year ended December 31, 2012. Compared to 2012, investment interest income was up $17.4 million due to increased loan production while investment interest expense was down $2.3 million primarily due to reduced hedging cost offset by increased interest expense associated with other lending activities.
During 2013, we reentered the securitization market and completed a RAIT sponsored floating rate CMBS securitization and issued $101 million of investment grade securities to finance $135 million of floating rate bridge loans. RAIT retained $34 million of equity in this transaction. We also installed $407 million of loans into 10 different CMBS transactions. For 2013, our loan production was $603 million as compared to $375 million of loan production in 2012.
As we discussed previously, the interest rate hedges in our RAIT one and RAIT two securitizations are continuing to burn off. Based on the current one month LIBOR period, we expect to see $3.9 million of reduced hedging cost this year as compared to 2013 as hedges continued to expire according to their terms. From a portfolio perspective, our credit statistics are stable with our non-accrual loans at approximately $37 million or 3.3% of our loan portfolio. This is a decrease of $32 million or 46% since 2012. Our current loan loss reserves are $22.9 million or 62% or our non-accrual loans and we believe that we’re adequately reserved for any future potential losses.
Rental income increased by 10% of $10.4 million in 2013 as compared to 2012. This increase is a result of; one, $4.3 million of four properties we acquired during 2012, $2.6 million from three properties acquired during 2012 and present for full year in 2013, and $3.5 million from continued improvement in occupancy and rental rates across our real-estate portfolio.
With respect to our portfolio home, multi-family occupancy at the end of 2013 was 92.2% up from 90% at the end of 2012. Average office and retail occupancy was stable at approximately 73% at year-end. Rental rates also continue to improve with multi-family rates increasing to $756 per unit per month at the end of the fourth quarter 2013, a 4% increase since the fourth quarter of 2012.
Lastly, fee and other income is up $16 million in 2013 as compared to 2012 primarily due to the sale of $407 million of conduit loans, which resulted in $18.4 million of profit during 2013.
With respect to our expenses, a couple of items of note; interest expense for 2013 is down $2.1 million compared to the 2012 due to lower outstanding debt in 2013 as compared to 2012. Property operating expenses for 2013 increased by $4.4 million as compared to 2012, this increase is a result of $1.9 million associated with four new properties acquired during 2013, $1.7 million from three properties acquired during 2012 and present for a full year in 2013 and $900,000 of increases in the existing properties primarily for utilities, real estate taxes and property insurance.
Overall the net operating income of our real-estate portfolio was $53.3 million in 2013, an increase of $5.9 million or 12% from 2012. Combined compensation and administrative expenses are down to approximately 17% of total revenue in 2013 as compared to 19% of total revenue in 2012. We continued to manage our expenses effectively as we grow our business. Loan loss provisions increased to $3 million in 2013 from $2 million in 2012 as our portfolio of balance sheet loans increased in 2013.
For 2013, operating income was $64.9 million, a 113% increase over the 2012 operating income of $30.5 million. That is a $34.4 million increase year-to-year. As with prior results, we reported a GAAP net loss for 2013 of $308 million or $4.54 per share. The GAAP net loss was attributable to $344 million of continued negative changes in the fair value of our various financial instruments. The primary driver of the negative changes and the fair value of our financial instruments was an increase in the market price of the legacy Taberna securitization liabilities during 2013. The effect of which narrows that gap between our adjusted book value and our GAAP book value. Please remember that the changes in the fair value of our various financial instruments are non-cash. As such we believe that our presentation and discussion of AFFO is more indicative of our, indicator of our financial performance. With respect to our CRE CDO, we continue to meet all the overcollateralization test. CRE I reported an OC test of 127%, above the required level of 115%.
CRE II reported an OC test of 119%, above the required level of 112%. These OC test results are largely unchanged compared to year-end 2012. As of the year end, we continue to maintain good liquidity and capital available for investments. We ended the quarter with $486 million of capital available for investment, comprised of $89 million of cash on hand, $219 million of availability under our two conduit warehouse lines, $143 million of availability under our bridge loan facility and $35 million of remaining commitment from Almanacs affiliate. In our continuing effort to maintain adequate capital for investment, we access the capital markets three times in the last 90 days.
First in December 2013, we completed $125 million, 4% convertible debt offerings. We used these proceeds in this offering to repurchase $80 million of our 7% convertible debt. Second, in January 2014, we completed a 10 million common share offering and raised net proceeds of $83 million. All of these proceeds are being used to fund our pipeline of loans. Lastly, in January 2014, Independence Realty Trust, our consolidated subsidiary completed an 8 million common share offering and raised net proceeds of $63 million. We have already deployed approximately 29 million of these proceeds into an apartment property in Waukegan, Illinois and expect to acquire additional private properties in the near term. Scott, this concludes the financial report, back to you.
Thanks, Jim. Operator, let’s open the call up for questions at this time.
(Operator Instructions) And our first question comes from the line of Jason Stewart with Compass Point. Please proceed.
Jason Stewart - Compass Point
On the sixth conduit business, I was just hoping if you give us a little bit more color about what’s going on in the competitive dynamics of the market there if its loan structure, size, borrower demand that’s causing a little bit of shift in expectations for volume there?
It is additional competition from loan originators and funders. The borrower demand remains strong but there are more players in the marketplace today and there appear to be more coming in everyday. And what that’s doing is, it’s driving down the spreads because it’s just a more competitive marketplace supply and demand theory and as you drive down the spread it means that obviously when you go to sell a loan, the profitability is lower. So, what we are indicating is that based upon the same volume you will see going forward lower profitability although we do believe that we can increase volume from prior years.
Jason Stewart - Compass Point
Right. And it looks like in the fourth quarter, if I can hear this correctly, the gain on sale margin for conduit was still on the high 3% range, so not much degradation in margin yet but what you are saying is we should expect that to occur in 2014 or is my math off?
Yes, that’s correct.
Jason Stewart - Compass Point
Okay. And then direct real estate lending there is a line in the release that just talks about opportunistic acquisitions. And I know in the past it’s been, if you can buy a property from some owner that you have an interest in already that’s been the strategy, is that, that strategy going forward or you are thinking you will make more direct open market acquisitions of direct real estate?
No, it’s the strategy, as you laid it out that where we see an opportunity to acquire property off market typically where we already have some relationship with the seller that’s what we are looking to do. We are not out actively within RAIT out actively seeking to acquire properties. IRT is out seeking to acquire multi-family properties but that’s Independence Realty Trust that’s not RAIT.
Jason Stewart - Compass Point
Got it. One last one and I will jump out. I know you typically provided some guidance at least last year and it’s been very helpful for folks, is that something that you expect to give investors guidance on this year for cash flow?
We do, we are just tightening up our numbers based upon the competition in the conduit space and the increase in bridge on balance sheet lending. We want to make sure that the assumptions that we are using are accurate and we expect to have something available in the near term.
(Operator Instructions) At this time, we have no further questions. I will now turn the call over to Mr. Scott Schaeffer, CEO, for closing.
Thank you. We continue executing on our gross strategy and look forward to sharing our progress with you in the next quarter. And thanks for joining our call today and your continued interest in RAIT.
Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. And 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: firstname.lastname@example.org. Thank you!