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

RAIT Financial Trust (NYSE:RAS)

Q1 2014 Earnings Conference Call

May 7, 2014 09:00 ET

Executives

Andres Viroslav - Managing Director, Corporate Communications

Scott Schaeffer - Chief Executive Officer

Jim Sebra - Chief Financial Officer

Analysts

Jason Stewart - Compass Point

Doug Weiss - DSW Investment

Operator

Good day, ladies and gentlemen and welcome to the Q1 2014 RAIT Financial Trust Earnings Conference Call. My name is Emily and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) And as a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Andres Viroslav. Please proceed.

Andres Viroslav - Managing Director, Corporate Communications

Thank you, Emily, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s first quarter 2014 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.rait.com. There will be 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 10523484.

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

Scott Schaeffer - Chief Executive Officer

Thanks, Andres and thank you all for joining our call today. We are pleased to report a quarter of significant growth in loan production and continued growth and stability in our portfolio of owned real estate. Our results this quarter as compared to the quarter ended March 2013 continue to demonstrate the depth of our commercial real estate platform.

As usual, let’s start with some highlights. Total revenues grew 15.4% to $67.3 million for the quarter ended March 31. Net interest margin from our loan portfolio increased 17% to $27.8 million. Rental income from our property portfolio increased 29% to $35.2 million and net operating income increased 34% to $17.1 million. Cash available for distribution or CAD is a new performance measure increased 58% to $17.2 million.

As we have previously discussed on our calls, we are growing our on balance sheet floating rate bridge lending business. Though it’s more capital intensive than our fixed rate conduit loans for sale business, the bridge lending which is RAIT’s historical core business offers attractive risk adjusted returns and a stable recurring stream of interest income. During the first quarter, we originated $224.5 million of new loans, $175.6 million were bridge loans which surpassed the $130 million of bridge loans that we produced for all of 2013. We also closed $46 million of conduit and $3 million of mezzanine loans during the first quarter. In addition, since the end of the first quarter, we closed an additional $93 million of loans and have $240 million of loans in our pipeline which are targeting to close before the end of the second quarter. Of course, the actual amount of loan closings during the quarter may change as we continue the underwriting and due diligence process.

In order to support this growth, we entered into a new warehouse facility with UBS this past January. We closed two capital raises, one in January, one in April, and we completed our second RAIT sponsored floating rate CMBS transaction in April. In our second floating rate CMBS transaction, we match funded $196 million of first lien bridge loans with non-recourse financing by selling $156 million of investment grade bonds that can fulfill the loans with RAIT retaining the $40 million residual interest, which should generate return in the high-teens to RAIT. The liability is priced at a weighted average cost of LIBOR plus 179, which is an improvement from the LIBOR plus 185 pricing of our first floating rate CMBS securitization, which closed in July of last year. We also increased the advance rate to 79.5% from the 75% advance rate on our first securitization. We expect to continue to use CMBS transactions like this to finance our bridge lending business going forward.

Our own real estate continues to provide stability to the overall portfolio. The multi-family properties continue to perform well and experienced year-over-year same store average rent per unit growth of 4.2%. Our subsidiary Independent Realty Trust and apartment property equity REIT which we externally manage and consolidate acquired seven properties during the first quarter totaling 2180 units for $127 million of purchase cost and now owns 4970 apartment units. RAIT currently owns approximately 7 million shares of stock representing 39% of IRT’s outstanding common stock.

On the asset and property management side of the business, we expanded our property management capabilities and now control a retail focused property manager named Urban Retail Properties based in Chicago. Urban currently manages 62 properties with 16.7 million square feet in 26 states. With the addition of urban RAIT commercial real estate platform includes the ability to offer property management services for multi-family, office and retail properties for us and third party property owners across the country. Including Urban’s properties RAIT’s asset under management increased to $5.1 billion at March 31, 2014. As a result of this performance across our core businesses RAIT’s Board announced our seventh consecutive quarterly common dividend increase to $0.17 per share or approximately 75% of cash for the first quarter of 2014.

At this point I would like to turn the call over to Jim to review the financial results in more detail. Jim?

Jim Sebra - Chief Financial Officer

Thank you, Scott. Historically, we have reported the key operating metrics, to further clarify our earnings without the effect of the legacy Taberna securitization we are introducing cash available for distribution or CAD as a key performance measure. For the first quarter CAD was $0.22 per share or $17.2 million. This is a 58% increase over Q1 2013 where CAD was $10.8 million. Compared to Q1 2013 investment interest income was up $3.7 million due to increased loan production while investment interest expense was down by $300,000 primarily due to reduced hedging costs offset by increased interest costs from our warehouse lending on floating rate loans for the first quarter. For the first quarter our loan production was $225 million as compared to $95 million of loan production in the first quarter of 2013.

As we have discussed previously the interest rate hedges in our RAIT loan and RAIT II securitizations are continuing to burn off. Based on the current one month LIBOR curve, we expect to see $2.9 million of reduced hedging costs over the remaining portion of this year when compared to the 2013 run rate as hedges continued to expire according to their terms. From the credits perspective our non-accrual loans declined to $28 million and represent about 2.3% of our loan portfolio at March 31. Our current loan loss reserves are $14.3 million or 51% of our non-accrual loans and we believe that we are adequately reserved for any future potential losses.

Rental income increased by 29% or $8 million in Q1 2014, this increase was primarily a result of the $7.1 million of rental income associated with properties acquired since March 31 of last year with $853,000 of increased rental income due to continued improvement in occupancy and rental rates across the remaining properties. Lastly fee and other income decreased approximately $2.9 million in Q1 2014 as profitability in our conduit loan sales declined when compared to Q1 last year. We expect that profitability will normalize throughout the remainder of 2014 in the 2 to 4 point range.

With respect to our expenses, a couple of items of note, interest expense for Q1 2014 is up $1.9 million compared to Q1 2013 due primarily to $1.5 million of interest associated with mortgage loans used to finance the real estate properties we acquired since the end of the first quarter last year. Property operating expenses for Q1 2014 increased by $3.7 million as compared to Q1 last year, this increase is the result of $2.9 million of operating expenses associated with properties acquired since March 31, last year and $480,000 of one-time real estate tax catch-ups for 2013, increased utility costs and other severe weather-related items that occurred in the first quarter of this year. Without these one-time items, property operating expenses on the historical portfolio increased $291,000 or 2.1%.

Overall, the net operating income of our real estate portfolio was $17.1 million in Q1 2014, an increase of $4.3 million from Q1 2013. Combined comp and administrative expenses increased slightly to approximately 96% of total revenue in Q1 2014 as compared to 18% of total revenue in Q1 2013. We did increase our loan loss provision to $1.0 million in Q1 2014 from $500,000 in the first quarter of last year. This increase is a result of our increased production of on balance sheet loans in 2014.

We are reporting a GAAP net loss for Q1 2014 of $14.6 million or $0.18 per share. The GAAP net loss was attributable to the $24 million of continued negative changes in the fair value of our various financial instruments. The primary driver of those negative changes was an increase in the market price of the legacy Taberna securitization liabilities during 2014, the effect of which narrows that gap between our adjusted book value and GAAP book value. Please remember that the changes in the fair value of our financial instruments are non-cash. As such, we believe that our presentation and discussion of CAD is more indicative of our financial performance.

With respect to our CRE CDOs, we continue to meet all the over-collateralization tests. CRE I reported an OC test of 127%, above the required level of 116%. 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 2013. As of quarter 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 $110 million of cash on hand, $228 million of availability under our two conduit warehouse lines, and $148 million of availability under our two bridge loan facilities.

We accessed the capital markets twice as we started the year. First in January, we completed a common stock offering of 10 million shares and raised $83 million of net process. In April, we completed a $60 million of 7.65% senior notes ands raised net proceeds of $58 million. We also drew the remaining $35 million of availability under our $ 100 million commitment from Almanacs at quarter end. All these proceeds are being used to fund our pipeline of loans. Lastly, in January 2014, Independence Realty Trust, our consolidated sub completed an 8 million common share offering and raised net proceeds of $63 million. All of these proceeds have been deployed in eight properties acquired by IRT so far in 2014.

Scott, this concludes the financial report. Back to you.

Scott Schaeffer - Chief Executive Officer

Thanks, Jim. I think at this time, operator, we would like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Okay. Your first question comes from the line of Jason Stewart with Compass Point. Please proceed.

Jason Stewart - Compass Point

Hey, good morning. Thanks for taking the questions. Scott, I was wondering if you could give us some more color on the competitive environment in the conduit origination market, I mean, I think can you give us some color on gain on sale, but in terms of volume, what are you seeing there? Is that still an opportunity to think that you can to get any cash flow this year or is it becoming too competitive for the return you are giving?

Scott Schaeffer

No, I don’t think it’s becoming too competitive. I think it’s clearly more competitive than it was in 2013, especially in the space that we play which is in the smaller loan category. The first question is always unique. It’s always the weakest quarter for loan production. Float rate, I think a lot of it has to do with the loans that you close in the first quarter or many of them are sourced in the latter half of the fourth quarter, which is it just happens to be a slower time in the world. What we are seeing going forward is we are seeing loan volumes that I would assess that will be similar in volume for us on the conduit side of speaking as 2013, but the increased competitiveness has resulted in a reduced spreads or profitability. So, while we were getting 5, 6, 7 points of gain on sale, last year, you are seeing what Jim referred to is normalizing at 2 to 4 points. We kind of always knew this would happen. Clearly, it happened a little more quickly than I anticipated, but we still see it as a part of the business. We still think that we will be able to clearly maintain the volume that we have generated in the past and hopefully increase it, but for the rest of 2014, anyway, I think pricing will be lower and result in that 2% to 4% range.

Jason Stewart - Compass Point

Yes. And I guess that’s what happens when you amortize 60%, 70% ROEs on the business, people start to (cramp through) right?

Scott Schaeffer

Yes, it’s one of the downsides of being successful.

Jason Stewart - Compass Point

That’s helpful commentary. And if you think about that in the bridge business, are you seeing banks, other lenders, start to enter that product as well or is that still pretty (indiscernible) up?

Scott Schaeffer

Well, it’s really not that unique per se, but it’s something where for us the market is much larger. We still are – we are a non-recourse lender where most banks are not. Banks still do not want to be at the 75% loan to value range especially not non-recourse. So what we are seeing is tremendous growth opportunities on that side of the lending business. We really jumped into it in earnest at the middle maybe in the middle half of last year because that’s when we were able to put the warehousing in place. Now we are seeing increased warehousing capacity. We have other banks coming to the same pools, but as warehouse, those loans for you we are able to match fund them through the floating rate securitizations. So, what I see going forward is real growth in increased volumes and good stable recurring net interest or growth in net interest margin from those floating rate loans.

Jason Stewart - Compass Point

It makes sense. And then in terms of the provision how are you guys looking at the provision I mean obviously the more you prune balance sheet, I think everybody would assume you have to think about provision, then how should we look at that? I mean, are we supposed to model that out over expected loss over the life of this product or is this rolling forward 12 months type provision that we should be thinking about?

Scott Schaeffer

I think it’s a rolling forward provision. Right now we have been adequately reserved for the legacy issues in the portfolio and we have increased it. I think we put aside $1.5 million in the fourth quarter just because we had been at $0.5 million for the first three quarters of 2013. And for 2014 based upon the production as we see it, it shifted general provision of $1 million. No specific analysis as to problem loans in the portfolio. It’s just with the increased – with the increased production when we are comfortable with $1 million a quarter going forward.

Jim Sebra

The reserve represents just over 1% of the loan book which is relatively consistent with our industry practices.

Jason Stewart - Compass Point

Okay. So as you grow by 1% number will be a fair number to model?

Scott Schaeffer

Yes, correct.

Jason Stewart - Compass Point

Okay. One last one and then I will jump back. The CAD number, can you give us what the CAD would have been for the – or was for the fourth quarter?

Jim Sebra

CAD was $0.27 for the fourth quarter.

Jason Stewart - Compass Point

Okay. Alright, thanks guys. I appreciate it.

Scott Schaeffer

Thank you, Jason.

Operator

Thank you. Your next question comes from the line of Doug Weiss with DSW Investment.

Doug Weiss - DSW Investment

Hi, good morning.

Scott Schaeffer

Good morning.

Doug Weiss - DSW Investment

In terms of the growth in assets under management and was that an acquisition the property manager or in Urban Retail Properties?

Scott Schaeffer

It was a company that RAIT made a preferred equity investment in a number of years ago and we made the decision late in the fourth quarter that we were not comfortable with the direction of the company and under the rates afforded us in our previous investment we took control.

Doug Weiss - DSW Investment

But is that a positive – does that positive substantial implications affected you are now the owner?

Scott Schaeffer

I think it is. Yes, I think it will generate a recurring stream of management fees, net profit management fees to RAIT and it’s had 62 properties that it manages which you will never know opportunities that will arise from being close to those assets, the financing and/or otherwise. And we think that the company in the current environment has a lot of future potential. So, we decided that I guess one way to say this, we didn’t like the direction of the company at the time and that since we had the rights if they control we did.

Doug Weiss - DSW Investment

Is it possible to give what your current overall fee base is on your assets under management?

Scott Schaeffer

I will get that number for you and get back to you.

Doug Weiss - DSW Investment

Okay. On the – on your own portfolio, just looking at your trends in retail, obviously it’s going quite well on multi-family, but if the retail occupancy trends have been headed down over the last year or so, could you comment on that a little bit?

Jim Sebra

Yes. Occupancy is down a little bit. Rental rate is up a little bit. I am seeing her smiling, because we are in the process of changing management companies on our own retail properties from the third-party, that’s interested fee generating management companies that we were using that we have no interest in, they were just managing for us, because we didn’t have the capability. So now, we are going to turn them over open. We are in the process of doing that. I am hopeful that we will see some increase in performance, but the retail properties that we have had difficulty and we are working them. And I think in the better economic environment in the future, they will obviously do better. There was some repositioning involved and occupancy issues relate to the side effect, I should say of that repositioning, but I am thankful that it’s not worse. And we think it will get much better under now that we can manage them ourselves or have the capability to manage them ourselves.

Doug Weiss - DSW Investment

Okay. And then just to follow-up a little bit on the prior question on the conduit loans versus bridge loans. So, I guess what my takeaway is that the sequential – some of the sequential decline in distributable cash reflects the absence of those higher margins on conduit loans. And if that’s the case, I guess my question is this is a good kind of base level looking forward through the rest of the year, where that there won’t be additional drag from further changes in your issuance volume on conduits?

Jim Sebra

I think it is a good base level. I think you will see clearly growth from this point forward clearly in the – on balance sheet lending. And I do think that the final three quarters and again this is a forward-looking statement without much to back it up other than looking at our pipelines and talking with our originators that the final three quarters of this year will be better from a conduit lending perspective than the first quarter was. But having said that, the conduit lending is a lumpy business, the gain on sale, some quarters are good, some quarters are bad, we had a good quarter in the third quarter and fourth quarter of last year. And the first quarter clearly was not nearly as good. That was one of the reasons that we talked about changing the strategy a little bit and focusing more on the on balance sheet bridge lending, which yes, you are not generating 3, 4, 5 point profit after holding a loan for three weeks and having levered it 3 to 1, but you are generating a 17%, 18% return on your equity recurring with match funding. So, there is – we are not taking any interest rate risk.

It’s a more stable income strain. And I think that we are going to be much more comfortable at a 75% payout ratio like we were in the first quarter on dividends makes upon that more stable income stream than we were with the lumpy stream relative to the conduit business. What the bridge business also does for us is it’s a feeder pipeline, if you will, for the conduit, because these are three to five-year loans, transitional properties. The borrower does this work, increases his cash flow and his income and then looks to put permanent financing loans, while we have the relationship and we have really for lack of a better term a last look at doing that permanent financing. So, it’s good recurring, high-teens income, net interest margin and then it becomes a feeder for the conduit business going forward.

Doug Weiss - DSW Investment

On – then on your book value calculation, and I think you – I think there was some commentary on this, early on the call, but I didn’t quite follow it, but in regards to Taberna, the Taberna adjustment has come down quite a bit. Does that reflect a revaluation up of the Taberna liabilities or a revaluation down of the Taberna assets or some combination of the two?

Jim Sebra

It’s a smaller increase in the value of the Taberna liabilities than what we have experienced in the past. And I think I am answering your question in the prior quarters we had much larger market value increases in the liabilities, and that’s why the GAAP losses were greater. At some point, these liabilities really can’t go any higher. And I am – I believe we are getting near that time and that’s why it was a $24 million increase in liability expense in the first quarter. And it does affect our GAAP book value, but since we eliminate that for the adjusted book value calculation, that’s why that spread is narrowing, because GAAP book value was coming down, but it doesn’t affect adjusted book value. So again that GAAP becomes smaller each time.

Doug Weiss - DSW Investment

I guess what I am asking is if on the chance that there eventually is some value to Taberna, I am just curious why that value has reflected in your book value adjustments has come down so much?

Jim Sebra

The book value – the Taberna effect in calculating adjusted book value effectively record our interest in Taberna at zero. So, if there is some improved value that is a nothing, but a good guide from an adjusted book value standpoint.

Doug Weiss - DSW Investment

Okay. Then last question, just on your land holdings, I am just curious what those are more specifically and if there is – if those are something you might sell at some point?

Scott Schaeffer

They are something you might sell at some point. For sure, they are largely beachfront parcels in Daytona, Florida that were hotels. The hotels were damaged in a hurricane in the mid 2000s. And while the borrower was fighting with his insurance company, he kept fighting up into the great recession and ended up filing for bankruptcy, we had mezzanine loans. We got first mortgage loans and we ended up taking the parcels back and closing down the properties that were on it, because they had never been repaired through the – from the hurricane damage. We are – what we are seeing in Daytona is we were a very small piece of a large – of a company that had large land holdings. So, when they went down we ended up with this 20 some acres, it’s all beachfront, but they probably had 120 acres of beachfront. So, the other banks that were involved were Wachovia and some of the larger banks, they have over the last three or four years have been on a systematic selling program of selling the parcels that they took back from this company. We have decided that we would be better off being the last group to sell rather than the first group to sell. We are now starting to see some development on those parcels. There is a hard rock going up. There is some overseas developers who have put a lot of money into the area and are talking about building new hotels. We think that we are well-positioned with the parcels that we hold were in the middle of some of the development that’s happening. And that over time, our value will be better than it is today, but I do think it’s something in the relatively near-term when I said that, two years or so that we would be disposing of this land. It’s not going to be a long, long, long term hold for us.

Doug Weiss - DSW Investment

Do you have any sense of what the other owners have been selling that parcels for?

Scott Schaeffer

We certainly do, but I don’t as I am sitting here.

Doug Weiss - DSW Investment

Okay. Alright, well thanks for all the answer and all the questions and look forward to talk to you more.

Operator

Thank you for your question. I would now like to turn the call over to Scott Schaefer for closing remarks.

Scott Schaeffer - Chief Executive Officer

Well, thank you for joining us today. Our plan is to continue executing on our strategy of growth and we look forward to sharing our progress with you at the end of next quarter. Thanks.

Operator

Thank you for joining in today’s conference. This concludes the presentation. You may now disconnect. Have a good 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's (RAS) CEO Scott Schaeffer on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts