Jonathan Cohen - President and CEO
Purvi Kamdar - Director, IR
Dave Bloom - SVP, Real Estate Lending
David Bryant - CFO
Gabe Poggi - FBR Capital Markets
Resource Capital Corp. (RSO) Q4 2010 Earnings Call March 9, 2011 8:30 AM ET
Good day ladies and gentlemen, and welcome to the Resource Capital Corp. earnings conference call for the three months and year ended December 31, 2010. (Operator Instructions) I would now like to turn the 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 year ended 2010. 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.
Thank you, Jonathan. When used in this conference call, the words believe, anticipate, expect, 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 1A 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 obligations to update any of these forward-looking statements.
And with that I'll turn the call back to Jonathan.
Thank you, Purvi. First, a few highlights, for the three and year ended December 31, 2010. We had adjusted net income of $0.33 and $1.15 per share diluted respectively, as compared to the three months and year ended December 31, 2009 of $0.36 and $1.45.
Estimated REIT taxable income for the three months and year ended December 31, 2010 was $0.14 per share diluted and $0.85 per share diluted respectively, as compared to $0.34 and $1.23 for the three months and year ended December 31, 2009.
We announced a dividend of $0.25 per common share for the quarter ended December 31, 2010 for $14.6 million in aggregate, which was paid on January 26, 2011 to stockholders of record. Book value was $5.99 for common share as of December 31, 2010.
With those highlights out of the way, I will now introduce my colleagues. With me today are, Dave Bloom, Senior Vice President in charge of Real Estate Lending; and David Bryant, our Chief Financial Officer; as well as Purvi Kamdar, our Director of Investor Relations.
The fourth quarter and fiscal year 2010 saw great improvement in our outlook for Resource Capital. As demonstrated by our adjusted net income, we earned $0.33 for the quarter, over 30% more than our $0.25 dividend. We made significant investments and restarted our commercial mortgage origination platform.
While we expanded greatly our commercial finance operations and our syndicated bank loan business, we continue to shrink our exposure to legacy real estate loans, with payoffs and sales on a combined $112 million of commercial real estate loans from the troubled period, those originated during the troubled period of 2006, 2007, almost all of these subordinate loans.
We started to reinvest these dollars and are seeing a market increase in net interest income. With these result and with our new investments, I reiterated as I have before that we are dedicated to $1 cash dividend for 2011 calendar year. We as managers and shareholders are working hard to build a company that can both pay a substantial dividend and increase shareholder value by building and growing business platforms.
During the fourth quarter, we took the opportunity to sell two large subordinate loan legacy positions, continuing our reducing exposure to those bonds of the financial crisis. Although we believed that these loans would be collectable, they were subordinated to much larger loans and exposed as to potential binary risk. So we considered it prudent to pay back such positions and focus our capital on new investments.
In viewing though, we took a loss of $14 million, but maintained a book value within 1% of where it was last quarter. We also added general reserves of $2 million and have approximately $11 million balance in general reserve at yearend. Dave Bryant, will comment more about this, as we move forward from here. But in general loan credit, we see a stable and improving situation.
The fourth quarter of 2010 was marked by many positive events, including the following:
First, we are in $0.33 of adjusted net income. Far in excess of our $0.25 dividend and did this with over $200 million, yet $200 million of cash on hand to invest. We lowered our exposure to legacy real estate risk substantially, through the sale of $39 million of subordinate possessions. Third, we continue to maintain significant liquidity.
Fourth, in the first quarter of 2011, we made new investments of over $60 million into commercial real estate loans, our syndicated bank loan business and commercial finance, all areas where we were able to achieve pretax projected returns of 12% to 25% or new dollars invested. And finally, number five. We put into overdrive. Our newly restarted commercial business and have started to put out the math of cash balances, we have been carrying those a lot a year or two.
In my opinion, while doing this reshuffling, we have ended up with a much improved company, more stable and able to seize more upside. Going forward we will focus on extending our real estate lending operation significantly. Finding new investments in syndicated bank loans and finally building franchise value at our commercial finance business.
Now, I will ask Dave Bloom, to review our real estate activities.
Thanks, Jonathan. Resource Capital Corp's commercial mortgage portfolio has a current committed balance of approximately $664 million in a granular pool of 42 individual loans. Our portfolio of commercial mortgage possessions is in components as follows, 73% whole loans, 18% mezzanine loans, and 9% b-notes.
The collateral base underlying the portfolio continues to be spread across the major asset categories in geographically diverse markets, with a portfolio breakdown of 30% multifamily, 15% office, 31% hotel, 14% retail, and 9% others, such as self-storage and industrial.
During the fourth quarter through today, we have closed three loans that total approximately $25 million. And we have another two loans of approximately $31 million that are approved and in the closing process for a total of $56 million of aggregate new loan production.
We have seen both sale and financing transaction volumes increasing, and liquidity returning to the market, and we continue experience payoffs in our portfolio. And for last quarter, we have taken advantage of liquidity returning to all segments of the market, including the subordinate debt sector, and we sold two mezzanines possessions in very complex multiparty debt structures that were originated, while we were fully establishing our whole loan platform. The ability to sell out of these mezzanine possessions adds to the equity that we have to deploy into new whole loans in situation where we were the sole lender.
Our portfolio for commercial real estate loans continues to be current and while we have modified a number of loans across the portfolio. In every instance our goal is to work with the borrower to provide adequate time, to see if their business plan through, and reach a capital event that will payoff our loan.
As the debt markets continue to heal, we're seeing significant increase in financing activity from banks, insurance companies and reconstituted CMBS programs. The debt capital markets are returning and we're again seeing situations, where multiple lenders are competing for the same loans.
The steadily increasing flow of real estate finance capital is obviously a positive sign for the market in general. And for our portfolio in specific, as we see a number of our portfolio properties readying for take out financings. RSO benefits from our focus and expertise in directly originating loans between approximately $10 million and $20 million. And even though there are a number of capital sources in the market to make new loans. The vast majority are looking to make larger loans, because an extensive pipeline of deals and are looking to convert select opportunities to loans for our portfolio.
We are actively sourcing new deals and are seeing opportunities to originate new loans at post prices valuations, premium spreads and optimal structure. There are hundreds of millions of dollars of loans coming due, and not enough debt providers to address the total finance demand, as properties trade, or as existing owners commit new capital to existing situations and seek refinancing.
In addition, there are numerous discounted payoff and REO situations that require financing at a new and much lower basis. We have fully established origination, asset management and servicing teams, and infrastructure in place. As the effort continues to build, we are poised to take advantage of opportunities for well-structured transactions and premium spreads in today's market. And to match our production levels with our existing financing facilities and capital availability.
Having kept our platform intact during the pullback in lending over the last few years provides a distinct advantage, as we have again commenced our new origination efforts. Our borrowers and intermediary community are extremely familiar with RSO as a capital provider. And our key professionals have remained in the market representing RSO's lending platform. This continuity is a unique and distinguishing feature, and provides the market with a proven platform. This has closed in excess of $1.5 billion of loans.
Our direct origination platform operates on a nationwide basis and is a significant note to our business model. We are not dependent on CMBS or secondary loan trading market, because we originate for our own balance sheet. Our self-originated whole loans are structured to provide maximum protections of principal, with debt service coverage minimum, loan to value maximum, and in many instances, elements of borrower resource and other credit enhancements.
RSO will benefit from loan repayments in select additional loan sales, as we reinvest wealth-structured higher yielding assets into our long term locked-in financing vehicles.
With that, I'll turn it back to Jonathan and rejoin for Q&A.
Thanks, Dave. Now I would like to review our investment in commercial sales and finance, and then speak more about syndicated bank loan business.
As of December 31, 2010 in the commercial finance business we had $109 million of leasing the loan assets in our portfolio. In January, we transformed this investment into a new one, and now we own our interest to a joint venture we formed with LEAF Financial and Guggenheim Securities.
We held $29 million of subordinate debt, which receives a 10% coupon per year. We also have warrants to purchase 48% of the business at a nominal price. These will give us the upside we are looking for to build book value eventually, for while the coupon gives us the ability to generate a nice current return.
We are very excited about this investment, as we believe that as the economy recovers, the opportunities for scalable financial businesses are great. We have many long-standing vendor relationships that provides steady assets to high quality receives, diversified across many geographies and industries and equipment types.
REIT management has experience, knowledge and the company has a scalable platform that can really grow as the economy expands. This can be big for us, and we can earn a nice coupon while we wait. As far as syndicated bank loan business, we augmented our approximately $900 million bank loan asset portfolio, that bind Churchill Pacific Asset Management, CPAM, for approximately $22 million, which we have renamed Resource Capital Asset Management.
This investment of $22 million should earn a pretax IR of 25% compounded. Here we are getting paid to manage similar assets, as we already owned and leverage our knowledge of the assets we owned and the system and people of Resource America or Manager.
We are so far extremely pleased and look forward to more opportunities like this to partner with Apidos Capital and its team that have been managing our bank loan assets very successfully since Resource Capital 144 offering in 2005.
I will now give you some statistics on our corporate bank loan, syndicated bank loan portfolio. As I stated earlier, we have syndicated bank loans of approximately $890 million in amortized cost encompassing over 30 industries. Our top industries are Healthcare 10.7%, Diversified 9.0%, Broadcasting and Entertainment 7.8%, Printing and Publishing 5.5%, and Retail stores 5.2%.
As of the end of December, our average loan asset yield's 2.94% over LIBOR and our liabilities are still costing us 47 basis points over LIBOR. This continues to be a tremendous investment for us.
Now I will ask Dave Bryant, our Chief Financial Officer, to walk us through the financials.
Our estimated REIT tax flow income for the fourth quarter was $7.6 million or $0.14 per common share diluted. Our Board declared a cash dividend for the fourth quarter of $0.25 per common share, a total of $14.6 million. This brings our year-to-date results to $40.7 million of REIT income or $0.85 per common share, with a dividend of $1 for a payout ratio of 117%.
On our 2010 adjusted net income of $1.15, we had a payout ratio of 87%. Of course, we paid all of our 2010 dividends in cash.
At December 31, 2010, RCC's investment portfolio was financed with approximately $1.5 billion of total indebtedness that included $1.4 billion of CDO senior notes, approximately $95 million of leased equipment backed-securitized notes and $51.5 million sourced from our unsecured junior subordinated debentures related to our two trust issuances in 2006.
We ended the period with $348.3 million in book equity. RCC's borrowings of $1.5 billion had a weighted average interest rate of 1.3% at December 31, 2010, a continued reflection of very low interest rates. Our investment portfolio remains completely match funded by long term borrowings at year-end.
We continue to pass all of the critical interest coverage and over-collateralization tests in our two real estate CDOs and three bank-loan CLOs through February of this year. Each of these structure has continued to perform and generate a stable cash flow to RCC in 2010. CRE CDOs produced over $24 million, and bank-loan CLOs generated over $22 million of cash flow for the year ended December 31.
Of note, as of February 28, we have in excess of $195 million in investable cash comprised of approximately $71 million and over a $124 million in our bank loans and real estate deals respectively. This cash is available for reinvestment in these CLOs and CDOs to build collateral, and more importantly, generate generous spreads over the cost of the associated debt, thereby strengthening our overall position in each structure.
For example, during year-ended December 31, we bought investment grade CMBS of $37.1 million par value, for a weighted average price of 77.53. The resulting discount of $8.3 million improved the collateralization in our real estate CDOs.
Now a little bit about our provisions and impairments. Our provisions for loan losses of $17 million was comprised almost entirely of losses on real estate loans. As John indicated, $14.3 million of provisions came from the sale of two mezzanine after year-end. $2.1 million was added to our general reserves, and $0.6 million was added to reserves for loans previously impaired.
On the bank loan portfolio, positive credit trends continued, and accordingly we reduced our reserves modestly. We also wrote off a nominal amount with respect to our legacy leasing portfolio. We also impaired two originally rated BBB minus legacy CMBS bonds, which were purchased in 2007 and recorded asset impairments of $68.1 million.
We replaced those bonds with new CDO collateral in the form of highly rated bonds purchased at discounts, and we are satisfied with the trade-off. With only one CRE loan in payment default, our credit otherwise remains stable.
Our leverage ratio is 4.4 times. When we consider our trust issuances which have a remaining term of 26 years as equity, we see our leverage drop to 3.7 times.
Focusing on real estate, we were levered 2.3 times on our real estate CDOs at the end of 2009, after giving effect to the significant debt repurchases during the year 2010, we ended the fourth quarter 1.5 times levered in our CRE portfolio. This is a decent improvement upon the projection from our December 2009 common stock offering, when we targeted a CRE leverage at the 1.7 times level.
Our GAAP book value for common share was $599 at December 31, down $0.04 from $603 at September 30. The change resulted from improved marks on our CMBS portfolio, amounting to approximately $0.27 per share. These are on bonds purchased primarily in 2009 and 2010 and is a reflection of a huge rally in that space. That improvement, coupled with increment in the mark-to-market of our derivatives during the period of approximately $0.6 per share gave us combined improved marks of $0.33 per share.
We also added $0.04 per share to book value from stock sales in our DRIP program. These improvements in book value were offset by a net loss of approximately $0.17 per share, and of course a dividend payout of $0.25 per share.
At December 31, our equity is allocated as follows: Commercial real estate loans and CMBS 77%, commercial bank loans 18%, lease receivables of 3% and trading securities of 2%.
With that, my formal remarks are completed, and I'll turn the call back to Jonathan Cohen.
Thanks Dave. During 2010, we really transitioned from dealing with the aftermath of the financial crisis to positioning Resource Capital for the future. We are pleased that we were able to do so with good results, reflected by the $1.15 of adjusted net income and $1 of cash dividend.
Now we are at a stage to reap the benefits of the new opportunities we have already seized and to take advantage of even more opportunities we see ahead of us, as we have started to do already in 2011.
We look forward to sharing the results with you in the future periods.
And now with that, I thank you for your patience, and we'll open the call for any questions.
(Operator Instructions) Your first question comes from the line of Gabe Poggi of FBR Capital Markets.
Gabe Poggi - FBR Capital Markets
A couple of quick questions; I think you guys said you have a $124 million of restricted cash in your two CRE CDOs?
That right, Gabe.
Gabe Poggi - FBR Capital Markets
And a portion of that $124 was deployed in the $25 million of loans you recently closed and in the $31 million?
Gabe, unfortunately for us it's actually a pretty fluid situation as the real estate market recovers. We are starting to see repayments. So the $124 million goes to $150 million, and that's down to $124 million. And it is important to mention that as we get closer over the next six months, a year, and then two or three years to the reinvestment period ending, we are actually actively looking for repayment and putting that money out for five to ten years with prepayment penalties at high rates, so that we can use the arbitrage for as long as possible on the CDOs.
So we have approximately the same amount today as we did then. We have already put out $25 million; we have another $30 million coming out, but I know there are people threatening to prepay, as well as we have sourced like the $39 million of subordinate notes for $25 million that was then put out again to make up some of the loss that we took on those properties.
Gabe Poggi - FBR Capital Markets
Right. Just recycling. Can you remind me when did the (reinvestment) with those close on the two CRE CDOs?
In September of this year on the first one, and then second one is in June 2012.
Gabe Poggi - FBR Capital Markets
You guys recently got a warehouse line from Wells. I think they purchased CMBS. Can you talk about that a little bit, at least what the intent there is?
Sure, that's a basic AAA high-rated CMBS line so that when we see opportunities, we can buy them easily without a lot of equity capital, some of those approximately 10% to 12%, instead of holding the cash on our balance sheet.
Gabe Poggi - FBR Capital Markets
What kind of leverage can you get there? Six-thirds?
You can really get, I mean AAA kind of what they call CMBS 2.0. So you can get substantial leverage there. But we intend to probably use five to seven times leverage or eight times leverage for the meantime. We are using more of a shorter term opportunity. We are in negotiations now with a few banks, but we'll choose one or two banks. We'll have a jumpstart or restart of our mortgage origination business, not only are we putting out the money in the CDOs but we are also looking to have $150 million to $300 million line of credit that will eventually originate new mortgages on, sell some to CMBS, keep these new mortgage pieces, and probably as the market recovers end up secured, I think.
Stay tuned for that. And certainly the CMBS market is back, the bank value market's coming back, people are positioning for financing real estate, and we are pretty excited about what we are seeing out there.
Gabe Poggi - FBR Capital Markets
Regarding the prepayments you guys had, and just call it the fourth quarter of 2010, how much of that was prepaid at par, or what was the average prepayment level if you will?
If they prepay, they prepay at par. For instance, the salary is $39 million alone. So it's not as though they prepay and they come in, they say hey, can I have a small discount, we would say, "no". And as we grow stronger as we have through 2010, as I made in my comments in my last remarks, "We've gone from defense. Oh my God, Apollo is coming at us. We'll probably give him a discount and say, hey, buddy, if you want to mess around, we will take your property to market and we'll take it and we love that property."
Gabe Poggi - FBR Capital Markets
The $39 million of subordinate positions where you took the $14 million provision, can you give an idea of how much more of that in that ballpark there is in the CRE portfolio?
There is not much. I just want to make this clear, those were positions that people bought because, and those were bought in those both examples by very active real estate investors because they think that those loans or proposition was money-good. But the situation was, as we learnt in the financial crisis is not to be involved with deals that are too big.
So both of those situations were on larger deals, where we really effectively could not be the real estate owner in the end. So most of our loans we did on properties where we could be the owner.
The next question comes from the line of (inaudible) of Deutsche Bank.
Just as a large picture question, with the stock yielding 13%, there is obviously some skepticism in the market as to how long the dollar dividend can be maintained. And that has to have to do with the high interest rates.
That is my question, and I am sure you've thought about this also, what do you think happens to the overall business as interest rates inevitably go up at some point?
Sure; I appreciate the comment. First of all, people were skeptical on the stock yield of 24%. So I am enjoying the fact that people are still skeptical of 13%, and of course people are trading things such as (inaudible) and others of 15%. So I feel that we've not gone into a new category. So I appreciate the skepticism.
The second thing is that as these go up, we really benefit for two reasons; almost all of our portfolio is match funded on a LIBOR basis and very little of it have LIBOR for us at this point because they've been negotiated out over that as we work with the real estate loans over the last three years.
So as LIBOR rises, we benefit as long as the economy then does not go into a tailspin. So now that we are more of the equity, or we're less leveraged on the real estate portfolio, as we get fully invested, and we have approximately $850 million of loans there, just kind of dumb math is that as it rises 1%, we have approximately $300 million invested in that portfolio, we make $3 million more, probably 1%, but it rises without doing any more work.
If in fact, LIBOR grows faster, the historic 5%, obviously we'd make $15 million more which is thirty some odd cents a share.
(Operator Instructions) And there are no further questions at this time. I'd like to turn the call back over to Mr. Jonathan Cohen for closing remarks.
Well, I appreciate everybody's support, and we look forward to speaking with you next quarter. Thank you very much, and let us know if you need anything.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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