RAIT Financial Trust (NYSE:RAS)
Q2 2011 Earnings Call
July 29, 2011 10:00 am ET
Andres Viroslav – IR
Scott Schaeffer – CEO
Jack Salmon – CFO
Good day ladies and gentlemen and welcome to the second quarter 2011 RAIT Financial Trust earnings conference call. My name is Chris and I will be your conference moderator for today. Presently, all participants are in listen-only mode. Later we will facilitate a question-and-answer session (Operator Instructions).
At this time, I would now like to turn the conference over to your presenter for today Mr. Andres Viroslav, Director of Corporate Communications. Sir, you may proceed.
Thank you, Chris and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s second quarter 2011 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 1:00 PM Eastern Time today. The dial-in for the replay is 888-286-8010, with a confirmation code of 18649139.
Before I turn the call over to Scott, I’d 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 releases 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?
Thank you very much Andres. I thank all of you for joining us this morning as we present RAIT’s second quarter 2011 results. We are pleased to report another quarter of progress at RAIT. I would like to take this time to review some of the key highlights. We are reporting $4.4 million of operating income, our third consecutive quarter of positive operating income. We are also reporting AFFO of $0.22 per share. GAAP earnings for the quarter were negative driven by non-cash mark-to-market adjustments of $26 million to our Legacy Taberna portfolios Jack will discuss this in more details shortly.
We received $106 million from loan repayments in asset sales during the quarter. We originated and funded $52 million in first mortgage loans purchased a $30 million first mortgage loan to $25 million and executed term sheets to fund $32 million in new loans over the next 30 days. Our newly formed CMBS group structured the sale of approximately $61 million first mortgage loans into a third party CMBS securitization. The closing originally scheduled for yesterday has been delayed due to S&P’s internal review of the CMBS ratings methodology. We expect these loans to be sold during the third quarter.
Independence Realty Trust is RAIT’s first non-listed REIT subsidiary. Independence is focused on acquiring a portfolio of multifamily properties. During the quarter, the SEC declared Independence’s registration statement effective for its issuance of common stock. Independence is now positioned to begin its capital raising efforts as we seek to enter into selling agreements with Independent broker dealers.
In our owned real estate portfolio, we continued to experience positive trends in both occupancy and rental income. In our loan book, we are reporting lower NPLs [ph] and reduced provisions for losses of $950,000 for the second quarter as the portfolio has stabilized. And as you can see in the press release, we continue to pass all of our CRE CDO coverage tests with dramatic improvement in the rate CRE CDO II over collateralization test.
During the quarter, we continued the deleveraging process. We repurchased $16.8 million of our 6.875% [ph] senior convertible notes $6.7 million of RAIT CRE CDO debt and we retired $15.7 million, which was the remaining outstanding of our 10% senior secured notes due in 2014. Our Board authorized a 1 for 3 reversed stock split during the quarter, which went into effect after the market closed on June 30, 2011. And lastly RAIT’s Board reinstated its review of the common stock dividend to a quarterly basis and declared a second quarter common dividend of $0.06 per share. This is the first quarterly common dividends since October of 2008 and its being paid today.
At this point, I would like to turn the call over to Jack. Jack?
Thank you, Scott. The financial highlights for the quarter ended June 30,2011 include a GAAP net loss of $20.1 million primarily caused by the changes in fair value of our financial instruments and an $8.5 million income or $0.22 per common share of adjusted funds from operations, which (Inaudible) $0.03 per share in AFFO over the first quarter of this year.
I’m going to summarize the consolidated results for operations, which has shown significant improvement this quarter in comparison to the same quarter last year and on the year-to-date basis as follows. Rental income of $22.1 million, increased $4.4 million or over 25% compared to the $17.7 million during the same quarter in 2010 and it’s up almost $10 million year-to-date. Rental growth reflects the increase in occupancies from 74% to 83% since the second quarter of 2010.
The related real estate operating expenses in this portfolio of $13.8 million were $400,000 higher this quarter, compared to last year as new properties came on stream. The increases in rent net of these operating costs resulted in $8.3 million of property and operating income, which is $4 million higher run rate than in 2010.
Interest expense of $22.3 million for the quarter and $45.7 million year-to-date is running 9% lower than the comparable periods in the prior year. Since we’ve reduced the aggregate amount of debt outstanding thereby lowering our total borrowing costs. Compensation expense of $5.7 million this quarter and $12.3 million for the first six months of the year is running $2.6 million or 18% lower year-to-date than in 2010.
G&A expense of $4.4 million is $900,000 lower this quarter versus the second quarter of 2010 and 8% lower on the year-over-year basis despite the incremental costs associated with the acquisition and launch of Independence Realty Trust this year.
Continuing improvements in our CRE loan portfolio from a credit perspective have resulted in lower provisions for loan losses of $2.9 million for the first half of 2011, compared to $24.9 million in the first half of 2010. During the quarter, we converted two multifamily loans into owned real estate.
Total expenses for the quarter are $54.5 million represent a 16% reduction from the second quarter of 2010 of $65.0 million. As a result, we generated $4.4 million of positive operating income this quarter, which was the $9 million improvement over the second quarter of last year and for the first six months of 2011 we’ve generated $6.1 million of operating, which was a $16.9 million improvement over 2010.
During the second quarter, we generated $4.3 million gains on sales of assets and debt extinguishments this year compared to $24.9 million in similar gains for the same quarter of last year. We also experienced a large change in the net fair value of mark-to-market adjustment this quarter, which was the net charge of $25.7 million. This non-cash amount is comprised of $2.1 million of asset pricing improvements on our Taberna securities offset by a $6.8 million increase in the non-recourse debt financing of these portfolios and further reduced by a $21 million increase in the related interest rate hedges, reflecting the high volatility in long-term interest rates that we had experienced recently.
This change in fair value was the primarily cause of a reported GAAP net loss of $20.1 million this quarter. The change in fair value of these financial instruments impacts the reported GAAP earnings and our FFO, which was the non-GAAP measure of operating performance. However, adding back the $25 million non-cash charge together with other adjustments as shown on schedule one of AFFO resulted in AFFO of $8.5 million this quarter and $15.5 million for the first six months of 2011.
Our AFFO per common shares increased each of the past three quarters from $0.15 at 12/31/2010 to $0.19 at the first quarter of this year and $0.22 at June 30. In comparing the $0.22 of AFFO this quarter to the $0.26 in the second quarter of last year it should be noted that we reported a one-time gain on sales of our management contracts of over $7.6 million in 2010, which contributed significantly to the prior year AFFO.
Turning to our assets, our $1.2 billion CRE loan portfolio has continued to perform better and loan product picked up as we received $38 million of loan repayments and funded $52 million of loans this quarter. As a result, our two CRE loan securitizations CRE I and CRE II are meeting all their interest coverage and OC requirements. And as with the recent payment cycle the most stringent OC test for CRE II was at 123.6% versus a trigger of 116.2% and for CRE II it was at 118.9% versus a trigger of 111.7%. CRE II has only one $4 million non-performing mezzanine loan outstanding today. Recently a $20 million mezzanine loan was brought current by the borrower, returning it to performing status and thereby dramatically improving our OC test.
The total NPLs [ph] is $94 million are down from $121 million at March 31, 2011 and represent 8.1% of the unpaid balance in the CRE loan portfolio. We have approximately $50 million or 53% of the current NPL [ph] balance available in reserves against any future losses.
In our CRE I portfolio $862 million of assets has increased $58 million during the quarter, primarily from the additional of two multifamily assets arising from loan conversions. And then one transaction, we purchased from a third party a $30 million senior first mortgage at a discount and then converted that into our owned real estate.
We have also completed the sales of two multifamily assets this quarter with gross proceeds of approximately $67 million thereby creating new lending liquidity in our CDOs. Turning to our debt capital, we began the year with $143.6 million of our 6.78% [ph] convertible debt outstanding, after repurchasing an additional $16.8 million this quarter, we now have approximately $38.8 million of this debt outstanding.
During this quarter, we also purchased $6.7 million of our CRE CDO non-recourse notes payable, which generated gain on debt extinguishment of $4.2 million. And turning to our bank debt, at quarter end we have $19.7 million of recourse debt outstanding on a secured bank credit facility, which we expect to refinance during the coming quarter.
In April, we prepaid the entire $15.7 million outstanding balance of the 10% senior secured notes that as in April 2014 maturity date. As a result of these actions we’ve reduced our recourse debt during the quarter by $32.5 million to a caring value of $245.5 million as of June 30, 2011.
Our total debt-to- equity ratio was 2.2 times at quarter end, compared to a ratio of 2.3 times at December 31, 2010. In the next week we will file our quarterly report on Form 10-Q and we also expect to file a new self-registration statement on Form S3 to replace the current self-registration, which is expiring.
With that, I will turn the call back to Scott.
Thanks Jack. Operator, I think at this time we would like to open the call up for questions.
(Operator Instructions) our first question comes from the line of (Inaudible) from Compass Point. Ma’am you may proceed.
Hi guys, just two quick questions. With the commercial loan balance, the increase in the commercial loan balance this quarter in any way related to the transfer of properties into Independence Realty or the two loan conversions that were completed during the quarter?
No, it really is a result of the net effect of the loan repayments against the loans that we funded and or repurchased.
Okay, thank you. And then also can you provide the approximate size of the fees generated from the $61 million in commercial loan origination in the CMBS JV? And were they reflected in this quarter’s results?
First of all they were not reflected in this quarter results it was a sale that was expected to be consummated, I think it was yesterday and we had estimated the gain to be a little over $2 million, of course it got caught up in the S&P delaying their ratings for all CMBS issuances.
Okay, thank you.
Our next question comes from the line of Richard (Inaudible). You may proceed.
Hi, guys. Just a couple of things, you mentioned something about a mezzanine loan being paid off that was subsequent to quarter end.
It was no, you are referring to the $20 million mezzanine loan that was non-performing.
No, that’s a mezzanine loan that did not payoff, it’s one where there was an extension being negotiated with the borrower and the senior lender. And during that extension period the borrower wasn’t paying so the senior loan went into default and our loan accordingly wasn’t paying. However, the extension was ultimately agreed to the borrower brought all of the loans current including errors [ph] and we agreed to extend as well. And the loan will be kept (Inaudible) forward-looking basis. So it’s one where, it was a non-performing loan but it wasn’t non-performing because of any issue relative to the property. It was non-performing just because of an extension being worked through between the borrower and the lenders.
Did the borrower come up with more extra fresh cash equity?
They did, a significant amount, they were somewhere in the area of $14 million or $15 million.
Okay, so you are I mean that measurably approves your position in the capital stack?
Well, it’s the new equity coming in behind us and it’s one where we believe all along that the value of the property was in excess of the total debt outstanding anyway.
It’s really not non-performing just because of again the non-payment during the negotiation period to the expansion.
That’s good to hear. Hey, I’m sorry I missed a bit of the beginning of the call but is there some kind of apples-to-apples number you got sort of and more sort of looking at your previous quarter, in terms of sort of recurring the cash flow basically, which would to me mean your NOI from the properties plus cash flow from the securitizations from the CDO’s.
Yeah, Richard. I don’t have a breakdown but I think by evidence of the growth in AFFO, you will see this has been reported each of the last year quarters AFFO has increased, which I think is a good indicator of growth in cash flow.
But there’s nothing non-recurring in there, in AFFO?
It’s all on the comparable basis in all quarters that were presented in the same basis.
Okay, good enough. Thank you, those are my questions.
That was our last question. I would now like to turn the call back over to Mr. Scott Schaeffer for closing remarks.
Well, thanks I would like to summarize by saying that RAIT is making great progress, what continuous to be a volatile and uncertain market. We are experiencing improving credit trends and real estate fundamentals within our portfolios, particularly in the multifamily asset class. And in the near term we will continue to focus our efforts in two strategic directions, real estate lending with a focus on bridge and CMBS loans and multifamily acquisitions to our Independence Reality Trust subsidiary. I’d like to thank you for joining us all today and we look forward to speaking with you again at the end of the third quarter.
Ladies and gentlemen that concludes today’s conference. Thank you so much for your participation. You may now disconnect. Have a great day.
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