RAIT Financial Trust (NYSE:RAS)
Q2 2016 Earnings Conference Call
August 5, 2016 09:00 AM ET
Andres Viroslav - Head of IR
Scott Schaeffer - CEO
Scott Davidson - President
Jim Sebra - CFO & Treasurer
Steve DeLaney - JMP Securities
Jade Rahmani - KBW
Good day ladies and gentlemen, thank you for standing by. Welcome to the RAIT Financial Trust Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later and the instructions will be given at that time.
Now I would like to welcome and turn the call to Mr. Andres Viroslav. You may begin.
Thank you, Carman, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust second quarter 2016 financial results. On the call with me today are Scott Schaeffer, Chief Executive Officer; Scott Davidson, President; and Jim Sebra, RAIT’s Chief Financial Officer.
This morning’s call is being webcast on our Web site at www.rait.com. There will be a replay of the call available via webcast on our Web site and telephonically beginning at approximately 12:00 PM Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 47299063.
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 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 Web site, 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 may be required by law.
Now, I would like to turn the call over to RAIT’s Chief Executive Officer, Scott Schaeffer. Scott?
Thank you, Andres. Thank you all for joining us today and welcome to RAIT’s second quarter 2016 earnings call. Second quarter CAD was $0.12 per share hitting the middle of our quarterly guidance range. We remain focused on executing our capital recycling and debt reduction strategies, driven largely by the sale of RAIT owned properties. And we’re continuing to originate bridge loans for our sixth floating rate securitization as the demand for floating rate bridge loans remain strong.
We are also continuing to originate and sell CMBS loans albeit at much lower volume than previous years. CMBS volumes are down significantly for the market as a whole, even though spreads have been tightening. The new risk retention rules and B buyer uncertainty have weighed on the CMBS market. However, looking forward we believe the outlook to be improving.
RAIT's property portfolio with our multifamily properties leading the way, continues to perform very well. At June 30, we owned 60 multifamily properties consisting of 4,215 units along with 12 office properties, totaling 2.1 million square feet and five retail properties with 1.4 million square feet. Together our same-store NOI increased 6% over the second quarter of 2015.
We are taking advantage of the strong sales market to opportunistically sell properties from our own portfolio. Over time this strategy supports both reductions in debt and frees up capital from our legacy securitizations for reinvestment into our lending platform. However, in the short-term it will reduce CAD as we delever and redeploy capital.
During the quarter we sold six properties consisting of five apartment communities and one parcel of land for $49.2 million, generating a $5.9 million book gain. The proceeds from these sales were used to reduce RAIT debt.
Before I turn the call over to Jim, I'd like to comment an Independence Realty Trust. At June 30 IRT owned 46 multifamily properties consisting of 12,982 units. The portfolio is performing very well at 94.4% occupancy with $961 per month rent. Year-over-year NOI growth was 8.9%. RAIT received $3.1 million in property management advisory fees from IRT during the quarter and still owns 7.2 million shares of IRT stock.
At this time, I’d like to turn the call over to Jim to report on the financial results.
Thank you, Scott. We are reporting a GAAP net loss of $7.6 million or $0.08 per diluted share for the second quarter. CAD was $10.5 million or $0.12 per common share and was in line with our expectations. However, CAD was lower than second quarter of last year due to increased real estate sales and loan repayments.
In Q2, our lending business generated $23 million of new loans, had loan payoffs of $120 million and we sold $21 million of CMBS loans into securitizations. Net interest margin decreased to $14.4 million as a result of the smaller loan portfolio.
From a credit perspective, all of our metrics remain consistent with the end of 2015 and in Q1 2016. We did convert one loan on a portfolio of four properties to owned real estate Q2, and had a small charge off against our loan loss reserves. We currently have $200 million of floating-rate bridge loans available for securitization and are originating floating-rate bridge loans with the expectation of completing our sixth floating rate securitization in the fourth quarter.
Regarding our real estate portfolio, we’ve identified nine properties for sale aggregating $214 million. The sale of these properties will generate approximately $20 million of GAAP gains and $25 million of liquidity after repayments of debt. The net effect of these sales after the redeployment of the capital is estimated to be at $0.03 annual reduction in CAD.
In Q2, the RAIT only same-store NOI increased by 6% across all asset classes when compared to the similar period of 2015. This improvement was led by RAIT's multifamily assets which had same-store NOI growth of just under 12%. The supplemental package provides additional information on the financial performance on the same-store portfolio.
During Q2, we sold six RAIT properties for total proceeds of $49.2 million and IRT sold two properties for total proceeds of $70 million. These sales generated a net gain of $35.6 million, $5.9 million of which was associated with RAIT properties and $29.7 million was associated with IRT properties.
Lastly, we did incur a $3.9 million of asset impairments in Q2, including $1.3 million of asset impairments on one real estate asset, $1.7 million associated with a tenant who defaulted on their lease and vacated early and $800,000 associated with a real estate joint venture that terminated during the quarter.
From a balance sheet perspective, we continue to focus on maintaining liquidity and delevering our balance sheet. Since year-end we reduced our indebtedness by $323 million as loans have repaid or as real estate assets have been sold. This includes the repayment of $29.2 million on our 7% convertible notes and the repurchase of 9.6 -- $19.6 million of our 4% convertible, 7.625% senior notes and our 7.125% senior notes.
As a result, our leverage ratio has improved to 75.7% at June 30, down from 77.4% at year end. Currently we do not have any unsecured debt maturity before October 2018.
From a liquidity standpoint, we ended the quarter with aggregate liquidity of $456 million including $386 million of capacity on our lines of credit, $40 million of cash and $31 million from future property sales and refinancing.
Before handing the call back to Scott, let's review our 2016 guidance. We are updating our 2016 CAD guidance to be between $0.48 and $0.55 from $0.50 to $0.60 and are expecting CAD to be between $0.10 and $0.12 per share for the third quarter. The reduction in our 2016 CAD guidance is a result of higher than forecasted loan repayments and real estate asset sales. Scott?
Thank you, Jim. Operator, at this time, I’d like to open the call for questions.
Thank you. [Operator Instructions] And our first question is from the line of Steve DeLaney with JMP Securities. Please go ahead.
Thank you. Good morning, everyone.
Thanks for the quick review there. The thing that strikes me and -- and Scott this is not just coming from RAIT, but these level of repayment, no one seems to be able to grow the portfolio even if they’re in a capital position to do so with what’s coming back. And you, of course in your updated guidance I believe you increased your expected repayments to $350 million from $200 million. Can you guys just comment on what you’re seeing there? I mean, is this all -- I assume, if it was structural maturities you would have already kind of had those in your mix. So is this all driven by this drop we had in rates over the last couple of quarters?
I believe it is, Steve. We've all known that there's a lot of maturities coming in the next few years. But I think some of them have been accelerated just because of the low interest rate environment.
Okay. The second thing -- you did -- you’re kind of keeping a toe in the conduit and I certainly understand the caution over the first half of the year. All the signals that are coming out of the market, including the risk retention deal this week, gosh it seems to be positive the way spreads are and we saw a peer yesterday who kind of stayed -- a bigger peer much larger peer, but who stayed in the game put up a gain on sale margin of over 5%. I’m just curious -- I believe you’re -- can you make any comment on your guidance as to whether you are still assuming zero CMBS gains for the year? And if that’s your -- if that’s the case those -- that deal is a touch conservative given the market environment. If you could comment on that, I would appreciate it.
Sure, Steve. Our guidance does assume zero gains and it is conservative. We believe or hopefully it will be not zero, but be something positive. But just because of the volatility that we’ve been through really for the last nine months in the CMBS market, we thought it best to be a conservative on guidance.
Appreciate the comments this morning. Thanks.
And our next question is from the line of Jade Rahmani with KBW. Please go ahead.
Thanks for taking my questions. Is a consequence of the accelerating loan repayments higher interest expense, because in your securitization the higher more senior rated tranches, which are lower cost to RAIT pay down first, is that what drove the higher interest expense in the quarter?
No, it's not higher interest expense per se. It's a compression of your net interest margin, because we are actually paying off bonds. So our interest increase -- our interest expense isn't increasing. It's just the bonds that we’re paying off are costing less than the assets that are being repaid. Jim, you can have a comment on the increase in expense.
Yes, the increase is more driven by as the assets are repaying, therefore the bonds are repaying, we are accelerating some of the amortization of the deferred financing costs, which increases interest expense.
Okay. That’s -- that makes perfect sense. I guess in the second half of the year do you anticipate further interest expense increases?
We do expect a little bit depending on how fast the assets prepay or how fast they do prepay. From a run rate perspective, if you start with the second quarter, you’re probably pretty close.
Okay. And regarding the pace of loan repayments, which year-to-date total around $64 million versus your guidance that implies a modest tick up in originations. Are those -- can you talk to the mix between loans for sale versus where you hold for investments?
Jade, you mean properties, not loans?
I’m sorry. I didn’t follow you.
What do you anticipate originating for the conduit business versus what you’ll put on the balance sheet?
Jade, I think the expectations in the conduit side is slightly lower, I mean probably in the low -- I think where -- the forecast includes $50 million of originations in that business for the remaining part of the year.
Okay. And what’s your feeling on the aggregator side about this demand for your loans? You have confidence in your ability to sell $50 million to the aggregators?
Absolutely. We have strong relationships that we’ve maintained. We sold loans in July, and we expect to be able to sell what we originate going forward.
And one of your peers in a conference call cited some increased [cost] [ph] with respect to credit quality and loan underwriting. Can you give your view if you’re seeing any deterioration in underwriting standards? And in addition, can you comment on credit quality across your portfolio and whether you’ve seen any signs of deterioration?
I’m going to let, Scott Davidson handle the underwriting standards. But let me respond to your second part of the question. We’re not seeing any real change in the credit quality of our existing portfolio of loans. You saw one conversion into property this quarter. Now all of those conversions that have happened really over the last two years has been legacy loans from pre-2006, that are now coming to their maturity where borrowers don’t believe that they can refinance the properties at a level that would take us out, and instead of putting more capital in are basically just saying, here, you take it back. So it's not the loans have been performing, but we’re getting to maturities where the borrowers still because of underwriting standards today can’t refinance us out and just are giving it back because the loan balance is close to the property value. But it's all loans from pre-2006 and ’07. Going forward everything that we’ve originated from 2011 on, we’ve had no credit issues whatsoever on interest payment and/or maturities. Scott, do you want to talk about current credit underwriting standards?
Sure. I think that while I think I know the party that you’re referencing and their comments, why don’t I just give you our view, which is, one of the reasons that we’ve been focused or originated fewer loans is that there was a period over the last little while, the last few months, where we thought focus in the market were being particularly aggressive and we didn’t feel as though we wanted to be similarly aggressive. As Scott, highlighted we haven’t, I think we’re started re-originating loans had any credit issues with them. And one of the strengths certainly of our floating rate program is we’ve been very consistent about the credit quality and types of loans we’ve originated, how we’ve underwritten those loans and that the latest continue that program, sell loans -- securitize loans, continue to stay active and we think be sort of at the forefront of that market. As credit conditions worsened we chose not to originate loans that we didn’t think met our criteria and so we didn’t. What we’re seeing more recently is that more loans that we would be willing to underwrite or willing to make an underwriting on reasonable terms are available today, and as opposed to one month or five or even six, seven, ten months ago. And as a consequence we feel like the market is doing better. But I would agree that underwriting standards and aggression by originators in an otherwise smaller market has been a problem. It's another reason we’re conservative in the CMBS space because that, that markets gotten smaller, it's been -- we’ve noticed folks being more aggressive about loans, loans that we don’t want to be aggressive about. And as a consequence as you’ve seen we haven’t originated this many loans this year as we have last year. So the very short answer is, we really haven’t changed our credit terms. If the market has got more aggressive we’ve sat back and when we can make loans that meet our credit terms, we’re happy to make them. But we won't chase the market and we haven’t.
Thanks very much for taking my questions.
Thank you. And I’m not showing any further questions in the queue. I’d like to turn the call back to, Scott Schaeffer for final remarks.
Well, thanks for joining us today, and we look forward to updating you on the third quarter later in the year. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.
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