Resource Capital's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Resource Capital (RSO)

Resource Capital Corporation (NYSE:RSO)

Q4 2011 Earnings Call

March 8, 2012 8:00 AM ET


Jonathan Cohen – President and CEO

Purvi Kamdar – Director, IR

David Bloom – SVP; SVP, Real Estate Investments

David Bryant – SVP, CFO, Chief Accounting Officer and Treasurer


Steve Delaney – JMP Securities


Good day ladies and gentlemen and welcome to the Fourth Quarter 2011 Resource Capital Corporation Earnings Conference Call. My name is Kim and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of today’s conference.

(Operator Instructions) As a reminder this call is being recorded.

I will now turn the conference over to your host for today’s call, Mr. Jonathan Cohen, CEO and President. Please proceed, Mr. Cohen.

Jonathan Cohen

Thank you and thank you for joining the Resource Capital Corporation’s conference call for the fourth quarter and year ended December 31, 2011. 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.

Purvi Kamdar

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 1-A 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 the date hereof. The company undertakes no obligation to update any of these forward-looking statements.

And with that, I’ll turn it back to Jonathan.

Jonathan Cohen

Thank you, Purvi. First, a few highlights. Adjusted funds from operations or AFFO, for the three months and year ended December 31, 2011 was $17 million, or $0.22 per share diluted and $63.9 million or $0.90 per share diluted respectively.

Our GAAP net income for the three months and year ended December 31, 2011, were $413,000 or $0.01 per share diluted or $37.7 million or $0.53 per share diluted compared – respectively as compared to GAAP net loss for the three months ended December 21, 2010 of $9.4 million or $0.17 per share diluted and GAAP net income for the year ended December 31, 2010 of $19.4 million, or $0.41 per share diluted respectively, increases of $9.8 million or 104%, and $18.3 million, or 94% respectively.

Total revenues increased by $9.6 million or 51%, and increased by $26.7 million or 40%, as compared to the three months in the year ended December 31, 2010. We paid a dividend of $0.25 per common share for the quarter or $20 million in aggregate on January 27, 2012, to stockholders of record as of December 30, 2011.

With those highlights out of the way, I will now introduce my colleagues. With me today are David Bloom, Senior Vice President in charge of Real Estate Lending; David Bryant, our Chief Financial Officer; and Purvi Kamdar, our Director of Investor Relations.

During the year ending December 31, 2011, Resource Capital Corp. shifted its approach to creating shareholder value from short-term or long-term thinking. When the year began, we were focused on first, the continuing overhang from the credit crisis that began in 2008.

Second maximizing current returns from buying back earlier debt at a discount, and distributing as much cash to our shareholders as could be deemed responsible. And third, positioning the company for the future by building our capital base, and growing and diversifying our assets. We believe that we were successful in doing all three and that allows us to really focus in the future. As we ended the year, shareholders should take note of declining credit costs, increasing revenue, and our guidance of $0.80 to $0.90 of FFO, which means we can look to growing our dividend from a very stable and sustainable base of $0.20 per quarter.

During 2011, as we began to accelerate our focus on the future, we set and met good dividend guidance, re-termed finance and the syndicated bank loans structured vehicle, we secured multiple commercial real estate lines, including a brand new, $150 million real estate loan facility, we made investments in real estate, and increase our loan origination, and we lowered to two under $67 million the amount of mezzanine loans from the pre-financial period, pre-financial crisis period.

We end the year with only 4.2 times in leverage, and 1.5 times in leverage against our real estate portfolio. Our focus on the future, includes several key elevenths, we use our capital to grow our business and portfolio is, the result of this is that the massive increase in revenue year-over-year of over 40%, we also made multiple long-term investments, that we think will be booked value enhancers, read, long-term gains that have low or zero current return.

These investments include our $36 million investments alongside a private equity fund in a leasing platform, as well as the continued equity investment program in the distressed and value-add real estate. We also continue to opportunistically buy discounted structured credit as well as CMBS. All of these investments are meant to grow book value over the next few years. We believe that a capital allocation that includes both solid, well-performing, current credit-based assets along with longer-term capital appreciation investment will benefit our shareholder now and into the future.

Book value ended the quarter at $5.38 and was primarily down – was down primarily due to tax planning moves taken in the fourth quarter 2011. These moves were necessary because of the outperformance of the non-real estate businesses, principally in syndicated bank loans, and will not need, I repeat, and will not need to be repeated as we have increased our real estate revenue with the addition of owned real estate.

Book value also decreased due to mark-to-market of our structured bonds, capitals, ABS while our CMBS portfolio was flat. We believe that these securities have rallied significantly since January 1, 2012, and pro forma would add approximately $0.07 to $0.10 per share if marked, as of the end of February, were closer to $5.45 to $5.48 per share of book value.

We are very pleased about this trend and believe there is further upside to this number. In addition, it does not include approximately $35 million of discount that we have yet to accrete on our syndicated bank loan portfolio or approximately another $0.40. We continue to grow our business through further investments in real estate loans, real estate distressed investment and value-add real estate equity investment.

The result of these initiatives are best illustrated through the new $150 million loan facility that we signed with Wells Fargo as well as the gains in the sale of distressed real estate that we earned in the December quarter. During the December quarter, a joint venture in distressed real estate between RSO and an institutional partner sold real estate investments resulting in cash proceeds to RSO of $2.9 million, representing approximately $1.1 million of gain on investments. We just completed the sale of another investment very recently with cash proceeds of $1.2 million to RSO and a gain of approximately $1.2 million.

We are very focused on growing our business and eager to complete the investment of $185 million of cash that remain on our balance sheet as of December 31, 2011. We expect this number to decrease more significantly within the next few months. Our confidence and the ability to grow our real estate business is bolstered by our recent accomplishment. In fact, we originated $139 million of real estate home loans for the year ended December 31, 2011, and are in the process of closing even more. In the same timeframe through a joint venture, we purchased approximately $700,000 of distressed real estate investments representing a 5% interest.

We acquired a multifamily property for approximately $18 million and opportunistically converted two loans we closed to $35 million in the equity ownership. We also purchased a10% equity interest in another joint venture for $2.4 million to acquire a multifamily property and also provide an additional $7 million whole loan for a total of $9.4 million.

We sold some positions and received almost $44 million of cash from repayments and pay-down this last year. Consistent with our goal to strengthen our assets, our commercial realty portfolio is now approximately 87% home loan as compared to 67% a year ago. We are growing as demonstrated by our revenue growth of $26.7 million and this should start to translate into dividend growth.

We had a very strong credit performance this year with provisions down 68% year-over-year. Now I will ask Dave Bloom to review our real estate activities.

David Bloom

Thanks, Jonathan. Resource Capital Corp’s commercial mortgage portfolio has a current committed balance of approximately $683 million, and a granted hole of 44 individual loans. The collateral basis underlying the portfolio continues to be spread across the major asset categories in geographically diverse markets, with a portfolio breakdown of 41% multifamily, 9% office, 23% hotel, 15% retail and 12% others such as mixed use and sub-storage. From the fourth quarter of 2011 through today, we originated foreign new loans with an aggregate balance of $49.6 million.

Since real estate markets began to stabilize in late 2010, we have been actively originating new loans. Although there have been several pull backs in the real estate finance market during which time we focused exclusively on prices’ cover. Today we have closed or are closing 14 new loans with an aggregate balance of approximately $166 million with a weighted average coupon of 7.26%.

When you take into account the typical 1% origination fee which is accreted to the income over the initial two-year term of the loans, our starting coupon is 7.76% on a floating rate basis over a LIBOR floor. Notwithstanding recent starting coupons of approximately 7.25%, we know pricing pressures CMBS has reemerged for stabilized assets, at fixed-rate coupons close to 5%, and as banks are aggressively looking to put out new floating rate loans at post-crisis valuations. We will continue to focus on credit quality and made prudent pricing investments as may be required for high-quality loans.

Our portfolio of commercial mortgage possessions is in components as follows. 87% whole loans, 11% mezzanine loans, and 2% B-notes. We continue to benefit from an increasing percentage of whole loan positions in our portfolio having gained another 3% this quarter, which continues the trend that began as we started lending again and began to realize payoffs in a number of our legacy subordinate acquisitions.

We still have some restricted cash in our second structure term financing facility which is $500 million, and we have a robust forward pipeline and looked to be fully invested in this vehicle in advance of the closing of this reinvestment period which ends in June of 2012. As previously noted, our first structured term financing facility which is $345 million in size was fully invested when its reinvestment period ended in September of 2011.

On February 27 of this year, we closed a new $150 million term financing facility with Wells Fargo Bank that is designed to fund the continued growth of our core lending business, floating rate whole loans and lightly transitional cash loan properties nationwide. The addition of this leverage will greatly enhance our net interest margin, and driving meaningful increase in return on equity and our lending platform, and RSO’s overall profitability.

We are pleased to see that the majority of the asset-specific business plans across the portfolio are back on track, and progressing towards the realization of borrowers plans for value creation, and we note improving metrics across all asset classes, with the majority of the property securing our loans, realizing improved cash flow on a year-over-year basis, and continuing to trend in an upward direction.

Sales and financing activity continues to increase, as the commercial real estate recovery takes hold in additional markets. CMBS lenders, banks, insurance companies, and well-established portfolio lenders such as RSO, are all seeing increased lending opportunities, while keeping an extreme focus on credit quality, we anticipate year-over-year loan production growth, and an overall increase in the size of our loan portfolio.

RSO benefits from our focus and expertise in directly originating floating-rate bridge loans between approximately $10 million and $25 million, even though there are a number of capital sources in the market to make new loans, and despite some signs of pricing pressure, we are still actively underwriting between $250 million and $500 million of transactions a month, and are confident in our ability to continue to grow new loan originations in an impactful manner. We look forward to steady, new loan origination, while maintaining a credit quality structure, pricing and diversity of our current portfolio, continuing to grow the RSO loan platform.

As I’ve noted on previous calls, as a value added strategy, to our focus a new whole loan production, since the beginning of 2011, our dedicated CMBS team has been actively buying highly rated CMBS bonds for our two structured finance vehicles and on a $100 million credit facility also with Wells Fargo bank that is designed for this purpose. Aggregate CMBS purchases for 2011 total $100.24 million par value at an average price of 99.6%.

The Wells Fargo CMBS facility provides RSO with the ability to deploy capital in AAA rated investments returns of between 12% and 15%. In addition to our whole loan origination in CMBS bond activities. We continue to take advantage of opportunities to own properties. RSO’s equity portfolio (inaudible) of four properties, three multifamily properties and one office building , all of which continue to perform at or ahead of pro forma. These properties are planned to be medium to long term holds and we see strong potential for capital appreciation over time. We are still targeting 15% to 25% overall returns for these properties but performance a day shows the potential for returns well above original underwriting. RSO will continue to look for real estate acquisition opportunities to provide strong current cash flow characteristics and a possibility of significant value creation and capital appreciation.

With that, I’ll turn it back to Jonathan and rejoin you for Q&A at the end of the call.

Jonathan Cohen

Thanks, Dave. Now I would like to review our investment in commercial finance. In early 2011, we transformed our previous investment into a new one and now we owned our interest through a joint venture we formed with LEAF Financial and Guggenheim Securities as well as Eos. Since then LEAF has made great progress in building its vendor programs and making high-quality leases. We completed its first securitization rated by Moody’s, which was widely distributed. Either good accomplishment in just a few months and we look forward to even making more progress in future periods.

Now, I will also review our syndicated bank loan portfolio. Resource Capital’s bank loan portfolio has a carrying value of approximately $1.2 billion at number tight cost. Overall, in my opinion our portfolio has remained in excellent condition and little has changed since last quarter. As of December 31, 2011, we have specific reserves of $1.6 million and general reserves at $1.7 million as compared to specific reserves of 166,000 in general reserves of $3.3 million for the third quarter.

We continued to forecasting very, very benign outlook in corporate credit for the next year or two. In the last 12 months, there was only one new loan default and one loan where he took conditional impairment. This was great for the last 12 months was 0.3%.

As we mentioned last quarter, Resource Capital Asset Management was also entitled to earn incentive fees for performance in addition to the base fees earned for managing five bank loan portfolios. These were the bank loan portfolios that we managed for other investors.

Since the deal closed, to purchase those management contracts, in February of last year, we are on track to receive what we estimate to be approximately $33 million over the next several years. We received $7.8 million in fees to date.

Now, I will ask Dave Bryant, our Chief Financial Officer, to discuss our financials.

David Bryant

Thank you, Jonathan. RSO’s board declared a cash dividend for fourth quarter and full year 2011 of $0.25 and $1 per share, respectively. Last quarter, we began reporting on funds from operations, or FFO, as an operating performance measure. We are now expanding on that metric in reporting adjusted funds from operations, or AFFO, which reflects the normalize performance of our operations, and support both our current and longer-term earnings and growth that fuels our cash dividend payouts today, and going forward.

Our AFFO income for the fourth quarter and year ended 2011, was $17 million or $0.22 per share, and $63.9 million or $0.90 per common share diluted. AFFO for the fourth quarter and year ended 2011 was impacted by several non-cash items, totaling $6.4 million and $15.8 million, and reduced adjusted FFO income by $0.08 and $0.22 per share respectively.

Also, during the period, we took steps to ensure compliance of the 75% REIT gross income tax. We believe these tax compliance steps to be nonrecurring in nature, and not a normal part of our operations. We continue to pass all the critical interest coverage and over collateralization tests in our two real estate CDOs and four bank loan CLOs to February 2012. Each of these structured financings performed and provided stable cash flow to RSO in 2011.

The real estate CDOs produced over $22 million, and bank loan CLOs generated over $27 million of cash flow during the year ended December 31. Notably, this cash flow will increase in 2012, as we deploy restricted cash available for reinvestment, and participate in cash flow from our new Apados CLO-8 beginning in 2012. As of December 31, we had in excess of $138 million of restricted cash in these structures, comprised of approximately $58 million in over $80 million in our bank loans and real estate deals respectively.

Except for approximately $20 million in Apados CDO-1 where our reinvestment period expired in July, this cash is available for reinvestment in our deals which we expect will provide very attractive spreads over the CLOs of the associated debt.

Of the Q4 provisions from loan losses of $6 million, $5.1 million is related to bank loans and $0.9 million is for real estate loans. Regarding our bank loan portfolio, we increased our reserves by $4.3 million, virtually all of it related to loan sales during the quarter. On our real estate loans, the 855,000 was added to reserve for previously-impaired whole loan.

Overall, I characterized our credit as improving and importantly, all of our 40 real estate loans, including the legacy loans are performing through February 2012. Our leverage is 4.2 times. When we treat our trough issuances which have a remaining term of 25 years as equity, our leverage is 3.6 times. Our leverage increased from September 30, 2011, primarily due to the issuance of our fourth CLO, Apados 8 that closed in October. We retained 43% of the equity in this deal.

Focusing on real estate, we began 2010 approximately 2.3 times levered in our real estate CDOs, after accounting for the debt repurchases in 2010, and 2011, we ended 2011 a conservative 1.5 times lever on our real estate portfolio. We ended 2011 with a GAAP book value per share of $5.38, down from $5.66 at September 30. $0.28 change resulted primarily from reduced mark-to-market adjustments on our available for sale ABS portfolio of $0.04 per share combined with the cash dividend of $0.25 offset by net income for the quarter of $0.01.

At December 31, 2011, our equity is allocated as follows: commercial real estate loans in CMBS, 63%; commercial finance, 31%; and 6% in other investments.

With that, my formal remarks are completed and I’ll turn call back to Jonathan Cohen.

Jonathan Cohen

Thanks, Dave. With that, I will open the call for any questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Steve Delaney with JMP Securities. Please proceed.

Steve Delaney – JMP Securities

Thank you. Good morning, everyone.

Jonathan Cohen

Good morning, Steve.

David Bryant

Good morning, Steve.

Steve Delaney – JMP Securities

My first question, I have two things. First was to ask you about the while recognizing the big drop in the provision for credit losses year-over-year. I did notice that $6 million in the fourth quarter looked tired than we’ve in the last couple of quarters. And Dave Bryant did touch on that. I guess I was surprised to find that the majority of that was actually on bank loans rather than CRE. So could you maybe give us a little color as to – since the bank loan portfolio has performed so well, was there a specific credit exposure – can you hear me?

David Bryant

Yeah. I can hear you. Go ahead, Steve.

Steve Delaney – JMP Securities

Yeah. I was just going to ask if there was a specific exposure that you are trying to shed, kind of like you’ve been shedding noise in the CRE portfolio. And as part of that, the – there was like $1.8 million of realized loss in the quarter on investments and loans available for sale and I didn’t know whether those two items were connected in some way. Thank you.

David Bloom

Yeah, Steve, just to address that, those – the reason we sold – so we – basically as we put forth most of the noise in that – in the quarter was from cash planning. What happened was the bank loan portfolio quite frankly over-performed in the real estate in terms of revenue and real estate was a little bit less.

Mostly because it didn’t keep up with the speed of investments and profit that was coming from the commercial finance part of the business, recognizing as we needed to sell things on the bank, syndicated bank loan side or the commercial finance side, so were selling things that – at a slight discount in order to generate cash losses in order to come back into compliance for the retest. It really didn’t have anything to do with the quality of the assets or whether or not they would have been impaired.

But just in selling them, we were generating losses so we were selling things. But even though we thought we’re perfectly good credits that would go to par that we had to generate losses. So we were selling what we had to at a discount in order to generate cash losses.

But really had nothing to do with credit, it really had much more to do with tax planning and in the fourth quarter and as we mentioned, that won’t recur again because we’ve now bought real estate properties and have enough revenue that’s coming in from those real estate properties, or I should say, converted loans to equity so that we won’t have that problem, going forward. So the bank loan product – the bank loan portfolio is an excellent shape, and in no means were those losses kind of credit-oriented, as much as they were sold at a discount to generate tax losses...

Steve Delaney – JMP Securities


David Bloom

Those losses, Steve, I just geography, when the loans were sold at losses, the loss goes through the provision line item.

Steve Delaney – JMP Securities

Understood. That’s very helpful, I apologize if I missed that nuance.

Jonathan Cohen

No, it’s a little bit confusing, but it really had more to do out-performance and tax planning than it did with credit area the credit on the bank loan portfolio is pristine.

Steve Delaney – JMP Securities

And specifically, you’re referring to, I think, is 80% income tax for goodwill income, is that...

David Bloom

It’s 75 it’s kind of links to 75%, where at least 75% of your gross income must come from qualifying real estate.

Steve Delaney – JMP Securities

Real estate? Yes. Okay, great. That’s helpful.

Jonathan Cohen

And as I pointed out, even though we took the hits there are, we did buy a large portfolio of, which is Apados 8, of bank loan portfolios at a deep discount, and so we actually have $40 million, $35 million of accretion that we haven’t accreted in the book, so when you add that back in, you obviously make up a lot of the difference that we, unfortunately, had to sell for tax reasons.

Steve Delaney – JMP Securities

Understood. That’s helpful. And my second question had to do with the CMBS effort, which appears now to kind of be ramping up with the $100 million Wells line. You’ve talked a lot over the years about the strength of Gretchen’s team on the bank loans, could you just talk briefly about the resources you have within REXI, and who is specifically leading that CMBS underwriting effort, are you – and where in the caps stack are these like the AM and HA tranches and what type of un-levered yields you’re seeking to obtain there? Thanks.

Jonathan Cohen

Well, really, just want to be clear, I think we will have two efforts. One is on the CMBS side and that’s led by a woman named Joan Sapinsley and her team. Joan had over 20 years of experience leading the charge for a very large insurance company, Teachers, insurance company, one of the largest buyers to CMBS. She bought at Teachers everything from AAA down to subordinate notes. A true veteran of the CMBS, well, she’s been with us probably four or five years or more, and has done an excellent job of leading the charge on CMBS.

We’re mostly buying at this point. We buy cyclically as AJs or AMs go down, we’ll buy them and rise them up and we have a lot of unbooked gains that are in that portfolio. From buying – which we sold out before now we bought when they went down, now they rallied significantly, as we mentioned in the call. But most of the time, right now we’re buying very short-dated AAA, very high up the stack. Basically looking for – even though it’s very short and are paying off very quickly so we have to replenish it, returns between 10% and 15% and betting a little bit more on our understanding of the rate of prepayment rather than the credit in the portfolio.

Steve Delaney – JMP Securities

Okay. Very good. That’s helpful, Jonathan.

Jonathan Cohen

And then the second part of what we’re doing, just not to confuse you, we do have $100 million line to do that which we’ve been using. But we’ve also just secured a $150 million line which really goes to reinvigorate outside of the traditional CDOs that we’ve viewed. Our real estate lending business, which is lending to borrowers who want to borrow to buy or refinance properties that was some sort of value-add, transitional nature to it, so we are able to, and we think that that’s a mid teens kind of call it, 12% to 17% kind of low-level return business that we like a lot.

Steve Delaney – JMP Securities

Very helpful. Good luck in 2012, now.

Jonathan Cohen



(Operator Instructions) Mr. Cohen, there is no further questions at this time.

Jonathan Cohen

Thank you very much, and we look forward to reporting on our next quarter.


Ladies and gentlemen, that does conclude today’s conference, thank you for your participation. You may now disconnect, and have a great day.

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