RAIT Financial Trust CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: RAIT Financial (RAS)

RAIT Financial Trust (NYSE:RAS)

Q1 2011 Earnings Call

April 29, 2011, 10:00 a.m. ET


Andres Viroslav - IR

Scott F. Schaeffer - CEO

Jack E. Salmon - CFO and Treasurer


Gabe Poggi - FBR Capital Markets


Good day ladies and gentlemen and welcome to the First Quarter 2011 RAIT Financial Trust’s Earnings Conference Call. My name is Towanda. And I will be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I’d now like to turn the presentation over to Mr. Andres Viroslav, Director of Corporate Communication. Please proceed, sir.

Andres Viroslav

Thank you, Towanda and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust first quarter 2011 financial results. On the call with 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 a call available via webcast on our website and telephonically beginning at approximately 12 PM Eastern Time today. The dial-in for the replay is 888-286-8010, with a confirmation code of 22905171.

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 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.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?

Scott F. Schaeffer

Thank you very much, Andres. And thank all of you for joining us this morning as we present RAIT’s first quarter 2011 results. Let’s start with some key highlights. We are reporting our second consecutive quarter of operating income. We increased rental income and property NOI on our owned portfolio. Our NGO’s are down in our loan book. Our provision for loan losses has declined to 1.95 million and our CRE CDO coverage test have stabilized.

In March we raised gross proceeds of 115 million to the issuance of the new convertible notes and used the proceeds to repurchase 88 million of our 2007 convertible notes and to reduce short-term recourse debt by 21 million or 51%. Subsequent to quarter end we repaid an additional 15.7 million of higher cost senior secured debt. And finally we are experiencing reduced volatility and our results quarter-over-quarter.

RAIT is much different company today than it was four year's ago. We have aggregated the sizeable portfolio of directly held real estate and moved away from being solely a specialty finance company.

Going forward as we continue to build our lending, ownership and management capability, we also must adapt that performance metrics to match our new direction. Therefore, we are introducing a new reporting metric adjusted funds from operation which will useful supplemental operating performance measure to our GAAP results. I’m pleased to report GAAP earnings of $0.05 per diluted share and 1.7 million of operating cost at the quarter. Our second consecutive quarter of operating income which includes 7.1 million in depreciation expense.

Adjusted funds from operation or AFFO was $0.06 per share for quarter ending March 31st, 2011 compared to $0.03 for the quarter ended March 31st, 2010. Jack will discuss great financial results, AFO and AFFO in more detail and highlight key drivers of RAIT’s first financial performance shortly.

We continue to from improvements in the commercial real estate markets in general and specifically from improvement in our core portfolios. These improvements have had a positive impact on the stability and importantly the quality of RAIT’s earning. The quarterly earnings are a direct result of increasing net operating income, driven by higher occupancy rates within our owned commercial real estate portfolio combined with stabilizing commercial real estate loan book, lower credit cost and fewer non-performing loan. General and administrative costs are up slightly as we invest capital today and the future revenue generating initiatives.

During the quarter we took advantage of an opportunity to an effect refinance our outstanding convertible debt. We successfully raised gross proceeds of 115 million and a public debt offering to the issuance of 7% senior convertible notes. The proceeds from the offering neutralized the April 2012 [put for cash] of our 6.78% convertible debt. We believe the company has the resources to retire the remaining $55.6 million balance put to us in April of 2012.

This transaction allows us to look forward and to focus our efforts on building revenues through our core competencies utilizing our vertically integrated commercial real estate platform.

Now into business initiatives. First as I mentioned last quarter in addition to our bridge and mezzanine lending programs, we recently formed a CMBS lending unit utilizing our assisting platform and internal expertise, we have been making progress, we are in the market quoting new loans and building up pipeline for our future securitization. Secondly, as previously announced we formed a non-traded REIT named Independence Realty Trust or IRT to acquire a multi-family property. RAIT additional manager of IRT and we will benefit from this strategy primarily through generating a recurring source of asset and property management fees as well as another revenue to access capital markets to further our strategic goals. We recently filed IRT’s initial registration statement which can be reviewed on filed with the SEC.

At this point I’d like to turn the call over to Jack. Jack?

Jack E. Salmon

Thank you, Scott. Our financial highlights for the quarter ended March 31st, 2011 included GAAP earnings per share diluted of 5.8 million or $0.05 per common share for the quarter; 6.9 million or $0.06 per common share diluted of adjusted funds from operations or AFFO; and 7.6 million in net reductions of total debt outstanding this quarter with significant changes at our debt structure since December 31st, 2010 which I will cover in just a minute.

Before I begin reviewing the first quarter results, I’d like to highlight that we made certain changes in our income statement to improve the presentation for investors and analysts. We now present the components of revenue broadly. To include rental income on our owned real estate portfolio, interest income on our loan book and fee income from our services.

We have to bind all components of investment and corporate interest expense as one line item under operating expenses. These changes better reflect our business focus on our lending and direct ownership of real estate and will be reflected to all periods presented going forward.

As Scott mentioned, there are changes in RAIT’s business model over the last several year's which have resulted in management using additional metrics to evaluate our financial performance. RAIT’s increasing direct ownership of real estate and other changes in our portfolios led us to adopt two non-GAAP financial performance measures we are getting this quarter. Funds from operations or FFO and adjusted funds from operations or AFFO.

We are presenting FFO and AFFO as supplemental non-GAAP performance measures which management uses for internal purposes and that other REIT use in reporting their results. Management believes that these additional measures can be useful to investors in evaluating RAIT’s operating performance overtime. And reference is made to exhibit one in the press release for the details of these computation and how management's rationale for presenting this information.

Now on to the first quarter results. Our consolidated results of operations saw significant improvement this quarter in comparison to the same quarter last year as follows. Rental income was 21.3 million increasing 5.2 million or over 30% compared to the 16.1 million during the first quarter of 2010. Related real estate operating expenses increased to 12.6 million or 2.1 million higher than the comparable quarter. This resulted in higher net operating income of 3.1 million.

Rental growth and increases in real estate operating expenses reflect a growth in occupancy of 71% to 82% since the first quarter of 2010, profit increased the number of owned properties. Total revenue decreased 7.9 million year-over-year as interest income and fee income in 2010 included results of the collateral assets and manager contracts that we sold in April of 2010.

Compensation expense of 6.5 million is running 1.5 million or 19% lower than in 2011. And although G&A is in line year-over-year the 2011 quarter includes approximately 300,000 of acquisition expenses related to our purchase of IRT in January. Otherwise, G&A expenses are running approximately 5% lower this year.

As Scott mentioned the continued improvements in our CRE loan portfolio from a credit perspective resulted in lower provisions for loan losses of 1.95 in 2011, compared to 17.35 for the first quarter of 2010. During this quarter we converted only 22.1 million loan on an office building into owned real estate at approximately 92% of the prior loan carrying value.

Total expenses for the quarter were 56.6 million representing a 22% reduction from the first quarter run rate of 72.5 million in 2010. And as a result we generated 1.7 million of positive operating income this quarter, which has a 7.9 million improvement over the first quarter last year.

Below operating income we generated 1.4 million in gains and asset sales, a small loss on refinancing our debt and 5.6 million of income from the changes in fair value of our securities portfolio. The net fair value mark-to-market adjustment this quarter of 5.6 million was comprised of the three items; 16.5 million of improvements in the credit performance of the underlying debt securities, offset by a $7 million increase in the corresponding non-recourse debt and 3.9 million decrease in the interest rate hedge liabilities reflecting changes in long-term interest rates.

Now onto the most significant events for the quarter which Scott alluded to the convertible debt issuance and other debt changes that have occurred since then. On the convertible debt this is by far the most significant debt change during 2011 and related to the issuance of 115 million of new 7% convertible debt due in 2031 and the [resulting 588] million of the 6.78 convertible debt due in 2027.

We began this year with 143.6 million of that convertible debt outstanding now have approximately 55 million of the 6.78 debts were remaining. Other debt changes this quarter include the following. On our secured bank credit facilities, at the quarter end we have $20 million of recourse debt on remaining secured bank credit facility which is schedule to mature in December which maybe extended. We prepaid all 16.2 million on our other secured recourse bank line in March and that have been scheduled to mature in October. In our senior secured notes we reduced 5.2 million of those notes, the equity convergence during a quarter. And in April we repay the remaining [15.7 million balance] of the 10% senior note due in April of 2014.

This avoided the potential future dilution of approximately 4.5 million common shares which had been reserved in the event that this step over had been converted to equity at the option of the holder.

We regained control of over $21 million of CRE debt securities that has been collateral under this loan agreement. Finally, loan sale on real estate, we refinanced a $0.5 million recoursed mortgage loan that due in 2012 is non-recourse financing at a rate of LIBOR plus 450 and extended the maturity for 10 year's, thereby further reducing our recourse indebtedness and near-term funding obligations overall.

Now as a result of all of these actions steps, we reduced our recourse debt for the quarter by 15.5 million to a balance of 277.9 million at March 31st, 2011. And that result of all of these debt changes will save approximately 1.5 million of interest expense per year. And our total debt equity ratio also improved to 2.1 times at quarter end compared to a ratio of 2.3 times at December 31st, 2010.

Next I will just briefly cover our other portfolios. Our CRE loan book has about 1.1 billion of loans representing 37% of our consolidated assets and are securitized by long-term max funded non-recourse financing. The two CRE loans securitization to CRE-1 and CRE-2 are meeting all of their interest coverage and over collateralization requirements, and as the most recent payment cycle the most stringent OC test was at 123.7 versus the figure of 116.2 in CRE-1 and at 115 versus the figure of 111.7 in CRE-2 which is an improvement of over 2 percentage points during the quarter.

And CRE owned portfolio about 868 million of assets representing 29% of our consolidated assets. The overall occupancy has been steadily improving since quarter one 2010. And has increased from 71% to 82% overall. However, in our multi-family portfolio, the assets contributed differently to organic growth of occupancy increasing from 78% to 88% during the same time, while real estate operating expense have been lower on a same-store basis.

These trends have been the primary cost for our 3.1 million of improvement in net operating margin performance quarter-over-quarter. And finally, on our debt securities portfolio, it represents 24% of our consolidated assets, comprised primarily of stocks and other debt securities owned by converter 8 and converter 9. Both the $719 million of assets and the 143 million of related non-recourse debt financing are reported on the fair value of accounting methods. Most of the quarterly cash flows are being implied to pay down the most senior debt tranches. We applied $12 million of cash to reduce the principal balances of these non-recourse debt during the quarter. We continue to receive only the senior portion of our collateral management fees on this portfolio.

And with that I will turn it back to Scott.

Scott F. Schaeffer

Thanks for that report Jack. Operator I think we will open the call up for questions at this time.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from the line of Gabe Poggi with FBR Capital Markets. Please proceed.

Gabe Poggi - FBR Capital Markets

Hi, good morning, guys and congratulations on a good quarter. It seems that portfolio is making nice progress.

Scott F. Schaeffer

Thanks Gabe.

Jack E. Salmon

Thanks Gabe.

Gabe Poggi - FBR Capital Markets

Couple of questions here, first is just regarding the share count, how should I think about the fully diluted share count going forward in conjunction with the March convert?

Jack E. Salmon

Well I think on our fully converted basis, there would be approximately 40 million shares that was converted at $2.56 price per share.

Gabe Poggi - FBR Capital Markets

Okay. You guys have a nice chunk of restricted cash, what are the opportunities or how should I think about the deployment of that restricted cash into new opportunities kind of the inside RAIT 1 and RAIT 2.

Jack E. Salmon

Certainly within RAIT 1 and RAIT 2 we have cash that’s been build up from repayments that are held in those structures that can be used to fund new loans. The other portion of restricted cash within the Taberna structures basically relates to reserves and other hedge costs that we will have to be in the future.

Gabe Poggi - FBR Capital Markets

You guys break out kind of the what percentage of that, whatever the number is and I get 170 or so, what’s between the RAIT’s and what’s between the Taberna.

Jack E. Salmon

It's particularly down but we can get that information for you afterwards Gabe.

Gabe Poggi - FBR Capital Markets

Okay. And then just one more follow-up on that, you just talked to the RAIT side of things what do you guys think is the yield pickup you can get as you redeploy that restricted cash today from prepayments, relative to what was prepaid. In other words I’m trying to a gauge for how you can grow earnings inside the structure with that restricted cash.

Scott F. Schaeffer

Gabe, this is Scott. We are primarily looking to do shorter term bridge loans within those vehicles and not to do the subordinated debt financing. The bridge loans that are rolling off have an average coupon of 200 basis points over LIBOR. And today you are reporting loans in the 500 over LIBOR.

Gabe Poggi - FBR Capital Markets


Scott F. Schaeffer

So, it's about a 300 basis points pickup.

Gabe Poggi - FBR Capital Markets

Got you. One last question for you, you guys mentioned two avenues for growth conduit lending and then independent. In regards to conduit lending how should I think about or should we think about the pace or originations or the potential pace of originations. I mean just getting off the ground but how do we think about that going forward. And I don’t know if you guys have disclosed in your 10, but how should I think about the economics in that JV.

Scott F. Schaeffer

Well, the economics change within that space almost on a daily basis as it's spread change and we yield the price. So, it's hard to say what the pricing economics will be going forward. But on origination flow view we still believe that once it's up and running that we will be able to do in the $500 million a year of new originations in two to three securitizations per year. And it is just started as you know, we really only got off the ground during this first quarter, but are actually out there seeking new opportunities in quoting loans and we have a couple of applications that we have issued. And we are still very hopeful that it's going to be a good source of revenue going forward.

Gabe Poggi - FBR Capital Markets

So, it's essentially up and running at this juncture.

Scott F. Schaeffer


Gabe Poggi - FBR Capital Markets

Okay, great. Thanks guys.

Scott F. Schaeffer

Thank you, Gabe.


At this time I would now like to turn the conference over to Mr. Scott Schaeffer for closing remarks.

Scott F. Schaeffer

Well, thank you. We continue to make progress and remain optimistic that we will successfully reposition and rebuild RAIT while staying focused on creating long-term shareholder value. We like to thank our shareholder for their continued support and interest in RAIT, and look forward to speaking with you next quarter.


Thank you for joining today’s conference that concludes the presentation. You may now disconnect and have a wonderful day.

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