Resource Capital Corporation (RSO) Q4 2016 Results Earnings Conference Call March 14, 2017 8:30 AM ET
Andrew Farkas - Chairman
Robert Lieber - Chief Executive Officer
David Bryant - Chief Financial Officer
Paul Hughson - Head of Debt and Equity Principle Investing at C-III Capital Partners
David Bloom - Senior Vice President-Real Estate Investments
Purvi Kamdar - Director of Investor Relations
Steve DeLaney - JMP Securities
Jade Rahmani - KBW
Good day, ladies and gentlemen and welcome to the Resource Capital Corp., Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Ms. Purvi Kamdar, you may begin.
Thank you. Thank you for joining the Resource Capital Corp., earnings conference call for the fourth quarter and fiscal year ended December 31, 2016. I'm Purvi Kamdar, Director of Investor Relations. With me today are Andrew Farkas, RSO's Chairman; Bob Lieber, CEO; David Bryant, CFO; Paul Hughson, Head of Debt and Equity Principle Investing at C-III Capital Partners; and Dave Bloom, Head of Real Estate.
When used in this conference call the words believes, anticipates, expects, 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 those 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 obligation to update any of these forward-looking statements.
Furthermore, certain non-GAAP financial measures will be discussed on this conference call. Our presentations of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with the Generally Accepted Accounting Principles can be accessed through our filings with the SEC at www.sec.gov.
I will now turn it over to Andrew for opening remarks.
Thank you, Purvi. This is Andrew Farkas. I'm Chairman of Resource Capital. As we described in our introductory earnings call last quarter, C-III's full-service commercial real estate platform is extremely complementary to RSO's primary investment strategies and has now been fully deployed in connection with the furtherment [ph] of achieving our objectives.
I've taken over the management responsibilities of numerous similar entities through RSO over the course of the last 30 years, while building companies like Insignia Financial Group, Island Capital and C-III Capital Partners. Drawing on our expertise and experience to operate our platform positions us to uniquely stabilize and grow RSO for the benefit of shareholders.
We continue to work towards those ends. C-III has over $13 billion of assets under management, has 8400 real estate professionals, has originated over $9 billion in mortgages, been a very active investor in the CMBS market having acquired interests in over $200 billion of securitizations. The C-III has successfully repositioned companies in the past and we're committed to doing so again with RSO. We believe RSO has another opportunity to successfully deploy capital into commercial real estate assets on behalf of investors including C-III which continues to hold approximately 714,000 shares in the company.
With that, I'll turn this over to our CEO, Bob Lieber. Bob?
Good morning. Thank you, Andrew and good morning everybody. We are continuing to implement a strategic plan that we laid out for you in the third quarter conference call and my goal is to take a few minutes and walk you through what we've done so far during the early stages of RSO's transition phase.
As we discussed on last quarter's call, a crucial step in our strategic plan was the evaluation of both our CRE loan for credit impairments and to establish the fair value of the assets and businesses that we intend to monetize. Accordingly, we wrote down a total of $15.9 million in the fourth quarter versus our previously provided guidance of $11 million to $14 million. Of the $15.9 million $12.2 million related to assets that we discussed in previous guidance and $3.7 million occurred subsequent to our last call and was unknown to us at the time of that last call.
Dave Bryant, our CFO will speak to the details of those items, but I think it is important to reiterate that until we dispose of all of our non-core assets we are likely to continue to have volatility in our reported earnings. Through February 28, 2017 we have monetized over $78 million of the approximate $500 million of investments that we targeted for sale as a part of our strategic plan. I'll report these assets were monetize at a slight premium to the third quarter book values and I'd like to highlight a couple of those from the fourth quarter.
First of all we sold little more than half of our residential mortgage servicing rights and realized about 96% of the book value after expenses. Additionally, we liquidated the Apidos Cinco CDO which is the last of our pre-financial crisis securitizations and generated income in excess of our third quarter book value. Furthermore, we collapsed Resource Real Estate Funding CDO 2007-1 which returned control of the underlying collateral to us allowing us to monetize that collateral as we see fit. This structure was no longer financially accretive and its collapse was a key achievement.
And it is important to highlight a distinction between selling liquid securities and selling operating business. Operating businesses sold through M&A transactions typically require a lengthier process than selling liquid securities. These processes are underway today so we have limited visibility in the timing and the proceeds of these transactions and we will not be able to provide updates on these processes until they are completed.
As we focus on origination platform, the RSO debt team has returned to the market and is now able to leverage C-III's expertise and vast platform of Realty Estate Resources to enhance its own capabilities. In the fourth quarter we originated over $50 million of loans across three properties and expect this to originate approximately $100 million in the first quarter of 2017.
Looking forward and looking to the broader lending environment, we think now is a good time to be a lender in the commercial real estate space. There is a significant balance of loans coming due during 2017, the so-called wall of maturities creating a lot of refinancing demand, but we look at this basically a lot of underlying credit quality we want to be very careful about. Our vast Real Estate platform which includes one of the largest special servicers is uniquely positioned to underwrite commercial real estate credit nationally. We also think that a rising rate environment is favorable for floating rate loan originators such as RSO.
We are also looking opportunistically to acquire CMBS bonds. C-III itself actively monitors and analyzes the performance CMBS and commercial real estate CEOs across the market. Additionally, C-III currents holds an investment position in bonds with aggregate outstanding principal balance of over $80 billion collateralized by over 8000 underlying commercial properties.
As we look forward also it is important that we continue to preserve liquidity while our commercial real estate loan origination pipeline builds and we seek to acquire CMBS bonds. Further, as we discussed in our third quarter earnings call, one of our key initiatives is to improve the disclosure and financial transparency for RSO. As a result we no longer report AFFO and have implemented a core earnings metric. We believe this metric is a better measure of financial performance of a mortgage REIT and will help analysts and investors better evaluate RSO's financial results. Additionally, we will also report core earnings before realized gains and losses which we believe is the metric that will best measure dividend coverage.
Now that I've given you a brief update on the projects of our strategic plan and reaffirmed our future vision for RSO, I will ask Dave Bryant, our CFO to discuss the details of the fourth quarter and full year financials. Dave?
Thank you, Bob. Our GAAP net loss applicable to common shares for the three months ended December 31, 2016 was $9.5 million or $0.31 per share and our net loss for the year was $53 million or$1.73 per share. Our fourth quarter was negatively impacted by several significant items totaling $15.9 million $12.2 of which related to guidance provided on our third quarter call and $3.7 million of items that occurred after our third quarter call.
Before I cover the details, I'll remind everyone that we estimated impairments for Q4 of $11 million to $14 million. The following items related to that impairment guidance totaled $12.2 million. First, we wrote down commercial real estate loans classified as assets held-for-sale by $7.7 million. This group of loans represents the last remaining components of our commercial real estate portfolio held by the legacy CRE CDOs issued in 2006 and 2007 that we liquidated in April and November respectively. The loans were adjusted to as is fair value based on third-party appraisals.
Second, we classified several non-commercial real estate and non-core businesses as assets held-for-sale or discontinued operations. This classification required us to assess the fair value of these businesses which resulted in additional impairments of $4.5 million. Of this amount, $3.4 million relates to primary capital mortgage our residential mortgage lending operation. Lastly, we had $1.1 million of fair value adjustments in the aggregate within our middle-market lending and Life Care settlement portfolios.
The following are several other write-downs that total a net loss of $3.7 million. The breakdown is as follows. First, we had impairments of $2.6 million in our middle market lending polio on a previously impaired credit. In addition, we recorded a $2.5 million provision on a commercial real estate loan originated in 2013. The loans secured by a shopping center was nearing maturity and we learnt that another tenant intended to vacate the property later this year.
Additionally, we continue to reevaluate our deferred tax asset and recognize an adjustment of $1.4 million which is the result of reduced expected future net income in our taxable REIT subsidiaries. This adjustment is reflected in income tax expense. These negative adjustments were partially offset by a gain of $2.8 million in connection with the liquidation of our 2007 CEO and its related adjustments.
As of December 31, 2016 our GAAP book value per share was $14.17 down from $17.63 at December 31, 2015. Significant drivers of the decrease in book value are the following. First, for the full year 2016 we had a net loss of $1.73 per share which included a $0.55 decline due to deconsolidation adjustments at the beginning of the period.
Second, we paid annual dividends of $1.31 per share including $0.05 per share for the December quarter. As Bob mentioned, we have made progress improving our financial transparency. In tandem with the call of having our dividends max sustainable earnings, we no longer report AFFOs and metric our performance and have instituted our core earnings metric. The definition and details of core earnings can be found in the press release where we have enumerated principles of calculation.
The calculation is similar to many of our peers in that it includes adjustments for industry standard items such as non-cash equity compensation expense and unrealized provisions and impairments. We also exclude from our earnings non-core activities as we transition to a traditional, commercial real estate mortgage REIT which is intended to demonstrate the progress in our plan and allow the market to measure the performance of our core real estate business.
Further, within MD&A we have included a segment view of the core earnings calculation which will allow our investors and analysts to gauge the progress of our strategic plan as we transition to our core real estate and CMBS investment platform. As proceeds from non-core assets are redeployed, earnings will shift towards the core real estate platform.
Turning to the commercial real estate portfolio, we liquidated our real estate securitization that was originated in December 2013 and received $33.4 million and the remaining collateral. We were able to unwind the deal from start to finish over a period of 36 months which is a credit to Dave Bloom and his team's structured credit management.
Our three most recent securitizations that closed in 2014 and 2015 are subject only to over collateralization tests which we have comfortably passed. We have total capacity of $650 million on our commercial real estate term facilities and have approximately $301 million available as of the end of the year. RSO's assets are match funded with non-recourse floating-rate term financing on a substantial portion of our lending platform.
We had $116 million of unrestricted cash on hand at December 31 and now have $171 million of cash at February 28, 2017 prior to the closing of $60 million of loans in March to-date. This gives us ample liquidity to continue originating commercial real estate loans and acquire CMBS.
With that I’ll hand the call back to Bob.
Thanks, Dave. As you've heard we're positioning RSO for long-term success and remain very excited about the prospects for the company. We are in the early stages of our strategic plan, but we're encouraged by what has been achieved so far. As we work through the transitional period we intend to pay a dividend of $0.05 per quarter for 2017. Lastly, on the third quarter earnings call I mentioned hosting an Investor Day. We remain committed to having an Investor Day, but only once we have made some real progress in achieving the goals of our strategic plan.
We thank you very much for joining us on our call today. We appreciate your interest and your support and your patience as we work through to improve the quality and the consistency of RSO's performance.
And with that I’ll open up the call to any questions.
Thank you. [Operator Instructions] And our first question comes from the line of Steve DeLaney with JMP Securities. Your line is now open.
Thank you. Good morning everyone and we appreciate the new core earnings measure. I think that will be helpful. I wanted to start with PCM Primary Capital Mortgage, it appears that that may have been deconsolidated as of 12/31 is that correct?
It was treated as discontinued operations Steve, as consolidated, so all of those assets are in assets held-for-sale and all its liabilities in liabilities held-for-sale.
Okay great. And can you comment, you have this is a separate question then, well let’s say within the assets held-for-sale and then any related liabilities can you comment on what your net carrying value is with respect to PCM and should be assumed that most of that represents fair value of mortgage servicing rights? Thanks.
I think it's fair to say that most of it represents fair value of mortgage servicing rights, although there would invariably be some loans on its books at year end offset by [indiscernible] yes. I can’t give you a fair breakout at this point Steve, but I would point to the fact that we will be filing our 10-K within a few days and you can look for further details there and of course we can have a follow up conversation as needed.
Okay, thank you. And then investments in unconsolidated entities $88 million or almost $3 a share, I assume that has your investment in the LEAF, financial leasing joint venture, can you comment if what other types of investments might make up that $88 million just generally?
We have a limited partnership interest in real estate venture. We have an investment in several structured CLOs. And if you look Bob, Steve I’m sorry, back at the third quarter, thank you, you'll see, the full breakdown, but again we will have that level of detail in our 10-K as well.
Okay, got it. But just to be clear that does not represent anything with PCM in that $88 million, is that correct?
No, that does not.
Okay and I guess my last question is, obviously you’ve said you’re going to focus on your core CRE lending business. I have also heard you mention today CMBS as well and given CIII's platform there that's understandable. I guess specifically are you looking, you’ve got a $170 of liquidity to put to work, are you looking at CMBS risk retention bonds as a possible avenue for capital deployment at this time? Thanks.
Steve, we've got a lot of experience and expertise looking across the broad CMBS spectrum. The risk retention dynamics are also of particular interest to us, but what we’re really looking for are attractively priced credit opportunities and those exist in legacy bonds, they exists in pre-risk retention bonds and they likely exist in today's market in the risk retention bonds as well. So we’re going to look across the spectrum for things that we think makes sense.
So top to bottom of the stack it sounds like, so…
Well, thank you very much for the comments this morning.
Thanks, for your interest.
And our next question comes from the line of Jade Rahmani with KBW. Your line is now open.
Thanks very much. At the outset, can you say whether the magnitude of impairments at RSO and write-downs are in line this year underwriting when you acquired REXI?
I think that – as we mentioned on the last call, we really dug in and forced once we closed the REXI transaction in September. We have continued to go through the portfolio and pick through with a fine tooth comb. We anticipate we can try to capture all we can and anticipate, but there are surprises, there are a lot of operating businesses and there are market factors in play there, we think we've got a good handle on it, but as we said there were some events that occurred after our last call which we didn't know about. So we think we've got our arms around it and we look each and every day and we'll learn more as we put some of these businesses and assets into the market to monetize them.
And just from the current vantage point, how long do you anticipate it would take to get RSO to close to normalized core earnings profitability?
That is a great question. I expected it's going to be – it will not be in 2017, it will likely be some point in 2018 once we get back to a stabilized run rate and core earnings. We still got $400 million plus of assets to divest and that capital to deploy. So and that is going to take some time and timing and sequencing of that is what we're focused on.
In terms of your current vantage point since the first quarter is almost over, do you expect to take additional impairments and write-downs and generate a core earnings and GAAP loss?
Jade, I would say that at this point, we do not anticipate any additional impairments in Q1 and I would think that in Q1 because we do have all this liquidity to deploy and are continuing to monetize as part of a strategic plan to non-core assets, we would likely have a core earnings loss in Q1 as well.
And I would point out once we sell these assets that we've got marked we will have realized losses that flow through as well.
That is true, but we do have those assets marked to what we believe to be fair value today.
You mentioned the 2013 retail loan other, what is your assessment of the post-2009 credit quality of the portfolio, do you anticipate any loss provisioning with respect to those loans?
We are taking a look at all of our reserves every single quarter and we believe that as of the end of the year we have taken sufficient impairments in reserves on the portfolio. We continue to go through each and every quarter. At this point, I don't see anything outstanding that I would highlight for Q1.
In terms of the aggregate G&A of the company, can you talk about the difference between what flows through the external management fee which presumably would cover C-III's expenses related to running RSO and the actual RSO G&A expenses, it's somewhat odd for an externally managed REIT to have this level of G&A relative to equity in assets, so can you give any color on what is actually flowing through the G&A line versus the management fees? Thanks.
Sure Jade. We are going to provide you a breakdown in our 10-K, a detailed breakdown, but there are reimbursements for some salaries, myself and my team that are included in there, half of our Investor Relations queries compensation. There are professional fees in there as well and then there are some general overhead expenses such as rent and related costs. So there will be a complete breakdown.
Is there any plan – is there any plan to optimize expense efficiencies and identify expense savings as the focus of the business model streamlines?
Yes I would say that as some of these non-core businesses are disposed off you can expect to see some reduction in the G&A.
What is a fair annualized G&A plus management fee run rate?
Can you, I don’t think it is really appropriate to try an estimate that here on this, I don’t know Dave, I just, I mean there is lots of details here and there is timing and sequencing around all those things, but we will tell you when we know more. I don’t think we have a clear vision about that yet.
Particularly for 2017.
Okay. And in terms of...
I want to be factual here.
Okay. And in terms of the origination business model going forward what percentage would C-III source and originate versus the RSO team?
We're doing this as a joint effort together, the C-III resources combined with the RSO resources to build the pipeline.
Okay, thanks very much for taking the questions.
Thanks for your interest.
And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Bob Lieber for closing remarks.
I want to thank you all for what is a dreary day here in New York and for joining us for the call today, we appreciate your interest. Andrew, is there anything you would like to follow up with?
Yes, everybody should know that we continue to be committed to this project. It was heavy lift to begin with and we think we've made significant progress along the way. Obviously there is some complexity to which we have to work during 2017, but our vision for the success of this has changed really not long. We continue to be confident in it. The company C-III owns a position in RSO. I personally own a position in RSO and as your other executives at C-III. So our oars are in the water pulling in the same direction as everybody else's.
So continue to stay tuned. Obviously the key here is the timing of the disposition of the non-core assets and then the redeployment of that capital into commercial real estate loans and CMBS as we go forward. So the timing and velocity and returns are really the variables on which to keep your eyes and I think that with the passage of the next several quarters, you'll be pleased with the progress. Thank you all for joining us.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.