Resource Capital Corporation's CEO Discusses Q1 2012 Earnings Call Transcript

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Resource Capital Corporation (NYSE:RSO) Q1 2012 Earnings Call Transcript May 2, 2012 8:30 AM ET


Jonathan Cohen - President and CEO

David Bloom - SVP - Real Estate

David Bryant - CFO

Purvi Kamdar - IR


Steve Delaney - JMP Securities

Gabe Poggi - FBR Capital Markets


Good day ladies and gentlemen and welcome to the Q1 2012 Resource Capital Corporation Earnings Conference Call. My name is [Pomi] and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

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

I would like to turn the conference over to Mr. Jonathan Cohen, President and CEO. Please proceed sir.

Jonathan Cohen

Thank you for joining the Resource Capital Corp. conference call for the first quarter ended March 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

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 in the forms 8-K, 10-Q and 10-K and in particular, item 1-A on the Form 10-K 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

First, a few highlights. Adjusted funds from operations or AFFO, for the three months ended March 31, 2012 was 18.6 million or $0.23 per share diluted. We paid a $0.20 per share for common share for the quarter in dividends or 16.9 million in aggregate on April 27, 2012 to stockholders of record as of March 30, 2012.

Our book value increased to $5.46 per share this quarter from $5.38 as of December 31, 2011. Our GAAP net income for the three months ended March 31, 2012 was 14.5 million or $0.18 per share diluted as compared to 13.1 million or $0.22 for the three months ended March 31. 2011.

Total revenues increased by 4.7 million or 23% as compared to the three months ended March 31, 2011 a year earlier. Provisions for loan losses decreased by 16% as compared to the three months ended March 31, 2011, and decreased 64% as compared to the three months ended December 31, 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; David Bryant, our Chief Financial Officer; and Purvi Kamdar, our Director of Investor Relations.

After reviewing our quarterly results, one of our directors said to me, congratulations, seems very straightforward and good. That sentiment is a very good summary of our performance this quarter. We made money from our portfolio, grew our book value, our credit quality was good, we kept our debt levels relatively low and opportunities to expand the franchise and company remained ever present.

From a financial standpoint, our Adjusted Funds From Operations or AFFO rose to $0.23 from $0.21 last quarter. We paid a sizeable and sustainable dividend of $0.20 for the quarter, and our book value per share increased to $5.46 per share from $5.38 per share as of December 31, 2011.

From an operational standpoint; we also faired well. While our real estate loan production only posed $17 million of net investment for the quarter, we did not sell any loans or get paid off on any loans. Our loan book actually grew.

In addition our pipeline for real estate loans grew substantially and we are in the process of closing $73 million of new real estate loans during the second quarter. As Dave Bloom will tell you, over 85% of our current real estate portfolio are now whole loans, senior loans, and less than 11% mezzanine positions.

We worked hard to obtain those ratios. Also late in the quarter we closed a $150 million warehouse line with Wells Fargo. This will really expand our ability to accelerate our whole loan origination and to generate additional growth. The world of real estate finance is finally [settling], and this should add I believe to our portfolio over the next few quarters.

Our Syndicated Bank Loan portfolio continued to perform well. Credit improved substantially across the entire company, provisions for loan decreased 64% from last quarter. This trend has continued over the last few quarters.

Our leasing joint venture continues to grow and improve its portfolio. We expect that venture to turn profitable later this year. We continue to be very excited about its prospect.

Without a doubt, the most exciting aspect of the last three months was all of the growth in our businesses. As compared to the quarter ending, March 31, 2011; this quarter we recorded revenues of 25.4 million versus 20.6 million a year ago; a tremendous achievement given the steadfastness of our debt-to-equity level.

In addition the revenue growth came from both the real estate loan segment, as well as the syndicated loan side of the business. Other revenue also grew as we harvested a distressed equity investment in our joint venture at a very good profit.

Now I will ask Dave Bloom to review our real estate activities.

David Bloom

Rescource Capital Corp. commercial mortgage portfolio has a current committed of approximately $744 million in a granular pool of 49 individual loans. In the first quarter of 2012 through today, we closed and funded new loans totaling $17 million.

We are committed to and are closing five additional loans totaling (inaudible) and have issued a negotiated term sheet on two more acquisition loans totaling 39.15 million, which will fund when the borrowers close on the properties that secure the loans. Aggregate new loan activities since the beginning of 2012 is $127.5 million

This quarter marks a return to whole loan production levels that we were experiencing in 2007 before the credit crisis, when we were originating approximately $500 million annually. While real estate debt markets are mercurial and can vary from quarter-to-quarter; we’ve seen an overall firming of fundamentals in many markets and are underwriting our consistent forward pipeline of approximately $250 million at any given time.

We are optimistic about meeting prior peak production levels and ultimately surpassing these numbers as we scale our well established origination platform. Since we restarted our loan origination activities in the late 2010, we have actively pursuing new loan opportunities; although there have been several pullbacks in the real estate finance markets, during which times our primary focus was on price discovery and the analysis of the credit trends.

Taking in to accounts periods in 2011 that we were not in full origination mode, we’ve been actively looking in new lending opportunities for about 12 months in total. During the time since we commenced our lending efforts again, we have closed or are closing approximately 21 new loans totaling approximately $280 million. The average size of our new [advantage] loans is 13.3 million and weighted average starting coupon is 6.96%.

However, when you take in to account typical 1% origination fee, which is accretive income over the initial two year term of the loans, we’ve realized starting coupons of 7.46% on a floating rate basis over LIBOR floors.

While there are many lending opportunities, we continue to be keenly aware of credit and deal structure; and although we are lending on likely transitional properties, we are only doing loans with day one cash flow coverage and meaningful sponsor equity.

Notwithstanding the starting coupons that we have realized to date, that has been [accompanying] in pricing as banks have reemerged and are aggressively to deploy capital in to the floating rate commercial real estate loans that post crisis valuations, and while not perfectly correlated, as CMBS [3.0] has taken hold with fixed rate coupons close to 5% this certainly adds to pricing pressure.

Regardless of others in the market, the number and capacity of balance sheet lenders still greatly trails the ever expanding opportunity as said. Yield continued to be guided by credit quality and make prudent pricing adjustments, as may be required for high quality loans.

In September of 2011, our first CDO a $345 million vehicle was full when its reinvestment period closed. Our second CDO, a $500 million vehicle has a reinvestment period that ends in late June of this year and the balance of the restricted cash in that vehicle is committed to loans that we are currently closing.

With both of our CDOs full at the end of their respective reinvestment periods, we’ll now utilize the $150 million term financing facility, we put in place in late February, which is designated specifically to fund our established [credit] lending business.

The addition of the leverage from the term facility will greatly increase net interest margins, with leverage yields on new loans targeted between 13% and 18%, which will increase the return on equity and overall profitability of RSO’s real estate lending platform.

Our existing financing facility has a revolving period prior mass funding loans that remained financed. And we will seek to increase our existing facility as well as lineup additional prudent leverage, as we continue to grow our commercial mortgage portfolio.

In speaking to RSO’s commercial mortgage portfolio as whole, the underlying collateral days continues to be spread across the major asset categories in geographically diverse markets. With a portfolio breakdown of 38% - multifam loans; 13% - office; 20% - hotel; 17% - retail and 12% - other, such as mixed use and self storage.

The portfolio is in components as follows; 88% whole loans, 10% mezzanine loans and 2% B Notes. The legacy subordinate debt portion of the portfolio has decreased dramatically overtime. From a high of 47% in 2007 to the 12% we carry today. A change of 35% which has shifted to self originated whole loans.

As our new loan production continues to grow, subordinate debt continues or constitutes a significantly diminishing component of the portfolio. Credit across the portfolio continues to move upwards, and we know improving metrics across all asset classes.

The majority of the [problem] in securing our loans continue to realize improved cash flow on a year-over-year basis and to trend in a positive direction. There are still a small number of legacy transactions that require extra asset management attention. But we remain extremely proactive in these situations which continue to resolve and be a much smaller portion of the portfolio.

In other commercial real estate activities, we continue to utilize a $100 million CMBS credit facility as well as an additional CMBS repurchase facility to buy highly rated CMBS bonds and to deploy meaningful amounts of capital in to AAA investments for very healthy risk adjusted returns between 13% 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 currently consists of four properties. Multi-family property is comprised of 1154 units and one 30,000 square foot office building. All of which continue hit or exceed their budgets.

Also RSO along with an institutional partner owns a portfolio of 16 distressed multifamily properties that were acquired at substantial discounts for a total investment just under $116 million. RSO participates in up to 25% of the profits, as these investments are harvested, and RSO has already realized gains from the venture from early resolutions of a small portion of the [venture] investments. RSO will continue to invest in both value add and distressed real estate transactions that provide opportunities for significant value creation and capital appreciation.

With that, I will turn it back to Jonathan and rejoin you for Q&A.

Jonathan Cohen

Now I will also review our Syndicated Bank Loan portfolio. Resource Capital’s bank loan portfolio or Syndicated Bank Loan portfolio has a caring value of approximately $1.2 billion at amortized cost.

Overall in my opinion, our portfolios remain in an excellent condition and little has changed since last quarter. As of March 31, 2012 we have specific reserves of 2.5 million and general reserves of 2.6 million as compared to specific reserves of 1.6 million and general reserves of 1.7 million for the fourth quarter.

We continue to forecast a very, very benign outlook in corporate credit, especially at the loan level for the next year or two. The default rate for the last 12 months was less than 1% or 0.5%. This has been a terrific business line for Resource Capital, and we will continue to allocate capital to it.

In addition to our portfolio of Syndicated Bank loans, we also collect management fees, for managing other CLOs. Since we bought the rights of managed five bank loan portfolios, we’ve received approximately $10.9 million in fees and received $2.1 million in fees this quarter alone.

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

Dave Bryant

RSO’s Board declared a cash dividend in the first quarter of $0.20 per common share of approximately 17 million in the aggregate. Our Adjusted Funds From Operations or AFFO was 18.6 million for the first quarter or $0.23 per common share.

AFFO was impacted by several non-cash adjustments totaling 4.3 million and to a lesser extent cash items of approximately 300,000. This represents a payout ratio of approximately 91% and demonstrates our ability to cover the dividends from operating cash flow.

We continue to pass all the critical interest coverage and over-collateralization test in our two real estate CDOs, and four bank loan CLOs through April of 2012. Each of these structured financings performed and continue to generate good cash flow to us in 2012.

The CRE CDOs produced over 6.2 million and bank loan CLOs generated approximately 6.7 million of cash flow going to quarter ended March 31. This compares favorably to the same period in 2011 when these structures generated 5.1 million and 6.3 million from CRE and bank loans respectively. This reflects both improved credit, as well as our ability to get the restricted cash balances from the 2011 put to work.

In addition in April, we received an initial distribution in our newest deal Apidos CLO VIII of 1.1 million. As of March 31, we have an excess of a 133 million of restricted cash in these structures on a combined basis. This is comprised of approximately 88.7 million and 44.3 million in our bank loans and it’s real estate deals respectively.

Of these balances, 39 million and 44 million are available for reinvestment in our CLOs and CDOs, which we expect will provide meaningful spreads over the very low cost of the associated debt. In fact as Dave Bloom mentioned, we have commitment with borrowers to lend and thus fully invest the balance of the CRE CDO cash in our 2007 CDO during the second quarter.

Of the Q1 provisions for loan losses of 2.2 million, 1.8 million is related to bank loans and 400,000 for real estate loans. Regarding our bank loan portfolio, we allocated 900,000 to general reserves and 900,000 for two loans in the fall.

On our real estate loans 400,000 was added to reserves for a previously impaired whole loans. Overall, I continue to characterize our credit as stable to improving and notably all of our 41 real estate loans both legacy and newly-underwritten loans keep on performing.

Our leverage ratio stands at 3.9 times at March 31. When we treat our trough issuances which had a remaining term of over 24 years as equity, our leverage is 3.4 times. Our leverage decreased from December 31 primarily due to pay downs and run-off of CLO debt mainly in Apidos I, as well as equity raised through our dividend reinvestment program and improvements in mark-to-mark (inaudible) indications when are available for sale security portfolio.

Focusing on real estate, we began two years in 2010 approximately 2.3 times lever on our real estate CDOs. If they are accounting for the debt repurchases since then in Q1 2012 approximately 1.6 lever in our real estate portfolio.

We ended the March quarter with GAAP book value per share of 5.46, up modestly from 5.38 at December 31. The (inaudible) of change resulted primarily from improved mark-to-market adjustments on our available for sale CMBS and ABS portfolios of approximately $0.12 per share offset by the net difference between the cash dividend and net income from the quarter worth $0.03 per share based on outstanding shares at quarter end.

At March 31, our equity is allocated as follows: commercial real estate loans in CMBS, 62%; commercial finance - 31%; and 7% in other investments.

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

Jonathan Cohen

With all discussion being behind us, I will open the call for any questions.

Question-and-Answer Session


(Operator Instruction). Please standby for your first questions. Your first question comes from the line of Steve Delaney, JMP Securities. Please proceed.

Steve Delaney - JMP Securities

Congratulations on the good progress in the first quarter. John I noticed that the common share count increased by about 5 million in the quarter. I know that you didn’t do a public offering. Was that a combination of DRIP plan issuance and may be a little bit of the aftermarket plan as well.

Jonathan Cohen

Yes. Well we don’t do that to market, but it was DRIP.

Steve Delaney - JMP Securities

So it was all DRIP.

Jonathan Cohen


Steve Delaney - JMP Securities

I noticed recently while I guess not so much in the last couple of weeks, but in the February --.

Jonathan Cohen

Sorry Steve, I just wanted to mention that our average price was $5.54.

Steve Delaney - JMP Securities

$5.54, okay.

Jonathan Cohen

Significantly above book value.

Steve Delaney - JMP Securities

Right. So do you know an ATM plan actually set up and just not using it or you just haven’t gone.

Jonathan Cohen

We don’t use ATM plans we only DRIP when the price is at a level and that we feel like it’s productive to DRIP. So for instance, one month when the price is down we will not DRIP and then the next month if it’s out we may do something very small’ we’ll have use for the capital.

Steve Delaney - JMP Securities

Got it. My second question is somewhat capital related too. It seems with this new $150 million line in the current flow, that you are in pretty good shape liquidity wise. In the balance sheet it doesn’t seem that you have any real near comp pressing needs for additional capital, things seemed to be balanced.

But we did see some companies come to market in February and March some mortgage [REITs] and take advantage of this historically low rates and issue either straight preferred or unsecured senior notes, and coupons in the range of about 8%, but kind of like Dave Bryant mentioned, treating the trough as capital, I think we view that more as capital than we do as debt. I was just curious whether that type of security might have a roll in your balance sheet and might be appealing to you.

Jonathan Cohen

Well two things; first, we signed a deal with Wells Fargo. Obviously one of the reasons we are DRIPing is because we plan on expanding our balance sheet and to do $115 million line of credit you probably need $70 million of equity which we had some, but no we’ve put away more so that we can be super aggressive in expanding our commercial real estate finance loan origination effort, which is expanding as we speak. So that’s the first thing.

The second thing; I think there is a great position in our balance sheet for a preferred more something like it in the 0.5% coupon. Obviously we’ll be very creative even if all we do is buy back our common shares. But we have reasons to believe we could put that money to work and use that to finally grow the dividend.

Steve Delaney - JMP Securities

Okay, that’s helpful. And I apologize, you are getting an advance rate probably of something like what $0.70, $0.75 on the dollar on your warehouse line and I had in my off-the-top analysis had failed to focus on the fact that you do need capital to draw that line down.

Jonathan Cohen

Yeah. But we do have the capital, so I want to entrust that we are not looking to do any kind of offering of any kind on the common side. But we have, as I was saying, preferred stock at that rate obviously would be a lot cheaper for common share holders and if we can find the same type of investments we are making that would be accretive and a very productive thing for us.

Steve Delaney - JMP Securities

My last question is, the origination volume looks like it might be a little lumpy, and I guess that’s because sort of the transactional nature of some of the transaction underlying these loans. But, would you say that run rate that maybe 15 is certainly low, but maybe that [70] is high and it’s looking out say over the balance of this year. Do you think may be something more in the 40 million to 50 million per quarter is more reasonable as far as what the average might be?

David Bryant

I think while it’s lumpy it’s a continuously building process, and then these yields, many are acquisition financing, so they will close in due time. I think that a run rate 75 million sounds comfortable; we’d certainly like to be dealing one.

Jonathan Cohen

Well I think what Dave is saying is, once we get up to - I mean it will lumpy for the next quarter too, but we plan on getting the originating between 250 million and 400 million a year of this product. By the way that’s the whole loan product that does not include mezzanine or other types of real estate finance that we might deal.

Jonathan Cohen

That’s very helpful. Congrats on the good start to the year.


Your next question comes from the line of Gabe Poggi. Please go ahead your line is open.

Gabe Poggi - FBR Capital Markets

Couple of questions for you. Just so I have it straight here, you said that Dave and Dave both commented that you are fully filled on the second CDO that closes in June 3 and you already have commitments out in advance to have that fully filled up and so now you are going to go and use your Wells Fargo line for additional whole loan origination.

David Bryant


Gabe Poggi - FBR Capital Markets

Can you just remind us of just what the average LTV is off the current whole loan book and what you guys are looking to do from a go-forward perspective?

David Bryant

Average LTV is probably about 75% in the current whole loan books, that’s really where we are staying in our new loans to response equity in our deals the legacy loans are as I said performing and have come back from a low point. So we say we are between 70% and 75% (inaudible).

Gabe Poggi - FBR Capital Markets

I know you guys commented last quarter, just want to make sure because your tax level was a little bit elevated this quarter relative to the run rates in 2011. Are you guys of over the hump with any retest issues. I know we had that one time event last quarter. I just want to make sure with the CDO being filled off, do you expect your tax rate to go back to that 1.8ish level, or should I assume the first quarter run rate going forward.

David Bryant

The first quarter run rate Dave was effected somewhat by a really strong performance in our structured notes and trading portfolio. So, probably closer to 1.8 to 2 is probably a decent run rate. We feel pretty good from where we test perspective for 2012 with, as you say, getting that money, put to work in the real estate CDOs and some other things that we expect to happen, not the least to which are some of these joint venture gains that Dave also mentioned in his remarks.

Jonathan Cohen

Gabe, you might look in Schedule II in the press release, where we talk about cash distribution and you’ll start to see the ramp up of real estate income even with in the 2006-I RREF and 2007-I RREF CDOs which are commercial real estate loans, and you will see some of the early syndicated bank loan deals are actually coming down a little bit. So you will see that shift from a - it’s great to have that income when we needed it, but now we are shifting back to the real estate side.

Gabe Poggi - FBR Capital Markets

Perfect. That’s helpful. Two other just quick questions. Can you give me a breakout of your borrowings you just kind of dealt, what did your current REPO or warehouse balance was as of 1Q relative to your CDO balance.

Jonathan Cohen

Well we don’t really have one line that’s actively being used right now, because we haven’t started using the Wells Fargo line yet. These new loans are exposing hopefully one or two on to that. So we have - how much on the CMBS line?

Gabe Poggi - FBR Capital Markets

I am sure you’ve an idea of how much you guys have put to work and then kind of what you still have left.

David Bryant

(inaudible) at the end of march we have about 65 of the 100 used on the CMBS facility. So there’s about 35 left there, and of course we haven’t touched the 150 yet, but obviously as Dave and other have said we expect to start doing that some time probably this quarter.

Gabe Poggi - FBR Capital Markets

One last question guys if I might. From a transitional CRE perspective, outside it’s obviously your whole loan kind of core business, but you’d mentioned can you guys now own your hard asset. How much of - do you have a hard number for how much equity is like to allocate bucket. I know 62% of your total equity is in CRE, but does that kind of transitional distress, whatever the word you want to use. Do you have a targeted allocation for that asset class?

David Bryant

It’s typically about 5% to 7% of our equity, and that can change. Obviously we were buying opportunistically as the market was low. You will see us probably in the near future have some good gains on those and we’ll have to decide if that’s opportunistic or that. These come with a big dividend so it’s sort of a hard thing yet to balance.


Thank you. There are no further questions at this stage. (Operator Instruction).

Jonathan Cohen

Ma’am are there any other questions?


There are no questions coming through at the moment.

Jonathan Cohen

Okay. Well thank you very much. We’re always available to walk anybody through our business and we appreciate the support very much. See you next quarter.


Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Good day.

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