RAIT's CEO Discusses Q1 2012 Results - Earnings Call Transcript
May 3, 2012
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about: RAS
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- Q&A
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RAIT Financial Trust (RAS) Q1 2012 Earnings Call May 3, 2012 9:30 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 RAIT Financial Trust Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. (Operator Instructions)
I would now like to turn the presentation over to your host for today's conference, Mr. Andres Viroslav, Director of Corporate Communications. You may proceed.
Andres Viroslav
Thank you, Jasmine, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s first quarter 2012 financial results. On the call with me 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 the call available via webcast on our website and telephonically beginning at approximately 11:30 AM Eastern Time today. The dial-in for the replay is 888-286-8010, with a confirmation code of 20606750.
Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect RAIT’s current views with respect to future events and financial performance. Actual results could differ substantially 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 Schaeffer
Thanks, Andres. And thanks to all of you for joining us on our call today. We had mixed results this quarter. We are reporting a GAAP loss resulting from a $109 million noncash charge. And yes, I want to emphasize noncash charge due to the change in the carrying value of our Taberna debt. Jack will provide more detail on this charge shortly.
Our AFFO was up $0.02 per share year-over-year but lower by $0.09 per share on a linked quarter basis driven by two factors. First, new loan fundings occurring late in the quarter and second, no gains from the sale of CMBS loans during the first quarter.
Looking forward, we expect interest income to rebound in the second quarter as we receive the full benefit of loans that closed later in the first quarter and the additional benefit of loans closing in the second quarter. Year-to-date we've closed $81 million of bridge and mezzanine loans and we have signed term sheets in house for another $100 million of bridge loans that we expect to close before the end of the second quarter.
In our CMBS business, after a slow start due to market turmoil last fall, we have closed or have signed applications for nine CMBS loans representing $65 million of funding and we continue to see good opportunities for growth in this platform.
We expect to fund and sell CMBS loans into securitizations in both the second and third quarters of this year. The recent capital raise of approximately $35 million provided sufficient capital to collateralize our warehouse facilities for future CMBS production and to fund mezzanine loan opportunities, while bridge loans continue to be funded through our existing securitization.
To date we have invested $19 million of this capital and will invest the remaining capital into identified CMBS loans that will close later this quarter.
Our portfolio of directly held real estate continues to improve. Rental income as well as occupancy and NOI continued to move up in our properties. Again, Jack will provide more details shortly.
In our non-traded REIT initiative, we continue to make progress regarding the offering of our multifamily focused non-traded equity REIT named Independence Realty Trust. While IRT has not yet commenced raising investor capital, we now have signed pre-selling agreements representing approximately 600 financial advisors and are in due diligence with another 12 broker dealers representing approximately 17,000 financial advisors. This process has clearly been slower than anticipated but we continue to make progress.
And finally, we've experienced enough positive developments within RAIT's portfolios and stabilized RAIT's balance sheet to the point where we have increased the common dividend to $0.08 per share in the first quarter of 2012 and we are comfortable providing dividend guidance for the balance of 2012. At this time, we expect to continue to declare quarterly dividends on our common shares of at least $0.08 per share for each quarter remaining in 2012.
And at this point, I'd like to turn the call over to Jack.
Jack Salmon
Thank you, Scott. The financial results for the quarter ended March 31 include a GAAP net loss per share diluted of $107 million or $2.42 per common share and $9.3 million or $0.21 per common share of adjusted funds from operations generated during the quarter. This compares to $6.9 million or $0.19 per common share of AFFO in the first quarter last year.
As we reported during our year-end 2011 earnings call in February, over $80 million of restricted cash of the Taberna CVO was used to pay down the most senior rated tranche of nonrecourse debt. That debt was paid down at par even though under FAS 159 accounting they had been carried at a fair value dollar price of 17.
The pay down triggered two debt re-pricing impacts. First, a $67 million fair value adjustment for the February repayment by itself. And second, an incremental upward fair value adjustment of $42 million on the remaining Taberna VIII and Taberna IX consolidated nonrecourse debt at quarter's end, which together amounted to the $109 million net change in fair value adjustment to equity. This noncash fair value adjustment caused the GAAP net loss for the first quarter.
Although we do not see any significant prepayments of the Taberna assets this quarter, we anticipate that asset repayments will likely occur over the next several years. As cash becomes available in Taberna VIII and IX, there will be repayments of the related debt in order of seniority. Additional fair value adjustments are likely to occur, which will cause GAAP charges and reductions in our consolidated equity.
Turning to our first quarter results. Our consolidated results of operations reflect the 100% increase in operating income to $3.4 million for the first quarter in comparison to $1.7 million for the same quarter last year as follows.
Our rental income was $24.8 million, which increased $3.5 million or 16% compared to the $21.3 million during the first quarter of 2011. The increase is attributed to $2.1 million of rental income from 10 properties acquired over the last 12 months and $1.3 million of improvements in occupancy and rental rates during that time.
Real estate operating expenses increased to $13.8 million from $12.6 million related to the new properties acquired. We expect to see continued growth in rental rates in excess of inflationary increases in the operating expenses. This trend resulted in the higher property net operating income of $2.3 million between the first quarters of 2012 versus 2011.
Total revenue decreased $4 million year-over-year as our average investments in loans and securities were lower by approximately $220 million. The primarily components of the changes include the following. Principal repayments of $225 million of loans, $74 million of securities, $93 million of loans that were converted into own real estate during this time and this was offset by $171 million of new loans funded during the last 12 months.
Turning to our operating expenses. Interest expense of $19.3 million has decreased from $23.4 million, an 18% reduction due to the efforts over the last year to reduce our recourse debt to a balance of $172.5 million at March 31. We expect to continue to pay down our debt obligation systematically in the future to reduce the debt leverage in our lines of business.
Compensation expense of $5.7 million was reduced by $800,000, which is 12% lower than last year. G&A expense of $3.8 million is lower by $1.1 million as we continue to achieve more cost efficiency in our operating platform. The decrease includes $300,000 of nonrecurring acquisition expenses last year.
Continuing improvements in our CRE loan portfolio from a credit perspective have resulted in lower provision for loan losses of $500,000 in 2012 compared to $2 million in 2011. There were no loan conversions during the first quarter of this year.
Our total operating expenses for the quarter were $50.9 million representing a 10% reduction from the first quarter 2011 run rate of $56.6 million. We also generated $1.6 million in gains on buying back $2.5 million of our CRE II debt as compared to a $500,000 loss on REIT finance (ph) corporate debt last year.
Including this transaction, we have repurchased a total of $112 million of CRE bonds for a cumulative cost of $24 million and we now have a total investment in CRE I and II of $493 million. In or CRE loan portfolio, there's $1 billion of loans outstanding representing 35% of our consolidated assets. These are securitized by long-term match funded nonrecourse financing. Our two CRE loan securitization, CRE I and II, are meeting all their IC and OC tests as they have done continuously.
As of March 31, 2012 the most stringent OC test was 126.3% versus a trigger of 116.2% in CRE I and was at 116.1% versus a trigger of 111.7% in CRE II.
Our CRE owned portfolio has $887 million of assets representing 31% of our consolidated total. Occupancy has been steadily improving since Q1 2011 and has increased from 82% to 85% overall as described in the press release.
In addition to increases in occupancy across our three primary asset categories of multifamily, office and retail, we have achieved growth in average rental rates in all three as well. These trends have been the primary reason for the improvements in property level NOI, operating margin and AFFO performance as reported this quarter.
Scott Schaeffer
Thanks, Jack. I think at this time, operator, we'd like to open the call up for questions.
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 RAIT Financial Trust Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. (Operator Instructions)
I would now like to turn the presentation over to your host for today's conference, Mr. Andres Viroslav, Director of Corporate Communications. You may proceed.
Andres Viroslav
Thank you, Jasmine, and good morning to everyone. Thank you for joining us today to review RAIT Financial Trust’s first quarter 2012 financial results. On the call with me 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 the call available via webcast on our website and telephonically beginning at approximately 11:30 AM Eastern Time today. The dial-in for the replay is 888-286-8010, with a confirmation code of 20606750.
Before I turn the call over to Scott, I would like to remind everyone that there may be forward-looking statements made in this call. These forward-looking statements reflect RAIT’s current views with respect to future events and financial performance. Actual results could differ substantially 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 Schaeffer
Thanks, Andres. And thanks to all of you for joining us on our call today. We had mixed results this quarter. We are reporting a GAAP loss resulting from a $109 million noncash charge. And yes, I want to emphasize noncash charge due to the change in the carrying value of our Taberna debt. Jack will provide more detail on this charge shortly.
Our AFFO was up $0.02 per share year-over-year but lower by $0.09 per share on a linked quarter basis driven by two factors. First, new loan fundings occurring late in the quarter and second, no gains from the sale of CMBS loans during the first quarter.
Looking forward, we expect interest income to rebound in the second quarter as we receive the full benefit of loans that closed later in the first quarter and the additional benefit of loans closing in the second quarter. Year-to-date we've closed $81 million of bridge and mezzanine loans and we have signed term sheets in house for another $100 million of bridge loans that we expect to close before the end of the second quarter.
In our CMBS business, after a slow start due to market turmoil last fall, we have closed or have signed applications for nine CMBS loans representing $65 million of funding and we continue to see good opportunities for growth in this platform.
We expect to fund and sell CMBS loans into securitizations in both the second and third quarters of this year. The recent capital raise of approximately $35 million provided sufficient capital to collateralize our warehouse facilities for future CMBS production and to fund mezzanine loan opportunities, while bridge loans continue to be funded through our existing securitization.
To date we have invested $19 million of this capital and will invest the remaining capital into identified CMBS loans that will close later this quarter.
Our portfolio of directly held real estate continues to improve. Rental income as well as occupancy and NOI continued to move up in our properties. Again, Jack will provide more details shortly.
In our non-traded REIT initiative, we continue to make progress regarding the offering of our multifamily focused non-traded equity REIT named Independence Realty Trust. While IRT has not yet commenced raising investor capital, we now have signed pre-selling agreements representing approximately 600 financial advisors and are in due diligence with another 12 broker dealers representing approximately 17,000 financial advisors. This process has clearly been slower than anticipated but we continue to make progress.
And finally, we've experienced enough positive developments within RAIT's portfolios and stabilized RAIT's balance sheet to the point where we have increased the common dividend to $0.08 per share in the first quarter of 2012 and we are comfortable providing dividend guidance for the balance of 2012. At this time, we expect to continue to declare quarterly dividends on our common shares of at least $0.08 per share for each quarter remaining in 2012.
And at this point, I'd like to turn the call over to Jack.
Jack Salmon
Thank you, Scott. The financial results for the quarter ended March 31 include a GAAP net loss per share diluted of $107 million or $2.42 per common share and $9.3 million or $0.21 per common share of adjusted funds from operations generated during the quarter. This compares to $6.9 million or $0.19 per common share of AFFO in the first quarter last year.
As we reported during our year-end 2011 earnings call in February, over $80 million of restricted cash of the Taberna CVO was used to pay down the most senior rated tranche of nonrecourse debt. That debt was paid down at par even though under FAS 159 accounting they had been carried at a fair value dollar price of 17.
The pay down triggered two debt re-pricing impacts. First, a $67 million fair value adjustment for the February repayment by itself. And second, an incremental upward fair value adjustment of $42 million on the remaining Taberna VIII and Taberna IX consolidated nonrecourse debt at quarter's end, which together amounted to the $109 million net change in fair value adjustment to equity. This noncash fair value adjustment caused the GAAP net loss for the first quarter.
Although we do not see any significant prepayments of the Taberna assets this quarter, we anticipate that asset repayments will likely occur over the next several years. As cash becomes available in Taberna VIII and IX, there will be repayments of the related debt in order of seniority. Additional fair value adjustments are likely to occur, which will cause GAAP charges and reductions in our consolidated equity.
Turning to our first quarter results. Our consolidated results of operations reflect the 100% increase in operating income to $3.4 million for the first quarter in comparison to $1.7 million for the same quarter last year as follows.
Our rental income was $24.8 million, which increased $3.5 million or 16% compared to the $21.3 million during the first quarter of 2011. The increase is attributed to $2.1 million of rental income from 10 properties acquired over the last 12 months and $1.3 million of improvements in occupancy and rental rates during that time.
Real estate operating expenses increased to $13.8 million from $12.6 million related to the new properties acquired. We expect to see continued growth in rental rates in excess of inflationary increases in the operating expenses. This trend resulted in the higher property net operating income of $2.3 million between the first quarters of 2012 versus 2011.
Total revenue decreased $4 million year-over-year as our average investments in loans and securities were lower by approximately $220 million. The primarily components of the changes include the following. Principal repayments of $225 million of loans, $74 million of securities, $93 million of loans that were converted into own real estate during this time and this was offset by $171 million of new loans funded during the last 12 months.
Turning to our operating expenses. Interest expense of $19.3 million has decreased from $23.4 million, an 18% reduction due to the efforts over the last year to reduce our recourse debt to a balance of $172.5 million at March 31. We expect to continue to pay down our debt obligation systematically in the future to reduce the debt leverage in our lines of business.
Compensation expense of $5.7 million was reduced by $800,000, which is 12% lower than last year. G&A expense of $3.8 million is lower by $1.1 million as we continue to achieve more cost efficiency in our operating platform. The decrease includes $300,000 of nonrecurring acquisition expenses last year.
Continuing improvements in our CRE loan portfolio from a credit perspective have resulted in lower provision for loan losses of $500,000 in 2012 compared to $2 million in 2011. There were no loan conversions during the first quarter of this year.
Our total operating expenses for the quarter were $50.9 million representing a 10% reduction from the first quarter 2011 run rate of $56.6 million. We also generated $1.6 million in gains on buying back $2.5 million of our CRE II debt as compared to a $500,000 loss on REIT finance (ph) corporate debt last year.
Including this transaction, we have repurchased a total of $112 million of CRE bonds for a cumulative cost of $24 million and we now have a total investment in CRE I and II of $493 million. In or CRE loan portfolio, there's $1 billion of loans outstanding representing 35% of our consolidated assets. These are securitized by long-term match funded nonrecourse financing. Our two CRE loan securitization, CRE I and II, are meeting all their IC and OC tests as they have done continuously.
As of March 31, 2012 the most stringent OC test was 126.3% versus a trigger of 116.2% in CRE I and was at 116.1% versus a trigger of 111.7% in CRE II.
Our CRE owned portfolio has $887 million of assets representing 31% of our consolidated total. Occupancy has been steadily improving since Q1 2011 and has increased from 82% to 85% overall as described in the press release.
In addition to increases in occupancy across our three primary asset categories of multifamily, office and retail, we have achieved growth in average rental rates in all three as well. These trends have been the primary reason for the improvements in property level NOI, operating margin and AFFO performance as reported this quarter.
Scott Schaeffer
Thanks, Jack. I think at this time, operator, we'd like to open the call up for questions.
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