Q3 2019 Earnings Call
Good morning, welcome to Aries commercial real estate Corporation's conference call to discuss the company's third quarter 2019 earnings results.
As a reminder, this conference is being recorded on November 829 team.
I will now turn the call over to Veronica Mayer from Investor Relations.
Thank you I really good morning, and thank you for joining us on today's conference call.
I'm joined today by Bill Benjamin our chairman and head of the real estate group with areas management, our CEO , Jimmy Henderson, David Ross, Our President Hesik, you, Nrcs, though and Carl Drake head of Investor Relations.
In addition to our press release and the 10-Q that we filed with the FCC. We have posted earnings presentation under the Investor resources section of our website at Www Dot Aries C. R. E. Dotcom before we begin I want to remind everyone that comments made during the course of this conference call and webcast and the accompanying documents contain.
Forward looking statements and are subject to risks and uncertainties. Many of these forward looking statements can be identified by the use of the words, such as anticipates believes expects intends well should may and similar expressions.
These forward looking statements are based on management's current expectations of market can sense and management's judgment.
These statements are not guarantees of future performance condition or results and involve a number of risks and uncertainties.
The company's actual results could differ materially from those expressed in the forward looking statements as a result of a number of factors, including those listed in its SEC filings.
Every commercial real estate Corporation assumes no obligation to update any such forward looking statements.
During this conference call, we will refer to certain non-GAAP financial measures. We use these measures of operating performance and these measures should not be considered in isolation from whereas a substitute for measures prepared in accordance with generally accepted accounting principle. These measures may not be comparable to like titled measures used by other companies.
We'll now turn the call over to Jamie Henderson.
Thank you Veronica good morning, everyone. Thank you for joining us today.
As you May have seen this morning, we announced that I will be stepping down as CEO of taker on December fit.
I'm continuing in my position as a director on the board.
In addition, I will remain at various through the ended this year.
This is a bittersweet decision for me one that isn't the best interest to my family.
In addition, I feel that I'm, leaving the company in an outstanding position with the board with extensive experience led by Bill Benjamin in a deep and highly capable management team that fire President David Ross takes Accuen and JB Gerber, our head of originations.
I also think very highly Brian donahoe, our new CEO and I can say with great conviction. They do he will do an excellent job leading acre in this next chapter of growth.
I'm very proud of all that our team has accomplished together over the last several years, we've executed on our strategic plan to expand our platform across the U.S. with new offices augment our talent improve origination capabilities and broaden our product offerings.
These initiatives have enabled us to remain more fully invested with loans it generate attractive risk adjusted returns.
As a result, we have collectively improved profitability and materially increase shareholder value.
In addition.
Weve increased our quarterly dividend four times since the beginning of 2018 for total increase of 22%.
We're very well positioned to exceed 100% core earnings coverage of our dividend for the fourth consecutive year.
I'd like to express my gratitude to the entire team into all of our shareholders in constituents for their support and I look forward to continue to contribute to the future successful Baker as a director for the foreseeable future.
Let me now turn to our third quarter results.
As you can see from our earnings results. This morning. The company continues to generate strong earnings with healthy investment activity and are well positioned balance sheet.
During the third quarter, we generate a gap in core earnings of 31, and 34 cents per share respectively.
And as basic will describe the first <unk> fourth quarter looks potentially better.
From an earnings standpoint.
During the third quarter, we originated five new loan commitments totaling 993 million.
Since quarter end, we've closed an additional 126 million a three loans, which brings our year to date commitments to 652 million a 38% increase from the same period in 2018.
Consistent with our current portfolio the new loans were all senior floating rate diversified across sectors and regions with anticipated gross unlevered returns in a low double digits.
Continuing to broaden our funnel of new investment opportunities.
I don't think we're currently reviewing and have quoted where our an award fan stages has increased over 30% versus the same period in 2018.
At the same time, we're remaining highly selective closing less than 5% other transactions that we reviewed year to date.
Looking ahead, our Ford pipeline reflects our focus on finding the best relative value across property types and products. We have executed term sheets on approximately 300 million of additional commitments that are expected to close in the fourth quarter and the pipeline behind those loans is deep.
As a result of our strong deployment activity in the third and fourth quarters to date.
We currently expect our fourth quarter EPS to be higher than our third quarter.
Let me now turn the call over to take to discuss our third quarter results in Florida look in more detail.
Terrific. Thank you Jamie and good morning, everyone earlier today, we reported GAAP net income of 9 million worth 31 cents per common share and core earnings of 9.7 million or 34 cents per common share for the third quarter of 2019.
So this brings us this brings our total core earnings for the first nine months of the year to a dollar four cents per common share in excess of the 99 cents per common share that we have paid in dividends for the comparable period.
As Ginny mentioned in the third quarter, we closed five new senior floating rate loans totaling 193 million a new commitments.
Total fundings for the quarter were $169 million.
As of September 30 of the loan portfolio included 47 loans with an outstanding principal balance of 1.5 billion up 3% from a second quarter 2019.
Credit quality continues to remain stable with no impairments in our portfolio weighted average unlevered effective yield was 6.9%.
Turning to our balance sheet, our leverage remained consistent with a debt to equity ratio of 2.9 times. This is inline with our target given that 96% of our loans our senior positions.
Let me now spend some time this morning discussing our unique portfolio positioning given the current declining interest rate environment.
As we've noted in the past our portfolio has historically benefited from rising interest rates given that 97% of our loan portfolio is floating rate.
At the same time, however, we have leveraged our direct origination capabilities and deep sponsor relationships to structure loans that provides protection against declining interest rates.
To this and we're purposely built in LIBOR floors on almost all of our loans.
More precisely at the end of the third quarter, 92% of our loan portfolio consisted of floating rate loans with built in LIBOR floors, averaging about 1.7%.
And in addition, 3% of our loans are fixed rate.
This means that overall, 95% of our loans have some level of protection against declining wide for.
And in fact currently based on LIBOR of 1.77% more than 50% of our loans have LIBOR floors that are either in the money or fixed rate.
In contrast for our liabilities, while we are careful to match fund our interest rate risk utilizing 100% floating rate debt. So in other words, all 1.2 billion of our dad shown on our balance sheet is floating rate I.
The only 56 million or less than 5% of outstanding principal have we agreed to provide LIBOR floors.
Overall, what this means is that in a declining interest rate environment. Our interest income is well protected by the fact that 95% of our loans at LIBOR floors or fixed rate.
At the same time in a declining interest rate environment as 100% of our liabilities are floating rate, but with less than 5%, having LIBOR floors, we expect to realize 95% of the benefits of lower interest expense.
As a result as you can see on page five of our third quarter 2019 earnings presentation on a pro forma basis of our balance sheet as of September Thirtyth 2019, including our assets and liabilities. We believed that our net income would increase should LIBOR either fall or.
Right.
Although it was change over time, particularly as our loans paid off based on our current portfolio and balance sheet construction. It's a unique hedge we win tales, we went situation with respect to changes in LIBOR.
Now, let me touch on repayment activity.
In the third quarter 119 million of loans repaid, bringing repayments for the first three quarters of the year to 367 million.
However, as we indicated in our last earnings call. We are expecting immaterial increase in repayments in the fourth quarter.
In conclusion, as Jamie mentioned based on improving investment activity early in the fourth quarter and our portfolio and balance sheet construction with respect to LIBOR. We currently expect that our fourth quarter earnings will exceed those of our third quarter.
It's clearly gives us confidence that will be more then cover our full year dividend for 2019 through a core earnings for the fourth consecutive year.
And with that I'll now turn the call over to Bill Benjamins for some closing remarks.
Thank you tick.
On behalf of the board of Baker, and the real estate group in areas management I want to thank Jamie for all his contributions over the past few years.
He is leaving the company in an outstanding position.
Look forward to continuing to work with Jamie After December 5th you. Just continued rolled is director and we wish him much success.
I'm also pleased to welcome Brian Donahoe to the team effective December 5th.
Grind has been a known entity to us and well respected by the acre executives, which has accomplished track record strong leadership and extensive relationships in the real estate sponsor community. We are confident to Brian's very well suited to lead acre and successfully execute on our plans for consulting for continued strong and crop.
A couple of growth in the years to come.
I can assure you that Brian will have the full resources of the broader real estate platform behind him a board of directors with extensive experience.
Deeply in highly capable management team led by David and take a strong team of 20 investment professionals led by JB Gerber, along with our asset management and capital market professionals. In addition, brine, we'll be able to collaborate and benefit from his colleagues across a broader areas management platform, including on the equity.
He side of our real estate business I want to express the confidence that high in the senior management team of areas management have in acre given that the business is outperforming on all fronts. We have an outstanding leadership team in place we are executing on our plan to stay more fully invested and we continue to generate attractive.
Dividends returns for shareholders with that operator, please open the lines for questions.
At this time, if he would like to ask a question. Please press Star then one.
Telephone.
If he would like to withdraw your question. Please press Star then too.
Our first question comes from Stephen laws with Raymond James.
Hi, good morning.
I guess first Jamie.
Good luck with.
What you pursue after this and congratulations on a good job we've done an acre over the last couple of years.
Moving to question I guess first taste like if I can follow up on on your repayment comments or you know, maybe specifically or the the Q4 it increase and repayments are those some of the loans. We've seen your breakout that that are scheduled to mature early next year and then specifically if you could talk to the.
It looks like February through April you've got three of your for residential condo loans scheduled to mature.
Could you touch on those and whether you expect those to pay off that maturity or extend.
It looks like a couple of that might be at pretty high interest rates as well set appreciate your comments around that.
Sure. Good morning, Steven Thanks for your question, so with respect to repayments as I mentioned, we do expect a tick up a prepayment activity in the fourth quarter I think we said something very similar on our last conference call. So without giving exact estimate we've had a little more than 100 million payoffs so far in the quarter.
And I think for the total for the quarter, we expect somewhere between call It 250 and 300.
For fourth quarter in the aggregate inclusive of the hundred plus that's paid off so far.
More specifically with respect to the residential condominium loans at your talk that you're referring to one of the three that you're referring to this is identified as the 17 and a half million senior loan.
In Florida that has already paid off in that as part of the slightly more than 100 million data. So far paid off in a in the fourth quarter. The other two the other two loans that you're referring to one isn't maturity coming up in February 2020.
And the third has a maturity in March of 20 to 20 again I think both of those situations. We do expect there to be pay off right around the maturity date.
We don't have a specific timeline for those too.
But the objective is to have a both of those loans pay off on or about the maturity date.
Great and can you touch on the Aries financing facility have you how has the company utilize that at all what are your thoughts saw a as.
You know as far as access or utilization.
Especially if we see see repayments slow if you could talk a little bit about the.
Any any update on on utilization of that facility.
Sure. So first of all we have not utilize a facility a this past quarter I.
I would tell you that it's still extremely helpful to us knowing that we have this so called excess capacity you know behind us at any point. So it gives all of our originators for example, the confidence that the capital will always be available to make sure that loans that we committed to.
I will have no risk of not being funded so while it's not been specifically drawn I think it continues to be very very additive to our origination activities in terms of again, having that extra capacity always on hand out to make sure that originations never slow down.
We would certainly anticipate utilizing the warehouse facility, our primary golf courses to keep the existing balance sheet and an existing capital as far as possible and I think we've done a very good jobs with making sure first and foremost at any repayment as capital is fully redeployed, you're obviously working towards and getting even more deployed.
And then eventually you know, we'll get to drawn capital and utilizing the warehouse as it really was fully didnt really maximize its full potential but to answer your question specifically.
To date in the third quarter and so far in the fourth quarter, we have not drawn upon the warehouse line, because we had been keeping our existing cap on balance sheet as fully invested as possible.
Great and last question, Jamie could you talk about the competitive market out there.
Hey, or discussions with borrowers are they pushing back more on LIBOR floors are there other our competitors bending and other places on on underwriting.
If you could maybe give us an update on the competitive landscape and and what you're seeing in the marketplace. Thank you.
Sure. Thanks, Thank you Steven.
I think I think it feels really good Oh, there's little blip in Q3, I think the industry was adjusting to.
You know that decrease in treasury yields.
Fourth quarter as as I mentioned in my prepared remarks pipeline feels great overall pipeline year over year is better than it ever has been a lot of that has been been the result of us effectuating our strategy of of building out a.
Brought a regional presence and partnering more closely with David Ross or equity team so deal flow feels really good.
I think the team has done an exceptional job.
Building in LIBOR floors during a time when when nobody really.
I felt like they needed that structure and that's showing up demonstrably in our earnings and I think Thats, just a testament to kind of that our credit first approach in the rigor.
Whereby we we approached lending borrowers are more alert to it now we're still getting them and I think overall structure feels.
Really good.
I don't really see.
Kind of mass capitulation on structure terms. So I think I think feels pretty good I think real estate fundamentals still feel darn good given.
The long expansion.
Great. Thanks for the commentary there appreciate it ticker.
Thanks Steven.
Our next question comes from Steve Delaney with JMP Securities.
Good morning, everyone and Jamie I would echo Stephen's comments about congrats to you probably no better way to.
Step aside them with the stock up 18% this year and.
Brian look forward to having the opportunity to meet you sense.
So turning to Cuba day.
Chasing the new slide or the new presentation on a lot more sensitivity was a was very welcome. So as you mentioned I think we're sitting here today 176 so.
I know swap.
Numbers and the way.
Floors weighted averages in all moves but would it be reasonable to think that up the down fit the eight cents benefit from down 50.
But essentially we are approximately have already with whiteboard today, we're realizing roughly half of that benefit. So therefore for sun annually, maybe one cent per quarter and is is the why bore forecast part of why you in Jamie you're suggesting that fourth quarter is going to be improved.
Over third quarter. Thanks.
Hi, Good morning, Steve. Thanks for your question, that's exactly right I think I mentioned in our comments that we do expect fourth quarter earnings.
To exceed those of third quarter and I think part of the reason for that is the impact of why board that we've already experience. So the chart that we show on page five of the earnings presentation. You can see that that really shows a changes from live or from the September thirtyth spot rate, which was around 2%. So weve.
The experience plus or minus 25 basis point change in LIBOR. So part of our fourth quarter estimate is based upon.
The drop in LIBOR or and the positive impact that we get from our LIBOR floors.
Got it thanks, and turning to the dividend I appreciate the comparison of dividends paid to cumulative core.
Just assuming you've already declared your fourth quarter dividend flat.
Yes.
One we asked you this do you assume that.
You at this point that you will have met with your.
Dividends through the fourth quarter, what dollar <unk> dollar 20.
32, whatever.
Well you assumed that you have met your requirement with respect to distributing taxable income.
And it maybe and if not you know there's a couple of waste to deal with that obviously, because you've got some time before your file return is filed but given where the did the dividends at a nice nice healthy level. When I think the worst thing or mortgage Riet can do is raised their dividend too much and then b.
Position they have to cut it.
As we look to next year I mean would you prefer to do if you had an extra additional distribution at this point.
Would you consider a special dividend or would you just you know he is.
Kind of patient as possible in raising the dividend right from from where we are now given the increases over the past year backs.
Sure you know as you know there is a number of inputs that the board and management in its recommendation will take into consideration in terms of setting to dividend certainly as you mentioned a stability and growth at a dividend is a key factor.
Tax requirements being a read is also another important factor.
Future forecast of our earnings and our ability to deliver returns is from a factor and then there's obviously a myriad of other considerations or two to consider as well.
So to answer really are question you know for right now I think from a tax perspective, we're in good shape. You know as you said this is not a year by year test there are other ways to manage the read distribution requirements and we have obviously fully met them.
I think we also had previously described the fact that we do have if you want to call. It some undistributed taxable earnings that we have not paid out in the form of dividends.
Some of that came about as for example, the result of income that we derived when we sold a long time ago few years ago.
Are.
You know, our Fannie Mae Freddie Mac mortgages agency business Yep Agency business and we had a you know we had a game there.
We're able to manage that we do pace excise tax because of that and that is obviously one of the reasons. We do have a a tax expense line in our income statement. So we are able to manage that very well.
And we'll certainly take down the consideration and it really final your question about a special dividend or certainly that's another consideration on another option that we can follow I know some of the other companies in our space and somebody other companies a in the REIT world have done that as well and so certainly that something else week.
Consider I.
I would say you know we have looked at this question very carefully. The board has obviously looked at this question very carefully and setting this quarter's dividend as well as the prior dividends throughout the year.
And we'll continue to closely monitor but right now I don't think I can really give you any sort of future outlook on.
What our dividends will be just given just a number of considerations that we need to we need to think about.
Alright, well, well watch court T.S. and to the extent that keeps going up I think that will give us give us comfort on the dividend. Thanks for your common Stacy.
Perfect. Thank you Steve.
Thanks, Steve.
Our next question comes from Jade Rahmani KBW.
Good morning, everyone. [noise]. This is actually Ryan Thomas or the on for Jade.
I just was hoping you can talk about where you're seeing incremental level Levered returns currently across the pipeline and on a go forward basis, just trying to understand how you're thinking about the confluence of factors of these recent rate cuts potential additional rate cuts.
Coupled with.
What seems to be still ongoing spread compression. The LIBOR floors, you laid out just in general you know if you think that low double digit IR ours are still achievable on a go forward basis for this business, particularly as the LIBOR floors in that but inevitably roll off.
Three payments.
Hey, Ryan this Jamie I guess I'd start by saying you know we've been really deliberate in creating.
As a business model that's focused on the Midmarket.
And.
A lot of that has to do with infrastructure and having people on the ground or.
Country.
And that gives us.
A much broader top of the funnel and we operate in a you know kind of that medium sized loan space plus or minus.
40 or $50 million.
We did see a little bit of spread compression in the midst of kinda at the outset of of Q3, but I've been very happy to see that that feels like it's slowed down and even has widened a little bit.
So feel pretty good about.
Where spreads are not terribly concerned about the index to tell you the truth I think the teams done a great job of.
You know structuring around that the.
As we've stated many times you know kind of current Levered are always are still.
In the low double digits.
So feel good about where the business sits today feel good about our balance sheet and feel good about the the loans that were able to source in the Midmarket space I think the large loan space is experiencing.
You know a lot of pressure or more pressure on spreads.
So I'm really happy about the business model that we've adopted.
That's that's really helpful. Thank you and then I guess you know on the on the oral pipeline of loans that you're seeing and what what's already close can you give us some color on on what's what types of loans. Those are in terms of geography property type.
Spreads I guess I'm, just wondering how that fits in with your with your just with your prior comments on on Unlevered returns.
Sure. Good morning, Ryan. This is outpacing in terms of you know the characteristics of the loans that.
Loans that we closed a so far.
Again, I think they're very consistent with our you know our history in our portfolio. So if you look at you know page four of our earnings.
We don't expect those types of metrics to materially changed from what we have.
The other good news is that Jamie mentioned the loans that we closed so far again in terms of their expected are always under Levered basis again continue to be very consistent with our overall returns.
And again based upon what we've seen so far I'm you know I think one that benefits that we've always talked about before is because we have a relatively smaller balance sheet that we we want to obviously keep has fully invested as possible. You know, we don't need to go out and chase market rate deals and we can be a little bit more so.
Active in the type of deals that we do.
So I think that selectivity, both in terms of credit as well as portfolio construction.
Well as returns remain very consistent with a with our existing portfolio.
And just lastly, it looks like there were there were two loan modifications in the quarter on two of your condo mezzanine loans, one in New York and one in Hawaii. So just was hoping you can give us some color on what's going on there you know how are those borrower business plans performing.
Are you expecting a full pay off or is it possible. We should you know we could see some sort of impairment on those loans pending their performance.
Well again, we certainly don't expect any impairment on you know on any of our loans, including the two that you mentioned a the Hawaii alone. We did extend out the maturity on that loan as you probably tell I think that is a we feel very good loan we want to give the.
Our little bit more time to execute the refinancing of that asset.
That is in process and so as I mentioned I think Stephen laws as outs asked question about what we expect on the repayments of Ciena loans are coming up in the first half of 2020, and so we do expect that Hawaii loan to you know to repay sort of on or about the now new stated maturity date of.
March 2020.
With respect to the to the New York loan you know this was really in relation to a bit of a change and in the mix of units that the developer is building.
You know we felt it was the right decision to make to really meet a different needs of the market than what was originally envisioned so that was really the primary reason for the change in that in that loan itself that loan doesn't mature until may 2021. So it's much too early to get any sort of insight as to whether it.
That loan will pay on her on her about its maturity, but certainly we don't see impairment on on either of those two loans.
That's that's really helpful color taste.
I, maybe pushing a bit too much here, but can you say, what the underwritten sellout value per square footage of that New York Standalone and perhaps.
For the overall book.
Got you know again I think we're careful not to give to specifics on the business lines of these units you know, we do want to be very respectful of our borrowers and their business plans.
Certainly we do a very indefinite ounces of of the market itself. We do a very death analysis of our LTV. Jamie did you want to add some times assure Ryan that's actually that's a very good question.
And I think the way I'll answer that is we've been very systematic in in avoiding.
Some of the major metro's luxury and ultra logs.
Condo.
Projects, we think Theres a you know.
In material risk in that sector.
And there's probably opportunity for pretty material reset.
Which point, maybe we'll be interested so I can tell you what we haven't done and <unk> and also tell you. It in a lot of these markets are there is very very significant demand for.
You know kind of milk middle of the road product as I had as I'd say, so we've been really systematic in avoiding the high end.
And feel really good about every project that we've elected to loan.
Thanks for all that color.
You're welcome.
Our next question comes from Rick Shane with JP Morgan.
Hi, guys. Thanks for taking my questions and Jamie We wish you the very best as you move on to what's next in your in your career.
It's been a pleasure getting to know you over the years.
Just you know interesting context, you had a pure company report last night and.
I would describe that company.
Okay.
It's more cautious defensive outlook I'm curious, where you guys are seen relative value.
Opportunity and I do notice that if you compare sort of the.
Portfolio originations this quarter versus the overall mix. It seems like you guys are shifting to more defensive.
Asset classes as well as that just a one quarter thing or is that something that's really more tactical.
So Rick Thank you for your kind words [noise].
And I guess I'll start.
You know to address your question on loan portfolio mix portfolio composition, So one of the.
You know tremendous strengths of acre is the fact that you know every deal goes to a global investment committee and as over 300 years of.
Professional real estate experience on it.
That's both debt and equity in credit. So it is it is not an easy hurdle.
To clear there's every one of us on on that committee of Transacted, you know many billions of dollars and.
Pretty much every asset class in most major markets.
So there's a lot of very granular a street level knowledge and asset class knowledge on that committee.
I'll say, we've been really deliberate in even kind of increasing the level of rigor over the over the past several quarters.
And I think our portfolio composition reflects that we you know.
We've been pretty conservative throughout our history, and I would say, we've gotten slightly more conservative.
Over the last several quarters, so not I'm not saying that every single deal has been you know like a scientific.
Add to the portfolio, but I think you know the level of rigorous extremely high.
Okay. Thank you.
You're welcome.
[noise] [noise], ladies and gentlemen, this concludes our Q and <unk> and our conference call for today.
If you Miss any part of today's call an archived replay of this conference call will be available approximately one hour. After the end of this call through November 20 seconds 29 team.
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