Q1 2020 Earnings Call

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This time, all participants are in listen only mode.

Later, we'll conduct a question and answer sanction.

Instructions will follow at that time, if anyone should require assistance during the conference.

Sorry, I didn't see real like attach tall telephone.

As a reminder, this conference is being recorded.

Now I'd like to introduce your host for today's conference.

Okay, Great <unk> senior Vice President corporate Finance, Sir you may begin.

Thank you operator.

Good morning, Thank you for joining our call.

Well, we begin I would like to remind everyone that certain statements made in the course of this call or not based on historical information.

They constitute forward looking statements.

When used in this conference call. The words believes anticipates expects and similar expressions hurricanes identify forward looking statements.

The company believes that these forward looking statements are based on reasonable assumptions.

Such statements are based on management's current expectations and beliefs and are subject to a number of trends risks and uncertainties.

Could cause actual results could differ materially from those contained in the forward looking statements.

These risks and uncertainties are discussed in the company's reports filed with the FCC.

It's reports on forms 8-K.

Thank you.

Okay.

Secular the risk factor section of our form 10-K.

Those are cautioned not to place undue reliance on these forward looking statements speak only as they hear us.

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.

Presentation. This information is not intended to be considered in isolation.

Or as a substitute the financial information presented in accordance with that.

Reconciliations of these non-GAAP financial measures to the most cool measures prepared in accordance with generally accepted accounting principles are contained in our earnings release for the passport.

What are you everybody thanks for calling in.

Really today or Bob LIBOR CEO.

Let's turn president of executives, Dave Bryant, our CFO, Paul Houston, Who's got a commercial real estate lending.

As you heard from Steve Redgrave, or not senior Vice President.

I'll, let me begin for use by expressing our hope that all of younger families are healthy and safe.

All of US an exact just capital Corp, and see three capital partners, which is a judge as manager So our health care and other central workers, who are doing in risking so much at this remarkable time.

As an organization she three capital partners made a concerted effort by charitable for their support it's about health healthcare workers on the front lines and assistance to doesn't need.

The unprecedented fallout from the Cobot 19 virus embroiled financial markets around the World has had an acute impact on commercial real estate.

Like many of our peers. These events have had a material impact on our company.

We transitioned our entire operations remote setting in the second week of much.

There hasn't continues to be no disruption in our ability to operate all of our employees are safe.

Has been approximately 12 years since our industry experience a shock of this magnitude.

We are rigorously monitoring what are the fluctuating environment to ensure the remain responsive and adaptable.

Well this period has been and we'll continue to be difficult.

This particular management team has been through several real estate cycles.

Confident we will find opportunities when the economy and financial markets stabilize.

Well the uncertainty in our financial markets in our economy today or first and foremost goal is to protect the franchise and retain sufficient excess liquidity.

We therefore did not pay a first quarter dividends on our camp common and preferred shares.

Wanted to do this to maximize liquidity for the company.

We understand this is uncomfortable for shareholders for the length in depth of this crisis is not yet no.

Actually the federal reserve and U.S. government I've, certainly stopped a free fall we're experiencing in the second half as much.

But there's still uncertainties its originated enough from an economic event for medical event, one we really haven't seen in this country at 100 years.

Recall that in the U.S., who cover when its medical issues resolved well positions and just to recover as well.

There's a lot this transpired over the course of the last eight to 10 weeks actually an extraordinary amount. This transpired over the course last eight to 10 weeks, all which have had a material impact on the company.

Because there's so much as that has transpired water to ensure our shareholders had a detailed explanation from the company.

As to exactly what happened how we responded what happened and how is it helped to mitigate further harm to the company.

The objective of course, but to make sure that the company emerges strong and solid as we go forward into the market and make sure that we have a future for all of our shareholders reorganization.

We've done a good job and making sure that's going to happen.

Call will be a little more detailed unusual so do you have all the information.

With that let me turn this over to our CEO Bob LIBOR.

Thank you Andrew and good morning, everybody as Andrew mentioned that we're going to talk through some of the timeline on the significant events that have occurred since March 4th.

Starting on March 4th on her last earnings call, we provided guidance about deployment for 2020.

And at the time, we noted that such guidance presumed <unk> normalized market conditions, but the recent market activity had not been normal we clearly weren't aware of how unfortunately pressure that caveat turned out to be.

The week after the earnings call members of senior management and the board were very excited about the addition of the fixed rate loan origination capabilities to our product offerings that exact does and we demonstrated this confidence in our business plan through the purchase of equity securities and the company.

The threat of Cobot 19 was not fully known at this time and even while we shut down or New York City Office, we were confident in our loan and CMBS portfolios.

Well as the direction of the company.

On the loan side as you know we focus on borrowers with like transitional business plans substantially all of which generate sufficient cash flow. During the transition we have no construction loans in our portfolio will be a minimal exposure to New York city over 98% of our portfolios and senior secured loans or portfolio geographically diverse with almost 60 per.

I never loans and multifamily assets.

Our CMBS portfolio was a mix of agency says B and conduit CMBS positions selected based on their strong credit profile as a result of their sponsorship the asset class and subordination levels. For example at February 29, 2020 about one third of our portfolio was comprised of the class B bonds from.

<unk> Maxx floating rate case series Securitizations.

These are pools of loans originated by Freddie Mac from their approved borrower list and each Bon had a 7.5% subordination level within the pool to absorb any realized losses are feeling was that even if the covert 19 fiber spread or portfolio was relatively insulated and despite the potential for short term disturbances, we felt the long term value diminish.

Patient was much less likely within this context than we initially funded CMBS margin calls to protect our bond portfolio.

Just 12 days after earnings call starting the week of March 16th the capital markets almost entirely seized up.

The weekend to March 21st of all several distressed trades due to the certain parties needing immediate liquidity with limited bidders in the market.

Just gave rise to us receiving sizable margin calls the following Monday morning, and these margin called differ materially and prices that we would see into liquid market never mind, what fair value was.

Despite our attempts to communicate and resolve these discrepancies we received an order to put default, which resulted in one of our bond polio bond portfolios being repriced and effectively sold by the lender into a shockingly illiquid market.

I'd like to point out that the cost of the settlement for this default was actually less than the margin call, which led to the default in the loss of our bonds.

But in order to protect our balance sheet, we decided to exit the remainder of our CMBS portfolio with the exception of our B piece investment we felt that an orderly unwinding of these positions given the.

Given the current market conditions was the best path to protect the Companys liquidity at book value.

And the final sales price.

Sure. So please shortly after the quarter under this is why we show a bond balance our March 31st financials.

That will discuss in more detail the impact to the CMBS transactions.

His comments.

On the loan side, we completed 208.9 million originations in the first quarter, but today have temporarily curtailed our loan origination as it's currently very difficult to actually underwrite loans.

Given this backdrop, we are rescinding our previous guidance of at least 1.1 billion of deployment in 2020, and we'll revisit providing our expectations for the remainder of the year on future calls I.

As of March 31st got book value per common share seven point $37 in 13 cents compared to $14 per share as of December 30, Onest 2019.

Economic book value per share as at March 31st $2026.77 at May 7th.

We have 36.7 million of cash as you would expect management is heavily focused on asset management at a plan to continue to enhance our liquidity cushion there will be opportunities arrive from this location and we want to maintain the optionality to seize them.

<unk> existing investor presentation, we have indicated that we generally target of $40 million minimum cash balance in an environment, where we are originating loans.

Given that we have curtailed our originations we feel comfortable with our current cash balance and have suspended our common or preferred stock dividends to preserve and build our liquidity.

Additionally, we are evaluating potential asset sales and have $91 million of unencumbered assets, which are potential sources of additional liquidity.

Further the company's actively exploring financing capital raising a strategic options and its engage JMP securities to assist us in that process.

To reiterate we believe the current market does create long term opportunities what our focus for the short term is generating and preserving liquidity through asset sales and financing opportunities until the longer term effects of this global virus on the U.S. economy stabilizes and show signs of a renewed economic activity.

With that I'd like to turn the call over to Matt Matt.

Thank you Bob and good morning, everyone.

As disclosed in our earnings release last night, we sold our entire CMBS portfolio other than the BP structures, we hold unlevered, which resulted in a 180.3 million dollar loss on sale were $5.69 per common share.

Relativity in the CMBS markets started in mid March that's starting in mid March led to the company funding 59.7 million of CMBS margin calls at following additional sizable CMBS margin call requests. We eventually received notices of default on repurchase facilities as disclosed in our two 8-K filings in late.

Mark what we certainly feel comfortable with the CMBS portfolio. We had acquired the lack of a quick liquidity and the CMBS market. During this time lets a pricing that was not reflective of underlying value and led to margin calls inconsistent with the fair value of our assets. Despite this dynamic as Bob discussed we concluded it was necessary.

Through the best our bond portfolio and protect our balance sheet.

The company's CMBS repo liabilities were not fully settled until April 2020. So you will note that we have liabilities that remain on the March 31st balance sheet of 175.9 billion, which are offset by the fair value of CMBS marching cash posted and retain feel in those.

As of April Twentyth, we no longer have any liabilities associated with our CMBS portfolio and all losses associated with the disposition of the CMBS portfolio has been recognized as of March 30, Onest as disclosed in our April 22nd eight K. all notices of default have been rescinded were withdrawn.

The 180.3 million dollar loss on disposition of the CMBS portfolio has the following components.

The size of our CMBS portfolio and retained investment grade CLL notes prior to the disposition was 548.8 million I cost financed with 436 million of short term repurchase agreements, yielding a net investment of 112.8 million before any margin calls and other deposits.

We had 4.8 million of restricted cash deposit at prior to the crisis and we funded this amount and additional margin calls and repo roles totaling 59.7 million from mid March through April that was utilized to pay down our CMBS borrowings as a result of lender based mark to market adjustments.

We also recognize an additional 3 million of charges related to that settlements with our CMBS lenders and other adjustments to reflect the sale of our CMBS book.

As of April 21st we terminated all of our interest rate swaps associated with our dispose CMBS portfolio and realized an 11.8 million dollar charge to equity as a result of our swap terminations of which 11.3 million was recognized at March 31st the remaining 475000 will impact.

Equity and the second quarter.

The loss on termination of the swaps will amortize into interest expense on the income statement over approximately seven years, but well up no further impact on GAAP book value as the losses already completely reflected in our book value of equity. It is important to note that our interest expense on the income statement will therefore include this non.

On cash expense going forward.

Our only remaining CMBS securities are the BP structures that we acquired in 2017, which remain on lever. We now carry these positions at 3.2 million after recording a 5 million dollar unrealized mark to market loss this quarter.

At March 31, 2020, our commercial real estate loan portfolio balance increased to 1.9 billion.

At the beginning of April the company had 124 loan assets outstanding only two of these loans did not make a payment in April and one other pay debt service, but did not find escrows and reserves.

It's important to note that the vast majority of our loans are in areas of the country less severely impacted by corporate 19, then is the New York Tri State area, where many of Us live.

As Bob mentioned, 60% of our portfolio was multifamily, which we have found historically hold up better it environments such as this.

The balance of our portfolio composition has not moved materially from last quarter and a breakdown is provided on schedule five of our press release issued last night.

We are acutely focused on the asset management of our existing CRV loan portfolio like every commercial lender today, we are having active discussions with our borrowers. These discussions are very fluid due to varying durations of locked down so were shelter in place orders around the country the right path for each of our assets will.

Depend on the asset type and region as well as our real estate underwriting.

On March 12, 2020, we were we're very pleased to have close the exact this 2020 dash eight A.C. olo financing 522.6 million of C.R.E. loans, and we placed 435.7 million of non recourse floating rate notes at may 7th 1.4, or 5 billion.

Although our entire 1.9 billion CRB loan portfolio is financed by Filos with 1.1 billion of debt that is non recourse and is not subject to margin call.

352.6 million of our loans are pledged to our three warehouse lenders with 237.8 million of debt currently outstanding.

The balance of 91, and a half million of assets are comprised of unencumbered assets and future fundings available for purchase and RCR lows are financing on our loan facilities.

We also have 297.5 million at face value of equity investments in RCM close.

We have been and continuous dialogue with RCR he loan warehouse lenders since the pandemic began and we are pleased to announce that we have negotiated covenant amendments under our facilities associated with the impact.

Our CMBS portfolio sale activity.

Additionally, just this week, we have entered into agreements with our two largest warehouse lenders representing over 90% of our 237.8 million of outstanding borrowings, which provide a framework to avoid credit brace markdowns for approximately four months.

As of today, we have reduced our leverage under our three warehouse lines to 67%, which we believe provides our lender sufficient comfort and they have been working productively with us. So that we are able to provide our borrowers where appropriate with adjustments to their long terms. We are appreciative of the time effort and productive engagement of our.

Warehouse line lenders through this process, we feel these arrangements give us the appropriate runway to navigate the current economic environment and pursue additional liquidity for the company going forward.

As a management team, we recognize both the importance and challenge of delivering real time information in these circumstances, we've made a concerted effort during our management of examples to build the trust and confidence of our shareholders financing power partners and borrowers and we will continue to do so as we navigate this environment.

With that I'd like to turn the call over today.

Thank you, Matt and good morning.

Our GAAP net loss allocable to common shares for the three months ended March 31st 20, Tony was 199.1 million worth $6.30 per share.

Earnings loss was 172.9 million worth $5.40 per share for Q1 2020.

And adjusted core earnings after adjusting for the 180.3 million dollar loss on CMBS dispositions was 7.4 million for 23 cents per share.

In terms of significant items impacting Q1, GAAP earnings we incurred 185.4 million were $5, an 86 cents per share of losses, one the combined impact from the sale of our CMBS portfolio that was financed by repurchase agreements and mark to market share.

He just on our remaining B piece investment.

Which of course was not financed.

We saw our Cecil reserve increase by 16.1 million were 51 cents per share at March 31st 2020, due to the macroeconomic shocks caused by the Kogut 19, pandemics effect on business can that conditions.

This adjustment is over and above the four and a half million. She so reserves already on the company's books at the time Cecil implementation on January 1st 2020.

And we recorded 3.8 million or 12 cents per share that's fair value adjustments.

You are held for sale strategic plan asset.

The net negative impact from these items in Q1 2020 was approximately 205.3 million worth 6049 cents per share.

When our yearend 2019 call held in early March. We report is available liquidity of 139 million as of February 20 nice.

Given that we're now reporting a 102 million less they shop and I wanted to provide a high level summary of the items that impacted liquidity.

We had three major uses of liquidity.

First we had significant mark to market margin calls from 59.7 million.

Third we closed new loans using another 14.8.

These uses were offset by nets yellow proceeds of 15.3 million.

Operating cash flow 4.1 million.

Implementation of Cecil, which is new counting guidance on our Loanloss reserves that applies to all mortgage reach and other financial institutions.

Choirs us to estimate expected credit losses over the life of islands.

In determining are expected credit losses.

We evaluate my property type and loan site.

Available relevant historical and current Loanloss data.

As well as future macroeconomic expectations.

The impact of Cecil resulted in a total allowance for credit losses at March 31st of 20.6 million or 1.09% on a on our 1.9 billion.

Tower Sheorey loan portfolio.

To reconcile the impact as of December 31st we have reported at approximately one and a half million and blouses against the loan portfolio.

We had a <unk>. We had also previously disclosed 3 million dollar or 10 cents per share adjustment related to the initial she's still implementation.

N retained earnings as of January 1st 2020.

And we recorded an additional 16.1 million.

War 51 cents per share through income as or March 31st 2020.

This March 31st edition to our ultra loom losses resulted primarily from the expected impact of coping 19, when the forward macro economic forecast that is used for she sold modeling.

It is important to know that these adjustments are now cash reserves.

Gap book value.

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<unk> value with $7 in 13 cents per share at March 31st 2020.

As compared to $14 per share at December 31st 2020.

Economic book value Nongaap measure with $6.77 per share at March 31st.

Compared to 13 61 cents per share at December 31st 2019.

Gap book value decline by $6.97 per share.

Which consists of $5.69 per share of loss from C.N.B.S. portfolio disposition.

To market as estimates from C.M.B.S. related interest rate <unk> 21 cents per share.

The implementation of Cecil allows for losses, which are not in cash reserves of 61 cents per share.

A. 16 cents per share loss on the unrealized mark the market adjustments on our remaining C.M.B.S.P. piece position.

And 12 cents per share from the evaluation adjustment in carrying costs on our help for sale assets and other adjustments that net to a negative eight cents per share.

Economical value is further impacted by the noncash discount on our convertibles senior notes of 23 cents per share and the redemption value of our preferred stock in excess of carrying value of 13 cents per share to arrive at the $6.70 per share of economic value.

Are gap debt to equity ratio was four and a half times.

When we adjust for the net impact of the pay off of the C.M.B.S. repurchase agreements and pay downs on our she already warehouse and lines.

That happened after a quarter ads.

<unk> providers financing by allowing for the purchase of additional loan findings from our balance sheet.

What we refer to as future findings.

Or she'll those were able to purchase 5 million of these future findings since you're in.

The 19, and we currently have 8.8 million a balance is available to purchase as loans to pay off within R.C.L. those.

At March 31st.

Are 1.9 billion floating rates, you're already loan portfolio at par had a weighted average live were floor of 1.91%.

And a weighted average right over library of 3.41%.

At the end of March we had 1.8 billion or 96% of our loan book log were floors.

That are in the money with 30 day library at approximately 1% at the end of the period.

We expect to continue to see a benefit to net interest income during 2020.

As the library or for the for word by word curve projects rates.

Main low to the balance of the year.

With that I'll turn the call back to Bob for some final comments.

I will turn it to Andrew Andrew.

Thank you Bob Thanks, everybody.

So.

Basically.

About two it out months ago or so this company was on a trajectory that was entirely consistent with our stated objectives.

According to the last five years, we took exists for their organization that was a series of disparate.

If this is.

And we converted it into a pure mortgage read which was the original intention.

And earnings from that mortgage rate continued to increase dividends over the course of the last five years or so.

And even as recently as two weeks ago, We had no reason to believe that that would not continue.

But took place 10 weeks ago, as lockdown commenced and the economic crisis coming to this country.

That was at least in the history of my tenure in my career in the industry, which stands about three decades.

Unprecedented.

And the impact on our company has been profound.

Our primary objective has been to ensure that the company has the ability to continue.

Going operation.

We are able to continue to aggregate liquidity I did get loans paid off.

Company can return to a normal standard of operation.

There is occurred has impacted everybody in the industry's in which we operate.

That is any consolation to any of us.

But the management of this particular organization has been through crises like these over and over again and we do have the skill set to help to navigate through this as best as is humanly possible.

We continue to appreciate your support.

We obviously wished that these things had not come to pass.

We have worked tirelessly to try to manage through them.

That I welcome your questions.

Yeah. It's time there are no question.

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Oh that no further questions at this point, we thank you for calling in obviously were available to you with any questions. You may have probably really on the phone.

And we hope that everybody continues to say healthy and safe.

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Thank you, ladies and gentlemen for participating in today's conference call the extra now.

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Mm.

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