Q3 2020 Exantas Capital Corp Earnings Call
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I would now like to introduce your host for today's conference Ryan Byrnes Vice President. Thank you maybe get.
Good afternoon, and thank you for joining our call.
Before we begin I would like to remind everyone that certain statements made in the course of this call are not based on historical information and May constitute forward looking statements when.
When used in this conference call. The word believes anticipates expects and similar expressions are intended to identify forward looking statements.
Although the company believes that these forward looking statements are based on reasonable assumptions such statements are based on management's current expectations and beliefs and are subject to a number of trends risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements.
These risks and uncertainties are discussed in the Companys reports filed with the FTC, including its reports on form 8-K, 10-Q, and 10-K and in particular, the risk factor section of our form 10-K and form 10-Q.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward looking statements.
Furthermore, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with GAAP reconciliations.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in our earnings release for the past quarter.
With me on the call today is Mark Paul go President and CEO and Dave Bryant our CFO.
Also available for Q and I as Andrew Fentress Chairman of Inventus.
I'd now like to turn over the call to Mark.
Good afternoon, everyone and thank you for joining our call today I will provide an update on the transition of the exact this matter has been contracted acres capital and discuss our key accomplishments to date and Dave Brian will then discuss our financial statements and operating results for the quarter.
I'm pleased to report that the integration associated with the July 30, Onest acquisition of event. This management contract is complete.
It's close link our work is focused on enhancing the company's financial profile stabilizing the existing loan portfolio and positioning the company to restart originating loans I'd like to highlight a few a few key accomplishments.
First the integration has gone very smoothly acres brought over 18 individuals from a prior management had a combined team is working together seamlessly.
Second.
The acres teams continue to work our work on the underlying loans in the portfolio during this challenging environment.
We have taken a deep dive into the entire portfolio and create have created a specific plan for each loan asset on our watch list.
We are working closely with every borrower, where we have executed a forbearance agreement provided into an extension to ensure their payments remain on track.
The total portfolio of 105 commercial real estate loans 18 have received some form of relief since the onset of cobot to reduce the credit risk primarily.
Primarily due to pandemic related financial difficulties.
With the exception of two loans, representing approximately 4% of the total portfolio all of our loans were current on debt service payments through October 2020.
Well, we believe we are proactively address the loans currently at risk.
Given the ongoing uncertainty additional borrowers could face challenges in complying with the terms of their loans in the months and quarters ahead.
Additionally.
Several bars, including many with multifamily and retail collateral paid down or fully repaid a total of $124 million of their loans during the quarter.
We believe that the ability to refinance in this uncertain environment speaks to the health and quality of the assets underlying our loan portfolio.
Third in September the company closed hey, so yellow backed by $297 million of floating rate commercial real estate first mortgage loan commitments originated or acquired by Exantus.
With the proceeds from this yellow issuance and the liquidity from the senior secured facility. The company was able to pay off the existing warehouse lines, which further reduced exposure to margin call risk.
As of the end of October the company had a cash balance of approximately $150 million and access to approximately $1 billion of financing capacity with which to restart loan originations.
Fourth with improved liquidity the company resumed payment of cash dividends on its series C preferred stock, including all the accrued payments in terms of the common dividend. The company is taking all the steps necessary towards stabilizing the business and its capital position.
The board evaluates dividend policy on a quarterly basis.
It is now actively originating and underwriting new loan opportunities on behalf of the company.
Quality of opportunities has improved over the course of the quarter and into the current fourth quarter.
We believe this presents a compelling opportunity and we will remain highly disciplined in our approach with our experienced underwriting team. We are focused on finding the ideal combination.
Location assets and sponsorship we look forward to reporting to you on our activity going forward.
The key driver for the acres the acquisition of the exact this management contract as a complementary nature of the platforms over the past eight years acres has been a successful and growing balance sheet lender focused on transitional loans to strong middle market sponsors in all major asset classes within the top 25, m. essays across the country.
The focus is on short term first mortgage loans and the 10, the $80 million range.
We believe many of these loans are potential candidates for the exacts a platform, which focuses on longer term loans the.
The market and our borrowers have validated our thinking and our increasing the volume of business they seek to execute with acres.
We are confident that acres network will provide access to additional originations for example, as we work towards our goal of being a full end to end solution for middle market commercial real estate borrowers nationwide.
We will now have our CFO, Dave Bryant discus, our financial statements and operating results during the third quarter.
Thank you and good afternoon, I'd like to Echo Marcs sentiment about the team coming together and working seamlessly.
Our third quarter results reflect the ongoing impact of COVID-19.
As well as the positive progress we continue to make.
Our GAAP net income allocable to common shares for the three months ended September Thirtyth 2020.
Was 5.6 million or 17 cents per share.
Core earnings adjusted for $2.6 million in one time costs.
Got it to the acres transaction were 5.7 million or 17 cents per share for the third quarter of 2020.
Net interest income declined by $3.1 million for the third quarter compared to the second quarter of 2020.
The primary drivers of 2 million of the decline, where the payoffs and paydowns of commercial real estate loans.
A loan sale and the temporary pause in loan originations during the second and third quarters of 2020.
Additionally, an increase in corporate interest expense on our 12% senior unsecured notes issued in the third quarter contributed 1 million to the decline.
The weighted average spread on the floating rate loans in our 1.7 billion loan portfolio remained stable from the second quarter at 3.41% over the weighted average of one month LIBOR floor.
War of 1.92% at quarter end for a gross rate of 5.33%.
These LIBOR floors are in the money.
All of our floating rate loans with one month LIBOR at approximately 15 basis points at the end of September.
We expect to continue to see a meaningful benefit to net interest income as the forward LIBOR curve projects rates to remain low for the balance of 2020.
All except two of our Companys 105, commercial real estate loans.
Our current on debt service payments through the end of October incur.
Including eight loans performing in accordance with forbearance agreement.
We have provided relief in the form of short term forbearance agreement and other modifications on 18 loans this year.
The implementation of Cecil on loan loss reserves, which applies to all mortgage reach and other financial institutions requires us to estimate ex acted credit losses over the life of our loans.
In determining our expected credit losses, we evaluate by property and loan site available relevant historical and current loan loss data as well as future macroeconomic expectations provided by third party economic experts.
The impact of Cecil resulted in a total allowance for credit losses at September Thirtyth.
$52.9 million.
For 3.2% or 1.7 billion loan portfolio.
This represents an 8.1 million reduction from our estimated loss at June Thirtyth, resulting from 124 million of loan pay offs too.
Together with the anticipated improvement in macroeconomic conditions and the related potential impact on arc estimated credit losses.
During the third quarter of 2020, we incurred $3.4 million of charges on a non core legacy asset held for sale Prime.
Primarily driven by 2.9 million valuation adjustment based on an offer received two purchase the property.
The balance is from protective operating advances and amortization of certain prepaid property expenses.
GAAP book value per share rose slightly to six Dollarsthree sat at September Thirtyth 2020, as compared to six hours and one side at June Thirtyth.
The increase to book value per share driven by our net income during the quarter was largely offset by the net impact of the issuances of senior unsecured notes.
And related warrants to purchase common shares.
Which we had announced in August.
Our GAAP debt to equity ratio decreased to 4.6 times at September Thirtyth from five times at June Thirtyth, but increased from year end 2019 due to the decline in retained earnings year to date.
In September we paid our commercial real estate term warehouse financing facilities down to zero and liquidated a 2018 CLL by refinancing the assets with our mass mutual senior secured financing facility.
And they knew CLL exams.
Xantus Capital Corp, 2020 Dash Rs nine.
The new COO financed $297 million of commercial real estate loan commitment.
By issuing 275 million of note.
Including 246 million issued to third parties at a weighted average cost of one month LIBOR plus 3.13%.
As a result of the new financing commitments and debt refinanced during the quarter. The company had 947 million of availability on its commercial real estate term warehouse and senior secured financing facilities and senior unsecured notes at.
Aggregated as of the end of September.
At October 31st the company's available liquidity was approximately $225 million in.
Including 150 million of unrestricted cash and 75 million of availability.
On the senior unsecured notes.
With an enhanced financial profile, including improved liquidity and reduced margin rash. We are encouraged by the progress. We have made in a short amount of time and look forward to continuing to build on this progress as we move forward with.
With that I'd like to open the call up for questions operator.
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Keith one moment, please be poll for questions.
Our first question comes from the line of Steve along with Raymond James. Please proceed with your question.
Hi, good afternoon.
Congratulations you guys have accomplished a lot it seems like in three months from reading through the release some of the updates.
Mark I guess first start with what the comments around originations.
You know you've got roughly 225 million liquidity can you talk about.
What type of loan sure looking to do are there certain of property types and also as we think about the impact on the model will these loans have any upfront origination fees or how do we think about.
How does the new loans are going to impact the interest income line in any one time fees there.
Sure.
Dave how are you I don't think the new loans will look dramatically different in nature can.
Compared to what is existing in the portfolio today in other words, the lion's share of new loan origination will be residential related type assets right now our portfolio is about 55% to 60% geared towards those types of assets.
And the other asset classes offer.
Office industrial retail hospitality, we're taking a hard look at a lot of the opportunities that are out there right now being very careful.
Taking our time and understanding what's going on in a lot of these markets and that will dictate the types of loans that we do well certainly stick to our knitting, which is to really focus on the credit quality of the assets versus pricing.
As far as the origination fees go that it won't be that much different in nature than what exists in the book today, meaning that the bulk of our loans have 1% origination fees.
Great that's helpful and and.
Yeah can you talk to a little mark towards the portfolio performance.
I may have these numbers slightly off but I think it's at all but two of the 105 loans or currency can you maybe talk to the two that are.
I believe in the release it said, maybe 18 loans had experienced some type of modification.
Yes, correct my number there from all but can you talk about what the typical modifications look like are you seeing Bob.
Borrowers contribute more capital into the deals is that interest or partial interest deferral.
You give us some color on.
On the type of.
Actions taking place there.
Sure.
As far as the the two loans that haven't paid one actually did pay subsequent to the end of the quarter. So the only loan that has not paid as a deal that's being.
Being taken back through or do you can lower foreclosure.
And that is one in which we project some good value. So we view that as a positive situation, but as far as the forbearance agreements go of it the bulk of the forbearance agreements were put in place in August and September.
And essentially gave borrowers a three month reprieve in a lot of cases on interest in which case is the interest was tacked onto the principal balance of the loan.
The majority of the situations a lot of the situations have been resolved through a lot of hard work and effort on our asset management team in that.
Many of the loans were modified to include as you suggested equity infusion by the borrower. We're finding that the majority of our borrowers are standing by their loans. They believe in their properties and feel like they just need some time to turn the corner. So they are infusing equity and the majority of cases.
And all of the deals that were in forbearance are performing in accordance with those forbearance agreements.
And all the loans that were modified are performing in accordance with those modifications.
Great and lastly, any comments around the common dividend either timing or what metrics. We should look at to think about where when and where that may.
Be reinstated I know you your current on the preferred sent to you.
Current there, but any any general comments around thoughts on the dividend.
Hey, Steve It's Andrew venture, so I'll take that one.
Yeah as you highlighted we did a reinstatement pay the preferred dividends.
And the board went through the exercise of discussing the common dividend elected not to pay in the <unk> for the period ending so.
At September Thirtyth.
But as we said in our prepared remarks.
We're going to evaluate where the company is from an origination standpoint, a liquidity standpoint and have a conversation again with the board at the next meeting which will be really ended January early fab for the Q4 period.
And.
And have a conversation to make a decision on that point.
Great. Thanks, Sandra I know clearly with the buyback announced you are looking at returning capital to shareholders that way at discount to book should be highly accretive there so Andrew Marc Dave. Thank you for your time to appreciate it.
That actually negative.
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Once again, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.
Hi, Good evening, everyone. Stephen took a couple of my good ones, but I'm glad they got out on the table.
Repayments are that I agree with your comment Mark there there kind of a sign to us.
Good ones in the portfolio can you just share with us any visibility that you have for our modeling purposes on repayments looking out over the next couple of quarters.
It's hard to say the majority of the loans that repaid the past quarter, where multifamily related assets and as you know thats a very active market right now with Fannie Freddie and just about anybody that's looking for good quality real estate.
Really hard to say at this juncture, what that might look like on a go forward basis given.
What's going on in the World.
You know people are still a little bit where you've been on multifamily about the potential for tenants to not pay rent.
And.
I think that it's it makes it difficult to analyze how a takeout lender might look at those types of situations and when these loans might get paid off so sure hope that.
Well tying that uncertainty with the.
Positioning to start looking at new opportunities the portfolios at 1.7 billion I mean to the extent that say between now and March.
Years almost over in that.
To the extent that you have repayments would it be reasonable for us to assume that you will look to find attractive loans to redeploy that capital. So that the portfolio doesn't fall too much well below the current 1.7 billion or maybe another way to look at it is how far would you let your portfolio contracts before.
Where you would.
Get serious about some adding some new ones.
No Steve we're actively looking at new loans right now we have local areas as Dave mentioned, so we're not waiting for payoffs to start the origination process. We're out in the market looking at deals, but we're being very careful we want to make sure that we bring in good quality assets into the portfolio at the at the right.
Pricing two.
To ensure that we don't have any problems down the road, but we are active in the market right now.
Thanks for clarifying that so I mean, we might even see the portfolio tick up a touch over the next couple of quarters. Okay. Great and then this is just a cleanup housekeeping for Dave.
The loan sale that you had in the quarter, Dave should should we assume that is the same loan held for sale held for sale loan that you took the $3.4 million write down on.
No Steve let me clarify.
Loan sale that I referred to actually happened at the end of the second quarter. So what I was saying is.
With the lumpy the combination of the loan pay offs that you've heard about the loan sassy and tail end of the second quarter.
And the temporary pause that mark referred to in loan originations.
All combined to explain our net interest income decline shot at that loan that loan was that.
$18 million alone in generated probably a quarter million hours of net interest income that we didn't have in the third quarter because it was the one by the end of the second quarter.
Got it now that the loan you did take the write down on it sounds like that is a final write down in that the property. The property was you got a bid for the property and it was sold.
So you're done on that asset.
It's not yet sold it we're not done until we're done okay. As we all know but.
But we are.
We're close and we would hope to.
To get there by the end of the year.
Okay and any from any further remaining legacy assets from the original.
Santa strategic plan left on the books other than this this one.
There is one other.
Steve that we had.
I talked about last quarter, which was a discounted pay off to the borrower, where we took a specific reserve against it.
And.
We're still working our way through that Ash I tried to say exactly when it will be disposed of but we are actively working on it okay.
Okay. So those those two cleanup items and you'll be done.
With all that okay, well. Thanks, I appreciate your comments and and good job, we'll look forward to a hopefully.
Hopefully the buyback will will help with the stock price a little bit here over the next couple of quarters and keep up the good work.
Thanks, Dave.
Thank you.
There are no further questions left in the queue I would like to turn the call back over to potential for any closing remarks.
Thank you very much for everybody joining the conference call and we look forward to updating you again.
For our fourth quarter results sometime towards the end of January February. Thank you.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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