Q2 2019 Earnings Call

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Oh R E T dotcom or call us at 2125153 200 at this time like to turn the call over to the company's Chief Executive Officer.

Stuart Rothstein you may begin.

Thank you operator, good morning, and thank you to those of US joining us on the REIT second quarter 2019 earnings call. Joining me in New York. This morning are Scott Wheeler and J.R. the wall.

Before I discuss our success year to date I want to take a few minutes to provide an update on our perspective on the current state of the commercial real estate lending market.

After a slow start to the year in the U.S. the market quickly return to being highly competitive with a mix of both public and private lenders chasing transactions and creating generally favorable conditions for borrowers.

Spread should remain tight and with expectations for linerboard to decrease in the future nominees nominal yields on new transactions have come in.

We continue to be active in pursuing transaction in the U.S., but it is clear from our activity year to date, we are taking to somewhat cautious approach to the market and finding more compelling opportunities to invest air ice capital in Europe as I have mentioned before Apollo on behalf of various forms of capital is one of the more active players in both European real estate equity and debt transactions Apollo's, London based she already dead team is well known and highly regarded in the market, which enables a arrived to benefit from their extensive reach and access to deal flow.

Over the past five years the team has completed over $3 billion of transactions throughout the continent on behalf of Eri and other managed accounts. The team has successfully formed first call relationships with high quality real estate owners and sponsors throughout Europe and has completed a significant number of transactions with repeat clients.

In approaching the deployment of air ice capital, we remain agnostic as to investing in the U.S. or Europe as such in evaluating transactions and reviewing our pipeline we regularly compare potential opportunities in both regions at present, we believe there are opportunities to generate more interesting risk adjusted returns by completing transactions in Europe , which are further enhanced from the attractive cost of currency hedging driven by regional interest rate differentials as well as our ability to source low cat low cost financing in local currency.

For the first six months of the year.

Air is committed capital to nine transactions totaling $1 billion and is funded approximately 190 million for previously closed loans given the record year. We had in 2018, which included a number of transactions with future funding components, we have been able to both keep our capital invested and to have the luxury of being somewhat selective in our pursuit of new transactions.

There have been several transactions in our own portfolio that have sought to refinance for additional proceeds.

Or obtain extensions or a transition from construction loans to inventory loans and we have chosen not to participate in the refinancings because we felt the returns were not commensurate with the increased risk profile.

I would like to conclude my comments on investing by reiterating a general philosophy I have discussed with many of you at conference presentations or non deal road show meetings, regardless of geography, our fundamental approach to managing a arise capital and investing in new transactions is to focus on protecting principal.

And then we see the most attractive risk adjusted returns available consistent with our view of the appropriate attachment point in any specific transaction.

Turning now to our capital markets activities. The second quarter was highlighted by our efforts to opportunistically capitalize on favorable market conditions and enhance a arise balance sheet.

In May we completed both another accretive common stock offering as well as era is very successful debut offering and the term loan b market.

Both transactions further strengthened day arrives capital structure and provided the company with ample liquidity for future investment activity.

The debut term loan b offering totaled $500 million and has a seven year term eri received a be a three double b minus corporate rating from Moodys and S&P, respectively, and the term loan was rated BA to double B minus the loan was priced at LIBOR, plus 275 basis points and subsequent to closing we swapped the floating rate loan to fixed at an all in cost for seven year money of 4.87%.

By all accounts the transaction was extremely successful and enabled eri to add non mark to market term leverage to our capital structure.

Before I turn the call over to Jay I wanted to mentioned that the multifamily property in Williston North Dakota underlying in Eri loan was sold during the quarter for approximately $3 million, which was approximately $2 million in excess of air eyes, GAAP cost basis, while the investment underperformed I am proud of the efforts of the investment and asset management teams, who diligently diligently focused on achieving the most favorable outcome and the law allowed eri to recoup some of the initial impairment and with that I will turn the call over to Jay to review our financial results.

Thank you Stuart for the second quarter of 2019.

Operating earnings were 69.1 million or 47 cents per share.

These numbers exclude the realized loss associated with it North Dakota loan of two other than a half million dollars or nine cents per share.

GAAP net income for the quarter was 56, and a half million or 37 cents per share.

During the second quarter, we closed five loan transactions totaling 554 million and funded an additional $78 million on previously goes loans.

Repayments during the quarter totaling 168 million.

At quarter end, our portfolio had an amortized cost of 5.4 billion.

Which is a 12% year over year increase.

The portfolio is comprised of 71 loans with a weighted average unlevered yield of 9% and the remaining term of just under three years.

And 93% of the loans in the portfolio had a floating interest rate.

As Stuart mentioned in May we completed a common stock offering of 17.2 million shares at a net price of $18.25.

Which is a 1.13 times book value multiple.

The shares generated.

Net proceeds of approximately 215 million.

And we used 172.5 million of those proceeds due to deem the 8% series C preferred stock at par.

At quarter end total common equity market cap was over 2.8 billion.

The offering was accretive to book value per share.

Which increased to $16.30 from $16.13 at the end of Q1.

Lastly, with respect to liquidity and leverage.

As of quarter end over 900 million of available capital in the form of cash and availability on our credit lines.

And we ended the quarter with a one times debt to equity ratio.

This continues to be the lowest amongst our peer group.

And with that we'd like to open the line for questions.

Operator, Please go ahead.

Thank you, ladies and gentlemen, if you have any questions or comments at this time. Please press. The Star then one key on your Touchtone telephone.

If your question has been answered all your western loop yourself from the queue. Please press the pound key once again, if you have any questions or comments. Please press star then one.

And our first question comes from Steve Delaney with JMP Securities You May proceed.

Good morning, and thank you for taking the question.

We know.

Hi, Stuart So we noticed looking through the the portfolio detail that you upgraded from a risk standpoint, a large $170 million Manhattan office construction loan to a two from three so just curious if you could give us some color on what event drove you to do that one.

And and a higher quality fashion. Thanks.

Yes, I mean, the history with the loan is we actually participated in the Predevelopment loan.

We are now partners in the construction loan it was a spec office building, where the sponsors have achieved significant amount of pre leasing with high quality tenants. So based on the amount of pre leasing.

Thats in place today, it's significantly decrease de risked the transaction and it's also apparent that in light of the.

Pre leasing in place today that.

When they have the opportunity to they will certainly take us out of our loan.

Yes, yes, that's stuff and the construction is also nearly done also so it's a combination of of the construction being nearly done with the CCOH over the next few months in the pre leasing.

We thought it made sense to upgrade the risk.

Yeah, well the good news is at work better probably better than you thought in the Bad News is you go get your money back so.

And you got to put it back to work, but I guess, that's never a bad outcome.

Thanks.

No that's for sure so shifting to the other side and this is congrats on North Oh, North Dakota, I know you're.

You're you're glad to have that in your in the in the past.

But switching down the other end you know you've been working trying to work through this but that's the thing for a long time I'm. The condo situation. There just like to have a brief update on activity pricing sort of there's been any spring summer pick up there.

Yes, I'll cover actually Bethesda, and Liberty Center, this and I'll say someone else from asking that question I'm look on Bethesda next to it.

You know our GAAP basis on Bethesda is 20 million and heading down at this point.

There are now based on what is under contract or recently closed there are nine units left there is a decent amount of activity on more than half of those nine units, we continue to chip away at it and.

I know, it's my responsibility to keep providing updates on it but I think it's sort of on the path that it's on which is to say.

Where regular dialog with the people onsite.

I'm trying to make deals as best we can and I think the.

The economic or future economic impact of that asset is pretty muted and we're just sort of moving towards the finish line. So.

Sort of where where I guess, we expect it to be and just sort of working deals as best we can.

I think from an asset management perspective, Liberty Center is more of a challenge. These days Rami continues to operate in the call it low eightys from an occupancy.

Perspective, which is.

It's functioning it exists, but it's certainly not where we would like to see it be.

To sort of get us on a path to getting out of the investment there are.

Several things we're working on that are somewhat.

Finally in their outcome in terms of their ability to.

Jumpstart what's going on.

At the asset I am actually going out there next week I think other members of our team are heading out there.

Later on this summer.

That continues to be the primary focus from an asset management perspective, and we're still grinding away as best we can.

Okay, well, thank you for the comments.

Yes.

And our next question comes from Jade Rahmani with KBW you May proceed.

Thanks very much.

What are the main factors driving your somewhat cautious approach to the market.

Described in your.

Initial comments.

Well look I think it's just pricing relative value sort of you know what do we perceive what do we get paid for our capital at an attachment point that were comfortable with and look we're certainly seeing it in our existing portfolio, where there are.

Loans, we've ended up extending by coming to I would say a somewhat middle ground with the borrower where they're happy to keep the loan in place with US don't want to go through the effort of a refinancing and maybe they are not in grinding away to get every last bit of spread in their favor out of a deal and there are other transactions where.

Look theres capital chasing things, if you're willing to turn over every stone or rock you could arguably fine.

Cheaper capital than ours and in those situations where.

Given what we did last year, given what we see in Europe , given some other things that we know sort of coming up how do we think that will come our way.

We're certainly not feeling the pressure to chase anything today and.

Unlike some of our peers and this is not meant to be a positive or negative comment.

We've tended never too to compete at the tightest enter the market. We've always tended to seek things that had a little bit more complex really a little bit more of a credit story to them.

In order to get paid.

More for our capital.

And were grinding away, but on a relative basis, it's more competitive today than it was nine months ago.

Just in terms of interest rate sensitivity.

I think you've disclosed about a seven cents impact from a 50 basis point decline in rates if that were to happen would you anticipate that to play out.

Which is about a 4% decline in earnings.

Or do you believe that the company is lack of relative relatively lower financial leverage.

Would be one area in which you could address that.

I guess I would say this.

I would say our desire is to keep our capital fully invested within the.

Leverage ranges, we have always talked about historically, which is sort of our comfort level from a from a leverage perspective, which is call. It ultimately one and a half to two times, which was obviously.

In some respects a relevant part of our dialogue in the whole term loan b marketing process as well so.

I think there's capital for us to invest Jay I think we have some room on the leverage side, but.

I don't I don't think leverage is the answer if ultimately the market shifts down.

But let's also keep in mind that we are talking about futures in a year ago, we were talking about LIBOR going up and that being a positive for earnings so.

We'll see how it ultimately plays out but I don't think leverage is necessarily the answer on a go forward basis.

And in terms of the mix of deals I think this quarter.

Just the highest percentage of first mortgages.

That I believe you have originated in some time.

You know on a levered basis are those investments similar to where you would have made subordinate investments or if the company does begin to do a disproportionate share of first mortgages will that also creates downward pressure on earnings.

I think in the in the World in which we're operating today I think levered first actually provide better ROI fees than mezz.

So I think on a risk adjusted return basis and I'd also factor in the the impact of Europe , where we tend to just you first mortgages as well.

Yes, I think that will impact the are always generally speaking getting to that what I think is the crux of your question. If you look at some of the legacy.

Mezzanine loans on our books.

Those sorts of ROI leads for Mezz loans don't exist in the market today.

Certainly not at risk levels that we would be comfortable taking.

Okay.

Well, thanks, very much for taking the questions.

And our next question comes from Rick Shane with JP Morgan You May proceed.

Hey, guys. Thanks for taking my questions. This morning.

In the maturity schedule it looks like you had.

A.

Multifamily property in.

Brooklyn mature in June and another multifamily in Manhattan mature in July .

Oh scheduled to mature in June and July and each has been extended.

One to September one to November I'm, just curious what you sort of see as an outcome. There was there any incremental economics picked up associated with the extensions on those loans.

No I mean June was just a simple extension the loans paid off so it's not an issue and we would expect in New York again, It's we're just being working with our borrower, but not it's not a situation Laura creating any sort of material economics for ourselves.

Got it and any impact obviously.

You know we have seen.

Some loan categorization movement from up here related to New York multifamily any impact there on that because the loan the Manhattan long as a sub loan.

No.

I mean, we've generally across the board sort of avoided the rent stabilization to marketplace. So.

Well, we certainly read the headlines which interest and think this will play out over a long period of time it has not had any.

Meaningful impact on our on our portfolio.

Terrific. Thank you for that commentary.

Once again, ladies and gentlemen, if you have any questions or comments. Please press star then one.

And our next question comes from Stephen Laws with Raymond James You May proceed.

Thank you good morning, Stuart Jade.

I appreciate the color you guys have provided already on the loans and then obviously rick's questions about New York multifamily that you just address kind of flipping to the liability side of the balance sheet you guys.

I have really done a good job of diversifying your capital structure and adding the term loan b.

Can you talk about other opportunities there to to further diversify or are there opportunities to grow the term loan facility and increase that.

As a.

Fixed rate financing source or maybe talk about where you plan to go from here and out of that promotion is in place.

Yes look I think the term loan was important because it sort of activated our ratings with the rating agencies and now made us a a issuer of rated paper, which certainly also opens us up to.

A significant number of investors, who will now follow us Theres, obviously, given what we did.

There is no immediate plans to do anything today, but I think we will like we do with all our potential capital market strategies.

Sort of keep an open dialogue with investors and obviously other peers in this space have done things in the traditional high yield notes market and there's other things for us to explore I think separately.

I think to his credit.

You know one of Jay's roles here is to keep a very active dialogue with all of our various.

Relationship banks on the on the repo side of things and I think both in terms of the U.S.

And what we've done in Europe .

On it literally a deal by deal basis, there is a very active dialogue around creating.

The right source of capital and the REIT structure and the right pricing for us to allow to get allow us to get business done.

Going forward. So I think the term loan b was important because it sort of gave us a new avenue and a new dialogue with investors, but I don't think there's anything today specifically.

That we're focused on that will be call. It another another new Avenue.

Okay, Great I appreciate the color there thanks a lot.

Sure.

Thank you ladies and gentlemen, this now concludes our Q and a portion of today's conference.

I would now like to turn the call back over to Stuart Rothstein for closing remarks, you May proceed sir.

Thank you operator, and thanks for those of you for participating on the call.

Ladies and gentlemen, thank you for tenant today's conference. This does conclude the program you may now disconnect everyone have a great day.