Exantas Capital Corp. (XAN) Q2 2020 Earnings Call Transcript

Exantas Capital Corp. (ACR -2.20%)
Q2 2020 Earnings Call
Aug 06, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2020 Exantas Capital Corp. earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Kyle Brengel, managing director of capital markets.

Sir, you may begin.

Kyle Brengel -- Managing Director of Capital Markets.

Good morning, and thank you for joining our call. Before we begin, I'd 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 used in this conference call, the words 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 company's reports filed with the SEC, including its reports on Forms 8-K, 10-Q and 10-K, and in particular, the Risk Factors 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 of these non-GAAP financial measures to the most comparable measures prepared in accordance with the generally accounted -- generally accepted accounting principles are contained in our earnings release for the past quarter. There was an announcement on August 3rd that ACRES Capital has acquired the management contract of Exantas. With that, I will now turn it over to the chairman of Exantas, Andrew Fentress, for opening remarks.

Andrew Fentress -- Chairman

Thank you, Kyle. Good morning, everyone, and thank you for joining our call. I'm pleased to be speaking to you today in my new role as the chairman of Exantas, following the acquisition of the management contract, which was announced earlier this week. With me today are Mark Fogel, the new president and CEO of Exantas; Dave Bryant, the CFO, who many of you know and have heard from over the years; Michael Pierro, a senior managing director, who came over from Exantas and has joined ACRES; and Kyle Brengel, managing director, who you just heard from.

Given the recent transaction, our call today is going to focus on the rationale between -- or behind this exciting combination, and we will provide some detail on the second-quarter results. We will forego the typical forward-looking loan origination expectations at this time. All of us at ACRES are excited about the opportunity to serve as the manager of Exantas, and we believe that our lending platforms and portfolios complement each other well. In short, our goal is to be a full end-to-end solution for middle-market commercial real estate borrowers nationwide.

Let me share some background on ACRES. We're a leading balance sheet lender that provides debt capital solutions to the commercial real estate industry in the top 25 MSAs across the country. Since our inception in 2012, we've built a highly successful lending platform by providing more than $1.6 billion in transitional loans to strong middle market sponsors in all major asset classes. We focus on short-term first mortgage loans generally overlooked by traditional lenders that range in size from $10 million to $80 million.

Our senior leadership consists of veteran commercial real estate finance executives with meaningful public company experience. In thinking about the combination, we want to continue to build on the Exantas strengths that were developed over the last four years by focusing on, first, mortgage loans of similar size and for the next phase of asset's life after an acreage financing. We expect the ACRES platform will generate new business pipeline of opportunities for Exantas. The complementary nature of our lending platforms provides a unique opportunity to offer one-stop commercial lending in the middle market, and we intend to leverage our experience in network of relationships to do just that.

There are three important aspects of the transaction that I want to focus on: one is to deliver critical liquidity to Exantas in order to mitigate any potential margin call or liquidity risk; two is to focus on asset management within the current portfolio; and three is to then put the company back into a position to begin underwriting again with an eye toward growing book value and earnings. Just to note on our two capital providers that you both read about in the transaction recently, Oaktree and MassMutual. Each of these two companies has been working with ACRES in partnership over the last several years, and they are equally energized about the opportunity in front of us all. With that, I'll now turn the call over to Mark Fogel, CEO and president of Exantas.

Mark Fogel -- New President and Chief Executive Officer

Thank you, Andrew, and good morning, everyone. As Andrew highlighted, all of us at ACRES are excited to have closed on this acquisition and to begin the important work of managing Exantas for the benefit of all stakeholders. We have already taken several steps to enhance the company's financial profile and ensure business continuity, which is key to maintaining long-term relationships in the borrower community. I want to discuss the strength of our operating platform.

In conjunction with the transaction, ACRES made the strategic decision to transition 18 professionals from C-III to ACRES, bringing our deep bench of experienced real estate professionals to 44. The majority of these individuals are from the former management, finance, and accounting teams as we felt it was important to maintain continuity in these critical functions. We are confident we have the right team in place to actively manage the current portfolio, advance our plan to fuel origination opportunities, and begin to grow book value and earnings. Turning to the recapitalization, we partnered with Oaktree and MassMutual to secure new capital commitments aggregating up to $375 million.

We believe these capital commitments not only provide us with the liquidity and optionality but that they demonstrate the strength and quality of Exantas' business and portfolio and reflect the compelling growth opportunities that we have identified. Oaktree provided a $125 million financing facility with an initial drawdown in closing of $50 million. This facility provides Exantas with the capital needed to navigate through the impact of the pandemic on the existing portfolio and to then restart originations. The MassMutual warehouse facility has a $250 million limit with a revolving period for the first two years.

This non mark-to-market facility can finance any asset class in the portfolio and provide the company with a stable financing source through these challenging times. Moreover, with this facility, the company will have access to approximately $1 billion of financing capacity. Today, Exantas has a current cash balance of $90 million with access to an additional $75 million as needed. With this liquidity, Exantas is well positioned to manage through the current challenging landscape and to reengage the company's loan origination business.

We anticipate that we will begin lending as we get into the fourth quarter with the pace picking up as we move through the balance of the year. We will now have our CFO, Dave Bryant, to discuss our financial statements and operating results during this second quarter. With that, I'll now turn the call over to Dave.

Dave Bryant

Thank you, Andrew and Mark, and good morning. I'm eager to work with the entire ACRES team on solidifying and growing the Exantas platform. Certainly, the COVID-19 pandemic has had a big impact on our results, as we shared last quarter. And while we have seen some improvement, the impact is carried over into the second quarter.

Our GAAP net loss allocable to common shares for the three months ended June 30th, was $36 million or $1.14 per share. Core earnings were $7.5 million or $0.24 per share for the second quarter of 2020 and $14.9 million or $0.47 per share for the first six months. Year to date, we incurred a net loss of $235.1 million or $7.42 per share. Net interest income declined modestly for the second quarter by $200,000 as compared to the three months ended March 31st.

Our loan portfolio's net interest increased by $3.4 million but was offset by a $3.6 million from the disposition of the CMBS portfolio. The improvement in our loan net interest income is largely due to the decline in LIBOR and the resulting positive effect it has had in lowering the cost of our liabilities. Loan assets maintained more of a constant yield from the benefit of LIBOR floor protection, which has a weighted average floor of 1.92%. In terms of significant items impacting second-quarter GAAP earnings, loan reserves increased by $40.5 million or $1.28 per share, and we now have a loan reserve balance of $61.1 million at June 30th.

We incurred $1 million or $0.03 per share loss on the sale of a CRE loan that had a basis of $18.5 million, which was a recovery of 95%. We recorded a loss of $900,000 or $0.03 per share of fair value adjustments to our strategic plan asset held for sale as we funded operating expenses at the property, and that property had closed as a result of the pandemic. Last, we recorded a loss of $900,000 or $0.03 per share of fair value adjustments to our remaining B-Piece CMBS. The net loss from these items in the second-quarter was approximately $43.3 million or $1.37 per share.

The implementation of CECL on loan loss reserves that applies to all mortgage REITs and other financial institutions requires us to estimate expected credit losses over the life of our loans. In determining our expected credit losses, we evaluate by property and loan type, available, relevant, historical, and current loan loss data as well as future macroeconomic expectations. The impact of CECL resulted in the total allowance for credit losses at June 30th for $61.1 million, or 3.4% on our $1.7 billion portfolio -- loan portfolio. The increase from our March 31st provision of $40.5 million resulted primarily from the expected impact of COVID-19 when the forward macroeconomic forecast that is used for our CECL modeling.

And secondly, the revaluation of two assets on which we incorporated loan-specific market terms into this analysis. It is important to note that these adjustments are noncash reserves. And upon the potential settlement of the two revalued assets, the associated reserves would be charged off from the allowance and we would not expect an incremental charge to earnings. GAAP book value was $6.01 per share at June 30th as compared to $7.13 per share at March 31st.

GAAP book value decreased by $1.12 per share, which was impacted primarily by the $1.37 of significant second-quarter items that I highlighted at the beginning of my comments. Our GAAP debt-to-equity ratio increased to five times at June 30th, as our retained equity declined since year-end 2019. At June 30th, our $1.7 billion floating rate CRE loan portfolio at par had a weighted average LIBOR floor of 1.92% and a weighted average spread over LIBOR of 3.41% for a gross rate of 5.33%. At the end of June, we had $1.7 billion, or 100% of our loan book with LIBOR floors that are in the money, with 30-day LIBOR at approximately 16 basis points at the end of the period.

We expect to continue to see a benefit to net interest income during 2020 as the forward LIBOR curve projects rates remain low for the balance of the year. With that, I'll turn the call back to Mark Fogel for final comments.

Mark Fogel -- New President and Chief Executive Officer

Thanks, Dave. In closing, I want to again stress our collective excitement about this highly strategic combination. We have reviewed the portfolio in detail and have developed a specific asset management plan for each loan asset. While it will take time, we believe there is significant opportunity to maximize shareholder value, especially with the company's enhanced financial profile.

We look forward to leveraging our experience and network of relationships to start sourcing new origination opportunities, strengthening our position as a leading middle market lender. With that, I'd like to open the call up for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Steve Delaney with the JPM Securities -- JMP Securities.

Steve Delaney -- JMP Securities -- Analyst

Good morning. And Andrew and Mark, welcome to the world of public mortgage REITS. Nice to be on with you this morning. I'd like to start with the increase in the reserve.

So you're about $60 million now, can you comment -- you mentioned two loans. I interpreted that there probably was a specific reserve on those loans, not that the $60 million is all general. Could you clarify that for me, please? Thanks.

Dave Bryant

Yes. The two loans, Steven, are -- one is a hotel that is closed and the other is a retail center that has had some issues, and it's one of the, actually, remaining strategic plan assets. So we had -- basically got some information in the market about what those loans could garner, if we were to expose them, which is a decision that hasn't quite yet been made. Obviously, that portfolio is being reviewed by the ACRES asset management team.

And so yes, those two are a large part of the increase, probably in the neighborhood of 25% of the total increase for the second quarter.

Steve Delaney -- JMP Securities -- Analyst

OK, so that $10 million there. And are they the same two loans that you show -- you report as being the only two loans that were delinquent as of July 31st? Is there a correlation there?

Dave Bryant

Actually, one is -- one of them is not delinquent. There's another, but the one hotel property is.

Steve Delaney -- JMP Securities -- Analyst

OK. Great. That's helpful. And I guess just looking forward, your comments about restarting lending in the fourth quarter and you've got your financing in place, I mean, great job on that.

The -- as obviously, we're talking about REITs. And when people talk about REITS, they think about dividends. So when I look at your strong core EPS, your cash position, how should we think about the possibility of you reestablishing a cash dividend in the September quarter? Thanks.

Andrew Fentress -- Chairman

Yes, this is Andrew.

Steve Delaney -- JMP Securities -- Analyst

Hi, Andrew.

Andrew Fentress -- Chairman

Hi. I think what we're thinking about the dividend policy is, obviously, it's going to be in conjunction with conversations with the board. And that's going to happen over the coming quarters and it's going to be driven by, first, what we can determine is the core earnings potential for the existing book. And that's going to be a function of what our asset action plans can derive over the coming quarters.

We've got a lot of work to do. We understand it's a challenging economic environment, and I think it's just -- at this stage, we're going to be a little premature in trying to project what the earnings and the dividend policy is going to be. So we'll just -- we're going to defer on that one probably until we get back to you in the third quarter.

Steve Delaney -- JMP Securities -- Analyst

Well, I would just offer a comment in closing that modest dividend is fine. It doesn't have to be, I think, just -- it sends a signal. If it was a nickel, I'd be thrilled, OK? So I'll just leave it there. And welcome, as I said, and good luck.

I know you'll do a great job. Thank you.

Andrew Fentress -- Chairman

Thank you.

Operator

Your next question comes from the line of Stephen Laws with Raymond James.

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning. Andrew and Mark, congratulations on the transaction. And Dave, good to hear from you again. Could you talk -- I know it's early, you've had, I guess, about 72 hours involved with the company, maybe less, but can you talk to -- the press release, I think, talked about 11 loans that had gotten some type of forbearance waiver, or partial waiver, like an extension in the CRE book.

I don't believe that includes the two that you just talked about. Can you talk about the asset management, what's going on with the modifications? How many more loans, if you have an idea at this point, do you think will be modified as you continue to work through the portfolio?

Andrew Fentress -- Chairman

Mark, do you want to address that one?

Mark Fogel -- New President and Chief Executive Officer

Yes, I'll address that. So the 11 forbearance loans that were discussed really revolve around the effects of the pandemic, mostly hotel-related and retail-related type assets. It's important to mention that those assets were performing quite well prior to March. So we've looked at the assets at ACRES, somewhat from a far.

We've done our diligence on them. We understand what the issues are that surround those properties. But until we get in and speak with the borrowers and really dig deep as to what a potential business plan might look like on a go-forward basis, it's too hard to tell at this juncture what the ultimate outcome of those situations might be. As far as the rest of the portfolio goes, as you know, a good chunk of the portfolio is in multifamily related type assets and self storage.

And for the most part, those assets are performing quite well and collections have been strong. So it's difficult to imagine, on a go-forward basis or think about on a go-forward basis what other potential forbearances might arise. At this juncture, we don't see any on -- as we look at the portfolio today, but it certainly is possible that other assets could enter into forbearing stages.

Stephen Laws -- Raymond James -- Analyst

Great. And I appreciate the deck you guys put up earlier this week, and I thought there was a lot of great information there. One thing jumped out and I talked about the complementary business strategies with ACRES and Exantas, given the more transitional and construction focus there, can you talk about that relationship? Is it really doing loans with the same sponsors on different assets? Do you view this as more of a pipeline, where you'll be able to do a new origination in Exantas to pay off a higher cost construction loan that you have in a different business segment? Can you maybe give us some color on that bullet that talked about the complementary business lines of the two portfolios?

Andrew Fentress -- Chairman

Sure. This is Andrew. So you should think about the two businesses having some overlap. But in no way, is ACRES going to be the exclusive pipeline for Exantas.

Exantas is going to continue to originate as it has done very successfully over the last four years into the same segments that it has been originating into. And I think if you look at the statistics, about 65% of the Exantas portfolio today resides in the multifamily space, with the remaining 355 allocated between different segments, including self storage, some office, some hospitality, and maybe some other subsectors. We intend to keep that mix fairly consistent with what it is and what it has been, and we like those segments in the marketplace. The ACRES product, as you highlighted, is a little bit more earlier stage in the asset's life cycle.

And we believe that some of those projects, when they reach their scheduled maturity or they get to a point where the borrower is looking for lower cost capital for the next phase of the asset's life, that Exantas may be interested in providing financing for that project, and that will be a portion of the Exantas origination pipeline. But we think the two are going to comfortably mutually exist. We think they can be complementary, and we look forward to helping the Exantas portfolio gain access to some of the strong borrower relationships and sponsor relationships that ACRES develops. Does that answer your question?

Stephen Laws -- Raymond James -- Analyst

It does. That's helpful, just to think about how the two compare the business lines. And lastly, I know it's $165 million, I think, of liquidity that was referenced, existing plus potentially $75 million, the drawdown will be $165 million new investments. I know it's probably too early to ask about the deployment pace, but can you talk about returns in the market that you're seeing today and how those returns on a new loan might compare to the existing portfolio ROE? And then if there are any asset classes that you're simply unwilling to do right now because of visibility or your lack of visibility in underwriting some hotel, retail, etc.

But can you maybe talk about returns available today and maybe initially when property tax or loans seem to appear the most attractive with the most returns?

Andrew Fentress -- Chairman

Yes, Mark, do you want to take that one?

Mark Fogel -- New President and Chief Executive Officer

Sure. We spent the better part of the last four or five months really studying the market and trying to understand some market dynamics, which is really difficult for most lenders right now. Certainly, the multifamily asset class has performed quite well during this pandemic. It will be a focus of ours on a go-forward basis.

There is a lot of competition in that space. And I would suggest that the spreads have remained somewhat similar to what they were pre pandemic. So it's a competitive landscape, but there's always opportunities out there that we can identify through our existing sponsors and brokerage network. As far as the other asset classes go, it's -- and we're a little bit skeptical on some.

Retail, in particular, and hotels are very difficult to determine where the market is going for those types of assets. But at the same time, we will always do what we've done in the past here at ACRES, which is bring in as many opportunities as we possibly can through our origination network, dig deep on assets that seem to make sense and really study them hard and underwrite them to determine whether or not they're a good fit for the portfolio. So the real answer is our focus will be residential-related assets but at the same time, we're not going to ignore other asset classes where there's potentially good opportunity.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks for taking my questions this morning, and I look forward to additional details in the portfolio for the months and quarters. Thank you.

Mark Fogel -- President and Chief Executive Officer

Thank you.

Operator

I will now turn the call back to management for closing remarks.

Andrew Fentress -- Chairman

Well, this is Andrew. I want to thank everybody for joining us today. We're excited about the opportunity that's in front of us here. We look forward to working with all of you in the coming quarters and years ahead.

And enjoy your weekend, everyone. Thank you very much.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Kyle Brengel -- Managing Director of Capital Markets.

Andrew Fentress -- Chairman

Mark Fogel -- New President and Chief Executive Officer

Dave Bryant

Steve Delaney -- JMP Securities -- Analyst

Stephen Laws -- Raymond James -- Analyst

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