Good day, ladies and gentlemen, and welcome to the Q1 2019 Exantas Capital Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Steve Landgraber, Vice President of Corporate Finance. Sir, you may begin..

Thank you. Good morning 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 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 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 of Forms 8-K ,10-Q ,and 10-K, and in particular, the Risk Factors section of our Form 10-K. 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 of the financial information presented in accordance with GAAP.

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. I will now turn it over to the Chairman of Exantas Capital Corp., Andrew Farkas, for opening remarks..

Thanks, Steve. Good morning, everyone. Thanks for joining. With me today are Bob Lieber, our CEO; Matt Stern, our President; Dave Bryant, our CFO; Paul Hughson, Head of Commercial Real Estate Lending; and Steve Landgraber from whom you just heard, Vice President of Corporate Finance.

We remain pleased with our progress and continuing to advance our operating strategy, with the expectation of reaching full deployment later this year.

The acceleration of core earnings and the corresponding increases to our dividend are driven by the success of our origination strategy, our focus on the transitional commercial real estate market, and the growth of our commercial real estate and CMBS portfolios.

To that end, we're pleased to announce our expectation of an increase in our quarterly dividend for the second quarter of 2019 to $0.225, or a 12.5% increase over the first quarter of 2019. That's a 125% increase over the second quarter of 2018. So, we are proceeding at pace very effectively. With that, I'll turn it over to our CEO, Bob Lieber.

Bob?.

Thank you, Andrew, and good morning, everybody. For the second quarter of 2019, we're reporting core earnings of $0.25 a share, which is up from adjusted core earnings of $0.24 a share last quarter and up from $0.03 per share in the first quarter of 2018.

Gross originations were $171 million in the first quarter of 2019 and net deployment was $110.3 million, which is up by over 20% from the net deployment of $91.7 million during the first quarter of 2018. Additionally, we had several loans closed after the quarter end, totaling $79.9 million. So, we're off to a good start for quarter two.

During the quarter, we grew our commercial real estate portfolio to $1.7 billion and our CMBS portfolio at par to $481 million. Net interest income during the first quarter was $14.5 million, or $0.46 per share compared to $15.6 million or $0.49 per share during the fourth quarter of 2018.

This decrease was caused by reduced exit fees in quarter one of $1 million, or $0.03 per share. We finished the month of April with $190 million of liquidity, which equates to over $450 million of potential full-year net deployment.

The strong reception for our latest CLO was another key driver to our robust liquidity balance sheet at the end of 2000 – of April 2019. Further, the execution of this permanent financing vehicle increased the availability on our loan financing facilities at April 30 to $795 million, providing ample support to reach full deployment this year.

Our GAAP book value per share increased to $14.06 this quarter compared to $14.02 per share during the prior quarter. And I want to take a second to expand on that. On our last call, we discussed the impact at the end of the year, market volatility had on our CMBS book, which led to a corresponding decrease in book value on those marks.

Our CMBS portfolio meaningfully recovered during the first quarter, as we anticipated it would, producing a net gain of $0.13. Economic book value also increased to $13.60 in the first quarter compared to $13.54 last quarter.

And as a reminder, this new metric accounts for the value of the equity option of our convertible notes and the redemption price of our outstanding preferred stock. And we believe this provides a more accurate measure of the economic position of our common shareholders.

We think it's also notable that our results have been stable, and we have reported economic book value between $13.54 and $13.72 for the past four quarters. And you know, stability and consistency are key objectives of ours.

We reported net income of $5.5 million or $0.18 per share, compared to $7.4 million or $0.23 per share during the fourth quarter, which is primarily due to the aforementioned exit fees. Core earnings once again covered our quarterly dividend. And with that, I'd like to turn the call over to Matt Stern.

Matt?.

Thank you, Bob, and good morning, everyone. At March 31, 2019, our commercial real estate loan portfolio balance has increased to $1.7 billion, 98.5% of which are floating rate.

We originated seven commercial real estate loans totaling $171 million or an average commitment of $24.4 million, with an average spread of $316 basis points over a 30-day LIBOR.

The weighted average unlevered yield on new loan originations increased by 24 basis points to 5.96% during the first quarter, compared to 5.72% during the fourth quarter of 2018.

Total CRE loan asset financing was $1.1 billion at quarter-end, with a weighted average spread of 175 basis points, an improvement of 44 basis points from the first quarter of 2018. Our CRE loan portfolio grew by $110.3 million during the first quarter, as new loan originations exceeded payoffs and paydowns.

Further, the full benefit of our Q1 production won't be observed until next quarter due to two factors. First, we had a number of payoffs at the end of the fourth quarter of 2018 and the early part of Q1. And second, some of our Q1 originations closed late in the first quarter.

As a result, our quarterly results are lower than our current run rate at quarter end, and we expect to see the full benefit of this net deployment during the second quarter.

Our property type diversification held constant from last quarter, with multi-family loans accounting for 62.2% of our portfolio, as we continue to see strong demand and opportunity in that space. So, we expect the contribution from other asset types to increase as we progress toward full deployment.

Our next highest allocation is to office at 13.8%, followed by a 10.8% allocation to hotels and the rest of our allocation including retail, were in the single digits.

While we've meaningfully decreased our exposure to retail to 6.3%, we do try to opportunistically target high-quality retail loans where we can capture excess spread, given the broader negativity surrounding this asset type.

We see additional opportunities in the self-storage and manufactured housing markets, as these are less competitive markets and are an area where C-III has a strong institutional presence. While the loans tend to be smaller, we feel that we can achieve better yields at similar levels of risk.

We believe this will supplement our traditional loan originations and offset some of the impact from ongoing spread compression in the marketplace. Turning now to our CMBS portfolio.

During the first quarter, we acquired $27.5 million in face amount of CMBS bonds, partially offset by $12.2 million in paydowns for net acquisitions of $15.3 million at a weighted average coupon rate of 4.91%.

At March 31, 2019, our $481 million CMBS portfolio at par was comprised of $322 million of floating rate bonds and $159 million of fixed rate bonds. As Bob mentioned, we reported a net increase of $0.13 in our CMBS portfolio this quarter, including the impact of mark-to-market on our interest rate swaps.

In aggregate, net core investment production for the quarter was $125.6 million, consisting of $110 million in commercial real estate loans and $15.3 million for our CMBS portfolio and increasing our CRE debt portfolio in total to $2.1 billion.

After the quarter, we closed the CLO, financing $687.2 million of CRE loans and sold $575.8 million of non-recourse floating rate notes to third-party investors. This is our largest CLO to date, and we remain encouraged by the strong demand in the debt markets for our CLO offerings.

We find this market to be an attractive and efficient financing source for our growing loan portfolio and will continue to opportunistically pursue transactions that help enhance net interest income and accelerate core earnings.

We are also pleased to announce – our expectation of a fifth consecutive increase in our quarterly dividend for the second quarter of 2019 to $0.225, or a 12.5% increase over the first quarter of 2019.

We believe we are still on track to reach our previously disclosed investment and origination guidance of between $850 million and $1 billion for 2019, and we look forward to discussing our progress with you in the quarters to come. With that, I'd like to turn it over to Dave Bryant to discuss our financials..

Thank you, Matt. Good morning, everyone. Our GAAP net income allocable to common shares for the three months ended March 31, 2019 was $5.5 million, or $0.18 per share. Core earnings were $7.8 million, or $0.25 per common share for Q1 2019.

The following material adjustments were made to net income to arrive at Q1 2019 core earnings, a $1 million or $0.03 per share add-back for the non-cash addition to our general loan loss reserve; two, a $0.7 million, $0.02 per share add-back for non-cash equity compensation; and three, $0.7 million with $0.02 per share add-back for the non-cash amortization of discounts associated with our convertible note borrowings.

The balance of the 1Q adjustments netted to a deduction of $100,000 and are listed in Schedule 1 of our earnings release. Furthermore, the $0.25 of core earnings for 1Q covers our $0.20 dividend. GAAP book value was $14.06 per common share, a $0.04 increase from December 31, 2018.

We began reporting economic book value, a non-GAAP metric at December 31, 2018, in an effort to improve transparency for our shareholders and the analyst community. As a reminder, two adjustments are made to GAAP book value to arrive at economic book value.

First, our GAAP book value includes the remaining aggregate value of the equity conversion options on our convertible notes of $10.3 million or $0.33 per share at March 31, 2019.

This amount is amortized into interest expense, increases the liability balance of our convertible notes and reduces GAAP book value over time, but has nothing to do with the company's operating performance.

Second, the carrying amount of our Series C preferred stock of $116 million does not reflect the full obligation of $120 million, which is the balance on which we pay preferred distributions and would be the amount due, should we ever redeem the preferred stock.

Adjusting for this $4 million difference, book value would be reduced by $0.13 per share at March 31, 2019. So in taking our GAAP book value per share of $14.06, less the two items discussed, totaling $0.46 per share, yields economic book value of $13.60 per share at March 31.

As a point of comparison, the economic book value at December 31 of 2017 was $13.63 per share, which reflects our book value stability. Our GAAP debt-to-equity ratio rose to 2.9 times at March 31, 2019, up slightly from 2.8 times at December 31 of 2018.

Asset specific debt rose modestly by $65.3 million during the three-month period, while stockholders' equity inched up by $4 million, primarily as a result of the improvements in our bond prices, which is reflected in other comprehensive income.

GAAP net income for the three months ended March 31, 2019, includes a $1 million net increase in our general loan reserve, primarily related to net loan balances of $70 million. We had a few loans that are running slightly behind our operating plan and therefore, we adjusted the risk rating from category two to category three.

As Matt discussed, we had strong CRE loan production during the first quarter of 2019 and we also acquired $27.5 million of CMBS bonds, all of which were floating rate at a spread of LIBOR plus 2.42%. Loan payoffs and paydowns were $67.4 million with a spread of LIBOR plus 4.3% and an average life of 32 months.

Our positive net loan production was achieved toward the latter part of Q1. And as Matt detailed earlier, we will see the full benefit of that production in the second quarter of 2019. Looking forward, we saw excellent execution by our commercial real estate team, with the pricing of our new CLO, Exantas Capital Corp.

2019-RSO7, just after the first quarter ended. Leverage at closing of the CLO was 85.25%, with a spread of one month LIBOR plus 1.32% on the offered notes. At closing, we purchased $10 million of the BBB minus offered notes. With that, I'll turn the call back to Bob for final comments..

Thanks, Dave, and thanks, Matt. As you can see, our longtime operating strategy remains on track. We continue to grow our portfolio with strategically deployed capital, keeping us on track to reach full deployment in 2019. The marks in our CMBS portfolio recovered as anticipated. Economic book value increased from last quarter.

We expect earnings will be boosted in the second quarter by run-rate adjustments from production, which has originated towards the end of the first quarter.

We have closed our largest CLO to-date, which will help drive core earnings and the increase in core earnings this quarter covered our dividend, which we are recommending that our Board raise to $0.225 for the second quarter of 2019.

We're pleased with these results and remain optimistic about our progress, and we look forward to updating you on our next call. With that, I'll ask the operator to open up to any questions from callers..

Thank you. [Operator Instructions] Our first question comes from the line of Steve DeLaney of JMP Securities..

Thank you, and congratulations on a strong start to 2019. I guess, I'll start with the general loan loss reserve because I think this is the first increase in that that we've seen. I was just looking at the $1 million, it's roughly 1% of the net loan growth. I wonder if that's a percentage that you intend to apply going forward.

And if you could comment, is this more trying to get ahead of CECL? Or does this increase in the general reserve relate to Dave Bryant's comments about some loans moving from two to three even though you did not classify this as a specific reserve? Thanks..

Yes. Thanks for the question, Steve. We certainly are aware of CECL and are taking a look at that. But what gave rise to this is, quarterly, we go through a process, quite similar to the balance of our peers, it's a bit more proactive.

And it basically just provides a mechanism, where if a property is, at all falls behind, the anticipated operating plan will end up applying proactively a reserve. This does not mean that there is an expectation of loss or anything along those lines per se. But if operating performance is behind at all, there is a mechanism really to provide for that.

That's what gave rise to it. So, there were just – there were a couple of properties that are – that we're behind plan a little bit operationally and they went from a two to a three..

Okay. So, you're putting a cushion in, but at this point, you are not assigning that to any specific property. But I'm also hearing you say, Matt, that we should not automatically for modeling purposes.

I'm not trying to put words in your mouth, but what I'm hearing you say, is that I don't have to build an additional 1% general loan loss on every dollar of net loan growth going forward quarter-by-quarter programmatically..

That's correct, Steve..

Okay. Thank you for clarifying that. And then just on the comments on the CMBS market. Obviously, it was a relief for everybody to see credit tightened back up.

Was curious if you can comment generally if that improvement that you saw in the first quarter, is the trend remained somewhat positive in the second quarter or things sort of flat lined since March 31?.

I think spreads have come in pretty much across all CMBS product throughout the first quarter. And I think that, I mean that has continued. So, our expectation is that we don't think that is reversing..

Okay. Okay. Great. Yes. I wasn't expecting reversing. But I was just trying to get to the fact that it might even be a touch better today, but not trying to get you to be specific. Okay. Well, thank you. Thank you for the comments. It was helpful..

Thanks, Steve..

[Operator Instructions] At this time, there are no further questions. Thank you for participating in the Q1 2019 Exantas Capital Corp. Earnings Conference Call. You may now disconnect..