Good day, ladies and gentlemen. And welcome to the Q1 2020 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, Senior Vice President of Corporate Finance. Sir, you may begin..

Thank you, operator. 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. While the company believes that these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs.

They 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. 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 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 over to Chairman of the Exantas Capital Corp, Andrew Farkas, for opening remarks..

Thanks Steve. Good morning, everybody. Thank you for calling in. With me today are Bob Lieber, our CEO; Matt Stern, our President of Exantas; Dave Bryant, our CFO; Paul Hughson, Head of Commercial Real Estate Lending; and as you heard from Steve Landgraber, who is our Senior Vice President.

Let me begin please by expressing our hope that all of you and your families are healthy and safe. All of us Exantas Capital Corp and C3 Capital Partners which is Exantas Capital manager salute our healthcare and other essential workers who are doing and risking so much at this remarkable time.

As an organization C3 Capital Partners made a concerted effort to provide charitable financial support to both healthcare workers on the frontlines and assistance to those in need. The unprecedented fallout from the Covid-19 virus embroiled financial markets around the world. It 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 for a remote setting in the second week of March. There hasn't and continues to be no disruption in our ability to operate and all of our employees are safe.

It's been approximately 12 years since our industry experienced a shock of this magnitude. We are rigorously monitoring what is a fluctuating environment to ensure that we remain responsive and adaptable. While this period has been and will continue to be difficult, this particular management team has been through several real estate cycles.

I'm confident we will find opportunities when the economy and financial markets stabilize. With the uncertainty in our financial markets and in our economy today, our first and foremost goal is to protect the franchise and retain sufficient excess liquidity. We therefore, did not pay our first quarter dividend on our common and preferred shares.

We wanted to do this to maximize the liquidity for the company. We understand this is uncomfortable for shareholders, but the length and depth of this crisis is not yet known. The action of the Federal Reserve and US government have certainly stopped the freefall, we were experiencing in the second half of March.

But there still uncertainty that's originated not from an economic event but from a medical event, one, we really haven't seen in this country in 100 years. We're confident the US will recover when its medical issue is resolved and positions Exantas to recover as well. There's a lot that's transpired over the course of the last 8 to 10 weeks.

Actually an extraordinary amount that's transpired over the course of last 8 to 10 weeks. All of which have had a material impact on the company.

Because there is so much that has transpired, we wanted to ensure that our shareholders had a detailed explanation from the company with regards to exactly what happened, how we responded to what happened and how it has helped to mitigate further harm to the company.

The objective of course is to make sure that the company emerges strong and solid as we go forward into the market and make certain that we have a future for all of our shareholders and for the organization. We've done a good job at making sure that that's going to happen.

This call will be a little more detailed than usual so you have all the information. With that let me turn this over to our CEO, Bob Lieber..

Thank you, Andrew, and good morning, everybody. As Andrew mentioned that we're going to talk through some of the timeline and the significant events that have occurred since March 4th. And starting on March 4th on our last earnings call, we provided guidance about deployment for 2020.

And at the time we noted that such guidance presumed normalized market conditions, but the recent market activity had not been normal. We clearly weren't aware of how unfortunately prescient 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 at Exantas and we demonstrated this confidence in our business plan through the purchase of equity securities in the company.

The threat of Covid-19 was not fully known at this time and even while we shut down our New York City office, we were confident our loan and CMBS portfolios, as 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 generates sufficient cash flow during the transition. We have no construction loans in our portfolio. We have minimal exposure to New York City.

Over 98% of our portfolios and senior secured loans and our portfolios geographically diverse with almost 60% of our loans in multifamily assets. Our CMBS portfolio was a mix of agency FASB and conduits CMBS position 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 Freddie Mac's floating rate K series securitizations. These are pools of loans originated by Freddie Mac from their approved borrower list and each bond had a 7.5% subordination level within the pool to absorb any realized losses.

Our feeling was that even if the Covid-19 virus spread, our portfolio was relatively insulated and despite the potential for short-term disturbances, we thought the long-term value dimination was much less likely. It was in this context that we initially funded CMBS margin calls to protect our bond portfolio.

Just 12 days after earnings call starting the week of March 16, the capital markets almost entirely seized up. The weekend of March 21st saw several distress pay due to the certain parties needing immediate liquidity with limited bidders in the market.

This gave rise to us receiving sizable margin calls the following Monday morning and these margin calls differed materially in prices that we would see in a liquid market never mind what fair value was.

Despite our attempts to communicate and resolve these discrepancies, we received a notice of a default which resulted in one of our bond portfolio is 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 BP's investment.

We felt that an orderly unwinding of these positions given the current market conditions with the best path to protect the company's liquidity and book value and the final sales price took place shortly after the quarter ended. This is why we show a bond balance on our March 31st financials.

Matt will discuss in more detail the impact of these CMBS transactions in his comments. On the loan side, we completed $208.9 million of originations in the first quarter but today have temporarily curtailed our loan origination as it is currently very difficult to accurately underwrite loans.

Given this backdrop, we are rescinding our previous guidance of at least $1.1 billion of deployment in 2020 and will revisit providing our expectations for the remainder of the year on future calls. As of March 31st, GAAP book value for common share is $7.13 compared to $14 per share as of December 31st, 2019.

Economic book value per share as of March 31st, 2020 is $6.77 at May 7th; we have $36.7 million of cash. As you would expect management is heavily focused on asset management and a plan to continue to enhance our liquidity cushion. There will be opportunities arrived from this location and we want to maintain the optionality to seize them.

In our existing investor presentation we have indicated that we generally target a $40 million minimum cash balance in 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 and preferred stock dividends to preserve and build our liquidity. Additionally, we are evaluating potential asset sales and have $91.5 million of unencumbered assets which are potential sources of additional liquidity.

Further, the company is actively exploring financing, capital raising and strategic options and has engaged JMP Securities to assist us in that process.

To reiterate, we believe the current market does create long-term opportunities, but 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 shows 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 released last night, we sold our entire CMBS portfolio other than the BP's tranches we held unlevered, which resulted in a $180.3 million loss on sale or $5.69 per common share.

Volatility in the CMBS markets starting in mid-March led to the company funding $59.7 million of CMBS margin calls and 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 March.

While we certainly felt comfortable with the CMBS portfolio we had acquired, the lack of liquidity in the CMBS market during this time led to 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 to divest 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 million which are offset by the fair value of CMBS margin cash posted and retained field notes.

As of April 20th, we no longer have any liabilities associated with our CMBS portfolio and all losses associated with the disposition of the CMBS portfolio have been recognized as of March 31st. As disclosed in our April 22nd, 8-K, all notices of default have been rescinded or withdrawn.

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

The size of our CMBS portfolio and retained investment grade CLO notes prior to the disposition was $548.8 million at 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 deposited prior to the crisis and we funded this amount an additional margin calls and repo rolls 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 recognized an additional $3 million of charges related to net 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 disposed CMBS portfolio and realized an $11.8 million charge to equity as a result of our swapped terminations of which $11.3 million was recognized at March 31st. The remaining $475,000 will impact equity in the second quarter.

The loss on termination of the swaps will amortize into interest expense on the income statement over approximately seven years, but will have no further impact on GAAP book value as the loss is 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-cash expense going forward. Our only remaining CMBS securities are the BP's tranches that we acquired in 2017 which remain unlevered.

We now carry these positions at $3.2 million after recording a $5 million unrealized mark-to-market loss this quarter. At March 31, 2020, our commercial real estate loan portfolio balance increase 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 paid debt service, but did not fund 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 Covid-19 than is the New York tri-state area where many of us live.

As Bob mentioned, 60% of our portfolio is multifamily, which we have found historically hold up better in 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 CRE 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 lockdowns or 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 are very pleased to have closed Exantas 2020 - A, a CLO financing $522.6 million of CRE loans and we placed $435.7 million of non-recourse floating rate notes.

At May 7th, $1.45 billion of our entire $1.9 billion CRE loan portfolio is financed by CLO 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 $91.5 million of assets is comprised of unencumbered assets and future fundings available for purchase in our CLOs are financing on our loan facilities. We also have $297.5 million at face value of equity investments in our CLOs. We have been in continuous dialogue with our CRE 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 of 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 based 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 lenders 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 loan 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 have made a concerted effort during our management of Exantas 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 Dave. .

Thank you, Matt and good morning. Our GAAP net loss allocable to common shares for the three months ended March 31st, 2020 was $199.1 million or $6.30 per share. The core earnings loss was $172.

9 million or $5.40 per share for Q1 2020 and adjusted core earnings after adjusting for the $180.3 million loss with CMBS dispositions was $7.4 million or $0.23 per share. In terms of significant items impacting Q1 GAAP earnings, we incurred $185.4 million or $5.86 per share of losses.

When the combined impact from the sale of our CMBS portfolio that was financed by repurchase agreements and mark-to-market changes on our remaining BP's investment, which of course was not financed.

We saw our CECL reserve increased by $16.1 million or $0.51 per share at March 31st, 2020 due to the macroeconomic shocks caused by the Covid-19 pandemics effect on business conditions.

This adjustment is over and above the $4.5 million of CECL reserves already on the company's books at the time of CECL implementation on January 1st, 2020 and we reported $3.8 million or $0.12 per share of fair value adjustments to our held for sale strategic plan asset.

The net negative impact from these items in Q1 2020 was approximately $205.3 million or $6.49 per share. When our year-end 2019 call held in early March, we reported available liquidity of $139 million as of February 2019.

Given that we are now reporting $102 million less at May 7, 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 of $59.7 million.

Second, we reduced the balance of our CRE loan warehouse financing facilities by $46.9 million which breaks down as $23.7 million from loan payoffs and $23.2 million from available cash. And third, we closed new loans using another $14.8 million. These uses were offset by net CLO proceeds of $15.3 million and operating cash flow of $4.1 million.

The implementation of CECL which is new accounting guidance on our loan loss reserves that applies to all mortgage REITs and our financial institutions requires us to estimate expected credit losses over the life of our loans.

In determining our expected credit losses, we evaluate it by property type and loan type available, relevant historical and current loan loss data, as well as future macroeconomic expectations. The impact of CECL resulted in a total allowance for credit losses at March 31st of $20.6 million or 1.09% on our $1.9 billion CRE loan portfolio.

To reconcile the impact as of December 31st, we had reported approximately $1.5 million of allowances against the loan portfolio. We had also previously disclosed a $3 million or $0.10 per share adjustment related to the initial CECL implementation and retained earnings as of January 1st, 2020.

And we recorded an additional $16.1 million or $0.51 per share through income as of March 31st, 2020. This March 31st edition to our allowance for loan losses resulted primarily from the expected impact of Covid-19 on the forward macroeconomic forecast that is used for CECL modeling.

It is important to note that these adjustments are non cash reserves. GAAP book value was $7.13 per share at March 31st, 2020 as compared to $14 per share at December 31st, 2020. Economic nook value, a non-GAAP measure was $6.77 per share at March 31st as compared to $13.61 per share at December 31st, 2019.

GAAP book value declined by $6.87 per share which consists of $5.69 per share of loss from CMBS portfolio disposition, mark-to-market adjustments from CMBS related interest rate has risen $0.21 per share.

The implementation of CECL allowance per loss of which are non-cash reserves of $0.61 per share, a $0.16 per share loss when the unrealized mark-to-market adjustments on our remaining CMBS BP's position and $0.12 per share from the valuation adjustment and carrying costs on our held for sale assets and other adjustments that led to a negative $0.08 per share.

Economic book value is further impacted by the non-cash discount on our convertible senior notes of $0.23 per share and the redemption value of our preferred stock in excess of carrying value of $0.13 per share to arrive at the $6.70 per share of economic book value.

Our GAAP debt to equity ratio was 4.5x when we adjust for the net impact of the payoffs of the CMBS repurchase agreements and pay downs on our CRE warehouse loans that happened after quarter end. Our CLOS S provide us financing by allowing for the purchase of additional loan fundings from our balance sheet what we refer to as future fundings.

Our CLOs were able to purchase $5 million of these future fundings since year end 2019 and we currently have $8.8 million of balances available to purchase as loans payoff within our CLOs.

At March 31st, our $1.9 billion floating rate CRE loan portfolio at par had a weighted average LIBOR floor of 1.91% and a weighted average spread over LIBOR of 3.41%. At the end of March, we had $1.8 billion or 96% of our loan book with LIBOR floors that are in the money with 30 day LIBOR 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 LIBOR floor, the forward LIBOR curve project rates to remain low to the balance of the year. With that I'll turn the call back to Bob for some final comments..

And I will turn it to Andrew.

Andrew?.

Thank you, Bob. Thanks everybody. So basically about 2.5 months ago or so this company was on a trajectory that was entirely consistent with our stated objective.

Over the course of the last five years, we took Exantas from an organization that was a series of disparate businesses and we converted it into a pure mortgage REIT which was the original intention. And earnings from that mortgage REIT continued to increase as the dividends over the course of the last five years or so.

And even as recently as 10 weeks ago we had no reason to believe that that would not continue. But took place 10 weeks ago as the lockdown commenced and the economic crisis commenced in this country, guys at least in the history my tenure and my career in the industry which spans about three decades, unprecedented.

And the impact on our company has been profound. Our primary objective has been to ensure the company has the ability to continue as a going operation and that we are able to continue to aggregate liquidity and to get loans paid off so that the company can return to a normal standard of operation.

I think it is occurred, has impacted everybody in the industry in which we operate. Not that that is any consolation to any of us, but the management of this particular organization has been through crisis like these over and over again. And we do have the skill set to help and navigate through this as best as humanly possible.

We continue to appreciate the support. We obviously wish that these things had not come to pass and we have worked tirelessly to try managing through them. With that I welcome your questions..

[Operator Instructions].

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At this time, there are no questions. I'd like to turn the call back to management..

And with no further questions at this point, we thank you for calling in. obviously, we are available to you with you any questions you may have privately on the phone. And we hope that everybody continues to stay healthy and safe. Thank you. .

Thank you. Ladies and gentlemen, for participating in today's conference call. We ask that you now disconnect your line..