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Edited Transcript of ORM earnings conference call or presentation 16-Mar-17 5:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Owens Realty Mortgage Inc Earnings Call

Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Owens Realty Mortgage Inc earnings conference call or presentation Thursday, March 16, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Worley

Owens Realty Mortgage, Inc. - SVP

* Bryan Draper

Owens Realty Mortgage, Inc. - Director & CFO

* Melina Platt

Owens Realty Mortgage, Inc. - Controller

* Bill Dutra

Owens Realty Mortgage, Inc. - EVP

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Conference Call Participants

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* Ben Zucker

JMP Securities - Analyst

* Steve DeLaney

JMP Securities - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Owens Realty Mortgage, Inc. fourth-quarter and full-year 2016 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Worley, Senior Vice President. Thank you, you may begin.

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Dan Worley, Owens Realty Mortgage, Inc. - SVP [2]

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Thank you, Laura, and good morning, everyone, and welcome to the fourth-quarter and full-year 2016 Owens Realty Mortgage earnings conference call. With me today are Bryan Draper, our President and Chief Executive Officer, and Melina Platt, our Chief Financial Officer. Also with us today is Bill Dutra, Executive Vice President.

Before we begin I would like to remind everyone that certain statements made in this conference call may be considered forward-looking statements within the meaning of the Safe Harbor provision in the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on ORM's present belief and expectations with respect to future events and financial performance. Actual results may differ materially from these forward-looking statements.

Information regarding factors that could cause these differences is detailed in our SEC reports which can be found on our website at www.owensmortgage.com. ORM undertakes no obligation to publicly update or revise these forward-looking statements as a result of new information, future events or otherwise. Investors are cautioned not to place undue reliance upon any public statements.

During this call we may also present certain non-GAAP financial measures such as FFO and certain ratios that use these measures. Definitions of these non-GAAP measures or reconciliation of these non-GAAP financial measures to the closest GAAP measures and a discussion about why we think these non-GAAP measures are relevant can be found in our Q4 earnings press release and the most current report on Form 10-K.

These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures. We would also like to note that we have updated our REO report for the fourth quarter and it will be available on our website at www.owensmortgage.com.

It is my pleasure to turn the call over to Bryan Draper, President and Chief Executive Officer of Owens Realty Mortgage.

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Bryan Draper, Owens Realty Mortgage, Inc. - Director & CFO [3]

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Thank you, Dan, and thanks, everyone, for joining us on the call today. Melina will be presenting our quarterly and year-to-date financial results after I discuss a few activities which occurred during the quarter and the year.

Our remaining major real estate holding continues to be our property in South Lake Tahoe, held in Tahoe Stateline Venture, LLC; Zalanta Resort at the Village, LLC; and Zalanta Resort at the Village Phase II, LLC. As previously reported, we have been actively marketing the 30 residential units held in Zalanta.

These units, in addition to approximately 20,000 square feet of commercial retail space, are expected to be completed next month. We currently have six of the residential units in contract. We expect to actively market commercial space in combination with the 30,000 square feet of existing commercial retail space held within Tahoe Stateline Ventures later this year.

In addition, we continue to have in contract approximately 8 acres of residential land held within Tahoe Stateline Venture. This sale will net the Company approximately $42.5 million. The City of South Lake Tahoe has approved a final map. We are proceeding with getting the lender to release this parcel in addition to the tax assessor determining values on the new parcels. We are hopeful that the sale will take place next month.

In addition to the previously discussed properties, we had six other properties listed for sale as of yearend and we sold two of them during the first quarter. One was an office building located in Oakdale, California; and the other, the last parcel of land located in Gypsum, Colorado.

As we continue with the orderly disposition of our real estate assets we will continue to deploy the cash generated from the sales to increasing the size of our loan portfolio in addition to potential stock repurchases.

The Company sold seven properties in 2016, most notably the condos and apartment building held within TOTB Miami, LLC, for net sales proceeds of $91 million which generated gains totaling $24.5 million. These dispositions, although partially offset by ongoing capitalized construction cost incurred under Zalanta totaling $24 million, reduced the Company's real estate holdings from 57% of total assets as of December 31, 2015 to 44% as of December 31, 2016.

2016 was a very productive year for the Company in loan originations. The Company originated a total of 23 loans with note amounts totaling $97.1 million, a $13 million increase from 2015. In addition, we are seeing loan production growth as the Company originated nine loans totaling approximately $43 million in the fourth quarter alone. Our loan production team continues to see substantial lending opportunities in our market.

The delay of the closing of the sale of the properties held within TOTB Miami, LLC partially restricted our lendable capital. However, we expect that going forward with the expected sale of the Tahoe Stateline Venture property that the Company should have more than adequate liquidity.

Speaking of credit, our line of credit with California Bank & Trust and First Bank has reserved room for an additional credit of $25 million, or $75 million in total, which we are actively seeking. $5 million of this has recently been added by First Bank bringing our total [current] credit limit to $55 million. We believe that with this increased availability of credit and capital provided from property dispositions we will be able to support our loan growth.

The Company's management and Board of Directors Compensation Committee are evaluating potential changes to the methods in which the manager gets compensated by the Company. We are hopeful to have a plan put forth to shareholders in the upcoming proxy season. With that I will turn over the call to Melina Platt to discuss our financial results.

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Melina Platt, Owens Realty Mortgage, Inc. - Controller [4]

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Thank you, Brian, and good morning. Let me begin by discussing our financial results for the fourth quarter and fiscal year 2016. Please note that the following numbers are rounded. For the quarter we reported net loss allocable to common stockholders of $1.2 million or $0.11 per average common share as compared to net income of $8.3 million or $0.80 per average common share for the corresponding period in 2015.

The primary reason for the decrease, the sale of four real estate properties during the fourth quarter of 2015, resulting in total gain on sales of real estate of $6.8 million. During the fourth quarter 2016 we recognize losses on sales of real estate totaling $536,000. In addition, we reported provision for loan losses of $938,000 in the fourth quarter 2016 as compared to a reversal of the allowance for loan losses of $1.5 million during 2015.

For the 2016 fiscal year net income allocable to common stockholders increased to $24.4 million or $2.38 per average common share from net income of $23.6 million or $2.22 per average common share in 2015. The primary reason for the increase is the sale of seven real estate properties resulting in aggregate gains on sales of real estate of $24.5 million in 2016 as compared to $21.8 million for 2015.

Other significant changes in results during 2016 were as follows.

An increase in interest income on loans of $645,000, which is primarily the result of an increase in the average balance of performing loans between 2015 and 2016 of approximately $46 million or 70%. This increase was partially offset by the fact that the 2015 period included approximately $1.7 million of interest income collected on an impaired loan that did not recur during 2016.

There was an increase in management and service fees totaling $1.3 million due to an increase in the average balance of our loan portfolio of 60% during 2016.

A decrease in net income from real estate properties including depreciation of $2.6 million due primarily to the sale of four operating properties during 2015 and five during 2016 due to an increase in property tax expense and other holding costs on the TOTB North apartment building held within TOTB Miami that can no longer be capitalized to the basis of the project once construction was completed in March 2016 and before it was sold in September. And also due to an increase in marketing related expenses for Zalanta property currently under construction.

There was an increase in interest expense of $921,000 due to a higher amount of interest incurred on our lines of credit as the balances were higher during 2016 as compared to 2015 and due to the fact that the interest incurred on the TOTB North construction loan can no longer be capitalized, as discussed previously.

There was an increase in provision for loan losses of $2.3 million and an increase in impairment losses on real estate properties of $1.6 million as a result of updated appraisals or other valuation information obtained on certain of our real estate properties.

The sales of real estate properties during 2016 have allowed us to increase loan originations during the year. We originated 23 new loans totaling $97.1 million with a weighted average interest rate of 7.7%. We also received full or partial repayment on 29 loans in a total amount of $55.8 million with a weighted average interest rate of 8%. Thus our loan portfolio grew approximately 21% during the year.

We have continued to see an increase in the average balance of performing loans in our portfolio. Performing non-impaired loans were approximately $125 million or 96% of our portfolio as of December 31, 2016 as compared to $98 million or 92% of our portfolio as of December 31, 2015.

As of December 31, 2016 we had an outstanding balance of $5 million on the California Bank & Trust line of credit in addition to $33.4 billion in other long-term debt.

Considering the maximum currently available to advance on the lines of credit is fully collateralized of approximately $55 million and the fully funded Zalanta construction loan of $31 million, and taking to account the other long-term debt currently on our balance sheet, our potential debt to equity ratio of approximately 44% represents a modest amount of leverage compared to many of our peers.

We declared a fourth-quarter 2016 dividend of $0.08 per share. With that we distributed 100% of net REIT taxable income and $2.8 million in net capital gains to shareholders for 2016. We also retained $1.7 million in net capital gains during 2016 and made a tax payment on behalf of stockholders of $583,000 in January of 2017.

In summary, the Company's loan portfolio has both grown and improved significantly. With anticipation of further capital for funding new loans from the sale of our real estate assets and our increased credit facility, we expect continued growth in interest income and mortgage assets. We will now open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Ben Zucker, JMP Securities.

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Ben Zucker, JMP Securities - Analyst [2]

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Congrats on a busy year for asset sales and making good progress on your transition plan. My first question is kind of higher level. But can we talk about how you envision the Company looking maybe one year, three years or five years down the line?

And I am not really trying to pin you down with any kind of timing for asset sales or anything, but more generally if you could offer an idea of maybe where the real estate might be fully divested, if that could be by the end of 2017, if that is the end of 2018 that would be helpful.

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Bryan Draper, Owens Realty Mortgage, Inc. - Director & CFO [3]

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So we do expect, especially with the current asset that we have in contract in Tahoe. In addition we would expect -- and it has been part of our plan for some time -- once that property is sold to actually market the remaining commercial space in Tahoe, which totals about 50,000 square feet. Once we just sell those two assets alone, in addition to the condos held in Zalanta, the vast majority of our real estate will be on our books.

So we would expect by the end of 2017 for the realignment on our balance sheet to be substantially completed. I would expect by 2018 the vast majority -- I can't guarantee there won't be some trailers that will be hanging on of small little properties. But I would expect the vast majority to be completed by 2018.

Moving forward then, we would expect -- and again, in association with these sales -- that the volume of loan production would increase and the total portfolio would dramatically increase.

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Dan Worley, Owens Realty Mortgage, Inc. - SVP [4]

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And, Ben, this is Dan. One thing I will add is -- that we have also made clear in our presentation documents is that at that point we would then, and continue to do so now, to improve the types of debt we have and increase to a 1 to 1 on equity leverage as we then focus on increasing our dividend.

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Ben Zucker, JMP Securities - Analyst [5]

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That is helpful, Dan. And maybe you just set me up perfectly for a segue there. We have spoken about the leverage in the past and I understand this is part of a constant ongoing dialogue with your lenders. But how have those talks been progressing and how do you feel about your ability to put more leverage on your loan book in 2017?

I am assuming you have a lot of the available capacity based off your current leverage at year end. And I am also wondering if all the loans in your book qualify as eligible collateral so that we could really see the leverage start to ratchet up fairly quickly in 1Q 2017?

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Bryan Draper, Owens Realty Mortgage, Inc. - Director & CFO [6]

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So to answer part of your question, not all of the loan assets that we have qualify to be added to the lending base for our line of credit. For example, construction loans, land loans, the lenders just will not accept those. That being said, we continue to make those loans in a discretionary basis just based on the economics.

Moving forward, as I said, we had an accordion provision in the line agreement of $25 million. We just filled $5 million of that; we are very hopeful to fill the other $20 million. But moving forward we really expect to be able to increase the credit and hopefully get credit that maybe is a little bit more easily accessible.

Subsequent to the sale of these properties that we hope to occur in this year our balance sheet is going to look tremendously different than it has in the recent past. So again, dealing with the bureaucracies of large lending institutions, we are very hopeful that will open some opportunities for us that we currently do not have.

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Ben Zucker, JMP Securities - Analyst [7]

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That is great; that is perfect. And you guys -- looking at the origination side of the business, you guys had a pretty healthy quarter for originations. And I guess that is partly attributable to the increased liquidity following the TOTB sale. When I was just looking at the gross commitment balance and repayment volumes, kind of on the surface it looks like you would expect loan growth of $28 million, $29 million.

I know there was a provision for about $1 million. But the balance sheet only really grew by $15 million. So I am assuming some of these loans have some kind of future funding component which we normally see on development or construction loans. So could you describe the type of loans that you were originating in the fourth quarter?

I noticed the land collateral balance grew a little and you stepped into some new lending markets like Colorado, where I know you guys have experienced from your Gypsum assets, and also Ohio. So could you just touch on those a little bit?

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Bill Dutra, Owens Realty Mortgage, Inc. - EVP [8]

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Yes, Ben, this is Bill Dutra. So we had sort of a mixed bag of different property types. We had a retail piece that was a conversion of an existing retail store to a 24-hour fitness facility. So, there was a good deal of that loan that was originated held back for the improvement work. All of that improvement work was completed prior to New Year's and the facility is open.

We had a construction loan for Senior residential on the peninsula here in San Francisco, which obviously is going to be funded as we go through 2017 and will probably be completed near the end of the year.

A couple of facilities that were done in locations outside the state that you had referenced there are loans that we have made to an existing borrower for similar projects where they take vacant big boxes like Target's or Kmart's and they do climate control interior storage facilities. And a couple of the other loans that we made were just office -- existing stabilized office building loans and/or industrial properties.

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Melina Platt, Owens Realty Mortgage, Inc. - Controller [9]

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And the Colorado loans -- land loan that you alluded to was the carryback financing on one of the parcel sales of our real estate we owned in Gypsum, Colorado. So that [isn't] a normal market that we have been (multiple speakers) doing or (multiple speakers).

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Bill Dutra, Owens Realty Mortgage, Inc. - EVP [10]

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Yes, that [Red Table Ventures] loan was just a carryback facility for the Gypsum property.

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Ben Zucker, JMP Securities - Analyst [11]

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Got you, that makes sense. And I had noticed your office exposure jumped a little bit. And then I guess lastly, and this is more housekeeping maybe for you, Melina. Based on where property NOI came in during the fourth quarter, would it be fair to say that now that TOTB is sold we should really not expect much if any property NOI going forward?

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Melina Platt, Owens Realty Mortgage, Inc. - Controller [12]

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Any property NOI -- no, none as far as -- well, we do still have a few operating properties on our books, much smaller than we have had in the past, Tahoe Stateline Venture being the biggest one, the retail there. So that will continue and that actually will be positive.

Now we do still have some land loans and other assets that aren't occupied, so those will drag and create a little bit of a net loss. But it will definitely look better -- we are projecting it will look better than what it did the beginning of last year while we were still holding onto TOTB and had holding cost from the North apartment building until we sold it.

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Bryan Draper, Owens Realty Mortgage, Inc. - Director & CFO [13]

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Ben, also on that 20,000 square feet of retail that we are completing in Zalanta, we already have a tenant that is moved in and paying rent. So depending on when we actually dispose of that property, we would expect that we would lease up the majority of that space which would create additional income on the retail side.

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Ben Zucker, JMP Securities - Analyst [14]

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That is great. Appreciate your comments, guys, and thanks again for taking my questions.

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Operator [15]

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(Operator Instructions). And showing no further questions this will conclude the question-and-answer session. I'm sorry; we do have a question that just came up from Steve DeLaney of JMP Securities.

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Steve DeLaney, JMP Securities - Analyst [16]

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Ben covered everything very thoroughly. But I just wanted to ask one follow-up on the construction loans. Obviously perception there that sort of on a risk return basis that maybe you are taking a little more risk. Can you comment on sort of the return profile of construction loans relative to more traditional bridge loans? And is there any possibility in some of those financings to obtain an equity kicker on the transaction? Thanks a lot?

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Bill Dutra, Owens Realty Mortgage, Inc. - EVP [17]

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Yes, we are not really set up in a manner that we actively solicit equity kickers. We do get a premium on the construction loans, generally anywhere from 25 to 50 basis points. And the loans that we are making we are cherry picking because we only -- obviously we don't want a large percentage of our portfolio in that type of paper.

But the construction loans that we have been making generally speaking are 65% of cost or less, in some cases they are 60% of cost. And the corresponding LTVs upon value when the property is completed are generally in the 50%-55% range. The borrowers have obviously a tremendous amount of capital invested in the property. We have professional draw consultants who review all the draws and inspect the property.

So, it is a consultant that we have been using for 25 years; we are very comfortable with them and we feel that, because of the structure of these construction loans, we are minimizing the risk and we are still getting a little bit in additional return.

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Steve DeLaney, JMP Securities - Analyst [18]

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Got it. And, Bill, do you normally look at a -- what a 9- to 12-month kind of construction process for the types of facilities you are looking at?

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Bill Dutra, Owens Realty Mortgage, Inc. - EVP [19]

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Yes, it depends. Because some of the things that we do are redevelopment and it is not ground up. But generally speaking on a ground up deal we are looking at a 12- to 18-month construction period depending on what it is and where it is. I mean if it is in a place where they have weather concerns then obviously it drags it out a little bit.

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Steve DeLaney, JMP Securities - Analyst [20]

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Got it. Okay, well, thank you for that additional color on the construction loans.

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Operator [21]

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And with that the question-and-answer session has concluded. The conference has now concluded as well. Thank you for attending today's presentation. You may now disconnect.