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Edited Transcript of RSO earnings conference call or presentation 6-Mar-19 1:30pm GMT

Q4 2018 Exantas Capital Corp Earnings Call

New York Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Exantas Capital Corp earnings conference call or presentation Wednesday, March 6, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew L. Farkas

Resource America, Inc. - Chairman, CEO & President

* Andrew S. Carr

Exantas Capital Corp. - Head of IR

* David J. Bryant

Exantas Capital Corp. - Senior VP, CFO & Treasurer

* Matthew J. Stern

Exantas Capital Corp. - President

* Paul A. Hughson

Exantas Capital Corp. - Executive VP of Commercial Real Estate Lending Business Division

* Robert C. Lieber

Exantas Capital Corp. - CEO

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Conference Call Participants

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* Benjamin Ira Zucker

BTIG, LLC, Research Division - Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q4 2018 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, Andy Carr, Head of Investor Relations. Sir, you may begin.

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Andrew S. Carr, Exantas Capital Corp. - Head of IR [2]

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Thank you, Haley. Good morning, everyone. 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 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. 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 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.

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Andrew L. Farkas, Resource America, Inc. - Chairman, CEO & President [3]

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Thank you, Andy. Good morning, all. Thanks for joining the call. With me today are Bob Lieber, our Chief Executive Officer; and Matt Stern, our President; Dave Bryant, our CFO; Paul Hughson, Head of Commercial Real Estate Lending; and Andy Carr, who just spoke to you, Head of Investor Relations from whom was first and you've already heard.

I want to take a moment to review our progress in 2018 before handing the call back to management for the normal quarterly review. We had a great 2018. Last night, we reported $1.1 billion in new transitional commercial real estate loan origination and CMBS investment activity in 2018, which will drive core earnings growth for 2019. 2018 adjusted core earnings increased to $0.71 per share from negative $0.37 per share in 2017.

The net growth of the company's core investment portfolio through 2018 caused core earnings to accelerate, which supported 3 consecutive quarterly dividend increases in 2018 from $0.05 per share at the beginning of the year to $0.175 per share paid for the fourth quarter. We're anticipating another increase in our dividend to $0.20 per share for the first quarter of 2019, which we will recommend to the board for approval.

We've largely completed the strategic plan that we first announced in November 2016. In May of 2018, we announced the rebranding of the company and presented the investment community with a company that is less complicated and has much more predictable earnings. I'm very pleased with the results of 2018 and the prospects for additional net investment portfolio growth, and in turn, core earnings growth. We look forward to reporting those results to you on future calls.

With that, Bob, I'd like to turn it over to you. Bob is our CEO.

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Robert C. Lieber, Exantas Capital Corp. - CEO [4]

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Thanks, Andrew, and good morning, everybody. As Andrew noted, 2018 was a great transition year for Exantas Capital, and we are very optimistic about the momentum that we've developed. Gross origination is at $1.1 billion, and importantly, net capital deployment was close to $475 million for the full year in 2018, which is an increase of over 200% from 2017. For the fourth quarter of 2018 -- for the fourth quarter, gross originations were over $355 million, and net deployment for the quarter was over $125 million or 68% higher than the fourth quarter of 2017. So the trend is very good.

We've also significantly reduced the company's cost of capital by redeeming preferred shares, improving the terms on our warehouse facilities and accessing the capital markets where appropriate. The results of these and other efforts have produced adjusted core earnings of $0.24 per share for the fourth quarter of 2018 when compared to a net of $0.01 loss in the fourth quarter of 2017.

Net interest income has increased by 36% to $0.49 per share in the fourth quarter of 2018 compared to $0.36 per common share in the fourth quarter of 2017. We are still in the process of converting the proceeds from the strategic plan and loan payoffs into future income-producing credit investments. Our available liquidity for the company at year-end was $175 million.

We believe that our ability to leverage the commercial real estate investment management and real estate services business with C-III Capital Partners will continue to be key value drivers for the growth of Exantas' investment portfolio in 2019 despite a competitive investing and lending environment. Additionally, we believe we are well positioned in the current interest rate environment to compete. With LIBOR over -- when LIBOR rose in 2018, we benefited as a floating rate lender. Indeed, spreads have compressed in the market, but this has not meaningfully impacted our levered asset-level weighted average yield because of our reduced cost of funds and increases in LIBOR, which Matt will talk in more detail shortly.

We've continued to make attractive investments and at the same time, use loan payoffs and proceeds from the strategic plan to derisk our portfolio. For example, concentration in retail assets in our loan portfolio is down from over 16% at June 30, 2018, to under 7% at the end of 2018. While there are still attractive opportunities in retail lending, we continue to favor other asset categories, like multifamily, in this market.

Turning to a review of our balance sheet. Like most participants, we were impacted by the fourth quarter market volatility. GAAP book value at year-end 2018 was $14.02 per share, down from $14.23 per share last quarter, resulting from a $0.28 reduction in the carrying values of our CMBS portfolio and the related swaps. The good news is at the end of February, the CMBS positions have already recovered more than half of these decreases, and we are still confident in the credit that we have underwritten. I'll provide more details on this in a moment.

We believe these marks are results of capital markets volatility and not a function of any deterioration in the underlying real estate credit fundamentals, which we believe are still strong. In comparison and to highlight both sides of this volatility, during the third quarter of 2018, we have realized an $0.08 increase in book value per share due to the increased carrying values for marking to market our CMBS and swap portfolios. So it went up in the third quarter, it went a little down in the fourth quarter.

And while market volatility can continue to lead to intra-quarter fluctuations in book value, we consider portfolio growth, originations and quality asset management to be the main benchmarks by which we track our operational effectiveness. To that end, the payment of our $0.175 per share dividend in the fourth quarter was supported by net income of $0.23 per share, thereby partially offsetting the impact of book value from the market volatility.

As mentioned on prior calls over the past year, we have been much more proactive in sharing our results and discussing Exantas with market participants. One of the topics frequently discussed has been book value and its components. And one item that has become clear to us is that market participants were not all aware of how GAAP accounting treats convertible stock and preferred shares on the balance sheet, and many adjustments have been made by the investment community in an attempt to control for this.

Going forward, we will, of course, continue to report book value according to GAAP, but you'll also hear us focus more on economic book value, which we believe provides a more accurate measure of the economic position of our common shareholders. Dave Bryant will give a little more detail about this in just a minute.

Finally, as I mentioned on prior calls, we continue to evaluate our dividend policy as core earnings visibility improves. As Andrew mentioned, we anticipate recommending a 20% dividend to the board for the first quarter dividend. Given the 300% dividend growth the company has experienced since the strategic plan was announced and the prospects for the continued trajectory in core earnings from the deployment of capital into income and producing transitional loans in CMBS, we believe Exantas continues to present a very compelling investment opportunity.

And with that, I'd like to turn the call over to Matt to discuss the portfolio. Matt?

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Matthew J. Stern, Exantas Capital Corp. - President [5]

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Thank you, Bob, and good morning, everyone. I'd like to begin by taking a closer look at our fourth quarter origination activity.

For the fourth quarter, the company originated 11 commercial real estate loans, totaling $275 million or an average commitment of $25 million, with a weighted average spread of 306 basis points over 30-day LIBOR. At December 31, 2018, our commercial real estate loan portfolio was comprised of $1.5 billion of floating rate self-originated whole loans, a $19 million preferred equity position and a $5 million fixed rate mezzanine loan.

Our portfolio grew by $55 million during the fourth quarter as new loan originations exceeded payoffs and pay-downs. Our commercial real estate loan origination team continues to see quality lending opportunities, resulting in a strong deal pipeline.

New deal flows sourced as a result of our growing market presence, combined with repeat lending opportunities arising from existing borrower relationships, contributed to a 40-plus percent year-over-year increase in loan originations, with 2018 loan origination volume exceeding $860 million. This is the highest annual origination volume in Exantas' history. We remain optimistic about the multifamily space, which accounted for approximately 53% of our loan portfolio collateral at December 31, 2018, while our exposure to retail has decreased to less than 10%.

Our lending strategy remains focused on seeking the best risk-adjusted returns in markets around the United States that are experiencing growing demographics and the prospects for job creation. Despite a competitive lending environment in 2018, the weighted average unlevered yield of new loan originations increased 13 basis points to 5.84% in 2018 from 5.71% in 2017. We also financed our loan portfolio more efficiently in 2018, thereby reducing the average spread on our asset level cost of funds by 52 basis points over the last 12 months. And as LIBOR rose throughout the year, it helped to offset spread compression from market competition, and our levered returns improved.

During the fourth quarter, we continued to diversify the company's asset base by investing in CMBS, where we see attractive investment opportunities that also offer duration. At December 31, 2018, our $466 million CMBS portfolio at par was comprised of $301 million of floating rate bonds and $165 million of fixed rate bonds, which we have substantially hedged. The weighted average life of our CMBS portfolio has increased to over 4 years at year-end 2018 as compared to approximately 1 year at year-end 2016.

During the fourth quarter, we acquired $83 million in face amount of CMBS bonds. While we continue to selectively invest and remain focused on credit quality, we are also periodically presented with opportunities to sell positions and have done so opportunistically to realize gains on our CMBS investments and related swaps. We are very pleased with the $1.1 billion of total loan origination and CMBS acquisition volume in 2018, which exceeded our 2018 guidance of $1 billion provided in March 2018 during our fourth quarter of 2017 earnings call.

We expect to see continued positive momentum in 2019 and anticipate that our total origination and investment volume will range between $850 million and $1 billion for the calendar year of 2019. We believe this investment goal as well as our plans to grow sustainable core earnings are achievable, as our loan origination pipeline and loans currently in process are meaningfully more than where we were at this time last year.

We look forward to discussing our progress with you in the quarters to come, and with that, I'd like to turn it over to Dave Bryant to discuss our financials. Dave?

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David J. Bryant, Exantas Capital Corp. - Senior VP, CFO & Treasurer [6]

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Thank you, Matt. Good morning, everyone.

Our GAAP net income allocable to common shares for the 3 months and year ended December 31, 2018, was $7.4 million or $0.23 and $7 million or $0.22 per share, respectively. Core earnings were $6.5 million or $0.21 per common share, and adjusted core earnings were $7.5 million or $0.24 per common share for Q4 2018. For calendar year of 2018, core earnings were $9.4 million or $0.30 per common share, and adjusted core earnings were $22.3 million or $0.71 per common share.

GAAP net income for the 3 months ended December 31 includes several significant items. One, the most significant was the $1.4 million recovery of a corporate credit loan position previously held in a legacy Apidos CLO, which, of course, was a non-core activity. Two, we also received $1.4 million in commercial real estate loan exit fees during the period due to increased loan payoffs, which have, based on our experience, tended to be seasonally higher in the last calendar quarter. And three, we realized an impairment of $932,000 on a legacy CMBS bond, which was recognized in Q4.

The following adjustments were made to arrive at 2018 adjusted core earnings: a $7.5 million or $0.24 per share from our redemption of $115 million of Series B Preferred Stock; a $2.3 million or $0.07 per share from a loss on a CRE loan originated in 2013 and reserved for in 2016; another $0.9 million or $0.03 per share from the impairment on the CMBS bonds acquired in 2007, which again occurred in Q4 of '18; and finally, we paid a $2.2 million or $0.03 per share legal charge, which was also accrued for in 2016.

We view these items as nonrecurring and/or as out-of-period adjustments that affected our core earnings performance in 2018. When we view our adjusted core earnings in tandem with our dividend policy, the result supports our Q4 annualized dividend level.

We saw growth of $13.5 million or approximately 32% in our reported year-over-year net interest income for 2018 as compared to 2017. Three items are driving the increase in net interest income. First, the incremental asset growth in our core investment platform. The net growth in the par value of the core earning assets was $475 million or 30% during 2018. Also, as of December 31, 2018, it's worth noting that 91% of our $2 billion investment portfolio was comprised of floating rate commercial real estate debt investments.

The second factor driving the increase in interest income is a 55 basis point reduction in the cost of our funds from related -- asset-related financing. And third is a net accretive benefit to our invested equity from rising LIBOR from our floating rate core real estate investments. A 94 basis point increase in LIBOR at December 31, 2018, over the same date in 2017, eclipsed the spread compression on all CRE assets of 84 basis points, resulting in a net 10 basis point improvement on the yield of our commercial real estate assets.

As Matt discussed, we had strong CRE loan production during the fourth quarter. The loan mix was 53% multifamily, 23% office and the balance from retail, self-storage and mixed-use properties. In addition, we acquired $83 million of CMBS bonds, all of which were floating rate at a spread of LIBOR plus 2.29%. Bond mix was 59% agency and 41% non-agency.

As is typical during the fourth quarter, we saw an uptick in CRE loan payoffs. Loan payoffs were $203 million, with a spread of LIBOR plus 5.21% and an average life of 38 months. Notably, a strategic plan loan with a balance of $17 million paid off in full in Q4 with an exit fee of $510,000. Our positive net loan production received -- was achieved after increased loan payoff volume and is a credit to our CRE origination team.

GAAP book value was $14.02 per common share and includes 2 items, which we wish to highlight for our common shareholders and the analyst community. First, as Bob referenced, our GAAP book value includes the remaining aggregate value of the equity conversion options on our convertible notes of $11 million or $0.35 per share at December 31, 2018. This amount will be amortized to interest expense, will increase the liability balance of our convertible notes and accordingly, reduce GAAP book value over time, but has nothing to do with the company's operating performance. We believe this slow decline in book value is misleading.

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 paid the preferred distributions and would be the amount due should we ever redeem that preferred stock. Adjusting for this $4 million decrement, book value would be reduced by $0.13 per share at year-end 2018.

We believe both of these accounting treatments misstate the economic position of the company. This period, in order to provide greater transparency, we are introducing a non-GAAP metric, economic book value. As a brief background, Exantas has been disclosing the adjustment related to the discount arising from the value of the equity option on our convertible note issuances in our quarterly earnings releases. In addition, some market participants have been taking into account the redemption price of our outstanding preferred stock for some time. We believe both items impact the economic value to common shareholders and decided to formally combine both adjustments into a single presentation in our earnings releases.

So our GAAP book value per share of $14.02, plus the 2 items discussed, totaling $0.48 per share, yields economic book value of $13.54 per share at December 31, 2018. As a point of comparison, the economic book value at December 31, 2017, was $13.63 per share, which reflects the relative book value stability we have managed for the company.

Our GAAP debt-to-equity ratio rose to 2.8x at year-end 2018, up from 1.7x at December 31 of '17. The increase in leverage results from 3 factors: one, a net increase of $457 million in asset-level borrowings, which reflects our having been underlevered in 2017; two, a decline in stockholders' equity of $118 million, $115 million of which is from the preferred stock redemptions; and three, a decline in corporate debt, primarily from the redemption of $70 million of 6% convertible notes.

During 2018, we continued our efforts to improve our capital structure by redeeming $165 million of preferred stock that had a weighted average coupon of 8.25% and paying off the remaining $70 million of our 6% convertible notes that came due in 4Q 2018. And lastly, reducing our asset-level financing costs by amending the terms of our existing warehouse line and through attractive terms and flexibility of new warehouse facilities.

With that, I'll turn the call back to Bob for some final comments.

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Robert C. Lieber, Exantas Capital Corp. - CEO [7]

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Thanks, Dave. As Andrew mentioned at the beginning of the call, we've made a lot of progress during 2018. Just to highlight, we've substantially completed our strategic plan; we've reduced our cost of capital; we've grown adjusted core earnings from a negative $0.37 in 2017 to a positive $0.71 in 2018; we've increased the dividend by 300% from $0.20 a year to $0.20 a quarter expected in the first quarter of 2019; our net capital deployment is up over 200% year-over-year; we've continued to diversify and derisk our portfolio and extend portfolio duration; and economic book value has remained relatively stable. We have over $175 million of available capital, and we're optimistic about the opportunities in front of us.

Thank you for your time here today and listening. I'd be happy to open the phone to any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Steve Delaney of JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [2]

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A lot of noise in December, obviously. I wanted to start with asking about the legacy CMBS, the $0.03 impairment there. Was that due -- also due to spread widening? Or was this more of a fundamental credit-driven type of a write-down?

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Matthew J. Stern, Exantas Capital Corp. - President [3]

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In that case, Steve, it was a legacy bond that we owned, that had 1 asset that remained. People responsible for the trust, it provided guidance on what valuation was, and that's what informed the mark. And they sold that 1 last asset at less than was anticipated, and that's what gave rise to it. Yes, so that's -- it was a -- that was not a mark-to-market concept.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [4]

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Got it. So that's pretty much done. And I'm guessing that's not included in the $0.28 general CMBS fair value decline and the estimated 50% recovery. This is completely separate from those numbers. Is that correct?

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Andrew L. Farkas, Resource America, Inc. - Chairman, CEO & President [5]

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That's right, Steve.

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Matthew J. Stern, Exantas Capital Corp. - President [6]

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That's right.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [7]

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Okay. And we noticed, you do -- you are carrying a general loan loss reserve of $1.4 million. Was that something -- I can't recall whether that was legacy back from RSO. Or is that something that C-III put in place just as sort of a buffer or a cushion? And is that something that we should expect to see you grow as we move through 2019 ahead of the CECL accounting policy coming into effect in 2020?

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Matthew J. Stern, Exantas Capital Corp. - President [8]

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Yes, the company has always had a reserve policy. But you are correct that since C-III took over the management agreement, we have altered that policy over time. But you'll see that rise because it is largely correlated to a percentage of the portfolio itself. And so as a result, as the aggregate investment portfolio rises, you would see that tick up.

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David J. Bryant, Exantas Capital Corp. - Senior VP, CFO & Treasurer [9]

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And Steve, we have not finalized our analysis of the impact of CECL, but we would expect the number to grow as a result of that as it would -- in next year, in 2020, and going forward. And of course, any catch-up adjustment that will be made will be a balance sheet entry and not impact earnings.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [10]

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Exactly. Because it's noncash, obviously, with core.

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David J. Bryant, Exantas Capital Corp. - Senior VP, CFO & Treasurer [11]

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Right.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [12]

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And is there -- that $1.4 million, I'm just curious if there's any kind of percentage of principal that you're trying to work towards?

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David J. Bryant, Exantas Capital Corp. - Senior VP, CFO & Treasurer [13]

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So Steve, if you take a look at the -- we haven't filed our K yet, but if you look at the third quarter Q, you'll notice that we have categories of risk ratings. And when you look at risk rating 3 and risk rating 4, that's how we developed our general reserve. Risk rating 3 is a 1.5% reserve, any -- meaning any loans in that bucket get 1.5% of their principal balance reserved for. And in category 4, it's 5%, because it's gotten progressively worse. And then aside from that, we have a category 5. Those are specifically impaired loans. So we look to establish a reserve on a loan-by-loan basis if anything falls into that category.

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Operator [14]

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Our next question comes from Ben Zucker of BTIG.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [15]

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I just wanted to talk about, actually, repayments quickly. Looking at your earnings release, 2018 originations are like half of your year-end '18 loan portfolio. So I don't want to put words in your mouth, but it really feels like repayment should be slowing down here in 2019. Is that a fair characterization?

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Matthew J. Stern, Exantas Capital Corp. - President [16]

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I just want to make sure we understand your first comment, meaning around -- meaning that originations for the year were about half?

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [17]

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Yes, is that right? Am I seeing like originations around $850 million, $860 million, which is about half of the carrying value of the year-end?

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Matthew J. Stern, Exantas Capital Corp. - President [18]

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That's correct. Yes, that's correct. I do think -- I think we mentioned on the third quarter call that 2018 repayments were a bit elevated. I think that's the product of the timing of the origination of some of the predecessor years when the origination volume for the company had ticked up. Obviously, you can have people pay off a little bit sooner or extend. It's difficult to predict with precision, but we would expect the number to be a bit lower in 2019.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [19]

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Okay, that's definitely helpful. And I guess following up on that, on the production side, you gave guidance of, I think, $850 million to $1 billion for 2019. Did that include CMBS as well? Or was that just CRE loan originations?

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Matthew J. Stern, Exantas Capital Corp. - President [20]

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Yes, that was a combination of our loan investments as well as CMBS.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [21]

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Okay. And from like a timing and deployment perspective, should we assume that the December volatility might exacerbate the normal seasonal 1Q slowdown? Or would you still expect that you have pretty steady flow throughout that period?

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Matthew J. Stern, Exantas Capital Corp. - President [22]

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The loan pipeline still looks strong right now. It's difficult to predict with precision exactly what'll close before the end of the month relative to what will fall into the beginning of 2Q, but the pipeline is still in decent shape, as we have mentioned.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [23]

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That's helpful, Matt. And then just kind of turning to the expense side of things. You guys were running on that fixed management fee agreement in 2018, correct?

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Matthew J. Stern, Exantas Capital Corp. - President [24]

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That's correct.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [25]

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So starting now, we go to the 1.5% on equity, I'm assuming. Is there anything that's going into that equity besides common and preferred stock?

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Matthew J. Stern, Exantas Capital Corp. - President [26]

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No, that's the calculation. So you would see -- starting in the first quarter, you'll see that run as a percentage of equity, as would typically be the case.

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Benjamin Ira Zucker, BTIG, LLC, Research Division - Analyst [27]

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Great. Well, I guess if my math looks right, on the surface, that should be a nice little drop in the management fees then. And did you guys have any kind of like G&A or operating expense targets for this year, for 2019? I can't remember when you were going through your Investor Day deck.

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Matthew J. Stern, Exantas Capital Corp. - President [28]

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Sure. I would say that the -- our expectation of following, being done with the strategic plan and normal operational activity, which certainly we would hope to achieve this year, you'll see guidance in the investor presentation. We'll be updating that shortly, I would say, in the coming weeks. But I think the guidance that is provided in the existing deck is consistent.

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Operator [29]

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Our next question comes from Stephen Laws of Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [30]

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Following up on a couple of these topics from Ben and Steve, I guess, CMBS growth, a little higher in the fourth quarter, was that opportunistic given wider spreads in December? If so, have you continued acquiring those assets here in January and February? Or have spreads tightened back up to shift your focus on a relative attractiveness back to loans here in the first quarter?

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Matthew J. Stern, Exantas Capital Corp. - President [31]

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I think there was origination activity on the buying side or investment activity earlier in the quarter as well. You're correct that there were a few bonds where spreads moved out that we ended up in committee on and ended up buying some. But I think it was relatively spread out across the quarter. I don't know that I can give specific guidance right now on 1Q activity, but as mentioned in our comments, spreads have come in maybe 50%, 60% since December. And we continue to look at opportunities to invest.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [32]

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Great. Along those lines, new loans, how do returns look today versus November? Has the dislocation lightened competition? Kind of what type of impact did December or late 4Q volatility have on what you're seeing in the competitive landscape for new CRE loans?

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Paul A. Hughson, Exantas Capital Corp. - Executive VP of Commercial Real Estate Lending Business Division [33]

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I mean, I think the volatility was much more pronounced in bonds than it was in loans. There was -- I'd say fourth quarter, if anything, there was a pause in spread tightening as opposed to any real meaningful spread widening. I think spreads have kind of stabilized within a band over the course of the last 8 to 10 weeks.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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Great. That's helpful. And Dave, I wanted to follow up, your comments talk about leverage at 2.8. Are you -- where do you see that running? What is a comfortable target? I know you mentioned there's still -- you do still have some capital available for investment that you guys highlighted in your prepared remarks. But can you talk about your leverage targets and where you see that moving to over the year?

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David J. Bryant, Exantas Capital Corp. - Senior VP, CFO & Treasurer [35]

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So we do have some more room to move leverage marginally higher. I think it's fair to say that we were underlevered in 2017. We're approaching a more reasonable level now and have some room in 2019. We're well within any leverage constraints that our warehouse facilities would call for. So we're not constrained by that. It's more of a question of being comfortable with the risk that we're taking. But we do have some room to move. Now obviously, as we do more CLOs, they tend to get us a little bit higher leverage. So that is obviously something that we look to do as we want to match on -- our assets with our debt.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [36]

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Great. I appreciate the color there on leverage. And then lastly, you guys have accomplished quite a bit with the legacy assets, looking at this table, from $480 million identified to $30 million. Can you talk about that remaining $30 million? What's the time line of addressing that? Are these assets that are left going to be more difficult? Or can you maybe talk about the time line of how the remaining legacy assets will wind down?

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Matthew J. Stern, Exantas Capital Corp. - President [37]

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Yes, there are just a couple of assets that remain, a couple of real estate loans and then some cash and legacy liabilities associated with one of the operating businesses. But we would anticipate that they'll play themselves out during 2019. It's a little challenging to speak with specifics there, but we would expect them to play themselves out this year.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [38]

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Well, that's helpful. So that will be addressed this year most likely. That's great.

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Operator [39]

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Our next question comes from Jade Rahmani of KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [40]

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This is actually Ryan Tomasello on for Jade. Looking at the anticipated dividend of $0.20 for 1Q, which equates to about, it looks like a 7.5% return on economic book value. So I'm just wondering if you could remind us what stabilized post-expense ROEs you're targeting when you expect to hit those levels. And perhaps how we should expect the dividend to trend throughout the year in 2019?

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Matthew J. Stern, Exantas Capital Corp. - President [41]

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I guess it's difficult to give specific guidance on exactly where the dividend will go. But I think the earnings power of the business, we tried to depict that. I believe it's on Page 12 of our investor presentation. Hopefully, that will provide some visibility. Obviously, we'll update that when we put out our new investor deck. But we think core earnings will substantially inform directionally where we go with the dividend. And at least relative to book value, we would anticipate the company, once fully deployed, to be able to be upwardly mobile.

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Robert C. Lieber, Exantas Capital Corp. - CEO [42]

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And just to add to Matt's comment, we do have capital availability to continue to grow our investment portfolio here in 2019.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [43]

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Okay. And given the historical participation you've had in the CLO market, we're just wondering if you could give us some commentary on the current state of that execution, if it's still attractive and how competition for the CLO-eligible loans has trended post-year, after this volatility has kind of played out?

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Paul A. Hughson, Exantas Capital Corp. - Executive VP of Commercial Real Estate Lending Business Division [44]

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I think CLO continues to be an efficient way to match fund our assets and liabilities. I mean, I think that spreads have moved around a little bit. I think spreads have widened more dramatically on managed yields than on static yields. I think that the dramatic tightening of CLO liabilities over the course of 2018 did lead to spread tightening on the origination side. That has largely dissipated. So I don't really think that CLO -- where CLO spreads are today meaningfully impacts where origination spreads are in today's market.

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Operator [45]

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Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Bob Lieber for closing remarks.

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Robert C. Lieber, Exantas Capital Corp. - CEO [46]

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Thank you all for joining us today and learning more. We intend to be out talking more to the market as we go through the investor conference upcoming here. We appreciate your interest and your questions. Don't hesitate to call. Andrew, would you like to have any closing comments?

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Andrew L. Farkas, Resource America, Inc. - Chairman, CEO & President [47]

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No, I think that's it. I want to congratulate management for yet another excellent performance. And I'd like to thank our shareholders for your continued support.

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Robert C. Lieber, Exantas Capital Corp. - CEO [48]

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Thank you, everybody.

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Operator [49]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a great day.