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Exantas Capital Corp. (XAN) Q2 2019 Earnings Call Transcript

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Exantas Capital Corp.  (NYSE: XAN)
Q2 2019 Earnings Call
Aug. 01, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2019 Exantas Capital Corp. Earnings Conference Call. [Operator Instructions]

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

Steve Landgraber -- Senior Vice President of Corporate Finance

Good morning. Thank you for joining the call. Before we begin, I would like to remind everyone that certain statements made in the course of this call are not based on historical information, and may constitute forward-looking statements. When used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements. Although the Company believes that these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs, and are subject to a number of trends, risks, and uncertainties that could cause 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 of Forms 8-K ,10-Q ,and 10-K, and in particular, the Risk Factors section of our Form 10-K. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of these forward-looking statements.

Furthermore, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute 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 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.

Andrew L. Farkas -- Chairman

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

So this was one of our most productive quarters. We've grown deployment numbers, the completion of a portfolio acquisition and the closing of most recent CLO. These achievements demonstrate our commitment to our business plan, and from all of our expectations of an increase in our quarterly dividends for the third quarter 2019 a $0.25, or an 11% increase over the second quarter of 2019. This allows us to continue to march forward and consistent with the plan we've articulated over the course of the last year or so.

With that, I'll turn it over to Bob Lieber, our CEO.

Robert C. Lieber -- Chief Executive Officer

Thank you, Andrew, and good morning, everybody. We're going to dig into a little more of the details about what Andrew described here. For the second quarter of 2019, we're reporting core earnings of $0.28 per share, which is up from core earnings of $0.25 per share last quarter, and $0.20 per share during the second quarter of 2018. Gross commercial real estate investment was $476.1 million for the second quarter of 2019. This includes a loan portfolio acquisition made during the quarter with a committed balance of $210.8 million.

We're pleased with the combination of our originations and loan portfolio acquisition generated substantial net deployment during the quarter, moving us closer to our year end, or to our end of year full deployment goal that we've articulated previously. Matt will provide more details on that shortly. Net deployment was $286.1 million, which compares to net deployment of $113 million during the second quarter of 2018. During the quarter, we grew our commercial real estate loan portfolio to almost $2 billion at $1.96 billion, and our CMBS portfolio at par to $482 million.

Net interest income during the second quarter improved to $15.5 million, or $0.49 per share, compared to $14.5 million, or 46% -- $0.46 per share during the first quarter of 2019. This net interest income was driven primarily by net deployment and will continue to improve next quarter, as we receive the full benefit of our investment activity, including our portfolio acquisition, which closed roughly two thirds of the way into the second quarter.

We have ample liquidity of over $150 million to continue to accretively deploy capital and grow net interest income. This translates roughly -- translates to roughly $350 million to $400 million of future deployment capacity from our balance sheet. We believe the current economic environment and real estate market remains supportive of our previous guidance of $850 million to $1 billion of commercial real estate debt deployment in 2019. And note, this does not include the impact of the portfolio acquisition. The backup in rates in the second quarter supports our real estate activity and our borrower relationships allow us to continue to win deals in a competitive lending environment.

Turning to book value for a moment, the GAAP book value per share remained constant from last quarter at $14.06 per share. Economic book value increased to $13.63 in the second quarter, compared to $13.60 last quarter. Economic book value has continued to remain within a relatively tight range of $13.54 and $13.72 over the past four quarters. We reported net income of $6.3 million, or $0.20 per share compared to $5.5 million, or $0.18 per share during the first quarter. And again, core earnings once again have covered our quarterly dividend.

With that, I'd like to turn the call over to Matt Stern for more details. Matt?

Matthew J. Stern -- President

Thank you, Bob, and good morning, everyone. At June 30, 2019, our commercial real estate loan portfolio balances increased to $1.96 billion. During the quarter, we originated 16 commercial real estate loans and one preferred equity investment, totaling $252 million and acquired 28 loans totaling $211 million. The 16 senior floating rate loans that we originated have an average commitment of $15.2 million, with a weighted average spread of 318 basis points over a 30-day LIBOR.

We also made one preferred equity commitment of $8.7 million with a fixed rate coupon of 11%. The 28 floating rate loans we acquired have an average spread of 406 basis points over 30-day LIBOR. The weighted average unlevered yield of new loans originated and acquired increased by 20 basis points to 6.07% during the second quarter, compared to 5.87% during the second quarter of 2018.

Total CRE loan asset financing was $1.4 billion at quarter end, with a weighted average spread of 1.54%, compared to a spread at 1.66% during the second quarter of 2018. Our CRE loan portfolio grew by $285.3 million during the second quarter, as new loan originations and acquisitions exceeded payoffs and pay downs.

Our portfolio diversification evolved slightly during the quarter, largely due to the aforementioned loan portfolio acquisition. Consistent with our comments last quarter, we expect our diversification to increase as we progress toward full deployment. Multifamily loans now account for 57.6% of our portfolio. Our next highest allocation is to office at 13.5%, followed by an 11.3% allocation to hotels. Finally, we want to make you aware that our loan portfolio is not impacted by any of the recent rent regulation legislation passed in New York State.

Before turning to CMBS, I would like to discuss the portfolio acquisition from C-III Commercial Mortgage. On May 29, 2019, Exantas acquired 28 loans with a committed balance of $211 million. Along with the $252 million of originations this quarter, this portfolio acquisition was a meaningful contributor to our strong net deployment in the second quarter. C-III made the decision to exit its mortgage business and to divest its loan portfolio. This presented a portfolio acquisition opportunity for Exantas. And the resulting transaction was a meaningful deployment of capital into a diverse pool of loans at above market spreads. We are very happy with transaction for Exantas, as it supports our objective of achieving full deployment.

Turning now to our CMBS portfolio. During the second quarter, we acquired $13.2 million in face amount of CMBS bonds, partially offset by $12.4 million in sales and pay downs for net acquisitions of $800,000 at a weighted average coupon rate of a 5.84%. At June 30, 2019, our $482 million CMBS portfolio at par, which has a carrying value of $446 million was comprised of $322 million of floating rate bonds, and $124 million of fixed rate bonds. This quarter, we recognized a net increase of $0.02 to book value from our CMBS portfolio, including the impact of mark-to-market on our interest rate swaps.

As a reminder, our $2.4 billion CRE debt portfolio is 94% floating rate. Net investment production of $286.1 million for the quarter, represents approximately 13.5% increase from the first quarter. This quarter, we achieved core earnings at the low end of the range provided in our investor presentations illustrative earnings profile. And as Bob highlighted, our current liquidity will allow us to still deploy between $350 million and $400 million of incremental capital, supporting the core earnings outlook outlined in our investor deck. We are also pleased to announce our expectation of a six consecutive increase in our quarterly dividend for the third quarter of 2019 to $0.25 per share, or an 11% increase over the second quarter of 2019.

With that, I'd like to turn it over to Dave Bryant to discuss our financials.

David J. Bryant -- Chief Financial Officer

Thank you, Matt, and good morning. Our GAAP net income allocable to common shares for the three months ended June 30, 2019 was $6.3 million or $0.20 per share, and was $11.8 million, or $0.38 per share for the six months ended June 30. Year-to-date, we've paid out common share dividends of $0.425. The growth in our core earnings is being driven primarily by our net investment production. Accordingly, we saw a net interest income increase by $1 million, or 7%, as compared to the first quarter of 2019, and by $2.1 million, or 15% over the second quarter of 2018.

The following material adjustments were made to net income to arrive at second quarter core earnings. First, a $1.3 million, or $0.04 per share add back for evaluation adjustment on a loan included in the strategic plan, which I will cover in more detail. Second, a $700,000 or $0.02 per share add back for the non-cash amortization of discounts associated with our convertible note borrowings. Third, a $400,000, or approximately $0.01 per share add back for non-cash equity compensation. And Forth, a $200,000, or approximately $0.01 per share add back for the non-cash increase to our general loan loss reserve. The balance of the 2Q adjustments, net to deduction of $47,000 and of course are listed in schedule one of our earnings release.

Furthermore, the $0.28 of core earnings for 2Q comfortably covers our $0.225 dividend paid. One of the remaining loans in our strategic plan has the underlying property completing, some necessary repairs to enhance the value before it is marketed and sold. While the repairs are under way, the in place receiver solicited several brokers' opinions of value as a prelude to marketing the asset. Result of taking these new brokers' opinions and our existing appraisal into account is an additional reserve of $750,000. Additionally, we have estimated $550,000 in closing costs and related fees, which coupled with the revised evaluation total to $1.3 million of additional reserve we've taken this quarter.

GAAP net income adjusted for this reserve would have been $0.24 per common share. GAAP book value excuse me, remained flat from March 31, at $14.06 per common share, and represents a $0.04 from December 31, of last year. We began reporting economic book value in non-GAAP metric at December 31, 2018, in an effort to improve transparency for our shareholders and the analyst community.

GAAP book value per share of $14.06, less the adjustments for an amortized discounts on our convertible notes, and redemption value of our preferred stock, which totaled $0.43 per share deals an economic book value of $13.63 per share at June 30. As a point of comparison, the economic book value at December 31, 2017, was $13.63 per share. And this clearly reflects our book value stability.

Our GAAP debt-to-equity ratio rose to 3.5 times at June 30, up from 2.9 times at March 31. Assets specific debt rose by $314 million during the quarter, primarily due to the portfolio acquisition from C-III Commercial Mortgage and incremental leverage from the issuance of our newest CLO Exantas Capital Corp. 2019-RSO7. Stockholders' equity remained flat as GAAP earnings were slightly above our dividend -- bellow our dividend, I'm sorry and were offset by an improvement in our CMBS bond prices, which is reflected in other comprehensive income.

As Matt discussed, we had strong net CRE loan production during the second quarter of 2019, and we also acquired $13.2 million of CMBS bonds, comprising $7.2 million of fixed rate bonds at a spread of 3.62 [Phonetic] over swaps and $6 million of floating rate bonds at a spread of LIBOR plus 2.20%. [Phonetic]

Loan payoffs and paydowns were $153.6 million with the spread of LIBOR plus 4.44%. And these loans had an average life of 25 months. Our positive net loan production includes the loan portfolio acquisition from C-III Commercial Mortgage at the end of May. And of course, we will see the full benefit from that acquisition to our run rate earnings profile in the third quarter of 2019.

After the quarter, we redeemed our 2017 CRE 5 CLO after a 24 month lifespan. We had recently seen our CLO's lifespan average approximately 36 months. But as the floating rate loan market was impacted by the reduction in loan spreads over the last couple of years, borrowers took advantage of the favorable terms and refinanced out of their loans once their minimum interest periods expire. Looking ahead, we expect to redeem remaining $21 million of 8% convertible notes when they mature January 2020.

Lastly, I want to reiterate that all of our loans have LIBOR floors. In a lower interest rate environment, LIBOR floors do provide some asset yield protection. On investment returns would also be enhanced by a decline in the corresponding cost of our liabilities. Since the start of 2018, we have originated or acquired $1.5 billion of CRE loans with a weighted average LIBOR floor of 2.04%. And these loans are largely still under their minimum interest period protections.

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

Robert C. Lieber -- Chief Executive Officer

Thank you, Dave. And as Andrew said, this has been one of our most productive quarters and you can see our long-term operating strategy remains on track. We continue to grow our portfolio and strategically deploy capital, keeping us on track to reach full deployment at the end of 2019. We acquired a high quality portfolio of loans, which are accretive to core earnings. Economic book value increased from last quarter, and we will be recommending to our Board that we raise our dividends at $0.25 for the third quarter of 2019. Based on our progress, we remain optimistic and look forward updating you further on our next call.

With that, I'd like to ask the operator to open up the call to any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question is from Steve DeLaney with JMP Securities.

Steven DeLaney -- JMP Securities -- Analyst

Good morning, everyone, and congratulations on your continued progress. Obviously, it looks like the strength in earnings was attributed to the heavy deployment, I think Matt mentioned the figure of $476 million from all the investment categories. But we also noted, we were looking very closely at repayments because of how competitive things are and it seems like there's a lot of bridge-to-bridge type of activity going on. So we saw $137 million in the -- I guess I'll call it the originated portfolio, about 8% on the quarter, which obviously lower prepayments helps as well. So I'm curious if looking at the portfolio now and like we should consider it one combined portfolio, I guess, with the portfolio, but can you give us some color on what you see as your repayment outlook for the second half of this year?

Andrew L. Farkas -- Chairman

Thanks, Steve. Paul, do you want to?

Paul Hughson -- Head of Commercial Real Estate Lending

Okay. I mean, I think as you mentioned with spreads have been compressed with LIBOR have been compressed, and as Dave mentioned, our loans having floors.

Steven DeLaney -- JMP Securities -- Analyst

Yes.

Paul Hughson -- Head of Commercial Real Estate Lending

We expect that there will be prepayments in the second half, as we have loans that come closer to the completion of the fruition of our -- their business plans. There are very few of our loans that have gone bridge-to-bridge.

Steven DeLaney -- JMP Securities -- Analyst

Okay

Paul Hughson -- Head of Commercial Real Estate Lending

Most of the prepayments that we've experienced are at assets where the business plan has been completely asset is either refinanced by putting us permanent capital structure in place or so.

Steven DeLaney -- JMP Securities -- Analyst

Got it.

Paul Hughson -- Head of Commercial Real Estate Lending

And I think the -- kind of the near term repayments that we're looking at, I think generally fall into those categories.

Steven DeLaney -- JMP Securities -- Analyst

Okay, that's helpful. But it would seem like conditions in the market that -- and just from our standpoint as analyst and how we're trying to -- you have $350 million to $400 million that which you say of capacity, I'm just trying to kind of balance, that we -- should we assume that, that capital could likely be deployed by the end of the year, or will we be fighting repayments that may make it impractical to get another $350 million or $400 million deployed on a net basis?

Robert C. Lieber -- Chief Executive Officer

I think in general, we've guided that it would be our expectation, as we pursue our aggregate capital deployment, as we've guided the The Street team [Phonetic] that the inclusive of net of payoffs, we would expect to approach that level around year end, this year. Obviously, it's very difficult to predict exactly when payoffs will occur. But in general, I think it was our expectation relative to last year that, that activity would slow down a little bit, what I mean is by payoffs. And as a result, we do think, as you saw last quarter, I think it was about $113 million, this quarter it was quite a bit higher. But even excluding the portfolio acquisition, it was about $100 million of net deployment. We would expect to continue to see that trend play out and that our net deployment would continue to rise.

Steven DeLaney -- JMP Securities -- Analyst

Okay.

Paul Hughson -- Head of Commercial Real Estate Lending

The C-III loans also are seasoned and they have different type of call protection. So the amount of call protection remaining on the C-III loans is minimal.

Steven DeLaney -- JMP Securities -- Analyst

Right. Okay.

Paul Hughson -- Head of Commercial Real Estate Lending

Right? So the -- what's -- what drives -- what will drive the refinancing decisions, mostly in those cases is how far along they are on getting to a place where they could put their longer term capital structure in place. Because if you're moving toward that structure, the frictional cost of refinancing again for floater and then to go to effects, is pretty significant unless your unless your plan has stalled.

Steven DeLaney -- JMP Securities -- Analyst

Got it. Okay. And Matt, you mentioned that C-III itself is out of the lending business. Were you referring just to senior floating rate loans, similar to what the REIT does, or because I would assume that C-III is still doing conduit lending? So if you could clarify that, that would be helpful.

Matthew J. Stern -- President

C-III is still doing conduit lending. And that maybe was a little bit confusing in the tax, but the lending that is -- that could conceivably be deemed to be competitive to the REIT, C-III has exited.

Steven DeLaney -- JMP Securities -- Analyst

Yes.

Matthew J. Stern -- President

So the floating rate business C-III is no longer making floating rate loans of any stripe. C-III it is making fixed rate conduit loans.

Steven DeLaney -- JMP Securities -- Analyst

Okay, great. That -- I thought that was the case, so I just wanted to clarify that, so we don't misrepresented in our note. Well, thank you so much for the comments. That's all I have this morning. Appreciate it.

David J. Bryant -- Chief Financial Officer

Thanks for your support, Steve.

Robert C. Lieber -- Chief Executive Officer

Thanks, Steve.

Steven DeLaney -- JMP Securities -- Analyst

Got it.

Operator

[Operator Instructions] Next question is from Stephen Laws with Raymond James.

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning.

Matthew J. Stern -- President

Good morning.

David J. Bryant -- Chief Financial Officer

Good morning.

Stephen Laws -- Raymond James -- Analyst

I guess, first, you guys should be commended. I was looking back at your decks from one and two years ago and you really -- you guys have done a nice job of executing strategic plan, what's producing legacy assets and net income, return of 11% quarter over six. [Phonetic] So it's been a nice job there. Following up on Steve's question, sounds like you guys expect full deployment end of year, or close to that. As we think about 2020, and potential growth from there, are there current assets that maybe weren't identified in the strategic plan that maybe you'll look to optimize? Do you think you'll see a pickup in repayments that will result in kind of a net flat portfolio size in 2020? Or do you think you'll be back in the market sometime the first half year kind of thinking about options of growing the balance sheet and increasing capital base?

Robert C. Lieber -- Chief Executive Officer

I think we don't want to get too much into projections here. We talk about this going forward here. I think that we're optimistic about the momentum that we're going here. And we're constantly evaluating what our capital market choices might be. We haven't made any decisions about any of that. Here today, our focus is on getting the continued deployment of the remaining availability that we have gone and reported on a -- from -- to earnings and our dividend.

Stephen Laws -- Raymond James -- Analyst

Okay, fair enough. And then I guess, to bring things back much more near term, Dave, I think you commented in the -- in your remarks about we'll see an additional benefit in Q3 from the full quarter impact of the acquired portfolio, which was above market spreads. What data that close or start contributing in Q2, so we can kind of think about that when we looked at our model for what the full quarter impact might be?

David J. Bryant -- Chief Financial Officer

Yes. As Bob said, it was about two thirds through the quarter, so by the end of [Speech Overlap] end of May.

Robert C. Lieber -- Chief Executive Officer

May 28. [Phonetic]

David J. Bryant -- Chief Financial Officer

And so it was only one-third of an impact in this particular quarter.

Stephen Laws -- Raymond James -- Analyst

Great. That's helpful. And then kind of bigger picture, Bob, when you think about, you guys invested in theory [Phonetic] that you've got the CMBS portfolio. Relative to each other, which you find more attractive now, is clearly the portfolio acquisition was kind of a one off but investment. But as your normal course of business, how do you think about allocating capital between your different investment options?

Robert C. Lieber -- Chief Executive Officer

So we're looking at where we can find the best risk adjusted returns in the real estate debt space, whether that be on the floating rate loans, whether that be in CMBS, or whether that be other kind of real estate credit investments. I think we've guided that around portfolio occasion kind of 65% plus, which would be in our floating rate, first mortgage business, and the balance we made up by where we see the most attractive risk adjusted returns exists.

David J. Bryant -- Chief Financial Officer

Yes. Consistent with what Bob said, I think if you look at our investor presentation, we expect the loan portfolio to represent in the 65% to 75% range long term. The balance of that today is in our bond portfolio. I think if you look at our portfolio today, it's closer to 80:20, but we continue to see opportunities in the bond side, and look for other opportunities to deploy capital. And it really does evolve, just depending upon how the markets behave.

Stephen Laws -- Raymond James -- Analyst

Great. And lastly, on the financing side for the CMBS securities, can you talk about advanced rates and the cost of that financing? What type of leverage you're able to put on CMBS, and, maybe how that's changed in your -- say, over the last year, if that's the case?

David J. Bryant -- Chief Financial Officer

It certainly depends what type of bonds you're financing and what we're buying. We have a pretty -- a decent variety. Obviously, we have down the fairway conduit oriented CMBS that we buy, but there are other single assent, single borrower and agency oriented bonds that we buy. So it will depend and obviously, where it sits in the stack. But the financing against those bonds has remained attractive, consistent with what we're getting on repo on the loan side. And I would say, in general, leverage is about the same as we can see on the loan side, in terms of our normal repo. But advanced rates are -- I'm sorry -- the rate that we are charged is quite a bit lower on the bond side than you tend to see on the loan side.

Stephen Laws -- Raymond James -- Analyst

Great. Thank you for taking my questions. And again, nice job on the business developments over the last couple years.

Matthew J. Stern -- President

Great. Thank you.

Robert C. Lieber -- Chief Executive Officer

Thanks for your questions, Steve,

Operator

There are no further questions at this time, so now I'd like to turn it back to management for any closing remarks.

Robert C. Lieber -- Chief Executive Officer

So we want to thank you all for joining us for the second quarter earnings call. And we look forward to speaking again in a couple of months, and updating you on our third quarter progress. Thank you, all.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Steve Landgraber -- Senior Vice President of Corporate Finance

Andrew L. Farkas -- Chairman

Robert C. Lieber -- Chief Executive Officer

Matthew J. Stern -- President

David J. Bryant -- Chief Financial Officer

Steven DeLaney -- JMP Securities -- Analyst

Paul Hughson -- Head of Commercial Real Estate Lending

Stephen Laws -- Raymond James -- Analyst

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