Home BancShares, Inc. (HOMB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Home Bancshares, Inc. Fireside Chat, retail and other CRE, conference call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Donna Townsell, Director of Investor Relations. Ma'am, please go ahead.

Thank you, Jamie, and welcome, everyone, to our next series in our fireside chat. This time, we will be focusing on retail and other CRE. We do have a slide deck that's been loaded to our Home Bancshares website, if you would like to follow along with that. And I'll direct your attention to our forward-looking statement. Our normal group of our management team is here with us today. We'll be available for questions at the end. And I will go ahead at this time and turn the call over to our Chairman, John Allison.

Thank you. Welcome, everyone. This is a continuation of something Donna started a while back we had called fireside chat. And someone who's wary of doing this, Donna said, "They said you normally don't act this way." And Steve said, "Well, we're normally not in the middle of a pandemic." So still, we -- since we don't -- we're not seeing you -- physically seeing people today, we thought it was important to cover our assets. And it's been good for us because we took a deep dive into hotels, and we learned a lot there. We learned that portfolio is better than we thought it was. We learned that the different categories of the hotels has made a difference in the performance of the hotels. So it's a good learning lesson for us all. And I think Kevin may comment on that today as he leads this. Kevin Hester will lead, our senior lender, this entire presentation today. But hotels are performing as we thought they would perform. The only ones that are dragging behind are the airport hotels. We have about $75 million, $80 million worth of airport hotels. They're kind of dragging. But the rest of them are doing fairly well. We just came off a great quarter, as you saw, and July looks like it's tracking with June. So hopefully, we're in -- hopefully, we're lining up for another good quarter. I told you I thought we were properly positioned to have a bang-up year for Home. And that's what it looks like at this point in time, provided we don't have some more seasonal interruptions in it. But if we don't have seasonal interruptions, this thing could be -- it could be a great second half of the year. So having said all of that, we cover -- I think I said we'd cover hotels then CCFG, and today is retail and other. Kevin, is that correct?

That is correct.

Well, why don't you take it from here, if you're ready to go, and give them whatever kind of news, good news, bad news or whatever it is?

You bet. Thank you, Johnny. Before we start on today's topics, I just want to give you a little update on what Johnny was mentioning on the hotel portfolio. We did a little more breaking down after that call, and we show about 79% of our hotel dollars in 3 segments that appear to be faring better than maybe some of the others, and that would be: coastal properties at about 37%, extended stay at 27% and then interstate property at 15%. We only have about 13% in what you would consider to be urban central business districts and about 6% in what would be considered airport hotels. So -- and those are 2 segments that are struggling more than some of the others. Also tracking occupancy in about 58 of our largest properties on a month-by-month basis, and in June, 53 of those improved. We're right here at the end of July. I'm looking forward to seeing those numbers as early as we can next week or the week after to kind of update that ongoing analysis. So into today's topics, which are retail and what we call other CRE, which is really things that don't fit into our other CRE categories. So diving into the slides that we have, on Page 3 of the slide deck. After the first couple of introductory slides, you'll see that we have about 341 loans that total $418 million. The largest of these loans is $30 million, and only 6 of these loans are over $10 million. So overall, it's a pretty low-balanced portfolio. That will make sense when you see the next slide. The LTV is low at 54%. A little over 50% of these balances are in Florida, another 26% are in Arkansas. So over 3/4 of these retail CRE balances are in our community bank footprint. As you can see, the Florida retail loans are geographically dispersed, with no more than 20% in any particular geographic area of Florida. Texas is third at 13%, but that's largely because the $30 million loan that we discussed just above there as being the largest loan is in that balance. The $41 million of remaining balances are comprised of 21 properties that are spread over 11 states. On to the next slide, where we cover the type of retail center. So you can see that shopping centers make up about 3/4 of our retail CRE portfolio. About half, or over half, of those balances are centered in the strip center and neighborhood center segments, which generally consist of smaller properties, where our most prominent tenant is a grocery or convenience store. These loans have an average balance of right at $1 million. They have fared well overall, with a July collection rate of around 90% on the weighted average. We only have 17 loans that total $134 million that would fall into the larger facility types of power centers, regional malls, community centers and lifestyle centers. All of these regional mall credits that total the $83 million there, all of those are either related to an insider or are to a very successful mall redeveloper. I am encouraged to share with you that the overall weighted July rent collections were at 83% for this entire group. We believe that's a very strong number, given where we are at this point in time. And you can see how that breaks down based on the kind of the shopping center type. And it would -- it kind of tracks with what you would expect with the regional malls and the power centers having a little lower number and the smaller properties having a higher collection percentage at this point. The next slide covers deferrals. As we discussed a couple of weeks ago in the earnings call, we were very liberal with the first 90-day deferral process. But our second deferral process is very defined, and it requires an approval process very similar to the new loan request. Overall, as of a couple of days ago, we had worked through the $2.2 billion of the overall $3.2 billion in first 90-day deferrals. At that point, 69% of those loans were going back to P&I payments at this time, and another 7% will be paying interest for the next 90 days. That means that only $500 million of the first $2.2 billion that we've reviewed so far are continuing for a second deferral -- full deferral. Updating that to today, we've reviewed $2.4 billion or 75% of those first deferrals, and the percentage that's going back to P&I has increased to 71%. So very strong movement back on to P&I. I believe that on the earnings call, we provided an estimate of second deferrals that ranged from $1.3 billion to $1.5 billion. Based on 75% of the precinct's reporting, I think we can call a winner here, and I'd say that we'll come in below that range. Specifically related to these CRE -- retail CRE loans, we've worked through 89% of the balances, and 88% of those are going back to P&I payments. Only $20 million is continuing for a full deferral for the next 90 days. Overall, with the concentration in lower-balanced properties that are primarily within our community bank footprint, combined with a strong July rent collection and a small balance of loans continuing on deferral, I feel good about this segment of our CRE portfolio. On to the other CRE. This balance of $725 million consists of 600 loans, with the largest loan being $36 million and only 12 loans over $10 million. The LTV is low here, also at 57%. Geographically, these are even more heavily centered in our community bank footprint, with 83% combined in Florida and Arkansas. And again, you can see that the loans in Florida are dispersed well throughout the state. As of property type, because this is a catch-all segment, you'll see several types of properties here. The single-largest segment in this group would be senior care facility. For us, this is split about 60-40 Florida versus Arkansas. Almost all the Florida credits are assisted living facilities, and most of those are still in the stabilization phase. A very large percentage of these credits have a substantial institutional sponsor, and they were underwritten with outsized stabilization budgets. Where additions have been needed to this point on individual projects, they've shown the willingness and ability to make those additions. And we feel good about the prospects of these credits once the current event subsides. Most of the Arkansas credits are nursing homes with a very experienced operator, who we've done business with since the beginning of about 20 years ago. As you can see, there are a few other types of properties in this segment but none that would rise to the level of a significant concentration. On to the deferrals with this group. We've worked through 2/3 of the first 90-day deferrals in this group, and 68% of those are going back on P&I payments. A total of about $141 million is continuing on to full deferral, and this is included in the overall numbers that we talked about on the previous slide. The last 2 slides in the deck provide a breakdown of LTV in our overall CRE portfolio: first, by CRE property type; and then by geography. On the property type, you see hotel first, which we covered in June. With the other CRE coverage today, we will have covered the largest 2 segments in our CRE book. As you can see, the LTVs are very low in virtually all of our segments. I would comment on the only segment that's above 60% on this slide being the small balance that's in construction residential-presold. At 72%, this sticks out among the other numbers, but it consists of 1-to-4 family properties, for which an end buyer has already been contracted, and is largely centered with builders with which we have a long-term lending relationship. So we're comfortable with this being the outlier here. On the geography, you see a little more dispersion between the values here. And that's because of the impact of the overall lower LTVs that's noted in the CCFG portfolio, which are centered in a few geographies, namely New York, Miami and Los Angeles. Otherwise, you can see that our LTVs geographically range from 55% to 65%. And we don't have any large concentrations in any particular geography, with the largest-single geography only being about 11% of overall CRE loans. That brings me to the end of the slide presentation, Johnny. And I'll bring it back over to you, and I'll answer any questions that you might have.

That's great. Anybody who wants to ask a question, we'd be open to those questions. I know it's -- we've covered a lot of territory in a short period of time, but I think it tells the tale for the number of loans that are going back on regular P&I is strong. So I think you said 69% and 7%, 76%. Is that right? Or 79%...

Yes. 71% going back to P&I, and another 7% paying their interest during this 90 days. So only about 22%, 24%, something like that.

Yes. That's excellent. So I think you see that the asset quality throughout the company is continuing to where it has. And we've maintained good asset quality in this company, and always have, as you know, and we're continuing to do that. So I think this is a good way to express our belief in our portfolio for everyone. I think this is the proper way to do that. I know most of you analysts are just getting off our earnings season. You're probably thinking why we're having the call now. But we kind of scheduled these along over a period of time, so we would have an opportunity. It's a pretty good job breaking down those portfolios and getting into them, really dissecting as a deep dive. So it's important that we kind of spread out those over a period of time. We have -- before we go with questions, I just have one thing I want you -- we're going to coin a term here. I'm not sure what the term is going to be, but we're working on the term that we think will be a percentage number that will be important for everyone that will help you guys, particularly you analysts when you're looking at the revenue of a company and how that breaks down. I think you look at the -- some companies have good revenue. But when you look behind that, you look at their margin, and then you turn around and look at their efficiency ratio. And this company leads. Home has led in margin, and Home has led in efficiency for years. So revenue is important, but we're going to coin a term as a percentage of expense to revenue. I don't know, I may call it train-ride money, you all heard that out of me before. So maybe at some point in time that we could do that. So anyway, we have somebody on the board who may want to ask a question. So Donna, if you want to take that?

Yes. Jamie, we'll go ahead and let you take back over for a moment for Q&A.

[Operator Instructions] And our first question today comes from Matt Olney from Stephens.

You started all this, Matt. You started every bit of this when you started asking about our hotels. So you started these -- all these conference calls. Well, thank you for it.

Well, you guys are giving us some good information on Centennial. And hopefully, other banks will follow your lead and also give us some additional details like you guys are. I think it's great to be transparent during these times. Wanted to ask on the CRE retail portfolio. I think you said that July weighted average collections were around 83% amongst all the properties. That sounds good. And then, I guess, that's definitely higher than I would have expected. I can't comp that to anybody else because nobody else has given that to us, other banks that is. So I'm curious if that's changed very much over the last few months before that. In other words, was it in the 70s and worked up to 80%? And if so, kind of what's been the change over the last few months?

Yes. I think Tracy will take a little of that. But I think it would be. I don't have that -- I don't have it specifically for April, May and June to compare it to. But based on comments we've heard from different customers, I would say that has to have increased. Tracy, you want to...

Yes, I think the number matches up, Matt, with what communication we do, Johnny and myself. We talk to our customers, and not necessarily customers that we have the loan on this sector of real estate, but just communicating with them to see what the real world is compared to what we hear from our lenders and our own borrowers. And his number was exactly what Kevin had when I spoke to him about 10 days ago on the 80%, 85%. He indicated like, in his business, and he's a very prominent, successful real estate person and company. And whenever that pandemic hit, they did similar to what banks are doing with their deferral program. They -- he reached out to every single tenant. He's communicating with every single tenant that he has. And so he worked with them just like most banks that we've heard are working with our borrowers. And said that if it was a certain anchor-type retail center, that they were performing fine. Some of them took a 90-day extension. Most of those are back paying today. His word actually was up to 90% when I spoke to him last week. And then he's taken some of those deferrals and set it up on a little amortization that will kick in, in 2021. But Kevin's number surprisingly is exactly what -- I know the conversations Johnny and I've had with our known customers, that not necessarily have all their money borrowed here, but that's the feedback that we're getting on that number.

That's good, Tracy. And I have been on the phone, and Kevin, too, just getting it from -- directly from the field as we had. Actually, one of them yesterday that reported on the call on our hotels called me and is looking at buying another hotel. He said, "Would you finance one?" And I said, "Yes, we would for you." So he's the one in Florida that is enjoying a major V-shaped recovery with his '20 outperforming -- significantly outperforming his '19. So I think it's important, and we've stayed in touch with those people on the ground. And as Tracy was saying, the guy we visited with is a big developer in the state of Florida. And he talked about how he had worked with his tenants, and how he had said you don't have to pay anything now or pay me half now, we'll catch up later. And he said that -- he said he was running about 80-plus percent. Isn't that right, Kevin, I mean, Tracy?

Yes. Yes.

80-plus percent of his revenue, thinking he's going to 90% and then going back up. But he said some of them will take a little longer to catch up than others. But he's taken them one at a time, as we've done here with our customers and looking at the -- what we need to do to help our customers and get through this. And it's not good experience. I've had the hurricane -- you heard me talk about that. I've had the hurricane experience, but that certainly is what we're following here. It worked for us then, and it appears to be working for us now. And I would think it will continue in the future.

Good. And at the beginning of the call, Kevin gave some good stats on the hotels. And you bucketed them into 5 different buckets. I didn't write that down fast enough. Do you still have that in front of you as far as what those buckets are and what the overall amounts are? And just repeat -- go over again the commentary as far as the occupancy levels or kind of the fundamental trends of each one of those buckets?

Yes, sure. The coastal property is at 37%. I don't have the dollars in front of me, but coastal property is at 37%, extended stay at 27%, interstate at 15%. So that's right at 79% -- yes, 79% of our hotel dollars in those 3 segments. And those appear to be probably leading some of the other segments. And then the other 2 numbers I gave were urban central business districts or downtown in urban areas, 13%, and airport at 6%.

So it's 6% of $1.3 billion, that's about $78 million. Is that right? That's about right. So that's about what we got. And those may struggle. Matt, those may struggle along. We may have to do 3 deferments on those until this is over because people are not flying like they were. So -- but even those -- the occupancy grows over with, really, basically 0 and thinking they're back up from there. So even they are doing better. But I guess, if we got to concern ourselves with exposure, we got $75 million, $80 million worth of airport hotels that got -- if they can't make it, got some value, so that's what you got reserves for. But let me say this, as of today, I made the statement on the conference call that we're going to see $0.01 of loss. And as of right now, we do not -- that continues on, and we do not see $0.01 of loss as of yet. If we -- you know how we operate. We certainly will bring it to you, and we'll charge it off, clean it up whatever we need to do and deal with it and move on down the road. But we don't -- there's nothing to deal with yet.

Good. That's good update. And yes, the track record speaks for itself. I appreciate the details. And thanks for hosting the call. Appreciate it.

Thanks, Matt. I know it's a tough time, but when did you finish up all of your quarterly calls? You just finished up?

I finish up tomorrow afternoon so almost there.

Well, I thank you for joining us.

Yes. Thanks for joining. I know how swamped you are. So if -- but we appreciate your support. We won't forget it. Thank you.

[Operator Instructions] Our next question comes from Stephen Scouten from Piper Sandler.

Appreciate you guys hosting this and giving the incremental data here. It doesn't sound like there's any outsized concern around any of the senior living and these other segments that you noted and broke out. But -- and you gave such good color about the hotels. I'm wondering if there was any segment here that you would be most concerned about, could you tell us what that would be? And do you know kind of what reserves you have allocated to each of these sorts of segments on a high level basis?

I'll take the last one first. I don't have that information on the segments here. I think we can probably circle up and probably provide something on that. As far as the segment, we really haven't looked in -- we haven't looked in detail at office. So I'm -- that's probably the next one that we'll dive into. I mean hotel has -- it has its concerns. There's good reasons why. So we'll continue to watch that. I don't have anything particularly that I am that concerned about over anything else. I mean you had individual properties and individual segments that you'll watch, but overall, I don't. I just don't see -- when you look at this LTV slide by property type and you see everything below 60%, that -- I think that cures a lot of problems.

We got -- we have -- from my perspective, Stephen, we got about $7 million or $8 million was of movie theaters. That does -- that's concerning because they're not open, right? That's one of our -- one of our deferrals for the second time around. But when you look back historically at losses, I think I said on the conference call that we had -- we've lost $2.1 million total on hotels over the last 21 years. So -- and that's 2 hotels. I mean that's -- excuse me, that's a guest house. We lost $100,000 in Key West, and we basically lost $2 million on a hotel in Florida because we let them overbuild in the market. We shouldn't have let that happen. So we take credit for that loss. But overall, it's been great. They've continued to perform well. If you go back to your historic losses. I'm still -- I've mentioned that our assisted -- not our assisted living, but our memory care centers, have been some concern of mine over a period of time. They're still a concern. Some of those are doing very well, though. I think we got 6. Is that right, Kevin, about 6 of those? I think 3 of them are a little concerning. However, there's major, major dollars invested equity into those centers. So that's comforting. I guess if push came to shove, we can turn them into a nursing Home when they did fine because it's basically what that is. But that one has bothered me a little bit. Oil and gas, we had, what, $66 million total in oil and gas. And oil prices are hanging in. So I think our -- I think our group's doing okay. They've -- particularly the one we've been in. We've been in a deal for about 10 or 12 years with one customer, and he has done -- they've cut major expenses back doing no more drilling, living off cash flow right now. I think they'll make it. Outside of that, I mean, there might be a onesie, twosie or something, but it is -- it is surprisingly good. Stephen, it is excellent.

Correct, and that's good to hear.

I know we're still getting busted with something somewhere. In a cycle like this, you are. But we don't even have -- even as bad as restaurants are, we don't even have -- well, I think I said we thought we might have one in April, it was about $400,000. But that's really it. It's...

You got more stimulus coming.

Yes, you got more stimulus coming. The PPP program worked out very well. Great job by the government on that program. And they basically did it on the fly, yes. But the banks worked with them. And that program has worked out great, and it has saved lots of small business. And I think we got another one coming, or we haven't?

The proposal is for a second. And so I think most proposals that have been proposed by the Senate Republicans, there'll be good folks that really can -- it will help a lot. Some of it is left over for sure.

I think that will be strong. So...

Stephen, that's what I've been trying to dive into if there's a certain class that we have to do. And Kevin and the entire lending group has proven there's not anything there that's a certain class that's concerned. I think even the deferral meetings that they have a lot of senior-level lenders on the call, and there's been 1 or 2 that we put as -- and why we need to watch this or work with it. But not anything that comes back to us. Johnny said we lost $0.01. I hope he can continue to say that. But...

Well, I think, I guess you could say we're going to lose $0.50 on the dollar on the airport hotel. So I mean, just fill that out. They're just a guess. That's $30, $35 million. And if you're going to lose all of the oil and gas, that's $50 million or $60 million. You'll lose all the movie theater money. And you're going to lose all of the memory -- you're going to lose 1/2 the memory care stuff. So I mean you could visualize in the worst-case scenario, if everything were off $0.50 on the dollar basically means you could have a $175 million loss in the company. But that's probably not realistic for all of that to happen. So -- but I think we've covered the bases. I think Tracy French has been -- he talked that deep dive. And he's been deep -- he's looking for it. As I told you in the conference call, he really is looking for -- he's trying to find something bad. I don't know, maybe it makes him happy. Does that make you happy, Tracy? What's making him happy is he's not finding anything bad. So...