Crystal River Capital, Inc. Q2 2009 Earnings Call Transcript

Crystal River Capital, Inc. (CYRV)

Q2 2009 Earnings Call

August 11, 2009 4:30 pm ET

Executives

Bill Powell - President and CEO

Craig Laurie - CFO and Treasurer

Jon Tyras - VP and General Counsel

Analysts

Robert Waldorf - Private Investor

Garry Claw - Private Investor

Bob Mikhail - Private Investor

Kevin Hanrahan - KMH Capital Advisors

Presentation

Operator

Welcome to the Crystal River Capital Second Quarter 2009 Earnings Conference Call. My name is Kelly, and I'll be the coordinator for today’s presentation.

Before we being I’d like to point out that some of that statements made on this conference call maybe forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933 that involve risks, uncertainties, and assumptions with respect to Crystal River, including some statements concerning the transactions described on this conference call, future results, projected sector returns, plans, goals, credit market conditions, and other events that have not yet occurred.

For a description of factors that may cause Crystal River's actual results to differ from those expressed in these forward-looking statements, please refer to Crystal River's 2008 Form 10-KA, the second quarter 2009 Form 10-Q report, and its other reports filed with the SEC, which are available on Crystal River's website. Please refer Crystal River's earnings release which is available on the company website at www.crystalriverreit.com, for a reconciliation of any non-GAAP financial measures used during this call.

With that, I’ll now turn the call over to Mr. Bill Powell, Crystal River's President and Chief Executive Officer. Please go ahead, sir.

Bill Powell

Good afternoon everyone and thank you for joining us to review Crystal River's second quarter 2009 results. With me today are Craig Laurie, our Chief Financial Officer and Jon Tyras, our Vice President and General Counsel.

I will begin by making a few remarks about the current market environment, will provide a recap on the plans and objectives we set out last year, and the progress that we have made towards those objectives. I’ll then hand the call over to Craig who will walk you though our financials in more detail.

Capital market condition continue to deteriorate during the second quarter of 2009, while some signs of stabilization in certain surfaced for long anticipated losses from the significant residential value declines have begun to manifest themselves in residential mortgage securitization. Additionally, delinquencies increased rapidly in the commercial real estate sector.

These factors combined present a challenging environment for the type of securities that are held in Crystal River's investment portfolio. Continued limited liquidity has led to low market values for many of the assets, which resulted in a continued negative GAAP equity position at June 30th, while continued credit losses have led to a decrease in cash flow.

In our second quarter of 2008 earnings conference call we communicated our goal of reducing short-term debt. In a prevailing credit environment, we felt that long-term asset should either be matched with long-term debt or on debt free. We are seeing volatility in asset value over the subsequent 12 months to June 30, 2009 indicates that our goal of reducing short-term debt should remain a priority.

We also believe that in order to run our business effectively amidst this volatility and liquidity, our fundamental focus needs to be on optimizing the current and expected cash flows of our assets. During the second quarter we received approximately $5 million in cash flow from operations and investing activities and utilized the cash to pay down the liabilities or our CDOs and pay the April 2009 quarterly dividend.

This cash flow was down from approximately $7 million in cash flow from operations and investing activities in the first quarter of 2009, and as a result we were unable to reduce the balance of our funding facility during this quarter and at the end of the second quarter, this balance remains at $28.9 million.

Regarding performance of our investment portfolio, during the second quarter of 2009 in our CMBS portfolio, the weighted average delinquency rate was 2.67% compared to 1.22% in the first quarter and our prime residential portfolio at a weighted average delinquency rate of 11.73%, which is up from 10.42% in the previous quarter.

I will now hand it over to Craig Laurie, who will address some of the specifics of the second quarter.

Craig Laurie

Thank you, Bill. I'll begin with the review of our balance sheet, followed by a discussion of our earnings for the quarter. Total assets at the end of the second quarter totaled approximately $407 million. Included in this total is our $291 million investment portfolio with commercial real estate and direct real estate loans accounting for approximately 80% of the portfolio and securities accounting for the other 20%. About 74% of the securities portfolio is owned within our two CDO structure.

Commercial real estate totaled approximately $225 million at the end of the quarter and consists of three high quality office buildings that are 100% leased on a triple net basis to JPMorgan Chase. The carrying value of our CMBS and RMBS portfolio at June 30, 2009 was $50.3 million and $7 million respectively.

Turning to the liabilities side of the balance sheet as Bill mentioned, at June 30, 2009, the company was unable to pay down the balance of its secured revolving credit facilities from the balance of March 31, 2009 and the balance remained at $29 million. The credit facility is currently the company's only short-term debt outstanding.

The GAAP net loss for the three months ended June 30, 2009 totaled $6.5 million or $0.26 per share. The primary contributor to the second quarter of 2009 net loss was a $14.3 million impairment charge against the company's available-for-sale securities, which was partially offset by a realized and unrealized gain on derivatives totaling $6.5 million.

That concludes my comments on the financial results. I'll hand it back to Bill for a few final comments, after which we will be happy to take any questions that you may have.

Bill Powell

Thank you Greg. In conclusion, we remain committed to the execution of the strategy we outlined, namely to create and preserve liquidity for Crystal River. During the third quarter of 2009, we will also be paying particular attention to the rising delinquency rates within our CMBS portfolio.

At this point, we'd like to open up the call for questions.

Question-and-Answer session

Operator

Thank you gentlemen. (Operator Instructions) We'll go first to [Robert Waldorf], Private Investor.

Robert Waldorf - Private Investor

Hi guys. I wanted to be able to first introduce myself. I've been a private investor for Crystal River since, I guess the stock hit about $0.50 a share. So, the question I had, has to do with realizing the difference between what you guys have written down your assets to and the face value of the underlying securities.

I understood at one point that there'd be some loan rollover in mid-to-late 2009. I am wondering if it is possible to really at what point is the face value of mature -- of the securities going to come in through the income statement. I mean shouldn’t you start realizing the face value of those securities as they refinance or pay off?

Bill Powell

Hey thanks, this is Bill and the most of the securities within the portfolio are longer-term securities and if you go to the 10-Q and look at item two, which is the management discussion of the portfolio. There are some very informative charts in there that are segregated. There is a chart for the CMBS portfolio, one for the prime residential portfolio and one for the subprime and within those charts, for each of those asset classes, we show the weighted average [values] and we also show the expected principle that we – our current cash flow projections tell us that we expect to receive back, and now would be number that are you’re looking for in order to compare against our [stated objectives].

Robert Waldorf - Private Investor

Okay. And maybe a follow-up question I guess because [lots of this indeed] has to do with -- running this company has a lot of corporate expenses. Has there been thoughts as to rolling out into another one of books, I guess band, other companies or just running as a private REIT?

Bill Powell

This is Bill again. I would say that the expenses that the company incurs, I would say that we have been very focused on controlling that and making sure they are not outlined for a company of this nature. As to your other question, certain aspects of that would be in the domain of our Board of Directors and if the Board of Directors were to entertain any such ideas they would disclose it appropriately, at the appropriate time.

Operator

We’ll hear next from [Garry Claw] a Private Investor.

Garry Claw - Private Investor

Yes, I try to read your materials yesterday including the 10-Q, your 8-K and of course extremely complex for any one who wasn’t I guess for instance accountant. And I guess I need some bottom line information, and that is I think the two of the conference calls ago some asked the basic question, are you viable, are we basically just doing a slow death watch or is this somewhere you can never go back to the good old days not the, super bubble good old days, it shouldn’t have existed, of set prime games and all that. But back to mortgage REIT assets had made money over the years and some still are and of course there are new people who are entering now who are in a good position.

So, I really my first question and do want to follow-up would be a very broad question for the CEO or somebody there as to where are we going long-term? I know you don’t know for sure but obviously you planned for those things and we're just happy to get what we have and we should take our dividends and plan to sell it at the 90% loss I have on the original securities or is there any hope that this will eventually come back as many companies are.

Oil companies [Synergy], I remember was trading under the dollar one time, a lot of companies that had forms of different nature two or three years ago, El Paso is an good example have come back dramatically in the market, other things like LTV, either went bankrupt or went down to pennies and stayed there. So, I know it's a broad question and you can't give me a definite answer but I'd like some color to the extent you can?

Bill Powell

This is still Powell, I'll try to answer the question. As we have talked about in previous calls and in our disclosures, the value that what we receive from our investment portfolio, it depends upon the timing and the amount of the cash flow that we received and I mean both principle and interest and I can't give the type of guidance or with certainty that you're looking for. All I can tell you is that we do continue to manage portfolio in accordance with the stated objectives, which is to maximize the cash flow from the portfolio and to eliminate our short-term debt.

Garry Claw - Private Investor

Well, do you have money available to conduct new investments or is it just a question of hoping that to your old investments don't go anymore solid than they already are?

Bill Powell

At the present time, the cash flow that is produced by the portfolio, we used to pay the expenses of the company and too reduce the short-term debt and we do not have excess amounts above that with which to make new investments.

Garry Claw - Private Investor

But your real estate that own, those leased JP Morgan things are actually 100% solid, probably more solid than any other company in a sense that 100% of your real estate is in good shape. Is that sense right? The problem is that CMBS is not the actual real estate, right?

Bill Powell

JP Morgan is a very good tenant for this property and we do receive a very nice income stream from owning those properties, which we've also disclosed in the 10-Q.

Garry Claw – Private Investor

Am I correct that the problem is – am I correct that the problem is in these in effect these three securities, called CDO, CMBS and all these other strange acronyms that we never dealt with in the old days that’s where the problem is and will remain, correct?

Bill Powell

What I would point you to Mr. Claw is, look at this shareholder letter that we published and in this shareholder letter we illustrated the delinquency rate that are within the CMBS portfolio and the RMBS, the Residential Mortgage-Backed Security portfolio and you'll see that those delinquency rates are rising and you are right, those are the areas that management is focused right now, yes.

Operator

We'll hear next from [Bob Mikhail] a Private Investor.

Bob Mikhail - Private Investor

Hello, I'd like on the, little bit on an explanation on the letter to stockholders, in regards to this comment that they've noticed the IPOs recently and the debt market and it does say that we have no money to take advantage of any of the opportunities. I'm just wondering is Brookfield looking to do something with Crystal River or are they looking to do something individually and if you could just provide a little information for me? Thank you.

Bill Powell

This is Bill again, thanks for the question. I can't speak for our manager's parent company, but I can note that, that our Board of Directors continues to oversee the manager of Crystal River, and as you noted, I mean given the fair market conditions that are lack in investable cash, we are unable to take advantage of new investment opportunities. But the focus and as I said earlier, our focus is to continue to manage the existing portfolio in accordance of the stated objectives, which is to maximize the cash flow in order to pay down our short-term debt, and it would not be appropriate for me to talk about any activities that parent company will [enact].

Bob Mikhail - Private Investor

Okay. I guess, the only part of that is a little bit confusing to me is that its -- you're saying you can't say anything but it is mentioned in the letter. So I don't know I just -- I don’t have a clear picture of it and I guess your explanation is you can't really say anything beyond what you have said so. I guess that's all I have to really say.

Operator

We'll hear next from Kevin Hanrahan with KMH Capital Advisors.

Kevin Hanrahan - KMH Capital Advisors

Hello Mr. Powell can you hear me okay?

Bill Powell

Yes I can.

Kevin Hanrahan - KMH Capital Advisors

Okay. I had a few questions. I think in the past quarters you have given cash flow from operations and I didn’t see that in the release today. Could you tell us some cash flow numbers?

Craig Laurie

Sure. This is Craig. We did disclose within the shareholder letter cash flow from operations and investing activities of $5 million versus $7 million last quarter. That can be found within the 10-Q on the statement of cash flow.

Kevin Hanrahan - KMH Capital Advisors

Okay. I could look at the Q, you said there will be -- I just looked at the press release, I thought it was in the press release for the entire quarter?

Craig Laurie

No, it is not, it is in the 10-Q.

Kevin Hanrahan - KMH Capital Advisors

Okay. If I could ask a follow-up question, I saw in the annual report, which I have Mr. Powell you were saying that the company, if you did have excess cash or free cash you would look to invest it in real estates. And I was of the opinion that given that some investors in the stock have lost nearly 90% of their money, it would be great if you could either boost the dividend or buy back share.

I know the company did buy back some shares maybe in the fall of 2007, and before you answer that I probably should congratulate yourself and [Chris]. I think he took some early enough action to maybe Crystal can survive, at least it has still maintained the dividend. So you have done better than some of your peers. So I guess that's a congratulation and I hope that you will give the shareholders maybe equal consideration in new investments.

Bill Powell

Kevin this Bill, so, you’re question is asking about what we would do with -- what types of new investments we would make and I think the way I would answer that is just short of emphasize that once again that right now we don’t have investable cash and no one expects to resume investment activity unless we do raise additional capital, because for at the time being we are taking the excess cash that we do produce and we are using it to pay down our short-term debt and that is our stated objective and that is what we are focused on. And so we’re simply not in a position to making investments at this time.

Operator

And gentlemen I’ll turn the conference back to you for concluding remarks.

Bill Powell

I’d like to thank everybody for joining us for the call today. And we look forward to speaking with you in future.

Operator

That concludes today’s conference. Thank you all for your participation.

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Comments

[bjamebon3]

when r the stockholders going to get their dividend back,when they cut it out in oct the stock plunged from 1,30 ash to .40 a sh

Jan 21 03:25 PM