Capital Trust, Inc. (CT) Q4 2010 Earnings Call April 4, 2011 10:00 AM ET
Stephen Plavin – CEO and President
Geoffrey Jervis – CFO
Brent Christ – Sirios Capital
Hello, and welcome to the Capital Trust Incorporated Management Conference Call. Before we begin, please be advised that the forward-looking statements contained on this conference call are subject to certain risks and uncertainties, including but not limited to the continued credit performance of the Company’s loan and CMBS investments, its asset/liability mix, the effectiveness of the Company’s hedging strategy, the rate of repayment of the Company’s portfolio assets and the impact of these events on the Company’s cash flow, as well as other risks indicated from time-to-time in the Company’s Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events or circumstances.
It’s now my pleasure to turn conference over to Mr. Stephen Plavin. Please go ahead sir.
Thank you. Good morning, everyone. Thank you for joining us and for your interest in Capital Trust. With me are Geff Jervis, our Chief Financial Officer; and Tom Ruffing, our Chief Credit Officer and Head of Asset Management.
Last Thursday we announced a comprehensive restructuring of all of the company’s outstanding recourse debt obligations and also reported our results for the fourth quarter and the full year via our 10-K filing. Geff will take you through the quarterly and full-year results as well as through the architecture of the restructuring in greater detail. My remarks will focus on why we restructured and what the restructuring accomplishes for CT.
The balance sheet investments that we made during the peak of the market as well as the debt that we used to fund them have been under great pressure since the market downturn. By year-end 2008 we’ve met over $200 million of margin call and the properties underlying our loans and securities were continuing to trend downward. As a result, in March 2009 we completed an interim restructuring that enabled CT to stabilize its liabilities in particular the recourse REPOs for a two-year period of time subject to debt reduction hurdles that we achieved.
In recent quarters, property values have begun to recover. However, we knew that the extent of recovery necessary for many of our assets was greater than what could be achieved within the term of our senior recourse indebtedness. So commencing early in 2010, we embarked on a plan to restructure our liabilities, to reduce debt and provide the time necessary to collect our assets and avoid being forced to sell them prematurely at deep discounts.
We sought a permanent solution whereby our post restructure liabilities would not require further extension or amendment if the legacy assets under our management perform as we expect with reasonable margin for any unanticipated market or asset-specific issues. We also sought to eliminate all legacy recourse of Capital Trust Inc., so that new capital raise and investments made in CT would not be subject to the legacy liabilities.
We considered many structural alternatives and several different capital sources to fund our plan before reaching agreement with Five Mile Capital Partners on a mezzanine loan to a newly formed subsidiary of CT that would acquire the Legacy Assets subject to the REPO debt. The $83 million Five Mile loan funded the cash cost to extinguish the senior credit facility and junior subordinated notes which had a combined balance of 242 million as well as a paid out to the REPO providers and other transaction costs.
By raising the new capital at the subsidiary level rather than at the parent, CT common shareholders were not diluted and our NOLs were preserved. Although CT’s ownership interest in the legacy assets was reduced by the economic participation in the new subsidiary of Five Mile and the former holders of the senior credit facility and junior subordinated notes.
This form of restructure also enabled CT to maintain full economic and management control of CT Investment Management Company or CTIMCO, a wholly owned subsidiary that manages its parent four CT sponsored private equity funds, the four CT CDOs and one-third party-sponsored CDO, the new legacy asset subsidiary and loan workouts to the restructuring as a CMBS special servicer. We have maintained all of the capabilities of our platform and are now very well positioned to continue our capital raising, investing in asset management activities.
Throughout the restructure process, our finance, accounting and capital markets team led by Geff Jervis demonstrated great effort, structural creativity, command of a myriad of highly technical REIT tax and accounting details and the perseverance necessary to complete a complex transaction that required the unanimous consent of well over a dozen counterparties with different motivations that had to agree on structure, economics and documents and close simultaneously. I’d also like to thank Five Mile and all the other parties involved in the transaction.
With that, I’ll turn the call over to Geff to run through the restructure in greater detail as well as the quarterly and full-year results.
Thank you, Steve and good morning everyone. Before we get into the restructuring, I want to spend a moment on Q4 and full-year 2010 results that were filed in our Form 10-K on Thursday afternoon.
For the fourth quarter, we recorded net income of $9.9 million or $0.44 per share. The quarter’s income was driven by $9.7 million of operating income on the loan and securities portfolio, $5.4 million of other revenues derived primarily from our investment management subsidiary CTIMCO, $7.6 million of net loan loss recoveries all offset by $10.7 million of securities impairments and G&A of $4.6 million.
For the full year, we recorded a net loss of $185.3 million or negative $8.28 per share. The year’s loss was driven by $34.8 million of operating income from the loan and securities portfolios, $15 million of other revenues derived primarily from CTIMCO offset by $221 million of net loan losses and securities impairments and G&A of $18.8 million.
At year-end total assets on the balance sheet stood at $4.1 billion, down $115 million from Q3 as the portfolio continues to experience repayments (ph). Total liabilities were $4.5 billion and shareholders’ equity was negative $411 million. On a per share basis based on 22.4 million shares outstanding, book value per share was negative $18.33.
Obviously our balance sheet presentation continues to be impacted by the adoption of FAS 167 in Q1 2010, as evidenced by the fact that while we made no new balance sheet investments between yearend 2009 and yearend 2010 our new consolidation regime required us to book over $2 billion of new assets and liabilities doubling the size of our balance sheet.
As we move forward, we will be making supplemental disclosures that will more clearly show what we believe to be our true economic portfolio, net of excessive consolidation as well as allow investors to track their financial performance of the newly restructured company.
As Steve discussed, last Thursday we closed the transaction that restructured 100% of the company’s recourse liabilities. In order to understand the restructuring a brief summary of pre-restructured CT is helpful.
Capital Trust has two primary lines of business, the balance sheet investment portfolio and investment management. The balance sheet investment portfolio can be divided into the CDO finance portfolio and the REPO finance portfolio. First, our CDOs. Our four balance sheet CDOs represent term matched, non-recourse financing for their collateral assets and, as we’ve mentioned in the past, these CDOs have all triggered cash flow redirection provisions. From an economic standpoint we believe that only CT CDO III has any real prospect for a recovery to the classes owned directly by us.
Our repurchase financings provided by JPMorgan, Morgan Stanley and Citigroup were all previously restructured in 2009 and represented full recourse liabilities with material restrictive covenant. Most important these facilities had a date of maturity of March 16, 2011. On Thursday the three REPOs had an aggregate balance of $340 million and were secured by 39 loan and security positions with an aggregate face value of $797 million, adjusted book value of $528 million and a fair value using 12/31 marks of $421 million. Absent the restructuring these contracts would have matured and all of the collateral assets were at risk of seizure by these lenders.
Our second line of business is investment management run through our wholly owned subsidiary, CT Investment Management Co., or CTIMCO. CTIMCO employs all of the staff at CT, manages its parent, four third-party capitalized private equity funds, five CDOs inclusive of the four balance sheet CDOs and is a rated special servicer.
In 2010 CTIMCO earned revenues of $16.7 million from its clients, made investment for its private equity accounts totaling $306 million and at year-end had $6.5 billion of assets under management. In addition to management contracts, our investment management business also includes a co-investment in our opportunity fund, CT Opportunity Partners I, where we have committed to invest $25 million of which we’ve funded.
Above our two business lines, CT had two types of corporate level debt, recourse debt, a $98 million senior credit facility and $144 million of junior subordinated notes. Both of these liabilities were also restructured in March of 2009 with the senior credit facility maturing March 15, 2011.
As Steve mentioned, to meet the goals of our restructuring we had to reduce the amount of leverage in the portfolio, amend the terms and extend the duration of the remaining leverage in order to match the anticipated collection timeframe to the legacy assets and to create an economic interest in the recovery for Capital Trust.
Our restructuring involved contributing all of the assets in our balance sheet investment business with the exception of CT, CDOs I, II and IV to a newly formed subsidiary, CT Legacy REIT or Legacy REIT. We own 52% of Legacy REIT with the balance owned by new and former lenders as I’ll describe in a moment.
Liabilities of Legacy REIT include the REPOs and a new mezzanine loan neither of which are recourse to Capital Trust Inc. The REPOs, formerly $340 million were paid down by 10% or $34 million and received slight increases in rate in return for extending their maturity date to 2013 and 2014 subject to repayment hurdles, eliminating recourse to Capital Trust Inc., eliminating any margin call or mark-to-market provision and eliminating financial and operating covenants except for key man (ph) covenants that apply to the executive officers.
The new mezzanine loan provided by affiliates of Five Mile Capital is an $83 million loan secured by the equity in each REPO line as well as CT CDO III and a small amount of assets that had been unencumbered pre-restructuring.
The mezzanine loan has a five-year term, it carries an interest rate of 15%, 8% current and 7% pickable and it’s fully pre-payable without penalty. Affiliates of Five Mile Capital also received a 24% ownership interest in Legacy REIT.
Proceeds from the mezzanine loan were used to fund the pay down of the REPOs, fund the cash component of the extinguishment of the senior credit facility and junior subordinated notes as I will describe more fully, and pay transaction costs and expenses.
On Thursday, the company’s $98 million senior credit facility was fully satisfied in exchange for a cash payment of $22.9 million, a 24% equity interest in Legacy REIT and $2.8 million of secured notes issued by subsidiaries of CT and secured by its ownership in Legacy REIT as more fully described in my remarks.
The company’s $144 million of junior subordinated notes were also fully satisfied in exchange for a cash payment of $4.6 million, subordinate common stock of Legacy REIT and $5 million of secured notes. The subordinate common stock entitles its holders to receive approximately 25% of the payment due to Capital Trust from its equity position in Legacy REIT after aggregate cash distributions of $50 million have been paid to all other classes the common stock of Legacy REIT.
After the dust settles, Legacy REIT has 44 loan and security positions with a face value of $837 million, adjusted book value excluding CDO III of 530 million and a fair value, again using 21/31 mark, of $427 million. Liabilities of Legacy REIT totaled $388 million in the form of $305 million of repurchase obligation and an $83 million mezzanine loan. CT Legacy REIT is owned 52% by Capital Trust, 24% by Five Mile and 24% by the former senior credit facility lenders. The entity is precluded from making any dividend payments until the REPOs and mezzanine loans are repaid in full.
Capital Trust specific ownership position is subject to $7.8 million of secured notes owned by the former senior credit facility lenders and junior subordinated note holders, pre-payable for $11.7 million and the subordinate common stock owned by the junior subordinated note holders.
At the end of the day, Capital Trust owns its interest in Legacy REIT, owns 100% of its investment management business, including its co-investment in CT Opportunity Partners, has cash of $28 million and net NOLs of approximately $123 million, all without any recourse liabilities. As Steve mentioned, we believe that CT is now stable with a potential for meaningful upside in its legacy assets. It is important to note that all of this was accomplished without diluting Capital Trust shareholders to the issuance of CT stock to any restructuring participants.
Before I turn it back to Steve, I would like to thank all of the members of the financing capital market team, especially Douglas Armer who runs Capital Markets for the company.
And with that, I will turn it back to Steve.
Thanks Geff. John, please open the call for questions.
(Operator Instructions) We will take our first question from Brent Christ with Sirios Capital. Please go ahead.
Brent Christ – Sirios Capital
Good morning, guys.
Brent Christ – Sirios Capital
Yeah, just a quick question in terms of kind of thinking about the earning stream, I guess from the legacy CT versus what’s being transferred over to the Newco. So could you just kind of walk through what portions are retained by CT, whether the management fees, the new dividend payment that you have make and the mezzanine loan, and any other expenses or revenues versus the portion that’s transferred into the new company?
Sure, I’ll take a crack at it. First, let’s start with our interest in legacy REIT. We do have a class of preferred shares that we own that gives us a payment of $7.5 million for the next – almost two years out of that portfolio. Other than that, however, our common stock position won’t receive any cash flow from it until all of the debt is repaid which is a future event.
With respect to CT, other than the $7.5 million we have, 100% of our management fees that we have earned before the restructuring, so all the private equity, CDO and special servicing fees. We retain the G&A in the company, although the G&A that was stated in the K, obviously has some element of the restructuring cost, which are non-recurring. And we have – and we have the net operating loss position which obviously is an offset to any future income.
Brent Christ – Sirios Capital
So to think about it, you have the management fees offset partially by the G&A and the $7.5 million of preferred interest but you have to first cover the – there are some other obligations before you can start receiving that?
Actually the obligations of secured notes have do not have a current cash component. They just receive payments that we would otherwise receive on our equity interest until they’re satisfied. And, so there is no cash component of that to the company until cash actually starts to flow from the common equity and CT legacy REIT. So we have no – other than – again it’s difficult to talk about this because of the consolidation. But we really have no cash debt service requirement to Capital Trust if you exclude the CDOs as being compartmentalized and the secured – the legacy REIT as being compartmentalized and the secured notes that will appear on our balance sheet as liabilities is only having cash flow, our cash debt service requirements in the event that there is actually cash flow from the equity interest at service collateral for those notes. So no debt service.
Brent Christ – Sirios Capital
Got you, okay. So when you boil all that together, is the legacy part – I guess not the non-CT legacy REIT, the old company as we knew it, is it profitable on an ongoing basis or is it reliant on earnings from CT legacy REIT?
It is – if you look at it sort of going backwards, it is – in fact it’s slightly profitable and obviously in the context of our old restructuring – in our old situation that’s a dramatic improvement. But it has no recourse liabilities, which means that it should be a clean vessel for future endeavors. And there’s also, as Steve discussed and I discussed in our remarks, significant upside potential in the legacy portfolio, which will be realized once the legacy liabilities in the new mezzanine loan will were repaid.
Brent Christ – Sirios Capital
Alright. Thanks a lot.
(Operators Instructions). And it appears we have no further questions at this time sir.
Thank you, John. Thanks everyone for joining.
And this concludes your teleconference for today. We thank you for joining. You may now disconnect your lines and please have a great day.
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