Stephen Plavin – CEO and President
Geoffrey Jervis – CFO
Thomas Ruffing – CCO, Asset Management
Chris Mittleman – Mittleman Brothers
Capital Trust, Inc. (CT) Q1 2011 Earnings Call May 11, 2011 10:00 AM ET
Hello, and welcome to the Capital Trust first quarter 2011 results 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.
There will be a Q&A session following the conclusion of this presentation. At that time, I will provide instructions for submitting a question to management. I will now turn the call over to Stephen Plavin, CEO of Capital Trust.
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 night, we filed our 10-Q and announced our results for the first quarter, which was highlighted by the comprehensive restructuring of all of our Legacy recourse liabilities, in a transaction that closed March 31.
Geff will take you through the key points of the restructure in the quarterly results, and also introduce our adjusted balance sheet and operating results. I will focus my remarks on post-restructured CT and the commercial mortgage market.
Completing the debt restructure was a necessary step in the evolution of Capital Trust. Our financial condition is greatly improved. We have isolated the down side REIT associated with our peak of the market balance sheet assets while maintaining management control at a significant ownership interest.
By having established the necessary time to work and collect our legacy assets in an improving market, we will maximize the recovery for all legacy REIT-share stakeholders as well as the CT shareholders.
In fact, we’ve already paid down over $100 million of legacy REIT debt from underline loan repayments since quarter end. Although there is still great volatility within the legacy REIT portfolio, we do expect to achieve additional pay downs over the next 12 months as we work the assets and progress towards the beginning of the equity realization, which is still likely a few years out.
Post restructure, CT maintains full economic and management control of CT Investor Management Company, or CTIMCO, our wholly-owned management subsidiary. CTIMCO manages its public company parent, the newly formed legacy asset REIT, four CT-sponsored private equity funds, five CDOs, and loan workouts and restructuring for the CMBS special servicer.
We have maintained all the capabilities of our platform and are now very well positioned to continue our capital raising, lending, investing, and asset management activities. We see great opportunity in the commercial mortgage finance market. The floating rate market, an historic area of strength for CT, is still dislocated and highly inefficient. The commercial banks, CMBS originators and CMBS investors, have not returned to the floating-rate market, which is now significantly funded by private bridge lenders with the high cost of capital.
This steep yield curve helps us market from a demand perspective while LIBOR provides a hedge to interest rates, likely to rise over time. The need for mezzanine financing to fill the gap on recapitalizations will continue to expand as the peak of the market five-year loans mature. There will also be more than distress opportunities for our special servicer in opportunistic fund.
We’ve been active in the low LTD mezzanine space through our high-grade fund, providing efficient financing due to investment-grade loans being securitized. We see continuing investment opportunity in this segment, particularly as a CMBS market expands to better handle large financing request.
While the specific opportunities and commercial mortgage events will evolve and change over time, we believe that this scale of the opportunity is great and emerging now, and the platform is very well positioned to exploit these opportunities.
With our recapitalization now more than a month behind us, we are evaluating all of our options regarding how to best position CT for the future. We expect to significantly advanced this process over the next quarter, so stay tuned. And with that, I’ll turn it over to Geff.
Thank you, Steve, and good morning everyone. As Steve mentioned, last night we reported our earnings for the first quarter and filed our Form 10-Q. Net income for the period was $254.6 million or $11.35 per share, driven by $250 million of gains on the extinguishment of debt, primarily associated with our March 31 restructuring.
Total assets on the balance sheet at quarter end stood at $3.9 billion, down $230 million from year end as the portfolio continued to experience repayment. Total liabilities were $4 billion and shareholders’ equity was negative $111 million.
On a per-share basis, based upon 22.8 million shares outstanding, book value per share was negative $4.88. As these GAAP numbers show, we continue to be plagued by the distortions of GAAP required consolidation regimes. This quarter, as we promised on the last earnings call, we began reporting an adjusted income statement and balance sheet.
We believe that these adjusted statement allow investors to better understand the economic condition of the company. These financials can be found in the earnings press release we filed last night, and also in the MD&A section of our Form 10-Q.
The adjustments to our GAAP financials are three. First, we eliminate the consolidation of securitization vehicles under FAS 167, showing only our net investment in such vehicles. And since all the liabilities in these vehicles are non-recourse, we only record a net investment to the extent that it has a positive value.
Second, we eliminate the assets and liabilities on our GAAP financials associated with assets that we sold, but where the sales did not meet GAAP criteria for sale accounting, and remain consolidated on our financials. We refer to these as participation sold.
Finally, the third adjustment is that we divide the resulting financial statement into those of CT Legacy REIT and those specific to Capital Trust Inc.
On this basis, adjusted earnings for Capital Trust for the first quarter was $179.3 million or $7.99 per share, driven primarily by $174.8 million of gains recognized on the extinguishment of debt associated with our March 31 restructuring. Excluding these gains, adjusted earnings was $4.4 million or $0.20 per share for the first quarter.
Other components of adjusted net income include a $7.9 million recovery of previous provisions for loan loss, $4.9 million of net interest income on the legacy loan and securities portfolio, and $2.1 million of investment management and servicing fees. All offset by $8.7 million of general and administrative expenses, a number that includes one-time expenses related to the March 31 restructuring and $1.7 million of securities impairment.
It is important to note that going forward, Capital Trust adjusted earnings will not include the legacy assets that we contributed to CT Legacy REIT, or the attended liabilities. And therefore, earnings will be isolated to the assets of CT owned post-restructuring, mainly in investment management business that we operate through CT Investment Management Co. or CTIMCO.
Had the restructuring closed on December 31, CT’s adjusted earnings would have basically been breakeven.
Before we discuss the balance sheet for CT, I want to spend a moment discussing the economic aspects of CT post-restructuring. Today, we no longer have any recourse debt obligations, and have unencumbered ownership of 100% of our CTIMCO Investment Management platform, our co-investment at CT Opportunity Partners 1, our residual ownership interest in CT CDOs I, II, and IV and our net opportunity loss carried forwards.
Furthermore, we have a 52% equity interest in CT Legacy REIT. Our economic interest in CT Legacy REIT however, is subject to our secured notes, management incentive awards that provide for participation in the recovery of CT Legacy REIT, and the subordinate Class B common stock of CT Legacy REIT owned by our former junior subordinated note holders.
In addition to our interest and the common stock of CT Legacy REIT, we also own 100% of CT Legacy REIT’s Class A preferred stock. The Class A preferred stock initially entitles us to cumulative preferred dividends of $7.5 million per annum, which current dividends will be reduced in 2013 as the CT Legacy REIT portfolio assets repay or are sold.
Looking at the adjusted balance sheet, this economic picture translates into $110.9 million of assets as March 31. Assets include cash of $27.8 million, our $10.1 million co-investment in CT Opportunity Partners 1, a $25 million commitment of which $14.9 million remains unfunded, and our equity interest in the CT Legacy REIT portfolio of $70.7 million on an adjusted basis.
Adjusted liabilities at CT were $13.5 million as of March 31, with none of the liabilities being recoursed to CT. Liabilities include $7.8 million of non-recourse secured notes that are collateralized by 93.5% of our common equity interest in CT Legacy REIT. The secured notes bear interest at a fixed rate of 8.2%, which may be deferred until maturity. Any prepayment of the notes will incur a prepayment penalty resulting in the ultimate payment amount of $11.7 million.
Adjusted shareholders’ equity was $97.4 million at quarter end, and based on 22.8 shares outstanding, adjusted book value was $4.28 per share. On a fully diluted basis, includes for the warrants we issued to the form repurchase agreement lenders in March of 2009, CT had 24.8 million shares outstanding and fully diluted book value per share was $3.93.
Moving over to CT Legacy REIT. As we discussed in our last call, in connection with our March 2011 restructuring, we transferred substantially all of our directly held interest earnings assets to CT Legacy REIT. The transferred assets include all of the loans and securities that service collateral for the legacy repurchase obligation, except for certain subordinate interest in CT CDOs I and II, our subordinate interest in CT CDO III, and 100% of our previously unencumbered loans and securities.
CT Legacy REIT is owned 52% by us, 24% by an affiliate of the mezzanine loan lender, and 24% by our former lenders under our senior credit facility. In addition, the former holders of our junior subordinated notes received a subordinate class of common stock in CT Legacy REIT that entitles them to 25% of CTs cash flow from its common shares in CT Legacy REIT after a gross $50 million recovery to CT Legacy REITs common shareholders.
At March 31, CT Legacy REIT’s portfolio included 27 loans for the principal balance of $642.9 million, adjusted book balance of $495.4 million, and a fair value of $427.2 million, as well as 14 securities with the principle balance of $144.4 million, adjusted book balance of $30 million, and fair value, excluding CDO residual interest of $3.5 million. At quarter end, our legacy portfolio included total impairments of $146.8 million against seven loans, and $111.6 million against nine securities, all on an adjusted basis.
CT Legacy REIT’s liabilities include $304.8 million of repurchase obligations with three counterparties, at an weighted cash cost of LIBOR + 2.38% and an $83 million mezzanine loan. The mezzanine loan has a 15% fixed rate of which 8% must be paid currently, and 7% may be deferred.
Adjusted shareholders’ equity at CT Legacy REIT was $160.2 million at quarter end. As mentioned earlier, CT’s interest in CT Legacy REIT, recorded on an adjusted basis, $70.7 million, reflecting our 52% ownership interest net of the Class B dilution.
Given the timing of the restructuring occurring on the last day of the first quarter, the adjusted income statement does not provide a meaningful picture of CT Legacy REIT’s operations. As we mentioned in the past, our goal is to manage CT Legacy REIT in order to maximize the recovery to its shareholders being mindful of the timeframe in which we realize that value.
From an operational standpoint, cash flow will be directed to pay operating expenses, debt service, the Preferred A dividend, and to amortize the repurchase obligations and the mezzanine loan.
Only after repayment of all of CT Legacy REIT’s obligations, will dividends begin to be paid to the common shareholders.
Turning to our investment management business. All of our investment management activities are conducted through CTIMCO, our wholly-owned investment management subsidiary. CTIMCO currently manages in access of $5 billion of assets, including the assets of a public company parent, CT Legacy REIT, five CDOs, three private equity funds, and one separate account.
In addition, CTIMCO is an improved special servicer by all three rating agencies. CTIMCO currently has two active investment vehicles; CT Opportunity Partners I, which has $540 million of total equity commitments, $322 million of which remains available to be invested, and CT High Grade Partners II, which has $667 million of total equity commitments, $160 million of which remains available to the investors.
Revenues from third-party investment management fees totaled $2.5 million in the first quarter of 2011 on a gross basis, of which inter-company fees of $657,000 were eliminated in consolidation.
As Steve mentioned, as we look forward, we see a very attractive commercial real estate lending environment with favorable supply demand, and competitive dynamics. Management and the Board are currently assessing the best manner in which Capital Trust and its CTIMCO platform can address that opportunity.
And with that, I’ll turn it back to Steve.
Thank you, Geff. Josh, you can open the call to questions.
Thank you. (Operator Instructions). At this time there are no questions, but one more reminder. (Operator Instructions). Our first question comes from the line of Chris Mittleman from Mittleman Brothers. Please go ahead, your line is open.
Chris Mittleman – Mittleman Brothers
Hi, guys. I was wondering, you said the opportunities for taking advantage of the environment exists at the CTIMCO level, but in terms of your own balance sheet, are you considering maybe doing a rights offering to raise some capital to take advantage on your own balance sheet directly, maybe to put the NOL to a little bit of better use?
We have certainly evaluated all means of raising capital. Historically, we’ve raised capital both publically and privately. We’re definitely considering, you know, in terms of a balance sheet standpoint, how best to raise that capital and certainly a rights offering is one of the structures that we’re getting serious about too.
Chris Mittleman – Mittleman Brothers
Okay, great. Thank you.
There are no further questions, but one final reminder. (Operator Instructions). We still have no questions, so at this point I would like to turn it back over to Mr. Plavin for his further remarks.
Thank you, everyone, for joining us. We look forward to reporting to you next quarter.
This does conclude your teleconference. Thank you for your participation. Please have a nice day, and you may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!