Capital Trust CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 4.11 | About: Blackstone Mortgage (BXMT)

Capital Trust, Inc. (CT) Q2 2011 Earnings Call August 4, 2011 10:00 AM ET


Stephen D. Plavin – Chief Executive Officer and President

Geoffrey G. Jervis – Chief Financial Officer, Treasurer and Secretary


Chris Mittleman – Mittleman Brothers


Hello, and welcome to the Capital Trust Second 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 assets/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 by submitting your question to management.

I will now turn the call over to Steve Plavin, CEO of Capital Trust. Please go ahead.

Stephen D. Plavin

Thanks, Megan. 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 second quarter, our first full quarter of operating CT Legacy REIT, the entity formed March 31, 2011 to hold our legacy assets.

Geff will take you through our quarterly results and also discuss our adjusted balance sheet and operating results. I will focus my remarks on Capital Trust and the commercial mortgage market.

Post-restructure, the financial condition of Capital Trust is greatly improved. We have isolated the downside risk associated with our peak of the market balance sheet assets while maintaining management control and a significant ownership interest in the portfolio. By having established the necessary time to work and collect our legacy assets in a market that should improve over time, we will maximize the recovery for all legacy-REIT stakeholders, the largest of which are the CT shareholders.

CT Investor Management Company or CTIMCO, our wholly-owned management subsidiary, maintained strong capabilities at lending, investing, asset management, and capital raising. The CTIMCO manages its public company parent, the Legacy asset REIT, four CT-sponsored private equity funds, five CDOs, and loan workouts and restructuring for the CMBS special servicer.

This past quarter the growth for CT Legacy REIT exemplify the asset management strength of our platform. During the quarter, CT Legacy REIT collected $207 million on 11 loans, representing 99% of our recovery. Although there is still significant credit challenges within the Legacy REIT portfolio, particularly with the 2006, 2007 originations, we are confidant that Tom and his team will maximize recoveries.

As for the market in general, volatility in global financial markets and economies combined with uncertain domestic economic and employment growth prospects have chilled the recovery in commercial real estate financial markets. The CMBS market has had its first significant setback since it restarted in 2009. Although, credit performance of current ventures of CMBS is likely to be very strong, subordination level already started to contract and some investors started feeling a little déjà vu. So when S&P withdrew its ratings on a deal about to close in an environment in which investors assume ratings would be a better governor than in the past, investor confidence would further shaken.

The reality is either legacy borrowers nor investors have fully recovered from the shock of the 2008 CMBS market collapse and the constant reminder provided by continued week credit performance of many legacy securitizations. As a result investors and borrowers have been slow to return to the CMBS market and now the market they contract before it starts to grow again.

And with lending companies approaching peak origination levels, they cannot take up the flag from the declining CMBS and still weak bank market. These market forces combined with the maturity of many peak of the market financing should create a better more opportunistic investment environment. With over $80 billion of loans still in special servicing and values improved from trough levels, there will be fewer extensions and more loans (inaudible) foreclosures that will generate additional transactions.

We are active as an investor and a special servicer on large structured financing. It will be on the frontlines of the several upcoming workouts. While the specific opportunities in commercial mortgage finance will evolve a change over time, we believe that the scale of the opportunity is great and that our platform is very well positioned to capitalizing these opportunities. There will be need for mezzanine financing to fill the gap on recapitalizations and acquisitions as the peak of the market five-year loans mature.

The floating rate market, a 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.

We also see an expanding investment opportunity in the low LTD mezzanine segment, particularly as the CMBS market struggles to absorb large offerings. We continue to be active at this space through a high-grade funds and related separate accounts, providing low risk financing, genitive investment-grade loans on core assets.

We aggressively manage our portfolios, continue to make new investments for our private fund, we continue to evaluate all of our options regarding how to best position CT for the future. We expect to significantly advance this process over the coming quarters.

And with that I’ll turn it over to Geff.

Geoffrey G. Jervis

Thank you, Steve, and good morning, everyone. As Steve mentioned, last night we reported our earnings for the second quarter and filed our Form 10-Q.

Consolidated net loss for the second quarter was $1.8 million or $0.08 per share. Total consolidated assets in the balance sheet at quarter end were $2.4 billion and total consolidated liabilities were $2.5 billion, resulting in shareholders equity of negative $111 million.

As these GAAP number show, despite our successful restructuring in March, it returned significant value to the equity owners of the company and despite managing an operationally cash flow positive business, we continue to be subject to the distortions of GAAP required consolidation regimes.

In order to address these presentational issues, last quarter we began reporting an adjusted income statement and balance sheet. We believe that these adjusted statements will 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, also filed last night.

The adjustments to our GAAP financials are four. First, we eliminate the consolidation of securitization vehicles under FAS 167, showing only our net investment in such vehicles. And since 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 loans that we sold, but where the sales did not meet GAAP criteria for sale accounting and remain consolidated on our financials. We refer these as participation sold.

Third, non-cash interest expense related to interest rate swap, no longer designated as cash flow added has been eliminated.

And finally, the fourth adjustment is that we divide the resulting financial statements into those of CT Legacy REIT and those specific to Capital Trust. We make this final adjustment because today Capital Trust represents, two businesses, one investment management business house in our CTIMCO subsidiary, and two, our legacy portfolio and a potential recovery from our ownership interest in CT Legacy REIT.

I’ll get into each entity in more detail later in my remark. All of the numbers discussed from here forward would be from the adjusted financials and as I mentioned earlier, each kind can be found at the back of the earnings press release and also in the MD&A section of our 10-Q.

Turning 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 hold interest earning asset to a newly point entity CT Legacy REIT, along with all of our remaining legacy liabilities.

At June 30, CT Legacy REITs portfolio of interest earning asset included 20 loans with a crystal balance of $434 million, adjusted book balance $279 million, and a fair value of $248 million.

In addition CT Legacy REIT held 14 securities at a principal balance of $101 million, adjusted book balance of $31 million and fair value excluding CDO residual interest of $4 million. All together interest earning assets totaled $310 million of adjusted book.

In addition for loan security portfolio CT Legacy REIT held $10 million of cash at quarter end. During the quarter CT Legacy REIT collected $207 million on 11 loans or 42% of the net book value of the loan portfolio as of March 31. These collections represent 99% of par recovery on the 11 loans. The portfolio continue to perform as expected and despite the flurry of (inaudible) in the second quarter, we do not anticipate similar activity in the near-term.

CT Legacy REIT’s liabilities include $119 million repurchase ability and $63 million mezzanine loan. During the second quarter CT Legacy REIT repaid $185 million of repurchased obligation, representing 61% of the post-restructuring balance. With the source of these repayments being a principal proceeds from the loans and securities that serve a security from each REPO lender.

Two of the three repurchased facilities in place at March 31, the facilities at Morgan Stanley and Citigroup were fully repaid during the quarter, leaving CT Legacy REIT with one repurchased facility with JPMorgan, securing the cash cost of LIBOR plus 2.5% and matures in December 2014 subject to annual pay down hurdles.

The only other exit bring liability of CT Legacy REIT mezzanine loans in Five Mile Capital. During the quarter we repaid $20 million of the original $83 million balance using principal proceeds from both previously and newly unencumbered assets as the source of these repayments. The mezzanine loans carries a 15% fixed rate of which 8% must be paid current and 7% may be deferred. This loan matures in March of 2016.

In total, CT Legacy REIT repaid $205 million of interest bearing liability or 53% of the aggregate March 31 balance. At June 30, adjusted shareholders equity at CT Legacy REIT was $146 million.

CT Legacy REIT is owned 52% by Capital Trust, 24% by affiliates 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 cost of common stock of CT Legacy REIT that entitles them to 25% of CT’s cash flow from it’s common stock interest in Legacy REIT after a growth to $50 million recovery to all CT Legacy REIT common shareholders.

Using the June 30 adjusted shareholders equity, CTs 52% interest, net of the Class D common stock impact was $66 million. This is the figure that carried over on to CT’s adjusted balance sheet that I will discuss in a moment.

On an adjusted basis, CT Legacy REIT’s net loss for the second quarter was $14.7 million, driven primarily by $9.4 million of provisions for loan losses on three loans, $1.9 million in preferred eight dividend that were paid to Capital Trust and a non-cash charge to interest expense of $4.4 million due to the acceleration of amortization of discount from the $20 million pay down on the mezzanine loan.

Looking through the numbers, cash based net income a proxy for operating cash flow was $1.2 million for the quarter. As we mentioned in the past, our goal is to manage CT Legacy REIT in order to maximize the recovery to its shareholders, be 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 dividend and to amortize the repurchase obligation and the mezzanine loan. Only after the repayment of all of CT Legacy REIT debt will dividends begin to be paid to the common shareholders. Based upon our estimates of repayment timing, we expect CT Legacy REIT to commence paying common stock dividends in the 2013, ‘14 timeframe.

Turning to Capital Trust, before we discuss the adjusted balance sheet for CT, I want to spend a discussing the economic aspect of CT post the marked 2011 restructuring. As of June 30, we have $28 million of cash, no longer have any recourse debt obligation and have unencumbered ownership of 100% of CTIMCO investment management platform, our co investment in CT Opportunity Partners I, 100% of the Class A preferred stock of CT Legacy REIT, separate and distinct from our common stock interest, our residual ownership interest in CT CDOs one, two and four, and our net operating loss carry forward.

We also have a 52% interest in CT Legacy REIT’s Class A common stock. Our economic interest in CT Legacy REIT however is subject to our non-recourse secured note and the management incentive awards plan that provides for participation in the recovery of CT Legacy REIT.

After giving effect to these two items, some of which are picked up in the adjusted financials in the liability section, CT’s net interest in CT Legacy REIT would be $45 million at June 30.

Looking at the adjusted balance sheet, this economic picture translates into a $108 million of assets as of June 30. Assets include $28 million of cash or $11 million co investment in CT Opportunity Partners 1, a $25 million commitment of which $14 million remains unfunded.

Our equity interest in CT Legacy REIT portfolio of $66 million, again that would be on growth basis. It’s also important to note that both GAAP and our adjusted presentation do not recognize any balance sheet value for the CTIMCO, the Class A preferred stock in CT Legacy REIT or our net operating loss carry forward.

Adjusted liabilities with CT was $16 million as of June 30, with none of the liabilities being recoursed to CT. Liabilities included $7.5 million of non-recourse secured notes that are collateralized by our Class A common equity interest in CT Legacy REIT. The secured notes bear interest at a fixed rate of 8.2%, which maybe deferred until maturity. Any prepayments of the notes will incur a prepayment penalty resulting in an ultimate payment amount of $11 million for these notes.

Adjusted shareholders’ equity was $92 million at quarter end, and based on $22.7 million of shares outstanding, adjusted book value was $4.04 per share. On a fully diluted basis, inclusive of the warrants that we issued to perform a repurchase agreement lenders in March of 2009, CT has $24.7 million shares outstanding and fully diluted book value per share was $3.73.

Using the adjusted methodology, CT recorded a net loss for the second quarter of $6.3 million or negative $0.28 per share. The net loss was primarily due to our recognition of the loss at CT Legacy REIT for the period, our share of that loss being $6 million. In addition, CT recorded a $1.2 million cash provision associated with our March restructuring. Shifting it down to cash, our cash basis net income for the quarter was $1.5 million.

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 approved special servicer by all three rating agencies and it is the main special servicer on $2.6 billion of loan. CTIMCO continue to invest in CT Opportunity Partners 1, which is $540 million of total equity commitment with approximately $250 million of dry powder.

CTIMCO’s other active private equity line, the high grade businesses as we refer to it, is investing on a discretionary separate accounts at CT High Grade Partners II, investment period expired in May. We look forward to growing the successful CT High Grade series of fund going forward.

As Steve mentioned, we look forward to give very attractive commercial real estate lending environment with favorable supply demand and competitive dynamics. Managemnt and the Board are currently assessing the best manner in which CT and its CTIMCO platform can address that opportunity.

And with that I’ll turn it back to Steve.

Stephen D. Plavin

Thanks, Geof. Magan, please open the call to any questions.

Question-and-Answer Session


(Operator Instructions) And it appears our first question will come from the side of Chris Mittleman with Mittleman Brothers. Your line is open.

Chris Mittleman – Mittleman Brothers

Hi, guys. I was just curious about CTIMCO’s profitability. I don’t think it’s currently running profitably, is that true?

Stephen D. Plavin

It is, although it’s difficult to see again through the GAAP financials. I think that the best way to look at it would be the numbers that I mentioned in my remarks, which were the Capital Trust when you boil it down have $1.5 million with positive net income. And so that would be the management fees associated with CTIMCO, G&A of the company and also picking up income from our co-invest in CT Opportunity Partners.

Chris Mittleman – Mittleman Brothers

Okay. That makes sense.

Stephen D. Plavin

And one thing I would mention is that typically we have higher levels of special servicing revenue in a quarter. This quarter however it was low, they are lumpy payments, and so even those results would be depressed by a lack of special servicing fees, which our expectations for special servicing fees for the year remained robust.

Chris Mittleman – Mittleman Brothers

In terms of the AUM of CTIMCO is about $5 billion I think you said now, do you have a sense of where – I actually forget where it was at its peak and where do you think you might be able to get back to it at some point? Do you have like kind of a scale target in line for CTIMCO?

Geoffrey G. Jervis

Our answer is that – because we’re at over $6 billion at the hike and from a target standpoint we do not have a target AUMs. What we have I think is more a desire to grow revenues and to do that in the most accretive manner. And so again, we’re very happy to focus more on the profitability of the business as opposed to the top line number. I think that as Legacy REIT repays over time that number will have some downward pressure on it going forward. But I don’t think that that’s going to necessarily have a linear impact on the profitability as a platform. And going forward in the businesses that we look to grow the High Grade, Opportunity Partners business and then sort of our bread and butter mezzanine business, I think those would put pressure on the number going back up.

Stephen D. Plavin

We have some large transactions in our portfolio, so as those get resolved, the number becomes volatile. It can move by large increments just based upon on a single asset being resolved. And as Geff mentioned, we do expect the core business to provide growth with new asset.

Chris Mittleman – Mittleman Brothers

And the last thing I would ask and then I’ll step out of the line is I'm just wondering about the on-balance sheet, the possibilities, I know that’s substantial tax assets. But the question is what’s the best way to utilize them? And I was thinking about the possibilities, Rights offering and some other capital raised. But to do the on-balance sheet thing again, as you’ve done in the past, would it be better to convert out of the REIT status and go into the C Corporation because I'm just trying to think how to best utilize those assets. Have you guys been giving any thought to that possibility or is it something that’s not on the near-term horizon.

Stephen D. Plavin

We consider all possibilities in all tax regimes. The business that we thought of as a balance sheet business has really been our traditional floating rate origination and investment business, home loans and mezzanine loans, moderate LTV. And as we look at that business for the future that shouldn’t be part of the Capital Trust line up. But we haven’t determined whether that would be an on-balance sheet business like it was in the past or whether it will be another off-balance sheet business like the hybrid business and the opportunity that business offer us today.

Chris Mittleman – Mittleman Brothers

Let’s say that alternative was your ultimate decision, would it be possible, will it make sense to change the corporate structure of CT, the holding company from a REIT to just a regular C corp to try to better maybe more quickly utilize the tax losses? Maybe is that something that’s even a remote consideration?

Geoffrey G. Jervis

I think that the best structure to execute the investment business for – in a public company format is certainly a REIT. And so if we did decide to execute that business line on balance sheet again, we would maintain our REIT status. You’re right, we do have substantial NOLs that if we de-REIT it and became a traditional C Corp would be able to seal the degree of income going forward, but the REIT will preclude us from re-reading for five years, which will be sort of risky proposition to try and to land backward in five years having used all of our NOLs and not having paid any tax in that period. So our conclusion is that the REIT is the best structure and the chances of us being C Corp will likely be if we decided not to do the business on balance sheet.

Chris Mittleman – Mittleman Brothers

Okay. That makes sense. Thank you very much.


(Operator Instructions) And it appears that there are no other questions at this time.

Stephen D. Plavin

Thank you, everyone, for joining us. We look forward to reporting to you next quarter.


This does conclude today's teleconference. Thank you for your participation. You may now disconnect.

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