Capital Trust's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 2.11 | About: Blackstone Mortgage (BXMT)

Capital Trust, Inc. (CT) Q3 2011 Earnings Call November 2, 2011 10:00 AM ET


Steve Plavin – CEO and President

Geff Jervis – CFO, Treasurer and Secretary


Hello, and welcome to the Capital Trust Third 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 performance of the Company’s investments, the timing of collections, its capability to repay indebtedness as it comes due, competition for servicing and investment management assignments, visibility to originate investments with the availability of capital and the Company’s tax status as well 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 Steve Plavin, CEO of Capital Trust.

Steve Plavin

Thank you Lindy. 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 third quarter, our second 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.

During the quarter we experienced continued strong repayment activity in CT Legacy REIT. The formation of CT Legacy REIT established the necessary time and flexibility to work and collect our legacy assets in the market that should improve overtime. Our management at CT Legacy REIT is focused on maximizing the recovery for all stakeholders, the largest of which are the Capital Trust shareholders.

We collected $54 million on five loans in Legacy REIT during the quarter bringing total collections since the March formation to $251 million on 15 loans representing over 99% of par recovery. Total recovery through September 30 equaled 50% of the CT Legacy REIT net book value on March 31. Although there are still significant credit challenges remaining within the Legacy REIT portfolio, and we expect head on velocity to flow, we remain confident that Tom and his team will continually achieve great results.

CT Investor Management Company or CTIMCO, our wholly-owned investment management subsidiary maintained strong capabilities in a wide array of activities, lending, investing, asset management, capital raising, special servicing and operating as public company parent.

Although our primary business remains investment management, our special servicing business has expanded as a five year peak of the market loans approach bottom maturity. In particular, we have established its strong track record working a large structured floating rate loan with securitized senior mortgages and multiple tranches of subordinate debt.

As for the markets in general, volatility in global financial markets and economies combined with uncertain domestic economic unemployment growth prospects continue to slow the recovery in commercial real estate. The CMBS market remained dislocated with the investor bonds subordinate to senior AAA largely absence in the market. Although credit performance of current business CMBS is likely to be very strong, investors remains uncomfortable with conduit offerings and pricing for junior bonds is gaped out.

The restoration of investor confidence in the economy and related commercial real estate credit performance is necessary to do conduit activity. The reality continues to be that investors have not fully recovered from the shock of the 2008 CMBS market collapse and the constant reminders provided by continuing weak credit performance of many legacy securitization. And now there is greater fear of event [ph] risk and related market volatility to keep more investors on the side lines. With life companies already at deep origination levels and focused narrowly on primary properties in market, permanent debt is not available for many assets.

While specific opportunities in commercial mortgage event will evolve change overtime, we believe that the scale of the opportunity for providers of Capital is great and that our platform is very well positioned to take advantage of these opportunities. There is an expanding need for mezzanine financing to fill the gap on recapitalization and acquisitions as peak of the market loans mature. The floating rate bridge loan market, an historic area of strength for CT is still dislocated highly inefficient funded primarily by private bridge lenders to the high cost of capital.

We also continue to see an expanding investment opportunity in the low LTD mezzanine segments particularly as CMBS markets struggle to absorb large offerings. We continue to be active in this bid through our high grade funds and related separate accounts providing low risk financing junior to investment grade loans and core assets. As we aggressively manage our portfolios and continue to make new investments for existing product funds, we have begun to work on a next generation investment vehicle. We expect to significantly invest in this process over the coming quarters.

And with that I will turn it over to Geff.

Geff Jervis

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

Consolidated net income for the third quarter was $13.7 million or $0.57 per share on a diluted basis. Total consolidated assets on the balance sheet at quarter end stood at $1.5 billion and total consolidated liabilities were $1.6 billion, resulting in GAAP shareholders equity of negative $100 million.

As we discussed on previous calls, our GAAP financial statements continue to be subject to require consolidation regimes distorting the financial picture of CT. In order to address these presentational issues, we recently began reporting an adjusted income statement and balance sheet which can be found in both the earnings press release we filed last night and also in the MD&A section of our Form-10Q. We believe that these adjusted financial statements allow investors to better understand the economic condition of the company. These financial statements include four adjustments to our GAAP financials.

First, we eliminate the consolidation of CDOs and other securitization vehicles 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 loans that we sold, but where the sales did not meet GAAP sale criteria and remain consolidated on our financials. We refer to these as participation sold.

Third, non-cash interest expense related to mark-to-market of interest rate swaps that are no longer designated as cash flow hedges has been eliminated. And finally, the fourth adjustment is that we divided the resulting financial statements into those of CT Legacy REIT and those specific to Capital Trust.

All of the numbers discussed from here forward will be from the adjusted financials. And as I mentioned earlier, these can be found at the back of the earnings press release and also in the MD&A section of our 10-Q.

Starting with Capital Trust, on an adjusted basis CT recorded a net loss for the third quarter of $3.1 million or negative $0.13 per share. The net loss was primarily due to our recognition of the adjusted loss at CT Legacy REIT for the period of which our share was $4.5 million. As in this loss, CT’s adjusted net income was $1.4 million driven primarily by fee income earned at our CTIMCO subsidiary during the quarter. Stripping it down to cash, our cash basis adjusted net income for the quarter was $1.3 million.

Now let’s turn to GAAP financial statements, CT’s business is very straight forward when viewed on adjusted basis. Our primary line of business is now our CTIMCO investment management and special servicing platform, with $4.5 billion of assets under management from mandates that include management of Capital Trust Inc, management of CT Legacy REIT, our private equity management mandates, collateral management of five commercial real estate CDOs and special servicing of securitized loan investments for both CTIMCO management vehicles and third parties.

In addition to CTIMCO, our adjusted assets as of September 30, includes unrestricted cash of $28 million, our $11 million co-investment to CT Opportunity Partners I and $25 million commitment of which $14 million remained unfunded, our common equity interest in the CT Legacy REIT portfolio recovery, our Class A preferred stock in CT Legacy REIT, and our net operating loss carry forwards. In the aggregate, our adjusted assets stood at $104.4 million as of quarter end.

I will discuss our CTIMCO platforms in further detail shortly but would first like to give some additional color around our net investments in the CT Legacy REIT portfolio. As of quarter end, CT Legacy REIT had adjusted assets of $265.4 million, and adjusted liabilities of $130.6 million resulting in adjusted equity of $134.8 million. We own 100% of CT Legacy REIT’s Class A one shares, 14% of its Class A2 shares and 8% of its class B share resulting in an aggregate investment in CT Legacy REIT of $61.1 million on an adjusted basis.

Our interest in the recovery of CT loans of the CT Legacy REIT portfolio however it’s further centric to our obligations under the related non-recourse secured notes and management incentive awards loan. The secured notes having $7.7 million face amount however as mentioned earlier, it required cash statement of $11 million in order to be satisfied. These notes are non-recourse to CT and are secured solely by a portion of CT’s equity interest in the Class A common stock of CT legacy REIT.

The management incentive awards provided for the participation of up to 6.75% of the net equity recovery in CT Legacy REIT. And net of these two obligations CT’s equity interest in CT Legacy REIT portfolio is $41.2 million on an adjusted basis. We also own a 100% of the Class A preferred stock of CT Legacy REIT, separately the stake from our common equity interest in the recovery of CT Legacy REIT. The Class A preferred stock currently entitled us to cumulative preferred dividends of $7.5 million per annum which will be reduced beginning in January 2013 to greater of 2.5% of CT Legacy REIT’s assets or $1 million per annum.

We have no recourse debt in our adjusted liabilities of $15.4 million are primarily comprised of the secured notes under management incentive awards that I just described which are offset to our recovery to the CT Legacy REIT portfolio. Finally, adjusted shareholders equity was $89 million at quarter end, and based on $23.7 million shares outstanding adjusted book value was $3.91 per share.

On a fully diluted basis includes some of the warrants we issued to the former repurchase agreement lenders in March of 2009 to get 24.6 million shares outstanding in our fully diluted book value per share was $3.51.

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 approximately $4.5 billion of assets, including its 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’s the main special servicer on $2.3 billion of loan. CTIMCO earns $4 million of growth fees during the quarter and $9 million on a year-to-date basis continuing to be a cash flow positive business.

CTIMCO continues to invest in CT Opportunity Partners I which has $540 million of total equity commitments with approximately $250 million of dry powder.

CTIMCO’s other active private equity business lines, 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 of this year. We look forward to growing the successful High Grade series of funds going forward.

In addition to these two business lines, we continue to develop plans and capitalize other business lines including a bridge lending program. As Steve mentioned as we look forward we give very attractive commercial real estate lending environment with favorable supply demand and competitive dynamics and management and the Board continue to invest the best manner in which Capital Trust and its CTIMCO platform can address that opportunity.

Turning to CT Legacy REIT, as we discussed on previous calls, in connection with our March 2011 restructuring, we transferred substantially all of our directly held interest earning assets to a newly formed entity, CT Legacy REIT, along with all of our remaining legacy liabilities.

On an adjusted basis, CT Legacy REIT’s net loss for the third quarter was $10.8 million. This was driven primarily by $23.5 million of securities impairments and $1.9 million of preferred dividends paid to CT. All of this was offset by a $14.5 million recovery, previous loss provisions. Excluding impairments and other non-cash activity CT Legacy REIT’s cash basis adjusted net income was $734,000 for the quarter and its quarter end cash balance was $13.7 million.

At September 30, CT Legacy REIT’s portfolio of interest earning asset included 18 loans with a crystal balance of $380 million, adjusted book balance of $239 million, and a fair value of $208 million. In addition, CT Legacy REIT held 14 securities with a principal balance of $144 million, adjusted book balance of $8 million and a fair value excluding CDO residual interests of $4 million. All together interest earning assets totaled $247 million of adjusted book value.

Since our March 31 restructuring, CT Legacy REIT has collected $256 million, 50% of the initial book value of the Legacy portfolio. The portfolio has continued to perform as expected and its (inaudible) received thus far, we do not anticipate similar activity in the near-term as the portfolio has been called down to the more difficult and longer term assets. During the same timeframe, CT Legacy REIT has repaid $238 million of repurchase obligation representing 78% under post-restructuring balance and includes the full repayments and termination of the Morgan Stanley and Citigroup facilities in the second quarter.

CT Legacy REIT’s remaining liabilities include a $67 million repurchase facility with JP Morgan and a $64 million mezzanine loan from Five Mile Capital. The JP Morgan facility carried a cash cost of LIBOR plus 2.5% and matures in December of 2014 subject to annual pay down hurdles.

The $64 million mezzanine loan, now to its initial balance of $83 million carried at 15% fixed rate of which 8% must be paid current and 70% maybe deferred and matures in March of 2015. At September 30, adjusted shareholders equity at CT Legacy REIT was $135 million. As I mentioned previously this translates to a $51 million investment in CT on an adjusted basis or $41 million net of obligations under related secured notes and management incentive awards plan.

As mentioned in the past, our goal is to manage CT Legacy REIT in order to maximize our coverage to the 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 rate 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, 2014 timeframe.

Before I hand it back to Steve, I want to take a moment to give a quick tax and regulatory updates. From a tax standpoint, CT and the CT Legacy REIT subsidiaries both operate at REITs, and both continue to experience pressure of complying with the REPOs [ph] at their respective portfolios liquidate. There are multiple tax playing options for both entities and we are exploring it now.

From a regulatory standpoint, CTIMCO will be required to register as a registered investment advisory under the mandates from the Dodd-Frank Act, a process we will undertake in the fourth quarter. And finally, CT currently operates under an exemption from the Investment Company Act of 1940. And late this summer, the SEC issued two releases that called into question the operation of the exemption used by CT and most of the mortgage REIT sector. We are currently working with our mortgage REIT peers to respond to the SEC and we’ll keep you posted on all fronts.

And with that I will turn it back to Steve.

Steve Plavin

Thanks Geff. Lindy, please open the call to any questions.

Question-and-Answer Session


(Operator Instructions) And it appears we have no other questions at this time.

Steve Plavin

Thank you everyone. We look forward to reporting to you next quarter.


This concludes today’s program. You may now disconnect at anytime. Thank you and have a great day.

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