Stephen Plavin – CEO, President and Director
Geoff Jervis – CFO, Treasurer and Secretary
Bernay Box – Bonanza Capital
Capital Trust, Inc. (CT) Q4 2011 Earnings Call February 14, 2012 10:00 AM ET
Hello, and welcome to the Capital Trust Fourth Quarter and Year End 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 capabilities to repay indebtedness as it comes due, competition for servicing and investment management assignments, its ability to originate investments, the availability of capital and the Company's tax status as well 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 the presentation. At this 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. Please go ahead sir.
Thank you. Good morning, everyone. Thank you for joining us and for your interest in Capital Trust. With me are Geoff Jervis, our Chief Financial Officer; and Tom Ruffing, our Chief Credit Officer and Head of Asset Management.
Last night, we filed our 10-K and announced our results for the fourth quarter, our third full quarter operating CT Legacy REIT the entity formed on March 31, 2011 to hold our legacy assets. Geoff will take you through our results, and also discuss our adjusted balance sheet and operating results.
The Capital Trust highlights for 2011 include the successful restructuring of our balance sheet assets and liabilities completed in March. Record revenues and profits at CT Investment Management Company, our invested management and special servicing subsidiary, strong performance of CT Legacy REIT, the entity formed to hold our former balance sheet assets and a $10.4 million increase in our cash balance to $34.8 million at year-end.
The formation of CT Legacy REIT established the necessary time and flexibility to work and collect our legacy assets in a market that should improve over time. Our management of Legacy REIT is focused on maximizing the recovery for all stakeholders, the largest of which are the Capital Trust shareholders.
Subsequent to year-end, we refinanced the remaining $65.3 million Legacy REIT mezzanine financing through an expansion of the senior credit facility with JPMorgan. The refinancing reduces the overall cost of debt in Legacy REIT; it helps to streamline the asset management.
Since the March formation of Legacy REIT, we have collected $270 million on 14 loans representing over 99% of par recovery. There are very significant credit challenges remaining within Legacy REIT, the result to some extent of adverse selection and paid out last year's float. We do remain confident that Tom and his team will continue to work the assets very hard and achieve strong results.
We had our best year ever in 2011 in CT Investment Management Company or CTIMCO, our wholly-owned investment management subsidiary which maintains the strong capabilities in a wide array of activities, lending, investing, asset management, capital raising, special servicing and operating as a public company parent.
Although our primary business remains Investment Management, we extended our special servicing business as the five year peak of the market loans approached the maturity. In particular, we have established a strong track record working at large structured floating rate loans will securitize senior mortgages and multiple charges of subordinate debt.
We generated over $9 million of special servicing fees in 2011 and have a good full year calendar going in to 2012. We do expect these fees to diminish beginning at 2013 as we get through the workout cycle. As the markets in general there still remains in excess of capital relative to transaction opportunities. Continued loan extensions, inability to achieve requisite proceeds from current market sales and refinancings are the primary reasons.
We expect this balance to begin to shift during 2012 and sale and recapitalization activity increase as more high loan-to-value financings reach truly final maturity. More lenders have forced to reduce portfolios because of regulatory pressure and the terms of new transaction improved to sellers due to lenders and buyers motivation to deploy capital. We believe that 2012 will be a good vintage for commercial real estate debt although debt risk remains high.
Global volatility directly affects liquidity in the CMBS market, so even a small market strips that can have its value impacted by financial markets in Europe. But the consequences should be short-term. The ultimate rise in the interest rates will also adversely affect values but we do believe that real estate fundamentals will improve from current levels.
The CMBS market, they will improve from the second half of last year remains fragile with the investor base for conduit bonds subordinate to senior AAA still thin. Although credit performance with current ventures CMBS is likely to be strong, investors are uncomfortable with the asset quality and conduit offerings and pricing to junior bonds remains wide.
The aggressive underwriting and weak credit performance of many legacy securitizations continues to overhang the market. Fear of event risk price volatility also chills new investment. The restoration of invested confidence in the economy and related commercial real estate credit performance is necessary to boost new conduit activity.
While the specific opportunities and commercial mortgage finance are still emerging from the downturn and will evolve and change over time. We believe that the scale of the opportunity is great and that our platform is well positioned.
Our structured financial work at expertise is being utilized in our special servicing of large complex financings. There will be an extending need for mezzanine financing to fill the proceeds gap on recapitalizations and acquisitions. The floating rate principle market and historic area of strength for CT, is still dislocated and highly inefficient funded primarily by private bridge lenders with the high cost of capital.
We also continue to see an expanding investment opportunity in the low LTV and mezzanine segment where we provide low risk financing junior to investment grade loans on core assets. A consequence of the aggressive management of our existing portfolios is that they diminish over time, so raising the capital replacement is critical.
We are working out plans for successor funds and strategies to expand our investment activities that we hope to allow later this year. The capital raising environment is challenging and there can be no assurance that we'll be successful but we do believe that the strength of our platform positions us well in these pursuits.
And with that I will turn over to Geoff.
Thank you, Steve and good morning everyone. As Steve mentioned last night we reported our earnings for 2011 and filed our 10-K.
Consolidated GAAP net income for the year was $258 million or $10.78 per share on a diluted basis. Total consolidated assets from the balance sheet stood at $1.4 billion and total consolidated liabilities were $1.5 billion resulting in GAAP equity of negative $129 million.
As we have discussed on previous calls our GAAP financial statements continued to be subject to required consolidation regimes, restoring the financial picture of the company. In order to address these presentational issues, in 2011, we 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 10-K.
We believe that these adjusted 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 of the liabilities in these vehicles are non-recourse, we only report 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 sale did not meet GAAP criteria for sale accounting and remain consolidated on our financials. We refer to these as participations sold. Third, non-cash interest expense related to the mark-to-market of interest rate swaps that are no longer designated as cash flow hedges has been eliminated. Finally, the fourth adjustment is that we divide the resulting financial statements into those of CT Legacy REIT and those specific to Capital Trust.
All the numbers discussed from here forward will be from the adjusted financials and as I mentioned earlier these can be found in the back of our earnings press release and also in the MD&A section of our 10-K.
Starting with Capital Trust, on an adjusted basis, CT recorded net income of $178 million or $7.87 per share driven primarily by gains recognized in conjunction with our March 2011 restructuring. For the fourth quarter, CT reported adjusted earnings of $8.5 million or $0.37 per share driven primarily by special servicing fees earned at our CTIMCO subsidiary.
Despite the complex GAAP financial statements, CT's business is straight forward when viewed on an adjusted basis. Our primary line of business, commercial real estate debt investment management is executed through our CTIMCO investment management and special servicing platform with $4.5 million of assets under management for mandates that included management of Capital Trust Inc., management of CT Legacy REIT, management of our private equity funds and separate accounts, collateral management of commercial real estate CDOs and special servicing of securitized loan investments for both CTIMCO managed vehicles and third parties.
In addition to CTIMCO, our adjusted assets as of December 31st include unrestricted cash of $35 million, our $10 million co-investment in CT Opportunity Partners I, a $25 million commitment of which $15 million remains unfunded and our common equity interest in the CT Legacy REIT portfolio recovery.
In the aggregate, our adjusted assets stood at a $114 million as of year-end. We have no recourse debt and our adjusted liabilities of $16 million are primarily comprised of the secured notes and the management incentive awards plan related solely to our interest in CT Legacy REIT.
Adjusted shareholder's equity was $98 million at year-end and on a fully diluted basis book value per share was $3.94. I will discuss our CTIMCO platform in further detail shortly but would first like to give some additional color around our net investment in CT Legacy REIT. As of quarter end CT Legacy REIT had adjusted assets of $260 million and adjusted liabilities of $124 million resulting in adjusted equity of a $136 million.
We own a 100% of CT Legacy REITs Class A1, shares 14% of its Class A2 shares and 8% of its Class B shares resulting in an aggregate investment in CT Legacy REIT of $62 million on an adjusted basis. Our interest in CT legacy REIT however is further subject to our obligations under the related non-recourse secured notes and management incentive awards plan.
The secured notes have a $7.8 million face-amount; however, they require a cash repayment of $11.1 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 provide for the participation in up to 6.75% of the net equity recovery of CT Legacy REIT. Net of these two obligations CT's adjusted book value in the CT Legacy portfolio is $42 million.
When thinking about CT's interest in CT Legacy REIT, it is important to note that this recovery is subordinate to the repayment of the debt at CT Legacy REIT and the secured notes.
Furthermore, as the portfolio matures over time, the asset base will become dominated by non-performing and troubled assets and the longer duration performing assets.
That said, the recovery is subject to material risks and is expected to occur in 2014 '15 and '16 and while the adjusted presentation is in market improvement to the consolidated GAAP presentation, it is important to keep in mind that these figures are not present values.
Turning to our Investment Management business, all of our investment management activities are conducted through CTIMCO, our wholly-owned taxable investment management subsidiary. Our investment management platform earned $10.6 million of gross revenues during the quarter and $22.2 million for the full year continuing to be a positive cash flow business.
CTIMCO continues to invest CT Opportunity Partners I which has $540 million of total equity commitments with over $250 million of dry powder available for investment through September of 2012 as we extended the investment period into copy (ph) in Q4.
CTIMCO other active private equity business line, the high the grade business as we refer to it, is investing on non-discretionary separate account basis as CT High Grade Partners II investment period expired in May.
In addition to these two business lines we continue to develop plans to capitalize other business lines including the bridge lending program.
As Steve mentioned, as we look forward, we see a very attractive commercial real estate lending environment with favorable supply demand in competitive dynamics. The management and the board continue to assess 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.
At December 31st, CT Legacy REIT's portfolio of interest earning assets included 17 loans for the principle balance of $372 million, adjusted book balance of $237 million and a fair value of $213 million.
In addition, CT Legacy REIT held 14 securities with a principle balance of $143 million, adjusted book balance of $7 million and fair value excluding CDO residual interests of $2 million. Altogether, interest earning assets totaled $245 million of adjusted book balance.
Since its inception on March 31st, CT Legacy REIT has collected $269 million or 54% of the initial net book value of the legacy portfolio. The portfolio continues to perform as expected and despite the flurry of payoffs received thus far we do not anticipate similar activity in the near-term as the portfolio has been culled down to the more difficult and longer term assets.
During the same timeframe CT Legacy REIT has repaid $267 million of liabilities, representing 69% of the post restructuring balance, bringing total debt at year end to a $124 million.
At year end liabilities included the repurchase facility with JPMorgan, carrying a $59 million balance and a rate of LIBOR plus 2.5% and the mezzanine loan carrying a balance of $65 million and a rate of 15%.
Subsequent to year end last week in fact, the company refinanced the JPMorgan repurchase facility and the mezzanine loan with a single new $124 million repurchase facility with JPMorgan. The facility matures in December 2014, carries a rate of LIBOR plus 5.5% that has paid down hurdle and associated potential rate increases going forward.
We are obviously very pleased with the refinancing having both reduced CT Legacy REIT's cost of debt and eliminated a multitude of receptive covenants associated with the former mezzanine loans.
At December 31, adjusted shareholders' equity at CT Legacy REIT was $136 million. As I mentioned previously, this translates to a $62 million investment at CT on adjusted basis or $42 million net of our obligations under the related secured notes and management incentive awards plan.
Before I hand it back to Steve, I want to take a moment to give a quick tax and regulatory update. From a tax standpoint, CT and at CT Legacy REIT subsidiary both operate as REITs and both continue to experience pressure on complying with the REIT rules as their respected portfolios liquidate. There are multiple tax planning options for both entities and we'll take advantage of these options should the need arise. From a regulatory standpoint, CTIMCO is now required to register as an investment advisor under mandates from the Dodd-Frank Act. And we took our first step last night filing Form ADV.
Finally, as we have reported to shareholders in the past, we are very involved with defending the real estate related exemptions from the Investment Company Act of 1940 and have been working with our peers and industry trade groups to lobby the SEC, as they continue to evaluate specific exemptions under which we operate.
And with that I will turn it back to Steve.
Thanks Geoff. Operator please open the call to anybody who has questions.
Absolutely. (Operator Instructions). Our first question comes from the side of Bernay Box with Bonanza Capital. Go ahead your line is open.
Bernay Box – Bonanza Capital
Could you give us a little more color on what your longer term game plan is with CTIMCO to possibly build the asset base up there and do you see given the fact that I think one of your comments was the commercial real estate business appeared to be overcapitalized well up to its opportunities. Where do you see the opportunities that actually grow the capital base at CTIMCO.
We're working on raising capital on a variety of fronts, our existing fund mandates in high grade and also in Opportunity Partners, we're developing the successor funds for those now and hope to roll those out later this year. So, we do intend to continue with those investment strategies. We're actively working on a bridge strategy and again, hoping to raise capital around that sometime in the second half of the year.
We see a lot of opportunities in the market. We see the dynamic in terms of the availability of capital versus opportunities changing during 2012. We think it will become better for lenders and investors than it is today, because we do think that there will be more force sellers, banks because of the regulatory pressure and borrowers as they reach truly final maturities in that financings.
Bernay Box – Bonanza Capital
Got you and on the shelf filing that you still have outstanding, what is the thought process behind that?
It's a $500 million shelf I mean it has a variety of products available to us and it is a tool in our work belt and we evaluate that as well as our other options as we think about capitalizing the businesses going forward.
Bernay Box – Bonanza Capital
So you think that the corporate level not externally raised capital, but internally raised capital, but that's something the company needs to address in 2012?
Unclear. Yes, we continue to evaluate. When we look at the business opportunities that are out there and we look at how best to exploit them, we will consider whether we want to raise third-party funds or potentially raise balance sheet capital to execute any of these strategies on balance sheet, so we continue to maintain the optionality to pursue either of those two approaches.
(Operator Instructions). There are no more questions at this time.
Thank you, everyone. We look forward to reporting to you next quarter.
This concludes today's conference call. You may now disconnect.
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