CapitalSource Inc. Q4 2007 Earnings Call Transcript

CapitalSource Inc. (CSE)

Q4 2007 Earnings Call

February 21, 2008 8:30 am ET

Executives

Dennis Oakes - VP of IR

John Delaney - Chairman and CEO

Tom Fink - SVP and CFO

Analysts

Bob Napoli - Piper Jaffray

Don Fandetti - Citigroup

Moshe Orenbuch - Credit Suisse

John Hecht - JMP Securities

Sameer Gokhale - KBW

Carl Drake - SunTrust Robinson Humphrey

Henry Coffey - Ferris, Baker Watts

James Shanahan - Wachovia Securities

Scott Valentin - FBR Capital Markets

Mike Taiano - Sandler O'Neill

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2007, CapitalSource Incorporated earnings conference call. (Operator Instructions)

I will now like to turn the presentation over to your host for today's call, Mr. Dennis Oakes, Vice President of Investor Relations. Please proceed.

Dennis Oakes

Thank you, Katrina. Good morning and thank you for joining us for the CapitalSource fourth quarter 2007 earnings conference call. With me today are John Delaney, our Chairman and Chief Executive Officer; and Tom Fink, our Chief Financial Officer.

The call is being webcast live on our website and a recording of the call will be available beginning at approximately 10:30 AM Eastern Time today. Our press release and website provide details on accessing the archived call.

I urge you to read the forward-looking statement language in our earnings release, but essentially it says statements in this earnings call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties and contingencies, many of which are beyond the control of CapitalSource's and which may cause actual results to differ materially from anticipated results. More detailed information about these risk factors can be found in our press release issued this morning and in our reports filed with the SEC. CapitalSource is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise, and we expressly disclaim any such obligation.

We have received many inquiries this week from investors, regarding the status of our acquisitions of TierOne Bank. As you know, we issued a press release on Monday, which indicated CapitalSource is continuing to evaluate the merger, and that our Board of Directors has authorized our Chairman and CEO to either renegotiate, or terminate the merger agreement.

Our application is still pending approval on The Office of Thrift Supervision, and the current terms of the merger agreement remain in effect that with the February 17 date having passed, either party may now terminate at will and without payment of the breakup fees that were in effect prior to that date.

Given the totality of circumstances in the contractual and securities law implication surrounding the proposed merger, our Legal Counsel has advised me and our senior management not to answer questions specific to the TierOne transaction. As a result, we respectfully ask callers not to pose such questions today. But John and Tom will be happy to address related or more general questions. At such times as there are additional material developments, we will report them promptly as required by SEC, NYSE and other applicable rules and laws.

I will turn the call over to now to John Delaney. John?

John Delaney

Thank you, Dennis, and good morning, everyone.

This quarter, as you see, we earned $0.51 in adjusted earnings and $2.32 for the full year, which we view as very strong performance, particularly in light of the other collapse of the capital markets. The central issue in the financial markets these days is credit and asset quality, and our credit continued to be very strong in the quarter with charge-offs downs significantly and non-accruals down slightly.

The fourth quarter and all of 2007 were characterized by strong credit performance, ample liquidity to fund our business, improved operating efficiencies and the continued origination of assets with superior risk adjusted returns. Of particular importance, the company navigated 2007 with no funding or financing issues, which I view as a huge testament to the quality of the work and planning of our finance group. All of the things we can control, we controlled very well.

Our results for both the quarter and the year were compressed by two things. First, we raised more capital than we anticipated through both our dividend reinvestment program and our direct stock purchase program. While this is not a negative in the classic sense of the word, it did result in de-leveraging of the business, which obviously lowers return on equity and adjusted earnings per share.

Second, we executed some higher cost financings in the second half of the year, and experienced some highly unusual spread compression, due to the dramatic swings in LIBOR and commercial paper rates.

Each of these things, de-leveraging of the business, executing higher cost financing and spread compression, due to unusual short-term funding volatility, are completely manageable, may be temporary, and don't undermine the foundation of our business model. The heart of our business is credit, liquidity, quality asset origination, and underwriting expertise in those areas, which also happen to be the essence of value in financial services we continue to excel.

As we look forward, I want to focus investors on four things; our dividend, opportunities in the market, impacts of a recession on our business, and our financing plan. First, we expect to pay quarterly cash dividends of $0.60 per share in 2008. Since the effects on our business I just outlined have been related to matters that don't impair the fundamental value of the business, we see no reason to alter our dividend payments.

Second, new lending opportunities are the best I have ever seen, and it's my bet they will even get better. We will talk about this in more detail at our Investor Conference in a few weeks. But by any measure, price, terms and structure they are incredibly attractive. We are cautious, however, as we expect opportunities to continue to improve.

Third, let me frame my view as to how the economic downturn or an economic downturn affects our business. Based on past experience, three of our businesses will be relatively unaffected in an economic downturn. They are healthcare, our security finance business, and our rediscount business.

The first two, comprising almost 40% of the balance sheet, serve as terrific anchors in recessionary times. The rediscount business, at almost 17% of the portfolio, is a highly structured asset secured portfolio specifically designed to be able to self-liquidate, and therefore, is also like to perform fine in a downturn. The remaining 40% to 45% of our business is in commercial real estate and corporate finance.

While these are clearly the areas that will have greater headwinds in a recession, we have a portfolio that in my judgment is not only currently in good shape from a credit perspective, but also one that was built with an eye towards managing risk. For example, in commercial real estate, we avoided much of the condo lending that is plaguing so many others.

And in corporate finance, we remained focused on building a very diverse, principally senior secured portfolio. In sum, our balance sheet was built with an eye that things could get worse. We have never taken the view that trees grow to the sky and certainly that view has informed the building of our portfolio.

Finally, we are very focused on restarting our capital markets program. Our past three securitizations have been single buyer transactions, and we want the next one to return to a broader distribution model. Across the last several weeks, Tom and I have been visiting with debt investors. I would characterize those meetings as positive and encouraging. As a result, I am cautiously optimistic that we will be able to again execute the more traditional transactions we used in the past to fund the growth of our business.

My confidence is based on my view of how the markets restructured debt will return and why CapitalSource remains a very good fit for them. Without going into too much detail, in the last couple of years, the securitization markets evolved into markets where the ultimate buyer of securities knew very little about the seller of those securities. This was very different from when we began the company and started using the securitization markets.

In recent years, the traditional lender and borrower relationship disappeared, and less relevant benchmarks like ratings and insurance, usurped fundamental credit work and intimate knowledge of the asset class. This is a far cry from the first securitizations when we would sit with investors and review in great detail, both CapitalSource's originator, and the specific loan assets themselves.

Today, the securitization markets remain largely closed because there is both a total lack of confidence in asset values, and pricing remains so volatile that only non-mark-to-market investors can invest. In my judgment, these markets will return in situations where buyers truly understand who they are lending to, and what assets they are lending against.

This type of transparency has always existed in the CapitalSource securitization program because we don't view these transactions as risk transfers, we view them as financings. In these transactions, our interests are aligned with those of the securitization investor, our lender.

We retained very significant investment in the assets being financed, and truly view the institutions to purchase our bonds as our lenders. This view of the world has been confirmed from the numerous real money buyers Tom and I have spoken to. They understand the value proposition of lending to CapitalSource, secured by the senior secured loans we have originated in service, and where we have significant skin in the game.

In sum, the senior team at CapitalSource and our Board of Directors are both very pleased with the current state of the business and truly excited for the year ahead. Importantly, the board members who are our true largest shareholders have demonstrated their positive view of our future in recent months by making large open-market purchases of our stock and reinvesting their quarterly dividends.

The best opportunities in 2008, in my judgment, we'll be making really safe senior loans at very attractive yields. This is just the stuff we like to do, it's the stuff we were built for and it's just the stuff that will drive enormous returns in the future, as we continue to pursue strategies to best capitalize on those opportunities.

I will now turn the call over to Tom.

Tom Fink

Thanks John and good morning everyone. Our business did indeed perform well this quarter, and really performed well for the full year, particularly against the backdrop of what has been a very dramatic and very challenging market environment for financial institutions in the second half of 2007.

For CapitalSource, adjusted earnings were $108.3 million for the fourth quarter, up 11% from the third quarter, and $448.2 million for the full year 2007, up 5.3% from 2006.

I hope you have had a chance to review our press release this morning. In addition to the usual financial information, we provided some additional insight on the quarter and the full year in the business overview section. Also, with this release, we begin the separate reporting of our Healthcare Net Lease segment. As a result, we are now reporting our business in three reportable segments.

Commercial Finance, which is our historic commercial finance business oriented towards directly originating, primarily senior debt to middle market borrowers. Healthcare Net Lease, which directly invests in income producing properties in the long-term healthcare industry. These two segments previously were combined as commercial lending and investment.

And finally, the Residential Mortgage Investment segment, which we use to optimize our REIT structure, and which focuses on high quality assets, Fannie or Freddie guaranteed securities, and two pools of receivables composed of prime or super prime quality whole loans.

A quick word on the Residential segment, it continues to perform very well and indeed, all of the company is subjected for it. Our Fannie and Freddie guaranteed securities enjoyed ample liquidity throughout the quarter, and we continue to have no, zero funding issues there. We did not add any assets to the Residential portfolio during the quarter, so the portfolio balance is approximately $150 million lower. We also expect to see this portfolio shrink further in 2008.

We did see in the quarter, some widening of spreads for even the most high quality mortgage assets. As previously discussed, since we account for these agency securities as a trading portfolio, we mark-to-market the entire portfolio, both assets and hedges.

As a result, we do see, as we saw again this quarter, some volatility in our GAAP net income based on changes in this mortgage bases. However, we believe these bases changes, including the reduction we saw in the fourth quarter, will come back to us over time through market moves in the other direction or ultimately as the assets repay.

So as a long-term holder, we properly add back these losses to or another period to subtract gains from adjusted earnings to provide a more fair presentation of the fundamental performance of the company.

Returning to the core business, you'll see in our release that the new Healthcare Net Lease segment looks a lot like other publicly traded healthcare property REITs, in terms of assets, leverage, cost structure, returns, et cetera. And that make sense, because our business is essentially the same as the other healthcare property REITs.

Relative to our Commercial Finance business, the Healthcare Net Lease segment's income is primarily lease income, as compared to interest in fee income in the Commercial Finance segment. Healthcare Net Lease has fixed rate assets and fixed rate debt. Healthcare Net Lease is also lower levered than our Commercial Finance segment, as are the other healthcare REITs, and we are in lined with those healthcare REITs.

Breaking the Healthcare Net Lease segment from the old commercial lending and investment segment, impacts our metric somewhat in the remaining Commercial Finance segment. We have therefore, shown both third quarter and fourth quarter segment results for these two new segments, and our former commercial lending and investment segment in the earnings release to help with that translation.

Also, as I go through the rest of my remarks, I will try to be as clear as I can with comments as to when they pertain to the Commercial Finance segment or the Healthcare Lease segment.

During the quarter, we saw some modest growth in our Commercial Finance loan portfolio, up approximately $240 million, while our Healthcare Net Lease investment, our direct real estate investment that is, were roughly flat.

As we had anticipated in the third quarter, the net growth of both segments of this quarter was lower than what we would have expected before the meltdown in the capital markets. The net growth profiles of both segments are reflective of our prudence and discipline at CapitalSource.

We'll be talking about all this more, during our investor conference in a couple of weeks. But the market dislocation has created a wider bid-ask spread, as some lenders like CapitalSource have recognized the new realities in the market, and have adjusted pricing for it. But it is not fully setting yet with borrowers.

Credit, as John mentioned, continued to be strong and stable during the quarter. Charge-offs were $6 million in the quarter, or 22 basis points of commercial assets, down substantially as expected from the third quarter.

Further, the forward-looking metrics continue to be good. Loans on non-accrual, our primary metric improved slightly from the third quarter and remained at the low end of our historical ranges and continue the improving the trend we have seen this year.

However, to put this in better perspective, not only is the loan non-accrual credit statistic better than at yearend 2006, but the dollar balance of loans on non-accrual is lower than last year too.

As a predominately floating rate lender, interest income in the commercial finance segment was down in dollar terms this quarter, primarily due to the decrease in LIBOR. However, as we laid out in our press release, our average coupon rate of interest on our commercial loan portfolio expressed as a spread to LIBOR, was up slightly in the quarter.

And further on the topic of yield is fee income, as predicted yield on our Commercial Finance portfolio was enhanced this past quarter, by an increase in pre-payment related fee income.

Cost of funds is a bit of the story this quarter and here is an area where we could clearly see some affect of the capital markets disruption.

On the service, cost of funds in our Commercial Finance segment looks relatively unaffected, up just 3 basis points from the prior quarter. However, as a spread to 30 day LIBOR, cost of funds increased 55 basis points from last quarter, as average LIBOR was 52 basis points lower in the fourth quarter compared to the third.

There are two forces that work here, first is higher credit spreads on our incremental financing. As we identified in each of the press releases we issued for our securitizations completed in the second half, the spreads on this financings were much wider than we had historically seen due to the dramatic widening of spreads generally in the market. This widening of credit spread is the new reality, just like wider spreads we expect to see on our assets. I don't think this reality is going to abate anytime soon.

We expect to see similarly wide or wider spreads on new securitizations that we may complete. Also as we renew credit facilities, I would expect them to reprise at higher levels as well. I expect this to contribute to wider borrowing spreads to LIBOR throughout 2008, with this being offset by wider spreads on new assets and reprising of some existing assets to wider spread.

The second force that works here in cost of funds or borrowing spread to LIBOR, is the volatility we have seen in the short term funding markets. Here the effects of the market disruption on us can clearly be seen in a few different ways. First we have spoken for years about our cost of funds as a borrowing spread to average 30 day LIBOR, since much of our debt is LIBOR based, usually resetting monthly on a specific day, or on a few specific days during the month. And what is not LIBOR based directly, is priced using a base rate for example, a conduit's weighted average CP rate that has historically held a very steady relationship to LIBOR.

To put it mildly, LIBOR has been very volatile in the second half of 2007. So in a month, were LIBOR can drop 75 basis points on a single day, it is mattered on which day your LIBOR price debt resets. Also LIBOR has not been behaving normally as the Fed has assumed in easing posture, typically LIBOR being a market rate would anticipate Fed moves and adjust downwards in advance of an expected Fed rate cut, in recent months it has not.

The prime rate on the other hand, has continued its historic linkage to the Fed funds rate and has adjusted downward as the Fed rate cuts were implemented. Since we price the fair amount of our loans based on prime, and have historically not hedged the prime LIBOR basis risk, this compression of the prime LIBOR spread has also resulted in some unusual spread compression for us.

Put this in perspective, expect for very short periods, as the market anticipated a Fed rate change, the prime LIBOR spread has been relatively steady over the last 15 years at 280 basis points to 290 basis points. Since the second half of last year, we have seen that spread gap out in both directions, to as high as 300 basis points and to as low as 200 basis points in the quarter. Most of that has been below the average level, which hurts our margins somewhat.

And finally, given the impact of the liquidity crises on the CP markets, our credit facility have experienced higher pricing on our CP as a spread to LIBOR and had passed that cost on to us. Also, with rates falling during the quarter and indeed into the first quarter of this year, it is hard for CP facilities, which generally have a weighted average maturity of 45 days or so, to keep up with the rapid drop in LIBOR. So, cost of funds tends to lag a little bit, to fast and large changes in LIBOR.

I know that's a lot to absorb, but there have been some very unusual dynamics at work, so I thought it would be helpful to explain them in some detail. In time, I expect some of these dynamics will settle back to normal. Asset spreads will be permanently wider, and liability spreads wider as well, but I expect the noise with respect to prime LIBOR and CP movements to stabilize and move back to normal levels.

This market impact is something we do not have much control over as John indicated and has had an impact on our results. However, it is something that can abate, whereas we do not think the higher credit spread environment will.

Let me wrap with a few points on leverage and I also want to share a few words about accounting, at least as it affects what I would call asymmetrical accounting that shows up in other income that we adjust for in adjusted earnings. Leverage for the quarter was slightly lower than the fourth quarter on a consolidated basis, when considering our old commercial lending and investment segment, there, as we discussed in our release, the period ending leverage was 3.98 times at December 31st, down from 4.03 at September 30th. In terms of our new Commercial Financial segment, leverage was lower at 4.39 times down from 4.48 at December 31st, with Healthcare and Net Lease segment, which has lower leverage like other healthcare REIT's, leverage at quarter end was 1.54 times, roughly flat to the third quarter.

And finally, a word about other income, and asymmetrical accounting. As we've explained in the press release, a big number rolling through out other income this quarter is a $31.5 million, unrealized loss on derivatives. This is an unrealized loss on derivatives on interest rate swaps that we use to minimize interest rate risk in our commercial business.

We've always described our business as interest rate insensitive and the interest rate swaps we have used are designed to achieve this goal and rocking the spreads on our assets when we make them. The swaps we have entered are hedges, not speculative positions, but we have not applied hedge accounting to them. Without hedge accounting, we have some asymmetry and now we must mark our derivatives to market, but we are not marking the other side of the transaction.

We are not marking the underlying hedged asset or liability. We believe for example that there is substantial appreciation in our Healthcare Net Lease business, where we have swapped our fixed rate lease income to floating in order to lock in the spread. Losses on those swaps and a falling interest rate environment, such as the fourth quarter of 2007, are reflected in our reported GAAP income. The corresponding appreciation in our net lease assets based on market comparables is not under GAAP accounting.

So as a reminder, these losses are unrealized and do not reflect the economic benefit to shareholders of this risk management strategy. As a result, we correct for this asymmetry and adjust for these unrealized losses through adjusted earnings.

In closing, I want to reiterate John's point that we view this quarter and the year as very good performance. We enter 2008 with strong credit metrics, excellent liquidity position and comfort that we will be able to continue to prosper through 2008 and beyond.

With that, I'll turn the call back to Dennis.

Dennis Oakes

Thank you, Tom. Operator, we're going to be ready for the question now. We do ask that questioners limit themselves to one question and one follow-up, so we can get to as many callers as possible this morning.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Bob Napoli representing Piper Jaffray. Please proceed.

Bob Napoli - Piper Jaffray

Good morning.

John Delaney

Hi, Bob.

Bob Napoli - Piper Jaffray

John, Tom, I was hoping you guys could give a little update on your bank strategy to the extent that, I think, you said you'll take related questions. Where do you stand with the Industrial Bank? And if you do not close the TierOne Bank, what is your strategy and beyond that?

John Delaney

Sure, Bob. As Dennis indicated, and as you kind of framed in your question, we won't address TierOne specifically. But we can talk about our view on deposit-based funding, which really hasn't changed. We view deposit-based funding as a very attractive source of funding for the business. We think our assets are very much bank-like. I think the credit performance this quarter even underscores that further.

If you consider some of the volatility Tom discussed around our funding, which isn't volatility-related, so available to your funding. But there is volatility around spreads, which is exactly what we talked about when we announced the TierOne acquisition.

In fact, we put a slide up that showed what has happened to deposit-based funding through periods of unrest in the capital markets and what happened to capital markets funding in period of unrest. And historically, you've seen capital markets funding widen and deposit funding not, and that's certainly happening today.

So again, I think these events confirm our view that deposit-based funding is attractive and I believe we have several avenues that we can purse to obtain deposit-based funding. It has to be something that makes sense for the company, of course, looking at all the aspects of how we obtain it. So I would say that our view as to its attractiveness is unchanged. One would argue that the current environment kind of supports these pieces that we've had for some time about the importance to deposit-based funding. We intend to continue to pursue it in the way that makes the best and most sense for the company.

Bob Napoli - Piper Jaffray

Are you doing the Industrial Bank?

Tom Fink

Yeah. We still have our application pending with the Industrial Bank. I mean we were sequencing these things kind of around TierOne. So yes, it's still pending.

Bob Napoli - Piper Jaffray

Just a follow-up question, the adjusted earnings for 2008, if you can give any kind of feel? I mean with the $0.60 dividend, I know a lot of that dividend is paid in stock to your large shareholders you might think that some management members are supposed to get that?

Tom Fink

Yes

Bob Napoli - Piper Jaffray

But with the adjusted earnings, would you expect the adjusted earnings to be able to cover the dividend

Tom Fink

We're not guiding, at least at this point, we're not guiding for adjusted earnings for '08. So I probably can't answer that question. The only thing we provided at this time is guidance around the dividend.

Bob Napoli - Piper Jaffray

Okay. Thank you.

Tom Fink

Sure.

Operator

Your next question comes from the line of Don Fandetti representing Citigroup. Please proceed

Don Fandetti - Citigroup

Hi. Good morning. John, I was intrigued by your commentary about the securitization markets. It seems like it's counterintuitive. Obviously, spreads are widening and there's increased fears in the credit markets. What makes you so confident that you can a CLO down or some type of CLO-type structure?

John Delaney

Well, I'm not confident that we can get a CLO done at the levels of the degree of attractiveness we are able to, let me just clear there. But I do have a degree of confidence that we can get one done. And I would say that's based on, as I said, Tom and I have spent a lot of time in the last two weeks meeting with investors, both here and in Europe.

And the number of debt investors who invest in the securitization markets used to be quite large, and now it's quite small. And the difference is the only people really investing now are what I call real money buyers; banks, insurance companies, people like that. There are no synthetic vehicles that are investing in the markets anymore, because most of them aren't able to do that.

And when we sit down with these real money buyers and have the kind of dialogue around what we do, most of them know us. What we're interested in getting for them in the securitization markets, which is principally selling the senior bonds, not driving very high leverage in the structure, and with CapitalSource, maintaining a fair amount of equity.

You definitely sense from these buyers that they view this as a very good opportunity, because many of these buyers were forced to invest in more junior bonds because of spreads, and because they had certain yield requirement. So they had invested in kind of A and maybe BBB bonds, and now they can essentially make the same spreads investing in AAA bonds and AA bonds. So, they view this as a good opportunity.

I think like a lot of people are waiting for some equilibrium in the market, which we obviously don't have yet. But again, based on these face-to-face meetings across a couple of weeks, which we had, I have a view that we will be able to get a securitization done, that would be viewed as a very conservative securitization as it relates to the person who is investing in it, meaning the structure would be very tight, the leverage would be low and the spreads would be wide.

But I think many of these institutions actually view investing in these securitizations, and again, when I talk about these institutions, I'm talking about these real cash buyers, many of which are banks. I think they view it as essentially lending to us and not lending a warehouse relationship, but essentially lending on a discrete pool of assets. And I think they view the amount of equity we have in the deal as effectively, almost being a recourse transaction to CapitalSource, because they know we want to defend the structure, which we have historically.

So I would say that my short answer would be my confidence is based on doing a lot of work around this and talking to investors. The confidence is not so high to stick here and say that we will do deals as attractive as we did in the past. I think the deals will be very different going forward. But having said that, I think the financing will be very different as well. So the net result will be the same. We'll have better assets and the people investing in our securitizations will have better assets.

Don Fandetti - Citigroup

Okay. I will leave it at that. Thank you.

Operator

Your next question comes from the line of Moshe Orenbuch representing Credit Suisse. Please proceed.

John Delaney

Are you there, Moshe? Operator, maybe we should move on and then come back.

Operator

Your next question comes from the line of John Hecht representing JMP Securities. Please proceed.

John Hecht - JMP Securities

Good morning, guys.

John Delaney

Good morning John.

Tom Fink

Hey John.

John Hecht - JMP Securities

You experienced modest growth in the commercial loan portfolio during the quarter and a little bit of contraction in the net leasing business. I wonder if you can tell us what types of products you are seeing demand in? What you are seeing in terms of the competitive behavior given the credit markets now? And what we should expect in the near-term for continued potential growth in that net leasing business?

Tom Fink

Sure. The net lease, contraction I think it was just depreciation.

John Delaney

We had a sale of one small property during the quarter and the rest of it is just the normal depreciation, which is about $9 million a quarter.

Tom Fink

And what we have said about that business tends to be pretty lumpy, John. The transactions tend to be a little larger, or sometimes it's a pool transaction. And so you don't see the kind of smooth growth in that business than you do in some of our other businesses.

In terms of where we are seeing opportunities, we push spreads pretty aggressively across all of our businesses, and I would say we've largely been ahead of most of our competitors in the market.

In fact, there were certain competitors that in the fall, which view this as somewhat of a temporary glitch and increase spreads modestly and try to do a lot of business. And they did in fact, and that turned out to be a bad decision. We didn't do that. We pushed spreads pretty aggressively, pretty darn early in August and September.

John Delaney

And that obviously resulted in slower growth. But we think the market is catching up to where we are. The market in general is very slow right now, because CapitalSource particularly states in what I describe as a transactional marketplace, meaning most of the stuff we are financing are deals of some sort or another.

There is a lot of buyer and seller disconnect, as communicated in his comments right now. I think buyers are focusing on asset values coming down, because there is no question that asset values, at least in my judgment will be coming in across all the sectors we participate in, whether it would be leverage buyouts or commercial real estate. I think we'll look back at '06 and '07 in these really historic levels of valuations in leverage buyouts for example. I think there is going to be very significant depreciation in the value of a lot of these companies.

But so we have been very cautious about whole thing. We were seeing a lot of opportunities right now. I would say interestingly, our healthcare business, particularly our healthcare accounts receivable business, which is a terrific business. But a one we haven't been able to grow that much in the past several years, has its deepest pipeline ever, dramatically deeper than it has been in the past. So, we are seeing good opportunities there and our Healthcare Real Estate business is still looking at stuff. Commercial Real Estate is largely pretty slow. There is not a lot happening in that marketplace.

Then in the Corporate Finance business, we are prudently pursuing opportunities and we are doing some deals. But again, there is a pretty big disconnect, I think between buyers and sellers right now. So in general, deal volume is down, where it's up, it's probably in the healthcare business.

John Hecht - JMP Securities

Okay. And then as a follow-up to that kind of commentary, I am trying to determine where margins might go in the near term. And the one that sounds like incremental spreads and new deals are higher, albeit in a slower pace of transaction activity. But given the liability structure, it seems like the prime LIBOR spreads has stabilized a little bit since the year end and LIBOR volatility has stabilized a little bit as well. Should we get some of the benefits of declining treasury curves in LIBOR rates to come to fruition in the near term here? Is there still a little bit of volatility in the liability structure?

John Delaney

I will let Tom answer that.

Tom Fink

Sure, John. I would say that of that increase in our borrowing spread to LIBOR last quarter, a fair amount of it, probably about half of it was due to this market noise, prime LIBOR, the reset issues around LIBOR, etcetera. CP conduit rates related to LIBOR. You are absolutely right, those things are stabilizing, and we expect them to. The prime LIBOR spread today is right back in a normal level. So, we do expect that to abate, the noises are about to abate, and then we will be left with looking at, higher credit spreads of course on incremental financings, but higher credit spreads on new assets.

Tom Fink

Yeah, and with out question, as we had indicated last quarter that we're seeing at least 200 basis points widening in new assets, and that's clearly continuing if not widening.

John Hecht - JMP Securities

And so, given, at some point I guess it didn't -- just trying to judge from the model, we should see widening spreads in new business start benefiting your margins, but my guess is we are couple of quarters off from that given the pace in new business.

John Delaney

That's right and if I could I may use your question John to kind of just lift up a little bit and frame, where I think you are going, which is how does all this change our business model. And really, if we go back to, say August, when this stuff was just starting to hit and go through today and you think about what affect did this, as I described it, this kind of utter collapse of the capital markets has had on our business and how it changes our business.

Let me try to address that, broadly speaking financial services companies have been affected in really three ways, based on what's happened. Many have been affected on the asset quality side, dramatic affects in credit and asset quality, that hasn't happened to CapitalSource. As you see that our asset quality has actually improved through that cycle. And to me that's really the heart of this businesses right. So that hasn't affected us. Other companies have lost access to funding, right that has happened to CapitalSource.

And the third thing that has happened is some companies have had spread compressions. That has happened to CapitalSource. And it has really happened, and I am thinking about it from the perspective of ROE for two reasons. Number one, we basically had de-levered the business, based on what's going on in the capital market, and that was somewhat of a cautious and prudent orientation that we took. We were expecting to run this business with much higher leverages than we have now. We raised a fair amount of support in capital, in the form of equity and convertible debt in the last six or seven months, if you remember we did a deal, a convertible deal in August, which was very controversial at that time, July, and then we've raised a fair amount of capital through our dividend reinvestment program and direct stock purchase program.

No, we really de-levered the business, fairly dramatically, from where we thought the business would be out right now. And that obviously hurts ROE. Again, I view that as a temporary issue, because it's so much financial engineering, lever your business more, your ROE goes up, if you lever it less, it goes down. And then Tom described in great detail, he had to live with a lot of very unusual volatility on the funding side, some of which is somewhat permanent, where did some financings that are more expensive, but other is some of this movement of rates.

And again, I think all that stuff will fix itself overtime. It's unfortunate. We wish it didn't happen, but relative to the two other things that could have happened, which is massive asset quality deterioration, which hasn't occurred and has occurred to many other institutions and lack of funding, which has occurred and in fact our funding increased. So, I think we have come through this thing very, very well, which is one of the reasons we are fairly optimistic about the business, about the divided etcetera.

But in terms of when the model readjusted, what essentially happened is we've had a somewhat of a faster increase in our cost of funds than we've been able to make up on the asset side, which I think where you're were going. Now, I expect that to catch up over the next several quarters, meaning we're originating assets in much higher spread. We have a fair amount of run-off in the portfolio, which we still have and that's being replaced with assets at much higher spreads. And then I think we'll start chipping away some of this volatility on the funding side, so what will start emerging is a business at least in my judgment that will probably have lower leverage than we anticipated, but can get back to same ROE. And it will get there with higher funding costs, but higher assets spreads.

John Hecht - JMP Securities

Thanks very much for the color.

Operator

Your next question comes from the line of Moshe Orenbuch representing Credit Suisse. Please proceed.

Moshe Orenbuch – Credit Suisse

See if you can make this work this time, can you hear me?

John Delaney

Yes, we hear you very well.

Moshe Orenbuch – Credit Suisse

Okay. I guess two thoughts, one is, could you just may be little more specific about the effects in the fourth quarter of that prime LIBOR and kind of the undoing of that at least so far in the first quarter?

John Delaney

Sure, Tom?

Tom Fink

Yeah, what I said just a minute ago Moshe was that, I mean it's hard to separate out all of these things discretely, so if you put all of these noise in one bucket it's probably 25 basis points or so of the increase in the cost of fund. The prime LIBOR compression, that shows up in margin, because you see cost of funds going up or not going down as fast as yield will be going down.

So, to give you some stats on that, what was very steady prime LIBOR, if you look at it in the first half the average prime LIBOR spread in the first half was 293 basis points and the standard deviation was zero, meaning it was 293 basis points every single day of the first half. If you look at it in the third quarter on average it was 275 basis points, if you look at it in the fourth quarter it was 260 basis points. So, the year-to-date in 2008 it's about 291, so it is sort of back in the normal rate. So hopefully that quantifies it for you.

Moshe Orenbuch - Credit Suisse

Great. And then, I guess with respect to your thoughts on kind of the adjusted earnings level versus the dividends, someone asked a question or kind of inferred that since part of that dividend is paid at the start, is there a period of time where you are willing to under earn the dividend, how should we think about that?

John Delaney

Well, let me direct that. I mean we think, as I said, the reasons that the adjusted earnings, for example, this quarter were below the dividend is because of the financial leverage in the business and really cost of funds. And again, we think those two things get to margin, and we think to some extent they will correct themselves overtime by higher yield on the assets that we're originating now, improvement in the relative cost of funds based on some of this dynamic Tom is talking about going away. And actually not improving leverage, we think leverage will probably not go up based on what's going on in the markets. So we think that will stabilize back to the level what you're referring to.

In terms of how we think about covering the dividend, I mean if you do the math on how much the company earned, how much it pays out in dividends, and then how much gets reinvested through dividend reimbursement program, it's clearly very positive if you do the math on that equation, which I think allows us to comfortably work through this short-term adjustment that we're going through, but again doesn't get to the fundamental value of the business.

I think answering this question very differently, if the reason that we have to disconnect you're referring to as over credit, right, because that really goes to the heart of the business and the heart of the performance of the company. So I'll be answering the question very, very differently, because it's due to stuff that we think is temporary/short-term/self-correcting based on the actions we're are taking.

And again, we'll have more insight into that as things unfold across the next year, of course. And when you consider the cash flow dynamic that I just described between what the company earns, what it pays on dividends and how much reinvestment, we feel very comfortable with our decision.

Moshe Orenbuch - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Sameer Gokhale representing KBW. Please proceed.

Sameer Gokhale - KBW

Hi. Good morning. I guess most of my questions have been answered at this point, but one of the things I just wanted to go back to a little bit was the issue of the topic of the wider bid-ask spreads that you talked about a few minutes ago. And I was wondering if you could quantify that for us. I mean it does seem like some competitors in a certain sense may have under-priced you guys and taken away some business, but what is the current bid-ask if you were to characterize that on recent deals that you may have lost to competitors?

And you have said that you expect pricing to improve going forward. Doesn't that imply to a certain extent that you're taking the opposite bet from some of the borrowers who may be hesitating to borrow now? But if spreads are just going to widen out for them, going forward, and it's going cost them even more, are they essentially taking the opposite bet? So I just wanted to get just some more color on that in addition to what you already talked about.

John Delaney

Sure, I mean a couple of things have happened, Sameer. One is we've actually lost a lot of competitors, which is a point that we were talking about last quarter, that we haven't really made on this call yet. But many of our principal competitors are effectively out of business or reorient their business in different ways.

So, I think to some extent I view us negotiating transactions now as a little less of the dialogue between the borrower telling us what other people will do, and trying to negotiate as to a point based on that, and a little more, the borrower trying to rationalize for themselves that what we're are talking about is the right pricing.

So we have really seen, I almost can't describe it as fully as it has happened and just kind of an utter drop-off in competition. I mean, for example Merrill Lynch Capital, one of our large competitors, which is one of the groups that kind of loaded up a little bit in the late summer, early fall, because they thought this was temporary, has now been sold to GE, and is effectively out of business.

So the dialogue is much more, because a lot of our borrowers are also using our money to make an investment of their equity capital, because across most of our businesses, we are principally financing investors. And what they are dealing with on the other side, is trying to figure out what the right price should be on these assets.

Based on the increased financing costs, and based on just the fact that in all asset classes people are demanding higher returns, which should translate into equity values going down in middle market companies, that should translate into cap rates widening in commercial real estate etcetera.

This process with our borrower that we are dealing, trying to figure what the right spreads are, we are then trying to rationalize why we think spreads should be where they are. For example, if we are looking at making a senior loan in our LBO business. We are really, as of today, thinking almost 550 to 600 over LIBOR with 2.5 to 3 point fees. And that's a market that people thought it was a 350 over-market with 2-point fees. So, it's that kind of thing.

Some borrowers, if they think you are getting good deals will bite the bull and accept the financing. Others will accept the financing and try to drive good deals. We've actually seen a lot of middle-market private equity funds kind of re-cut and re-traded on deals that they had in a contract based on the kind of financing they are able to get. So it's a lot of that, just like there is a lack of people who have been in the securitization market, there is kind of a lack of equilibrium in some of the smaller end-markets that we finance.

Where buyers and sellers are going through the dance, it historically happens when markets disconnect like this, the sellers think prices haven't changed for them, buyers think prices have changed, and the lenders are demanding higher returns.

So, it's much less that we are loosing things to other people at this point and it's more of just borrowers getting a grip on what the financing costs are. And even to the extent they have a grip, it's being able to make good investments with that kind of financing. That's how I would describe the situation.

Sameer Gokhale - KBW

Okay. That's very helpful.

John Delaney

It's really very attractive. The kinds of things we're seeing are almost shocking in terms of how attractive they are.

Sameer Gokhale - KBW

Okay. Thank you.

Operator

Your next question comes from the line of Carl Drake representing SunTrust Robinson Humphrey. Please proceed.

Carl Drake - SunTrust Robinson Humphrey

Thank you, good morning. John, I was wondering if you could provide a little more color behind the forward credit pipeline with respect to the corporate finance business, commercial real estate, underlying borrower cash flow performance, and asset values in the bank?

John Delaney

Well, in the pipeline on those different businesses?

Carl Drake - SunTrust Robinson Humphrey

Yeah and particularly in light of and I don't think there is too much to read into the jump in the loan loss reserve. I think it was about 23 basis points. But maybe you could kind of touch on how those might perform at a downturn, and how the underlying cash flow performance and values are in those particular segments?

John Delaney

Yeah, as I talked about on this, we don't worry about the credit pipeline. Again, the credit performance has been good and the credit pipeline also looks good. I am being remindful of what's going on in the world, obviously, and we are thinking a lot about our portfolio, as it relates to that.

As I said on the call, the healthcare security finance rediscount provides nice anchors for our business, which distinguishes us, I think, from other businesses.

Tom Fink

40% to 45% of our business is however, commercial real estate through corporate finance. Commercial Real Estate, I think the team has been very disciplined. They didn't chase the condo lending business, which is turning into an utter disaster, and I think they've got a portfolio, that's about 16%, 17% of the portfolio of our total portfolio, and its touching all the different food groups of Commercial Real Estate.

Right now that portfolio is in good shape and we have done a lot of work on that portfolio in the last quarter, really making sure we understand the business plans of the borrowers, most of these situations have some form of financial sponsor or investor in the deal. A lot of exposures were actually in the New York City, which is still performing pretty well. A lot of our big deals in New York City are paying off, as we speak, few of them actually just got major recapitalization transactions.

And so, I would say in general we feel about as good about our commercial loan paying portfolios, as you could possibly feel, recognizing that we have a view that asset prices are coming in. And so, de-leveraging that portfolio that we have to go up, not because of any change in the dynamics of the portfolio, necessarily, but just because we think the underlying asset values are coming down. I wouldn't want to be a real estate mezzanine lender. I wouldn't want to have heavy exposure to condo finance. I think those are dangerous places to be. We are principally senior secured. We don't have nearly as much condo exposure as others, so I feel good about that portfolio.

Which doesn't mean we won't have a few blips if things continue to get rough, they certainly well. But again, with there being 17% of our portfolio and having the profile I just described, I think it's manageable. And then you get in corporate finance business, the corporate finance business touches lot of industries, and really the only two places right now where we are seeing any softness is in our retail portfolio and our media portfolio.

Our media and retail portfolios were each about 3% or 4% of the company's whole portfolio. They are part of our corporate finance business, and they are roughly 30%, 40% of our corporate finance business, those two. And the softness isn't across the board. Now retail portfolio, we break those companies down into the kind of two categories, especially brands and front-end retailers. We are really seeing the softness in the front-end retailers, not so much especially brands right now.

And in the media portfolio, the media portfolio kind of breaks down into two different buckets, ad based and non-ad based. Some B2B companies will be non-ad based if you will. And we are really seeing a lot of softness in the ad-based media properties. By and large that's the only place we are really seeing a lot of softness.

Bryan Corsini, our Chief Credit Officer is here with me now and he is not in approval with the statement I just made, which is good. But we are obviously very mindful. I mean the thing you have to remember Carl, is that we are senior lender, right? I wouldn't want to be, if you had mezzanine or equity exposure right now, it would be dramatically different what the performance will be, because we really see a lot of pressure on asset values and equity write downs, and you know the mezzanine could go into the equity. But if you are a senior lender like we are, and we've also managed hold prices pretty well, so to the extent that we have problems, we don't have massive -- several hundred million exposures in these things, most of the hold sizes are $15 million, $20 million, $25 million.

Knock on wood, we feel pretty good about that. We're in a bit of a huger down mode, we are really focused on the portfolio, and we are kind of waiting for things to pop up, we haven't see that much. So again, all of this informs our view that the credit pipeline is in good shape, and I say that with some knowledge of things, because we do engage in very active portfolio management here.

Carl Drake - SunTrust Robinson Humphrey

And with respect to the increase in the loan loss reserve, John is there anything to read into that. That seems if --

John Delaney

No. I mean if you look historically, our loan loss reserves have moved around. I don't think the levels right now are even at the historically highs.

Carl Drake - SunTrust Robinson Humphrey

And so, it was just unusually low because of the charge-off on some specific reserves last quarter?

John Delaney

And I think I addressed that. The dynamic you'll see when we charge things off, reserves go down, because part of our reserves are specific part of them are general, and when you charge-off something, it adds to the specific reserve, you generally release that specific reserve, and you don't always catch up in that same quarter.

Carl Drake - SunTrust Robinson Humphrey

So there is nothing mix-related in the quarter that --

John Delaney

No, no.

Carl Drake - SunTrust Robinson Humphrey

Okay. That's very helpful. Thank you.

John Delaney

Sure.

Operator

Your next question comes from the line of Henry Coffey representing Ferris, Baker Watts. Please proceed.

Henry Coffey - Ferris, Baker Watts

Hi. The absence of my phone ringing during this call tells me that about 300 of our retail people are very happy with you keeping the dividend, so if they hear me say any of this, they'll probably shoot me. What is the thought process behind keeping it at $0.60? It seems that you see a potential for a correction on the earnings side, obviously, some time during the course of 2008. How deep does your DRIP program allow people to go? Maybe you can talk about that a little bit.

John Delaney

Sure. When you say correction what are you referring to?

Henry Coffey - Ferris, Baker Watts

Well, an improvement in spread just kind of what Tom has been talking about all along?

John Delaney

As I said, when you look at the effect that this capital market disruption has on our business, I said this earlier, the heart of all these businesses is credit and asset quality. And what's happened in the capital markets hasn't affected us there. Following right behind that is liquidity. Often times those are linked. When your asset quality goes down, surprisingly your liquidity goes away. And our liquidity is very good, and in many ways has improved, and Tom has spoken to that. You can speak to him in more details. And so that didn't happen to us.

And then the third thing is we've had margin compression because we de-levered the business and we've had some unusual activity on the right side of the balance sheet. So most of our activity has been related, I would say, to margin, which is not as surprised. It would be hard to imagine coming through what just happened completely unscathed. And again, on a relative business, we didn't have asset quality issues that we have in funding issues, which are the big things.

We're optimistic about how the margin can improve overtime based on originating assets, how our spreads doing some work on the cost of funds. And so, we do know view what's really happened as it relates to margin as temporary in that the business can self-correct, meaning our liabilities have widened faster than our asset -spreads have widened. But we'll catch-up on asset side is the point I'm really trying to make here because we're not necessarily going to see a lot more widening on the liability side. And I think we will see continued widening on the asset side as the portfolio turns and we take advantage of this market opportunity.

So, that's probably the best way I can answer it by saying, as we look at the facts now, we're optimistic that this margin will improve. And so, we don't really feel the need to take any action.

Henry Coffey - Ferris, Baker Watts

On the portfolio turn issue, and that's obviously a big one because it hits all your revenue items right now, but what is the expected turnover of the portfolio over the next sort of 6 to 18 months? And a related question, how quickly can the margin correct?

John Delaney

Tom?

Tom Fink

Well, on the turnover, again, it's been very hard for us to forecast turnover because our portfolio doesn't behave in any kind of way relative to interest rates or those kinds of things. We don't get refied out typically when someone who save on their coupon. So it's really giving more buying things going on at borrower level.

Last quarter we talked about how prepayment fee income was down. The immediate temptation was to go at it well. Must be the market conditions because the prepay volume is down. And we said, well, we can't actually point anything in that regard. And sure enough, this quarter prepayment fee income is up as we expected it would be and prepayment volume was up relative to last quarter.

So, we can't really point anything in the market. I think it would be a fair thing to assume that runoff would be less in the quarter. But it's hard for me to give you a number that I would feel comfortable. Historically the runoff has been on a net basis 20% something. We can take half of that, but it's really hard for us to forecast that with any kind of scientific precision.

Henry Coffey - Ferris, Baker Watts

Thank you.

Operator

Your next question comes from the line of James Shanahan representing Wachovia Securities. Please proceed.

James Shanahan - Wachovia Securities

Thank you. Good morning. Nine months have passed here from the date of the announcement of the TierOne acquisition through mid-February. And this application has been in profits with the OTS, presumably for a significant portion at that time. That seems like a very long time to be outstanding with our resolution either way. I am really curious generally, is nine months a long time or what is typical for the OTS approval process, and to the extent you could comment specifically on reasons why the OTS has been slow to approve the application, that'd be great. Otherwise generally speaking, what would be a typical reason for such a lengthy delay?

John Delaney

Well, a lot of factors go into the approval process. And there are two things I will comment on, because again we're not going to comment specifically on TierOne, as you know, because we mentioned that earlier.

The first is that we want to be approved for a specific business plan. Our approach from the beginning and we describe this to people is we are not interested in being a passive investor in TierOne, so getting approved to be a passive investor is one level of approval, getting approved to integrate and we think utilize the institution etcetera is a different level approval.

But second point I'll make is probably the more important point and is that the OTS has been busy. It would probably be the best way I could describe it. And I would suspect it on the data to support this, but the OTS approval process is slower when they are busy and is faster when they are not busy. And I think you know they have been busy with several larger higher profile situations.

James Shanahan - Wachovia Securities

Sure.

John Delaney

And it's just our view that that has cost the process. I think we thought the process was normally kind of a six month process, based on whatever data you could compile and not much shorter than that by the way. We thought it was a six-month process.

So I don't think, when you consider the fact that the OTS has in fact been busy, I don't think we are necessarily at any kind of odd outer limits of how long this has taken.

James Shanahan - Wachovia Securities

Thank you very much.

Operator

Your next question comes from line of Scott Valentin representing FBR Capital Markets. Please proceed.

Scott Valentin - FBR Capital Markets

Good morning. Thanks for taking my question. I had two questions. First I guess, Tom, you kind of addressed maybe a little bit the turnover issue to portfolio. I was thinking of it more in terms of prepayment penalty income. You guys are right, it did increase this quarter. Was curious if this is kind of more of a rate that we should expect to see going forward, or if we should expect it to come down a little given the slowdown in turnover? And two, I was curious about the warehouse lines and where they stand and how much you sense it was?

Tom Fink

Sure. First in the prepayment-related fee income, we usually talk about in terms of basis points for the quarter, it was 49 basis points, which compares to what we've always talked about 50 basis points in guidance level. We did have a strong performance in that regard in the first half. So for the full year, I think we were around 60 basis points. But 50 is being our guidepost for really for ever, and I will say this is the quarter that we've actually gotten the closest to it.

We've been off on both directions and again that just goes back to the lack of ability to scientifically predict any of the stuff, because it's just very specific to what's happening in individual loans.

With respect to the credit facilities, as we indicated in the press release, we had $3.4 billion of undrawn committed funding at 12/31. So that's a very robust number, continues to be a very robust number for the company. To put that number in some historical perspective for you, I mean, the business grew about $2 billion last year and this is relative to the 3.4, and that compares to historical net growth of typically $1.7 billion or $1.8 billion a year.

Given all of John's comments, it's about, on the one hand the attractive opportunities that exist, but also the fact that we are going to be very selective. It's certainly possible that we would grow less than that this year, which makes that liquidity, that undrawn liquidity number even more impressive. So, it's something we've always focused on and there has been an area of big success for CapitalSource, all of our work on the right side of the balance sheet and I think it's a very impressive number.

Scott Valentin - FBR Capital Markets

Thank you.

John Delaney

Operator, we have time for one more question please.

Operator

Your final question will come from the line of Mike Taiano representing Sandler O'Neill. Please proceed.

Mike Taiano - Sandler O'Neill

Hey good morning. Most of my questions have been answered. I just had a question on the Healthcare Net Lease segment. Is there a plan to spin that off at some point possibly this year, and would you wait for the TONE acquisition to get resolved before doing that, or does this one not have anything to do with the other?

John Delaney

I would say they are related. I mean, I think particularly when you have an application pending with the regulator, you don't want to make dramatic changes to your business. Even ones, that that on their face, would produce a lot of shareholder value. So, I think there is some relationship there.

Mike Taiano - Sandler O'Neill

Okay.

Tom Fink

And I think clearly, breaking it out as a separate segment although, it's tied to our management of the segment as well. It does help you and others, I think, form a view as to the value of that business, which again is very comparable to other healthcare REIT's and performs at a very comparable level. So, I think it's pretty much connect the dots there.

Mike Taiano - Sandler O'Neill

Okay. Thanks a lot.

John Delaney

Thank you. I think that's it. Thanks for calling in everyone and obviously Tom, Dennis and myself are available to answer any of questions you may have throughout the day.

Dennis Oakes

And just one quick reminder that the webcast is posted later today and also that we have our investor conference coming up on March 3rd, which will also be webcast. Thanks very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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: [e-mail]. Thank you!