John Klopp - President, CEO and Director
Geoffrey Jervis - CFO
Capital Trust Inc. (CT) Q1 2008 Earnings Call May 7, 2008 10:00 AM ET
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Hello, and welcome to the Capital Trust first quarter 2008 results conference call. Before we begin, please be advised that the forward-looking statements expressed in today's call are subject to certain risks and uncertainties including but not limited to the continued performance, new origination volume and the rate of repayment of the company's, and its funds loan and investment portfolios, the continued maturity and satisfaction of the company's portfolio assets as well as other risks contained in the company's latest 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.
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 Mr. John Klopp, CEO of Capital Trust.
Thank you. I think this is Q1, I hope. Good morning everyone. Thank you for joining us and for your continuing interest in Capital Trust.
Last night, we reported our numbers for the first quarter and filed our 10-Q. In yet another wild period in the capital markets, arguably the most volatile we've experienced to date, CT stuck to its plan. We dialed back new originations, focused hard on our existing assets and liabilities, raised significant new capital to profit from the market disruption and produced steady earnings and dividends.
Geoff will run you through the details later in the call but the financial headlines include the following. Net income totaled $14.8 million, virtually unchanged from the first quarter of 2007 during a period when LIBOR averaged 3.3%, 200 basis points below the level of a year ago. On a per-share basis, EPS was $0.82, down 2 pennies and 2% year-over-year, due primarily to a [higher count 1:55] resulting from our March common equity offering. More on that in a moment. Most importantly to us, we paid a regular quarterly dividend of $0.80 per share consistent with our run rate for the last five quarters.
On our last call in early March, we identified the three priorities that we set for 2008, managing credit, maintaining financing, and raising new capital. On all three fronts, we feel very good about the progress we made in the first quarter.
Here is our report card. First, credit. We had no losses and no additional reserves and in general, our assets continued their strong performance. However, two balance sheet loans totaling $22 million, less than 1% of our total interest earning assets were nonperforming as of 3-31, and as of today. One is a $10 million second mortgage secured by land, the other, a $12 million first mortgage on a stalled condo convergent project. Both are in Southern California.
We believe that our existing provision is adequate to cover any losses and thankfully, we have zero additional exposure to the California housing market. The only other assets that experienced turbulence in the quarter was our Macklowe EOP position, which came due in February but was subsequently extended by the lending group to February 2009.
Our Macklowe exposure is $50 million at the balance sheet plus an additional pari passu amount held by one of our funds, and is secured by a portfolio of four Class A midtown Manhattan office buildings.
As reported in the press, the properties are currently in the very early stages of being offered for sale, pursuant to a consensual arrangement with the borrower, with the proceeds going to the lenders to repay debt. While transaction volume has been light for Midtown Manhattan office buildings, recent comps in the market support our position in the capital structure and we continue to believe that our investment is [money 4:01] good.
As the year unfolds and the liquidity crisis grinds on, we fully expect that additional credit issues will emerge in the commercial real estate sector creating problems for existing lenders and opportunities for those with capital. While no categories are immune, the obvious problem areas are loans with near-term maturities, condos and land.
Other than Macklowe, we have seven loans aggregating at a $113 million with '08 maturities, $47 million of which is scheduled to the payoff tomorrow. Other than the $12 million loan that just defaulted, we have four condo loans aggregating $89 million of outstanding, three of which, $67 million are sold out and scheduled to repay in the next 60 days.
Other than the $110 million loan against which we've already taken a reserve, and the full amount of our net exposure, we have no other land exposure in our loan portfolio. While there may be noise along the way, we are confident that our portfolios can weather this storm and will significantly outperform the market.
Second, financing. During Q1, we extended the maturity of our senior unsecured credit facility and made good progress in discussions with our repo lenders in anticipation of rollovers later in the year. In this environment, financing is a precious commodity, allocated by Wall Street to only the strongest and most reliable counterparties. CT is clearly one of the select few.
The unfortunate events at Bear Stearns claimed one of our best trading and financing partners. But the resolution with JPMorgan represents a very positive outcome for Capital Trust. While the process will require some give and take, and probably mostly give by us, we are absolutely confident in our ability to roll over our lines as they come due later in the year.
Third, new capital. In this difficult market, the true winners will be the firms that can manage their existing assets and liabilities and raise fresh capital to exploit current opportunities in a disrupted market. On this score, CT is demonstrating the power of its people and its platform.
During the quarter, we continued the capitalization of CT Opportunity Partners, our newest private equity fund, which now stands at just under $500 million of committed equity capital. We expect to finish this raise in Q2 and continue to build out our investment management business with additional targeted vehicles that complement the investment strategy of the balance sheet and allow us to take advantage of the full range of opportunities available in the market.
In the process, we generate additional streams of fee income which leverage our corporate capital and our human resources. Just before the end of the quarter, we also chose to augment our capital at CT, raising $113 million through a 4 million share of common issuance. This highly successful offering of straight common at a 20-plus percent premium to book value was executed at a time of extreme uncertainty and volatility when most of our peers were either shut out of the public market entirely or relegated to painful rescue type financing.
We are already deploying this capital into some of the best opportunities that we have seen in many years. Overall, we're satisfied with our performance in the first quarter and cautiously optimistic about the balance of the year. As I constantly tell my guys, this isn't a sprint, it's a marathon. It may not be pretty along the way, but we intend to finish strong. Thanks for sticking with us.
I will turn it over to Geoff to go through the numbers in detail.
Thank you, John, and good morning everyone. Before we begin, I want to point out that we are unable to comment further on any of our investment management products that are still in the marketing phase, and our comments on those funds will be limited to our prepared remarks.
I'll begin with the balance sheet. Total assets of the company were $3.3 billion at 3-31, an increase of $95 million or 3% when compared to where we were at the end of the year. During the period, we did not originate new assets for the balance sheet by design, and the increase of our total assets was due primarily to a $107 million net increase in our cash position generated by the proceeds of the common equity offering that we closed at the end of the first quarter.
We have already begun to put the proceeds to work, having consummated origination post quarter end, and have a healthy pipeline. It is our expectation that we will continue to ramp up origination and while we have strong demand for our capital, we will continue to exercise caution when putting it to work.
On the investment management front, we originated one new $49 million loan for the new CT Opportunity Partners fund, and like the balance sheet, we've originated additional assets subsequent to quarter end and have a healthy pipeline of potential transactions.
We continue to expect investment management activity to accelerate in 2008 as we now have multiple mandates investing and are continuing to actively pursue additional investment management strategies that we expect will further increase the scope of our platform.
On a net basis, Interest Earning Assets decreased by approximately $10 million. Repayments of approximately $40 million were partially offset by loan funding during the period of approximately $30 million. At March 31, the entire $3.1 billion portfolio of Interest Earning Assets had a weighted average all-in effective rate of 6.31%. From a credit standpoint, the average rating of the CMBS portfolio was BB, and the weighted average last dollar loan to value for the loan portfolio was 67%.
During the quarter, the CMBS portfolio experienced two upgrades, with a total book value of $10 million, and four downgrades, with a total book value of $48 million. Two of our downgrades were in vintage bonds that we acquired at deep discounts and we expected downgrades when we purchased the security.
The third security was downgraded for the special servicing fees paid by the trust despite continued positive outlook for the underlying credit. The fourth security is a 2006 vintage floating-rate security where our net exposure to the underlying properties is sub 50% LTV. In all cases, our bonds are either performing better than expected or the performance issues raised by the rating agencies are not expected to impact our cash flows.
In total, after giving effect to the quarter's rating activities, almost 70% of the portfolio is rated investment grade with 40% of the portfolio rated A, AA or AAA. And all the ratings data mentioned is based upon the lowest rating available for each to bond that we own. Furthermore, over 80% of our CMBS exposure is vintage 2005 and earlier. In summary, we continue to believe that our CMBS portfolio will perform well.
Over to the loans, our $2.3 billion portfolio continued to perform well despite one additional nonperforming loan since year end. We currently have two nonperforming loans on the balance sheet at quarter end with a total outstanding balance of $22 million, less than 1% of our portfolio.
The first NPL is the $10 million land loan that we reserved against in the fourth quarter of 2007. Our reserve against the loan is $4 million and as we have noted in the past, we have financed the loan on a stand-alone non-recourse basis such that our net exposure to the loan is a maximum of $4 million, the amount of our reserve.
The second loan is a condominium conversion project in Southern California, where we have a $12 million pari passu participation in a first mortgage, and while the loan is nonperforming, we continue to expect a full recovery of our $12 million loan balance. We are in negotiations with the borrower to take title to the property and the current borrower is cooperating in the transfer process.
Taking a deeper look into the loan portfolio, other than the one land loan against which we have taken a reserve, we do not have any other land exposure in the portfolio. We have five loans with a carrying value of $101 million collateralized by residential condominiums and other than the $12 million first mortgage that was previously discussed, all of these loans are performing and we expect them to continue to perform through maturity.
Looking at maturity exposures, we have seven loans with a carrying value of $113 million with final maturities in 2008 and six loans with a carrying value of $176 million with final maturities in 2009. In general, we feel confident that our portfolio will perform well.
As we have stated in the past, we do expect that we will continue to have noise in the portfolio and potentially isolated losses as the credit crisis evolves. But we feel that our underwriting process is second to none and that our experience will be strong on both an absolute and relative basis.
Moving down to equity investments. We have two equity investments in unconsolidated subsidiaries as of March 31. Both are co-investments in funds that we sponsored, A roughly $1 million investment in Fund III and our investment in the new Opportunity Fund.
Our equity commitment to the new fund is $25 million and we expect to fund our commitment over the fund's three-year investment period. The fund has raised $389 million of total equity commitments at quarter end and subsequent to quarter end, we raised an additional $100 million, bringing total commitment to $489 million.
Over to the right hand-side of the balance sheet, total interest-bearing liabilities defined as repurchase obligations, CDOs, our unsecured credit facility, and trust preferred securities, were $2.3 billion at March 31 and carried a weighted average cash coupon of 3.9% and a weighted average all-in effective rate of 4.15%.
Our repurchase obligations continued to provide us with a revolving component of our liability structure from a diverse group of counterparties. At the end of the quarter, our borrowings totaled $910 million against $1.6 billion of commitments from nine counterparties. We remain in compliance with all of our facility covenants and have $663 million of unutilized capacity on our repo line.
During the quarter, one of our repurchase agreement counterparties, Bear Stearns, experienced what can only be described as extreme liquidity pressure and responded by agreeing to combine with JPMorgan. Bear is one of our largest counterparties with $480 million of commitment, most maturing in August of this year, and $344 million of borrowings at quarter end on the balance sheet in addition to multiple relationships with our investment management vehicles.
At quarter end, our relationship with Bear Stearns was being managed by JPMorgan and we expect that our Bear Stearns lending relationship will be formally assumed by JPMorgan once the merger is consummated this summer.
JPMorgan is also a repurchase agreement counterparties with $250 million of commitments maturing in October of this year and $187 million of borrowings at quarter end on the balance sheet in addition to relationships with our investment management vehicles. We anticipate, based upon our conversations with both Bear and JPMorgan, that both of these credit relationships will be extended in 2008.
Our repurchase obligations are marked to market and we have posted additional collateral to our lenders as the fair value of our assets pledged to them as security has migrated as spreads have widened. Since the beginning of 2007, we have received a total of $83 million of margin calls, $46 million in 2008. Since quarter end, however, we have not had any material mark to market activity, and it had, in some instances, improvements in previous marks.
Our CDO liabilities at the end of quarter totaled $1.2 billion. This amount represents the notes that we have sold to third parties in our four balance sheet CDO transactions to date. At March 31, the all-in cost of our CDOs was 3.9%. All of our CDOs are performing and in compliance with their respective interest coverage over collateralization and reinvestment tests. At quarter end, total cash in our CDOs recorded as restricted cash on our balance sheet was $16 million.
In addition, we received upgrades on two classes of our third CDO from Fitch during the period. Of the 14 rated classes since issuance, nine have been upgraded by one to two notches and the remaining five classes have had their pre-existing ratings affirmed twice. Fitch attributes the rating activity to the improved credit quality of the portfolio and the seasoning of the collateral.
On March 31, we borrowed $100 million under our unsecured credit facility for a syndicate led by WestLB. During the quarter, we executed our option to extend the facility for a year, now maturing in 2009, with pricing of LIBOR plus 175.
The final component of interest-bearing liabilities is $125 million of trust preferred securities. In total, our $125 million of trust provides us with long-term financing at a cash cost of 7.2% or 7.3% on an all-in basis.
Over to the equity section, shareholders equity was $503 million at March 31, representing a $95 million or 23% increase from December 31. The increase was primarily attributable to our public share offering of 4 million Class A common shares that generated $113 million of net proceeds. This increase was offset in part by non-cash [Audio Gap] at the end of 2007.
Had we marked all of our assets and liabilities to market using the [Audio Gap], the net asset value of the company (inaudible), a 40% increase over stated book value. To be clear, this figure is arrived at by replacing book concerning assets and interests using the fair values disclosed...
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