Blackstone Mortgage Trust Inc (BXMT) 2004 Q1 法說會逐字稿

Hello and welcome to the Capital Trust first quarter 2004 results conference call. Before we begin please be advised the forward-looking statements expressed in today's call are subject to certain risks and uncertainties included but not limited to the continued performance, new origination volume and rate of the repayment of the company's NFS funds loan and investment portfolio, the continuing maturity and satisfaction of the compnay's portfolio assets as well as other risks contained in the company's latest Form 10-K and Form 10-Q title 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 John Klopp, CEO of Capital Trust. Go ahead, please.

Thank you. Good morning everyone. Thank you for joining us and for your continuing interest in Capital Trust. In the last 48 hours we've issued two press releases and made what seems to us like a blizzard of public filings, all good news but a lot to cover this morng so we'll get right to it.

On Tuesday we announced that we'd completed a direct placement of common shares to W. R. Berkley Corporation. For those of you who may not know W. R. Berkley is a New York stock enchange-listed insurance holding company, that's been existance for over 25 years. Their ticker symbol is BER. Led by its founder Bill Berkley, the company is known as a very savvy investor and we are very pleased that they've chosen to make a major commitment to Capital Trust.

Josh Polan, Managing Director of Berkley Capital, has also joined our Board of Directors and we look forward to the insight and counsel that the entire Berkley team will undoubtedly bring to our company. Essentially we sold 1,310,000 shares of common stock at $23.40 per share to raise a little over $30.5 million. In order to comply with New York Stock Exchange rules the transaction was structured as a two-step.

Subject to shareholder approval at our annual meeting on June 17th, Berkley will buy an additional 325,000 shares at the same price and the warrants that we issued this week for 365,000 shares will become exercisable at that point. Given the recent choppiness in the equity market particularly for rates particularly since April 1st, we think this was a great execution for the company that brings us a great long-term partner.

The immediate use of proceeds will be to pay down debt. But ultimately we intend to use this capital to continue growing our balance sheet assets and potentially to redeem a portion of our convertible trust preferred securities. We're working on several large transactions and as one or more of them gel in the coming weeks it will be clear why we needed the capital now.

Of course, the direct placement of stock to a single investor does not of -- in and of itself advance our stated goal of increasing the float in liquidity of this company. But given our investment opportunities we made the decision to raise this capital now and wait for a more stabilized market environment to do a bigger, broader, capital rate. Brian will give you the details on our first quarter results in just a moment but I will provide a brief overview.

Asset growth in the first quarter was strong with $67 million of new originations for the balance sheet and over $100 million of new originations for Fund III. Net of repayment earning assets increased by roughly $46 million, still a strong performance relative to our other stated goal, to grow balance sheet assets by $100 million for the year. Based solely on that first quarter I don't think, however, you can simply extrapolate, because the market today is very competitive, and we continue to be extremely selective on credit quality.

As a result, we expect that asset growth will be uneven as the year progresses. The other thing I'll point out is the ongoing migration of our balance sheet assets from larger and riskier Mezzanine loans to smaller and lower risk B Notes. As this migration continues you will see some impact on credit spreads but over time we believe greater efficiency on how we finance these lower risk assets.

Overall we feel good about our business and our prospects for the balance of 2004. Our assets continue to perform and the credit quality of all of our portfolios is extremely strong. In our market, competition has increased. Putting pressure on both credit spreads and underwriting standards. But by being opportunistic and nimble we're still finding good investment opportunities for the both the balance sheet and for Fund III.

I mentioned Fund III's first quarter production exceeded $100 million. And we actually just closed a very large transaction for the fund this week, a loan in the hospitality sector. And our production for the first year of the fund's investment period, which will end in June, will total approximately $500 million. Better, I presume, than all of our competitors but still a little bit behind in terms of our own internal objectives.

The issue that seems to be giving everybody the jitters today is interest rates. For Capital Trust, you have to look at two levels to assess the impact of potentially higher rates. First the credit impact on the loans in our portfolios and then secondly the income statement impact on the company itself. In the first instance we feel very good about the ability of our loans to withstand higher rates.

In addition the mandatory interest rate management features included in those loans, like slots and cap, the in-place average cash flow from the collateral that secures our loans relative to our last dollar of exposure is in excess of 11%, providing a significant cushion for refinancing at maturity. At the company level, a modest rise in rates will have almost no effect on us. And larger rate increases will actually benefit our net income.

Overall, we believe that a more normalized interest rate environment will actually be good for our marketplace and will definitely be good for Capital Trust. I'll turn it over now to Brian Oswald, our CFO, to go through specifics of our first quarter numbers. Brian.

Thank you, John, and good morning everyone. Last night we issued a press release reporting our first quarter results and filed our Q for the quarter. We reported net income of $3.1 million for the quarter ended March 31, 2004. On a per-share basis this represents 46 cents fully diluted, unchanged from the amount reported in the first quarter of 2003, and down from 54 cents in the fourth quarter of 2003.

On the balance sheet, total assets increased 17% from $400 to $466 million. During the quarter, we purchased $35 million of CMBS and made $32.5 million of new loans. More than offsetting $18.7 million of loan repayments and amortization and $3.1 million of Freddie Mac repayments. We're off to a strong start for the year and expect to exceed our stated goal of increasing net assets by $100 million in 2004.

On the liability side, there was one significant change from the presentation in our 2003 10-K. In evaluating FASB's interpretation number 46R, which was effective from March 15th, 2004, we concluded we could no longer consolidate CT Convertible Trust I the LED which issued the Convertible Trust Preferred or CTP Securities. We elect to restate prior periods as permitted by the interpretation. And there was no change to the previously reported net income as a result of restatement.

The resulting changes were generally cosmetic in nature with the CTP Securities being eliminated from the balance sheet and replaced with the underlying step-up convertible junior subordinated debentures included in liabilities which we sold to the trust back in 1998 and the convertible trust common securities included in assets which we purchased from the trust back in 1998. These debentures and common securities were previously eliminated in consolidation.

On the income statement, the expense from payment of interest on debentures is reported as interest and related expenses on convertible junior subordinated debentures. While I have described a number of changes to our presentation the bottom line is there are no changes to the economics of the instrument.

The combination of an increase in borrowing to finance the assets added in the first quarter and the inclusion of the debentures as liability will significantly change our reported debt-to-equity ratio from the levels we reported in the past. As of December 31st, 2003, we calculated our debt-to-equity ratio at 1.1 to 1. After the restatement for the inclusion of the debentures as liabilities the December 31st debt-to-equity ratio was 3.0 to 1. At March 31st, as a result of the increased borrowing to fund our new assets, our debt-to-equity ratio stands at 3.5 to 1.

Our liquidity position remains strong, and subsequent to the sale of the common stock earlier this week we have approximately $80 million of liquidity including 5 million of cash on hand and 75 million of available borrowings under our committed credity facility. While this level of liquidity is adequate to fund our near-term needs, we anticipate accessing the capital markets again later this year to redeem the outstanding subordinated debentures and fund additional balance sheet growth.

Our book value per share fluctuates based on a number of factors including sales of common stock and changes in the market value of our available for sale securities which includes our Freddie Mac and CMBS investments. While we are required to mark these assets at fair value the marks are accomplished through equity without any effects on our P&L.

We anticipate holding these securities to maturity and fully realizing their face valeu. This will result in our reversing these unrealized losses over time as we approach the maturity of the securities. Our calculation of book value per share, $14.71 at March 31st, includes 137,000 shares representing in the money options in addition to the 6.5 million shares outstanding. If the CTP shareholders were to convert their securities to common stock, book value per share would increase to $17.46 per share.

We are committed to maintaining an asset/liability mix which minimizes the negative effect to changes in interest rates on our future results. At March 31st, 2004, we had 16 investments totalling $186.9 million earning interest on a variable basis and 20 investments totalling $275.4 million earning interest at fixed rates. On the liabilities side, $259 million of our debt bears interest at floating rates and $92.7 million of subordinated debentures bears interest at fixed rates.

To insulate ourselves from significant changes in net income due to changes in interest rates we entered into rate swaps which converted $109 million of variable rate debt to fixed. After the swap, and including the effects from the investments in the fund we are positively correlated with the amount remaining at risk for changes in interest rates of $49.7 million. Based upon assets, liabilities, and hedges in place at March 3, an increase in LIBOR of 100 basis points would increase the annual net income by only $9,000.

This increase is lower than the expected increase of $497,000 due to the effects of floors in place on some of our floating rate loans. Further, a 300-basis-point spike in LIBOR would positively impact our earnings by approximately $908,000. These statistics show our intent and commitment to minimize the negative exposure and in fact capitalize on changes in interest rates.

Switching over to the income statement, diluted earnings per share for the quarter was 46 cents compared to 54 cents for the quarter ended December 31st, 2003. From the balance sheet, investment business, net interest income was virtually unchanged. We plan to continue making new loans and investments to replace further runoff of the Freddie Mac securities and any loan repayments resulting in net increase to assets, thereby increasing our net interest income.

From the investment management business, income from base management fees and equity investments in the fund was down $189,000, reflecting reduced management fees on Fund II as expected as the assets continue to repay and reduce the invested capital upon which the fees are calculated. G&A expenses were $113,000 higher than in the prior quarter due to increased compensation accruals as annual bonuses are accrued based on a percentage of expected net annual net income before bonuses.

Finally, the provision for income taxes was higher than that of the previous quarters as the taxable lease subsidiaries had higher levels of income than in the prior quarter. Within our investment management business we have the potential to earn significant future incentive management fees. As disclosed in the 10-Q if Fund II's assets were sold and its liabilities settled on April 1, 2004 at the recorded book value which is netted and allowance for possible credit losses and the fund equity and income were distributed, we would record approximately $7 million of incentive income representing our share of the incentive management fees.

This amount will change based on the duration of performance of the assets in the fund. We do not anticipate recognizing any of this incentive compensation until late in 2005. Fund III has a similar incentive management fee structure. We began deploying the fund's $425 million of committed capital in June 2003, and anticipate investing the remainder over the next 14 months.

At Fund III's targetrf leverage ratio of 2 to 1 we anticipate making investments of more than $1 billion over the fund's two-year investment period. Both Fund II and Fund III's investment portfolios are 100% performing and have not experienced any losses to date. Combining the two business units, CT reported net income of $3.1 million for the quarter ended March 31, compared to 3.6 million for quarter ended December 31st and $2.5 million for the quarter ended March 2003.

In March, we declared a dividend of 45 cents per share payable to holders of record on March 31st which was paid on April 15th. Our dividend policy is to set the divident at sustainable levels and pay dividends that equal or exceed our leased taxable income. That wraps it up for the financials and at this point I'll turn it back to John.

Thanks, Brian. And at this point I'll turn it to the audience to take any and all questions.

Thank you. At this time to ask a question please press the star and 1 on your touch-tone phone. Once again the instructions for asking a question, star and 1 on your touch-tone phone. If you're listening on a speakerphone I'd like to remind to you pick up your handset before you press star and 1. You may withdraw your question at any time by pressing the pound sign. We'll take our first question from Don Destino J&P Securities. Go ahead please.

Hi, guys. I got a few of them here. First, it looks like a lot of the -- or the majority of the net asset growth, or net earning asset growth, came from CMBS. Can you talk a little bit about what type of securities you bought and were they newly issued noninvestment grade? Are you buying on the secondary market, or what the opportunity is there?

Sure, yes. In the first quarter a not insignificant portion of our new originations were, in fact, CMBS. Essentially comprised of an investment-grade floating rate new issue Don. So you know, a little bit different than perhaps our traditional standard Mezzanine lending, a little bit lower risk, and obviously in securitized format. But good solid, large loan floater bonds.

Does an investment grade -- can you get the financing on an investment-grade security to kind of hit your return target?

The answer is yes. These are definitely financeable, and, in fact, can be financed a little bit higher advance rates than perhaps individual Mezzanine loans. These securities are basicially are rated BBB.

Got it. And then tou mentioned in the press release that there might be some strategic incentives or motivation or at least benefit from the W. R. Berkley investment. Can you provide a little more color what they might be able to help you with?

Well, I think they can help us with a variety of different things, but there's certainly nothing that is, you know, that is contractual, basically beyond the investment that they've made, and their joining their board. I think there's potential for to us do business together in a variety of different ways but none of that is in place today or anticipated.

Got it. And then finally, as you look at the markets today, is there anything else out there that looks interesting in terms of opportunities for new funds other than, you know, obviously you won't do another Mezzanine fund until Fund III is fully invested but are there any other asset classes that look interesting to you that you think you have the talent in place or at least acquireable to pursue?

Well, we think we have unending talent in place. But, no, we continue to look at a variety of different types of businesses and asset classes that we believe fit with our core expertise which essentially if you boil it down is credit, underwriting, and structuring. Those two being the primary features. I don't think there's anything that is near-term or certain enough to discuss at this point in time but as we've said in the past we continue to search the marketplace for ways that we can expand our franchise. We have always been in both the Mezzanine business and the CMBS business as obviously your first question indicated.

And we have been looking at increasing our internal capeabilities, our internal infrastructure to be able to focus more and more on smaller loan transactions, and more securitized, or more structured product. I think we're well underway in terms of putting that infrastructure in place. As the year progresses, we'll see. We've always looked at CMBS on an opportunistic basis, and going forward I think we will continue to do that but perhaps address that sector of the market in a little bit more programatic manner.

Thank you very much. That's helpful.

Thanks Don.

Thank you once again. The instruction for asking a question are star 1 on your touch-tone phone. You can press star 1 on your touch-phone anytime. Mr. Klopp at this time there appears to be no one else that's queuing up to ask a question so I'll turn the program back over to management.

Okay, well thank you very much everybody. Again, I think we've sort of said it all. More to come. We'll talk to you in a quarter. Thank you for your attention.