Blackstone Mortgage Trust Inc (BXMT) 2005 Q3 法說會逐字稿

Hello and welcome to the Capital Trust third-quarter 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 at the Company's and its funds, loan and investment portfolio; 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 question-and-answer session following the conclusion of the presentation. At this time, I will provide instructions for submitting a question to management. I would now like to turn the call over to John Klopp, CEO, Capital Trust.

Thank you. Good morning everyone. Thank you for joining us once again and for your continued interest in Capital Trust. Last night we reported our results for the third quarter and filed our 10-Q. All good news. No surprises and the numbers in fact are pretty straightforward. As a result, my comments will be brief.

Net income per share totaled $0.64, up 28% versus the comparable period last year and 10% higher than the second quarter of '05. Year-to-date GAAP net income totaled almost 28 million, compared to 12.5 million in 2004. On a per-share basis, earnings and dividends for the nine months were up 27 and 22% year-over-year.

The story of Q3 was strong growth in our balance sheet business, with total assets increasing by almost 300 million net during the quarter from 1 billion to 1.3 billion. New originations totaled a record 454 million with 339 million funded on the balance sheet and 115 million on behalf of CT Mezzanine Partners III.

As we expected, repayments moderated in the quarter, totaling only 42 million and contributing to our net growth. Year-to-date, total gross originations for both CT and Fund III now span at approximately 1.2 billion, well ahead of last year's record volume.

As you may recall, Fund III's investment period expired in June but allowed for committed transactions to be closed. So this quarter represents the last investment that Fund III will make. In addition, we've decided to put the capital raised for CT Mezzanine Partners IV on hold at this time. In an environment where good deals are increasingly hard to find, much of the business that would be done in Fund IV can simply be done more accretively on CT's balance sheet.

As a result, for at least the rest of '05 all of our origination efforts for mezzanine loans, B Notes, and CMBS will be for our own account. In the short term, we give up some fee income but believe that net interest margin from higher investment volumes will more than offset.

Going forward, we still intend to grow our investment management business and are currently working with our stable fund investors to create new products that utilize our core skills and our additive to our core business.

Over 50% of our third quarter originations took the form of longer-term fixed-rate investments, primarily CMBS that we acquired and simultaneously financed with our third CDO issuance in early August. These linked transactions demonstrate several of our strategies in today's environment; expand our targets to include more fixed-rate investments and more CMBS, lengthen the duration of our asset base to insulate against prepays, and utilize the CDO markets to provide cost-effective mass funded financing. Expect more of the same in coming months.

The market remains competitive but we are confident that Capital Trust's business model, platform, and people create a sustainable advantage that will allow us to succeed. The stock market seems to be worried about just about everything these days and credit quality, interest rates, and growth are near the top of the list. On all three fronts, CT is in great shape. The credit quality of our portfolios remains as strong as anyone in the business. Our balance sheet is well matched. Our cost of debt is competitive. And our earnings stand to increase as interest rates rise further.

We continue to find good opportunities to invest our capital, earn solid risk-adjusted returns, and grow our earnings and dividends, which is our primary mission.

Thank you for your confidence in us. At this point I'll turn it over to Geoff Jervis, our CFO, to run you through the numbers and then we will come back for Q&A.

Thank you, John, and good morning everyone. Capital Trust's third quarter was marked by solid growth on both the right and left-hand side of the balance sheet that translated into strong operating results.

Let's start with the balance sheet. Total assets were $1.33 billion at quarter end, reflecting a $300 million or 29% increase from June 30 and a $455 million or 52% increase from the beginning of the year. Looking inside the numbers, the primary driver of total asset growth was an increase in interest-earning assets, most notably CMBS and loans receivable. Interest-earning assets increased by $470 million from $804 million at year end 2004 to $1.27 billion at September 30, an increase of 58%.

As John mentioned, the major drivers of changes in interest-earning assets are originations and repayments. During the first nine months of the year, originations totaled $754 million on balance sheet and satisfactions plus partial repayments were $263 million. $339 million of the year-to-date originations were made in the third quarter.

At quarter end, our CMBS portfolio consisted of 36 investments and 25 different securitizations for a total book balance of $454 million. That represents an increase of $207 million in terms of book value from year-end 2004. The bulk of the increase was due to our acquisition of $157 million of vintage fixed-rate subordinate CMBS in connection with the issuance of our third CDO. In addition to those fixed-rate bonds, we originated one additional fixed-rate CMBS investment and four new floating-rate CMBS investments during the first nine months of the year totaling $48 million with repayments in the portfolio of less than $2 million.

On an accounting note, on August 4, 2005 as discussed in detail in our 10-Q, we elected to change the accounting classification of our CMBS investments from available for sale to held to maturity in order to more accurately reflect our investment pieces on these bonds.

The loan portfolio at quarter end consisted of one $8 million first mortgage loan; 59 B Notes totaling $552 million; and 14 mezzanine loans totaling $260 million. Other than the $8 million first mortgage investment, the loan in Mexico that we have discussed in the past that we carry at $3 million, the portfolio is 100% performing.

Our solo total return swap which originated last quarter is performing as expected and is carried at $4 million.

With respect to our coinvestment in our private equity funds, the $16.5 million on the balance sheet is comprised of our remaining $1.8 million coinvestment in Fund II; our $9.9 million coinvestment in Fund III; and $4.8 million of capitalized costs associated with the investment management business. At September 30, Fund II and Fund III had 68 million and $537 million of assets remaining respectively. And both portfolios remain 100% performing.

As to incentive management fees, CT has received $7.8 million of payments from Fund II to date and if we liquidated the portfolio on October 1, 2005 at book value, we would receive an additional $2.1 million instead of management fee payments. Now that Fund III is through its investment period, we have a better sense of what incentive management fees might be for this fund. Using the same methodology as Fund II, liquidation of assets and liabilities at book value on October 1, 2005, we had received $5.4 million of incentive management fees.

As is the case with Fund II, the timing of these payments is difficult to predict and the ultimate amount is based upon among other things continued performance in the fund's investments.

On the liability side, as John mentioned, we executed our third CDO early in the quarter. Our third CDO is different from the first in that one, it is comprised of 100% CMBS. Two, the assets and liabilities are 100% fixed-rate. And three, given the long-term nature of these assets, the CDO is static without a reinvestment feature.

CDO 3 allowed us to finance a $303 million market value or $341 million face value portfolio of fixed-rate CMBS with $272 million of term and indexed matched, non mark-to-market, nonrecourse fixed-rate liabilities. CDOs continue to play a significant role in our business model. At quarter end, 84% of our interest-bearing liabilities were in the form of CDOs. The all-in cost of our $552 million of reinvesting CDOs is LIBOR plus 94 basis points and for CDO 3, our static fixed-rate CDO, it is 5.25%, equivalent to swaps plus 58 at the time of issuance.

For all of our CDOs on a combined basis, our total cost of debt is LIBOR or swaps plus 82 basis points. In addition to CDOs, we continue to realize improvements in the terms and pricing of our repurchase agreements. During the quarter we executed three new agreements for a total of $225 million with two lenders bringing total commitments to $650 million. While the terms are not at the level of our CDOs, we continue to narrow the gap with spreads ranging from 35 basis points to 200 basis points over LIBOR and advance rates ranging from 70 to 92% depending upon the collateral characteristics.

As we go forward these facilities will remain an integral part of our capital structure.

To finish the balance sheet, there was no new equity capital raised during the period and book value per share was 21.70 at September 30, compared to $20.79 at year-end 2004, representing an increase of $0.91 per share. As a result of the new investment activity, our debt to equity ratio increased to the 3-to-1 at quarter end as compared to 1.7-to-1 at year-end 2004. While we do not have a debt to equity ratio target, we have the ability and tolerance for increased leverage assuming it is appropriate given the risk level of our assets and the structure of our liabilities.

With respect to liquidity, our position remains strong with $17 million of restricted and unrestricted cash; $124 million of immediately available borrowings; and $369 million of additional capacity under our repo arrangements. Included in the $17 million of cash is restricted cash of $2 million which represents the total cash balance in our two reinvesting CDOs. Cash is generated in the CDOs from underlying collateral amortization and repayments that have not yet been reinvested. Keeping our reinvesting CDOs full is key to their performance and we are more than pleased with the 99.5% utilization of these vehicles.

Turning to the income statement, we reported net income of $9.8 million for the quarter or $0.64 per share on a dilutive basis. This compares to $5.9 million or $0.50 per share for the same period one year ago. The $3.9 million increase to net income, 67%, is primarily due to the growth in net interest income driven by increased interest-earning assets and partially offset by lower spreads on new assets.

Average interest-earning assets for the quarter were $1.1 billion, compared to $639 million a year ago. During the period we earned 7.9% on these assets as compared to 8.1% for the year ago period. The reduction in rates is attributable to the continued shift in our investment focus to include more lower LTV B Notes and CMBS and a generally more competitive marketplace, offset by a 2% rise in LIBOR between the periods.

At the same time, average interest-bearing liabilities increased from $412 million to $847 million for the quarter. The average rate paid on interest-bearing liabilities increased to 4.77% from 3.6%, primarily due to the aforementioned increase in average LIBOR offset by the reduced cost of our new CDOs.

Net interest margin, the difference between the spread on our assets and liabilities, equated to 3.13%. Given our debt to equity ratio of 3-to-1, this equates to growth returns on equity in excess of 17%.

In light of the current interest rate and economic news, we reiterate our commitment to maintaining an appropriate asset liability mix that manages the impacts of changes in interest rates. As has been our policy, we are positively correlated to changes in interest rates and as of September 30, our book is comprised of $205 million of net floating-rate exposure. As such, a 100 basis point increase in interest rates would equate to an increase of $2 million to net interest income or roughly $0.13 per share on a diluted annual basis.

In the quarter, other revenues decreased $109,000 to $2.1 million from $2.2 million during the same period last year. The decrease was due to lower levels of base management fees and investment income from Fund II and Fund III, which was partially offset by the receipt of incentive management fees from Fund II of $428,000.

On the expense side, G&A increased $1.3 million to $5.3 million for the three months ended September 30 from $4 million for the comparable period a year ago. The increase in G&A was primarily due to an increase in employee compensation expense from the issuance of additional restricted stock; the timing of the annual bonus accrual; and the allocation of Fund II incentive management fees for payment to employees.

With respect to taxes, we reversed our provision for income taxes by $846,000, reflecting our revised expectation for taxable income at our taxable REIT subsidiary, CTIMCO. In September we declared our quarterly dividend of $0.55 per share and paid the dividend on October 15 to shareholders of record on September 30.

That wraps it up from my end. At this point, I will turn it back to John.

Thanks Geoff. Patrick, I think we're ready for Q&A.

(OPERATOR INSTRUCTIONS) Dan Welden, Jefferies.

This is a big quarter for CMBS. I was wondering if you could give a little detail was this a result of a good market environment or continued interest on your part in that business? And/or if you could talk a little bit about the outlook for the fourth quarter, which should also be big? And then also in '06 the overall CMBS market and your expected involvement there?

Okay. Well, it obviously has been a very big quarter in terms of market volume and not just this quarter but year-to-date. CMBS volumes have gone through the roof and are certainly well on pace to hit records almost unheard of in prior years. There's been an enormous amount of volume. The primary focus given where interest rates are and where yield curves are has been on the fixed-rate side. And as we have said in prior quarters, our involvement -- we expect will continue to increase on the longer-term fixed-rate side of the aisle.

We have traditionally been focused on floating-rate mezzanine lending. In the years past of Capital Trust, today, and going forward, we think we've got a much broader investment pallet. We think that is necessary in this environment, this competitive environment to be able to look at across the difference spectrums, loans, securities, floating, and fixed, short and long term. We don't see any real sense that the volume is backing off and that has created a fair amount of opportunity. Obviously there's a lot of things to look at and we intend to be involved going forward.

Great, and one follow-up question. In terms of the leverage, based on your current balance sheet mix, how comfortable would you be to go in terms of your debt to equity ratio?

I think that is completely dependent upon what we're financing. As I mentioned earlier, certainly we're comfortable at the levels we're at now given our asset mix. And frankly given our excess liquidity now of in excess of $120 million we have the capacity to continue to put assets on and increase the debt to equity ratio. We really don't have a target and it is dependent upon what we're doing. If we continue to do more lower loan to value B Notes and very high below investment grade or low investment grade investing -- sort of double B., triple B investing, our tolerance will be for greater than 3-to-1 on a weighted average basis.

That has been part of the plan all year. We've talked about it. We wanted to lever out our balance sheet and create more efficiency and I think so far with the success we have had in the CDO marketplace, we have been able to do that and do that on a very efficient cost-effective basis.

Great, thanks.

Don Fandetti, Citigroup.

John, quick question about your plans for Fund IV. It sounds like most of your -- or all of your lending activities would be done on balance sheet. Should we presume that maybe you might do some type of net lease real estate in a fund? And also what are the implications to the 4 million of capitalized cost on the balance sheet? When would you have to expense that if you don't do another fund?

We intend to continue to be in the investment management business. We've sort of put ourselves on hold at the moment, notwithstanding a very, very good expected response from our investors in our conversations about raising a subsequent mezzanine fund. The analysis on our part was really what I discussed, pretty straightforward.

At the moment, we believe that we are better served. Our shareholders are better served for this core business to go on CT's balance sheet. But we believe that this platform has the capacity to do a lot of different things and we are currently working to create and working, talking to our investors about additional fund management products that we can bring to that audience.

So we believe that over time we will create additional fund products that can be marketed and sold to those existing investors of ours that are additive to CT's core business. Therefore we're not going out of the investment management business. We think we have created that franchise over a number of years and that is a transferable, transformable franchise that we can make into other products.

Okay, and we have been hearing from some folks that there has been a sort of moderation in terms of the asset yield compression in the debt market. But that seems counterintuitive to the amount of capital that continues to be raised in the private side. Any comments there? Are things sort of bouncing along the bottom? Any positive signs or are you still cautious?

I'm going to flip that to Steve Plavin.

I think we have seen a slowing of spread compression in the market, particularly on the floating-rate side. I think that the CDOs all have similar cost of capital, although slightly differing appetites. I think at this stage the decline of spread relates in large part to lowering ROE requirements on the part of the CDOs to get their money deployed in the ever competitive environment.

But as spreads have come closer and closer to zero, the absolute level of spread compression has to moderate and so we have seen that trend. We anticipate that there will be less spread compression, but given the degree of competition in our market I don't think the spread compression is gone yet.

One last question on the total return swap you have or you put on last quarter. Can you talk about sort of the risk that we should consider for that asset versus a direct loan? Also why not do more? It seems like the levered return is up in the 20% range. How should we view that from a risk/reward perspective?

I think, Don, the total return swap that we completed that you see in our financial statements, what really enabled us to do is buy an asset that we otherwise would have purchased with the leverage built in. That is essentially a $20 million loan that we purchased as a synthetic for $4 million. If we had purchased the loan just in the conventional way for $20 million and borrowed $16 million against it and achieved -- and could have achieved the same ROE, we probably would've executed the transaction that way.

But the reality is the synthetic gave us more efficient leverage than what we would be able to achieve by borrowing 80% against the asset. So that is why we executed the trade in that fashion. We are seeing other opportunities to buy assets in that same fashion. It is not a big part of the market and again, the accounting treatment for us in that those assets get mark-to-market quarterly is a little bit more potentially disruptive to the financial statements than buying the assets in the traditional way.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) James Shanahan, Wachovia.

I would like to follow up here on Don's question from earlier. I'm not sure you answered it, maybe you did. But he asked about your interest in net lease real estate assets and he also asked about the $4 million in capitalized cost. Maybe you could go into more detail there?

I purposely did not answer the question but I thought I got away with it. We have discussed net lease products in the past and have had questions in the past. It is certainly a related area of investment to what we do. It has got real estate and credit intermixed and we have looked at in the past net lease opportunities. But there is no current pending plan to launch a net lease fund. To the extent that we think that the opportunity is there and it meets the objective of our investors and it makes sense for us, then we would consider that. But there is certainly nothing in the works or immediately imminent at this point in time. In terms of the capitalized cost, Geoff, do you want to follow up?

The vast majority of the capitalized costs that were mentioned are associated with Fund II and Fund III. And as you have been following the income statement over the last few quarters you can see that with respect with Fund II, what we've been doing is we have a normal amortization schedule that we amortize these costs over but we accelerate the expensing of some of those capitalized costs every time we recognize some promote income.

So you should expect to see that $4.8 million come down with the continued recognition of promoted Fund II and then subsequently as we recognize promote with Fund III. But the bulk of it will be matched against incentive management fee payments assuming that things perform as we expect.

Having said that, those costs were incurred to build the franchise and build the investment management business and we have no intention of going out of that business.

With regard to Fund III, do you care to estimate what percentage of the current portfolio could be run off by year end '05 and year end '06?

No. These are mostly floating-rate assets and as a result don't have a lot of call protection. That is basically what that business is selling to the borrower a fairly high degree of flexibility. As a result, projecting precise timing of repayments is very difficult. We have a sense of how that will roll. But in terms of producing predictions at this point in time, we just don't really think that makes a lot of sense.

What are the scheduled repayments in that portfolio? By say, year-end '06? What percentage of the current portfolio is scheduled to repay?

In terms of contractual maturities?

Most of those loans were five-year loans including extension provisions that were originated between the spring of '03 and the summer of '05. So those loans in general have a lot of remaining available curve. In most cases the call protection has been eliminated. So the borrower basically has the option to pre pay the loan any time between now and its final maturity. And again, no real significant maturities, final maturities in that portfolio for another I would say 18 months to two years.

You have been very patient but I would like to ask one more question here. It looks like in the fund management business historically you've allocated about 85% or so of your G&A to that business. How does that allocation methodology change as you deemphasize that business?

I think the way we view it is that we allocate a portion of our expenses into our taxable REIT subsidiary and our taxable REIT subsidiary not only manages our investment management vehicles but also manages our balance sheet. So I don't think that we view any change in the allocation of expenses into CTIMCO.

Thank you, gentleman.

(OPERATOR INSTRUCTIONS) There are no more questions at this time. That concludes the Capital Trust third-quarter 2005 conference call. A recorded replay of the call will be available from noon on today through midnight, November 15. The replay call number is 1-800-753-0348 or 402-220-2672 for international callers.