Blackstone Mortgage Trust Inc (BXMT) 2005 Q4 法說會逐字稿

Hello and welcome to the Capital Trust fourth-quarter and year-end 2005 results conference call. Before we begin, please be advised that 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 the presentation. At that time, I will provide instructions for submitting a question to management. And please note this call may be recorded. I will now turn the call over to John Klopp, CEO of 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 fourth quarter and filed our 10-K. Geoff will take you through the detailed numbers in a moment, but first I want to review 2005, believe it or not, our ninth year in business at Capital Trust and give you a preview, but no, not guidance, of our 10th. You have heard me say it before but year in and year out we have found that there are three keys to long-term success in this business; originating good assets, driving down the cost of capital, and managing your risk.

2005 was another year of achievement for the CT team on all three fronts. First, originations. New originations topped $1.5 billion in 2005, including $1.1 billion for the balance sheet and approximately $400 million for Fund III. The total was a record, but more importantly, originations for CT's own account doubled from $550 million in 2004 as we increased the stroke and brought the fund business on balance sheet in the second half of the year.

Second, cost of capital. As promised, at the outset, we funded our 2005 growth by levering out our balance sheet completing our second and third CDOs in March and August. The weighted average credit spread on the debt we issued in those two deals was 48 basis points or 68 basis points fully loaded. By year end, 69% of our interest-bearing liabilities were in the form of CDOs, which provide cheaper, more stable financing that in turn allows us to invest in lower risk assets and still achieve solid ROEs.

Third, risk. During 2005, all of our performing investments continued to perform and the assets that we added during the year were predominantly lower LTV B Notes and rated CMBS. A number of loans that we had attached losses to when we bought them in 2004 paid off at par and 65% of the bonds in our CDO 3 transaction have been upgraded in the last six months since we closed.

We view risk management as an integrated system that starts with asset selection and underwriting, but then continues through the way we finance individual assets and the overall portfolio and ends with aggressive surveillance and asset management. Hopefully, all this hard work translates into results. And I believe our 2005 performance speaks for itself.

Net of repayments, we increased total assets by over 75% to just under $1.6 billion at year end. One of our goals for 2005 was to begin to lengthen the duration of our portfolio to insulate against prepays and we added over $230 million of longer-term assets, which we believe will provide a stable base of earnings in the years ahead.

We doubled net income and increased earnings per share by 35%. Included in the fourth quarter is a onetime gain of roughly $5 million on the sale of our investment in a company called Global Realty Outsourcing. As you probably can tell from the name, GRO was a real estate outsourcing company that we actually helped start about five years ago and which today employs over 750 people in the U.S. and in India. Although we are no longer an owner, GRO will continue to be a close relationship for CT as they provide 16 full-time dedicated employees to us pursuant to a long-term contract.

Stripping out that gain from GRO, EPS would have been closer to $2.58 a share, still a 20% increase over 2004. Most importantly, year-over-year, we increased our regular quarterly dividend payout by $0.40 and paid out a special dividend of $0.20 per share. We believe that our primary mission is to steadily grow the dividends to our shareholders and that if we do that the rest will follow.

Our plan for 2006 is to do more of the same and the year is already off to a good start. Steve Plavin, our COO, is here this morning, has established aggressive origination targets that include all of our major food groups; large and small balance B Notes and mezzanine loans plus a broader menu of CMBS. As the year progresses, we will continue to look for new investment management products that complement our balance sheet appetite.

Geoff Jervis can provide details, but we have already been busy on the capital raising front, closing our first Trust Preferred issuance and launching our fourth CDO, both in February. We expect that our continued growth will bring us back to the equity capital markets sometime during the year.

Overall, we feel very good about Capital Trust's prospects for 2006. Competition remains intense. But the reasons for that competition are the facts that our markets are rapidly growing and evolving, providing ample opportunities for players that are both experienced and nimble. CT is both. I'll now turn it over to Geoff Jervis to go over the details of the fourth quarter and full year 2005.

Thank you, John. Good morning, everyone. Since John has discussed the highlights for the year, I will get right into the numbers. First, the balance sheet. During the year, total assets increased by over 75% from $878 million at the end of 2004 to $1.6 billion at the end of 2005. The primary drivers of this growth were new originations of loans in CMBS totaling over $1 billion net of repayments of $375 million.

During the year, we purchased $245 million of CMBS in 27 transactions and originated 45 loans for $791 million representing net of respective repayments 97% growth in CMBS and 78% growth in loans. As you know, in 2004, we reversed our reserve for possible credit losses and in 2005, we did not reserve for any of our loans as the portfolio performance remained strong.

Moving down the balance sheet, equity investments in funds decreased from $21 million at year end 2004 to $14 million at the end of the year 2005 representing a decrease in our investment in Fund II and Fund III as they continued to liquidate in normal course and the accelerated amortization of capitalized costs associated with the fund business as we realized Fund II promotes.

On the right hand side of the balance sheet there was also significant activity in 2005. At year end, we had three CDOs totaling 69% of our interest-bearing liability and $370 million of repurchase obligations. During 2005, we issued two new CDOs, CDO 2, $338 million reinvesting CDO collateralized primarily by floating-rate B Notes and Mezz loans with a cost of debt of LIBOR plus 49 on a cash basis and LIBOR plus 71 all in. And CDO 3, a $341 million static CDO collateralized exclusively by six straight CMBS at a cost of debt of 5.17% on a cash basis and 5.25% all in.

CDOs not only offer economic benefit to us, but also and equally as important represent nonrecourse, non-mark to market financing for the Company. At year end, 73% of our interest-bearing liabilities were nonrecourse, a truly dramatic change from prior years.

Over on the income statement, we reported net income of $44.1 million or $2.88 per share on a diluted basis representing growth of 35% on a per share basis. The primary driver of growth was interest income. Interest income for the year was $86 million on average interest-earning assets of $1.1 billion representing a yield on the portfolio of 8.1%. This compares to a yield on the portfolio of 8.4% in 2004 with the differences being accounted for primarily by decreases in portfolio credit spreads due to our origination of lower risk B Notes, lower risk, lower spread B Notes and a general compression in market credit spreads during the year.

This was offset by increases in LIBOR. LIBOR rose from an average of 1.5% in 2004 to 3.9% in 2005. Interest expense grew to $37 million as we increased our liabilities to finance our asset growth. The cost of our average interest-bearing liabilities was 4.7% in 2005 compared to 4.1% in 2004. The differences in this cost can primarily be accounted for by lower credit spreads on our CDO and repurchase obligations offset by increases in LIBOR.

In other revenues, management and advisory fees from our funds grew to $13 million. This growth is primarily due to the recognition in 2005 of our first incentive management fee payments from Fund II totaling $8 million for the year offset by lower base management fees at Fund II and Fund III as these funds continue to liquidate in the normal course.

Gain on sale of investment represent proceeds from the sale of our investment in GRO. Between 2000 and 2003, we invested $2.1 million into GRO and over the course of the last two years, wrote down the investment to zero as we recorded our share of operating losses at GRO. The sale for $4.9 million was therefore accounted for at the full gain for GAAP despite being only a $2.9 million gain over and above our investment. Still a terrific return to us.

Moving down to other expenses. G&A grew to $21.9 million in 2005 from $15.2 million in 2004. The growth is due to $2 million dollars of employee Fund II promote payments, $1 million of what we characterize as onetime expenses and increases in compensation expense primarily associated with the non-cash amortization of restricted stock grants.

For the year, we paid dividends totaling $2.45 per share, including a $0.20 special dividend that we paid in conjunction with our regular fourth-quarter dividend of $0.60. Year-over-year, dividends to our shareholders grew by over 30% on an all-in basis and by over 20% when you exclude the special dividend.

On a per share basis, booked value increased during the year by $1.12 per share to $21.91 per share at year end. This was primarily due to a $22 million increase in shareholders equity driven by the retention of $7 million of earnings and $11 million of realized and unrealized gains on our swap and CMBS positions.

We remain committed to maintaining an asset liability mix, which minimizes the negative effects of changes in interest rates on our future results. In the current interest rate environment, we're maintaining a net positive floating-rate exposure on our balance sheet with $226 million more floating-rate assets than floating-rate liabilities. Based upon assets, liabilities and hedges in place at December 31, an increase in LIBOR of 100 basis points would increase annual net income by approximately $2.3 million. Conversely, a 100 basis point decrease in LIBOR would decrease our earnings by approximately $2.3 million as well.

At year end, our liquidity position remained strong. We had $26 million of cash, including restricted stock, and $89 million of available borrowings for a total of $115 million of liquidity. As you know, we raised $50 million of Trust Preferred in the first quarter of this year and the proceeds from the sale have been added to our position.

Two subsequent events of note. First, as I just mentioned, we issued $50 million of Trust Preferred, which is 30-year paper to the Company. The spread on this debt for the first ten years is at a fixed rate of 7.45% and at the end of the 10-year period, it floats for the remaining life of the liability at LIBOR plus 265 and this paper is callable at par after five years. This represents the tightest print of Trust Preferred in the mortgage REIT space.

The second item is CDO IV. This is a $430 million CDO that we are currently in the market with and unfortunately we cannot comment on the CDO until it closes. That wraps it up for the financials and at this point, I'll turn it back to John.

Thanks, Geoff. I would like to open it up for any and all questions.

(OPERATOR INSTRUCTIONS). Don Destino, JMP Securities.

Congratulations on a terrific end to the year. A couple of questions. Your originations and net loan growth far exceeded our expectations and we had increased our expectations when you announced that you weren't at least immediately commencing with Fund IV. Is there any way for you to decipher or at least give some color on how much of the growth in the fourth quarter was a consequence of not doing a fourth mezzanine fund? How much incremental balance sheet growth we got because you didn't do the fund?

It's tough to call because of the variety of different subcategories of assets that we originate and one of the reasons that we decided to essentially take the fund business on balance sheet was the two business plans or investment strategies sort of continued to converge. It became a little bit more confusing and bottom line, as we said to you in the fall when we chose not to raise a fourth formal CT Mezzanine Partners fund at this time, we felt that it was simply going to be more accretive to us and we could make up the shortfall in fee income with greater net interest margin.

I think in our K, I believe we have a set of numbers that says about 10 loans, $235 million or thereabouts, is kind of what we count as what we did on the balance sheet in the second half that otherwise would have gone into Fund IV. That number is in the eye of the beholder to a certain extent because it really is a question of where we could've, would've allocated business.

In general answer to your question, I believe that the numbers again speak for themselves. We stopped originating for Fund III during the course of 2005 and began allocating that flavor of business onto our balance sheet and going forward, at least the current plan is that we will continue to do that. We think that net bottom line increases our firepower on the balance sheet and will translate into higher asset growth and higher net interest margin.

Got it. And I realize you said you can't comment on the CDO. Let me see if I can ask a generic question and if you can't answer, you can't answer. What you have disclosed thus far indicates that the CDO will be something like a 7.3 debt to equity transaction. I am assuming it is safe to assume that the assets you are contributing that are currently on your balance sheet were not levered at 7.3 to 1 so you are freeing some equity capital up there. Can you talk generically about the extent to which the CDO is a transaction that is allowing you to deploy incremental capital versus freeing up capital that could then be used to do other things?

How about this? No. I'm sorry, but it's a private placement. The intersection of public company disclosure with private placement requirements makes it difficult. The truth is that we are pretty darn close to being able to provide a lot of details. Once it is all closed up and buttoned up and I would really just prefer to defer the answer, sorry, till we can give you real clear and concise kinds of answers. We think it is consistent with what we have been doing now for the last 18, 24 months. We consider ourselves to be a serial issuer at this point in time. I think that in general, that will pay dividends to us as a company over time and we are excited about it. We will tell you about it as soon as we can.

Two more quick ones then. Fund III promote, any color on putting that in at least the six-month time period of when that could start hitting?

Where we are with Fund III is we have collected now during 2005 $8 million of total promote gross, pretty much -- I'm sorry Fund II -- I misspoke -- pretty much evenly, not evenly but throughout the course of 2005, I think we received promote payments all four quarters actually; although they were front-loaded into the early part of the year.

We are kind of down in a normal course liquidation sense to what I guess you could call the hard core. That doesn't mean the bad stuff. It actually is all very, very good solid loans that are left, but for a variety of reasons, they're likely to stick around for a while longer.

Therefore while we're not really projecting the timing, I think we do say in the K as we have in the past that if we were to liquidate the assets in the fund at their book value as of the statement date and run it through the waterfall and pay off all the liabilities, I think the numbers we disclose are $2 million, more to come from Fund II in terms of gross promotes to CT and I think that comparable number is 5.5, 5.4 million or thereabouts from Fund III.

Those -- the timing is your question and I would say that it is very hard to call because it depends on when things pay off, but we really don't anticipate much if any 2006 promote activity. It is more geared towards 2007 and beyond.

Okay. And then last question, was the $0.20 special dividend, was that a preview, although we didn't know at the time it was a preview of the sale of the outsourcing business? Where are you in terms of taxable earnings and what you have paid out? Was there any spillover '05 to '06?

As usual, there are multiple questions there. I'm going to turn it over to Geoff.

First, to answer your question on the GRO gain, that entire gain was shielded by some net capital loss carryforwards that we had on balance sheet and, as I mentioned in my script, we had $7 million of retained earnings for the year. The majority of that was from the GRO gain that had no distribution impact for the Company.

With respect to our dividend, the entire dividend that we paid, including the special in 2005, our ordinary income, there is a little bit to come. We are -- obviously we will file our returns later in '06, but, yes, there is a little bit to come in clawback of the first-quarter dividend that we will be announcing in the next few days.

Sounds great. Thank you for much.

Daniel Welden, Jefferies & Co.

Nice quarter, guys. I was wondering if you could -- a couple of questions -- if you could discuss the character of the mortgage loan investments you made during the fourth quarter specific to the breakout where you talk about the B Notes. You made some mortgage loan investments as well.

Yes, I'll turn it over to Steve. In the press release and in the K, I think we give some degree of detail, by let's just use it as an opportunity for Steve to tell you what he is seeing in the marketplace also.

I think we saw more of the same in the fourth quarter. The one point of differentiation from us is that we made some first mortgage loans, more first mortgage loans in the fourth quarter than we had made in the previous periods. Initiated a bridge lending program and had four loans close that were consistent with that first mortgage bridge initiative. So that was a little different.

In terms of the B note and mezzanine activities, I think those were consistent with what we have seen early in the year and what we're seeing at this point for '06.

Got it. When you say you initiated a bridge lending program, this is an area where you talked about being active across the board in '06. Is this one of the areas where you think there will be recurring business?

Yes. This is more -- there are first mortgage loans as opposed to junior participations and mezzanine loans and tend to be sort of in the LIBOR plus 200 to 300 spread range and we are seeing more opportunity in that segment than we had previously.

Got it. And sort of a follow-up to that, for the past couple of quarters, we have seen your ROE, excluding gains, has been trending up. Looking out at the range of investment opportunities, are you seeing incrementally accretive opportunities out there relative to where your portfolio spreads are now or are we sort of in line with where you are now? In other words, what is the market opportunity right now in the competitive landscape?

Well, there are a couple of different aspects. We will tag team you here. One of the things that is going on that we clearly have been doing as we have been levering out our balance sheet, creating incremental financial leverage and as we grow it, the business, incremental operating leverage. So I think that certainly is contributing to the returns on equity that we are able to achieve as we continue to grow out our platform.

One of the questions that will come up, I think it may already have, is leverage. Obviously, what we have done is significantly increase the financial leverage year-over-year from 12-31-04 to 12-31-05, largely but not entirely -- largely through the adding of more securitized debt, which we believe is a stable non-recourse non-mark to market source of financing that unto itself will allow us to incur comfortably more financial leverage. But then it also feeds back to the left-hand side because with that financing, we are able to dial down the risk profile on the assets that we are originating, which in turn allows us to put some more leverage on the balance sheet and be comfortable with it.

So while I think that a part of the answer to your question is what are we finding in terms of just pure asset origination opportunities, I think you've got to run it through the whole cuisinart of how we are looking at our overall business and our overall balance sheet and how we finance it. Steve, you got any --?

No, I think the spread environment is stabilizing a little bit after a year of more significant spread compression last year. So I think we're optimistic that we will be able to maintain or increase ROEs on our '06 originations.

Don Fandetti, Citigroup.

A quick question, John or Steve, can you just update us on where you are in terms of staffing in CMBS? You've had a lot of good growth there. Do you need to add more capacity or who is your point person on that business?

We added a vice president in January to the CMBS effort. Jeff Williams who we hired from GMAC Hyperion, a very experienced CMBS portfolio manager. So he is the new addition to our team focused solely on CMBS and otherwise the resources we've been using for our CMBS acquisition through last year are all still available here as well.

We do use -- one of the things we mentioned was GRO. GRO, we have been working with since we helped to start the company four or five years ago. We have 15 full-time GRO employees who are dedicated to only CT's business. They support and assist us in several different ways, including on the front door side where they help us to process information on multi-asset portfolios and CMBS, but also on the asset management side postclosing where their support enables us to track a much broader universe of information on all of our assets and our investments and in our portfolios.

Great. Going back to your comment, John, about new investment management products that complement your balance sheet I think was the comment. There's a lot of talk in the market about synthetics. Do you think that becomes a part of your business at some point, maybe in a taxable REIT subsidiary or something of that nature?

Well if you look at our balance sheet, a very, very small asset but it gets its own line because it is different is a total return swap for all of $4 million is the way it is shown on our balance sheet. That is a synthetic. That is essentially a synthetic investment in what is an underlying reference loan of $20 million and effectively the $4 million represents our equity investment before leverage or our cash collateral amount in a total return swap context.

The answer is yes. We see synthetics as an increasingly interesting source of product and risk exposure in this business and we intend to be part of that. It is, as you point out, an instrument that produces bad REIT income. So your speculation as to either running -- if we can generate -- if we believe we can generate a significant amount of this business as opposed what we have done to date, which is just sort of put our toe in the water, we will either run it through a TRS or we will allocate it into I guess you'd call it an off balance sheet vehicle or a managed fund. But yes, I think that there is going to be more activity in synthetics going forward.

Great. And then some accounting issues. Geoff, now that you are officially the CFO, can you comment on FAS 140 and any impact that that had on your financial statement this quarter, the impact going forward?

Sure, my favorite topic. We did not change any of our presentations on any of our assets or liabilities based upon the current issue with FAS 140. A very quick summary -- it looks like FASB is coming down the pike with potentially having us characterize some of our assets and some of our liabilities not on a gross basis as we currently present them, but on a net basis and account for them as nonhedged derivatives.

If we had done this at 12/31 as we disclosed in the K, $189 million of assets would have disappeared and $118 million worth of repo would have disappeared and a new $71 million derivative would have appeared in the asset section on the balance sheet. There would be no economic impact and I want to repeat that. There is no economic impact to the Company. It is simply a presentation change.

With respect to the income statement, as a nonhedged derivative, these assets net of their liabilities, the changes in the net value would run through the income statement potentially creating some income statement volatility, but that is really it. There has been no definitive conclusion; although we are capable of reporting it either way. We just believe that the more fair presentation is to present our assets and liabilities on a gross basis giving investors a true presentation of our financial position.

That's a very detailed answer. Thank you. Would you also entertain just moving some of those repos to another financial institution?

That is certainly a solution.

And then just lastly, the prepayment income in the fourth quarter, how much was that of the 4 million full-year number?

Let me answer your question a little bit differently. I'll give you a net answer on all of this. Of the $1.06 that we earned in the fourth quarter, if you netted out and adjusted for the impact of taking out the onetime items, both revenue and expense, the Company would have earned $0.70.

Well let's give a little more detail. That is GRO obviously, which is a onetime gain. It is prepays effectively, which accelerate -- which happen in the normal course if you ask me, but which do tend to accelerate income to that prepayment date and then a variety of positive and negative sort of offsetting types of results from those primary drivers I think is fair to say. When you net it all back out, it probably -- instead of what I said of GRO of a $0.30 difference in the fourth quarter -- comes down to $0.36, $0.35, something like that.

Great. Good year. Thanks for the answers.

James Shanahan, Wachovia.

Most of my questions have been answered. I had really just one sort of high-level question at this point. The (indiscernible) leverage, the way it's increasing now has been -- it maybe alarming to some, but with the quality of the assets, that seems reasonable to me and I think you'd probably agree, but how should we think about leverage going forward? Have we gone from 1.7 to 3.5 times leverage in a year and we're on our way to 7 times or are we about where you think you feel comfortable?

Well as a starting point, I will say that I think we have been very vocal that we felt 1.75 times was underlevered period. So I think that we had some not insubstantial catching up to do, but it is fair question; it is a good question. As of year end, we are at 3.5 to 1 and that is basically double where we were 12 months before.

I think the answer may not be the most satisfying to you because it depends upon the assets that we originate. If we continue to find good opportunities with lower risk assets that we believe we can finance harder, effectively, creating ROEs that we think are good for our shareholders and on a basis that we think is stable financing against those assets then we will do it. But we believe that where we are -- if you look at where we are today and the pipeline we are working on, it is a mix. It continues to be a mix, a mix of higher rated, lower spread assets that we can and will finance harder and more of our I guess you would call it traditional Capital Trust mezzanine and B note product, which I guess arguably has a higher degree of real estate risk to it, but which attracts a lower-level of financing.

Exactly where we end up given that mix will depend upon where we find the best mix of opportunities as we move through 2006.

(OPERATOR INSTRUCTIONS) John Moran, Ryan Beck.

Thanks for taking the question, guys. I'll see if maybe I can ask that leverage question in a different way.

I'll see if I can give you the same answer.

As you look out, what kind of assets or markets or whatever do you guys see the most attractive opportunities in at this point?

Well again I will tag team it with Steve who is on the front line day to day. We are finding opportunities across a spectrum of asset types, including the more senior, more packaged CMBS that you see us buying both in the secondary and more and more in the primary market and the more traditional CT product of mezzanine and B note on specific individual assets and portfolios and then in turn, what Steve mentioned moments ago, which is in the fourth quarter, we have restarted something that we did a lot of in the early days of Capital Trust, which is a little bit more bridge lending, direct first mortgage lending.

So I think the mix of assets will continue to cover that spectrum and we will push it where we see the best risk-adjusted returns. In turn, that will determine what our leverage is because we dial our leverage in depending upon what we think the mix of assets are.

So kind of the same answer.

I gave you a nonanswer again?

That's okay though. Just a second quick one. The trust that you guys raised back in early February was $50 million. Do you guys have a deployment time frame on that or kind of how soon do you think you can put that to work?

Well we have announced CDO IV, which I believe, I hope we have announced and incorporates both assets that are on our balance sheet and assets to be acquired in conjunction with that new deal. And that is going to suck up some of that capital that we just raised. Ongoing originations on a daily, weekly basis will continue to deploy out that capital. We felt that the $50 million was the right size for us right now. We believe we can go back to that marketplace again when we want and need more and we thought that was very, very accretive positive capital.

Exactly what our time frame is for going back to the Trust Preferred market again, will depend upon the pace of origination. At some point, I will give you a partial answer to your leverage question. At some point, as I think I said, we do anticipate raising common equity sometime during the year this year to support our ongoing origination volume and to moderate and put our leverage ratio where we want it to be.

Terrific. I think the rest of what I had has pretty much been covered. I appreciate it.

We have no further questions at this time.

Well then thank you, everyone, very much for your continued interest and attention. We will be talking to you next quarter. Have a good day.

Thank you. This concludes today's teleconference. You may now disconnect your lines and have a great day.