Blackstone Mortgage Trust Inc (BXMT) 2006 Q1 法說會逐字稿

Hello and welcome to the Capital Trust first-quarter 2006 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 rates of repayment of the Company's and its funds loan 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 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 first quarter and filed our Q. The bottom line is net income per share of $0.71, up 18% versus the comparable period last year. We're pleased with the quarter and believe that 2006 will be a very strong year for CT.

Let me give you a sense of what you can expect from us as the year unfolds. We're confident because our business plan is working. Yes, competition has increased and making money is harder than it was in the good old days when we started Capital Trust, believe it or not almost 10 years ago. But the velocity and variety and sophistication of the opportunities have also increased exponentially and CT today is uniquely positioned to capitalize on the best of those opportunities.

It seems like I say it on every call, because I probably do, but the key to this business are finding good assets, financing them efficiently and controlling risk. In the first quarter of 2006 we again demonstrated our ability to do all three.

In today's much more competitive environment you need to be flexible and adaptable to find the investments that produce the best risk-adjusted returns. We believe that requires the ability to go wherever the best values are whether that's CMBS, whole loans, mezzanine loans, B Notes or synthetics, originated directly or through partners.

In the first quarter we found value in BBB rated CMBS and roughly 75% of our total originations took the form of bonds that we acquired and then financed with our fourth CDO that closed in mid March. While the spreads are tighter on these investments the risk is lower and the duration is longer creating a baseline of quality earnings going forward. And just as an aside, our total originations for the quarter were almost $440 million which is an all-time quarterly record for CT.

We will continue to be opportunistic in seeking out the best investments available in the market at any point in time regardless of their format. In the second quarter expect a greater proportion of loan assets, mezzanine and B Notes at wider spreads.

On the capital raising fronts we were also accessing the most efficient sources of capital to finance our balance sheet business. In the last 20 months we have issued 1.3 billion of CDO liabilities in four separate customized transactions providing cost-effective, nonrecourse, non mark-to-market and index match financing -- I know everybody says that over and over again -- index match financing for our portfolio. During that time we have purposefully increased our financial leverage because with stable financing matched to lower risk assets, we believe that strategy is both accretive and prudent.

We also issued our first trust, not our first, but our first straight trust preferred securities adding $50 million of long-term capital at a fixed cost for the first 10 years set at swaps plus 240 basis points. Going forward expect us to calibrate our leverage to match the risk profile of our balance sheet, use more CDOs and trust preferreds where available and be relatively stingy about issuing our dearest commodity, common equity.

We're unique among our commercial finance peers because capital trust also is in the investment management business and we continue to be committed to that business and will raise capital in the private market to support complementary investment strategies. While the intersection of public company and private placement disclosure rules makes it difficult to provide any detail, expect us to be back in the fund business very soon.

In a credit sensitive business, managing risk is critical to long-term success and the credit quality of Capital Trust book has never been more solid. The risk profile of our CMBS portfolio is strong with almost 75% of the assets in our CDO 3 transaction upgraded in the eight or nine months since we closed.

Performance in our loan portfolio is equally strong with a number of loans that we initially attached losses to paying off at par. We have even made progress with our one nonperforming loan collecting during the first quarter $300,000 from the foreclosure of a guarantor's house and reducing our carry basis to $2.75 million. We are hopeful that we can reach a final resolution on these sole nonperforming assets later this year.

As we continue to build our portfolio of high-quality balance sheet assets and increase fee income from our investment management business, we expect our earnings to increase.

Before I turn it over to Jeff to go through the specific numbers in Q1, I did want to point out one more thing. Last night we filed a Form 4 regarding the sale of stock by a family partnership that I control. The sale was motivated solely by the desire to diversify my family's assets and in no way alters my commitment to or confidence in this Company. CT remains my family's largest asset and my sole business focus, and my baby.

I'll turn it over to Jeff to go through the first-quarter numbers. Thanks.

Thank you, John. And good morning everyone. First to the balance sheet. During the quarter total assets increased by 23% from year-end 2005 driven primarily by increases in interest-earning assets defined as CMBS, loans and total return swaps. These assets grew by $361 million from $1.6 billion at year end to $1.9 billion at the end of the quarter. Originations of interest-earning assets totaled $439 million and partial and full repayments totaled $62 million for the period. Originations were comprised of $335 million of CMBS primarily from the $303 million of BBB- average rated CMBS we purchased in conjunction with the closing of our fourth CDO; $102 million of loans; and a $1 million total return swap. All-in rates on new originations were 7.14% comprised of 6.11% for new CMBS and 10.43% for new loans. The new total return swaps that effectively has embedded leverage carries an 18.03% return.

Given the snapshot of March 31st, the entire $1.9 billion portfolio of interest-earning assets had an all-in rate of 8.08% which comprised of 7.24% for CMBS, 8.69% for loans, and 21.21% for total return swaps. From a credit standpoint, the CMBS portfolio has an average credit rating of BB and the loan portfolio has an average appraised loan to value of 65%. Credit for the entire portfolio remains strong across all investment categories.

On that note we have had some extraordinary experience in our third CDO, as John mentioned, a $341 million static pool fixed rate CMBS CDO where since we have closed that CDO 3 in the summer of 2005, 74% of the underlying bonds have been upgraded, a testament to the underwriting performed by Steve's team.

Inside the loan portfolio the only nonperforming asset at quarter end remains the $8 million Mexican loan we have discussed in the past. On that note, as John mentioned, we did collect $288,000 against that loan during the quarter as we sold collateral owned by one of the guarantors.

Moving down the balance sheet, equity investment in funds remained the same at year end, $14.3 million. Performance of the underlying loans at the funds remains strong with no nonperforming loans. As we have disclosed in the 10-Q, to promote value embedded to us in Fund II and Fund III is $2 million and $6.1 million respectively. Collection of these promotes is of course dependent upon among other things performance at the funds and timing is very difficult to predict. That said, we do expect the remainder of the Fund II promote to come in over the next year and to begin to collect Fund III promote starting at the end of 2007.

On the right-hand side of the balance sheet, there was also significant activity in the quarter as we closed our fourth CDO that we cleverly refer to as CDO IV. CDO IV is a $489 million static pool CDO collateralized primarily by fixed rate CMBS; $303 million of the CMBS rated on average BBB- was purchased at closing from a dealer and the balance of the collateral came from our portfolio. We sold $429 million of CDO notes to third parties and, as we have in the past, we retained 100% of the below investment-grade notes and the equity.

The cost of debt on CDO IV is 5.52% on a cash basis which equates to swaps less plus 43 basis points at closing and 5.64% on an all-in basis including fees and expenses. CDO IV is, like our other CDOs, consolidated in our financial statements and to TIMCO, our [taxable] rate subsidiary, serves as the collateral manager.

At quarter end our CDO liabilities totaled $1.3 billion. This number represents the notes that we have sold to third parties off of our four CDOs. The all-in cost of our CDOs is 5.58% at quarter end. All of our CDOs are performing and our interest coverage and over collateralization tests are at or above the levels at issuance.

Our repurchase obligations continue to improve both from an economic standpoint and from the amount of commitments and the number of counterparties we have. At quarter end we had barred $248 million and had $900 million of commitments from six counterparties. We remain in compliance with all of our facility covenants.

During the quarter we issued trust preferred securities, raising $50 million at a cash cost of 7.45%, equating to swaps plus 2.4% at closing and 7.53% on an all-in basis. The securities have a 30-year term, carry the aforementioned fixed rate for 10 years, floating at LIBOR plus 2.65% thereafter and are callable at par at the end of five years.

I'd like to take a moment to summarize how we progressed on the right-hand side of the balance sheet over the last two years. From an economic standpoint we've driven down the cost of our debt capital by well over 100 basis points and have created structures, both to our repos and CDOs, to maximize the credit available to the Company. From a structural standpoint, we've increased the use of CDOs where they represent over 80% of our liabilities at quarter end. These liabilities are nonrecourse and non mark-to-market and are structured to index and term match our assets. This is a vast improvement from the full recourse, full mark-to-market, term mismatch situation that this Company was in a few years ago.

In the past we managed the risk of our liabilities by holding large amounts of defensive liquidity and avoiding longer-term assets. Today that is no longer necessary. We still hold defensive liquidity, of course, but the required amount in our view is much smaller making us a much more efficient user of capital. Furthermore, by pooling our assets into discrete nonrecourse CDO pools, we effectively compartmentalize the risk in each pool to the equity we have in each CDO. Again, a vast improvement in the way that we finance our business.

Over to the equity section, book value at quarter end was $348 million equating to $22.38 on a per share basis. This represents a $0.47 increase to book value per share from last quarter. And changes in book value are primarily attributable to the increases in the value of our interest rate swaps during the quarter.

As always, we remain committed to maintaining an asset liability mix which minimizes the negative effects of changes in interest rates on our future results. At quarter end, we had a $250 million net positive floating-rate position on our balance sheet and as such an increase in LIBOR of 100 basis points with increased annual net income by approximately $2.5 million. Conversely, a 100 basis point drop in LIBOR which decreased our earnings by that same amount.

Our liquidity position remains strong and at quarter end we had $9 million of cash and $112 million of available borrowings under our repo facilities for total liquidity of $121 million.

Turning over to the income statement, we reported net income of $11 million or $0.71 per share on a diluted basis representing growth of 18% on a per share basis from the first quarter a year ago. The primary driver of net income growth was increases in interest income related to the growth in interest-earning assets for the quarter. Net interest income was $14.4 million for the period, an increase of $4.5 million roughly a 50% increase relative to a year ago.

I would like to point out that in the past there has been a not insignificant portion of non-recurring income in our interest income numbers, typically income associated with early payoffs of loans primarily exit fees and accelerated discount amortization. For example, net interest income in the fourth quarter of 2005 included $2 million of such non-recurring income items. For this quarter, however, there was effectively no activity of that nature.

Other revenues primarily management and advisory fees from our funds was $1.3 million. This number is significantly lower than the $6.5 million of other revenues in Q1 2005 due to the receipt in the first quarter of last year of our first promote payment from Fund II.

Moving down to other expenses, G&A was $5.1 million for the quarter, $700,000 lower than Q1 2005 due to the payment of a portion of the previously mentioned Fund II promote and employee compensation expense in the first quarter of last year. We recorded a tax benefit of $700,000 for the quarter as we recorded a loss at the TIMCO due to the decrease in fund income and the stable levels of G&A at the Company. The $700,000 represents a recapture of taxes paid in the past and we expect to receive a cash refund or credit for that amount during the year.

During the quarter we paid a $0.60 per share dividends and in light of the earnings in Q1 and our expectation for the rest of the year, we will be revisiting the dividend with the Board in advance of announcing our second-quarter dividend in mid June.

That wraps up for the financials. And at this point I'll turn it back to John.

And I will turn it over to you all to field any and all questions that you may have, fire them in please. Tosha?

(OPERATOR INSTRUCTIONS) Don Destino with JMP Securities.

The other Italian Don that covers the stock. Looks like you guys were a little more active this quarter in the mezzanine market just judging by the yield and the LTV of the loan originations. Could you talk a little bit about if that's just coincidence? That's what happened to be in the pipeline or does that represent any kind of change in the market or change in your view?

I'm going to send that question to Steve Plavin.

I think it's a little bit of both, Don. We have, we are trying to emphasize transactions that have a little bit more spread. Because of the liability structures we've been able to achieve, we've been really had been focused over the past year or two on lower risk assets because of our ability to finance them so efficiently. In addition to continuing to pursue those assets we're also looking for assets that have a little bit more yield. And we see some opportunities there that we're able to capitalize on in the first quarter. Specifically we had a couple of hotel loans that we were able to originate at we thought very attractive risk-adjusted spreads.

Steve, does that -- once you start putting on some mezz loans, does that give you an incentive to continue to do that so you can build up critical mass to do a more kind of mezz CDO? Or can you just pick and choose whatever you want to do in each particular quarter and do a CDO that with mixed types of assets?

Before I turn it over to Steve, I just want to say one thing. All those originations during the quarter were originated to achieve appropriate equity yields based upon the repo financings that we have in place. So while, yes, certainly a CDO is something that we look forward to do and it's always an improvement over our repo positions, there is no warehousing risk in this book. This is a book that works with our repos in place very well. So with that I will turn it over to Steve.

I think what we're beginning to see is that we are originating ahead of the pace of repayments in our two existing revolving CDOs. So the assets that we originate they're financed with -- repo debt from the street are increasing. We will deal with the term CDOs term financing of those later in the year depending upon how things evolve within the existing portfolio on terms of repayments.

And then next question, could you just talk a little bit more about the total return swaps opportunity? I mean that's obviously the returns on the small amount of capital that you deployed there so far looked really impressive. Is that a business and a market that you see as continuing to develop and potentially becoming a more material part of your business?

We are trying to grow that part of our business. We're not seeing a huge flow of opportunity but we are seeing occasional opportunities. And what it really is, Don, it's business not dissimilar from business we would otherwise do. It just comes with superior embedded leverage. So we're buying the equity portion in an already financed loan and the financing terms are just better than what would conventionally be available. So the risk profile of the assets is consistent with what we otherwise would do. And in some cases enables us to transact on lower risk assets due to the increased efficiency of the financing enabling us to have lower spread assets yet still achieve high equity returns.

And then, Jeff, you hit on this last question a little bit towards the end of your prepared remarks. You're at $0.71 in the first quarter. I think you're at least at that level of run rate heading into the second on the first day of the second quarter, you're at a $0.60 dividend. What is this view and terms of raising the dividend right up to where you're kind of your earnings run rate is or do you take the tact of keeping it -- keeping a cushion and then paying out something maybe as a special at the end of the year? And how do you think about that?

You are relentless in your attempt to get me to answer this question and I'm relentless in my resistance. Our policy continues to be what it has been which is on a quarter-by-quarter basis we will look at where we are in terms of sustainable run rate and we will adjust the dividend to reflect what we believe is that comfortable sustainable run rate. I think pretty clearly as we have been able to redirect business from what had been Fund III last year in the second half of last year, the beginning of this year, and build our balance sheet book, that momentum is increasing those assets are building and we believe our run rate has been increasing as a result.

So I think we will look at it again. I think we will try to be very prudent and terms of where we set it and if we miss we're going to try -- we're not going to try to miss -- but if we miss, we're going to miss on the low side not the high side. And if that means we end up with something in the tank at the end of the year in the form of a special then I guess we will do it that way. That is certainly not what we're angling for. What we're trying to do is calibrate the dividend to what we think is that sustainable run rate.

Don, just to add to that. In '05 we had, as I mentioned, gave the impact and the fourth quarter, there were some not insignificant non-recurring items aside from the gross sale but just in net interest income. And so when we were setting the dividend we were setting it on a quarterly basis ignoring those non-recurring items. That generated the special at the end of the year, the buildup of those items. As I said in '06, at least in the first quarter, we haven't had much of that activity. So in general I would expect to see the dividend much closer to where we report GAAP income.

That is very helpful. Thank you very much.

Don Fandetti with Citigroup.

Good morning. Very good quarter. John, I was just curious if you folks considered any major strategic transactions in the quarter?

We are always in the business of considering strategic alternatives. I think that is the nature of being a public company. And we will continue to look at any number of potential combinations and permutations a they come up and as we think they are consider them to be good for our shareholders. I think that that is not a specific issue. It's a continuous issue that we'll always look at both organic and I guess what you could call inorganic opportunities.

Okay. And I assume if there were any expenses related to that, those would have been disclosed?

Anything that is significant will always be disclosed.

Okay. Secondly, it just feels like looking at the other companies in your space, commercial real estate finance lenders, that the new investment volumes are just very strong. Do you think anything has changed? Do you sense that it's easier to get deal flow today than a year ago?

No, I actually -- I mean maybe this is a group answer. But I'll fire mine out first. I think it's nothing more than the continuing evolution of this capital market which is the whole reason we created Capital Trust way back when. Securitization and structured finance is here to stay and against the backdrop of pretty significant vibrant investment, sales, refinancing activities, activity in the marketplace. There's simply more product out there being created because more and more of it is being redirected away from the traditional balance sheet, vanilla version into ever increasingly sophisticated forms of structured finance instruments. And that is really what we're in the business of finding and structuring and investing in. So I think that the volumes are there.

And one of the things I said previously in my remarks that just that velocity of business is very significant today. So I don't think that people's origination volumes being strong are all that difficult to understand. The tough part is picking through the pile and finding those investments that have the right risk-adjusted return. That ain't so easy.

Great. And one last question. I could just not be remembering correctly but I thought that in your fund business that you weren't going to do another fund in a short term for various reasons. Is this a unique opportunity that popped up or have you always been intending to do another fund?

No, I think that we have always been intending to stay in the investment management business. But we're not and have not intended -- what we decided last year was not to offer another mezzanine loan fund of the like a clone of the previous funds, Funds I and Fund II. I think that going forward we believe that our platform can support other complementary, different but nevertheless complementary investment strategies. And that some of those strategies should be done on balance sheet and some of them should be done in managed funds. And when we come up with those ideas, those strategies and they are appropriately housed in a fund that we can sponsor and manage, then we will do that.

Okay. And do you think you have the resources and expertise for let's say a European or nondomestic type fund?

We have looked at a variety of opportunities outside of the United States. We will continue to look and yes I think the answer is we have the capacity and the platform both internal and through our relationships and our network with a variety of different kinds of partners. I wouldn't focus, not to pick on Europe specific words, but I'm not sure that we would focus our first efforts in Europe.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Richard Shane with Jefferies & Company.

Good morning, guys. Thanks for taking my question. I guess if I want to move up in the Q, I probably need to change my name or something.

Call yourself Don.

Okay, there you go. Just sort of looking at the other side of things, it seems like business is very good, credit strong. When you are looking at the market, what are the sort of long-term sectors that concern you from a credit perspective? I mean what are the areas where internally even if spreads haven't widened out you're saying, gee, we don't want to play in this area unless we see really compelling pricing?

We go to great links to not generalize or redline sector by sector asset class by asset class. So we're always willing to look at opportunities in the conventional and the nonconventional asset classes. We see transactions in areas in difficult geographic areas that still might work for us. So places like Texas and Atlanta and other more difficult markets where in general we wouldn't want to play in those markets and scale given the opportunity to avoid them. But we still see select opportunities to make investments everywhere and in every asset class.

So I don't know if that is a great answer to your question or not. But we don't see any particular reason to seek more spread from certain sectors.

Actually I think it's an interesting response in that you're not looking at it from a vertical perspective but more from a geographical -- from a geographic perspective.

Let me jump in. I mean it's sort of the intersection of a bunch of different aspects. It's not just geography. It's product side, it's underlying asset format that all -- its structure, its sponsorship, yes, as you said, return. It's all of that and how it comes together. Our whole idea here, the whole concept of Capital Trust is to be able to be nimble and flexible and to be able to go find where those vast opportunities are without -- I'll use Steve's phrase -- without redlining or predetermining what is good and what isn't on some kind of top down research oriented bases. We use the research obviously but I think our investment strategy is much more sort of bottom up and related to the specifics of certain situations.

And that is I think why we've been able to be successful over a long period of time not just looking for one style or one type of investment but instead able to be flexible enough to go find them where they are and take them when the risk-adjusted returns are what we think is compelling.

John, I think that actually brings up another interesting issue which is given that nimbleness and given what I would describe as a little bit of convergence amongst the finance REITs, you're seeing some of the commercial focused finance REITs pushing into residential; you're seeing some of the residentials push into commercial. Is that a strategy -- I mean is that a leap of strategy that you feel like you have the expertise to make and the nimbleness? Is that something we should consider as an opportunity for Capital Trust?

I think it certainly belongs on the long list. I'm not sure it belongs on the shortest list. We believe stepping back a little bit, we believe that what we are all are structured finance credit professionals. We find and underwrite and structure credit sensitive investments. And I think that that has obviously to date kept us mostly or almost entirely in the United States commercial real estate structured finance arena. And it has done that because we found good opportunity here.

But as we continue to look to grow this business, this company, I think that there are a number of what I would call adjacent areas where we believe we have the skill set and the network to be able to organically move into and in certain cases if it's a little bit more of a leap but nevertheless related, I think the way we'd look to do that is with partners.

It's not a great specific answer, Rick. But I think that it's possible residential could be a good fit for us at some point in the future but it's certainly not on the near-term radar screen.

That is actually a very helpful answer. Thank you, guys.

James Shanahan with Wachovia Securities.

Good morning, thanks for taking my call. A question, in John's prepared remarks he mentioned that BBB- CMBS was originated at tighter spreads at lower risk, lower duration. Does that imply that CT is more comfortable with the much lower subordination rates on new issue CMBS than say two, three, five years ago?

If you look at our CMBS strategy in terms of where we've been buying CMBS in the secondary market we pretended to buy below investment-grade, single B, BB. And we compare the vintage single B, BB to the new issue BBB, BBB+ CMBS. We look at in our analysis subordination levels and the other vintage CMBS has much greater subordination levels than the new issue CMBS does. There's a lot of different factors but basically the comparable risk need to be in our view a couple of credit notches higher in new stuff relative to old stuff to take into account lower subordination levels, lower coupons on the loans and in some cases more aggressive underwriting.

And with respect to CDO IV, when you dive into that portfolio specifically the $303 million of the BBB- CMBS that we bought, that's a weighted average rating of BBB-. And really the portfolio if you look at how much new issue BBB- CMBS that was in the $303 million was actually a very small percent. It was a lot of seasoned paper, a lot of more senior paper and some of the stacks it was some of the older style REMICs that were even rated AAA. So it was a weighted average BBB-; it was by no means new issue BBB- CMBS.

You should also know that before we buy CMBS we do go through a very extensive underwriting of the loans in the pool. So we don't generalize in terms of rating categories. We run a model on every deal that we look at, a top down and then do bottom up loan by loan analytical work. And we see -- we get very divergent result among comparably rated deals when we go through our underwriting process.

And one additional follow-up if you don't mind. The previous caller had commented that you were on a run rate of $0.71 of earnings. And we took the quarter and adjusted for the tax impact and got $0.66. Of course that's an average based upon your earning asset position and yields at the time. But you didn't object to that. Was your silence a recognition that maybe he was on track or did you -- were you ignoring that part of his question?

I think I know I believe it was Don Destino that made that comment. I believe and Don Destino, please feel free come back on to clarify if I am wrong. But I believe what Don was referring to was the fact that so much of our originations in the first quarter specifically CDO IV came on in the middle of March. So really if you view it in 15 days of having those assets on balance sheet that the run rate for going forward is higher just by doing that simple math than what the first quarter was.

Understood. Okay, thank you.

(OPERATOR INSTRUCTIONS) It appears that we have no further questions at this time.

Then thank you very much again all for being part of us and we will see you again next quarter.

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