Blackstone Mortgage Trust Inc (BXMT) 2006 Q2 法說會逐字稿

Welcome to the Capital Trust second-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 rate of repayment of the Company's and its funds, loan and investment portfolios. The continued maturity and satisfaction of the Company's portfolio assets as well as other risks contained in the Company's latest form 10-K and form 10-Q filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. There will be a Q&A session following the conclusion of this presentation. At that time I'll 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 continuing interest in Capital Trust. Last night we reported our results for the second quarter and filed our 10-Q. Needless to say we are pleased with our performance. $0.91 per-share, up 57% year-over-year and 28% compared to Q1 and the best in the Company's history. We are also pleased with the overall direction of our business and feel good about the rest of the year. And before Jeff walks you through the detailed numbers I want to take just a moment to explain why.

Our optimism stems from two sources, our platform and our people. In an ever more competitive market we believe that a key to success is the ability to be nimble and opportunistic while always preserving discipline. And after almost 10 years in this business we've learned that you simply can't do that if your company is tied to a single product type, investment style or origination channel. At Capital Trust we built our platform on a foundation of solid credit underwriting and creative financial structuring. These principles underpin everything that we do.

But we've also staffed the platform with great people, people who have the experience and sophistication to adapt to a rapidly changing marketplace and find the best investment opportunities available at any point in time. For example, in the first quarter we found value in triple B rated CMBS and 75% of our originations were longer-term fixed-rate bonds that we simultaneously financed with our fourth CDO. In contrast, in Q2 we found value in mezzanine loans and B Notes, including several large corporate transactions and over 90% of our originations took the form of loan. These new investments are collateralized by a mix of product types, including retail, multifamily, hotel, health care and office assets, they are located throughout the country, and they were sourced through a variety of channels, both direct and indirect. For Q3 look for the mix to change again to include more first mortgages and construction loans as we seek out the best risk-adjusted returns available in the market.

In the future look for us to push the envelope even further, expanding into new products like synthetics and exploring new markets outside the U.S. Another example of the power of CT's platform was the closing during the second quarter of our newest private equity fund called CT large loan 2006. This fund was designed to complement CT's balance sheet activities, giving us the discretionary capital to commit to very large transactions while providing our private investor clients the opportunity to invest side-by-side with CT.

In under 90 days from start to finish we raised $325 million of equity capital from 8 investors, 7 of whom were repeat partners. Large loan also closed its first investment during the quarter purchasing a $100 million pari passu investment in a $150 million B Note secured by a premier super regional mall. We sole sourced this opportunity based on our intimate knowledge of the underlying asset, our strong relationship with the senior lender and our ability to commit firm for $150 million subordinate position.

When the dust settled CT ended up with an attractively priced $50 million investment on its balance sheet, plus an annualized management fee of $750,000 from the large loan fund. Our second fund investments a mezzanine tranche of the financing for a reprivatization is about to close, and we have several additional transactions in the pipeline.

Going forward, look for us to create additional investment management vehicles that extend our reach into adjacent products and investment strategies. Strategy is important, but people get the job done. And I believe that Capital Trust has the best team in the business, period. A perfect example is our newly minted chief credit officer, Tom Ruffing. Tom is a career real estate finance professional having cut his teeth doing banking workout scenario sales at JPMorgan Chase before joining CT over five years ago. Tom will continue running our asset management and rated special servicing functions and will now step up to work even more closely with Steve Plavin on the underwriting and credit process for new investments. He is just one example of the smart, motivated and dedicated people who collectively are the true key to our success.

We believe that our unique combination of platform and people will continue to pay off for Capital Trust shareholders. The best example of this is our dividend, which we increased by 17% from $0.60 to $0.70 for Q2. Going forward we will stubbornly stick to our policy and set the regular quarterly dividend at a level that we believe is comfortably supportable by recurring run rate earnings.

So without further ado, I am going to turn it over to Geoff Jervis our CFO to run you through the numbers for the second quarter, and then we will come back and take any and all of your questions.

Thank you, John, and good morning everyone. First, to the balance sheet. During the period total assets increased by 13% from last quarter driven primarily by increases in interest-earning assets defined as CMBS, loans and total return swaps. For the three-month period these assets grew by approximately $200 million to $2.1 billion at quarter end. Originations of interest earning assets totaled $378 million and partial and full repayments totaled approximately $175 million for the period. Originations were comprised of $24 million of CMBS, $351 million of loans and a $3 million total return swap. The weighted average all in effective rate on new originations was 9.99% comprised of 8.84% for new CMBS and 9.98% for new loans. The new total return swap that effectively has embedded leverage carries a 20.56% return.

Using this is snapshot of June 30, the entire $2.1 billion portfolio in interest-earning assets had a weighted average all in effective rate of 8.62%, which was comprised of 7.42% for CMBS, 9.41% for loans and 19.55% 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 68%. Credit for the entire portfolio remains strong across all investment categories. Inside the loan portfolio the only nonperforming asset at quarter end remains the $8 million Mexican loan we have discussed in the past.

Moving down the balance sheet, equity investment in funds decreased by $4.5 million to $9.8 million from $14.3 million last quarter. The decrease is a result of the continued ordinary course liquidation of the CT mezzanine partner's funds as well as the acceleration and full amortization of $1.8 million of capitalized costs, specifically associated with our venture agreement with Citigroup. As we no longer expect to cosponsor investment management vehicles pursuant to that agreement.

Performance at the funds remains strong with no nonperforming loans. Fund 2 continues to wind down and as of today we have only two remaining investments. At fund 3 as of June 30 we had 10 investments with total assets of $375 million. As we have disclosed in our 10-Q the promote value to us embedded in fund 2 and fund 3 assuming liquidation at June 30, is $2.5 million and $6.7 million, respectively. Collections of the promotes is of course dependent upon, among other things performance of the funds and timing can be very difficult to predict. That said, we do expect the remainder of the fund 2 promote to come in during 2006 and to begin to collect fund 3 promote starting at the end of 2007. In addition to fund 2 and fund 3 we also managed CT large loan 2006, our new private equity fund that held its initial and final closings during the quarter. The Fund made its first investment in May, purchasing $100 million pari passu interest and $100 million subordinate mortgage interest that we originated, with CT holding the remaining $50 million on balance sheet. At June 30 the fund had just one investment with a book value of $100 million, and we earned management fees of 75 basis points per annum on that asset.

Continuing down the other assets on the balance sheet, deposits and other receivables were higher than usual this quarter at $49.9 million compared to $3.9 million last quarter. The vast majority of this change was a result of asset repayments that occurred late in the quarter but where we had not received the cash from our loan servicing system at quarter end. Since quarter end we have received all the cash from our servicers on these loans.

One more item of note in assets, our interest rate swap agreements which we entered into in connection with fixed-rate origination, continued to increase in value as rates, move. And at quarter end interest rate hedge assets were recorded at $15.5 million, up from $7.7 million at March 31. Over to the right hand side of the balance sheet total interest-bearing liabilities defined as CDOs, repurchase obligations and trust preferred securities, were $1.6 billion and carried a weighted average coupon of 5.85% and a weighted average all in effective rate of 6.05%.

Our CDO liabilities at quarter end totaled $1.3 billion; this number represents the notes that we have sold to third parties off of our 4 CDOs. And at quarter end the all in cost for our CDOs was 5.79%. All of our CDOs are performing, fully deployed and in compliance with their respective interest coverage, overcollateralization and reinvestment criteria. Our repurchase obligations continue to provide us with a revolving component of our liability structure from a diverse group of counterparties at ever improving economic terms. At quarter end we had borrowed $334 million and had $900 million of commitments from 6 counterparties. We remain in compliance with all of our facility covenants.

During the quarter we paid our first quarterly dividend out of our $50 million of trust preferred securities that we issued in the first quarter, the securities have a thirty-year term and carry a cash cost of 7.45% and 7.53% on an all in basis. A new item in liabilities in the second quarter is participation sold. These are loans that we closed at CT and subsequently sold participation interest to third parties during the quarter. In accordance with GAAP, we are required to present these participations sold on a consolidated basis. With the amount sold recorded assets and liabilities on our balance sheet and the amounts paid to our participants shown as both interest income and interest expense on our income statement. At June 30 we recorded $156 million of participations sold on the balance sheet as the loans receivables and liabilities and the pass-through rate on these participations was 8.89%.

Over to the equity section book value at quarter end was $359 million equating to $23.13 on a per-share basis. This represents a $0.75 increase to book value per share from last quarter. Changes in book value are primarily attributed to the increases in the value of our interest rate swaps and our retention of earnings as net income exceeded dividends by $3.5 million during the quarter.

At June 30 our debt to equity ratio defined as the ratio of interest-bearing liabilities to equity was 4.6 to 1 compared to 4.5 to 1 at March 31. As always we remain committed to maintaining a matched asset liability mix, and at quarter end we had approximately $200 million of net positive floating-rate exposure on our balance sheet. Consequently, an increase in LIBOR of 100 basis points would increase annual net income by approximately $2 million. Conversely, 100 basis point drop in LIBOR would decrease earnings by that same amount.

Our liquidity position remains strong, and at quarter end we had $14 million of cash and $88 million of immediately available borrowings under our repo facilities for total liquidity of $102 million.

Turning over to the income statement, we reported net income of $14 million or $0.91 per share on a diluted basis, representing growth of 57% on a per-share basis from the second quarter a year ago. The primary driver of net income growth was an increase in interest income related to the growth in interest-earning assets for the quarter. Net interest income was $20 million for the period, an increase of $8.7 million or roughly 77% relative to a year ago. As one might expect, this includes a significant amount of prepayment penalties, exit fees and discount realizations during the quarter to the tune of $3.5 million.

Other revenues, primarily management advisory fees from our funds was $1.2 million, lower than in the past as fund 2 and fund 3 continued to pay down offset by the added impact of the large loan fund. Moving down to other expenses, G&A was $5.7 million for the quarter, $400,000 higher than Q2 '05 due to increased employee compensation expense.

Depreciation and amortization increased by $1.8 million from $280,000 to $2.1 million as a result of our expensing all of the capitalized costs relating to venture agreement as we have previously discussed. We recorded a tax benefit of $770,000 for the company as we recorded a loss at CTIMCO, our taxable subsidiary. This $770,000 represents primarily a recapture of federal taxes paid in the past, and we expect to receive a cash refund or credit for that amount during the year. As usual, we had a number of items that were arguably non-recurring during the quarter both positive and negative. When you sort through the numbers backing out 100% of prepaid fees and penalties, extraordinary amortization and tax benefits, we earned approximately $0.75 per share on a diluted basis.

During the quarter we paid a $0.70 per-share dividend, an increase of $0.10 per share or 17% from the previous quarter's dividend of $0.60 per share. Given our earnings for the second quarter we will reevaluate our dividend rate with the board before we declare our next dividend. That wraps it up for the financials, and at this point I will turn it back to John.

Thanks, Jeff. I think we open it up now for questions from any and all.

(OPERATOR INSTRUCTIONS) Don Destino, JMP Securities.

(technical difficulty)

David, I don't know if it is just us, but we can't hear John's question.

I apologize. I think he was disconnected, if he could press Star one again he'll enter the queue. I will now open his line.

Can you hear me?

Now we can I think.

I'll start over assuming you didn't hear anything. Forgive me if I am asking things that have been covered; I am trying to listen to two calls at the same time. Jeff, I'm wondering if you are being a little conservative on your recurring earnings number. Is that $0.75, and obviously you are taking out all of the prepayment fees, are you making any adjustment for the forgone earnings from those loans that repaid? Or did those loans repay right at the end of the quarter and so there wasn't really any forgone earnings from prepaid loans?

John, I'll start it even though you directed it to Jeff. You know, yes, I think we are being typically consistently conservative. We are backing out in that number the 75 -- to get the $0.75, 100% of the prepayments and accelerations, which as you ask, those did not all occur at quarter end. They occurred sort of spread throughout the quarter. But in the interest of being as conservative as we possibly can, that is the way we characterize that number. I think we have the ongoing conversation because if you follow us quarter by quarter, you see that we pretty regularly have an amount of prepays that are related to early accelerated payoffs of loans, and you can argue that not 100% of those should be excluded out in terms of our calculation of recurring earnings. But in order to be as conservative and consistent as we possibly can, that is the way we did that number.

Got it. And then next question John or maybe Steve if he is on the line, it looks like for the second quarter in a row on the lending side you guys focused little bit more on higher LTV, higher spread mezzanine product. Is that just opportunistic; those are the types of deals that you saw this quarter, or is there anything going on in your opinion on pricing kind of higher up in the LTV capital structure?

I'll take that. I don't think there is anything going on at pricing. We had a couple of large opportunistic transactions that hit that quarter. We are seeing continuing opportunities as a result of the privatization of some of the public REITs. And with that trend we hope to see more opportunities to make larger investments and ideally at wider spreads. We are seeing more transitional assets now and some of those transitional assets won't get split a, b. They will originate just as floating-rate whole loans; as a result we focus more of our origination effort on those kinds of loans. You'll see more of that going forward in addition to our regular mix of mezzanine loans and B Notes.

Will we see an increase in the -- forgot what it was called now -- participation lines on the balance sheet where you will take down those and sell off the senior piece?

Certainly to the extent that what we're doing is in large loan fund is co-originating side-by-side. With the balance sheet and the fund. $100 million of that amount reflects that pari passu interest that we closed and then subsequently sold to the large loan fund. So to the extent that there is more of that and we expect there will be, that is exactly why we raised that pool of capital. That will contribute to that line item or those line items on both sides of our balance sheet. To the extent that we find opportunities to originate whole loans and sell off senior portions as a way of effectively financing a subordinate position manufacturing our own subordinate position, then you will also see in certain instances that line item appear also, Don.

And then finally we saw on one of the racks you guys participated more made I think it was a first mortgage construction loan of a decent size. I guess some color on that. Is that, again a one-off opportunistic thing or do you see opportunities in construction loans? Maybe something about the profitability of those loans versus other things you are doing? And then hold side -- I assume as the construction loan it takes a while for it to be drawn down, but are those hold sides is one thing you're comfortable with?

I think that, I don't know if I am going to remember all the components of that question, but I will do my best. We are seeing more construction lending opportunities. We do think that in many instances it is a good time in the cycle to make it to capitalize on those opportunities in many markets, including the market that we made this construction loan in. Completed buildings are selling well in excess of replacement cost. So if you have an opportunity to make a construction loan with a strong sponsor and a well located building, you feel very good about loan to value relative to loan to cost. And we've seen that trend in a few other markets and we are actively pursuing those.

As it relates to hold amount, the initial outstanding balance of these construction loans are typically very small, just the land advance in the very beginning of construction and they increase over time. As our outstanding balances increase and our overall portfolio construction loans increase, we'll reevaluate our hold positions. But right now we are very comfortable with what we see out there and what we have in our portfolio.

That is very helpful. Thank you very much.

(OPERATOR INSTRUCTIONS) John Moran, Cohen Brothers.

I was just wondering if you could touch base quickly on how fast you anticipate the ramp up in large loan. I know you had mentioned that you identified a second opportunity here that you expect to close near term. If you can provide any detail about the size of that and kind of where you see large loan going over the next six months or so.

I think that the large loan, by definition, are deals that overall loan size is greater than $50 million. And those are in connection with these -- most of what we are seeing is in connection with these large REIT LBOs. Very difficult to predict how many of those get done and how many of those deals were able to capture meaningful portion of the financing. So I don't think I can offer you any real specific projection. We do believe there are good opportunities going forward, there is a lot of activity; I'm sure you guys have some view in terms of which REITs might get taken out and we are actively, aggressively pursuing all of those opportunities trying to decide which ones we are comfortable with the credit and trying to get the best positions we can in those financings.

And maybe if I could ask you guys to just give a quick update on your credit outlook; I know that Jeff had mentioned in his prepared remarks that in the portfolio everything is kind of looking still very solid. If you have any concerns in particular property types or geographies, if you wouldn't mind sharing those.

I think in general we're feeling pretty good about most asset classes in most markets. We are careful not to red-line anything because we don't want to foreclose out any opportunities that might present themselves. I think across the country there is certainly is (indiscernible) for sale housing. So as it relates to land that is land loans related to for sale housing and also condominiums, we will continue to be as we always have been extremely conservative in how we view those opportunities. But opportunistic possibilities may emerge in those sectors as well going forward and we are very mindful of that.

Great. Thanks very much.

It appears there are no further questions at this time. Excuse me a question has just been submitted by James Shanahan of Wachovia.

Actually thought that I was in the queue. I apologize. Thanks for taking the call. A couple questions. What has been the impact on average over the last few quarters on interest income from the realization of prepayment penalties exit visa discounts and would you consider [surfing] that out as a separate line item on the income statement going forward?

As far as the impact on a quarter to quarter basis I don't have all the figures in front of me. But certainly we do our best to disclose it every quarter as to what it is, saying this quarter is $3.5 million in. Wit respect to presenting it differently no, we have no intention of doing that. It is certainly in conformity with GAAP that we present these; typically it is the acceleration of a fee that we had otherwise been amortizing over a different expected life for a loan, whether it be an exit or an origination or a penalty or otherwise. All of these items are appropriately housed inside our interest income line, and I would say we probably won't break them out. But we will continue to disclose them in the press releases and on the calls as appropriate.

The question is really more can you disclose it on the earnings conference? I mean on the earnings press release prior to the call? That would be helpful. Anyway, can you also review the commentary again associated with the wind down of fund 2? I think I missed some of the numbers. Are you saying that fund 2 will be wound down by the end of this year and the achievement of the full $2.5 million incentive fee will also be achieved in the second half?

Right now with the number of assets in the fund we are evaluating whether or not it makes sense to call that fund. And whether or not we do depends upon our cosponsor Citigroup agreeing with us and executing whatever wind down that is in conjunction with the terms of the document. It is likely that either in the third or fourth quarter that fund does go away, and if it goes away I encourage you to look at the 10-Q, you will see not only the positive benefits from what promotes we would realize, but also you would get a sense of there are some capitalized costs associated with fund 2 that remain on our balance sheet that are being amortized, and those would go away as well. Those would be expensed as well. (multiple speakers). The promote being a cash impact and the acceleration of the amortization of the capitalized costs would be obviously non-cash impact.

I see on page 25 the disclosure of the remaining gross incentive fees. I don't see the disclosure of the --

If you go to note 6, equity investment and funds, there is a new chart this quarter that breaks out what capitalized costs are. With respect to fund 2 there are $1.8 million remaining at June 30 inside at Capital Trust, as well as there are some fees in the general partner about half $1 million of capitalized costs of the general partner.

Thank you.

Rick Shane, Jefferies & Co.

Thank you for taking my question. When I look at the numbers in terms of G&A the trends have been pretty favorable over the last year. We saw slight uptick this quarter but nothing meaningful. I'm curious as you expand into, as you sort of describe the flexibility of the model and the ability to start looking at (technical difficulty) and even wider set of asset classes, should we expect additional staffing, or how should we be looking at G&A?

I think it is a couple of different aspects, Rick. Number one, we continue to believe that we have significant capacity in this platform, particularly in the context of adding assets under management both on our balance sheet and in funds. And I think that that expansion capability, that operating leverage definitely exits. Certainly as we add new products or enter into new sectors there will be at the margin probably a few more people that we need to add. As we ramped up our CMBS a bit in the beginning of this year we hired an individual who has a lot of experience in the CMBS world and who focus pretty explicitly on that area as we move into other, more forcefully into other asset categories you might see the same kind of thing. But in general I think we feel like we've got a platform that has unutilized capacity, and we think that is part of the advantage going forward of Capital Trust. Having said all of that, the most important thing is our people, and we need to keep them and keep them happy and keep them here and we've done a pretty good job of that.

And absolutely, and it looks to me like again you are doing a good job managing the expenses there. On a more general level are you seeing salary increases across the board? Are you seeing the competitive pressures due to all the capital that is sort of flowing to the sector driving the price for good employees up significantly? Is that something you've noticed?

I guess the one word short answer is, yes. I think there is an amazing amount of competition in this sector. We've talked about that quarter in and quarter out. I think that translates into competition for good people and I think that we correctly are perceived as having the best people in the sector. So it is competitive. And we need to be in a position to retain our people. And I think we try very, very hard to do that. But the answer is yes, there is competition for deals, and there is competition for the people who make them happen. And it is just a fact of life. We've been trying to hold our expenses as carefully in line as we can, but that is a reality of the marketplace today.

And have you actually seen -- have you lost any employees to competitors? Significant employees to competitors?

To competitors? Short answer, no.

Guys, thank you very much.

It appears that we have no further questions at this time; I would now like to turn the program back over to our presenters for any closing remarks.

I think the closing remarks are nothing more than thank you very much for your continued interest. Obviously we got off easy this morning. Maybe scheduling and maybe good results, maybe both. But we look forward to talking to you next quarter, and keep your eye on us. Thank you.