Blackstone Mortgage Trust Inc (BXMT) 2007 Q1 法說會逐字稿

Welcome to the Capital Trust first quarter 2007 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 will provide instructions for submitting a question to management. I will now turn the call over to John Klopp, CEO of Capital Trust.

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 10-Q. I will turn it over to Jeff in a moment to review the detailed numbers but our bottom line performance was solid and consistent with our expectations.

Net income of $14.9 million, and $0.84 per share, up 36% and 18%, respectively year-over-year. New originations of $477 million, down from our all-time record in Q4, but actually a first quarter record for CT, which is historically our seasonal low point in production. No losses, no reserves and continued strong credit performance in all of our portfolios. And while it now seems like somewhat old news, an increase in our regular quarterly dividend to $0.80 per share, up 7% from the prior quarter and 33% compared to Q1 '06.

Before we turn back to the financials, I want to spend a few moments on what has been going on in the credit markets, the real estate markets and what we believe it all means for Capital Trust. After an incredibly long, positive run several recent events have caused many of us to question whether we have reached an inflection point in leverage and valuations. It started with subprime residential meltdown in late January. While it's easy to dismiss this event as having nothing to do with our business, the truth is that all markets are increasingly interconnected and events in one sector eventually impact others.

The immediate result of the subprime implosion was a pullback in the share prices of most finance companies, including ours, as stock investors sold credit risk of any type. The secondary impact was a widening of spreads in the CDO markets as crossover buyers burned by ABS took their lumps and became more cautious. In the last few weeks announcements by all three major rating agencies that they are finally drawing the line on CMBS subordination levels triggered further spread widening across the curve, particularly in the junior classes.

In stark contrast the appetite of institutional, individual and offshore buyers on the equity side for quality, commercial real estate continues unabated at least for the moment. If the availability of leverage declines and the cost increases, equity valuations will inevitably be impacted. But the fundamentals in most markets remain strong, and we do not see a train wreck coming down the track. Instead, we believe that more volatility and uncertainty creates opportunities that play directly to Capital Trust strengths. As I've said on this call many times before, increased competition has stressed lending standards, and some loans and some lenders will encounter problems. Particularly in this environment credit selection and underwriting are the keys to success, and here we believe our skills are second to none.

We believe that asset and liability spreads may disconnect for a time but ultimately will come back in line. In Q1 we increased our balance sheet liquidity substantially both to withstand any short-term turbulence and to have the capital on hand to move opportunistically. Specifically we raised an additional $75 million of long term trust preferreds at a spread 30 basis points inside our last issuance, and put in place a new $50 million senior unsecured credit facility. We believe that spreads will not move in lockstep and that the ability to invest across all asset categories will be critical to finding the best risk-adjusted returns. Subsequent to quarter end in April we closed our latest investment management vehicle, a new fund designed to invest in CDOs that CT sponsors and manages but that don't fit our balance sheet for structural, regulatory or tax reasons.

Called CTX Fund 1LP, this single investor fund has $50 million of initial equity capital, substantial amounts of additional firepower and will allow us to further broaden our reach into the synthetic CMBS and structured finance markets. We have also made significant progress in increasing our direct origination capabilities and are working hard to expand our footprint into other products and markets where competition is less intense. Look for more news from us on all these fronts as the year progresses.

Lastly, we believe in our business plan and our ability to adapt to changing market conditions just as we have successfully done over the ten years since founding Capital Trust. With that, I will pass the microphone to Jeff to review the financials.

Thank you, John, and good morning everyone. Let's jump right to the balance sheet. Total assets increased by 11% during the quarter to $2.9 billion from $2.6 billion at year-end 2006. The primary drivers of asset growth were new originations of interest-earning assets which we define as loans, CMBS and total return swaps. For the first quarter interest-earning assets grew by approximately $287 million, net to $2.9 billion. Origination for our balance sheet of interest-earning assets totaled $477 million including $100 million of unfunded commitments for new fundings of $377 million.

During the quarter we experienced $117 million of partial and full repayments that were partially offset by advances during the period on previously unfunded commitments of $27 million. The combination of originations net of unfunded commitments, repayments and new advances totaled the $287 million increase in interest-earning assets for the period. Balance sheet originations were comprised of $36 million of CMBS and $442 million of loans, $342 million funded and $100 million unfunded. The weighted average all in effective rate on new originations was 7.76%; at March 31, 2007 the entire $2.9 billion portfolio of interest-earning assets had a weighted average all in effective rate of 8.31%.

From a credit standpoint the average credit rating of the CMBS portfolio has not changed from BB+ at year-end 2006, and the loan portfolio has a weighted average loan to value of 69% compared to 70% at year-end 2006. Before we move off of interest-earning assets I would like to discuss the mix of loan types originated during the quarter. As detailed in note 4 of our financials, originations were comprised of $174 million of whole loans and $193 million of B Notes and mezzanine loans. The weighted average spread on the loan originations was 7.82% comprised of 7.46% for the whole loans and 8.1% for the B Notes and mezzanine loans.

Whole loan last dollar LTVs were 72%, and our B Note and mezzanine loans last dollar LTVs were 62%. Looking across the entire portfolio, credit performance remained strong in all investment categories. The CMBS portfolio experienced net 7 upgrades and inside the loan portfolio the only nonperforming asset at quarter end remains the Baja loan.

Moving down the balance sheet equity investments and unconsolidated subsidiaries decreased to $9.9 million at the end of the first quarter. The decrease is due to the successful windup of Fund II during the period, continued ordinary course repayments at Fund III, partially offset by $1 million of funding associated with our investment in Bracor. Going forward we expect to fund our remaining $8 million Bracor commitment over the next few periods. As to Fund III we expect to continue to experience repayments, and if anything, our expectation to promote realization as well as the ultimate wind up of Fund III has accelerated.

As of March 31st Fund III had five investments, total assets of $194 million, with all assets performing well. As we have discussed in the 10-Q, the gross promote value to us embedded in Fund III assuming liquidation at quarter end was $7.8 million. Collection of the Fund III promote is, of course, dependent upon among other things, continued performance at the fund and the timing of payoffs. That said, we currently expect to be in collecting Fund III promotes starting in the second half of 2007. Any funds we promote will be accompanied by expensing a portion of capitalized costs, as well as payments to employees of their share of promotes received.

At quarter end in addition to Fund III we managed two other investment management vehicles; CT Large Loan 2006 and CT High Grade. At the end of the first quarter of 2007 CT Large Loan had three investments and total assets of $151 million, and CT High Grade had two investments and total assets of $65 million. We do not co-invest in either of these vehicles and our management fees of 75 basis points on assets, subject to leverage levels at CT Large Loan and 25 basis points on assets for CT High Grade. Or do not originate new investments for either fund during Q1 we have already had solid activity at both CT Large Loan and CT High Grade during Q2.

As John mentioned, subsequent to quarter end we closed our newest investment management vehicle, CTX Fund 1LP, a fund designed to capitalize CT's off-balance sheet CDO investment management business by buying the equity tranches of CT sponsored and managed off-balance sheet CDOs. We do not seed the fund itself, but we will earn both base collateral management fees and incentive management fees on each CDO in which the CTX fund invests. The fund is capitalized with $50 million from a single third party institution, and we expect that the initial capital will provide us with the funds to sponsor three to five CDOs.

On the right-hand side of the balance sheet total interest-bearing liabilities, defined as repurchase obligations, CDOs and new senior unsecured credit facility and trust preferred securities, were $2.2 billion at March 31st and carried a weighted average cash coupon of 6.02% and a weighted average all in effective rate of 6.22%.

Activity on the right-hand side of the balance sheet during the period included increasing repurchase commitments from $1.2 billion to $1.6 billion, closing the new $50 million senior unsecured revolving credit facility and issuing $75 million of trust preferred securities. Our CDO liabilities at the end of the first quarter totaled $1.2 billion; this amount represents the notes that we have sold to third parties in our 4 CDO transactions to date. At March 31st the all in cost of our CDOs was 5.88%. All of our CDOs are performing, fully deployed and in compliance with their respective interest coverage, over collateralization and reinvestment criteria. And the total cash in our CDOs at quarter end was $913,000 recorded as restricted cash on our balance sheet.

Our repurchase obligations continue to provide us with the revolving component of our liability structure from a diverse group of counterparties. At the end of the first quarter we had borrowed $881 million and had $1.6 billion of commitments from 7 counterparties. We remain comfortably in compliance with all of our facility covenants. And with $719 million of unutilized capacity on our repo lines, we are confident that we have the immediately available debt capital to fund our near and mid-term growth.

In March 2007 we closed a $50 million senior unsecured revolving credit facility with West LB. The facility has an initial term of one year with two 1-year extension options; and at the end of any year a one-year term-out at our option. Effectively making the life of this facility a minimum of two years and a maximum of four years. The facility has a cash cost of LIBOR plus 150 and an all in effective cost of LIBOR plus 170. At quarter end we had drawn $25 million under this facility.

The final component of interest-bearing liabilities is $125 million of trust preferred securities, of which $75 million were issued during the quarter in our second trust preferred offering. The new securities have a thirty-year term and bear interest at a fixed rate of 7.03%, all in effective rate of [714]. For the first ten years ending April 2007 and thereafter at a floating rate of three-month LIBOR plus 2.25%. In total our $125 million of trust preferred securities provide financing at a cash cost of 7.2% and 7.3% on an all in basis.

One more item of note in liabilities is participation sold. At March 31st we had $239 million of participation sold on the balance sheet. Recorded as both assets under the loans receivable and liabilities as participation sold. And the pass-through rate on these participations was 8.86%.

Over in the equities section shareholders equity was $426 million at March 31st and our book value per share was $24.03. Our debt to equity ratio defined as the ratio of interest-bearing liabilities to book equity increased to 5.3 to 1 compared to 4.6 to 1 at year end 2006. We remain comfortable with our leverage levels and, as we have said in the past, these levels will migrate depending upon the types of assets we originate and the structure of liabilities that we raise. As always, we remain committed to maintaining a matched asset liability mix. And at quarter end we had approximately $406 million of net positive floating rate exposure on a notional basis on our balance sheet.

Consequently an increase in LIBOR of 100 basis points would increase annual net income by approximately $4.1 million. Conversely 100 basis point drop in LIBOR would decrease earnings by that same amount. Our liquidity position remains strong, and at the end of the first quarter we had $22 million of cash, $144 million of immediately available borrowing under our repo facilities and $25 million available under our revolving credit facility, for a total liquidity of $191 million.

Turning to the income statement, we reported net income of $14.9 million or $0.84 per share on a diluted basis for the first quarter of 2007 representing growth of 18% on a per-share basis from the first quarter of 2006. The primary drivers of net income growth for the quarter were increases in interest-earning assets and net interest margin. Year-over-year net interest margin increased by 49% to $21.3 million in the first quarter of 2007.

Other revenues for the first quarter 2007, primarily management advisory fees from our funds, were $2.1 million, a $1.1 million increase compared to the same prior quarter. The increase is primarily due to the receipt of $1 million of Fund II promote during the quarter.

Moving down to other expenses, G&A was $6.8 million for the quarter, an increase of $1.7 million from the first quarter of 2006. This increase is as a result of increased employee compensation expense and professional fees in addition to recording the payment to employees of their share of Fund II promote received. In addition, depreciation and amortization was elevated by $1.3 million as we expensed Fund II's capitalized costs.

During the quarter we booked a tax benefit of $254,000. This amount was due exclusively to reversing a previously booked tax provision at Capital Trust, the parent. CTIMCO, our taxable REIT subsidiary, did operate at a loss for the period, but we elected to fully reserve for the associated tax benefit and therefore did not record a tax benefit associated with that loss.

As is typically the case our income for the period included items that we would consider non-recurring. During the first quarter non-recurring items included interest income of $1.6 million from the early repayment of loans, including exit fees, prepayment penalties and accelerated discount and premium amortization. A net expense of roughly $750,000 from Fund II items, including expensing capitalized costs, receipt of the promote and a loss on our co investment in Fund II; and approximately $500,000 of G&A expense representing employee payments of the Fund II promote and seasonal employee costs.

And finally, the recognition of the $254,000 tax benefit. In total non-recurring items were roughly $600,000 net recording to recurring income on a diluted basis of $0.81 per share for the quarter. In terms of dividends our policy is to set regular quarterly dividends at a level commensurate with the recurring income generated by our business. At the same time in order to take full advantage of the dividends paid deduction of a REIT we endeavored to pay out 100% of taxable income. In the event the taxable income exceeds our regular dividend payout rate we will make additional distributions in the form of special dividends. We paid a regular quarterly cash dividend of $0.80 in the first quarter, a 33% increase year-over-year.

That wraps up for the financials. At this point I will turn it back to John.

Thank you, Jeff. I think at this time we will open it up for questions from everybody on the phone.

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

Come on, guys, none?

It looks like we have one now, it is from James Shanahan, Wachovia.

That's what I get for being asleep at the switch. I figured somebody would jump in and had a chance to get something together here. I do want to talk about the impact of spread widening and CMBS, and your decision to hold CMBS, held to maturity benefited you this period. But certainly there was an impact in any of the 4, 6, 8 quarters prior when spreads were tightening in CMBS. Can you comment on what the fair market value is of your CMBS portfolio relative to your carrying value?

And a follow-up question would be it appears that about 50% or so of your CMBS were from periods prior to 2000. And I'm wondering what you think the impact is likely to be from prepayments in the next year or two years.

I will turn that one to Geoff.

I'll start, I will turn over the impact of prepayments in the conduit CMBS to Steve after I'm done, but with respect to our CMBS portfolio I think let's focus on the fixed rate CMBS with respect to the marks. During the quarter we had de minimus changes in valuation from year-end. I think that is primarily due to the seasoned and higher credit quality nature of our portfolio. As you know, most of our portfolio is pre 2005 vintage, and the stuff that we have invested in in 2005, 2006, and 2007 has been investment-grade or higher or low investment-grade or even higher up into the AAA stack in some instances.

And if you look in the Q it is disclosed in the market risk chart in the back, you will see that the fair value of our CMBS at the end of fixed-rate CMBS was $717 million at quarter end.

I did see that, Geoff, but it didn't hear that there was really -- if you net out the originations and repayments on the two fixed and variable-rate portfolios there really was no change in fair value, and I guess that would hit the point that you made that these are older vintage relatively high quality CMBS with significant subordination. Is that the reason why?

Yes.

Okay, great. Thanks. And then the follow-up, please.

Impact of prepayments.

This is Steve Plavin. The loans underlie the CMBS bonds are mostly ten-year fixed-rate loans. They don't have a lot of prepayment flexibility for the borrowers. Generally its the only option for a borrower to get out of debt is to defease the debt, which means for us that the mortgage collateral is substituted by treasury collateral, and the loan continues on to its conclusion. So I don't think that we will have any impact from prepayments other than what we anticipated with all those bonds when we purchased them.

Are there any of those underlying loans that mature during 2007 or 2008, and is it significant?

Yes, I think some of the older vintage CMBS we are reaching the end of some of the loans, and they will repay in the ordinary course. They repay -- the loans repay sequentially in the CMBS transactions, and were generally invested at, let's say in general BB/BBB. So we won't feel the impact of those early loan repayments until they work through the repayment of the more senior securities.

I guess I'd jump in kind of to top it off. The reason that we hold our CMBS or virtually all of our CMBS as held to maturity is, in fact because we intend to hold to maturity. In turn, we have financed the vast majority of our long-term fixed rate CMBS with CDOs, which are longer-term, non mark to market liabilities. And therefore we think that both the treatment on the asset side and the financing on the liabilities side reflects our intent with respect to those investments, Jim.

Understood. And one more follow-up. I hope I'm not being selfish here.

If nobody else has a question, keep going please.

We're suffering from a [destino] affect (multiple speakers). The debt to equity ratio climbing now to 5.3 times, if I'm not mistaken there used to be a discussion of leverage in the mid 4.5 times level. And as you've added more certain type of investments I guess you've gotten comfortable with leverage at this level. We were thinking there is a potential need here for more new equity at some point in the middle part of '07. What do you think about that now?

I think that as our business has continued to evolve we have continued to rethink our leverage levels. And I think that is consistent with what we've been saying if you look at it over time. As we have found more opportunities to invest in whole loans, for example, which have a starting point first dollar loan to value of zero, we think that we can apply somewhat greater leverage to those types of investments.

If you look at our last quarter production in terms of last dollar LTVs, you will see that we actually dialed down the last dollar loan to value a little bit. And again, the way we believe we finance our assets is predicated upon what the risk profile is. Our CMBS investments again as Geoff said have been sort of right at the crossover point, sometimes a little bit above that investment-grade turnover point.

In turn we have continuously said that as we increase the stability of our liability side we are comfortable with somewhat greater leverage. We have clearly converted a significant portion of our liabilities from mark to market lines to non mark to market CDOs. And that makes us more comfortable. Where we go with the leverage going forward, essentially depends upon again our assessment of what the risk is on the asset side and what the stability is on the liability side. At some point we clearly will re-equitize and add more equity into the mix. But we will do so in the same way we've done it in the past, which is carefully and somewhat stingy, if that is a word.

I understand, and since there is no one here I'll keep going. On the CDOs the market has been a little bit weaker in the past couple months or so. And in our model we have -- we expect that you will be back in the market. Can you comment on where you think the market is for you guys? Maybe a bit wider and maybe some comments on leverage if anything is changing for you guys as an issuer?

Geoff and Steve tag team this part of our business, so I will turn it over to one or both of them.

Let's answer both questions. With respect to the levels that we would expect to receive from the agencies on pools of mezzanine loans, B Notes, whole loans, CMBS, we have been in dialogue with the agencies and our counterparties. We do not expect any change there. Where we do see volatility is obviously on the spread side on the liabilities we are selling. And I think that there are a few deals in the market now where some of our competitors that we are reviewing the results of, some that closed or priced as recently as this week, some that are in the market now. I think the general sense is that liability spreads on CDOs are wider primarily at the A and BBB level. And the net impact to the cost of capital on a coupon basis is probably somewhere in the -- depending upon what the collateral type is, depending upon who the issuer is, is somewhere in the 5 to 25 maybe even a little broader than that on the synthetic deals.

But the one thing I would say also is we are getting good market intelligence back that the seasoned issuers and the ability of the market and the willingness of the market to distinguish between the stronger issuers and the newer platforms is starting to happen, which we are very happy about.

Thank you, and your favorite subject, Geoff, credit, do you -- we are not really observing any trends in credit. There has been some one-off issues but except for condo conversion issues we haven't really discerned any trends here in credit quality. But it sure feels like things are maybe changing here or might be near an inflection point in credit. What are your thoughts there? And I'll drop off.

I think that in general we are being more cautious on credit. But our portfolio we haven't seen any downturn in performance on our portfolio assets across all of the asset classes. We are watching very closely for any signs of downward migration in occupancy or operating performance in hotels and we just really haven't seen it. I think the credit concerns will relate to the transactions we are considering now. With cap rates a little bit lower and in some cases leverage higher. I think what will really be determined is what gets done now in the current environment and the performance of those assets is not going to be measurable for another two or three or four periods.

Thank you.

(OPERATOR INSTRUCTIONS) David Fick, Stifel Nicolaus.

Good morning. Can you explain this credit line? It doesn't seem given your size and your pipeline process here to be anywhere near the size that I would anticipate you putting in place, $50 million.

Well, I would say two things; number one I think we certainly have an expectation to grow that. We recently closed it. And I would say that even at $50 million, the facility really is what I would call something along the lines of a finance company, a working capital line in that typically when we close an investment, a loan, a B Note, a CMBS loan we have to have our lenders side-by-side with us, and we call that a wet funding. It can complicate the closing process tremendously and what this line does, not only being attractively priced, but what this line does is this line allows us to close without a lender, saving a significant amount of legal and due diligence costs. And basically presenting our lenders with baked transactions as opposed to having them involved in the origination process effectively.

So that's flexibility but it is really sort of a short-term, almost one-off kind of thing where you are going to immediately replace that capital?

Well, the other thing I would say is that if you look at the marginal cost of our last dollars of repo, our grids are all -- they are all grids, and so our borrowing costs is we advance less against any individual asset go up and down as you get closer to the maximum advance rate. And so this line actually relative to some of our more expensive repos is cheaper. And so we will probably end up using it -- my sense is we will use maybe even have it completely utilized throughout the entire term of the liability, and hopefully we will be able to grow this even bigger over the next three months.

So really I don't mean to be dense about this, but it is allowing you to stage your repo process a little bit better?

That's right, and also think about we also have senior unsecured borrowings at a cost of 150 over.

Great. And the loan to value in your originations was at 64%, stronger than usual. Are you doing stuff higher in the capital sector? What is the deal with that?

I think that we've seen some good opportunities that are lower in loan to value. We've seen some of our whole loan origination has been at slightly lower leverage points, and so the mezzanine loan and B Note production that we have seen in the market. But in general we are looking across the landscape of opportunities for us and choosing those which we feel have provided the best risk-adjusted return. And in the case of the first quarter that included more lower LTVs than usual.

Okay, thank you.

It appears that we have no further questions at this time.

Okay, well you let us off easy this time but we appreciate your interest and you will hear from us again soon. Thank you.