Blackstone Mortgage Trust Inc (BXMT) 2007 Q3 法說會逐字稿

Hello and welcome to the Capital Trust third 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 fund's 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.

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 numbers for the third quarter and filed our 10-Q. During a period of continued upheaval in virtually all sectors of the financial markets, Capital Trust produced steady earnings, strong credit performance, and a solid balance sheet. Geoff will run you through the detailed numbers in just a moment, but here are the headlines -- net income of $15.5 million, or $0.87 per diluted share; new originations of $110 million, with only $65 million for the balance sheet, substantially and purposefully down from our previous pace as we dial back originations in anticipation of better opportunities that we see coming in the months ahead; more on that in a moment; continued credit quality across all of our portfolios, with zero losses or provisions during the quarter.

In an environment when downgrades seem to be ever present, we received upgrades on seven classes of our CDO III bonds, reflecting improved credit quality and seasoning of the underlying collateral. And in a market where liquidity is king, we added $250 million of new borrowing capacity from a new line lender, increased the capital in one of our investment management vehicles by $100 million, and ended the quarter with more immediately-available balance sheet liquidity than we have ever had.

Lastly, and of great importance to us, we paid a regular quarterly dividend of $0.80 per share against our net income of $0.87. On a cumulative basis, 2007 dividends so far are $2.40 per share versus year-to-date net earnings of $3.14 per share, reflecting a payout ratio of only 76%.

With new write-downs of residential and CDO exposures announced or rumored by banks and broker-dealers almost every day, it is clear that the crisis gripping the financial markets has not yet fully run its course. Closer to home, CMBS spreads have reached all-time wides in the last week. The CMBS index is gyrating wildly and concerns are rising about the ultimate impact on commercial real estate values.

Behind the scenes, however, there is evidence that the new reality is sinking in. Banks are beginning to mark down unsold loans that they hold on their books to market-clearing levels and borrowers are beginning to accept that new loans will only be available at wider spreads, lower advance rates, and tougher terms.

We believe that time to pounce will come soon, but we also believe that this is a market where disciplined asset selection and credit underwriting will be the key to long-term success. We are -- these are the strengths that Capital Trust was built on and we expect they will continue to serve us well going forward.

We maintained our discipline during the wild ride up in the last 18 months and the quality of our existing book of assets reflects those sometimes painful decisions. We steered away from new-issue CMBS as subordination levels plummeted and underwriting standards deteriorated. As a result, our upgrade to downgrade ratio has been 18 to 1 over this time frame.

In our loan book, we consciously dialed down our risk profile, focusing on more senior B notes and today have a portfolio with a last dollar LTV of 69%, capable of withstanding significant value erosion before our positions are at risk.

We avoided largely the condo craze, choosing only those project that we felt were in strong supply-constrained markets and keeping a close eye on rental value in our underwriting as a backstop to our exposure. We never got comfortable with land loans, so we have only one $10 million investment in a financing that, in typical CT style, has substantial subordinate capital below us. We stuck to high-quality institutional properties owned by strong and experienced sponsors and believe that our portfolios will continue to outperform the market.

We have applied that same discipline to the way we run our balance sheet and asset and liability mix. The vast majority of our longer-term fixed-rate assets are match funded with CDOs, which comprise over 50% of our interest-bearing liabilities. The assets that we have financed with mark-to-market repo facilities are primarily short-duration, credit-good floaters, which experience much lower price volatility in times of spread widening. In addition, our repo financing takes the form of committed lines of credit from a diversified group of lenders, most of whom have years of successful experience with Capital Trust. Those lenders are sticking with us now just as they did in 1998. We have always religiously maintained more than adequate liquidity to defend our book in the event of unforeseen events.

As I mentioned at the top, the true bottom line for us is the dividend that we pay to our shareholders. We set our regular quarterly dividend at a level that we believe is comfortably supportable from recurring income generated by our business and payout any excess at year-end in the form of a special. Perhaps not the best strategy to maximize share price in the short term, but one that we think insures sustainability over the long haul.

A good friend and great investor reminded me recently of that classic question, what is the difference between being early and being wrong? Answer -- none. Between our balance sheet resources and our investment management capabilities, we believe that Capital Trust is well positioned to exploit opportunities that result from this period of turmoil.

I am going to keep it short today and turn it over now to Geoff so we have lots of time at the end for questions in this interesting time.

Thank you, John. Good morning, everyone. I will begin with the balance sheet.

Total assets at the Company were $3.1 billion at 9/30, a decline of $89 million, or 3%, when compared to where we were at the end of the second quarter. And, as John explained, the decline was due to our strategic decision to be a spectator during the recent market volatility.

During the period, we originated $65 million of balance sheet loans including $2 million of unfunded commitments for new fundings of $63 million, and we funded an additional $42 million of new advances on our existing portfolio. This activity was offset by repayments during the period that totaled $212 million, netting to a roughly $100 million decrease in interest-earning assets for the period. At September 30, the entire $3 billion portfolio of interest-earning assets had a weighted average all-in effective rate of 8.04%.

From a credit standpoint, the average rating of the CMBS portfolio remains BB+ and the weighted average last dollar loan to value for the loan portfolio was 69%.

Looking inside the origination numbers, new loans were comprised of $22 million of whole loans and $43 million of B notes and mezzanine loans. The weighted average all-in effective rate on the originations was 8.19% and the average last dollar loan to value was 71%.

Looking across the entire portfolio, credit performance remained strong in all investment categories. The CMBS portfolio experienced 12 upgrades and no downgrades during the period and inside the loan portfolio, all assets are performing. We booked no provisions for loan losses this quarter and feel very comfortable with the quality of the portfolio.

Moving down the balance sheet, equity investments in unconsolidated subsidiaries increased to $17 million at the end of the third quarter. Activity included $5 million of fundings associated with our investment in Bracor that we up-sized from an initial commitment of $15 million to $30 million during the period, offset by the continued impact of repayments on our equity coinvestment at Fund III. Inside Fund III, we expect to continue to experience repayments and as of September 30, the fund had only four remaining investments, with total assets of $114 million, with all assets performing well.

As we have disclosed in the 10-Q, the gross promote value to us embedded in Fund III, assuming liquidation at quarter end, was $8.2 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 begin collecting Fund III promotes starting as soon as the fourth quarter of 2007 and on into 2008. Any Fund III promote will be accompanied by our 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 three other investment management vehicles, CT Large Loan, CT High Grade, and the CTX Fund. Activity in our other investment management vehicles, like the balance sheet, was relatively quiet, with CT High Grade, our previously $250 million, now $350 million high grade B note and mezzanine loan account, making one new investment, bringing total assets in the account to $232 million at the end of the period.

Over to the right hand side of the balance sheet, total interest-bearing liabilities, defined as repurchase obligations, CDOs, our unsecured credit facility, and trust preferred securities, were $2.3 billion at September 30 and carried a weighted average cash coupon of 5.86% and a weighted average all-in effective rate of 6.08%. During the quarter we entered into a new $250 million master repurchase agreement with Citigroup, bringing our total committed secured financing facilities to $1.8 billion. The new facility is designed to provide us with financing for our general loan and securities investment activity.

In addition, we extended the term of our $300 million repurchase facility with JPMorgan to October 31 of 2008 and last week up-sized our existing committed facility with Goldman Sachs by $50 million from $150 million to $200 million.

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 third quarter, our borrowings totaled $889 million against $1.8 billion of commitments from nine counterparties. We remain comfortably in compliance with all of our facility covenants and with $1 billion of unutilized capacity on our repo lines, we are confident that we have the immediately-available debt capacity to fund our near and mid-term growth.

Our CDO liabilities at the end of the third quarter totaled $1.2 billion. This amount represents the notes that we have sold to third parties and our four balance sheet CDO transactions to date. At September 30, the all in cost of our CDOs was 5.75%. All of our CDOs are performing, fully deployed, and in compliance with their respective interest coverage, overcollateralization, and reinvestment tests. At quarter end, total cash in our CDOs, recorded as restricted cash on our balance sheet, was $3.7 million.

In addition, we received upgrades on seven classes of CT CDO III from Fitch ratings. Of the 14 rated classes, seven were upgraded by one to two notches and the remaining seven classes had their pre-existing ratings affirmed. Fitch attributed the ratings actions to the improved credit quality of the portfolio and seasoning of the collateral.

The final component of interest-bearing liability are our $100 million unsecured credit facility, with borrowings of $75 million at quarter end, and our $129 million of trust preferred securities. There was no new activity in these accounts during the period.

One more item of note in liabilities is participation sold. At September 30, we had $330 million of participation sold on the balance sheet, recorded as both assets, as loans receivable, and liabilities, as participations sold, and the pass-through rate on these participations was 8.37%.

Over to the equity section, shareholders equity was $440 million at September 30 and our book value per share was $24.84. Book value decreased during the quarter from $452 million at June 30 to $440 million at quarter end, down approximately $12 million. The major component of the change was a $14 million net decrease in the value of our interest rate swaps.

Our debt-to-equity ratio, defined as the ratio of interest-bearing liabilities to book equity, remained at 5.2 to 1. We remained comfortable with our level of leverage and as we 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 remained committed to maintaining an index and term matched asset liability mix. At the end of the quarter, we had approximately $411 million of net positive floating rate exposure on a notional basis on the balance sheet and consequently, an increase of LIBOR of 100 basis points would increase annual net income by approximately $4.1 million and conversely, a 100-basis-point drop in LIBOR would decrease our earnings by the same amount.

Our liquidity position remains strong and at the end of the third quarter we had $28 million of cash, $166 million of immediately-available borrowings under our repo facilities, and $25 million of availability under our credit facilities for total liquidity of $219 million.

Turning to the income statement, we reported net income of $15.5 million, or $0.87 per share on a diluted basis, for the third quarter of 2007. Interest income for the period was $64.7 million. Interest expense totaled $43.7 million, with resultant net interest income of $21 million. Other items of note during the period, management advisory fees from our funds was $1.1 million, an increase of almost $400,000 when compared to the third quarter of 2006, as management fees from CT Large Loan, CT High Grade, and the CTX Fund increased, slightly offset by the decrease in base management fees from Fund III. We expect these revenue streams to continue to grow in the coming quarters.

Servicing fee income during the third quarter of 2007 was $173,000, compared to none in the third quarter of 2006 as we recognized revenue relating to the servicing contracts acquired as part of our purchase of the healthcare origination platform in June.

Moving down to other expenses, G&A was $6.8 million for the quarter, an increase of $961,000 from the third quarter of 2006. This increase is primarily the result of higher levels of employment costs resulting from the increase in headcount associated with the healthcare platform, as well as increased professional fees. Depreciation and amortization was only $61,000 in the third quarter, a decrease of almost $300,000 when compared to last year, due primarily to the elimination of the depreciation expense associated with the capitalized costs that have been fully amortized from prior investment management ventures.

Moving further down the income statement to the income loss from equity investments, the $109,000 loss from equity investments in the third quarter resulted primarily from a net loss of $157,000 at Bracor, representing our share of operating losses for the period from April 1, 2007 through June 30, 2007, as we report Bracor's operating results on a one fiscal quarter lag.

In both the third quarter of 2007 and 2006, we did not pay any taxes at the REIT level, however CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings. In the third quarter of 2007, CTIMCO recorded an operating loss before income taxes of $2 million, which resulted in our recording a $50,000 tax benefit.

As we have done in the past, we disclose the impact of items that we consider nonrecurring to our net income. For the period, these non-recurring items were de minimis and the recurring income was in the mid $0.80 per share range.

In terms of dividends, our policy is to set our regular quarterly dividend at a level commensurate with the recurring income generated by our business. At the same time, in order to take full advantage of the dividend paid deduction of a REIT, we endeavor to pay out 100% of taxable income. In the event that taxable income exceeds our regular dividend payout rates, we will make additional distributions in the form of special dividends.

We paid a regular quarterly cash dividend of $0.80 in the third quarter, a 7% increase year over year. Through the nine months, we have paid total dividends of $2.40 per share, representing a net income payout ratio of 76%.

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

I guess at this point, we will turn it over to you to ask any and all questions. Cameron?

(OPERATOR INSTRUCTIONS) David Boardman, Wachovia.

Regarding investment activity within the quarter and then going forward here, spreads did blowout in the quarter probably continuing here, but the originations within the quarter really did not kind of witness that. Where would spreads be today on the whole loan, B note, and mez side compared to where your book currently sits?

I think I can give you an answer as it relates to the general trends in spread. I agree with your statement that spreads are continuing to widen. There has been some volatility within the period where it looks like spreads are flattening out in any sort of two or three-week period, but then as the index flows out and the street gets more nervous, we see spreads widening again. So I think the trend is still to the wider side. Depending upon where you are in the capital structure, I think anywhere from 50 basis points to 250 basis points wider.

Regarding your hotel portfolio concentration, I think it was at the end of last quarter in the 26%. Considering economic growth may be slowing down, are there any concerns regarding that?

I think the hotels in our portfolio continue to perform well. RevPAR, week-by-week, month-by-month RevPAR across most markets is still positive. I do think that if there is a significant economic recession that certainly hotel performance will be impacted, but we do not see any imminent risks in our hotel portfolio at this point.

What's your liquidity? You certainly seem to have a lot of dry powder to put to work whenever you so choose. Are there any constraints or aspects of your committed facilities that would possibly limit the ability to pretty much plow money into whatever you see fit?

I would just say that obviously our repo providers have to agree on the credits that we pose to them, so I would say that would be the constraint.

Thank you very much for taking my questions.

Don Fandetti, Citigroup.

A quick question. As you look at CMBX, obviously spreads have gone down notably. I know it's not the most liquid index, but do you think the market has it wrong on that side, or do you think we are headed to a major correction in commercial real estate?

Well, I am not sure that CMBX at the moment is a particularly good indicator or a particularly correlated index to anything. There seems to be an awful lot of action in the index, people trying to get short, make bets, anticipate downturns in this business, and there does not seem to be a great correlation with the cash market, although obviously there is some.

I think the better question is the second half of yours, which is where do we see things going irrespective of CMBX? Clearly there is uncertainty at this point in time as to where values really are going, given the ongoing credit issues in the various different financial markets and their ultimate potential impact on the U.S. economy. I think there is no question about it that values have backed off, but I also think that it is quite differential in terms of its impact. The better quality, better product is holding value better, at least so far. The lesser quality stuff is probably falling more. But at least at this point in time, underlying performance in terms of cash flows has held pretty strong and we are cautiously optimistic about valuations going forward. Steve?

I think the other thing think about when you look at the index is a lot of the index trading really reflects the perception of the quality of the first half 2007 CMBS originations, a period of time where values were peaking and underwriting was at its most aggressive point. So we are not big fans of first half 2007 CMBS, and I do think the index does reflect that as well.

Okay, John, I think on the Q2 call you said that you did believe that the CRE/CDO market would open back up. Are you more positive or less positive today?

I do not think I am any different in terms of the view than I was three months ago. The CRE/CDO market is basically closed today to everybody. I think that has an awful lot to do with stuff going on in other markets as opposed to the commercial real estate CDO market, because if you look at the underlying performance of collateral, ours and others, it continues to, so far, to be very, very strong. I do not know -- we do not know when that market and how that market will reopen, but my sense is it is going to take awhile and when it comes back, it is going to come back on different terms than we had before, certainly less leverage, more plain vanilla structures, and with a focus much more than we had in the past on the quality of the manager, which as I think we saw over the course of the preceding year or two or so virtually anybody who could assemble collateral could execute a CDO. I do not see that happening going forward.

We've seen one other company in the space do these single buyer treaty CDOs. Is that an option or not necessarily for CT?

I think that there are a lot of opportunities out there. Unfortunately the single buyer typically meant a wrapper, so the state of that community I think impacts that transaction going forward. But I think that there certainly are some, again, as John said, some more vanilla CDOs and by vanilla, they probably will not have the same marketing aspect. They probably will not sell down as much the liabilities.

But I think CDOs will come back. I think you're going to be surprised how quickly they do. I think there are a lot of ideas that are in the queue right now that people are just waiting for the opportunity to consummate these transactions.

Okay. Thanks for the answers.

Rick Shane, Jefferies & Co.

A couple different things here. It looks like there were paydowns or principal paydowns in CT Large Loan. Is that correct? So it actually did not grow during the quarter?

That is correct. There were paydowns across all of the portfolios, but obviously the pace of paydown has declined in this current market environment.

Okay, and is the expectation -- this ties in really to my second question. John, you had made the comment that there is no difference between being early and being wrong. Should we expect you to be more conservative in terms of deploying CT Large Loan? We had previously assumed it was going to be fully deployed by the end of third quarter. Obviously that is not the case. Do you think you are going to be slower there as well?

I think short answer, yes. Steve, you can give the longer answer if you choose.

I think the opportunities for Large Loan relate primarily to deals have already been -- deals that have already been struck and are identified in the market. Some of those deals are a little bit challenged given the timing of when they were originated. The LBO activity going forward obviously is going to be greatly reduced and so we do not see a lot of new opportunities coming down the pike for Large Loan like what we saw in the first half of the year. But we are looking at the inventory of existing deals and when the time is right, we will probably make an investment or two in those deals.

So basically what you're saying is that you think that there is probably some product on dealer desks that needs to be discounted and maybe as we get towards the end of the year and they are willing to take those marks you might have an opportunity?

Yes.

Strategically, John, getting back to your comment about early and wrong, early versus wrong, obviously you guys have maintained a lot of discipline and the comment was made that if you look every few weeks, it feels like spreads have widened out it and we have reached a new level and then all of a sudden they start to widen out again. What keeps -- how you maintain the discipline of being on the sidelines and what is going to be the event or the catalyst for you to say, you know what, we're done here and now it is time to wade back in?

I do not know if you're ever going to know that we are "done." I think the issue is when we find transactions that we are comfortable with from a risk standpoint and which we believe have been priced at a level where the returns make sense relative to that risk and make sense relative to how we can finance it, in other words, produce a return on equity that we think is commensurate, then we will pull the trigger.

We are beginning to find those new levels on some of the existing product. We are beginning to see the pricing on new originations reflect that set of criteria for us. I do not think there is going to be a bell that goes off that says we're at the bottom. I think it is going to be much choppier that, but as we wade our way through this process, I think we definitely expect to find good opportunities to deploy our capital and the capital of our partners and our investment management vehicles.

Maybe just to refine that question a little bit, are there specific negative catalysts that you guys are looking for between now and either the end of the year or early next year, whether it is auditor effect or dealers needing to dump product or anything like that?

We certainly have seen year-ends, fiscal year-ends for the broker-dealers, calendar for the banks, be in previous eras of crisis be a catalyst. There is no question about it. Cleaning up before statement date, often in fact taking the hits before the statement date and then moving the inventory shortly thereafter has certainly been a pattern in the past.

So yes, time does matter and we think we're approaching those dates and there is going to be more product that issues forth and is liberated off of the current holders' balance sheets.

Okay, great. That is very helpful. I appreciate you guys answering those questions.

David Fick, Stifel Nicolaus.

Stepping back for a minute, you have talked about being somewhat bullish that the CDO market will return, but if you look at the majority of your capital structure today, whether it is equity or CDOs, and excluding your floating-rate debt, virtually none of it would be available to you on a replacement basis right now. You could not build your engine this way and I am hearing you talk a conservative game in terms of net asset growth, but if there is no funding and I am hearing you talk about alternative sources and so forth, but no specificity there, what is really the future of the model?

I think the future of the model goes back to the way -- let's just step back. First off, we do believe CDOs are going to come back. Whether or not they come back as a balance sheet financing alternative is unclear. So we are 100% prepared to continue to run this business without the financing alternative that was a collateralized debt obligation. We ran this business from 1997 through 2004 without CDOs and we're capable of doing it for the next ten years as well.

I think what you need to do if you're going to run a book based upon shorter term repo financing is you need to have a much keener eye towards matching of index and duration and you need to have more liquidity. I think as we mentioned -- there is a discussion of this in the 10-Q that we expect until other alternatives make themselves available we expect to run this book with a higher level of liquidity. I think that if you have to do in order to defend your book when it is repo financed.

In terms of value, the implications of your statement that you're going to be more cautious and sit on the sidelines until you see adjustment in market levels, what you're saying I think is that cap rates have to move and if that is the case, what does that mean for your current book?

We think there is adequate equity cushion in the deals that we have on our book to withstand the kinds of drops in cap rates that we are anticipating. I think values have already declined. I think 5% to sort of 15% I think is a good range to apply across the board, obviously every situation being unique, so we are continuing to look at the fundamental performance of markets and collateral across all of our portfolios very intently to make sure -- to see if we see early signs of any erosion of performance and if so we make the proper defensive moves.

But so far you've seen virtually nothing. You're not having to renegotiate deals or grant extensions or adjust fee structures or anything?

No.

Okay, my last question is I guess for Geoff. You have a hold to maturity strategy. I am wondering if there is any potential impact that you have identified from FAS 159.

I think that we have a held to maturity -- we have elected held to maturity for our interest-bearing assets and we expect to continue to hold these to maturity and we're very comfortable with that position and obviously given the letter of GAAP, we have the intention and the capability of holding the assets to maturity as well.

And we made that decision, obviously, quite a long time ago.

Okay, thanks.

Marsella Martino, KeyBanc Capital.

As you talk about and think about originations going forward and you see opportunities out there, is there any areas, you know, as in terms of asset classes, that you think provide some good opportunities for you or any that you'll particularly focus on?

I do not think we're focused on any particular asset class. We just try and remain very opportunistic looking for transactions that in general meet our risk and return profile. So we look across all the asset classes. We have been avoiding, as you may have noticed in John's comments, assets related to for-sale housing, land, and condominiums for quite some time. I do not know that we're going to the first ones, the ones to try and pick the exact bottom of that market, when to jump back in. That's more of a category that we'll continue to be conservative in investing in. In terms of some of the other major asset classes, we think there'll be opportunities in all of them in selected situations.

And then just one small housekeeping. I think G&A on a linked-quarter basis declined a little bit. Anything there or was last quarter kind of an anomaly?

No, there is nothing there. I think it was just professional fees and our accruals on those really accounted for much of the difference.

Okay, great. Thank you.

Omotayo Okusanya, UBS.

My question about the CRE/CDO market has been answered, but in regards to the CMBS portfolio that is held to maturity, could you tell us what the fair market value of the portfolio is right now if you were to mark it to market?

Yes, actually we go through that process at least every quarter ended is in the back of the Q in the risk disclosure chart. The fair value as quarter-end was $853 million.

Verses $884 million, which is the book?

That is right, about a $30 million difference.

Thank you very much.

David Boardman, Wachovia.

I'm just going to piggyback off Don's question. We saw somebody in the space today not do a CDO, if you will, through one buyer, but kind of renegotiate a warehouse line, or repo line, and have no mark-to-market feature and it looks maybe accept higher cost of funds. I just wonder if you could just talk about that and if that is something that you would look like and then frame of how you feel about trading higher cost for that mark-to-market and valuation elimination.

Certainly a trade-off. We would look at it as it was presented to us, but in general, if somebody offered me a non-mark-to-market line with some reasonable increasing costs, I think we would find it pretty attractive.

Fair enough. All right, have a good day.

At this time we have to further questions queued

Well then, thank you again for your interest in Capital Trust and we will talk to you next quarter. Thanks.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect at any time.