Blackstone Mortgage Trust Inc (BXMT) 2010 Q4 法說會逐字稿

Hello, and welcome to the Capital Trust Incorporated management conference call. Before we begin, please be advised that the forward-looking statements contained on this conference call are subject to certain risk and uncertainties including, but not limited to, the continued credit performance of the Company's loan and fee MBS investments, its asset-liability mix, the effectiveness of the Company's hedging strategy, the rate of repayment of the Company's portfolio of assets, and the impact of these events on the Company's cash flow, as well as other risks indicated from time to time in the Company's 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 or circumstances.

It is now my pleasure to turn the conference over to Mr. Stephen Plavin. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us and for your interest in Capital Trust. With me are Geoff Jervis, our Chief Financial Officer, and Tom Ruffing, our Chief Credit Officer and Head of Asset Management.

Last Thursday, we announced a comprehensive restructuring of all of the Company's outstanding recourse debt obligations and also reported our results for the fourth quarter and the full year via our 10-K filing. Geoff will take you through the quarterly and full-year results, as well as through the architecture of the restructuring in greater detail.

My remarks will focus on why we restructured and what the restructuring accomplishes for CT.

The balance sheet investments that we made during the peak of the market, as well as the debt that we used to fund them, have been under great pressure since the market downturn. By year-end 2008, we had met over $200 million in margin calls and the properties underlying our loans and securities were continuing to trend downward. As a result, in March 2009, we completed an interim restructuring that enabled CT to stabilize its liabilities, in particular the recourse repos, for a two-year period of time, subject to debt reduction hurdles that we achieved.

In recent quarters, property values have begun to recover. However, we knew that the extent of recovery necessary for many of our assets was greater than what could be achieved within the term of our senior recourse indebtedness. So commencing early in 2010, we embarked on a plan to restructure our liabilities to reduce debt and provide for the time necessary to collect our assets and avoid being forced to sell them prematurely at deep discounts.

We sought a permanent solution whereby our post-restructure liabilities would not require further extension or amendment if the legacy assets under our management perform as we expect, with reasonable margin for any unanticipated market or asset-specific issues.

We also sought to eliminate all legacy recourse to Capital Trust Inc. so that new capital raised and investments made in CT would not be subject to the legacy liabilities.

We considered many structural alternatives and several different capital sources to fund our plan before reaching agreement with Five Mile Capital Partners on a mezzanine loan to a newly-formed subsidiary of CT that would acquire the legacy assets subject to the repo debt.

The $83 million Five Mile loan funded the cash cost to extinguish the senior credit facility and junior subordinated notes, which had a combined balance of $242 million, as well as a paydown to the repo providers and other transaction costs.

By raising the new capital at this subsidiary level rather than at the parent, CT common shareholders were not diluted and our NOLs were preserved, although CT's ownership interest in the legacy assets was reduced by the economic participation in the new subsidiary of Five Mile and the former holders of the senior credit facility and junior subordinated notes.

This form of restructure also enables CT to maintain full economic and management control of CT Investment Management Company or CTIMCO, our wholly-owned subsidiary that manages its parent for CT-sponsored private equity funds, the four CT CDOs and one third-party sponsored CDO, the new legacy asset subsidiary and loan workouts and restructurings as a CMBS special servicer.

We have maintained all of the capabilities of our platform and are now very well positioned to continue our capital raising, investing in asset management activities.

Throughout the restructure process, our Finance, Accounting and Capital Markets teams, led by Geoff Jervis, demonstrated great effort, structural creativity, command of a myriad of highly technical REIT tax and accounting details and the perseverance necessary to complete a complex transaction that required the unanimous consent of well over a dozen counterparties with different motivations that had to agree on structure, economics and documents and close simultaneously.

I would also like to thank Five Mile and all the other parties involved in the transaction. With that, I will turn the call over to Geoff to run through the restructuring in greater detail, as well as the quarterly and full year-results.

Thank you, Steve, and good morning, everyone. Before we get into the restructuring, I want to spend a moment on Q4 and full-year 2010 results that were filed in our Form 10-K on Thursday afternoon.

For the fourth quarter, we recorded net income of $9.9 million, or $0.44 per share. The quarter's income was driven by $9.7 million of operating income from the loan and securities portfolios, $5.4 million of other revenues, derived primarily from our Investment Management subsidiary, CTIMCO, $7.6 million of net loan-loss recoveries, all offset by $10.7 million of securities impairments and G&A of $4.6 million.

For the full year, we recorded a net loss of $185.3 million, or negative $8.28 per share. The year's loss was driven by $34.8 million of operating income from the loan and securities portfolios, $15 million of other revenues, derived primarily from CTIMCO, offset by $221 million of net loan-losses and securities impairments and G&A of $18.8 million.

At year-end, total assets on the balance sheet stood at $4.1 billion, down $115 million from Q3, as the portfolio continued to experience repayments. Total liabilities were $4.5 billion, and shareholders' equity was negative $411 million. On a per-share basis, based on 22.4 million shares outstanding, book value per share was negative $18.33.

Obviously, our balance sheet presentation continues to be impacted by the adoption of FAS 167 in Q1 2010, as evidenced by the fact that while we made no new balance sheet investments between year-end 2009 and year-end 2010, our new consolidation regime required us to book over $2 billion of new assets and liabilities, doubling the size of our balance sheet.

As we move forward, we will be making supplemental disclosures that will more clearly show what we believe to be our true economic portfolio, net of excessive consolidation, as well as allow investors to track the financial performance of the newly-restructured Company.

As Steve discussed, last Thursday, we closed a transaction that restructured 100% of the Company's recourse liabilities. In order to understand the restructuring, a brief summary of pre-restructured CT is helpful.

Capital Trust has two primary lines of business -- the balance sheet investment portfolio and investment management. The balance sheet investment portfolio can be divided into the CDO-financed portfolio and the repo-financed portfolio. First, our CDOs.

Our four balance sheet CDOs represent term-matched, nonrecourse financing for their collateral assets and, as we have mentioned in the past, these CDOs have all triggered cash flow redirection provisions. From an economic standpoint, we believe that only CT CDO III has any real prospect for a recovery to the classes owned directly by us.

Our repurchase financings, provided by JPMorgan, Morgan Stanley and Citigroup, were all previously restructured in 2009 and represented full-recourse liabilities with material restrictive covenants. Most important, these facilities had a stated maturity of March 16, 2011.

On Thursday, the three repos had an aggregate balance of $340 million and were secured by 39 loan and security positions with an aggregate face value of $797 million, adjusted book value of $528 million and a fair value using 12-31 marks of $421 million. Absent a restructuring, these contracts would have matured and all of the collateral assets were at risk of seizure by these lenders.

Our second line of business is investment management, run through our wholly-owned subsidiary, CT Investment Management Co. or CTIMCO. CTIMCO employs all of the staff at CT, manages its parent, four third-party capitalized private equity funds, five CDOs, inclusive of the four balance sheet CDOs, and is a rated special servicer.

In 2010, CTIMCO earned revenues of $16.7 million from its clients, made investments for its private equity account totaling $306 million and at year-end had $6.5 billion of assets under management.

In addition to management contracts, our investment management business also includes a coinvestment in our opportunity fund, CT Opportunity Partners I, where we have committed to invest $25 million, of which we have funded $10 million.

Above our two business lines, CT had two types of corporate level debt -- recourse debt -- a $98 million senior credit facility and $144 million of junior subordinated notes. Both of these liabilities were also restructured in March of 2009, with the senior credit facility maturing March 15, 2011.

As Steve mentioned, to meet the goals of our restructuring, we had to reduce the amount of leverage in the portfolio, amend the terms and extend the duration of the remaining leverage in order to match the anticipated collection timeframe for the legacy assets, and to create an economic interest in the recovery for Capital Trust. Our restructuring involved contributing all of the assets in our balance sheet investment business, with the exception of CT CDOs I, II and IV, to a newly-formed subsidiary, CT Legacy REIT, or Legacy REIT. We own 52% of Legacy REIT, with the balance owned by new and former lenders, as I will describe in a moment.

Liabilities of Legacy REIT include the repos and a new mezzanine loan, neither of which are recoursed to Capital Trust Inc. The repos, formerly $340 million, were paid down by 10% or $34 million, and received slight increases in rate in return for extending their maturity dates to 2013 and 2014, subject to repayment hurdles, eliminating recourse to Capital Trust Inc., eliminating any margin call or mark-to-market provisions and eliminating financial and operating covenants, except for key man covenants that apply to the executive officers.

The new mezzanine loan, provided by affiliates of Five Mile Capital, is an $83 million loan secured by the equity in each repo line, as well as CT CDO III and a small amount of assets that had been unencumbered pre-restructuring.

The mezzanine loan has a five-year term, carries an interest rate of 15%, 8% current and 7% [pickable], and is fully pre-payable without penalty. Affiliates of Five Mile Capital also received a 24% ownership interest in Legacy REIT.

Proceeds from the mezzanine loan were used to fund the paydown of the repos, fund the cash component of the extinguishment of the senior credit facility and junior subordinated notes, as I will describe more fully, and pay transaction costs and expenses.

On Thursday, the Company's $98 million senior credit facility was fully satisfied in exchange for a cash payment of $22.9 million, a 24% equity interest in Legacy REIT and $2.8 million of secured notes issued by subsidiaries of CT and secured by its ownership in Legacy REIT, as more fully described in my remarks.

The Company's $144 million of junior subordinated notes were also fully satisfied in exchange for a cash payment of $4.6 million subordinate common stock of Legacy REIT and $5 million of secured notes. The subordinate common stock entitles its holders to receive approximately 25% of the payments due to Capital Trust from its equity position in Legacy REIT, after aggregate cash distributions of $50 million have been paid to all other classes to common stock of Legacy REIT.

After the dust settled, Legacy REIT has 44 loan and security positions with a face value of $837 million, adjusted book values, excluding CDO III, of $530 million and a fair value, again using 12-31 marks, of $427 million.

Liabilities of Legacy REIT totaled $388 million in the form of $305 million of repurchase obligations and an $83 million mezzanine loan. CT Legacy REIT is owned 52% by Capital Trust, 24% by Five Mile and 24% by the former senior credit facility lenders. The entity is precluded from making any dividend payments until the repos and mezzanine loans are repaid in full.

Capital Trust's specific ownership position is subject to $7.8 million of secured notes owned by the former senior credit facility lenders and junior subordinate noteholders, pre-payable for $11.7 million, and the subordinate common stock owned by the junior subordinated noteholders.

At the end of the day, Capital Trust owns its interest in Legacy REIT, owns 100% of its investment management business, including its coinvestment in CT Opportunity Partners, has cash of $28 million and net NOLs of approximately $123 million, all without any recourse liabilities.

As Steve mentioned, we believe that CT is now stable, with a potential for meaningful upside in its legacy assets. It is important to note that all of this was accomplished without diluting Capital Trust shareholders through the issuance of CT stock to any restructuring participant.

Before I turn it back to Steve, I would like to thank all of the members of the Financing Capital Markets teams, especially Douglas Armer, who runs Capital Markets for the Company. With that, I will turn it back to Steve.

Thanks, Jeff. John, please open the call to questions.

(Operator Instructions) [Brent Christ], Sirios Capital.

Just a quick question in terms of kind of thinking about the earnings stream, I guess, from the legacy CT versus what is being transferred over to the NewCo. Could you just kind of walk through what portions are retained by CT, whether -- the management fees, the new dividend payment that you have to make on the mezzanine loan, and any other expenses or revenues versus the portion that is transferred into the new company?

Sure, I'll take a crack at it. First, let's start with our interest in Legacy REIT. We do have a class of preferred shares that we own that gives us a payment of $7.5 million for the next almost 2 years out of that portfolio. Other than that, however, our common stock position won't receive any cash flow from it until all of the debt is repaid, which is a future event.

With respect to CT, other than the $7.5 million, we have 100% of our management fees that we had earned before the restructuring, so all the private equity, CDO and special servicing fees. We retain the G&A in the Company, although the G&A that was stated in the K obviously has some element of the restructuring costs, which are nonrecurring. And we have the net operating loss position, which obviously is an offset to any future income.

So to think about it, you have the management fees offset partially by the G&A and the $7.5 million in preferred interest, but you have to first cover some other obligations before you can start receiving that?

Actually, the obligations to the secured notes do not have a current cash component. They just receive payments that we would otherwise receive on our equity interest until they are satisfied. So there is no cash component of that to the Company until cash actually starts to flow from the common equity in CT Legacy REIT.

So we have no -- other than -- again, it's difficult to talk about this because of the consolidation -- but we really have no cash debt service requirements at Capital Trust if you exclude the CDOs as being compartmentalized and the secured -- the Legacy REIT as being compartmentalized, and the secured notes that will appear on our balance sheet as liabilities as only having cash flow -- cash debt service requirements in the event that there is actually cash flow from the equity interest that serve as collateral for those notes. So no debt service.

Got you. Okay. So when you boil all that together, is the legacy -- I guess not the non-CT Legacy REIT -- the old Company as we knew it -- is it profitable on an ongoing basis or is it reliant on earnings from CT Legacy REIT?

It is -- if you look at it sort of going backwards, it is slightly profitable. And obviously, in the context of our old restructuring -- or in our old situation, that is a dramatic improvement, that it has no recourse liabilities, which means that it should be a clean vessel for future endeavors.

And there is also, as Steve seed discussed and I discussed in our remarks, significant upside potential in the legacy portfolio, which will be realized once the legacy liabilities and the new mezzanine loan were repaid.

All right. Thanks a lot.

(Operator Instructions). It appears we have no further questions at this time, sir.

Thank you, John. Thanks, everyone, for joining.

This concludes your teleconference for today. We thank you for joining. You may now disconnect your lines, and please have a great day.