Blackstone Mortgage Trust Inc (BXMT) 2011 Q2 法說會逐字稿

Hello and welcome to the Capital Trust second quarter 2011 results conference call.

Before we begin, please be advised that the forward-looking statements contained on this conference call are subject to certain risks and uncertainties, including but not limited to the continued credit performance of the Company's loan and CMBS investments, its assets-liability mix, the effectiveness of the Company's hedging strategy, the rate of repayment of the Company's portfolio 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.

There will be a Q&A session following the conclusion of this presentation. At that time, I will provide instructions for submitting your question to management.

I will now turn the call over to Steve Plavin, CEO of Capital Trust. Please go ahead.

Thanks, Megan. 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 night, we file our 10-Q and announced our results for the second quarter, our first full quarter of operating CT Legacy REIT, the entity formed March 31st, 2011, to hold our legacy assets.

Geoff will take you through our quarterly results and also discuss our adjusted balance sheet and operating results. I will focus my remarks on Capital Trust and the commercial mortgage market.

Post restructure, the financial condition of Capital Trust has greatly improved. We have isolated the downside risk associated with our peak-of-the-market balance sheet assets while maintaining management control and significant ownership interest in the portfolio. By having established the necessary time to work and collect our legacy assets in a market that should improve over time, we will maximize the recovery for all Legacy REIT stakeholders, the largest of which are the CT shareholders.

CT Investment Management Company or CTIMCO, our wholly owned management subsidiary, maintains strong capabilities in lending, investing, asset management, and capital raising. CTIMCO manages its public company parent, the legacy asset REIT, four CT-sponsored private equity funds, five CDOs, and loan workouts and restructurings as a CMBS special servicer.

This past quarter, the first for CT Legacy REIT, exemplified the asset management strength of our platform. During the quarter, CT Legacy REIT collected $207 million on 11 loans, representing a 99% of par recovery. Although there are still significant credit challenges within the Legacy REIT portfolio, particularly with the 2006-2007 originations, we are confident that Tom and his team will maximize recovery.

As for the markets in general, volatility and global financial markets and economies combined with uncertain domestic economic and employment growth prospects have chilled the recovery in commercial real estate financial markets.

The CMBS market has had its first significant setback since it restarted in 2009. Although credit performance of [niche] CMBS is likely to be very strong, subordination levels have already started to contract, and some investors started feeling a little deja vu. But when S&P withdrew its ratings on a deal about to close in an environment in which investors assumed ratings would be a better governor than in the past, investor confidence was further shaken.

The reality is, neither legacy borrowers nor investors have fully recovered from the shock of the 2008 CMBS market collapse and the constant reminder provided by continued weak credit performance of many legacy securitizations. As a result, investors and borrowers have been slow to return to the CMBS market. And now the market may contract before it starts to grow again. And with [life] companies approaching peak origination levels, they cannot take up the slack from the declining CMBS and still-weak bank market.

These market forces, combined with the maturity of many peak-of-the-market financings should create a better, more opportunistic investment environment. With over $80 billion of loans still in special servicing and values improved from trough levels, there'll be fewer extensions and more loan sales and foreclosures that will generate additional transactions.

We are active as an investor and a special servicer on large structured financing. And we'll be on the front lines of several upcoming workouts. While the specific opportunities in commercial mortgage finance will evolve and change over time, we believe that the scale of the opportunity is great and that our platform is very well positioned to capitalize on these opportunities. There will be a need for mezzanine financing to fill the gap on recapitalizations and acquisitions as the peak-of-the-market five-year loans mature.

The floating-rate market, an historic area of strength for CT, is still dislocated and highly inefficient. The commercial banks, CMBS originators, and CMBS investors have not returned to the floating rate market, which is now significantly funded by private bridge lenders with a high cost of capital.

We also see an expanding investment opportunity in the low LTV mezzanine segment, particularly as the CMBS market struggles to absorb large offerings. We continue to be active in this space through our high-grade funds and related separate accounts, providing low-risk financing due to new investment-grade loans on core assets.

As we aggressively manage our portfolios and continue to make new investments for our private fund, we continue to evaluate all of our options regarding how to best position CT for the future. We expect to significantly advance this process over the coming quarters. And with that, I'll turn it over to Geoff.

Thank you, Steve, and good morning, everyone. As Steve mentioned, last night, reported our earnings for the second quarter and filed our Form 10-Q. Consolidated net loss for the second quarter was $1.8 million, or $0.08 per share.

Total consolidated assets on the balance sheet a quarter end stood at $2.4 billion, and total consolidated liabilities were $2.5 billion, resulting in a shareholders' equity of negative $111 million.

As these GAAP numbers show, despite our successful restructuring in March, it returned significant value to the equity owners of the Company. And despite managing an operationally cash flow positive business, we continue to be subject to the distortions of GAAP-required consolidation regime.

In order to address these presentational issues, last quarter, we began reporting and adjusted income statement and balance sheet. We believe that these adjusted statements allow investors to better understand the economic condition of the Company. These financials can be found in the earnings press release we issued last night and also in the MD&A section of our Form 10-Q also filed last night.

The adjustments to our GAAP financials are four. First, we eliminate the consolidation and securitization vehicles under FAS 167, showing only our net investment in such vehicles. And since the liabilities in these vehicles are non-recourse, we only report our net investment to the extent that it has a positive value.

Second, we eliminate the assets and liabilities on our GAAP financials associated with loans that we sold but where the sales did not meet GAAP criteria for sale accounting and remained consolidated on our financials. We refer to these as participations sold.

Third, non-cash interest expense related to interest rate swaps no longer designated as cash flow hedges have been eliminated.

Finally, the fourth adjustment is that we divide the resulting financial statement into those of CT Legacy REIT and those specific to Capital Trust. We make this final adjustment because, today, Capital Trust represents two businesses, one, the investment management business housed in our CTIMCO subsidiary, and two, our legacy portfolio and the potential recovery from our ownership interest in CT Legacy REIT. I will get into each entity in more detail later in my remarks.

All of the numbers discussed from here forward will be from the adjusted financials. And as I mentioned earlier, these can be found in the back of the earnings press release and also in the MD&A section of our 10-Q.

Starting with CT Legacy REIT, as we discussed in our last call, in connection with our March 2011 restructuring, we transferred substantially all of our directly held interest-earning assets to a newly formed entity, CT Legacy REIT, along with all of our remaining legacy liabilities.

At June 30th, CT Legacy REIT's portfolio of interest-earning assets included 20 loans with a principal balance of $434 million, adjusted book balance of $279 million, and a fair value of $248 million.

In addition, CT Legacy REIT held 14 securities with a principal balance of $144 million, adjusted book balance of $31 million, and fair value, excluding CDO residual interests, of $4 million.

All together, interest-earning assets totaled $310 million of adjusted book. In addition to loan and securities portfolios, CT Legacy REIT held $10 million of cash at quarter end.

During the quarter, CT Legacy REIT collected $207 million on 11 loans or 42% of the net book value of the loan portfolio as of March 31st. These collections represented a 99% of par recovery on the 11 loans. The portfolio continues to perform as expected. And despite the flurry of chaos in the second quarter, we do not anticipate similar activity in the near term.

CT Legacy REIT's liabilities include a $119 million repurchase facility and a $63 million mezzanine loan. During the second quarter, CT Legacy REIT repaid $185 million of repurchase obligation, representing 61% of the post-restructuring balance, with the source of these repayments being the principal proceeds from the loans and securities that serve as securities for each repo lender.

Two of the three repurchase facilities in place through March 31st, the facilities of Morgan Stanley and Citigroup, were fully repaid during the quarter, leaving CT Legacy REIT with one repurchase facility with J.P. Morgan that carry the cash cost of LIBOR plus 2.5% and matures in December 2014, subject to annual paydown hurdles.

The only other interest-bearing liability of CT Legacy REIT is the mezzanine loan from Five Mile Capital. During the quarter, we repaid $20 million of the original $83 million balance, using principal proceeds from both previously and newly unencumbered assets as a source of these repayments. The mezzanine loan carries a 15% fixed rate, of which 8% must be paid current, and 7% may be deferred. This loan matures in March of 2016.

In total, CT Legacy REIT repaid $205 million of interest-bearing liability or 53% of the aggregate March 31st balance.

At June 30th, adjusted shareholders' equity of CT Legacy REIT was $146 million.

CT Legacy REIT is owned 52% by Capital Trust, 24% by affiliates of the mezzanine loan lender, and 24% by our former lenders under our senior credit facility. In addition, the former holders of our junior subordinated notes received a subordinate class of common stock of CT Legacy REIT that entitles them to 25% of CT's cash flow from its common stock interest in Legacy REIT after it grows $50 million recovery to all CT Legacy REIT common shareholders.

Using the June 30th adjusted shareholders equity, CT's 52% interest net of the class D common stock impact was $66 million. This is the figure that carries over onto CT's adjusted balance sheet that I will discuss in a moment.

On an adjusted basis, CT Legacy REIT's net loss for the second quarter was $14.7 million, driven primarily by $9.4 million of provisions for loan losses on three loans, $1.9 million in preferred A dividends that were paid to Capital Trust, and a non-cash charge to interest expense of $4.4 million due to the acceleration of amortization of discount from the $20 million paydown on the mezzanine loan.

Looking through the numbers, cash basis net income, a proxy for operating cash flow, was $1.2 million for the quarter.

As we mentioned in the past, our goal is to manage CT Legacy REIT in order to maximize the recovery to its shareholders, being mindful of the timeframe in which we realize that value. From an operational standpoint, cash flow will be directed to pay operating expenses, debt service, the preferred A dividend, and to amortize the repurchase obligation and the mezzanine loan.

Only after the repayment of CT Legacy REIT's debt will dividends begin to be paid to the common shareholders. Based upon our estimates of repayment timing, we expect CT Legacy REIT to commence paying common stock dividends in the 2013-'14 timeframe.

Turning to Capital Trust, before we discuss the adjusted balance sheet for CT, I want to spend a moment discussing the economic aspects of CT post the March 2011 restructuring.

As of June 30th, we have $28 million of cash, no longer have any recourse debt obligations, and have unencumbered ownership of 100% of our CTIMCO investment management platform, our co-investment in CT Opportunity Partners I, 100% of the class A preferred stock of CT Legacy REIT, separate and distinct from our common stock interests, our residual ownership interests in CT CDOs I, II, and IV, and our net operating loss carryforwards.

We also have a 52% interest in CT Legacy REIT class A common stock. Our economic interest in CT Legacy REIT, however, is subject to our non-recourse secured notes and the management incentive awards plan that provides for participation in the recovery of CT Legacy REIT,

After giving effects to these two items, some of which are picked up in the adjusted financials in the liabilities section, CT's net interest in CT Legacy REIT would be $45 million at June 30th.

Looking at the adjusted balance sheet, this economic picture translates into $108 million of assets as of June 30th. Assets include $28 million of cash, our $11 million co-investment in CT Opportunity Partners I, a $25 million commitment, of which $14 million remains unfunded, our equity interest in CT Legacy REIT portfolio of $66 million -- again, that would be on a growth basis.

It's also important to note that both GAAP and our adjusted presentation do not recognize any balance sheet value for CTIMCO, the class A preferred stock in CT Legacy REIT, or our net operating loss carryforward.

Adjusted liabilities at CT were $16 million as of June 30th with none of the liabilities being recoursed to CT. Liabilities included $7.5 million of non-recourse secured notes that are collateralized by our class A common equity interests in CT Legacy REIT. The secured notes bear interest at a fixed rate of 8.2%, which may be deferred until maturity. Any prepayments of the notes will incur a prepayment penalty, resulting in an ultimate payment amount of $11 million for these notes.

Adjusted shareholders' equity was $92 million at quarter end. And based on $22.7 million of shares outstanding, adjusted book value was $4.04 per share. On a fully diluted basis, inclusive of the warrants that we issued to perform a repurchase agreement [lenders] in March of 2009, CT has 24.7 million shares outstanding and fully diluted book value per share was $3.73.

Using the adjusted methodology, CT reported a net loss for the second quarter of $6.3 million, or negative $0.28 per share. The net loss was primarily due to our recognition of the loss at CT Legacy REIT for the period, our share of that loss being $6 million. In addition, CT recorded a $1.2 million tax provision associated with our March restructuring. Stripping it down to cash, our cash basis net income for the quarter was $1.5 million.

Turning to our investment management business, all of our investment management activities are conducted through CTIMCO, our wholly owned investment management subsidiary. CTIMCO currently managed in excess of $5 billion of assets, including the assets of its public company parent, CT Legacy REIT, five CDOs, three private equity funds, and one separate account. In addition, CTIMCO is an approved special servicer by all three rating agencies and is the named special servicer on $2.6 billion of loans.

CTIMCO continues to invest CT Opportunity Partners I, which has $540 million of total equity commitments with approximately $250 million of dry powder. CTIMCO's other active private equity lines, the high-grade business as we refer to it, is investing on a discretionary separate account basis at CT High-Grade Partners III -- sorry, CT High-Grade Partners II investor period expired in May. We look forward to growing the successful CT high-grade series of funds going forward.

As Steve mentioned, as we look forward, we see a very attractive commercial real estate lending environment with favorable supply-demand and competitive dynamics. Management and the Board are currently assessing the best manner in which CT and its CTIMCO platform can address that opportunity.

And with that, I will turn it back to Steve.

Thanks, Geoff. Megan, please open the call to any questions.

Absolutely. (Operator Instructions). And it appears that our first question will come from the site of Chris Middleman with Middleman Brothers. Your line is open.

Hi, guys. I was just curious about CTIMCO's profitability. I don't think it's currently running profitably. Is that true?

It is, although it's difficult to see again through the GAAP financials. I think that the best way to look at it would be the numbers that I mentioned in my remarks, which were that Capital Trust when you boil it down have $1.5 million of positive net income. And so, that would be the management fees associated with CTIMCO, G&A at the Company, and also picking up income from our co-invest in CT Opportunity Partners.

Okay. That makes sense. The other --

And one thing I would mention is that, typically, we have higher levels of special servicing revenue in a quarter. This quarter, however, just was a low. I think they're lumpy payments. And so, even those results would be depressed by a lack of special servicing fees, which our expectation for special servicing fees for the year remains robust.

Okay. In terms of the AUM of CTIMCO, it's about $5 billion I think you said now. Do you have a sense of where -- I actually forget where it was at its peak and where do you think you might be able to get back to at some point? Do you have kind of a scale target in mind for CTIMCO?

I'll answer it because we were over $6 billion at the height. And from a target standpoint, we do not have a target AUM. What we have I think is more a desire to grow revenues and to do that in the most accretive manner. And so, again, we're very happy to focus more on the profitability of the business as opposed to the top line number. I think that as Legacy REIT and -- repays over time, that number will have some downward pressure on it going forward, but I don't think that that's going to necessarily have a linear impact on the profitability of the platform.

And I think going forward in the businesses that we look to grow, the high grade, the opportunity partners business, and then sort of our bread-and-butter mezzanine business, I think those will put pressure on the number going back up.

We have some large transactions in our portfolio. So, as those get resolved, the AUM number becomes volatile. It could move by large increments just based upon a single asset being resolved. But, as Geoff mentioned, we do expect the core business to provide growth with new assets.

Okay. The last thing I would ask, and then I'll step out of the line, is I'm just wondering about the on-balance sheet, the possibilities that -- I know you've got substantial tax assets. But, the question is, what's the best way to utilize them? And I was thinking about the possibilities, rights offering, some other capital raise. But, to do the on-balance sheet thing again, as you had done in the past, would it be better to convert out of the REIT status and go into a C-corporation because I'm just trying to think how to best utilize those assets? Have you guys been giving any thought to that possibility, or is it something that's not on the near-term horizon?

I think -- I'll tell you we consider all possibilities and all tax regimes. The business that we've thought of as a balance sheet business has really been our traditional floating-rate origination and investment business, whole loans and B notes and mezzanine loans, moderate LTV.

And as we look at that business in the future, that should be part of the Capital Trust lineup. But, what we haven't determined is whether that will be an on-balance sheet business like it was in the past or whether it will be another off-balance sheet business, like the high-grade business and the opportunity fund businesses are for us today.

But, if that was the -- let's say that that alternative was the ultimate decision, would it be possible? Would it make sense to change the corporate structure of CT, the holding company, from a REIT to just a regular C-corp to try to better, maybe more quickly utilize the tax losses? Is that something that's even a remote consideration?

I think that the best structure to execute the investment business for a public company format is certainly a REIT. And so, if we did decide to execute that business line on balance sheet again, we would maintain our REIT status.

You're right. We do have substantial NOLs that if we de-REITed and became a traditional C-corp, we'd be able to shield a degree of income going forward. But, the REIT rules would preclude us from re-REITing for five years, which would be a sort of risky proposition to try and land back with in five years, having used all of our NOLs but not having paid any tax in that period.

So, our conclusion is that the REIT is the best structure. And the chances of us being a C-corporate would likely be if we decided not to do the business on balance sheet.

Okay. That makes sense. Thank you very much.

(Operator Instructions). And it appears that there are no other questions at this time.

Thanks, Megan. Thank you, everyone, for joining us. We look forward to reporting to you next quarter.

And this does conclude today's teleconference. Thank you for your participation. You may now disconnect.