Blackstone Mortgage Trust Inc (BXMT) 2011 Q4 法說會逐字稿

Hello and welcome to the Capital Trust fourth quarter and year end 2011 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 performance of the Company's investments, the timing of collections, its capability to repay indebtedness as it comes due, competition for servicing and investment management assignments, its ability to originate investments the availability of capital and the Company's tax status as well 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 a question to management.

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

Thank you ,good morning everyone and thank you for joining us and your interest in Capital Trust. With me our Geff Jervis, our Chief Financial Officer; and Tom Ruffing, Chief Credit Officer and Head of Asset Management. Last night we filed our 10-K and announced our results for the fourth quarter. Our third full quarter of operating CT Legacy REIT the entity formed March 31, 2011, to hold our legacy assets. Geff will take you through our result and also discuss our adjusted balance sheet and operating result.

The Capital Trust highlights for 2011 include the successful restructuring of our balance sheet assets and liabilities completed in March. Record revenue and profits at CT Investor Management Company our investment management and special service subsidiary . Strong performance at CT Legacy REIT , the entity formed to hold our former balance sheet asset, and a $10.4 million increase in our cash balance to $34.8 million at year end. The formation of CT Legacy REIT established the necessary time and flexibility to work and collect our Legacy assets in a market that should improve overtime. Our management of Legacy REIT is focused on maximizing the recovery for all stakeholder the largest of which are the Capital Trust shareholders.

Subsequent to year end we refinanced the remaining $65.3 million Legacy REIT mezzanine financing to an expansion of senior credit facility with JPMorgan. The refinance reduces the overall cost and debt of Legacy REIT and helps to stream line its asset management. Since the March formation of Legacy REIT we have collected $270 million on 14 loans representing over a 99% par recovery. There are very significant credit challenges remaining within Legacy REIT, the result to some extent of adverse selection and paid out velocity has slowed. We do remain confident that Tom and his team will continue to work the assets very hard and achieve strong results.

We had our best year ever in 2011 in CT Investment Management Company or CTIMCO or wholly owned investment subsidiary which maintains strong capabilities in a wide array of activities; lending, investing, asset management , capital raising, special servicing, and operating as a public company parent. Although our primary business remains investment management, we expanded our special servicing business as the 5 year peak of the market loans approached maturity. In particular, we have established a strong track record for working on large structured floating rate loan with securitized senior mortgages and multiple tranches of subordinate debt. We generated over $9 million in special servicing fees in 2011 and have a good forward calendar in 2012. We do expect these fees to diminish beginning in 2013 as we get through the work out cycle. As tothe markets in general, there still remains an excess of capital relative to the transaction opportunities.

Continued loan extensions and an inability to achieve requisite proceeds from current market sales and refinancings are the primary reason. We expect this balance to begin to shift in 2012, and sale and recapitalization increase. As more high on the value financing reach truly final maturity moremore lenders are forced to reduce portfolio because of regulatory pressure, and the terms of new transactions improve to sellers due lenders and buyers motivation to deploy capital. We believe that 2012 will be a good vintage for commercial real estate debt ,although the net risk remains high. Global volatility directly affects liquidity in the CMBS market so even a small market strip center can have its value impacted by financial markets in Europe, but the consequences should be short term. The ultimate rise in interest rates will also adversely affect values , but we do believe that real estate fundamentals will improve from current levels.

The CMBS market though improved from the second half of last year, remains fragile with the investor based conduit bonds subordinate to senior AAA still thin. Although credit performance of current vintage CMBS is likely to be strong, investors are uncomfortable with the asset quality in conduit offering and pricing for junior bonds remains wide. The aggressive underwriting and weak credit performance of many legacy securitizations continues to overhang the market. The year of event risk and price volatility also chill new investments. The restoration of investor confidence in the economy and related commercial real estate credit performance is necessary to boost new conduit activity.

While the specific opportunities in commercial mortgage finance are still emerging from the down turn and will evolve and change overtime, we believe the scale of the opportunity is great and our platform is well position. Our structured finance and work out expertise is being utilized in our special servicing of large complex financing. There will be a expanding need for mezzanine financing to fill the proceeds gap on recapitalizations and acquisition. The floating rate bridge loan market, an historic area of strength for CT is still dislocated and highly inefficient funded primarily by private bridge lenders with a high cost of capital. We also continue to see an expanding investment opportunity in the low LTD mezzanines segment where we provide low risk financing junior to investment grade loans on core assets.

A consequence of the aggressive management of our existing portfolio is that they diminish overtime, so raising the capital replacement is critical. We are working on plans for success our funds and strategies to expand our investment activities that we hope to roll out later this year. The capital raising environment is challenging and there canbe no assurance that we will be successful, but we do believe that the strength of our platform positions us well in these pursuits. And with that I will turn it over to Geff

Thank you, Steve and good morning , everyone. As Steve mentioned, last night we reported our earnings for 2011 and filed our 10-K. Consolidated GAAP net income for the year was $258 million or $10.78 per share on a diluted basis. Total consolidated assets on the balance sheet stood at $1.4 billion and total consolidated liability were $1.5 billon resulting in a GAPP equity of negative $129 million.

As we have discussed on previous calls, our GAAP financial statements continue to be subject to required consolidation regimes distorting the financial picture of the Company. In order to address these presentational issues, in 2011 we began reporting an adjusted income statement and balance sheet which can be found in both the earnings press release we filed last night and also in the MD&A section of our 10-K. We believe that these adjusted statements allow investors to better understand the economic condition of the Company. These financial statements include four adjustments to our GAAP financials First , we eliminate the consolidation of CDOs and other securitization vehicles showing only our net investment in such vehicles. And since all the liabilities in these vehicles are non-recourse, we only record a 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 remain consolidated on our financials. We refer to these as participation sold. Third, non-cash interest expense related to mark-to-market of interest rate swaps that are no longer designated as cash flow hedges has been eliminated. And finally, the fourth adjustment is that we divided the resulting financial statements into those of CT Legacy REIT and those specific to Capital Trust. All of the numbers discussed from here forward will be from the adjusted financials. And as I mentioned earlier, these can be found at the back of the earnings press release and also in the MD&A section of our 10-K.

Starting with Capital Trust. On an adjusted basis CT recorded net income of a $178 million or $7.87 per share driven primarily by gains recognized in conjunction with our March 2011 restructuring. For the fourth quarter CT reported adjusted earnings of $8.5 million or $0.37 per share driven primarily by special servicing fees earned at CTIMCO subsidiary. Despite its complex GAAP financial statement, CT business is straight forward when viewed on an adjusted basis.

Our primary line of business, commercial real estate debt and investment management , is executed through CTIMCO investment management and special servicing platform with $4.5 billion of assets under management from mandates that include management of Capital Trust Inc., management of CT Legacy REIT, management of our private equity funds and separate accounts, collateral management of commercial real estate CDOs, and special servicing of secured tied loans investments for both the CTIMCO managed vehicles and third parties. In addition to CTIMCO , our adjusted assets as of December 31st, included unrestricted cash of $35 million, our $10 million co investment of CT Opportunity Partners I, a $25 million commitment of which $15 million remains unfunded, and common equity interest in the CT Legacy REIT portfolio recovery. In the aggregate our adjusted assets stood at $114 million as of year end. We have no recourse debt, and our adjusted liability of $16 million are primarily comprised of the secured note and the management incentive reward plan related solely to our interest in CT Legacy REIT.

Adjusted shareholders equity was $98 million at year end and on a fully diluted basis book value per share was $3.94. I will discuss our CTIMCO platform in further detail shortly, but first would like to give some additional color around our net investment into CT Legacy REIT. As the quarter end CT Legacy REIT had adjusted assets of $260 million and adjusted liabilities of $124 million, resulting in adjusted equity of a $136 million. We own a 100% of CT Legacy REIT Class A1 shares , 14% of its Class A2 shares , and 8% of its Class B shares. Resulting in aggregate investment in CT Legacy REIT of $62 million on an adjusted basis. Our interest in CT Legacy REIT however is further subject to our obligations under the related non recourse secured notes and management incentive rewards plan. The secured notes have $7.8 million face amount; however, they will require a cash repayment of $11.1 million in order to be satisfied.

These notes are non recourse to CT and our secured solely by a portion of CT equity interest in the Class A common stock of CT Legacy REIT. The management incentive rewards provide for the participation in up to 6.75% of the net equity recovery of CT Legacy REIT. Net of these two obligations CT's adjusted book value in the CT Legacy portfolio is $42 million. When thinking about CT's interest in CT Legacy REIT it is important to note that this recovery is subordinate to the repayment of the debt at CT Legacy REIT and the secured notes. Further more, as the portfolio matures overtime the asset base will become dominated by non performing and troubled asset and the longer duration performing assets. That said, the recovery is subject to material risk and is expected to occur in 2014, 2015, and 2016. And while the adjusted presentation is a market improvement to the consolidated GAAP presentation, it is important to keep in mind these figure are not present value.

Turning to our investment management business. All of our investment management activities are conducted through CTMICO our wholly owned taxable investment management subsidiary. Our investment management platform earned $10.6 million of gross revenues during the quarter and $22.2 million for the full year. Continuing to be a positive cash flow business. CTMICO continues to invest CT Opportunity Partners I which has $540 million of total equity commitment with over $250 million of dry powder available for investment through September of 2012 , as extended the investment period in CTOP in Q4. CTMICO's other active private equity business line ,the High Grade business as we refer to it , is investing on a non discretionary separate account basis and CT High Grade Partners II investment period expired in May. In addition to these two business lines, we continue to develop plans capitalize other business lines including the bridge funding program.

As Steve mention as we look forward we see a very attractive commercial real estate lending environment with favorable supply demand and competitive dynamics, and management and the Board continue to assess the best manner in which Capital Trust and its CTIMCO platform can address that opportunity. Turning to CT Legacy REIT as we discussed on previous calls in connection with our March 2011 restructuring we have transferred substantially all of our directly held interest earning assets to a newly formed entity CT Legacy REITs along with all of our remaining Legacy liabilities. At December 31st, CT Legacy REIT portfolio of interest earning assets included 17 loans with a principal balance of $372 million, adjusted book balance of $237 million, and a fair value of $213 million .In addition CT Legacy REIT held securities with a principal balance of a $143 million, adjusted book balance of $7 million,and fair value excluding CDO residuals of $2 million. All together interest earning assets totaled $245 million of adjusted book balance.

Since it's inception on January 31, CT Legacy REIT has collected $269 million or 54% of initial net book value of the Legacy portfolio. The portfolio continues to perform as expected despite , and despite the flurry of pay-offs received thus far we do not anticipate activity in the near term as the portfolio has been called down to the more difficult and longer term assets.

During the same time frame CT Legacy REIT has repaid $267 million of liability representing 69% of their post restructuring balance. Bringing total debt at year end to a $124 million. At year end liabilities included the repurchase facility with JPMorgan caring a $59 million balance and rate of liable or plus 2.5%, and a mezzanine loan caring a balance of $69 million and a rate of 15% . Subsequent to year end , last week in fact, the Company refinanced the JPMorgan repurchase facility and the mezzanine loan with a single new $124 million repurchase facility with JPMorgan . The facility matures in December 2014 carries a rate of liable or plus 5.5% and has pay down hurdles and associated potential rate increases going forward. We are obviously very please would the refinancing having both reduced CT Legacy REIT's cost of debt and eliminated a multitude of restrictive covenants associated with the former mezzanine loan. At December 31st adjusted shareholders equity of CT Legacy REIT was a $136 million. As I mentioned previously this translate to a $62 million investment at CT on an adjusted basis or $42 million net of our obligation under the related secured notes and management incentive rewards plan.

Before I hand it back to Steve, I want to take a moment to give a quick tax and regulatory update. From a tax stand point CT and its CT Legacy REIT subsidiary both operates as REITs. And both continue to experience pressure on complying with the REIT rules as their respective portfolios liquidate. There are multiple tax planning options for both entities , and we will take advantage of these options should the need arrive. From a regulatory standpoint CTMICO is now required to register as a investment advisor under mandates from the Dodd-Frank Act, and we took our first steps last night filing Form ADV.

Finally as we have reported to shareholders in the past, we are very involved with defending the real estate related exemptions from the Investment Company Act of 1940 , and have been working with our peers and industry trade groups to lobby the SEC as they continue to evaluate specific exemptions under which we operate. And with that I will turn it back to Steve.

Thank, Geff. Operator please open the call to anybody that has questions.

Absolutely. (Operator Instructions). Our first question comes from the site of [Berna Bock] with Bonanza Capital. Go ahead your line is open.

Thanks you guys .Good morning. Could you give us a little more color on what your longer term game plan is with CTIMCO to possibly build the asset base up there, and do you see -- given the fact that one of your comments was the commercial real estate business appeared to be over capitalized relative to its opportunities. Where do you see the opportunities to actually grow the capital basis in CTMICO?

Well, we are working on raising capital in a variety of fronts. Our existing funds mandates in High Grade and also in Opportunity Partners. We are developing the successive funds for those now, and hope to roll those out later this year. So we do intend to continue those investment strategy's. We are actively working on a bridge strategy and again hoping to raise capital around that sometime in the second half of the year. We see a lot of opportunities in the market . We see the dynamic in terms of availability of capital versus opportunities changing during 2012 , we think it will become better for lenders than investors than it is today. Because we do think that there will be more forced seller banks because of the regulatory pressure and borrowers as they reach truly final maturities in there financing.

Got you. and on the shelf filing that you still have outstanding, what is the thought process behind that?

It is a $500 million shelf . It has a variety of products to us, and it is a tool in our work belt. And we evaluate that as well as all other options as we think about capitalizing the businesses going forward.

So you think that at the corporate level not externally raised capital but internally raise capital because that is something this Company needs to address in 2012?

Unclear.

We continue to evaluate. When we look at the business opportunities that are out there and we look at how best to exploit them, we will consider whether we want to raise third party funds or potentially raise to balance sheet capital to execute any of these strategies on balance sheet. So we continue to maintain the optionally to pursue either of those to approaches.

Got you. Okay. Thank you.

(Operator Instructions). There are no more questions at this time.

Thank you, everyone. We look forward to reporting to you next quarter.

This concludes today's conference call. You may now disconnect.