Capital Trust, Inc. (CT)

Q1 2010 Earnings Call Transcript

May 5, 2010 10:00 am ET

Executives

Steve Plavin – President and CEO

Geoff Jervis – CFO, Treasurer and Secretary

Analysts

Alan Adams [ph]

J.F. Banger [ph] – DN [ph]

Presentation

Operator

Hello and welcome to the Capital Trust first quarter 2010 results conference call. Before we begin, please be advised that the forward-looking statements contained in this news release are subject to certain risk and uncertainties, including but not limited to the success of the company's debt restructuring; the continued credit performance of the company's loan in CMBS investments; its asset 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 Forms 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 today's presentation. At that time, I will provide instructions for submitting a question to management.

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

Steve Plavin

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 night we reported our results for the first quarter and filed our 10-Q. CT reported a net loss of $63.5 million or $2.84 per share. The losses were largely the result of loan loss provisions and impairments totaling $72 million. Geoff will run you through the detailed numbers, but weak property level performance was the primary driver behind the increase in provisions and impairments.

During the quarter, we also added five loans totaling $109 million and one security with a book value of $20 million to our loan and securities watch lists. We adopted new accounting guidance in the first quarter which required that we consolidate seven previously unconsolidated CMBS and CDO trusts.

Securities that had a carrying value of $79 million at year-end are now accounted for as newly consolidated loans totaling $2.8 billion on our March 31, 2010 balance sheet. Our total assets were $4.6 billion at quarter end versus $1.9 billion at year-end, a $2.7 billion increase in total assets without any new balance sheet investments having been made during the quarter.

As a result of our newly consolidated loans, the magnitude of our surveillance, quarterly asset review and compliance significantly increased. Our finance, accounting and asset management groups have risen to the challenge of the new accounting regime and again demonstrated why they are the best in class.

Despite considerable uncertainty in the overall economy, lenders and investors are beginning to return to commercial real estate. Pricing for high quality buildings, loans and securities continue to trend upward. Investors are coming off the sidelines and reentering the market, concerned that the best investment opportunities may soon be in the past.

Supply of capital at least temporarily exceeds the availability of investment opportunities and that's reflected in asset pricing. Yet industry wide, loan delinquencies continue to rise and property cash flows remain under intense pressure. The recovery in hotel revenue is at an early stage and improvement in office building leasing has not taken hold in most markets.

Very significant cash flow recovery remains necessary for most loans originated in 2006 and 2007 despite improvements in cap rates and market liquidity. There are many loan workouts still to come as final maturity dates approach in 2011 and 2012.

Our first quarter results continue to reflect the challenges of loans and securities that originated at or near the peak of the market. We expect challenging conditions to persist for the next several quarters as commercial property performance typically lags the general economy.

Before I turn it over to Geoff, I did want to note that one of the founders of CT, Craig Hatkoff, resigned from the Board of Capital Trust last week and I wanted to thank him for his many years of service and contributions to CT. We do not plan to replace Craig on the Board.

And with that, I'll turn it over to Geoff to run you through the first quarter financials.

Geoff Jervis

Thank you, Steve and good morning to everyone. As Steve mentioned, last night we reported results for the first quarter, recording a net loss of $63 million or $2.84 per share. The net loss for the quarter was primarily the result of $72 million of reserves and impairments that we took against our loan and security portfolios offset in part by income from operations.

Specifically, we recorded credit loss provisions of $52 million against fixed loans and net credit related impairments of $20 million on five securities. Exclusive of credit provisions and impairments, operating income was $8.6 million or $0.38 per share during the period.

Primary component of this quarter's operating income was net interest margin of $8.7 million down $1.1 million from last quarter and $3.3 million from the first quarter of 2009 with the reduction due to asset level performance, loan and security repayments, lower LIBOR and impacts from our new consolidation regime as we're now consolidating additional variable interest entities or VIEs, an accounting change that I will discuss later.

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