Capital Trust, Inc. (CT)

Q2 2010 Earnings Call Transcript

July 28, 2010 10:00 am ET


Steve Plavin – President and CEO

Geoff Jervis – CFO, Treasurer and Secretary



Hello and welcome to the Capital Trust second quarter 2010 results conference call. Before we begin, please be advised that the forward-looking statements contained in the news release are subject to certain risks and uncertainties including, but not limited to, the success of the company's debt restructuring, the continued credit performance of the company's loans and CMBS investments, its asset liability mix, the effectiveness of the company's hedging strategies, 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 a question to management.

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

Steve Plavin

Thank you. Good morning, everyone. Thank you for joining us and for your continued 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 second quarter and filed our 10-Q. CT reported net income of $2.9 million or $0.13 per share. Operating income of $6.4 million was primarily reduced by $4 million, the amount by which current period provisions and impairments exceeded the recovery of prior loan loss provisions.

During the quarter, we added four loans totaling $82 million and two securities with a book value of $10 million to our loans and securities watch list, in addition to recording $19 million of loan loss provisions and $2 million of security impairments.

The recoveries we achieved during the quarter primarily eliminated from transactions with existing sponsors hoping to preserve or enhance their equity and properties acquired at or near the peak of the market.

Many sponsors of similar vintage loans do not have the liquidity to make such investments or have incurred such steep losses that maintaining control of the underlying real estate will be very difficult. Nonetheless, working with motivated sponsors to maximize loan recoveries continues to be one of our primary asset management strategies.

Despite persistent uncertainty in the overall economy, lenders and investors are continuing to return to commercial real estate. Many of the street conduit programs are restarting and loan terms for borrowers are improving with the increased competition and low rates. But most sponsors are still unable to achieve sufficient proceeds to repay their existing loans, so borrower demand is weak.

Property cash flows remain under intense pressure, substantially below the peak levels anticipated at loan originations. Even with lower cap rates and greater market liquidity, very significant cash flow improvement remains necessary for the full repayment of most loans originated in 2006 and 2007.

Many of the loans from these vintages are being kept aside by low LIBOR and will be unable to sufficiently recover in order to avoid a workout or foreclosure as final maturity dates approach in 2011 and 2012.

The challenges to the commercial real estate finance market create new investment opportunities, and CT's asset management business continues to grow. Including our balance sheet assets and all of our third party managed vehicles we now manage over $6 billion of commercial real estate loans and securities. As a rated special service, we are named on $2.6 billion of loans.

The scale and quality of our asset management operation is recognized by our investors. The investment periods for CT Opportunity Partners and CT High Grade Partners II were both extended by a year during the second quarter and we have over $500 million of equity remaining to invest in those vehicles.

Our second quarter results continue to reflect the challenges of CT balance sheet loans and securities originated at or near the peak of the market. We expect challenging market conditions to persist for the next several quarters as commercial property performance typically lags the general economy, which is still not yet in full recovery.

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

Geoff Jervis

Thank you, Steve, and good morning, everyone. As Steve mentioned, last night we reported results for the second quarter, reporting net income of $2.9 million or $0.13 per share. Net income for the quarter was primarily the result of income from operations, offset partially by $4 million of net reserves and impairments that we took against our loan and security portfolios.

Specifically, we recorded $2 million of impairments on four securities and $2 million of net provisions for loan losses on nine loans. Loan loss provisions in the second quarter included $19 million of provisions against four loans, offset by $17 million of recovery associated with loan dispositions and restructurings.

Exclusive of credit provisions, impairments and a $463,000 gain on the extinguishment of debt associated with our consolidated VIEs, operating income was $6.4 million or $0.29 per share during the period.

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