Capital Trust CEO Discusses Q4 2011 Results - Earnings Call Transcript

Capital Trust, Inc. ( CT)

Q4 2011 Earnings Call

February 14, 2012 10:00 AM

Executives

Stephen Plavin – CEO, President and Director

Geoff Jervis – CFO, Treasurer and Secretary

Analysts

Bernay Box – Bonanza Capital

Presentation

Operator

Hello, and welcome to the Capital Trust Fourth Quarter and Year End 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 performance of the Company's investments, the timing of collections, its capabilities 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 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 the presentation. At this time, I will provide instructions for submitting a question to management. I will now turn the call over to Stephen Plavin, CEO of Capital Trust. Please go ahead sir.

Stephen 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 filed our 10-K and announced our results for the fourth quarter, our third full quarter operating CT Legacy REIT the entity formed on March 31, 2011 to hold our legacy assets. Geoff will take you through our results, and also discuss our adjusted balance sheet and operating results.

The Capital Trust highlights for 2011 include the successful restructuring of our balance sheet assets and liabilities completed in March. Record revenues and profits at CT Investment Management Company, our invested management and special servicing subsidiary, strong performance of CT Legacy REIT, the entity formed to hold our former balance sheet assets 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 over time. Our management of Legacy REIT is focused on maximizing the recovery for all stakeholders, the largest of which are the Capital Trust shareholders.

Subsequent to year-end, we refinanced the remaining $65.3 million Legacy REIT mezzanine financing through an expansion of the senior credit facility with JPMorgan. The refinancing reduces the overall cost of debt in Legacy REIT; it helps to streamline the asset management.

Since the March formation of Legacy REIT, we have collected $270 million on 14 loans representing over 99% of par recovery. There are very significant credit challenges remaining within Legacy REIT, the result to some extent of adverse selection and paid out last year's float. 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, our wholly-owned investment management subsidiary which maintains the 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 extended our special servicing business as the five year peak of the market loans approached the maturity. In particular, we have established a strong track record working at large structured floating rate loans will securitize senior mortgages and multiple charges of subordinate debt.

We generated over $9 million of special servicing fees in 2011 and have a good full year calendar going in to 2012. We do expect these fees to diminish beginning at 2013 as we get through the workout cycle. As the markets in general there still remains in excess of capital relative to transaction opportunities. Continued loan extensions, inability to achieve requisite proceeds from current market sales and refinancings are the primary reasons.

We expect this balance to begin to shift during 2012 and sale and recapitalization activity increase as more high loan-to-value financings reach truly final maturity. More lenders have forced to reduce portfolios because of regulatory pressure and the terms of new transaction improved to sellers due to lenders and buyers motivation to deploy capital. We believe that 2012 will be a good vintage for commercial real estate debt although debt risk remains high.

Global volatility directly affects liquidity in the CMBS market, so even a small market strips that can have its value impacted by financial markets in Europe. But the consequences should be short-term. The ultimate rise in the interest rates will also adversely affect values but we do believe that real estate fundamentals will improve from current levels.

The CMBS market, they will improve from the second half of last year remains fragile with the investor base for conduit bonds subordinate to senior AAA still thin. Although credit performance with current ventures CMBS is likely to be strong, investors are uncomfortable with the asset quality and conduit offerings and pricing to junior bonds remains wide.

The aggressive underwriting and weak credit performance of many legacy securitizations continues to overhang the market. Fear of event risk price volatility also chills new investment. The restoration of invested confidence in the economy and related commercial real estate credit performance is necessary to boost new conduit activity.

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