Capital Trust's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Capital Trust, Inc. (CT)

Q1 2012 Earnings Call

May 9, 2012 10:00 am ET

Executives

Stephen Plavin – Chief Executive Officer, President and Director

Geoffrey Jervis – Chief Financial Officer, Treasurer and Secretary

Thomas Ruffing – Chief Credit Officer and Head of Investment Management

Analysts

Martin Feely [ph] – Private Investor

Presentation

Operator

Hello and welcome to the Capital Trust First Quarter and 2012 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 this presentation. (Operator instructions) I will now turn the call over to Stephen Plavin, CEO of Capital Trust. Please go ahead.

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-Q and announced our results for the first quarter. Following my remarks, Geoff will take you through the quarterly results and discuss our adjusted balance sheet and the changes in our consolidated assets and liabilities resulting from the deconsolidation of our former legacy portfolio.

The formation of CT Legacy REIT, the entity that now holds most of our former balance sheet assets, provided the necessary time and flexibility for us to work and collect the legacy assets. Our management of Legacy REIT is focused on maximizing the recovery for all stakeholders, the largest of which are the Capital Trust shareholders.

In February, we refinanced the remaining $65 million Legacy REIT mezzanine financing through an expansion of the senior credit facility with JP Morgan. The refinancing reduced the overall cost of debt in Legacy REIT and helped us streamline its asset management.

Since the March, 2011 formation of Legacy REIT, we’ve collected $299 million on our Legacy portfolio representing 60% of its initial net book value. There are very significant credit challenges remaining within Legacy REIT, the result, to some extent, of adverse selection and pay-down velocity has slowed. We remain confident that Tom and his team will continue to work the assets very hard and achieve strong results.

In CT Investment Management Company, or CTIMCO, our wholly-owned investment management subsidiary, we had $5.7 million of revenue prior to GAAP eliminations in the first quarter. CTIMCO 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, our special servicing business is very active as the five-year peak of the market loans are maturing this year and many require major restructuring. We have a strong capability in working out large structured floating rate loans with securitized senior mortgages and multiple charges of subordinate debt. A consequence of the aggressive management of our existing loan portfolios is that they diminish over time, so raising the capital to replace them is critical.

While CT Legacy REIT is a liquidating vehicle, CT Opportunity Partners 1 and CT High Grade Mezzanine, on a nondiscretionary basis, are open for new investments. We are also working on plans for successive funds and new strategies to expand our investment activities. We will try to account for as much of the leverage spectrum as possible with our future investment vehicles and continue to expand more scalable, less volatile low LTD strategies along with high risk and return mezzanine and opportunistic funds.

The capital raising environment is challenging and there can be no assurance that we will be successful, but we do believe that the strength of our platform positions us well in these pursuits. As for the markets in general, we continue to believe that 2012 will be a good vintage for commercial real estate debt and that, in general, real estate fundamentals will improve from current levels, but we are very leery of deals predicated upon the continuation of historically low cap rates.

There is still an excess of capital relative to transaction opportunities. The CMBS loan origination market is much more robust following last summer’s fallout and conduit activity is now highly competitive. Insurance companies are originating at peak volume levels. Only the first mortgage bridge loan market remains dislocated with the floating rate CMBS originators and many commercial banks out of the market, replaced primarily by private lenders with a higher cost of capital.

Borrower demand for new loans continues to be impacted by the availability of existing loan extensions and an inability to achieve requisite proceeds from current market sales and refinancing. We expect sale and recapitalization activity to increase as more high-loan-to-value refinancings reach truly final maturity, more lenders are forced to reduce portfolios because of regulatory pressure, and the terms of new transactions improve for sellers due to lenders’ and buyers’ motivation to deploy capital.

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