Capital Trust's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Capital Trust, Inc. (CT)

Q2 2012 Results Earnings Call

August 2, 2012 10:00 AM ET

Executives

Stephen Plavin – Chief Executive Officer

Geoff Jervis – Chief Financial Officer

Tom Ruffing – Chief Credit Officer and Head, Asset Management

Analysts

Presentation

Operator

Hello. And welcome to the Capital Trust Second Quarter 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 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 question-and-answer 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 Stephen Plavin, CEO of Capital Trust.

Stephen Plavin

Thank you, [Rio]. 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 second quarter. Following my remarks, Geoff will take you through the quarterly results and also discuss our adjusted balance sheet.

Greater connection with the March 2011 restructuring, CT Legacy REIT, both most of our forward balance sheet investments and our ownership interests in it, is our largest asset. Our management of Legacy REIT focused on maximizing the recovery for all stakeholders, the large users of which are the Capital Trust shareholders.

After generating almost $300 million of payment in the first year of Legacy REITs, there were no repayments during the quarter. Although, there were very significant credit challenges remaining in Legacy REITs, performance remains consistent with our expectations. And we do not expect repayment activity to pick up. We do expect repayment activity to pick up again in 2013, as more underlying loans reach final maturity.

During the quarter, we made a $3 million co-investment in CT High Grade II, an investment vehicle with a single institutional account that has $552 million of invested equity capital.

Also, during the quarter, we purchased $10 million of CMBS with CT High Grade Mezzanines, which now has $249 million of investments. We continued to like the High Grade’s strategy of making and buying low LTV subordinate loans and expect our investment activity to increase in coming quarters.

The investment mandates for CT Opportunity Partners I, achieving a 15% return on commercial real estate debt investments is more difficult in the current low rate environment.

We continue to avoid taking opportunistic equity like risks for capitalized debt return. We made a small $1 million purchase of debt related to an existing investment during the quarter at a $20 million investment post quarter end.

The CT Investment Management Company or CTIMCO, are wholly-owned investment management subsidiary. We have $5 million of revenue prior to GAAP eliminations in the second quarter. CTIMO maintains strong capabilities in a wide array of activities, lending, investing, asset management, capital raising, special servicing and operating public company parent.

Our special servicing business is very active as many of the five year peak of the market loans where we are named special service to mature this year and require restructuring. We have a strong capability in working out large structured floating rate loans to securitized senior mortgages and multiple charges of subordinate debt.

We believe that 2012 will be a good advantage for commercial real estate debt and that in general, real estate fundamentals will improve from current levels. We expect sales and recapitalization activity increase, as more high loans and value financing to reach truly final maturity, more lenders that force through new portfolios because of regulatory pressure, and terms of new transactions improve for sellers due to lenders and buyer’s motivation to deploy capital and find yield.

In the completion of the markdown process, there is still $55 billion of loans in CMBS special servicing loans, along with increasing loan maturities. We’ll generate opportunities for those investors best position in the market.

The strength of our platform has generated significant interest from firms interested in initiating or expanding their direct investment activity into commercial mortgage debt, be a transaction with CT and/or CTIMCO.

To help further develop and evaluate this interest and in order to maximize shareholder value, we formed a special committee of the Board of Directors, engaged Evercore Partners and on May 15th, announced that we were exploring strategic alternatives.

As a matter of policy, the company will not comment or provide the market with updates as to the status or expiration of strategic alternatives. Until such time, if ever, that it enters into a definitive agreement for completed transaction or as otherwise required to make an announcement. As such, we will not take any questions regarding this topic in the Q&A.

And with that, I will turn it over to Geoff.

Geoff Jervis

Thank you, Steve, and good morning, everyone. As Steve mentioned, last night we reported our earnings for the second quarter of 2012 and filed our 10-Q. Consolidated GAAP net income for the quarter was $2.3 million or $0.09 per share on a diluted basis. If we exclude the impact of the CT Legacy REIT consolidation from Q1’s numbers, these results are generally consistent with the first quarter.

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