fourth quarter 2004 update final print version€¦ · fourth quarter 2004 update 9 corporate...
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Investor Presentation
Fourth Quarter 2004 Update
Investor PresentationFourth Quarter 2004 Update2
Forward Looking Statements
Certain information included in this presentation and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company’s business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; and (v) the loss of one or more members of the Company’s management team. More detailed information about these factors is contained in CapitalSource’s filings with the SEC, including the sections captioned “Risk Factors” and “Business” in our Form 10-K. CapitalSource is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.
Investor PresentationFourth Quarter 2004 Update3
Who We Are
National, Specialized Commercial Finance ProviderSmall and Mid-Sized Business Clients in Three Focused Areas:
Corporate Finance HealthCare & Specialty FinanceStructured Finance
$4.3B of Loans to 452 Clients as of December 31, 2004Well-Diversified by Loan Size and Type, Customer and Geography
Well Positioned to be the Lender of Choice for Small and Medium-Sized Businesses that Require Customized and Sophisticated Debt Financing
Investor PresentationFourth Quarter 2004 Update4
Company History
Formed September 2000 by John Delaney and Jason FishInitial Capitalization of Over $500M (Largest Private Capitalization at the Time)Original Investors Still Own Approximately 60% of the Company, with Approx. 45% Held by Management and Affiliates of the Board of DirectorsPrior to CapitalSource…
John Delaney was the Founder and CEO of HealthCare Financial Partners NYSE-Listed (Ticker: HCF)Sold to Heller Financial in 1999 (46% IRR to Original IPO Investors)
Jason Fish was a Partner at Farallon Capital ManagementResponsible for Real Estate and Distressed Credit Investing
CapitalSource and HCF Met or Exceeded Street Estimates Every Quarter as Public CompaniesIn Four Years, CapitalSource has Grown to Approximately 400 Employees, $4.3B in Loans and $3.0B of Market Capitalization, as of December 31, 2004
Investor PresentationFourth Quarter 2004 Update5
Investment Highlights
Large, Underserved Market
Strategic Sector Focus
Tailored Model
Strong Credit Culture“Credit First” Approach
Conservative Balance Sheet Leverage
Experienced, Motivated Team
Superior Growth and Returns
Strong Risk-Adjusted Yields
Stable, Improving Financing Spreads
Scalable Platform
Earnings Growth not Dependent on Volume Growth
Overview of Business
Investor PresentationFourth Quarter 2004 Update7
Large, Underserved Market
$1 MM – $75 MM< $1 MM $75 MM+
Num
ber o
f Com
pani
es
CapitalSource’s target market: 500,000 companies with
revenues between $5MM and $250MM
Borrowing Needs
Served by local banks
Commodity pricing
Underserved
Specialization required
Non-commodity pricing
Served by major banks
Commodity pricing
Investor PresentationFourth Quarter 2004 Update8
Our Strategy – Attractive, Defensible, High Margin Niches
Low
High
Low
High
Higher Risk Adjusted Returns
EXPERTISE
LIQ
UID
ITY
Equipment Leasing
Conduit Real Estate
Large Sponsor
Cash Flow
Mezzanine Loans
Large Structured Real Estate
Small Structured Real Estate
Rediscount
HealthCare Real Estate
HealthCare Working Capital
Small Sponsor
Cash Flow
The Area of Highest Risk-Adjusted Returns…
TheCapitalSource
Zone
Investor PresentationFourth Quarter 2004 Update9
Corporate Finance – $1,709 MM / 40% Of Portfolio
President – Joe KenaryCustomers
Private Equity Firms (Approx. 500 Primary Sponsors and 1,000 Secondary Sponsors)Small to Medium-Sized Sponsors are UnderservedSponsor Company Industries: - Business Services - Consumer Products & Services - Retail, Media - Value-Added Manufacturing
Borrower CharacteristicsStrong Historical and Prospective Cash FlowsExperienced Management Teams and SponsorsLimited Operating Leverage and Event RiskLeadership in Market Niches
ProductsCash Flow Loans Underwritten to Enterprise ValueSenior Loans at 40-60% of Enterprise ValueMezzanine Loans at 60-75% of Enterprise Value
Competitive AdvantagesExecution ▪ CreativityFlexibility ▪ SpeedExpertise ▪ “One-Stop” ShopReputation as Reliable Lender/Brand
Underwriting & Structuring
“Core”: <$25MM Borrowings (~75% of CFB Loans)- Foothill - BDC/RICS - Regional BanksLarger Deals: >$25MM Borrowings (~25% of Loans)- Commercial Banks - GE Capital - Merrill Lynch- CIT - Antares - Foothill- Hedge Funds - Abelco Finance
Note: Portfolio data as of December 31, 2004
Competition
Senior Secured Cash Flow LoansTerm B, Second Lien and Mezzanine Loans; Limited EquityAsset-Based Revolvers
Investor PresentationFourth Quarter 2004 Update10
HealthCare & Specialty Finance – $1,339 MM / 31% of Portfolio
Product GroupsHealthCare Credit Group (HealthCare asset-based lending)HealthCare Real Estate GroupBusiness Credit Services Group (generic asset-based lending)Security Alarm Lending GroupCapitalSource Mortgage Finance (FHA/HUD lending and advisory subsidiary)
Specialized Credit SkillsIntense collateral review; daily borrowing baseIn-house reimbursement and clinical expertiseProprietary loan management capabilities
Market OpportunityHealthCare is 1/6th of U.S. EconomyDominated by small and mid-sized borrowersUnderserved by traditional lendersUnaffected by general economic conditionsUndergoing rapid growth and changeAsset-based lending expertise allows broadening to larger asset-based market
President – Dean Graham
CompetitionGE CapitalMerrill LynchHealthCare Business CreditGMAC
Competitive AdvantagesExpertise ▪ “One-Stop” ShopExperience ▪ SystemsBrandSpeed
Note: Portfolio data as of December 31, 2004
Investor PresentationFourth Quarter 2004 Update11
Structured Finance – $1,227 MM / 29% Of Portfolio
CustomersSpecialty Lenders:
– Mortgage Companies– Consumer and Commercial Lenders
Real Estate Developers/Investors
Specialized Credit SkillsLender Finance: Intense Collateral AnalysisReal Estate: Property and Market Specific AnalysisPortfolio Acquisition Experience/Expertise
Market OpportunityMarket Segments that Require Highly Specialized Lending ExpertiseFragmented and UnderservedNeed for Highly Customized Solutions
ProductsAsset-Based Lending PracticeLender Finance: Senior Asset-Based RevolversReal Estate: Predominately First Mortgage DebtEnhanced Mezzanine Debt
President – Michael C. Szwajkowski
Competitive AdvantagesSophisticated Structuring CapabilitiesFlexibility ▪ SpeedExpertise ▪ “One-Stop” Shop
CompetitionLender Finance: Foothill, Textron, Regional Banks and Hedge FundsReal Estate: Conduits, Banks, Finance Companies and Hedge Funds
Note: Portfolio data as of December 31, 2004
Investor PresentationFourth Quarter 2004 Update12
All Lending Groups Share Common Business Attributes
Value-Added Lending Products
Market Leadership Positions
Sustainable Competitive Advantages
Common Operating Model
Entrepreneurial CapitalSource Culture
Investor PresentationFourth Quarter 2004 Update13
Specially Designed to Minimize Losses and Optimize Execution
Tailored Operating Model
Reports to ChiefCredit Officer
Reports to ChiefCredit Officer
Underwriting Officer
(CapitalAnalytics)
Development Officer
Investment Officer
Credit Committee
Loan Officer
Loan Analyst (CapitalAnalytics)
Reports to Group Head
Origination Underwriting Approval Servicing
Reports to Group Head
Investor PresentationFourth Quarter 2004 Update14
Zero Loss ToleranceMore (and Better) Resources in the Process60+ Experienced Underwriters at CapitalAnalytics
Independent Underwriting, Forensic Accounting and Field Examination FunctionLending Group Focused; Sector Specific MethodologiesStaff with Average of 10+ Years of Experience; ~75% with a CPA and/or MBA
Numerous Checks and BalancesBest-in-Class Information SystemsUnanimous Approval of Credit Committee Required for Every Loan
Committee Composed of CEO, President, CCO, Chief Legal Officer and Group PresidentSame Team has Approved all Loans made to Date
“Credit First” Approach
Investor PresentationFourth Quarter 2004 Update15
$175.9
$42.1
$17.7
$9.7
Screened prospects
Term sheetsproposed
Closed
Term sheets accepted
$ Billions
23.9%
10.1%
5.5%
%
Source: CapitalSource DealTracker from inception to December 31, 2004.
High Degree of Deal Selectivity
Investor PresentationFourth Quarter 2004 Update16
Maintaining True Diversified Senior Debt Focus
Portfolio Breakdown by Type
36% 33% 28% 29% 27% 31%
33% 35% 41% 41% 40% 37%
25% 28% 27% 25% 27% 26%
6% 4% 4% 5% 6% 6%
0%
10%
20%30%
40%
50%
60%
70%80%
90%
100%
3Q03 4Q03 1Q04 2Q04 3Q04 4Q04Senior Secured Asset Based Loans Senior Secured Cash Flow LoansFirst Mortgage Loans Mezzanine Loans
Financials
Investor PresentationFourth Quarter 2004 Update18
Superior Financial Model
CapitalSource Attributes
Strong Risk-Adjusted Yields
Efficient, Scalable Cost Structure
Stable, Diverse Low Cost Funding
Low Financial Leverage
Recurring RevenuesNo Gain on Sale Accounting
Stable, Manageable Loan Growth Targets
Strong Credit Quality
Attainable, High-Growth Earnings and
ProfitabilityProduces
Investor PresentationFourth Quarter 2004 Update19
CapitalSource – A Compelling Economic Model For Shareholders
Pretax Return on Equity1
10%
15%
20%
25%
30%
3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05
High, Stable Risk-Adjusted Returns
High, Stable Return on Assets
Lower Leverage & Lower Risk
Higher Margin of Safety
Superior Return on Equity
1Data represent trailing four quarter results
CapitalSource
% of Assets
Effect of Leverage
Total Return
Yield & Other Income 12%Provision -1%Operating Expenses -2%Gross Return on Assets 9%
Interest Expense -4%Return to Debt Capital 5% x 4.0 = 20%
Return to Equity Capital 9% x 1.0 = 9%
= 29%
Simple Illustration of the CapitalSource Model
Long-Term Pretax Return on Equity
Investor PresentationFourth Quarter 2004 Update20
Financial Metrics
FY 2004 FY 2004($ millions, except per share data) Guidance Actual
Net Originations 1,800$ 1,858$
Yield on IEA 11.4% 11.6%
Cost of Funds 3.0% 3.1%
Net Interest Margin 9.1% 9.3%
Other Income 18.3$ 17.8$
General Reserves 73 bps 70 bps
Specific Provisions 40 bps 34 bps
Op Exp to Assets 3.2% 3.1%
ROA 3.5% 3.6%
ROE 13.4% 14.2%
Leverage (Period End) 3.6x 3.9x
Diluted EPS 1.02$ 1.06$
Investor PresentationFourth Quarter 2004 Update21
47%
20%
12%
21%
Diverse Funding Sources
Note: Financial information is as of December 31, 2004
Debt/Equity: 3.93x
CreditFacilities
Demonstrated Capital Markets AccessEquity Markets
$367 million IPO – August ’03$430 million Secondary Offering – February ’04
Convertible Market$225 million 1.25% - March ’04$330 million 3.50% - July ’04
Term Debt SecuritizationsOver $3.1 billion in Proceeds from Six Oversubscribed Transaction
$1.84B in Credit Facility Capacity123% of Expected Annual Net Growth
Term DebtConvertible Debentures
Equity
Total: $4.7 billion
Diverse, Stable, Low Cost Funding Sources
Cost of Funds: 2003 – 3.32%2004 – 3.08%
All Financings Accounted for on Balance Sheet
No Gain on Sale Recognized
Largely Interest Rate Insensitive
Attractive Financial Characteristics
Investor PresentationFourth Quarter 2004 Update22
Superior Financial Model
CapitalSource Attributes
Strong Risk-Adjusted Yields
Efficient, Scalable Cost Structure
Stable, Diverse Low Cost Funding
Low Financial Leverage
Recurring RevenuesNo Gain on Sale Accounting
Stable, Manageable Loan Growth Targets
Strong Credit Quality
Attainable, High-Growth Earnings and
ProfitabilityProduces
Supplemental Information
Investor PresentationFourth Quarter 2004 Update24
Balance Sheet ($000s)
FY 2003 FY 2004 GrowthCash $ 69,865 $ 206,077 195%Restricted Cash 79,913 237,176 197%
Loans 2,416,907 4,274,525 77%Deferred Loan Fees (59,793) (98,936) 65%Allowance for Loan Losses (18,025) (35,208) 95%Loans, net 2,339,089 4,140,381 77%
Investments 39,788 44,044 11%Other Assets 38,436 109,151 184%Total Assets $ 2,567,091 $ 4,736,829 85%
Credit Facilities $ 746,444 $ 966,961 30%Term Debt 923,208 2,189,356 137%Unsecured Debt - 561,371 NATotal Borrowings 1,669,652 3,717,688 123%Other Liabilities 30,307 72,750 140%Total Liabilities 1,699,959 3,790,438 123%Total Equity 867,132 946,391 9%Total Liabilities and Equity $ 2,567,091 $ 4,736,829 85%
Investor PresentationFourth Quarter 2004 Update25
Income Statement
($000s, except per share data)FY 2003 FY 2004 Growth
Total Interest and Fee Income $ 225,765 $ 400,151 77%Interest Expense (39,956) (79,053) 98%Net Interest and Fee Income 185,809 321,098 73%
General Reserves (8,609) (14,547) 69%Specific Reserves (2,728) (11,163) 309%Net Interest & Fee Income after Chargeoffs & Provision
174,472 295,388 69%
Total Operating Expenses (67,807) (107,748) 59%Total Other Income 25,815 17,781 -31%Pre-tax Income 132,480 205,421 55%Taxes (50,342) (80,570) 60%Net Income $ 82,138 $ 124,851 52%
EPS (Fully Diluted) $ 0.77 $ 1.06 38%
Note: After-tax net income for 2003 is pro forma based on a 38% effective tax rate.
Investor PresentationFourth Quarter 2004 Update26
Credit Quality Ratios
3.93x3.41x3.04x2.39x1.93xDebt/Equity
0.82%0.86%0.75%0.84%0.75%Allowance for Loan Losses as % of Loans
0.29%0.00%0.44%0.36%0.00%Net Charge-Offs as % of Avg. Loans, Annualized
0.53%1.16%0.98%0.37%0.36%Loans on Nonaccrual Status
0.76%0.66%0.00%0.00%0.18%60+ Days Delinquencies as % of Loans
4Q043Q042Q041Q042003