third quarter 2005 update final {print version} 1 · 2009. 2. 5. · investor presentation third...

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Investor Presentation

Third Quarter 2005 Update

Investor PresentationThird Quarter 2005 Update2

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Forward Looking StatementsThis presentation contains “forward- looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this presentation that are not clearly historical in nature are forward- looking, and the words “anticipate,” “believe,” “expect,” “estimate,” “plan,” and similar expressions are generally intended to identify forward- looking statements. Examples of these forward- looking statements include, but are not limited to: our belief that we will elect REIT tax status with our 2006 tax year; our estimate as to the amount of our historical earnings and profits that we will be required to pay out to our shareholders; and our projected dividends for 2006 and 2007.

All forward- looking statements (including statements regarding future financial and operating results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance, or achievements. The forward- looking statements in this presentation regarding our anticipated results and performance as a REIT commencing in 2006 are subject to particular risks including, but not limited to: resolution of, and receipt of final Board of Directors approval with respect to, relevant legal, accounting and financial matters relating to our election of REIT status beginning January 1, 2006, and no occurrence of other events that require a change in the timing of our REIT election; our ability to restructure our corporate entities and existing financings to permit us to position our assets in the most advantageous manner between the REIT and a taxable REIT subsidiary; material variance in the expected level of our cumulative earnings and profits or our projected dividend payout, and the implications of any such variance on our stock price; our ability to access the capital markets on attractive terms or at all to obtain the financing we will require to acquire sufficient additional real estate assets as necessary to implement our new business plan, and the additional capital we will require to operate as a REIT; our management’s ability to operate our business in accordance with the complex rules and regulations governing REITs as necessary to ensure our qualification for and maintenance of our REIT status; potential changes in tax laws that could reduce the benefits we associate with the REIT election; our lack of share ownership limitations and transfer restrictions in our charter could result in our failure to qualify as a REIT if five or fewer individuals were to acquire 50 percent or more of our outstanding shares of common stock; and the relative attractiveness of our dividend payout as compared to other investment options should market interest rates continue to rise.

More detailed information about factors we believe could cause our actual results, performance or achievements to differ materially from anticipated levels is contained in our filings with the SEC, including the sections captioned “Risk Factors” and “Business” in our Annual Report on Form 10- K as filed with the SEC on March 15, 2005. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward- looking statements, whether as a result of new information, future events or otherwise.


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Who We Are

“Super” REIT Structure Broad Based Middle Market Lending PlatformBlending Asset Based Loans, Corporate Loans, Commercial & Healthcare Real Estate LoansDeliver a Growing & Predictable Dividend

Large Scale Platform543 Employees23 OfficesOver $5.5 Billion in Assets in Core Business; over 840 Loans to Over 550 BorrowersStrong Growth in Core Business and Approximately $3.0B in Residential Mortgage Securities AcquiredMarket Leadership Position in All Major Business Lines

Seasoned, Proven Management TeamThe Most Balanced and Diversified, Tax Advantaged, Dividend Paying Enterprise

Note: Loan data as of September 30, 2005


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Superior Business Attributes

Focused Business ModelAll Business Units Compete on Service, Expertise and Insight Derived from Being an “Insider”All Business Units offer Non-Commodity ProductsGenerates Superior Risk Adjusted Returns and Superior Credit Outcomes

Strong Shareholder AlignmentManagement and the Board Own Approximately $1.6 Billion in Company StockIn the Last Six Months, Management and the Board have Purchased Approximately $130 Million in Company Stock

Compelling Financial ModelLarge, Broad, Diversified Lending PlatformHigh Return on EquityModest Leverage, Diverse Funding SourcesTax Efficient StructureHigh Asset Quality; 95% of Loan Assets are Senior SecuredLargely Interest Rate Insensitive

Note: Data as of September 30, 2005, except shareholder data which is as of December 31, 2005 and based on a year end share price of $22.40


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Multiple Lending Products Create a Balanced Portfolio

Core PortfolioCorporate Loans

Asset-Based RevolversSenior Secured Cash Flow LoansAsset-Based Revolvers to Healthcare OperatorsDIP Loans

Real Estate Lending & InvestingFirst Mortgage Debt to Commercial Real Estate InvestorsAsset-Based Loans to Real Estate LendersFirst Mortgage Debt to Healthcare OperatorsSale Leaseback Transactions

Residential Investment Strategy Residential Mortgage Loans

Agency Whole Pools

High Credit, Non-Conforming


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Multiple Business Units

Corporate Finance Healthcare Credit Healthcare Real Estate

Commercial Real Estate Rediscount BCS

Security Finance Fee Businesses CapitalAnalyticsAsset Based Lending toSecurity Alarm Companies

Senior Secured Debt toFinance LBO’s

Asset Based Lending to Healthcare Companies

First Mortgage Debt Securedby All Real Estate Asset Types

First Mortgage Debt andSale Leasebacks on HealthcareProperties

Asset Based Lending to Middle Market Finance Companies

Asset Based Lending, Including DIP Loans and Distressed Investing to Non-Healthcare Companies

Origination and Servicing Businesses Leveraging the Expertise of the Platform

Captive In-House Audit andDue Diligence Function, Playing a Crucial Role in Loan Approval and Management


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A Fully Built Out Platform and The Leading Brand

543 Employees390 Investment Professionals (1)

23 Offices$258.3 Billion of Deals Reviewed From Inception to September 30, 2005

(1) Investment professionals include Credit Committee, Development Officers, Investment Officers, Loan Officers, Underwriting Officers, Loan Analysts, Attorneys and related support staff


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Deals in Review - A Growing Pipeline While Maintaining Discipline

$0

$5

$10

$15

$20

$25

$30

$35

1Q 2004

2Q 2004

3Q 2004

4Q 2004

1Q 2005

2Q 2005

3Q 2005

Dol

lars

(Bill

ions

)

3%

4%

5%

6%

7%

8%

9%

10%

Clo

sing

Rat

e

Pipeline ($'s) Closing Rate (%)


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True Diversification Across All Products and Businesses

Portfolio by Product MixPortfolio by Lending Groups

33%

29%38%

Healthcare & Specialty FinanceCorporate FinanceStructured Finance

31%

5%

29% 35%

Senior Secured Asset-BasedSenior Secured Cash FlowFirst MortgageMezzanine

Note: Portfolio data as of September 30, 2005


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Highly Diverse Portfolio

Portfolio breakdown by Industry

Retail 1%

Resort Finance 5%

Security Alarm 3%

Rediscount (Other) 0%

Office/Retail/Ind RE 3%

Multi-Familty Real Estate 2%

Media 4%

Mortgage Lender 4%

Hospitality 2%

Hard Money Lender 1%

Enhanced Mezzanine 2%

Direct Money Lender 4%

Consumer Prods & Svc 9%

Special Situations 2%

Value-Added Man6%

Condo Conversion 3%

Auto Lender 2%

Healthcare27%

Business Prods & Svc 20%


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Benefits of a Balanced Business Model

Diversification, No Large Exposures

Predictable Growth

Greater Management Discipline

Stronger Funding Platform

Allows for the Application of Best Lending Practices

Helps Attract and Retain People

Stable Stream of Cash Flow


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Superior Financial Model

CapitalSource Attributes

Strong Risk-Adjusted Yields

Efficient, Scalable Cost Structure

Stable, Diverse Low Cost Funding

Conservative Financial Leverage

Recurring RevenuesNo Gain on Sale Accounting

Reasonable Loan Growth Targets

Strong Credit Quality

Tax Efficient Structure


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$1.99

$2.42

$2.75

$3.30

$3.78

$4.72

$5.07

$5.49

$4.28

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05

($Bi

llion

s)

CapitalSource Portfolio Growth


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Our Strategy – Attractive, Defensible, High Margin Niches

Low

High

Low

High

The CapitalSource Zone

EXPERTISE

LIQ

UID

ITY

Equipment Leasing

Conduit Real Estate

Large Sponsor

Cash Flow

Mezzanine Loans

Structured Real Estate

Sale Leasebacks

HealthCare Real Estate

HealthCare Working Capital

Small Sponsor

Cash Flow

Higher Risk Adjusted ReturnsRediscount

Asset-Based

RevolversDIP Loans


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12%

14%

15%

19%

10%

15%

20%

2003 2004 2005E 2006E

CapitalSource Return on Equity

Note: 2003 pro forma for c- corporation tax rates, 2005 and 2006 are estimates


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36%

26%

10%

28%

Diverse Funding Sources

Note: Financial information is as of September 30, 2005. Pro forma for equity offering in early October 2005.

Debt/Equity: 2.84x

CreditFacilities

Demonstrated Capital Markets AccessEquity Markets

$367 million IPO – August ’03$430 million Secondary Offering – February ’04$429 million Follow- On Offering – October ‘05

Convertible Market$225 million 1.25% - March ’04$330 million 3.50% - July ’04

Term Debt SecuritizationsOver $4.2 billion in Proceeds from Seven Oversubscribed Transactions

$2.4B in Credit Facility Capacity

Term DebtConvertible Debentures

Equity

Total: $5.7 billion

Diverse, Stable, Low Cost Funding Sources

Cost of Funds: 2003: 3.32%; 211 bps Spread to Libor2004: 3.08%; 155 bps Spread to LiborYTD05: 4.61%; 110 bps Spread to Libor

All Financings Accounted for on Balance Sheet

No Gain on Sale Recognized

Largely Interest Rate Insensitive

Attractive Financial Characteristics


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Zero Loss ToleranceMore (and Better) Resources in the Process85+ 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

Risk and Credit Management


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$258.3

$56.3

$25.2

$13.4

Screened prospects

Term sheetsproposed

Closed

Term sheets accepted

$ Billions

21.8%

9.8%

5.2%

%

Source: Unaudited, CapitalSource DealTracker from inception to September 30, 2005.

High Degree of Deal Selectivity


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“Super REIT” vs. Peer BDC and REIT

(1) Average of Composite (Internally Managed Only)(2) Considering all the Leverage Inherent in the Capital Structure

CapitalSource "Super REIT"

Monoline BDC

Monoline Residential REIT

Monoline Commercial REIT

Diversified Yes No No No

Asset Profile Senior Secured Mezzanine / Equity Senior Secured Mezzanine / B Loan

Growth Drivers Multiple Single Single Single

Employees 543 132(1) N/A(1) 99 (1)

"True" Leverage Low (2) High (2) High (2) High (2)

Retain Earnings Able to in TRS No Not Generally Not Generally


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Superior Business Attributes

Focused Business ModelAll Business Units Compete on Service, Expertise and Insight Derived from Being an “Insider”All Business Units offer Non-Commodity ProductsGenerates Superior Risk Adjusted Returns and Superior Credit Outcomes

Strong Shareholder AlignmentManagement and the Board Own Approximately $1.6 Billion in Company StockIn the Last Six Months, Management and the Board have Purchased Approximately $130 Million in Company Stock

Compelling Financial ModelLarge, Broad, Diversified Lending PlatformHigh Return on EquityModest Leverage, Diverse Funding SourcesTax Efficient StructureHigh Asset Quality; 95% of Loan Assets are Senior SecuredLargely Interest Rate Insensitive

Note: Data as of September 30, 2005, except shareholder data which is as of December 31, 2005 and based on a year end share price of $22.40

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Supplemental Information


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Balance Sheet

($000s)12/31/2004 9/30/2005 Growth

Cash $ 206,077 $ 125,405 -39%Restricted Cash 237,176 169,782 -28%

Loans 4,274,525 5,487,256 28%Deferred Loan Fees (98,936) (109,875) 11%Allowance for Loan Losses (35,208) (81,498) 131%Loans, net 4,140,381 5,295,883 28%

Investments 44,044 90,442 105%Other Assets 109,151 90,301 -17%Total Assets $ 4,736,829 $ 5,771,813 22%

Credit Facilities $ 964,843 $ 1,998,582 107%Term Debt 2,186,311 2,094,511 -4%Unsecured Debt 555,000 555,000 NATotal Borrowings 3,706,154 4,648,093 25%Other Liabilities 84,284 44,123 -48%Total Liabilities 3,790,438 4,692,216 24%Total Equity 946,391 1,079,597 14%Total Liabilities and Equity $ 4,736,829 $ 5,771,813 22%


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Income Statement

Note: After-tax net income for 2003 is pro forma based on a 38% effective tax rate.

($000s, except per share data)FY 2003 FY 2004 Growth 3Q2004 3Q2005 Growth

Total Interest and Fee Income $ 225,765 $ 400,151 77% $ 112,354 $ 169,251 51%

Interest Expense (39,956) (79,053) 98% (21,922) (50,981) 133%Net Interest and Fee Income 185,809 321,098 73% 90,432 118,270 31%

Reserves (11,337) (25,710) 127% (7,832) (42,884) 448%Net Interest & Fee Income after Chargeoffs & Provision

174,472 295,388 69% 82,600 75,386 -9%

Total Operating Expenses (67,807) (107,748) 59% (28,465) (33,295) 17%Total Other Income 25,815 17,781 -31% 4,014 2,743 -32%Pre-tax Income 132,480 205,421 55% 58,149 44,834 -23%Taxes (50,342) (80,570) 60% (23,841) (16,751) -30%Net Income $ 82,138 $ 124,851 52% $ 34,308 $ 28,083 -18%

EPS (Fully Diluted) $ 0.77 $ 1.06 38% $ 0.29 $ 0.24 -17%


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0.62

%

0.59

%

0.66

%

0.76

%

0.75

%

0.84

%

0.75

%

0.86

%

0.82

% 0.96

%

0.88

%

1.49

%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05

Allowance of Loan Loss as % of Loans


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Recovery Analysis through September 30, 2005

Since June 2003, CapitalSource has Reported 25 Loans (Totaling $278.2Million) as Delinquent and/or Non-Accrual

Fourteen Loans ($133.0 Million) were Resolved with a Net Recovery of 88%

Senior Secured Asset-Based: 2 Loans ($14.2 Million); Net Recovery of 93%

Senior Secured Cash Flow: 5 Loans ($52.2 Million); Net Recovery of 78%

First Mortgage: 7 Loans ($66.6 Million); Net Recovery of 96%

Eleven Loans ($145.1 Million) Remain Unresolved

Senior Secured Asset-Based: 2 Loans ($5.3 Million)

Senior Secured Cash Flow : 3 Loans ($66.0 Million)

First Mortgage : 6 Loans ($73.8 Million)

Note: Data as of September 30, 2005. Non- Accrual and Delinquent Loan Balances as of Date Loans First Disclosed in Credit Statistics.

Source: CapitalSource Asset Manager (CAM) - Unaudited

third quarter 2005 update final {print version} 1 · 2009. 2. 5. · investor presentation third...

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