As filed with the Securities and Exchange Commission on August 14, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 1-14788
Capital Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland 94-6181186
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 Park Avenue, 14th Floor, New York, NY 10022
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 655-0220
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[ X ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of outstanding shares of the Registrant's Class A Common
Stock, par value $0.01 per share ("Class A Common Stock"), as of August 13, 2003
was 6,500,734.
EXPLANATORY NOTE
- ----------------
On April 2, 2003, the Registrant successively filed with the State Department of
Assessments and Taxation of Maryland articles of amendment and restatement and
articles of amendment which amended and restated and then further amended the
Registrant's charter effective as of that date, among other things, to eliminate
from the authorized stock of the Registrant the entire 100,000,000 shares of the
Registrant's authorized but unissued class B common stock and to effect a one
(1) for three (3) reverse stock split of the Registrant's outstanding class A
common stock. The financial statements and other stock and per share related
information contained in this quarterly report on Form 10-Q reflects the
foregoing amendments to the Registrant's charter as though they were in effect
for all fiscal periods and as of all balance sheet dates presented.
CAPITAL TRUST, INC.
INDEX
Part I. Financial Information
Item 1: Financial Statements 1
Consolidated Balance Sheets - June 30, 2003 (unaudited) and
December 31, 2002 (audited) 1
Consolidated Statements of Income - Three and Six Months Ended
June 30, 2003 and 2002 (unaudited) 2
Consolidated Statements of Changes in Stockholders' Equity - Six Months
Ended June 30, 2003 and 2002 (unaudited) 3
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003
and 2002 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3: Quantitative and Qualitative Disclosures about Market Risk 19
Item 4: Disclosure Controls and Procedures 20
Part II. Other Information
Item 1: Legal Proceedings 21
Item 2: Changes in Securities 21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21
Item 5: Other Information 22
Item 6: Exhibits and Reports on Form 8-K 22
Signatures 24
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(in thousands)
June 30, December 31,
-------------------- ------------------
2003 2002
-------------------- ------------------
(Unaudited) (Audited)
Assets
Cash and cash equivalents $ 5,583 $ 10,186
Available-for-sale securities, at fair value 32,668 65,233
Commercial mortgage-backed securities available-for-sale, at fair value 152,588 155,780
Loans receivable, net of $6,672 and $4,982 reserve for possible credit losses at
June 30, 2003 and December 31, 2002, respectively 170,789 116,347
Equity investment in CT Mezzanine Partners I LLC ("Fund I"), CT Mezzanine
Partners II LP ("Fund II") and CT MP II LLC ("Fund II GP") (together "Funds") 22,683 28,974
Deposits and other receivables 839 431
Accrued interest receivable 2,687 4,422
Deferred income taxes 1,920 1,585
Prepaid and other assets 3,129 2,018
-------------------- ------------------
Total assets $ 392,886 $ 384,976
==================== ==================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 8,280 $ 9,067
Credit facility 29,000 40,000
Term redeemable securities contract 20,000 --
Repurchase obligations 150,900 160,056
Deferred origination fees and other revenue 741 987
Interest rate hedge liabilities 5,809 1,822
-------------------- -----------------
Total liabilities 214,730 211,932
-------------------- -----------------
Company-obligated, mandatory redeemable, convertible trust preferred securities of
CT Convertible Trust I, holding $89,742 of convertible 10.0% junior
subordinated debentures at June 30, 2003 and December 31, 2002 ("Convertible
Trust Preferred Securities") 89,227 88,988
-------------------- ----------------
Stockholders' equity:
Class A common stock, $0.01 par value, 100,000 shares authorized, 6,501 and 5,405
shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively
("Class A Common Stock") 65 54
Restricted Class A Common Stock, $0.01 par value, 17 and 100 shares issued and
outstanding at June 30, 2003 and December 31, 2002, respectively ("Restricted Class A
Common Stock" and together with Class A Common Stock, "Common Stock") -- 1
Additional paid-in capital 140,772 126,919
Unearned compensation (44) (320)
Accumulated other comprehensive loss (38,018) (28,988)
Accumulated deficit (13,846) (13,610)
-------------------- ----------------
Total stockholders' equity 88,929 84,056
-------------------- ----------------
Total liabilities and stockholders' equity $ 392,886 $ 384,976
==================== ==================
See accompanying notes to unaudited consolidated financial statements.
-1-
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Six Months Ended June 30, 2003 and 2002
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ----------------- ----------------
Income from loans and other investments:
Interest and related income $ 8,668 $ 12,969 $ 17,627 $ 26,955
Less: Interest and related expenses 2,458 4,614 4,753 10,263
---------------- --------------- ---------------- ----------------
Income from loans and other investments, net 6,210 8,355 12,874 16,692
---------------- ---------------- ----------------- ----------------
Other revenues:
Management and advisory fees from Funds 1,432 2,585 2,808 5,076
Income/(loss) from equity investments in Funds 533 920 1,318 (1,774)
Advisory and investment banking fees -- 75 -- 150
Net gain on sales of investments and reduced maturity
of fair value hedge -- 1,651 -- 1,651
Other interest income 19 30 38 58
---------------- ---------------- ----------------- ----------------
Total other revenues 1,984 5,261 4,164 5,161
---------------- ---------------- ----------------- ----------------
Other expenses:
General and administrative 2,989 3,479 6,693 7,408
Other interest expense -- 11 -- 23
Depreciation and amortization 256 248 488 496
Net unrealized (gain)/loss on derivative securities and
corresponding hedged risk on CMBS securities -- 2,849 -- 2,596
Recapture of allowance for possible credit losses -- -- -- (2,963)
---------------- ----------------- ----------------- ----------------
Total other expenses 3,245 6,587 7,181 7,560
---------------- ----------------- ----------------- ---------------
Income before income taxes and distributions and
amortization on Convertible Trust Preferred Securities 4,949 7,029 9,857 14,293
Provision for income taxes -- 3,548 -- 7,086
---------------- ----------------- ----------------- ---------------
Income before distributions and amortization on
Convertible Trust Preferred Securities 4,949 3,481 9,857 7,207
Distributions and amortization on Convertible Trust
Preferred Securities, net of income tax benefit of
$2,039 and $3,894 for the three and six months
ended June 30, 2002, respectively 2,363 2,364 4,726 4,517
---------------- ----------------- ----------------- ---------------
Net income allocable to Common Stock $ 2,586 $ 1,117 $ 5,131 $ 2,690
================ ================= ================= ===============
Per share information:
Net earnings per share of Common Stock:
Basic $ 0.46 $ 0.18 $ 0.93 $ 0.43
================ ================= ================= ===============
Diluted $ 0.46 $ 0.18 $ 0.92 $ 0.42
================ ================= ================= ===============
Weighted average shares of Common Stock
outstanding:
Basic 5,579,341 6,164,553 5,525,307 6,216,983
================ ================= ================= ===============
Diluted 5,628,502 6,185,397 5,557,277 6,344,368
================ ================= ================= ===============
See accompanying notes to unaudited consolidated financial statements.
-2-
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2003 and 2002
(in thousands)
(unaudited)
Restricted Accumulated
Class A Class A Additional Other
Comprehensive Common Common Paid-In Unearned Comprehensive
Income/(Loss) Stock Stock Capital Compensation Income/(Loss)
------------- ---------------------------------------------------------
Balance at January 1, 2002 $ 61 $ 1 $136,930 $ (583) $ (29,909)
Net income $ 2,690 -- -- -- -- --
Unrealized gain on derivative financial instruments, net of
related income taxes 1,036 -- -- -- -- 1,036
Unrealized loss on available-for-sale securities, net of
related income taxes 7,818 -- -- -- -- 7,818
Issuance of Class A Common Stock unit awards -- -- 1 312 -- --
Issuance of restricted
Class A Common Stock -- -- -- 400 (400) --
Vesting of restricted Class A Common Stock
to unrestricted Class A Common Stock -- 1 (1) -- -- --
Restricted Class A Common Stock earned -- -- -- -- 346 --
Repurchase and retirement of shares of Class A Common
Stock previously outstanding -- (2) -- (2,606) -- --
------------- ---------------------------------------------------------
Balance at June 30, 2002 $ 11,544 $ 60 $ 1 $ 135,036 $ (637) $ (21,055)
============= =========================================================
Balance at January 1, 2003 $ 54 $ 1 $ 126,919 $ (320) $ (28,988)
Net income $ 5,131 -- -- -- -- --
Unrealized loss on derivative financial instruments (3,987) -- -- -- -- (3,987)
Unrealized loss on available-for-sale securities (5,043) -- -- -- -- (5,043)
Sale of shares of Class A Common Stock under stock
option agreement -- -- -- 4 -- --
Cancellation of restricted
Class A Common Stock -- -- -- (192) 192 --
Vesting of restricted Class A Common Stock
to unrestricted Class A Common Stock -- 1 (1) -- -- --
Restricted Class A Common Stock earned -- -- -- -- 84 --
Repurchase of warrants to purchase shares of Class A
Common Stock -- -- -- (2,132) -- --
Repurchase and retirement of shares of Class A Common
Stock previously outstanding -- (1) -- (946) -- --
Dividends declared on Class A Common Stock -- -- -- -- -- --
Shares redeemed in one for three reverse stock split -- -- -- (8) -- --
Shares of Class A Common Stock issued in private offeri -- 11 -- 17,127 -- --
------------- ---------------------------------------------------------
Balance at June 30, 2003 $ (3,899) $ 65 $ -- $ 140,772 $ (44) $ (38,018)
============= =========================================================
Accumulated
Deficit Total
----------------------------
Balance at January 1, 2002 $ (3,872) $ 102,628
Net income 2,690 2,690
Unrealized gain on derivative financial instruments, net of
related income taxes -- 1,036
Unrealized loss on available-for-sale
securities, net of related income taxes -- 7,818
Issuance of Class A Common Stock unit awards -- 313
Issuance of restricted
Class A Common Stock -- --
Vesting of restricted Class A Common Stock
to unrestricted Class A Common Stock -- --
Restricted Class A Common Stock earned -- 346
Repurchase and retirement of shares of Class A
Common Stock previously outstanding -- (2,608)
----------------------------
Balance at June 30, 2002 $ (1,182) $ 112,223
============================
Balance at January 1, 2003 $ (13,610) $ 84,056
Net income 5,131 5,131
Unrealized loss on derivative financial instruments -- (3,987)
Unrealized loss on available-for-sale securities -- (5,043)
Sale of shares of Class A Common Stock under stock
option agreement -- 4
Cancellation of restricted Class A Common Stock -- --
Vesting of restricted Class A Common Stock
to unrestricted Class A Common Stock -- --
Restricted Class A Common Stock earned -- 84
Repurchase of warrants to purchase shares of Class A
Common Stock -- (2,132)
Repurchase and retirement of shares of Class A Common
Common Stock previously outstanding -- (947)
Dividends declared on Class A Common Stock (5,367) (5,367)
Shares redeemed in one for three reverse stock split -- (8)
Shares of Class A Common Stock issued in private offering -- 17,138
---------------------------
Balance at June 30, 2003 $ (13,846) $ 88,929
===========================
See accompanying notes to unaudited consolidated financial statements.
-3-
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002
(in thousands)
(unaudited)
2003 2002
---------------- -----------------
Cash flows from operating activities:
Net income $ 5,131 $ 2,690
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Deferred income taxes (335) (322)
Recapture of allowance for possible credit losses -- (2,963)
Depreciation and amortization 488 496
Loss/(income) from equity investments in Funds (1,318) 1,774
Net gain on sales of CMBS and available-for-sale securities -- (711)
Unrealized (gain)/loss on hedged and derivative securities -- 2,596
Restricted Class A Common Stock earned 84 345
Amortization of premiums and accretion of discounts on
loans and investments, net (421) (1,627)
Accretion of discounts on term redeemable securities contract -- 680
Accretion of discounts and fees on Convertible Trust Preferred Securities, net 239 399
Changes in assets and liabilities, net:
Deposits and other receivables (408) 745
Accrued interest receivable 4,273 1,128
Prepaid and other assets (1,087) (799)
Deferred origination fees and other revenue (301) 773
Accounts payable and accrued expenses (3,829) 582
---------------- -----------------
Net cash provided by operating activities 2,516 5,786
---------------- -----------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (39,999)
Principal collections and proceeds from sales of available-for-sale securities 31,177 94,222
Principal collections and proceeds from sales of CMBS -- 67,880
Origination and purchase of loans receivable (36,525) --
Principal collections and proceeds from sale of loans receivable 30,384 107,437
Equity investments in Funds (6,216) (4,533)
Return of capital from Funds 6,651 4,845
Purchase of remaining interest in Fund I (19,946) --
Purchases of equipment and leasehold improvements (16) (2)
---------------- -----------------
Net cash provided by investing activities 5,509 229,850
---------------- -----------------
Cash flows from financing activities:
Proceeds from repurchase obligations 28,061 144,937
Repayment of repurchase obligations (37,217) (114,425)
Proceeds from credit facilities 59,015 46,000
Repayment of credit facilities (94,100) (167,211)
Proceeds from term redeemable securities contract 20,000 35,816
Repayment of term redeemable securities contract -- (173,628)
Repayment of notes payable -- (477)
Sale of shares of Class A Common Stock under stock option agreement 4 --
Payment of Class A Common Stock Dividend (2,442) --
Repurchase of warrants to purchase shares of Class A Common Stock (2,132) --
Proceeds from sale of shares of Class A Common Stock 17,138 --
Repurchase and retirement of shares of Common and
Preferred Stock previously outstanding (955) (2,607)
---------------- -----------------
Net cash used in financing activities (12,628) (231,595)
---------------- -----------------
Net increase/(decrease) in cash and cash equivalents (4,603) 4,041
Cash and cash equivalents at beginning of year 10,186 11,651
---------------- -----------------
Cash and cash equivalents at end of period $ 5,583 $ 15,692
================ =================
See accompanying notes to unaudited consolidated financial statements.
-4-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2003
(unaudited)
1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
accompanying unaudited consolidated interim financial statements should be read
in conjunction with the financial statements and the related management's
discussion and analysis of financial condition and results of operations filed
with the Annual Report on Form 10-K of Capital Trust, Inc. and Subsidiaries
(collectively, the "Company") for the fiscal year ended December 31, 2002. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the three months ended June 30, 2003, are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2003.
The accompanying unaudited consolidated interim financial statements of the
Company include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation. The accounting and reporting policies of the Company conform in
all material respects to accounting principles generally accepted in the United
States. Certain prior period amounts have been reclassified to conform to
current period classifications.
On April 2, 2003, the Company's charter was amended and restated and then
further amended to eliminate from the authorized stock of the Company the entire
100,000,000 shares of the Company's authorized but unissued class B common stock
and to effect a one (1) for three (3) reverse stock split of the Company's class
A common stock. Fractional shares resulting from the reverse stock split were
settled in cash at a rate of $16.65 multiplied by the percentage of a share
owned after the split.
All per share information concerning the computation of earnings per share,
dividends per share, authorized stock, and per share conversion and exercise
prices reported in the accompanying consolidated interim financial statements
and these notes to consolidated financial statements have been adjusted as if
the amendments to the Company's charter were in effect for all fiscal periods
and as of all balance sheet dates presented.
2. REIT Election
In December 2002, the Company's board of directors authorized the Company's
election to be taxed as a real estate investment trust ("REIT") for the 2003 tax
year. The Company will continue to make, for its own account and as investment
manager for the account of funds under management, loans and debt-related
investments in various types of commercial real estate and related assets.
In view of the Company's election to be taxed as a REIT, the Company has
tailored its balance sheet investment program to originate or acquire loans and
investments to produce a portfolio that meets the asset and income tests
necessary to maintain the Company's qualification as a REIT. In order to
accommodate the Company's REIT status, the legal structure of future investment
funds the Company sponsors may be different from the legal structure of the
Company's existing investment funds.
In order to qualify as a REIT, five or fewer individuals may own no more than
50% of the Company's Common Stock. As a means of facilitating compliance with
such qualification, stockholders controlled by John R. Klopp and Craig M.
Hatkoff and trusts for the benefit of the family of Samuel Zell each sold
166,666 shares of Class A Common Stock to an institutional investor in a
transaction that closed on February 7, 2003. Following this transaction, the
Company's largest five individual stockholders own in the aggregate less than
50% of the Company's Class A Common Stock.
-5-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
3. Purchase of Citigroup's Interest in Fund I
In January 2003, the Company purchased the 75% interest in CT Mezzanine Partners
I LLC ("Fund I") held by affiliates of Citigroup Alternative Investments, LLC
("Citigroup") for a purchase price of approximately $38.4 million (including the
assumption of liabilities), at the book value of the fund. On January 31, 2003,
the Company began consolidating the balance sheet and operations of Fund I in
its consolidated financial statements.
4. Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. New Accounting Pronouncement
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instrumnets with
Characteristics of Both Liabilities and Equity" ("SFAS No. 150") was issued.
SFAS No. 150 defines the appropriate balance sheet classification of instruments
with both debt and equity components and the appropriate expense classification
for any dividend, interest or fair value adjustments. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim peirod beginning
after June 15, 2003. The pronouncement is to be implemented by reporting the
cumulative effect of a change in anaccounting principle for financial
instruments created before the issuace date of SFAS No. 150 and still existing
at the beginning of the interim period of adoption. The Company has reviewed the
provisions of this standard, and its adoption is not expected to have a material
effect on the Company's consolidated financial statements.
6. Available-for-Sale Securities
At June 30, 2003, the Company's available-for-sale securities consisted of the
following (in thousands):
Gross
Amortized Unrealized Estimated
---------------------
Cost Gains Losses Fair Value
-----------------------------------------------
Federal Home Loan Mortgage Corporation Gold, fixed rate
interest at 6.50%, due September 1, 2031 $ 4,401 $ 149 $ -- $ 4,550
Federal Home Loan Mortgage Corporation Gold, fixed rate
interest at 6.50%, due September 1, 2031 14,145 405 -- 14,550
Federal Home Loan Mortgage Corporation Gold, fixed rate
interest at 6.50%, due September 1, 2031 962 31 -- 993
Federal Home Loan Mortgage Corporation Gold, fixed rate
interest at 6.50%, due April 1, 2032 12,068 507 -- 12,575
-----------------------------------------------
$ 31,576 $ 1,092 $ -- $ 32,668
===============================================
-6-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
7. Loans Receivable
At June 30, 2003 and December 31, 2002, the Company's loans receivable consisted
of the following (in thousands):
June 30, December 31,
2003 2002
------------------- ------------------
(1) Mortgage Loans $ 14,302 $ 15,202
(2) Mezzanine Loans 163,159 98,268
(3) Other loans receivable -- 7,859
------------------- ------------------
177,461 121,329
Less: reserve for possible credit losses (6,672) (4,982)
------------------- ------------------
Total loans $ 170,789 $ 116,347
=================== ==================
In connection with the Company's purchase of the Fund I interest held by
Citigroup, the Company recorded additional loans receivable of $50,034,000 and
recorded a $1,690,000 increase to the reserve for possible credit losses on the
acquisition date. The assets were recorded at their carrying value from Fund I,
which approximated the market value on the acquisition date.
One Mortgage Loan receivable with an original principal balance of $8,000,000
reached maturity on July 15, 2001 and has not been repaid with respect to
principal and interest. In December 2002, the loan was written down to
$4,000,000 through a charge to the allowance for possible credit losses. In
accordance with the Company's policy for revenue recognition, income recognition
has been suspended on this loan and for the six months ended June 30, 2003,
$228,000 of potential interest income has not been recorded.
During the six months ended June 30, 2003, the Company purchased three Mezzanine
Loans for $36,525,000, received partial repayments on seven Mortgage and
Mezzanine Loans totaling $2,665,000 and received one Mezzanine Loan and one
other loan satisfaction totaling $27,718,0000.
At June 30, 2003, the weighted average interest rate in effect, including
amortization of fees and premiums, for the Company's performing loans receivable
is as follows:
(1) Mortgage Loans 10.21%
(2) Mezzanine Loans 9.91%
Total loans 9.93%
At June 30, 2003, $84,831,000 (49%) of the aforementioned performing loans bear
interest at floating rates ranging from LIBOR plus 235 basis points to LIBOR
plus 875 basis points. The remaining $88,630,000 (51%) of loans bear interest at
fixed rates ranging from 11.62% to 12.00%.
8. Equity Investments in CT Mezzanine Partners III, Inc. ("Fund III")
On June 2, 2003, CT Mezzanine Partners III, Inc. ("Fund III"), the Company's
third commercial real estate mezzanine investment fund co-sponsored with
Citigroup Investments Inc. ("Citigroup"), held its initial closing (the "Initial
Closing"). Fund III's initial closing with an aggregate of $31.2 million in
capital commitments was made by the co-sponsors. Affiliates of the Company and
Citigroup made capital commitments of $6.2 million and $25.0 million,
respectively, to Fund III, which were subject to increase upon subsequent
closings on third-party investor capital commitments.
On June 27, 2003, Fund III effected its second closing on an additional $113.87
million of capital commitments made primarily by third-party institutional
private equity investors. The capital commitments made to Fund III by affiliates
of the Company and Citigroup increased an additional $1.0 million and $4.0
million, respectively.
Fund III commenced its investment operations immediately following the initial
closing and the Company effected its final closing on August 8, 2003. See Note
18, Subsequent Events.
Based upon the $145.1 million aggregate capital commitments made at the initial
and the second closing, the Company would earn annual investment management fees
of $2.0 million through the service of its subsidiary, CT Investment Management
Co. LLC ("CTIMCO"), as investment manager to Fund III.
-7-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
9. Long-Term Debt
Credit Facility
In connection with the Company's purchase of the Fund I interest held by
Citigroup, the Company assumed the obligations under the credit facility entered
into by Fund I. There were outstanding borrowings of $24,084,000 on the date of
acquisition. The lender for the Fund I credit facility is the same as the lender
for the Company's outstanding credit facility and thus the two facilities have
been combined for reporting purposes.
On June 27, 2003, the Company formally combined under one facility the
outstanding borrowings under the two facilities and extended the maturity of the
$150 million credit facility for two additional years to July 16, 2005 on
substantially the same terms. At June 30, 2003, the Company has borrowed
$29,000,000 under the credit facility at an average interest rate of Libor +
2.25% (3.62% at June 30, 2003); assuming no additional utilization under the
credit facility and including the amortization of fees paid and capitalized over
the term of the credit facility, the all-in borrowing cost was 6.16% at June 30,
2003. The Company has pledged assets of $102,562,000 as collateral for the
borrowing against such credit facility. On June 30, 2003, the unused amount of
potential credit under the remaining credit facility was $121,000,000.
Repurchase Obligations
At June 30, 2003, the Company was obligated to three counterparties under
repurchase agreements.
The repurchase obligation with the first counterparty, an affiliate of a
securities dealer, was utilized to finance CMBS securities. At June 30, 2003,
the Company has sold CMBS assets with a book and market value of $152,588,000
and has a liability to repurchase these assets for $91,360,000 that is
non-recourse to the Company. This repurchase obligation had an original one-year
term that expired in February 2003 and was extended to February 2004. The
liability balance bears interest at specified rates over LIBOR based upon each
asset included in the obligation.
The repurchase obligation with the second counterparty, a securities dealer,
arose in connection with the purchase of Federal Home Loan Mortgage Corporation
Gold available-for-sale securities. At June 30, 2003, the Company has sold such
assets with a book and market value of $32,668,000 and has a liability to
repurchase these assets for $31,687,000. This repurchase agreement comes due
monthly and has a current maturity date in September 2003. The liability balance
bears interest at LIBOR.
The repurchase obligation with the third counterparty, a securities dealer, was
entered into on May 28, 2003 pursuant to the terms of a master repurchase
agreement and provides the Company with the right to finance up to $50,000,000
by selling specific assets to the counterparty. To June 30, 2003, the master
repurchase agreement has been utilized in connection with the purchase of loans
in the second quarter of 2003. At June 30, 2003, the Company has sold loans with
a book and market value of $36,507,000 and has a liability to repurchase these
assets for $27,853,000. The master repurchase agreement terminates on June 1,
2004 and bears interest at specified rates over LIBOR based upon each asset
included in the obligation.
The average borrowing interest rate in effect for all the repurchase obligations
outstanding at June 30, 2003 was Libor + 1.00% (2.30% at June 30, 2003), which
including amortization of fees paid and capitalized was 2.58% at June 30, 2003.
Term Redeemable Securities Contract
At June 30, 2003, the Company has borrowed $20,000,000 under a $75 million term
redeemable securities contract at an average interest rate of Libor + 1.99%
(3.05% at June 30, 2003); assuming no additional utilization under the term
redeemable securities contract and including the amortization of fees paid and
capitalized over the term of the term redeemable securities contract, the all-in
borrowing cost was 5.07% at June 30, 2003. The Company has pledged assets of
$34,393,000 as collateral for the borrowing against such credit facility. On
June 30, 2003, the unused amount of potential credit under the remaining credit
facility was $55,000,000.
-8-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
10. Derivative Financial Instruments
The following table summarizes the notional value and fair value of the
Company's derivative financial instruments at June 30, 2003. The notional value
provides an indication of the extent of the Company's involvement in these
instruments at that time, but does not represent exposure to credit, interest
rate or foreign exchange market risks.
Interest
Hedge Type Notional Value Rate Maturity Fair Value
- ----------- -------------------- ----------------- ---------------- ------------ ---------------
Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $ (4,545,000)
Swap Cash Flow Hedge 24,000,000 4.2325% 2015 (1,264,000)
On June 30, 2003, the derivative financial instruments were reported at their
fair value as interest rate hedge liabilities of $5,809,000.
11. Earnings Per Share
The following table sets forth the calculation of Basic and Diluted EPS for the
six months ended June 30, 2003 and 2002:
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
-------------------------------------------- --------------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
Amount Amount
---------------- --------------------------- -------------- ----------------- -----------
Basic EPS:
Net earnings per share of
Common Stock $ 5,131,000 5,525,307 $ 0.93 $ 2,690,000 6,216,983 $ 0.43
============= ============
Effect of Dilutive Securities
Options outstanding for the
purchase of Common Stock -- 31,970 -- 29,182
Warrants outstanding for the
purchase of Common Stock -- -- -- 98,203
---------------- -------------- -------------- -----------------
Diluted EPS:
Net earnings per share of
Common Stock and Assumed
Conversions $ 5,131,000 5,557,277 $ 0.92 $ 2,690,000 6,344,368 $ 0.42
================ ============== ============ ============== =============== =============
The following table sets forth the calculation of Basic and Diluted EPS for the
three months ended June 30, 2003 and 2002:
Three Months Ended June 30, 2003 Three Months Ended June 30, 2002
-------------------------------------------- --------------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
Amount Amount
---------------- --------------------------- -------------- ----------------- -----------
Basic EPS:
Net earnings per share of
Common Stock $ 2,586,000 5,579,341 $ 0.46 $ 1,117,000 6,164,553 $ 0.18
============= ============
Effect of Dilutive Securities
Options outstanding for the
purchase of Common Stock -- 49,161 -- 20,844
Warrants outstanding for the
purchase of Common Stock -- -- -- --
---------------- -------------- -------------- -----------------
Diluted EPS:
Net earnings per share of
Common Stock and Assumed
Conversions $ 2,586,000 5,628,502 $ 0.46 $ 1,117,000 6,185,397 $ 0.18
================ ============= ============= ============== =============================
-9-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
All per share information has been adjusted for the one for three reverse stock
split in the computation of earnings per share and dividends per share as
presented on the consolidated statements of income. See Note 1.
12. Income Taxes
The Company intends to make an election to be taxed as a REIT under Section
856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax
year ending December 31, 2003. As a REIT, the Company generally is not subject
to federal income tax. To maintain qualification as a REIT, the Company must
distribute at least 90% of its REIT taxable income to its stockholders and meet
certain other requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax on its taxable
income at regular corporate rates. The Company may also be subject to certain
state and local taxes on its income and property. Under certain circumstances,
federal income and excise taxes may be due on its undistributed taxable income.
At June 30, 2003, the Company was in compliance with all REIT requirements.
13. Class A Common Stock
On June 18, 2003, the Company issued 1,075,000 shares of Class A Common Stock in
a private placement. Thirty-two separate investors, led by certain institutional
clients advised by Lend Lease Rosen Real Estate Securities, LLC, purchased the
shares. Net proceeds to the Company were $17.1 million after payment of offering
expenses and fees to Conifer Securities, LLC, placement agent for the Company.
14. Dividends
In order to maintain its election to qualify as a REIT, the Company must
currently distribute, at a minimum, an amount equal to 90% of its REIT taxable
income and must distribute 100% of its REIT taxable income to avoid paying
corporate federal income taxes. The Company anticipates it will distribute all
of its REIT taxable income to its stockholders. Because REIT taxable income
differs from cash flow from operations due to non-cash revenues or expenses, in
certain circumstances, the Company may be required to borrow to make sufficient
dividend payments to meet this anticipated dividend threshold.
On June 24, 2003, the Company declared a dividend of approximately $2,925,000,
or $0.45 per share of Class A Common Stock applicable to the three-month period
ended June 30, 2003, payable on July 15, 2003 to stockholders of record on June
30, 2003.
15. Employee Benefit Plans
1997 Long-Term Incentive Stock Plan
During the six months ended June 30, 2003, the Company did not issue any options
to acquire shares of Class A Common Stock or restricted shares of Class A Common
Stock.
The following table summarizes the option activity under the incentive stock
plan for the quarter ended June 30, 2003:
Weighted Average
Options Exercise Price Exercise Price
Outstanding per Share per Share
--------------------------------------------- ------------------
Outstanding at January 1, 2003 657,250 $12.375 - $30.00 $ 18.87
Granted in 2003 -- -- --
Exercised in 2003 (334) $12.375 - $15.90 13.34
Canceled in 2003 (119,002) $12.375 - $30.00 18.56
------------------- ------------------
Outstanding at June 30, 2003 537,914 $12.375 - $30.00 $ 18.95
=================== ==================
At June 30, 2003, 435,674 of the options are exercisable. At June 30, 2003, the
outstanding options have various remaining contractual exercise periods ranging
from 2.51 to 8.60 years with a weighted average life of 6.10 years.
-10-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
16. Supplemental Disclosures for Consolidated Statements of Cash Flows
Interest paid on the Company's outstanding debt and Convertible Preferred Trust
Securities during the six months ended June 30, 2003 and 2002 was $9,384,000 and
$13,349,000, respectively. Income taxes paid by the Company during the six
months ended June 30, 2003 and 2002 was $1,693,000 and $7,075,000, respectively.
In connection with the purchase of the Fund I interest held by Citigroup, the
Company assumed $24,084,000 of credit facility debt that is a non-cash activity.
17. Segment Reporting
The Company has established two reportable segments beginning January 1, 2003.
The Company has an internal information system that produces performance and
asset data for its two segments along service lines.
The Lending and Investment segment includes all of the Company's activities
related to direct loan and investment activities and the financing thereof.
The Investment Management segment includes all of the Company's activities
related to investment management services provided to the Company and funds
under management and includes the Company's taxable REIT subsidiary, CTIMCO, and
its subsidiaries. The segment also provides asset management and advisory
services relating to real estate properties.
The following table details each segment's contribution to the Company's overall
profitability and the identified assets attributable to each such segment for
the six months ended and as of June 30, 2003, respectively (in thousands):
Lending and Investment Inter-Segment
Investment Management Activities Total
---------------- ---------------- ---------------- -----------------
Income from loans and other investments:
Interest and related income $ 17,627 $ -- $ -- $ 17,627
Less: Interest and related expenses 4,752 -- -- 4,753
---------------- ---------------- ---------------- -----------------
Income from loans and other investments, net 12,874 -- -- 12,874
---------------- ---------------- ---------------- -----------------
Other revenues:
Management and advisory fees -- 5,023 (2,215) 2,808
Income/(loss) from equity investments in Funds 1,409 (91) -- 1,318
Other interest income 20 18 -- 38
---------------- ---------------- ---------------- -----------------
Total other revenues 1,429 4,950 (2,215) 4,164
---------------- ---------------- ---------------- -----------------
Other expenses:
General and administrative 3,496 5,412 (2,215) 6,693
Depreciation and amortization 422 66 -- 488
---------------- ---------------- ---------------- -----------------
Total other expenses 3,918 5,478 (2,215) 7,181
---------------- ---------------- ---------------- -----------------
Income before income taxes and distributions and
amortization on Convertible Trust Preferred Securities 10,385 (528) -- 9,857
Provision for income taxes -- -- -- --
---------------- ---------------- ---------------- -----------------
Income before distributions and amortization on
Convertible Trust Preferred Securities 10,385 (528) -- 9,857
Distributions and amortization on Convertible Trust
Preferred Securities 4,726 -- -- 4,726
---------------- ---------------- ---------------- -----------------
Net income allocable to Class A Common Stock $ 5,659 $ (528) $ -- $ 5,131
================ ================ ================ =================
Total Assets $ 390,420 $ 16,892 $ (14,426) $ 392,886
================ ================ ================ =================
-11-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The following table details each segment's contribution to the Company's overall
profitability attributable to each such segment for the three months ended and
as of June 30, 2003, respectively (in thousands):
Lending and Investment Inter-Segment
Investment Management Activities Total
------------------ ---------------- ----------------- -------------------
Income from loans and other investments:
Interest and related income $ 8,668 $ -- $ -- $ 8,668
Less: Interest and related expenses 2,458 -- -- 2,458
------------------- ---------------- ---------------- -------------------
Income from loans and other investments, net 6,210 -- -- 6,210
------------------- ---------------- ---------------- -------------------
Other revenues:
Management and advisory fees -- 2,487 (1,055) 1,432
Income/(loss) from equity investments in Funds 678 (145) -- 533
Other interest income 9 10 -- 19
------------------- ---------------- ---------------- -------------------
Total other revenues 687 2,352 (1,055) 1,984
------------------- ---------------- ---------------- -------------------
Other expenses:
General and administrative 1,555 2,489 (1,055) 2,989
Depreciation and amortization 223 33 -- 256
------------------- ---------------- ---------------- -------------------
Total other expenses 1,778 2,522 (1,055) 3,245
------------------- ---------------- ---------------- -------------------
Income before income taxes and distributions and
amortization on Convertible Trust Preferred Securities 5,119 (170) -- 4,949
Provision for income taxes -- -- -- --
------------------- ---------------- ----------------- ------------------
Income before distributions and amortization on
Convertible Trust Preferred Securities 5,119 (170) -- 4,949
Distributions and amortization on Convertible Trust
Preferred Securities 2,363 -- -- 2,363
------------------- ---------------- ----------------- ------------------
Net income allocable to Class A Common Stock $ 2,756 $ (170) $ -- $ 2,586
=================== ================ ================= ==================
All revenues were generated from external sources within the United States. The
Investment Management segment earned fees of $2,215,000 and $1,055,000 for
management of the Lending and Investment segment for the six and three months
ended June 30, 2003, respectively, which is reflected as offsetting adjustments
to other revenues and other expenses in the Inter-Segment Activities column in
the tables above.
18. Subsequent Event
On July 17, 2003 and August 13, 2003, Fund III effected its third and final
closings on an aggregate of $279.9 million of additional capital commitments
bringing the total equity commitments in Fund III to $425.0 million. The capital
commitments made to Fund III by affiliates of the Company and Citigroup
increased to $20.0 million and $80.0 million, respectively.
Based upon the $425.0 million aggregate capital commitments made at the initial
and subsequent closings, the Company will earn annual investment management fees
of $6.0 million through the service of its subsidiary, CTIMCO, as investment
manager to Fund III.
-12-
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Historical results set forth are not necessarily indicative of the future
financial position and results of operations of the Company.
Introduction
- ------------
The Company is a fully integrated, self-managed investment management and
finance company that makes loans and debt-related investments in various types
of commercial real estate assets and operating companies. Since 1997, the
Company has completed, for its own account and on behalf of funds that it
manages, $3.1 billion of total investments in 102 separate transactions. In
December 2002, the Company's board of directors authorized an election to be
taxed as a REIT for the 2003 tax year.
The Company operated principally as a balance sheet lender until the start of
its investment management business in 2000. On March 8, 2000, the Company
entered into a venture with affiliates of Citigroup Alternative Investments, LLC
("Citigroup") to co-sponsor, commit to invest capital in and manage a series of
high-yield commercial real estate mezzanine investment funds. Pursuant to the
venture agreement, the Company and Citigroup have co-sponsored CT Mezzanine
Partners I LLC ("Fund I"), CT Mezzanine Partners II LP ("Fund II") and CT
Mezzanine Partners III, Inc. ("Fund III"). The Company has capitalized costs of
$6,167,000, net, from the formation of the Funds that are being amortized over
the anticipated lives of the Funds.
Fund I commenced its investment operations in May 2000 with equity capital
supplied solely by the Company (25%) and Citigroup (75%). From May 11, 2000 to
April 8, 2001 (the investment period for the fund), Fund I completed $330
million of total investments in 12 transactions. On January 31, 2003, the
Company purchased from affiliates of Citigroup their 75% interest in Fund I for
$38.4 million (including the assumption of liabilities). As of January 31, 2003,
the Company began consolidating the operations of Fund I in its consolidated
financial statements.
Fund II had its final closing on August 7, 2001, ultimately raising $845.2
million of total equity commitments, including $49.7 million (5.9%) and $198.9
million (23.5%) from the Company and Citigroup, respectively. The balance of the
capital commitments came from third-party private equity investors, including
public and corporate pension plans, endowment funds, financial institutions and
high net worth individuals. During its two-year investment period, Fund II
invested $1.2 billion in 40 separate transactions. Fund II utilizes leverage to
increase its return on equity, with a target debt-to-equity ratio of 2:1. Total
capital calls during the investment period were $329.0 million. On January 1,
2003, the general partners of Fund II (affiliates of the Company and Citigroup)
voluntarily reduced the base management fees for the remainder of the investment
period (to April 9, 2003) by 50% due to a lower than expected level of
deployment of the fund's capital.
CT Investment Management Co. LLC ("CTIMCO"), a wholly-owned subsidiary of the
Company, acts as the investment manager to Fund II and receives 100% of the base
management fees paid by the fund. As of July 1, 2003, the Company is receiving
base management fees from Fund II equal to 1.287% per annum of invested capital.
The Company and Citigroup are also entitled to receive incentive management fees
from Fund II if the return on invested equity is in excess of 10% after all
invested capital has been returned. The incentive management fees are split
equally between the Company and Citigroup. The Company intends to pay 25% of the
Fund II incentive management fees it receives as long-term incentive
compensation to its employees. No such incentive fees have been earned at June
30, 2003 and as such, no amount has been accrued as income for such potential
fees in the Company's financial statements. If Fund II's assets were sold and
liabilities were settled on July 1, 2003 at the recorded book value and the fund
equity and income were distributed, the Company would record approximately $4.1
million of incentive income. The amount of incentive fees to be received in the
future will be dependent upon a number of factors, including the Fund's ability
to generate returns in excess of 10% which is impacted by the duration and
ultimate performance of the fund's assets. Potential incentive fees received as
Fund II winds down could result in significant additional income from operations
in certain periods during which such payments can be recorded as income.
Since December 31, 2002, the Company has made equity contributions to Fund II of
$5.5 million and equity contributions to Fund II's general partner of $757,000.
The Company does not anticipate making any additional equity contributions to
Fund II or its general partner. The Company's total investment in Fund II and
its general partner at June 30, 2003 is $16.5 million. As of June 30, 2003, Fund
II has outstanding loans and investments totaling $632.8 million, all of which
are performing in accordance with the terms of their agreements.
-13-
Until the end of the investment period for Fund II on April 9, 2003, the Company
generally did not originate or acquire loans or CMBS directly for its own
balance sheet portfolio. Now that the Fund II investment period has ended, the
Company is originating loans and investments for its own account as permitted by
funds under management. The Company will also use its available working capital
to make contributions to Fund III or any other funds as and when required by the
capital commitments made by the Company to such funds. If repayments of the
Company's existing balance sheet loans and investments increase significantly
before excess capital is invested in new funds, or otherwise accretively
deployed, the Company may experience a reduction in revenues and lower earnings
until offsetting revenues are derived from funds under management or other
sources. For the remainder of 2003, the Company does not expect a decrease in
total assets, as the Company expects to purchase or originate additional assets
during the remainder of the year.
Third Investment Management Fund
- --------------------------------
On June 2, 2003, Fund III effected its initial closing and on August 8, 2003 its
final closing, raising a total of $425.0 million in capital commitments. The
Company and Citigroup made capital commitments of $20.0 million (4.7%) and $80.0
million (18.8%), respectively, with the balance made by third-party investors.
As of June 30, 2003, Fund III had closed one investment for $25.0 million.
The Company receives 100% of the base management fees from Fund III calculated
at a rate equal to 1.42% per annum of committed capital during Fund III's
two-year investment period, and 1.42% of invested capital thereafter. Based upon
Fund III's $425.0 million of total capital commitments, the Company will earn
annual base management fees of $6.0 million during the investment period,
through the service of its subsidiary, CTIMCO, as investment manager to Fund
III. The Company and Citigroup are also entitled to receive incentive management
fees from Fund III if the return on invested equity is in excess of 10% after
all invested capital has been returned. The Company and Citigroup will receive
62.5% and 37.5%, respectively, of the total incentive management fees. The
Company expects to distribute a portion of the Fund III incentive management
fees it receives as long-term incentive compensation to its employees.
Results of Operations for the Three and Six Months Ended June 30, 2003 and 2002
- -------------------------------------------------------------------------------
The Company reported a net income of $5,131,000 for the six months ended June
30, 2003, an increase of $2,441,000 from the net income of $2,690,000 for the
six months ended June 30, 2002. This increase was primarily the result of the
elimination of income taxes in 2003 with the REIT election, the elimination of
the net unrealized loss on derivative securities and the corresponding hedged
risk on CMBS securities that was eliminated by settling the fair value hedge in
December 2002 and entering into a new cash flow hedge and the increase in income
from equity investments in Funds. These increases were partially offset by a
reduction in management and advisory fees from Funds, a recapture of the
allowance for possible credit losses and sales of investments and reducing the
maturity of fair value hedges resulting in net gains in 2002, which did not
recur in 2003, and a reduction in net income from loans and investments.
The Company reported net income of $2,586,000 for the three months ended June
30, 2003, an increase of $1,489,000 from the net income of $1,117,000 for the
three months ended June 30, 2002. This increase was primarily the result of the
elimination of income taxes in 2003 with the REIT election and the elimination
of the net unrealized loss on derivative securities and the corresponding hedged
risk on CMBS securities that was eliminated by settling the fair value hedge in
December 2003 and entering into a new cash flow hedge. These increases were
partially offset by a reduction in management and advisory fees from Funds, a
reduction in the maturity of a fair value hedge that resulted in net gains in
2002, which did not recur in 2003, and a reduction in net income from loans and
investments.
Interest and related income from loans and other investments amounted to
$17,627,000 for the six months ended June 30, 2003, a decrease of $9,328,000
from the $26,955,000 amount for the six months ended June 30, 2002. Average
interest-earning assets decreased from approximately $536.3 million for the six
months ended June 30, 2002 to approximately $350.1 million for the six months
ended June 30, 2003. The average interest rate earned on such assets increased
from 10.1% in 2002 to 10.2% in 2003. During the six months ended June 30, 2003
and June 30, 2002, the Company recognized $367,000 and $370,000, respectively,
in additional income on the early repayment of loans and investments. Without
this additional interest income, the earning rate for the 2003 period would have
been 9.9% versus 10.0% for the 2002 period. LIBOR rates averaged 1.3% for the
six months ended
-14-
June 30, 2003 and 1.8% for the six months ended June 30, 2002, a decrease of
0.5%. The portion of the Company's assets that earn interest at fixed-rates did
not decrease in 2003, which served to offset the decrease in earnings from the
decrease in the average LIBOR rate.
Interest and related income from loans and other investments amounted to
$8,668,000 for the three months ended June 30, 2003, a decrease of $4,301,000
from the $12,969,000 amount for the three months ended June 30, 2002. Average
interest-earning assets decreased from approximately $510.0 million for the
three months ended June 30, 2002 to approximately $348.6 million for the three
months ended June 30, 2003. The average interest rate earned on such assets
decreased from 10.2% in 2002 to 10.0% in 2003. During the three months ended
June 30, 2002, the Company recognized $370,000 in additional income on the early
repayment of loans. Without this additional interest income, the earning rate
for the 2003 period would have been 10.0% versus 9.9% for the 2002 period. LIBOR
rates averaged 1.3% for the three months ended June 30, 2003 and 1.8% for the
three months ended June 30, 2002, a decrease of 0.5%. The portion of the
Company's assets that earn interest at fixed-rates did not decrease in 2003,
which served to offset the decrease in earnings from the decrease in the average
LIBOR rate.
Interest and related expenses amounted to $4,753,000 for the six months ended
June 30, 2003, a decrease of $5,510,000 from the $10,263,000 amount for the six
months ended June 30, 2002. The decrease in expense was due to a decrease in the
amount of average interest-bearing liabilities outstanding from approximately
$307.7 million for the six months ended June 30, 2002 to approximately $208.9
million for the six months ended June 30, 2003, and a decrease in the average
rate paid on interest-bearing liabilities from 6.7% to 4.6% for the same
periods. The decrease in the average rate is substantially due to the increased
use of repurchase agreements as a percentage of total debt in the 2003 period at
lower spreads to LIBOR than the credit facilities utilized in the 2002 period
and the decrease in swap levels and rates.
Interest and related expenses amounted to $2,458,000 for the three months ended
June 30, 2003, a decrease of $2,156,000 from the $4,614,000 amount for the three
months ended June 30, 2002. The decrease in expense was due to a decrease in the
amount of average interest-bearing liabilities outstanding from approximately
$284.8 million for the three months ended June 30, 2002 to approximately $204.8
million for the three months ended June 30, 2003, and a decrease in the average
rate paid on interest-bearing liabilities from 6.5% to 4.8% for the same
periods. The decrease in the average rate is substantially due to the increased
use of repurchase agreements as a percentage of total debt in the 2003 period at
lower spreads to LIBOR than the credit facilities utilized in the 2002 period
and the decrease in swap levels and rates.
The Company also utilizes the outstanding Convertible Trust Preferred Securities
to finance its interest-earning assets. During the six months ended June 30,
2003 and 2002, the Company recognized $4,726,000 and $4,517,000, respectively,
of net expenses related to its outstanding Convertible Trust Preferred
Securities. This amount consisted of distributions to the holders totaling
$4,487,000 and $8,012,000, respectively, and amortization of discount and
origination costs totaling $239,000 and $399,000, respectively, during the six
months ended June 30, 2003 and 2002. In the 2002 period, this total was
partially offset by a tax benefit of $3,894,000. Due to the Company's election
to be taxed as a REIT, there is no tax benefit for the expense in the 2003
period. The decrease in the distribution amount and amortization of discount and
origination costs resulted from the elimination of the distributions and
discount and fees on the Non-Convertible Amount, which was repaid on September
30, 2002.
During the three months ended June 30, 2003 and 2002, the Company recognized
$2,363,000 and $2,364,000, respectively, of net expenses related to its
outstanding Convertible Trust Preferred Securities. This amount consisted of
distributions to the holders totaling $2,243,000 and $4,203,000, respectively,
and amortization of discount and origination costs totaling $120,000 and
$200,000, respectively, during the three months ended June 30, 2003 and 2002. In
the 2002 period, this total was partially offset by a tax benefit of $2,039,000.
Due to the Company's election to be taxed as a REIT, there is no tax benefit for
the expense in the 2003 period. The decrease in the distribution amount and
amortization of discount and origination costs resulted from the elimination of
the distributions and discount and fees on the Non-Convertible Amount, which was
repaid on September 30, 2002.
Other revenues decreased $997,000 from $5,161,000 for the six months ended June
30, 2002 to $4,164,000 for the six months ended June 30, 2003. During the six
months ended June 30, 2002, the Company sold investments and reduced the
maturity of its fair value hedge, which resulted in a gain of $1,651,000. On
January 1, 2003, the general partners of Fund II (affiliates of the Company and
Citigroup) voluntarily reduced by 50% the management fees charged to Fund II for
the remainder of the investment period due to a lower than expected level of
deployment of the Fund's capital. This, along with the reduction in income when
the Company began charging management fees on invested capital for Fund II,
partially offset by the management fees charged to Fund III, reduced the
Company's
-15-
management and advisory fees from Funds by $2.3 million. In 2002, Fund I
increased its allowance for possible credit losses by establishing a specific
reserve for the non-performing loan it was carrying. The loss from equity
investments in Funds during the six months ended June 30, 2002 is primarily due
to this additional expense. Other revenues decreased $3,277,000 from $5,261,000
for the three months ended June 30, 2002 to $1,984,000 for the three months
ended June 30, 2003. During the quarter ended June 30, 2003, the Company began
charging management fees on invested capital rather than committed capital for
Fund II, which reduced income by $1.0 million from the same quarter of the prior
year. During the three months ended June 30, 2002, investment sales and the
reduction in the maturity of the fair value hedge resulted in a $1,651,000 gain
as discussed above further adding to the decrease from 2002 to 2003.
General and administrative expenses decreased $715,000 to $6,693,000 for the six
months ended June 30, 2003 from $7,408,000 for the six months ended June 30,
2002 and decreased $490,000 to $2,989,000 for the three months ended June 30,
2003 from $3,479,000 for three months ended June 30, 2002. The decrease in
general and administrative expenses was primarily due to reduced employee
compensation. The Company employed an average of 25 employees during the six
months ended June 30, 2003 and 27 during the six months ended June 30, 2002. The
Company had 25 full-time employees and one part-time employee at June 30, 2003.
During the six months ended June 30, 2002, the Company recaptured $2,963,000 of
its previously established allowance for possible credit losses. The Company
deemed this recapture necessary due to the substantial reduction in the loan
portfolio and a general reduction in the default risk of the loans remaining
based upon current conditions. At June 30, 2003, the Company believes that the
reserve is adequate based on the existing loans in the balance sheet portfolio.
The Company intends to make an election to be taxed as a REIT under Section
856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax
year ending December 31, 2003. As a REIT, the Company generally is not subject
to federal income tax. To maintain qualification as a REIT, the Company must
distribute at least 90% of its REIT taxable income to its stockholders and meet
certain other requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax on its taxable
income at regular corporate rates. The Company may also be subject to certain
state and local taxes on its income and property. Under certain circumstances,
federal income and excise taxes may be due on its undistributed taxable income.
At June 30, 2003, the Company was in compliance with all REIT requirements and
as such, has not provided for any income tax expense in 2003.
Liquidity and Capital Resources
- -------------------------------
At June 30, 2003, the Company had $5,583,000 in cash. The primary sources of
liquidity for the Company for 2003 will be cash on hand, cash generated from
operations, principal and interest payments received on loans and investments
and additional borrowings under the Company's credit facilities. The Company
believes these sources of capital are adequate to meet future cash requirements.
The Company expects that during 2003, it will use a significant amount of its
available capital resources to satisfy capital contributions required in
connection with future funds and originate loans and investments for its balance
sheet. The Company intends to continue to employ leverage on its existing
balance sheet assets to enhance its return on equity.
The Company experienced a net decrease in cash of $4,603,000 for the six months
ended June 30, 2003, compared to the net increase of $4,041,000 for the six
months ended June 30, 2002. Cash provided by operating activities during the six
months ended June 30, 2003 was $2,516,000, compared to $5,786,000 provided
during the same period of 2002. For the six months ended June 30, 2003, cash
provided by investing activities was $5,509,000, compared to $229,850,000 during
the same period in 2002 as the Company experienced lower levels of loan and
investment repayments in the 2003 period than the 2002 period. The Company
utilized the cash received on loan repayments in both years to reduce borrowings
under its credit facilities and term redeemable securities contract that
accounted for the majority of the change in the net cash used in financing
activities from $231,595,000 in 2002 to the $12,628,000 in the same period of
2003.
On January 31, 2003, the Company purchased Citigroup's 75% interest in Fund I
for a purchase price of approximately $38.4 million (including the assumption of
liabilities), equal to the book value of the fund. In conjunction with the
purchase on January 31, 2003, the Company began consolidating the balance sheet
and operations of Fund I in its consolidated financial statements including
$50.0 million of loans receivable and $24.1 million of borrowings under a credit
facility.
-16-
In addition to those acquired with the purchase of Citigroup's interest in Fund
I, the Company has originated or purchased three new loans since December 31,
2002 totaling $36.5 million and has no future commitments under any existing
loans. The Company has received full satisfaction of two loans totaling $27.7
million and partial repayments on seven loans totaling $2.7 million in 2003. At
June 30, 2003, the Company had outstanding loans totaling approximately $177.5
million (net of reserves) and held CMBS and other available-for-sale securities
of $152.6 million and $32.7 million, respectively.
At June 30, 2003, after assumption of the debt in conjunction with the purchase
of Citigroup's interests in Fund I, the Company was party to two credit
facilities with a commercial lender that provides for a total of $150 million of
credit. On June 27, 2003, the Company formally combined under one facility the
outstanding borrowings under the two facilities and extended the maturity of the
$150 million credit facility for two additional years to July 16, 2005 on
substantially the same terms. At June 30, 2003, the Company had outstanding
borrowings under the credit facility of $29,000,000, and had unused potential
credit of $121,000,000, an amount of available credit that provides the Company
with adequate liquidity for its short-term needs. The credit facility provides
for advances to fund lender-approved loans and investments made by the Company.
Borrowings under the credit facility are secured by pledges of the assets
originated or acquired by the Company with advances under the credit facility.
Borrowings under the credit facility bear interest at specified rates over
LIBOR, which rates may fluctuate, based upon the credit quality of the pledged
assets. Future repayments and redrawdowns of amounts previously subject to the
drawdown fee will not require the Company to pay any additional fees. The credit
facility provides for margin calls on asset-specific borrowings in the event of
asset quality and/or market value deterioration as determined under the credit
facility. The credit facility contains customary representations and warranties,
covenants and conditions and events of default.
On June 30, 2003, the Company was party to a $75 million term redeemable
securities contract. The term redeemable securities contract has a two-year
term, maturing in February 2004, with an automatic one-year amortizing extension
option, if not otherwise extended. The Company has borrowings against the term
redeemable securities contract of $20,000,000 at June 30, 2003.
In May 2003, the Company entered into a new master repurchase agreement with a
securities dealer that provides for the Company to finance up to $50,000,000 by
selling specific assets to the counterparty. As of June 30, 2003, the Company
has utilized the master repurchase agreement to finance the purchase of three
loans during the second quarter of 2003.
At June 30, 2003, the Company also has outstanding repurchase obligations of
$150,900,000. The average interest rate in effect for the repurchase obligations
outstanding at June 30, 2003 was 2.58%. The Company expects to enter into new
repurchase obligations at their maturity.
The Company is party to two interest rate cash flow swaps with a total notional
value of $109 million. These cash flow interest rate swaps effectively convert
floating rate debt to fixed rate debt, which is utilized to finance assets which
earn interest at fixed rates. At June 30, 2003, the market value of the swaps is
a liability of $5,809,000 which is recorded as interest rate hedge liabilities
and accumulated other comprehensive loss on the balance sheet of the Company.
In March 2003, the Company repurchased 66,427 shares of Class A Common stock
under the open market share repurchase program from the Company's former chief
financial officer at a price of $14.25 per share. After the repurchase, the
Company has 666,339 shares remaining authorized for repurchase under the
program.
In 2001 and 2002, in connection with the organization of Fund I and Fund II, the
Company issued to affiliates of Citigroup warrants to purchase 2,842,822 shares
of Class A Common Stock. At December 31, 2002, all such warrants had a $15.00
per share exercise price, were exercisable and were to expire on March 8, 2005.
In January 2003, the Company purchased all of the warrants outstanding from the
affiliates of Citigroup for $2.1 million.
On June 18, 2003, the Company issued 1,075,000 shares of Class A Common Stock in
a private placement made to thirty-two separate investors, led by certain
institutional clients advised by Lend Lease Rosen Real Estate Securities, LLC.
Net proceeds to the Company were $17.1 million after payment of offering costs
and fees to Conifer Securities, LLC, placement agent for the Company.
-17-
Note on Forward-Looking Statements
- ----------------------------------
Except for historical information contained herein, this quarterly report on
Form 10-Q contains forward-looking statements within the meaning of the Section
21E of the Securities and Exchange Act of 1934, as amended, which involve
certain risks and uncertainties. Forward-looking statements are included with
respect to, among other things, the Company's current business plan, business
and investment strategy and portfolio management. These forward-looking
statements are identified by their use of such terms and phrases as "intends,"
"intend," "intended," "goal," "estimate," "estimates," "expects," "expect,"
"expected," "project," "projected," "projections," "plans," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes" and "scheduled" and similar expressions. The Company's actual results
or outcomes may differ materially from those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date the statement was made. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Important factors that the Company believes might cause actual results to differ
from any results expressed or implied by these forward-looking statements are
discussed in the cautionary statements contained in Exhibit 99.1 to this Form
10-Q (filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K, filed
on March 28, 2003 and incorporated therein by reference), which are incorporated
herein by reference. In assessing forward-looking statements contained herein,
readers are urged to read carefully all cautionary statements contained in this
Form 10-Q
-18-
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The principal objective of the Company's asset/liability management activities
is to maximize net interest income, while minimizing levels of interest rate
risk. Net interest income and interest expense are subject to the risk of
interest rate fluctuations. To mitigate the impact of fluctuations in interest
rates, the Company uses interest rate swaps to effectively convert fixed rate
assets to variable rate assets for proper matching with variable rate
liabilities and variable rate liabilities to fixed rate liabilities for proper
matching with fixed rate assets. Each derivative used as a hedge is matched with
an asset or liability with which it has a high correlation. The swap agreements
are generally held-to-maturity and the Company does not use derivative financial
instruments for trading purposes. The Company uses interest rate swaps to
effectively convert variable rate debt to fixed rate debt for the financed
portion of fixed rate assets. The differential to be paid or received on these
agreements is recognized as an adjustment to the interest expense related to
debt and is recognized on the accrual basis.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates at June 30, 2003.
For financial assets and debt obligations, the table presents cash flows to the
expected maturity and weighted average interest rates based upon the current
carrying values. For interest rate swaps, the table presents notional amounts
and weighted average fixed pay and variable receive interest rates by
contractual maturity dates. Notional amounts are used to calculate the
contractual cash flows to be exchanged under the contract. Weighted average
variable rates are based on rates in effect as of the reporting date.
Expected Maturity Dates
-------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Assets: (dollars in thousands)
Available-for-sale securities
Fixed Rate $ 10,316 $ 14,695 $ 4,637 $ 1,260 $ 343 $ 127 $31,378 $ 32,668
Average interest rate 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76%
CMBS
Fixed Rate -- -- -- $ 7,811 $ 135 $201,024 $208,970 $152,588
Average interest rate -- -- -- 9.62% 7.98% 11.96% 11.87%
Loans receivable
Fixed Rate -- -- -- -- $ 39,254 $ 49,149 $ 88,403 $105,004
Average interest rate -- -- -- -- 11.33% 11.99% 11.70%
Variable Rate $ 37,936 $ 6,923 $ 904 $ 915 $ 14,452 $ 27,787 $88,917 $ 86,978
Average interest rate 8.89% 3.18% 6.73% 6.73% 8.92% 6.70% 7.72%
Liabilities:
Credit Facilities
Variable Rate -- -- $ 29,000 -- -- -- $ 29,000 $ 29,000
Average interest rate -- -- 6.16% -- -- -- 6.16%
Term redeemable securities
contract
Variable Rate -- -- $ 20,000 -- -- -- $ 20,000 $ 20,000
Average interest rate -- -- 5.07% -- -- -- 5.07%
Repurchase obligations
Variable Rate $ 31,687 $119,213 -- -- -- -- $150,900 $150,900
Average interest rate 1.11% 2.98% -- -- -- -- 2.58%
Convertible Trust
Preferred Securities
Fixed Rate -- -- -- $89,742 -- -- $89,742 $89,227
Average interest rate -- -- -- 10.00% -- -- 10.00%
Interest rate swaps
Notional amounts -- -- -- -- -- $ 109,000 $109,000 $ (5,809)
Average fixed pay rate -- -- -- -- -- 4.24% 4.24%
Average variable
receive rate -- -- -- -- -- 1.32% 1.32%
-19-
ITEM 4. Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Quarterly Report on Form 10-Q was made under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and Chief Financial Officer. Based upon this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that as of the end of the period covered by this Quarterly Report
on Form 10-Q the Company's disclosure controls and procedures (a) are effective
to ensure that information required to be disclosed by the Company in reports
filed or submitted under the Exchange Act is timely recorded, processed,
summarized and reported and (b) include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in reports filed or submitted under the Exchange Act is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
There was no change in our "internal control over financial reporting" (as
defined in Rule 13a-15(f) under the Exchange Act) that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
-20-
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Changes in Securities
On June 18, 2003, the Company issued 1,075,000 shares of Class A
Common Stock in a private placement made to thirty-two separate
investors, led by certain institutional clients advised by Lend
Lease Rosen Real Estate Securities, LLC. The Company raised gross
proceeds of $17.6 million and net proceeds of $17.1 million after
payment of $52,000 offering expenses and $441,000 fees to Conifer
Securities, LLC, placement agent for the Company.
The Company issued the Class A common Stock to the investors in
reliance on the exemptions from registration under the Securities
Act of 1933, as amended, (the "Securities Act") contained in
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder. The Company believes the issuance of the Class A
Common Stock qualifies as a transaction by an issuer not involving
a public offering within the meaning of Section 4(2) of Securities
Act and meets the requirements of a safe harbor from registration
contained in Regulation D, based on the manner of offering to
"accredited investors" (as defined in Rule 501 of Regulation D)
without general solicitation) and the investors' financial status,
investment experience and investment intent, as represented to the
Company.
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
(a). The Company held a special meeting of stockholders on April 2,
2003 and its 2003 annual meeting of stockholders on June 5,
2003.
(b) and (c). Stockholders acted on the following proposals:
At the special meeting of stockholders on April 2, 2003 considered and
voted upon:
1. A proposal to amend and restate the Company's charter to
make the amendments determined necessary in connection with
the Company's election to be taxed as a real estate investment
trust and to simplify the Company's capital structure by
eliminating from the Company's charter the authorized but
unissued class B common stock ("Proposal 1"); and
2. To consider and vote upon a proposal to further amend the
Company's charter to effect a one (1) for three (3) reverse
stock split and a corresponding reduction in our stated
capital ("Proposal 2").
The following table sets forth the number of votes in favor, the number
of votes opposed, the number of abstentions (or votes withheld in the case of
the election of directors) and broker non-votes with respect to each of the
foregoing proposals.
Proposal Votes in Favor Votes Opposed Abstentions Broker Non-Votes
Proposal 1 13,756,364 11,935 10,065 --
Proposal 2 14,629,930 456,674 11,869 --
-21-
At the 2003 annual meeting of stockholders held on June 5, 2003
considered and voted upon:
1. A proposal to elect twelve directors (identified in the table
below) to serve until the next annual meeting of stockholders or
until such directors' successors are elected and shall have been
duly qualified ("Proposal 1"); and
2. A proposal to ratify the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending
December 31, 2002 ("Proposal 2").
The following table sets forth the number of votes in favor, the number
of votes opposed, the number of abstentions (or votes withheld in the case of
the election of directors) and broker non-votes with respect to each of the
foregoing proposals.
Proposal Votes in Favor Votes Opposed Abstentions Broker Non-Votes
(Withheld)
Proposal 1
Samuel Zell 5,082,708 -- 5,013 --
Jeffrey A. Altman 5,060,527 -- 27,194 --
Thomas E. Dobrowski 5,060,527 -- 27,194 --
Martin L. Edelman 5,060,491 -- 27,230 --
Gary R. Garrabrant 5,082,717 -- 5,004 --
Craig M. Hatkoff 5,081,979 -- 5,742 --
John R. Klopp 5,060,414 -- 27,307 --
Henry N. Nassau 5,060,527 -- 27,194 --
Sheli Z. Rosenberg 5,060,521 -- 27,200 --
Steven Roth 5,082,717 -- 5,004 --
Lynne B. Sagalyn 5,060,497 -- 27,224 --
Proposal 2 4,993,723 90,539 3,459 --
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statements regarding Computation of Earnings per Share (Data
required by Statement of Financial Accounting Standard No. 128,
Earnings per Share, is provided in Note 11 to the consolidated
financial statements contained in this report).
31.1 Certification of John R. Klopp, Chief Executive Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Brian H. Oswald, Chief Financial Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Risk Factors (filed as Exhibit 99.1 to the Company's Annual
Report on Form 10-K, filed on March 28, 2003 and incorporated
herein by reference).
-22-
(b) Reports on Form 8-K
During the fiscal quarter ended June 30, 2003, the Company filed the
following Current Reports on Form 8-K:
(1) Current Report on Form 8-K, dated April 2, 2003, as filed with
the Commission on April 2, 2003, reporting under Item 5 "Other
Events" the amendment and restatement of the Company's
charter.
(2) Current Report on Form 8-K, dated May 16, 2003, as filed with
the Commission on May 16, 2003, reporting under Item 9
"Regulation FD Disclosure" the Company's issuance of a press
release reporting the Company's financial results for its
fiscal quarter ended March 31, 2003.
-23-
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL TRUST, INC.
August 14, 2003 /s/ John R. Klopp
- --------------- -----------------
Date John R. Klopp
Chief Executive Officer
/s/ Brian H. Oswald
-------------------
Brian H. Oswald
Chief Financial Officer