To be filed with the Securities and Exchange Commission on October 31, 2005
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 September 30, 2005
------------------
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
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(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
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). 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, as of October 31, 2005 was 15,158,447.
CAPITAL TRUST, INC.
INDEX
Part I. Financial Information
Item 1: Financial Statements 1
Consolidated Balance Sheets - September 30, 2005 (unaudited) and
December 31, 2004 (audited) 1
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 2005 and 2004 (unaudited) 2
Consolidated Statements of Changes in Shareholders' Equity - Nine Months
Ended September 30, 2005 and 2004 (unaudited) 3
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2005 and 2004 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3: Quantitative and Qualitative Disclosures about Market Risk 24
Item 4: Controls and Procedures 25
Part II. Other Information
Item 1: Legal Proceedings 26
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3: Defaults Upon Senior Securities 26
Item 4: Submission of Matters to a Vote of Security Holders 26
Item 5: Other Information 26
Item 6: Exhibits 27
Signatures 28
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(in thousands)
September 30, December 31,
2005 2004
-------------------- -------------------
(unaudited) (audited)
Assets
Cash and cash equivalents $ 14,412 $ 24,583
Restricted cash 2,089 611
Commercial mortgage-backed securities 454,260 247,765
Loans receivable 815,225 556,164
Total return swap 4,000 --
Equity investment in CT Mezzanine Partners II LP ("Fund II"), CT MP II LLC
("Fund II GP") and CT Mezzanine Partners III, Inc. ("Fund III") (together
"Funds") 16,503 21,376
Deposits and other receivables 3 10,282
Accrued interest receivable 7,983 4,029
Interest rate hedge assets 1,070 194
Deferred income taxes 3,734 5,623
Prepaid and other assets 13,476 7,139
-------------------- -------------------
Total assets $ 1,332,755 $ 877,766
==================== ===================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 17,818 $ 17,388
Credit facility -- 65,176
Repurchase obligations 157,774 225,091
Collateralized debt obligations ("CDOs") 823,817 252,778
Deferred origination fees and other revenue 739 836
-------------------- -------------------
Total liabilities 1,000,148 561,269
-------------------- -------------------
Shareholders' equity:
Class A common stock, $0.01 par value, 100,000 shares authorized, 14,844 and
14,769 shares issued and outstanding at September 30, 2005 and
December 31, 2004, respectively ("class A common stock") 148 148
Restricted class A common stock, $0.01 par value, 314 and 283 shares issued and
outstanding at September 30, 2005 and December 31, 2004, respectively
("restricted class A common stock" and together with class A common stock,
"common stock") 3 3
Additional paid-in capital 324,937 321,937
Accumulated other comprehensive gain 14,095 3,815
Accumulated deficit (6,576) (9,406)
-------------------- -------------------
Total shareholders' equity 332,607 316,497
-------------------- -------------------
Total liabilities and shareholders' equity $ 1,332,755 $ 877,766
==================== ===================
See accompanying notes to unaudited consolidated financial statements.
- 1 -
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2005 and 2004
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Income from loans and other investments:
Interest and related income $ 22,751 $ 12,979 $ 57,359 $ 31,169
Less: Interest and related expenses on secured debt 10,325 3,758 23,709 8,848
Less: Interest and related expenses on step up
convertible junior subordinated debentures -- 1,552 -- 6,417
------------ ------------ ------------ ------------
Income from loans and other investments, net 12,426 7,669 33,650 15,904
------------ ------------ ------------ ------------
Other revenues:
Management and advisory fees from Funds 1,517 1,910 12,144 6,025
Income/(loss) from equity investments in Funds 467 301 (835) 1,126
Gain on sales of investments -- -- -- 300
Other interest income 137 19 374 35
------------ ------------ ------------ ------------
Total other revenues 2,121 2,230 11,683 7,486
------------ ------------ ------------ ------------
Other expenses:
General and administrative 5,316 3,996 16,384 10,127
Depreciation and amortization 278 274 837 822
------------ ------------ ------------ ------------
Total other expenses 5,594 4,270 17,221 10,949
------------ ------------ ------------ ------------
Income before income taxes 8,953 5,629 28,112 12,441
Provision for income taxes (846) (229) 315 --
------------ ------------ ------------ ------------
Net income $ 9,799 $ 5,858 $ 27,797 $ 12,441
============ ============ ============ ============
Per share information: Net earnings per share of common stock:
Basic $ 0.65 $ 0.51 $ 1.84 $ 1.46
============ ============ ============ ============
Diluted $ 0.64 $ 0.50 $ 1.81 $ 1.43
============ ============ ============ ============
Weighted average shares of common stock outstanding:
Basic 15,125,443 11,448,503 15,110,227 8,492,967
============ ============ ============ ============
Diluted 15,358,943 11,659,193 15,339,533 8,686,079
============ ============ ============ ============
Dividends declared per share of common stock $ 0.55 $ 0.45 $ 1.65 $ 1.35
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
- 2 -
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 2005 and 2004
(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, 2004 $ 65 $ -- $ 141,402 $ (247) $ (33,880)
Net income $ 12,441 -- -- -- -- --
Unrealized gain on derivative financial
instruments (902) -- -- -- -- (902)
Unrealized gain on available-for-sale securities 35,778 -- -- -- -- 35,778
Implementation of SFAS No.123 -- -- -- (247) 247 --
Issuance of restricted class A common stock -- -- 3 (3) -- --
Sale of shares of class A common stock under
stock option agreement -- 1 -- 784 -- --
Vesting of restricted class A common stock to
unrestricted class A common stock -- -- -- -- -- --
Conversion of class A common stock units to
class A common stock -- -- -- 410 -- --
Conversion of step up convertible junior
subordinated debentures to class A common
stock -- 43 -- 90,048 -- --
Restricted class A common stock earned -- -- -- 814 -- --
Stock options expensed under SFAS No. 123 -- -- -- 51 -- --
Shares of class A common stock issued in public
offering -- 19 -- 41,603 -- --
Shares of class A common stock issued in direct
public offering -- 16 -- 37,963 -- --
Shares of class A common stock issued upon
exercise of warrants -- 4 -- 8,537 -- --
Dividends declared on common stock -- -- -- -- -- --
---------------- -----------------------------------------------------------------
Balance at September 30, 2004 $ 47,317 $ 148 $ 3 $ 321,362 $ -- $ 996
================ =================================================================
Balance at January 1, 2005 $ 148 $ 3 $ 321,937 $ -- $ 3,815
Net income $ 27,797 -- -- -- -- --
Unrealized loss on derivative financial
instruments 876 -- -- -- -- 876
Unrealized gain on available-for-sale
securities, net of amortization 8,393 -- -- -- -- 8,393
Sale of shares of common stock under
stock option agreements -- -- -- 1,121 -- --
Deferred gain on settlement of swap, net of
amortization -- -- -- -- -- 1,011
Vesting of restricted class A common stock
to unrestricted class A common stock -- -- -- -- -- --
Restricted class A common stock earned -- -- -- 1,936 -- --
Restricted class A common stock forfeited upon
resignation by holder -- -- -- (57) -- --
Dividends declared on common stock -- -- -- -- -- --
---------------- -----------------------------------------------------------------
Balance at September 30, 2005 $ 37,066 $ 148 $ 3 $ 324,937 $ -- $ 14,095
================ =================================================================
Accumulated
Deficit Total
-----------------------------
Balance at January 1, 2004 $ (11,323) $ 96,017
Net income $ 12,441 12,441
Unrealized gain on derivative financial
instruments -- (902)
Unrealized gain on available-for-sale securities -- 35,778
Implementation of SFAS No.123 -- --
Issuance of restricted class A common stock -- --
Sale of shares of class A common stock under
stock option agreement -- 785
Vesting of restricted class A common stock to
unrestricted class A common stock -- --
Conversion of class A common stock units to
class A common stock -- 410
Conversion of step up convertible junior
subordinated debentures to class A common
stock -- 90,091
Restricted class A common stock earned -- 814
Stock options expensed under SFAS No. 123 -- 51
Shares of class A common stock issued in public
offering -- 41,622
Shares of class A common stock issued in direct
public offering -- 37,979
Shares of class A common stock issued upon
exercise of warrants -- 8,541
Dividends declared on common stock (12,533) (12,533)
-----------------------------
Balance at September 30, 2004 $ (11,415) $ 311,094
=============================
Balance at January 1, 2005 $ (9,406) $ 316,497
Net income $ 27,797 27,797
Unrealized loss on derivative financial
instruments -- 876
Unrealized gain on available-for-sale
securities, net of amortization -- 8,393
Sale of shares of common stock under
stock option agreements -- 1,121
Deferred gain on settlement of swap, net of
amortization -- 1,011
Vesting of restricted class A common stock
to unrestricted class A common stock -- --
Restricted class A common stock earned -- 1,936
Restricted class A common stock forfeited upon
resignation by holder -- (57)
Dividends declared on common stock (24,967) (24,967)
-----------------------------
Balance at September 30, 2005 $ (6,576) $ 332,607
=============================
See accompanying notes to unaudited consolidated financial statements.
- 3 -
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months ended September 30, 2005 and 2004
(in thousands)
(unaudited)
2005 2004
---------------- -----------------
Cash flows from operating activities:
Net income $ 27,797 $ 12,441
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income taxes 1,889 (1,830)
Depreciation and amortization 837 822
Loss/(income) from equity investments in Funds 835 (1,126)
Stock based compensation 1,899 814
Gain on sale of investments -- (300)
Amortization of premiums and accretion of discounts on
loans and investments, net (2,158) (1,106)
Accretion of discounts and fees on convertible trust preferred
securities or convertible step up junior subordinated debentures, net -- 276
Stock option expense -- 51
Changes in assets and liabilities, net:
Deposits and other receivables 279 123
Accrued interest receivable (3,954) (437)
Prepaid and other assets 886 1,660
Deferred origination fees and other revenue (97) (1,761)
Accounts payable and accrued expenses (354) 755
---------------- -----------------
Net cash provided by operating activities 27,859 10,382
---------------- -----------------
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities (205,565) (59,551)
Principal collections on and proceeds from sale of commercial
mortgage-backed securities 8,787 5,012
Principal collections and proceeds from sales on available-for-sale -- 19,561
securities
Origination and purchase of loans receivable (510,015) (366,988)
Principal collections and proceeds from sale of loans receivable 261,787 60,264
Purchase of total return swap (4,000) --
Equity investments in Funds (4,660) (3,500)
Return of capital from Funds 7,950 6,554
Increase in restricted cash (1,478) (8,009)
Purchases of equipment and leasehold improvements (23) (102)
---------------- -----------------
Net cash used in investing activities (447,217) (346,759)
---------------- -----------------
Cash flows from financing activities:
Proceeds from repurchase obligations 436,393 122,422
Repayment of repurchase obligations (503,710) (91,283)
Proceeds from credit facilities 104,704 169,676
Repayment of credit facilities (169,880) (179,544)
Repayment of term redeemable securities contract -- (11,651)
Proceeds from issuance of CDOs 571,039 252,778
Settlement of interest rate hedges 1,410 --
Payment of deferred financing costs (7,734) (6,060)
Dividends paid on class A common stock (24,156) (9,663)
Sale of shares of class A common stock under stock option agreements 1,121 785
Proceeds from sale of shares of class A common stock -- 79,601
Proceeds from exercise of warrants for shares of class A common stock -- 8,541
---------------- -----------------
Net cash provided by financing activities 409,187 335,602
---------------- -----------------
Net decrease in cash and cash equivalents (10,171) (775)
Cash and cash equivalents at beginning of year 24,583 8,738
---------------- -----------------
Cash and cash equivalents at end of period $ 14,412 $ 7,963
================ =================
See accompanying notes to unaudited consolidated financial statements
- 4-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
1. Presentation of Financial Information
References herein to "we," "us" or "our" refer to Capital Trust, Inc. and its
subsidiaries unless the context specifically requires otherwise.
We are a fully integrated, self managed finance and investment management
company that specializes in credit-sensitive structured financial products. To
date, our investment activities have focused primarily on the U.S. commercial
real estate subordinate debt markets. We execute our business both as a balance
sheet investor and as an investment manager through our CT Mezzanine Partners
family of funds. We conduct our operations as a real estate investment trust, or
REIT, for federal income tax purposes. We are headquartered in New York City.
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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
In our opinion, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the three and nine months ended September 30, 2005 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2005.
The accompanying unaudited consolidated interim financial statements include our
accounts, our wholly-owned subsidiaries and our interests in variable interest
entities in which we are the primary beneficiary. All significant intercompany
balances and transactions have been eliminated in consolidation. Our accounting
and reporting policies 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.
From time to time we purchase commercial mortgage backed securities, or CMBS,
and other investments in which we have a level of control over the issuing
entity; we refer to these investments as Controlling Class Investments. The
presentation of Controlling Class Investments in our financial statements is
governed in part by Financial Accounting Standards Board ("FASB") Interpretation
No. 46 ("FIN 46"). FIN 46 could require that certain Controlling Class
Investments be presented on a consolidated basis. Based upon the specific
circumstances of certain of our CMBS investments that are Controlling Class
Investments and our interpretation of FIN 46, specifically the exemption for
qualifying special purpose entities as defined under FASB Statements of
Financial Accounting Standard No. 140 ("FAS 140"), we have concluded that the
entities that have issued the Controlling Class Investments should not be
presented on a consolidated basis. We are aware that FAS 140 is currently under
review by standard setters and that as a result of this review our current
interpretation of FIN 46 and FAS 140 may change.
On August 4, 2005, pursuant to the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 115, we made a decision to change the
accounting classification of our CMBS investments from available for sale to
held to maturity. In accordance with this decision, CMBS with an amortized cost
of $410,047,000 and a market value of $422,259,000 were reclassified from
available for sale to held to maturity. As was the case prior to this
reclassification, the difference between amortized cost and expected recovery on
these investments will continue to be accreted through the income statement
using the level yield method accretion schedules in place prior to the
reclassification. The difference between amortized cost and market value as of
the reclassification date, $12,212,000, was segregated within accumulated other
comprehensive income and will be amortized over the remaining life of the
securities using the level yield method without impact to the income statement.
We made the decision to reclassify these investments based upon our intent and
ability to hold these investments to maturity. Going forward, new originations
of held to maturity investments will be stated at cost plus the amortization of
any premiums or discounts and any premiums or discounts will be amortized
through the income statement using the level yield method. Other than in the
instance of impairment, these held to maturity investments will be shown in our
financial statements at their adjusted values pursuant to the methodology
described above.
- 5 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
2. Application of New Accounting Policy
During the fourth quarter of 2004, we elected to adopt the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123
using the modified prospective method provided in Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". Under the modified prospective method, we recognized
stock-based employee compensation costs based upon the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 effective
January 1, 2004 and have restated previously reported quarterly results to
reflect the adoption. Compensation expense on awards with graded vesting is
recognized on the accelerated attribution method under Financial Accounting
Standards Board Interpretation No. 28.
3. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
4. Restricted Cash
Restricted cash of $2,089,000 at September 30, 2005 is on deposit with the
trustee for our reinvesting CDOs and will be used to purchase replacement
collateral for the CDOs.
5. Commercial Mortgage-Backed Securities
During the nine months ended September 30, 2005, we made eighteen investments in
commercial mortgage-backed securities, or CMBS, with a total purchase price of
$205,404,000 ($229,867,000 face value). Fourteen investments with a total
purchase price of $165,460,000 ($189,918,000 face value) earn interest at fixed
rates with a weighted average stated coupon of 6.26% and four investments with a
total purchase price of $39,944,000 ($39,948,000 face value) earn interest at
variable rates with a weighted average stated coupon of LIBOR plus 1.91% (5.77%
at September 30, 2005). In addition, one CMBS investment with a face value of
$1,750,000 was repaid in full during the period.
At September 30, 2005, we had thirty six investments in twenty five separate
CMBS issues with an aggregate face value of $493,127,000. CMBS with a face value
of $98,924,000 earn interest at variable rates and have coupons averaging LIBOR
plus 2.64% (6.50% at September 30, 2005). The remaining CMBS, $394,204,000 face
value, earn interest at fixed rates and have coupons averaging 6.98%. In the
aggregate, we purchased the CMBS at total discounts to face value of $69,431,000
and expected to recover, net of anticipated losses, $42,631,000 of that amount
which we amortize over the lives of the securities. As of September 30, 2005,
the remaining discount to be amortized into income over the remaining lives of
the securities was $18,810,000. At September 30, 2005, the weighted average
coupon of the entire CMBS portfolio was 6.88%. As of September 30, 2005, the
securities were carried at market value of $455,500,000, reflecting a
$12,198,000 net unrealized gain to the amortized cost of the portfolio and other
than temporary write-downs taken in 2004 on two securities of $5,275,000.
On August 4, 2005, pursuant to the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 115, we made a decision to change the
accounting classification of our CMBS investments from available for sale to
held to maturity. In accordance with this decision, CMBS with an amortized cost
of $410,047,000 and a market value of $422,259,000 were reclassified from
available for sale to held to maturity. As was the case prior to this
reclassification, the difference between amortized cost and expected recovery on
these investments will continue to be accreted through the income statement
using the level yield method accretion schedules in place prior to the
reclassification. The difference between amortized cost and market value as of
the reclassification date, $12,212,000, was segregated within accumulated other
comprehensive income and will be amortized over the remaining life of the
securities using the level yield method without impact to the income statement.
We made the decision to reclassify these investments based upon our intent and
ability to hold these investments to maturity. Going forward, new originations
of held to maturity investments will be stated at cost plus the amortization of
any
- 6 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
premiums or discounts and any premiums or discounts will be amortized through
the income statement using the level yield method. Other than in the instance of
impairment, these held to maturity investments will be shown in our financial
statements at their adjusted values pursuant to the methodology described above.
6. Loans Receivable
At September 30, 2005 and December 31, 2004, our loans receivable consisted of
the following (in thousands):
September 30, December 31,
2005 2004
------------------- -------------------
First mortgage loans $ 3,038 $ 3,038
Property mezzanine loans 260,487 159,506
B Notes 551,700 393,620
------------------- -------------------
Total loans $ 815,225 $ 556,164
=================== ===================
One first mortgage loan with an original principal balance of $8,000,000 matured
on July 15, 2001 but 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. Since the write-down, cash collections
of $962,000 have reduced the carrying value of the loan to $3,038,000. In
accordance with our policy for revenue recognition, income recognition has been
suspended on this loan and potential interest income of $791,000 has not been
recorded for the nine months ended September 30, 2005. All other loans are
performing in accordance with the terms of the loan agreements.
During the nine months ended September 30, 2005, we originated seven property
mezzanine loans for $169,570,000 (of which $144,538,000 was funded as of
September 30, 2005) and 25 B Notes for $375,477,000. In addition, we received
partial repayments on five property mezzanine loans and 27 B Notes totaling
$45,533,000 and three property mezzanine loans and twenty three B Notes totaling
$215,420,000 were satisfied and repaid. We have outstanding unfunded loan
commitments at September 30, 2005 of $25,033,000.
At September 30, 2005, the weighted average interest rates for our performing
loans receivable were as follows:
Property mezzanine loans 9.01%
B Notes 7.38%
Total Loans 7.90%
At September 30, 2005, $681,793,000 (84%) of the aforementioned performing loans
bear interest at floating rates ranging from LIBOR plus 1.60% to LIBOR plus
7.29%. The remaining $130,395,000 (16%) of loans bear interest at fixed rates
ranging from 7.00% to 11.67%.
7. Total Return Swap
During the nine months ended September 30, 2005, we entered into one total
return swap agreement. Under the terms of the agreement, we have posted
$4,000,000 of cash collateral as security for a $20,000,000 synthetic interest
in an underlying referenced loan that is secured by shares of a publicly traded
REIT. We receive interest at LIBOR flat on the $4,000,000 cash collateral
balance and LIBOR plus 3.75% on the $20,000,000 interest in the referenced loan
and pay LIBOR plus 1.00% on the $20,000,000 referenced loan. At September 30,
2005, we are receiving LIBOR plus 13.75% on the $4,000,000 cash collateral
balance (17.61% at September 30, 2005). We collected an origination fee with the
execution of the agreement which adds an additional 2.95% to the return. If the
price of the stock which serves as collateral for the referenced loan falls
below a specified level, we will be required to increase our cash collateral to
30% of the loan balance. If the loan was to default, we would be required to
purchase the loan, thereby eliminating the total return swap agreement. The
total return swap is treated as a non-hedge derivative for accounting purposes
and therefore changes in market value are recorded through the income statement.
At September 30, 2005 the total return swap has a fair market value of
$4,000,000.
- 7 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
8. Equity Investment in Funds
Equity Investments in Funds represents our investment in third party private
equity funds managed by our wholly owned subsidiary, CT Investment Management
Co., LLC, which we refer to as CTIMCO. As of September 30, 2005, CTIMCO managed
two such funds, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc.
which we refer to as Fund II and Fund III, respectively. We account for these
investments using the equity method. At quarter end, our limited partner
investment in Fund II was carried at $1,331,000 and our investment in Fund III
was carried at $9,864,000, representing a 5.38% and 4.71% investment in each
fund, respectively. We also own a 50% share in Fund II's general partner, CTMP
II LLC. CTMP II LLC owns a 1.0% interest in Fund II that is carried at $482,000.
In addition to our investments in these entities, Equity Investments in Funds
includes $4,826,000 of capitalized costs associated with the organization of the
investment management business.
During the nine months ended September 30, 2005, through our ownership interest
in the Fund II general partner, we received $7,841,000 of incentive management
fees from Fund II. In connection with receipt of the incentive management fees,
the amortization of certain capitalized costs at the general partner of Fund II
was accelerated. For the nine months ended September 30, 2005, the total of
scheduled amortization and the accelerated amortization of these previously
capitalized costs that flowed through to us was $1,397,000.
9. Long-Term Debt
Credit Facility
At September 30, 2005, we were no longer a party to any credit facilities.
Repurchase Obligations
On August 16, 2005, we entered into a new three year $75,000,000 repurchase
facility with a securities dealer. In addition to the August 15, 2005 repurchase
facility, we entered into several additional repurchase agreements outstanding
with the same securities dealer. At September 30, 2005, we had secured
borrowings of $69,411,000 with the securities dealer and had the ability to
borrow an additional $61,258,000 against the collateral pledged to secure
borrowings under those agreements. Borrowings under these repurchase agreements
bear interest at specified rates over LIBOR based upon the credit
characteristics of the collateral. At September 30, 2005, borrowing rates ranged
from LIBOR plus 0.35% to LIBOR plus 2.00%.
On July 29, 2005, we entered into two new three year $75,000,000 repurchase
facilities with a second securities dealer. At September 30, 2005, we had
secured borrowings of $40,710,000 and had the ability to borrow an additional
$34,737,000 against the collateral pledged to secure borrowings under these
agreements. Borrowings under these repurchase agreements bear interest at
specified rates over LIBOR based upon the credit characteristics of the
collateral. At September 30, 2005, borrowing rates ranged from LIBOR plus 0.50%
to LIBOR plus 2.00%.
On March 4, 2005, we entered into a new five year $75,000,000 repurchase
facility with a third securities dealer. At September 30, 2005, we had secured
borrowings of $27,005,000. Borrowings under this repurchase facility bear
interest at LIBOR plus 1.00%.
At September 30, 2005, we were party to repurchase agreements with four
securities dealers with total repurchase commitments of $650,000,000 and had
total outstanding borrowings of $157,774,000. The weighted average cash
borrowing cost for all the repurchase agreements outstanding at September 30,
2005 was LIBOR plus 1.06% (4.92% at September 30, 2005). Assuming no additional
utilization under the repurchase agreements and including the amortization of
all fees paid and capitalized over the remaining term of the repurchase
agreements, the all-in effective borrowing cost was LIBOR plus 1.34% (5.20% at
September 30, 2005). At September 30, 2005, if all of the assets pledged under
repurchase agreements were drawn upon, we could obtain an additional
$123,620,000 of financing.
- 8 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Collateralized Debt Obligations
On August 4, 2005, we issued our third collateralized debt obligation that we
refer to as CDO III. CDO III is secured by a static pool of $341,261,000 of
fixed rate subordinate CMBS. At issuance, we sold notes rated AAA through BBB
with a total face value of $269,594,000 to third parties for proceeds of
$272,174,000. We retained all of the unrated and below investment grade rated
notes, the BBB- rated notes and the preferred equity interests. The fixed rate
notes we sold carry a weighted average coupon of 5.22% and because of the
$2,580,000 premium at which they were sold, have an effective cash cost to us of
5.17%. The issuance represents term and index matched, non-recourse and non-mark
to market financing for the underlying collateral. We incurred $2,088,000 of
issuance costs that will be amortized on a level yield basis over the average
life of the CDO. Including the amortization of the issuance costs, the all in
effective rate for the notes sold was 5.25%. For accounting purposes, the CDO is
consolidated in our financial statements.
On March 15, 2005, we issued our second collateralized debt obligation that we
refer to as CDO II. CDO II is a reinvesting CDO secured by $337,755,000 of
mezzanine loans, B Notes, subordinate CMBS and cash. At issuance, we sold notes
rated AAA to BBB- with a face value of $298,913,000 to third parties at par. The
notes we sold bear interest at a weighted average floating rate of LIBOR plus
0.49% (4.35% at September 30, 2005). We retained all of the unrated and below
investment grade rated notes and the preferred equity interests. We incurred
$5,223,000 of issuance costs which will be amortized on a level yield basis over
the average life of the CDO. Including the amortization of the issuance costs,
the all in effective rate for the notes sold was LIBOR plus 0.71% (4.57% at
September 30, 2005). CDO II was structured with a five year reinvestment period
that allows us to reinvest principal proceeds from collateral repayments into
new investments, effectively extending the life of the financing. For accounting
purposes, the CDO is consolidated in our financial statements.
At September 30, 2005, we had collateralized debt obligations outstanding from
three separate issuances with a total face value of $821,285,000. CDOs are
recorded on the balance sheet at $823,817,000, representing the amortized sales
price of the securities sold to third parties.
Derivative Financial Instruments
The following table summarizes the notional and fair values of our derivative
financial instruments at September 30, 2005. The notional value provides an
indication of the extent of our involvement in the 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 $74,094,000 4.584% 2014 $197,000
Swap Cash Flow Hedge 19,291,000 3.950% 2011 575,000
Swap Cash Flow Hedge 18,438,000 4.589% 2015 77,000
Swap Cash Flow Hedge 8,683,000 4.648% 2018 50,000
Swap Cash Flow Hedge 7,445,000 4.470% 2013 52,000
Swap Cash Flow Hedge 5,499,000 3.118% 2007 119,000
During the nine months ended September 30, 2005, we received $1,410,000 from
counterparties in settlement of two interest rate swaps. Recognition of these
settlements has been deferred and is being amortized over the remaining life of
the previously hedged item using an approximation of the level yield basis. We
also entered into four new cash flow hedges during the nine months ended
September 30, 2005.
On September 30, 2005, the derivative financial instruments were reported at
their fair value of $1,070,000 as interest rate hedge assets.
- 9 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
10. Earnings Per Share
The following table sets forth the calculation of Basic and Diluted EPS for the
nine months ended September 30, 2005 and 2004:
Nine months Ended September 30, 2005 Nine months Ended September 30, 2004
-----------------------------------------------------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
----------------------------------------------------------- ----------------- -----------
Basic EPS:
Net earnings per share of
common stock $ 27,797,000 15,110,227 $ 1.84 $ 12,441,000 8,492,967 $ 1.46
============== ===========
Effect of Dilutive Securities
Options outstanding for the
purchase of common stock -- 172,744 -- 123,592
Warrants outstanding for
purchase of common stock -- -- -- 25,100
Stock units outstanding
convertible to shares of
common stock -- 56,562 -- 44,420
---------------- -------------- -------------- -----------------
Diluted EPS:
Net earnings per share
of common stock and
assumed conversions $ 27,797,000 15,339,533 $ 1.81 $ 12,441,000 8,686,079 $ 1.43
================ ============= ============ ============== ================= ===========
The following table sets forth the calculation of Basic and Diluted EPS for the
three months ended September 30, 2005 and 2004:
Three Months Ended September 30, 2005 Three Months Ended September 30, 2004
-----------------------------------------------------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
----------------------------------------------------------- ----------------- -----------
Basic EPS:
Net earnings per share of
common stock $ 9,799,000 15,125,443 $ 0.65 $ 5,858,000 11,448,503 $ 0.51
============ ===========
Effect of Dilutive Securities
Options outstanding for the
purchase of common stock -- 173,900 -- 134,846
Warrants outstanding for
purchase of common stock -- -- -- 26,308
Stock units outstanding
convertible to shares of
common stock -- 59,600 -- 49,536
---------------- -------------- -------------- -----------------
Diluted EPS:
Net earnings per share
of common stock and
assumed conversions $ 9,799,000 15,358,943 $ 0.64 $ 5,858,000 11,659,193 $ 0.50
================ ============= ============ ============== ================= ===========
- 10 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
11. Income Taxes
We made 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 ended December
31, 2003. As a REIT, we are generally not subject to federal income tax. To
maintain qualification as a REIT, we must distribute at least 90% of our REIT
taxable income to our shareholders and meet certain other requirements. If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on taxable income at regular corporate rates. We may also be subject
to certain state and local taxes on our income and property. Under certain
circumstances, federal income and excise taxes may be due on our undistributed
taxable income. At September 30, 2005, we were in compliance with all REIT
requirements.
During the nine months ended September 30, 2005, we recorded $315,000 of income
tax expense for income attributable to taxable REIT subsidiaries. Our effective
tax rate for the nine months ended September 30, 2005 attributable to taxable
REIT subsidiaries was 40.2%. The difference between the U.S. federal statutory
tax rate of 35% and the effective tax rate was primarily state and local taxes,
net of federal tax benefit.
12. Dividends
In order to maintain our election to qualify as a REIT, we must currently
distribute, at a minimum, an amount equal to 90% of our REIT taxable income and
must distribute 100% of our REIT taxable income to avoid paying corporate
federal income taxes. We expect to distribute all of our REIT taxable income to
our shareholders. Because REIT taxable income differs from cash flow from
operations due to non-cash revenues or expenses, in certain circumstances, we
may be required to borrow to make sufficient dividend payments to meet this
anticipated dividend threshold.
On September 15, 2005, we declared a dividend of approximately $8,337,000, or
$0.55 per share of common stock applicable to the three-month period ended
September 30, 2005, payable on October 15, 2005 to shareholders of record on
September 30, 2005.
13. Employee Benefit Plans
Amended and Restated 1997 Long-Term Incentive Stock Plan
During the nine months ended September 30, 2005, we did not issue any options to
acquire shares of class A common stock.
The following table summarizes the option activity under the incentive stock
plan for the quarter ended September 30, 2005:
Weighted Average
Options Exercise Price Exercise Price
Outstanding per Share per Share
------------------- ------------------------- ------------------
Outstanding at January 1, 2005 458,998 $12.375 - $30.00 $ 19.67
Granted in 2005 -- -- --
Exercised in 2005 (58,815) $12.375 - $30.00 $19.06
Canceled in 2005 -- -- --
------------------- ------------------
Outstanding at September 30, 2005 400,183 $12.375 - $30.00 $ 19.75
=================== ==================
At September 30, 2005, all of the options are exercisable. At September 30,
2005, the outstanding options have various remaining contractual exercise
periods ranging from 0.25 to 6.34 years with a weighted average life of 3.72
years.
- 11 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Amended and Restated 2004 Long-Term Incentive Plan
During the first quarter of 2005, we issued 56,073 shares of common stock to
employees as incentive compensation pursuant to the 2004 Long-Term Incentive
plan.
We issued 21,448 shares of common stock to John R. Klopp pursuant to his
employment agreement as a result of the attainment of 2004 annual performance
measures set forth in the related performance award, 50% of which are subject to
further time vesting in one-third increments on each of January 1, 2006, 2007
and 2008 and 50% of which are subject to further performance vesting as
performance stock and vest, if at all, on December 31, 2008 if total shareholder
return exceeds 13% during the period from January 1, 2005 to December 31, 2008.
We issued 34,625 shares of common stock to other employees pursuant to
restricted stock and performance unit awards. Pursuant to the awards, 50% of the
shares vest as restricted stock in equal one-third increments on each of
February 4, 2006, 2007 and 2008 and 50% of the shares are subject to performance
vesting as performance stock and vest, if at all, on February 4, 2009 if total
shareholder return exceeds 13% during the period from January 1, 2005 to
December 31, 2008.
During the nine months ended September 30, 2005, 8,703 shares of restricted
stock for which the vesting requirements had not yet been met were forfeited by
employees who resigned. In connection with the forfeiture, we reversed $57,000
of compensation expense.
Compensation expense for stock awards is recognized on the accelerated
attribution method under Financial Accounting Standards Board Interpretation No.
28.
14. Supplemental Disclosures for Consolidated Statements of Cash Flows
Interest paid on our outstanding debt and convertible junior subordinated
debentures during the nine months ended September 30, 2005 and 2004 was
$21,733,000 and $14,247,000, respectively. We paid income taxes during the nine
months ended September 30, 2005 and 2004 of $5,000 and $1,011,000, respectively.
- 12 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
15. Segment Reporting
We operate two reportable segments. We have an internal information system that
produces performance and asset data for the two segments along business lines.
The Balance Sheet Investment segment includes all activities related to direct
loan and investment activities (including direct investments in Funds) and the
financing thereof.
The Investment Management segment includes all activities related to investment
management services provided to us and third-party funds under management and
includes our taxable REIT subsidiary, CT Investment Management Co., LLC and its
subsidiaries.
The following table details each segment's contribution to our overall
profitability and the identified assets attributable to each such segment for
the nine months ended, and as of, September 30, 2005, respectively (in
thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
----------------- ---------------- ---------------- --------------
Income from loans and other investments:
Interest and related income $ 57,359 $ -- $ -- $ 57,359
Less: Interest and related expenses on credit
facilities, term redeemable securities contract
and repurchase obligations 23,709 -- -- 23,709
----------------- ---------------- ---------------- --------------
Income from loans and other investments, net 33,650 -- -- 33,650
----------------- ---------------- ---------------- --------------
Other revenues:
Management and advisory fees -- 15,718 (3,574) 12,144
Income/(loss) from equity investments in Funds 628 (1,463) -- (835)
Other interest income 318 64 (8) 374
----------------- ---------------- ---------------- --------------
Total other revenues 946 14,319 (3,582) 11,683
----------------- ---------------- ---------------- --------------
Other expenses:
General and administrative 6,710 13,248 (3,574) 16,384
Other interest expense 8 -- (8) --
Depreciation and amortization 633 204 -- 837
----------------- ---------------- ---------------- --------------
Total other expenses 7,351 13,452 (3,582) 17,221
----------------- ---------------- ---------------- --------------
Income before income taxes 27,245 867 28,112
Provision for income taxes -- 315 -- 315
----------------- ---------------- ---------------- --------------
Net income allocable to class A common stock $ 27,245 $ 552 $ -- $ 27,797
================= ================ ================ ==============
Total Assets $ 1,331,130 $ 11,469 $ (9,844) $ 1,332,755
================= ================ ================ ==============
- 13 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The following table details each segment's contribution to our overall
profitability and the identified assets attributable to each such segment for
the nine months ended, and as of, September 30, 2004, respectively (in
thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
----------------- ---------------- ---------------- --------------
Income from loans and other investments:
Interest and related income $ 31,169 $ -- $ -- $ 31,169
Less: Interest and related expenses on credit
facilities, term redeemable securities contract
and repurchase obligations 8,848 -- -- 8,848
Less: Interest and related expenses on
convertible junior subordinated debentures 6,417 -- -- 6,417
----------------- ---------------- ---------------- --------------
Income from loans and other investments, net 15,904 -- -- 15,904
----------------- ---------------- ---------------- --------------
Other revenues:
Management and advisory fees -- 8,264 (2,239) 6,025
Income/(loss) from equity investments in Funds 1,420 (294) -- 1,126
Gain on sales of investments 300 -- -- 300
Other interest income 24 240 (229) 35
----------------- ---------------- ---------------- --------------
Total other revenues 1,744 8,210 (2,468) 7,486
Other expenses:
General and administrative 4,248 8,118 (2,239) 10,127
Other interest expense 229 -- (229) --
Depreciation and amortization 634 188 -- 822
----------------- ---------------- ---------------- --------------
Total other expenses 5,111 8,306 (2,468) 10,949
----------------- ---------------- ---------------- --------------
Income before income taxes 12,537 (96) -- 12,441
Provision for income taxes -- -- -- --
----------------- ---------------- ---------------- --------------
Net income $ 12,537 $ (96) $ -- $ 12,441
================= ================ ================ ==============
Total Assets $ 787,575 $ 13,537 $ (14,120) $ 786,992
================= ================ ================ ==============
- 14 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The following table details each segment's contribution to our overall
profitability and the identified assets attributable to each such segment for
the three months ended, and as of, September 30, 2005, respectively (in
thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
----------------- ---------------- ---------------- --------------
Income from loans and other investments:
Interest and related income $ 22,751 $ -- $ -- $ 22,751
Less: Interest and related expenses on credit
facilities, term redeemable securities contract and
repurchase obligations 10,325 -- -- 10,325
----------------- ---------------- ---------------- --------------
Income from loans and other investments, net 12,426 -- -- 12,426
----------------- ---------------- ---------------- --------------
Other revenues:
Management and advisory fees -- 2,711 (1,194) 1,517
Income/(loss) from equity investments in Funds 528 (61) -- 467
Other interest income 111 26 -- 137
----------------- ---------------- ---------------- --------------
Total other revenues 639 2,676 (1,194) 2,121
----------------- ---------------- ---------------- --------------
Other expenses:
General and administrative 2,026 4,484 (1,194) 5,316
Other interest expense -- -- -- --
Depreciation and amortization 211 67 -- 278
----------------- ---------------- ---------------- --------------
Total other expenses 2,237 4,551 (1,194) 5,594
----------------- ---------------- ---------------- --------------
Income before income taxes 10,828 (1,875) -- 8,953
Provision for income taxes -- (846) -- (846)
----------------- ---------------- ---------------- --------------
Net income allocable to class A common stock $ 10,828 $ (1,029) $ -- $ 9,799
================= ================ ================ ==============
All revenues were generated from external sources within the United States. The
Balance Sheet Investment segment paid the Investment Management segment fees of
$1,194,000 and $3,574,000, respectively, for management of the segment for the
three and nine months ended September 30, 2005 and $8,000 for inter-segment
interest for the nine months ended September 30, 2005, which is reflected as
offsetting adjustments to other revenues and other expenses in the Inter-Segment
Activities column in the tables above.
- 15 -
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The following table details each segment's contribution to our overall
profitability and the identified assets attributable to each such segment for
the three months ended, and as of, September 30, 2004, respectively (in
thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
------------------- ----------------- --------------------- ----------------
Income from loans and other investments:
Interest and related income $ 12,979 $ -- $ -- $ 12,979
Less: Interest and related expenses on credit
facilities, term redeemable securities contract
and repurchase obligations 3,758 -- -- 3,758
Less: Interest and related expenses on
convertible junior subordinated debentures 1,552 -- -- 1,552
------------------- ----------------- --------------------- ----------------
Income from loans and other investments, net 7,669 -- -- 7,669
------------------- ----------------- --------------------- ----------------
Other revenues:
Management and advisory fees -- 2,745 (835) 1,910
Income/(loss) from equity investments in Funds 409 (108) -- 301
Gain on sales of investments -- -- -- --
Other interest income 14 40 (35) 19
------------------- ----------------- --------------------- ----------------
Total other revenues 423 2,677 (870) 2,230
------------------- ----------------- --------------------- ----------------
Other expenses:
General and administrative 1,446 3,385 (835) 3,996
Other interest expense 35 -- (35) --
Depreciation and amortization 212 62 -- 274
------------------- ----------------- --------------------- ----------------
Total other expenses 1,693 3,447 (870) 4,270
------------------- ----------------- --------------------- ----------------
Income before income taxes 6,399 (770) -- 5,629
Provision for income taxes -- (229) -- (229)
------------------- ----------------- --------------------- ----------------
Net income $ 6,399 $ (541) $ -- $ 5,858
=================== ================= ===================== ================
All revenues were generated from external sources within the United States. The
Balance Sheet Investment segment paid the Investment Management segment fees of
$835,000 and $2,239,000, respectively, for management of the segment and $35,000
and $229,000, respectively, for inter-segment interest for the three and nine
months ended September 30, 2004, which is reflected as offsetting adjustments to
other revenues and other expenses in the Inter-Segment Activities column in the
tables above.
- 16 -
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 our future
financial position and results of operations.
Introduction
We are a fully integrated, self-managed finance and investment management
company that specializes in credit-sensitive structured financial products. To
date, our investment activities have focused primarily on the U.S. commercial
real estate subordinate debt markets. From the commencement of our finance
business in 1997 through September 30, 2005, we have completed over $5.6 billion
of real estate-related investments both directly and on behalf of our managed
funds. We conduct our operations as a real estate investment trust, or REIT, for
federal income tax purposes.
Currently, we make balance sheet investments for our own account and manage a
series of private equity funds on behalf of institutional and individual
investors. Since commencement of our investment management business in March
2000, we have co-sponsored three funds: CT Mezzanine Partners I LLC, CT
Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer to
as Fund I, Fund II and Fund III, respectively.
Balance Sheet Overview
During the nine months ended September 30, 2005, we made eighteen investments in
commercial mortgage-backed securities, or CMBS, with a total purchase price of
$205.4 million ($229.9 million face value). Fourteen investments with a total
purchase price of $165.5 million ($190.0 million face value) earn interest at
fixed rates with a weighted average stated coupon of 6.26% and four investments
with a total purchase price of $39.9 million ($39.9 million face value) earn
interest at variable rates with a weighted average stated coupon of LIBOR plus
1.91% (5.77% at September 30, 2005). In addition, one CMBS investment with a
face value of $1.8 million was repaid in full during the period.
At September 30, 2005, we had thirty six investments in twenty five separate
CMBS issues with an aggregate face value of $493.1 million. CMBS with a face
value of $98.9 million earn interest at variable rates and have coupons
averaging LIBOR plus 2.64% (6.50% at September 30, 2005). The remaining CMBS,
$394.2 million face value, earn interest at fixed rates and have coupons
averaging 6.98%. In the aggregate, we purchased the CMBS at total discounts to
face value of $69.4 million and expected to recover, net of anticipated losses,
$42.6 million of that amount, which we amortize over the lives of the
securities. As of September 30, 2005, the remaining discount to be amortized
into income over the remaining lives of the securities was $18.8 million. At
September 30, 2005, the weighted average coupon of the entire CMBS portfolio was
6.88%. As of September 30, 2005, the securities were carried at market value of
$455.5 million, reflecting a $12.2 million net unrealized gain to the amortized
cost of the portfolio and other than temporary write-downs taken in 2004 on two
securities of $5.3 million.
On August 4, 2005, pursuant to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, we made a decision to change the
accounting classification of our CMBS investments from available for sale to
held to maturity. In accordance with this decision, CMBS with an amortized cost
of $410.0 million and a market value of $422.3 million were reclassified from
available for sale to held to maturity. As was the case prior to this
reclassification, the difference between amortized cost and expected recovery on
these investments will continue to be accreted through the income statement
using the level yield method accretion schedules in place prior to the
reclassification. The difference between amortized cost and market value as of
the reclassification date, $12.2 million, was segregated within accumulated
other comprehensive income and will be amortized over the remaining life of the
securities using the level yield method without impact to the income statement.
We made the decision to reclassify these investments based upon our intent and
ability to hold these investments to maturity. Going forward, new originations
of held to maturity investments will be stated at cost plus the amortization of
any premiums or discounts and any premiums or discounts will be amortized
through the income statement using the level yield method. Other than in the
instance of impairment, these held to maturity investments will be shown in our
financial statements at their adjusted values pursuant to the methodology
described above.
- 17 -
During the nine months ended September 30, 2005, we originated seven property
mezzanine loans for $169.6 million (of which $144.5 million was funded as of
September 30, 2005) and 25 B Notes for $375.5 million. In addition, we received
partial repayments on five property mezzanine loans and 27 B Notes totaling
$45.5 million and three property mezzanine loans and twenty three B Notes
totaling $215.4 million were satisfied and repaid. We have outstanding unfunded
loan commitments at September 30, 2005 of $25.0 million.
At September 30, 2005, we had 73 performing loans receivable with a current
carrying value of $812.2 million. Six of the loans totaling $130.4 million bear
interest at an average fixed rate of interest of 9.27%. The 67 remaining loans,
totaling $681.8 million bear interest at a variable rate of interest averaging
LIBOR plus 3.78% (7.64% at September 30, 2005). One mortgage loan receivable
with an original principal balance of $8.0 million matured on July 15, 2001 but
has not been repaid with respect to principal and interest. In December 2002,
the loan was written down to $4.0 million through a charge to the allowance for
possible credit losses. Since the write-down, we have received cash collections
of $962,000 reducing the carrying value of the loan to $3.0 million. In
accordance with our policy for revenue recognition, income recognition has been
suspended on this loan and for the three months ended September 30, 2005,
$277,000 of potential interest income was not recorded. All other loans are
performing in accordance with their terms.
On at least a quarterly basis, management reevaluates the reserve for possible
credit losses based upon our current portfolio of loans. Each loan is evaluated
using our proprietary loan risk rating system, which considers loan to value,
debt yield, cash flow stability, exit plan, sponsorship, loan structure and any
other factors necessary to assess the likelihood of delinquency or default. If
we believe that there is a potential for delinquency or default, a downside
analysis is prepared to estimate the value of the collateral underlying our
loan, and this potential loss is multiplied by our estimate of the likelihood of
default. Based upon our detailed review at September 30, 2005, we concluded that
a reserve for possible credit losses was not warranted.
At September 30, 2005, we had investments in Funds of $16.5 million, including
$4.8 million of unamortized costs capitalized in connection with entering into
our venture agreement with Citigroup Alternative Investments LLC and the
commencement of the related fund management business. These costs are being
amortized over the lives of the Funds and the venture agreement, and are
reflected as a reduction in income/(loss) from equity investments in Funds.
With our issuance of collateralized debt obligations, commonly known as CDOs, we
have substantially restructured the manner in which we finance our business.
While we still borrow under our repurchase agreements, 84% of our debt is in the
form of CDOs at September 30, 2005. The CDOs we have issued generally carry
lower interest rates and allow for higher levels of leverage than our previously
utilized financing sources.
On August 4, 2005, we issued our third collateralized debt obligation that we
refer to as CDO III. CDO III is secured by a static pool of $341.3 million of
fixed rate subordinate CMBS. At issuance, we sold notes rated AAA through BBB
with a total face value of $269.6 million to third parties for proceeds of
$272.2 million. We retained all of the unrated and below investment grade rated
notes, the BBB- rated notes and the preferred equity interests. The fixed rate
notes we sold carry a weighted average coupon of 5.22% and because of the $2.6
million premium at which they were sold, have an effective cash cost to us of
5.17%. The issuance represents term and index matched, non-recourse and non-mark
to market financing for the underlying collateral. We incurred $2.1 million of
issuance costs that will be amortized on a level yield basis over the average
life of the CDO. Including the amortization of the issuance costs, the all in
effective rate for the notes sold was 5.25%. For accounting purposes, the CDO is
consolidated in our financial statements.
On March 15, 2005, we issued our second collateralized debt obligation that we
refer to as CDO II. CDO II is a reinvesting CDO secured by $337.8 million of
mezzanine loans, B Notes, subordinate CMBS and cash. At issuance, we sold notes
rated AAA to BBB- with a face value of $298.9 million to third parties at par.
The notes we sold bear interest at a weighted average floating rate of LIBOR
plus 0.49% (4.35% at September 30, 2005). We retained all of the unrated and
below investment grade rated notes and the preferred equity interests. We
incurred $5.2 million of issuance costs which will be amortized on a level yield
basis over the average life of the CDO. Including the amortization of the
issuance costs, the all in effective rate for the notes sold was LIBOR plus
0.71% (4.57% at September 30, 2005). CDO II was structured with a five year
reinvestment period that allows us to reinvest principal proceeds from
collateral repayments into new investments, effectively extending the life of
the financing. For accounting purposes, the CDO is consolidated in our financial
statements.
- 18 -
At September 30, 2005, we had collateralized debt obligations outstanding from
three separate issuances with a total face value of $821.3 million. CDOs are
recorded on the balance sheet at $823.8 million, representing the amortized
sales price of the securities sold to third parties. In total, our two floating
rate CDOs provide us with $551.7 million of debt financing at a stated average
interest rate of LIBOR + 0.55% (4.41% at September 30, 2005) and an all-in
effective rate (including the amortization of issuance costs) LIBOR + 0.87%
(4.73% at September 30, 2005). Our fixed rate CDO provides us with $269.6
million of notional balance financing (which we sold for proceeds of $272.2
million) with a cash cost of 5.22% (5.17% based upon proceeds) and an all in
effective interest rate of 5.25%.
At September 30, 2005, we were party to repurchase agreements with four
securities dealers with total repurchase commitments of $650.0 million and had
total outstanding borrowings of $157.8 million. The weighted average cash
borrowing cost for all the repurchase agreements outstanding at September 30,
2005 was LIBOR plus 1.06% (4.92% at September 30, 2005). Assuming no additional
utilization under the repurchase agreements and including the amortization of
all fees paid and capitalized over the remaining term of the repurchase
agreements, the all-in effective borrowing cost was LIBOR plus 1.34% (5.20% at
September 30, 2005). At September 30, 2005, if all of the assets pledged under
repurchase agreements were drawn upon, we could obtain an additional $123.6
million of financing.
We were party to six cash flow interest rate swaps with a total notional value
of $133.5 million as of September 30, 2005. These cash flow interest rate swaps
effectively convert floating rate debt to fixed rate debt, which is utilized to
finance assets that earn interest at fixed rates. We receive a rate equal to
LIBOR (3.78% at September 30, 2005) and pay an average rate of 4.43%. The market
value of the swaps at September 30, 2005 was $1.1 million, which is recorded as
an interest rate hedge asset and as a component of accumulated other
comprehensive gain/(loss) on our balance sheet.
At September 30, 2005, we had 15,158,447 shares of our class A common stock
outstanding.
Investment Management Overview
We operated principally as a balance sheet investor until the start of our
investment management business in March 2000, when we entered into a venture
with affiliates of Citigroup Alternative Investments to co-sponsor and invest
capital in a series of commercial real estate mezzanine investment funds managed
by us. Pursuant to the venture agreement, we have co-sponsored with Citigroup
Alternative Investments Fund I, Fund II and Fund III. We have capitalized costs
of $4.8 million net, from the formation of the venture and the Funds that are
being amortized over the remaining anticipated lives of the Funds and the
related venture agreement. Fund I has concluded its operations and been
dissolved.
Fund II had its initial closing on equity commitments on April 9, 2001 and its
final closing on August 7, 2001, ultimately raising $845.2 million in equity
commitments, including $49.7 million (5.9%) from us and $198.9 million (23.5%)
from Citigroup Alternative Investments. Third-party private equity investors,
including public and corporate pension plans, endowment funds, financial
institutions and high net worth individuals, made the balance of the equity
commitments. During its two-year investment period, which expired on April 9,
2003, Fund II invested $1.2 billion in 40 separate transactions. CT Investment
Management Co. LLC, our wholly-owned taxable REIT subsidiary, acts as the
investment manager to Fund II and receives 100% of the base management fees paid
by the fund. As of April 9, 2003, the end of Fund II's investment period, CT
Investment Management Co. earns annual base management fees calculated at a rate
equal to 1.287% of invested capital.
We and Citigroup Alternative Investments, through our collective ownership of
the general partner of Fund II, which we refer to as Fund II GP, are 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 Fund II
incentive management fees are split equally between Citigroup Alternative
Investments and us. We received our first such payment totaling $6.2 million on
March 29, 2005, a payment of $1.2 million on June 24, 2005 and an additional
payment of $428,000 on September 26, 2005, reflecting 50% of the total incentive
management fees paid to the general partner. In connection with the receipt of
the incentive management fees, Fund II GP, which is 50% owned by us and the
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general partner of Fund II, expensed costs that it had previously capitalized of
$2.4 million, of which $1.2 million flowed through to us. The payment of the
incentive management fees by Fund II reduced the value of our investment in Fund
II and Fund II GP by $1.1 million, reflecting our proportionate share of the
incentive management payment. In addition, we have and will continue to pay 25%
of our share of the Fund II incentive management fees as long-term incentive
compensation to our employees. The amount of future additional incentive fees to
be received will depend upon a number of factors, including the level of
interest rates and the fund's ability to generate additional returns, which is
in turn 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. If Fund II's remaining assets were sold
and liabilities were settled on October 1, 2005 at the recorded book value, and
the fund's equity and income were distributed, we would record approximately
$2.1 million of additional gross incentive fees.
We do not anticipate making any additional equity contributions to Fund II or
its general partner. Our net investment in Fund II and its general partner at
September 30, 2005 was $1.8 million. As of September 30, 2005, Fund II had 7
outstanding loans and investments totaling $67.8 million, all of which were
performing in accordance with the terms of their agreements.
Fund III effected its initial closing on equity commitments on June 2, 2003 and
its final closing on August 8, 2003, raising a total of $425.0 million in equity
commitments, including our equity commitment of $20.0 million (4.7%) and
Citigroup Alternative Investments' equity commitment of $80.0 million (18.8%).
From the initial closing through September 30, 2005, we have made equity
investments in Fund III of $15.9 million. Through September 30, 2005, Fund III
had made 35 loans and investments of approximately $1.2 billion. As of September
30, 2005, Fund III had 19 outstanding loans and investments totaling $536.9
million, all of which were performing in accordance with the terms of their
agreements.
CT Investment Management Co. 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 (which expired June 2, 2005) and 1.42% of
invested capital thereafter. We and our co-sponsor 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. We will receive
62.5% and our co-sponsor will receive 37.5% of the total incentive management
fees. We intend to distribute a portion (up to 40%) of our share of the Fund III
incentive management fees as long-term incentive compensation to our employees.
If Fund III's remaining assets were sold and liabilities were settled on October
1, 2005 at recorded book value and the Fund's equity and income were
distributed, we would record approximately $5.4 million of additional gross
incentive management fees.
Three and Nine Months Ended September 30, 2005 Compared to Three and Nine Months
Ended September 30, 2004
We reported net income of $9.8 million for the three months ended September 30,
2005, an increase of $3.9 million from the net income of $5.9 million for the
three months ended September 30, 2004. We reported net income of $27.8 million
for the nine months ended September 30, 2005, an increase of $15.4 million from
the net income of $12.4 million for the nine months ended September 30, 2004.
These increases were primarily the result of an increase in net interest income
from loans and other investments, the receipt of incentive management fees from
Fund II and the reduction of our cost of debt through the use of CDOs.
Interest and related income from loans and other investments amounted to $57.4
million for the nine months ended September 30, 2005, an increase of $26.2
million from the $31.2 million amount for the nine months ended September 30,
2004. Average interest-earning assets increased from approximately $479.0
million for the nine months ended September 30, 2004 to approximately $963.5
million for the nine months ended September 30, 2005. The average interest rate
earned on such assets decreased from 8.7% for the nine months ended September
30, 2004 to 7.9% for the nine months ended September 30, 2005. During the nine
months ended September 30, 2005, we recognized $1.3 million in additional income
on the early repayment of loans. The decrease in rates was due primarily to a
change in the mix of our investment portfolio to include more lower risk B Notes
in 2005 (which generally carry lower interest rates than mezzanine loans) and a
general decrease in credit spreads obtained on newly originated investments,
partially offset by a higher average LIBOR rate, which increased by 1.8% from
1.3% for the nine months ended September 30, 2004 to 3.1% for the nine months
ended September 30, 2005.
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Interest and related income from loans and other investments amounted to $22.8
million for the three months ended September 30, 2005, an increase of $9.8
million from the $13.0 million amount for the three months ended September 30,
2004. Average interest-earning assets increased from approximately $638.6
million for the three months ended September 30, 2004 to approximately $1,122.5
million for the three months ended September 30, 2005. The average interest rate
earned on such assets decreased from 8.1% for the three months ended September
30, 2004 to 7.9% for the three months ended September 30, 2005. During the three
months ended September 30, 2005, we recognized $501,000 in additional income on
the early repayment of loans. The decrease in rates was again due primarily to a
change in the mix of our investment portfolio to include more lower risk B Notes
in 2005 (which generally carry lower interest rates than mezzanine loans) as
higher rate mezzanine loans are paid down and a general decrease in credit
spreads obtained on newly originated investments, and was partially offset by a
higher average LIBOR rate, which increased by 2.0% from 1.6% for the three
months ended September 30, 2004 to 3.6% for the three months ended September 30,
2005.
We utilize our repurchase obligations and CDOs to finance our interest-earning
assets.
Interest and related expenses on secured debt amounted to $23.7 million for the
nine months ended September 30, 2005, an increase of $14.9 million from the $8.8
million amount for the nine months ended September 30, 2004. The increase in
expense was due to an increase in the amount of average interest-bearing
liabilities outstanding from approximately $281.9 million for the nine months
ended September 30, 2004 to approximately $693.8 million for the nine months
ended September 30, 2005 and an increase in the average rate paid on
interest-bearing liabilities from 4.2% to 4.5% for the same periods. The
increase in the average rate is substantially due to increases in the average
LIBOR rate, which increased by 1.8% from 1.3% for the nine months ended
September 30, 2004 to 3.1% for the nine months ended September 30, 2005, and was
partially offset by the use of CDOs to finance a large portion of the portfolio
at lower credit spreads than obtained under the credit facility and term
redeemable securities contract.
Interest and related expenses on secured debt amounted to $10.3 million for the
three months ended September 30, 2005, an increase of $6.6 million from the $3.8
million amount for the three months ended September 30, 2004. The increase in
expense was due to an increase in the amount of average interest-bearing
liabilities outstanding from approximately $412.2 million for the three months
ended September 30, 2004 to approximately $847.1 million for the three months
ended September 30, 2005, and an increase in the average rate paid on
interest-bearing liabilities from 3.60% to 4.77% for the same periods. The
increase in the average rate is again substantially due to the increase in
average LIBOR rate, which increased by 2.0% from 1.6% for the three months ended
September 30, 2004 to 3.6% for the three months ended September 30, 2005, and
was partially offset by the use of CDOs to finance a large portion of the
portfolio at lower credit spreads than obtained under the credit facility and
term redeemable securities contract.
Prior to September 29, 2004, we also utilized the convertible junior
subordinated debentures to finance our interest-earning assets. During the three
and nine months ended September 30, 2004, we recognized $1.6 million and $6.4
million, respectively of expenses related to the convertible junior subordinated
debentures. No expense was recorded for the three and nine months ended
September 30, 2005 as the liability was extinguished in 2004 upon the conversion
of one half of the principal amount due on the debentures into common stock on
July 28, 2004 and the conversion of the remaining amount due on the debentures
into common stock on September 29, 2004.
Other revenues increased $4.2 million from $7.5 million for the nine months
ended September 30, 2004 to $11.7 million for the nine months ended September
30, 2005. The increase is primarily due to the receipt of incentive management
fees from Fund II of $7.8 million during the nine months ended September 30,
2005. In connection with the receipt of the incentive management fees, Fund II
GP, which is 50% owned by us and is the general partner of Fund II, expensed
costs that it had previously capitalized of $2.4 million, of which $1.2 million
flowed through to us. This was partially offset by a decrease in base management
fees and investment income from Fund II, due to lower levels of investment in
2005 as the fund winds down and a decrease in the base management fees and
investment income from Fund III, as Fund III reached the end of its investment
period on June 2, 2005 and the fees are now charged on invested capital as
opposed to committed capital.
Other revenues decreased $109,000 from $2.2 million for the three months ended
September 30, 2004 to $2.1 million for the three months ended September 30,
2005. The decrease is due to lower levels of base management fees and investment
income from Fund II and Fund III, which was partially offset by the receipt of
incentive management fees from Fund II of $428,000 during the three months ended
September 30, 2005. In connection with
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the receipt of the incentive management fees, Fund II GP, which is 50% owned by
us and the general partner of Fund II, expensed costs that it had previously
capitalized of $52,000, of which $26,000 flowed through to us.
General and administrative expenses increased $6.3 million to $16.4 million for
the nine months ended September 30, 2005 from $10.1 million for the nine months
ended September 30, 2004. The increase in general and administrative expenses
was primarily due to the allocation of Fund II incentive management fees for
payment to employees (representing 25% of the total received, or $2.0 million),
increases in employee compensation expense from the issuance of additional
restricted stock and the timing of the annual bonus accrual, due diligence costs
of $475,000 from an abandoned corporate acquisition and additional expenses
related to the services provided under our contract with Global Realty
Outsourcing, Inc. which began in April 2004.
General and administrative expenses increased $1.3 million to $5.3 million for
the three months ended September 30, 2005 from $4.0 million for the three months
ended September 30, 2004. The increase in general and administrative expenses
was primarily due to increases in employee compensation expense from the
issuance of additional restricted stock, the timing of the annual bonus accrual
and the allocation of Fund II incentive management fees for payment to employees
(representing 25% of the total received, or $107,000).
We have made 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 ended
December 31, 2003. As a REIT, we generally are not subject to federal income
tax. To maintain qualification as a REIT, we must distribute at least 90% of our
REIT taxable income to our shareholders and meet certain other requirements. If
we fail to qualify as a REIT in any taxable three months, we will be subject to
federal income tax on our taxable income at regular corporate rates. We may also
be subject to certain state and local taxes on our income and property. Under
certain circumstances, federal income and excise taxes may be due on our
undistributed taxable income.
At September 30, 2005 and 2004, we were in compliance with all REIT requirements
and, as such, have not provided for income tax expense on our REIT taxable
income for the three or the nine months ended September 30, 2005 and 2004. We
also have taxable REIT subsidiaries which are subject to tax at regular
corporate rates. During the nine months ended September 30, 2005 and 2004, we
recorded $315,000 and $0, respectively, of income tax expense. This increase
resulted from increased taxable income in our taxable REIT subsidiaries
primarily due to incentive management fees recognized from Fund II.
Liquidity and Capital Resources
At September 30, 2005, we had $14.4 million in cash. Our primary sources of
liquidity for the remainder of 2005 are expected to be cash on hand, cash
generated from operations, principal and interest payments received on loans and
investments, and additional borrowings under our repurchase obligations. We
believe these sources of capital will be adequate to meet future cash
requirements for 2005. We expect that during 2005, we will use a significant
amount of our available capital resources to originate or purchase new loans and
investments for our balance sheet. We intend to continue to employ leverage on
our balance sheet assets to enhance our return on equity.
We experienced a net decrease in cash of $10.2 million for the nine months ended
September 30, 2005, compared to a net decrease of $775,000 for the nine months
ended September 30, 2004. Cash provided by operating activities during the nine
months ended September 30, 2005 was $27.9 million, compared to $10.4 million
during the same period of 2004. For the nine months ended September 30, 2005,
cash used in investing activities was $447.2 million, compared to $346.8 million
during the same period in 2004. The change was primarily due our increased loan
and investment originations partially offset by increased levels of principal
collections when comparing the first nine months of 2005 to the same period in
2004. We financed the increased investment activity with additional borrowings
under our repurchase obligations and CDOs. This accounted for substantially all
of the change in the net cash activity from financing activities.
At September 30, 2005, we had outstanding borrowings under our outstanding CDOs
of $823.8 million and outstanding repurchase obligations totaling $157.8
million. At September 30, 2005, we had pledged assets that enable us to obtain
an additional $123.6 million of financing under our repurchase agreements. At
September 30, 2005, we had $492.2 million of credit available for the financing
of new and existing unpledged assets pursuant to our credit facility and
repurchase agreements.
- 22 -
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Impact of Inflation
Our operating results depend in part on the difference between the interest
income earned on our interest-earning assets and the interest expense incurred
in connection with our interest-bearing liabilities. Changes in the general
level of interest rates prevailing in the economy in response to changes in the
rate of inflation or otherwise can affect our income by affecting the spread
between our interest-earning assets and interest-bearing liabilities, as well
as, among other things, the value of our interest-earning assets and our ability
to realize gains from the sale of assets and the average life of our
interest-earning assets. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations, and other factors beyond our control. We
employ the use of correlated hedging strategies to limit the effects of changes
in interest rates on our operations, including engaging in interest rate swaps
and interest rate caps to minimize our exposure to changes in interest rates.
There can be no assurance that we will be able to adequately protect against the
foregoing risks or that we will ultimately realize an economic benefit from any
hedging contract into which we enter.
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 our 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. Our 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. We assume 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 we believe 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 our Annual Report on Form 10-K, filed on March 10, 2005 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.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The principal objective of our asset/liability management activities is to
maximize net interest income, while managing levels of interest rate risk. Net
interest income and interest expense are subject to the risk of interest rate
fluctuations. In certain instances, to mitigate the impact of fluctuations in
interest rates, we use interest rate swaps to effectively convert 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 we do not use derivative financial instruments for trading
purposes. We use 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.
Our loans and investments, including our fund investments, are also subject to
credit risk. The ultimate performance and value of our loans and investments
depends upon the owner's ability to operate the properties that serve as our
collateral so that they produce cash flows adequate to pay interest and
principal due us. To monitor this risk, our asset management team continuously
reviews the investment portfolio and in certain instances is in constant contact
with our borrowers, monitoring performance of the collateral and enforcing our
rights as necessary.
The following table provides information about our financial instruments that
are sensitive to changes in interest rates at September 30, 2005. 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
------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Assets: (dollars in thousands)
Commercial Mortgage-
backed Securities
Fixed Rate -- -- $ 5, 135 $ 3,783 $ 5,380 $351,520 $365,818 $356,574
Average interest rate -- -- 4.96% 6.37% 9.66% 8.49% 8.37%
Variable Rate $ 38 $ 6,677 $ 13,659 $ 65,001 $ 14,000 $ 1,305 $100,680 $ 99,098
Average interest rate 4.89% 4.89% 6.04% 6.12% 5.24% 36.79% 6.40%
Loans receivable
Fixed Rate $ 233 $ 1,055 $ 8,050 $ 47,975 $ 775 $ 73,616 $131,704 $139,246
Average interest rate 10.56% 9.90% 8.31% 11.77% 8.18% 8.01% 9.42%
Variable Rate $ 22,803 $ 239,957 $202,529 $ 41,112 $ 79,106 $106,299 $691,806 $686,931
Average interest rate 8.71% 7.40% 7.66% 7.80% 6.83% 7.80% 7.54%
Total Return Swap
Variable Rate -- $ 4,000 -- -- -- -- $ 4,000 $ 4,000
Average interest rate -- 20.56% -- -- -- -- 20.56%
Interest rate swaps
Notional amounts $ 84 $ 377 5,826 $ 490 $ 28,857 $ 97,816 $133,450 $ 1,070
Average fixed pay rate 3.69% 3.77% 3.21% 4.23% 4.58% 4.46% 4.43%
Average variable
receive rate 3.80% 3.80% 3.80% 3.80% 3.80% 3.78% 3.78%
Liabilities:
Repurchase obligations
Variable Rate -- $ 43,266 $ 46,793 $ 40,710 -- $ 27,005 $157,774 $157,774
Average interest rate -- 4.18% 5.74% 4.70% -- 5.03% 4.92%
Collateralized debt obligations
Variable Rate $ 5,000 $ 92,252 $105,871 $618,162 $821,285 $823,817
Average interest rate 6.01% 4.66% 4.69% 5.07% 4.98%
- 24 -
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this quarterly report was made under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer. Based upon this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (a) are effective to ensure that information required to be disclosed
by us in reports filed or submitted under the Securities 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 us in reports filed or submitted under the Securities
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
There have been no significant changes in our "internal control over financial
reporting" (as defined in rule 13a-15(f) under the Securities Exchange Act) that
occurred during the period covered by this quarterly report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
- 25 -
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3: Defaults Upon Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
On August 16, 2005, Capital Trust, Inc. (the "Company") entered into a $75
million Master Repurchase Agreement (the "Repurchase Agreement") with Bear,
Stearns Funding, Inc. ("Bear"). The Repurchase Agreement expires on August 15,
2008, although may terminate prior to such date in accordance with its
provisions. Subject to the terms and conditions thereof, the Repurchase
Agreement provides for the purchase, sale and repurchase of, inter alia,
commercial mortgage loans, commercial mezzanine loans, B-notes and commercial
mortgage-backed securities and other mutually agreed upon collateral and bears
interest at varying rates over LIBOR based upon the type of asset included in
the repurchase obligation.
- 26 -
ITEM 6: Exhibits
3.1 Charter of Capital Trust, Inc. (filed as Exhibit 3.1.a to the
Company's Current Report on Form 8-K (File No. 1-14788) filed on
April 2, 2003 and incorporated herein by reference).
3.2 Amended and Restated Bylaws of Capital Trust, Inc. (filed as Exhibit
3.2 to the Company's Current Report on Form 8-K (File No. 1-14788)
filed on January 29, 1999 and incorporated herein by reference).
3.3 First Amendment to Amended and Restated Bylaws of Capital Trust,
Inc. (filed as Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q (File No. 1-14788) filed on August 16, 2004 and incorporated
herein by reference).
o 10.1 Master Repurchase Agreement, dated as of July 29, 2005, by and
between the Company and Morgan Stanley Bank.
o 10.2 Master Repurchase Agreement, dated as of July 29, 2005, by and among
the Company, CT RE CDO 2004-1 Sub, LLC, CT RE CDO 2005-1 Sub, LLC
and Morgan Stanley Bank.
o 10.3 Master Repurchase Agreement, dated as of August 16, 2005, by and
between the Company and Bear, Stearns Funding, Inc.
o 10.4 Letter Agreement, dated as of August 16, 2005, by and between the
Company and Bear, Stearns Funding, Inc.
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).
o 31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
o 31.2 Certification of Geoffrey G. Jervis, Chief Financial Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
o 32.1 Certification of John R. Klopp, Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
o 32.2 Certification of Geoffrey G. Jervis, 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 (File No. 1-14788), filed on March 10, 2005 and
incorporated herein by reference).
o Filed herewith.
- 27 -
SIGNATURES
Pursuant to the requirements 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.
October 31, 2005 /s/ John R. Klopp
- ---------------- -----------------
Date John R. Klopp
Chief Executive Officer
October 31, 2005 /s/ Geoffrey G. Jervis
- ---------------- -----------------------
Date Geoffrey G. Jervis
Chief Financial Officer
- 28 -