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, 2006
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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
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Capital Trust, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 655-0220
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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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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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 30, 2006 was 15,397,525.
CAPITAL TRUST, INC.
INDEX
Part I. Financial Information
Item 1: Financial Statements 1
Consolidated Balance Sheets - September 30, 2006
(unaudited) and December 31, 2005 (audited) 1
Consolidated Statements of Income - Three and
Nine Months Ended September 30, 2006 and
2005 (unaudited) 2
Consolidated Statements of Changes in Shareholders'
Equity - Nine Months Ended September 30, 2006 and
2005 (unaudited) 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2006 and 2005 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3: Quantitative and Qualitative Disclosures about Market Risk 29
Item 4: Controls and Procedures 30
Part II. Other Information
Item 1: Legal Proceedings 31
Item 1A: Risk Factors 31
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3: Defaults Upon Senior Securities 32
Item 4: Submission of Matters to a Vote of Security Holders 32
Item 5: Other Information 32
Item 6: Exhibits 33
Signatures 34
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
(in thousands)
September 30, December 31,
2006 2005
-------------------- --------------------
(unaudited) (audited)
Assets
Cash and cash equivalents $ 26,720 $ 24,974
Restricted cash 8,210 1,264
Commercial mortgage-backed securities 845,452 487,970
Loans receivable 1,334,014 990,142
Total return swaps 3,000 4,000
Equity investment in unconsolidated subsidiaries 11,185 14,301
Deposits and other receivables 6,664 5,679
Accrued interest receivable 10,431 9,437
Interest rate hedge assets 959 2,273
Deferred income taxes 5,630 3,979
Prepaid and other assets 17,400 13,511
-------------------- --------------------
Total assets $ 2,269,665 $ 1,557,530
==================== ====================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses $ 23,474 $ 24,957
Repurchase obligations 351,433 369,751
Collateralized debt obligations ("CDOs") 1,241,949 823,744
Junior subordinated debentures 51,550 --
Participations sold 248,137 --
Deferred origination fees and other revenue 5,529 228
-------------------- --------------------
Total liabilities 1,922,072 1,218,680
-------------------- --------------------
Commitments and contingencies
Shareholders' equity:
Class A common stock, $0.01 par value, 100,000 shares authorized, 14,912 and
14,870 shares issued and outstanding at September 30, 2006 and
December 31, 2005, respectively ("class A common stock") 149 149
Restricted class A common stock, $0.01 par value 485 and 404 shares issued and
outstanding at September 30, 2006 and December 31, 2005, respectively
("restricted class A common stock" and together with class A common stock, 5 4
"common stock")
Additional paid-in capital 329,564 326,299
Accumulated other comprehensive gain 13,246 14,879
Retained earnings/(deficit) 4,629 (2,481)
-------------------- --------------------
Total shareholders' equity 347,593 338,850
-------------------- --------------------
Total liabilities and shareholders' equity $ 2,269,665 $ 1,557,530
==================== ====================
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, 2006 and 2005
(in thousands, except share and per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
Income from loans and other investments:
Interest and related income $ 46,011 $ 22,751 $ 123,862 $ 57,359
Less: Interest and related expenses 28,838 10,325 72,374 23,709
----------------- ----------------- ----------------- -----------------
Income from loans and other investments, net 17,173 12,426 51,488 33,650
----------------- ----------------- ----------------- -----------------
Other revenues:
Management and advisory fees 748 1,517 2,196 12,144
Income/(loss) from equity investments 328 467 1,050 (835)
Other interest income 440 137 790 374
----------------- ----------------- ----------------- -----------------
Total other revenues 1,516 2,121 4,036 11,683
----------------- ----------------- ----------------- -----------------
Other expenses:
General and administrative 5,879 5,316 16,706 16,384
Depreciation and amortization 357 278 2,696 837
----------------- ----------------- ----------------- -----------------
Total other expenses 6,236 5,594 19,402 17,221
----------------- ----------------- ----------------- -----------------
Income before income taxes 12,453 8,953 36,122 28,112
(Benefit)/provision for income taxes (984) (846) (2,455) 315
----------------- ----------------- ----------------- -----------------
Net income allocable to common stock $ 13,437 $ 9,799 $ 38,577 $ 27,797
================= ================= ================= =================
Per share information: Net earnings per share of common stock:
Basic $ 0.88 $ 0.65 $ 2.52 $ 1.84
================= ================= ================= =================
Diluted $ 0.86 $ 0.64 $ 2.48 $ 1.81
================= ================= ================= =================
Weighted average shares of common stock outstanding:
Basic 15,337,325 15,125,443 15,327,855 15,110,227
================= ================= ================= =================
Diluted 15,585,880 15,358,943 15,542,306 15,339,533
================= ================= ================= =================
Dividends declared per share of common stock $ 0.75 $ 0.55 $ 2.05 $ 1.65
================= ================= ================= =================
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, 2006 and 2005
(in thousands)
(unaudited)
Restricted Accumulated
Class A Class A Additional Other Retained
Comprehensive Common Common Paid-In Comprehensive Earnings
Income/(Loss) Stock Stock Capital Income/(Loss) (Deficit) Total
------------- --------------------------------------------------------------------------
Balance at January 1, 2005 $ 148 $ 3 $ 321,937 $ 3,815 $ (9,406) $ 316,497
Net income $ 27,797 -- -- -- -- 27,797 27,797
Unrealized loss on derivative financial
instruments 876 -- -- -- 876 -- 876
Unrealized gain on available-for-sale
securities 8,393 -- -- -- 8,393 -- 8,393
Sale of shares of class A common stock
under stock option agreements -- -- -- 1,121 -- -- 1,121
Deferred gain on settlement of swap, net
of amortization -- -- -- -- 1,011 -- 1,011
Restricted class A common stock earned -- -- -- 1,936 -- -- 1,936
Restricted class A common stock forfeited
upon resignation by holder -- -- -- (57) -- -- (57)
Dividends declared on class A common stock -- -- -- -- -- (24,967) (24,967)
------------- --------------------------------------------------------------------------
Balance at September 30, 2005 $ 37,066 $ 148 $ 3 $ 324,937 $ 14,095 $ (6,576) $ 332,607
============= ==========================================================================
Balance at January 1, 2006 $ 149 $ 4 $ 326,299 $ 14,879 $ (2,481) $ 338,850
Net income $ 38,577 -- -- -- -- 38,577 38,577
Unrealized loss on derivative financial
instruments (1,315) -- -- -- (1,315) -- (1,315)
Unrealized loss on available for sale
security (96) -- -- -- (96) (96)
Amortization of unrealized gain on
securities (1,226) -- -- -- (1,226) -- (1,226)
Currency translation adjustments 1 -- -- -- 1 -- 1
Sale of shares of class A common stock
under stock option agreements -- -- -- 368 -- -- 368
Deferred gain on settlement of swap, net
of amortization -- -- -- -- 1,003 -- 1,003
Reimbursement of offering expenses -- -- -- 124 -- -- 124
Restricted class A common stock earned -- -- -- 2,818 -- -- 2,818
Restricted class A common stock forfeited
upon resignation by holder -- -- -- (45) -- -- (45)
Issuance of restricted stock -- -- 1 -- -- -- 1
Dividends declared on class A common stock -- -- -- -- -- (31,467) (31,467)
------------- --------------------------------------------------------------------------
Balance at September 30, 2006 $ 35,941 $ 149 $ 5 $ 329,564 $ 13,246 $ 4,629 $ 347,593
============= ==========================================================================
See accompanying notes to unaudited consolidated financial statements.
-3-
Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and 2005
(in thousands)
(unaudited)
2006 2005
---------------- -----------------
Cash flows from operating activities:
Net income $ 38,577 $ 27,797
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,696 837
(Income)/loss from equity investments (1,050) 835
Distributions from equity investments 1,009 --
Restricted class A common stock earned 2,818 --
Amortization of premiums and accretion of discounts on
loans and investments, net (1,131) (2,158)
Amortization of deferred gains on interest rate hedges (182) --
Stock based compensation (45) 1,899
Changes in assets and liabilities, net:
Deposits and other receivables 5,237 279
Accrued interest receivable (994) (3,954)
Deferred income taxes (1,651) 1,889
Prepaid and other assets 2,261 886
Accounts payable and accrued expenses (814) (354)
Deferred origination fees and other revenue 5,301 (97)
---------------- -----------------
Net cash provided by operating activities 52,032 27,859
---------------- -----------------
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities (384,732) (205,565)
Principal collections on and proceeds from sale of commercial
mortgage-backed securities 26,548 8,787
Origination and purchase of loans receivable (771,200) (510,015)
Principal collections on loans receivable 421,617 261,787
Equity investments (3,208) (4,660)
Return of capital 3,752 7,950
Purchase of total return swaps (4,138) (4,000)
Proceeds from total return swaps 5,138 --
Increase in restricted cash (6,946) (1,478)
Purchases of equipment and leasehold improvements -- (23)
---------------- -----------------
Net cash used in investing activities (713,169) (447,217)
---------------- -----------------
Cash flows from financing activities:
Proceeds from repurchase obligations 878,534 436,393
Repayment of repurchase obligations (896,852) (503,710)
Proceeds from credit facilities -- 104,704
Repayment of credit facilities -- (169,880)
Issuance of junior subordinated debentures 51,550 --
Purchase of common equity in CT Preferred Trust I (1,550) --
Proceeds from CDOs 429,399 571,039
Repayments of CDOs (11,194) --
Proceeds from participations sold 248,137 --
Settlement of interest rate hedge 1,186 1,410
Payment of deferred financing costs (4,681) (7,734)
Reimbursement of offering expenses 124 --
Dividends paid on class A common stock (32,138) (24,156)
Sale of shares of class A common stock under stock option agreements 368 1,121
---------------- -----------------
Net cash provided by financing activities 662,883 409,187
---------------- -----------------
Net decrease in cash and cash equivalents 1,746 (10,171)
Cash and cash equivalents at beginning of year 24,974 24,583
---------------- -----------------
Cash and cash equivalents at end of period $ 26,720 $ 14,412
================ =================
See accompanying notes to unaudited consolidated financial statements
-4-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
1. Organization
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 programs have focused on loans and securities backed by
commercial real estate assets. We invest for our own account and for private
equity funds that we manage on behalf of third parties. From the commencement of
our finance business in 1997 through September 30, 2006, we have completed $7.2
billion of 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 and we are headquartered in New York City.
2. Summary of Significant Accounting Policies
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
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, 2005.
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, 2006 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2006. Our accounting and reporting policies conform in all
material respects to accounting principles generally accepted in the United
States.
Principles of Consolidation
The accompanying unaudited consolidated interim financial statements include, on
a consolidated basis, our accounts, the accounts of 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 interest in CT Preferred Trust I is
accounted for using the equity method and its assets and liabilities are not
consolidated into our financial statements due to our determination that CT
Preferred Trust I is a variable interest entity in which we are not the primary
beneficiary under Financial Accounting Standards Board, or FASB, Interpretation
No. 46, or FIN 46. We account for our co-investment interests in two of the
private equity funds we have co-sponsored and continue to manage, CT Mezzanine
Partners II LP and CT Mezzanine Partners III, Inc., or Fund II and Fund III,
respectively, under the equity method of accounting. We also account for our
investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, under the
equity method of accounting. As such, we report a percentage of the earnings of
Fund II, Fund III and Bracor equal to our ownership percentage on a single line
item in the consolidated statement of operations as income from equity
investments.
Revenue Recognition
Interest income from our loans receivable is recognized over the life of the
investment using the effective interest method and recorded on the accrual
basis. Fees, premiums, discounts and direct costs in connection with these
investments are deferred until the loan is advanced and are then recognized over
the term of the loan as an adjustment to yield. Fees on commitments that expire
unused are recognized at expiration. For loans where we have unfunded
commitments, we amortize the appropriate items on a straight line basis. Income
recognition is generally suspended for loans at the earlier of the date at which
payments become 90 days past due or when, in the opinion of management, a full
recovery of income and principal becomes doubtful. Income recognition is resumed
when the loan becomes contractually current and performance is demonstrated to
be resumed.
Fees from special servicing and asset management services are recognized as
services are rendered. We account for incentive fees we can potentially earn
from our investment management business in accordance with Method 1 of Emerging
Issues Task Force Topic D-96. Under Method 1, no incentive income is recorded
until all contingencies have been eliminated.
-5-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Restricted Cash
Restricted cash of $8.2 million at September 30, 2006 is on deposit with the
trustee for our CDOs and is expected to be used to pay contractual interest and
principal and to purchase replacement collateral for our reinvesting CDOs during
their respective reinvestment periods.
Commercial Mortgage Backed Securities
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, or
Controlling Class Investments. The presentation of Controlling Class Investments
in our financial statements is governed in part by 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, or 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.
We classify our CMBS investments pursuant to FAS No. 115 on the date of
acquisition of the investment. On August 4, 2005, we made a decision to change
the accounting classification of our CMBS investments from available-for-sale to
held-to-maturity. Held-to-maturity investments are stated at cost plus the
amortization of any premiums or discounts and any premiums or discounts will be
amortized through the consolidated statements of income 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. We may from time to time invest in
CMBS and certain other securities which may be classified as available-for-sale.
Available-for-sale securities are carried at estimated fair value with the net
unrealized gains or losses reported as a component of accumulated other
comprehensive income/(loss) in shareholders' equity. Many of these investments
are relatively illiquid and management must estimate their values. In making
these estimates, management utilizes market prices provided by dealers who make
markets in these securities, but may, under certain circumstances, adjust these
valuations based on management's judgment. Changes in the valuations do not
affect our reported income or cash flows, but impact shareholders' equity and,
accordingly, book value per share.
Income on these securities is recognized based upon a number of assumptions that
are subject to uncertainties and contingencies. Examples include, among other
things, the rate and timing of principal payments, including prepayments,
repurchases, defaults and liquidations, the pass-through or coupon rate and
interest rates. Additional factors that may affect our reported interest income
on our mortgage-backed securities include interest payment shortfalls due to
delinquencies on the underlying mortgage loans and the timing and magnitude of
credit losses on the mortgage loans underlying the securities that are impacted
by, among other things, the general condition of the real estate market,
including competition for tenants and their related credit quality, and changes
in market rental rates. These uncertainties and contingencies are difficult to
predict and are subject to future events that may alter the assumptions.
We account for CMBS under Emerging Issues Task Force 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets", or EITF 99-20. Under EITF 99-20, when significant
changes in estimated cash flows from the cash flows previously estimated occur
due to actual prepayment and credit loss experience and the present value of the
revised cash flows using the current expected yield is less than the present
value of the previously estimated remaining cash flows, adjusted for cash
receipts during the intervening period, an other-than-temporary impairment is
deemed to have occurred. Accordingly, the security is written down to fair value
with the resulting change being included in income and a new cost basis
established with the original discount or premium written off when the new cost
basis is established. In accordance with this guidance, on a quarterly basis,
when significant changes in estimated cash flows from the cash flows previously
estimated occur due to actual prepayment and credit loss experience, we
calculate a revised yield based upon the current amortized cost of the
investment, including any other-than-temporary impairments recognized to date,
and the revised cash flows. The revised yield is then applied prospectively to
recognize interest income. Management must also assess whether unrealized losses
on securities reflect a decline in value that is other-than-temporary, and,
accordingly, write down the impaired security to its fair value, through a
charge to earnings. Significant judgment of management is required in this
analysis that includes, but is not limited to, making
-6-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
assumptions regarding the collectibility of the principal and interest, net of
related expenses, on the underlying loans.
Loans Receivable and Reserve for Possible Credit Losses
We purchase and originate commercial real estate debt and related instruments,
or Loans, to be held as long term investments at amortized cost. Management must
periodically evaluate each of these loans for possible impairment. Impairment is
indicated when it is deemed probable that we will not be able to collect all
amounts due according to the contractual terms of the loan. If a loan were
determined to be permanently impaired, we would write down the loan through a
charge to the reserve for possible credit losses. Given the nature of our loan
portfolio and the underlying commercial real estate collateral, significant
judgment of management is required in determining the permanent impairment and
the resulting charge to the reserve, which includes but is not limited to making
assumptions regarding the value of the real estate that secures the loan. Each
loan in our portfolio is evaluated at least quarterly using our loan risk rating
system which considers loan-to-value, debt yield, cash flow stability, exit
plan, loan sponsorship, loan structure and other factors deemed necessary by
management 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 the default likelihood to determine the size of
the reserve. Actual losses, if any, could ultimately differ from these
estimates.
Repurchase Obligations
In certain circumstances, we have financed the purchase of investments from a
counterparty through a repurchase agreement with that same counterparty. We
currently record these investments in the same manner as other investments
financed with repurchase agreements, with the investment recorded as an asset
and the related borrowing under any repurchase agreement as a liability on our
consolidated balance sheet. Interest income earned on the investments and
interest expense incurred on the repurchase obligations are reported separately
on the consolidated statements of income. There is a position under
consideration by standard setters, based upon a technical interpretation of FAS
140, that these transactions will not qualify as a purchase by us. We believe,
consistent with industry practice, that we are accounting for these transactions
in an appropriate manner; however, if these investments do not qualify as a
purchase under FAS 140, we would be required to present the net investment
(asset balance less the repurchase obligation balance) on our balance sheet
together with an embedded derivative with the corresponding change in fair value
of the derivative being recorded in the consolidated statements of income. The
value of the derivative would reflect not only changes in the value of the
underlying investment, but also changes in the value of the underlying credit
provided by the counterparty. Income from these arrangements would be presented
on a net basis. Furthermore, hedge instruments related to these assets and
liabilities, currently deemed effective, may no longer be effective and may have
to be accounted for as non-hedge derivatives. As of September 30, 2006 we had
entered into thirteen such transactions, with a book value of the associated
assets of $310.1 million financed with repurchase obligations of $198.0 million.
Adoption of the aforementioned treatment would result in a reduction in total
assets and liabilities on our consolidated balance sheet of $198.0 million and
$118.2 million at September 30, 2006 and December 31, 2005, respectively.
Interest Rate Derivative Financial Instruments
In the normal course of business, we use interest rate derivative financial
instruments to manage, or hedge, cash flow variability caused by interest rate
fluctuations. Specifically, we currently use interest rate swaps to effectively
convert variable rate liabilities, that are financing fixed rate assets, to
fixed rate liabilities. The differential to be paid or received on these
agreements is recognized on the accrual basis as an adjustment to the interest
expense related to the attendant liability. The swap agreements are generally
accounted for on a held-to-maturity basis, and, in cases where they are
terminated early, any gain or loss is generally amortized over the remaining
life of the hedged item. These swap agreements must be effective in reducing the
variability of cash flows of the hedged items in order to qualify for the
aforementioned hedge accounting treatment. Changes in value of effective cash
flow hedges are reflected in our financial statements through accumulated other
comprehensive income/(loss) and do not affect our net income. To the extent a
derivative does not qualify for hedge accounting, and is deemed a non-hedge
derivative, the changes in its value are included in net income.
To determine the fair value of derivative instruments, we use third parties to
periodically value our interests.
Income Taxes
Our financial results generally do not reflect provisions for current or
deferred income taxes on our REIT taxable income. Management believes that we
have and intend to continue to operate in a manner that will continue to allow
-7-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
us to be taxed as a REIT and, as a result, do not expect to pay substantial
corporate-level taxes (other than taxes payable by our taxable REIT subsidiaries
which are accounted for in accordance with Statement of Financial Accounting
Standards No. 109). Many of these requirements, however, are highly technical
and complex. If we were to fail to meet these requirements, we may be subject to
Federal income tax on current and past income and may be subject to penalties.
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 may ultimately differ from those estimates.
Reclassifications
Certain reclassifications have been made in the presentation of the prior
periods consolidated financial statements to conform to the September 30, 2006
presentation.
-8-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
3. Commercial Mortgage-Backed Securities
Activity relating to our commercial mortgage-backed securities, or CMBS, for the
nine months ended September 30, 2006 was as follows ($ values in thousands):
Weighted Average
------------------------------------------
Number Number
Face Book of of Maturity
Asset Type Value Value Securities Issues Rating(1) Coupon(2) Yield(2) (Years)(3)
- ---------------------------------------------- ------------ ---------- ------- ---------- ---------- --------- ----------
December 31, 2005
Floating Rate $ 106,666 $ 105,032 11 9 BBB- 6.89% 6.99% 2.3
Fixed Rate 419,885 382,938 34 21 B+ 6.97% 7.72% 10.1
------------- ------------ ------------------ ---------- ---------- --------- ----------
Total/Average 526,551 487,970 45 30 BB- 6.95% 7.57% 8.4
Originations- Nine Months
Floating Rate 25,448 25,451 4 2 BB+ 7.18% 7.21% 3.0
------------- ------------ ------------------ ---------- ---------- --------- ----------
Fixed Rate 361,255 359,280 34 28 BBB- 6.35% 6.33% 8.0
------------- ------------ ------------------ ---------- ---------- --------- ----------
Total/Average 386,703 384,731 38 30 BBB- 6.41% 6.39% 7.6
Repayments & Other(4)-Nine Months
Floating Rate 18,748 18,737 3 2 N/A N/A N/A N/A
Fixed Rate 9,059 8,512 1 1 N/A N/A N/A N/A
------------- ------------ ------------------ ---------- ---------- --------- ----------
Total/Average 27,807 27,249 4 3 N/A N/A N/A N/A
September 30, 2006
Floating Rate 113,366 111,747 12 9 BBB- 7.66% 7.79% 2.0
Fixed Rate 772,081 733,705 67 48 BB 6.70% 7.35% 8.7
------------- ------------ ------------------ ---------- ---------- --------- ----------
Total/Average $ 885,447 $ 845,452 79 57 BB 6.82% 7.41% 7.8
============ ============ ========= ======= ========== ========== ========= =========
(1) Rating is the lowest rating from Fitch Ratings, Standard & Poor's and/or
Moody's Investors Service and the weighted average is calculated using the
Fitch Ratings methodology.
(2) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of
4.39% as of December 31, 2005.
(3) Represents the maturity of the investment assuming all extension options are
executed.
(4) Includes full repayments, sale, partial repayments, mark-to-market
adjustments, and the impact of premium and discount amortization and losses,
if any. The figures shown in "Number of Securities" and "Number of Issues"
represent the full repayments/sales, if any.
While we typically account for our CMBS investments on a held-to-maturity basis,
under certain circumstances we will account for CMBS on an available-for-sale
basis. At September 30, 2006, we had one CMBS investment that we designated and
account for on an available-for-sale basis with a face value of $10.0 million.
The security earns interest at a rate of 8.00%. As of September 30, 2006, the
security was carried at its fair market value of $10.5 million. The investment
matures in February 2010.
Quarterly, we reevaluate our CMBS portfolio to determine if there has been an
other-than-temporary impairment based upon our assessment of future cash flow
receipts. For the nine months ended September 30, 2006, we believe that there
has not been any adverse change in cash flows for our CMBS portfolio and,
therefore, did not recognize any other-than-temporary impairments. During the
fourth quarter of 2004, we concluded that two of our CMBS investments had
incurred other-than-temporary impairment and we incurred a charge of $5.9
million through the consolidated statements of income. Significant judgment of
management is required in this analysis that includes, but is not limited to,
making assumptions regarding the collectibility of the principal and interest,
net of related expenses, on the underlying loans.
-9-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
4. Loans Receivable
Activity relating to our loans receivable for the nine months ended September
30, 2006 was as follows ($ values in thousands):
Weighted Average(1)
---------------------------------------
Invest- Maturity
Asset Type Face Value(1) Book Value(1) ments(1) LTV(2) Coupon(3) Yield(3) (Years)(4)
- ---------------------------------- ---------------------------------------------- ------------------- ---------
December 31, 2005
- -----------------
Floating rate
Mortgage loans $ 66,471 $ 66,471 3 71.8% 6.90% 6.85% 2.8
Subordinate mortgage interests 527,497 526,435 51 64.3% 7.75% 7.82% 3.7
Mezzanine loans 230,174 229,998 14 70.4% 8.56% 8.59% 3.5
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 824,142 822,904 68 66.6% 7.91% 7.96% 3.6
Fixed rate
Mortgage loans - -
Subordinate mortgage interests 49,390 48,435 4 71.6% 7.78% 8.15% 16.9
Mezzanine loans 119,543 115,764 4 70.5% 9.00% 9.54% 5.9
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 168,933 164,199 8 70.8% 8.65% 9.13% 9.2
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average - December 31, 2005 993,075 987,103 76 67.1% 8.01% 8.13% 4.5
============= ============= ========= ======== ========== ======== =========
Originations - Nine Months(5)
- -----------------------------
Floating rate
Mortgage loans 146,027 146,027 10 75.8% 8.76% 8.85% 3.9
Subordinate mortgage interests 206,280 206,280 4 77.5% 9.22% 9.37% 4.0
Mezzanine loans 392,480 392,480 8 74.8% 9.98% 10.18% 4.3
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 744,787 744,787 22 75.7% 9.53% 9.69% 4.1
Fixed rate
Mortgage loans -- -- -- -- -- -- --
Subordinate mortgage interests -- -- -- -- -- -- --
Mezzanine loans 25,700 26,413 4 80.0% 11.49% 10.98% 4.6
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 25,700 26,413 4 80.0% 11.49% 10.98% 4.6
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 770,487 771,200 26 75.9% 9.60% 9.74% 4.1
============= ============= ========= ======== ========== ======== =========
Repayments & Other(6) - Nine Months
- -----------------------------------
Floating rate
Mortgage loans 61,569 61,569 3 N/A N/A N/A N/A
Subordinate mortgage interests 296,450 296,255 30 N/A N/A N/A N/A
Mezzanine loans 68,795 68,763 4 N/A N/A N/A N/A
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 426,814 426,587 37 N/A N/A N/A N/A
Fixed rate
Mortgage loans -- -- -- N/A N/A N/A N/A
Subordinate mortgage interests 159 61 -- N/A N/A N/A N/A
Mezzanine loans 578 392 -- N/A N/A N/A N/A
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 737 453 -- N/A N/A N/A N/A
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 427,551 427,040 37 N/A N/A N/A N/A
============= ============= ========= ======== ========== ======== =========
September 30, 2006
- ------------------
Floating rate
Mortgage loans 150,929 150,929 10 74.9% 8.64% 8.98% 3.8
Subordinate mortgage interests 437,327 436,460 25 69.0% 8.92% 9.01% 3.5
Mezzanine loans 553,859 553,715 18 72.7% 9.85% 10.01% 4.0
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 1,142,115 1,141,104 53 71.5% 9.34% 9.49% 3.8
Fixed rate
Mortgage loans -- -- -- -- -- -- --
Subordinate mortgage interests 49,231 48,374 4 70.2% 7.78% 7.86% 16.2
Mezzanine loans 144,665 141,785 8 69.5% 9.30% 9.59% 5.1
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average 193,896 190,159 12 69.7% 8.91% 9.15% 7.9
------------- ------------- --------- -------- ---------- -------- ---------
Total/Average - September 30, 2006 $ 1,336,011 $ 1,331,263 65 71.2% 9.27% 9.44% 4.4
============= ============= ========= ======== ========== ======== =========
(1) Does not include one non-performing loan with a face value of $8,000 and a
book value of $2,751 and $3,039 on September 30, 2006 and December 31, 2005,
respectively.
(2) Loan to value is based upon appraised values determined by third parties.
(3) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of
4.39% as of December 31, 2005.
(4) Represents the maturity of the investment assuming all extension options are
executed.
(5) Includes additional fundings on prior period originations. The figures shown
in "Investments" represents the actual number of originations during the
period.
(6) Includes full repayments, sale, partial repayments and the impact of premium
and discount amortization and losses, if any. The figures shown in
"Investments" represents the full repayments/sales, if any.
-10-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
We continue to have one defaulted loan, an $8.0 million first mortgage at
September 30, 2006. We received $288,000 in cash on the loan during the nine
months ended September 30, 2006. The cash collections reduced the carrying value
to $2.8 million at September 30, 2006.
In some instances, we have a further obligation to fund additional amounts under
our loan arrangements, or Unfunded Commitments. At September 30, 2006, we had
five such Unfunded Commitments for a total future funding obligation of $218.9
million.
At September 30, 2006, we had $6.2 million included in deposits and other
receivables which represented loans that were satisfied and repaid prior to
September 30, the proceeds of which had not been remitted to us by our
servicers.
Quarterly, we reevaluate the reserve for possible credit losses based upon our
current portfolio of loans. At September 30, 2006, a detailed review of the
entire portfolio was completed, and we concluded that a reserve for possible
credit losses was not warranted.
5. Total Return Swaps
Total return swaps are derivative contracts in which one party agrees to make
payments that replicate the total return of a defined underlying asset,
typically in return for another party agreeing to bear the risk of performance
of the defined underlying asset. Under our current total return swaps, we bear
the risk of performance of the underlying asset and receive payments from our
counterparty as compensation. In effect, these total return swaps allow us to
receive the leveraged economic benefits of asset ownership without our
acquiring, or our counterparty selling, the actual underlying asset. Our total
return swaps reference commercial real estate loans and contain a put provision
whereby our counterparty has the right to require us to buy the reference loan
at its par value under certain reference loan performance scenarios. The put
obligation imbedded in these arrangements constitutes a recourse obligation for
us to perform under the terms of the contract.
Activity relating to our total return swaps for the nine months ended September
30, 2006 was as follows ($ values in thousands):
Weighted Average
------------------------
Asset Type Fair Market Cash Reference Number Maturity
Value Loan/ of
(Book Value) Collateral Participation Investments Yield(1) (Years)
- ----------------------------------------- --------------- ------------- ----------- ------------ ------------
December 31, 2005 $ 4,000 $ 4,000 $ 20,000 1 18.14% 0.6
Originations- Nine Months(2) 4,138 4,138 40,000 2 19.55% 1.9
Repayments- Nine Months 5,138 5,138 20,000 1 N/A N/A
------------ --------------- ------------- ----------- ------------ ------------
September 30, 2006(2) $ 3,000 $ 3,000 $ 40,000 2 20.55% 1.0
============ =============-- ============= =========== ============ ============
(1) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of
4.39% as of December 31, 2005.
(2) One total return swap currently has no outstanding balance and a $3.0
million Unfunded Commitment exists.
The total return swaps are treated as non-hedge derivatives for accounting
purposes and, as such, changes in their market value are recorded through the
consolidated statements of income. At September 30, 2006, our total return swaps
were valued at par and no such consolidated statement of income impact was
recorded.
-11-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
6. Equity Investment in Unconsolidated Subsidiaries
Pursuant to a venture agreement with Citigroup Alternative Investments, LLC, or
the Venture Agreement, entered into in 2000 and subsequently amended in 2003, we
have co-sponsored two funds: CT Mezzanine Partners II LP and CT Mezzanine
Partners III, Inc., or Fund II and Fund III. We are an investor in the funds and
our wholly-owned subsidiary, CT Investment Management Co., LLC, serves as the
investment manager to the funds. Both funds have concluded their respective
investment periods and are liquidating in the ordinary course. In connection
with entering into the Venture Agreement and the formation of the funds, we
capitalized certain costs. These costs are being amortized over the expected
life of each fund with respect to each of the funds. During the second quarter,
management concluded that it no longer intends to co-sponsor investment
management vehicles pursuant to the Venture Agreement. Accordingly, the costs
related to the Venture Agreement were accelerated and fully amortized during the
quarter ended June 30, 2006. Included in depreciation and amortization for the
quarter ended June 30, 2006, was $1.8 million of the accelerated amortization of
these costs.
In September of 2006, we made a founding investment in Bracor Investimentos
Imobiliarios Ltda., or Bracor, a newly formed net lease commercial real estate
company located and operating in Brazil. Our total commitment is $15.0 million
and at September 30, 2006, we funded $3.2 million. Bracor is owned 24% by us,
47% by Equity International Properties, Ltd., or EIP, and 29% by third parties.
Our Chairman, Sam Zell, is the Chairman of EIP and has an ownership position in
EIP. Bracor's operations will be conducted in Brazilian Reais and changes in the
USD/Reais exchange rate will impact the carrying value of our investment. At
September 30, 2006, the currency valuation adjustment for our investment was
$1,000 and was recorded as an adjustment to accumulated other comprehensive
income/(loss) in shareholders' equity. Our share of profits and losses from
Bracor will be reported one quarter subsequent to the period earned by Bracor.
Activity relating to our equity investment in unconsolidated subsidiaries for
the nine months ended September 30, 2006 was as follows ($ values in thousands):
Venture Fund II Fund II Fund III Bracor Total
Agrmt. GP(1)
----------- ---------- ---------- ---------- ---------- ----------
Equity Investment
Beginning Balance $ -- $1,278 $692 $7,754 $ -- $9,724
Equity investment -- -- -- -- 3,209 3,209
Company portion of fund income -- 410 (70) 804 -- 1,144
Amortization of capitalized costs -- (93) -- -- -- (93)
Investment/(Distributions)
from funds -- (106) -- (4,656) -- (4,762)
----------- ---------- ---------- ---------- ---------- ----------
Ending Balance $ -- $1,489 $622 $3,902 $3,209 $9,222
=========== ========== ========== ========== ========== ==========
Capitalized Costs
Beginning Balance $2,020 $2,036 $ -- $521 $ -- $4,577
Amortization of capitalized costs (2,020) (481) -- (113) -- (2,614)
----------- ---------- ---------- ---------- ---------- ----------
Ending Balance $ -- $1,555 $ -- $408 $ -- $1,963
=========== ========== ========== ========== ========== ==========
Total
Beginning Balance $2,020 $3,314 $692 $8,275 $ -- $ 14,301
Equity investment -- -- -- -- 3,209 3,209
Company portion of fund income -- 410 (70) 804 -- 1,144
Amortization of capitalized costs (2,020) (574) -- (113) -- (2,707)
Distributions from funds -- (106) -- (4,656) -- (4,762)
----------- ---------- ---------- ---------- ---------- ----------
Ending Balance $ -- $3,044 $622 $4,310 $3,209 $11,185
=========== ========== ========== ========== ========== ==========
(1) $420,000 of the equity investment consists of capitalized costs at Fund II
GP which are being amortized over the expected life of the Fund.
-12-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
7. Debt
At September 30, 2006 and December 31, 2005 we had approximately $1.6 billion
and $1.2 billion, respectively, of total debt outstanding. The balances of each
category of debt and their respective all-in effective cost, including the
amortization of fee and expenses, as of September 30, 2006 and December 31, 2005
were as follows ($ values in thousands):
September 30, 2006 December 31, 2005
---------------------------------------------- -----------------------------------------------
All-In All-In
Face Value Book Value Coupon(1) Cost Face Value Book Value Coupon(1) Cost
----------- ----------- ---------- ----- ---------- ---------- --------- ----
Repurchase Obligations $351,433 $351,433 6.51% 6.81% $369,751 $369,751 5.33% 5.57%
Collateralized Debt
Obligations
CDO I (Floating) 252,778 252,778 5.94% 6.36% 252,778 252,778 5.01% 5.43%
CDO II (Floating) 298,913 298,913 5.81% 6.03% 298,913 298,913 4.88% 5.10%
CDO III (Fixed) 269,594 271,830 5.22% 5.25% 269,594 272,053 5.22% 5.25%
CDO IV(Floating)(2) 418,428 418,428 5.52% 5.62% -- -- -- --
----------- ----------- ---------- ----- ---------- ---------- --------- ----
Total CDOs 1,239,713 1,241,949 5.61% 5.79% 821,285 823,744 5.03% 5.25%
Junior subordinated
debentures 51,550 51,550 7.45% 7.53% -- -- -- --
----------- ----------- ---------- ----- ---------- ---------- --------- ----
Total $1,642,696 $1,644,932 5.86% 6.06% $1,191,036 $1,193,495 5.12% 5.35%
=========== =========== ========== ===== ========== ========== ========= =====
(1) Calculations based on LIBOR of 5.32% as of September 30, 2006 and LIBOR of
4.39% as of December 31, 2005.
(2) Comprised of $402.2 million of floating rate notes sold and $16.2 million of
fixed rate notes sold.
Repurchase Obligations
At September 30, 2006, we were a party to eight repurchase agreements with six
counterparties that provide total commitments of $950.0 million. At September
30, 2006, we borrowed $351.4 million under these agreements and had the ability
to borrow $77.5 million without pledging additional collateral.
In February 2006, we amended and restated our repurchase agreements with Bear
Stearns increasing the combined commitment by $75 million to $200 million. The
agreements expire in August 2008 and are designed to finance, on a recourse
basis, our general investment activity as well as assets designated for one or
more of our CDOs. Under the agreements, advance rates are up to 85.0% and cash
costs of funds range from LIBOR plus 0.55% to LIBOR plus 2.00%. At September 30,
2006, we had incurred borrowings under the agreements of $88.3 million and had
the ability to borrow an additional $31.6 million against the assets
collateralizing the borrowings under the agreement.
In March 2006, we extended our $200 million repurchase agreement with Liquid
Funding, LTD., an affiliate of Bear Stearns. The agreement, which we originally
entered into in February 2002, is designed to provide us with non-recourse
financing for our general securities investment activity. Under the agreement,
advance rates are up to 85.0% and cash costs of funds range from LIBOR plus
0.40% to LIBOR plus 1.70%. At September 30, 2006, we had incurred borrowings
under the agreement of $25.7 million.
In March 2006, we entered into a loan-specific repurchase obligation
representing borrowings of $6.0 million with Lehman Brothers. The obligation is
non-recourse, has a term of one year and the advance rate is 60.0% with a cash
cost of LIBOR plus 2.50%.
In June 2006, we extended our $100 million repurchase agreement with Goldman
Sachs Mortgage Company to June 2009 and in August we amended and restated the
agreement to increase the commitment to $150 million. The agreement, which we
originally entered into in May 2003, is designed to finance, on a recourse
basis, our general
-13-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
investment activity. Under the agreement, advance rates are up to 88.0% and cash
costs of funds range from LIBOR plus 0.60% to LIBOR plus 1.95%. At September 30,
2006, we had incurred borrowings under the agreement of $71.0 million and had
the ability to borrow an additional $24.6 million against the assets
collateralizing the borrowings under the agreement.
Collateralized Debt Obligations
At September 30, 2006, we had collateralized debt obligations, or CDOs,
outstanding from four separate issuances with a total face value of $1.2
billion. Our existing CDOs are financing vehicles for our assets and, as such,
are consolidated on our balance sheet at $1.2 billion, representing the
amortized sales price of the securities sold to third parties. In total, our two
floating rate reinvesting CDOs provide us with $551.7 million of debt financing
at a cash cost of LIBOR plus 0.55% (5.87% at September 30, 2006) and an all-in
effective interest rate (including the amortization of issuance costs) of LIBOR
plus 0.87% (6.19% at September 30, 2006). Our two fixed rate static CDOs provide
us with $690.3 million of financing with a cash cost of 5.40% and an all-in
effective interest rate of 5.47%. On a combined basis, our CDOs provide us with
$1.2 billion of non-recourse, non-mark-to-market, index matched financing at a
weighted average cash cost of 0.49% over the applicable index (5.61% at
September 30, 2006) and a weighted average all-in cost of 0.69% over the
applicable index (5.79% at September 30, 2006).
Junior Subordinated Debentures
In February 2006, we sold $50 million of trust preferred securities through a
subsidiary, CT Preferred Trust I. The trust preferred securities have a 30-year
term, maturing in April 2036, are redeemable at par on or after April 30, 2011
and pay distributions at a fixed rate of 7.45% for the first ten years ending
April 2016, and thereafter, at a floating rate of three month LIBOR plus 2.65%.
The all-in cost of the junior subordinated debentures is 7.53%.
Our interest in CT Preferred Trust I is accounted for using the equity method
and the assets and liabilities are not consolidated into our financial
statements due to our determination that CT Preferred Trust I is a variable
interest entity under FIN 46 and that we are not the primary beneficiary of the
entity. Interest on the junior subordinated debentures is included in interest
expense on our consolidated statements of income while the junior subordinated
notes are presented as a separate item in our consolidated balance sheet.
8. Participations Sold
Participations sold represent interests in loans that we originated and
subsequently sold to third parties. We present these sold interests as secured
borrowings in conformity with GAAP on the basis that these arrangements do not
qualify as sales under FAS 140. At September 30, 2006, we had three such
participations sold with a total book balance of $248.1 million at a weighted
average yield of LIBOR plus 3.64% (8.96% at September 30, 2006). The income
earned on the loans is recorded as interest income and an identical amount is
recorded as interest expense on the consolidated statements of income.
-14-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
9. Derivative Financial Instruments
To manage interest rate risk, we typically employ interest rate swaps or other
arrangements, to convert a portion of our floating rate debt to fixed rate debt
in order to index match our assets and liabilities. The net payments due under
these swap contracts are recognized as interest expense over the life of the
contracts.
During the nine month period ended September 30, 2006, we entered into nine new
cash flow hedge agreements with a total current notional balance of $404.1
million. Additionally, during the nine months ended September 30, 2006, we
received $1.2 million from counterparties in settlement of seven interest rate
swaps. Recognition of these settlements has been deferred and is being amortized
over the remaining life of the previously hedged item using an approximation of
the level yield basis.
The following table summarizes the notional and fair values of our derivative
financial instruments as of September 30, 2006. The notional value provides an
indication of the extent of our involvement in the instruments at that time, but
does not represent exposure to credit or interest rate risk ($ values in
thousands):
Hedge Type Notional Value Interest Rate Maturity Fair Value
---------- --------------------- -------------------- ------------------ ------------- -------------
Swap Cash Flow Hedge $340,895 5.10% 2015 ($662)
Swap Cash Flow Hedge 74,094 4.58% 2014 1,495
Swap Cash Flow Hedge 19,037 3.95% 2011 794
Swap Cash Flow Hedge 16,894 4.83% 2014 181
Swap Cash Flow Hedge 16,377 5.52% 2018 (635)
Swap Cash Flow Hedge 15,278 5.05% 2016 (29)
Swap Cash Flow Hedge 8,007 4.77% 2011 44
Swap Cash Flow Hedge 7,410 5.31% 2011 (124)
Swap Cash Flow Hedge 7,062 5.10% 2016 (48)
Swap Cash Flow Hedge 6,328 4.78% 2007 26
Swap Cash Flow Hedge 5,384 3.12% 2007 82
Swap Cash Flow Hedge 5,104 5.18% 2016 (62)
Swap Cash Flow Hedge 4,134 4.76% 2007 18
Swap Cash Flow Hedge 3,325 5.45% 2015 (104)
Swap Cash Flow Hedge 2,870 5.08% 2011 (17)
-------------------- ------------------ ------------- -------------
Total/Weighted Average $532,199 4.96% 2014 $959
==================== ================== ============= =============
As of September 30, 2006, the derivative financial instruments were reported at
their fair value of $959,000 as interest rate hedge assets. Income and expense
associated with these instruments is recorded as interest expense on the
company's consolidated statements of income.
-15-
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, 2006 and 2005 (in thousands, except share and
per share amounts):
Nine months Ended September 30, 2006 Nine months Ended September 30, 2005
-----------------------------------------------------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
---------------- ------------- -------------- ------------- ----------------- -----------
Basic EPS:
Net earnings per share
of common stock $ 38,577 15,327,855 $ 2.52 $ 27,797 15,110,227 $ 1.84
============== ===========
Effect of Dilutive Securities:
Options outstanding for the
purchase of common stock -- 147,643 -- 172,744
Stock units outstanding
convertible to shares of
common stock -- 66,808 -- 56,562
---------------- -------------- -------------- -----------------
Diluted EPS:
Net earnings per share
of common stock and
assumed conversions $ 38,577 15,542,306 $ 2.48 $ 27,797 15,339,533 $ 1.81
================ ============== ============= ============= ================= ===========
The following table sets forth the calculation of Basic and Diluted EPS for the
three months ended September 30, 2006 and 2005 (in thousands, except share and
per share amounts):
Three months Ended September 30, 2006 Three months Ended September 30, 2005
-----------------------------------------------------------------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
---------------- ------------- -------------- ------------- ----------------- -----------
Basic EPS:
Net earnings per share
of common stock $ 13,437 15,337,325 $ 0.88 $ 9,799 15,125,443 $ 0.65
============== ===========
Effect of Dilutive Securities:
Options outstanding for the
purchase of common stock -- 178,748 -- 173,900
Stock units outstanding
convertible to shares of
common stock -- 69,807 -- 59,600
------------------------------- -------------- -----------------
Diluted EPS:
Net earnings per share
of common stock and
assumed conversions $ 13,437 15,585,880 $ 0.86 $ 9,799 15,358,943 $ 0.64
================ ============== ============= ============= ================= ===========
-16-
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. Under certain
circumstances, federal income and excise taxes may be due on our undistributed
taxable income. At September 30, 2006, we were in compliance with all REIT
requirements.
During the three and nine months ended September 30, 2006, we recorded $984,000
and $2.5 million of income tax benefit for losses of $2.2 million and $5.3
million, respectively, attributable to our taxable REIT subsidiary. Our
effective tax rate for the three and nine months ended September 30, 2006
attributable to the taxable REIT subsidiary was 44.4% and 46.2%, respectively.
12. Shareholders' Equity
On September 15, 2006, we declared a dividend of approximately $11.5 million, or
$0.75 per share of common stock applicable to the three-month period ended
September 30, 2006, which was paid on October 15, 2006 to shareholders of record
on September 30, 2006. All dividends paid during the period presented were
ordinary income.
13. Employee Benefit Plans
We had three benefit plans in effect at September 30, 2006: (1) the Second
Amended and Restated 1997 Long-Term Incentive Stock Plan, or 1997 Employee Plan,
(2) the Amended and Restated 1997 Non-Employee Director Stock Plan, or 1997
Director Plan, and (3) the Amended and Restated 2004 Long-Term Incentive Plan,
or 2004 Employee Plan. Activity under these three plans for the nine month
period ended September 30, 2006 is summarized in the chart below in share and
share equivalents:
1997 Employee 1997 Director 2004 Employee Plan
Plan Plan Total
------------------ -------------------- ------------------- --------------------
Options(1)
Beginning Balance 352,960 85,002 -- 437,962
Granted 2006 -- -- -- --
Exercised 2006 (13,169) (8,334) -- (21,503)
Canceled 2006 -- -- -- --
------------------ -------------------- ------------------- --------------------
Ending Balance 339,791 76,668 -- 416,459
Restricted Stock(2)
Beginning Balance -- -- 405,790 405,790
Granted 2006 -- -- 119,504 119,504
Vested 2006 -- -- (23,366) (23,366)
Forfeited 2006 -- -- (16,929) (16,929)
------------------ -------------------- ------------------- --------------------
Ending Balance -- -- 484,999 484,999
Stock Units(3)
Beginning Balance 62,384 -- 62,384
Granted 2006 9,047 -- 9,047
Converted 2006 -- -- --
------------------ -------------------- ------------------- --------------------
Ending Balance 71,431 -- 71,431
------------------ -------------------- ------------------- --------------------
Total Outstanding Shares 339,791 148,099 484,999 972,889
================== ==================== =================== ====================
(1) All options are fully vested as of September 30, 2006.
(2) Comprised of both performance based awards that vest upon the attainment of
certain common equity return thresholds and time based awards that vest
based upon an employee's continued employment on vesting dates.
(3) Stock units are given to certain members of our board of directors in lieu
of cash compensation for services and in lieu of dividends earned on
previously granted stock units.
-17-
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Compensation expense for stock awards is recognized on the accelerated
attribution method under FASB Interpretation No. 28.
The following table summarizes the outstanding options as of September 30, 2006:
Exercise Price Options Weighted Average Weighted
per Share Outstanding Exercise Price per Share Average Remaining Life
--------------------- ----------------------------- ----------------------------- --------------------------------
1997
1997 Employee Director 1997 Employee 1997 1997 Employee 1997 Director
Plan Plan Plan Director Plan Plan Plan
--------------- ------------- -------------- -------------- --------------- ----------------
$10.00 - $15.00 55,939 -- $ 13.34 $ -- 4.20 --
$15.00 - $20.00 197,184 8,334 16.85 18.00 3.72 0.79
$20.00 - $25.00 -- -- -- -- -- --
$25.00 - $30.00 86,668 68,334 28.85 30.00 1.54 1.33
--------------- ------------- -------------- -------------- --------------- ----------------
Total/W. Average 339,791 76,668 $ 19.33 $ 28.70 3.24 1.27
=============== ============= ============== ============== =============== ================
In addition to the equity interests detailed above, we have granted percentage
interests in the incentive compensation received by us from the Funds. At
September 30, 2006, we had granted, net of forfeitures, 24% and 43% of the Fund
II and fund III incentive compensation received by us, respectively.
14. Supplemental Disclosures for Consolidated Statements of Cash Flows
Interest paid on our outstanding debt during the nine months ended September 30,
2006 and 2005 was $70.6 million and $21.7 million, respectively. We paid income
taxes during the nine months ended September 30, 2006 and 2005 of $197,000 and
$5,000, respectively.
At September 30, 2006, we had $6.2 million included in deposits and other
receivables which represented loans that were satisfied and repaid prior to
September 30, 2006, the proceeds of which had not been remitted to us by our
servicers. The reclassification from loans receivable to deposits and other
receivables resulted in a non-cash investing activity.
-18-
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
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, 2006, respectively (in
thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
------------------- ------------------ ------------------- -------------------
Income from loans and other investments:
Interest and related
income $ 123,862 $ -- $ -- $ 123,862
Less: Interest and
related expenses 72,374 -- -- 72,374
------------------- ------------------ ------------------- -------------------
Income from loans and
other investments, net 51,488 -- -- 51,488
------------------- ------------------ ------------------- -------------------
Other revenues:
Management and advisory
fees -- 8,058 (5,862) 2,196
Income/(loss) from equity
investments in Funds 1,120 (70) -- 1,050
Other interest income 830 (7) (33) 790
------------------- ------------------ ------------------- -------------------
Total other revenues 1,950 7,981 (5,895) 4,036
------------------- ------------------ ------------------- -------------------
Other expenses:
General and administrative 9,467 13,101 (5,862) 16,706
Other interest expense 33 -- (33) --
Depreciation and amortization 2,501 195 -- 2,696
------------------- ------------------ ------------------- -------------------
Total other expenses 12,001 13,296 (5,895) 19,402
------------------- ------------------ ------------------- -------------------
Income (loss) before income
taxes 41,437 (5,315) -- 36,122
Benefit for income taxes -- (2,455) -- (2,455)
------------------- ------------------ ------------------- -------------------
Net (loss) income allocable to $ 41,437 $ (2,860) $ -- $ 38,577
class A common stock
=================== ================== =================== ===================
Total Assets $ 2,269,723 $ 6,481 $ (6,539) $ 2,269,665
=================== ================== =================== ===================
All revenues were generated from external sources within the United States. The
Balance Sheet Investment segment paid the Investment Management segment fees of
$5.9 million for management of the segment for the nine months ended September
30, 2006, which is reflected as offsetting adjustments to other revenues and
other expenses in the Inter-Segment Activities column in the tables above.
-19-
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, 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 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
=================== ================== =================== ===================
All revenues were generated from external sources within the United States. The
Balance Sheet Investment segment paid the Investment Management segment fees of
$3.6 million for management of the segment 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.
-20-
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, 2006, respectively (in
thousands):
Balance Sheet Investment Inter-Segment
Investment Management Activities Total
------------------- ------------------ ------------------- -------------------
Income from loans and other investments:
Interest and related
income $ 46,011 $ -- $ -- $ 46,011
Less: Interest and
related expenses 28,838 -- -- 28,838
------------------- ------------------ ------------------- -------------------
Income from loans and
other investments, net 17,173 -- -- 17,173
------------------- ------------------ ------------------- -------------------
Other revenues:
Management and advisory
fees -- 2,604 (1,856) 748
Income/(loss) from equity
investments in Funds 348 (20) -- 328
Other interest income 500 (27) (33) 440
------------------- ------------------ ------------------- -------------------
Total other revenues 848 2,557 (1,889) 1,516
------------------- ------------------ ------------------- -------------------
Other expenses:
General and administrative 3,027 4,708 (1,856) 5,879
Other interest expense 33 -- (33) --
Depreciation and amortization 292 65 -- 357
------------------- ------------------ ------------------- -------------------
Total other expenses 3,352 4,773 (1,889) 6,236
------------------- ------------------ ------------------- -------------------
Income before income taxes 14,669 (2,216) -- 12,453
Benefit for income taxes -- (984) -- (984)
------------------- ------------------ ------------------- -------------------
Net income allocable to class A
common stock $ 14,669 $ (1,232) $ -- $ 13,437
=================== ================== =================== ===================
Total Assets $ 2,269,723 $ 6,481 $ (6,539) $ 2,269,665
=================== ================== =================== ===================
All revenues were generated from external sources within the United States. The
Balance Sheet Investment segment paid the Investment Management segment fees of
$1.9 million for management of the segment for the three months ended September
30, 2006, which is reflected as offsetting adjustments to other revenues and
other expenses in the Inter-Segment Activities column in the tables above.
-21-
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 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
Benefit for income taxes -- (846) -- (846)
------------------- ------------------ ------------------- -------------------
Net income allocable to class A
common stock $ 10,828 $ (1,029) $ -- $ 9,799
=================== ================== =================== ===================
Total Assets $ 1,331,130 $ 11,469 $ (9,844) $ 1,332,755
=================== ================== =================== ===================
All revenues were generated from external sources within the United States. The
Balance Sheet Investment segment paid the Investment Management segment fees of
$1.2 million for management of the segment for the three 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.
-22-
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 programs have focused on loans and securities backed by
commercial real estate assets. We invest for our own account and for private
equity funds that we manage on behalf of third parties. From the commencement of
our finance business in 1997 through September 30, 2006 we have completed $7.2
billion of 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 and we are headquartered in New York City.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires our management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Our accounting policies affect our more significant judgments
and estimates used in the preparation of our financial statements. Actual
results could differ from these estimates. There have been no material changes
to our Critical Accounting Policies described in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 10, 2006.
Balance Sheet Overview
At September 30, 2006, total assets were $2.3 billion, an increase of $712.1
million or 46% from year end 2005. Asset growth was driven predominantly by
growth in CMBS, Loans and total return swaps, which we refer to collectively as
Interest Earning Assets. Interest Earning Assets grew by $700.4 million or 47%
from $1.5 billion at year end 2005 to $2.2 billion at September 30, 2006. At
September 30, 2006, Interest Earning Assets had a weighted average yield of
8.67% (based upon LIBOR of 5.32% as of September 30, 2006).
During the nine months ended September 30, 2006, we made 38 investments in CMBS,
with a total purchase price of $384.7 million ($386.7 million face value) with a
weighted average yield of 6.39%. Four investments with a purchase price of $25.5
million ($25.5 million face value) bear interest at floating rates with a yield
of LIBOR plus 1.89% (7.21% at September 30, 2006). Thirty four investments with
a purchase price of $359.3 million ($361.3 million face value) bear interest at
fixed rates with a yield of 6.33%.
At September 30, 2006, we held 79 investments in 57 separate issues of CMBS with
an aggregate book value of $845.5 million that yield 7.41%. Floating rate CMBS
with a book value of $111.7 million yields LIBOR plus 2.47% (7.79% at September
30, 2006). The remaining CMBS, $733.7 million book value, earns interest at
fixed rates and yields 7.35%. At September 30, 2006, the expected average life
for the CMBS portfolio was 94 months.
During the nine months ended September 30, 2006, we originated $771.2 million of
Loans with a weighted average yield of 9.74%. Originations were comprised of ten
mortgage loans for $146.0 million, four subordinate mortgage interests for
$206.3 million and twelve mezzanine loans for $418.9 million. Twenty two of the
loans we originated with a balance of $744.8 million bear interest at floating
rates with a yield of LIBOR plus 4.37% (9.69% at September 30, 2006). Four loans
with a balance of $26.4 million bear interest at fixed rates with a yield of
10.98%.
At September 30, 2006, we had 65 performing loans with a current book value of
$1.3 billion and a yield of 9.44%. Twelve of the loans totaling $190.2 million
bear interest at fixed rates with a yield of 9.15%. The 53 remaining loans,
totaling $1.1 billion, bear interest at variable rates with a yield of LIBOR
plus 4.17% (9.49% at September 30, 2006). One mortgage loan with an original
principal balance of $8.0 million matured on July 15, 2000 but has not been
repaid with respect to principal and interest, all other loans were performing
in accordance with their terms. At September 30, 2006, we had five outstanding
unfunded loan commitments for $218.9 million.
-23-
At September 30, 2006, we had two total return swaps with total market value of
$3.0 million that earned interest at floating rates with a yield of LIBOR plus
15.24% (20.55% at September 30, 2006). The total return swaps are treated as
non-hedge derivatives for accounting purposes and, as such, changes in their
market value are recorded through the consolidated statements of income. At
September 30, 2006, we had $3.0 million of unfunded commitments on our total
return swaps.
At September 30, 2006, equity investments in unconsolidated subsidiaries
consisted of our co-investments in Fund II and Fund III, associated capitalized
costs and a new investment in Bracor Investimentos Imobiliarios Ltda., or
Bracor. Bracor is a newly formed net lease commercial real estate company
located and operating in Brazil. Our total commitment to Bracor is $15.0 million
and, at September 30, 2006, we had funded $3.2 million of that commitment.
Bracor's operations will be conducted in local currency and, as such, changes in
local currency value will impact the carrying value of our investment. At
quarter end, the currency valuation adjustment for our investment was $1,000 and
was recorded as an adjustment to accumulated other comprehensive income/(loss)
in shareholders' equity. At quarter end, total equity investments were $11.2
million, including $2.0 million of unamortized costs capitalized in connection
with raising Fund II and Fund III. These costs are being amortized over the
expected lives of the funds. At September 30, 2006, we had $11.8 million of
unfunded commitments associated with our equity investments in unconsolidated
subsidiaries.
We were party to 15 cash flow interest rate swaps with a total notional value of
$532.2 million as of September 30, 2006. 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. Under these swaps, we receive
a rate equal to LIBOR (5.32% at September 30, 2006) and pay a weighted average
rate of 4.96%. The market value of the swaps at September 30, 2006 was $959,000,
which is recorded as an interest rate hedge asset and as a component of
accumulated other comprehensive income/(loss) in shareholders' equity.
At September 30, 2006, total liabilities were $1.9 billion, an increase of
$703.4 million or 58% from year end 2005. Liability growth, the vast majority of
which was in the form of repurchase obligations, CDOs and junior subordinated
debentures which we refer to collectively as Interest Bearing Liabilities, was
the primary source of funds used to finance new originations. At September 30,
2006, Interest Bearing Liabilities had a weighted average all-in cost of 6.06%
(based upon LIBOR of 5.32% as of September 30, 2006).
At September 30, 2006 we were a party to eight repurchase agreements with six
counterparties that provide for total commitments of $950.0 million. At quarter
end we borrowed $351.4 million under these agreements and had the ability to
borrow an additional $77.5 million without pledging additional collateral. The
weighted average cash borrowing cost for all the repurchase agreements
outstanding at September 30, 2006 was LIBOR plus 1.19% (6.51% at September 30,
2006). 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 1.49% (6.81% at September 30, 2006).
At September 30, 2006, we had CDOs outstanding from four separate issuances with
a total face value of $1.2 billion. Our existing CDOs are financing vehicles for
our assets and, as such, are consolidated on our balance sheet at $1.2 billion,
representing the amortized sales price of the securities sold to third parties.
In total, our two floating rate reinvesting CDOs provide us with $551.7 million
of debt financing at a cash cost of LIBOR plus 0.55% (5.87% at September 30,
2006) and an all-in effective interest rate (including the amortization of
issuance costs) of LIBOR plus 0.87% (6.19% at September 30, 2006). Our two fixed
rate static CDOs provide us with $690.3 million of financing with a cash cost of
5.40% and an all-in effective interest rate of 5.47%. On a combined basis, our
CDOs provide us with $1.2 billion of non-recourse, non-mark-to-market, index
matched financing at a weighted average cash cost of 0.49% over the applicable
index (5.61% at September 30, 2006) and a weighted average all-in cost of 0.69%
over the applicable index (5.79% at September 30, 2006).
In February 2006, we sold $50.0 million of trust preferred securities through a
subsidiary, CT Preferred Trust I. The trust preferred securities have a 30-year
term ending April 2036, are redeemable at par on or after April 30, 2011 and pay
distributions at a fixed rate of 7.45% for the first ten years ending April
2016, and thereafter, at a floating rate of three month LIBOR plus 2.65%. The
all-in cost of the junior subordinated debentures is 7.53%.
At September 30, 2006, total shareholders' equity was $347.6 million, an
increase of $8.7 million or 3% from the year ended 2005. The increase in
shareholders' equity was primarily due to an increase in retained earnings as
our net income exceeded our dividends declared which was offset by a decrease in
accumulated other comprehensive income/(loss) as the value of our interest rate
swaps decreased by $1.3 million.
-24-
At September 30, 2006, we had 15,397,525 shares of our class A common stock
outstanding including unearned restricted stock.
Investment Management Overview
In addition to our balance sheet investment activities, we act as an investment
advisor for third parties. The purpose of the investment management business is
to create additional revenue sources for us and to broaden our platform to
include investment activities complimentary to those executed directly on our
balance sheet. We currently manage three private equity funds through our
wholly-owned, taxable, investment management subsidiary, CT Investment
Management Co., LLC, or CTIMCO.
Two of these funds, CT Mezzanine Partners II LP and CT Mezzanine Partners III,
Inc., were co-sponsored vehicles under a joint venture with Citigroup
Alternative Investments, or CAI. We have a co-investment in each of these
vehicles. The third fund, CT Large Loan 2006, Inc., or the Large Loan Fund, is
exclusively sponsored by us and we do not have a co-investment in this vehicle.
At September 30, 2006, Fund II had one investment, total assets of $47.9 million
and invested equity of $27.7 million. Our equity co-investment at quarter end
totaled $2.1 million (5.88%). CTIMCO earns base management fees of 1.29% per
annum on invested capital and is entitled to incentive compensation payments on
a 50/50 basis with our co-sponsor. We have agreed to pay up to 25% of the
incentive compensation we receive to employees. If Fund II's assets were sold
and liabilities were settled on October 1, 2006 at the recorded book value, and
the fund's equity and income were distributed, we would record approximately
$2.3 million of additional gross incentive fees.
At September 30, 2006, Fund III had six investments, total assets of $216.3
million and invested equity of $71.5 million. Our equity co-investment at
quarter end totaled $3.9 million (4.71%). CTIMCO earns base management fees of
1.42% per annum on invested capital and is entitled to incentive compensation
payments on a 62.5/37.5 basis with our co-sponsor. We have agreed to pay up to
43% of the incentive compensation we receive to employees. If Fund III's assets
were sold and liabilities were settled on October 1, 2006 at the recorded book
value, and the fund's equity and income were distributed, we would record
approximately $7.1 million of additional gross incentive fees.
At September 30, 2006, Large Loan Fund had two investments, total assets of
$195.2 million and invested equity of $98.0 million. Large Loan Fund's
investment mandate is to co-invest with us in large mezzanine transactions that
exceed the appetite of the balance sheet. Large Loan Fund has a one year
investment period that expires in May 2007. CTIMCO earns management fees of
0.75% per annum of invested assets.
Three Months Ended September 30, 2006 Compared to Three Months Ended September
30, 2005
We reported net income of $13.4 million for the three months ended September 30,
2006, an increase of $3.6 million, or 37%, from net income of $9.8 million for
the three months ended September 30, 2005. The increase was primarily the result
of an increase in net interest income from Interest Earning Assets (due to both
higher levels of aggregate investments and increases in average LIBOR).
Interest and related income from Interest Earning Assets amounted to $46.0
million for the three months ended September 30, 2006, an increase of $23.3
million or 102.2% from the $22.8 million for the three months ended September
30, 2005. The increase in interest income was due to the growth in Interest
Earning Assets and a higher average LIBOR rate, which increased by 1.75% from
3.60% for the three months ended September 30, 2005 to 5.35% for the three
months ended September 30, 2006.
Interest and related expenses on Interest Bearing Liabilities amounted to $28.8
million for the three months ended September 30, 2006, an increase of $18.5
million from the $10.3 million for the three months ended September 30, 2005.
The increase in expense was due to an increase in the amount of Interest Bearing
Liabilities outstanding in connection with our asset growth as well as an
increase in LIBOR. The increase in interest expense was partially offset by the
increased use of lower cost collateralized debt obligations and more favorable
terms under our repurchase agreements.
Other revenues decreased $605,000 from $2.1 million for the three months ended
September 30, 2005 to $1.5 million for the three months ended September 30,
2006. The decrease was primarily due to the lower level of fund management fees
received during the three months ended September 30, 2006.
-25-
General and administrative expenses increased $563,000 to $5.9 million for the
three months ended September 30, 2006 from approximately $5.3 million for the
three months ended September 30, 2005. The increase in general and
administrative expenses was primarily due to increased employee compensation
expense and professional fees.
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, 2006 and 2005, we were in compliance with all REIT requirements
and, therefore, have not provided for income tax expense on our REIT taxable
income for the three months ended September 30, 2006 and 2005. We also have
taxable REIT subsidiaries which are subject to tax at regular corporate rates.
During the three months ended September 30, 2006 and 2005, we recorded a
$984,000 and $846,000 income tax benefit, respectively. The income tax benefits
resulted from a net operating loss for the period in our taxable REIT
subsidiaries.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005
We reported net income of $38.6 million for the nine months ended September 30,
2006, an increase of $10.8 million, or 39%, from net income of $27.8 million for
the nine months ended September 30, 2005. The increase was primarily the result
of an increase in net interest income from Interest Earning Assets (due to both
higher levels of aggregate investments and increases in average LIBOR),
partially offset by decreases in fund base management and incentive management
fees.
Interest and related income from Interest Earning Assets amounted to $123.9
million for the nine months ended September 30, 2006, an increase of $66.5
million or 115.9% from the $57.4 million for the nine months ended September 30,
2005. The increase in interest income was due to the growth in Interest Earning
Assets and a higher average LIBOR rate, which increased by 1.89% from 3.13% for
the nine months ended September 30, 2005 to 5.02% for the nine months ended
September 30, 2006.
Interest and related expenses on Interest Bearing Liabilities amounted to $72.4
million for the nine months ended September 30, 2006, an increase of $48.7
million from the $23.7 million for the nine months ended September 30, 2005. The
increase in expense was due to an increase in the amount of Interest Bearing
Liabilities outstanding in connection with our asset growth as well as an
increase in LIBOR. The increase in interest expense was partially offset by the
increased use of lower cost collateralized debt obligations and more favorable
terms under our repurchase agreements.
Other revenues decreased $7.6 million from $11.7 million for the nine months
ended September 30, 2005 to $4.0 million for the nine months ended September 30,
2006. The decrease was primarily due to the receipt of $7.8 million of incentive
management fees from Fund II during the nine months ended September 30, 2005
offset by the acceleration of $1.0 million of previously capitalized fund
related expenses in that same period as well as the lower level of fund
management fees received during the nine months ended September 30, 2006.
General and administrative expenses increased $322,000 to $16.7 million for the
nine months ended September 30, 2006 from approximately $16.4 million for the
nine months ended September 30, 2005. The increase in general and administrative
expenses was primarily due to generally higher employee compensation expense and
professional fees offset by the allocation in March 2005 of Fund II incentive
management fees for payment to employees (representing 25% of the total received
by us, or $2.0 million).
Depreciation and amortization increased by $1.9 million from $837,000 to $2.7
million for the nine months ended September 30, 2006 as a result of our
expensing an additional $1.8 million of the capitalized costs relating to the
Venture Agreement.
At September 30, 2006 and 2005, we were in compliance with all REIT requirements
and, therefore, have not provided for income tax expense on our REIT taxable
income for the nine months ended September 30, 2006 and 2005. We also have
taxable REIT subsidiaries which are subject to tax at regular corporate rates.
During the nine months ended September 30, 2006 and 2005, we recorded a $2.5
million income tax benefit and a $315,000 income
-26-
tax expense, respectively. The income tax benefit resulted from a net operating
loss for the period in our taxable REIT subsidiaries.
Liquidity and Capital Resources
We expect that during the balance of 2006, 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. At September 30, 2006,
we had $26.7 million in cash, $8.2 million in restricted cash and $77.5 million
of immediately available liquidity from our repurchase agreements. Our primary
sources of liquidity for the remainder of 2006 are expected to be cash on hand,
cash generated from operations, principal and interest payments received on
loans and investments, additional borrowings under our repurchase agreements,
and capital raised through CDO issuances, stock offerings, junior subordinated
debenture issuances and other capital raising activities. We believe these
sources of capital will be adequate to meet future cash requirements.
We experienced a net increase in cash of $1.7 million for the nine months ended
September 30, 2006, compared to a net decrease of $10.2 million for the nine
months ended September 30, 2005. Cash provided by operating activities during
the nine months ended September 30, 2006 was $52.0 million, compared to cash
provided by operating activities of $27.9 million during the same period of
2005. The change was primarily due to increased net interest income due to our
increased investment originations. For the nine months ended September 30, 2006,
cash used in investing activities was $713.2 million, compared to $447.2 million
during the same period in 2005. The change was primarily due to our increased
investment originations. For the nine months ended September 30, 2006, cash
provided by financing activities was $662.9 million, compared to $409.2 million
during the same period in 2005. The change was primarily due to our increased
investment originations.
At September 30, 2006, we had outstanding repurchase obligations totaling $351.4
million. At September 30, 2006, we had pledged assets that enable us to obtain
an additional $77.5 million of financing under our repurchase agreements without
pledging additional collateral. At September 30, 2006, we had $598.6 million of
credit available for the financing of new and existing unpledged assets pursuant
to our repurchase agreements.
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.
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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, 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.
-28-
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. The swap agreements are generally held-to-maturity and we do not use
interest rate derivative financial instruments for trading purposes. 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, 2006. For financial
assets and debt obligations, the table presents cash flows (in certain cases,
face adjusted for expected losses) to the expected maturity and weighted average
interest rates based upon the current carrying values of the remaining assets
and liabilities. 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
-----------------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- -----------
Assets: (dollars in thousands)
Commercial Mortgage-backed
Securities
Fixed Rate $ 1,509 $ 21,745 $ 48,802 $ 7,784 $ 17,639 $ 653,988 $ 751,467 $ 724,205
Average interest rate 6.66% 6.66% 6.67% 6.71% 6.70% 6.50% 6.52%
Variable Rate $ 146 $ 34,752 $ 57,689 $ 19,195 -- $ 1,583 $ 113,365 $ 112,301
Average interest rate 7.62% 7.54% 7.42% 7.20% -- 11.26% 7.47%
Loans receivable
Fixed Rate $ 404 $ 15,890 $ 61,102 $ 1,538 $ 1,671 $ 113,291 $ 193,896 $ 194,198
Average interest rate 8.91% 8.79% 8.30% 7.75% 7.74% 7.34% 7.77%
Variable Rate $ 80,505 $ 264,897 $ 515,197 $ 106,863 $ 87,261 $ 90,142 $ 1,144,865 $ 1,145,082
Average interest rate 9.37% 9.49% 9.40% 9.91% 10.56% 11.16% 9.69%
Total Return Swaps
Variable Rate -- $ 3,000 -- -- -- -- $ 3,000 $ 3,000
Average interest rate -- 20.55% -- -- -- -- 20.55%
Interest rate swaps
Notional amounts $ 6,694 $ 36,343 $ 41,375 $ 37,425 $ 14,107 $ 396,255 $ 532,199 $ 959
Average fixed pay rate 5.07% 4.68% 5.08% 4.69% 5.04% 5.00% 4.96%
Average variable receive
rate 5.32% 5.32% 5.32% 5.32% 5.32% 5.32% 5.32%
Liabilities:
Repurchase obligations
Variable Rate $ 56,161 $ 71,021 $ 224,251 -- -- -- $ 351,433 $ 351,433
Average interest rate 6.08% 6.40% 6.64% -- -- -- 6.49%
Collateralized debt
obligations
Fixed Rate $ 324 $ 5,976 $ 5,030 $ 4,396 $ 2,603 $ 267,460 $ 285,789 $ 265,082
Average interest rate 6.82% 5.37% 5.65% 5.69% 5.28% 5.29% 5.31%
Variable Rate $ 8,052 $ 24,255 $ 121,225 $201,424 $ 151,803 $ 453,524 $ 960,283 $ 960,283
Average interest rate 5.69% 5.69% 5.34% 5.55% 5.74% 5.83% 5.69%
-29-
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.
-30-
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
None
ITEM 1A: Risk Factors
There have been no material changes to the risk factors previously
disclosed in Item 1A of our annual report on Form 10-K for the
year ended December 31, 2005, filed on March 10, 2006 with the
Securities and Exchange Commission, except that the Company has
determined to add the following risk factors:
We are subject to risks related to our international investments.
We make investments in foreign countries. Investing in foreign
countries involves certain risks that may not exist when investing
in the United States. The risks involved in foreign investments
include:
o exposure to local economic conditions, foreign exchange
restrictions and restrictions on the withdrawal of foreign
investment and earnings, investment restrictions or
requirements, expropriations of property and changes in
foreign taxation structures;
o potential adverse changes in the diplomatic relations of
foreign countries with the United States and government
policies against investments by foreigners;
o changes in foreign regulations;
o hostility from local populations, potential instability of
foreign governments and risks of insurrections, terrorist
attacks, war or other military action;
o fluctuations in foreign exchange rates;
o changes in social, political, legal and other conditions
affecting our international investment;
o logistical barriers to our timely receiving the financial
information relating to our international investments that
may need to be included in our periodic reporting obligations
as a public company; and
o lack of uniform accounting standards (including availability
of information in accordance with U.S. generally accepted
accounting principles).
Unfavorable legal, regulatory, economic or political changes such
as those described above could adversely affect our financial
condition and results of operations.
There are increased risks involved with construction lending
activities. We originate loans for the construction of commercial
and residential use properties. Construction lending generally is
considered to involve a higher degree of risk than to other types
of lending due to a variety of factors, including generally larger
loan balances, the dependency on successful completion or
operation of the project for repayment, the difficulties in
estimating construction costs and loan terms which often do not
require full amortization of the loan over its term and, instead,
provide for a balloon payment at stated maturity.
Some of our investments and investment opportunities are in
synthetic form.
Synthetic investments are contracts between parties whereby
payments are exchanged based upon the performance of an underlying
reference obligation. These investments can take the form of
either a total return swap, contracts in which one party agrees to
make payments that replicate the total return of a defined
underlying asset, typically in return for an upfront payment from
the counterparty who essentially bears the risk of performance of
the referenced asset, or a credit default swap, where one
counterparty receives payments in return for assuming the risk of
defaults and losses corresponding to the reference obligation. In
addition to the performance of the reference obligation, these
synthetic interests carry the risk of the counterparty not
performing its contractual obligations. Market standards, the GAAP
accounting methodology and tax regulations related to these
investments are evolving, and we cannot be certain that their
evolution will not adversely impact the value or sustainability of
these investments.
Furthermore, our ability to invest in synthetic investments, other
than through a taxable REIT subsidiary, may be severely limited by
the REIT qualification requirements because total return swaps and
other synthetic investment contracts generally are not qualifying
assets and do not produce qualifying income for purposes of the
REIT asset and income tests.
-31-
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
None
-32-
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).
o10.1.a Amended and Restated Master Repurchase Agreement, dated as of
August 15, 2006, by and between Goldman Sachs Mortgage
Company and Capital Trust, Inc.
o10.1.b Annex I to Amended and Restated Master Repurchase Agreement,
dated as of August 15, 2006, by and between Goldman Sachs
Mortgage Company and Capital Trust, Inc.
o10.1.c Letter, dated as of August 15, 2006, by and between Goldman
Sachs Mortgage Company and Capital Trust, Inc.
+10.2 Employment Agreement, dated as of August 4, 2006, by and
among Capital Trust, Inc., CT Investment Management Co., LLC
and Thomas C. Ruffing (filed as Exhibit 10.2 to Capital
Trust, Inc.'s Quarterly Report on Form 10-Q (File No.
1-14788) filed on August 8, 2006 and incorporated herein by
reference).
o+10.3 Employment Agreement, dated as of September 29, 2006, by and
among Capital Trust, Inc., CT Investment Management Co., LLC
and Geoffrey G. Jervis.
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 10 to the
consolidated financial statements contained in this report).
o31.1 Certification of John R. Klopp, Chief Executive Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
o31.2 Certification of Geoffrey G. Jervis, Chief Financial Officer,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
o32.1 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.
o32.2 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.
o99.1 Risk Factors
------------------------
o Filed herewith
+ Represents a management contract or compensatory plan or
arrangement
-33-
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 30, 2006 /s/ John R. Klopp
- ---------------- -----------------
Date John R. Klopp
Chief Executive Officer
October 30, 2006 /s/ Geoffrey G. Jervis
- ---------------- -----------------------
Date Geoffrey G. Jervis
Chief Financial Officer
-34-