Attached files
file | filename |
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EX-31.1 - BLACKSTONE MORTGAGE TRUST, INC. | e605983_ex31-1.htm |
EX-31.2 - BLACKSTONE MORTGAGE TRUST, INC. | e605983_ex31-2.htm |
EX-32.2 - BLACKSTONE MORTGAGE TRUST, INC. | e605983_ex32-2.htm |
EX-32.1 - BLACKSTONE MORTGAGE TRUST, INC. | e605983_ex32-1.htm |
EX-99.1 - BLACKSTONE MORTGAGE TRUST, INC. | e605983_ex99-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30,
2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ____________ to _____________
Commission
File Number 1-14788
Capital
Trust, Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
94-6181186
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
410 Park Avenue,
14th Floor, New York,
NY
|
10022
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(212)
655-0220
(Registrant's
telephone number, including area
code)
|
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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No
o [This requirement
is currently not applicable to the registrant.]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer ý
|
|
Non-accelerated
filer o (Do not check if
a smaller reporting company)
|
Smaller
Reporting Company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
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 28, 2009 was 22,046,680.
CAPITAL TRUST,
INC.
|
||||||
INDEX
|
||||||
Part
I.
|
Financial
Information
|
|||||
Item 1:
|
1
|
|||||
1
|
||||||
2
|
||||||
3
|
||||||
4
|
||||||
5
|
||||||
|
||||||
Item
2:
|
35
|
|||||
|
||||||
Item
3:
|
54
|
|||||
Item 4:
|
56
|
|||||
Part
II.
|
Other
Information
|
|||||
Item 1:
|
57
|
|||||
Item 1A:
|
57
|
|||||
Item 2:
|
57
|
|||||
Item 3:
|
57
|
|||||
Item 4:
|
57
|
|||||
Item 5:
|
57
|
|||||
Item 6:
|
58
|
|||||
59
|
Capital Trust, Inc. and Subsidiaries
|
||||||||
Consolidated
Balance Sheets
|
||||||||
September
30, 2009 and December 31, 2008
|
||||||||
(in
thousands except per share data)
|
||||||||
September
30,
|
December
31,
|
|||||||
Assets
|
2009
|
2008
|
||||||
(unaudited)
|
||||||||
Cash
and cash equivalents
|
$ | 28,575 | $ | 45,382 | ||||
Restricted
cash
|
155 | 18,821 | ||||||
Securities
held-to-maturity
|
746,319 | 852,211 | ||||||
Loans
receivable, net
|
1,587,590 | 1,790,234 | ||||||
Loans
held-for-sale, net
|
12,000 | 92,175 | ||||||
Real
estate held-for-sale
|
— | 9,897 | ||||||
Equity
investments in unconsolidated subsidiaries
|
1,624 | 2,383 | ||||||
Accrued
interest receivable
|
4,913 | 6,351 | ||||||
Deferred
income taxes
|
1,706 | 1,706 | ||||||
Prepaid
expenses and other assets
|
7,742 | 18,369 | ||||||
Total
assets
|
$ | 2,390,624 | $ | 2,837,529 | ||||
Liabilities
& Shareholders' Equity
|
||||||||
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 9,741 | $ | 11,478 | ||||
Repurchase
obligations
|
491,833 | 699,054 | ||||||
Collateralized
debt obligations
|
1,124,983 | 1,156,035 | ||||||
Senior
credit facility
|
99,443 | 100,000 | ||||||
Junior
subordinated notes
|
127,075 | 128,875 | ||||||
Participations
sold
|
289,795 | 292,669 | ||||||
Interest
rate hedge liabilities
|
34,508 | 47,974 | ||||||
Total
liabilities
|
2,177,378 | 2,436,085 | ||||||
Shareholders'
equity:
|
||||||||
Class
A common stock $0.01 par value 100,000 shares authorized,
21,759
and
21,740 shares issued and outstanding as of September 30, 2009
and
December
31, 2008, respectively ("class A common stock")
|
218 | 217 | ||||||
Restricted
class A common stock $0.01 par value, 287 and 331 shares
issued
and
outstanding as of September 30, 2009 and December 31, 2008,
respectively
("restricted class A common stock" and together with class
A
common stock, "common stock")
|
3 | 3 | ||||||
Additional
paid-in capital
|
559,859 | 557,435 | ||||||
Accumulated
other comprehensive loss
|
(47,878 | ) | (41,009 | ) | ||||
Accumulated
deficit
|
(298,956 | ) | (115,202 | ) | ||||
Total
shareholders' equity
|
213,246 | 401,444 | ||||||
Total
liabilities and shareholders' equity
|
$ | 2,390,624 | $ | 2,837,529 |
See
accompanying notes to consolidated financial
statements.
|
- 1
-
Capital Trust, Inc. and Subsidiaries
|
||||||||||||||||
Consolidated
Statements of Operations
|
||||||||||||||||
Three
and Nine Months Ended September 30, 2009 and 2008
|
||||||||||||||||
(in
thousands, except share and per share data)
|
||||||||||||||||
(unaudited)
|
||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 29,527 | $ | 44,141 | $ | 93,341 | $ | 149,725 | ||||||||
Less:
Interest and related expenses
|
19,604 | 28,175 | 61,116 | 98,918 | ||||||||||||
Income
from loans and other investments, net
|
9,923 | 15,966 | 32,225 | 50,807 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
2,959 | 3,477 | 8,768 | 9,827 | ||||||||||||
Servicing
fees
|
168 | 116 | 1,502 | 337 | ||||||||||||
Other
interest income
|
16 | 483 | 153 | 1,307 | ||||||||||||
Total
other revenues
|
3,143 | 4,076 | 10,423 | 11,471 | ||||||||||||
Other
expenses:
|
||||||||||||||||
General
and administrative
|
5,492 | 5,711 | 18,450 | 18,819 | ||||||||||||
Depreciation
and amortization
|
51 | 13 | 65 | 140 | ||||||||||||
Total
other expenses
|
5,543 | 5,724 | 18,515 | 18,959 | ||||||||||||
Total
other-than-temporary impairments of securities
|
(77,883 | ) | — | (96,529 | ) | — | ||||||||||
Portion
of other-than-temporary impairments of securities recognized
in other comprehensive income
|
11,987 | — | 17,612 | — | ||||||||||||
Impairment
of goodwill
|
— | — | (2,235 | ) | — | |||||||||||
Impairment
of real estate held-for-sale
|
— | — | (2,233 | ) | — | |||||||||||
Net
impairments recognized in earnings
|
(65,896 | ) | — | (83,385 | ) | — | ||||||||||
Provision
for loan losses
|
(47,222 | ) | — | (113,716 | ) | (56,000 | ) | |||||||||
Valuation
allowance on loans held-for-sale
|
— | — | (10,363 | ) | — | |||||||||||
Gain
on extinguishment of debt
|
— | — | — | 6,000 | ||||||||||||
Gain
on sale of investments
|
— | — | — | 374 | ||||||||||||
Loss
from equity investments
|
(862 | ) | (625 | ) | (3,074 | ) | (549 | ) | ||||||||
(Loss)
income before income taxes
|
(106,457 | ) | 13,693 | (186,405 | ) | (6,856 | ) | |||||||||
Income
tax provision/(benefit)
|
— | 26 | (408 | ) | (475 | ) | ||||||||||
Net
(loss) income
|
$ | (106,457 | ) | $ | 13,667 | $ | (185,997 | ) | $ | (6,381 | ) | |||||
Per
share information:
|
||||||||||||||||
Net
(loss) income per share of common stock:
|
||||||||||||||||
Basic
|
$ | (4.75 | ) | $ | 0.61 | $ | (8.32 | ) | $ | (0.31 | ) | |||||
Diluted
|
$ | (4.75 | ) | $ | 0.61 | $ | (8.32 | ) | $ | (0.31 | ) | |||||
Weighted
average shares of common stock outstanding:
|
||||||||||||||||
Basic
|
22,426,623 | 22,247,042 | 22,361,541 | 20,707,262 | ||||||||||||
Diluted
|
22,426,623 | 22,250,631 | 22,361,541 | 20,707,262 | ||||||||||||
Dividends
declared per share of common stock
|
$ | — | $ | 0.60 | $ | — | $ | 2.20 |
See
accompanying notes to consolidated financial
statements.
|
- 2
-
Capital Trust, Inc. and Subsidiaries
|
|||||||||||||||||||||||||||||
Consolidated
Statements of Changes in Shareholders' Equity
|
|||||||||||||||||||||||||||||
For
the Nine Months Ended September 30, 2009 and 2008
|
|||||||||||||||||||||||||||||
(in
thousands)
|
|||||||||||||||||||||||||||||
(unaudited)
|
|||||||||||||||||||||||||||||
Comprehensive
Loss
|
Class
A Common Stock
|
Restricted
Class A Common Stock
|
Additional
Paid-In Capital
|
Accumulated
Other Comprehensive Loss
|
Accumulated
Deficit
|
Total
|
|||||||||||||||||||||||
Balance
at January 1, 2008
|
$ | 172 | $ | 4 | $ | 426,113 | $ | (8,684 | ) | $ | (9,368 | ) | $ | 408,237 | |||||||||||||||
Net
loss
|
$ | (6,381 | ) | — | — | — | — | (6,381 | ) | (6,381 | ) | ||||||||||||||||||
Unrealized
loss on derivative financial instruments
|
(1,233 | ) | — | — | — | (1,233 | ) | — | (1,233 | ) | |||||||||||||||||||
Unrealized
gain on available-for-sale security
|
277 | — | — | — | 277 | — | 277 | ||||||||||||||||||||||
Reclassification
to gain on sale of investments
|
(482 | ) | — | — | — | (482 | ) | — | (482 | ) | |||||||||||||||||||
Amortization
of unrealized gain on securities
|
(1,278 | ) | — | — | — | (1,278 | ) | — | (1,278 | ) | |||||||||||||||||||
Deferred
loss on settlement of swap
|
(612 | ) | — | — | — | (612 | ) | — | (612 | ) | |||||||||||||||||||
Amortization
of deferred gains and losses on settlement of swaps
|
(140 | ) | — | — | — | (140 | ) | — | (140 | ) | |||||||||||||||||||
Shares
of class A common stock issued in public offering
|
— | 40 | — | 112,567 | — | — | 112,607 | ||||||||||||||||||||||
Shares
of class A common stock issued under dividend reinvestment plan and stock
purchase plan
|
— | 5 | — | 12,835 | — | — | 12,840 | ||||||||||||||||||||||
Sale
of shares of class A common stock under stock option
agreement
|
— | — | — | 180 | — | — | 180 | ||||||||||||||||||||||
Restricted
class A common stock earned
|
— | — | — | 2,759 | — | — | 2,759 | ||||||||||||||||||||||
Dividends
declared on common stock
|
— | — | — | — | — | (48,294 | ) | (48,294 | ) | ||||||||||||||||||||
Balance
at September 30, 2008
|
$ | (9,849 | ) | $ | 217 | $ | 4 | $ | 554,454 | $ | (12,152 | ) | $ | (64,043 | ) | $ | 478,480 | ||||||||||||
Balance
at January 1, 2009
|
$ | 217 | $ | 3 | $ | 557,435 | $ | (41,009 | ) | $ | (115,202 | ) | $ | 401,444 | |||||||||||||||
Net
loss
|
$ | (185,997 | ) | — | — | — | — | (185,997 | ) | (185,997 | ) | ||||||||||||||||||
Cumulative
effect of change in accounting principle
|
— | — | — | — | (2,243 | ) | 2,243 | — | |||||||||||||||||||||
Unrealized
gain on derivative financial instruments
|
13,465 | — | — | — | 13,465 | — | 13,465 | ||||||||||||||||||||||
Amortization
of unrealized gain on securities
|
(675 | ) | — | — | — | (675 | ) | — | (675 | ) | |||||||||||||||||||
Amortization
of deferred gains and losses on settlement of swaps
|
(70 | ) | — | — | — | (70 | ) | — | (70 | ) | |||||||||||||||||||
Other-than-temporary
impairments of securities related to fair value adjustments in excess of
expected credit losses
|
(17,346 | ) | — | — | — | (17,346 | ) | — | (17,346 | ) | |||||||||||||||||||
Issuance
of warrants in conjunction with debt restructuring
|
— | — | — | 940 | — | — | 940 | ||||||||||||||||||||||
Restricted
class A common stock earned
|
— | 1 | — | 1,091 | — | — | 1,092 | ||||||||||||||||||||||
Deferred
directors' compensation
|
— | — | — | 393 | — | — | 393 | ||||||||||||||||||||||
Balance
at September 30, 2009
|
$ | (190,623 | ) | $ | 218 | $ | 3 | $ | 559,859 | $ | (47,878 | ) | $ | (298,956 | ) | $ | 213,246 |
See
accompanying notes to consolidated financial
statements.
|
- 3
-
Capital Trust, Inc. and Subsidiaries
|
||||
Consolidated
Statements of Cash Flows
|
||||
For
the Nine Months Ended September 30, 2009 and 2008
|
||||
(in
thousands)
|
||||
(unaudited)
|
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (185,997 | ) | $ | (6,381 | ) | ||
Adjustments
to reconcile net loss to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Net
impairments recognized in earnings
|
83,385 | — | ||||||
Provision
for loan losses
|
113,716 | 56,000 | ||||||
Valuation
allowance on loans held-for-sale
|
10,363 | — | ||||||
Gain
on extinguishment of debt
|
— | (6,000 | ) | |||||
Gain
on sale of investments
|
— | (374 | ) | |||||
Loss
from equity investments
|
3,074 | 549 | ||||||
Employee
stock-based compensation
|
1,102 | 2,759 | ||||||
Depreciation
and amortization
|
65 | 140 | ||||||
Amortization
of premiums/discounts on loans and securities and deferred interest
on loans
|
(4,966 | ) | (8,050 | ) | ||||
Amortization
of deferred gains and losses on settlement of swaps
|
(70 | ) | (140 | ) | ||||
Amortization
of deferred financing costs and premiums/discounts on
|
||||||||
debt
obligations
|
7,109 | 4,003 | ||||||
Deferred
directors' compensation
|
393 | 393 | ||||||
Changes
in assets and liabilities, net:
|
||||||||
Accrued
interest receivable
|
1,439 | 3,026 | ||||||
Deferred
income taxes
|
— | (501 | ) | |||||
Prepaid
expenses and other assets
|
2,220 | 3,943 | ||||||
Accounts
payable and accrued expenses
|
(1,747 | ) | (6,102 | ) | ||||
Net
cash provided by operating activities
|
30,086 | 43,265 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of securities
|
— | (660 | ) | |||||
Principal
collections and proceeds from securities
|
11,342 | 27,896 | ||||||
Origination/purchase
of loans receivable
|
— | (47,193 | ) | |||||
Add-on
fundings under existing loan commitments
|
(7,698 | ) | (68,151 | ) | ||||
Principal
collections of loans receivable
|
56,188 | 206,008 | ||||||
Proceeds
from operation/disposition of real estate held-for-sale
|
7,665 | — | ||||||
Contributions
to unconsolidated subsidiaries
|
(2,315 | ) | (3,473 | ) | ||||
Increase
in restricted cash
|
— | (12,535 | ) | |||||
Net
cash provided by investing activities
|
65,182 | 101,892 | ||||||
Cash
flows from financing activities:
|
||||||||
Decrease
in restricted cash
|
18,666 | — | ||||||
Borrowings
under repurchase obligations
|
— | 184,025 | ||||||
Repayments
under repurchase obligations
|
(93,709 | ) | (273,674 | ) | ||||
Borrowings
under senior credit facility
|
— | 25,000 | ||||||
Repayments
under senior credit facility
|
(2,500 | ) | — | |||||
Repayment
of collateralized debt obligations
|
(31,636 | ) | (33,274 | ) | ||||
Repayment
of participations sold
|
(2,889 | ) | — | |||||
Settlement
of interest rate hedges
|
— | (612 | ) | |||||
Payment
of deferred financing costs
|
(7 | ) | (306 | ) | ||||
Proceeds
from stock options exercised
|
— | 180 | ||||||
Dividends
paid on common stock
|
— | (82,532 | ) | |||||
Proceeds
from sale of shares of class A common stock and stock purchase
plan
|
— | 123,108 | ||||||
Proceeds
from dividend reinvestment plan
|
— | 2,339 | ||||||
Net
cash used in financing activities
|
(112,075 | ) | (55,746 | ) | ||||
Net
(decrease)/increase in cash and cash equivalents
|
(16,807 | ) | 89,411 | |||||
Cash
and cash equivalents at beginning of period
|
45,382 | 25,829 | ||||||
Cash
and cash equivalents at end of period
|
$ | 28,575 | $ | 115,240 |
See
accompanying notes to consolidated financial
statements.
|
- 4
-
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, real estate finance and investment management
company that specializes in credit sensitive 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 directly on our balance sheet
and for third parties through a series of investment management vehicles. From
the inception of our finance business in 1997 through September 30, 2009,
we have completed over $11.1 billion of investments in the commercial real
estate debt arena. 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, or GAAP, 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 notes required by GAAP for complete
financial statements. The accompanying unaudited consolidated interim financial
statements should be read in conjunction with the consolidated financial
statements and the related management’s discussion and analysis of financial
condition and results of operations filed with our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008. In our opinion, all material
adjustments (consisting of normal, recurring accruals) considered necessary for
a fair presentation have been included. The results of operations for the nine
months ended September 30, 2009 are not necessarily indicative of results that
may be expected for the entire year ending December 31, 2009.
Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 168, “The FASB Accounting Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162,” or FAS 168. FAS 168 establishes the FASB Accounting
Standards Codification, or the Codification, as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP, and
states that all guidance contained in the Codification carries equal level of
authority. Rules and interpretive releases of the Securities and Exchange
Commission, or SEC, under federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification does not change GAAP,
however it does change the way in which it is to be researched and referenced.
FAS 168 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Accordingly, references to
pre-Codification accounting literature in our financial statements have been
removed.
Principles
of Consolidation
The
accompanying 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, prepared in
accordance with GAAP. All significant intercompany balances and transactions
have been eliminated in consolidation. Our co-investment interest in the private
equity funds we manage, CT Mezzanine Partners III, Inc., or Fund III, and
CT Opportunity Partners I, LP, or CTOPI, and others are accounted for using the
equity method. These entities’ assets and liabilities are not consolidated into
our financial statements due to our determination that either (i) for entities
that are variable interest entities we are not the primary beneficiary of such
entities’ variability, generally due to the insignificance of our share of
ownership and certain control provisions for these entities, or (ii) for
entities that are not variable interest entities, the investors have sufficient
rights to preclude consolidation by us. As such, we report our allocable
percentage of the earnings or losses of these entities on a single line item in
our consolidated statements of operations as income/(loss) from equity
investments.
CTOPI
maintains its financial records at fair value in accordance with GAAP. We have
applied such accounting relative to our investment in CTOPI, and include any
adjustments to fair value recorded at the fund level in determining the
income/(loss) we record on our equity investment in CTOPI.
Revenue
Recognition
Interest
income from our loans receivable is recognized over the life of the investment
using the effective interest method and is recorded on the accrual basis. Fees,
premiums, discounts and direct costs associated 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. For loans where we have unfunded commitments, we
amortize these fees and other items on a straight line basis. Fees on
commitments that expire unused are recognized at expiration. 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.
- 5
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Fees from
special servicing and asset management services are recorded on an accrual basis
as services are rendered under the applicable agreements, and when receipt of
fees is reasonably certain. We do not recognize incentive income from our
investment management business until contingencies have been eliminated.
Accordingly, revenue recognition has been deferred for certain fees received
which are subject to potential repayment provisions. Depending on the structure
of our investment management vehicles, certain incentive fees may be in the form
of carried interest or promote distributions.
Cash
and Cash Equivalents
We
classify highly liquid investments with original maturities of three months or
less from the date of purchase as cash equivalents. We place our cash and cash
equivalents with high credit quality institutions to minimize credit risk
exposure. As of, and for the periods ended, September 30, 2009 and December 31,
2008, we had bank balances in excess of federally insured amounts. We have not
experienced any losses on our demand deposits, commercial paper or money market
investments.
Restricted
Cash
Restricted
cash as of September 30, 2009 was comprised of $155,000 held on deposit with the
trustee for our collateralized debt obligations, or CDOs, and is expected to be
used to pay contractual interest and principal. Restricted cash as of December
31, 2008 was $18.8 million.
Securities
We
classify our securities as held-to-maturity, available-for-sale, or trading on
the date of acquisition of the investment. On August 4, 2005, we decided to
change the accounting classification of certain of our securities from
available-for-sale to held-to-maturity. Held-to-maturity investments are stated
at cost adjusted for the amortization of any premiums or discounts, which are
amortized through the consolidated statements of operations using the effective
interest method. Other than in the instance of an other-than-temporary
impairment (as discussed below), these held-to-maturity investments are shown in
our consolidated financial statements at their adjusted values pursuant to the
methodology described above.
We may
also invest in 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 limited 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
from our securities is recognized using a level yield with any purchase premium
or discount accreted through income over the life of the security. This yield is
calculated using cash flows expected to be collected which are based on a number
of assumptions on the underlying loans. 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
securities include interest payment shortfalls due to delinquencies on the
underlying mortgage loans and the timing and magnitude of expected 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.
Further,
as required under GAAP, when, based on current information and events, there has
been an adverse change in cash flows expected to be collected from those
previously estimated, an other-than-temporary impairment is deemed to have
occurred. A change in expected cash flows is considered adverse if the present
value of the revised cash flows (taking into consideration both the timing and
amount of cash flows expected to be collected) discounted using the security’s
current yield is less than the present value of the previously estimated
remaining cash flows, adjusted for cash receipts during the intervening period.
Should an other-than-temporary impairment be deemed to have occurred, the
security is written down to fair value. The total other-than-temporary
impairment is bifurcated into (i) the amount related to expected credit losses,
and (ii) the amount related to fair value adjustments in excess of expected
credit losses, or the Valuation Adjustment. The portion of the
other-than-temporary impairment related to expected credit losses is calculated
by comparing the amortized cost basis of the security to the present value of
cash flows expected to be collected, discounted at the security’s current yield,
and is recognized through earnings in the consolidated statement of operations.
The remaining other-than-temporary impairment related to the Valuation
Adjustment is recognized as a component of accumulated other comprehensive
income/(loss) in shareholders’ equity. A portion of other-than-temporary
impairments recognized through earnings is accreted back to the amortized cost
basis of the security through interest income, while amounts recognized through
other comprehensive income/(loss) are amortized over the life of the security
with no impact on earnings.
- 6
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
From time
to time we purchase securities and other investments in which we have a level of
control over the issuing entity; we refer to these investments as controlling
class investments. Generally, these and similar instruments could be
required to be presented on a consolidated basis. However, based upon the
specific circumstances of certain of our securities that are controlling
class investments and our interpretation of the exemption for qualifying
special purpose entities under GAAP, we have concluded that the entities that
have issued the controlling class investments should not be presented on a
consolidated basis. As discussed further below, recent modifications to GAAP may
impact our consolidation conclusions regarding these entities effective January
1, 2010.
Loans
Receivable, Provision for Loan Losses, Loans Held-for-Sale and Related
Allowance
We
purchase and originate commercial real estate debt and related instruments, or
Loans, generally 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 impaired, we would write down the Loan
through a charge to the provision for loan losses. Impairment on these loans
is measured by comparing the estimated fair value of the underlying collateral
to the carrying value of the respective loan. These valuations require
significant judgments, which include assumptions regarding capitalization rates,
leasing, creditworthiness of major tenants, occupancy rates, availability of
financing, exit plan, loan sponsorship, actions of other lenders and other
factors deemed necessary by management. Actual losses, if any, could
ultimately differ from these estimates.
Loans
held-for-sale are carried at the lower of our amortized cost basis and fair
value. A reduction in the fair value of loans held-for-sale is recorded as a
charge to our consolidated statement of operations as a valuation allowance on
loans held-for-sale.
Deferred
Financing Costs
The
deferred financing costs which are included in prepaid expenses and other assets
on our consolidated balance sheets include issuance costs related to our debt
obligations and are amortized using the effective interest method or a method
that approximates the effective interest method over the life of the related
obligations.
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 recorded as a liability
on our consolidated balance sheets. Interest income earned on the investments
and interest expense incurred on the repurchase obligations are reported
separately on the consolidated statements of operations.
For
fiscal years beginning after November 15, 2008, recent revisions to GAAP presume
that an initial transfer of a financial asset and a repurchase financing shall
not be evaluated as a linked transaction and shall be evaluated separately. If
the transaction does not meet the requirements for sale accounting, it shall
generally be accounted for as a forward contract, as opposed to the current
presentation, where the purchased asset and the repurchase liability are
reflected separately on the balance sheet. This revised guidance is effective on
a prospective basis, with earlier application prohibited. Given that the revised
guidance is to be applied prospectively, our adoption on January 1, 2009 did not
have a material impact on our consolidated financial statements with respect to
our existing transactions. New transactions entered into subsequently, which are
subject to the revised guidance, may be presented differently on our
consolidated financial statements.
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
floating 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 interest rate 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 consolidated 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.
- 7
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
To
determine the fair value of interest rate derivative financial instruments, we
use a third party derivative specialist to assist us in periodically valuing 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 operate in
a manner that will continue to allow us to be taxed as a REIT and, as a result,
we do not expect to pay substantial corporate level taxes (other than taxes
payable by our taxable REIT subsidiaries). 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, state and local income tax on current and past
income, and we may also be subject to penalties.
Accounting
for Stock-Based Compensation
Compensation
expense for the time vesting of stock-based compensation grants is recognized on
the accelerated attribution method and compensation expense for performance
vesting of stock-based compensation grants is recognized on a straight line
basis. Compensation expense relating to stock-based compensation is recognized
in net income using a fair value measurement method, which we determine with the
assistance of a third-party appraisal firm.
The fair
value of the restricted shares is measured on the grant date using a Monte Carlo
simulation to estimate the probability of the market vesting conditions being
satisfied. The Monte Carlo simulation is run approximately 100,000 times. For
each simulation, the payoff is calculated at the settlement date, and is then
discounted to the grant date at a risk-free interest rate. The average of the
values over all simulations is the expected value of the restricted shares on
the grant date. The valuation is performed in a risk-neutral framework, so no
assumption is made with respect to an equity risk premium. Significant
assumptions used in the valuation include an expected term and stock price
volatility, an estimated risk-free interest rate and an estimated dividend
growth rate.
Estimates
of fair value are not intended to predict actual future events or the value
ultimately realized by employees who receive equity awards, and subsequent
events are not indicative of the reasonableness of the original estimates of
fair value made by us.
Comprehensive
Income / (Loss)
Total
comprehensive loss was ($190.6) million and ($9.8) million, for the nine months
ended September 30, 2009 and 2008, respectively. The primary components of
comprehensive loss other than net income/(loss) are the unrealized
gains/(losses) on derivative financial instruments and the component of
other-than-temporary impairments of securities related to the Valuation
Adjustment. As of September 30, 2009, accumulated other comprehensive loss was
($47.9) million, comprised of net unrealized gains on securities previously
classified as available-for-sale of $5.9 million, other-than-temporary
impairments of securities of ($19.6) million, net unrealized losses on cash flow
swaps of ($34.5) million, and $288,000 of net deferred gains on the settlement
of cash flow swaps.
Earnings
per Share of Common Stock
Basic
earnings per share, or EPS, is computed based on the net earnings allocable to
common stock and stock units, divided by the weighted average number of shares
of common stock and stock units outstanding during the period. Diluted EPS is
based on the net earnings allocable to common stock and stock units, divided by
the weighted average number of shares of common stock and stock units and
potentially dilutive common stock options and warrants.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP 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 period
consolidated financial statements to conform to the September 30, 2009
presentation.
Segment
Reporting
We
operate in two reportable segments. We have an internal information system that
produces performance and asset data for the two segments along service
lines.
- 8
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
“Balance Sheet Investment” segment includes our portfolio of interest earning
assets (including our co-investments in investment management vehicles) and the
financing thereof.
The
“Investment Management” segment includes the investment management activities of
our wholly-owned investment management subsidiary, CT Investment Management Co.
LLC, or CTIMCO, and its subsidiaries. CTIMCO is a taxable REIT subsidiary and
serves as the investment manager of Capital Trust, Inc., all of our investment
management vehicles and all of our CDOs, and serves as senior servicer and
special servicer on certain of our investments and for third
parties.
Goodwill
Goodwill
represents the excess of acquisition costs over the fair value of the net assets
of businesses acquired. Goodwill is reviewed, at least annually, in the fourth
quarter to determine if there is an impairment at a reporting unit level, or
more frequently if an indication of impairment exists. During the second quarter
of 2009, we completely impaired goodwill, as described in Note 8. No impairment
charges for goodwill were recorded during the year ended December 31,
2008.
Fair
Value of Financial Instruments
The “Fair
Value Measurements and Disclosures” topic of the Codification defines fair
value, establishes a framework for measuring fair value, and requires certain
disclosures about fair value measurements under GAAP. Specifically, this
guidance defines fair value based on exit price, or the price that would be
received upon the sale of an asset or the transfer of a liability in an orderly
transaction between market participants at the measurement date. Our assets and
liabilities which are measured at fair value are indicated as such in the
respective notes to the consolidated financial statements, and are discussed in
Note 16.
Recent
Accounting Pronouncements
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133,” or FAS 161. FAS 161
requires enhanced disclosures about an entity’s derivative and hedging
activities, with the goal of improving the transparency of financial reporting.
FAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. FAS 161 encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
The adoption of FAS 161 on January 1, 2009, did not have a material
impact on our consolidated financial statements. The required disclosures are
included in Note 11. FAS 161 has been superseded by the Codification and its
guidance incorporated into the “Derivatives and Hedging” topic presented
therein.
In June
2008, the FASB issued Staff Position EITF 03-06-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” or FSP EITF 03-06-1. Under the guidance of FSP EITF 03-06-1,
unvested share-based awards that contain non-forfeitable rights to dividends or
dividend equivalents are considered participating securities and shall be
included in the computation of earnings-per-share, or EPS, pursuant to the
two-class method. FSP EITF 03-06-1 was effective for fiscal years and interim
periods beginning after December 15, 2008, with the requirement that any
prior-period EPS presented in future consolidated financial statements be
adjusted retrospectively to conform to current guidance. We currently present
and have historically presented EPS based on both restricted and unrestricted
shares of our class A common stock. Accordingly, the adoption of FSP EITF
03-06-1 as of January 1, 2009 did not have a material impact on our consolidated
financial statements. FSP EITF 03-06-1 has been superseded by the Codification
and its guidance incorporated into the “Earnings per Share” topic presented
therein.
In April
2009, the FASB issued three concurrent Staff Positions, which included: (i)
Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” or FSP FAS 115-2, (ii) Staff Position No. FAS
157-4, “Determining Fair Value When the Volume and Level of Activity for an
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly,” or FSP FAS 157-4, and (iii) Staff Position No. FAS 107-1
and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments, or
FSP FAS 107-1. All three of these FASB Staff Positions are effective for periods
ending after June 15, 2009, with earlier adoption permitted for periods ending
after March 15, 2009. The adoption of FSP FAS 115-2, FSP FAS 157-4 and FSP FAS
107-1 is required to occur concurrently. Accordingly, we adopted all three of
these standards as of January 1, 2009.
- 9
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
FSP FAS
115-2 provides additional guidance for other-than-temporary impairments on debt
securities. In addition to existing guidance, under FSP FAS 115-2, an
other-than-temporary impairment is deemed to exist if an entity does not expect
to recover the entire amortized cost basis of a security. As discussed above,
FSP FAS 115-2 provides for the bifurcation of other-than-temporary impairments
into (i) amounts related to expected credit losses which are recognized through
earnings, and (ii) amounts related to the Valuation Adjustment which are
recognized as a component of other comprehensive income. Further, FSP FAS 115-2
requires certain disclosures for securities, which are included in Note 3. The
adoption of FSP FAS 115-2 required a reassessment of all securities which were
other-than-temporarily impaired as of January 1, 2009, the date of adoption, and
resulted in a $2.2 million reclassification from the beginning balance of
retained deficit to accumulated other comprehensive loss on our consolidated
balance sheet. FSP FAS 115-2 has been superseded by the Codification and its
guidance incorporated into the “Investments-Other” topic presented
therein.
FSP FAS
157-4 provides additional guidance for fair value measures under FAS 157 in
determining if the market for an asset or liability is inactive and,
accordingly, if quoted market prices may not be indicative of fair value. The
adoption of FSP FAS 157-4 did not have a material impact on our consolidated
financial statements. FSP FAS 157-4 has been superseded by the Codification and
its guidance incorporated into the “Fair Value Measurements and Disclosures”
topic presented therein.
FSP FAS
107-1 extends the existing disclosure requirements related to the fair value of
financial instruments to interim periods in addition to annual financial
statements. The adoption of FSP FAS 107-1 did not have a material impact on our
consolidated financial statements. The disclosure requirements under FSP FAS
107-1 are included in Note 16 to the consolidated financial statements. FSP FAS
107-1 has been superseded by the Codification and its guidance incorporated into
the “Financial Instruments” topic presented therein.
In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events,” or FAS 165. FAS 165 requires that, for listed companies,
subsequent events be evaluated through the date that financial statements are
issued, and that financial statements clearly disclose the date through which
subsequent events have been evaluated. FAS 165 is effective for periods ending
after June 15, 2009. The adoption of FAS 165 as of April 1, 2009 did not have a
material impact on our consolidated financial statements. FAS 165 has been
superseded by the Codification and its guidance incorporated into the
“Subsequent Events” topic presented therein.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
“Accounting for Transfers of Financial Assets, an amendment of FASB Statement
No. 140,” or FAS 166. FAS 166 amends various components of the guidance
governing sale accounting, including the recognition of assets obtained and
liabilities assumed as a result of a transfer, and considerations of effective
control by a transferor over transferred assets. In addition, FAS 166 removes
the consolidation exemption for qualifying special purpose entities discussed
above in relation to certain of our securities. FAS 166 is effective for the
first annual reporting period that begins after November 15, 2009, with early
adoption prohibited. While the amended guidance governing sale accounting is
applied on a prospective basis, the removal of the qualifying special purpose
entity exception will require us to evaluate certain entities for consolidation.
While we are currently evaluating the effect of adoption of FAS 166, we
currently believe that the presentation of our consolidated financial statements
may significantly change prospectively upon adoption. FAS 166 has been
superseded by the Codification and its guidance incorporated into the “Transfers
and Servicing” topic presented therein.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R),” or FAS 167, which amends existing
guidance for determining whether an entity is a variable interest entity, or
VIE, and requires the performance of a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE. Under this guidance, an
entity would be required to consolidate a VIE if it has (i) the power to direct
the activities that most significantly impact the entity’s economic performance
and (ii) the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could be significant to the VIE. FAS 167 is effective
for the first annual reporting period that begins after November 15, 2009, with
early adoption prohibited. While we are currently evaluating the effect of
adoption of FAS 167, we currently believe that the presentation of our
consolidated financial statements may significantly change prospectively upon
adoption. FAS 167 has been superseded by the Codification and its guidance
incorporated into the “Consolidation” topic presented therein.
- 10
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
3.
|
Securities
Held-to-Maturity
|
Our
securities portfolio consists of commercial mortgage-backed securities, or CMBS,
collateralized debt obligations, or CDOs, and other securities. Activity
relating to our securities portfolio for the nine months ended September 30,
2009 was as follows (in thousands):
CMBS
|
CDOs
& Other
|
Total
Book
Value
(3)
|
|||||||||||
December
31, 2008
|
$669,029 | $183,182 | $852,211 | ||||||||||
Principal
paydowns
|
(2,461 | ) | (7,339 | ) | (9,800 | ) | |||||||
Satisfactions
(1)
|
(1,542 | ) | — | (1,542 | ) | ||||||||
Discount/premium
amortization & other (2)
|
2,330 | (351 | ) | 1,979 | |||||||||
Other-than-temporary
impairments:
|
|||||||||||||
Recognized
in earnings
|
(15,881 | ) | (63,036 | ) | (78,917 | ) | |||||||
Recognized
in accumulated other comprehensive income
|
(9,735 | ) | (7,877 | ) | (17,612 | ) | |||||||
September
30, 2009
|
$641,740 | $104,579 | $746,319 |
(1)
|
Includes
final maturities and full repayments.
|
|
(2)
|
Includes
mark-to-market adjustments on securities previously classified as
available-for-sale, amortization of other-than-temporary impairments, and
losses, if any.
|
|
(3)
|
Includes
securities with a total face value of $870.8 million and $884.0 million as
of September 30, 2009 and December 31, 2008,
respectively.
|
The
following table details overall statistics for our securities portfolio as of
September 30, 2009 and December 31, 2008:
September
30, 2009
|
December
31, 2008
|
|||
Number
of securities
|
76
|
77
|
||
Number
of issues
|
54
|
55
|
||
Rating
(1)
(2)
|
BB-
|
BB
|
||
Fixed
/ Floating (in millions) (3)
|
$662
/ $84
|
$680
/ $172
|
||
Coupon
(1)
(4)
|
6.20%
|
6.23%
|
||
Yield (1)
(4)
|
6.64%
|
6.87%
|
||
Life
(years) (1)
(5)
|
4.0
|
4.6
|
(1)
|
Represents
a weighted average as of September 30, 2009 and December 31, 2008,
respectively.
|
|
(2)
|
Weighted
average ratings are based on the lowest rating published by Fitch Ratings,
Standard & Poor’s or Moody’s Investors Service for each security and
exclude $37.9 million face value ($2.2 million book value as of September
30, 2009) of unrated equity investments in collateralized debt
obligations.
|
|
(3)
|
Represents
the total book value of our portfolio allocated between fixed rate and
floating rate securities.
|
|
(4)
|
Calculations
for floating rate securities is based on LIBOR of 0.25% and 0.44% as of
September 30, 2009 and December 31, 2008,
respectively.
|
|
(5)
|
Weighted
average life is based on the timing and amount of future expected
principal payments through the expected repayment date of each respective
investment.
|
- 11
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The table
below details the ratings and vintage distribution of our securities as of
September 30, 2009 (in thousands):
Rating
as of September 30, 2009
|
|||||||||||||||||
Vintage
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC
and
Below
|
Total
|
|||||||||
2007
|
$—
|
$—
|
$—
|
$—
|
$2,812
|
$—
|
$32,776
|
$35,588
|
|||||||||
2006
|
—
|
—
|
—
|
—
|
—
|
20,684
|
28,310
|
48,994
|
|||||||||
2005
|
—
|
—
|
—
|
22,415
|
20,428
|
5,164
|
1,500
|
49,507
|
|||||||||
2004
|
—
|
24,856
|
20,768
|
—
|
25,501
|
9,781
|
—
|
80,906
|
|||||||||
2003
|
9,905
|
—
|
—
|
4,976
|
—
|
13,548
|
1,150
|
29,579
|
|||||||||
2002
|
—
|
—
|
—
|
6,605
|
—
|
2,587
|
11,194
|
20,386
|
|||||||||
2001
|
—
|
—
|
—
|
4,850
|
14,214
|
—
|
—
|
19,064
|
|||||||||
2000
|
7,529
|
—
|
—
|
—
|
4,980
|
—
|
23,823
|
36,332
|
|||||||||
1999
|
—
|
—
|
11,460
|
1,434
|
17,356
|
—
|
—
|
30,250
|
|||||||||
1998
|
120,753
|
—
|
82,688
|
75,094
|
11,907
|
—
|
12,726
|
303,168
|
|||||||||
1997
|
—
|
—
|
35,192
|
5,036
|
8,563
|
252
|
18,474
|
67,517
|
|||||||||
1996
|
24,106
|
—
|
—
|
—
|
—
|
—
|
922
|
25,028
|
|||||||||
Total
|
$162,293
|
$24,856
|
$150,108
|
$120,410
|
$105,761
|
$52,016
|
$130,875
|
$746,319
|
The table
below details the ratings and vintage distribution of our securities as of
December 31, 2008 (in thousands):
Rating
as of December 31, 2008
|
|||||||||||||||||
Vintage
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC
and
Below
|
Total
|
|||||||||
2007
|
$—
|
$—
|
$—
|
$—
|
$32,540
|
$41,525
|
$36,356
|
$110,421
|
|||||||||
2006
|
—
|
—
|
—
|
34,502
|
14,395
|
—
|
—
|
48,897
|
|||||||||
2005
|
—
|
—
|
—
|
47,012
|
15,000
|
—
|
—
|
62,012
|
|||||||||
2004
|
—
|
24,879
|
28,106
|
26,120
|
9,054
|
—
|
—
|
88,159
|
|||||||||
2003
|
9,903
|
—
|
—
|
4,972
|
6,044
|
7,691
|
1,115
|
29,725
|
|||||||||
2002
|
—
|
—
|
—
|
6,572
|
—
|
13,382
|
—
|
19,954
|
|||||||||
2001
|
—
|
—
|
—
|
4,871
|
14,234
|
—
|
—
|
19,105
|
|||||||||
2000
|
7,597
|
—
|
—
|
—
|
5,515
|
—
|
27,490
|
40,602
|
|||||||||
1999
|
—
|
—
|
11,529
|
1,441
|
17,350
|
—
|
—
|
30,320
|
|||||||||
1998
|
122,013
|
—
|
82,455
|
74,916
|
19,347
|
—
|
5,144
|
303,875
|
|||||||||
1997
|
—
|
—
|
35,615
|
5,585
|
8,554
|
262
|
23,340
|
73,356
|
|||||||||
1996
|
23,750
|
—
|
—
|
—
|
—
|
—
|
2,035
|
25,785
|
|||||||||
Total
|
$163,263
|
$24,879
|
$157,705
|
$205,991
|
$142,033
|
$62,860
|
$95,480
|
$852,211
|
As
detailed in Note 2, on August 4, 2005 we changed the accounting classification
of our then portfolio of securities from available-for-sale to held-to-maturity.
While we typically account for the securities in our portfolio on a
held-to-maturity basis, under certain circumstances we will account for
securities on an available-for-sale basis. As of both September 30, 2009 and
December 31, 2008, we had no securities classified as available-for-sale. Our
securities’ book value as of September 30, 2009 is comprised of (i) our
amortized cost basis, as defined under GAAP, of $760.0 million (of which $647.5
million related to CMBS and $112.5 million related to CDOs and other
securities), (ii) amounts related to mark-to-market adjustments on securities
previously classified as available-for-sale of $6.0 million and (iii) the
portion of other-than-temporary impairments of ($19.6) million not related to
expected credit losses.
Quarterly,
we reevaluate our securities portfolio to determine if there has been an
other-than-temporary impairment based upon expected future cash flows. As a
result of this evaluation, under the guidance discussed in Note 2, we believe
that during the quarter there has been an adverse change in expected cash flows
for three of the securities in our portfolio and, therefore, recognized an
aggregate gross other-than-temporary impairment of $77.9 million during the
three months ended September 30, 2009. Of this total other-than-temporary
impairment, $65.9 million is related to expected credit losses and has been
recorded through earnings, and $12.0 million is related to fair value
adjustments in excess of expected credit losses, or the Valuation Adjustment,
and recorded as a component of accumulated other comprehensive income/(loss) on
our consolidated balance sheet with no impact on earnings.
During
the first nine months of 2009, we recorded a gross other-than-temporary
impairment of $96.5 million, of which $78.9 million was related to expected
credit losses and recorded through earnings, and $17.6 million was related to
the Valuation Adjustment and recorded as a component of accumulated other
comprehensive income/(loss) on our consolidated balance sheet with no impact on
earnings.
- 12
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
To
determine the component of the gross other-than-temporary impairment related to
expected credit losses, we compare the amortized cost basis of each
other-than-temporarily impaired security to the present value of its revised
expected cash flows, discounted using its pre-impairment yield. Significant
judgment of management is required in this analysis that includes, but is not
limited to, (i) assumptions regarding the collectability of principal and
interest, net of related expenses, on the underlying loans, (ii) current
subordination levels at both the individual loans which serve as collateral
under our securities and at the securities themselves, and (iii) the current
unamortized discounts or premiums on our securities.
The
following table summarizes activity related to the other-than-temporary
impairments of our securities during the nine months ended September 30, 2009
(in thousands):
Gross
Other-Than-Temporary Impairments
|
Credit
Related Other-Than-Temporary Impairments
|
Non-Credit
Related Other-Than-Temporary Impairments
|
|||||||||||
December
31, 2008
|
$2,243 | $2,243 | $— | ||||||||||
Impact
of change in accounting principle (1)
|
— | (2,243 | ) | 2,243 | |||||||||
Additions
due to change in expected
cash
flows
|
96,529 | 78,917 | 17,612 | ||||||||||
Amortization
of other-than-temporary
impairments
|
(218 | ) | 47 | (265 | ) | ||||||||
September
30, 2009
|
$98,554 | $78,964 | $19,590 |
(1)
|
Represents
a reclassification to other comprehensive income of other-than-temporary
impairments on securities which were previously recorded in earnings. As
discussed in Note 2, upon adoption of FSP FAS 115-2 these impairments were
reassessed and determined to be related to fair value adjustments in
excess of expected credit
losses.
|
Certain
of our securities are carried at values in excess of their fair values. This
difference can be caused by, among other things, changes in interest rates and
credit spreads. As of September 30, 2009, 61 securities with an aggregate
carrying value of $687.5 million were carried at values in excess of their fair
values. Fair value for these securities was $448.1 million as of September 30,
2009. In total, as of September 30, 2009, we had 76 investments in securities
with an aggregate carrying value of $746.3 million that have an estimated fair
value of $513.8 million, including 65 investments in CMBS with an estimated fair
value of $436.5 million and 11 investments in CDOs and other securities with an
estimated fair value of $77.3 million (these valuations do not include the value
of interest rate swaps entered into in conjunction with the purchase/financing
of these investments). We determine fair values using third party dealer
assessments of value, supplemented in limited cases with our own internal
financial model-based estimations of fair value. We regularly examine our
securities portfolio and have determined that, despite these changes in fair
value, our expectations of future cash flows have only changed adversely for
eleven of our securities, against which we have recognized
other-than-temporary-impairments.
Our
estimation of cash flows expected to be generated by our securities portfolio is
based upon an internal review of the underlying loans securing our investments
both on an absolute basis and compared to our initial underwriting for each
investment. Our efforts are supplemented by third party research reports, third
party market assessments and our dialogue with market participants. As of
September 30, 2009, we do not intend to sell our securities, nor do we believe
it is more likely than not that we will be required to sell our securities
before recovery of their amortized cost bases, which may be at maturity. This,
combined with our assessment of cash flows, is the basis for our conclusion that
these investments are not impaired despite the differences between estimated
fair value and book value. We attribute the difference between book value and
estimated fair value to the current market dislocation and a general negative
bias against structured financial products such as CMBS and CDOs.
- 13
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table shows the gross unrealized losses and fair value of our
securities for which the fair value is lower than our book value as of September
30, 2009 and that are not deemed to be other-than-temporarily impaired (in
millions):
Less
Than 12 Months
|
Greater
Than 12 Months
|
Total
|
||||||||||||||||||||||||||||
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Book
Value (1)
|
||||||||||||||||||||||||
Floating
Rate
|
$— | $— | $26.6 | ($51.5 | ) | $26.6 | ($51.5 | ) | $78.1 | |||||||||||||||||||||
Fixed
Rate
|
27.3 | (4.0 | ) | 394.2 | (183.9 | ) | 421.5 | (187.9 | ) | 609.4 | ||||||||||||||||||||
Total
|
$27.3 | $(4.0 | ) | $420.8 | ($235.4 | ) | $448.1 | ($239.4 | ) | $687.5 |
(1)
|
Excludes,
as of September 30, 2009, $58.8 million of securities which were carried
at or below fair value and securities against which an
other-than-temporary impairment equal to the entire book value was
recognized in
earnings.
|
As of
December 31, 2008 our securities portfolio included 77 investments in securities
with an aggregate carrying value of $852.2 million that had an estimated market
value of $582.5 million, including 66 investments in CMBS with an estimated fair
value of $456.1 million and 11 investments in CDOs and other securities with an
estimated fair value of $126.4 million. The following table shows the gross
unrealized losses and fair value of our securities for which the fair value is
lower than our book value as of December 31, 2008 and that are not deemed to be
other-than-temporarily impaired (in millions):
Less
Than 12 Months
|
Greater
Than 12 Months
|
Total
|
||||||||||||||||||||||||||||
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Book
Value (1)
|
||||||||||||||||||||||||
Floating
Rate
|
$0.2 | ($0.6 | ) | $89.0 | ($82.0 | ) | $89.2 | ($82.6 | ) | $171.8 | ||||||||||||||||||||
Fixed
Rate
|
183.8 | (36.1 | ) | 268.4 | (156.4 | ) | 452.2 | (192.5 | ) | 644.7 | ||||||||||||||||||||
Total
|
$184.0 | ($36.7 | ) | $357.4 | ($238.4 | ) | $541.4 | ($275.1 | ) | $816.5 |
(1)
|
Excludes,
as of December 31, 2008, $35.7 million of securities which were carried at
or below fair value and securities against which an other-than-temporary
impairment equal to the entire book value was recognized in
earnings.
|
Our
securities portfolio includes investments in three entities that are, or could
potentially be construed to be, variable interest entities, as defined under
GAAP. In each of these three cases, we own less than 50% of the variable
interest, are not the primary beneficiary of such entities’ variability and,
therefore, do not consolidate the operations of the entity in our consolidated
financial statements. These entities have direct and synthetic exposure to real
estate debt and securities in the aggregate amount of $1.7 billion that is
financed by the issuance of CDOs to third parties. We have limited control over
the operation of these entities and have not provided, nor are obligated to
provide any financial support to any of these entities. One of the three
entities was sponsored by us. Our maximum exposure to loss as a result of our
involvement with these entities is $78.8 million, the principal amount of our
investments. As of September 30, 2009, we have recorded
other-than-temporary-impairments of $70.9 million against these investments,
resulting in a net aggregate carrying value of $5.0 million which is recorded as
part of our securities portfolio on our consolidated balance sheet.
- 14
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
4.
Loans Receivable, net
Activity
relating to our loans receivable for the nine months ended September 30, 2009
was as follows (in thousands):
Gross
Book Value
|
Provision
for Loan Losses
|
Net
Book Value (3)
|
||||||||||
December
31, 2008
|
$1,847,811 | ($57,577 | ) | $1,790,234 | ||||||||
Additional
fundings
(1)
|
6,471 | — | 6,471 | |||||||||
Satisfactions
(2)
|
(33,803 | ) | — | (33,803 | ) | |||||||
Principal
paydowns
|
(22,385 | ) | — | (22,385 | ) | |||||||
Discount/premium
amortization & other
|
1,151 | — | 1,151 | |||||||||
Provision
for loan losses
|
— | (113,716 | ) | (113,716 | ) | |||||||
Realized
loan losses
|
(52,665 | ) | 52,665 | — | ||||||||
Reclassification
to loans held-for-sale
|
(40,362 | ) | — | (40,362 | ) | |||||||
September
30, 2009
|
$1,706,218 | ($118,628 | ) | $1,587,590 |
(1)
|
Additional fundings includes capitalized interest of $1.4 million
for the nine months ended September 30,
2009.
|
|
(2)
|
Includes final maturities and full
repayments.
|
|
(3)
|
Includes loans with a total principal balance of $1.71 billion and
$1.86 billion as of September 30, 2009 and December 31, 2008,
respectively.
|
The
following table details overall statistics for our loans receivable portfolio as
of September 30, 2009 and December 31, 2008:
September
30, 2009
|
December
31, 2008
|
|||
Number
of investments
|
65
|
73
|
||
Fixed
/ Floating (in millions) (1)
|
$132
/ $1,456
|
$172
/ $1,618
|
||
Coupon
(2)
(3)
|
3.49%
|
3.90%
|
||
Yield (2)
(3)
|
3.52%
|
4.09%
|
||
Maturity
(years) (2)
(4)
|
2.6
|
3.3
|
(1)
|
Represents the net book value of our portfolio allocated between
fixed rate and floating rate loans.
|
|
(2)
|
Represents a weighted average as of September 30, 2009 and December
31, 2008, respectively.
|
|
(3)
|
Calculations for floating rate loans are based on LIBOR of 0.25% as
of September 30, 2009 and LIBOR of 0.44% as of December 31,
2008.
|
|
(4)
|
Represents the final maturity of the investment assuming all
extension options are
executed.
|
- 15
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
tables below detail the types of loans in our portfolio, as well as the property
type and geographic distribution of the properties securing our loans, as of
September 30, 2009 and December 31, 2008 (in thousands):
September
30, 2009
|
December
31, 2008
|
|||||||||||
Asset Type
|
Book Value
|
Percentage |
Book Value
|
Percentage | ||||||||
Mezzanine
loans
|
$598,109
|
38
|
% |
$693,002
|
39
|
% | ||||||
Subordinate
mortgages
|
498,503
|
31
|
553,232
|
31
|
||||||||
Senior
mortgages
|
384,297
|
24
|
434,179
|
24
|
||||||||
Other
|
106,681
|
7
|
109,821
|
6
|
||||||||
Total
|
$1,587,590
|
100
|
% |
$1,790,234
|
100
|
% | ||||||
Property Type
|
Book Value
|
Percentage |
Book Value
|
Percentage | ||||||||
Hotel
|
$671,661
|
42
|
% |
$688,332
|
38
|
% | ||||||
Office
|
573,258
|
36
|
661,761
|
37
|
||||||||
Healthcare
|
142,857
|
9
|
147,397
|
8
|
||||||||
Multifamily
|
35,595
|
2
|
123,492
|
7
|
||||||||
Retail
|
39,826
|
3
|
42,385
|
3
|
||||||||
Other
|
124,393
|
8
|
126,867
|
7
|
||||||||
Total
|
$1,587,590
|
100
|
% |
$1,790,234
|
100
|
% | ||||||
Geographic Location
|
Book Value
|
Percentage |
Book Value
|
Percentage | ||||||||
Northeast
|
$457,754
|
29
|
% |
$560,071
|
31
|
% | ||||||
Southeast
|
339,314
|
21
|
387,500
|
22
|
||||||||
Southwest
|
282,508
|
17
|
295,490
|
16
|
||||||||
West
|
203,313
|
13
|
235,386
|
13
|
||||||||
Northwest
|
90,144
|
6
|
91,600
|
5
|
||||||||
Midwest
|
27,806
|
2
|
28,408
|
2
|
||||||||
International
|
122,323
|
8
|
122,387
|
7
|
||||||||
Diversified
|
64,428
|
4
|
69,392
|
4
|
||||||||
Total
|
$1,587,590
|
100
|
% |
$1,790,234
|
100
|
% |
Quarterly,
management evaluates our loan portfolio for impairment as described in Note 2.
As of September 30, 2009, we identified 13 loans with an aggregate gross book
value of $214.3 million for impairment, against which we have recorded a $118.6
million provision, and which are carried at an aggregate net book value of $95.7
million. These include four loans with an aggregate gross carrying value of
$91.7 million which are current in their interest payments, against which we
have recorded a $40.9 million provision, as well as nine loans which are
delinquent on contractual payments with an aggregate gross carrying value of
$122.6 million, against which we have recorded a $77.7 million provision. Our
average balance of impaired loans was $52.2 million and $3.0 million during the
nine months ended September 30, 2009 and 2008, respectively. We recorded
interest on these loans of $754,000 during the nine months ended September 30,
2009.
In some
cases our loan originations are not fully funded at closing, creating an
obligation for us to make future fundings, which we refer to as Unfunded Loan
Commitments. Typically, Unfunded Loan Commitments are part of construction and
transitional loans. As of September 30, 2009, our six Unfunded Loan Commitments
totaled $12.6 million, which will only be funded when and/or if the borrower
meets certain performance hurdles with respect to the underlying collateral. As
of September 30, 2009, $5.6 million of the Unfunded Loan Commitments relates to
a loan classified as held-for-sale, as described in Note 5.
5.
|
Loans
Held-for-Sale, net
|
As of
September 30, 2009, we were in discussions with the borrower under one loan to
settle its obligation at a discount. This loan has a gross carrying value of
$14.4 million and a net carrying value of $12.0 million as of September 30,
2009, and is classified as held-for-sale.
On April
6, 2009, one loan which had previously been classified as held-for-sale was
transferred to the secured lender, Lehman Brothers, in satisfaction of our
obligations under our secured borrowing facility.
- 16
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
In the
first quarter of 2009, in conjunction with the restructuring of our debt
obligations, four loans with an aggregate gross carrying value of $140.4 million
and a net carrying value of $92.2 million, which had been previously classified
as held-for-sale, were transferred to the secured lenders, Goldman Sachs and
UBS, in satisfaction of our obligations under the respective credit facilities.
See Note 9 for more details regarding our restructured debt
obligations.
The
following table details overall statistics for our loans held-for-sale as of
September 30, 2009 and December 31, 2008:
September
30, 2009
|
December
31, 2008
|
|||
Number
of investments
|
1
|
4
|
||
Coupon
(1)
(2)
|
L +
4.50%
|
2.54%
|
||
Yield (1)
(2)
|
4.75%
|
2.62%
|
||
Maturity
(years) (1)
(3)
|
2.6
|
3.2
|
(1)
|
Represents a weighted average as of December 31, 2008 based on
gross carrying value, before any valuation
allowance.
|
|
(2)
|
Calculations for floating rate loans are based on LIBOR of 0.25% as
of September 30, 2009 and LIBOR of 0.44% as of December 31,
2008.
|
|
(3)
|
Represents the maturity of the investment assuming all extension
options are executed, and does not give effect to known sales or transfers
subsequent to the balance sheet
date.
|
Loans
held-for-sale are carried at the lower of our amortized cost basis and fair
value. As of September 30, 2009, we had recorded a valuation allowance of $2.4
million against the remaining loan. We determined the valuation allowance on
loans held-for-sale based upon transactions which are expected to occur in the
near future.
6.
|
Real
Estate Held-for-Sale
|
In 2008,
we, together with our co-lender, foreclosed on a loan secured by a multifamily
property, and took title to the collateral securing the original loan. At the
time the foreclosure occurred, the loan had a book balance of $11.9 million,
which was reclassified as Real Estate Held-for-Sale (also referred to as Real
Estate Owned) on our consolidated balance sheet as of December 31, 2008 to
reflect our ownership interest in the property. Since that time, we have
received $564,000 of accumulated cash from the property, which has been recorded
as a reduction to our basis in the asset. In addition, we have also previously
recorded an aggregate $4.2 million impairment since the time of foreclosure to
reflect the property at fair value as of June 30, 2009. In July 2009, we sold
this asset for $7.1 million, which was our book value at June 30, 2009, and,
accordingly, we did not record a material gain or loss on the sale.
7.
|
Equity
Investments in Unconsolidated
Subsidiaries
|
Our
equity investments in unconsolidated subsidiaries consist primarily of our
co-investments in investment management vehicles that we sponsor and manage. As
of September 30, 2009, we had co-investments in two such vehicles, CT Mezzanine
Partners III, Inc., or Fund III, in which we have a 4.7% investment, and CT
Opportunity Partners I, LP, or CTOPI, in which we have a 4.6% investment. In
addition to our co-investments, we record capitalized costs associated with
these vehicles in equity investments in unconsolidated subsidiaries. As of
September 30, 2009 we had an unfunded capital commitment to CTOPI of $19.2
million.
Activity
relating to our equity investment in unconsolidated subsidiaries for the nine
months ended September 30, 2009 was as follows (in thousands):
Fund
III
|
CTOPI
|
Other
|
Total
|
|||||||||||||
December
31, 2008
|
$ | 597 | $ | 1,782 | $ | 4 | $ | 2,383 | ||||||||
Contributions
|
— | 2,315 | — | 2,315 | ||||||||||||
Loss
from equity investments
|
(168 | ) | (2,904 | ) | (2 | ) | (3,074 | ) | ||||||||
September
30, 2009
|
$ | 429 | $ | 1,193 | $ | 2 | $ | 1,624 |
In
accordance with the management agreements with Fund III and CTOPI, CTIMCO may
earn incentive compensation when certain returns are achieved for the
shareholders/partners of Fund III and CTOPI, which will be accrued if and when
earned, and when appropriate contingencies have been eliminated. In the event
that additional capital calls are made at Fund III, we may be required to refund
some or all of the $5.6 million incentive compensation previously received. As
of September 30, 2009, our maximum exposure to loss from Fund III and CTOPI was
$6.3 million and $8.2 million, respectively.
- 17
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
8.
Prepaid Expenses and Other Assets
Prepaid
expenses and other assets consist of the following as of September 30, 2009 and
December 31, 2008 (in thousands):
September
30, 2009
|
December
31, 2008
|
|||||||
Deferred
financing costs, net
|
$ | 6,097 | $ | 8,342 | ||||
Prepaid
expenses/security deposit
|
1,230 | 1,972 | ||||||
Other
assets
|
415 | 1,945 | ||||||
Common
equity - CT Preferred Trusts
|
— | 3,875 | ||||||
Goodwill
|
— | 2,235 | ||||||
$ | 7,742 | $ | 18,369 |
Deferred
financing costs include costs related to our debt obligations and are amortized
using the effective interest method or a method that approximates the effective
interest method, as applicable, over the life of the related debt
obligations.
Our
ownership interests in CT Preferred Trust I and CT Preferred Trust II, the
statutory trust issuers of our legacy trust preferred securities backed by our
junior subordinated notes, were accounted for using the equity method due to our
determination that they were variable interest entities in which we were not the
primary beneficiary. In connection with the debt restructuring described in Note
9, we eliminated 100% of our ownership interest in both CT Preferred Trust I and
CT Preferred Trust II.
In June
2007, we purchased a healthcare loan origination platform for $2.6 million ($1.9
million in cash and $700,000 in common stock) and recorded $2.2 million of
goodwill in connection with the acquisition. In December 2008, we transferred
the ownership interest in the healthcare loan origination platform back to its
original owners. As discussed in Note 2, we assess goodwill for impairment at
least annually unless events occur which otherwise require consideration for
impairment at an interim date. Based on an assessment of our current business,
as it relates to the previously acquired entity, we impaired goodwill completely
as of June 30, 2009.
- 18
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
9.
Debt Obligations
As of
September 30, 2009 and December 31, 2008, we had $1.8 billion and $2.1 billion
of total debt obligations outstanding, respectively. The balances of each
category of debt, their respective coupons and all-in effective costs, including
the amortization of fees and expenses, were as follows (in
thousands):
September
30, 2009
|
December
31, 2008
|
September
30, 2009
|
|||||||||||||||||||||||
Debt
Obligation
|
Principal
Balance
|
Book
Balance
|
Book
Balance
|
Coupon(1)
|
All-In Cost(1)
|
Maturity Date(2)
|
|||||||||||||||||||
Repurchase
obligations and secured debt
|
|||||||||||||||||||||||||
JPMorgan
|
$281,898 | $281,498 | $336,271 | 1.76 | % | 1.80 | % |
March
15, 2011
|
|||||||||||||||||
Morgan
Stanley
|
166,522 | 166,311 | 182,937 | 2.13 | % | 2.13 | % |
March
15, 2011
|
|||||||||||||||||
Citigroup
|
44,098 | 44,024 | 63,830 | 1.59 | % | 1.65 | % |
March
15, 2011
|
|||||||||||||||||
Goldman
Sachs
|
— | — | 88,282 | — | — | — | |||||||||||||||||||
Lehman
Brothers
|
— | — | 18,014 | — | — | — | |||||||||||||||||||
UBS
|
— | — | 9,720 | — | — | — | |||||||||||||||||||
Total
repurchase obligations and secured debt
|
$492,518 | 491,833 | 699,054 | 1.87 | % | 1.90 | % |
March
15, 2011
|
|||||||||||||||||
Collateralized
debt obligations (CDOs)
|
|||||||||||||||||||||||||
CDO
I
|
242,959 | 242,959 | 252,045 | 0.87 | % | 0.91 | % |
December
19, 2011
|
|||||||||||||||||
CDO
II
|
294,069 | 294,069 | 298,913 | 0.75 | % | 1.02 | % |
June
13, 2012
|
|||||||||||||||||
CDO
III
|
254,802 | 256,072 | 257,515 | 5.23 | % | 5.46 | % |
January
14, 2013
|
|||||||||||||||||
CDO IV (3)
|
331,883 | 331,883 | 347,562 | 0.87 | % | 1.02 | % |
December
22, 2012
|
|||||||||||||||||
Total
CDOs
|
1,123,713 | 1,124,983 | 1,156,035 | 1.83 | % | 2.00 | % |
August
19, 2012
|
|||||||||||||||||
Senior
credit facility - WestLB
|
99,443 | 99,443 | 100,000 | 3.25 | % | 7.20 | % |
March
15, 2011
|
|||||||||||||||||
Junior subordinated
notes - A (4)
|
143,753 | 127,075 | — | 1.00 | % | 4.28 | % |
April
30, 2036
|
|||||||||||||||||
Junior
subordinated notes -
B
|
— | — | 128,875 | — | — | — | |||||||||||||||||||
Total/Weighted
Average
|
$1,859,427 | $1,843,334 | $2,083,964 | 1.85 | % | 2.42 | % |
(5)
|
October
22, 2013
|
(1)
|
Floating
rate debt obligations assume LIBOR of 0.25% at September 30,
2009.
|
|
(2)
|
Maturity dates for our repurchase obligations with JPMorgan, Morgan
Stanley and Citigroup, and our senior credit facility, assume we meet the
necessary conditions to exercise our one year extension option. Maturity
dates for our CDOs represent a weighted average of expected principal
repayments to the respective bondholders.
|
|
(3)
|
Comprised (at September 30, 2009) of $318.6 million of floating
rate notes sold and $13.3 million of fixed rate notes
sold.
|
|
(4)
|
Represents the junior subordinated notes issued pursuant to the
exchange transactions on March 16, 2009 and May 14, 2009. The coupon will
remain at 1.00% per annum through April 29, 2012, increase to 7.23% per
annum for the period from April 30, 2012 through April 29, 2016 and then
convert to a floating interest rate of three-month LIBOR + 2.44% per annum
through maturity.
|
|
(5) | Including the impact of interest rate hedges with an aggregate notional balance of $418.5 million as of September 30, 2009, the effective all-in cost of our debt obligations would be 3.46% per annum. |
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement
and certain of our junior subordinated notes.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
|
·
|
Maturity
dates were modified to one year from the March 16, 2009 effective date of
each respective agreement, which maturity dates may be extended further
for two one-year periods. The first one-year extension option is
exercisable by us so long as the outstanding balance as of the first
extension date is less than or equal to a certain amount, reflecting a
reduction of twenty percent (20%), including the upfront payment described
above, of the outstanding amount from the date of the amendments, and no
other defaults or events of default have occurred and are continuing, or
would be caused by such extension. The second one-year extension option is
exercisable by each participating secured lender in its sole
discretion.
|
- 19
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
|
·
|
We
agreed to pay each secured participating lender periodic amortization as
follows: (i) mandatory payments, payable monthly in arrears, in an amount
equal to sixty-five (65%) (subject to adjustment in the second year) of
the net interest income generated by each such lender’s collateral pool,
and (ii) one hundred percent (100%) of the principal proceeds received
from the repayment of assets in each such lender’s collateral pool. In
addition, under the terms of the amendment with Citigroup, we agreed to
pay Citigroup an additional quarterly amortization payment equal to the
lesser of: (x) Citigroup’s then outstanding senior secured credit facility
balance or (y) the product of (i) the total cash paid (including both
principal and interest) during the period to our senior credit facility in
excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0
million facility amount, and (ii) a fraction, the numerator of which is
Citigroup’s then outstanding senior secured credit facility balance and
the denominator is the total outstanding secured indebtedness of the
secured participating lenders.
|
|
·
|
We
further agreed to amortize each participating secured lender’s secured
debt at the end of each calendar quarter on a pro rata basis until we have
repaid our secured, recourse credit facilities and thereafter our senior
credit facility in an amount equal to any unrestricted cash in excess of
the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment
commitments.
|
|
·
|
Each
participating secured lender was relieved of its obligation to make future
advances with respect to unfunded commitments arising under investments in
its collateral pool.
|
|
·
|
We
received the right to sell or refinance collateral assets as long as we
apply one hundred percent (100%) of the proceeds to pay down the related
secured credit facility balance subject to minimum release price
mechanics.
|
|
·
|
We
eliminated the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. Under the revised secured credit
facilities, going forward, collateral value is expected to be
determined by our lenders based upon changes in the performance of the
underlying real estate collateral as opposed to changes
in market spreads under the original terms. Beginning September
2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities,
each collateral pool may be valued monthly on this basis. If the ratio of
a secured lender’s total outstanding secured credit facility balance to
total collateral value exceeds 1.15x the ratio calculated as of the
effective date of the amended agreements, we may be required to liquidate
collateral and reduce the borrowings or post other collateral in an
effort to bring the ratio back into compliance with the prescribed ratio,
which may or may not be successful.
|
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
|
·
|
prohibit
new balance sheet investments except, subject to certain limitations,
co-investments in our investment management vehicles or protective
investments to defend existing collateral assets on our balance
sheet;
|
|
·
|
prohibit
the incurrence of any additional indebtedness except in limited
circumstances;
|
|
·
|
limit
the total cash compensation to all employees and, specifically with
respect to our chief executive officer, chief operating officer and chief
financial officer, freeze their base salaries at 2008 levels, and require
cash bonuses to any of them to be approved by a committee comprised of one
representative designated by the secured lenders, the administrative agent
under the senior credit facility and the chairman of our board of
directors;
|
|
·
|
prohibit
the payment of cash dividends to our common shareholders except to the
minimum extent necessary to maintain our REIT
status;
|
|
·
|
require
us to maintain a minimum amount of liquidity, as defined, of $7.0 million
in year one and $5.0 million
thereafter;
|
- 20
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
|
·
|
trigger
an event of default if both our chief executive officer and chief
operating officer cease their current employment during the term of the
agreement and we fail to hire replacements acceptable to the lenders;
and
|
|
·
|
trigger
an event of default, if any event or condition occurs which causes any
obligation or liability of more than $1.0 million to become due prior to
its scheduled maturity or any monetary default under our restructured debt
obligations if the amount of such obligation is at least $1.0
million.
|
Pursuant
to the restructuring, the interest rates on our secured borrowings remain the
same as those previously in effect.
The
following table details our progress towards reducing the outstanding principal
amounts under our secured credit facilities in order to meet the conditions for
the first one-year extension thereof (in thousands):
September
30, 2009
|
March
15, 2009
|
March
15, 2009 to
September
30, 2009 Change
|
Target
Debt
Obligation
(B)
|
Additional
Debt Reduction
Required (A-B) (2)
|
||||||||||||||||||||||||||||
Participating
Secured Lender
|
Collateral Balance
(1)
|
Debt
Obligation
(A)
|
Collateral Balance
(1)
|
Debt
Obligation
|
Collateral
Balance
|
Debt
Obligation
|
||||||||||||||||||||||||||
JPMorgan
(3)
|
$ | 524,930 | $ | 281,898 | $ | 559,548 | $ | 334,968 | $ | (34,618 | ) | $ | (53,070 | ) | $ | 267,572 | $ | 14,326 | ||||||||||||||
Morgan
Stanley
|
406,898 | 166,522 | 411,342 | 181,350 | (4,444 | ) | (14,828 | ) | 145,688 | 20,834 | ||||||||||||||||||||||
Citigroup
|
77,648 | 44,098 | 99,590 | 63,830 | (21,942 | ) | (19,732 | ) | 50,894 | N/A | ||||||||||||||||||||||
$ | 1,009,476 | $ | 492,518 | $ | 1,070,480 | $ | 580,148 | $ | (61,004 | ) | $ | (87,630 | ) | $ | 464,154 | $ | 35,160 |
(1)
|
Represents the aggregate outstanding principal balance of
collateral as of each respective period.
|
|
(2)
|
Represents the amount by which we are required to reduce our debt
obligations by March 15, 2010 in order to qualify for a one-year
extension.
|
|
(3)
|
The additional debt reduction required under our agreement with
JPMorgan is subject to adjustment based on changes in the fair value of
certain of our interest rate swap agreements with JPMorgan between
September 30, 2009 and March 15, 2010. Amount noted above assumes no
change in the fair value of such derivatives as of September 30,
2009.
|
On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The fair value assigned to these warrants, totaling
$940,000, has been recorded as a discount on the related debt obligations with a
corresponding increase to additional paid-in capital, and will be accreted as a
component of interest expense over the term of each respective facility. The
warrants were valued using the Black-Scholes valuation method.
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the secured credit facility.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
As of
September 30, 2009, we had book balances of $281.5 million under our agreement
with JP Morgan at an all-in cost of LIBOR plus 1.55%, $166.3 million under our
agreement with Morgan Stanley at an all-in cost of LIBOR plus 1.88% and $44.0
million under our agreement with Citigroup at an all-in cost of LIBOR plus
1.40%. These balances reflect the amortization of the warrants issued in
conjunction with our debt restructuring described above.
- 21
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table details the aggregate outstanding principal balance, carrying
value and fair value of our assets, primarily loans receivable, which were
pledged as collateral under our secured credit facilities as of September 30,
2009, as well as the amount at risk under each facility (in thousands). The
amount at risk is generally equal to the carrying value of our collateral less
the outstanding principal balance of the associated credit
facility.
Loans
and Securities Collateral Balances, as of September 30,
2009
|
||||||||||||||||||||
Secured
Lender
|
Principal
Balance
|
Carrying
Value
|
Fair
Market Value
|
Amount
at Risk
(1)
|
||||||||||||||||
JPMorgan
|
$ | 524,930 | $ | 494,233 | $ | 318,768 | $ | 219,241 | ||||||||||||
Morgan
Stanley
|
406,898 | 270,625 | 186,279 | 104,103 | ||||||||||||||||
Citigroup
|
77,648 | 75,323 | 54,079 | 31,225 | ||||||||||||||||
$ | 1,009,476 | $ | 840,181 | $ | 559,126 | $ | 354,569 |
(1)
|
Amount
at risk is calculated on an asset-by-asset basis for each facility and
considers the greater of (a) the carrying value of an asset and (b) the
fair value of an asset, in determining the total
risk.
|
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
|
·
|
extend
the maturity date of the senior credit agreement to be co-terminus with
the maturity date of the secured credit facilities with the participating
secured lenders (as they may be further extended until March 16, 2012, as
described above);
|
|
·
|
increase
the cash interest rate under the senior credit agreement to LIBOR plus
3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per
annum less the cash interest rate;
|
|
·
|
initiate
quarterly amortization equal to the greater of: (i) $5.0 million per annum
and (ii) 25% of the annual cash flow received from our currently
unencumbered collateralized debt obligation
interests;
|
|
·
|
pledge
our unencumbered collateralized debt obligation interests and provide a
negative pledge with respect to certain other assets;
and
|
|
·
|
replace
all existing financial covenants with substantially similar covenants and
default provisions to those described above with respect to the
participating secured facilities.
|
As of
September 30, 2009, we had $99.4 million outstanding under our senior credit
facility at a cash cost of LIBOR plus 3.00%. Since we amended and restated our
senior credit agreement on March 16, 2009, we have made amortization payments of
$2.5 million and $1.9 million of accrued interest was added to the outstanding
balance.
Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as mentioned above in exchange for $21.9 million face amount of the Trust
Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
- 22
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
As of
September 30, 2009, we had a principal balance of $143.8 million ($127.1 million
book balance) of junior subordinated notes at a cash cost of 1.00% per
annum.
Collateralized
Debt Obligations
As of
September 30, 2009, we had collateralized debt obligations, or CDOs, outstanding
from four separate issuances with a total face value of $1.1 billion. Our CDOs
are financing vehicles for our assets and, as such, are consolidated on our
balance sheet representing the amortized sales price of the securities we sold
to third parties. On a combined basis, our CDOs provide us with $1.1 billion of
non-recourse, non-mark-to-market, index matched financing at a weighted average
cash cost of 0.54% over the applicable indices (1.83% at September 30, 2009) and
a weighted average all-in cost of 0.71% over the applicable indices (2.00% at
September 30, 2009). As of September 30, 2009, $496.9 million of our loans
receivable and $713.9 million of our securities were financed by our CDOs. As of
December 31, 2008, $548.8 million of our loans receivable and $746.0 million of
our securities were financed by our CDOs. During the third quarter of 2009, we
received downgrades to 4 classes of our second CDO, CT CDO 2005-1
Ltd.
CDO I and
CDO II each have interest coverage and overcollateralization tests, which when
breached provide for hyper-amortization of the senior notes sold by a
redirection of cash flow that would otherwise have been paid to the subordinate
classes, some of which are owned by us. When such tests are in breach for six
consecutive months, the reinvesting feature of the CDO is suspended. The
hyper-amortization would cease once the test is back in compliance. The
overcollateralization tests are a function of impairments to the CDO collateral.
During the first quarter of 2009, we were informed by our CDO trustee of
impairments due to rating agency downgrades of certain of the securities which
serve as collateral in all of our CDOs. The impairments resulted in a breach of
a CDO II overcollateralization test. During the second and third quarters,
additional ratings downgrades on securities combined with the non-performance of
loan collateral resulted in breaches of the CDO I
overcollateralization tests and an additional CDO II overcollateralization test
failure as well as a breach of a CDO II interest coverage test. These
breaches have caused the redirection of CDO I and CDO II cash flow that would
otherwise have been paid to the subordinate classes of the CDOs, some of which
we own.
Furthermore,
all four of our CDOs provide for the re-classification of interest proceeds from
impaired collateral as principal proceeds. During the first quarter of 2009, we
were informed by our CDO trustee of impairments due to rating agency downgrades
of certain of the securities which serve as collateral in all of our CDOs
resulting in the reclassification of interest proceeds from those securities as
principal proceeds. During the second and third quarters of 2009, additional
downgrades of securities in CDO IV resulted in additional impairments and
therefore a significant diminution of cash flow to us. Other than collateral
management fees, we currently receive cash payments from only one of our four
CDOs, CDO III.
10.
|
Participations
Sold
|
Participations
sold represent interests in certain loans that we originated and subsequently
sold to CT Large Loan 2006, Inc. (one of our investment management vehicles) and
third parties. We present these sold interests as both assets and liabilities
(in equal amounts) on the basis that these arrangements do not qualify as sales
under GAAP. As of September 30, 2009, we had five such participations sold with
a total book balance of $289.8 million at a weighted average coupon of LIBOR
plus 3.27% (3.52% at September 30, 2009) and a weighted average yield of LIBOR
plus 3.28% (3.53% at September 30, 2009). 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 operations.
As of
December 31, 2008, we had five such participations sold with a total book
balance of $292.7 million at a weighted average coupon of LIBOR plus 3.27%
(3.71% at December 31, 2008) and a weighted average yield of LIBOR plus 3.27%
(3.71% at December 31, 2008).
- 23
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
11.
|
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 interest rate swaps that
we employ are designated as cash flow hedges and are designed to hedge fixed
rate assets against floating rate liabilities. Under cash flow hedges, we pay
our hedge counterparties a fixed rate amount and our counterparties pay us a
floating rate amount, which are settled monthly, and recorded as a component of
interest expense. Our counterparties in these transactions are financial
institutions and we are dependent upon the financial health of these
counterparties and a functioning interest rate derivative market in order to
effectively execute our hedging strategy.
The
following table summarizes the notional and fair values of our interest rate
swaps as of September 30, 2009 and December 31, 2008. 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 (in
thousands):
Type
|
Counterparty
|
Notional
Amount
|
Interest
Rate
|
Maturity
|
September
30, 2009
Fair
Value
|
December
31, 2008
Fair
Value
|
||||||
Cash
Flow Hedge
|
Swiss
RE Financial
|
$273,810
|
5.10%
|
2015
|
($24,542)
|
($29,383)
|
||||||
Cash
Flow Hedge
|
Bank
of America
|
45,134
|
4.58%
|
2014
|
(3,353)
|
(4,526)
|
||||||
Cash
Flow Hedge
|
Morgan
Stanley
|
18,207
|
3.95%
|
2011
|
(886)
|
(1,053)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
17,974
|
5.14%
|
2014
|
(1,186)
|
(2,867)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
16,894
|
4.83%
|
2014
|
(986)
|
(2,550)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
16,377
|
5.52%
|
2018
|
(1,270)
|
(3,827)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
12,310
|
5.02%
|
2009
|
—
|
(302)
|
||||||
Cash
Flow Hedge
|
Bank
of America
|
11,054
|
5.05%
|
2016
|
(1,107)
|
(1,366)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
7,062
|
5.11%
|
2016
|
(460)
|
(706)
|
||||||
Cash
Flow Hedge
|
Bank
of America
|
5,104
|
4.12%
|
2016
|
(299)
|
(430)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
3,263
|
5.45%
|
2015
|
(241)
|
(663)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
2,838
|
5.08%
|
2011
|
(131)
|
(241)
|
||||||
Cash
Flow Hedge
|
Morgan
Stanley
|
780
|
5.31%
|
2011
|
(47)
|
(60)
|
||||||
Total/Weighted
Average
|
$430,807
|
4.99%
|
2015
|
($34,508)
|
($47,974)
|
As of
both September 30, 2009 and December 31, 2008, all of our derivative financial
instruments were at their fair value as interest rate hedge liabilities on our
consolidated balance sheet. During the nine months ended September 30, 2009, we
did not enter into any new derivative financial instrument
contracts.
The table
below shows amounts recorded to other comprehensive income and amounts recorded
to interest expense from other comprehensive income for the nine months ended
September 30, 2009 and 2008 (in thousands):
Amount
of gain (loss) recognized in
OCI for the nine months ended |
Amount
of loss reclassified from OCI to income for the nine months ended (1) |
Income
Statement Location
|
||||||||||||
Hedge
|
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
September
30, 2008
|
||||||||||
Interest
rate swaps
|
$13,465 | ($1,233 | ) | ($15,432 | ) | ($7,358 | ) |
Interest
expense
|
(1)
|
Represents net amounts paid to swap counterparties during the
period, which are included in interest expense, offset by an immaterial
amount of non-cash swap
amortization.
|
All of
our hedges were classified as highly effective for all of the periods presented,
and over the next twelve months we expect approximately $18.4 million to be
reclassified from other comprehensive income to interest expense.
Certain
of our derivative agreements contain provisions whereby a default on any of our
debt obligations could also constitute a default under these derivative
obligations. As of September 30, 2009, the fair value of such derivatives in a
net liability position related to these agreements was $8.5 million. If we had
breached any of these provisions at September 30, 2009, we could have been
required to settle our obligations under the agreements at their termination
value.
As of
September 30, 2009, we were not in default under any of our debt obligations and
have not posted any assets as collateral under our derivative
agreements.
12.
|
Shareholders’
Equity
|
Authorized
Capital
We have
the authority to issue up to 200,000,000 shares of stock, consisting of
(i) 100,000,000 shares of class A common stock and (ii) 100,000,000
shares of preferred stock. Subject to applicable New York Stock Exchange listing
requirements, our board of directors is authorized to issue additional shares of
authorized stock without shareholder approval.
- 24
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Common
Stock
Shares of
class A common stock are entitled to vote on all matters presented to a
vote of shareholders, except as provided by law or subject to the voting rights
of any outstanding preferred stock. Holders of record of shares of class A
common stock on the record date fixed by our board of directors are entitled to
receive such dividends as may be declared by the board of directors subject to
the rights of the holders of any outstanding preferred stock. A total of
22,046,680 shares of common stock were issued and outstanding as of September
30, 2009.
We did
not repurchase any of our common stock during the three months ended September
30, 2009 other than the 3,536 shares we acquired pursuant to elections by
incentive plan participants to satisfy tax withholding obligations through the
surrender of shares equal in value to the amount of the withholding obligation
incurred upon the vesting of restricted stock.
Preferred
Stock
We have
100,000,000 shares of preferred stock authorized and have not issued any shares
of preferred stock since we repurchased all of the previously issued and
outstanding preferred stock in 2001.
Warrants
As
discussed in Note 9, in conjunction with our debt restructuring, we issued to
certain of our secured lenders warrants to purchases an aggregate 3,479,691
shares of our class A common stock at an exercise price of $1.79 per share. The
warrants will become exercisable on March 16, 2012 and expire on March 16, 2019,
and may be exercised through a cashless exercise. The fair value assigned to
these warrants, totaling $940,000, has been recorded as an increase to
additional paid-in capital, and will be amortized over the term of the related
debt obligations. The warrants were valued using the Black-Scholes valuation
method.
Dividends
We
generally intend to distribute each year substantially all of our taxable income
(which does not necessarily equal net income as calculated in accordance with
GAAP) to our shareholders so as to comply with the REIT provisions of the
Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. If
necessary for REIT qualification purposes, we may need to distribute any taxable
income remaining after giving effect to the distribution of the final regular
quarterly dividend each year, together with the first regular quarterly dividend
payment of the following taxable year or, at our discretion, in a separate
dividend distributed prior thereto. We refer to these dividends as special
dividends. As required by covenants in our restructured debt obligations, our
cash dividend distributions are restricted to the minimum amount necessary to
maintain our status as a REIT. Moreover, such covenants require us to make any
distribution in stock to the extent permitted, taking into consideration the
recent Internal Revenue Service ruling, “Revenue Procedure 2008-68,” which allow
REITs to distribute up to 90% of their dividends in the form of stock for tax
years ending on or before December 31, 2009.
In
addition to the
foregoing restrictions, our dividend policy remains
subject to revision at the discretion of our board of directors. All
distributions will be made at the discretion of our board of directors and will
depend upon our taxable income, our financial condition, our maintenance of REIT
status and other factors as our board of directors deems relevant. No dividends
were declared during the nine months ended September 30, 2009.
Earnings
Per Share
The
following table sets forth the calculation of Basic and Diluted earnings per
share, or EPS, based on both restricted and unrestricted class A common stock,
for the nine months ended September 30, 2009 and 2008 (in thousands, except
share and per share amounts):
Nine
Months
Ended September 30, 2009
|
Nine
Months Ended September 30, 2008
|
|||||||||||||||||||||||
Net Loss |
Shares
|
Per
Share Amount |
Net Loss |
Shares
|
Per
Share Amount |
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||
Net
loss allocable to
|
||||||||||||||||||||||||
common
stock
|
$ | (185,997 | ) | 22,361,541 | $ | (8.32 | ) | $ | (6,381 | ) | 20,707,262 | $ | (0.31 | ) | ||||||||||
Effect
of Dilutive Securities:
|
||||||||||||||||||||||||
Warrants
& Options outstanding for the purchase of common
stock
|
— | — | — | — | ||||||||||||||||||||
Diluted
EPS:
|
||||||||||||||||||||||||
Net
loss per share of common stock and assumed
conversions
|
$ | (185,997 | ) | 22,361,541 | $ | (8.32 | ) | $ | (6,381 | ) | 20,707,262 | $ | (0.31 | ) |
- 25
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table sets forth the calculation of Basic and Diluted EPS based on
both restricted and unrestricted class A common stock, for the three months
ended September 30, 2009 and 2008 (in thousands, except share and per share
amounts):
Three
Months Ended September 30, 2009
|
Three
Months Ended September 30, 2008
|
||||||||||||||||||||||||
Net Income |
Shares
|
Per
Share Amount |
Net Income |
Shares
|
Per
Share Amount |
||||||||||||||||||||
Basic
EPS:
|
|||||||||||||||||||||||||
Net
income allocable to
|
|||||||||||||||||||||||||
common
stock
|
$ |
(106,457
|
) | 22,426,623 | $ | (4.75 | ) | $ | 13,667 | 22,247,042 | $ | 0.61 | |||||||||||||
Effect
of Dilutive Securities:
|
|||||||||||||||||||||||||
Warrants
& Options outstanding for the purchase of common
stock
|
— | — | — | 3,589 | |||||||||||||||||||||
Diluted
EPS:
|
|||||||||||||||||||||||||
Net
loss per share of common stock and assumed
conversions
|
$ | (106,457 | ) | 22,426,623 | $ | (4.75 | ) | $ | 13,667 | 22,250,631 | $ | 0.61 |
As of
September 30, 2009, Diluted EPS excludes 162,000 options and 3.5 million
warrants which were antidilutive for the period. These instruments could
potentially impact Diluted EPS in future periods, depending on changes in our
stock price. As of September 30, 2008, Diluted EPS excludes 170,000 options
which were similarly antidilutive.
13.
|
General
and Administrative Expenses
|
General
and administrative expenses for the nine months ended
September 30, 2009 and 2008 consisted of the following (in
thousands):
Nine
Months Ended September
30, |
||||||||
2009
|
2008
|
|||||||
Personnel
costs
|
$ | 7,950 | $ | 10,050 | ||||
Employee
stock based compensation
|
1,102 | 2,759 | ||||||
Restructuring
costs
|
3,042 | — | ||||||
Operating
and other costs
|
2,014 | 2,240 | ||||||
Professional
services
|
4,342 | 3,770 | ||||||
Total
|
$ | 18,450 | $ | 18,819 |
14.
|
Income
Taxes
|
We made
an election to be taxed as a REIT under Section 856(c) of the Internal
Revenue Code, commencing with the tax year ending December 31, 2003.
As a REIT, we generally are not subject to federal, state, and local income
taxes except for the operations of our taxable REIT subsidiary, CTIMCO. 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, we may be subject to material penalties such as
federal, state and local income tax on our taxable income at regular corporate
rates. As of September 30, 2009 and December 31, 2008, we were in
compliance with all REIT requirements. During the nine months ended September
30, 2009, we received a $408,000 state income tax refund related to prior
years.
During
the nine months ended September 30, 2009 and 2008, CTIMCO paid no federal taxes
and paid small amounts of state and local taxes. As of September 30, 2009, we
have net operating losses and net capital losses available to be carried forward
and utilized in current or future periods.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities used for financial reporting purposes
and the amounts used for tax reporting purposes.
15.
|
Employee
Benefit and Incentive Plans
|
We had
four benefit plans in effect as of September 30, 2009: (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, (3) the Amended and Restated 2004 Long-Term Incentive Plan,
or 2004 Plan, and (4) the 2007 Long-Term Incentive Plan, or 2007 Plan. The 1997
Employee Plan and 1997 Director Plan expired in 2007 and no new awards may be
issued under them, and no further grants will be made under the 2004 Plan. Under
the 2007 Plan, a maximum of 700,000 shares of class A common stock may be
issued. Shares canceled under the 2004 Plan are available to be reissued under
the 2007 Plan. As of September 30, 2009, there were 362,473 shares available
under the 2007 Plan.
- 26
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Under
these plans, our employees are issued shares of our restricted common stock
which is expensed by us over their vesting period. A portion of these shares
vest pro-rata over a three-year service period, with the remainder contingently
vesting after a four-year period based on the returns we have
achieved.
As of
September 30, 2009 unvested share-based compensation consisted of 287,422 shares
of restricted common stock with an unamortized value of $1.0 million. Subject to
vesting conditions and the continued employment of certain employees, these
costs will be recognized as compensation expense over the next 3.4
years.
Activity
under these four plans for the nine months ended September 30, 2009 is
summarized in the table below in share and share equivalents:
Benefit
Type
|
1997 Employee
Plan
|
1997 Director
Plan
|
2004
Plan
|
2007
Plan
|
Total
|
|||||||||||||||
Options(1)
|
||||||||||||||||||||
Beginning
Balance
|
170,477 | — | — | — | 170,477 | |||||||||||||||
Expired
|
(8,251 | ) | — | — | — | (8,251 | ) | |||||||||||||
Ending
Balance
|
162,226 | — | — | — | 162,226 | |||||||||||||||
Restricted
Stock(2)
|
||||||||||||||||||||
Beginning
Balance
|
— | — | 289,637 | 41,560 | 331,197 | |||||||||||||||
Granted
|
— | — | — | 216,269 | 216,269 | |||||||||||||||
Vested
|
— | — | (43,646 | ) | (14,702 | ) | (58,348 | ) | ||||||||||||
Forfeited
|
— | — | (193,310 | ) | (8,386 | ) | (201,696 | ) | ||||||||||||
Ending
Balance
|
— | — | 52,681 | 234,741 | 287,422 | |||||||||||||||
Stock
Units(3)
|
||||||||||||||||||||
Beginning
Balance
|
— | 80,017 | — | 135,434 | 215,451 | |||||||||||||||
Granted/deferred
|
— | — | — | 225,464 | 225,464 | |||||||||||||||
Ending
Balance
|
— | 80,017 | — | 360,898 | 440,915 | |||||||||||||||
Total
Outstanding Shares
|
162,226 | 80,017 | 52,681 | 595,639 | 890,563 |
(1)
|
All
options are fully vested as of September 30,
2009.
|
|
(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 granted 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.
|
The
following table summarizes the outstanding options as of September 30,
2009:
Weighted
Average Exercise Price per Share
|
Weighted
Average Remaining Life (in Years)
|
||||||||||||||||||||||||
Exercise Price
per Share
|
Options
Outstanding
|
||||||||||||||||||||||||
1997 Employee
|
1997 Director
|
1997 Employee
|
1997 Director
|
1997 Employee
|
1997 Director
|
||||||||||||||||||||
Plan
|
Plan
|
Plan
|
Plan
|
Plan
|
Plan
|
||||||||||||||||||||
$10.00
- $15.00
|
35,557 | — | $13.50 | $— | 1.34 | — | |||||||||||||||||||
$15.00 - $20.00 | 126,669 | — | 16.38 | — | 1.77 | — | |||||||||||||||||||
Total/Weighted
Average
|
162,226 | — | $15.75 | $— | 1.68 | — |
In
addition to the equity interests detailed above, we may grant percentage
interests in the incentive compensation received by us from certain of our
investment management vehicles. As of September 30, 2009, we had granted a
portion of the Fund III incentive compensation received by us.
- 27
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
A summary
of the unvested restricted common stock as of and for the nine month period
ended September 30, 2009 was as follows:
Restricted
Common Stock
|
||||||||
Shares
|
Grant
Date Fair Value
|
|||||||
Unvested
at January 1, 2009
|
331,197 | $30.61 | ||||||
Granted
|
216,269 | 3.32 | ||||||
Vested
|
(58,348 | ) | 27.44 | |||||
Forfeited
|
(201,696 | ) | 28.99 | |||||
Unvested
at September 30, 2009
|
287,422 | $12.27 |
A summary
of the unvested restricted common stock as of and for the nine month period
ended September 30, 2008 was as follows:
Restricted
Common Stock
|
||||||||
Shares
|
Grant
Date Fair Value
|
|||||||
Unvested
at January 1, 2008
|
423,931 | $30.96 | ||||||
Granted
|
44,550 | 27.44 | ||||||
Vested
|
(108,224 | ) | 28.96 | |||||
Forfeited
|
(414 | ) | 51.25 | |||||
Unvested
at September 30, 2008
|
359,843 | $30.53 |
16. Fair
Values of Financial Instruments
As
discussed in their respective notes to our consolidated financial statements,
certain of our assets and liabilities are measured at fair value on either a
recurring or nonrecurring basis. These fair values are determined using a
variety of inputs and methodologies, which are detailed below. As discussed in
Note 2, the “Fair Value Measurement and Disclosures” topic of the Codification
establishes a fair value hierarchy that prioritizes the inputs used in
determining fair value under GAAP, which includes the following classifications,
in order of priority:
|
·
|
Level
1 generally includes only unadjusted quoted prices in active markets for
identical assets or liabilities as of the reporting
date.
|
|
·
|
Level
2 inputs are those which, other than Level 1 inputs, are observable for
identical or similar assets or
liabilities.
|
|
·
|
Level
3 inputs generally include anything which does not meet the criteria of
Levels 1 and 2, particularly any unobservable
inputs.
|
The
following table summarizes our financial instruments recorded at fair value as
of September 30, 2009 (in thousands):
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
Total Fair Value at
September
30, 2009
|
Quoted
Prices in Active Markets
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant Unobservable Inputs
(Level
3)
|
|||||||||||||
Measured
on a recurring basis:
|
||||||||||||||||
Loans
held-for-sale (1)
|
$12,000 | $— | $12,000 | $— | ||||||||||||
Interest
rate hedge liabilities
|
(34,508 | ) | — | (34,508 | ) | — | ||||||||||
Measured on a nonrecurring basis: | ||||||||||||||||
Impaired
loans (2)
|
$95,675 | $— | $— | $95,675 | ||||||||||||
Impaired
securities (3)
|
6,106 | — | 2,250 | 3,856 |
(1)
|
Transactions related to these assets have a high probability of
closing subsequent to September 30, 2009.
|
|
(2)
|
Loans receivable against which we have recorded a provision for
loan losses as of September 30, 2009.
|
|
(3)
|
Securities which were other-than-temporarily impaired during the
three months ended September 30,
2009.
|
The
following methods and assumptions were used to estimate the fair value of each
type of asset and liability which was measured at fair value as of September 30,
2009:
Loans
held-for-sale, net:We determined the fair value of loans held-for-sale
based upon the transactions which are likely to occur in the near future related
to the settlement amount of the remaining asset.
- 28
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
Interest rate hedge liabilities:
Interest rate hedges were valued using advice from a third party
derivative specialist, based on a combination of observable market-based inputs,
such as interest rate curves, and unobservable inputs such as credit valuation
adjustments due to the risk of non-performance by both us and our
counterparties.
Impaired loans: The loans
indentified for impairment are collateral dependant loans. Impairment on these
loans is measured by comparing the estimated fair value of the underlying
collateral to the carrying value of the respective loan. These valuations
require significant judgments, which include assumptions regarding
capitalization rates, leasing, creditworthiness of major tenants, occupancy
rates, availability of financing, exit plan, loan sponsorship, actions of other
lenders and other factors deemed necessary by management. The table above
includes all impaired loans, regardless of the period in which impairment was
recognized.
Impaired securities:
Securities which are other-than-temporarily impaired have been valued by
a combination of (a) obtaining assessments from third party dealers and, in
limited cases where such assessments are unavailable or deemed not to be
indicative of fair value, (b) discounting expected cash flows using estimated
market discount rates. The expected cash flows of each security are based on
assumptions regarding the collection of principal and interest on the underlying
loans and securities. The table above includes only securities which were
impaired during the three months ended September 30, 2009.
In
addition to the above disclosures for assets and liabilities which are measured
at fair value, GAAP also requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
position, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based upon estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the estimated market
discount rate and the estimated future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. These disclosure requirements exclude certain financial instruments
and all non-financial instruments.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments, excluding those described above that are carried
at fair value, for which it is practicable to estimate that value:
Cash and cash equivalents:
The carrying amount of cash on hand and money market funds is considered
to be a reasonable estimate of fair value.
Securities held-to-maturity:
These investments, other than securities that have been
other-than-temporarily impaired, are presented on a held-to-maturity basis and
not at fair value. The fair values have been estimated by a combination of (a)
obtaining assessments from third party dealers and, in limited cases where such
assessments are unavailable or deemed not to be indicative of fair value, (b)
discounting expected cash flows using estimated market discount rates. The
expected cash flows of each security are based on assumptions regarding the
collection of principal and interest on the underlying loans and
securities.
Loans receivable, net: Other
than impaired loans, these assets are reported at their amortized cost and not
at fair value. The fair values were estimated by using current institutional
purchaser yield requirements for loans with similar credit
characteristics.
Repurchase obligations: As a
result of our debt restructuring on March 16, 2009, our repurchase obligations
no longer have terms which are comparable to other facilities in the market.
Given the unique nature of our restructured obligations, it is not practicable
to estimate their fair value. Accordingly, they are included at their current
face value in the table below. See note 9 for a detailed description of our
repurchase obligations.
Collateralized debt obligations:
These obligations are presented on the basis of proceeds received at
issuance and not at fair value. The fair value was
estimated based upon the amount at which similar placed financial instruments
would be valued today.
Senior credit facility: This
instrument is presented on the basis of total cash proceeds borrowed, and not at
fair value. The fair value was estimated based on the interest rate that is
currently available in the market for similar credit facilities.
Junior subordinated notes:
These instruments bear interest at fixed rates. The fair value was
obtained by calculating the present value of future cash payments based on
current market interest rates.
- 29
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table details the carrying amount, face amount, and approximate fair
value of the financial instruments described above (in thousands):
Fair
Value of Financial Instruments
|
||||||||||||||||||||||||
(in
thousands)
|
September
30, 2009
|
December
31, 2008
|
||||||||||||||||||||||
Carrying
Amount
|
Face
Amount
|
Fair
Value
|
Carrying
Amount
|
Face
Amount
|
Fair
Value
|
|||||||||||||||||||
Financial
assets:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$28,575 | $28,575 | $28,575 | $45,382 | $45,382 | $45,382 | ||||||||||||||||||
Securities
held-to-maturity
|
746,319 | 870,802 | 513,844 | 852,211 | 883,958 | 582,478 | ||||||||||||||||||
Loans
receivable, net
|
1,587,590 | 1,711,107 | 1,046,210 | 1,790,234 | 1,855,432 | 1,589,929 | ||||||||||||||||||
Financial
liabilities:
|
||||||||||||||||||||||||
Repurchase
obligations
|
491,833 | 492,518 | 492,518 | 699,054 | 699,054 | 699,054 | ||||||||||||||||||
Collateralized
debt obligations
|
1,124,983 | 1,123,713 | 457,546 | 1,156,035 | 1,154,504 | 441,245 | ||||||||||||||||||
Senior
credit facility
|
99,443 | 99,443 | 50,630 | 100,000 | 100,000 | 94,155 | ||||||||||||||||||
Junior
subordinated notes
|
127,075 | 143,753 | 25,032 | 128,875 | 128,875 | 80,099 | ||||||||||||||||||
Participations
sold
|
289,795 | 289,845 | 144,836 | 292,669 | 292,734 | 258,416 |
17.
|
Supplemental
Disclosures for Consolidated Statements of Cash
Flows
|
Interest
paid on our outstanding debt obligations during the nine months ended September
30, 2009 and 2008 was $50.8 million and $84.5 million, respectively. Taxes
recovered by us during the nine months ended September 30, 2009 and 2008 were
$408,000 and $677,000, respectively. Non-cash investing and financing activity
during the nine months ended September 30, 2009 resulted from our investments in
loans where we sold participations as well as the primarily non-cash settlement
of certain of our secured borrowings as discussed in Note 9.
18.
|
Transactions
with Related Parties
|
We earn
base management and incentive fees in our capacity as investment manager for
multiple vehicles which we have sponsored. Due to the nature of our relationship
with these vehicles, all management fees are considered revenue from related
parties under GAAP.
On
November 9, 2006, we commenced our CT High Grade MezzanineSM investment
management initiative and entered into three separate account agreements with
affiliates of W. R. Berkley Corporation, or WRBC, for an aggregate of $250
million. On July 25, 2007, we amended the agreements to increase the
aggregate commitment of the WRBC affiliates to $350 million. Pursuant to
these agreements, we invest, on a discretionary basis, capital on behalf of WRBC
in low risk commercial real estate mortgages, mezzanine loans and participations
therein. The separate accounts are entirely funded with committed capital
from WRBC and are managed by a subsidiary of CTIMCO. CTIMCO earns a
management fee equal to 0.25% per annum on invested assets.
On April
27, 2007, we purchased a $20 million subordinated interest in a mortgage from a
dealer. Proceeds from the mortgage financing provide for the construction and
leasing of an office building in Washington, D.C. that is owned by a joint
venture. WRBC has a substantial economic interest in one of the joint venture
partners. As of September 30, 2009, this loan was classified as held-for-sale as
a result of discussions with the borrower for a potential discounted settlement
of the loan.
WRBC
beneficially owned approximately 17.4% of our outstanding class A common
stock as of October 28, 2009, and a member of our board of directors
is an employee of WRBC.
On March
28, 2008, we announced the closing of our public offering of 4,000,000 shares of
our class A common stock. We received net proceeds of approximately $113
million. Morgan Stanley & Co. Incorporated acted as the sole underwriter of
the offering. Affiliates of Samuel Zell, our chairman of the board, and WRBC
purchased a number of shares in the offering sufficient to maintain their pro
rata ownership interests in us.
Prior to
2007, we paid Equity Group Investments, L.L.C. and Equity Risk
Services, Inc., affiliates under common control of the chairman of the
board of directors, for certain corporate services provided to us. These
services included consulting on insurance matters, risk management, and investor
relations.
In July
2008, CTOPI, a private equity fund that we manage, held its final closing
completing its capital raise with $540 million total equity commitments.
EGI-Private Equity II, L.L.C., an affiliate under common control of the chairman
of our board of directors, owns a 3.7% limited partner interest in CTOPI. During
the nine months ended September 30, 2009, we recorded $6.4 million in fees from
CTOPI, $262,000 of which were attributable to EGI Private Equity II, L.L.C.
Affiliates of the chairman of our board of directors also own interests in Fund
III, an investment management vehicle that we manage and in which we also have
an ownership interest.
- 30
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
During
2008, CTOPI purchased $37.1 million face value of our CDO notes in the open
market for $21.1 million.
19.
|
Segment
Reporting
|
We have
two reportable segments. We have an internal information system that produces
performance and asset data for our two segments along service
lines.
The
Balance Sheet Investment segment includes all of our activities related to
direct loan and investment activities (including direct investments in Funds)
and the financing thereof.
The
Investment Management segment includes all of our activities related to
investment management services provided to us and third party funds under
management and includes our taxable REIT subsidiary, CTIMCO and its
subsidiaries.
The
following table details each segment's contribution to our operating results and
the identified assets attributable to each such segment for the nine months
ended, and as of, September 30, 2009 (in thousands):
Balance
Sheet Investment |
Investment Management |
Inter-Segment Activities |
Total
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 93,341 | $ | — | $ | — | $ | 93,341 | ||||||||
Less:
Interest and related expenses
|
61,116 | — | — | 61,116 | ||||||||||||
Income
from loans and other investments, net
|
32,225 | — | — | 32,225 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
— | 12,746 | (3,978 | ) | 8,768 | |||||||||||
Servicing
fees
|
— | 2,012 | (510 | ) | 1,502 | |||||||||||
Other
interest income
|
150 | 16 | (13 | ) | 153 | |||||||||||
Total
other revenues
|
150 | 14,774 | (4,501 | ) | 10,423 | |||||||||||
Other
expenses
|
||||||||||||||||
General
and administrative
|
10,066 | 12,362 | (3,978 | ) | 18,450 | |||||||||||
Servicing
fee expense
|
510 | — | (510 | ) | — | |||||||||||
Other
interest expense
|
— | 13 | (13 | ) | — | |||||||||||
Depreciation
and amortization
|
— | 65 | — | 65 | ||||||||||||
Total
other expenses
|
10,576 | 12,440 | (4,501 | ) | 18,515 | |||||||||||
Total
other-than-temporary impairments of securities
|
(96,529 | ) | — | — | (96,529 | ) | ||||||||||
Portion
of other-than-temporary impairments of securities
recognized in other comprehensive income
|
17,612 | — | — | 17,612 | ||||||||||||
Impairment
of goodwill
|
— | (2,235 | ) | — | (2,235 | ) | ||||||||||
Impairments
of real estate held-for-sale
|
(2,233 | ) | — | — | (2,233 | ) | ||||||||||
Net
impairments recognized in earnings
|
(81,150 | ) | (2,235 | ) | — | (83,385 | ) | |||||||||
Provision
for loan losses
|
(113,716 | ) | — | — | (113,716 | ) | ||||||||||
Valuation
allowance on loans held-for-sale
|
(10,363 | ) | — | — | (10,363 | ) | ||||||||||
Loss
from equity investments
|
— | (3,074 | ) | — | (3,074 | ) | ||||||||||
Loss
before income taxes
|
(183,430 | ) | (2,975 | ) | — | (186,405 | ) | |||||||||
Income
tax benefit
|
(408 | ) | — | — | (408 | ) | ||||||||||
Net
loss
|
$ | (183,022 | ) | $ | (2,975 | ) | $ | — | $ | (185,997 | ) | |||||
Total
assets
|
$ | 2,382,157 | $ | 10,424 | $ | (1,957 | ) | $ | 2,390,624 |
All
revenues were generated from external sources within the United States. The
“Investment Management” segment earned fees of $4.0 million for management of
the “Balance Sheet Investment” segment and $510,000 for serving as collateral
manager of the four CDOs consolidated under our “Balance Sheet Investment”
segment, and was charged $13,000 for inter-segment interest for the nine months
ended September 30, 2009, which is reflected as offsetting adjustments to other
interest income and other interest expense in the inter-segment activities
column in the table above.
- 31
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table details each segment's contribution to our operating results and
the identified assets attributable to each such segment for the nine months
ended, and as of, September 30, 2008 (in thousands):
Balance
Sheet Investment |
Investment Management |
Inter-Segment Activities |
Total
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 149,725 | $ | — | $ | — | $ | 149,725 | ||||||||
Less:
Interest and related expenses
|
98,918 | — | — | 98,918 | ||||||||||||
Income
from loans and other investments, net
|
50,807 | — | — | 50,807 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
— | 15,137 | (5,310 | ) | 9,827 | |||||||||||
Servicing
fees
|
— | 337 | — | 337 | ||||||||||||
Other
interest income
|
1,391 | 24 | (108 | ) | 1,307 | |||||||||||
Total
other revenues
|
1,391 | 15,498 | (5,418 | ) | 11,471 | |||||||||||
Other
expenses
|
||||||||||||||||
General
and administrative
|
8,517 | 15,612 | (5,310 | ) | 18,819 | |||||||||||
Other
interest expense
|
— | 108 | (108 | ) | — | |||||||||||
Depreciation
and amortization
|
— | 140 | — | 140 | ||||||||||||
Total
other expenses
|
8,517 | 15,860 | (5,418 | ) | 18,959 | |||||||||||
Provision
for loan losses
|
(56,000 | ) | — | — | (56,000 | ) | ||||||||||
Gain
on extinguishment of debt
|
6,000 | — | — | 6,000 | ||||||||||||
Gain
on sale of investments
|
374 | — | — | 374 | ||||||||||||
Loss
from equity investments
|
— | (549 | ) | — | (549 | ) | ||||||||||
Loss
before income taxes
|
(5,945 | ) | (911 | ) | — | (6,856 | ) | |||||||||
Income
tax benefit
|
— | (475 | ) | — | (475 | ) | ||||||||||
Net
loss
|
$ | (5,945 | ) | $ | (436 | ) | $ | — | $ | (6,381 | ) | |||||
Total
assets
|
$ | 3,060,233 | $ | 10,521 | $ | (3,035 | ) | $ | 3,067,719 |
All
revenues were generated from external sources within the United States. The
“Investment Management” segment earned fees of $5.3 million for management of
the “Balance Sheet Investment” segment and was charged $108,000 for
inter-segment interest for the nine months ended September 30, 2008, which is
reflected as offsetting adjustments to other interest income and other interest
expense in the inter-segment activities column in the table above.
- 32
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table details each segment's contribution to our operating results and
the identified assets attributable to each such segment for the three months
ended, and as of, September 30, 2009 (in thousands):
Balance
Sheet Investment |
Investment Management |
Inter-Segment Activities |
Total
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 29,527 | $ | — | $ | — | $ | 29,527 | ||||||||
Less:
Interest and related expenses
|
19,604 | — | — | 19,604 | ||||||||||||
Income
from loans and other investments, net
|
9,923 | — | — | 9,923 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
— | 4,459 | (1,500 | ) | 2,959 | |||||||||||
Servicing
fees
|
— | 423 | (255 | ) | 168 | |||||||||||
Other
interest income
|
15 | 1 | — | 16 | ||||||||||||
Total
other revenues
|
15 | 4,883 | (1,755 | ) | 3,143 | |||||||||||
Other
expenses
|
||||||||||||||||
General
and administrative
|
2,600 | 4,392 | (1,500 | ) | 5,492 | |||||||||||
Servicing
fee expense
|
255 | — | (255 | ) | — | |||||||||||
Depreciation
and amortization
|
— | 51 | — | 51 | ||||||||||||
Total
other expenses
|
2,855 | 4,443 | (1,755 | ) | 5,543 | |||||||||||
Total
other-than-temporary impairments of securities
|
(77,883 | ) | — | — | (77,883 | ) | ||||||||||
Portion
of other-than-temporary impairments of securities
recognized in other comprehensive income
|
11,987 | — | — | 11,987 | ||||||||||||
Net
impairments recognized in earnings
|
(65,896 | ) | — | — | (65,896 | ) | ||||||||||
Provision
for loan losses
|
(47,222 | ) | — | — | (47,222 | ) | ||||||||||
Loss
from equity investments
|
— | (862 | ) | — | (862 | ) | ||||||||||
Loss
before income taxes
|
(106,035 | ) | (422 | ) | — | (106,457 | ) | |||||||||
Income
tax provision
|
— | — | — | — | ||||||||||||
Net
loss
|
$ | (106,035 | ) | $ | (422 | ) | $ | — | $ | (106,457 | ) | |||||
Total
assets
|
$ | 2,382,157 | $ | 10,424 | $ | (1,957 | ) | $ | 2,390,624 |
All
revenues were generated from external sources within the United States. The
“Investment Management” segment earned fees of $1.5 million for management of
the “Balance Sheet Investment” segment and $255,000 for servicing as collateral
manager on the four CDOs consolidated under our “Balance Sheet Investment”
segment and was not charged any inter-segment interest for the three months
ended September 30, 2009.
- 33
-
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (continued)
(unaudited)
The
following table details each segment's contribution to our operating results and
the identified assets attributable to each such segment for the three months
ended, and as of, September 30, 2008 (in thousands):
Balance
Sheet
|
Investment
|
Inter-Segment
|
||||||||||||||
Investment
|
Management
|
Activities
|
Total
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 44,141 | $ | — | $ | — | $ | 44,141 | ||||||||
Less:
Interest and related expenses
|
28,175 | — | — | 28,175 | ||||||||||||
Income
from loans and other investments, net
|
15,966 | — | — | 15,966 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
— | 5,303 | (1,826 | ) | 3,477 | |||||||||||
Servicing
fees
|
— | 116 | — | 116 | ||||||||||||
Other
interest income
|
505 | 9 | (31 | ) | 483 | |||||||||||
Total
other revenues
|
505 | 5,428 | (1,857 | ) | 4,076 | |||||||||||
Other
expenses
|
||||||||||||||||
General
and administrative
|
2,808 | 4,729 | (1,826 | ) | 5,711 | |||||||||||
Other
interest expense
|
— | 31 | (31 | ) | — | |||||||||||
Depreciation
and amortization
|
— | 13 | — | 13 | ||||||||||||
Total
other expenses
|
2,808 | 4,773 | (1,857 | ) | 5,724 | |||||||||||
Loss
from equity investments
|
— | (625 | ) | — | (625 | ) | ||||||||||
Income
before income taxes
|
13,663 | 30 | — | 13,693 | ||||||||||||
Income
tax provision
|
— | 26 | — | 26 | ||||||||||||
Net
income
|
$ | 13,663 | $ | 4 | $ | — | $ | 13,667 | ||||||||
Total
assets
|
$ | 3,060,233 | $ | 10,521 | $ | (3,035 | ) | $ | 3,067,719 |
All
revenues were generated from external sources within the United States. The
“Investment Management” segment earned fees of $1.8 million for management of
the “Balance Sheet Investment” segment and was charged $31,000 for inter-segment
interest for the three months ended September 30, 2008, which is reflected as
offsetting adjustments to other interest income and other interest expense in
the inter-segment activities column in the table above.
20. Subsequent
Events
We have
evaluated events subsequent to September 30, 2009, through November 3, 2009, the
date of financial statement issuance, for disclosure. Through and including
November 3, 2009, we have not identified any significant events relative to our
consolidated financial statements as of September 30, 2009 that warrant
additional disclosure.
- 34
-
ITEM
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
References
herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its
subsidiaries unless the context specifically requires otherwise.
The following discussion
should be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this quarterly report on Form 10-Q.
Historical results set forth are not necessarily indicative of our future
financial position and results of operations.
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 consolidated financial statements.
Actual results could differ from these estimates. Other than the adoption of FSP
FAS 115-2, FSP FAS 157-4 and FSP FAS 107-1 in the first quarter of 2009, as
discussed in Note 2 to the consolidated financial statements, 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
16, 2009.
Introduction
Our
business model is designed to produce a mix of net interest margin from our
balance sheet investments and fee income plus co-investment income from our
investment management operations. In managing our operations, we focus on
originating investments, managing our portfolios and capitalizing our
businesses.
Current
Market Conditions
During
the first nine months of 2009, the state of the commercial real estate markets
continued to deteriorate. Occupancy and rental rates declined in virtually all
product types and geographic markets, and borrowers with near-term refinancing
needs encountered increased difficulty finding replacement financing. As a
result, commercial mortgage delinquencies and defaults are rising rapidly, as
sponsors are unable (or unwilling) to support projects in the face of value
decline. In the first nine months of 2009, our portfolio experienced significant
credit deterioration, evidenced by $113.7 million of new provisions for loan
losses and $98.8 million of impairments on our securities portfolio and real
estate owned. We expect this trend to continue for the foreseeable future and
expect significant challenges ahead for our business. These challenges are
discussed in the risk factors contained in Exhibit 99.1 to this Form
10-Q.
Restructuring
of Our Debt Obligations
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement,
and certain of our trust preferred securities. While we believe that the
restructuring of our debt obligations is a positive development for us in our
efforts to stabilize our business, there can be no assurance that ultimately our
restructuring will be successful. For a further discussion, see the risk factors
contained in Exhibit 99.1 to this Form 10-Q.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
|
·
|
Maturity
dates were modified to one year from the March 16, 2009 effective date of
each respective agreement, which maturity dates may be extended further
for two one-year periods. The first one-year extension option is
exercisable by us so long as the outstanding balance as of the first
extension date is less than or equal to a certain amount, reflecting a
reduction of twenty percent (20%), including the upfront payment described
above, of the outstanding amount from the date of the amendments, and no
other defaults or events of default have occurred and are continuing, or
would be caused by such extension. The second one-year extension option is
exercisable by each participating secured lender in its sole
discretion.
|
- 35
-
|
·
|
We
agreed to pay each secured participating lender periodic amortization as
follows: (i) mandatory payments, payable monthly in arrears, in an amount
equal to sixty-five (65%) (subject to adjustment in the second year) of
the net interest income generated by each such lender’s collateral pool,
and (ii) one hundred percent (100%) of the principal proceeds received
from the repayment of assets in each such lender’s collateral pool. In
addition, under the terms of the amendment with Citigroup, we agreed to
pay Citigroup an additional quarterly amortization payment equal to the
lesser of: (x) Citigroup’s then outstanding senior secured credit facility
balance or (y) the product of (i) the total cash paid (including both
principal and interest) during the period to our senior credit facility in
excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0
million facility amount, and (ii) a fraction, the numerator of which is
Citigroup’s then outstanding senior secured credit facility balance and
the denominator is the total outstanding secured indebtedness of the
secured participating lenders.
|
|
·
|
We
further agreed to amortize each participating secured lender’s secured
debt at the end of each calendar quarter on a pro rata basis until we have
repaid our secured, recourse credit facilities and thereafter our senior
credit facility in an amount equal to any unrestricted cash in excess of
the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment
commitments.
|
|
·
|
Each
participating secured lender was relieved of its obligation to make future
advances with respect to unfunded commitments arising under investments in
its collateral pool.
|
|
·
|
We
received the right to sell or refinance collateral assets as long as we
apply one hundred percent (100%) of the proceeds to pay down the related
secured credit facility balance subject to minimum release price
mechanics.
|
|
·
|
We
eliminated the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. Under the revised secured credit
facilities, going forward, collateral value is expected to be
determined by our lenders based upon changes in the performance of the
underlying real estate collateral as opposed to changes
in market spreads under the original terms. Beginning September
2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities,
each collateral pool may be valued monthly on this basis. If the ratio of
a secured lender’s total outstanding secured credit facility balance to
total collateral value exceeds 1.15x the ratio calculated as of the
effective date of the amended agreements, we may be required to liquidate
collateral and reduce the borrowings or post other collateral in an
effort to bring the ratio back into compliance with the prescribed ratio,
which may or may not be successful.
|
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
|
·
|
prohibit
new balance sheet investments except, subject to certain limitations,
co-investments in our investment management vehicles or protective
investments to defend existing collateral assets on our balance
sheet;
|
|
·
|
prohibit
the incurrence of any additional indebtedness except in limited
circumstances;
|
|
·
|
limit
the total cash compensation to all employees and, specifically with
respect to our chief executive officer, chief operating officer and chief
financial officer, freeze their base salaries at 2008 levels, and require
cash bonuses to any of them to be approved by a committee comprised of one
representative designated by the secured lenders, the administrative agent
under the senior credit facility and the chairman of our board of
directors;
|
|
·
|
prohibit
the payment of cash dividends to our common shareholders except to the
minimum extent necessary to maintain our REIT
status;
|
|
·
|
require
us to maintain a minimum amount of liquidity, as defined, of $7.0 million
in year one and $5.0 million
thereafter;
|
|
·
|
trigger
an event of default if both our chief executive officer and chief
operating officer cease their current employment during the term of the
agreement and we fail to hire replacements acceptable to the lenders;
and
|
- 36
-
|
·
|
trigger
an event of default, if any event or condition occurs which causes any
obligation or liability of more than $1.0 million to become due prior to
its scheduled maturity or any monetary default under our restructured debt
obligations if the amount of such obligation is at least $1.0
million.
|
Pursuant
to the restructuring, the interest rates on our secured borrowings remain the
same as those previously in effect.
On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The warrants will become exercisable on March 16,
2012 and expire on March 16, 2019, and may be exercised through a cashless
exercise.
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the secured credit facility.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
|
·
|
extend
the maturity date of the senior credit agreement to be co-terminus with
the maturity date of the secured credit facilities with the participating
secured lenders (as they may be further extended until March 16, 2012, as
described above);
|
|
·
|
increase
the cash interest rate under the senior credit agreement to LIBOR plus
3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per
annum less the cash interest rate;
|
|
·
|
initiate
quarterly amortization equal to the greater of: (i) $5.0 million per annum
and (ii) 25% of the annual cash flow received from our currently
unencumbered collateralized debt obligation
interests;
|
|
·
|
pledge
our unencumbered collateralized debt obligation interests and provide a
negative pledge with respect to certain other assets;
and
|
|
·
|
replace
all existing financial covenants with substantially similar covenants and
default provisions to those described above with respect to the
participating secured facilities.
|
Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
- 37
-
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as mentioned above in exchange for $21.9 million face amount of the Trust
Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
Originations
We have
historically allocated investment opportunities between our balance sheet and
investment management vehicles based upon our assessment of risk and return
profiles, the availability and cost of capital, and applicable regulatory
restrictions associated with each opportunity. The restructuring of our recourse
secured and unsecured debt obligations included covenants that require us to
cease our balance sheet investment activities and not incur any further
indebtedness unless used to retire the debt due our lenders. Going forward,
until these covenants are eliminated through the repayment or refinancing of the
restructured debt obligations, we will not make new balance sheet investments,
but will continue to carry out investment activities for our investment
management vehicles, consistent with our previous strategies and investment
mandates for each respective vehicle.
Notwithstanding
the current capabilities of our investment management platform, we have
maintained a defensive posture with respect to investment originations in light
of the continued market volatility. The table below summarizes our total
originations and the allocation of opportunities between our balance sheet and
the investment management business for the nine months ended September 30, 2009
and for the year ended December 31, 2008.
Originations(1)
|
||||||||
(in
millions)
|
Nine
months ended
September
30, 2009
|
Year
ended
December
31, 2008
|
||||||
Balance
sheet
|
$― | $48 | ||||||
Investment
management
|
22 | 426 | ||||||
Total
originations
|
$22 | $474 |
(1)
|
Includes
total commitments, both funded and unfunded, net of any related purchase
discounts.
|
Our
balance sheet investments include various types of commercial mortgage backed
securities and collateralized debt obligations, or Securities, and commercial
real estate loans and related instruments, or Loans, which we collectively refer
to as our Interest Earning Assets. The table below shows our Interest Earning
Assets as of September 30, 2009 and December 31, 2008.
Interest
Earning Assets
|
||||||||||||||||
(in
millions)
|
September
30, 2009
|
December
31, 2008
|
||||||||||||||
Book
Value
|
Yield(1)
|
Book
Value
|
Yield(1)
|
|||||||||||||
Securities
|
$746 | 6.64 | % | $852 | 6.87 | % | ||||||||||
Loans
(2)
|
1,588 | 3.52 | % | 1,790 | 4.09 | % | ||||||||||
Total
/ Weighted Average
|
$2,334 | 4.52 | % | $2,642 | 4.99 | % |
(1)
|
Yield
on floating rate assets assumes LIBOR of 0.25% and 0.44% at September 30,
2009 and December 31, 2008,
respectively.
|
|
(2)
|
Excludes
loans classified as
held-for-sale.
|
- 38
-
In some
cases our Loan originations are not fully funded at closing, creating an
obligation for us to make future fundings, which we refer to as Unfunded Loan
Commitments. Typically, Unfunded Loan Commitments are part of construction and
transitional Loans. As of September 30, 2009, our six Unfunded Loan Commitments
totaled $12.6 million, which will only be funded when and/or if the borrower
meets certain performance hurdles with respect to the underlying collateral. As
of September 30, 2009, $5.6 million of the Unfunded Loan Commitments relates to
a Loan classified as held-for-sale, as described in Note 5 to the consolidated
financial statements.
According
to the terms of our restructured debt obligations, our lenders are no longer
required to advance a portion of these commitments and our ability to fund these
Unfunded Loan Commitments will be contingent upon our having sufficient
liquidity available to us after required payments to our creditors.
In
addition to our investments in Interest Earning Assets, we have two equity
investments in unconsolidated subsidiaries as of September 30, 2009. These
represent our equity co-investments in private equity funds that we manage, CT
Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or
CTOPI.
The table
below details the carrying value of those investments, as well as their
capitalized costs.
Equity
Investments
|
||||||||
(in
thousands)
|
September
30, 2009
|
December
31, 2008
|
||||||
Fund
III
|
$429 | $597 | ||||||
CTOPI
|
1,193 | $1,782 | ||||||
Capitalized
costs/other
|
2 | 4 | ||||||
Total
|
$1,624 | $2,383 |
Asset
Management
We
actively manage our balance sheet portfolio and the assets held by our
investment management vehicles. While our investments are primarily in the form
of debt, which generally means that we have limited influence over the
operations of the collateral securing our portfolios, we are aggressive in
exercising the rights afforded to us as a lender. These rights may include
collateral level budget approvals, lease approvals, loan covenant enforcement,
escrow/reserve management/collection, collateral release approvals and other
rights that we may negotiate.
During
the nine months ended September 30, 2009, three Loans with an aggregate
outstanding balance of $33.8 million were fully repaid. In addition, six Loans
with an aggregate outstanding balance of $140.8 million as of September 30,
2009, which did not qualify for extension pursuant to the corresponding loan
agreements, were extended during the nine months ended September 30,
2009.
Also, in
May 2009, we negotiated a discounted partial repayment with one of our
borrowers, which resulted in a repayment of $3.0 million to us, and the
forgiveness of an additional $1.0 million of the borrower’s indebtedness.
Following this discounted repayment, we were relieved of a $3.8 million Unfunded
Loan Commitment under this loan. As a result of this transaction, we recorded a
$1.0 million loss during the second quarter under the provision for loan losses
on our consolidated statement of operations.
- 39
-
The table
below details the overall credit profile of our Interest Earning Assets, which
includes: (i) Loans where we have foreclosed upon the underlying collateral and
own an equity interest in real estate, (ii) Loans against which we have recorded
a provision for loan losses, or reserves, and (iii) Loans that are categorized
as Watch List Loans, which are currently performing Loans that we actively
monitor and manage to mitigate the risk of potential future non-performance.
Beginning in the second quarter of 2009, our assessment also includes
other-than-temporarily impaired securities and securities that are characterized
as Watch List Securities.
Portfolio
Performance(1)
|
||||
(in
millions, except for number of investments)
|
September
30, 2009
|
December
31, 2008
|
||
Interest
earning assets ($ / #)
|
$2,334
/ 141
|
$2,643
/ 150
|
||
Real
estate owned, net (2)
($ / #)
|
$―
/ ―
|
$10
/ 1
|
||
Percentage
of interest earning assets
|
―
%
|
0.4%
|
||
Impaired
loans (3)
|
||||
Performing
loans ($ / #)
|
$51
/ 4
|
$12
/ 2
|
||
Non-performing
loans ($ / #)
|
$45 / 9
|
$12 / 3
|
||
Total
($ / #)
|
$96
/ 13
|
$24
/ 5
|
||
Percentage
of interest earning assets
|
4.1%
|
0.9%
|
||
Impaired
Securities ($ / #)
|
$27
/ 11
|
$6
/ 3
|
||
Percentage
of interest earning assets
|
1.2%
|
0.2%
|
||
Watch
List Assets
|
||||
Watch
List Loans (4)
($ / #)
|
$509
/ 17
|
$383
/ 17
|
||
Watch
List Securities (5)
($ / #)
|
$195 / 23
|
N/A
|
||
Total
($ / #)
|
$704
/ 40
|
$383
/ 17
|
||
Percentage
of interest earning assets
|
30.1%
|
14.5%
|
(1)
|
Portfolio
statistics exclude Loans classified as
held-for-sale.
|
|
(2)
|
Includes
one Loan which has been transferred to Real Estate Held-for-Sale with a
gross asset balance of $11.3 million, against which we had recorded a $2.0
million impairment as of December 31, 2008. This asset was sold in July
2009 for $7.1 million.
|
|
(3)
|
Amounts
represent net book value after provisions for loan
losses.
|
|
(4)
|
Includes
one additional Loan with a book value of $6.6 million that has been
retroactively classified as a Watch List Loan as of December 31, 2008
based upon revised criteria. Watch List Loans exclude Loans against which
we have recorded a reserve, and Real Estate
Owned.
|
|
(5)
|
We
did not begin using this performance measure until the second quarter of
2009. Accordingly, equivalent amounts are not presented as of December 31,
2008. Watch List Securities exclude Securities which have been
other-than-temporarily
impaired.
|
As of
September 30, 2009, we had 13 Loans with an aggregate net book value of $95.7
million ($214.3 million gross carrying value, net of $118.6 million of reserves)
against which we had recorded a provision for loan losses. During the nine
months ended September 30, 2009, we recorded $113.7 million in provision for
loan losses.
In 2008,
we, together with our co-lender, foreclosed on a Loan secured by a multifamily
property, and took title to the collateral securing the original Loan. At the
time the foreclosure occurred, the Loan had a book balance of $11.9 million,
which was reclassified as Real Estate Held-for-Sale (also referred to as Real
Estate Owned) on our consolidated balance sheet as of December 31, 2008 to
reflect our ownership interest in the property. Since that time, we have
received $564,000 of accumulated cash from the property, which has been recorded
as a reduction to our basis in the asset. In addition, we have also previously
recorded an aggregate $4.2 million impairment to reflect the property at fair
value as of June 30, 2009. In July 2009, we sold this asset for $7.1 million,
which was our book value at June 30, 2009, and, accordingly, we did not record a
material gain or loss on the sale.
In
addition to our Loans receivable, which are a component of our Interest Earning
Assets, we also held one Loan investment which was classified as held-for-sale
as of quarter-end. This Loan had an aggregate carrying value of $12.0 million,
net of a valuation allowance of $2.4 million as of September 30, 2009. We are
currently in discussions with the borrowers under this Loan to settle their
obligation on a discounted basis and, accordingly, the Loan is classified as
held-for-sale.
- 40
-
We
actively manage our Securities portfolio using a combination of quantitative
tools and loan/property level analysis to monitor the performance of the
Securities and their collateral against our original expectations. Securities
are analyzed to monitor underlying loan delinquencies, transfers to special
servicing, and changes to the servicer’s watch list population. Realized losses
on underlying loans are tracked and compared to our original loss expectations.
On a periodic basis, individual loans of concern are also
re-underwritten.
As of
September 30, 2009, we have recorded an aggregate $98.6 million
other-than-temporary impairment against eleven of our Securities, which had an
aggregate net book value at September 30, 2009 of $27.3 million. Of this total
other-than-temporary impairment, $79.0 million was related to expected credit
losses, as discussed in Notes 2 and 3 to our consolidated financial statements,
and has been recorded through earnings, and $19.6 million was related to fair
value adjustments in excess of expected credit losses, or the Valuation
Adjustment, and has been recorded as a component of other comprehensive
income/(loss) with no impact on earnings.
During
the nine months ended September 30, 2009, we have recorded an aggregate $96.5
million other-than-temporary impairment against ten of our Securities, which had
an aggregate net book value at September 30, 2009 of $27.0 million. Of this
total other-than-temporary impairment, $78.9 million was related to expected
credit losses, as discussed in Notes 2 and 3 to our consolidated financial
statements, and has been recorded through earnings, and $17.6 million was
related to the Valuation Adjustment and has been recorded as a component of
other comprehensive income/(loss) with no impact on earnings
At
quarter-end, there were significant differences between the estimated fair value
and the book value of some of the Securities in our portfolio. We believe these
differences to be related to the disruption in the capital markets and the
general negative bias against structured financial products and not reflective
of a change in cash flow expectations from these securities. Accordingly, we
have recorded no additional other-than-temporary impairments on our
Securities.
The
ratings performance of our Securities portfolio over the nine months ended
September 30, 2009 and the year ended December 31, 2008 is detailed
below:
Rating
Activity(1)
|
|||
Nine
months ended
September
30, 2009
|
Year
ended
December
31, 2008
|
||
Securities
Upgraded
|
1
|
6
|
|
Securities
Downgraded
|
21
|
13
|
(1)
|
Represents
activity from any of Fitch Ratings, Standard & Poor’s and/or Moody’s
Investors
Service.
|
We
continue to foresee three trends in asset performance in 2009 that are likely to
lead to further defaults and downgrades: (i) borrowers faced with maturities
will have a more difficult time refinancing their properties in light of the
volatility and lack of liquidity in the financial markets, (ii) real estate
fundamentals will weaken as the U.S. economy continues to deteriorate and (iii)
capitalization rates for commercial real estate will continue to increase with
corresponding reductions in values. These trends may result in negotiated
extensions or modifications of the terms of our investments or the exercise of
foreclosure and other remedies; in any event, it is likely that we will continue
to experience difficulty with respect to our assets and will likely incur
material losses on our portfolio.
Capitalization
We
capitalize our business with a combination of debt and equity. Our debt sources,
which we collectively refer to as Interest Bearing Liabilities, currently
include repurchase agreements, CDOs, a senior credit facility and junior
subordinated notes. Our equity capital is currently comprised entirely of common
stock.
During
the first and second quarters, certain of our Interest Bearing Liabilities,
including repurchase agreements and secured debt, our senior credit facility and
junior subordinated notes, were restructured, exchanged, terminated, or
otherwise satisfied pursuant to the transactions described in Note 9 to the
consolidated financial statements. In addition, we are subject to certain
covenants under our restructured debt obligations which, among other things,
restrict our ability to incur additional indebtedness for the foreseeable
future. While we believe that the March 2009 restructuring improved the
stability of our capital structure, there can be no assurance that a further
restructuring will not be required or that any such further restructuring will
be successful.
- 41
-
The table
below shows our capitalization mix as of September 30, 2009 and December 31,
2008:
Capital
Structure(1)
|
||||
(in
millions)
|
September
30, 2009
|
December
31, 2008
|
||
Repurchase
obligations and secured debt(2)
|
$493
|
$699
|
||
Collateralized
debt obligations(2)
|
1,124
|
1,155
|
||
Senior
credit facility(2)
|
99
|
100
|
||
Junior
subordinated notes(2)(3)
|
144
|
129
|
||
Total
interest bearing liabilities
|
$1,860
|
$2,083
|
||
Weighted
average effective cost of debt (4)
|
2.42%
|
2.47%
|
||
Shareholders'
equity
|
$213
|
$401
|
||
Ratio
of interest bearing liabilities to shareholders' equity
|
8.7
: 1
|
5.2
: 1
|
(1)
|
Excludes
participations sold.
|
|
(2)
|
Amounts
represent principal balances as of September 30, 2009 and December 31,
2008.
|
|
(3)
|
During
the first quarter of 2009, we exchanged certain of our legacy junior
subordinated notes with a face value of $103.1 million for new junior
subordinated notes with a face value of $118.6 million. In the second
quarter of 2009, we exchanged the remaining legacy junior subordinated
notes with a face value of $21.9 million for new junior subordinated notes
with a face value of $25.2 million. In connection with these transactions,
we also eliminated $3.9 million of our ownership interests in the legacy
statutory trusts. See Note 9 to the consolidated financial statements for
additional details related to these
transactions.
|
|
(4)
|
Floating
rate debt obligations assume LIBOR of 0.25% and 0.44% at September 30,
2009 and December 31, 2008, respectively. Including the impact of interest
rate hedges with an aggregate notional balance of $418.5 million as of
September 30, 2009 and $465.9 million as of December 31, 2008, the
effective all-in cost of our debt obligations would be 3.46% and 3.48% per
annum.
|
A summary
of selected structural features of our Interest Bearing Liabilities as of
September 30, 2009 and December 31, 2008 is detailed in the table
below:
Interest
Bearing Liabilities
|
||||
September
30, 2009
|
December
31, 2008
|
|||
Weighted
average life (years)
|
4.3
|
4.2
|
||
%
Recourse
|
39.6%
|
44.5%
|
||
%
Subject to valuation tests
|
26.5%
|
33.5%
|
The table
below summarizes our repurchase obligations and secured debt as of September 30,
2009 and December 31, 2008:
Repurchase
Obligations and Secured Debt
|
||||
($
in millions)
|
September
30, 2009
|
December
31, 2008
|
||
Counterparties
|
3
|
6
|
||
Outstanding
repurchase obligations and secured debt
|
$493
|
$699
|
||
All-in
cost
|
L +
1.65%
|
L +
1.66%
|
Our
collateralized debt obligations, or CDOs, as of September 30, 2009 and December
31, 2008 are described below:
Collateralized
Debt Obligations
|
|||||||||
(in
millions)
|
September
30, 2009
|
December
31, 2008
|
|||||||
Issuance
Date
|
Book
Value
|
All-in
Cost(1)
|
Book
Value
|
All-in
Cost(1)
|
|||||
CDO
I(2)
|
7/20/04
|
$243
|
0.91%
|
$252
|
1.52%
|
||||
CDO
II(2)
|
3/15/05
|
294
|
1.02%
|
299
|
1.18%
|
||||
CDO
III
|
8/4/05
|
256
|
5.46%
|
257
|
5.27%
|
||||
CDO
IV(2)
|
3/15/05
|
332
|
1.02%
|
348
|
1.15%
|
||||
Total
|
$1,125
|
2.00%
|
$1,156
|
2.15%
|
(1)
|
Includes amortization
of premiums and issuance costs.
|
|
(2)
|
Floating
rate CDOs assume LIBOR of 0.25% and 0.44% at September 30, 2009 and
December 31, 2008,
respectively.
|
- 42
-
The most
subordinated components of our debt capital structure were our junior
subordinated notes that backed trust preferred securities issued to third
parties. These securities represent long-term, subordinated, unsecured financing
and generally carry limited covenants. On March 16, 2009, we reached an
agreement with certain holders of these notes to issue new junior subordinated
notes in exchange for $50.0 million face amount of trust preferred securities
issued through our statutory trust subsidiary CT Preferred Trust I, which we
refer to as the Trust I Securities, and $53.1 million face amount of trust
preferred securities issued through our statutory trust subsidiary CT Preferred
Trust II, which we refer to as the Trust II Securities. Pursuant to the exchange
agreement, we issued $118.6 million aggregate principal amount of new junior
subordinated notes due on April 30, 2036 (an amount equal to 115% of the
aggregate face amount of the Trust Securities exchanged).
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as mentioned above in exchange for $21.9 million face amount of the Trust
Securities. Pursuant to the exchange agreement, we issued $25.2 million
aggregate principal amount of new junior subordinated notes due on April 30,
2036 (an amount equal to 115% of the aggregate face amount of the Trust
Securities exchanged). On a combined basis, the junior subordinated notes
provide us with financing at a current cash cost of 1.00% per
annum.
We did
not issue any new shares of common stock during the quarter. Changes in the
number of shares resulted from restricted stock grants, forfeitures and vesting,
as well as stock unit grants.
Shareholders'
Equity
|
||||
September
30, 2009
|
December
31, 2008
|
|||
Book
value (in millions)
|
$213
|
$401
|
||
Shares:
|
||||
Class
A common stock
|
21,759,258
|
21,740,152
|
||
Restricted
stock
|
287,422
|
331,197
|
||
Stock
units
|
359,396
|
215,451
|
||
Warrants
& Options(1)
|
—
|
—
|
||
Total
|
22,406,076
|
22,286,800
|
||
Book
value per share
|
$9.52
|
$18.01
|
(1)
|
Dilutive
shares issuable upon the exercise of outstanding warrants and options
assuming a September 30, 2009 and December 31, 2008 stock price,
respectively, and the treasury stock
method.
|
As of
September 30, 2009, we had 22,046,680 of our class A common stock and restricted
stock outstanding.
Other
Balance Sheet Items
Participations
sold represent interests in certain loans that we originated and subsequently
sold to CT Large Loan 2006, Inc. (one of our investment management vehicles) and
third parties. We present these sold interests as both assets and liabilities
(in equal amounts) on the basis that these arrangements do not qualify as sales
under GAAP. As of September 30, 2009, we had five such participations sold with
a total book balance of $289.8 million at a weighted average coupon of LIBOR
plus 3.27% (3.52% at September 30, 2009) and a weighted average yield of LIBOR
plus 3.28% (3.53% at September 30, 2009). 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 operations.
Interest
Rate Exposure
We
endeavor to manage a book of assets and liabilities that are generally matched
with respect to interest rates, typically financing floating rate assets with
floating rate liabilities and fixed rate assets with fixed rate liabilities. In
some cases, we finance fixed rate assets with floating rate liabilities and, in
those cases, we may use interest rate derivatives, such as swaps, to effectively
convert the floating rate debt to fixed rate debt. In such instances, the equity
we have invested in fixed rate assets is not typically swapped, leaving a
portion of our equity capital exposed to changes in value of the fixed rate
assets due to interest rate fluctuations. The balance of our assets earn
interest at floating rates and are financed with floating rate liabilities,
leaving a portion of our equity capital exposed to cash flow variability from
fluctuations in rates. Generally, these assets and liabilities earn interest at
rates indexed to one-month LIBOR.
Our
counterparties in these transactions are large financial institutions and we are
dependent upon the financial health of these counterparties and a functioning
interest rate derivative market in order to effectively execute our hedging
strategy.
- 43
-
The table
below details our interest rate exposure as of September 30, 2009 and December
31, 2008:
Interest
Rate Exposure
|
||||
(in
millions except for weighted average life)
|
September
30, 2009
|
December
31, 2008
|
||
Value
exposure to interest rates(1)
|
||||
Fixed
rate assets
|
$838
|
$880
|
||
Fixed
rate debt
|
(412)
|
(395)
|
||
Interest
rate swaps
|
(418)
|
(466)
|
||
Net
fixed rate exposure
|
$8
|
$19
|
||
Weighted
average life (fixed rate assets)
|
4.2
yrs
|
4.9
yrs
|
||
Weighted
average coupon (fixed rate assets)
|
6.91%
|
6.90%
|
||
Cash
flow exposure to interest rates(1)
|
||||
Floating
rate assets
|
$1,731
|
$1,949
|
||
Floating
rate debt less cash
|
(1,709)
|
(1,931)
|
||
Interest
rate swaps
|
418
|
466
|
||
Net
floating rate exposure
|
$440
|
$484
|
||
Weighted
average life (floating rate assets)
|
2.2
yrs
|
2.9
yrs
|
||
Weighted
average coupon (floating rate assets)
(2)
|
3.14%
|
3.52%
|
||
Net
income impact from 100 bps change in LIBOR
|
$4.4
|
$4.8
|
(1)
|
All
values are in terms of face or notional amounts, and include loans
classified as held-for-sale.
|
|
(2)
|
Weighted
average coupon assumes LIBOR of 0.25% and 0.44% at September 30, 2009 and
December 31, 2008,
respectively.
|
Investment
Management Overview
In
addition to our balance sheet investment activities, we act as an investment
manager for third parties. We have developed our investment management business
to leverage our platform, generate fee revenue from investing third party
capital and, in certain instances, earn co-investment income. Our active
investment management mandates are described below:
|
·
|
CT
High Grade Partners II, LLC, or CT High Grade II, is currently investing
capital. The fund closed in June 2008 with $667 million of commitments
from two institutional investors. Currently, $498 million of committed
equity remains undrawn. The fund targets senior debt opportunities in the
commercial real estate debt sector and does not employ leverage. The
fund’s investment period expires in May 2010. We earn a base management
fee of 0.40% per annum on invested
capital.
|
|
·
|
CT
Opportunity Partners I, LP, or CTOPI, is currently investing capital. The
fund held its final closing in July 2008 with $540 million in total equity
commitments. Currently, $415 million of committed equity remains undrawn.
We have a $25 million commitment to invest in the fund ($6 million
currently funded, $19 million unfunded) and entities controlled by the
chairman of our board have committed to invest $20 million. The fund
targets opportunistic investments in commercial real estate, specifically
high yield debt, equity and hybrid instruments, as well as non-performing
and sub-performing loans and securities. The fund’s investment period
expires in December 2010. We earn base management fees as the investment
manager of CTOPI (1.60% per annum of total equity commitments during the
investment period, and of invested capital thereafter). In addition, we
earn net incentive management fees of 17.7% of profits after a 9%
preferred return and a 100% return of
capital.
|
|
·
|
CT
High Grade MezzanineSM,
or CT High Grade is no longer investing capital (its investment period
expired in July 2008). The fund closed in November 2006, with a single,
related party investor committing $250 million, which was subsequently
increased to $350 million in July 2007. This separate account targeted
lower risk subordinate debt investments without leverage. We earn
management fees of 0.25% per annum on invested assets. In July 2007, we
upsized the account by $100 million to $350
million.
|
|
·
|
CT
Large Loan 2006, Inc., or CT Large Loan, is no longer investing capital
(its investment period expired in May 2008). The fund closed in May 2006
with total equity commitments of $325 million from eight third-party
investors. We earn management fees of 0.75% per annum of invested assets
(capped at 1.5% on invested
equity).
|
- 44
-
|
·
|
CTX
Fund I, L.P., or CTX Fund, is no longer investing capital. CTX is a single
investor fund designed to invest in collateralized debt obligations, or
CDOs, sponsored, but not issued, by us. We do not earn fees on the CTX
Fund, however, we earn CDO management fees from the CDOs in which the CTX
Fund invests.
|
|
·
|
CT
Mezzanine Partners III, Inc., or Fund III, is no longer investing capital.
The fund is a vehicle we co-sponsored with a joint venture partner, and is
currently liquidating in the ordinary course. We earn 100% of base
management fees of 1.42% of invested capital, and we split incentive
management fees with our partner, which receives 37.5% of the fund’s
incentive management fees.
|
As of
September 30, 2009, we managed five private equity funds and one separate
account through our wholly-owned, taxable, investment management subsidiary, CT
Investment Management Co., LLC, or CTIMCO.
Investment
Management Mandates, as of September 30, 2009
|
|||||||||||||||
(in
millions)
|
Incentive
Management Fee
|
||||||||||||||
Total
|
Total
Capital
|
Co-
|
Base
|
Company
|
Employee
|
||||||||||
Type
|
Investments(1)
|
Commitments
|
Investment
%
|
Management
Fee
|
%
|
%
|
|||||||||
Investing:
|
|||||||||||||||
CT
High Grade II
|
Fund
|
$169
|
$667
|
—
|
0.40%
(Assets)
|
N/A
|
N/A
|
||||||||
CTOPI
|
Fund
|
287
|
540
|
4.63%
|
(2)
|
1.60%
(Equity)
|
100%(3)
|
—%(4)
|
|||||||
Liquidating:
|
|||||||||||||||
CT
High Grade
|
Sep.
Acc.
|
344
|
350
|
—
|
0.25%
(Assets)
|
N/A
|
N/A
|
||||||||
CT
Large Loan
|
Fund
|
275
|
325
|
—
|
(5)
|
0.75%
(Assets)(6)
|
N/A
|
N/A
|
|||||||
CTX
Fund
|
Fund
|
8
|
10
|
—
|
(5)
|
(Assets)(7)
|
100%(7)
|
—%(7)
|
|||||||
Fund
III
|
Fund
|
44
|
425
|
4.71%
|
1.42%
(Equity)
|
57%(8)
|
43%(4)
|
(1)
|
Represents
total investments, on a cash basis, as of
period-end.
|
|
(2)
|
We
have committed to invest $25.0 million in
CTOPI.
|
|
(3)
|
CTIMCO
earns net incentive management fees of 17.7% of profits after a 9%
preferred return on capital and a 100% return of capital, subject to a
catch-up.
|
|
(4)
|
Portions
of the Fund III incentive management fees received by us have been
allocated to our employees as long-term performance awards. We have not
allocated any of the CTOPI incentive management fee to employees as of
September 30, 2009.
|
|
(5)
|
We
co-invest on a pari passu, asset by asset basis with CT Large Loan and CTX
Fund.
|
|
(6)
|
Capped
at 1.5% of equity.
|
|
(7)
|
CTIMCO
serves as collateral manager of the CDOs in which the CTX Fund invests,
and earns base and incentive management fees as CDO collateral manager. As
of September 30, 2009, we manage one such $500 million CDO and earn base
management fees of 0.10% of assets and have the potential to earn
incentive management fees.
|
|
(8)
|
CTIMCO
(62.5%) and our co-sponsor (37.5%) earn net incentive management fees of
18.9% of profits after a 10% preferred return on capital and a 100% return
of capital, subject to a
catch-up.
|
- 45
-
Results
of Operations
Comparison
of Results of Operations: Three Months Ended September 30, 2009 vs.
September 30, 2008
|
||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$29,527 | $44,141 | ($14,614 | ) | (33.1 | %) | ||||||||||
Less:
Interest and related expenses
|
19,604 | 28,175 | (8,571 | ) | (30.4 | %) | ||||||||||
Income
from loans and other investments, net
|
9,923 | 15,966 | (6,043 | ) | (37.8 | %) | ||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
2,959 | 3,477 | (518 | ) | (14.9 | %) | ||||||||||
Servicing
fees
|
168 | 116 | 52 | 44.8 | % | |||||||||||
Other
interest income
|
16 | 483 | (467 | ) | (96.7 | %) | ||||||||||
Total
other revenues
|
3,143 | 4,076 | (933 | ) | (22.9 | %) | ||||||||||
Other
expenses:
|
||||||||||||||||
General
and administrative
|
5,492 | 5,711 | (219 | ) | (3.8 | %) | ||||||||||
Depreciation
and amortization
|
51 | 13 | 38 | N/A | ||||||||||||
Total
other expenses
|
5,543 | 5,724 | (181 | ) | (3.2 | %) | ||||||||||
Total
other-than-temporary impairments of securities
|
(77,883 | ) | — | (77,883 | ) | N/A | ||||||||||
Portion
of other-than-temporary impairments of securities recognized
in other comprehensive income
|
11,987 | — | 11,987 | N/A | ||||||||||||
Net
impairments recognized in earnings
|
(65,896 | ) | — | (65,896 | ) | N/A | ||||||||||
Provision
for loan losses
|
(47,222 | ) | — | (47,222 | ) | N/A | ||||||||||
Loss
from equity investments
|
(862 | ) | (625 | ) | (237 | ) | 37.9 | % | ||||||||
(Loss)
income before income taxes
|
(106,457 | ) | 13,693 | (120,150 | ) | N/A | ||||||||||
Income
tax provision
|
— | 26 | (26 | ) | N/A | |||||||||||
Net
(loss) income
|
($106,457 | ) | $13,667 | ($120,124 | ) | N/A | ||||||||||
Net
(loss) income per share - diluted
|
($4.75 | ) | $0.61 | ($5.36 | ) | N/A | ||||||||||
Dividend
per share
|
$— | $0.60 | ($0.60 | ) | (100.0 | %) | ||||||||||
Average
LIBOR
|
0.27 | % | 2.62 | % | (2.35 | %) | (89.7 | %) |
Income
from loans and other investments, net
A decline
in Interest Earning Assets ($561 million or 19% from September 30, 2008 to
September 30, 2009), an increase in non-performing loans and a 90% decrease in
average LIBOR contributed to a $14.6 million, or 33%, decrease in interest
income during the third quarter of 2009 compared to the third quarter of 2008.
Lower LIBOR and a decrease in leverage of $361.0 million, or 16%, from September
30, 2008 to September 30, 2009 resulted in an $8.6 million, or 30%, decrease in
interest expense for the period. On a net basis, net interest income decreased
by $6.0 million, or 38%.
Management
fees from affiliates
Base
management fees from our investment management business decreased $518,000, or
15%, during the third quarter of 2009 compared to the third quarter of 2008. The
decrease was attributed primarily to a decrease of $258,000 in fees from Large
Loan and a $240,000 one-time decrease in fees from CTOPI. This was partially
offset by a $117,000 increase in fees from CT High Grade II.
Servicing
fees
Servicing
fees increased $52,000 in the third quarter of 2009 compared to the third
quarter of 2008. Servicing fees in the third quarter of 2009 were a result of
modifications to loans for which we are named special servicer.
General
and administrative expenses
General
and administrative expenses include personnel costs, operating expenses and
professional fees. Total general and administrative expenses decreased $219,000,
or 4%, between the third quarter of 2008 and the third quarter of 2009. The
slight decrease in 2009 was primarily a result of lower personnel costs offset
by an increase in professional fees.
- 46
-
Net
impairments recognized in earnings
During
the third quarter of 2009, we recorded a gross other-than-temporary impairment
of $77.9 million on three of our securities that had an adverse change in cash
flow expectations. Of this amount, $65.9 million was included in earnings and
the remainder, $12.0 million, was recorded in other comprehensive income. No
impairments were recorded during the three months ended September 30,
2008.
Provision
for loan losses
During
the third quarter of 2009, we recorded an aggregate $47.2 million provision for
loan losses against six loans. No provisions for loan losses were recorded
during the third quarter of 2008.
Loss
from equity investments
The loss
from equity investments during the third quarter of 2009 resulted primarily from
our share of losses incurred at CTOPI. Our share of losses from CTOPI was
$909,000, primarily due to fair value adjustments on the underlying investments.
The loss from equity investments during the third quarter of 2008 resulted
primarily from our share of operating losses at both Fund III and
CTOPI.
Income
tax provision
During
the third quarter of 2009 we did not record an income tax provision. In the
third quarter of 2008, we recorded a provision for income taxes of
$26,000.
Dividends
We did
not pay a dividend in the third quarter of 2009. In the third quarter of 2008 we
paid a dividend of $0.60 per share.
- 47
-
Comparison
of Results of Operations: Nine Months Ended September 30, 2009 vs.
September 30, 2008
|
||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$93,341 | $149,725 | ($56,384 | ) | (37.7 | %) | ||||||||||
Less:
Interest and related expenses
|
61,116 | 98,918 | (37,802 | ) | (38.2 | %) | ||||||||||
Income
from loans and other investments, net
|
32,225 | 50,807 | (18,582 | ) | (36.6 | %) | ||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
8,768 | 9,827 | (1,059 | ) | (10.8 | %) | ||||||||||
Servicing
fees
|
1,502 | 337 | 1,165 | N/A | ||||||||||||
Other
interest income
|
153 | 1,307 | (1,154 | ) | (88.3 | %) | ||||||||||
Total
other revenues
|
10,423 | 11,471 | (1,048 | ) | (9.1 | %) | ||||||||||
Other
expenses:
|
||||||||||||||||
General
and administrative
|
18,450 | 18,819 | (369 | ) | (2.0 | %) | ||||||||||
Depreciation
and amortization
|
65 | 140 | (75 | ) | (53.6 | %) | ||||||||||
Total
other expenses
|
18,515 | 18,959 | (444 | ) | (2.3 | %) | ||||||||||
Total
other-than-temporary impairments of securities
|
(96,529 | ) | — | (96,529 | ) | N/A | ||||||||||
Portion
of other-than-temporary impairments of securities recognized
in other comprehensive income
|
17,612 | — | 17,612 | N/A | ||||||||||||
Impairment
of goodwill
|
(2,235 | ) | — | (2,235 | ) | N/A | ||||||||||
Impairment
of real estate held-for-sale
|
(2,233 | ) | — | (2,233 | ) | N/A | ||||||||||
Net
impairments recognized in earnings
|
(83,385 | ) | — | (83,385 | ) | N/A | ||||||||||
Provision
for loan losses
|
(113,716 | ) | (56,000 | ) | (57,716 | ) | 103.1 | % | ||||||||
Valuation
allowance on loans held-for-sale
|
(10,363 | ) | — | (10,363 | ) | N/A | ||||||||||
Gain
on extinguishment of debt
|
— | 6,000 | (6,000 | ) | N/A | |||||||||||
Gain
on sale of investments
|
— | 374 | (374 | ) | N/A | |||||||||||
Loss
from equity investments
|
(3,074 | ) | (549 | ) | (2,525 | ) | N/A | |||||||||
Loss
before income taxes
|
(186,405 | ) | (6,856 | ) | (179,549 | ) | N/A | |||||||||
Income
tax benefit
|
(408 | ) | (475 | ) | 67 | (14.1 | %) | |||||||||
Net
loss
|
($185,997 | ) | ($6,381 | ) | ($179,616 | ) | N/A | |||||||||
Net
loss per share - diluted
|
($8.32 | ) | ($0.31 | ) | ($8.01 | ) | N/A | |||||||||
Dividend
per share
|
$— | $2.20 | ($2.20 | ) | (100.0 | %) | ||||||||||
Average
LIBOR
|
0.37 | % | 2.84 | % | (2.47 | %) | (87.1 | %) |
Income
from loans and other investments, net
A decline
in Interest Earning Assets ($561 million or 19% from September 30, 2008 to
September 30, 2009), an increase in non-performing loans and an 87% decrease in
average LIBOR contributed to a $56.4 million, or 38%, decrease in interest
income during the nine months ended September 30, 2009 compared to the nine
months ended September 30, 2008. Lower LIBOR and a decrease in leverage of
$361.0 million, or 16%, from September 30, 2008 to September 30, 2009 resulted
in a $37.8 million, or 38%, decrease in interest expense for the period. On a
net basis, net interest income decreased by $18.6 million, or 37%.
Management
fees from affiliates
Base
management fees from our investment management business decreased $1.1 million,
or 11%, during the nine months ended September 30, 2009 compared to the nine
months ended September 30, 2008. The decrease was attributed primarily to a
decrease of $870,000 in fees from CT Large Loan and a one-time decrease of
$314,000 in fees from CTOPI.
Servicing
fees
Servicing
fees increased $1.1 million during the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008, primarily due to a
one-time special servicing fee of $1.2 million received in the first quarter of
2009.
- 48
-
General
and administrative expenses
General
and administrative expenses include personnel costs, operating expenses and
professional fees. Total general and administrative expenses decreased $369,000
between the nine months ended September 30, 2009 and the nine months ended
September 30, 2008 as a result of (i) a decrease of $2.1 million in personnel
costs, (ii) a decrease of $1.7 million in employee stock based compensation and
(iii) a decrease of approximately $700,000 of other operating costs. This was
offset by $3.1 million in non-recurring costs associated with our debt
restructuring incurred during the first quarter of 2009 and an increase of $1.1
million in professional fees.
Net
impairments recognized in earnings
During
the nine months ended September 30, 2009, we recorded an other-than-temporary
impairment of $2.2 million on our Real Estate Held-for-Sale to reflect the
property at fair value. Also during the nine months ended September 30, 2009, we
recorded a $2.2 million impairment of goodwill related to our June 2007
acquisition of a healthcare loan origination platform. We also recorded a gross
other-than-temporary impairment of $96.5 million on ten of our securities that
had an adverse change in cash flow expectations. Of this amount, $78.9 million
was included in earnings and the remainder, $17.6 million, was included in other
comprehensive income. No impairments were recorded during the nine months ended September 30,
2008.
Provision
for loan losses
During
the nine months ended September 30, 2009, we recorded an aggregate $113.7
million provision for loan losses against thirteen loans. During the nine months
ended September 30, 2008, we recorded a $50.0 million provision for loan losses
against a single loan. Also during the nine months ended September 30, 2008, we
recorded an additional $6.0 million charge on one loan that was written off
during the second quarter. The $6.0 million liability collateralized by the loan
was forgiven by the creditor as described below.
Valuation
allowance on loans held-for-sale
During the nine months
ended September 30, 2009, we
recorded a $10.4 million valuation allowance against two loans that we
classified as held-for-sale to reflect these assets at fair value. No loans were
classified as held-for-sale during the nine months ended September 30,
2008.
Gain
on extinguishment of debt
During
the nine months ended September 30, 2009, we did not record any gains on the
extinguishment of debt. During the second quarter of 2008, $6.0 million of debt
forgiveness by a creditor was recorded as a gain on extinguishment of
debt.
Gain
on sale of investments
During
the nine months ended September 30, 2009 we did not record any gains on sale of
investments. At December 31, 2007, we had one CMBS investment that we designated
and accounted for on an available-for-sale basis with a face value of $7.7
million. During the second quarter of 2008, the security was sold for a gain of
$374,000.
Loss
from equity investments
The loss
from equity investments during the nine months ended September 30, 2009 resulted
primarily from our share of losses incurred at CTOPI. Our share of losses from
CTOPI was $2.9 million, primarily due to fair value adjustments on the
underlying investments. The loss from equity investments during the nine months
ended September 30, 2008 resulted primarily from our share of operating losses
at both Fund III and CTOPI.
Income
tax benefit
During
the nine months ended September 30, 2009, we received $408,000 in tax refunds
that we recorded as an income tax benefit. During the nine months ended
September 30, 2008, CTIMCO recorded operating income before income taxes which,
when combined with GAAP to tax differences and changes in valuation allowances,
resulted in an income tax benefit of $475,000.
Dividends
We did
not pay a dividend in the nine months ended September 30, 2009. In the nine
months ended September 30, 2008, we paid a dividend of $2.20 per
share.
Liquidity
and Capital Resources
Sources
of liquidity as of September 30, 2009 include cash on hand, net operating cash
flow, repayments under Loans and Securities and asset disposition proceeds. Uses
of liquidity include operating expenses, required debt repayments, Unfunded Loan
Commitments of $12.6 million, unfunded capital commitments to our managed funds
and dividends necessary to maintain our REIT status. We believe our current
sources of capital, coupled with our expectations regarding potential asset
dispositions and other transactions, will be adequate to meet our near term cash
requirements.
- 49
-
Our
liquidity and capital resources outlook was significantly impacted by the
restructuring of our debt obligations during the first quarter of 2009. We
agreed to pay each of our participating secured lenders additional principal
amortization equal to 65% of the net interest margin and 100% of the principal
proceeds from assets in their collateral pool, which amounts would otherwise
have been free cash flow available to us. We have also agreed to make minimum
aggregate principal payments to each of our participating secured lenders equal
to 20% of our outstanding borrowings as of March 16, 2009, the date of our debt
restructuring, to qualify for the first one year extension option under the
restructured facilities in March 2010. In addition to the required repayments to
our secured lenders, we agreed to make a minimum $5.0 million repayment under
our senior credit facility by March 2010.
The
following table details our progress towards reducing the outstanding principal
amounts under our secured credit facilities in order to meet the conditions for
the first one-year extension thereof (in thousands):
September
30, 2009
|
March
15, 2009
|
March
15, 2009 to
September
30, 2009 Change
|
Target
Debt
Obligation
(B)
|
Additional
Debt Reduction
Required (A-B) (2)
|
||||||||||||||||||||||||||||
Participating
Secured Lender
|
Collateral Balance
(1)
|
Debt
Obligation
(A)
|
Collateral Balance
(1)
|
Debt
Obligation
|
Collateral
Balance
|
Debt
Obligation
|
||||||||||||||||||||||||||
JPMorgan
(3)
|
$ | 524,930 | $ | 281,898 | $ | 559,548 | $ | 334,968 | $ | (34,618 | ) | $ | (53,070 | ) | $ | 267,572 | $ | 14,326 | ||||||||||||||
Morgan
Stanley
|
406,898 | 166,522 | 411,342 | 181,350 | (4,444 | ) | (14,828 | ) | 145,688 | 20,834 | ||||||||||||||||||||||
Citigroup
|
77,648 | 44,098 | 99,590 | 63,830 | (21,942 | ) | (19,732 | ) | 50,894 | N/A | ||||||||||||||||||||||
$ | 1,009,476 | $ | 492,518 | $ | 1,070,480 | $ | 580,148 | $ | (61,004 | ) | $ | (87,630 | ) | $ | 464,154 | $ | 35,160 |
(1)
|
Represents the aggregate outstanding principal balance of
collateral as of each respective period.
|
|
(2)
|
Represents
the amount by which we are required to reduce our debt obligations by
March 15, 2010 in order to qualify for a one-year
extension.
|
|
(3)
|
The
additional debt reduction required under our agreement with JPMorgan is
subject to adjustment based on changes in the fair value of certain of our
interest rate swap agreements with JPMorgan between September 30, 2009 and
March 15, 2010. Amount noted above assumes no change in the fair value of
such derivatives as of September 30,
2009.
|
Cash
Flows
We
experienced a net decrease in cash of $16.8 million for the nine months ended
September 30, 2009, compared to a net increase of $89.4 million for the nine
months ended September 30, 2008.
Cash
provided by operating activities during the nine months ended September 30, 2009
was $30.1 million, compared to cash provided by operating activities of $43.3
million during the same period of 2008. The change was primarily due to a
decrease in our net interest margin and non-recurring restructuring costs
incurred in the first quarter of 2009, offset by additional servicing fees
collected during the first nine months of 2009. A significant portion of our
interest earning assets serve as collateral for our secured debt (repurchase
agreements and CDOs). These interest earning assets generate a significant
portion of our cash flow, which has been redirected, either in whole or in part,
towards repayment of the applicable debt.
During
the nine months ended September 30, 2009, cash provided by investing activities
was $65.2 million, compared to $101.9 million provided by investing activities
during the same period in 2008. The change was primarily due to a decrease in
principal repayments of $166.4 million during the nine months ended September
30, 2009 compared to the nine months ended September 30, 2008, offset by a
decrease in additional fundings, originations, and acquisitions of $108.3
million for the same periods. During the nine months ended September 30, 2008,
we also experienced an increase of $12.5 million in restricted cash at our
CDOs.
During
the nine months ended September 30, 2009, cash used in financing activities was
$112.1 million, compared to $55.8 million during the same period in 2008. During
the nine months ended September 30, 2009, the cash used in financing activities
was primarily comprised of repayments of $93.7 million under our repurchase
obligations and $31.7 million in repayments of collateralized debt obligations.
During the nine months ended September 30, 2008, the cash used in financing
activities was comprised of net repayments under repurchase obligations and
credit facilities of $64.6 million, repayments of collateralized debt
obligations of $33.3 million, and dividend distributions of $82.5 million,
offset by $123.1 million in proceeds from the public offering of our common
stock.
Capitalization
Our
authorized capital stock consists of 100,000,000 shares of $0.01 par value class
A common stock, of which 22,046,680 shares were issued and outstanding as of
September 30, 2009, and 100,000,000 shares of preferred stock, none of which
were outstanding as of September 30, 2009.
Pursuant
to the terms of our debt restructuring on March 16, 2009, we issued to JPMorgan,
Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class
A common stock at an exercise price of $1.79 per share, the closing bid price on
the New York Stock Exchange on March 13, 2009. The warrants will become
exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised
through a cashless exercise.
- 50
-
Repurchase
Obligations and Secured Debt
As of
September 30, 2009, we were party to three master repurchase agreements with
three counterparties, with aggregate total outstanding borrowings of $492.5
million. The terms of these agreements are described in Note 9 to the
consolidated financial statements.
Collateralized
Debt Obligations
As of
September 30, 2009, we had CDOs outstanding from four separate issuances with a
total face value of $1.1 billion. Our CDOs are financing vehicles for our assets
and, as such, are consolidated on our balance sheet representing the amortized
sales price of the securities we sold to third parties. On a combined basis, our
CDOs provide us with $1.1 billion of non-recourse, non-mark-to-market, index
matched financing at a weighted average cash cost of 0.54% over the applicable
indices (1.83% at September 30, 2009) and a weighted average all-in cost of
0.71% over the applicable indices (2.00% at September 30, 2009). As of September 30, 2009,
$496.9 million of our loans receivable and $713.9 million of our securities were
financed by our CDOs. As of December 31, 2008, $548.8 million of our loans
receivable and $746.0 million of our securities were financed by our
CDOs.
CDO I and
CDO II each have interest coverage and overcollateralization tests, which when
breached provide for hyper-amortization of the senior notes sold by a
redirection of cash flow that would otherwise have been paid to the subordinate
classes, some of which are owned by us. When such tests are in breach for six
consecutive months, the reinvesting feature of the CDO is suspended. The
hyper-amortization would cease once the test is back in compliance. The
overcollateralization tests are a function of impairments to the CDO collateral.
During the first quarter of 2009, we were informed by our CDO trustee of
impairments due to rating agency downgrades of certain of the securities which
serve as collateral in all of our CDOs. The impairments resulted in a breach of
a CDO II overcollateralization test. During the second and third quarters,
additional ratings downgrades on securities combined with the non-performance of
loan collateral resulted in breaches of the CDO I
overcollateralization tests and an additional CDO II overcollateralization test
failure as well as a breach of a CDO II interest coverage test. These
breaches have caused the redirection of CDO I and CDO II cash flow that would
otherwise have been paid to the subordinate classes of the CDOs, some of which
we own.
Furthermore,
all four of our CDOs provide for the re-classification of interest proceeds from
impaired collateral as principal proceeds. During the first quarter of 2009, we
were informed by our CDO trustee of impairments due to rating agency downgrades
of certain of the securities which serve as collateral in all of our CDOs
resulting in the reclassification of interest proceeds from those securities as
principal proceeds. During the second and third quarters of 2009, additional
downgrades of securities in CDO IV resulted in additional impairments and
therefore a significant diminution of cash flow to us. Other than collateral
management fees, we currently receive cash payments from only one of our four
CDOs, CDO III.
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. As of September
30, 2009, we had $99.4 million outstanding under our senior credit facility at a
cash cost of LIBOR plus 3.00% and an all-in cost of 7.20%. The terms of this
agreement are described in Note 9 to the consolidated financial
statements.
Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as those mentioned above in exchange for $21.9 million face amount of the trust
securities.
- 51
-
The terms
of the $143.8 million aggregate principal amount of new junior subordinated
notes issued pursuant to the exchange transactions are described in Note 9 to
the consolidated financial statements.
Contractual
Obligations
The
following table sets forth information about certain of our contractual
obligations as of September 30, 2009:
Contractual
Obligations(1)
|
|||||||||
(in
millions)
|
|||||||||
Payments
due by period
|
|||||||||
Total
|
Less
than
1 year |
1-3
years
|
3-5
years
|
More
than
5 years |
|||||
Long-term
debt obligations
|
|||||||||
Repurchase
obligations
|
$493
|
$35
|
$458
|
$—
|
$—
|
||||
Collateralized
debt obligations
|
1,124
|
—
|
—
|
—
|
1,124
|
||||
Senior
credit facility
|
99
|
5
|
94
|
—
|
—
|
||||
Junior
subordinated notes
|
144
|
—
|
—
|
—
|
144
|
||||
Total
long-term debt obligations
|
1,860
|
40
|
552
|
—
|
1,268
|
||||
Unfunded
commitments
|
|||||||||
Loans
|
13
|
1
|
10
|
2
|
—
|
||||
Equity
investments
|
19
|
—
|
19
|
—
|
—
|
||||
Total
unfunded commitments
|
32
|
1
|
29
|
2
|
—
|
||||
Operating
lease obligations
|
10
|
1
|
2
|
2
|
5
|
||||
Total
|
$1,902
|
$42
|
$583
|
$4
|
$1,273
|
(1)
|
We
are also subject to interest rate swaps for which we cannot estimate
future payments
due.
|
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
- 52
-
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, 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
risk factors 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.
- 53
-
ITEM
3. Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Risk
The
principal objective of our asset/liability management activities is to maximize
net interest income while minimizing levels of interest rate risk. Net interest
income and interest expense are subject to the risk of interest rate
fluctuations. In certain instances, to mitigate the impact of fluctuations in
interest rates, we use interest rate swaps to effectively convert floating rate
liabilities to fixed rate liabilities for proper matching with fixed rate
assets. Each derivative used as a hedge is matched with an asset or liability
with which it is expected to have a high correlation. 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.
As of
September 30, 2009, a 100 basis point change in LIBOR would impact our net
income by approximately $4.4 million.
Credit
Risk
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 to
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.
- 54
-
The
following table provides information about our financial instruments that are
sensitive to changes in interest rates as of September 30, 2009. 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. For interest rate swaps, the table presents notional
amounts and weighted average fixed pay and floating 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
floating rates are based on rates in effect as of the reporting
date.
Expected
Maturity/Repayment Dates (1)
|
|||||||||||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
Fair
Value
|
||||||||||
(in
thousands)
|
|||||||||||||||||
Assets:
|
|||||||||||||||||
Securities
|
|||||||||||||||||
Fixed
rate
|
$29,302
|
$17,803
|
$96,826
|
$109,099
|
$177,707
|
$256,405
|
$687,142
|
$480,928
|
|||||||||
Interest
rate(2)
|
6.45%
|
7.28%
|
7.37%
|
7.05%
|
6.85%
|
6.12%
|
6.68%
|
||||||||||
Floating
rate
|
$1,975
|
$28,330
|
$17,941
|
$34,947
|
$11,410
|
$1,584
|
$96,187
|
$32,916
|
|||||||||
Interest
rate(2)
|
2.25%
|
2.78%
|
1.84%
|
1.89%
|
5.65%
|
1.19%
|
2.58%
|
||||||||||
Loans
receivable, net
|
|||||||||||||||||
Fixed
rate
|
$5,770
|
$1,283
|
$27,831
|
$1,160
|
$1,246
|
$94,362
|
$131,652
|
$119,503
|
|||||||||
Interest
rate(2)
|
8.53%
|
8.05%
|
8.46%
|
7.79%
|
7.78%
|
7.86%
|
8.02%
|
||||||||||
Floating
rate
|
$34,466
|
$127,453
|
$699,278
|
$498,379
|
$89,905
|
$11,358
|
$1,460,839
|
$926,707
|
|||||||||
Interest
rate(2)
|
4.06%
|
3.73%
|
2.62%
|
3.33%
|
3.98%
|
2.21%
|
3.08%
|
||||||||||
Loans
held-for-sale
|
|||||||||||||||||
Floating
rate
|
$—
|
$—
|
$—
|
$14,444
|
$—
|
$—
|
$14,444
|
$12,000
|
|||||||||
Interest
rate(2)
|
—
|
—
|
—
|
4.75%
|
—
|
—
|
4.75%
|
||||||||||
Debt
Obligations:
|
|||||||||||||||||
Repurchase
obligations
|
|||||||||||||||||
Floating
rate (3)
|
$—
|
$36,015
|
$456,503
|
$—
|
$—
|
$—
|
$492,518
|
$492,518
|
|||||||||
Interest
rate(2)
|
—
|
1.98%
|
1.86%
|
—
|
—
|
—
|
1.87%
|
||||||||||
CDOs
|
|||||||||||||||||
Fixed
rate
|
$4,620
|
$4,690
|
$42,357
|
$59,895
|
$112,165
|
$44,407
|
$268,134
|
$199,351
|
|||||||||
Interest
rate(2)
|
5.47%
|
5.16%
|
5.16%
|
5.16%
|
5.19%
|
6.00%
|
5.32%
|
||||||||||
Floating
rate
|
$31,318
|
$65,932
|
$209,775
|
$347,729
|
$63,899
|
$136,926
|
$855,579
|
$258,195
|
|||||||||
Interest
rate(2)
|
0.60%
|
0.56%
|
0.58%
|
0.78%
|
0.78%
|
0.96%
|
0.74%
|
||||||||||
Senior
credit facility
|
|||||||||||||||||
Fixed
rate
|
$1,250
|
$5,000
|
$93,193
|
$—
|
$—
|
$—
|
$99,443
|
$50,630
|
|||||||||
Interest
rate(2)
|
3.25%
|
3.25%
|
3.25%
|
—
|
—
|
—
|
3.25%
|
||||||||||
Junior
subordinated notes
|
|||||||||||||||||
Fixed
rate
|
$—
|
$—
|
$—
|
$—
|
$—
|
$143,753
|
$143,753
|
$25,032
|
|||||||||
Interest
rate(2)
(4)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||
Participations
sold
|
|||||||||||||||||
Floating
rate
|
$—
|
$—
|
$88,442
|
$201,403
|
$—
|
$—
|
$289,845
|
$144,836
|
|||||||||
Interest
rate(2)
|
—
|
—
|
2.10%
|
3.68%
|
—
|
—
|
3.20%
|
||||||||||
Derivative Financial Instruments: | |||||||||||||||||
Interest
rate swaps
|
|||||||||||||||||
Notional
amounts
|
$1,352
|
$13,383
|
$46,400
|
$81,886
|
$39,947
|
$235,529
|
$418,497
|
($34,508)
|
|||||||||
Fixed
pay rate(2)
|
5.01%
|
5.06%
|
4.65%
|
4.98%
|
4.97%
|
5.06%
|
4.99%
|
||||||||||
Floating
receive rate(2)
|
0.25%
|
0.25%
|
0.25%
|
0.25%
|
0.25%
|
0.25%
|
0.25%
|
(1)
|
Expected
repayment dates and amounts are based on contractual agreements as of
September 30, 2009, and do not give effect to transactions which may be
expected to occur in the future.
|
|
(2)
|
Represents
weighted average rates where applicable. Floating rates are based on LIBOR
of 0.25%, which is the rate as of September 30,
2009.
|
|
(3)
|
As
discussed in Note 16 to the consolidated financial statements, due to the
unique nature of our restructured repurchase obligations and secured debt,
it is not practicable to estimate a fair value for these instruments.
Accordingly, the amount included in the table above represents the current
principal amount of these
obligations.
|
|
(4)
|
The
coupon on our junior subordinated notes will remain at 1.00% per annum
through April 29, 2012, increase to 7.23% per annum for the period from
April 30, 2012 through April 29, 2016 and then convert to a floating
interest rate of three-month LIBOR + 2.44% per annum through maturity in
2036.
|
- 55
-
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, (the “Exchange Act”), 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
recorded, processed, summarized and reported within the time periods specified
by Securities and Exchange Commission rules and forms 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) of the Exchange Act) that occurred
during the period covered by this quarterly report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
ITEM
1:
|
Legal
Proceedings
|
None.
ITEM
1A:
|
Risk
Factors
|
In
addition to the other information discussed in this quarterly report on Form
10-Q, please consider the risk factors provided in our updated risk factors
attached as Exhibit 99.1, which could materially affect our business, financial
condition or future results.
Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may adversely affect our business, financial condition or
operating results.
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.
- 57 -
ITEM 6:
|
Exhibits
|
3.1a
|
Charter
of the Capital Trust, Inc. (filed as Exhibit 3.1.a to Capital
Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788)
filed on April 2, 2003 and incorporated herein by
reference).
|
|
3.1b
|
Certificate
of Notice (filed as Exhibit 3.1 to Capital Trust, Inc.’s Current
Report on Form 8-K (File No. 1-14788) filed on February 27,
2007 and incorporated herein by reference).
|
|
3.2
|
Second
Amended and Restated By-Laws of Capital Trust, Inc. (filed as
Exhibit 3.2 to Capital Trust, Inc.’s Current Report on
Form 8-K (File No. 1-4788) filed on February 27, 2007 and
incorporated herein by reference).
|
|
·
|
31.1
|
Certification
of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|
·
|
31.2
|
Certification
of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
·
|
32.1
|
Certification
of John R. Klopp, Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
·
|
32.2
|
Certification
of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
·
|
99.1
|
Updated
Risk Factors from our Annual Report on Form 10-K for the year ended
December 31, 2008, filed on March 16, 2009 with the Securities and
Exchange Commission.
|
·
|
Filed
herewith
|
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-
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.
|
|||
November 3,
2009
|
|
/s/ John R. Klopp | |
Date
|
John R. Klopp | ||
Chief
Executive Officer
|
|||
November 3,
2009
|
|
/s/ Geoffrey G. Jervis | |
Date
|
Geoffrey G. Jervis | ||
Chief
Financial Officer
|
|||
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