Edgar Filing: CAPITAL TRUST INC

Unassociated Document

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 March 31, 2009

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)

Registrant's telephone number, including area code:	(212) 655-0220

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 ¨	Accelerated filer ý
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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

The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of April 29, 2009 was 22,062,814.

CAPITAL TRUST, INC.
INDEX

Part I.	Financial Information

	Item 1:	Financial Statements	1

		Consolidated Balance Sheets – March 31, 2009 (unaudited) and December 31, 2008 (audited)	1

		Consolidated Statements of Operations – Three Months Ended March 31, 2009 (unaudited) and 2008 (unaudited)	2

		Consolidated Statements of Changes in Shareholders' Equity – Three Months Ended March 31, 2009 (unaudited) and 2008 (unaudited)	3

		Consolidated Statements of Cash Flows – Three Months Ended March 31, 2009 (unaudited) and 2008 (unaudited)	4

		Notes to Consolidated Financial Statements (unaudited)	5

	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	49

	Item 4:	Controls and Procedures	51

Part II.	Other Information

	Item 1:	Legal Proceedings	52

	Item 1A:	Risk Factors	52

	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 3:	Defaults Upon Senior Securities	52

	Item 4:	Submission of Matters to a Vote of Security Holders	52

	Item 5:	Other Information	52

	Item 6:	Exhibits	53

	Signatures		54

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2009 and December 31, 2008
(in thousands except per share data)

	March 31,			December 31,
Assets	2009			2008
	(unaudited)			(audited)
Cash and cash equivalents	$	18,268		$	45,382
Restricted cash		160			18,821
Securities		834,329			852,211
Loans receivable, net		1,688,528			1,791,332
Loans held-for-sale, net		30,014			92,175
Real estate held-for-sale		8,000			9,897
Equity investment in unconsolidated subsidiaries		2,931			2,383
Accrued interest receivable		4,907			6,351
Interest rate hedge assets		1,154			—
Deferred income taxes		1,706			1,706
Prepaid expenses and other assets		12,489			18,369
Total assets		2,602,486			2,838,627
Liabilities & Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses	$	6,653		$	10,918
Repurchase obligations		560,854			699,054
Collateralized debt obligations		1,142,097			1,156,035
Senior unsecured credit facility		100,000			100,000
Junior subordinated notes		125,837			128,875
Participations sold		292,674			292,669
Interest rate hedge liabilities		45,509			47,974
Deferred origination fees and other revenue		1,521			1,658
Total liabilities		2,275,145			2,437,183
Shareholders' equity:
Class A common stock $0.01 par value 100,000 shares authorized, 21,749 and 21,740 shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively ("class A common stock")		217			217
Restricted class A common stock $0.01 par value, 314 and 331 shares issued and outstanding as of March 31, 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		558,930			557,435
Accumulated other comprehensive loss		(45,704	)		(41,009	)
Accumulated deficit		(186,105	)		(115,202	)
Total shareholders' equity		327,341			401,444
Total liabilities and shareholders' equity	$	2,602,486		$	2,838,627

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended March 31, 2009 and 2008
(in thousands, except share and per share data)
(unaudited)

	Three Months Ended
	March 31,
	2009			2008
Income from loans and other investments:
Interest and related income	$	33,239		$	56,554
Less: Interest and related expenses		21,268			37,944
Income from loans and other investments, net		11,971			18,610

Other revenues:
Management fees		2,879			2,197
Servicing fees		1,179			178
Other interest income		128			188
Total other revenues		4,186			2,563

Other expenses:
General and administrative		8,457			6,901
Depreciation and amortization		7			105
Total other expenses		8,464			7,006

Total other-than-temporary impairments on securities		(14,646	)		—
Portion of other-than-temporary impairments on securities
recognized in other comprehensive income		5,624			—
Impairments on real estate held-for-sale		(1,333	)		—
Net impairments recognized in earnings		(10,355	)		—

Provision for possible credit losses		(58,763	)		—
Valuation allowance on loans held-for-sale		(10,363	)		—
(Loss)/income from equity investments		(1,766	)		7
(Loss)/income before income taxes		(73,554	)		14,174
Income tax benefit		(408	)		(599	)
Net (loss)/income	$	(73,146	)	$	14,773

Per share information:
Net (loss)/earnings per share of common stock:
Basic	$	(3.28	)	$	0.82
Diluted	$	(3.28	)	$	0.82

Weighted average shares of common stock outstanding:
Basic		22,304,887			17,942,649
Diluted		22,304,887			18,017,413

Dividends declared per share of common stock	$	—		$	0.80

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2009 and 2008
(in thousands)
(unaudited)

						Restricted				Accumulated
				Class A		Class A		Additional		Other
	Comprehensive			Common		Common		Paid-In		Comprehensive			Accumulated
	Income			Stock		Stock		Capital		Loss			Deficit			Total
Balance at January 1, 2008				$	172	$	4	$	426,113	$	(8,684	)	$	(9,368	)	$	408,237

Net income	$	14,773			—		—		—		—			14,773			14,773

Unrealized loss on derivative financial instruments		(16,961	)		—		—		—		(16,961	)		—			(16,961	)
Unrealized gain on available for sale security		277			—		—		—		277			—			277
Amortization of unrealized gain on securities		(437	)		—		—		—		(437	)		—			(437	)
Deferred loss on settlement of swap		(419	)		—		—		—		(419	)		—			(419	)
Amortization of deferred gains and losses on settlement of swaps		(55	)		—		—		—		(55	)		—			(55	)
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		—			—		—		1,541		—			—			1,541
Sale of shares of class A common stock under stock option agreement		—			—		—		180		—			—			180
Restricted class A common stock earned		—			1		—		1,004		—			—			1,005
Dividends declared on common stock		—			—		—		—		—			(17,356	)		(17,356	)
Balance at March 31, 2008	$	(2,822	)	$	213	$	4	$	541,405	$	(26,279	)	$	(11,951	)	$	503,392

Balance at January 1, 2009				$	217	$	3	$	557,435	$	(41,009	)	$	(115,202	)	$	401,444

Net Loss	$	(73,146	)		—		—		—		—			(73,146	)		(73,146	)

Cumulative effect of change in accounting principle		—			—		—		—		(2,243	)		2,243			—
Unrealized gain on derivative financial instruments		3,619			—		—		—		3,619			—			3,619
Amortization of unrealized gain on securities		(423	)		—		—		—		(423	)		—			(423	)
Amortization of deferred gains and losses on settlement of swaps		(24	)		—		—		—		(24	)		—			(24	)
Other-than-temporary impairments on securities		(5,624	)		—		—		—		(5,624	)		—			(5,624	)
Issuance of warrants in conjunction with debt restructuring		—			—		—		940		—			—			940
Restricted class A common stock earned		—			—		—		424		—			—			424
Deferred directors' compensation		—			—		—		131		—			—			131
Balance at March 31, 2009	$	(75,600	)	$	217	$	3	$	558,930	$	(45,704	)	$	(186,105	)	$	327,341

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2009 and 2008
(in thousands)
(unaudited)

	2009			2008
Cash flows from operating activities:
Net (loss)/income	$	(73,146	)	$	14,773
Adjustments to reconcile net (loss)/income to net cash provided by
operating activities:
Depreciation and amortization		7			105
Net impairments recognized in earnings		10,355			—
Provision for possible credit losses		58,763			—
Valuation allowance on loans held-for-sale		10,363			—
Deferred directors compensation		131			—
Loss/(income) from equity investments		1,766			(7	)
Employee stock-based compensation		424			1,004
Amortization of premiums and discounts on loans, securities,
and debt, net		(1,902	)		(1,698	)
Amortization of deferred gains on interest rate hedges		(24	)		(55	)
Amortization of deferred financing costs		1,142			1,370
Changes in assets and liabilities, net:
Deposits and other receivables		1,149			2,250
Accrued interest receivable		1,444			810
Deferred income taxes		—			(599	)
Prepaid expenses and other assets		602			428
Deferred origination fees and other revenue		(135	)		(650	)
Accounts payable and accrued expenses		(4,264	)		(5,931	)
Net cash provided by operating activities		6,675			11,800

Cash flows from investing activities:
Principal collections on and proceeds from securities		3,865			3,568
Origination/purchase of loans receivable and add-on fundings under existing loans		(6,149	)		(28,639	)
Principal collections on loans receivable		7,914			34,842
Proceeds from real estate held-for-sale		564			—
Contributions to unconsolidated subsidiaries		(2,314	)		—
Purchase of equipment and leasehold improvements		—			(10	)
Increase in restricted cash		—			(10,060	)
Net cash provided by/(used in) investing activities		3,880			(299	)

Cash flows from financing activities:
Decrease in restricted cash		18,661			—
Borrowings under repurchase obligations		—			101,393
Repayments under repurchase obligations		(42,467	)		(103,202	)
Borrowings under credit facilities		—			25,000
Repayment of collateralized debt obligations		(13,857	)		(4,317	)
Settlement of interest rate hedges		—			(419	)
Payment of deferred financing costs		(6	)		(94	)
Sale of class A common stock upon stock option exercise		—			180
Dividends paid on common stock		—			(47,492	)
Proceeds from sale of shares of class A common stock		—			112,608
Proceeds from dividend reinvestment plan and stock purchase plan		—			1,541
Net cash (used in)/provided by financing activities		(37,669	)		85,198

Net (decrease)/increase in cash and cash equivalents		(27,114	)		96,699
Cash and cash equivalents at beginning of period		45,382			25,829
Cash and cash equivalents at end of period	$	18,268		$	122,528

See accompanying notes to consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Organization

References herein to “we,” “us,” “our” or the “Company” 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 March 31, 2009, we have completed over $11.0 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 footnotes 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 three months ended March 31, 2009 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2009.

Principles of Consolidation

The accompanying consolidated 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 interest in CT Preferred Trust II, the issuer of trust securities backed by our junior subordinated notes, is accounted for using the equity method and its assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust II is a variable interest entity in which we are not the primary beneficiary under Financial Accounting Standards Board, or FASB, Interpretation No. 46(R) “Consolidation of Variable Interest Entities,” or FIN 46(R). We account for 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, under the equity method of accounting. As such, we report a percentage of the earnings or losses of the companies in which we have such investments equal to our ownership percentage on a single line item in the consolidated statement of operations as income/(loss) from equity investments. CTOPI is an investment company (under the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies) and therefore it maintains its financial records at fair value. We have applied such accounting relative to our investment in CTOPI pursuant to the Emerging Issues Task Force, or EITF, Issue No. 85-12 “Retention of Specialized Accounting for Investments in Consolidation.”

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 in connection with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. 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.

Fees from special servicing and asset management services are recognized as services are rendered. We account for incentive fees we earn from our investment management business in accordance with Method 1 of EITF D-96, “Accounting for Management Fees Based on a Formula.” Under this guidance, no incentive income is recorded until all contingencies have been eliminated.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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. The Company places its cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. As of, and for the periods ended, March 31, 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 March 31, 2009 was comprised of $160,000 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 pursuant to FASB Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” or FAS 115, 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 certain circumstances, adjust these valuations based on management’s judgment. Changes in the valuations do not affect our reported income or cash flows, but impact shareholders’ equity and, accordingly, book value per share.

We account for our securities under EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” as amended by FASB Staff Position EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” or EITF 99-20. Under EITF 99-20, income 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 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, under the guidance of EITF 99-20, when, based on current information and events, there has been an adverse change in cash flows expected to be collected from those originally estimated, an other-than-temporary impairment is deemed to have occurred. A change in expected cash flows is considered adverse under the guidance of EITF 99-20 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 current yield is less than the present value of the originally estimated remaining cash flows, adjusted for cash receipts during the intervening period. Under the guidance of FSP FAS 115-2, as defined below, 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 credit losses, and (ii) the amount related to all other factors. The portion of the other-than-temporary impairment related to credit losses is calculated by comparing the amortized cost 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 on the consolidated statement of operations. The portion of the other-than-temporary impairment related to all other factors is recognized as a component of other comprehensive income/(loss) on the consolidated balance sheet. Other-than-temporary impairments recognized through earnings are accreted back to the amortized cost basis of the security through interest income, while amounts recognized through other comprehensive loss are amortized over the life of the security with no impact on earnings.

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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. The presentation of controlling class investments in our consolidated financial statements is governed in part by FIN 46(R), which could require that certain controlling class investments be presented on a consolidated basis. Based upon the specific circumstances of certain of our securities that are controlling class investments and our interpretation of FIN 46(R), specifically the exemption for qualifying special purpose entities as defined under FASB Statement of Financial Accounting Standard No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” or FAS 140, we have concluded that the entities that have issued the controlling class investments should not be presented on a consolidated basis. In 2008, the FASB issued Staff Position No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” or FSP 140-4, which requires additional disclosures for certain of our investments effective as of December 15, 2008. These disclosures are included in Note 3 to the consolidated financial statements.

Loans Receivable, Provision for Possible Credit 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 permanently impaired, we would write down the Loan through a charge to the provision for possible credit losses. Given the nature of our Loan portfolio and the underlying commercial real estate collateral, significant judgment on the part of management is required in determining permanent impairment and the resulting charge to the provision, which includes but is not limited to, making assumptions regarding the value of the real estate that secures the loan. Each Loan in our portfolio is evaluated at least quarterly using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors deemed necessary by management to assess the likelihood of delinquency or default. If we believe there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our Loan, and a provision is recorded taking into consideration both the likelihood of delinquency or default and the estimated value of the underlying collateral. 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 fair value of loans held-for-sale is recorded as a charge to the Company’s 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.

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. In February 2008, the FASB issued FASB Staff Position 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,” or FSP 140-3, which provides guidance on accounting for transfers of financial assets and repurchase financings. FSP 140-3 presumes 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 under FAS 140. If the linked transaction does not meet the requirements for sale accounting, the linked transaction 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.

FSP 140-3 is effective on a prospective basis for fiscal years beginning after November 15, 2008, with earlier application not permitted. Given that FSP 140-3 is to be applied prospectively, our adoption of FSP 140-3 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 FSP 140-3, may be presented differently on our consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Interest Rate Derivative Financial Instruments

In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. Specifically, we currently use interest rate swaps to effectively convert variable rate liabilities that are financing fixed rate assets, to fixed rate liabilities. The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability. The 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.

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 which are accounted for in accordance with FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or FAS 109). Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and we may also be subject to penalties.

In September 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109,” or FIN 48. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Accounting for Stock-Based Compensation

We account for stock-based compensation in accordance with FASB Statement of Financial Accounting Standards No. 123(R) “Share Based Payment,” or FAS 123(R). Upon adoption of FAS 123(R), as of January 1, 2006, we have elected to utilize the modified prospective method, and there was no impact from this adoption. 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.

Comprehensive Income / (Loss)

We comply with the provisions of the FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” or FAS 130, in reporting comprehensive income and its components in the full set of general purpose financial statements. Total comprehensive loss was ($75.6) million and ($2.8) million, for the three months ended March 31, 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 on securities recognized in other comprehensive income/(loss). As of March 31, 2009, accumulated other comprehensive loss was ($45.7) million, comprised of net unrealized gains on securities previously classified as available-for-sale of $6.2 million, other-than-temporary impairments on securities of ($7.9) million, net unrealized losses on cash flow swaps of ($44.4) million, and $300,000 of net deferred realized gains on the settlement of cash flow swaps.

Earnings per Share of Common Stock

Earnings per share of common stock are presented based on the requirements of the FASB Statement of Financial Accounting Standards No. 128, “Earnings per Share,” or FAS 128. Basic 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.

- 8 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

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.

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 net assets of businesses acquired. Under the guidance of FASB Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or FAS 142, 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. No impairment charges for goodwill were recorded during the three months ended March 31, 2009 or the year ended December 31, 2008.

Fair Value of Financial Instruments

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” or FAS 157. FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Specifically, FAS 157 defines fair value based on exit price, or the price that would be received to sell an asset or transfer 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 to the consolidated financial statements

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. The use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Constituents have expressed concerns that the disclosure requirements in FASB Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. Accordingly, FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves 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 to the consolidated financial statements.

In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” or FSP EITF 03-6-1. Under the guidance of FSP EITF 03-6-1, 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 03-6-1 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 03-6-1 as of January 1, 2009 did not have a material impact on our consolidated financial statements.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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, the Company adopted all three of these standards as of January 1, 2009.

As discussed above, 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 credit losses which are recognized through earnings, and (ii) amounts related to all other factors 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 to the consolidated financial statements. 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 the consolidated balance sheet.

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 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.

3. Securities

Activity relating to our securities portfolio for the three months ended March 31, 2009 was as follows (in thousands):

				Other-Than-
	Gross Book			Temporary			Net Book
	Value			Impairment			Value
December 31, 2008		$854,454			($2,243	)		$852,211
Principal paydowns		(3,866	)		—			(3,866	)
Discount/premium amortization & other (1)		630			—			630
Other-than-temporary impairments		—			(14,646	)		(14,646	)
March 31, 2009		$851,218			($16,889	)		$834,329


(1)	Includes mark-to-market adjustments on any available for sale securities, the impact of premium and discount amortization and losses, if any.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our securities portfolio as of March 31, 2009 and December 31, 2008:

	March 31, 2009	December 31, 2008
Number of securities	77	77
Number of issues	55	55
Rating (1)(2)	BB	BB
Coupon (1)(3)	6.23%	6.23%
Yield (1)(3)	6.75%	6.87%
Life (years) (1)(4)	4.3	4.6


(1)	Represents a weighted average as of March 31, 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 ($33.7 million book value) of unrated equity investments in collateralized debt obligations.
(3)	Calculations based on LIBOR of 0.50% and 0.44% as of March 31, 2009 and December 31, 2008, respectively. For $37.9 million face value ($33.7 million book value) of securities, calculations use an effective rate based on cash received.
(4)	Weighted average life is based on the timing and amount of future expected principal payments through the maturity of each respective investment assuming all extension options are executed.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The tables below detail the ratings, vintage, property type and geographic distribution of the collateral underlying our securities as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009					December 31, 2008
Ratings	Book Value		Percentage			Book Value		Percentage
AAA		$163,099		20	%		$163,263		19	%
AA		24,871		3			24,879		3
A		154,494		19			157,705		19
BBB		182,099		21			205,991		23
BB		123,093		15			142,033		17
B		37,836		5			62,860		7
CCC		70,908		8			4,488		1
CC		2,531		—			5,144		1
D		41,715		5			48,376		6
NR		33,683		4			37,472		4
Total		$834,329		100	%		$852,211		100	%

Vintage	Book Value		Percentage			Book Value		Percentage
2007		$104,721		13	%		$110,421		13	%
2006		48,921		6			48,897		6
2005		62,067		7			62,012		7
2004		85,152		10			88,159		10
2003		29,792		4			29,725		3
2002		20,097		2			19,954		2
2001		19,039		2			19,105		2
2000		38,410		5			40,602		5
1999		30,297		4			30,320		4
1998		303,318		36			303,875		36
1997		67,664		8			73,356		9
1996		24,851		3			25,785		3
Total		$834,329		100	%		$852,211		100	%

Property Type	Book Value		Percentage			Book Value		Percentage
Retail		$263,280		32	%		$271,067		32	%
Office		175,685		21			190,975		22
Hotel		151,292		18			137,062		16
Multifamily		95,349		11			95,448		11
Other		63,423		8			68,743		9
Healthcare		41,929		5			44,251		5
Industrial		43,371		5			44,665		5
Total		834,329		100	%		852,211		100	%

Geographic Location	Book Value		Percentage			Book Value		Percentage
Southeast		$214,507		26	%		$232,391		27	%
Northeast		211,349		25			195,674		23
West		149,817		18			145,043		17
Southwest		124,353		15			128,389		15
Midwest		102,363		12			115,845		14
Northwest		17,620		2			19,410		2
Other		14,320		2			15,459		2
Total		$834,329		100	%		$852,211		100	%

As detailed in Note 2, on August 4, 2005, pursuant to the provisions of FAS 115, 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 March 31, 2009 and December 31, 2008, we had no securities classified as available-for-sale. As defined in FSP FAS 115-2, the amortized cost basis of our securities excludes from book value (i) amounts related to mark-to-market adjustments on available-for-sale securities and (ii) the portion of other-than-temporary impairments not related to credit losses. The amortized cost basis of our securities portfolio was $836.0 million as of March 31, 2009.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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 of EITF 99-20, we believe that there has been an adverse change in expected cash flows for six of the securities in our portfolio and, therefore, recognized an aggregate gross other-than-temporary impairment of $14.6 million as of March 31, 2009. Of this total other-than-temporary impairment, $9.0 million is related to credit losses, as defined under FSP FAS 115-2, and has been recorded through earnings, and $5.6 million is related to other factors and has been recorded as a component of other comprehensive income on our consolidated balance sheet with no impact on earnings.

To determine the component of the gross other-than-temporary impairment related to credit losses, we compared 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, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans. Other factors considered in determining the component of other-than-temporary impairments related to credit losses include current subordination levels at both the individual loans which serve as collateral under our securities and at the securities themselves, and the current unamortized discounts or premiums on our securities.

The following table summarizes activity related to the amount of other-than-temporary impairments related to credit losses during the three months ended March 31, 2009:

	Gross Other-Than-Temporary Impairments		Other-Than-Temporary Impairments Included in Other Comprehensive Income		Net Other-Than-Temporary Impairments Included in Earnings
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		14,646		5,624		9,022
March 31, 2009		$16,889		$7,867		$9,022


(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 factors other than credit losses.

Certain of our securities are carried at values in excess of their market values. This difference can be caused by, among other things, changes in interest rates, changes in credit spreads, realized/unrealized losses in the underlying securities and general market conditions. As of March 31, 2008, 67 securities with an aggregate carrying value of $783.4 million were carried at values in excess of their market values. Market value for these securities was $480.1 million as of March 31, 2009. In total, we had 77 investments in securities with an aggregate carrying value of $834.3 million that have an estimated market value of $538.4 million (this valuation does 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 certain cases with our own internal 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 six securities in our portfolio since our last financial report. As noted above, we have therefore recognized an aggregate other-than-temporary impairment of $14.6 million for these assets.

Our estimation of cash flows expected to be generated by our securities portfolio is based upon an internal review of the underlying mortgage 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. Our assessment of cash flows combined with our ability and intent to hold our securities to maturity (at which point we expect to recover book value plus amortized discounts/premiums, which may be at maturity), 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 with unrealized losses as of March 31, 2009 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		$—		$—			$62.1		($103.9	)		$62.1		($103.9	)		$166.0
Fixed Rate		128.1		(11.4	)		289.9		(188.0	)		418.0		(199.4	)		617.4
Total		$128.1		($11.4	)		$352.0		($291.9	)		$480.1		($303.3	)		$783.4


(1)	Excludes $50.9 million of securities which were carried at or below fair value as of March 31, 2009.

Our securities portfolio includes investments in three entities that are, or could potentially be construed to be, variable interest entities, or VIEs, as defined in FIN 46(R). In each of these three cases, we own less than 50% of the variable interest, are not the primary beneficiary as defined in FIN 46(R) and, therefore, do not consolidate the operations of the entity in our consolidated financial statements. As of March 31, 2009, the aggregate carrying value of these three assets recorded as part of our securities portfolio on our balance sheet was $70.1 million. 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 involvement in 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 above mentioned three entities was sponsored by us.

4. Loans Receivable, net

Activity relating to our loans receivable for the three months ended March 31, 2009 was as follows (in thousands):

	Gross Book Value			Provision for Possible Credit Losses			Net Book Value
December 31, 2008		$1,848,909			($57,577	)		$1,791,332
Additional fundings (1)		4,008			—			4,008
Satisfactions (2)		(2,370	)		—			(2,370	)
Principal paydowns		(5,757	)		—			(5,757	)
Discount/premium amortization & other (3)		440			—			440
Provision for possible credit losses		—			(58,763	)		(58,763	)
Reclassification to loans held-for-sale		(40,362	)		—			(40,362	)
March 31, 2009		$1,804,868			($116,340	)		$1,688,528


(1)	Additional fundings includes capitalized interest of $497,000 for the three months ended March 31, 2009.
(2)	Includes final maturities and full repayments.
(3)	Includes the impact of premium and discount amortization and losses, if any.

- 14 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our loans receivable portfolio as of March 31, 2009 and December 31, 2008:

	March 31, 2009	December 31, 2008
Number of investments	69	73
Coupon (1)(2)	3.93%	3.90%
Yield (1)(2)	4.06%	4.09%
Maturity (years) (1)(3)	2.8	3.3


(1)	Represents a weighted average as of March 31, 2009 and December 31, 2008, respectively.
(2)	Calculations based on LIBOR of 0.50% as of March 31, 2009 and LIBOR of 0.44% as of December 31, 2008.
(3)	Represents the maturity of the investment assuming all extension options are executed.

The tables below detail the property type and geographic distribution of the properties securing our loans receivable as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009					December 31, 2008
Property Type	Book Value		Percentage			Book Value		Percentage
Office		$610,625		36	%		$661,761		37	%
Hotel		682,471		40			688,332		38
Healthcare		147,404		10			147,397		8
Multifamily		109,135		6			123,492		7
Retail		39,981		2			42,385		4
Other		98,912		6			127,965		6
Total		$1,688,528		100	%		$1,791,332		100	%

Geographic Location	Book Value		Percentage			Book Value		Percentage
Northeast		$522,261		31	%		$560,071		31	%
Southeast		354,829		21			387,500		22
Southwest		284,370		17			295,490		16
West		218,387		13			235,386		13
Northwest		90,682		5			91,600		5
Midwest		28,310		2			28,408		2
International		122,392		7			122,387		7
Diversified		67,297		4			70,490		4
Total		$1,688,528		100	%		$1,791,332		100	%

Quarterly, management reevaluates the provision for possible credit losses based upon our current portfolio of loans. Each loan in our portfolio is evaluated using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors necessary to, among other things, assess the likelihood of delinquency or default. If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our loan, and a provision is recorded taking into consideration both the likelihood of delinquency or default and the estimated value of the underlying collateral.

As of March 31, 2009, we had provisions for possible credit losses on 10 loans with an aggregate net book value of $46.8 million ($163.1 million principal balance, net of a $116.3 million provision). These include three loans with an aggregate principal balance of $57.3 million which are current in their interest payments, against which we have recorded a $31.7 million provision, as well as seven loans which are delinquent on contractual payments with an aggregate principal balance of $105.8 million, against which we have recorded an $84.6 million provision.

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 March 31, 2009, our eight Unfunded Loan Commitments totaled $19.7 million. Of the total Unfunded Loan Commitments, $12.8 million will only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral. As of March 31, 2009, $5.6 million of the Unfunded Loan Commitments relates to a loan classified as held-for-sale, as described in Note 5.

- 15 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

5. Loans Held-for-Sale, net

As of March 31, 2009, we had two loans with an aggregate gross carrying value of $40.4 million and a net carrying value of $30.0 million classified as held-for-sale. One of these loans is classified as held-for-sale as a result of our entering into a satisfaction, termination and release agreement with Lehman Brothers on April 6, 2009, as described in Note 20. We are currently in discussions with the borrower under the other loan to settle their obligation at a discount and, accordingly, that loan is classified as held-for-sale.

As of December 31, 2008, we had four loans with an aggregate gross carrying value of $140.4 million and a net carrying value of $92.2 million classified as held-for-sale. These loans served as collateral under our repurchase agreements with UBS and Goldman Sachs and were classified as held-for-sale at that time due to the termination of these agreements during the first quarter of 2009, as described in Note 9. Following the consummation of the transactions with UBS and Goldman Sachs, all of the loans previously classified as held-for-sale were transferred to the respective lender.

The following table details overall statistics for our loans held-for-sale as of March 31, 2009 and December 31, 2008:

	March 31, 2009	December 31, 2008
Number of investments	2	4
Coupon (1)(2)(3)	7.19%	2.54%
Yield (1)(2)(3)	8.75%	2.62%
Maturity (years) (1)(4)	5.7	3.2


(1)	Represents a weighted average as of March 31, 2009 and December 31, 2008 based on gross carrying value, before any valuation allowance.
(2)	Calculations based on LIBOR of 0.50% as of March 31, 2009 and LIBOR of 0.44% as of December 31, 2008.
(3)	Includes one loan which bears interest at a fixed rate of 8.4% per annum and one loan which bears interest at LIBOR + 4.5% per annum as of March 31, 2009.
(4)	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 March 31, 2009, we recorded a valuation allowance of $10.4 million against these loans. We determined the valuation allowance on loans held-for-sale based upon the transactions which have occurred subsequent to March 31, 2009, as described in Note 20, and those expected to occur in the near future.

6. Real Estate Held-for-Sale

In 2008, the Company and its 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. We have recorded an aggregate $3.3 million impairment since the time of foreclosure to reflect the property at fair value as of March 31, 2009.

7. Equity Investment 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 March 31, 2009, we had co-investments in two such vehicles, Fund III, in which we have a 4.7% investment, and 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.

- 16 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Activity relating to our equity investment in unconsolidated subsidiaries for the three months ended March 31, 2009 was as follows (in thousands):

	Fund III			CTOPI			Other		Total
December 31, 2008	$	597		$	1,782		$	4	$	2,383
Contributions		—			2,314			—		2,314
Loss from equity investments		(206	)		(1,560	)		—		(1,766	)
March 31, 2009	$	391		$	2,536		$	4	$	2,931

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 all 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 incentive compensation previously received.

8. Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009		December 31, 2008
Deferred financing costs, net	$	7,201	$	8,342
Common equity - CT Preferred Trust(s)		678		3,875
Goodwill		2,235		2,235
Prepaid rent/security deposit		929		928
Prepaid expenses		650		1,044
Deposits and other receivables		485		1,422
Other assets		311		523
	$	12,489	$	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. As of March 31, 2009, deferred financing costs were $7.2 million, net of accumulated amortization.

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, are accounted for using the equity method due to our determination that they are variable interest entities in which we are not the primary beneficiary under FIN 46(R). In connection with the debt restructuring described in Note 9, we eliminated 100% of our ownership interest in CT Preferred Trust I, as well as the majority of our common equity interests in 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. Under the guidance of FAS 142, we assess goodwill for impairment at least annually unless events occur which otherwise require consideration for impairment at an interim date. No impairment charges for goodwill were recorded during the three months ended March 31, 2009 or the year ended December 31, 2008.

- 17 -

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

9. Debt Obligations

As of March 31, 2009 and December 31, 2008, we had $1.9 billion and $2.1 billion of total debt 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):

	March 31,		March 31,		December 31,
	2009		2009		2008		March 31, 2009

Debt Obligation	Principal Balance		Book Balance		Book Balance		Coupon(1)			All-In Cost(1)			Maturity Date(2)

Repurchase obligations and secured debt
JP Morgan(3)		$323,784		$323,246		$336,271		1.99	%		2.05	%	March 15, 2011
Morgan Stanley(4)		175,458		175,175		182,937		2.39			2.41		March 15, 2011
Citigroup(5)		44,518		44,419		63,830		1.85			2.18		March 15, 2011
Lehman Brothers(6)		18,014		18,014		18,014		2.00			2.00		June 11, 2013
Goldman Sachs		—		—		88,282		—			—		—
UBS		—		—		9,720		—			—		—
Total repurchase obligations and secured debt		561,774		560,854		699,054		2.10			2.17		April 10, 2011

Collateralized debt obligations (CDOs)
CDO I		249,437		249,437		252,045		1.12			1.54		February 23, 2012
CDO II		296,061		296,061		298,913		1.00			1.24		May 3, 2012
CDO III		255,612		257,063		257,515		5.22			5.24		January 12, 2013
CDO IV(7)		339,536		339,536		347,562		1.11			1.21		October 23, 2012
Total CDOs		1,140,646		1,142,097		1,156,035		2.00			2.18		August 4, 2012
Senior unsecured credit facility - WestLB		100,000		100,000		100,000		3.50			3.50		March 15, 2011
Junior subordinated notes - A (8)(10)		118,594		103,284		—		1.00			4.28		April 30, 2036
Junior subordinated notes - B (9)(10)		22,553		22,553		128,875