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 June 30, 2010

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 o
Non-accelerated filer ý (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 July 23, 2010 was 21,965,841.

CAPITAL TRUST, INC.

INDEX

Part I.	Financial Information

	Item 1:	Financial Statements	1

		Consolidated Balance Sheets – June 30, 2010 (unaudited) and December 31, 2009	1

		Consolidated Statements of Operations – Three and Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	2

		Consolidated Statements of Changes in Shareholders' Equity (Deficit) – Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	3

		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	4

		Notes to Consolidated Financial Statements (unaudited)	5

	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	42

	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	59

	Item 4:	Controls and Procedures	61

Part II.	Other Information

	Item 1:	Legal Proceedings	62

	Item 1A:	Risk Factors	62

	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	62

	Item 3:	Defaults Upon Senior Securities	62

	Item 4:	(Removed and Reserved)	62

	Item 5:	Other Information	62

	Item 6:	Exhibits	63

	Signatures		64

Index

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2010 and December 31, 2009
(in thousands except per share data)

	June 30,			December 31,
Assets	2010			2009
	(unaudited)

Cash and cash equivalents	$	26,495		$	27,954
Securities held-to-maturity		17,695			17,332
Loans receivable, net		717,598			766,745
Loans held-for-sale, net		5,488			—
Equity investments in unconsolidated subsidiaries		5,181			2,351
Accrued interest receivable		2,591			3,274
Deferred income taxes		1,711			2,032
Prepaid expenses and other assets		6,959			8,391
Subtotal		783,718			828,079

Assets of Consolidated Variable Interest Entities ("VIEs")
Securities held-to-maturity		570,722			697,864
Loans receivable, net		3,125,398			391,499
Loans held-for-sale, net		—			17,548
Real estate held-for-sale		12,055			—
Accrued interest receivable and other assets		10,990			1,645
Subtotal		3,719,165			1,108,556

Total assets	$	4,502,883		$	1,936,635

Liabilities & Shareholders' Deficit

Liabilities:
Accounts payable and accrued expenses	$	7,943		$	8,228
Repurchase obligations		428,489			450,137
Senior credit facility		98,665			99,188
Junior subordinated notes		130,112			128,077
Participations sold		288,447			289,144
Interest rate hedge liabilities		4,344			4,184
Subtotal		958,000			978,958

Non-Recourse Liabilities of Consolidated VIEs
Accounts payable and accrued expenses		4,718			1,798
Securitized debt obligations		3,801,225			1,098,280
Interest rate hedge liabilities		32,600			26,766
Subtotal		3,838,543			1,126,844

Total liabilities		4,796,543			2,105,802

Shareholders' deficit:
Class A common stock $0.01 par value 100,000 shares authorized, 21,907 and 21,796 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively ("class A common stock")		219			218
Restricted class A common stock $0.01 par value, 59 and 79 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively ("restricted class A common stock" and together with class A common stock, "common stock")		1			1
Additional paid-in capital		559,267			559,145
Accumulated other comprehensive loss		(57,585	)		(39,135	)
Accumulated deficit		(795,562	)		(689,396	)
Total shareholders' deficit		(293,660	)		(169,167	)

Total liabilities and shareholders' deficit	$	4,502,883		$	1,936,635

See accompanying notes to consolidated financial statements.

- 1 -

Index

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2010 and 2009
(in thousands, except share and per share data)
(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Income from loans and other investments:
Interest and related income	$	39,428		$	30,575		$	79,398		$	63,814
Less: Interest and related expenses		31,653			20,244			62,905			41,512
Income from loans and other investments, net		7,775			10,331			16,493			22,302

Other revenues:
Management fees from affiliates		924			2,929			3,940			5,809
Servicing fees		1,226			155			2,737			1,334
Other interest income		97			8			105			136
Total other revenues		2,247			3,092			6,782			7,279

Other expenses:
General and administrative		4,504			4,503			9,241			12,959
Depreciation and amortization		5			7			10			14
Total other expenses		4,509			4,510			9,251			12,973

Total other-than-temporary impairments of securities		(3,848	)		(4,000	)		(39,835	)		(18,646	)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		1,852			—			18,015			5,624
Impairment of goodwill		—			(2,235	)		—			(2,235	)
Impairment of real estate held-for-sale		—			(899	)		—			(2,233	)
Net impairments recognized in earnings		(1,996	)		(7,134	)		(21,820	)		(17,490	)

Provision for loan losses		(2,010	)		(7,730	)		(54,227	)		(66,493	)
Valuation allowance on loans held-for-sale		—			—			—			(10,363	)
Gain on extinguishment of debt		463			—			463			—
Income (loss) from equity investments		932			(445	)		1,302			(2,211	)
Income (loss) before income taxes		2,902			(6,396	)		(60,258	)		(79,949	)
Income tax provision (benefit)		—			—			293			(408	)
Net income (loss)	$	2,902		$	(6,396	)	$	(60,551	)	$	(79,541	)

Per share information:
Net income (loss) per share of common stock:
Basic	$	0.13		$	(0.29	)	$	(2.71	)	$	(3.56	)
Diluted	$	0.13		$	(0.29	)	$	(2.71	)	$	(3.56	)

Weighted average shares of common stock outstanding:
Basic		22,344,552			22,368,539			22,340,071			22,327,895
Diluted		22,667,326			22,368,539			22,340,071			22,327,895

See accompanying notes to consolidated financial statements.

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Index

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
For the Six Months Ended June 30, 2010 and 2009
(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, 2009				$	217	$	3	$	557,435	$	(41,009	)	$	(115,202	)	$	401,444


Net Loss	$	(79,541	)		—		—		—		—			(79,541	)		(79,541	)
Cumulative effect of change in accounting principle		—			—		—		—		(2,243	)		2,243			—
Unrealized gain on derivative financial instruments		14,151			—		—		—		14,151			—			14,151
Amortization of unrealized gains and losses on securities		(537	)		—		—		—		(537	)		—			(537	)
Amortization of deferred gains and losses on settlement of swaps		(47	)		—		—		—		(47	)		—			(47	)
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization		(5,490	)		—		—		—		(5,490	)		—			(5,490	)
Issuance of warrants in conjunction with debt restructuring		—			—		—		940		—			—			940
Restricted class A common stock earned		—			1		—		774		—			—			775
Deferred directors' compensation		—			—		—		262		—			—			262

Balance at June 30, 2009	$	(71,464	)	$	218	$	3	$	559,411	$	(35,175	)	$	(192,500	)	$	331,957

Balance at January 1, 2010				$	218	$	1	$	559,145	$	(39,135	)	$	(689,396	)	$	(169,167	)


Net loss	$	(60,551	)		—		—		—		—			(60,551	)		(60,551	)
Cumulative effect of change in accounting principle		—			—		—		—		3,800			(45,615	)		(41,815	)
Unrealized loss on derivative financial instruments		(5,994	)		—		—		—		(5,994	)		—			(5,994	)
Amortization of unrealized gains and losses on securities		(406	)		—		—		—		(406	)		—			(406	)
Amortization of deferred gains and losses on settlement of swaps		(50	)		—		—		—		(50	)		—			(50	)
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization		(15,800	)		—		—		—		(15,800	)		—			(15,800	)
Restricted class A common stock earned		—			1		—		19		—			—			20
Deferred directors' compensation		—			—		—		103		—			—			103

Balance at June 30, 2010	$	(82,801	)	$	219	$	1	$	559,267	$	(57,585	)	$	(795,562	)	$	(293,660	)

See accompanying notes to consolidated financial statements.

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Index

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2010 and 2009
(in thousands)
(unaudited)

	2010			2009
Cash flows from operating activities:
Net loss	$	(60,551	)	$	(79,541	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net impairments recognized in earnings		21,820			17,490
Provision for loan losses		54,227			66,493
Valuation allowance on loans held-for-sale		—			10,363
Gain on extinguishment of debt		(463	)		—
(Income) loss from equity investments		(1,302	)		2,211
Employee stock-based compensation		76			775
Depreciation and amortization		10			14
Amortization of premiums/discounts on loans and securities and deferred interest on loans		(1,347	)		(3,262	)
Amortization of deferred gains and losses on settlement of swaps		(50	)		(47	)
Amortization of deferred financing costs and premiums/discounts on debt obligations		3,711			2,801
Deferred interest on senior credit facility		1,977			948
Deferred directors' compensation		103			262
Changes in assets and liabilities, net:
Accrued interest receivable		312			1,263
Deferred income taxes		321			—
Prepaid expenses and other assets		576			2,081
Accounts payable and accrued expenses		810			(3,692	)
Net cash provided by operating activities		20,230			18,159

Cash flows from investing activities:
Principal collections and proceeds from securities		10,758			7,856
Add-on fundings under existing loan commitments		(886	)		(7,698	)
Principal collections of loans receivable		77,206			45,664
Proceeds from operation/disposition of real estate held-for-sale		—			564
Proceeds from disposition of loans		23,548			—
Contributions to unconsolidated subsidiaries		(1,528	)		(2,315	)
Net cash provided by investing activities		109,098			44,071

Cash flows from financing activities:
Decrease in restricted cash		—			18,666
Repayments under repurchase obligations		(21,883	)		(82,969	)
Repayments under senior credit facility		(2,500	)		(1,250	)
Repayment of securitized debt obligations		(106,404	)		(22,519	)
Payment of deferred financing costs		—			(7	)
Net cash used in financing activities		(130,787	)		(88,079	)

Net decrease in cash and cash equivalents		(1,459	)		(25,849	)
Cash and cash equivalents at beginning of period		27,954			45,382
Cash and cash equivalents at end of period	$	26,495		$	19,533

See accompanying notes to consolidated financial statements.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 1. Organization

References herein to “we,” “us” or “our” refer to Capital Trust, Inc., a Maryland corporation, 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 June 30, 2010, we have completed over $11.2 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.

Note 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, 2009. In our opinion, all material adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation, in accordance with GAAP, have been included. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2010.

Principles of Consolidation

The accompanying financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, in which we are the primary beneficiary, prepared in accordance with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary. Our consolidated VIEs generally include two categories of entities: (i) collateralized debt obligations sponsored and issued by us, which we refer to as CT CDOs, and (ii) other consolidated VIEs, which are also securitization vehicles but were not issued or sponsored by us.

As of June 30, 2010, our consolidated balance sheet includes an aggregate $3.7 billion of assets and $3.8 billion of liabilities related to 11 consolidated VIEs. Due to the non-recourse nature of these VIEs, and other factors, our net exposure to loss from investments in these entities is limited to $39.6 million. See Note 11 for additional information on our investments in VIEs.

Balance Sheet Presentation

As a result of the recent accounting pronouncements discussed below, we have adjusted the presentation of our consolidated balance sheet, in accordance with GAAP, to separately categorize (i) our assets and liabilities, and (ii) the assets and liabilities of consolidated VIEs. Assets of consolidated VIEs can generally only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us. We have aggregated all the assets and liabilities of our consolidated VIEs due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful. Similarly, the notes to our consolidated financial statements separately describe our assets and liabilities and those of our consolidated VIEs.

Equity Investments in Unconsolidated Subsidiaries

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 (i) these entities are not VIEs, and (ii) 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.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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 accrual 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, recovery of income and principal becomes doubtful. Income is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

Interest 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.

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, June 30, 2010 and December 31, 2009, 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.

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 described above. 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 is required to estimate their fair 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.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

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 is required to 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 is determined to be impaired, we 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.

In addition, for certain pools of smaller loans which have similar credit characteristics, primarily loans in our other consolidated VIEs, we have recorded a general provision for loan losses in lieu of the asset-specific provisions we record on all other loans. This general provision is based on macroeconomic data with respect to historic loan losses, vintage, property type, and other factors deemed relevant for such loan pools. These loans do not undergo the same level of asset management as our larger, direct investments.

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 our consolidated statements of operations.

Subsequent to our origination of these investments, revisions to GAAP presume that an initial transfer of a financial asset and a repurchase financing shall be evaluated as a linked transaction and not 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 was effective on a prospective basis, as of January 1, 2009, with earlier application prohibited. Accordingly, 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.

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Index

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 penalties.

Accounting for Stock-Based Compensation

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. 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.

The fair value of the performance vesting restricted common stock 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 ($82.8) million and ($71.5) million, for the six months ended June 30, 2010 and 2009, respectively. The primary components of comprehensive loss other than net income (loss) are the unrealized gains and losses on derivative financial instruments and the component of other-than-temporary impairments of securities related to the Valuation Adjustment.

There was a one-time $3.8 million adjustment to accumulated other comprehensive loss upon our adoption of new accounting guidance effective January 1, 2010. See below in this Note 2 the discussion under “Recent Accounting Pronouncements” for additional information. See also Note 12 for additional discussion of accumulated other comprehensive loss.

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. See also Note 12 for additional discussion of earnings per share.

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 June 30, 2010 presentation. Primarily, certain assets and liabilities of our consolidated VIEs have been presented separately on our consolidated balance sheet. See above in this Note 2 the discussion under “Balance Sheet Presentation” for additional information.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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 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, as well as our co-investments in investment management vehicles. 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 CT CDOs, and serves as senior servicer and special servicer for 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, 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, and therefore have not recorded any goodwill as of June 30, 2010.

Fair Value of Financial Instruments

The “Fair Value Measurements and Disclosures” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or 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 discussed in Note 16.

Recent Accounting Pronouncements

New accounting guidance which was effective as of January 1, 2010 changed the criteria for consolidation of VIEs and removed a preexisting consolidation exception for qualified special purpose entities, such as certain securitization vehicles. The amended guidance requires a qualitative, rather than quantitative assessment of when a VIE should be consolidated. Specifically, an entity would generally 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 right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.

As a result of the amended guidance, we have consolidated an additional seven VIEs beginning January 1, 2010, all of which are securitization vehicles not sponsored by us. We have consolidated these entities generally due to our ownership interests in subordinate classes of securities issued by the VIEs, which investments carry certain control provisions. Although our investments are generally passive in nature, by owning more than 50% of the controlling class of each VIE we do control special servicer naming rights, which we believe gives us the power to direct the most significant economic activities of these entities.

Upon consolidation of these seven VIEs, we recorded a one-time adjustment to shareholders’ equity of ($41.8) million on January 1, 2010. This reduction in equity is due to the difference between the net carrying value of our investment in the newly consolidated VIEs and the net assets, or equity, of those VIEs. This difference was primarily caused by asset impairments recorded at the VIEs which are in excess of our investment amount. Due to the fact that the liabilities of these VIEs are entirely non-recourse to us, this excess charge to equity, as well as similar charges on VIEs previously consolidated, will eventually be reversed when our interests in the VIEs are repaid, sold, or the VIEs are otherwise deconsolidated in the future.

In January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” or ASU 2010-06. ASU 2010-06 amends existing disclosure guidance related to fair value measurements. Specifically, ASU 2010-06 requires (i) details of significant asset or liability transfers in and out of Level 1 and Level 2 measurements within the fair value hierarchy, and (ii) inclusion of gross purchases, sales, issuances, and settlements within the rollforward of assets and liabilities valued using Level 3 inputs within the fair value hierarchy. In addition, ASU 2010-06 clarifies and increases existing disclosure requirements related to (i) the disaggregation of fair value disclosures, and (ii) the inputs used in arriving at fair values for assets and liabilities valued using Level 2 and Level 3 inputs within the fair value hierarchy. ASU 2010-06 is effective for the first interim or annual period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward, which is required for annual reporting periods beginning after December 15, 2010 and for interim periods within those years. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements. Additional disclosure, as applicable, is included in Note 16.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

In February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010. The adoption of ASU 2010-09 did not have a material impact on our consolidated financial statements.

Note 3. Securities Held-to-Maturity

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate only to our securities portfolio we own directly. See also Note 11 for comparable disclosures regarding our securities which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

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 six months ended June 30, 2010 was as follows (in thousands):

	CMBS			CDOs & Other		Total Book Value (1)

December 31, 2009		$2,081			$15,251		$17,332

Principal paydowns		(84	)		—		(84	)
Discount/premium amortization & other (2)		122			325		447
Other-than-temporary impairments:
Recognized in earnings		(227	)		—		(227	)
Recognized in accumulated other comprehensive income		227			—		227

June 30, 2010		$2,119			$15,576		$17,695


(1)	Includes securities with a total face value of $36.1 million and $105.2 million as of June 30, 2010 and December 31, 2009, respectively. Securities with an aggregate face value of $69.0 million, which had a net carrying value of zero as of December 31, 2009, have been eliminated in consolidation beginning January 1, 2010 as discussed in Note 2.
(2)	Includes mark-to-market adjustments on securities previously classified as available-for-sale, amortization of other-than-temporary impairments, and losses, if any.

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 June 30, 2010 and December 31, 2009, we had no securities classified as available-for-sale. Our securities’ book value of $17.7 million as of June 30, 2010 is comprised of (i) our amortized cost basis, as defined under GAAP, of $24.2 million (of which $5.9 million related to CMBS and $18.3 million related to CDOs and other securities), (ii) amounts related to mark-to-market adjustments on securities previously classified as available-for-sale of ($549,000) and (iii) the portion of other-than-temporary impairments not related to expected credit losses of ($6.0) million.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table details overall statistics for our securities portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010	December 31, 2009
Number of securities	7	9
Number of issues	5	6
Rating (1) (2)	CC	B-
Fixed / Floating (in millions) (3)	$17 / $1	$16 / $1
Coupon (1) (4)	9.60%	9.82%
Yield (1) (4)	7.57%	7.89%
Life (years) (1) (5)	4.3	2.8


(1)	Represents a weighted average as of June 30, 2010 and December 31, 2009, 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 unrated equity investments in CDOs with a net book value of $1.2 million as of both June 30, 2010 and December 31, 2009.
(3)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate securities.
(4)	Coupon is based on the securities’ contractual interest rates, while yield is based on expected cash flows for each security, and considers discounts/premiums and asset non-performance. Calculations for floating rate securities are based on LIBOR of 0.35% and 0.23% as of June 30, 2010 and December 31, 2009, 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.

The table below details the ratings and vintage distribution of our securities as of June 30, 2010 and December 31, 2009 (in thousands):

	Rating as of June 30, 2010			Rating as of December 31, 2009
Vintage	B	CCC and Below	Total	B	CCC and Below	Total
2003	$—	$14,557	$14,557	$13,488	$1,162	$14,650
2002	—	1,019	1,019	—	602	602
2000	—	871	871	—	879	879
1997	233	—	233	246	—	246
1996	—	1,015	1,015	—	955	955
Total	$233	$17,462	$17,695	$13,734	$3,598	$17,332

Other-than-temporary impairments

Quarterly, we reevaluate our securities portfolio to determine if there has been an other-than-temporary impairment based upon expected future cash flows from each securities investment. As a result of this evaluation, under the accounting guidance discussed in Note 2, during the six months ended June 30, 2010, we determined that no additional other-than-temporary impairments were necessary for our securities portfolio. However, we did determine that $227,000 of impairments previously recorded in other comprehensive income should be recognized as credit losses due to a decrease in cash flow expectations for one of our securities with a net book value of $976,000.

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, and (ii) current subordination levels at both the individual loans which serve as collateral under our securities and at the securities themselves.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The following table summarizes activity related to the other-than-temporary impairments of our securities during the six months ended June 30, 2010 (in thousands):

	Gross Other-Than-Temporary Impairments			Credit Related Other-Than-Temporary Impairments			Non-Credit Related Other-Than-Temporary Impairments

December 31, 2009		$85,838			$79,210			$6,628

Impact of change in accounting principle (1)		(68,989	)		(68,989	)		—
Additions due to change in expected cash flows		—			227			(227	)
Amortization of other-than-temporary impairments		(549	)		(122	)		(427	)

June 30, 2010		$16,300			$10,326			$5,974


(1)	Due to the consolidation of additional VIEs, as discussed in Note 2, other-than-temporary impairments which were previously recorded on our investment in these entities have been eliminated in consolidation beginning January 1, 2010.

Unrealized losses and fair value of securities

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 credit spreads and interest rates. 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 June 30, 2010 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		($0.9	)		$0.2		($0.9	)		$1.1

Fixed Rate		—		—		2.4		(12.0	)		2.4		(12.0	)		14.4

Total		$—		$—		$2.6		($12.9	)		$2.6		($12.9	)		$15.5


(1)	Excludes, as of June 30, 2010, $2.2 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 June 30, 2010, four securities with an aggregate carrying value of $15.5 million were carried at values in excess of their fair values. Fair value for these securities was $2.6 million as of June 30, 2010. In total, as of June 30, 2010, we had seven investments in securities with an aggregate carrying value of $17.7 million that have an estimated fair value of $6.0 million, including three investments in CMBS with an estimated fair value of $3.4 million and four investments in CDOs and other securities with an estimated fair value of $2.6 million. These valuations do not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments, if any.

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, 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		$—		$—		$0.2		($0.9	)		$0.2		($0.9	)		$1.1

Fixed Rate		—		—		3.8		(9.7	)		3.8		(9.7	)		13.5

Total		$—		$—		$4.0		($10.6	)		$4.0		($10.6	)		$14.6


(1)	Excludes, as of December 31, 2009, $2.7 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.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

As of December 31, 2009, three securities with an aggregate carrying value of $14.6 million were carried at values in excess of their fair values. Fair value for these securities was $4.0 million as of December 31, 2009. In total, as of December 31, 2009, we had nine investments in securities with an aggregate carrying value of $17.3 million that have an estimated fair value of $8.5 million, including three investments in CMBS with an estimated fair value of $3.9 million and six investments in CDOs and other securities with an estimated fair value of $4.7 million. These valuations do not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments, if any.

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 the differences between carrying value and fair value discussed above, our expectations of future cash flows have only changed adversely for four 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 June 30, 2010, 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, other than as described above, 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.

Investments in variable interest entities

Our securities portfolio includes investments in both CMBS and CDOs, which securitization structures are generally considered VIEs. We have not consolidated these VIEs due to our determination that, based on the structural provisions of each entity and the nature of our investments, we do not have the power to direct the activities that most significantly impact these entities' economic performance.

These securities were acquired through investment, and do not represent a securitization or other transfer of our assets. We are not named as special servicer on these investments, nor do we have the right to name special servicer.

We are not obligated to provide, nor have we provided, any financial support to these entities. As of June 30, 2010, our maximum exposure to loss as a result of our investment in these entities is $36.1 million, the principal amount of our securities portfolio. We have recorded other-than-temporary impairments of $16.3 million against this portfolio, resulting in a net exposure to loss of $19.8 million as of June 30, 2010.

Note 4. Loans Receivable, net

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate only to our loans receivable portfolio we own directly. See also Note 11 for comparable disclosures regarding our loans receivable which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Activity relating to our loans receivable for the six months ended June 30, 2010 was as follows (in thousands):

	Gross Book Value			Provision for Loan Losses			Net Book Value (1)

December 31, 2009		$1,126,697			($359,952	)		$766,745

Additional fundings (2)		1,071			—			1,071
Satisfactions (3)		(6,000	)		—			(6,000	)
Principal paydowns		(8,109	)		—			(8,109	)
Discount/premium amortization & other		378			—			378
Provision for loan losses (4)		—			(31,000	)		(31,000	)
Realized loan losses		(17,511	)		17,511			—
Reclassification to loans held-for-sale		(16,130	)		10,643			(5,487	)

June 30, 2010		$1,080,396			($362,798	)		$717,598


(1)	Includes loans with a total principal balance of $1.10 billion and $1.13 billion as of June 30, 2010 and December 31, 2009, respectively.
(2)	Additional fundings includes capitalized interest of $185,000.
(3)	Includes final maturities, full repayments, and sales.
(4)	Provision for loan losses is presented net of a $10.0 million recovery of provisions recorded in prior periods.

The following table details overall statistics for our loans receivable portfolio as of June 30, 2010 and December 31, 2009:

	June 30, 2010	December 31, 2009
Number of investments	33	35
Fixed / Floating (in millions) (1)	$53 / $665	$58 / $708
Coupon (2) (3)	3.81%	3.77%
Yield (2) (3)	3.89%	3.59%
Maturity (years) (2) (4)	1.9	2.2


(1)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate loans.
(2)	Represents a weighted average as of June 30, 2010 and December 31, 2009, respectively.
(3)	Calculations for floating rate loans are based on LIBOR of 0.35% and 0.23% as of June 30, 2010 and December 31, 2009, respectively.
(4)	Represents the final maturity of each investment assuming all extension options are executed.

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Index

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 June 30, 2010 and December 31, 2009 (in thousands):

	June 30, 2010					December 31, 2009
Asset Type	Book Value		Percentage			Book Value		Percentage
Senior mortgages		$300,829		42	%		$302,999		40	%
Mezzanine loans		204,173		28			209,980		27
Subordinate interests in mortgages		138,172		19			179,525		23
Other		74,424		11			74,241		10
Total		$717,598		100	%		$766,745		100	%

Property Type	Book Value		Percentage			Book Value		Percentage
Office		$333,050		46	%		$339,142		44	%
Hotel		166,750		23			176,557		23
Healthcare		112,992		16			113,900		15
Multifamily		18,115		3			23,657		3
Retail		14,226		2			14,219		2
Other		72,465		10			99,270		13
Total		$717,598		100	%		$766,745		100	%

Geographic Location	Book Value		Percentage			Book Value		Percentage
Northeast		$221,993		31	%		$222,303		29	%
Southeast		197,396		28			196,640		26
Southwest		96,357		13			97,384		13
West		67,274		9			76,751		10
Northwest		35,788		5			64,260		8
Midwest		18,713		3			18,827		2
International		44,644		6			54,800		7
Diversified		35,433		5			35,780		5
Total		$717,598		100	%		$766,745		100	%

Quarterly, management evaluates our loan portfolio for impairment as described in Note 2. As of June 30, 2010, we identified nine loans with an aggregate gross book value of $460.7 million for impairment, against which we have recorded a $362.8 million provision, and which are carried at an aggregate net book value of $97.9 million. These include five loans with an aggregate gross carrying value of $358.9 million which are current in their interest payments, against which we have recorded a $295.4 million provision, as well as four loans which are delinquent on contractual payments with an aggregate gross carrying value of $101.8 million, against which we have recorded a $67.4 million provision.

Our average balance of impaired loans was $76.2 million during the six months ended June 30, 2010. Subsequent to their impairment, we recorded interest on these loans of $6.0 million during the first six months of 2010. Our average balance of impaired loans was $18.0 million during the six months ended June 30, 2009. Subsequent to their impairment, we recorded interest on these loans of $185,000 during the first six months of 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 June 30, 2010, our two Unfunded Loan Commitments totaled $1.5 million, which will generally only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral, or to reimburse costs associated with leasing activity.

Note 5. Loans Held-for-Sale, Net

During the second quarter of 2010, we reclassified a $16.1 million mezzanine loan to loans held-for-sale, against which we have previously recorded a provision for loan losses of $10.6 million. This loan had a net book value of $5.5 million as of June 30, 2010, which amount approximates fair value. The loan has a fixed coupon of 8.55%; however it is in maturity default and is not currently paying interest. See also Note 11 for disclosures regarding loans held-for-sale which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 6. Real Estate Held-for-Sale

We do not have any real estate held-for-sale as of June 30, 2010. During the six months ended June 30, 2009, we recorded a $2.2 million impairment against an investment which was sold in July 2009. See also Note 11 for disclosures regarding real estate held-for-sale which are held in consolidated VIEs, as separately stated on our consolidated balance sheets.

Note 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 June 30, 2010, 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 June 30, 2010, $16.3 million of our $25.0 million capital commitment to CTOPI remains unfunded.

Activity relating to our equity investments in unconsolidated subsidiaries for the six months ended June 30, 2010 was as follows (in thousands):

	Fund III			CTOPI		Other			Total

December 31, 2009		$158			$2,175		$18			$2,351
Contributions		—			1,528		—			1,528
(Loss) income from equity investments		(33	)		1,338		(3	)		1,302
June 30, 2010		$125			$5,041		$15			$5,181

In accordance with the respective 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 June 30, 2010, our maximum exposure to loss from Fund III and CTOPI was $6.2 million and $8.7 million, respectively.

Note 8. Debt Obligations

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate to the debt obligations of Capital Trust, Inc. and its wholly-owned subsidiaries only. See also Note 11 for comparable disclosures regarding the debt obligations of our consolidated VIEs, which are non-recourse to us, as separately stated on our consolidated balance sheets.

- 16 -

Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

As of June 30, 2010 and December 31, 2009, we had $657.3 million and $677.4 million 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):

	June 30, 2010		December 31, 2009	June 30, 2010
Recourse Debt Obligations	Principal Balance	Book Balance	Book Balance	Coupon(1)	All-In Cost(1)		Maturity Date(2)

Repurchase obligations
JPMorgan	$247,795	$247,600	$258,203	1.87%	1.92%		March 15, 2011
Morgan Stanley	137,796	137,693	148,170	2.21%	2.21%		March 15, 2011
Citigroup	43,231	43,196	43,764	1.69%	1.69%		March 15, 2011
Total repurchase obligations	428,822	428,489	450,137	1.96%	1.99%		March 15, 2011

Senior credit facility	98,665	98,665	99,188	3.35%	7.20%		March 15, 2011

Junior subordinated notes (3)	143,753	130,112	128,077	1.00%	4.28%		April 30, 2036

Total/Weighted Average	$671,240	$657,266	$677,402	1.96%	3.23%	(4)	March 4, 2016


(1)	Represents a weighted average for each respective facility, assuming LIBOR of 0.35% at June 30, 2010 for floating rate debt obligations.
(2)	Maturity dates for our repurchase obligations with JPMorgan, Morgan Stanley and Citigroup, and our senior credit facility, do not give effect to the potential one year extension, to March 15, 2012, which is at our lenders’ discretion.
(3)	The coupon for 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.
(4)	Including the impact of interest rate hedges with an aggregate notional balance of $64.2 million as of June 30, 2010, the effective all-in cost of our debt obligations would be 3.70% per annum.

Repurchase Obligations

On March 16, 2009, we amended and restructured our repurchase obligations 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.

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 amended the terms of each such facility, without any change to the collateral pool securing the debt owed to each repurchase 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 was exercised by us in March 2010, as a result of a successful twenty percent reduction in the amount owed each repurchase lender from the amount outstanding as of the March 16, 2009 amendment. The second one-year extension option is exercisable by each repurchase lender in its sole discretion. Currently, maturity dates for our repurchase agreements have been extended to March 15, 2011.

We agreed to pay each repurchase lender periodic amortization as follows: (i) mandatory payments, payable monthly in arrears, in an amount equal to sixty-five (65%) of the net interest income generated by each such lender’s collateral pool (this amount did not change during the first one-year extension period), 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 generally equal to 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 repurchase facility balance and the denominator is the total outstanding indebtedness of our repurchase lenders.

We further agreed to amortize each repurchase lender’s secured debt at the end of each calendar quarter on a pro rata basis until we have repaid our repurchase 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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Each repurchase 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 provided we apply one hundred percent (100%) of the proceeds to pay down the related repurchase 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 repurchase facilities. Under the revised 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, each collateral pool may be valued monthly. If a repurchase lender determines that the ratio of their total outstanding 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 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 repurchase lenders, the administrative agent under the senior credit facility and a representative 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 $5.0 million;

trigger an event of default if our current chief executive officer ceases his employment with us during the term of the agreement and we fail to hire a replacement 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.

On March 16, 2009, in connection with the restructuring discussed above, 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.

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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 repurchase facilities as of June 30, 2010, 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 repurchase facility.

		Loans and Securities Collateral Balances, as of June 30, 2010
Repurchase Lender	Facility Balance	Principal Balance	Carrying Value	Fair Market Value (1)	Amount at Risk (2)
JPMorgan	$247,795	$493,550	$369,008	$298,478	$127,727
Morgan Stanley (3)	137,796	367,044	243,555	142,885	36,771
Citigroup	43,231	77,648	76,074	55,762	32,842
	$428,822	$938,242	$688,637	$497,125	$197,340


(1)	Fair values represent the amount at which assets could be sold in an orderly transaction between a willing buyer and willing seller. The immediate liquidation value of these assets would likely be substantially lower.
(2)	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.
(3)	Amounts other than principal exclude certain subordinate interests in our CDOs which have been pledged as collateral to Morgan Stanley. These interests have been eliminated in consolidation and therefore have a carrying value of zero on our balance sheet.

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 our repurchase facilities (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 then unencumbered collateralized debt obligation interests;

pledge our unencumbered CDO 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 our repurchase facilities.

As of June 30, 2010, we had $98.7 million outstanding under our senior credit facility at a cash cost of LIBOR plus 3.00% per annum. Since we amended and restated our senior credit agreement on March 16, 2009, we have made amortization payments of $6.3 million, and $5.0 million of accrued interest was added to the outstanding balance.

Junior Subordinated Notes

The most subordinate component of our debt obligations are our junior subordinated notes. As of June 30, 2010, these notes had a principal balance of $143.8 million ($130.1 million book balance) at a cash cost of 1.00% per annum.

Pursuant to exchange agreements dated March 16, 2009 and May 14, 2009, we issued a $143.8 million aggregate principal amount of junior subordinated notes which mature on April 30, 2036 and are freely redeemable by us at par at any time. The interest rate payable under the subordinated notes is 1% per annum from the date of issuance through and including April 29, 2012, 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 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.

Note 9. Participations Sold

Participations sold represent interests in certain loans that we originated and subsequently sold to one of our investment management vehicles, CT Large Loan 2006, Inc., and third parties. We present these sold interests as both assets and non-recourse liabilities on the basis that these arrangements do not qualify as sales under GAAP. We have no economic exposure to these liabilities in excess of the value of the assets sold. As of June 30, 2010, we had five such participations sold with a total gross carrying value of $288.4 million.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense in the consolidated statements of operations. Generally, participations sold are recorded as assets and liabilities in equal amounts on our consolidated balance sheets. During 2009, we recorded $172.5 million of provisions for loan losses against certain of our participations sold assets, resulting in a net book value of $116.0 million as of June 30, 2010. The associated liabilities have not been adjusted as of June 30, 2010, because we are prohibited by GAAP from reducing their carrying value until the loan assets are contractually extinguished.

The following table describes our participations sold assets and liabilities as of June 30, 2010 and December 31, 2009 (in thousands):

	June 30,			December 31,
	2010			2009
Participations sold assets
Gross carrying value		$288,447			$289,144
Less: Provision for loan losses		(172,465	)		(172,465	)
Net book value of assets		$115,982			$116,679

Participations sold liabilities
Net book value of liabilities		$288,447			$289,144
Net impact to shareholders' equity		($172,465	)		($172,465	)

Note 10. 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 we settle monthly, and record 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.

As described in Note 2, our consolidated balance sheets separately state our assets and liabilities and certain assets and liabilities of our consolidated VIEs. The following disclosures relate only to the interest rate hedge liabilities of Capital Trust, Inc. and its wholly-owned subsidiaries. See also Note 11 for comparable disclosures regarding the interest rate hedge liabilities of our consolidated VIEs, which are non-recourse to us, as separately stated on our consolidated balance sheets.

The following table summarizes the notional and fair values of our interest rate swaps as of June 30, 2010 and December 31, 2009. 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	June 30, 2010 Notional Amount	Interest Rate (1)	Maturity	June 30, 2010 Fair Value	December 31, 2009 Fair Value
Cash Flow Hedge	JPMorgan Chase	$17,846	5.14%	2014	($1,192)	($1,182)
Cash Flow Hedge	JPMorgan Chase	16,894	4.83%	2014	(1,049)	(966)
Cash Flow Hedge	JPMorgan Chase	16,377	5.52%	2018	(1,292)	(1,239)
Cash Flow Hedge	JPMorgan Chase	7,062	5.11%	2016	(490)	(440)
Cash Flow Hedge	JPMorgan Chase	3,231	5.45%	2015	(243)	(237)
Cash Flow Hedge	JPMorgan Chase	2,818	5.08%	2011	(78)	(120)
Total/Weighted Average		$64,228	5.16%	2015	($4,344)	($4,184)


(1)	Represents the gross fixed interest rate we pay to our counterparties under these derivative instruments. We receive an amount of interest indexed to one-month LIBOR on all of our interest rate swaps as of June 30, 2010 and December 31, 2009.

As of both June 30, 2010 and December 31, 2009, all of our derivative financial instruments were recorded at fair value as interest rate hedge liabilities on our consolidated balance sheet. During the six months ended June 30, 2010, we did not enter into any new derivative financial instrument contracts.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

The table below shows amounts recorded to other comprehensive income and amounts recorded to interest expense from other comprehensive income for the six months ended June 30, 2010 and 2009 (in thousands):

	Amount of gain (loss) recognized		Amount of loss reclassified from OCI
	in OCI for the six months ended		to income for the six months ended (1)

Hedge	June 30, 2010	June 30, 2009	June 30, 2010	June 30, 2009

Interest rate swaps	($160)	$4,440	($1,489)	($1,732)


(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. Over the next twelve months we expect approximately $2.8 million to be reclassified from other comprehensive income to interest expense, which amount is generally the present value of expected payments under the respective derivative contracts.

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 June 30, 2010, derivatives related to these agreements were in a net liability position of $9.8 million based on their contractual terms, which amount excludes certain adjustments made in arriving at fair value in accordance with GAAP. If we breach any of these provisions, we could be required to settle our obligations under the agreements at their termination value. As of June 30, 2010, we were not in default under any of our debt obligations and have not posted any assets as collateral under our derivative agreements.

On October 10, 2008, we terminated an interest rate swap with a notional amount of $18.0 million as a result of our counterparty filing for bankruptcy. In the second quarter of 2010, we paid our former counterparty $246,000 to settle a claim concerning the termination of this interest rate swap, which is included as a component of interest expense on our consolidated statement of operations.

Note 11. Consolidated Variable Interest Entities

As of June 30, 2010, our consolidated balance sheet includes an aggregate $3.7 billion of assets and $3.8 billion of liabilities related to 11 consolidated variable interest entities, or VIEs. Due to the non-recourse nature of these VIEs, and other factors discussed below, our net exposure to loss from investments in these entities is limited to $39.6 million.

Our consolidated VIEs generally include two categories of entities: (i) collateralized debt obligations sponsored and issued by us, which we refer to as CT CDOs, and (ii) other consolidated VIEs, which are also securitization vehicles but were not issued or sponsored by us. We have historically consolidated the CT CDOs; however we began consolidating the additional VIEs as of January 1, 2010, as discussed in Note 2.

CT CDOs

We currently consolidate four collateralized debt obligation, or CDO, trusts, which are VIEs that were sponsored by us. These CT CDO trusts invest in commercial real estate debt instruments, some of which we originated/acquired and transferred to the trust entities, and are financed by the debt and equity they issue. We are named as collateral manager of all four CT CDO trusts and are named special servicer on a number of CDO collateral assets. As a result of consolidation, our subordinate debt and equity ownership interests in these CT CDO trusts have been eliminated, and our balance sheet reflects both the assets held and debt issued by these CDO trusts to third parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of the CT CDO entities, as opposed to our net economic interests in these entities. Fees earned by us for the management of these CDO trusts are eliminated in consolidation.

Our interest in the assets held by these CT CDO trusts, which are consolidated on our balance sheet, is restricted by the structural provisions of these entities, and our recovery of these assets will be limited by the CDO trusts’ distribution provisions, which are subject to change due to covenant breaches or asset impairments, as further described below in this Note 11. The liabilities of the CT CDO trusts, which are also consolidated on our balance sheet, are non-recourse to us, and can generally only be satisfied from each CDO trust’s respective asset pool.

We are not obligated to provide, nor have we provided, any financial support to these CT CDO trusts. Accordingly, as of June 30, 2010, our maximum exposure to loss as a result of our investment in these entities is limited to $234.0 million, the notional amount of the subordinate debt and equity interest we retained in these CDO trusts. After giving effect to certain transfers of these interests, provisions for loan losses and other-than-temporary impairments recorded as of June 30, 2010, our remaining net exposure to loss from these entities is $39.6 million.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

Other Consolidated VIEs

As discussed above, we currently consolidate seven additional VIEs, all of which are securitization vehicles substantially similar to the CT CDOs. These VIEs invest in commercial real estate debt instruments, which investments were not originated or transferred to the VIEs by us. In addition to our investment in the subordinate classes of the securities issued by these VIEs, we are named special servicer on a number of the VIEs’ assets. As a result of consolidation, our ownership interests in these VIEs have been eliminated, and our balance sheet reflects both the assets held and debt issued by these VIEs to third parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of the VIEs, as opposed to our net economic interests in these entities. Special servicing fees paid to us on assets owned by these VIEs are eliminated in consolidation.

Our interest in the assets held by these VIEs, which are consolidated on our balance sheet, is restricted by the structural provisions of these entities, and a recovery of our investment in the VIEs will be limited by each entity’s distribution provisions. The liabilities of the VIEs, which are also consolidated on our balance sheet, are non-recourse to us, and can generally only be satisfied from each VIE’s respective asset pool.

We are not obligated to provide, nor have we provided, any financial support to these VIEs. In addition, five of these seven investments have been made through our CT CDOs, which limits our exposure to loss as discussed above. Accordingly, as of June 30, 2010, our maximum exposure to loss as a result of our investment in these entities is limited to $69.0 million, the notional amount of our investment in the two VIEs not held by our CT CDOs. Prior to consolidation, we have previously impaired 100% of our investment in these entities, resulting in a zero net exposure to loss as of June 30, 2010.

A. Securities Held-to-Maturity – Consolidated VIEs

Our consolidated VIEs’ securities portfolio consists of CMBS, CDOs, and other securities. Activity relating to these securities for the six months ended June 30, 2010 was as follows (in thousands):

CMBS