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, 2011
OR
|
o
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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)
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Maryland
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94-6181186
|
|
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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| |
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410 Park Avenue, 14th Floor, New York, NY
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10022
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(Address of principal executive offices)
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(Zip Code)
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| |
|
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(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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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|
Smaller Reporting Company ý
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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 May 5, 2011 was 22,244,273.
INDEX
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Part I.
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Financial Information
|
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| |
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|
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| |
Item 1:
|
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1
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1
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3
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4
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5
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6
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Item 2:
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57
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Item 3:
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74
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Item 4:
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76
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Part II.
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Other Information
|
|
| |
|
|
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| |
Item 1:
|
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77
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| |
|
|
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| |
Item 1A:
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Item 2:
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Item 3:
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Item 4:
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Item 5:
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Item 6:
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PART I. FINANCIAL INFORMATION
|
ITEM 1.
|
Financial Statements
|
|
Capital Trust, Inc. and Subsidiaries
|
|
|
Consolidated Balance Sheets
|
|
|
March 31, 2011 and December 31, 2010
|
|
|
(in thousands, except per share data)
|
|
| |
|
|
|
|
|
|
| |
|
March 31,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$27,779 |
|
|
|
$24,449 |
|
|
Securities held-to-maturity
|
|
|
— |
|
|
|
3,455 |
|
|
Loans receivable, net
|
|
|
86,570 |
|
|
|
606,318 |
|
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Loans held-for-sale, net
|
|
|
— |
|
|
|
5,750 |
|
|
Equity investments in unconsolidated subsidiaries
|
|
|
9,519 |
|
|
|
8,932 |
|
|
Accrued interest receivable
|
|
|
— |
|
|
|
2,392 |
|
|
Deferred income taxes
|
|
|
658 |
|
|
|
658 |
|
|
Prepaid expenses and other assets
|
|
|
2,263 |
|
|
|
9,952 |
|
|
Subtotal
|
|
|
126,789 |
|
|
|
661,906 |
|
| |
|
|
|
|
|
|
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|
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Assets of Consolidated Variable Interest Entities ("VIEs")
|
|
|
|
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|
|
|
|
| |
|
|
|
|
|
|
|
|
|
CT Legacy REIT, Excluding Securitization Vehicles
|
|
|
|
|
|
|
|
|
|
|
|
|
4,213 |
|
|
|
— |
|
|
Securities held-to-maturity
|
|
|
3,577 |
|
|
|
— |
|
|
Loans receivable, net
|
|
|
495,412 |
|
|
|
— |
|
|
Accrued interest receivable and other assets
|
|
|
10,149 |
|
|
|
— |
|
|
Subtotal
|
|
|
513,351 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Securitization Vehicles
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
|
490,242 |
|
|
|
504,323 |
|
|
Loans receivable, net
|
|
|
2,739,898 |
|
|
|
2,891,379 |
|
|
Real estate held-for-sale
|
|
|
8,055 |
|
|
|
8,055 |
|
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Accrued interest receivable and other assets
|
|
|
12,785 |
|
|
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55,027 |
|
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Subtotal
|
|
|
3,250,980 |
|
|
|
3,458,784 |
|
| |
|
|
|
|
|
|
|
|
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Total assets
|
|
|
$3,891,120 |
|
|
|
$4,120,690 |
|
See accompanying notes to consolidated financial statements.
|
Capital Trust, Inc. and Subsidiaries
|
|
|
Consolidated Balance Sheets
|
|
|
March 31, 2011 and December 31, 2010
|
|
|
(in thousands, except per share data)
|
|
| |
|
|
|
|
|
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March 31,
|
|
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December 31,
|
|
| |
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2011
|
|
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2010
|
|
| |
|
(unaudited)
|
|
|
|
|
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Liabilities & Shareholders' Deficit
|
|
|
|
|
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| |
|
|
|
|
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Liabilities:
|
|
|
|
|
|
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Accounts payable and accrued expenses
|
|
|
$5,727 |
|
|
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$6,726 |
|
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Repurchase obligations
|
|
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— |
|
|
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372,582 |
|
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Senior credit facility
|
|
|
— |
|
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98,124 |
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Junior subordinated notes
|
|
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— |
|
|
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132,190 |
|
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Secured notes
|
|
|
7,778 |
|
|
|
— |
|
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Participations sold
|
|
|
86,570 |
|
|
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259,304 |
|
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Interest rate hedge liabilities
|
|
|
— |
|
|
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8,451 |
|
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Subtotal
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100,075 |
|
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877,377 |
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| |
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|
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|
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Non-Recourse Liabilities of Consolidated VIEs
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|
|
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|
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|
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|
|
|
|
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CT Legacy REIT, Excluding Securitization Vehicles
|
|
|
|
|
|
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Accounts payable and accrued expenses
|
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|
65 |
|
|
|
— |
|
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Repurchase obligations
|
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|
304,750 |
|
|
|
— |
|
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Mezzanine loan, net of unamortized discount
|
|
|
67,236 |
|
|
|
— |
|
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Participations sold
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|
97,465 |
|
|
|
— |
|
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Interest rate hedge liabilities
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|
|
7,518 |
|
|
|
— |
|
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Subtotal
|
|
|
477,034 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Securitization Vehicles
|
|
|
|
|
|
|
|
|
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Accounts payable and accrued expenses
|
|
|
3,550 |
|
|
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3,809 |
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Securitized debt obligations
|
|
|
3,408,944 |
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3,621,229 |
|
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Interest rate hedge liabilities
|
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25,851 |
|
|
|
29,462 |
|
|
Subtotal
|
|
|
3,438,345 |
|
|
|
3,654,500 |
|
| |
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
4,015,454 |
|
|
|
4,531,877 |
|
| |
|
|
|
|
|
|
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Commitments and contingencies
|
|
|
— |
|
|
|
— |
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| |
|
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|
|
|
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Equity:
|
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|
|
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|
|
|
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Class A common stock, $0.01 par value, 100,000 shares authorized, 21,925 and 21,917 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively ("class A common stock")
|
|
|
219 |
|
|
|
219 |
|
|
Restricted class A common stock, $0.01 par value, 319 and 33 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively ("restricted class A common stock" and together with class A common stock, "common stock")
|
|
|
3 |
|
|
|
— |
|
|
Additional paid-in capital
|
|
|
596,826 |
|
|
|
559,411 |
|
|
Accumulated other comprehensive loss
|
|
|
(42,321 |
) |
|
|
(50,462 |
) |
|
Accumulated deficit
|
|
|
(665,770 |
) |
|
|
(920,355 |
) |
|
Total Capital Trust, Inc. shareholders' deficit
|
|
|
(111,043 |
) |
|
|
(411,187 |
) |
| |
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
(13,291 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' deficit
|
|
|
$3,891,120 |
|
|
|
$4,120,690 |
|
See accompanying notes to consolidated financial statements.
Capital Trust, Inc. and Subsidiaries
|
|
|
Consolidated Statements of Operations
|
|
|
Three Months Ended March 31, 2011 and 2010
|
|
|
(in thousands, except share and per share data)
|
|
|
(unaudited)
|
|
| |
|
Three Months Ended
|
|
| |
|
March 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Income from loans and other investments:
|
|
|
|
|
|
|
|
Interest and related income
|
|
|
$36,991 |
|
|
|
$39,978 |
|
|
Less: Interest and related expenses
|
|
|
26,247 |
|
|
|
31,252 |
|
|
Income from loans and other investments, net
|
|
|
10,744 |
|
|
|
8,726 |
|
| |
|
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
Management fees from affiliates
|
|
|
1,580 |
|
|
|
3,016 |
|
|
Servicing fees
|
|
|
310 |
|
|
|
1,511 |
|
|
Total other revenues
|
|
|
1,890 |
|
|
|
4,527 |
|
| |
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
10,280 |
|
|
|
4,742 |
|
|
Total other expenses
|
|
|
10,280 |
|
|
|
4,742 |
|
| |
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments of securities
|
|
|
(4,933 |
) |
|
|
(35,987 |
) |
|
Portion of other-than-temporary impairments of securities
recognized in other comprehensive income
|
|
|
(3,271 |
) |
|
|
16,164 |
|
|
Net impairments recognized in earnings
|
|
|
(8,204 |
) |
|
|
(19,823 |
) |
| |
|
|
|
|
|
|
|
|
|
Recovery of (provision for) loan losses
|
|
|
9,161 |
|
|
|
(52,217 |
) |
|
Gain on extinguishment of debt
|
|
|
250,040 |
|
|
|
— |
|
|
Income from equity investments
|
|
|
955 |
|
|
|
370 |
|
|
Income (loss) before income taxes
|
|
|
254,306 |
|
|
|
(63,159 |
) |
|
Income tax provision
|
|
|
389 |
|
|
|
293 |
|
|
Net income (loss)
|
|
|
$253,917 |
|
|
|
($63,452 |
) |
| |
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to noncontrolling interests
|
|
|
668 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Capital Trust, Inc.
|
|
|
$254,585 |
|
|
|
($63,452 |
) |
| |
|
|
|
|
|
|
|
|
|
Per share information:
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$11.35 |
|
|
|
($2.84 |
) |
|
Diluted
|
|
|
$11.04 |
|
|
|
($2.84 |
) |
| |
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,435,551 |
|
|
|
22,335,540 |
|
|
Diluted
|
|
|
23,068,385 |
|
|
|
22,335,540 |
|
See accompanying notes to consolidated financial statements.
Capital Trust, Inc. and Subsidiaries
|
|
|
Consolidated Statements of Changes in Shareholders' Deficit
|
|
|
For the Three Months Ended March 31, 2011 and 2010
|
|
|
(in thousands)
|
|
|
(unaudited)
|
|
| |
|
| |
|
Comprehensive (Loss) Income
|
|
|
|
Class A Common Stock
|
|
|
Restricted Class A Common Stock
|
|
|
Additional Paid-In Capital
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
Noncontrolling Interests
|
|
|
Accumulated Deficit
|
|
|
Total
|
|
|
Balance at January 1, 2010
|
|
|
|
|
|
|
$218 |
|
|
|
$1 |
|
|
|
$559,145 |
|
|
|
($39,135 |
) |
|
|
$— |
|
|
|
($689,396 |
) |
|
|
($169,167 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
($63,452 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(63,452 |
) |
|
|
(63,452 |
) |
|
Cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,800 |
|
|
|
— |
|
|
|
(45,615 |
) |
|
|
(41,815 |
) |
|
Unrealized loss on derivative financial instruments
|
|
|
(1,695 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,695 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,695 |
) |
|
Amortization of unrealized gains and losses on securities
|
|
|
(175 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(175 |
) |
|
|
— |
|
|
|
— |
|
|
|
(175 |
) |
|
Amortization of deferred gains and losses on settlement of swaps
|
|
|
(25 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
|
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization
|
|
|
(14,355 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,355 |
) |
|
|
— |
|
|
|
— |
|
|
|
(14,355 |
) |
|
Restricted class A common stock earned
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
Deferred directors' compensation
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
56 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
56 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
($79,702 |
) |
|
|
|
$218 |
|
|
|
$1 |
|
|
|
$559,195 |
|
|
|
($51,585 |
) |
|
|
$— |
|
|
|
($798,463 |
) |
|
|
($290,634 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
|
|
|
|
|
|
$219 |
|
|
|
$— |
|
|
|
$559,411 |
|
|
|
($50,462 |
) |
|
|
$— |
|
|
|
($920,355 |
) |
|
|
($411,187 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Capital Trust, Inc.
|
|
|
$254,585 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
254,585 |
|
|
|
254,585 |
|
|
Net loss attributable to noncontrolling interests
|
|
|
(668 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(668 |
) |
|
|
— |
|
|
|
(668 |
) |
Allocation to noncontrolling interests
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
37,156 |
|
|
|
— |
|
|
|
(12,623 |
) |
|
|
— |
|
|
|
24,533 |
|
|
Unrealized gain on derivative financial instruments
|
|
|
4,544 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,544 |
|
|
|
— |
|
|
|
— |
|
|
|
4,544 |
|
|
Amortization of unrealized gains and losses on securities
|
|
|
(229 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(229 |
) |
|
|
— |
|
|
|
— |
|
|
|
(229 |
) |
|
Amortization of deferred gains and losses on settlement of swaps
|
|
|
(24 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization
|
|
|
3,850 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,850 |
|
|
|
— |
|
|
|
— |
|
|
|
3,850 |
|
|
Restricted class A common stock earned
|
|
|
— |
|
|
|
|
— |
|
|
|
3 |
|
|
|
212 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
215 |
|
|
Deferred directors' compensation
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
|
$262,058 |
|
|
|
|
$219 |
|
|
|
$3 |
|
|
|
$596,826 |
|
|
|
($42,321 |
) |
|
|
($13,291 |
) |
|
|
($665,770 |
) |
|
|
($124,334 |
) |
See accompanying notes to consolidated financial statements.
Capital Trust, Inc. and Subsidiaries
|
|
|
Consolidated Statements of Cash Flows
|
|
|
For the Three Months Ended March 31, 2011 and 2010
|
|
|
(in thousands)
|
|
|
(unaudited)
|
|
| |
|
2011
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$253,917 |
|
|
($63,452 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
Net impairments recognized in earnings
|
|
8,204 |
|
|
19,823 |
|
|
(Recovery of) provision for loan losses
|
|
(9,161 |
) |
|
52,217 |
|
|
Gain on extinguishment of debt
|
|
(250,040 |
) |
|
— |
|
|
Income from equity investments
|
|
(955 |
) |
|
(370 |
) |
|
Employee stock-based compensation
|
|
223 |
|
|
46 |
|
|
Incentive awards plan expense
|
|
2,579 |
|
|
— |
|
|
Deferred directors' compensation
|
|
47 |
|
|
56 |
|
|
Amortization of premiums/discounts on loans and securities and deferred interest on loans
|
|
619 |
|
|
(754 |
) |
|
Amortization of deferred gains and losses on settlement of swaps
|
|
(24 |
) |
|
(25 |
) |
|
Amortization of deferred financing costs and premiums/discounts on
|
|
|
debt obligations
|
|
2,360 |
|
|
2,781 |
|
|
Changes in assets and liabilities, net:
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
685 |
|
|
(388 |
) |
|
Deferred income taxes
|
|
— |
|
|
321 |
|
|
Prepaid expenses and other assets
|
|
(800 |
) |
|
306 |
|
|
Accounts payable and accrued expenses
|
|
(3,784 |
) |
|
(2,565 |
) |
|
Net cash provided by operating activities
|
|
3,870 |
|
|
7,996 |
|
| |
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Principal collections and proceeds from securities
|
|
8,372 |
|
|
3,120 |
|
|
Add-on fundings under existing loan commitments
|
|
— |
|
|
(185 |
) |
|
Principal collections of loans receivable
|
|
224,625 |
|
|
24,155 |
|
|
Proceeds from disposition of loans held-for-sale
|
|
5,750 |
|
|
17,548 |
|
|
Contributions to unconsolidated subsidiaries
|
|
(231 |
) |
|
— |
|
|
Distributions from unconsolidated subsidiaries
|
|
599 |
|
|
— |
|
|
Increase in restricted cash
|
|
(4,213 |
) |
|
— |
|
|
Net cash provided by investing activities
|
|
234,902 |
|
|
44,638 |
|
| |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Repayments under repurchase obligations
|
|
(67,929 |
) |
|
(5,529 |
) |
|
Repayments under senior credit facility
|
|
(22,932 |
) |
|
(1,250 |
) |
|
Repayment of junior subordinated notes
|
|
(4,640 |
) |
|
— |
|
|
Borrowing under mezzanine loan
|
|
83,000 |
|
|
— |
|
|
Repayment of securitized debt obligations
|
|
(211,823 |
) |
|
(47,805 |
) |
|
Payment of financing expenses
|
|
(11,118 |
) |
|
— |
|
|
Net cash used in financing activities
|
|
(235,442 |
) |
|
(54,584 |
) |
| |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
3,330 |
|
|
(1,950 |
) |
|
Cash and cash equivalents at beginning of period
|
|
24,449 |
|
|
27,954 |
|
|
Cash and cash equivalents at end of period
|
|
$27,779 |
|
|
$26,004 |
|
See accompanying notes to consolidated financial statements.
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. 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, 2011, we have completed over $11.6 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. We are traded on the New York Stock Exchange, or NYSE, under the symbol “CT”, and are headquartered in New York City.
March 2011 Restructuring
On March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which we refer to as our March 2011 restructuring. Our March 2011 restructuring involved: (i) the contribution of certain of our legacy assets to a newly formed subsidiary, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, (ii) the assumption of our legacy repurchase obligations by CT Legacy REIT, and (iii) the extinguishment of the remainder of our recourse obligations, our senior credit facility and junior subordinated notes. The restructuring was financed with a new $83.0 million mezzanine loan obtained from an affiliate of Five Mile Capital Partners LLC, or Five Mile, by CT Legacy REIT, and the issuance of equity interests in CT Legacy REIT to our former junior subordinated noteholders and former lenders under our senior credit facility, as well as to an affiliate of Five Mile.
Capital Trust, Inc.
Following the completion of our March 2011 restructuring, we no longer have any recourse debt obligations, and retain unencumbered ownership of 100% of (i) our investment management platform, CT Investment Management Co., LLC, (ii) our co-investment in CT Opportunity Partners I, LP, (iii) our residual ownership interests in CT CDOs I, II, and IV, and (iv) our tax-basis net operating losses. Furthermore, we have a 52% equity interest in CT Legacy REIT. Our economic interest in CT Legacy REIT is, however, subject to (i) the secured notes, (ii) incentive awards that provide for the participation in our retained equity interests in CT Legacy REIT, and (iii) the subordinate class B common stock of CT Legacy REIT owned by our former junior subordinate noteholders. See below for further discussion of the secured notes, management incentive plan, and class B common stock.
In addition to our interest in the common stock of CT Legacy REIT, we also own 100% of its class A preferred stock. The class A preferred stock initially entitles us to cumulative preferred dividends of $7.5 million per annum, which dividends will be reduced in 2013 as the CT Legacy REIT portfolio assets repay or are sold.
CT Legacy REIT
In connection with the restructuring, we transferred substantially all of our directly held interest earning assets to CT Legacy REIT. The transferred assets included: (i) all of the loans and securities which serve as collateral for the legacy repurchase obligations, except for certain subordinate interests in CT CDOs I and II, (ii) our subordinate interests in CT CDO III, and (iii) 100% of our previously unencumbered loans and securities, which we collectively refer to as our Legacy Assets.
CT Legacy REIT, which will be taxed as a REIT commencing in 2011, is owned 52% by us, 24% by an affiliate of Five Mile, and 24% by the former lenders under our senior credit facility. In addition, the former holders of our junior subordinated notes received a subordinate class of common stock of CT Legacy REIT, which is described below. Capital Trust, Inc. will manage CT Legacy REIT and the Legacy Assets as a liquidating portfolio.
Mezzanine Loan
CT Legacy REIT entered into an $83.0 million mezzanine loan that carries a 15.0% per annum interest rate, of which 7.0% per annum may be deferred, and that matures on March 31, 2016. The mezzanine loan is not recourse to Capital Trust, Inc. except for certain limited non-recourse, “bad boy” carve outs. Proceeds from the mezzanine loan were used to (i) extinguish the senior credit facility, (ii) extinguish the junior subordinated notes, (iii) provide for cash paydowns of the repurchase obligations, (iv) pay transaction expenses, and (v) establish liquidity reserves at CT Legacy REIT.
The mezzanine loan is collateralized by 100% of the equity interests in a subsidiary of CT Legacy REIT, which in-turn owns all of our Legacy Assets, subject in-part to the repurchase obligations. Five Mile has consent rights with respect to material actions on the Legacy Assets such as material modifications, sales, and/or the pursuit of certain remedies with regard to the Legacy Assets. The mezzanine loan also contains covenants that (i) prohibit CT Legacy REIT from paying common stock cash dividends until the mezzanine loan has been repaid, (ii) prohibit us from selling or otherwise transferring our equity interests in CT Legacy REIT, and (iii) require the continued employment of certain key employees.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
In addition, as discussed above, an affiliate of Five Mile acquired a 24% equity interest in the common stock of CT Legacy REIT in conjunction with the making of the mezzanine loan.
Repurchase Obligations
Our $339.6 million of legacy repurchase obligations with JP Morgan, Morgan Stanley and Citigroup were assumed by wholly-owned subsidiaries of CT Legacy REIT, and the recourse to Capital Trust, Inc. was eliminated. In addition, the facilities were amended with the following terms:
|
|
·
|
Each of the repurchase lenders received cash paydowns equal to 10% of their outstanding balances, in the aggregate $33.9 million.
|
|
|
·
|
Except for certain key man provisions, all restrictive covenants governing the operations of Capital Trust, Inc. were eliminated, including covenants restricting employee compensation, dividend payments, and new balance sheet investments.
|
|
|
·
|
Net interest margin sweep and periodic amortization provisions were eliminated.
|
|
|
·
|
All forms of margin call or similar requirements under the facilities were eliminated.
|
|
|
·
|
Maturity dates were extended to December 15, 2014 in the case of JPMorgan, January 31, 2013 in the case of Morgan Stanley, and March 31, 2013 in the case of Citigroup, subject in all three cases to periodic required repayment thresholds.
|
|
|
·
|
Interest rates were increased to LIBOR + 2.50% per annum in the cases of JPMorgan and Morgan Stanley, and LIBOR + 1.50% per annum in the case of Citigroup, subject in all three cases to periodic rate increases over the term of each respective facility.
|
Senior Credit Facility
Our $98.1 million senior credit facility was fully satisfied and all collateral for the senior credit facility was released in exchange for (i) a cash payment of $22.9 million, (ii) a 24% equity interest in the common stock of CT Legacy REIT, and (iii) $2.8 million of secured notes, as further discussed below.
Junior Subordinated Notes
Our $143.8 million of junior subordinated notes were fully satisfied in exchange for (i) a cash payment of $4.6 million, (ii) 100% of the subordinate class B common stock of CT Legacy REIT, and (iii) $5.0 million of secured notes, as further discussed below. The subordinate class B common stock of CT Legacy REIT entitles its holders to receive approximately 25% of the dividends otherwise payable to us on our equity interest in the common stock of CT Legacy REIT, after aggregate cash distributions of $50.0 million have been paid to all other classes of common stock.
Secured Notes
In conjunction with the satisfaction of the senior credit facility and the junior subordinated notes, a wholly-owned subsidiary issued secured notes to our former creditors, which secured notes are not recourse to us. The secured notes have an aggregate initial face balance of $7.8 million and are secured by 93.5% of our equity interests in CT Legacy REIT, which represents 48.3% of the total common stock of CT Legacy REIT. The secured notes mature on March 31, 2016 and bear interest at a rate of 8.2% per annum, which interest may be deferred until maturity. All dividends we receive from our equity interests in the common stock of CT Legacy REIT which serve as collateral under the secured notes must be used to pay, or prepay, interest and principal due thereunder. Any prepayment, or partial prepayment, of the secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.7 million.
Incentive Awards Plan
Upon completion of our March 2011 restructuring, we granted senior level employees incentive awards issued under our long term incentive plan that participate in our retained equity interest in CT Legacy REIT. The awards provide payments to certain senior level employees equal to 6.75% of the total recovery (subject to certain caps) of our legacy assets, net of CT Legacy REIT’s obligations.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
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, 2010. 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 three months ended March 31, 2011 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2011.
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. 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, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’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.
Our consolidated VIEs include: (i) the CT Legacy REIT, and (ii) eleven securitization vehicles, including our four CT CDOs which were sponsored and issued by us, as well as seven other, similar, vehicles. See Note 10 and Note 11 for additional information on our investments in VIEs.
Balance Sheet Presentation
Our consolidated balance sheets separately present: (i) our direct assets and liabilities, (ii) the direct assets and liabilities of CT Legacy REIT, and (iii) the assets and liabilities of consolidated securitization vehicles, some of which are subsidiaries of CT Legacy REIT. Assets of all 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 the consolidated securitization vehicles 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 (i) our direct assets and liabilities, (ii) the direct assets and liabilities of CT Legacy REIT, and (iii) the assets and liabilities of consolidated securitization vehicles, some of which are subsidiaries of CT Legacy REIT.
Equity Investments in Unconsolidated Subsidiaries
Our co-investment interests in the private equity funds we manage 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 from equity investments.
One such fund, CT Opportunity Partners I, LP, or 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 we record on our equity investment in CTOPI.
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 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. These 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.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Fees from special servicing and asset management services are recorded on an accrual basis as services are rendered under the applicable agreements, and when receipt of fees is reasonably certain. We do not recognize incentive income from our investment management business until contingencies have been eliminated. 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, March 31, 2011 and December 31, 2010, 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.
We classify the cash balances held by CT Legacy REIT as restricted because of limitations imposed on the payment of dividends by CT Legacy REIT to its common equity holders, including us. As further described in Notes 1 and 10, common dividends cannot be paid by CT Legacy REIT until the mezzanine loan and repurchase obligations have been extinguished. Accordingly, while these cash balances are available for use by CT Legacy REIT for operations, debt service, or other purposes, they are currently unavailable to us.
We classify our securities as held-to-maturity, available-for-sale, or trading on the date of acquisition of the investment. Held-to-maturity investments are stated at cost, adjusted for the amortization of any premiums or discounts, which are amortized through our consolidated statements of operations using the level yield method described above. Other than in the instance of an other-than-temporary impairment, as discussed below, these held-to-maturity investments are carried on our consolidated financial statements at their amortized cost basis.
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. Changes in the valuations do not affect our reported income or cash flows, but do impact shareholders’ equity and, accordingly, book value per share. On August 4, 2005, we changed the accounting classification of certain of our securities from available-for-sale to held-to-maturity. We have not designated any securities as available-for-sale since that time.
Further, as required under GAAP, when, based on current information and events, there has been an adverse change in the cash flows expected to be collected from those previously estimated for one of our securities, 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 book 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.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
In conjunction with our quarterly loan portfolio review, management assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, loan-to-value ratio, or LTV, collateral performance, structure, exit plan, and sponsorship. Loans are rated one through eight, which are defined as follows:
|
1 -
|
Low Risk: A loan that is expected to perform through maturity, with relatively lower LTV, higher in-place debt yield, and stable projected cash flow.
|
|
2 -
|
Average Risk: A loan that is expected to perform through maturity, with medium LTV, average in-place debt yield, and stable projected cash flow.
|
|
3 -
|
Acceptable Risk: A loan that is expected to perform through maturity, with relatively higher LTV, acceptable in-place debt yield, and some uncertainty (due to lease rollover or other factors) in projected cash flow.
|
|
4 -
|
Higher Risk: A loan that is expected to perform through maturity, but has exhibited a material deterioration in cash flow and/or other credit factors. If negative trends continue, default could occur.
|
|
5 -
|
Low Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 15% probability of default or principal loss.
|
|
6 -
|
Medium Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 33% probability of default or principal loss.
|
|
7 -
|
High Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 67% or higher probability of default or principal loss.
|
|
8 -
|
In Default: A loan which is in contractual default and/or which has a very high likelihood of principal loss.
|
In addition, for certain pools of smaller loans which have similar credit characteristics, primarily loans with an outstanding principal balance of $10.0 million or less in our consolidated securitization vehicles, 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.
In certain cases, we may classify loans as held-for-sale based upon the specific facts and circumstances of particular Loans, including known or expected transactions. 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.
Real Estate Held-for-Sale
Loan investments where we have foreclosed upon the underlying collateral and own an equity interest in real estate are categorized as real estate owned. We generally do not intend to hold such foreclosed assets for long-term operations and therefore classify such assets as real estate held-for-sale on our consolidated balance sheets. Real estate held-for-sale are carried at the lower of our basis in the real estate and fair value, with reductions in fair value recorded as an impairment of real estate-held-for-sale on our consolidated statements of operations.
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.
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. No such transactions have occurred since January 1, 2009.
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 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 on our consolidated financial statements through accumulated other comprehensive income (loss) and do not affect our net income (loss). 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 (loss).
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.
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 those 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
Stock-based compensation expense 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 common stock 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 income (loss) was $262.1 million and ($79.7) million for the three months ended March 31, 2011 and 2010. The primary components of comprehensive income (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 discussion under “Recent Accounting Pronouncements” in this Note 2 for additional information. See Note 13 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, stock units and potentially dilutive common stock options and warrants. See Note 13 for additional discussion of earnings per share.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
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.
Certain reclassifications have been made in the presentation of the prior period consolidated financial statements to conform to the March 31, 2011 presentation.
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 consolidated 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 CT CDOs, and serves as senior servicer and special servicer for certain of our investments and for third parties.
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 18.
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, which includes 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 vehicle 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 securitization vehicles, 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 aggregate pre-consolidation book value of our investment in these vehicles (which were accounted for as securities) and the aggregate net assets, or equity, of those vehicles upon consolidation. This difference was primarily caused by asset impairments recorded at the entity-level which are in excess of our investment amount. Due to the fact that the liabilities of these vehicles are entirely non-recourse to us, this excess charge to equity, as well as similar charges on securitization vehicles previously consolidated, will eventually be reversed when our interests in the entities are repaid or sold, or the entities are otherwise deconsolidated in the future.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
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 disclosures, as applicable, are included in Note 18.
In July 2010, the FASB issued Accounting Standards Update 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” or ASU 2010-20. ASU 2010-20 primarily requires additional disaggregated disclosures of (i) credit risks associated with financing receivables, and (ii) impaired financing receivables and the related allowance for credit losses. ASU 2010-20 is generally effective for the first interim or annual period ending after December 15, 2010; however certain disclosures are not required until the first interim or annual period beginning after December 15, 2010. The adoption of ASU 2010-20 did not have a material impact on our consolidated financial statements. Additional disclosures have been included, as applicable, in the notes to our consolidated financial statements.
In April 2011, the FASB issued Accounting Standards Update 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” or ASU 2011-02. ASU 2011-02 primarily clarifies when creditors should classify loan modifications as troubled debt restructurings and provides examples and factors to be considered. Loan modifications which are considered troubled debt restructurings could result in additional disclosure requirements and could impact the related provision for loan losses. ASU 2011-02 is effective for the first interim or annual period beginning after June 15, 2011, with retrospective application to the beginning of the year. The adoption of ASU 2011-02 will impact how we account for loan modifications, and may result in an increase in the loan modifications we classify as troubled debt restructurings, and therefore our provision for loan losses.
Note 3. Securities Held-to-Maturity
As described in Note 1, in conjunction with our March 2011 restructuring of our recourse debt obligations, a significant portion of our assets, including all of our securities, were transferred to a majority-owned subsidiary, CT Legacy REIT. In addition, as described in Note 2, our consolidated balance sheets separately state our direct assets and liabilities and certain assets and liabilities of consolidated VIEs. See Note 10 for disclosures regarding securities that have been transferred to CT Legacy REIT, and see Note 11 for comparable disclosures regarding securities that are held in consolidated securitization vehicles, as separately stated on our consolidated balance sheets.
Prior to their transfer to CT Legacy REIT, our securities portfolio consisted of commercial mortgage-backed securities, or CMBS, collateralized debt obligations, or CDOs, and other securities. Activity relating to our securities portfolio for the three months ended March 31, 2011 was as follows (in thousands):
| |
|
CMBS
|
|
|
CDOs & Other
|
|
|
Total
Book Value (1)
|
|
| |
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
$2,246 |
|
|
|
$1,209 |
|
|
|
$3,455 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal paydowns
|
|
|
(45 |
) |
|
|
— |
|
|
|
(45 |
) |
|
Discount/premium amortization & other (2)
|
|
|
168 |
|
|
|
12 |
|
|
|
180 |
|
|
Other-than-temporary impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in earnings
|
|
|
(1,653 |
) |
|
|
— |
|
|
|
(1,653 |
) |
|
Recognized in accumulated other comprehensive income
|
|
|
1,640 |
|
|
|
— |
|
|
|
1,640 |
|
|
Transfer to CT Legacy REIT
|
|
|
(2,356 |
) |
|
|
(1,221 |
) |
|
|
(3,577 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
$— |
|
|
|
$— |
|
|
|
$— |
|
| |
|
|
|
(1)
|
Includes securities with a total face value of $36.0 million as of December 31, 2010. All securities have been transferred to CT Legacy REIT on March 31, 2011, as discussed in Note 1.
|
| (2) |
Includes mark-to-market adjustments on securities previously classified as available-for-sale, amortization of other-than-temporary impairments, and losses, if any.
|
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, 2011 and December 31, 2010:
| |
|
March 31, 2011
|
|
December 31, 2010
|
|
Number of securities
|
|
─
|
|
7
|
|
Number of issues
|
|
─
|
|
5
|
|
Rating (1) (2)
|
|
n/a
|
|
CCC
|
|
Fixed / Floating (in millions) (3)
|
|
$─ / $─
|
|
$2 / $1
|
|
Coupon (1) (4)
|
|
n/a
|
|
7.44%
|
|
Yield (1) (4)
|
|
n/a
|
|
10.54%
|
|
Life (years) (1) (5)
|
|
n/a
|
|
1.9
|
| |
|
|
|
(1)
|
Represents a weighted average as of December 31, 2010.
|
| (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 December 31, 2010.
|
| (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 0.26% as of December 31, 2010.
|
| (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 March 31, 2011 and December 31, 2010 (in thousands):
| |
|
Rating as of March 31, 2011
|
|
|
|
Rating as of December 31, 2010
|
|
|
Vintage
|
|
|
B |
|
|
CCC and
Below
|
|
|
|
Total
|
|
|
|
|
B |
|
|
CCC and
Below
|
|
|
|
Total
|
|
|
2003
|
|
|
$— |
|
|
|
$— |
|
|
|
|
$— |
|
|
|
|
$— |
|
|
|
$1,210 |
|
|
|
|
$1,210 |
|
|
2002
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
2000
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
955 |
|
|
|
|
955 |
|
|
1997
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
218 |
|
|
|
— |
|
|
|
|
218 |
|
|
1996
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
1,072 |
|
|
|
|
1,072 |
|
|
Total
|
|
|
$— |
|
|
|
$— |
|
|
|
|
$— |
|
|
|
|
$218 |
|
|
|
$3,237 |
|
|
|
|
$3,455 |
|
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 three months ended March 31, 2011, we recorded a gross other-than-temporary impairment of $13,000. In addition, we determined that $1.6 million of impairments previously recorded in other comprehensive income should be recognized as credit losses due to a decrease in cash flow expectations for two of our securities.
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 on the underlying loans, net of related expenses, and (ii) current subordination levels at both the individual loans which serve as collateral under our securities and at the securities themselves.
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 three months ended March 31, 2011 (in thousands):
| |
|
Gross Other-Than-
Temporary
Impairments
|
|
|
|
Credit Related
Other-Than-Temporary
Impairments
|
|
|
Non-Credit Related
Other-Than-Temporary
Impairments
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
$30,567 |
|
|
|
|
$27,776 |
|
|
|
$2,791 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions due to change in expected cash flows
|
|
|
13 |
|
|
|
|
1,653 |
|
|
|
(1,640 |
) |
|
Amortization of other-than-temporary impairments
|
|
|
(110 |
) |
|
|
|
(67 |
) |
|
|
(43 |
) |
|
Transfer to CT Legacy REIT (1)
|
|
|
(30,470 |
) |
|
|
|
(29,362 |
) |
|
|
(1,108 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
$— |
|
|
|
|
$— |
|
|
|
$— |
|
| |
|
|
|
(1)
|
All securities have been transferred to CT Legacy REIT on March 31, 2011, as discussed in Note 1.
|
Unrealized losses and fair value of securities
As discussed above, we do not directly own any securities as of March 31, 2011. Historically, certain of our securities have been 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 December 31, 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 |
|
|
|
($1.1 |
) |
|
|
|
$0.2 |
|
|
|
($1.1 |
) |
|
|
|
$1.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$— |
|
|
|
$— |
|
|
|
$0.2 |
|
|
|
($1.1 |
) |
|
|
|
$0.2 |
|
|
|
($1.1 |
) |
|
|
|
$1.3 |
|
| |
|
|
|
(1)
|
Excludes, as of December 31, 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 December 31, 2010, one of our securities with a book value of $1.3 million was carried at a balance in excess of its fair value. Fair value for this security was $158,000 as of December 31, 2010. In total, as of December 31, 2010, we had seven investments in securities with an aggregate book value of $3.5 million that have an estimated fair value of $5.5 million, including three investments in CMBS with an estimated fair value of $5.3 million and four investments in CDOs and other securities with an estimated fair value of $158,000. 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, and our own internal financial model-based estimations of fair value. See Note 18 for further discussion of fair value.
Note 4. Loans Receivable, Net
As described in Note 1, in conjunction with our March 2011 restructuring of our recourse debt obligations, a significant portion of our assets, including all of our loans, were transferred to a majority-owned subsidiary, CT Legacy REIT. Our only remaining loans have been sold to third-parties and recorded as participations sold assets and liabilities, as further described in Note 8. In addition, as described in Note 2, our consolidated balance sheets separately state our direct assets and liabilities and certain assets and liabilities of consolidated VIEs. See Note 10 for disclosures regarding loans receivable that have been transferred to CT Legacy REIT, and see Note 11 for comparable disclosures regarding loans receivable that are held in consolidated securitization vehicles, as separately stated on our consolidated balance sheets.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Activity relating to our loans receivable for the three months ended March 31, 2011 was as follows (in thousands):
| |
|
Gross Book
Value
|
|
|
Provision for
Loan Losses
|
|
|
|
Net Book
Value (1)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
$978,098 |
|
|
|
($371,780 |
) |
|
|
|
$606,318 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactions (2)
|
|
|
(19,500 |
) |
|
|
— |
|
|
|
|
(19,500 |
) |
|
Principal paydowns
|
|
|
(5,097 |
) |
|
|
— |
|
|
|
|
(5,097 |
) |
|
Discount/premium amortization & other
|
|
|
(7,653 |
) |
|
|
— |
|
|
|
|
(7,653 |
) |
|
Recovery of provision for loan losses
|
|
|
— |
|
|
|
7,914 |
|
|
|
|
7,914 |
|
|
Realized loan losses
|
|
|
(119,584 |
) |
|
|
119,584 |
|
|
|
|
— |
|
|
Transfer to CT Legacy REIT
|
|
|
(739,694 |
) |
|
|
244,282 |
|
|
|
|
(495,412 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
$86,570 |
|
|
|
$— |
|
|
|
|
$86,570 |
|
| |
|
|
|
(1)
|
Includes loans with a total principal balance of $86.6 million and $979.1 million as of March 31, 2011 and December 31, 2010, respectively.
|
| (2) |
Includes final maturities, full repayments, and sales.
|
The following table details overall statistics for our loans receivable portfolio as of March 31, 2011 and December 31, 2010:
| |
|
March 31, 2011
|
|
December 31, 2010
|
|
Number of investments
|
|
2
|
|
29
|
|
Fixed / Floating (in millions) (1)
|
|
$─ / $87
|
|
$55 / $551
|
|
Coupon (2) (3)
|
|
4.21%
|
|
4.02%
|
|
Yield (2) (3)
|
|
4.21%
|
|
3.81%
|
|
Maturity (years) (2) (4)
|
|
0.9
|
|
1.7
|
| |
|
|
|
(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 March 31, 2011 and December 31, 2010, respectively.
|
| (3) |
Calculations for floating rate loans are based on LIBOR of 0.24% and 0.26% as of March 31, 2011 and December 31, 2010, respectively.
|
| (4) |
Represents the final maturity of each investment assuming all extension options are executed.
|
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 March 31, 2011 and December 31, 2010 (in thousands):
| |
|
March 31, 2011
|
|
December 31, 2010
|
|
Asset Type
|
|
Book Value
|
|
Percentage
|
|
Book Value
|
|
Percentage
|
|
Mezzanine loans
|
|
|
$51,570 |
|
|
|
60 |
% |
|
|
$229,346 |
|
|
|
38 |
% |
|
Subordinate interests in mortgages
|
|
|
35,000 |
|
|
|
40 |
|
|
|
113,591 |
|
|
|
18 |
|
|
Senior mortgages
|
|
|
— |
|
|
|
― |
|
|
|
240,150 |
|
|
|
39 |
|
|
Other
|
|
|
— |
|
|
|
― |
|
|
|
23,231 |
|
|
|
5 |
|
|
Total
|
|
|
$86,570 |
|
|
|
100 |
% |
|
|
$606,318 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type
|
|
Book Value
|
|
Percentage
|
|
Book Value
|
|
Percentage
|
|
Healthcare
|
|
|
$51,570 |
|
|
|
60 |
% |
|
|
$53,705 |
|
|
|
9 |
% |
|
Hotel
|
|
|
35,000 |
|
|
|
40 |
|
|
|
147,014 |
|
|
|
24 |
|
|
Office
|
|
|
— |
|
|
|
― |
|
|
|
307,390 |
|
|
|
51 |
|
|
Multifamily
|
|
|
— |
|
|
|
― |
|
|
|
18,093 |
|
|
|
3 |
|
|
Retail
|
|
|
— |
|
|
|
― |
|
|
|
11,460 |
|
|
|
2 |
|
|
Other
|
|
|
— |
|
|
|
― |
|
|
|
68,656 |
|
|
|
11 |
|
|
Total
|
|
|
$86,570 |
|
|
|
100 |
% |
|
|
$606,318 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Location
|
|
Book Value
|
|
Percentage
|
|
Book Value
|
|
Percentage
|
|
Southeast
|
|
|
$16,806 |
|
|
|
19 |
% |
|
|
$170,400 |
|
|
|
28 |
% |
|
Southwest
|
|
|
15,129 |
|
|
|
18 |
|
|
|
94,491 |
|
|
|
15 |
|
|
Northeast
|
|
|
13,161 |
|
|
|
15 |
|
|
|
175,297 |
|
|
|
29 |
|
|
Midwest
|
|
|
6,577 |
|
|
|
8 |
|
|
|
6,967 |
|
|
|
1 |
|
|
West
|
|
|
— |
|
|
|
― |
|
|
|
54,688 |
|
|
|
9 |
|
|
Northwest
|
|
|
— |
|
|
|
― |
|
|
|
29,926 |
|
|
|
5 |
|
|
International
|
|
|
— |
|
|
|
― |
|
|
|
39,470 |
|
|
|
7 |
|
|
Diversified
|
|
|
34,897 |
|
|
|
40 |
|
|
|
35,079 |
|
|
|
6 |
|
|
Total
|
|
|
$86,570 |
|
|
|
100 |
% |
|
|
$606,318 |
|
|
|
100 |
% |
Loan risk ratings
Quarterly, management evaluates our loan portfolio for impairment as described in Note 2. In conjunction with our quarterly loan portfolio review, management assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, LTV, collateral performance, structure, exit plan, and sponsorship. Loans are rated one (less risk) through eight (greater risk), which ratings are defined in Note 2.
The following table allocates the net book value and principal balance of our loans receivable based on our internal risk ratings as of March 31, 2011 and December 31, 2010 (in thousands):
| |
|
Loans Receivable as of March 31, 2011
|
|
|
|
Loans Receivable as of December 31, 2010
|
|
|
Risk
Rating
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
| |
1 - 3 |
|
|
|
2 |
|
|
|
$86,570 |
|
|
|
$86,570 |
|
|
|
|
10 |
|
|
|
$375,169 |
|
|
|
$374,885 |
|
| |
4 - 5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
8 |
|
|
|
141,667 |
|
|
|
126,540 |
|
| |
6 - 8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
11 |
|
|
|
462,221 |
|
|
|
104,893 |
|
|
Total
|
|
|
2 |
|
|
|
$86,570 |
|
|
|
$86,570 |
|
|
|
|
29 |
|
|
|
$979,057 |
|
|
|
$606,318 |
|
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
In making this risk assessment, one of the primary factors we consider is how senior or junior each loan is relative to other debt obligations of the borrower. The following tables further allocate our loans receivable by both loan type and our internal risk ratings as of March 31, 2011 and December 31, 2010 (in thousands):
| |
|
Senior Mortgage Loans
|
|
| |
|
as of March 31, 2011
|
|
|
|
as of December 31, 2010
|
|
|
Risk
Rating
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
| |
1 - 3 |
|
|
|
— |
|
|
|
$— |
|
|
|
$— |
|
|
|
|
2 |
|
|
|
$129,200 |
|
|
|
$128,852 |
|
| |
4 - 5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
4 |
|
|
|
57,554 |
|
|
|
57,513 |
|
| |
6 - 8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
3 |
|
|
|
66,347 |
|
|
|
53,785 |
|
|
Total
|
|
|
— |
|
|
|
$— |
|
|
|
$— |
|
|
|
|
9 |
|
|
|
$253,101 |
|
|
|
$240,150 |
|
| |
|
Subordinate Interests in Mortgages
|
|
| |
|
as of March 31, 2011
|
|
|
|
as of December 31, 2010
|
|
|
Risk
Rating
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
| |
1 - 3 |
|
|
|
1 |
|
|
|
$35,000 |
|
|
|
$35,000 |
|
|
|
|
1 |
|
|
|
$48,000 |
|
|
|
$48,000 |
|
| |
4 - 5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
1 |
|
|
|
28,965 |
|
|
|
14,483 |
|
| |
6 - 8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
5 |
|
|
|
110,585 |
|
|
|
51,108 |
|
|
Total
|
|
|
1 |
|
|
|
$35,000 |
|
|
|
$35,000 |
|
|
|
|
7 |
|
|
|
$187,550 |
|
|
|
$113,591 |
|
| |
|
Mezzanine & Other Loans
|
|
| |
|
as of March 31, 2011
|
|
|
|
as of December 31, 2010
|
|
|
Risk
Rating
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
|
|
Number
of Loans
|
|
|
Principal
Balance
|
|
|
Net
Book Value
|
|
| |
1 - 3 |
|
|
|
1 |
|
|
|
$51,570 |
|
|
|
$51,570 |
|
|
|
|
7 |
|
|
|
$197,969 |
|
|
|
$198,033 |
|
| |
4 - 5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
3 |
|
|
|
55,148 |
|
|
|
54,544 |
|
| |
6 - 8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
3 |
|
|
|
285,289 |
|
|
|
— |
|
|
Total
|
|
|
1 |
|
|
|
$51,570 |
|
|
|
$51,570 |
|
|
|
|
13 |
|
|
|
$538,406 |
|
|
|
$252,577 |
|
Loan impairments
We have no impaired loans as of March 31, 2011. However, certain of our loans receivable which were transferred to CT Legacy REIT had previously been impaired, and are discussed in Note 10. The following table details our average balance of impaired loans by loan type, and the income recorded on such loans subsequent to their impairment during the three months ended March 31, 2011 (in thousands):
|
Income on Impaired Loans for the Three Months Ended March 31, 2011
|
|
|
Asset Type
|
|
Average Net
Book Value
|
|
|
Income
Recorded (1)
|
|
|
Senior Mortgage Loans
|
|
|
$17,269 |
|
|
|
$255 |
|
|
Subordinate Interests in Mortgages
|
|
|
19,940 |
|
|
|
225 |
|
|
Mezzanine & Other Loans
|
|
|
— |
|
|
|
1,915 |
|
|
Total
|
|
|
$37,209 |
|
|
|
$2,395 |
|
| |
|
|
|
(1)
|
Substantially all of the income recorded on impaired loans during the period was received in cash.
|
Nonaccrual loans
In accordance with our revenue recognition policies discussed in Note 2, we do not accrue interest on loans which are 90 days past due or, in the opinion of management, are otherwise uncollectable. Accordingly, we do not have any material interest receivable accrued on nonperforming loans as of March 31, 2011.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
Note 5. Loans Held-for-Sale, Net
Activity relating to our loans held-for-sale for the three months ended March 31, 2011 was as follows (in thousands):
| |
|
Gross Book
Value
|
|
|
Valuation
Allowance
|
|
|
|
Net Book Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
$16,130 |
|
|
|
($10,380 |
) |
|
|
|
$5,750 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfactions
|
|
|
(16,130 |
) |
|
|
10,380 |
|
|
|
|
(5,750 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
$— |
|
|
|
$— |
|
|
|
|
$— |
|
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. During 2010, we increased the book value of this loan by $263,000 resulting in a net book value of $5.8 million as of December 31, 2010. The loan was subsequently sold on January 25, 2011 for its net book value of $5.8 million.
Note 6. Equity Investments in Unconsolidated Subsidiaries
Our equity investments in unconsolidated subsidiaries consist of our co-investments in investment management vehicles that we sponsor and manage. As of March 31, 2011, we had a co-investment in one such vehicle, CT Opportunity Partners I, LP, or CTOPI, in which we have a commitment to invest up to $25.0 million, or 4.6% of CTOPI’s total capital commitments. We have funded $12.6 million of our commitment as of March 31, 2011 and received $2.5 million as a return of capital, resulting in a $14.9 million unfunded commitment balance. In addition to our co-investments, we record capitalized costs associated with these vehicles in equity investments in unconsolidated subsidiaries.
Activity relating to our equity investments in unconsolidated subsidiaries for the three months ended March 31, 2011 was as follows (in thousands):
| |
|
CTOPI
|
|
|
Other
|
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
$8,931 |
|
|
|
$1 |
|
|
|
|
$8,932 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
231 |
|
|
|
— |
|
|
|
|
231 |
|
|
Income from equity investments
|
|
|
955 |
|
|
|
— |
|
|
|
|
955 |
|
|
Distributions
|
|
|
(599 |
) |
|
|
— |
|
|
|
|
(599 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
$9,518 |
|
|
|
$1 |
|
|
|
|
$9,519 |
|
In accordance with the CTOPI management agreement, CTIMCO may earn incentive compensation when certain returns are achieved for the partners of CTOPI, which will be accrued if and when earned, and when appropriate contingencies have been eliminated. As of March 31, 2011, our maximum exposure to loss from CTOPI was $9.9 million.
Note 7. Debt Obligations
As described in Note 1, on March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which restructuring included the assumption of certain debt obligations by a subsidiary, CT Legacy REIT. In addition, as described in Note 2, our consolidated balance sheets separately state our direct assets and liabilities and certain assets and liabilities of consolidated VIEs. See Note 10 for disclosures regarding debt obligations of CT Legacy REIT, and see Note 11 for comparable disclosures regarding debt obligations of consolidated securitization vehicles, all of which are non-recourse to us, as separately stated on our consolidated balance sheets.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
As of March 31, 2011 and December 31, 2010, we had $7.8 million and $602.3 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):
| |
|
March 31,
2011
|
|
|
December 31,
2010
|
|
|
|
March 31,
2011
|
|
|
Debt Obligations
|
|
Principal
Balance
|
|
|
Book Value
|
|
|
Book Value
|
|
|
|
Coupon
|
|
|
All-In Cost
|
|
|
Maturity Date
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured notes
|
|
|
$7,778 |
|
|
|
$7,778 |
|
|
|
$— |
|
|
|
|
8.19 |
% |
|
|
8.19 |
% |
|
March 31, 2016
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan
|
|
|
— |
|
|
|
— |
|
|
|
224,915 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Morgan Stanley
|
|
|
— |
|
|
|
— |
|
|
|
105,044 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Citigroup
|
|
|
— |
|
|
|
— |
|
|
|
42,623 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Total repurchase obligations
|
|
|
— |
|
|
|
— |
|
|
|
372,582 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
|
— |
|
|
|
— |
|
|
|
98,124 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes
|
|
|
— |
|
|
|
— |
|
|
|
132,190 |
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Total/Weighted Average
|
|
|
$7,778 |
|
|
|
$7,778 |
|
|
|
$602,896 |
|
|
|
|
8.19 |
% |
|
|
8.19 |
% |
|
March 31, 2016
|
|
Secured Notes
In conjunction with our March 2011 restructuring and the corresponding satisfaction of our senior credit facility and junior subordinated notes, a wholly-owned subsidiary issued secured notes to our former creditors, which secured notes are not recourse to us. The secured notes have an aggregate initial face balance of $7.8 million and are secured by 93.5% of our equity interests in CT Legacy REIT, which represents 48.3% of the total common stock of CT Legacy REIT. The secured notes mature on March 31, 2016 and bear interest at a rate of 8.2% per annum, which interest may be deferred until maturity. All dividends we receive from our equity interests in the common stock of CT Legacy REIT which serve as collateral under the secured notes must be used to pay, or prepay, interest and principal due thereunder. Any prepayment, or partial prepayment, of the secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.7 million.
Repurchase Obligations
On March 31, 2011, our legacy repurchase obligations with JP Morgan, Morgan Stanley and Citigroup were assumed by wholly-owned subsidiaries of CT Legacy REIT, and the recourse to Capital Trust, Inc. was eliminated. See Note 10 for further discussion of these amended facilities at CT Legacy REIT.
Senior Credit Facility
On March 31, 2011, our senior credit facility was fully satisfied and all collateral for the senior credit facility was released in exchange for (i) a cash payment of $22.9 million, (ii) a 24% equity interest in the common stock of CT Legacy REIT, and (iii) $2.8 million of secured notes, as discussed above.
Junior Subordinated Notes
On March 31, 2011, our junior subordinated notes were fully satisfied in exchange for (i) a cash payment of $4.6 million, (ii) 100% of the subordinate common stock of CT Legacy REIT, and (iii) $5.0 million of secured notes, as discussed above.
Note 8. Participations Sold
Participations sold represent interests in certain loans that we originated and subsequently sold to one of our investment management vehicles or to third-parties. We present these participations sold as both assets and non-recourse liabilities because 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 March 31, 2011, we had two such participations sold with a total gross book value of $86.6 million.
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
The income earned on these loans is recorded as interest income and an identical amount is recorded as interest expense on our consolidated statements of operations. Generally, participations sold are recorded as assets and liabilities in equal amounts on our consolidated balance sheets. We have previously recorded a $75.0 million provision for loan losses against one of our participations sold assets, however the associated liability had not historically been adjusted because we were prohibited by GAAP from reducing its book value until the loan asset was contractually extinguished. In January 2011, this loan was restructured resulting in a termination of the participation agreement, and recognition of a $75.0 million gain on extinguishment of the participation sold debt.
In addition, in connection with our March 2011 restructuring, one of our $97.5 million loan participations, which was similarly impaired, was transferred to CT Legacy REIT. See Note 10 for further discussion.
The following table describes our participations sold assets and liabilities as of March 31, 2011 and December 31, 2010 (in thousands):