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, 2011

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 ý No o

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 o (Do not check if a smaller reporting company)		Smaller Reporting Company ý

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 29, 2011 was 22,211,108.

CAPITAL TRUST, INC.

INDEX

Part I.	Financial Information

	Item 1:	Financial Statements

		Consolidated Balance Sheets – June 30, 2011 (unaudited) and December 31, 2010	1

		Consolidated Statements of Operations – Three and Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)	3

		Consolidated Statements of Changes in Shareholders' Deficit – Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)	4

		Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)	5

		Notes to Consolidated Financial Statements (unaudited)	6

	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	59

	Item 3:	Quantitative and Qualitative Disclosures About Market Risk	90

	Item 4:	Controls and Procedures	92

Part II.	Other Information

	Item 1:	Legal Proceedings	93

	Item 1A:	Risk Factors	93

	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	93

	Item 3:	Defaults Upon Senior Securities	93

	Item 4:	(Removed and Reserved)	93

	Item 5:	Other Information	93

	Item 6:	Exhibits	94

	Signatures		95

Index

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2011 and December 31, 2010
(in thousands, except per share data)

	June 30,		December 31,
	2011		2010
	(unaudited)
Assets

Cash and cash equivalents		$28,430		$24,449
Securities held-to-maturity		—		3,455
Loans receivable, net		28,660		606,318
Loans held-for-sale, net		—		5,750
Equity investments in unconsolidated subsidiaries		9,851		8,932
Accrued interest receivable		—		2,392
Deferred income taxes		1,597		658
Prepaid expenses and other assets		1,985		9,952
Subtotal		70,523		661,906

Assets of Consolidated Variable Interest Entities ("VIEs")
CT Legacy REIT, Excluding Securitization Vehicles
Restricted cash		10,225		—
Securities held-to-maturity		3,664		—
Loans receivable, net		247,190		—
Loans held-for-sale, net		32,107		—
Accrued interest receivable and other assets		5,995		—
Subtotal		299,181		—

Securitization Vehicles
Securities held-to-maturity		467,420		504,323
Loans receivable, net		1,504,991		2,891,379
Real estate held-for-sale		8,055		8,055
Accrued interest receivable and other assets		15,230		55,027
Subtotal		1,995,696		3,458,784

Total assets		$2,365,400		$4,120,690

See accompanying notes to consolidated financial statements.

- 1 -

Index

Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2011 and December 31, 2010
(in thousands, except per share data)

	June 30,			December 31,
	2011			2010
	(unaudited)
Liabilities & Shareholders' Deficit

Liabilities:
Accounts payable and accrued expenses		$8,618			$6,726
Repurchase obligations		—			372,582
Senior credit facility		—			98,124
Junior subordinated notes		—			132,190
Secured notes		7,529			—
Participations sold		28,660			259,304
Interest rate hedge liabilities		—			8,451
Subtotal		44,807			877,377

Non-Recourse Liabilities of Consolidated VIEs
CT Legacy REIT, Excluding Securitization Vehicles
Accounts payable and accrued expenses		760			—
Repurchase obligations		119,343			—
Mezzanine loan, net of unamortized discount		51,631			—
Participations sold		97,465			—
Interest rate hedge liabilities		8,288			—
Subtotal		277,487			—

Securitization Vehicles
Accounts payable and accrued expenses		2,856			3,809
Securitized debt obligations		2,129,571			3,621,229
Interest rate hedge liabilities		26,849			29,462
Subtotal		2,159,276			3,654,500

Total liabilities		2,481,570			4,531,877

Commitments and contingencies		—			—

Equity:
Class A common stock, $0.01 par value, 100,000 shares authorized, 21,967 and 21,917 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively ("class A common stock")		220			219
Restricted class A common stock, $0.01 par value, 244 and 33 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively ("restricted class A common stock" and together with class A common stock, "common stock")		2			—
Additional paid-in capital		596,749			559,411
Accumulated other comprehensive loss		(40,303	)		(50,462	)
Accumulated deficit		(667,615	)		(920,355	)
Total Capital Trust, Inc. shareholders' deficit		(110,947	)		(411,187	)

Noncontrolling interests		(5,223	)		—

Total liabilities and shareholders' deficit		$2,365,400			$4,120,690

See accompanying notes to consolidated financial statements.

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Index

Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2011 and 2010

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Income from loans and other investments:
Interest and related income		$32,554			$39,525			$69,545			$79,503
Less: Interest and related expenses		32,296			31,653			58,543			62,905
Income from loans and other investments, net		258			7,872			11,002			16,598

Other revenues:
Management fees from affiliates		1,595			924			3,174			3,940
Servicing fees		438			1,226			748			2,737
Total other revenues		2,033			2,150			3,922			6,677

Other expenses:
General and administrative		4,649			4,509			14,928			9,251
Total other expenses		4,649			4,509			14,928			9,251

Total other-than-temporary impairments of securities		—			(3,848	)		(4,933	)		(39,835	)
Portion of other-than-temporary impairments of securities recognized in other comprehensive income		—			1,852			(3,271	)		18,015
Net impairments recognized in earnings		—			(1,996	)		(8,204	)		(21,820	)

Recovery of (provision for) loan losses		8,088			(2,010	)		17,249			(54,227	)
Valuation allowance on loans held-for-sale		(224	)		—			(224	)		—
Gain on extinguishment of debt		937			463			250,976			463
Income from equity investments		842			932			1,797			1,302
Income (loss) before income taxes		7,285			2,902			261,590			(60,258	)
Income tax provision		1,061			—			1,450			293
Net income (loss)		$6,224			$2,902			$260,140			($60,551	)

Less: Net income attributable to noncontrolling interests		(8,069	)		—			(7,400	)		—

Net (loss) income attributable to Capital Trust, Inc.		($1,845	)		$2,902			$252,740			($60,551	)

Per share information:
Net (loss) income per share of common stock:
Basic		($0.08	)		$0.13			$11.19			($2.71	)
Diluted		($0.08	)		$0.13			$10.52			($2.71	)

Weighted average shares of common stock outstanding:
Basic		22,723,146			22,344,552			22,580,143			22,340,071
Diluted		22,723,146			22,667,326			24,024,222			22,340,071

See accompanying notes to consolidated financial statements.

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Index

Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Deficit

For the Six Months Ended June 30, 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 attributable to Capital Trust, Inc.		($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	)

Balance at January 1, 2011					$219		$—		$559,411			($50,462	)		$—			($920,355	)		($411,187	)


Net income attributable to Capital Trust, Inc.		$252,740			—		—		—			—			—			$252,740			$252,740
Net income attributable to noncontrolling interests		7,400			—		—		—			—			7,400			—			7,400
Allocation to noncontrolling interests		—			—		—		37,156			—			(12,623	)		—			24,533
Purchase of noncontrolling interests		—			—		—		(142	)		—			—			—			(142	)
Unrealized gain on derivative financial instruments		3,545			—		—		—			3,545			—			—			3,545
Loss on interest rate swaps not designated as cash flow hedges		3,201			—		—		—			3,201			—			—			3,201
Amortization of unrealized gains and losses on securities		(506	)		—		—		—			(506	)		—			—			(506	)
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		3,966			—		—		—			3,966			—			—			3,966
Restricted class A common stock earned		—			1		2		230			—			—			—			233
Deferred directors' compensation		—			—		—		94			—			—			—			94

Balance at June 30, 2011		$270,299			$220		$2		$596,749			($40,303	)		($5,223	)		($667,615	)		($116,170	)

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, 2011 and 2010

(in thousands)

(unaudited)

	2011	2010
Cash flows from operating activities:
Net income (loss)	$260,140	($60,551)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Net impairments recognized in earnings	8,204	21,820
(Recovery of) provision for loan losses	(17,249)	54,227
Valuation allowance on loans held-for-sale	224	—
Gain on extinguishment of debt	(250,976)	(463)
Income from equity investments	(1,797)	(1,302)
Employee stock-based compensation	317	76
Incentive awards plan expense	2,980	—
Deferred directors' compensation	94	103
Amortization of premiums/discounts on loans and securities and deferred interest on loans	(912)	(1,347)
Amortization of deferred gains and losses on settlement of swaps	(47)	(50)
Amortization of deferred financing costs and premiums/discounts on
debt obligations	6,648	3,711
Deferred interest on senior credit facility	—	1,977
Loss on interest rate swaps not designated as cash flow hedges	3,970	—
Changes in assets and liabilities, net:
Accrued interest receivable	2,617	312
Deferred income taxes	(939)	321
Prepaid expenses and other assets	448	586
Accounts payable and accrued expenses	(1,283)	810
Net cash provided by operating activities	12,439	20,230

Cash flows from investing activities:
Principal collections and proceeds from securities	31,435	10,758
Add-on fundings under existing loan commitments	—	(886)
Distributions from equity investments	3,360	—
Principal collections of loans receivable	1,680,725	77,206
Proceeds from disposition of loans	5,750	23,548
Contributions to unconsolidated subsidiaries	(1,991)	(1,528)
Distributions from unconsolidated subsidiaries	2,869	—
Increase in restricted cash	(10,225)	—
Net cash provided by investing activities	1,711,923	109,098

Cash flows from financing activities:
Repayments under repurchase obligations	(253,336)	(21,883)
Repayments under senior credit facility	(22,932)	(2,500)
Repayment of junior subordinated notes	(4,640)	—
Borrowing under mezzanine loan	83,000	—
Repayments under mezzanine loan	(20,000)	—
Repayment of securitized debt obligations	(1,490,715)	(106,404)
Payment of financing expenses	(11,126)	—
Purchase of noncontrolling interests	(142)	—
Purchase of secured notes	(405)	—
Vesting of restricted Class A common stock	(85)	—
Net cash used in financing activities	(1,720,381)	(130,787)

Net increase (decrease) in cash and cash equivalents	3,981	(1,459)
Cash and cash equivalents at beginning of period	24,449	27,954
Cash and cash equivalents at end of period	$28,430	$26,495

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. 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. Our business model is designed to produce a mix of net interest margin from our balance sheet investments, and fee income and co-investment income from our investment management vehicles. In managing our operations, we focus on originating investments, managing our portfolios and capitalizing our business. From the inception of our finance business in 1997 through June 30, 2011, we have completed over $11.8 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 by CT Legacy REIT from an affiliate of Five Mile Capital Partners LLC, or Five Mile, and the issuance of equity interests in the common stock of 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 the common stock of CT Legacy REIT. Our economic interest in CT Legacy REIT is, however, subject to (i) the secured notes, which are collateralized by certain of our retained equity interests in the common stock of CT Legacy REIT, (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 awards 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 is expected to 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 class B common stock, 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.

During the second quarter of 2011, the CT Legacy REIT portfolio received repayments of $207.0 million, including full loan satisfactions of $191.2 million and partial repayments of $15.8 million, which repayments represented approximately 41.5% of the net book value of the CT Legacy REIT portfolio as of March 31, 2011.

Mezzanine Loan

CT Legacy REIT entered into an $83.0 million mezzanine loan (which was subsequently reduced to $63.0 million as of June 30, 2011) 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.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

During the second quarter of 2011, $20.0 million of the mezzanine loan was repaid using proceeds from the satisfaction of former repurchase facility collateral assets. As further described below, during the second quarter of 2011 the Morgan Stanley and Citigroup repurchase facilities were terminated and the remaining collateral thereunder was released.

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. Subsequently, during the second quarter of 2011, an affiliate of Five Mile also acquired 9.4% of the subordinate class B common stock of CT Legacy REIT which was originally issued to our former junior subordinate noteholders. See below for further discussion of the class B common stock.

Repurchase Obligations

Our $339.6 million of legacy repurchase obligations (which were subsequently reduced to $119.3 million as of June 30, 2011) 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 then 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.

During the second quarter of 2011, $185.4 million of the legacy repurchase obligations were repaid, including the full repayment and termination of the Morgan Stanley and Citigroup facilities and a release of the remaining collateral thereunder, as well as a $54.1 million repayment of the JP Morgan 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 is a subordinate class that entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to us on certain of 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.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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 non-recourse to us. The secured notes had an aggregate initial face balance of $7.8 million and are secured by 93.5% of our equity interests in the class A-1 and class A-2 common stock of CT Legacy REIT, which represents 48.3% of the total outstanding class A-1 and class A-2 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 remaining secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.1 million.

During the second quarter of 2011, we purchased $405,000 of the secured notes at par.

Management 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 amounts earned from 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, when and if distributed to us as dividends.

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 six months ended June 30, 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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

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 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.

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, June 30, 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.

Restricted Cash

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 satisfied. 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.

Securities

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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

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.

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.

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 generally 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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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 $270.3 million and ($82.8) million for the six months ended June 30, 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 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, stock units and potentially dilutive common stock options and warrants. See 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, 2011 presentation.

Segment Reporting

We operate in two reportable segments. We have an internal information system that produces performance and asset data for the two segments along service lines.

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 17.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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.

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 17.

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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

In April 2011, the FASB issued Accounting Standards Update 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements,” or ASU 2011-03. ASU 2011-03 primarily removes certain criteria from the consideration of effective control over assets subject to repurchase agreements. The removal of these criteria will generally result in asset transfers pursuant to repurchase agreements being accounted for as secured borrowings, with both the transferred assets and repurchase liability recorded on the transferor’s balance sheet. ASU 2011-03 is effective for the first interim or annual period beginning after December 15, 2011, and is to be applied prospectively to transactions which occur subsequent to the effective date. The adoption of ASU 2011-03 is not expected to have a material impact on our financial statements.

In May 2011, the FASB issued Accounting Standards Update 2011-04, “Fair Value Measurement (Topic 860): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” or ASU 2011-04. ASU 2011-04 amends existing guidance on fair value measurements related to (i) instruments held in a portfolio, (ii) instruments classified within shareholders’ equity, (iii) application of the “highest and best use” concept to nonfinancial assets, (iv) application of blockage factors and other premiums and discounts in the valuation process, and (v) other matters. In addition, ASU 2011-04 expanded the required disclosures around fair value measurements including (i) reporting the level in the fair value hierarchy used to value assets and liabilities which are not measured at fair value, but where fair value is disclosed, and (ii) qualitative disclosures about the sensitivity of Level 3 fair value measurements to changes in unobservable inputs used. ASU 2011-04 is effective for the first interim or annual period beginning after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a material impact on our financial statements, however may significantly expand our disclosures related to fair value measurements.

In June 2011, the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” or ASU 2011-05. ASU 2011-05 does not change the items that must be reported in other comprehensive income, however it eliminates the option to present other comprehensive income on the statement of shareholders’ equity and instead requires either (i) a continuous statement of comprehensive income which would replace the current statement of operations, or (ii) an additional statement of other comprehensive income, which would immediately follow the statement of operations, and would report the components of other comprehensive income. ASU 2011-05 is effective for the first interim or annual period beginning after December 15, 2011, and should be applied retrospectively to all periods reported after the effective date. The adoption of ASU 2011-05 is not expected to have a material impact on our financial statements.

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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

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 six months ended June 30, 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	)

June 30, 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.

The following table details overall statistics for our securities portfolio as of June 30, 2011 and December 31, 2010:

	June 30, 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 June 30, 2011 and December 31, 2010 (in thousands):

	Rating as of June 30, 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 first quarter of 2011, we recorded a gross other-than-temporary impairment of $13,000 prior to the transfer of these securities to CT Legacy REIT. 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.

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Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

To determine the component of the gross other-than-temporary impairment related to expected credit losses, we compare the amortized cost basis of each other-than-temporarily impaired security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. Significant judgment of management is required in this analysis that includes, but is not limited to, (i) assumptions regarding the collectability of principal and interest 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.

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

June 30, 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 June 30, 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 were 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.

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Index

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

We determine fair values using third party dealer assessments of value, and our own internal financial model-based estimations of fair value. See Note 17 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.

Activity relating to our loans receivable for the six months ended June 30, 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)		(71,070	)		—			(71,070	)
Principal paydowns		(11,437	)		—			(11,437	)
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	)

June 30, 2011		$28,660			$—			$28,660


(1)	Includes loans with a total principal balance of $28.7 million and $979.1 million as of June 30, 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 June 30, 2011 and December 31, 2010:

	June 30, 2011	December 31, 2010
Number of investments (1)	1	29
Fixed / Floating (in millions) (2)	$─ / $29	$55 / $551
Coupon (3) (4)	1.44%	4.02%
Yield (3) (4)	1.44%	3.81%
Maturity (years) (3) (5)	0.4	1.7


(1)	Our only remaining loan has been sold to third-parties and recorded as participations sold assets and liabilities, as further described in Note 8
(2)	Represents the aggregate net book value of our portfolio allocated between fixed rate and floating rate loans.
(3)	Represents a weighted average as of June 30, 2011 and December 31, 2010, respectively.
(4)	Calculations for floating rate loans are based on LIBOR of 0.19% and 0.26% as of June 30, 2011 and December 31, 2010, respectively.
(5)	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, 2011 and December 31, 2010 (in thousands):

	June 30, 2011				December 31, 2010
Asset Type	Book Value		Percentage		Book Value		Percentage
Subordinate interests in mortgages		$28,660		100%		$113,591		18%
Senior mortgages		—		―		240,150		39
Mezzanine loans		—		―		229,346		38
Other		—		―		23,231		5
Total		$28,660		100%		$606,318		100%

Property Type	Book Value		Percentage		Book Value		Percentage
Hotel		28,660		100%		$147,014		24%
Office		—		―		307,390		51
Healthcare		—		―		53,705		9
Multifamily		—		―		18,093		3
Retail		—		―		11,460		2
Other		—		―		68,656		11
Total		$28,660		100%		$606,318		100%

Geographic Location	Book Value		Percentage		Book Value		Percentage
Southeast		$13,761		48%		$170,400		28%
Southwest		12,388		43		94,491		15
Midwest		2,511		9		6,967		1
Northeast		—		―		175,297		29
West		—		―		54,688		9
Northwest		—		―		29,926		5
International		—		―		39,470		7
Diversified		—		―		35,079		6
Total		$28,660		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 June 30, 2011 and December 31, 2010 (in thousands):

		Loans Receivable as of June 30, 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		1		$28,660		$28,660		10		$375,169		$374,885
	4 - 5		—		—		—		8		141,667		126,540
	6 - 8		—		—		—		11		462,221		104,893

Total			1		$28,660		$28,660		29		$979,057		$606,318

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Index

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 June 30, 2011 and December 31, 2010 (in thousands):

		Senior Mortgage Loans
		as of June 30, 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 June 30, 2011

as of December 31, 2010