UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2007
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the Transition period from
to
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Commission
File Number 1-14788
Capital
Trust, Inc.
(Exact
name of registrant as specified in its charter)
Maryland
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94-6181186
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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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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Registrant’s
telephone number, including area code: (212)
655-0220
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class
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Name
of Each Exchange
on
Which Registered
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class
A common stock,
$0.01
par value (“class A common stock”)
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes o No x
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 the filing
requirements for at least the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10‑K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or 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. (Check
one):
Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No x
MARKET
VALUE
The
aggregate market value of the outstanding class A common stock held by
non-affiliates of the registrant was approximately $433,053,575 as of
June 30, 2007 (the last business day of the registrant’s most recently
completed second fiscal quarter) based on the closing sale price on the New York
Stock Exchange on that date.
OUTSTANDING
STOCK
As of
February 20, 2008 there were 17,649,594 outstanding shares of class A
common stock. The class A common stock is listed on the New York Stock Exchange
(trading symbol “CT”).
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates information by reference from the registrant’s definitive proxy
statement to be filed with the Commission within 120 days after the close of the
registrant’s fiscal year.
CAPITAL TRUST,
INC.
PART I
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1
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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26
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Item
2.
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Properties
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26
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Item
3.
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Legal
Proceedings
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26
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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26
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PART II
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27
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Item
5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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27
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Item
6.
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Selected
Financial Data
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29
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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30
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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54
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Item
8.
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Financial
Statements and Supplementary Data
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56
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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56
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Item
9A.
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Controls
and Procedures
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56
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Item
9B.
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Other
Information
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56
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PART III
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57
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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57
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Item
11.
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Executive
Compensation
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57
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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57
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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57
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Item
14.
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Principal
Accounting Fees and Services
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57
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PART IV
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58
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Item
15.
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Exhibits,
Financial Statement Schedules
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58
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Signatures
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68
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Index
to Consolidated Financial Statements
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F-1
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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 December 31, 2007, we
have completed over $10.5 billion of investments in the commercial real
estate debt arena. We conduct our operations as a real estate
investment trust, or REIT, for federal income tax purposes and we are
headquartered in New York City.
Segment
revenue and profit information is presented in Note 18 to the Consolidated
Financial Statements.
Current
Market Conditions
During
2007, the global capital markets experienced unprecedented volatility, triggered
initially by credit problems in the U.S. subprime residential mortgage
sector. As the year progressed, the “subprime contagion” spread to
virtually every debt market, causing dramatic declines in asset prices,
widespread illiquidity and massive losses at many financial
institutions. Notwithstanding continuing credit performance in the
real estate debt market and strong fundamentals in the underlying property
markets, the impact of the global credit crisis on our sector has been
acute. By year end, transaction volume had declined significantly,
credit spreads for all forms of mortgage debt had reached all-time highs and
issuance levels of commercial mortgage backed securities, or CMBS, had ground to
a virtual halt. Financial institutions still hold significant
inventories of unsold loans and CMBS, creating a further overhang on the
markets. We believe that the continuing dislocation in the debt
capital markets, coupled with a slowdown in the U.S. economy, have already
reduced property valuations and will ultimately impact real estate
fundamentals.
In
response to these conditions, we significantly reduced the pace of our
originations in the second half of 2007, choosing to maintain our liquidity and
be patient until the markets had settled. We believe that ultimately,
this environment will create new opportunities in our markets for investors with
access to capital and expertise in credit underwriting and financial
structuring. We believe that our balance sheet and investment
management businesses will benefit from a market environment where assets are
priced and structured more conservatively and there is less competition among
investors.
Developments
during Fiscal Year 2007
During
the year ended December 31, 2007, we originated $2.5 billion of new
investments in 109 separate transactions, representing a record year of
investment activity for us. Of this total, we closed $1.5 billion
directly for our balance sheet and $1.0 billion for our managed funds and
accounts, which we refer to as investment management vehicles.
Driven by
these originations, our balance sheet portfolio of interest earning assets
(defined as loans, commercial mortgage backed securities, or CMBS, and total
return swaps, or TRS) grew from $2.6 billion (159 separate investments) at year
end 2006 to $3.1 billion (160 separate investments) at year end
2007. At year end, we held 80 loans with an aggregate book value of
$2.3 billion and an average last dollar loan to value of 67%. Our CMBS portfolio
was comprised of 79 bonds with an aggregate book value of $877 million and a
weighted average rating of BB+. At year end, we had one TRS position
with an aggregate book value of $0 referencing $20 million of real estate
debt. In addition to interest earning assets, our balance sheet
assets include our equity investments in unconsolidated subsidiaries, primarily
comprised of our co-investments in our investment management vehicles. All of
our investments were performing at year end and, during 2007, we resolved our
one defaulted loan, a first mortgage loan with an original principal balance of
$8 million, generating a gain of $4.0 million. During 2007, we did
not realize any losses on our investments, however, we did book a reserve of
$4.0 million (0.18% of loans) against a $10 million second mortgage
loan.
On the
capital raising front, we raised $175 million of new balance sheet capital in
2007 through the following transactions:
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In
March 2007, we privately placed $75 million of trust preferred
securities through a statutory trust subsidiary, CT Preferred Trust II.
The trust preferred securities have a 30-year term, maturing in
April 2037, are redeemable at par on or after April 30, 2012 and
pay distributions at a fixed rate of 7.03% per annum for the first ten
years ending April 2017, and thereafter, at a floating rate of three
month LIBOR plus 2.25%. Trust preferred securities are backed by and
recorded as junior subordinated debentures on our balance sheet and the
all in effective cost of these liabilities, including the amortization of
fees and expenses, is 7.14%.
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In
March 2007, we closed a $50 million senior unsecured revolving credit
facility with WestLB AG, which we amended in June 2007, increasing the
size to $100 million and adding new lenders to the syndicate. The facility
has an initial term of one year (with a one year term out provision at our
option) and a maximum term of four years (including extension options).
The facility bears interest at LIBOR plus 1.50% (LIBOR plus 1.80% on an
all in basis) and we expect to use the facility borrowings for general
corporate purposes and working capital needs, including providing
additional flexibility for funding loan originations. At December 31,
2007, we had borrowed $75 million under this facility.
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In 2007, we renewed
or obtained new repurchase financing commitments totaling $900
million:
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In
February 2007, we increased our total commitment from Bear Stearns by $250
million to $450 million.
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In
February 2007, we increased our total commitment from Morgan Stanley by
$100 million to $375 million.
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In March 2007, we
renewed our $250 million master repurchase agreement with JPMorgan,
extending the maturity by a full year to October
2008.
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In
July 2007, we entered into a new $250 million master repurchase agreement
with Citigroup Financial Products Inc. and Citigroup Global Markets Inc.
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In
October 2007, we amended and restated our master repurchase agreement with
Goldman Sachs, increasing the facility’s commitment by $50 million to $200
million.
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In July 2007, we received ratings upgrades to seven classes and
ratings affirmation on seven classes of our third CDO, CT CDO III. The
ratings action was attributed to the credit quality of the underlying portfolio
of CMBS bonds.
In 2007, we continued to expand our investment management business
by, (a) raising two new private equity vehicles, CT Opportunity Partners I, LP
and the CTX Fund I, L.P., (b) increasing our CT High Grade MezzanineSM account
mandate by $100 million and extending its investment period to July 2008, and
(c) extending the investment period of CT Large Loan 2006, Inc. by one year to
May 2008. Our investment management business is designed to
complement the investing activities of our balance sheet making investments
which are senior, junior or pari passu with the balance sheet and, in certain
cases, in products that are unsuitable for the balance sheet.
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CT
Opportunity Partners I, LP, or CTOPI, is a multi-investor private equity
fund designed to invest in commercial
real estate debt and equity investments, specifically taking advantage of
the current dislocation in the commercial real estate capital
markets. CTOPI held its initial closing on December 13, 2007,
with $314 million of equity commitments ($167 million immediately
available) and, subsequent to year end, held two additional closings
bringing total equity commitments to $389 million ($271 million
immediately available) as of February 20, 2008. We have
committed to invest $25 million in the vehicle and entities controlled by
our chairman have committed to invest $20 million. The fund’s
investment period expires in December of 2010, and we earn base management
fees as the investment manager of CTOPI (1.64% of committed equity during
the investment period and of invested capital thereafter). In
addition, we earn gross incentive management fees of 20% of profits after
a 9% preferred return and a 100% return of
capital.
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CTX
Fund I, L.P., or the CTX Fund, is a single investor fund designed to
invest in collateralized debt obligations, or CDOs, sponsored but not
issued by us. The CTX Fund was initially capitalized with $50
million and, subsequent to year end, the capital commitment was reduced to
$10 million as we do not anticipate further investment activity for the
account. We do not earn fees on the CTX Fund, however, we earn
CDO management fees from the CDOs in which the CTX Fund
invests. We sponsored one such CDO in 2007, a $500 million CDO
secured primarily by credit default swaps referencing
CMBS.
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CT
High Grade MezzanineSM,
or CT High Grade, closed in November 2006, with a single, related
party investor committing $250 million. This separate account does
not utilize leverage and we earn management fees of 0.25% per annum of
invested assets. In July 2007, we upsized the account by $100
million to $350 million and extended the investment period to July
2008.
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CT
Large Loan 2006, Inc., or CT Large Loan, closed in May 2006 with
total equity commitments of $325 million from eight third party investors.
The fund employs leverage (not to exceed a two to one ratio of debt to
equity), and we earn management fees of 0.75% per annum of invested assets
(capped at 1.5% on invested equity). In April 2007, we extended
the investment period of the fund to May
2008.
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Our
platform consists of 53 full time professionals with extensive real estate
credit, capital markets and structured finance expertise. Our senior management
team has, on average, over 20 years of industry experience. Founded in 1997, our
business has been built on long-standing relationships with borrowers, brokers
and our origination partners. This extensive network produces a pipeline of
investment opportunities from which we select only those transactions that we
believe exhibit a compelling risk/return profile. Once a transaction that meets
our parameters is identified, we apply a disciplined process founded on four
elements:
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intense
credit underwriting;
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creative
financial structuring;
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efficient
capitalization; and
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aggressive
asset management.
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The first
element, and the foundation of our past and future success, is our expertise in
credit underwriting. For each prospective investment, an in-house underwriting
team is assigned to perform an intense ground-up analysis of all aspects of
credit risk. Our rigorous underwriting process is embodied in our proprietary
credit policies and procedures that detail the due diligence steps from initial
client contact through closing. We have developed the capability to apply this
methodology to a high volume of investment opportunities, including CMBS
transactions with a large number of underlying loans, through the combination of
personnel, procedures and technology. On all levels, input is received from our
finance, capital markets, credit and legal teams, as well as from various third
parties, including our credit providers.
Creative
financial structuring is the second critical element. In our direct investment
programs, we strive to design a customized structure for each investment that
provides us with the necessary credit, yield and protective structural features
while meeting the varying, and often complex, needs of our clients. We believe
our demonstrated ability to structure creative solutions gives us a distinct
competitive advantage in the marketplace. In the structured products arena, our
broad capital markets expertise enables us to better analyze the risks and
opportunities embedded in complex vehicles such as CMBS and synthetic
securities.
Efficient
capitalization is the third integral element of our platform. We utilize
multiple debt and equity products to capitalize our balance sheet and investment
management business. We use leverage to increase returns on equity and portfolio
diversification, and work diligently to manage the increased risks associated
with such leverage. We control financial risk by actively managing our capital
structure, seeking to minimize our recourse and mark-to-market exposure and to
match the duration and interest rate index of our assets and liabilities (in
some cases, utilizing hedging instruments). Our objective is to maximize our
return on equity while managing the risk inherent in a leveraged investment
strategy. As such, we always seek to maintain adequate liquidity to defend the
balance sheet and investment management vehicles against capital market and real
estate market volatility.
The final element of our platform is aggressive asset
management. We pride ourselves on our active style of managing our portfolios.
From the closing of an investment through its final repayment, our dedicated
asset management team is in constant contact with our borrowers and servicers,
monitoring performance of our collateral and enforcing our rights as necessary.
We are rated/approved as a special servicer by all three rating agencies;
allowing us to exercise a substantial level of control in certain structured
transactions, such as CMBS.
By
adhering to these four key elements that define our platform, from
July 1997 through December 31, 2007, we have originated over $10.5
billion of investments, both directly and on behalf of our managed investment
vehicles, and have limited the loss experience of our portfolios to less than
1.0%.
As
depicted below, our business model is designed to produce a unique mix of net
interest income from our balance sheet investments and fee income from our
investment management operations.
We
allocate opportunities between our balance sheet and investment management
vehicles based upon our assessment of the availability and relative cost of
capital, the risk and return profiles of each investment and applicable
regulatory requirements. The combination of balance sheet and investment
management capabilities allows us to maximize the scope of opportunities upon
which we can capitalize. Our goal is to deliver a stable, growing stream of
earnings from these two complementary activities.
Currently,
we are investing capital for our own account, as well as on behalf of CT Large
Loan, CT High Grade, CTX Fund, and CTOPI. All of these entities are designed to
complement the activities of our balance sheet. At year end 2007, in addition to
our active investment management mandates, we manage one other vehicle, CT
Mezzanine Partners III Inc. or Fund III. Fund III has completed its
investment period and is now liquidating in the ordinary course.
We
operate our business to qualify as a REIT for federal income tax purposes. Our
primary reason for operating as a REIT is to pay dividends to our shareholders
on a tax-efficient basis. We manage our balance sheet investments to produce a
portfolio that meets the asset and income tests necessary to maintain our REIT
qualification and conduct our investment management business through our
wholly-owned subsidiary, CT Investment Management Co., LLC, which is subject to
federal, state and city income tax.
Since
1997, our investment programs have focused on various strategies designed to
take advantage of opportunities that have developed in the commercial real
estate finance sector. These opportunities have been created largely by the
evolution and growing importance of securitization in the commercial real estate
debt capital markets. With approximately $3.2 trillion outstanding as of
September 30, 2007, the market for U.S. commercial real estate debt is
large and dynamic.
Depending
on our assessment of relative value, our real estate investments may take a
variety of forms including, but not limited to:
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Mortgage
Loans—These are secured property loans evidenced by a first mortgage which
is senior to any mezzanine financing and the owner’s equity. These loans
may finance stabilized properties, may be bridge loans to finance property
owners that require interim funding or may be construction loans. Our
mortgage loans range in duration and typically require a balloon payment
of principal at maturity. These investments may include pari passu
participations in mortgage loans. We may also originate and fund first
mortgage loans in which we intend to sell the senior tranche, thereby
creating what we refer to as a subordinate mortgage
interest.
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Subordinate
Mortgage Interests—Sometimes known as B Notes, these are loans evidenced
by a junior participation in a first mortgage, with the senior
participation known as an A Note. Although a subordinate mortgage interest
may be evidenced by its own promissory note, it shares a single borrower
and mortgage with the A Note and is secured by the same collateral.
Subordinate mortgage interests have the same borrower and benefit from the
same underlying obligation and collateral as the A Note lender. The
subordinate mortgage interest is subordinated to the A Note by virtue of a
contractual arrangement between the A Note lender and the subordinate
mortgage interest lender and in most instances are contractually limited
in rights and remedies in the case of default. In some cases, there may be
multiple senior and/or junior interests in a single mortgage loan.
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Mezzanine
Loans—These include both property and corporate mezzanine loans. Property
mezzanine loans are secured property loans that are subordinate to a first
mortgage loan, but senior to the owner’s equity. A mezzanine loan is
evidenced by its own promissory note and is typically made to the owner of
the property-owning entity, which is typically the first mortgage
borrower. It is not secured by a mortgage on the property, but by a pledge
of the borrower’s ownership interest in the property-owning entity.
Subject to negotiated contractual restrictions, the mezzanine lender
generally has the right, following foreclosure, to become the owner of the
property, subject to the lien of the first mortgage. Corporate mezzanine
loans, on the other hand, are investments in or loans to real estate
related operating companies, including REITs. Such investments may take
the form of secured debt, preferred stock and other hybrid instruments
such as convertible debt. Corporate mezzanine loans may finance, among
other things, operations, mergers and acquisitions, management buy-outs,
recapitalizations, start-ups and stock buy-backs generally involving real
estate and real estate related entities.
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CMBS—These
are securities collateralized by pools of individual first mortgage loans.
Cash flows from the underlying mortgages are aggregated and allocated to
the different classes of securities in accordance with their seniority,
typically ranging from the AAA rated through the unrated, first loss
tranche. Administration and servicing of the pool is performed by a
trustee and servicers, who act on behalf of all security holders in
accordance with contractual agreements. Our investments generally
represent the subordinated tranches in these pools ranging from the BBB
rated through the unrated class. When practical, we are designated the
Special Servicer for the CMBS trusts in which we have appropriate
ownership interests, enabling us to control the resolution of matters
which require lender approval. We also include select
investments in CDOs in this category.
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Synthetics—These
instruments are contracts between parties whereby payments are exchanged
based upon the performance of an underlying reference obligation. The type
of obligation referenced may be any of the above described asset types.
These investments typically take the form of either a total return swap or
a credit default swap. In addition to the performance of the reference
obligation, synthetics carry the additional risk of the performance of the
counterparty.
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2007 was
a record year for our company in terms of origination volume, with $2.5 billion
of total commitments made for our balance sheet and our investment management
vehicles. The following charts illustrate the diversification of the assets we
originated in 2007.
Our
business strategy is to continue to grow our balance sheet investments and our
third party assets under management. We expect the growth of our business to be
driven primarily by the following activities:
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we
will continue to make commercial real estate debt investments for our
balance sheet;
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we
will expand our investment management business through additional
offerings of subsequent investment management vehicles; and
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we
may incubate or acquire complementary balance sheet and investment
management businesses that leverage our core skills in credit underwriting
and financial structuring.
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We are
engaged in a highly competitive business. In our investment activities, we
compete for opportunities with numerous public and private investment vehicles,
including financial institutions, specialty finance companies, mortgage banks,
pension funds, opportunity funds, hedge funds, REITs and other institutional
investors, as well as individuals. Many competitors are significantly larger
than us, have well established operating histories and may have greater access
to capital, more resources and other advantages over us. These competitors may
be willing to accept lower returns on their investments or to compromise
underwriting standards and, as a result, our origination volume and profit
margins could be adversely affected. In our investment management business, we
compete with other investment management companies in attracting third party
capital for our vehicles and many of our competitors are well established,
possessing substantially greater financial, marketing and other
resources.
Our
activities in the United States, including the financing of our operations, are
subject to a variety of federal and state regulations. In addition, a majority
of states have ceilings on interest rates chargeable to certain customers in
financing transactions. Furthermore, our international activities are also
subject to local regulations.
As of
December 31, 2007, we had 53 full-time employees. Our staff is employed
under a co-employment agreement with a third party human resources firm, Ambrose
Employer Group, LLC. In addition, our chief executive officer, chief operating
officer, chief financial officer and chief credit officer are employed under
employment contracts. None of our employees are covered by a collective
bargaining agreement and management considers the relationship with our
employees to be good. In addition to our staff in New York, Alabama, and
Minnesota, we contract for the services of an additional 15 dedicated
professionals employed by a commercial real estate underwriting
services firm in Chennai, India.
Code
of Business Conduct and Ethics and Corporate Governance Documents
We have
adopted a code of business conduct and ethics that applies to all of our
employees and our board of directors, including our principal executive officer
and principal financial and accounting officer. This code of business conduct
and ethics is designed to comply with SEC regulations and New York Stock
Exchange corporate governance rules related to codes of conduct and ethics
and is posted on our corporate website at http://www.capitaltrust.com. In
addition, our corporate governance guidelines and charters for our audit,
compensation and corporate governance committees of the board of directors are
also posted on our corporate website. Copies of our code of business conduct and
ethics, our corporate governance guidelines and our committee charters are also
available free of charge, upon request directed to Investor Relations, Capital
Trust, Inc., 410 Park Avenue, 14th Floor, New York, NY 10022.
Website
Access to Reports
We
maintain a website at http://www.capitaltrust.com. Through our website, we make
available, free of charge, our annual proxy statement, annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, as soon as reasonably practicable after we electronically
file such material with, or furnish them to, the SEC. The SEC maintains a
website that contains these reports at http://www.sec.gov.
FORWARD
LOOKING INFORMATION
Our
Annual Report on Form l0-K for the year ended December 31, 2007, our
2007 Annual Report to Shareholders, any of our Quarterly Reports on
Form 10-Q or Current Reports on Form 8-K of the Company, or any other
oral or written statements made in press releases or otherwise by or on behalf
of Capital Trust, Inc., may contain forward looking statements within the
meaning of the Section 21E of the Securities and Exchange Act of 1934, as
amended, which involve certain risks and uncertainties. Forward looking
statements predict or describe our future operations, business plans, business
and investment strategies and portfolio management and the performance of our
investments and our investment management business. These forward looking
statements are identified by their use of such terms and phrases as “intends,”
“intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,”
“expected,” “project,” “projected,” “projections,” “plans,” “seeks,”
“anticipates,” “anticipated,” “should,” “could,” “may,” “will,” “designed to,”
“foreseeable future,” “believe,” “believes” and “scheduled” and similar
expressions. Our actual results or outcomes may differ materially from those
anticipated. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date the statement was made. We
undertake no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or
otherwise.
Our
actual results may differ significantly from any results expressed or implied by
these forward looking statements. Some, but not all, of the factors that might
cause such a difference include, but are not limited to:
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the
general political, economic and competitive conditions, in the United
States and foreign jurisdictions wherein we invest;
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the
level and volatility of prevailing interest rates and credit spreads,
magnified by the current turmoil in the credit markets;
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adverse
changes in the real estate and real estate capital markets;
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difficulty
in obtaining financing or raising capital, especially in the current
credit and equity environment;
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the
deterioration of performance and thereby credit quality of property
securing our investments, borrowers and, in general, the risks associated
with the ownership and operation of real estate that may cause cash flow
deterioration to us and potentially principal losses on our investments;
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a
compression of the yield on our investments and the cost of our
liabilities, as well as the level of leverage available to us;
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adverse
developments in the availability of desirable loan and investment
opportunities whether they are due to competition, regulation or
otherwise;
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events,
contemplated or otherwise, such as natural disasters including hurricanes
and earthquakes, acts of war and/or terrorism (such as the events of
September 11, 2001) and others that may cause unanticipated and
uninsured performance declines and/or losses to us or the owners and
operators of the real estate securing our investment;
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the
cost of operating our platform, including, but not limited to, the cost of
operating a real estate investment platform and the cost of operating as a
publicly traded company;
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authoritative
generally accepted accounting principles or policy changes from such
standard-setting bodies as the Financial Accounting Standards Board, the
Securities and Exchange Commission, Internal Revenue Service, the New York
Stock Exchange, and other authorities that we are subject to, as well as
their counterparts in any foreign jurisdictions where we might do
business; and
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the
risk factors set forth below.
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Risks Related to Our
Investment Program
Our
existing loans and investments expose us to a high degree of risk associated
with investing in real estate assets.
Real
estate historically has experienced significant fluctuations and cycles in
performance that may result in reductions in the value of our real estate
related investments. The performance and value of our loans and investments once
originated or acquired by us depends upon many factors beyond our
control. The ultimate performance and value of our investments is
subject to the varying degrees of risk generally incident to the ownership and
operation of the properties which collateralize or support our
investments. The ultimate performance and value of our loans and
investments depends upon, in large part, the commercial property owner’s ability
to operate the property so that it produces sufficient cash flows necessary
either to pay the interest and principal due to us on our loans and investments
or pay us as an equity advisor. Revenues and cash flows may be adversely
affected by:
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changes
in national economic conditions;
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changes
in local real estate market conditions due to changes in national or local
economic conditions or changes in local property market characteristics;
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the
extent of the impact of the current turmoil in the sub-prime residential
loan market on credit markets;
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the
lack of demand for commercial real estate collateralized debt obligations,
or CDOs, which has been halted as a result of the current turmoil in the
credit markets;
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competition
from other properties offering the same or similar services;
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changes
in interest rates and in the state of the debt and equity capital markets;
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the
ongoing need for capital improvements, particularly in older building
structures;
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changes
in real estate tax rates and other operating expenses;
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adverse
changes in governmental rules and fiscal policies, civil unrest, acts
of God, including earthquakes, hurricanes and other natural disasters, and
acts of war or terrorism, which may decrease the availability of or
increase the cost of insurance or result in uninsured losses;
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adverse
changes in zoning laws;
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the
impact of present or future environmental legislation and compliance with
environmental laws;
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the
impact of lawsuits which could cause us to incur significant legal
expenses and divert management’s time and attention from our day-to-day
operations; and
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other
factors that are beyond our control and the control of the commercial
property owners.
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In the
event that any of the properties underlying our loans or investments experiences
any of the foregoing events or occurrences, the value of, and return on, such
investments, our profitability and the market price of our class A common stock
would be negatively impacted.
A prolonged
economic slowdown, a lengthy or severe recession, or declining real estate
values could harm our operations.
We believe the
risks associated with our business are more severe during periods of economic
slowdown or recession if these periods are accompanied by declining real estate
values. Declining real estate values would likely reduce the level of new
mortgage loan originations, since borrowers often use increases in the value of
their existing properties to support the purchase of or investment in additional
properties, which in turn could lead to fewer opportunities for our investment.
Borrowers may also be less able to pay principal and interest on our loans if
the real estate economy weakens. Further, declining real estate values
significantly increase the likelihood that we will incur losses on our loans in
the event of default because the value of our collateral may be insufficient to
cover our basis in the loan. Any sustained period of increased payment
delinquencies, foreclosures or losses could adversely affect both our net
interest income from loans in our portfolio as well as our ability to operate
our investment management business, which would significantly harm our revenues,
results of operations, financial condition, liquidity, business prospects and
our ability to make distributions to the stockholders.
We
may change our investment strategy without shareholder consent, which may result
in riskier investments than our current investments.
We may
seek to expand our investment activities beyond real estate related investments.
We may change our investment activities at any time without the consent of our
shareholders, which could result in our making investments that are different
from, and possibly riskier than, our current real estate investments. New
investments we may make outside of our area of historical expertise may not
perform as well as our current portfolio of real estate related
investments.
We
are exposed to the risks involved with making subordinated
investments.
Our
subordinated investments involve the risks attendant to investments consisting
of subordinated loans and similar positions. In many cases, management of our
investments and our remedies with respect thereto, including the ability to
foreclose on or direct decisions with respect to the collateral securing such
investments, is subject
to the rights of senior lenders and the rights set forth in inter-creditor or
servicing agreements. Our interests and those of the senior lenders and other
interested parties may not be aligned.
We
may not be able to obtain the level of leverage necessary to optimize our return
on investment.
Our
return on investment depends, in part, upon our ability to grow our balance
sheet portfolio of invested assets and those of our investment management
vehicles through the use of leverage at a cost of debt that is lower than the
yield earned on our investments. We generally obtain leverage through the
issuance of CDOs, repurchase agreements and other borrowings. Our ability to
obtain the necessary leverage on beneficial terms ultimately depends upon the
quality of the portfolio assets that collateralize our indebtedness. Our failure
to obtain and/or maintain leverage at desired levels, or to obtain leverage on
attractive terms, would have an adverse effect on our performance or that of our
investment management vehicles. Moreover, we are dependent upon a limited
universe of lenders to provide financing under repurchase agreements for our
origination or acquisition of loans and investments, and there can be no
assurance that these agreements will be renewed or extended at expiration. Our
ability to obtain financing through CDOs is subject to conditions in the debt
capital markets which are impacted by factors beyond our control that may at
times be adverse and reduce the level of investor demand for such
securities.
We
are subject to the risks of holding leveraged investments.
Leverage
creates an opportunity for increased return on equity, but at the same time
creates risk for us and our investment management vehicles. For example,
leveraging magnifies changes in our net worth. We and our investment
management vehicles will leverage assets only when there is an expectation that
leverage will provide a benefit, such as enhancing returns, although we cannot
assure you that the use of leverage will prove to be beneficial. Increases in
credit spreads in the market generally may adversely affect the market value of
our investments. Because borrowings under our repurchase agreements and some
other agreements are secured by our investments, which are subject to being
marked to market by our credit providers, the borrowings available to us may
decline if the market value of our investments decline. Moreover, we
cannot assure you that we will be able to meet mark-to-market capital calls or
debt service obligations in general and, to the extent such obligations are not
met, there is a risk of loss of some or all of our investments through
foreclosure or a financial loss if we or they are required to liquidate assets,
the impact of which could be magnified if such a liquidation is at a
commercially inopportune time.
The leverage
providers under our repurchase agreements may elect not to extend financing to
us, which could quickly and seriously impair our liquidity.
We finance a
meaningful portion of our investments with repurchase agreements, which are
short-term financing arrangements. Under the terms of these agreements, we sell
an investment to a counterparty for a specified price and concurrently agree to
repurchase the same investment from our counterparty at a later date at the
specified price. During the term of the repurchase agreement the counterparty
makes funds available to us and holds the investment as collateral and we pay
them interest on our borrowings. When the term of a repurchase agreement ends,
we are required to repurchase the investment for the specified repurchase price.
If we want to continue to finance the investment with a repurchase agreement, we
ask the counterparty to extend or renew the repurchase agreement for another
term. Our counterparties are not required to roll our repurchase agreements upon
the expiration of the stated terms, which subjects us to a number of risks. The
renewed repurchase agreement could impose more onerous terms upon us, including
higher interest rates and lower advance rates (a reduction in the amount of
leverage available to us). More significantly, in the event that a counterparty
elects not to roll our repurchase financings with them, we would be required pay
the counterparty the full repurchase price on the maturity date and find an
alternate source of financing. Alternate sources of financing may be more
expensive, contain more onerous terms or simply may not be available. If we were
unable to pay the repurchase price for any investment financed with a repurchase
agreement, the counterparty has the right to sell the underlying investment
being held as collateral and require us to compensate them for any shortfall
between the value of our obligation to the counterparty and the amount for which
the collateral was sold (which may be sold at a significantly discounted
price).
We
may guarantee some of our leverage and contingent obligations.
We
guarantee the performance of some of our obligations, including, but not limited
to, most of our repurchase agreements, derivative agreements, obligations to
co-invest in our investment management vehicles and unsecured indebtedness. The
non-performance of such obligations may cause losses to us in excess of the
capital we initially may have invested or committed under such obligations and
there is no assurance that we will have sufficient capital to cover any such
losses.
Our
secured and unsecured credit agreements may impose restrictions on our operation
of the business.
Under our
secured and unsecured credit agreements, such as our repurchase agreements and
derivative agreements, we may make certain representations, warranties and
affirmative and negative covenants that may restrict our ability to operate
while still utilizing those sources of credit. Such representations, warranties
and covenants may include, but are not limited to, restrictions on corporate
guarantees, the maintenance of certain financial ratios, including our ratio of
debt to equity capital and our debt service coverage ratio, as well as the
maintenance of a minimum net worth, restrictions against a change of control of
our company and limitations on alternative sources of capital. In
addition, we are subject to potential margin calls under the terms of our
repurchase facilities should the value of our investments decline. If
margin calls are not met, we would be forced to sell investments, which could
lead to losses.
Our
success depends on the availability of attractive investments and our ability to
identify, structure, consummate, leverage, manage and realize returns on
attractive investments.
Our
operating results are dependent upon the availability of, as well as our ability
to identify, structure, consummate, leverage, manage and realize returns on
credit sensitive investment opportunities. In general, the
availability of desirable credit sensitive investment opportunities and,
consequently, our balance sheet returns and our investment management vehicles’
returns, will be affected by the level and volatility of interest rates,
conditions in the financial markets, general economic conditions, the demand for
credit sensitive investment opportunities and the supply of capital for such
investment opportunities. We cannot make any assurances that we will be
successful in identifying and consummating investments which satisfy our rate of
return objectives or that such investments, once consummated, will perform as
anticipated. In addition, if we are not successful in investing for our
investment management vehicles, the potential revenues we earn from management
fees and co-investment returns will be reduced. We may expend significant time
and resources in identifying and pursuing targeted investments, some of which
may not be consummated.
The
real estate investment business is highly competitive. Our success depends on
our ability to compete with other providers of capital for real estate
investments.
Our
business is highly competitive. Competition may cause us to accept economic or
structural features in our investments that we would not have otherwise accepted
and it may cause us to search for investments in markets outside of our
traditional product expertise. We compete for attractive investments with
traditional lending sources, such as insurance companies and banks, as well as
other REITs, specialty finance companies and private equity vehicles with
similar investment objectives, which may make it more difficult for us to
consummate our target investments. Many of our competitors have greater
financial resources and lower costs of capital than we do, which provides them
with greater operating flexibility and a competitive advantage relative to
us.
Our
loans and investments may be subject to fluctuations in interest rates which may
not be adequately protected, or protected at all, by our hedging
strategies.
Our current balance
sheet investment program emphasizes loans with both floating interest rates and
fixed interest rates. Floating rate investments earn interest at rates that
adjust from time to time (typically monthly) based upon an index (typically one
month LIBOR). These floating rate loans are insulated from changes in
value specifically due to changes in interest rates, however, the coupons they
earn fluctuate based upon interest rates (again, typically one month LIBOR) and,
in a declining and/or low interest rate environment, these loans will earn lower
rates of interest and this will impact our operating performance and our
dividend. Fixed interest rate investments, however, do not have adjusting
interest rates and, as prevailing interest rates change, the relative value of
the fixed cash flows from these investments will cause potentially significant
changes in value. Depending on market conditions, fixed rate assets may become a
greater portion of our new loan originations. We may employ various hedging
strategies to limit the effects of changes in interest rates (and in some cases
credit spreads), including engaging in interest rate swaps, caps, floors and
other interest rate derivative products. We believe that no strategy can
completely insulate us or our investment management vehicles from the risks
associated with interest rate changes and there is a risk that they may provide
no protection at all and potentially compound the impact of changes in interest
rates. Hedging transactions involve certain additional risks such as
counterparty risk, the legal enforceability of hedging contracts, the early
repayment of hedged transactions and the risk that unanticipated and significant
changes in interest rates may cause a significant loss of basis in the contract
and a change in current period expense. We cannot make assurances that we will
be able to enter into hedging transactions or that such hedging transactions
will adequately protect us or our investment management vehicles against the
foregoing risks.
Accounting for
derivatives under GAAP is extremely complicated. Any failure by us to account
for our derivatives properly in accordance with GAAP in our financial statements
could adversely affect our earnings. In particular, cash flow hedges which are
not perfectly correlated (and appropriately designated and/or documented as
such) with a variable rate financing will impact our reported income as gains,
and losses on the ineffective portion of such hedges.
Our
use of leverage may create a mismatch with the duration and index of the
investments that we are financing.
We
attempt to structure our leverage to minimize the difference between the term of
our investments and the leverage we use to finance such an investment. In the
event that our leverage is shorter term than the financed investment, we may not
be able to extend or find appropriate replacement leverage and that would have
an adverse impact on our liquidity and our returns. In the event that our
leverage is longer term than the financed investment, we may not be able to
repay such leverage or replace the financed investment with an optimal
substitute or at all, which will negatively impact our desired leveraged
returns.
We
attempt to structure our leverage such that we minimize the difference between
the index of our investments and the index of our leverage—financing floating
rate investments with floating rate leverage and fixed rate investments with
fixed rate leverage. If such a product is not available to us from our lenders
on reasonable terms, we may use hedging instruments to effectively create such a
match. For example, in the case of fixed rate investments, we may finance such
an investment with floating rate leverage, but effectively convert all or a
portion of the attendant leverage to fixed rate using hedging
strategies.
Our
attempts to mitigate such risk are subject to factors outside of our control,
such as the availability to us of favorable financing and hedging options, which
is subject to a variety of factors, of which duration and term matching are only
two such factors.
Our
loans and investments may be illiquid which will constrain our ability to vary
our portfolio of investments.
Our real
estate investments and structured financial product investments are relatively
illiquid and some are highly illiquid. Such illiquidity may limit our ability to
vary our portfolio or our investment management vehicles’ portfolios of
investments in response to changes in economic and other
conditions. Illiquidity may result from the absence of an established
market for investments as well as the legal or contractual restrictions on their
resale. In addition, illiquidity may result from the decline in value of a
property securing these investments. We cannot make assurances that the fair
market value of any of the real property serving as security will not decrease
in the future, leaving our or our investment management vehicles’ investments
under-collateralized or not collateralized at all, which could impair the
liquidity and value, as well as our return on such investments.
We
may not have control over certain of our loans and investments.
Our
ability to manage our portfolio of loans and investments may be limited by the
form in which they are made. In certain situations, we or our investment
management vehicles may:
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acquire
investments subject to rights of senior classes and servicers under
inter-creditor or servicing agreements;
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acquire
only a participation in an underlying investment;
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co-invest
with third parties through partnerships, joint ventures or other entities,
thereby acquiring non-controlling interests; or
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rely
on independent third party management or strategic partners with respect
to the management of an asset.
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Therefore,
we may not be able to exercise control over the loan or investment. Such
financial assets may involve risks not present in investments where senior
creditors, servicers or third party controlling investors are not involved. Our
rights to control the process following a borrower default may be subject to the
rights of senior creditors or servicers whose interests may not be aligned with
ours. A third party partner or co-venturer may have financial difficulties
resulting in a negative impact on such asset, may have economic or business
interests or goals which are inconsistent with ours and those of our investment
management vehicles, or may be in a position to take action contrary to our or
our investment management vehicles’ investment objectives. In addition, we and
our investment management vehicles may, in certain circumstances, be liable for
the actions of our third party partners or co-venturers.
We
may not achieve our targeted rate of return on our investments.
We
originate or acquire investments based on our estimates or projections of
overall rates of return on such investments, which in turn are based upon, among
other considerations, assumptions regarding the performance of assets, the
amount and terms of available financing to obtain desired leverage and the
manner and timing of dispositions, including possible asset recovery and
remediation strategies, all of which are subject to significant uncertainty. In
addition, events or conditions that we have not anticipated may occur and may
have a significant effect on the actual rate of return received on an
investment.
As we
acquire or originate investments for our balance sheet portfolio, whether as new
additions or as replacements for maturing investments, there can be no assurance
that we will be able to originate or acquire investments that produce rates of
return comparable to rates on our existing investments.
Investor
demand for commercial real estate CDOs has been substantially
curtailed.
The
recent turmoil in the structured finance markets, in particular the sub-prime
residential loan market, has negatively impacted the credit markets generally,
and, as a result, investor demand for commercial real estate CDOs has been
substantially curtailed. In recent years, we have relied to a substantial extent
on CDO financings to obtain match funded financing for our investments. Until
the market for commercial real estate CDOs recovers, we may be unable to utilize
CDOs to finance our investments and we may need to utilize less favorable
sources of financing to finance our investments on a long-term basis. There can
be no assurance as to when demand for commercial real estate CDOs will return or
the terms of such securities investors will demand or whether we will be able to
issue CDOs to finance our investments on terms beneficial to us.
We
may not be able to acquire suitable investments for a CDO issuance, or we may
not be able to issue CDOs on attractive terms, which may require us to utilize
more costly financing for our investments.
We intend to
capitalize on opportunities to finance certain of our investments through the
issuance of CDOs. During the period that we are acquiring these investments, we
intend to finance our purchases through repurchase agreements. We use these
repurchase agreements to finance our acquisition of investments until we have
accumulated a sufficient quantity of investments, at which time we may refinance
them through a securitization, such as a CDO issuance. As a result, we are
subject to the risk that we will not be able to acquire a sufficient amount of
eligible investments to maximize the efficiency of a CDO issuance. In addition,
conditions in the debt capital markets may make the issuance of CDOs less
attractive to us even when we do have a sufficient pool of collateral. If we are
unable to issue a CDO to finance these investments, we may be required to
utilize other forms of potentially less attractive financing, which may require
a larger portion of our cash flows and thereby reduce the amount of cash
available for distribution to our stockholders and funds available for
operations and investments, and which may also require us to assume higher
levels of risk when financing our investments.
We
may not be able to find suitable replacement investments for CDOs with
reinvestment periods.
Some of
our CDOs have periods where principal proceeds received from assets securing the
CDO can be reinvested only for a defined period of time, commonly referred to as
a reinvestment period. Our ability to find suitable investments during the
reinvestment period that meet the criteria set forth in the CDO documentation
and by rating agencies may determine the success of our CDO investments. Our
potential inability to find suitable investments may cause, among other things,
lower returns, interest deficiencies, hyper-amortization of the senior CDO
liabilities and may cause us to reduce the life of our CDOs and accelerate the
amortization of certain fees and expenses.
The
use of CDO financings with over-collateralization and interest coverage
requirements may have a negative impact on our cash flow.
The terms
of CDOs will generally provide that the principal amount of investments must
exceed the principal balance of the related bonds by a certain amount and that
interest income exceeds interest expense by a certain amount. Generally, CDO
terms provide that, if certain delinquencies, losses, and/or or other factors
cause a decline in collateral or cash flow levels, the cash flow otherwise
payable on our retained subordinated classes may be redirected to repay classes
of CDOs senior to ours until the issuer or the collateral is in compliance with
the terms of the governing documents. Other tests (based on delinquency levels
or other criteria) may restrict our ability to receive net income from assets
pledged to secure CDOs. We cannot assure you that the performance tests will be
satisfied. With respect to future CDOs we may issue, we cannot assure you, in
advance of completing negotiations with the rating agencies or other key
transaction parties as to the actual terms of the delinquency tests,
over-collateralization and interest coverage terms, cash flow release mechanisms
or other significant factors upon which net income to us will be calculated.
Failure to obtain favorable terms with regard to these matters may adversely
affect the availability of net income to us. If our investments fail to perform
as anticipated, our over-collateralization, interest coverage or other credit
enhancement expense associated with our CDO financings will
increase.
We
may be required to repurchase loans that we have sold or to indemnify holders of
our CDOs.
If any of
the loans we originate or acquire and sell or securitize through CDOs do not
comply with representations and warranties that we make about certain
characteristics of the loans, the borrowers and the underlying properties, we
may be required to repurchase those loans or replace them with substitute loans.
In addition, in the case of loans that we have sold instead of retained, we may
be required to indemnify persons for losses or expenses incurred as a result of
a breach of a representation or warranty. Repurchased loans typically
require a significant allocation of working capital to carry on our books, and
our ability to borrow against such assets is limited. Any significant
repurchases or indemnification payments could adversely affect our financial
condition and operating results.
The
commercial mortgage and mezzanine loans we originate or acquire and the
commercial mortgage loans underlying the commercial mortgage backed securities
in which we invest are subject to delinquency, foreclosure and loss, which could
result in losses to us.
Our
commercial mortgage and mezzanine loans are secured by commercial property and
are subject to risks of delinquency and foreclosure, and risks of loss that are
greater than similar risks associated with loans made on the security of
single-family residential property. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of the property rather than upon the existence of
independent income or assets of the borrower. If the net operating income of the
property is reduced, the borrower’s ability to repay the loan may be impaired.
Net operating income of an income-producing property can be affected by, among
other things, tenant mix, success of tenant businesses, property management
decisions, property location and condition, competition from comparable types of
properties, changes in laws that increase operating expenses or limit rents that
may be charged, any need to address environmental contamination at the property,
changes in national, regional or local economic conditions and/or specific
industry segments, declines in regional or local real estate values, declines in
regional or local rental or occupancy rates, increases in interest rates, real
estate tax rates and other operating expenses, and changes in governmental
rules, regulations and fiscal policies, including environmental legislation,
acts of God, terrorism, social unrest and civil disturbances.
Our
investments in subordinated commercial mortgage backed securities and similar
investments are subject to losses.
In
general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property and then
by the most junior security holder, referred to as the “first loss” position. In
the event of default and the exhaustion of any equity support and any classes of
securities junior to those in which we invest (and in some cases we may be
invested in the junior most classes of securitizations), we may not be able to
recover all of our investment in the securities we purchase. In addition, if the
underlying mortgage portfolio has been overvalued by the originator, or if the
values subsequently decline and, as a result, less collateral is available to
satisfy interest and principal payments due on the related mortgage backed
securities, the securities in which we invest may incur significant
losses. Subordinate interests generally are not actively traded and
are relatively illiquid investments and recent volatility in CMBS trading
markets has caused the value of these investments to decline.
The
prices of lower credit quality commercial mortgage backed securities, or CMBS,
are generally less sensitive to interest rate changes than more highly rated
investments, but more sensitive to adverse economic downturns and underlying
borrower developments. A projection of an economic downturn, for example, could
cause a decline in the price of lower credit quality CMBS because the ability of
borrowers to make principal and interest payments on the mortgages underlying
the mortgage backed securities may be impaired. In such event, existing credit
support in the securitization structure may be insufficient to protect us
against the loss of our principal on these securities.
We
may invest in non-performing assets that are subject to a higher degree of
financial risk.
We will
make investments in non-performing or other troubled assets that involve a high
degree of financial risk and there can be no assurance that our investment
objectives will be realized or that there will be any return on our investment.
Furthermore, investments in properties operating in workout modes or under
bankruptcy protection
laws may, in certain circumstances, be subject to additional potential
liabilities that could exceed the value of our original
investment.
The
impact of the events of September 11, 2001 and the effect thereon on terrorism
insurance expose us to certain risks.
The
terrorist attacks on September 11, 2001 disrupted the U.S. financial markets,
including the real estate capital markets, and negatively impacted the U.S.
economy in general. Any future terrorist attacks, the anticipation of any such
attacks, and the consequences of any military or other response by the U.S. and
its allies may have a further adverse impact on the U.S. financial markets and
the economy generally. We cannot predict the severity of the effect
that such future events would have on the U.S. financial markets, the economy or
our business.
In
addition, the events of September 11, 2001 created significant uncertainty
regarding the ability of real estate owners of high profile assets to obtain
insurance coverage protecting against terrorist attacks at commercially
reasonable rates, if at all. The Terrorism Risk Insurance Act of 2002, or TRIA,
was extended in December 2007. Coverage under the new law, the
Terrorism Risk Insurance Program Reauthorization Act, or TRIPRA, now expires in
2014. There is no assurance that TRIPRA will be extended beyond 2014.
The absence of affordable insurance coverage may adversely affect the general
real estate lending market, lending volume and the market’s overall liquidity
and may reduce the number of suitable investment opportunities available to us
and the pace at which we are able to make investments. If the properties that we
invest in are unable to obtain affordable insurance coverage, the value of those
investments could decline and in the event of an uninsured loss, we could lose
all or a portion of our investment.
The
economic impact of any future terrorist attacks could also adversely affect the
credit quality of some of our loans and investments. Some of our loans and
investments will be more susceptible to such adverse effects than others. We may
suffer losses as a result of the adverse impact of any future attacks and these
losses may adversely impact our results of operations.
Our
non-U.S. investments will expose us to certain risks.
We make
investments in foreign countries. Investing in foreign countries involves
certain additional risks that may not exist when investing in the United States.
The risks involved in foreign investments include:
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exposure
to local economic conditions, local interest rates, foreign exchange
restrictions and restrictions on the withdrawal of foreign investment and
earnings, investment restrictions or requirements, expropriations of
property and changes in foreign taxation structures;
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potential
adverse changes in the diplomatic relations of foreign countries with the
United States and government policies against investments by foreigners;
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changes
in foreign regulations;
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hostility
from local populations, potential instability of foreign governments and
risks of insurrections, terrorist attacks, war or other military action;
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fluctuations
in foreign currency exchange rates;
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changes
in social, political, legal, taxation and other conditions affecting our
international investment;
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logistical
barriers to our timely receiving the financial information relating to our
international investments that may need to be included in our periodic
reporting obligations as a public company; and
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lack
of uniform accounting standards (including availability of information in
accordance with U.S. generally accepted accounting principles).
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Unfavorable
legal, regulatory, economic or political changes such as those described above
could adversely affect our financial condition and results of
operations.
We may
from time to time invest a portion of our assets in non-U.S. investments or in
instruments denominated in non-U.S. currencies, the prices of which will be
determined with reference to currencies other than the U.S. dollar. We may hedge
our foreign currency exposure. To the extent unhedged, the value of our non-U.S.
assets will fluctuate with U.S. dollar exchange rates as well as the
price changes of our investments in the various local markets and currencies.
Among the factors that may affect currency values are trade balances, the level
of short-term interest rates, differences in relative values of similar assets
in different currencies, long-term opportunities for investment and capital
appreciation and political developments. An increase in the value of the U.S.
dollar compared to the other currencies in which we make our investments will
reduce the effect of increases and magnify the effect of decreases in the prices
of our securities in their local markets. We could realize a net loss on an
investment, even if there were a gain on the underlying investment before
currency losses were taken into account. We may seek to hedge currency risks by
investing in currencies, currency futures contracts and options on currency
futures contracts, forward currency exchange contracts, swaps, options or any
combination thereof (whether or not exchange traded), but there can be no
assurance that these strategies will be effective, and such techniques entail
costs and additional risks.
There
are increased risks involved with construction lending activities.
We
originate loans for the construction of commercial and residential use
properties. Construction lending generally is considered to involve a higher
degree of risk than other types of lending due to a variety of factors,
including generally larger loan balances, the dependency on successful
completion of a project, the dependency upon the successful operation of the
project (such as achieving satisfactory occupancy and rental rates) for
repayment, the difficulties in estimating construction costs and loan terms
which often do not require full amortization of the loan over its term and,
instead, provide for a balloon payment at stated maturity.
Some
of our investments and investment opportunities may be in synthetic
form.
Synthetic
investments are contracts between parties whereby payments are exchanged based
upon the performance of an underlying obligation. In addition to the risks
associated with the performance of the obligation, these synthetic interests
carry the risk of the counterparty not performing its contractual obligations.
Market standards, GAAP accounting methodology and tax regulations related to
these investments are evolving, and we cannot be certain that their evolution
will not adversely impact the value or sustainability of these investments.
Furthermore, our ability to invest in synthetic investments, other than through
a taxable REIT subsidiaries, may be severely limited by the REIT qualification
requirements because synthetic investment contracts generally are not qualifying
assets and do not produce qualifying income for purposes of the REIT asset and
income tests.
Risks Related to Our
Investment Management Business
We
are subject to risks and uncertainties associated with operating our investment
management business, and we may not achieve from this business the investment
returns that we expect.
We will
encounter risks and difficulties as we operate our investment management
business. In order to achieve our goals as an investment manager, we
must:
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manage
our investment management vehicles successfully by investing their capital
in suitable investments that meet their respective investment criteria;
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actively
manage the assets in our portfolios in order to realize targeted
performance;
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create
incentives for our management and professional staff to the task of
developing and operating the investment management business; and
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structure,
sponsor and capitalize future investment management vehicles that provide
investors with attractive investment opportunities.
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If we do
not successfully operate our investment management business to achieve the
investment returns that we or the market anticipates, our results of operations
may be adversely impacted.
We may
expand our investment management business to involve other investment classes
where we do not have prior investment experience. We may find it difficult to
attract third party investors without a performance track record involving such
investments. Even if we attract third party capital, there can be no assurance
that we will be successful in deploying the capital to achieve targeted returns
on the investments.
We
face substantial competition from established participants in the private equity
market as we offer mezzanine and other investment management vehicles to third
party investors.
We face
significant competition from large financial and other institutions that have
proven track records in marketing and managing investment management vehicles
and otherwise have a competitive advantage over us because they have access to
pre-existing third party investor networks into which they can channel competing
investment opportunities. If our competitors offer investment products that are
competitive with products offered by us, we will find it more difficult to
attract investors and to capitalize our investment management
vehicles.
Our
investment management vehicles are subject to the risk of defaults by third
party investors on their capital commitments.
The
capital commitments made by third party investors to our investment management
vehicles represent unsecured promises by those investors to contribute cash to
the investment management vehicles from time to time as investments are made by
the investment management vehicles. Accordingly, we are subject to general
credit risks that the investors may default on their capital commitments. If
defaults occur, we may not be able to close loans and investments we have
identified and negotiated which could materially and adversely affect the
investment management vehicles’ investment program or make us liable for breach
of contract, in either case to the detriment of our franchise in the private
equity market.
Risks Related to Our
Company
We
are dependent upon our senior management team to develop and operate our
business.
Our
ability to develop and operate our business depends to a substantial extent upon
the experience, relationships and expertise of our senior management and key
employees. We cannot assure you that these individuals will remain in our
employ. The employment agreements with (i) our chief executive officer, John R.
Klopp, expires on December 31, 2008, unless further extended, (ii) our chief
operating officer, Stephen D. Plavin, expires on December 28, 2008 (subject to
our option to extend for an additional twelve months), unless further extended,
(iii) our chief financial officer, Geoffrey G. Jervis, expires on December 31,
2009 (subject to our option to extend for an additional twelve months), unless
further extended, and (iv) our chief credit officer, Thomas C. Ruffing, expires
on December 31, 2008, unless further extended. The loss of the services of our
senior management and key employees could have a material adverse effect on our
operations.
There
may be conflicts between the interests of our investment management vehicles and
us.
We are
subject to a number of potential conflicts between our interests and the
interests of our investment management vehicles. We are subject to potential
conflicts of interest in the allocation of investment opportunities between our
balance sheet and our investment management vehicles. In addition, we may make
investments that are senior or junior to, participations in, or have rights and
interests different from or adverse to, the investments made by our investment
management vehicles. Our interests in such investments may conflict with the
interests of our investment management vehicles in related investments at the
time of origination or in the event of a default or restructuring of the
investment. Finally, our officers and employees may have conflicts in allocating
their time and services among us and our investment management
vehicles.
We
must manage our portfolio in a manner that allows us to rely on an exclusion
from registration under the Investment Company Act of 1940 in order to avoid the
consequences of regulation under that Act.
We rely
on an exclusion from registration as an investment company afforded by Section
3(c)(5)(C) of the Investment Company Act of 1940. Under this exclusion, we are
required to maintain, on the basis of positions taken by the SEC staff in
interpretive and no-action letters, a minimum of 55% of the value of the total
assets of our portfolio in “mortgages and other liens on and interests in real
estate,” which we refer to as “Qualifying Interests,” and a minimum of 80% in
Qualifying Interests and real estate related assets. Because registration as an
investment company would significantly affect our ability to engage in certain
transactions or to organize ourselves in the manner we are currently organized,
we intend to maintain our qualification for this exclusion from registration. In
the past, when required due to the mix of assets in our balance sheet portfolio,
we have purchased all of the outstanding interests in pools of whole residential
mortgage loans, which we treat as Qualifying Interests based on SEC staff
positions. Investments in such pools of whole residential mortgage loans may not
represent an optimum use of our investable capital when compared to the
available investments we target pursuant to our investment
strategy. These investments present additional risks to us, and these
risks are compounded by our inexperience with such investments. We continue to
analyze our investments and may acquire other pools of whole loan residential
mortgage backed securities when and if required for compliance
purposes.
We treat
our investments in CMBS, B Notes and mezzanine loans as Qualifying Interests for
purposes of determining our eligibility for the exclusion provided by Section
3(c)(5)(C) to the extent such treatment is consistent with guidance provided by
the SEC or its staff. In the absence of such guidance that otherwise supports
the treatment of these investments as Qualifying Interests, we will treat them,
for purposes of determining our eligibility for the exclusion provided by
Section 3(c)(5)(C), as real estate related assets or miscellaneous assets, as
appropriate.
If our
portfolio does not comply with the requirements of the exclusion we rely upon,
we could be forced to alter our portfolio by selling or otherwise disposing of a
substantial portion of the assets that are not Qualifying Interests or by
acquiring a significant position in assets that are Qualifying Interests.
Altering our portfolio in this manner may have an adverse effect on our
investments if we are forced to dispose of or acquire assets in an unfavorable
market and may adversely affect our stock price.
If it
were established that we were an unregistered investment company, there would be
a risk that we would be subject to monetary penalties and injunctive relief in
an action brought by the SEC, that we would be unable to enforce contracts with
third parties and that third parties could seek to obtain rescission of
transactions undertaken during the period it was established that we were an
unregistered investment company and limitations on corporate leverage that would
have an adverse impact on our investment returns.
We
may expand our franchise through business acquisitions and the recruitment of
financial professionals, which may present additional costs and other challenges
and may not prove successful.
Our
business plan contemplates expansion of our franchise into complementary
investment strategies involving other credit-sensitive structured financial
products. We may undertake such expansion through business acquisitions or the
recruitment of financial professionals with experience in other products. We may
also expend a substantial amount of time and capital pursuing opportunities to
expand into complementary investment strategies that we do not consummate. The
expansion of our operations could place a significant strain on our management,
financial and other resources. Our ability to manage future expansion will
depend upon our ability to monitor operations, maintain effective quality
controls and significantly expand our internal management and technical and
accounting systems, all of which could result in higher operating expenses and
could adversely affect our current business, financial condition and results of
operations.
We cannot
assure you that we will be able to identify and integrate businesses or
professional teams we acquire to pursue complementary investment strategies and
expand our business. Moreover, any decision to pursue expansion into businesses
with complementary investment strategies will be in the discretion of our
management and may be consummated without prior notice or shareholder approval.
In such instances, shareholders will be relying on our management to assess the
relative benefits and risks associated with any such expansion.
Risks Relating to Our Class
A Common Stock
Because
a limited number of shareholders, including members of our management team, own
a substantial number of our shares, they may make decisions or take actions that
may be detrimental to your interests.
By virtue
of their direct and indirect share ownership, John R. Klopp, a director and our
chief executive officer, Craig M. Hatkoff, a director and former officer, and
other shareholders indirectly owned by trusts for the benefit of our chairman of
the board, Samuel Zell, have the power to significantly influence our affairs
and are able to influence the outcome of matters required to be submitted to
shareholders for approval, including the election of our directors, amendments
to our charter, mergers, sales of assets and other acquisitions or sales. The
influence exerted by these shareholders over our affairs might not be consistent
with the interests of some or all of our other shareholders. As of February 20,
2008, these shareholders collectively own and control 2,127,393 shares of our
class A common stock representing approximately 12.1% of our outstanding class A
common stock.
W. R.
Berkley Corporation, or WRBC, owns 3,133,300 shares of our class A common stock
which represents 17.8% of our outstanding class A common stock as of February
20, 2008. An officer of WRBC serves on our board of directors and, therefore,
has the power to significantly influence our affairs. Through its significant
ownership of our class A common stock, WRBC may have the ability to influence
matters submitted for shareholder approval. The influence exerted by WRBC over
our affairs might not be consistent with the interests of some or all of our
other shareholders.
The
concentration of ownership in our officers or directors or shareholders
associated with them may have the effect of delaying or preventing a change in
control of our company, including transactions in which you might otherwise
receive a premium for your class A common stock, and might negatively affect the
market price of our class A common stock.
Some
provisions of our charter and bylaws and Maryland law may deter takeover
attempts, which may limit the opportunity of our shareholders to sell their
shares at a favorable price.
Some of
the provisions of our charter and bylaws and Maryland law discussed below could
make it more difficult for a third party to acquire us, even if doing so might
be beneficial to our shareholders by providing them with the opportunity to sell
their shares at a premium to the then current market price.
Issuance of Preferred Stock Without
Shareholder Approval. Our charter authorizes our board of directors to
authorize the issuance of up to 100,000,000 shares of preferred stock and up to
100,000,000 shares of class A common stock. Our charter also authorizes our
board of directors, without shareholder approval, to classify or reclassify any
unissued shares of our class A common stock and preferred stock into other
classes or series of stock and to amend our charter to increase or decrease the
aggregate number of shares of stock of any class or series that may be issued.
Our board of directors, therefore, can exercise its power to reclassify our
stock to increase the number of shares of preferred stock we may issue without
shareholder approval. Preferred stock may be issued in one or more series, the
terms of which may be determined without further action by shareholders. These
terms may include preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
or terms or conditions of redemption. The issuance of any preferred stock,
however, could materially adversely affect the rights of holders of our class A
common stock and, therefore, could reduce the value of the class A common stock.
In addition, specific rights granted to future holders of our preferred stock
could be used to restrict our ability to merge with, or sell assets to, a third
party. The power of our board of directors to issue preferred stock could make
it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change in control, thereby preserving the current shareholders’
control.
Advance Notice Bylaw. Our
bylaws contain advance notice procedures for the introduction of business and
the nomination of directors. These provisions could discourage proxy contests
and make it more difficult for you and other shareholders to elect
shareholder-nominated directors and to propose and approve shareholder proposals
opposed by management.
Maryland Takeover Statutes.
We are subject to the Maryland Business Combination Act which could delay or
prevent an unsolicited takeover of us. The statute substantially restricts the
ability of third parties who acquire, or seek to acquire, control of us to
complete mergers and other business combinations without the approval of our
board of directors even if such transaction would be beneficial to shareholders.
“Business combinations” between such a third party acquiror or its affiliate and
us are prohibited for five years after the most recent date on which the
acquiror or its affiliate becomes an “interested shareholder.” An “interested
shareholder” is defined as any person who beneficially owns 10 percent or more
of our shareholder voting power or an affiliate or associate of ours who, at any
time within the two-year period prior to the date interested shareholder status
is determined, was the beneficial owner of 10 percent or more of our shareholder
voting power. If our board of directors approved in advance the transaction that
would otherwise give rise to the acquiror or its affiliate attaining such
status, such as the issuance of shares of our class A common stock to WRBC, the
acquiror or its affiliate would not become an interested shareholder and, as a
result, it could enter into a business combination with us. Our board of
directors could choose not to negotiate with an acquirer if the board determined
in its business judgment that considering such an acquisition was not in our
strategic interests. Even after the lapse of the five-year prohibition period,
any business
combination with an interested shareholder must be recommended by our board of
directors and approved by the affirmative vote of at least:
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80%
of the votes entitled to be cast by shareholders; and
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two-thirds
of the votes entitled to be cast by shareholders other than the interested
shareholder and affiliates and associates thereof.
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The
super-majority vote requirements do not apply if the transaction complies with a
minimum price requirement prescribed by the statute.
The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors prior to the time that
an interested shareholder becomes an interested shareholder. Our board of
directors has exempted any business combination involving family partnerships
controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited
liability company indirectly controlled by a trust for the benefit of Samuel
Zell and his family. As a result, these persons and WRBC may enter into business
combinations with us without compliance with the super-majority vote
requirements and the other provisions of the statute.
We are
subject to the Maryland Control Share Acquisition Act. With certain exceptions,
the Maryland General Corporation Law provides that “control shares” of a
Maryland corporation acquired in a control share acquisition have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiring
person or by our officers or by our directors who are our employees, and may be
redeemed by us. “Control shares” are voting shares which, if aggregated with all
other shares owned or voted by the acquiror, would entitle the acquiror to
exercise voting power in electing directors within one of the specified ranges
of voting power. A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions, including an undertaking
to pay expenses, may compel our board to call a special meeting of shareholders
to be held within 50 days of demand to consider the voting rights of the
“control shares” in question. If no request for a meeting is made, we may
present the question at any shareholders’ meeting.
If voting
rights are not approved at the shareholders’ meeting or if the acquiring person
does not deliver the statement required by Maryland law, then, subject to
certain conditions and limitations, we may redeem for fair value any or all of
the control shares, except those for which voting rights have previously been
approved. If voting rights for control shares are approved at a shareholders’
meeting and the acquiror may then vote a majority of the shares entitled to
vote, then all other shareholders may exercise appraisal rights. The fair value
of the shares for purposes of these appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if we are not a party to the
transaction, nor does it apply to acquisitions approved or exempted by our
charter or bylaws. Our bylaws contain a provision exempting certain holders
identified in our bylaws from this statute, including WRBC, family partnerships
controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited
liability company indirectly controlled by a trust for the benefit of Samuel
Zell and his family.
We are
also subject to the Maryland Unsolicited Takeovers Act which permits our board
of directors, among other things and notwithstanding any provision in our
charter or bylaws, to elect on our behalf to stagger the terms of directors and
to increase the shareholder vote required to remove a director. Such an election
would significantly restrict the ability of third parties to wage a proxy fight
for control of our board of directors as a means of advancing a takeover offer.
If an acquiror was discouraged from offering to acquire us, or prevented from
successfully completing a hostile acquisition, you could lose the opportunity to
sell your shares at a favorable price.
The
market value of our class A common stock may be adversely affected by many
factors.
As with
any public company, a number of factors may adversely influence the price of our
class A common stock, many of which are beyond our control. These factors
include, in addition to other risk factors mentioned in this
section:
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the
level of institutional interest in us;
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the
perception of REITs generally and REITs with portfolios similar to ours,
in particular, by market professionals;
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the
attractiveness of securities of REITs in comparison to other companies;
and
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the
market’s perception of our growth potential and potential future cash
dividends.
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An
increase in market interest rates may lead prospective purchasers of our class A
common stock to expect a higher dividend yield, which would adversely affect the
market price of our class A common stock.
One of
the factors that will influence the price of our class A common stock will be
the dividend yield on our stock (distributions as a percentage of the price of
our stock) relative to market interest rates. An increase in market interest
rates may lead prospective purchasers of our class A common stock to expect a
higher dividend yield, which could adversely affect the market price of our
class A common stock.
Your
ability to sell a substantial number of shares of our class A common stock may
be restricted by the low trading volume historically experienced by our class A
common stock.
Although
our class A common stock is listed on the New York Stock Exchange, the daily
trading volume of our shares of class A common stock has historically been lower
than the trading volume for certain other companies. As a result, the ability of
a holder to sell a substantial number of shares of our class A common stock in a
timely manner without causing a substantial decline in the market value of the
shares, especially by means of a large block trade, may be restricted by the
limited trading volume of the shares of our class A common stock.
Risks Related to our REIT
Status and Certain Other Tax Items
Our
charter does not permit any individual to own more than 9.9% of our class A
common stock, and attempts to acquire our class A common stock in excess of the
9.9% limit would be void without the prior approval of our board of
directors.
For the
purpose of preserving our qualification as a REIT for federal income tax
purposes, our charter prohibits direct or constructive ownership by any
individual of more than a certain percentage, currently 9.9%, of the lesser of
the total number or value of the outstanding shares of our class A common stock
as a means of preventing ownership of more than 50% of our class A common stock
by five or fewer individuals. The charter’s constructive ownership rules are
complex and may cause the outstanding class A common stock owned by a group of
related individuals or entities to be deemed to be constructively owned by one
individual. As a result, the acquisition of less than 9.9% of our outstanding
class A common stock by an individual or entity could cause an individual to own
constructively in excess of 9.9% of our outstanding class A common stock, and
thus be subject to the charter’s ownership limit. There can be no assurance that
our board of directors, as permitted in the charter, will increase, or will not
decrease, this ownership limit in the future. Any attempt to own or transfer
shares of our class A common stock in excess of the ownership limit without the
consent of our board of directors will be void, and will result in the shares
being transferred by operation of the charter to a charitable trust, and the
person who acquired such excess shares will not be entitled to any distributions
thereon or to vote such excess shares.
The 9.9%
ownership limit may have the effect of precluding a change in control of us by a
third party without the consent of our board of directors, even if such change
in control would be in the interest of our shareholders or would result in a
premium to the price of our class A common stock (and even if such change in
control would not reasonably jeopardize our REIT status). The ownership limit
exemptions and the reset limits granted to date would limit our board of
directors’ ability to reset limits in the future and at the same time maintain
compliance with the REIT qualification requirement prohibiting ownership of more
than 50% of our class A common stock by five or fewer individuals.
There
are no assurances that we will be able to pay dividends in the
future.
We intend
to pay quarterly dividends and to make distributions to our shareholders in
amounts so that all or substantially all of our taxable income in each year,
subject to certain adjustments, is distributed. This, along with other factors,
should enable us to qualify for the tax benefits accorded to a REIT under the
Internal Revenue Code. All distributions will be made at the discretion of our
board of directors and will depend on our earnings, our financial condition,
maintenance of our REIT status and such other factors as our board of directors
may deem relevant from time to time. There are no assurances that we will be
able to pay dividends in the future. In addition, some of our distributions may
include a return of capital, which would reduce the amount of capital available
to operate our business.
We
will be dependent on external sources of capital to finance our
growth.
As with
other REITs, but unlike corporations generally, our ability to finance our
growth must largely be funded by external sources of capital because we
generally will have to distribute to our shareholders 90% of our taxable income
in order to qualify as a REIT, including taxable income where we do not receive
corresponding cash. Our access to external capital will depend upon a number of
factors, including general market conditions, the market’s perception of our
growth potential, our current and potential future earnings, cash distributions
and the market price of our class A common stock.
If
we do not maintain our qualification as a REIT, we will be subject to tax as a
regular corporation and face a substantial tax liability. Our taxable REIT
subsidiaries will be subject to income tax.
We expect
to continue to operate so as to qualify as a REIT under the Internal Revenue
Code. However, qualification as a REIT involves the application of highly
technical and complex Internal Revenue Code provisions for which only a limited
number of judicial or administrative interpretations exist. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, new tax
legislation, administrative guidance or court decisions, in each instance
potentially with retroactive effect, could make it more difficult or impossible
for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year,
then:
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we
would be taxed as a regular domestic corporation, which under current
laws, among other things, means being unable to deduct distributions to
shareholders in computing taxable income and being subject to federal
income tax on our taxable income at regular corporate rates;
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any
resulting tax liability could be substantial, could have a material
adverse effect on our book value and would reduce the amount of cash
available for distribution to shareholders; and
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unless
we were entitled to relief under applicable statutory provisions, we would
be required to pay taxes, and thus, our cash available for distribution to
shareholders would be reduced for each of the years during which we did
not qualify as a REIT.
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Fee
income from our investment management business is expected to be realized by one
of our taxable REIT subsidiaries, and, accordingly, will be subject to income
tax.
Complying
with REIT requirements may cause us to forego otherwise attractive opportunities
and limit our expansion opportunities.
In order
to qualify as a REIT for federal income tax purposes, we must continually
satisfy tests concerning, among other things, our sources of income, the nature
of our investments in commercial real estate and related assets, the amounts we
distribute to our shareholders and the ownership of our stock. We may also be
required to make distributions to shareholders at disadvantageous times or when
we do not have funds readily available for distribution. Thus, compliance with
REIT requirements may hinder our ability to operate solely on the basis of
maximizing profits.
Complying
with REIT requirements may force us to liquidate or restructure otherwise
attractive investments.
In order
to qualify as a REIT, we must also ensure that at the end of each calendar
quarter, at least 75% of the value of our assets consists of cash, cash items,
government securities and qualified REIT real estate assets. The remainder of
our investments in securities cannot include more than 10% of the outstanding
voting securities of any one issuer or 10% of the total value of the
outstanding securities of any one issuer unless we and such issuer jointly elect
for such issuer to be treated as a “taxable REIT subsidiary” under the Internal
Revenue Code. The total value of all of our investments in taxable REIT
subsidiaries cannot exceed 20% of the value of our total assets. In addition, no
more than 5% of the value of our assets can consist of the securities of any one
issuer. If we fail to comply with these requirements, we must dispose of a
portion of our assets within 30 days after the end of the calendar quarter in
order to avoid losing our REIT status and suffering adverse tax
consequences.
Complying
with REIT requirements may force us to borrow to make distributions to
shareholders.
From time
to time, our taxable income may be greater than our cash flow available for
distribution to shareholders. If we do not have other funds available in these
situations, we may be unable to distribute substantially all of our taxable
income as required by the REIT provisions of the Internal Revenue Code. Thus, we
could be required to borrow funds, sell a portion of our assets at
disadvantageous prices or find another alternative. These options could increase
our costs or reduce our equity.
We
utilize “taxable mortgage pools” to finance our investments.
Certain
securitizations, such as our CDOs, are considered taxable mortgage pools, or
TMPs, for federal income tax purposes. TMPs are generally subject to an
unavoidable federal tax on the portion of their income deemed to be excess
inclusion income, or EII. As a REIT, we are exempt from taxation at the
corporate level on such EII as long as we own 100% of the equity interests in
the securitization (as defined for tax purposes). Notwithstanding the foregoing,
we will be subject to taxation at the corporate level on any EII allocated to
certain shareholders treated as disqualified organizations under applicable tax
rules (generally tax-exempt entities, including federal, state, and foreign
governmental entities).
In
certain instances, we have either pledged our equity interests in these TMPs as
collateral under our repurchase agreements or have contributed these interests
to other TMPs—in both cases subjecting the pools to the potential loss of their
tax exempt status in the event that we were forced to sell our interests or our
interests were foreclosed upon by a third party that was not afforded the same
exemption as us.
Despite
our general corporate level exemption from taxation on EII, our shareholders
(other than disqualified organizations, described above) are subject to taxation
on the EII that we earn. The Internal Revenue Service has not given clear
guidance as to the appropriate method for the calculation of EII and, absent
such clear guidance, we have calculated EII based upon what we believe to be a
reasonable method. Our estimation of EII is disclosed in our year end financial
statements. In addition, pursuant to recently issued guidance from the Internal
Revenue Service, we are required to allocate EII to our shareholders in
proportion to dividends paid and to inform our shareholders of the amount and
character of the EII allocated to them. Given the lack of guidance concerning
calculation of EII, there can be no assurances that we have calculated excess
inclusion income in a manner satisfactory to the Internal Revenue
Service.
|
Unresolved
Staff Comments
|
None.
Our
principal executive and administrative offices are located in approximately
15,000 square feet of office space leased at 410 Park Avenue, New York, New York
10022. Our telephone number is (212) 655-0220 and our website address is
http://www.capitaltrust.com. Our lease for office space expires in October
2018.
Item
3.
|
Legal
Proceedings
|
We are
not party to any material litigation or legal proceedings, or, to the best of
our knowledge, any threatened litigation or legal proceedings, which, in our
opinion, individually or in the aggregate, would have a material adverse effect
on our results of operations or financial condition.
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
We did
not submit any matters to a vote of security holders during the fourth quarter
of 2007.
Item
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our class
A common stock is listed for trading on the New York Stock Exchange, or NYSE,
under the symbol “CT.” The table below sets forth, for the calendar
quarters indicated, the reported high and low sale prices for the class A common
stock as reported on the NYSE composite transaction tape and the per share cash
dividends declared on the class A common stock.
|
|
High
|
|
|
Low
|
|
|
Dividend
|
2007
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
$38.17 |
|
|
|
$26.91 |
|
|
|
$2.70 |
(1) |
Third
Quarter
|
|
|
37.37 |
|
|
|
30.65 |
|
|
|
0.80 |
|
Second
Quarter
|
|
|
47.39 |
|
|
|
34.14 |
|
|
|
0.80 |
|
First
Quarter
|
|
|
55.27 |
|
|
|
43.70 |
|
|
|
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
$50.62 |
|
|
|
$39.70 |
|
|
|
$1.40 |
(2) |
Third
Quarter
|
|
|
42.97 |
|
|
|
33.89 |
|
|
|
0.75 |
|
Second
Quarter
|
|
|
35.62 |
|
|
|
29.69 |
|
|
|
0.70 |
|
First
Quarter
|
|
|
34.32 |
|
|
|
29.60 |
|
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
|
$32.30 |
|
|
|
$28.87 |
|
|
|
$0.80 |
|
Third
Quarter
|
|
|
34.50 |
|
|
|
30.57 |
|
|
|
0.55 |
|
Second
Quarter
|
|
|
34.97 |
|
|
|
32.06 |
|
|
|
0.55 |
|
First
Quarter
|
|
|
34.00 |
|
|
|
28.86 |
|
|
|
0.55 |
|
|
|
|
(1) |
Comprised of a regular quarterly dividend of $0.80 per share and a
special dividend of $1.90 per share.
|
(2) |
Comprised of
a regular quarterly dividend of $0.75 per share and a special dividend of
$0.65 per
share. |
The last
reported sale price of the class A common stock on February 20, 2008 as
reported on the NYSE composite transaction tape was $28.50. As of
February 20, 2008, there were 410 holders of record of the class A common
stock. By including persons holding shares in broker accounts under street
names, however, we estimate our shareholder base to be approximately 9,205 as of
February 20, 2008.
We
generally intend to distribute each year substantially all of our taxable income
(which does not necessarily equal net income as calculated in accordance with
generally accepted accounting principles) to our shareholders so as to comply
with the REIT provisions of the Internal Revenue Code. We intend to make
dividend distributions quarterly, which we refer to as regular dividends and we
seek to set our recurring dividend at a level that we believe is comfortably
sustainable. If necessary for REIT qualification purposes, we may need to
distribute any taxable income remaining after giving effect to the distribution
of the final regular quarterly dividend each year, together with the first
regular quarterly dividend payment of the following taxable year or, at our
discretion, in a separate dividend distributed prior thereto. We refer to these
dividends as special dividends.
Our
dividend policy is subject to revision at the discretion of our board of
directors. All distributions will be made at the discretion of our board of
directors and will depend upon our taxable income, our financial condition, our
maintenance of REIT status and other factors that our board of directors deems
relevant. All dividends declared in 2006 and 2007 are ordinary income. In
accordance with Internal Revenue Service guidance, we are required to report the
amount of excess inclusion income earned by the Company. In 2007, we calculated
excess inclusion income to be $925,000 or 1.1% of our total
distributions.
We did
not repurchase any of our common stock during the year ended December 31,
2007.
Equity
Compensation Plan Information
The
following table summarizes information, as of December 31, 2007, relating
to our equity compensation plans pursuant to which shares of our common stock or
other equity securities may be granted from time to time.
Plan category
|
|
|
(a)
Number of securities to be
issued upon exercise of
outstanding options
|
|
|
(b)
Weighted average
exercise price of
outstanding options
|
|
|
(c)
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a))
|
Equity
compensation plans approved by security holders(1)
|
|
|
|
240,478
|
|
|
|
|
|
|
|
|
|
685,430
|
|
Equity
compensation plans not approved by security holders (2)
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Total
|
|
|
|
240,478
|
|
|
|
|
|
|
|
|
|
685,430
|
|
|
|
|
(1) |
The
number of securities remaining for future issuance in 2007 consists of
685,430 shares issuable under our 2007 long-term incentive plan which was
approved by our shareholders. Awards under the plan may include restricted
stock, unrestricted stock, stock options, stock units, stock appreciation
rights, performance shares, performance units, deferred share units or
other equity-based awards, as the board of directors may determine.
|
(2) |
All of our
equity compensation plans have been approved by security
holders. |
Item
6.
|
Selected
Financial Data
|
The
following table sets forth selected consolidated financial data, which was
derived from our historical consolidated financial statements included in our
Annual Reports on Form 10-K, for the years ended 2003 through
2007.
Certain
reclassifications have been made to all periods presented prior to 2005 to
reflect the application of Financial Accounting Standards Board Interpretation
No. 46R on January 1, 2004.
You
should read the following information together with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the notes thereto included in “Item 8.
Financial Statements and Supplementary Data.”
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands, except for per share data)
|
|
STATEMENT
OF INCOME DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
$
|
254,505 |
|
|
$ |
176,758 |
|
|
$ |
86,753 |
|
|
$ |
46,639 |
|
|
$ |
38,577 |
|
Management
and advisory fees
|
|
|
10,330 |
|
|
|
4,407 |
|
|
|
13,124 |
|
|
|
7,863 |
|
|
|
8,020 |
|
Total
revenues
|
|
|
264,835 |
|
|
|
181,165 |
|
|
|
99,877 |
|
|
|
54,502 |
|
|
|
46,597 |
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
162,377 |
|
|
|
104,607 |
|
|
|
37,229 |
|
|
|
20,141 |
|
|
|
19,575 |
|
General
and administrative expenses
|
|
|
29,956 |
|
|
|
23,075 |
|
|
|
21,939 |
|
|
|
15,229 |
|
|
|
13,320 |
|
Depreciation
and amortization
|
|
|
1,810 |
|
|
|
3,049 |
|
|
|
1,114 |
|
|
|
1,100 |
|
|
|
1,057 |
|
Unrealized
loss on available for sale securities for other than temporary
impairment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,886 |
|
|
|
— |
|
(Recapture
of)/provision for allowance for possible credit losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,672 |
) |
|
|
— |
|
Total
operating expenses
|
|
|
194,143 |
|
|
|
130,731 |
|
|
|
60,282 |
|
|
|
35,684 |
|
|
|
33,952 |
|
Gain
on sale of investments
|
|
|
15,077 |
|
|
|
— |
|
|
|
4,951 |
|
|
|
300 |
|
|
|
— |
|
Income/(loss)
from equity investments
|
|
|
(2,109 |
) |
|
|
898 |
|
|
|
(222 |
) |
|
|
2,407 |
|
|
|
1,526 |
|
Income
before income tax expense
|
|
|
83,660 |
|
|
|
51,332 |
|
|
|
44,324 |
|
|
|
21,525 |
|
|
|
14,171 |
|
Income
tax expense/(benefit)
|
|
|
(706 |
) |
|
|
(2,735 |
) |
|
|
213 |
|
|
|
(451 |
) |
|
|
646 |
|
NET
INCOME/(LOSS) ALLOCABLE TO COMMON STOCK:
|
|
$ |
84,366 |
|
|
$ |
54,067 |
|
|
$ |
44,111 |
|
|
$ |
21,976 |
|
|
$ |
13,525 |
|
PER
SHARE INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
4.80 |
|
|
$ |
3.43 |
|
|
$ |
2.91 |
|
|
$ |
2.17 |
|
|
$ |
2.27 |
|
Diluted
|
|
$ |
4.77 |
|
|
$ |
3.40 |
|
|
$ |
2.88 |
|
|
$ |
2.14 |
|
|
$ |
2.23 |
|
Dividends
declared per share of common stock
|
|
$ |
5.10 |
|
|
$ |
3.45 |
|
|
$ |
2.45 |
|
|
$ |
1.85 |
|
|
$ |
1.80 |
|
Weighted
average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,570 |
|
|
|
15,755 |
|
|
|
15,181 |
|
|
|
10,141 |
|
|
|
5,947 |
|
Diluted
|
|
|
17,690 |
|
|
|
15,923 |
|
|
|
15,336 |
|
|
|
10,277 |
|
|
|
10,288 |
|
|
|
Years ended December 31,
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
BALANCE
SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
$3,211,482 |
|
|
|
$2,648,564 |
|
|
|
$1,557,642 |
|
|
|
$877,766 |
|
|
|
$399,926 |
Total
liabilities
|
|
|
2,803,245 |
|
|
|
2,222,292 |
|
|
|
1,218,792 |
|
|
|
561,269 |
|
|
|
303,909 |
Shareholders’
equity
|
|
|
408,237 |
|
|
|
426,272 |
|
|
|
338,850 |
|
|
|
316,497 |
|
|
|
96,017 |
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operation
|
References
herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its
subsidiaries unless the context specifically requires otherwise.
Our
business model is designed to produce a mix of net interest margin from our
balance sheet investments and fee income plus co-investment income from our
investment management operations—with our primary goals being the generation of
stable net income and dividend growth. In managing our operations, we focus on
originating investments, managing our portfolios and capitalizing our
businesses.
Current
Market Conditions
During
2007, the global capital markets experienced unprecedented volatility, triggered
initially by credit problems in the U.S. subprime residential mortgage
sector. As the year progressed, the “subprime contagion” spread to
virtually every debt market, causing dramatic declines in asset prices,
widespread illiquidity and massive losses at many financial
institutions. Notwithstanding continuing credit performance in the
real estate debt market and strong fundamentals in the underlying property
markets, the impact of the global credit crisis on our sector has been
acute. By year end, transaction volume had declined significantly,
credit spreads for all forms of mortgage debt had reached all-time highs and
issuance levels of commercial mortgage backed securities, or CMBS, had ground to
a virtual halt. Financial institutions still hold significant
inventories of unsold loans and CMBS, creating a further overhang on the
markets. We believe that the continuing dislocation in the debt
capital markets, coupled with a slowdown in the U.S. economy, has already
reduced property valuations and will ultimately impact real estate
fundamentals.
In
response to these conditions, we significantly reduced the pace of our
originations in the second half of 2007, choosing to maintain our liquidity and
be patient until the markets had settled. We believe that ultimately,
this environment will create new opportunities in our markets for investors with
credit and financial structuring expertise. We believe that our
balance sheet and investment management businesses will benefit from a market
environment where assets are priced and structured more conservatively and there
is less competition among investors.
We
allocate investment opportunities between our balance sheet and investment
management vehicles based upon our assessment of risk and return profiles, the
availability and cost of capital, and applicable regulatory restrictions
associated with each opportunity. The combination of balance sheet and
investment management capabilities allows us to maximize the scope of
opportunities upon which we can capitalize. The table below summarizes our gross
originations and the allocation of opportunities between our balance sheet and
the investment management business for the past two years.
Gross
Originations(1)(2) |
|
|
|
(in
millions)
|
|
Year
Ended
December 31, 2007
|
|
|
Year
Ended
December 31, 2006
|
Balance
sheet |
|
|
$1,454
|
|
|
|
|
$2,054 |
|
Investment
management |
|
|
1,011 |
|
|
|
|
65 |
|
Total
originations
|
|
|
$2,465
|
|
|
|
|
$2,119 |
|
|
|
|
(1) |
Includes total commitments both funded and
unfunded.
|
(2) |
Includes $315
million and $238 million of participations sold recorded on our balance
sheet relating to participations that we sold to CT Large Loan for
the years ended December 31, 2007 and December 31, 2006, respectively. We
have included these originations in balance sheet originations and not in
investment management originations in order to avoid double
counting.
|
Total
gross originations in 2007 increased by $346 million (16%) compared to 2006,
driven by an increase of $946 million in investment management originations,
partially offset by a $600 million reduction in balance sheet originations.
Increased levels of originations were driven in large part by our broad network
of relationships, transacting with 16 institutional counterparties and
increasing our direct originations in 2007, and the general increase in
transaction volume in the real estate and real estate debt markets in the first
half of 2007. Total gross originations in the first half of 2007 were
$2 billion, as compared to $458 million in the second half of the year, a 77%
reduction reflecting the dramatic change in the commercial real estate capital
markets from the first half of 2007 to the second half of 2007. The
change in the ratio of balance sheet originations to investment management
originations from 2006 to 2007 was due in large part to our having three
investment management vehicles actively investing during 2007: CT Large Loan
(formed May 2006), CT High Grade (formed November 2006) and the CTX Fund (formed
May 2007). We expect higher volumes of investment management
originations in the near term.
Our
balance sheet investments include commercial mortgage backed securities or CMBS,
commercial real estate debt and related instruments, or Loans, and total return
swaps, which we collectively refer to as our Interest Earning
Assets. Originations of Interest Earning Assets for our balance sheet
for the years ended December 31, 2007 and December 31, 2006 are detailed in the
table below:
Balance
Sheet Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
Year
Ended
December
31, 2007
|
|
Year
Ended December
31, 2006
|
|
|
Originations(1)
|
|
|
Yield(2)
|
|
LTV
/
Rating(3)
|
|
Originations(1)
|
|
|
Yield(2)
|
|
LTV
/
Rating(3)
|
CMBS
|
|
|
$111 |
|
|
|
8.92 |
% |
|
BB-
|
|
|
$395 |
|
|
|
6.45 |
% |
|
BBB-
|
Loans(4)
|
|
|
1,343 |
|
|
|
7.67 |
|
|
64.4%
|
|
|
1,655 |
|
|
|
9.19 |
% |
|
72.1%
|
Total
return
swaps
|
|
|
— |
|
|
|
— |
|
|
—
|
|
|
4 |
|
|
|
19.55 |
|
|
N/A
|
Total
/ Weighted Average
|
|
|
$1,454 |
|
|
|
7.77 |
% |
|
|
|
|
$2,054 |
|
|
|
8.68 |
% |
|
|
|
|
|
(1) |
Includes total commitments both funded and
unfunded.
|
(2) |
Yield on
floating rate originations assume LIBOR at December 31, 2007 and 2006
of 4.60% and 5.32%, respectively. |
(3) |
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 $38 million face value ($37 million book value) of
unrated equity investments in collateralized debt
obligations. Loan to Value (LTV) is based on third party
appraisals received by us when each loan is
originated.
|
(4) |
Includes
$315 million and $238 million of participations sold recorded on our
balance sheet relating to participations that we sold to CT Large Loan for
the years ended December 31, 2007 and 2006, respectively. We have included
these originations in balance sheet originations and not in investment
management originations in order to avoid double
counting.
|
The table
below shows our Interest Earning Assets at December 31, 2007 and December 31,
2006. In any period, the ending balance of Interest Earning Assets
will be impacted not only by new balance sheet originations, but also by
repayments, advances, sales and losses, if any. As the table below
shows, we grew Interest Earning Assets by $570 million, or 22%, from 2006 to
2007.
Interest
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions) |
|
December
31,
2007
|
|
December
31,
2006
|
|
|
Book
Value(1)
|
|
|
Yield(2)
|
|
LTV
/
Rating(3)
|
|
Book
Value(1)
|
|
|
Yield(2)
|
|
LTV
/
Rating(3)
|
CMBS
|
|
|
$877 |
|
|
|
7.35 |
% |
|
BB+
|
|
|
$811 |
|
|
|
7.17 |
% |
|
BB+
|
Loans
|
|
|
2,257 |
|
|
|
7.80 |
% |
|
66.5%
|
|
|
1,752 |
|
|
|
8.96 |
% |
|
70.4%
|
Total
return swaps
|
|
|
— |
|
|
|
— |
|
|
—
|
|
|
2 |
|
|
|
20.55 |
% |
|
N/A
|
Total
/ Weighted Average
|
|
|
$3,134 |
|
|
|
7.67 |
% |
|
|
|
|
$2,565 |
|
|
|
8.40 |
% |
|
|
|
|
|
(1) |
December
31, 2006 values do not include one non performing loan that was
successfully resolved in the second quarter of
2007.
|
(2) |
Yield
on floating rate Interest Earning Assets assumes LIBOR at December 31,
2007 and December 31, 2006, of 4.60% and
5.32%, respectively.
|
(3) |
Weighted
average ratings are based on the lowest rating published by Fitch Ratings,
Standard & Poor’s or Moody’s Investors Service for each security and
exclude $37 million of unrated equity investments in collateralized debt
obligations.
|
In some cases our originations are not fully funded at closing, creating an
obligation for us to make future fundings, which we refer to as Unfunded Loan
Commitments. Typically, Unfunded Loan Commitments are part of
construction and transitional loans. At December 31, 2007, our gross
Unfunded Loan Commitments were $177 million and our unfunded commitment under
our one total return swap was $3 million. Net of in place financing commitments
from our lenders, our net unfunded commitments were $41
million.
In
addition to our investments in Interest Earning Assets, we have two equity
investments in unconsolidated subsidiaries as of December 31,
2007. The first is an equity co-investment in a private equity fund
that we manage, CT Mezzanine Partners III, Inc., or Fund III. The second is an
equity co-investment in a private equity fund, CTOPI, that we formed in 2007,
which we also manage. At December 31, 2007, we had not funded any of
our $25 million equity commitment to CTOPI and expect to fund our commitment
over the fund’s three year investment period. In 2006, we co-founded
and made an
investment in a Brazilian net lease commercial real estate company, Bracor
Investimentos Imobiliarios Ltda., or Bracor, that we helped found. In December
of 2007 we sold our investment in Bracor generating a $15.1 million
gain. The table below details the carrying value of those
investments, as well as their capitalized costs.
Equity
Investments
|
|
|
|
|
|
|
(in
thousands)
|
|
December
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
CT
Mezzanine Partners II, LP
|
|
|
$— |
1 |
|
|
$1,208 |
1 |
Fund
III
|
|
|
923 |
9923 |
|
|
2,929 |
1 |
Bracor
|
|
|
— |
|
|
|
5,675 |
1 |
CTOPI
|
|
|
(60 |
) |
|
|
— |
|
Capitalized
costs/other
|
|
|
114 |
|
|
|
1,673 |
|
Total
|
|
|
$977 |
1 |
|
|
$11,485 |
1 |
We
actively manage our balance sheet portfolio and the assets held by our
investment management vehicles. While our investments are primarily
in the form of debt, which generally means that we have limited influence over
the operations of the collateral securing our portfolios, we are aggressive in
exercising the rights afforded to us as a lender. These rights can
include collateral level budget approvals, lease approvals, loan covenant
enforcement, escrow/reserve management/collection, collateral release approvals
and other rights that we may negotiate. The table below details
balance sheet Interest Earning Assets loss experience for 2007 and 2006, and the
percentage of non-performing and/or impaired investments at December 31, 2007
and December 31, 2006.
Portfolio
Performance
|
|
|
|
|
|
|
(in
millions)
|
|
December
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
Interest
Earning Assets
|
|
|
$3,134 |
|
|
|
$2,565 |
|
Losses
|
|
|
|
|
|
|
|
|
$
Value
|
|
|
$
0 |
|
|
|
$
0 |
|
Percentage
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Non-performing/impaired
loans
|
|
|
|
|
|
|
|
|
$
Value
|
|
|
$10 |
(1) |
|
|
$
3 |
(2) |
Percentage
|
|
|
0.3 |
% |
|
|
0.1 |
% |
|
|
|
(1) |
At
December 31, 2007, includes one second mortgage loan with a principal
balance of $10 million against which we have reserved $4.0
million.
|
(2) |
At
December 31, 2006, includes one non-performing first mortgage loan with an
original principal balance of $8 million that has since been successfully
resolved.
|
We have a
proprietary risk rating system to assess and track the risk of each of our
loans. There was no material change to the weighted average risk rating of the
portfolio between December 31, 2006 and December 31, 2007. Based upon our review
of the portfolio, we recorded a $4.0 million reserve for possible credit losses
related to a $10 million second mortgage as of December 31, 2007. In
2006, we concluded that a reserve for possible credit losses was not warranted
on any of our loans.
We
actively manage our CMBS investments using a combination of quantitative tools
and loan/property level analysis in order to monitor the performance of the
securities and their collateral versus our original expectations. Securities are
analyzed on a monthly basis for delinquency, transfers to special servicing, and
changes to the servicer’s watchlist population. Realized loan losses are tracked
on a monthly basis and compared to our original loss expectations. On a periodic
basis, individual loans of concern are also re-underwritten. Updated collateral
loss projections are then compared to our original loss expectations to
determine how each investment is performing. Based on our review of the
portfolio, we concluded that no impairments were warranted in 2006 or
2007.
The
ratings performance of our CMBS portfolio over the past two years is detailed
below:
CMBS
Rating Activity(1)
|
|
|
December
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
Upgrades
|
|
|
28
|
|
|
|
67
|
|
Downgrades
|
|
|
3
|
|
|
|
3
|
|
|
|
|
(1) |
Represents
activity from any of Fitch Ratings, Standard & Poor’s and/or Moody’s
Investors
Service.
|
Two
trends in asset performance that we foresee in 2008 are (i) borrowers faced with
maturities will have a more difficult time refinancing their properties in light
of the volatility in the capital markets, and (ii) real estate fundamentals will
deteriorate if the U.S. economy continues to slow. We believe that
the impact of these two trends on our portfolios will be
manageable.
Our
balance sheet investment activities are capital intensive and the availability
and cost of capital is a critical component of our business. We capitalize our
business with a combination of debt and equity. Our debt sources, which we refer
to as Interest Bearing Liabilities, currently include repurchase agreements,
CDOs, a senior unsecured credit facility, and junior subordinated debentures
(which we also refer to as trust preferred securities). Our equity capital is
currently comprised entirely of common equity.
The chart below shows our capitalization mix for the past two
years:
Capital
Structure(1)
|
|
|
|
|
|
|
(in
millions)
|
|
December
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
Repurchase
obligations
|
|
|
$912 |
|
|
|
$704 |
|
Collateralized
debt obligations
|
|
|
1,192 |
|
|
|
1,213 |
|
Senior
unsecured credit facility
|
|
|
75 |
|
|
|
— |
|
Junior
subordinated debentures
|
|
|
129 |
|
|
|
52 |
|
Total
Interest Bearing Liabilities
|
|
|
$2,308 |
|
|
|
$1,969 |
|
All
In Cost of debt(2)
|
|
|
5.68 |
% |
|
|
6.15 |
% |
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
$408 |
|
|
|
$426 |
|
Ratio
of Interest Bearing Liabilities to Shareholders’ Equity
|
|
5.7:1
|
|
|
4.6:1
|
|
|
|
|
(1) |
Excludes participations sold.
|
(2) |
Floating
rate liabilities assume LIBOR at December 31, 2007 and December 31, 2006,
of 4.60% and 5.32%,
respectively.
|
We use
leverage to enhance our returns on equity by attempting
to: (i) maximize the differential between the yield of our
Interest Earning Assets and the cost of our Interest Bearing Liabilities, and
(ii) optimize the amount of leverage employed. The use of leverage,
however, adds risk to our business, magnifying our shareholders’ exposure to
asset level risk by subordinating our equity interests to our debt capital
providers. The level of leverage we utilize is based upon the risk associated
with our assets, as well as the structure of our liabilities. In general, we
will apply greater amounts of leverage to lower risk assets and vice versa. In
addition, structural features of our leverage, such as recourse, mark-to-market
provisions and duration, factor into the amounts of leverage we are comfortable
applying to our assets. Our sources of recourse financing generally require
financial covenants, including restrictions on corporate guarantees, the
maintenance of certain financial ratios (such as specified debt to equity and
debt service coverage ratios) as well as the maintenance of a minimum net worth.
A summary of selected structural features of our debt for the past two years is
detailed in the table below:
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Weighted
average maturity (1)
|
|
4.1
yrs.
|
|
|
4.0
yrs.
|
|
%
Recourse
|
|
48.1%
|
|
|
36.9%
|
|
%
Mark-to-market
|
|
39.5%
|
|
|
35.8%
|
|
|
|
|
(1) |
Based upon balances as of December 31, 2007 and December 31,
2006.
|
Over
the past few years, we have used CDOs as one method to finance our
business. While we expect to continue to utilize CDOs and
other structured products to
finance both our balance sheet and our investment management businesses going
forward, the current state of the debt capital markets makes it unlikely that,
in the near term, we will be able to issue liabilities
similar to our existing CDOs. The
lack of a CDO or similar structured product market makes
us more reliant on other financing options such as our repurchase
facilities. Unlike our CDOs, our repurchase facilities are shorter
term, mark-to-market, recourse liabilities. Given the additional
liquidity risks associated with a portfolio of assets financed with these
types of liabilities, we believe that a higher degree of balance sheet
liquidity is necessary to manage these
liabilities.
Our CDOs
are non-recourse, non-mark-to-market, index matched financings that generally
carry a lower cost of debt and allow for higher levels of leverage than our
other financing sources. During 2007, we did not issue any new CDOs
for our balance sheet: however, we continued contributing assets to our
previously issued reinvesting CDOs, which have reinvestment periods extending
through July 2008 for CDO I and April 2010 for CDO II. Our CDO
liabilities as of December 31, 2007 and December 31, 2006 are described
below:
Collateralized
Debt Obligations
|
|
|
|
(in
millions)
|
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Issuance Date
|
|
Type
|
|
Book Value
|
|
|
All in Cost(1)
|
|
Book Value
|
|
|
All in Cost(1)
|
CDO
I(2)
|
7/20/04
|
|
Reinvesting
|
|
|
$253 |
|
|
|
5.67 |
% |
|
|
$253 |
|
|
|
6.39 |
% |
CDO
II (2)
|
3/15/05
|
|
Reinvesting
|
|
|
299 |
|
|
|
5.32 |
|
|
|
299 |
|
|
|
6.04 |
|
CDO
III
|
8/04/05
|
|
Static
|
|
|
261 |
|
|
|
5.37 |
|
|
|
267 |
|
|
|
5.25 |
|
CDO
IV(2)
|
3/15/06
|
|
Static
|
|
|
379 |
|
|
|
5.11 |
|
|
|
394 |
|
|
|
5.81 |
|
Total
|
|
|
|
|
|
$1,192 |
|
|
|
5.34 |
% |
|
|
$1,213 |
|
|
|
5.86 |
% |
|
|
|
(1) |
Includes
amortization of premiums and issuance
costs.
|
(2) |
Floating rate CDO liabilities assume LIBOR at December 31, 2007 and
December 31, 2006, of 4.60% and 5.32%,
respectively.
|
Repurchase
obligation financings provide us with an important revolving component to our
liability structure. Our repurchase agreements provide stand alone financing for
certain assets and interim, or warehouse financing for assets that we plan to
contribute to our CDOs. At any point in time, the amounts and the cost of our
repurchase borrowings are based upon the assets being financed—higher risk
assets will attract lower levels of leverage at higher costs and vice versa. The
table below summarizes our repurchase agreement liabilities as of year end 2007
and 2006.
Repurchase
Agreements
|
|
($
in millions)
|
|
December
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
Repurchase
commitments
|
|
|
$1,600 |
|
|
|
$1,200 |
|
Counterparties
|
|
|
9 |
|
|
|
7 |
|
Outstanding
repurchase borrowings
|
|
|
$912 |
|
|
|
$704 |
|
All
in cost
|
|
|
L +
1.20 |
% |
|
|
L +
1.21 |
% |
Our
repurchase obligations generally include mark-to-market features. The
mark-to-market provisions in our repurchase facilities are designed to keep our
lenders’ credit exposure constant as a percentage of the market value of the
assets pledged as security to them. As asset values have declined in
2007 (and this trend has continued in 2008), the gross amount of leverage
available to us has been reduced as our assets have been
marked-to-market. The impact to date from these marks to market has
been a reduction in our liquidity. We believe that we maintain
sufficient liquidity on our balance sheet in order to meet margin calls and
defend our portfolios. In addition, our repurchase agreements are not
term matched financings and mature from time to time. In 2007, we
have experienced, and expect to continue to experience in 2008, lower advance
rates and higher pricing under these agreements as we negotiate renewals and
extensions of these liabilities.
In March
2007, we closed a $50 million senior unsecured revolving credit facility with
WestLB AG, which we amended in June 2007, increasing the size to $100 million
and adding new lenders to the syndicate. The facility has an initial term of one
year (with a one year term out provision at our option) and a maximum term of
four years (including extension options). The facility has a cash cost of LIBOR
plus 1.50% (LIBOR plus 1.80% on an all-in effective basis) and we expect to use
the facility borrowings for general corporate purposes and working capital
needs, including providing additional flexibility for funding loan originations.
At December 31, 2007, we had borrowed $75 million under this
facility.
The most
subordinated components of our debt capital structure are junior subordinated
debentures that back trust preferred securities issued by our statutory trust
subsidiary to third parties. These securities represent long term,
subordinated, unsecured financing and generally carry limited operational
covenants. At December 31, 2007, we had issued $129 million of junior
subordinated debentures that back $125 million of trust preferred securities
sold to third parties in two separate issuances. On a combined basis, the junior
subordinated debentures provide us with financing at a cash cost of 7.20% and an
all in effective rate of 7.30%. In March 2007, our statutory trust
subsidiary, CT Preferred Trust II, sold $75 million of trust preferred
securities to third parties and $2 million common securities to
us. These trust preferred securities have a 30 year term, maturing in
April 2037, are redeemable at par on or after April 30, 2012 and pay
distributions at a cash cost of 7.03% and an all-in effective rate of 7.14% for
the first ten years ending April 2017, and thereafter, at a floating rate of
three month LIBOR plus 2.25%.
During
2007 we did not issue new common equity to the public. Changes in the number of
shares resulted from option exercises, restricted stock grants and vesting,
stock unit grants, and common stock issuances in connection with the purchase of
a healthcare loan origination platform.
During
2007, we instituted a dividend reinvestment and stock purchase
plan. The plan has two components; a dividend reinvestment component
and a direct stock purchase component. The dividend reinvestment
component allows shareholders to designate all or a portion of the cash
dividends on their shares of our common stock for reinvestment in additional
shares of common stock at a discount. The direct stock purchase component allows
shareholders and new investors, subject to our approval, to purchase shares of
common stock directly from us at a discount that can range from 0% to
5.0%.
Shareholders’
Equity
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Book
value (in millions)
|
|
|
$408 |
|
|
|
$426 |
|
Shares
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
17,165,528 |
|
|
|
16,932,892 |
|
Restricted
stock
|
|
|
423,931 |
|
|
|
480,967 |
|
Stock
units
|
|
|
94,587 |
|
|
|
73,848 |
|
Options(1)
|
|
|
84,743 |
|
|
|
230,399 |
|
Total
|
|
|
17,768,789 |
|
|
|
17,718,106 |
|
Book
value per share
|
|
|
$22.97 |
|
|
|
$24.06 |
|
|
|
|
(1) |
Dilutive shares issuable upon the exercise of outstanding options
assuming a December 31, 2007 and 2006 stock price, respectively, and the
treasury stock method.
|
At
December 31, 2007, we had 666,339 shares remaining authorized for open
market repurchase of our class A common stock pursuant to authorization by the
board in 2000. We did not repurchase any of our common stock during the year
ended December 31, 2007, and currently, we are not actively pursuing open
market purchases.
Other
Balance Sheet Items
Participations
sold represent interests in loans that we originated and subsequently sold to CT
Large Loan and third parties. We present these sold interests as both
assets and liabilities (in equal amounts) in conformity with GAAP on the basis
that these arrangements do not qualify as sales under FAS 140. At
December 31, 2007, we had seven such participations sold with a total book
balance of $408 million at a weighted average yield of LIBOR plus 3.41% (8.01%
at December 31, 2007). At December 31, 2006, we had four such
participations sold with a total book balance of $209 million at a weighted
average yield of LIBOR plus 3.54% (8.86% at December 31, 2006). The
income earned on the loans is recorded as interest income and an identical
amount is recorded as interest expense on the consolidated statements of
income.
We
endeavor to manage a book of assets and liabilities that are matched with
respect to interest rates, financing floating rate assets with floating rate
liabilities and fixed rate assets with fixed rate liabilities. In some cases, we
finance fixed rate assets with floating rate liabilities and, in those cases, we
generally use interest rate derivatives, such as swaps, to effectively convert
the floating rate debt to fixed rate debt. In such instances, the equity we have
invested in fixed rate assets is not typically swapped, leaving a portion of our
equity capital exposed to changes in value of the fixed rate assets due to
interest rate fluctuations. The balance of our assets earn interest
at floating rates and are financed with floating rate liabilities, leaving a
portion of our equity capital exposed to cash flow variability from fluctuations
in rates. Generally, these assets and liabilities earn interest at rates indexed
to one month LIBOR.
The table
below details our interest rate exposure as of the years ended 2007 and
2006:
Interest
Rate Exposure
|
|
(in
millions)
|
|
December
31, 2007
|
|
December
31, 2006
|
Value
Exposure to Interest Rates(1)
|
|
|
|
Fixed
rate assets
|
|
|
$948 |
|
|
|
$1,001 |
|
Fixed
rate liabilities
|
|
|
(403 |
) |
|
|
(331 |
) |
Interest
rate swaps
|
|
|
(513 |
) |
|
|
(560 |
) |
Net
fixed rate exposure
|
|
|
$32 |
|
|
|
$110 |
|
Weighted
average maturity (assets)
|
|
7.4
yrs
|
|
|
8.2
yrs
|
|
Weighted
average coupon (assets)
|
|
|
7.10 |
% |
|
|
7.18 |
% |
|
|
|
|
|
|
|
|
|
Cash
Flow Exposure to Interest Rates(1)
|
|
|
|
|
|
|
|
|
Floating
rate assets(2)
|
|
|
$2,235 |
|
|
|
$1,607 |
|
Floating
rate debt less cash
|
|
|
(2,280 |
) |
|
|
(1,816 |
) |
Interest
rate swaps
|
|
|
513 |
|
|
|
560 |
|
Net
floating rate exposure
|
|
|
$468 |
|
|
|
$351 |
|
|
|
|
|
|
|
|
|
|
Net
income impact from 100 bps change in LIBOR
|
|
|
$4.7 |
|
|
|
$3.5 |
|
|
|
|
(1) |
All values are in terms of face or notional
amounts.
|
(2) |
December
31, 2006 values do not include one non performing loan that was
successfully resolved in the second quarter of
2007.
|
In
addition to our balance sheet investment activities, we act as an investment
manager for third parties. The purpose of our investment management
business is to leverage our platform, generating fee revenue from investing
third party capital and in certain instances co-investment
income. Our third party investment management mandates are designed
to be complementary to our balance sheet programs and are built around
opportunities that we do not pursue directly on balance sheet due to their
scale/concentration, risk/return profile and/or regulatory
constraints. In some instances, we co-invest in our investment
management vehicles (as described below). In 2007, we continued to
expand our investment management business by (a) raising two new private equity
vehicles, CTOPI and the CTX
Fund, (b)
increasing the CT High Grade mandate by $100 million and extending its
investment period to July 2008, and (c) extending the investment period of CT
Large Loan by
one year to May 2008. Our investment management business is
designed to complement the investing activities of our balance sheet investing
senior, junior and pari passu with the balance sheet
and, in certain cases, in products that are unsuitable for the balance
sheet.
|
·
|
CTOPI
is a multi-investor private equity fund designed to invest in commercial
real estate debt and equity investments, specifically taking advantage of
the current dislocation in the commercial real estate capital
markets. CTOPI held its initial closing on December 13, 2007,
with $314 million of equity commitments ($167 million immediately
available) and, subsequent to year end, held two additional closings
bringing total equity commitments to $389 million ($271 million
immediately available) as of February 20, 2008. We have
committed to invest $25 million in the vehicle and entities controlled by
our chairman have committed to invest $20 million. The fund’s
investment period expires in December of 2010, and we earn base management
fees as the investment manager of CTOPI (1.64% of committed equity during
the investment period and of invested capital thereafter). In
addition, we earn gross incentive management fees of 20% of profits after
a 9% preferred return and a 100% return of
capital.
|
|
·
|
CTX
Fund is a single investor fund designed to invest in collateralized debt
obligations, or CDOs, sponsored, but not issued, by us. The CTX
Fund was initially capitalized with $50 million and, subsequent to year
end, the capital commitment was reduced to $10 million as we do not
anticipate further investment activity for the account. We do
not earn fees on the CTX Fund, however, we earn CDO management fees from
the CDOs in which the CTX Fund invests. We sponsored one such
CDO in 2007, a $500 million CDO secured primarily by credit default swaps
referencing CMBS.
|
|
·
|
CT
High Grade closed in November 2006, with a single, related party
investor committing $250 million. This separate account does not
utilize leverage and we earn management fees of 0.25% per annum of
invested assets. In July 2007, we upsized the account by $100
million to $350 million and extended the investment period to July
2008.
|
|
·
|
CT
Large Loan closed in May 2006 with total equity commitments of $325
million from eight third party investors. The fund employs leverage (not
to exceed a two to one ratio of debt to equity), and we earn management
fees of 0.75% per annum of invested assets (capped at 1.5% on invested
equity). In April 2007, we extended the investment period of
the fund to May 2008.
|
At December 31, 2007, we managed four private equity
funds and one separate account through our wholly-owned, taxable, investment
management subsidiary, CT Investment Management Co., LLC, or CTIMCO.
Investment
Management Mandates
|
|
|
|
|
|
|
|
|
|
Incentive
Management Fee
|
|
Type
|
|
Total
Equity
Commitments
($
in millions)
|
|
Co-Investment%
|
|
Base
Management
Fee
|
|
Company
%
|
|
Employee
%
|
Fund
III
|
Fund
|
|
$425
|
|
4.71%
|
|
1.42%
(Equity) 2
|
|
57%(1)
|
|
43%(2)
|
CT
Large Loan
|
Fund
|
|
325
|
|
(3)
|
|
0.75%
(Assets)
(4)
|
|
N/A
|
|
N/A
|
CT
High Grade
|
Sep.
Acct.
|
|
350
|
|
0%
|
|
0.25%
(Assets) 2
|
|
N/A
|
|
N/A
|
CTX
Fund
|
Fund
|
|
50(5)
|
|
(3)
|
|
(6)
|
|
(6)
|
|
(6)
|
CTOPI
|
Fund
|
|
|
|
(7)
|
|
1.64%
(Equity) 2
|
|
100%(9)(10)
|
|
0%(10)
|
|
|
|
(1) |
CTIMCO earns gross incentive management fees of 20% of profits
after a 10% preferred return on capital and a 100% return of capital,
subject to a catch up.
|
(2) |
Portions
of the Fund III incentive management fees received by us have been
allocated to our employees as long term performance awards.
|
(3) |
We
co-invest on a pari passu, asset by asset basis with CT Large Loan and CTX
Fund.
|
(4) |
Capped at 1.5% of
equity. |
(5) |
In 2008, we reduced
the total capital commitment in the CTX Fund to $10
million. |
(6) |
CTIMCO
serves as collateral manager of the CDOs in which the CTX Fund invests and
CTIMCO earns base and incentive management fees
as CDO collateral manager. At year end, we manage one such $500
million CDO and earn base management fees of 0.15% and have the potential
to earn incentive management fees.
|
(7) |
We
have committed to invest $25 million in CTOPI and expect that our
co-investment percentage will be less than 10% once capital raising
activities have concluded.
|
(8) |
Assumes
all equity commitments are available. At December 31, 2007,
$167 million of these commitments were immediately
available.
|
(9) |
CTIMCO
earns gross incentive management fees of 20% of profits after a 9%
preferred return on capital and a 100% return of capital, subject to a
catch-up.
|
(10) |
We
have not allocated any of the CTOPI incentive management fee to employees
as of December 31, 2007.
|
The table
below describes the status of our investment management vehicles as of December
31, 2007 and December 31, 2006.
Investment
Management Snapshot
|
|
(in
millions)
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Fund
III
|
|
|
|
|
|
|
Assets
|
|
|
$47 |
|
|
|
$195 |
|
Equity
|
|
|
$15 |
|
|
|
$50 |
|
Incentive
fees collected(1)
|
|
|
$5.6 |
|
|
|
$— |
|
Incentive
fees projected(2)
|
|
|
$2.6 |
|
|
|
$7.5 |
|
Status(3)
|
|
Liquidating
|
|
|
Liquidating
|
|
|
|
|
|
|
|
|
|
|
CT
Large Loan
|
|
|
|
|
|
|
|
|
Assets
|
|
|
$323 |
|
|
|
$157 |
|
Equity
|
|
|
$130 |
|
|
|
$79 |
|
Status(4)
|
|
Investing
|
|
|
Investing
|
|
|
|
|
|
|
|
|
|
|
CT
High Grade
|
|
|
|
|
|
|
|
|
Assets
|
|
|
$305 |
|
|
|
$65 |
|
Equity
|
|
|
$305 |
|
|
|
$65 |
|
Status(4)
|
|
Investing
|
|
|
Investing
|
|
|
|
|
|
|
|
|
|
|
CTX
Fund
|
|
|
|
|
|
|
|
|
Assets(5)
|
|
|
$500 |
|
|
|
N/A |
|
Equity
|
|
|
$7 |
|
|
|
N/A |
|
Status(4)
|
|
Investing
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
CTOPI
|
|
|
|
|
|
|
|
|
Assets
|
|
|
$69 |
|
|
|
N/A |
|
Equity
commitments(6)
|
|
|
$314 |
|
|
|
N/A |
|
Incentive
fees collected
|
|
|
$— |
|
|
|
N/A |
|
Incentive
fees projected
|
|
|
$— |
|
|
|
N/A |
|
Status(4)
|
|
Investing
|
|
|
|
N/A |
|
|
|
|
(1) |
CTIMCO received $5.6 million of incentive fees from Fund III in
2007 of which $372,000 may have to be returned under certain
circumstances. Accordingly, we only recorded $5.2 million as revenue for
the year ended December 31, 2007.
|
(2) |
Assumes
assets were sold and liabilities were settled on January 1, 2008 and
January 1, 2007, respectively, at the recorded book value, and the fund’s
equity and income was distributed for the respective period ends.
|
(3) |
Fund III’s
investment period ended in June 2005. |
(4) |
CT Large Loan, CT
High Grade, CTX Fund, and CTOPI investment periods expire in May 2008,
July 2008, April 2008, and December 2010,
respectively. |
(5) |
Represents the total
notional cash exposure to CTX CDO I collateral. |
(6) |
Assumes
all equity commitments are available. At December 31, 2007,
$167 million of these commitments were immediately
available.
|
We expect
to continue to grow our investment management business, sponsoring additional
investment vehicles consistent with the theme of developing mandates that are
complementary to our balance sheet activities.
We
account for our operations on both a GAAP and tax basis. The
financial statements are presented using the methods prescribed in
GAAP. Below, we reconcile the differences between these two
bases.
Our
operations are conducted in two separate taxable entities, Capital Trust, Inc.
(a real estate investment trust, or REIT) and CTIMCO (a wholly owned taxable
REIT subsidiary, or TRS, of the REIT). From a GAAP standpoint, these
two entities are consolidated, and our GAAP results reflect the combination of
the two operations. The chart
below shows consolidated GAAP net income, as well as the contributions from each
of the REIT and the TRS on a GAAP presentation basis:
GAAP
Net Income Detail
|
|
|
(in
thousands)
|
|
Year
Ended December 31, 2007
|
|
REIT
GAAP Net Income
|
|
|
$85,951 |
|
TRS
GAAP Net Income
|
|
|
(1,585 |
) |
Consolidated
GAAP Net Income
|
|
|
$84,366 |
|
REIT
(Capital Trust, Inc.)
We have
made a tax election to be treated as a REIT. The primary benefit from
this election is that we are able to deduct from the calculation of taxable
income (shown as REIT Taxable Income in the chart below), dividends paid to our
shareholders, effectively eliminating corporate taxes on the operations of the
REIT. In order to qualify as a REIT, our activities must focus on
real estate investments and we must meet certain asset, income, ownership and
distribution requirements. If we fail to maintain qualification as a
REIT, we may be subject to material penalties and potentially subject to past
and future taxes. The chart below reconciles the differences between
GAAP income and taxable income for the REIT:
REIT
GAAP to Tax Reconciliation
|
|
|
(in
thousands)
|
|
Year
Ended December 31, 2007
|
|
REIT
GAAP Net Income
|
|
|
$85,951 |
|
GAAP
to Tax Differences
|
|
|
|
|
|
General
and administrative(1)
|
|
1,017 |
|
|
Depreciation
and amortization(2)
|
|
(1,198 |
) |
|
Recovery/(provision)
for loan loss(3)
|
|
4,000 |
|
|
Other
|
|
(173 |
) |
|
Subtotal
|
|
3,646 |
|
|
|
|
|
|
|
REIT
Taxable Income (pre-dividend)
|
|
$89,597 |
|
|
|
|
(1) |
Primarily differences associated with stock based compensation to
our directors and employees.
|
(2) |
Primarily
differences associated with expenses that we capitalized in association
with our investment management business.
|
(3) |
Provision for loan
loss recorded in the fourth quarter of 2007 is not recognized for tax
purposes. |
For tax
year 2007, we do not expect to pay any taxes at the REIT, as we have paid
dividends to our shareholders at least equal to REIT taxable income
(pre-dividend).
TRS
(CTIMCO)
CTIMCO is
a wholly owned subsidiary of ours that operates our investment management
business (including the management of Capital Trust, Inc.) and holds certain of
our assets. As a taxable REIT subsidiary, CTIMCO is subject to
standard corporate taxation.
The chart
below reconciles GAAP income to taxable income for the TRS:
TRS
GAAP to Tax Reconciliation
|
|
|
(in
thousands)
|
|
Year
Ended December 31, 2007
|
|
TRS
GAAP Net Income
|
|
|
($1,585 |
) |
GAAP
to Tax Differences
|
|
|
|
|
|
General
and administrative(1)
|
|
2,576 |
|
|
Other
|
|
(262 |
) |
|
Subtotal
|
|
2,314 |
|
|
|
|
|
|
|
TRS
Taxable Income (pre-NOL/NCL)
|
|
$729 |
|
|
|
|
(1) |
Primarily differences associated with stock based compensation to
our directors and
employees.
|
For tax
year 2007, we do not expect to pay any taxes at the TRS, as the TRS is expected
to be able to utilize net operating loss carryforwards to offset TRS taxable
income.
GAAP
Tax Provision
During
2007, in our GAAP financials, we recorded a tax benefit of
$706,000. The tax benefit was comprised of (i) a $50,000 tax benefit
associated with the GAAP operating loss at the TRS, and (ii) the reversal of tax
liability reserves of $656,000 from previous years.
Our
policy is to set our regular quarterly dividend at a level commensurate with the
recurring income generated by our business. At the same time, in order to take
full advantage of the dividends paid deduction of a REIT, we endeavor to pay out
100% of taxable income. In the event that taxable income exceeds our regular
dividend pay out rate, we will make additional distributions in the form of
special dividends.
See
Part II, Item 5 for details on dividend taxation.
Comparison of Results of
Operations: Year Ended December 31, 2007 vs. December 31,
2006
|
|
|
|
|
(in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
Income from loans and other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related
income
|
|
$ |
253,422 |
|
|
$ |
175,404 |
|
|
$ |
78,018 |
|
|
|
44.5 |
%
|
Interest and related
expenses
|
|
|
162,377 |
|
|
|
104,607 |
|
|
|
57,770 |
|
|
|
55.2 |
%
|
Income from loans and other
investments, net
|
|
|
91,045 |
|
|
|
70,797 |
|
|
|
20,248 |
|
|
|
28.6 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
|
|
3,499 |
|
|
|
2,650 |
|
|
|
849 |
|
|
|
32.0 |
%
|
Incentive management
fees
|
|
|
6,208 |
|
|
|
1,652 |
|
|
|
4,556 |
|
|
|
275.8 |
%
|
Servicing
fees
|
|
|
623 |
|
|
|
105 |
|
|
|
518 |
|
|
|
493.3 |
%
|
Other
|
|
|
1,083 |
|
|
|
1,354 |
|
|
|
(271 |
)
|
|
|
(20.0 |
%)
|
Total other
revenues
|
|
|
11,413 |
|
|
|
5,761 |
|
|
|
5,652 |
|
|
|
98.1 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
|
29,956 |
|
|
|
23,075 |
|
|
|
6,881 |
|
|
|
29.8 |
%
|
Depreciation and
amortization
|
|
|
1,810 |
|
|
|
3,049 |
|
|
|
(1,239 |
)
|
|
|
(40.6 |
%)
|
Total other
expenses
|
|
|
31,766 |
|
|
|
26,124 |
|
|
|
5,642 |
|
|
|
21.6 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery/(provision) for
losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
N/A |
|
Gain on sale of
investments
|
|
|
15,077 |
|
|
|
— |
|
|
|
15,077 |
|
|
|
N/A |
|
Income/(loss) from equity
investments
|
|
|
(2,109 |
)
|
|
|
898 |
|
|
|
(3,007 |
)
|
|
|
(335 |
%)
|
(Benefit) provision for income
taxes
|
|
|
(706 |
)
|
|
|
(2,735 |
)
|
|
|
2,029 |
|
|
|
(74.2 |
%)
|
Net income
|
|
$ |
84,366 |
|
|
$ |
54,067 |
|
|
$ |
30,299 |
|
|
|
56.0 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share -
diluted
|
|
|
$4.77 |
|
|
|
$3.40 |
|
|
|
$1.37 |
|
|
|
40.3 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per
share
|
|
|
$5.10 |
|
|
|
$3.45 |
|
|
|
$1.65 |
|
|
|
47.8 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
LIBOR
|
|
|
5.25 |
%
|
|
|
5.10 |
%
|
|
|
0.15 |
%
|
|
|
2.9 |
%
|
Income
from loans and other investments
Growth in
Interest Earning Assets ($570 million or 22% from December 31, 2006 to December
31, 2007) and $4.3 million of interest revenue from the successful
resolution of a non-performing loan, along with an increase in average LIBOR,
drove a $78.0 million (45%) increase in interest income between 2006 and 2007.
These same factors,
combined with generally higher levels of leverage, resulted in a $57.8 million
(55%) increase in interest expense for the same period. On a net basis, net
interest income increased by $20.2 million (29%), which was the primary driver
of net income growth.
Management
fees
Base
management fees from our investment management business increased in 2007 by
$849,000 (32%) as base management fees from CT Large Loan, CT High Grade, CTX
Fund and CTOPI offset the decrease in these fees at CT Mezzanine Partners II,
LP, or Fund II, and Fund III as these vehicles liquidated in the normal course.
Fund II paid its final base management fee to us during the first quarter of
2007.
Incentive
management fees
Incentive
management fees increased substantially during 2007, primarily due to incentive
fees received from Fund III. Total incentive management fees from
Fund III totaled $5.2 million in 2007 composed primarily of a catch up payment
from incentive management fees earned but not paid from the inception of Fund
III in 2003 through 2007. We received a final incentive management
fee distribution from Fund II of $962,000 in March 2007 as the Fund II’s last
investment repaid and Fund II was liquidated. In 2006, we received $1.7 million
of Fund II incentive management fees.
Servicing
fee income for 2007 was $623,000, compared with $105,000 in 2006 as we
recognized revenue relating to the servicing contracts acquired as part of our
purchase of a healthcare origination platform in June 2007.
General
and administrative expenses
General
and administrative expenses include compensation and benefits for our employees,
operating expenses and professional fees. Total general and administrative
expenses increased 30% between 2007 and 2006 primarily as a result of the
payment of $2.6 million in 2007 of employee performance compensation associated
with our receipt of Fund II and Fund III incentive management
fees. Net of the impact of incentive management fees, general and
administrative expenses increased $4.3 million (19%) from 2006 primarily as a
result of the additional employee compensation expense associated with our
acquisition of a healthcare lending platform in 2007.
Depreciation
and amortization
Depreciation
and amortization decreased by $1.2 million between 2006 and 2007 due primarily
to the write off of $1.8 million of capitalized costs in the third quarter of
2006, as we expensed all of the capitalized costs relating to an investment
management joint venture. This was partially offset by the write off of $1.3
million of capitalized costs related to the liquidation of Fund II in the first
quarter of 2007. Net of the Fund II and investment management
write-offs, depreciation and amortization in 2007 decreased $739,000 to $510,000
from $1.2 million in 2006.
Recovery
of provision for losses
In the
second quarter of 2007 we recorded a $4.0 million recovery related to the
successful resolution of a non-performing loan. We received net proceeds of
$10.9 million that resulted in the following: (a) reduced the carrying value of
the loan from $2.6 million to zero (b) recorded a $4.0 million recovery of a
provision for losses and (c) recorded $4.3 million of interest
income. In the fourth quarter of 2007 we recorded a $4.0 million
provision for loss against one second mortgage loan with a principal balance of
$10.0 million.
Gain
on sale of investments
In the
fourth quarter of 2007 we sold our investment in Bracor and realized a gain of
$15.1 million that included a $2.5 million currency translation
adjustment. Our ownership interest was purchased by four investors on
the same terms, including WRBC. WRBC beneficially owns approximately
17.8% of our outstanding class A common stock as of March 4, 2008 and a
member of our board of directors is an employee of WRBC. We did not
sell any of our equity investments in 2006.
Income/(loss)
from equity investments
Our loss
from equity investments was derived primarily from our recording our share of
losses from the operations of Bracor, Fund II and Fund III. In 2007
and 2006, our Bracor investment generated a net loss of $1.2 million and
$132,000, respectively. In 2007, our Fund II investment generated a
net loss of $690,000 which included an operating loss $306,000 and the
amortization of $384,000 of capitalized costs passed through to us from the
general partner of Fund II. In 2007, our Fund III investment
generated a net loss of $119,000. During 2006, income from
equity investments was primarily comprised of co-investment income from Fund II
and Fund III.
(Benefit)
provision for income taxes
We did
not pay any taxes at the REIT level in either 2007 or 2006. However, CTIMCO, our
investment management subsidiary, is a taxable REIT subsidiary and subject to
taxes on its earnings. In 2007, CTIMCO recorded an operating loss before income
taxes of $2.0 million, which resulted in an income tax benefit of $939,000,
$889,000 of which we reserved and $50,000 of which we recorded. In 2006, CTIMCO
recorded an operating loss before income taxes of $6.7 million, which resulted
in an income tax benefit of $2.7 million, none of which we reserved and the
entire $2.7 million of which we recorded. In addition to the benefit we recorded
in 2007 as a result of operations at CTIMCO, we reversed tax liability reserves
at Capital Trust, Inc. and CTIMCO of $254,000 and $402,000,
respectively.
Net
income
Net
income grew by $30.3 million (56%) from 2006 to 2007, based in large part upon
increased net interest income generated by a higher level of Interest Earning
Assets, $8.3 million of income from the successful resolution of a
non-performing loan, and a $15.1 million gain from the sale of our investment in
Bracor. On a diluted per share basis, net income was $4.77 and $3.40 in 2007 and
2006, respectively, representing an increase of 40%.
Our
regular dividends for 2007 and 2006 were $3.20 per share and $2.80 per share,
respectively, representing growth of 14% in recurring income from our
operations. In both 2007 and 2006, we also paid a special dividend of $1.90 per
share and $0.65 per share, respectively. Total dividends per share in 2007 and
2006 were $5.10 and $3.45, respectively, representing as increase of $1.65, or
48%.
Comparison of Results of
Operations: Year Ended December 31, 2006 vs. December 31,
2005
|
|
|
|
|
(in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
Income from loans and other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related
income
|
|
$ |
175,404 |
|
|
$ |
86,200 |
|
|
$ |
89,204 |
|
|
|
103.5 |
%
|
Interest and related
expenses
|
|
|
104,607 |
|
|
|
37,229 |
|
|
|
67,378 |
|
|
|
181.0 |
%
|
Income from loans and other
investments, net
|
|
|
70,797 |
|
|
|
48,971 |
|
|
|
21,826 |
|
|
|
44.6 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
|
|
2,650 |
|
|
|
5,091 |
|
|
|
(2,441 |
)
|
|
|
(47.9 |
%)
|
Incentive management
fees
|
|
|
1,652 |
|
|
|
8,033 |
|
|
|
(6,381 |
)
|
|
|
(79.4 |
%)
|
Servicing
fees
|
|
|
105 |
|
|
|
— |
|
|
|
105 |
|
|
|
N/A |
|
Other
|
|
|
1,354 |
|
|
|
553 |
|
|
|
801 |
|
|
|
144.8 |
%
|
Total other
revenues
|
|
|
5,761 |
|
|
|
13,677 |
|
|
|
(7,916 |
)
|
|
|
(57.9 |
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
|
23,075 |
|
|
|
21,939 |
|
|
|
1,136 |
|
|
|
5.2 |
%
|
Depreciation and
amortization
|
|
|
3,049 |
|
|
|
1,114 |
|
|
|
1,935 |
|
|
|
173.7 |
%
|
Total other
expenses
|
|
|
26,124 |
|
|
|
23,053 |
|
|
|
3,071 |
|
|
|
13.3 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of
investments
|
|
|
— |
|
|
|
4,951 |
|
|
|
(4,951 |
)
|
|
|
N/A |
|
Income (loss) from equity
investments
|
|
|
898 |
|
|
|
(222 |
)
|
|
|
1,120 |
|
|
|
(504.5 |
%)
|
(Benefit) provision for income
taxes
|
|
|
(2,735 |
)
|
|
|
213 |
|
|
|
(2,948 |
)
|
|
|
(1,384.0 |
%)
|
Net income
|
|
$ |
54,067 |
|
|
$ |
44,111 |
|
|
$ |
9,956 |
|
|
|
22.6 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share -
diluted
|
|
|
$3.40 |
|
|
|
$2.88 |
|
|
|
$0.52 |
|
|
|
18.1 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per
share
|
|
|
$3.45 |
|
|
|
$2.45 |
|
|
|
$1.00 |
|
|
|
40.8 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
LIBOR
|
|
|
5.10 |
%
|
|
|
3.39 |
%
|
|
|
1.71 |
%
|
|
|
50.4 |
%
|
Income
from loans and other investments
Growth in
Interest Earning Assets, along with a 50.4% increase in average LIBOR, drove a
104% increase in interest income between 2005 and 2006. These same factors,
combined with generally higher levels of leverage, created a 181% increase in
interest expense for the same period. On a net basis, net interest margin
increased by 45%, which was the primary driver of net income growth from 2005 to
2006.
Management
and advisory fees
Base
management fees from our investment management business decreased as both Fund
II and Fund III continued to wind down. Base management fees from CT Large Loan
and CT High Grade offset the reduction only in part, due to the generally lower
level of fees that these vehicles generate and the timing of their launch after
mid-year 2006.
Incentive
management fees
Fund II
continued to pay incentive management fees in 2006, albeit at substantially
lower levels than 2005, when we received our initial payment of incentive
management fees from Fund II. In 2005, we received $8.0 million of incentive
fees, composed primarily of a catch up payment for incentive management fees
earned but not paid from the inception of Fund II in 2001 through 2005. With the
catch up phase completed in 2005, 2006 payments reflected only incentive fees
actually earned in that year.
General
and administrative expenses
General
and administrative expenses include compensation and benefits for our employees,
operating expenses and professional fees. Total general and administrative
expenses increased 5% between 2006 and 2005, a lower growth rate than would be
expected given the business activity in 2006. The change between 2006 and 2005
can be explained in part by one time expense items in 2005. These items include
(i) the payment of approximately $2.0 million of Fund II incentive
management fees to employees in 2005, while only $398,000 was paid in 2006, and
(ii) the incurrence of $757,000 of costs in 2005 associated with a
potential corporate combination, an abandoned fund management venture and
increased expenses under our contract with Global Realty Outsourcing, Inc.
These impacts were offset by increases in professional fees between 2005 and
2006 of roughly $800,000.
Depreciation
and amortization
Depreciation
and amortization increased by $1.9 million between 2005 and 2006 due primarily
to $1.8 million of expenses incurred in 2006 associated with the effective
termination of our investment management venture with a joint venture
partner.
Gain
on sale of investments
In 2006,
we did not sell any securities or investments. During 2005, we sold our
investment in Global Realty Outsourcing, Inc., a real estate outsourcing
firm for which we were a founding shareholder, for a gain of $5.0
million.
Income/(loss)
from equity investments
Income
from equity investments was predominantly derived from our co-investment in Fund
III during 2006, offset by start up operating losses at Bracor. In 2006, the
Bracor investment generated a net loss of $132,000, representing our share of
operating losses (plus de minimus currency adjustments) for the period from
Bracor’s inception through September 30, 2006 (we report Bracor’s operating
results on a one fiscal quarter lag). In 2005, income from equity investments
was negative, based primarily upon our co-investment at Fund II, where the fund
expensed $16 million of incentive management fees ($8.0 million paid to CTIMCO)
and generated an operating loss for the year. In conjunction with the payment of
Fund II incentive management fees to CTIMCO in 2005, we expensed $1.2 million of
costs that we had previously capitalized associated with Fund II.
(Benefit)
provision for income taxes
We did
not pay any taxes at the REIT level in either 2006 or 2005. However, CTIMCO, our
investment management subsidiary, is a taxable REIT subsidiary and subject to
taxes on its earnings. In 2006, CTIMCO recorded an operating loss before income
taxes of $6.7 million, which resulted in an income tax benefit of $2.7 million.
In 2005, CTIMCO recorded net income before income taxes of $104,000, which
when combined with GAAP to tax difference resulted in a provision for income
taxes of $213,000, all of which we recorded.
Net
income
Net
income grew by $10.0 million or 23% from 2005 to 2006, based in large part upon
the increased net interest income generated by a higher level of Interest
Earning Assets. On a diluted per share basis, net income was $3.40 and $2.88 in
2006 and 2005, respectively, representing an increase of 18%.
Our
regular dividends for 2006 and 2005 were $2.80 per share and $2.25 per share,
respectively, representing growth of 25% in recurring income from our
operations. In both 2006 and 2005, we also paid a special dividend, $0.65 per
share and $0.20 per share, respectively. Total dividends per share increased by
$1.00, or 41%, from 2005 to 2006.
Liquidity
and Capital Resources
We expect
to use a significant amount of our available capital resources to invest in new
and existing loans and investments for our balance sheet. We intend
to continue to employ leverage on our balance sheet to enhance our return on
equity. At December 31, 2007, our net liquidity was as follows:
Net
Liquidity |
|
|
|
(in
millions)
|
|
December
31, 2007
|
Available
cash
|
|
|
$32 |
|
Available
borrowings
|
|
|
172 |
|
Total
immediate liquidity
|
|
|
204 |
|
Net
unfunded commitments(1)
|
|
|
(41 |
) |
Net
liquidity
|
|
|
$163 |
|
|
|
|
(1) |
Represents
gross unfunded commitments of $180 million less respective
in
place financing commitments from our lenders of $139
million.
|
At
December 31, 2007, we had total immediate liquidity of $204 million comprised of
$26 million in cash, $6 million in restricted cash and $147 million of
immediately available liquidity from our repurchase agreements ($145.4 million
from master repurchase agreements and $2 million from asset specific repurchase
agreements) and $25 million from our senior unsecured credit
facility. Our primary sources of liquidity during the next 12 months
are expected to be cash on hand, cash generated from operations, principal and
interest payments received on loans and investments, additional borrowings under
our repurchase agreements and senior unsecured credit facility, stock offerings,
proceeds from our direct stock purchase plan and dividend reinvestment plan, and
other capital raising activities. We believe these sources of capital
will be adequate to meet both short term and medium term cash
requirements.
We
experienced a net decrease in cash of $313,000 for the year ended December 31,
2007, compared to a net increase of $1 million for the year ended December 31,
2006. Cash provided by operating activities during the year ended
December 31, 2007 was $87 million, compared to cash provided by operating
activities of $65 million during the same period of 2006. The change
was primarily due to increased net interest income due to our increase in
interest earning assets. For the year ended December 31, 2007, cash
used in investing activities was $359 million, compared to $1.2 billion during
the same period in 2006. The change was primarily due to a decrease
in originations of $651 million during the year ended December 31, 2007 compared
to the year ended December 31, 2006, and an increase in principal repayments of
$138 million for the same periods. For the year ended December 31, 2007, cash
provided by financing activities was $271 million, compared to $1.1 billion
during the same period in 2006. The change was primarily due to
proceeds from participations sold in 2006 and the proceeds in March 2006 from
the issuance of the CDO IV obligations, and activity on other debt.
At
December 31, 2007, under our repurchase agreements, we had pledged assets that
enable us to borrow an additional $147 million. We had $613 million of
credit available for the financing of new and existing unpledged assets pursuant
to these sources of financing. Furthermore, at December 31, 2007, we
had $25 million of liquidity available under our senior unsecured credit
facility. At December 31, 2007, we had outstanding debt in the form of CDOs of
$1.2 billion and outstanding repurchase obligations totaling $912
million. The terms of these agreements are described in Note 7 of the
consolidated financial statements and in the capitalization discussion in this
Item 2. Additional liquidity will be generated when assets that are
currently pledged under repurchase obligations are contributed to our CDOs as
the difference between the repurchase price under our repurchase agreements is
generally less than the leverage available to us in our CDOs. At
December 31, 2007, we had additional liquidity of $6 million in our CDOs in the
form of restricted cash.
The
following table sets forth information about certain of our contractual
obligations as of December 31, 2007:
Contractual
Obligations
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Long-Term
Debt Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
obligations
|
|
|
$912 |
|
|
|
$644 |
|
|
|
$268 |
|
|
|
$— |
|
|
|
$— |
|
Collateralized
debt obligations
|
|
|
1,190 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,190 |
|
Participations
sold
|
|
|
408 |
|
|
|
165 |
|
|
|
127 |
|
|
|
116 |
|
|
|
— |
|
Senior
unsecured credit facility
|
|
|
75 |
|
|
|
— |
|
|
|
75 |
|
|
|
— |
|
|
|
— |
|
Junior
subordinated debentures
|
|
|
129 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
129 |
|
Total
long-term debt obligations
|
|
|
2,714 |
|
|
|
809 |
|
|
|
470 |
|
|
|
116 |
|
|
|
1,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
|
|
|
177 |
|
|
|
48 |
|
|
|
123 |
|
|
|
6 |
|
|
|
— |
|
Total
return swaps
|
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
Equity
investments
|
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
Total
unfunded commitments
|
|
|
205 |
|
|
|
48 |
|
|
|
151 |
|
|
|
6 |
|
|
|
— |
|
Operating
Lease Obligations
|
|
|
15 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
8 |
|
Total(2)
|
|
|
$2,934 |
|
|
|
$858 |
|
|
|
$624 |
|
|
|
$125 |
|
|
|
$1,327 |
|
|
|
|
(1) |
Our unfunded loan commitments net of in place financing as of
December 31, 2007 were $41 million.
|
(2) |
We are
also subject to interest rate swaps for which we cannot estimate future
payments due.
|
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires our management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. Our accounting policies affect our more significant judgments
and estimates used in the preparation of our financial statements. Actual
results could differ from these estimates. During 2007, management reviewed and
evaluated its critical accounting policies and believes them to be appropriate.
Our accounting policies are described in Note 2 to our consolidated financial
statements. The following is a summary of our accounting policies that we
believe are the most affected by management judgments, estimates and
assumptions:
Principles
of Consolidation
The
accompanying consolidated financial statements include, on a consolidated basis,
our accounts, the accounts of our wholly-owned subsidiaries and our interests in
variable interest entities in which we are the primary
beneficiary. All significant intercompany balances and transactions
have been eliminated in consolidation. Our interests in CT Preferred Trust I and
CT Preferred Trust II, the issuers of trust securities backed by our junior
subordinated debentures, are accounted for using the equity method and their
assets and liabilities are not consolidated into our financial statements due to
our determination that CT Preferred Trust I and CT Preferred Trust II are
variable interest entities in which we are not the primary beneficiary under
Financial Accounting Standards Board, or FASB, Interpretation No. 46(R), or
FIN 46R. We account for our co-investment interest in private equity funds we
manage, CT Mezzanine Partners III, Inc., or Fund III, and CTOPI, under the
equity method of accounting. We also account for our investment in Bracor under
the equity method of accounting. As such, we report a percentage of the earnings
of Fund III, CTOPI and Bracor equal to our ownership percentage on a single line
item in the consolidated statement of operations as income from equity
investments.
Revenue
Recognition
Interest
income from our loans receivable is recognized over the life of the investment
using the effective interest method and is recorded on the accrual basis. Fees,
premiums, discounts and direct costs in connection with these investments are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment to yield. Fees on commitments that expire unused are
recognized at expiration. For loans where we have unfunded commitments, we
amortize the appropriate items on a straight line basis. Income recognition is
generally suspended for loans at the earlier of the date at which payments
become 90 days past due or when, in the opinion of management, a full recovery
of income and principal becomes doubtful. Income recognition is resumed when the
loan becomes contractually current and performance is demonstrated to be
resumed.
Fees from
special servicing and asset management services are recognized as services are
rendered. We account for incentive fees we can potentially earn from our
investment management business in accordance with Method 1
of Emerging Issues Task Force Topic D-96. Under Method 1, no incentive income is
recorded until all contingencies have been eliminated.
Commercial
Mortgage Backed Securities
We
classify our CMBS investments pursuant to FASB Statement of Financial Accounting
Standards No. 115, or FAS 115, on the date of acquisition of the
investment. On August 4, 2005, we made a decision to change the accounting
classification of our CMBS investments from available-for-sale to
held-to-maturity. Held-to-maturity investments are stated at cost plus the
amortization of any premiums or discounts and any premiums or discounts are
amortized through the consolidated statements of income using the level yield
method. Other than in the instance of impairment, these held-to-maturity
investments are shown in our financial statements at their adjusted values
pursuant to the methodology described above.
We may
also invest in CMBS and certain other securities which may be classified as
available-for-sale. Available-for-sale securities are carried at estimated fair
value with the net unrealized gains or losses reported as a component of
accumulated other comprehensive income/(loss) in shareholders’ equity. Many of
these investments are relatively illiquid and management must estimate their
values. In making these estimates, management utilizes market prices provided by
dealers who make markets in these securities, but may, under certain
circumstances, adjust these valuations based on management’s judgment. Changes
in the valuations do not affect our reported income or cash flows, but impact
shareholders’ equity and, accordingly, book value per share.
Income on
these securities is recognized based upon a number of assumptions that are
subject to uncertainties and contingencies. Examples include, among other
things, the rate and timing of principal payments, including prepayments,
repurchases, defaults and liquidations, the pass-through or coupon rate and
interest rates. Additional factors that may affect our reported interest income
on our mortgage backed securities include interest payment shortfalls due to
delinquencies on the underlying mortgage loans and the timing and magnitude of
credit losses on the mortgage loans underlying the securities that are impacted
by, among other things, the general condition of the real estate market,
including competition for tenants and their related credit quality, and changes
in market rental rates. These uncertainties and contingencies are difficult to
predict and are subject to future events that may alter the
assumptions.
We
account for CMBS under Emerging Issues Task Force 99-20, “Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”, or EITF 99-20. Under EITF 99-20, when significant
changes in estimated cash flows from the cash flows previously estimated occur
due to actual prepayment and credit loss experience and the present value of the
revised cash flows using the current expected yield is less than the present
value of the previously estimated remaining cash flows, adjusted for cash
receipts during the intervening period, an other than temporary impairment is
deemed to have occurred. Accordingly, the security is written down to fair value
with the resulting change being included in income and a new cost basis
established with the original discount or premium written off when the new cost
basis is established. In accordance with this guidance, on a quarterly basis,
when significant changes in estimated cash flows from the cash flows previously
estimated occur due to actual prepayment and credit loss experience, we
calculate a revised yield based upon the current amortized cost of the
investment, including any other than temporary impairments recognized to date,
and the revised cash flows. The revised yield is then applied prospectively to
recognize interest income. Management must also assess whether unrealized losses
on securities reflect a decline in value that is other than temporary, and,
accordingly, write down the impaired security to its fair value, through a
charge to earnings. Significant judgment of management is required in this
analysis that includes, but is not limited to, making assumptions regarding the
collectibility of the principal and interest, net of related expenses, on the
underlying loans.
During
the fourth quarter of 2004, we concluded that two of our CMBS investments had
incurred other than temporary impairment and we incurred a charge of $5.9
million through the income statement. At December 31, 2007 we believe there
has not been any adverse change in cash flows relating to existing CMBS
investments, therefore we did not recognize any additional other than temporary
impairment on any CMBS investments. Significant judgment of management is
required in this analysis that includes, but is not limited to, making
assumptions regarding the collectibility of the principal and interest, net of
related expenses, on the underlying loans.
From time
to time we purchase CMBS and other investments in which we have a level of
control over the issuing entity; we refer to these investments as controlling
class investments. The presentation of controlling class investments in our
financial statements is governed in part by FIN 46R. FIN 46R could require that
certain controlling class investments be presented on a consolidated basis.
Based upon the specific circumstances of certain of our CMBS investments that
are controlling class investments and our interpretation of FIN 46R,
specifically the exemption for qualifying special purpose entities as defined
under FASB Statements of Financial Accounting Standard No. 140, or FAS 140,
we have concluded that the entities that have issued the controlling class
investments should not be presented on a consolidated basis. We are aware that
FAS 140 is currently under review by standard setters and that, as a result of
this review, our current interpretation of FIN 46R and FAS 140 may
change.
Loans
Receivable and Reserve for Possible Credit Losses
We
purchase and originate commercial real estate debt and related instruments, or
Loans, to be held as long term investments at amortized cost. Management must
periodically evaluate each of these Loans for possible impairment. Impairment is
indicated when it is deemed probable that we will not be able to collect all
amounts due according to the contractual terms of the Loan. If a Loan were
determined to be permanently impaired, we would write down the Loan through a
charge to the reserve for possible credit losses. Given the nature of our Loan
portfolio and the underlying commercial real estate collateral, significant
judgment on the part of management is required in determining the permanent
impairment and the resulting charge to the reserve, which includes but is not
limited to making assumptions regarding the value of the real estate that
secures the loan. Each Loan in our portfolio is evaluated at least quarterly
using our loan risk rating system which considers loan-to-value, debt yield,
cash flow stability, exit plan, loan sponsorship, loan structure and other
factors deemed necessary by management to assess the likelihood of delinquency
or default. If we believe that there is a potential for delinquency or default,
a downside analysis is prepared to estimate the value of the collateral
underlying our Loan, and this potential loss is multiplied by the default
likelihood to determine the size of the reserve. Actual losses, if any, could
ultimately differ from these estimates.
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 as a liability on our
consolidated balance sheet. Interest income earned on the investments and
interest expense incurred on the repurchase obligations are reported separately
on the consolidated statements of income. There is a position under
consideration by standard setters, based upon a technical interpretation of FAS
140, that starting in fiscal 2009 these transactions will not qualify as a
purchase by us. We believe, consistent with industry practice, that we are
accounting for these transactions in an appropriate manner; however, if these
investments do not qualify as a purchase under FAS 140, we would be required to
present the net investment (asset balance less the repurchase obligation
balance) on our balance sheet together with an embedded derivative with the
corresponding change in fair value of the derivative being recorded in the
consolidated statements of income. The value of the derivative would reflect not
only changes in the value of the underlying investment, but also changes in the
value of the underlying credit provided by the counterparty. Income from these
arrangements would be presented on a net basis. Furthermore, hedge instruments
related to these assets and liabilities, currently deemed effective, may no
longer be effective and may have to be accounted for as non-hedge derivatives.
As of December 31, 2007 we had entered into 26 such transactions, with
a book value of the associated assets of $669.2 million financed with repurchase
obligations of $475.5 million.
Accounting
for Stock-Based Compensation
We
account for stock based compensation in accordance with FASB Statement of
Financial Accounting Standards No. 123(R), or FAS 123(R) “Share Based
Payment”. We have elected to utilize the modified prospective method,
and there was no material impact from this adoption. Compensation
expense for the time vesting of stock based compensation grants is recognized on
the accelerated attribution method and compensation expense for performance
vesting of stock based compensation grants is recognized on a straight-line
basis.
Interest
Rate Derivative Financial Instruments
In the
normal course of business, we use interest rate derivative financial instruments
to manage, or hedge, cash flow variability caused by interest rate fluctuations.
Specifically, we currently use interest rate swaps to effectively convert
variable rate liabilities, that are financing fixed rate assets, to fixed rate
liabilities. The differential to be paid or received on these agreements is
recognized on the accrual basis as an adjustment to the interest expense related
to the attendant liability. The swap agreements are generally accounted for on a
held-to-maturity basis, and, in cases where they are terminated early, any gain
or loss is generally amortized over the remaining life of the hedged item. These
swap agreements must be effective in reducing the variability of cash flows of
the hedged items in order to qualify for the aforementioned hedge accounting
treatment. Changes in value of effective cash flow hedges are reflected in our
financial statements through accumulated other comprehensive income/(loss) and
do not affect our net income. To the extent a derivative does not qualify for
hedge accounting, and is deemed a non-hedge derivative, the changes in its value
are included in net income.
To
determine the fair value of derivative instruments, we use third parties to
periodically value 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,
do not expect to pay substantial corporate level taxes (other than taxes payable
by our taxable REIT subsidiaries which are accounted for in accordance with FASB
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes”, or FAS 109). Many of these requirements, however, are highly technical
and complex. If we were to fail to meet these requirements, we may be subject to
federal, state and local income tax on current and past income, and we may also
be subject to penalties.
In June
2006, the FASB issued Financial Interpretation No. 48, or FIN
48. This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FAS 109. This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This interpretation
was effective January 1, 2007 for the company. The adoption of FIN 48 did not
have a material impact on our financial results.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” or FAS 157. FAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. FAS 157 applies to reporting periods beginning
after November 15, 2007. As discussed above, the company reports the changes in
the value of effective cash flow hedges through accumulated other comprehensive
income/(loss). If the cash flow hedges were accounted for under FAS 157 as of
December 31, 2007, the value would be a liability on our consolidated balance
sheet of $17.7 million as compared to a liability of $18.7 million
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or
FAS 159. FAS 159 permits entities to choose to measure many financial
instruments, and certain other items, at fair value. FAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. FAS 159 applies to reporting periods
beginning after November 15, 2007. We will adopt FAS 159 as
required.
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
The
principal objective of our asset/liability management activities is to maximize
net interest income while minimizing levels of interest rate risk. Net interest
income and interest expense are subject to the risk of interest rate
fluctuations. In certain instances, to mitigate the impact of fluctuations in
interest rates, we use interest rate swaps to effectively convert variable rate
liabilities to fixed rate liabilities for proper matching with fixed rate
assets. Each derivative used as a hedge is matched with an asset or liability
with which it is expected to have a high correlation. The swap agreements are
generally held-to-maturity and we do not use interest rate derivative financial
instruments for trading purposes. The differential to be paid or received on
these agreements is recognized as an adjustment to the interest expense related
to debt and is recognized on the accrual basis.
Our loans
and investments, including our fund investments, are also subject to credit
risk. The ultimate performance and value of our loans and investments depends
upon the owner’s ability to operate the properties that serve as our collateral
so that they produce cash flows adequate to pay interest and principal due to
us. To monitor this risk, our asset management team continuously reviews the
investment portfolio and in certain instances is in constant contact with our
borrowers, monitoring performance of the collateral and enforcing our rights as
necessary.
The
following table provides information about our financial instruments that are
sensitive to changes in interest rates at December 31, 2007. For
financial assets and debt obligations, the table presents cash flows (in certain
cases, face adjusted for expected losses) to the expected maturity and weighted
average interest rates. For interest rate swaps, the table presents notional
amounts and weighted average fixed pay and variable receive interest rates by
contractual maturity dates. Notional amounts are used to calculate the
contractual cash flows to be exchanged under the contract. Weighted average
variable rates are based on rates in effect as of the reporting
date.
|
Expected
Maturity Dates
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair
Value
|
|
(dollars
in thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
$ |
49,813 |
|
|
$ |
6,858 |
|
|
$ |
14,013 |
|
|
$ |
76,003 |
|
|
$ |
195,184 |
|
|
$ |
396,970 |
|
|
$ |
738,841 |
|
|
$ |
679,986 |
Avg
Int Rate
|
|
6.38% |
|
|
|
7.65% |
|
|
|
7.28% |
|
|
|
7.47% |
|
|
|
7.17% |
|
|
|
6.07% |
|
|
|
6.56% |
|
|
|
|
Variable
Rate
|
$ |
19,618 |
|
|
$ |
29,797 |
|
|
$ |
83,164 |
|
|
|
— |
|
|
$ |
2,651 |
|
|
$ |
36,390 |
|
|
$ |
171,620 |
|
|
$ |
150,425 |
Avg
Int Rate
|
|
6.39% |
|
|
|
6.92% |
|
|
|
7.94% |
|
|
|
— |
|
|
|
10.00% |
|
|
|
10.50% |
|
|
|
8.16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
$ |
61,400 |
|
|
$ |
17,967 |
|
|
$ |
1,997 |
|
|
$ |
24,864 |
|
|
$ |
2,124 |
|
|
$ |
94,861 |
|
|
$ |
203,213 |
|
|
$ |
214,798 |
Avg
Int Rate
|
|
10.68% |
|
|
|
8.52% |
|
|
|
8.23% |
|
|
|
8.42% |
|
|
|
7.76% |
|
|
|
7.37% |
|
|
|
8.61% |
|
|
|
|
Variable
Rate
|
$ |
989,307 |
|
|
$ |
670,210 |
|
|
$ |
126,845 |
|
|
$ |
10,429 |
|
|
$ |
249,180 |
|
|
$ |
13,000 |
|
|
$ |
2,058,971 |
|
|
$ |
2,011,647
|
Avg
Int Rate
|
|
7.46% |
|
|
|
7.40% |
|
|
|
8.49% |
|
|
|
7.35% |
|
|
|
8.20% |
|
|
|
6.56% |
|
|
|
7.59% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
return swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
Avg
Int Rate
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amounts
|
$ |
41,825 |
|
|
$ |
49,553 |
|
|
$ |
14,280 |
|
|
$ |
50,023 |
|
|
$ |
81,887 |
|
|
$ |
275,475 |
|
|
$ |
513,043 |
|
|
$ |
(18,686) |
Avg
Fixed Pay Rate
|
|
5.08% |
|
|
|
4.77% |
|
|
|
5.04% |
|
|
|
4.66% |
|
|
|
4.98% |
|
|
|
5.06% |
|
|
|
4.98% |
|
|
|
|
Avg Variable Receive Rate
|
|
4.60% |
|
|
|
4.60% |
|
|
|
4.60% |
|
|
|
4.60% |
|
|
|
4.60% |
|
|
|
4.60% |
|
|
|
4.60% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
$ |
644,372 |
|
|
$ |
246,235 |
|
|
$ |
21,250 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
911,857 |
|
|
$ |
911,857 |
Avg
Int Rate
|
|
5.50% |
|
|
|
5.73% |
|
|
|
5.60% |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.56% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
$ |
4,502 |
|
|
$ |
3,042 |
|
|
$ |
5,473 |
|
|
$ |
44,255 |
|
|
$ |
68,965 |
|
|
$ |
148,273 |
|
|
$ |
274,510 |
|
|
$ |
243,309 |
Avg
Int Rate
|
|
5.60% |
|
|
|
6.22% |
|
|
|
5.19% |
|
|
|
5.10% |
|
|
|
5.16% |
|
|
|
5.42% |
|
|
|
5.31% |
|
|
|
|
Variable
Rate
|
$ |
37,226 |
|
|
$ |
268,532 |
|
|
$ |
49,443 |
|
|
$ |
155,101 |
|
|
$ |
196,410 |
|
|
$ |
209,226 |
|
|
$ |
915,938 |
|
|
$ |
824,204 |
Avg
Int Rate
|
|
4.97% |
|
|
|
5.05% |
|
|
|
5.77% |
|
|
|
4.90% |
|
|
|
4.98% |
|
|
|
5.20% |
|
|
|
5.08% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
— |
|
|
$ |
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
75,000 |
|
|
$ |
75,000 |
Avg
Int Rate
|
|
— |
|
|
|
6.10% |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6.10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
128,875 |
|
|
$ |
128,875 |
|
|
$ |
98,863 |
Avg
Int Rate
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7.20% |
|
|
|
7.20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participation Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
$ |
164,830 |
|
|
$ |
97,465 |
|
|
$ |
29,050 |
|
|
|
— |
|
|
$ |
117,089 |
|
|
|
— |
|
|
$ |
408,434 |
|
|
$ |
396,900 |
Avg
Int Rate
|
|
7.31% |
|
|
|
8.25% |
|
|
|
9.10% |
|
|
|
— |
|
|
|
8.42% |
|
|
|
— |
|
|
|
7.98% |
|
|
|
|
|
Financial
Statements and Supplementary Data
|
The
financial statements required by this item and the reports of the independent
accountants thereon required by Item 14(a)(2) appear on pages F-2 to
F-48. See accompanying Index to the Consolidated Financial Statements on
page F-1. The supplementary financial data required by Item 302 of
Regulation S-K appears in Note 19 to the consolidated financial
statements.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
Item
9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
An
evaluation of the effectiveness of the design and operation of our “disclosure
controls and procedures” (as defined in Rule 13a-15(e)) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this annual report on Form 10-K was made under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures (a) are effective to ensure that information required to be
disclosed by us in reports filed or submitted under the Securities Exchange Act
is timely recorded, processed, summarized and reported and (b) include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in reports filed or submitted under the
Securities Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Management’s
Report on Internal Control over Financial Reporting
Management’s
Report on Internal Control over Financial Reporting, which appears on
page F-3, is incorporated herein by reference.
Attestation
Report of Registered Public Accounting Firm
The
effectiveness of our internal control over financial reporting as of
December 31, 2007 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which
appears on page F-2, and is incorporated herein by reference.
Changes
in Internal Controls
There
have been no significant changes in our “internal control over financial
reporting” (as defined in rule 13a-15(f) of the Exchange Act) that
occurred during the quarter ended December 31, 2007 that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
Item
9B.
|
Other
Information
|
None.
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
The
information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and
(d)(5) of Regulation S-K is incorporated herein by reference to the
Company’s definitive proxy statement to be filed not later than April 29,
2008 with the Securities and Exchange Commission pursuant to Regulation 14A
under the Exchange Act.
Item
11.
|
Executive
Compensation
|
The
information required by Item 402 and paragraph (e)(4) and (e)(5) of
Item 407 of Regulation S-K is incorporated herein by reference to the Company’s
definitive proxy statement to be filed not later than April 29, 2008 with
the Securities and Exchange Commission pursuant to Regulation 14A under the
Exchange Act.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
information required by Items 201(d) and 403 of Regulation S-K is
incorporated herein by reference to the Company’s definitive proxy statement to
be filed not later than April 29, 2008 with the Securities and Exchange
Commission pursuant to Regulation 14A under the Exchange Act.
Item
13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
The
information required by Items 404 and 407(a) of Regulation S-K is
incorporated herein by reference to the Company’s definitive proxy statement to
be filed not later than April 29, 2008 with the Securities and Exchange
Commission pursuant to Regulation 14A under the Exchange Act.
Item
14.
|
Principal
Accounting Fees and Services
|
The
information required by Item 9(e) of Schedule 14A is incorporated
herein by reference to the Company’s definitive proxy statement to be filed not
later than April 29, 2008 with the Securities and Exchange Commission
pursuant to Regulation 14A under the Exchange Act.
Item
15.
|
Exhibits,
Financial Statement Schedules
|
|
See
the accompanying Index to Financial Statement Schedule on
page F-1.
|
|
Consolidated
Financial Statement
Schedules
|
|
See
the accompanying Index to Financial Statement Schedule on
page F-1.
|
Exhibit
Number
|
|
Description
|
|
|
|
3.1.a
|
|
Charter
of the Capital Trust, Inc. (filed as Exhibit 3.1.a to Capital
Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788)
filed on April 2, 2003 and incorporated herein by
reference).
|
|
|
|
3.1.b
|
|
Certificate
of Notice (filed as Exhibit 3.1 to Capital Trust, Inc.’s Current
Report on Form 8-K (File No. 1-14788) filed on February 27,
2007 and incorporated herein by reference).
|
|
|
|
3.2.a
|
|
Amended
and Restated By-Laws of Capital Trust, Inc. (filed as
Exhibit 3.2 to Capital Trust, Inc.’s Current Report on
Form 8-K (File No. 1-14788) filed on January 29, 1999 and
incorporated herein by reference).
|
|
|
|
3.2.b
|
|
Second
Amended and Restated By-Laws of Capital Trust, Inc. (filed as
Exhibit 3.2 to Capital Trust, Inc.’s Current Report on
Form 8-K (File No. 1-4788) filed on February 27, 2007 and
incorporated herein by reference).
|
|
|
|
3.3
|
|
First
Amendment to Amended and Restated Bylaws of Capital Trust, Inc.
(filed as Exhibit 3.2 to Capital Trust, Inc.’s Quarterly Report
on Form 10-Q (File No. 1-14788) filed on August 16, 2004
and incorporated herein by reference).
|
|
|
|
+10.1
|
|
Capital
Trust, Inc. Second Amended and Restated 1997 Long-Term Incentive
Stock Plan (the “1997 Plan”) (filed as Exhibit 10.1 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 10, 2005 and incorporated herein by
reference).
|
|
|
|
+10.2
|
|
Capital
Trust, Inc. Amended and Restated 1997 Non-Employee Director Stock
Plan (filed as Exhibit 10.2 to Capital Trust, Inc.’s Current
Report on Form 8-K (File No. 1-14788) filed on January 29,
1999 and incorporated herein by reference) (the “1997 Director
Plan”).
|
|
|
|
+10.3
|
|
Capital
Trust, Inc. 1998 Employee Stock Purchase Plan (filed as
Exhibit 10.3 to Capital Trust, Inc.’s Current Report on
Form 8-K (File No. 1-14788) filed on January 29, 1999 and
incorporated herein by reference).
|
|
|
|
+10.4
|
|
Capital
Trust, Inc. 1998 Non-Employee Stock Purchase Plan (filed as
Exhibit 10.4 to Capital Trust, Inc.’s Current Report on
Form 8-K (File No. 1-14788) filed on January 29, 1999 and
incorporated herein by reference).
|
|
|
|
+10.5
|
|
Capital
Trust, Inc. Amended and Restated 2004 Long-Term Incentive Plan (the
“2004 Plan”) (filed as Exhibit 10.5 to Capital Trust, Inc.’s
Annual Report on Form 10-K (File No. 1-14788) filed on
March 10, 2005 and incorporated herein by
reference).
|
|
|
|
•+10.6
|
|
2007
Amendment to the 2004 Plan.
|
|
|
|
+10.7
|
|
Form of
Award Agreement granting Restricted Shares and Performance Units under the
2004 Plan (filed as Exhibit 99.1 to Capital Trust, Inc.’s
Current Report on Form 8-K (File No. 1-14788) filed on
February 10, 2005 and incorporated herein by
reference).
|
|
|
|
+10.8
|
|
Form of
Award Agreement granting Performance Units under the 2004 Plan (filed as
Exhibit 10.7 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.9
|
|
Form of
Award Agreement granting Performance Units under the 2004 Plan (filed as
Exhibit 10.8 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
+10.10
|
|
Form of
Award Agreement granting Performance Units under the 2004 Plan (filed as
Exhibit 10.9 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.11
|
|
Form of
Stock Option Award Agreement under the 2004 Plan (filed as
Exhibit 10.10 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.12
|
|
Form of
Restricted Share Award Agreement under the 2004 Plan (filed as
Exhibit 10.11 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.13
|
|
Deferral
and Distribution Election Form for Restricted Share Award Agreement
under the 2004 Plan (filed as Exhibit 10.12 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 10, 2005 and incorporated herein by
reference).
|
|
|
|
+10.14
|
|
Form of
Restricted Share Unit Award Agreement under the 2004 Plan (filed as
Exhibit 10.13 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.15
|
|
Deferral
and Distribution Election Form for Restricted Share Unit Award
Agreement under the 2004 Plan (filed as Exhibit 10.14 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 10, 2005 and incorporated herein by
reference).
|
|
|
|
+10.16
|
|
Deferred
Share Unit Program Election Forms under the 2004 Plan (filed as
Exhibit 10.15 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.17
|
|
Director
Retainer Deferral Election Form for Stock Units under the 1997 Plan.
(filed as Exhibit 10.16 to Capital Trust, Inc.’s Annual Report
on Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
+10.18
|
|
Form of
Award Agreement granting Performance Awards under the Company’s Amended
and Restated 2004 Long-Term Incentive Plan (filed as Exhibit 10.1 to
Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on May 4, 2005 and incorporated herein by
reference).
|
|
|
|
+10.19
|
|
Capital
Trust, Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”) (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.
1-14788) filed on June 12, 2007 and incorporated herein by
reference).
|
|
|
|
•+10.20
|
|
2007
Amendment to the 2007 Plan.
|
|
|
|
+10.21
|
|
Form
of Award Agreement granting Restricted Shares and Performance Units under
the 2007 Plan (filed as Exhibit 10.3 to Capital Trust, Inc.’s Quarterly
Report on Form 10-Q (File No. 1-14788) filed on November 7, 2007 and
incorporated herein by reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
+10.22
|
|
Form
of Restricted Share Award Agreement under the 2007 Plan (filed as Exhibit
10.4 to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File No.
1-14788) filed on November 7, 2007 and incorporated herein by
reference).
|
|
|
|
+10.23
|
|
Form
of Performance Unit and Performance Share Award Agreement under the 2007
Plan (filed as Exhibit 10.5 to Capital Trust, Inc.’s Quarterly Report on
Form 10-Q (File No. 1-14788) filed on November 7, 2007 and incorporated
herein by reference).
|
|
|
|
+10.24
|
|
Form
of Stock Option Award Agreement under the 2007 Plan (filed as Exhibit 10.6
to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File No. 1-14788)
filed on November 7, 2007 and incorporated herein by
reference).
|
|
|
|
+10.25
|
|
Form
of SAR Award Agreement under the 2007 Plan (filed as Exhibit 10.7 to
Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File No. 1-14788)
filed on November 7, 2007 and incorporated herein by
reference).
|
|
|
|
+10.26
|
|
Form
of Restricted Share Unit Award Agreement under the 2007 Plan (filed as
Exhibit 10.8 to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on November 7, 2007 and incorporated herein by
reference).
|
|
|
|
+10.27
|
|
Deferral
Election Agreement for Deferred Share Units under the 2007 Plan (filed as
Exhibit 10.9 to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on November 7, 2007 and incorporated herein by
reference).
|
|
|
|
•+10.28
|
|
Deferral
Election Agreement for Selected Plan Awards, dated as of December 24,
2007, by and between Capital Trust, Inc. and John R.
Klopp.
|
|
|
|
•+10.29
|
|
Deferral
Election Agreement for Selected Plan Awards, dated as of December 24,
2007, by and between Capital Trust, Inc. and Geoffrey G.
Jervis.
|
|
|
|
•+10.30
|
|
Deferral
Election Agreement for Selected Plan Awards, dated as of December 24,
2007, by and between Capital Trust, Inc. and Geoffrey G.
Jervis.
|
|
|
|
•+10.31
|
|
Deferral
Election Agreement for Selected Plan Awards, dated as of December 24,
2007, by and between Capital Trust, Inc. and Geoffrey G.
Jervis. |
|
|
|
•+10.32
|
|
Deferral
Election Agreement for Selected Plan Awards, dated as of December 24,
2007, by and between Capital Trust, Inc. and Stephan D.
Plavin.
|
|
|
|
•+10.33
|
|
Deferral
Election Agreement for Selected Plan Awards, dated as of December 24,
2007, by and between Capital Trust, Inc. and Thomas C.
Ruffing.
|
|
|
|
+10.34
|
|
Employment
Agreement, dated as of February 24, 2004, by and between Capital
Trust, Inc. and CT Investment Management Co., LLC and John R. Klopp
(filed as Exhibit 10.1 to Capital Trust, Inc.’s Quarterly Report
on Form 10-Q (File No. 1-14788) filed on May 12, 2004 and
incorporated herein by reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
+10.35
|
|
Employment
Agreement, dated as of December 28, 2005, by and between Capital
Trust, Inc. and Stephen D. Plavin (filed as Exhibit 10.19 to
Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 10, 2006 and incorporated herein by
reference).
|
|
|
|
+10.36
|
|
Employment
Agreement, dated as of September 29, 2006, by and among Capital
Trust, Inc., CT Investment Management Co., LLC and Geoffrey G. Jervis
(filed as Exhibit 10.3 to Capital Trust, Inc.’s Quarterly Report
on Form 10-Q (File No. 1-14788) filed on October 30, 2006
and incorporated herein by reference).
|
|
|
|
+10.37
|
|
Employment
Agreement, dated as of August 4, 2006, by and among Capital Trust,
Inc., CT Investment Management Co., LLC and Thomas C. Ruffing (filed as
Exhibit 10.2 to Capital Trust, Inc.’s Quarterly Report on
Form 10-Q (File No. 1-14788) filed on August 8, 2006 and
incorporated herein by reference).
|
|
|
|
+10.38
|
|
Termination
Agreement, dated as of December 29, 2000, by and between Capital
Trust, Inc. and Craig M. Hatkoff (filed as Exhibit 10.9 to
Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on April 2, 2001 and incorporated herein by
reference).
|
|
|
|
+10.39
|
|
Transition
Agreement dated May 26, 2005, by and between the Company and Brian H.
Oswald (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K (File No. 1-14788) filed on May 27, 2005 and
incorporated herein by reference).
|
|
|
|
+10.40
|
|
Consulting
Services Agreement, dated as of January 1, 2003, by and between CT
Investment Management Co., LLC and Craig M. Hatkoff. (filed as
Exhibit 10.1 to Capital Trust, Inc.’s Quarterly Report on
Form 10-Q (File No. 1-14788) filed on November 6, 2003 and
incorporated herein by reference).
|
|
|
|
10.41
|
|
Agreement
of Lease dated as of May 3, 2000, between 410 Park Avenue Associates,
L.P., owner, and Capital Trust, Inc., tenant (filed as
Exhibit 10.11 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on April 2, 2001 and
incorporated herein by reference).
|
|
|
|
10.42.a
|
|
Amended
and Restated Master Loan and Security Agreement, dated as of June 27,
2003, between Capital Trust, Inc., CT Mezzanine Partners I LLC and
Morgan Stanley Mortgage Capital Inc. (filed as Exhibit 10.4 to
Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on November 6, 2003 and incorporated herein
by reference).
|
|
|
|
10.42.b
|
|
Joinder
and Amendment, dated as of July 20, 2004, among Capital
Trust, Inc., CT Mezzanine Partners I LLC, CT RE CDO 2004-1 Sub, LLC
and Morgan Stanley Mortgage Capital Inc. (filed as Exhibit 10.21.b to
Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 10, 2005 and incorporated herein by
reference).
|
|
|
|
10.43
|
|
Master
Repurchase Agreement, dated as of July 29, 2005, by and between the
Company and Morgan Stanley Bank (filed as Exhibit 10.1 to Capital
Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on November 1, 2005 and incorporated herein
by reference).
|
|
|
|
10.44.a
|
|
Master
Repurchase Agreement, dated as of July 29, 2005, by and among the
Company, CT RE CDO 2004-1 Sub, LLC, CT RE CDO 2005-1 Sub, LLC and Morgan
Stanley Bank (filed as Exhibit 10.2 to Capital Trust, Inc.’s
Quarterly Report on Form 10-Q (File No. 1-14788) filed on
November 1, 2005 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
10.44.b
|
|
Amendment
No. 1 to the Master Repurchase Agreement, dated as of
November 4, 2005, by and among Capital Trust, Inc., CT RE CDO
2004-1 Sub, LLC, CT RE CDO 2005-1 Sub, LLC and Morgan Stanley Bank (filed
as Exhibit 10.1 to Capital Trust, Inc.’s Current Report on
Form 8-K (File No. 1-14788) filed on November 9, 2005 and
incorporated herein by reference).
|
|
|
|
*10.44.c
|
|
Amendment
No. 5 to Master Repurchase Agreement, dated as of February 14, 2007, by
and among Capital Trust, Inc., CT RE CDO 2004-1 SUB, LLC, CT RE CDO 2005-1
SUB, LLC and Morgan Stanley Bank (filed as Exhibit 10.4 to Capital Trust,
Inc.’s Quarterly Report on Form 10-Q (File No. 1-14788) filed on May 1,
2007 and incorporated herein by reference).
|
|
|
|
10.45.a
|
|
Amended
and Restated Master Repurchase Agreement, dated as of August 15,
2006, by and between Goldman Sachs Mortgage Company and Capital
Trust, Inc. (filed as Exhibit 10.1.a to Capital
Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on October 30, 2006 and incorporated herein
by reference).
|
|
|
|
10.45.b
|
|
Annex
I to Amended and Restated Master Repurchase Agreement, dated as of
August 15, 2006, by and between Goldman Sachs Mortgage Company and
Capital Trust, Inc. (filed as Exhibit 10.1.b to Capital
Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on October 30, 2006 and incorporated herein
by reference).
|
|
|
|
10.45.c
|
|
Letter,
dated as of August 15, 2006, by and between Goldman Sachs Mortgage
Company and Capital Trust, Inc. (filed as Exhibit 10.1.c to
Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on October 30, 2006 and incorporated herein
by reference).
|
|
|
|
10.46
|
|
Master
Loan Repurchase Facility, dated as of August 17, 2004, by and between
Goldman Sachs Mortgage Company and Capital Trust, Inc. (filed as
Exhibit 10.1 to Capital Trust, Inc.’s Quarterly Report on
Form 10-Q (File No. 1-14788) filed on November 3, 2004 and
incorporated herein by reference).
|
|
|
|
10.47.a
|
|
Master
Repurchase Agreement, dated as of February 19, 2002, by and between
Liquid Funding, Ltd. and CT LF Funding Corp. (filed as
Exhibit 10.24.a to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 10, 2005 and
incorporated herein by reference).
|
|
|
|
10.47.b
|
|
Terms
Annex, dated March 1, 2005, by and between Liquid Funding, Ltd. and
CT LF Funding Corp. (filed as Exhibit 10.24.b to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 10, 2005 and incorporated herein by
reference).
|
|
|
|
10.47.c
|
|
Confirmation,
dated as of March 20, 2006, by and between CT LF Funding Corp. and
Liquid Funding, Ltd (filed as Exhibit 10.7 to Capital
Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on May 4, 2006 and incorporated herein by
reference).
|
|
|
|
10.48
|
|
Master
Repurchase Agreement, dated as of March 4, 2005, by and among Capital
Trust, Inc., Bank of America, N.A. and Banc of America Securities
LLC. (filed as Exhibit 10.25 to Capital Trust, Inc.’s Annual
Report on Form 10-K (File No. 1-14788) filed on March 10,
2005 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
10.49.a
|
|
Amended
and Restated Master Repurchase Agreement, dated as of February 15,
2006, by and among Bear, Stearns Funding, Inc., Capital
Trust, Inc. and CT BSI Funding Corp. (filed as Exhibit 10.31.a
to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 10, 2006 and incorporated herein by
reference).
|
|
|
|
10.49.b
|
|
Letter
agreement, dated as of February 15, 2006, by and among Bear, Stearns
Funding, Inc., Capital Trust, Inc. and CT BSI Funding Corp.
(filed as Exhibit 10.31.b to Capital Trust, Inc.’s Annual Report
on Form 10-K (File No. 1-14788) filed on March 10, 2006 and
incorporated herein by reference).
|
|
|
|
10.49.c
|
|
Amendment
No. 1, dated as of February 7, 2007, to the Amended and Restated Master
Repurchase Agreement, by and among Bear, Stearns Funding, Inc., Capital
Trust, Inc. and CT BSI Funding Corp.(filed as Exhibit 10.7.a to Capital
Trust, Inc.’s Quarterly Report on Form 10-Q (File No. 1-14788) filed on
May 1, 2007 and incorporated herein by reference).
|
|
|
|
*10.49.d
|
|
Letter
Agreement, dated as of February 7, 2007, by and among Bear, Stearns
Funding, Inc., Capital Trust, Inc. and CT BSI Funding Corp. (filed as
Exhibit 10.7b to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on May 1, 2007 and incorporated herein by
reference).
|
|
|
|
10.50.a
|
|
Amended
and Restated Master Repurchase Agreement, dated as of February 15,
2006, by and among Bear, Stearns International Limited, Capital
Trust, Inc. and CT BSI Funding Corp. (filed as Exhibit 10.32.a
to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 10, 2006 and incorporated herein by
reference).
|
|
|
|
10.50.b
|
|
Letter
agreement, dated as of February 15, 2006, by and among Bear, Stearns
International Limited, Capital Trust, Inc. and CT BSI Funding Corp.
(filed as Exhibit 10.32.b to Capital Trust, Inc.’s Annual Report
on Form 10-K (File No. 1-14788) filed on March 10, 2006 and
incorporated herein by reference).
|
|
|
|
10.50.c
|
|
Amendment
No. 1, dated as of February 7, 2007, to the Amended and Restated Master
Repurchase Agreement, by and among Bear, Stearns International Limited,
Capital Trust, Inc. and CT BSI Funding Corp. (filed as Exhibit 10.6.a to
Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File No. 1-14788)
filed on May 1, 2007 and incorporated herein by
reference).
|
|
|
|
*10.50.d
|
|
Letter
Agreement, dated as of February 7, 2007, by and among Bear, Stearns
International Limited, Capital Trust, Inc. and CT BSI Funding Corp. (filed
as Exhibit 10.6.b to Capital Trust, Inc.’s Quarterly Report on Form 10-Q
(File No. 1-14788) filed on May 1, 2007 and incorporated herein by
reference).
|
|
|
|
10.51
|
|
Master
Repurchase Agreement, dated as of November 1, 2006, by and between Capital
Trust, Inc. and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.35 to
Capital Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788) filed
on February 28, 2007 and incorporated herein by
reference).
|
|
|
|
10.52
|
|
Limited
Liability Company Agreement of CT MP II LLC, by and among Travelers
General Real Estate Mezzanine Investments II, LLC and CT-F2-GP, LLC, dated
as of March 8, 2000 (filed as Exhibit 10.3 to Capital Trust,
Inc.'s Current Report on Form 8-K (File No. 1-14788) filed on
March 23, 2000 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
10.53
|
|
Venture
Agreement amongst Travelers Limited Real Estate Mezzanine Investments I,
LLC, Travelers General Real Estate Mezzanine Investments II, LLC,
Travelers Limited Real Estate Mezzanine Investments II, LLC, CT-F1, LLC,
CT-F2-GP, LLC, CT-F2-LP, LLC, CT Investment Management Co., LLC and
Capital Trust, Inc., dated as of March 8, 2000 (filed as
Exhibit 10.1 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 1-14788) filed on March 23, 2000 and incorporated
herein by reference).
|
|
|
|
10.54
|
|
Guaranty
of Payment, by Capital Trust, Inc. in favor of Travelers Limited Real
Estate Mezzanine Investments I, LLC, Travelers General Real Estate
Mezzanine Investments II, LLC and Travelers Limited Real Estate Mezzanine
Investments II, LLC, dated as of March 8, 2000 (filed as
Exhibit 10.6 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 1-14788) filed on March 23, 2000 and incorporated
herein by reference).
|
|
|
|
10.55
|
|
Guaranty
of Payment, by The Travelers Insurance Company in favor of Capital
Trust, Inc., CT-F1, LLC, CT-F2-GP, LLC, CT-F2-LP, LLC and CT
Investment Management Co., LLC, dated as of March 8, 2000 (filed as
Exhibit 10.8 to Capital Trust, Inc.'s Current Report on Form 8-K
(File No. 1-14788) filed on March 23, 2000 and incorporated
herein by reference).
|
|
|
|
10.56
|
|
Amended
and Restated Investment Management Agreement, dated as of April 9,
2001, by and among CT Investment Management Co. LLC, CT MP II LLC and CT
Mezzanine Partners II LP (filed as Exhibit 10.37 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 10, 2006 and incorporated herein by
reference).
|
|
|
|
10.57
|
|
Registration
Rights Agreement, dated as of July 28, 1998, among Capital Trust,
Vornado Realty L.P., EOP Limited Partnership, Mellon Bank N.A., as trustee
for General Motors Hourly-Rate Employees Pension Trust, and Mellon Bank
N.A., as trustee for General Motors Salaried Employees Pension Trust
(filed as Exhibit 10.2 to Capital Trust’s Current Report on
Form 8-K (File No. 1-8063) filed on August 6, 1998 and
incorporated herein by reference).
|
|
|
|
10.58
|
|
Registration
Rights Agreement, dated as of February 7, 2003, by and between
Capital Trust, Inc. and Stichting Pensioenfonds ABP (filed as
Exhibit 10.24 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 28, 2003 and
incorporated herein by reference).
|
|
|
|
10.59
|
|
Registration
Rights Agreement, dated as of June 18, 2003, by and among Capital
Trust, Inc. and the parties named therein (filed as Exhibit 10.2
to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on May 12, 2004 and incorporated herein by
reference).
|
|
|
|
10.60
|
|
Securities
Purchase Agreement, dated as of May 11, 2004, by and among Capital
Trust, Inc. W. R. Berkley Corporation and certain shareholders of
Capital Trust, Inc. (filed as Exhibit 10.1 to Capital
Trust, Inc.’s Current Report on Form 8-K (File No. 1-14788)
filed on May 11, 2004 and incorporated herein by
reference).
|
|
|
|
10.61
|
|
Registration
Rights Agreement dated as of May 11, 2004, by and among Capital
Trust, Inc. and W. R. Berkley Corporation (filed as Exhibit 10.2
to Capital Trust, Inc.’s Current Report on Form 8-K (File
No. 1-14788) filed on May 11, 2004 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
10.62
|
|
Junior
Subordinate Indenture, dated February 10, 2006, by and between
Capital Trust, Inc. and JP Morgan Chase Bank, N.A. (filed as
Exhibit 10.1 to Capital Trust, Inc.’s Quarterly Report on
Form 10-Q (File No. 1-14788) filed on May 4, 2006 and
incorporated herein by reference).
|
|
|
|
10.63
|
|
Amended
and Restated Trust Agreement, dated February 10, 2006, by and among
Capital Trust, Inc., JP Morgan Chase Bank, N.A., Chase Bank USA, N.A.
and the Administrative Trustees named therein (filed as Exhibit 10.2
to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on May 4, 2006 and incorporated herein by
reference).
|
|
|
|
10.64
|
|
Investment
Management Agreement, dated as of November 9, 2006, by and between Berkley
Insurance Company and CT High Grade Mezzanine Manager, LLC (filed as
Exhibit 10.48 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on February 28, 2007 and incorporated herein by
reference).
|
|
|
|
10.65
|
|
Investment
Management Agreement, dated as of November 9, 2006, by and between Berkley
Regional Insurance Company and CT High Grade Mezzanine Manager, LLC (filed
as Exhibit 10.49 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on February 28, 2007 and incorporated herein by
reference).
|
|
|
|
10.66
|
|
Investment
Management Agreement, dated as of November 9, 2006, by and between Admiral
Insurance Company and CT High Grade Mezzanine Manager, LLC (filed as
Exhibit 10.50 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on February 28, 2007 and incorporated herein by
reference).
|
|
|
|
+10.67
|
|
Summary
of Non-Employee Director Compensation (filed as Exhibit 10.51 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788) filed on
February 28, 2007 and incorporated herein by
reference).
|
|
|
|
10.68
|
|
Junior
Subordinated Indenture, dated as of March 29, 2007, by and between Capital
Trust, Inc. and The Bank of New York Trust Company, National Association
(filed as Exhibit 10.1 to Capital Trust, Inc.’s Quarterly Report on Form
10-Q (File No. 1-14788) filed on May 1, 2007 and incorporated herein by
reference).
|
|
|
|
10.69
|
|
Amended
and Restated Trust Agreement, dated as of March 29, 2007, by and among
Capital Trust, Inc., The Bank of New York Trust Company, National
Association, The Bank of New York (Delaware) and the Administrative
Trustees named therein. (filed as Exhibit 10.2 to Capital Trust, Inc.’s
Quarterly Report on Form 10-Q (File No. 1-14788) filed on May 1, 2007 and
incorporated herein by reference).
|
|
|
|
10.70
|
|
Credit
Agreement, dated as of March 22, 2007, by and among Capital Trust, Inc.,
the lenders identified therein and WestLB AG, New York Branch (filed as
Exhibit 10.3 to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on May 1, 2007 and incorporated herein by
reference).
|
|
|
|
10.71
|
|
First
Amendment to Credit Agreement, dated as of June 1, 2007, by and among
Capital Trust, Inc., the lenders identified therein and WestLB AG, New
York Branch (filed as Exhibit 10.1 to Capital Trust, Inc.’s Quarterly
Report on Form 10-Q (File No. 1-14788) filed on August 1, 2007 and
incorporated herein by reference).
|
|
|
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
|
|
|
*10.72
|
|
Master
Repurchase Agreement, dated as of July 30, 2007, by and among Capital
Trust, Inc., Citigroup Global Markets Inc. and Citigroup Financial
Products Inc. (filed as Exhibit 10.1 to Capital Trust, Inc.’s Quarterly
Report on Form 10-Q (File No. 1-14788) filed on November 7, 2007 and
incorporated herein by reference).
|
|
|
|
+10.73
|
|
Summary
of Non-Employee Director Compensation (filed as Exhibit 10.51 to Capital
Trust, Inc.'s Annual Report on Form 10-K (File No. 1-14788) filed on
February 28, 2007 and incorporated herein by
reference).
|
|
|
|
•10.74
|
|
Additional
Space, Lease Extension and First Lease Modification Agreement, dated as of
May 23, 2007, by and between 410 Park Avenue Associates, L.P. and Capital
Trust, Inc.
|
|
|
|
11.1
|
|
Statements
regarding Computation of Earnings per Share (Data required by Statement of
Financial Accounting Standard No. 128, Earnings per Share, is
provided in Note 10 to the consolidated financial statements contained in
this report).
|
|
|
|
14.1
|
|
Capital
Trust, Inc. Code of Business Conduct and Ethics (filed as Exhibit
14.1 to Capital Trust, Inc.'s Annual Report on Form 10-K (File No.
1-14788) filed on February 28, 2007 and incorporated herein by
reference).
|
|
|
|
•
21.1
|
|
Subsidiaries
of Capital Trust, Inc.
|
|
|
|
•
23.1
|
|
Consent
of Ernst & Young LLP
|
|
|
|
•
31.1
|
|
Certification
of Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
•
31.2
|
|
Certification
of Chief Financial Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
•
32.1
|
|
Certification
of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
•
32.2
|
|
Certification
of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
+
|
Represents
a management contract or compensatory plan or arrangement.
|
|
|
•
|
|
|
|
*
|
Portions
of this exhibit has been omitted and filed separately with the Securities
and Exchange Commission pursuant
to a confidential treatment request under Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended
|
Pursuant
to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
March
4, 2008
|
|
|
/s/
John R. Klopp
|
|
|
Date
|
|
|
John
R. Klopp
|
|
|
|
|
|
Chief
Executive Officer
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
March
4, 2008
|
|
|
/s/
Samuel Zell
|
|
|
Date
|
|
|
Samuel
Zell
|
|
|
|
|
|
Chairman
of the Board of Directors
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
John R. Klopp
|
|
|
Date
|
|
|
John
R. Klopp
|
|
|
|
|
Chief
Executive Officer and Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Geoffrey G. Jervis
|
|
|
Date
|
|
|
Geoffrey
G. Jervis
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Thomas E. Dobrowski
|
|
|
Date
|
|
|
Thomas
E. Dobrowski, Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Martin L. Edelman
|
|
|
Date
|
|
|
Martin
L. Edelman, Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Craig M. Hatkoff
|
|
|
Date
|
|
|
Craig
M. Hatkoff, Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Edward S. Hyman
|
|
|
Date
|
|
|
Edward
S. Hyman, Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Henry N. Nassau
|
|
|
Date
|
|
|
Henry
N. Nassau, Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Joshua A. Polan
|
|
|
Date
|
|
|
Joshua
A. Polan, Director
|
|
|
|
|
|
|
March
4, 2008
|
|
|
/s/
Lynne B. Sagalyn
|
|
|
Date
|
|
|
Lynne
B. Sagalyn, Director
|
|
Index
to Consolidated Financial Statements and Schedules
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
Management’s
Report of Internal Control over Financial Reporting
|
|
F-3
|
Management’s
Responsibility for Financial Statements
|
|
F-4
|
Report
of Independent Registered Public Accounting Firm
|
|
F-5
|
Audited
Financial Statements
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
F-6
|
Consolidated
Statements of Income for the years ended December 31, 2007, 2006
and 2005
|
|
F-7
|
Consolidated
Statements of Shareholders’ Equity for the years ended
December 31, 2007, 2006 and 2005
|
|
F-8
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007,
2006 and 2005
|
|
F-9
|
Notes
to Consolidated Financial Statements
|
|
F-10
|
Schedule IV—Mortgage
Loans on Real Estate
|
|
S-1
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Capital Trust, Inc.
We have
audited Capital Trust, Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Capital Trust, Inc.’s management
is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Capital Trust, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
31, 2007 and 2006, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2007 of Capital Trust, Inc. and our report dated March 3,
2008 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
New
York, NY
|
|
|
March
3, 2008
|
|
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, and for performing an assessment of the effectiveness of
internal control over financial reporting as of December 31, 2007. Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s system of internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management
performed an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2007 based upon criteria in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (‘‘COSO’’). Based on our assessment,
management determined that the Company’s internal control over financial
reporting was effective as of December 31, 2007 based on the criteria in
Internal Control-Integrated Framework issued by COSO.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.
Dated: March
4, 2008
John
R. Klopp
|
Geoffrey
G. Jervis
|
Chief
Executive Officer
|
Chief
Financial Officer
|
MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL
Capital
Trust, Inc.’s management is responsible for the integrity and objectivity
of all financial information included in this Annual Report. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The financial statements
include amounts that are based on the best estimates and judgments of
management. All financial information in this Annual Report is consistent with
that in the consolidated financial statements.
Ernst &
Young LLP, an independent registered public accounting firm, has audited these
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and have expressed herein
their unqualified opinion on those financial statements.
The Audit
Committee of the Board of Directors, which oversees Capital Trust, Inc.’s
financial reporting process on behalf of the Board of Directors, is composed
entirely of independent directors (as defined by the New York Stock Exchange).
The Audit Committee meets periodically with management, the independent
accountants, and the internal auditors to review matters relating to the
Company’s financial statements and financial reporting process, annual financial
statement audit, engagement of independent accountants, internal audit function,
system of internal controls, and legal compliance and ethics programs as
established by Capital Trust, Inc.’s management and the Board of Directors.
The internal auditors and the independent accountants periodically meet alone
with the Audit Committee and have access to the Audit Committee at any
time.
Dated: March
4, 2008
John
R. Klopp
|
Geoffrey
G. Jervis
|
Chief
Executive Officer
|
Chief
Financial Officer
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Capital Trust, Inc.
We have
audited the accompanying consolidated balance sheets of Capital Trust, Inc. and
Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31,
2007. Our audits also included the financial statement schedule
listed in the Index to Consolidated Financial Statements and
Schedules. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2007 and 2006, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
As
discussed in Note 2 to the consolidated financial statements in 2006 the Company
adopted Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share Based
Payments. As discussed in Note 2 to the consolidated financial
statements in 2007 the Company adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 3, 2008 expressed an
unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
New
York, New York
|
|
March
3, 2008
|
|
Capital Trust, Inc. and
Subsidiaries
|
|
Consolidated Balance
Sheets
|
|
December 31, 2007 and
2006
|
|
(in thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
25,829 |
|
|
$ |
26,142 |
|
Restricted
cash
|
|
|
5,696 |
|
|
|
1,707 |
|
Commercial mortgage backed
securities
|
|
|
876,864 |
|
|
|
810,970 |
|
Loans
receivable
|
|
|
2,257,563 |
|
|
|
1,754,536 |
|
Total return
swaps
|
|
|
— |
|
|
|
1,815 |
|
Equity investment in
unconsolidated subsidiaries
|
|
|
977 |
|
|
|
11,485 |
|
Deposits and other
receivables
|
|
|
3,927 |
|
|
|
3,128 |
|
Accrued interest
receivable
|
|
|
15,091 |
|
|
|
14,888 |
|
Interest rate hedge
assets
|
|
|
— |
|
|
|
2,565 |
|
Deferred income
taxes
|
|
|
3,659 |
|
|
|
3,609 |
|
Prepaid and other
assets
|
|
|
21,876 |
|
|
|
17,719 |
|
Total
assets
|
|
$ |
3,211,482 |
|
|
$ |
2,648,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$ |
65,682 |
|
|
$ |
38,061 |
|
Repurchase
obligations
|
|
|
911,857 |
|
|
|
704,444 |
|
Collateralized debt
obligations
|
|
|
1,192,299 |
|
|
|
1,212,500 |
|
Senior unsecured credit
facility
|
|
|
75,000 |
|
|
|
— |
|
Junior subordinated
debentures
|
|
|
128,875 |
|
|
|
51,550 |
|
Participations
sold
|
|
|
408,351 |
|
|
|
209,425 |
|
Interest rate hedge
liabilities
|
|
|
18,686 |
|
|
|
1,688 |
|
Deferred origination fees and
other revenue
|
|
|
2,495 |
|
|
|
4,624 |
|
Total
liabilities
|
|
|
2,803,245 |
|
|
|
2,222,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Class A common stock $0.01 par
value 100,000 shares authorized, 17,166 and 16,933 shares issued and
outstanding at December 31, 2007 and December 31, 2006, respectively
("class A common stock")
|
|
|
172 |
|
|
|
169 |
|
Restricted class A common stock
$0.01 par value, 424 and 481 shares issued and outstanding at December 31,
2007 and December 31, 2006 respectively ("restricted class A common stock"
and together with class A common stock, "common
stock")
|
|
|
4 |
|
|
|
5 |
|
Additional paid-in
capital
|
|
|
426,113 |
|
|
|
417,641 |
|
Accumulated other comprehensive
(loss)/income
|
|
|
(8,684 |
)
|
|
|
12,717 |
|
Accumulated
deficit
|
|
|
(9,368 |
)
|
|
|
(4,260 |
)
|
Total shareholders'
equity
|
|
|
408,237 |
|
|
|
426,272 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders' equity
|
|
$ |
3,211,482 |
|
|
$ |
2,648,564 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial
statements.
|
Capital Trust, Inc. and
Subsidiaries
|
|
Consolidated Statements of
Income
|
|
For the Years Ended December 31,
2007, 2006, and 2005
|
|
(in thousands, except share and
per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Income from loans and other
investments:
|
|
|
|
|
|
|
|
|
|
Interest
and related income
|
|
$ |
253,422 |
|
|
$ |
175,404 |
|
|
$ |
86,200 |
|
Less:
Interest and related expenses
|
|
|
162,377 |
|
|
|
104,607 |
|
|
|
37,229 |
|
Income
from loans and other investments, net
|
|
|
91,045 |
|
|
|
70,797 |
|
|
|
48,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
|
|
3,499 |
|
|
|
2,650 |
|
|
|
5,091 |
|
Incentive
management fees
|
|
|
6,208 |
|
|
|
1,652 |
|
|
|
8,033 |
|
Servicing
fees
|
|
|
623 |
|
|
|
105 |
|
|
|
— |
|
Other
interest income
|
|
|
1,083 |
|
|
|
1,354 |
|
|
|
553 |
|
Total
other revenues
|
|
|
11,413 |
|
|
|
5,761 |
|
|
|
13,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
29,956 |
|
|
|
23,075 |
|
|
|
21,939 |
|
Depreciation
and amortization
|
|
|
1,810 |
|
|
|
3,049 |
|
|
|
1,114 |
|
Total
other expenses
|
|
|
31,766 |
|
|
|
26,124 |
|
|
|
23,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery/(provision) for
losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gain on sale of
investments
|
|
|
15,077 |
|
|
|
— |
|
|
|
4,951 |
|
Income/(loss) from equity
investments
|
|
|
(2,109 |
)
|
|
|
898 |
|
|
|
(222 |
)
|
Income before income
taxes
|
|
|
83,660 |
|
|
|
51,332 |
|
|
|
44,324 |
|
(Benefit)/provision
for income taxes
|
|
|
(706 |
)
|
|
|
(2,735 |
)
|
|
|
213 |
|
Net income
|
|
$ |
84,366 |
|
|
$ |
54,067 |
|
|
$ |
44,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
4.80 |
|
|
$ |
3.43 |
|
|
$ |
2.91 |
|
Diluted
|
|
$ |
4.77 |
|
|
$ |
3.40 |
|
|
$ |
2.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,569,690 |
|
|
|
15,754,655 |
|
|
|
15,181,476 |
|
Diluted
|
|
|
17,690,266 |
|
|
|
15,923,397 |
|
|
|
15,335,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share of common stock
|
|
$ |
5.10 |
|
|
$ |
3.45 |
|
|
$ |
2.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(in
thousands)
|
|
|
|
|
|
Comprehensive
Income
|
|
Class
A Common Stock
|
|
Restricted
Class A Common Stock
|
|
Additional
Paid-In Capital
|
|
Accumulated
Other Comprehensive Income/(Loss)
|
|
Accumulated
Deficit
|
|
Total
|
Balance
at December 31, 2004
|
|
|
|
|
$ |
148 |
|
|
$ |
3 |
|
|
$ |
321,937 |
|
|
$ |
3,815 |
|
|
$ |
(9,406 |
) |
|
$ |
316,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
44,111 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
44,111 |
|
|
|
44,111 |
|
Unrealized
gain on derivative financial instruments
|
|
|
2,079 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,079 |
|
|
|
— |
|
|
|
2,079 |
|
Unrealized
gain on securities
|
|
|
8,684 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,684 |
|
|
|
— |
|
|
|
8,684 |
|
Amortization
of unrealized gain on securities
|
|
|
(671 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(671 |
) |
|
|
— |
|
|
|
(671 |
) |
Deferred
gain on settlement of swap
|
|
|
1,410 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,410 |
|
|
|
— |
|
|
|
1,410 |
|
Amortization
of deferred gain on settlement of swap
|
|
|
(438 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(438 |
) |
|
|
— |
|
|
|
(438 |
) |
Sale
of shares of class A common stock under stock
option
agreement
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1,570 |
|
|
|
— |
|
|
|
— |
|
|
|
1,571 |
|
Restricted
class A common stock earned
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
2,804 |
|
|
|
— |
|
|
|
— |
|
|
|
2,805 |
|
Restricted
class A common stock forfeited
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(260 |
) |
|
|
— |
|
|
|
— |
|
|
|
(260 |
) |
Reimbursement
of offering expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
248 |
|
|
|
— |
|
|
|
— |
|
|
|
248 |
|
Dividends
declared on common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(37,186 |
) |
|
|
(37,186 |
) |
Balance
at December 31, 2005
|
|
$ |
55,175 |
|
|
|
149 |
|
|
|
4 |
|
|
|
326,299 |
|
|
|
14,879 |
|
|
|
(2,481 |
) |
|
|
338,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
54,067 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
54,067 |
|
|
|
54,067 |
|
Unrealized
loss on derivative financial instruments
|
|
|
(1,401 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,401 |
) |
|
|
— |
|
|
|
(1,401 |
) |
Unrealized
loss on available for sale security
|
|
|
(54 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(54 |
) |
|
|
— |
|
|
|
(54 |
) |
Amortization
of unrealized gain on securities
|
|
|
(1,640 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,640 |
) |
|
|
— |
|
|
|
(1,640 |
) |
Currency
translation adjustments
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
Deferred
gain on settlement of swap
|
|
|
1,186 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,186 |
|
|
|
— |
|
|
|
1,186 |
|
Amortization
of deferred gain on settlement of swap
|
|
|
(255 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(255 |
) |
|
|
— |
|
|
|
(255 |
) |
Shares
of class A common stock issued in
public
offering
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
|
|
86,589 |
|
|
|
— |
|
|
|
— |
|
|
|
86,609 |
|
Sale
of shares of class A common stock under stock
option
agreement
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
662 |
|
|
|
— |
|
|
|
— |
|
|
|
662 |
|
Reimbursement
of offering expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
124 |
|
|
|
— |
|
|
|
— |
|
|
|
124 |
|
Restricted
class A common stock earned
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,013 |
|
|
|
— |
|
|
|
— |
|
|
|
4,013 |
|
Restricted
class A common stock forfeited upon
resignation
of holder
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45 |
) |
|
|
— |
|
|
|
— |
|
|
|
(45 |
) |
Issuance
of restricted Class A common stock
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dividends
declared on common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(55,846 |
) |
|
|
(55,846 |
) |
Balance
at December 31, 2006
|
|
$ |
51,905 |
|
|
|
169 |
|
|
|
5 |
|
|
|
417,641 |
|
|
|
12,717 |
|
|
|
(4,260 |
) |
|
|
426,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
84,366 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
84,366 |
|
|
|
84,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivative financial instruments
|
|
|
(19,559 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,559 |
) |
|
|
— |
|
|
|
(19,559 |
) |
Unrealized gain
on securities
|
|
|
259 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
259 |
|
|
|
— |
|
|
|
259 |
|
Amortization
of unrealized gain on securities
|
|
|
(1,684 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,684 |
) |
|
|
— |
|
|
|
(1,684 |
) |
Deferred
loss on settlement of swaps
|
|
|
(153 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(153 |
) |
|
|
— |
|
|
|
(153 |
) |
Amortization
of deferred gains and losses on
settlement
of swaps
|
|
|
(262 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(262 |
) |
|
|
— |
|
|
|
(262 |
) |
Currency
translation adjustment
|
|
|
2,451 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,451 |
|
|
|
— |
|
|
|
2,451 |
|
Reclassification
to gain on sale of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation adjustment
|
|
|
(2,453 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,453 |
) |
|
|
|
|
|
|
(2,453 |
) |
Issuance
of stock relating to business purchase
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
707 |
|
|
|
— |
|
|
|
— |
|
|
|
707 |
|
Sale
of shares of class A common stock under stock
option
agreement
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,159 |
|
|
|
— |
|
|
|
— |
|
|
|
3,159 |
|
Restricted
class A common stock earned
|
|
|
— |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
4,606 |
|
|
|
— |
|
|
|
— |
|
|
|
4,608 |
|
Dividends
declared on common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(89,474 |
) |
|
|
(89,474 |
) |
Balance
at December 31, 2007
|
|
$ |
62,965 |
|
|
$ |
172 |
|
|
$ |
4 |
|
|
$ |
426,113 |
|
|
$ |
(8,684 |
) |
|
$ |
(9,368 |
) |
|
$ |
408,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Trust, Inc. and Subsidiaries
|
|
Consolidated
Statement of Cash Flows
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
84,366 |
|
|
$ |
54,067 |
|
|
$ |
44,111 |
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,810 |
|
|
|
3,048 |
|
|
|
1,114 |
|
Provision
for losses
|
|
|
4,000 |
|
|
|
— |
|
|
|
— |
|
Gain
on sale of investment
|
|
|
(15,077 |
) |
|
|
— |
|
|
|
— |
|
Loss/(Income)
from equity investments
|
|
|
2,109 |
|
|
|
(898 |
) |
|
|
222 |
|
Distributions of income from equity investments in
unconsolidated
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
56 |
|
|
|
1,373 |
|
|
|
1,704 |
|
Restricted
class A common stock earned
|
|
|
4,606 |
|
|
|
3,968 |
|
|
|
2,545 |
|
Amortization
of premiums and discounts on loans, CMBS,
|
|
|
|
|
|
|
|
|
|
|
|
|
and
debt, net
|
|
|
(2,685 |
) |
|
|
(2,029 |
) |
|
|
(3,842 |
) |
Amortization
of deferred gains on interest rate hedges
|
|
|
(262 |
) |
|
|
(255 |
) |
|
|
(437 |
) |
Amortization
of finance costs
|
|
|
5,247 |
|
|
|
3,504 |
|
|
|
3,083 |
|
Changes
in assets and liabilities, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
and other receivables
|
|
|
1,772 |
|
|
|
2,568 |
|
|
|
4,603 |
|
Accrued
interest receivable
|
|
|
(204 |
) |
|
|
(5,451 |
) |
|
|
(5,408 |
) |
Deferred
income taxes
|
|
|
(50 |
) |
|
|
370 |
|
|
|
1,644 |
|
Prepaid
and other assets
|
|
|
(1,013 |
) |
|
|
(784 |
) |
|
|
(845 |
) |
Deferred
origination fees and other revenue
|
|
|
(2,129 |
) |
|
|
4,397 |
|
|
|
(608 |
) |
Accounts
payable and accrued expenses
|
|
|
4,508 |
|
|
|
946 |
|
|
|
2,876 |
|
Net
cash provided by operating activities
|
|
|
87,054 |
|
|
|
64,824 |
|
|
|
50,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of commercial mortgage-backed securities
|
|
|
(110,550 |
) |
|
|
(392,732 |
) |
|
|
(245,175 |
) |
Principal collections on and proceeds from commercial
mortgage-
|
|
|
|
|
|
|
|
|
|
backed
securities
|
|
|
44,761 |
|
|
|
69,375 |
|
|
|
14,339 |
|
Origination
and purchase of loans receivable
|
|
|
(1,058,968 |
) |
|
|
(1,423,917 |
) |
|
|
(790,997 |
) |
Principal
collections on loans receivable
|
|
|
749,145 |
|
|
|
582,519 |
|
|
|
359,383 |
|
Equity
investments in unconsolidated subsidiaries
|
|
|
(24,122 |
) |
|
|
(5,845 |
) |
|
|
(4,660 |
) |
Return
of capital from equity investments in unconsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
2,314 |
|
|
|
5,240 |
|
|
|
8,812 |
|
Proceeds
from sale of equity investment
|
|
|
43,638 |
|
|
|
— |
|
|
|
— |
|
Purchase
of total return swaps
|
|
|
— |
|
|
|
(4,138 |
) |
|
|
(4,000 |
) |
Proceeds
from total return swaps
|
|
|
1,815 |
|
|
|
6,323 |
|
|
|
|
|
Purchase
of equipment and leasehold improvements
|
|
|
(662 |
) |
|
|
— |
|
|
|
(23 |
) |
Payments
for business purchased
|
|
|
(1,853 |
) |
|
|
— |
|
|
|
— |
|
Payment
of capitalized costs
|
|
|
(126 |
) |
|
|
— |
|
|
|
— |
|
Increase
in restricted cash
|
|
|
(3,989 |
) |
|
|
(443 |
) |
|
|
(653 |
) |
Net
cash used in investing activities
|
|
|
(358,597 |
) |
|
|
(1,163,618 |
) |
|
|
(662,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from repurchase obligations
|
|
|
1,503,568 |
|
|
|
1,508,970 |
|
|
|
713,474 |
|
Repayment
of repurchase obligations
|
|
|
(1,296,154 |
) |
|
|
(1,174,277 |
) |
|
|
(568,814 |
) |
Proceeds
from credit facilities
|
|
|
150,000 |
|
|
|
— |
|
|
|
104,704 |
|
Repayment
of credit facilities
|
|
|
(75,000 |
) |
|
|
— |
|
|
|
(169,880 |
) |
Issuance
of junior subordinated debentures
|
|
|
77,325 |
|
|
|
51,550 |
|
|
|
— |
|
Purchase of common equity in CT Preferred Trust I & CT
Preferred
|
|
|
|
|
|
|
|
|
|
Trust
II
|
|
|
(2,325 |
) |
|
|
(1,550 |
) |
|
|
— |
|
Proceeds
from issuance of collateralized debt obligations
|
|
|
— |
|
|
|
429,398 |
|
|
|
571,087 |
|
Repayment
of collateralized debt obligations
|
|
|
(19,892 |
) |
|
|
(40,643 |
) |
|
|
— |
|
Proceeds
from participations sold
|
|
|
— |
|
|
|
287,102 |
|
|
|
— |
|
Settlement
of interest rate hedges
|
|
|
(153 |
) |
|
|
1,186 |
|
|
|
1,410 |
|
Payment
of deferred financing costs
|
|
|
(2,936 |
) |
|
|
(5,483 |
) |
|
|
(8,704 |
) |
Sale
of class A common stock upon stock option exercise
|
|
|
3,251 |
|
|
|
662 |
|
|
|
1,571 |
|
Dividends
paid on common stock
|
|
|
(66,362 |
) |
|
|
(43,686 |
) |
|
|
(32,493 |
) |
Proceeds
from sale of shares of class A common stock
|
|
|
— |
|
|
|
86,609 |
|
|
|
— |
|
Payment/Reimbursement
of offering expenses
|
|
|
(92 |
) |
|
|
124 |
|
|
|
248 |
|
Net
cash provided by financing activities
|
|
|
271,230 |
|
|
|
1,099,962 |
|
|
|
612,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(313 |
) |
|
|
1,168 |
|
|
|
391 |
|
Cash
and cash equivalents at beginning of year
|
|
|
26,142 |
|
|
|
24,974 |
|
|
|
24,583 |
|
Cash
and cash equivalents at end of period
|
|
$ |
25,829 |
|
|
$ |
26,142 |
|
|
$ |
24,974 |
|
|
See
accompanying notes to consolidated financial
statements.
|
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
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 finance and investment management company that
specializes in credit sensitive structured 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 commencement of our finance business in 1997 through December 31, 2007,
we have completed over $10.5 billion of investments in the commercial real
estate debt arena. We conduct our operations as a real estate investment trust,
or REIT, for federal income tax purposes and we are headquartered in New York
City.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include, on a consolidated basis,
our accounts, the accounts of our wholly-owned subsidiaries and our interests in
variable interest entities in which we are the primary
beneficiary. All significant intercompany balances and transactions
have been eliminated in consolidation. Our interests in CT Preferred Trust I and
CT Preferred Trust II, the issuers of trust securities backed by our junior
subordinated debentures, are accounted for using the equity method and their
assets and liabilities are not consolidated into our financial statements due to
our determination that CT Preferred Trust I and CT Preferred Trust II are
variable interest entities in which we are not the primary beneficiary under
Financial Accounting Standards Board, or FASB, Interpretation No. 46(R), or
FIN 46R. We account for our co-investment interest in the private equity funds
we co-sponsored and continue to manage, CT Mezzanine Partners III, Inc., or Fund
III, and CTOPI, under the equity method of accounting. We also account for our
investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, under the
equity method of accounting. As such, we report a percentage of the earnings of
the companies in which we have such investments equal to our ownership
percentage on a single line item in the consolidated statement of income as
income from equity investments.
Interest
income from our loans receivable is recognized over the life of the investment
using the effective interest method and is recorded on the accrual basis. Fees,
premiums, discounts and direct costs in connection with these investments are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment to yield. Fees on commitments that expire unused are
recognized at expiration. For loans where we have unfunded commitments, we
amortize the appropriate items on a straight line basis. Income recognition is
generally suspended for loans at the earlier of the date at which payments
become 90 days past due or when, in the opinion of management, a full recovery
of income and principal becomes doubtful. Income recognition is resumed when the
loan becomes contractually current and performance is demonstrated to be
resumed.
Fees from
special servicing and asset management services are recognized as services are
rendered. We account for incentive fees we earn from our investment management
business in accordance with Method 1
of Emerging Issues Task Force Topic D-96. Under Method 1, no incentive income is
recorded until all contingencies have been eliminated.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
2.
Summary of Significant Accounting Policies (Continued)
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. At December 31, 2007, a
majority of the cash and cash equivalents consisted of overnight deposits in
demand deposit accounts. At December 31, 2006, a majority
of the cash and cash equivalents consisted of overnight investments in
commercial paper. As of, and for the years ended, December 31, 2007 and
2006 and 2005, 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 at December 31, 2007 was comprised of $5.7 million that was on deposit with
the trustee for our collateralized debt obligations, or CDOs and is
expected to be used to pay contractual interest and principal and to purchase
replacement collateral for our reinvesting CDOs during their respective
reinvestment periods. Restricted cash at December 31, 2006 was $1.7
million.
Commercial
Mortgage Backed Securities (“CMBS”)
We
classify our CMBS investments pursuant to FASB Statement of Financial Accounting
Standards No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, or FAS 115, on the date of acquisition of the investment. On
August 4, 2005, we made a decision to change the accounting classification
of our CMBS investments from available-for-sale to held-to-maturity.
Held-to-maturity investments are stated at cost adjusted for the amortization of
any premiums or discounts and any premiums or discounts are amortized through
the consolidated statements of income using the effective interest method. Other
than in the instance of impairment, these held-to-maturity investments are shown
in our financial statements at their adjusted values pursuant to the methodology
described above.
We may
also invest in CMBS and certain other securities which may be classified as
available-for-sale. Available-for-sale securities are carried at estimated fair
value with the net unrealized gains or losses reported as a component of
accumulated other comprehensive income/(loss) in shareholders’ equity. Many of
these investments are relatively illiquid and management must estimate their
values. In making these estimates, management utilizes market prices provided by
dealers who make markets in these securities, but may, under certain
circumstances, adjust these valuations based on management’s judgment. Changes
in the valuations do not affect our reported income or cash flows, but impact
shareholders’ equity and, accordingly, book value per share.
Income on
these securities is recognized based upon a number of assumptions that are
subject to uncertainties and contingencies. Examples include, among other
things, the rate and timing of principal payments, including prepayments,
repurchases, defaults and liquidations, the pass-through or coupon rate and
interest rates. Additional factors that may affect our reported interest income
on our mortgage backed securities include interest payment shortfalls due to
delinquencies on the underlying mortgage loans and the timing and magnitude of
credit losses on the mortgage loans underlying the securities that are impacted
by, among other things, the general condition of the real estate market,
including competition for tenants and their related credit quality, and changes
in market rental rates. These uncertainties and contingencies are difficult to
predict and are subject to future events that may alter the
assumptions.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
2.
Summary of Significant Accounting Policies (Continued)
We
account for CMBS under Emerging Issues Task Force 99-20, “Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”, or EITF 99-20. Under EITF 99-20, when significant
changes in estimated cash flows from the cash flows previously estimated occur
due to actual prepayment and credit loss experience and the present value of the
revised cash flows using the current expected yield is less than the present
value of the previously estimated remaining cash flows, adjusted for cash
receipts during the intervening period, an other than temporary impairment is
deemed to have occurred. Accordingly, the security is written down to fair value
with the resulting change being included in income and a new cost basis
established with the original discount or premium written off when the new cost
basis is established. In accordance with this guidance, on a quarterly basis,
when significant changes in estimated cash flows from the cash flows previously
estimated occur due to actual prepayment and credit loss experience, we
calculate a revised yield based upon the current amortized cost of the
investment, including any other than temporary impairments recognized to date,
and the revised cash flows. The revised yield is then applied prospectively to
recognize interest income. Management must also assess whether unrealized losses
on securities reflect a decline in value that is other than temporary, and,
accordingly, write down the impaired security to its fair value, through a
charge to earnings. Significant judgment of management is required in this
analysis that includes, but is not limited to, making assumptions regarding the
collectibility of the principal and interest, net of related expenses, on the
underlying loans.
During
the fourth quarter of 2004, we concluded that two of our CMBS investments had
incurred other than temporary impairment and we incurred a charge of $5.9
million through the income statement. At December 31, 2007 we believe there
has not been any adverse change in cash flows relating to existing CMBS
investments, therefore we did not recognize any additional other than temporary
impairment on any CMBS investments. Significant judgment of management is
required in this analysis that includes, but is not limited to, making
assumptions regarding the collectibility of the principal and interest, net of
related expenses, on the underlying loans.
From time
to time we purchase CMBS and other investments in which we have a level of
control over the issuing entity; we refer to these investments as controlling
class investments. The presentation of controlling class investments in our
financial statements is governed in part by FIN 46R. FIN 46R could require that
certain controlling class investments be presented on a consolidated basis.
Based upon the specific circumstances of certain of our CMBS investments that
are controlling class investments and our interpretation of FIN 46R,
specifically the exemption for qualifying special purpose entities as defined
under FASB Statements of Financial Accounting Standard No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”, or FAS 140, we have concluded that the entities that have issued
the controlling class investments should not be presented on a consolidated
basis. We are aware that FAS 140 is currently under review by standard setters
and that, as a result of this review, our current interpretation of FIN 46R and
FAS 140 may change.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
2.
Summary of Significant Accounting Policies (Continued)
Loans
Receivable and Reserve for Possible Credit Losses
We
purchase and originate commercial real estate debt and related instruments, or
Loans, to be held as long term investments at amortized cost. Management must
periodically evaluate each of these Loans for possible impairment. Impairment is
indicated when it is deemed probable that we will not be able to collect all
amounts due according to the contractual terms of the Loan. If a Loan were
determined to be permanently impaired, we would write down the Loan through a
charge to the reserve for possible credit losses. Given the nature of our Loan
portfolio and the underlying commercial real estate collateral, significant
judgment on the part of management is required in determining permanent
impairment and the resulting charge to the reserve, which includes but is
not limited to making assumptions regarding the value of the real estate that
secures the loan. Each Loan in our portfolio is evaluated at least quarterly
using our loan risk rating system which considers loan-to-value, debt yield,
cash flow stability, exit plan, loan sponsorship, loan structure and other
factors deemed necessary by management to assess the likelihood of delinquency
or default. If we believe that there is a potential for delinquency or default,
a downside analysis is prepared to estimate the value of the collateral
underlying our Loan, and this potential loss is multiplied by the default
likelihood to determine the size of the reserve. Actual losses, if any, could
ultimately differ from these estimates.
The
deferred financing costs which are included in prepaid and other assets on our
consolidated balance sheets include issuance costs related to our debt and are
amortized using the effective interest method or a method that approximates the
effective interest method.
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 as a liability on our
consolidated balance sheets. Interest income earned on the investments and
interest expense incurred on the repurchase obligations are reported separately
on the consolidated statements of income. There is a position under
consideration by standard setters, based upon a technical interpretation of FAS
140, that starting in fiscal 2009 these transactions will not qualify as a
purchase by us. We believe, consistent with industry practice, that we are
accounting for these transactions in an appropriate manner; however, if these
investments do not qualify as a purchase under FAS 140, we would be required to
present the net investment (asset balance less the repurchase obligation
balance) on our consolidated balance sheets together with an embedded derivative
with the corresponding change in fair value of the derivative being recorded in
the consolidated statements of income. The value of the derivative would reflect
not only changes in the value of the underlying investment, but also changes in
the value of the underlying credit provided by the counterparty. Income from
these arrangements would be presented on a net basis. Furthermore, hedge
instruments related to these assets and liabilities, currently deemed effective,
may no longer be effective and may have to be accounted for as non-hedge
derivatives. As of December 31, 2007 we had entered into 26 such
transactions, with a book value of the associated assets of $669.2 million
financed with repurchase obligations of $475.5 million.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
2.
Summary of Significant Accounting Policies (Continued)
Interest
Rate Derivative Financial Instruments
In the
normal course of business, we use interest rate derivative financial instruments
to manage, or hedge, cash flow variability caused by interest rate fluctuations.
Specifically, we currently use interest rate swaps to effectively convert
variable rate liabilities, that are financing fixed rate assets, to fixed rate
liabilities. The differential to be paid or received on these agreements is
recognized on the accrual basis as an adjustment to the interest expense
related to the attendant liability. The swap agreements are generally accounted
for on a held-to-maturity basis, and, in cases where they are terminated early,
any gain or loss is generally amortized over the remaining life of the hedged
item. These swap agreements must be effective in reducing the variability of
cash flows of the hedged items in order to qualify for the aforementioned hedge
accounting treatment. Changes in value of effective cash flow hedges are
reflected in our financial statements through accumulated other comprehensive
income/(loss) and do not affect our net income. To the extent a derivative does
not qualify for hedge accounting, and is deemed a non-hedge derivative, the
changes in its value are included in net income.
To
determine the fair value of derivative instruments, we use third parties to
periodically value 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,
do not expect to pay substantial corporate level taxes (other than taxes payable
by our taxable REIT subsidiaries which are accounted for in accordance with FASB
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes”, or FAS 109). Many of these requirements, however, are highly technical
and complex. If we were to fail to meet these requirements, we may be subject to
federal, state and local income tax on current and past income, and we may also
be subject to penalties.
In June
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109”, or FIN
48. This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FAS 109. This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This interpretation
was effective January 1, 2007 for us. The adoption of FIN 48 did not have a
material impact on our financial results.
Accounting
for Stock-Based Compensation
We
account for stock based compensation in accordance with FASB Statement of
Financial Accounting Standards No. 123(R) “Share Based Payment,” or FAS
123(R). Upon adoption of FAS 123(R), as of January 1, 2006, we have
elected to utilize the modified prospective method, and there was no impact from
this adoption. Compensation expense for the time vesting of stock
based compensation grants is recognized on the accelerated attribution method
and compensation expense for performance vesting of stock based compensation
grants is recognized on a straight-line basis. Compensation expense
relating to stock-based compensation is recognized in net income using a fair
value measurement method.
We comply
with the provisions of the FASB Statement of Financial Accounting Standards
No. 130, “Reporting Comprehensive Income”, or FAS 130, in reporting
comprehensive income and its components in the full set of general-purpose
financial statements. Total comprehensive income was $63.0 million, $51.9
million and $55.2 million, for the years ended December 31, 2007, 2006
and 2005, respectively. The primary components of comprehensive income, other
than net income, were the unrealized gain/(loss) on derivative financial
instruments and CMBS. At December 31, 2007, accumulated other
comprehensive loss is $8.7 million, comprised of unrealized gains on CMBS of
$8.5 million, unrealized losses on cash flow swaps of $18.7 million
and $1.5 million of deferred realized gains on the settlement of cash
flow swaps.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
2.
Summary of Significant Accounting Policies (Continued)
Earnings
per Share of Common Stock
Earnings
per share of common stock are presented based on the requirements of the FASB
Statement of Accounting Standards No. 128, “Earnings Per Share”, or FAS
128. Basic EPS is computed based on the net earnings applicable to common stock
and stock units divided by 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 weighted average
number of shares of common stock and stock units and potentially dilutive common
stock options.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 2006 and 2005
consolidated financial statements to conform to the 2007
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 portfolio of interest earning
assets (including our co-investments in investment management vehicles and our
investment in Bracor) and the financing thereof.
The
“Investment Management” segment includes the activities of our wholly-owned
investment management subsidiary, CT Investment Management Co. LLC,
or CTIMCO and its subsidiaries. CTIMCO is a taxable REIT subsidiary and
serves as the investment manager of Capital Trust, Inc., all of our investment
management vehicles, all of our CDOs and serves as senior servicer and special
servicer on certain of our investments and for third parties. In addition,
CTIMCO owns certain of our assets.
Business
Combination
On June
15, 2007, we purchased a healthcare loan origination platform with 18 employees,
located in Birmingham, Alabama. We paid a $2.6 million initial purchase price
($1.9 million in cash and $707,000 in common stock) and we have a contingent
obligation to pay up to an additional $1.8 million ($1.1 million in cash and
$700,000 in stock) on March 15, 2009, if the acquired business meets certain
performance criteria. We have recorded $2.1 million of goodwill associated with
the initial purchase price.
Goodwill
Goodwill
represents the excess of acquisition costs over the fair value of net assets of
businesses acquired. Goodwill is reviewed annually in the fourth
quarter to determine if there is impairment at a reporting unit level, or more
frequently if an indication of impairment exists. No impairment
charges for goodwill were recorded in 2007.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
2.
Summary of Significant Accounting Policies (Continued)
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” or FAS 157. FAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. FAS 157 applies to reporting periods beginning
after November 15, 2007. As discussed above, we report the changes in the value
of effective cash flow hedges through accumulated other comprehensive
income/(loss). If the cash flow hedges were accounted for under FAS 157 as of
December 31, 2007, the value would be a liability on our consolidated balance
sheet of $17.7 million as compared to a liability of $18.7 million.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or
FAS 159. FAS 159 permits entities to choose to measure many financial
instruments, and certain other items, at fair value. FAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. FAS 159 applies to reporting periods
beginning after November 15, 2007. We will adopt FAS 159 as
required.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
3.
Commercial Mortgage Backed Securities
Activity
relating to our CMBS for the year ended December 31, 2007 was as follows ($
values in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
Asset
Type
|
|
Face
Value
|
|
|
Book
Value
|
|
|
Number
of Securities
|
|
|
Number
of Issues
|
|
|
Rating
(1)
|
|
|
Coupon(2)
|
|
Yield(2)
|
|
Maturity
(Years)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate
|
|
$ |
86,012 |
|
|
$ |
84,807 |
|
|
|
11 |
|
|
|
9 |
|
|
BBB-
|
|
|
|
7.42 |
% |
|
|
7.51 |
% |
|
|
2.0 |
|
Fixed
Rate
|
|
|
764,607 |
|
|
|
726,163 |
|
|
|
66 |
|
|
|
48 |
|
|
BB+
|
|
|
|
6.68 |
% |
|
|
7.13 |
% |
|
|
8.5 |
|
Total/Average
|
|
|
850,619 |
|
|
|
810,970 |
|
|
|
77 |
|
|
|
57 |
|
|
BB+
|
|
|
|
6.75 |
% |
|
|
7.17 |
% |
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate
|
|
|
109,621 |
|
|
|
109,617 |
|
|
|
7 |
|
|
|
4 |
|
|
BB-
|
|
|
|
8.94 |
% |
|
|
8.94 |
% |
|
|
3.3 |
|
Fixed
Rate
|
|
|
1,000 |
|
|
|
933 |
|
|
|
1 |
|
|
|
1 |
|
|
BB+
|
|
|
|
6.13 |
% |
|
|
6.57 |
% |
|
|
2.8 |
|
Total/Average
|
|
|
110,621 |
|
|
|
110,550 |
|
|
|
8 |
|
|
|
5 |
|
|
BB-
|
|
|
|
8.91 |
% |
|
|
8.92 |
% |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
& Other (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate
|
|
|
24,013 |
|
|
|
23,881 |
|
|
|
4 |
|
|
|
2 |
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Fixed
Rate
|
|
|
20,817 |
|
|
|
20,775 |
|
|
|
2 |
|
|
|
2 |
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total/Average
|
|
|
44,830 |
|
|
|
44,656 |
|
|
|
6 |
|
|
|
4 |
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate
|
|
|
171,620 |
|
|
|
170,543 |
|
|
|
14 |
|
|
|
11 |
|
|
BB
|
|
|
|
8.16 |
% |
|
|
8.19 |
% |
|
|
2.6 |
|
Fixed
Rate
|
|
|
744,790 |
|
|
|
706,321 |
|
|
|
65 |
|
|
|
47 |
|
|
BB+
|
|
|
|
6.69 |
% |
|
|
7.14 |
% |
|
|
7.5 |
|
Total/Average
|
|
$ |
916,410 |
|
|
$ |
876,864 |
|
|
|
79 |
|
|
|
58 |
|
|
BB+
|
|
|
|
6.97 |
% |
|
|
7.35 |
% |
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average ratings are based on the lowest rating published by Fitch Ratings,
Standard & Poor’s or Moody’s Investors Service for each security and
exclude $37.9 million face value ($37.1 million book value) of unrated
equity investments in collateralized debt obligations.
|
(2)
|
Calculations
based on LIBOR of 4.60% as of December 31, 2007 and LIBOR of 5.32% as of
December 31, 2006.
|
(3)
|
Represents
the maturity of the investment assuming all extension options are
executed.
|
(4)
|
Includes
full repayments, sales, partial repayments, mark-to-market adjustments on
available-for-sale securities, and the impact of premium and discount
amortization and losses, if any. The figures shown in “Number of
Securities” and “Number of Issues” represent only the full
repayments/sales, if any.
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
3.
Commercial Mortgage Backed Securities (Continued)
The
charts below detail the ratings, vintage, property type and geographic
distribution of the collateral securing our CMBS at year end 2007 ($ values in
thousands).
Rating
|
|
|
Book Value
|
|
Percentage
|
BBB
|
|
|
$ |
238,768
|
|
|
|
27
|
%
|
A |
|
|
|
194,455
|
|
|
|
22
|
|
BB
|
|
|
|
158,116
|
|
|
|
18
|
|
AAA
|
|
|
|
106,732
|
|
|
|
12
|
|
B |
|
|
|
62,154
|
|
|
|
7
|
|
AA
|
|
|
|
49,650
|
|
|
|
6
|
|
NR
|
|
|
|
36,357
|
|
|
|
4
|
|
D |
|
|
|
23,842
|
|
|
|
3
|
|
CCC
|
|
|
|
6,790
|
|
|
|
1
|
|
Total
|
|
|
$ |
876,864
|
|
|
|
100
|
%
|
Vintage
|
|
Book Value
|
|
Percentage
|
1998
|
|
$ |
311,620
|
|
|
|
36
|
%
|
2007
|
|
|
109,619
|
|
|
|
13
|
|
2004
|
|
|
96,475
|
|
|
|
11
|
|
1997
|
|
|
75,650
|
|
|
|
8
|
|
2005
|
|
|
61,627
|
|
|
|
7
|
|
2006
|
|
|
48,803
|
|
|
|
6
|
|
2000
|
|
|
41,463
|
|
|
|
5
|
|
1996
|
|
|
33,467
|
|
|
|
3
|
|
Other
|
|
|
98,140
|
|
|
|
11
|
|
Total
|
|
$ |
876,864
|
|
|
|
100
|
%
|
Property
Type
|
|
Book Value
|
|
Percentage
|
Retail
|
|
$ |
244,788
|
|
|
|
28
|
%
|
Office
|
|
|
198,056
|
|
|
|
23
|
|
Hotel
|
|
|
170,914
|
|
|
|
19
|
|
Multifamily
|
|
|
124,067
|
|
|
|
14
|
|
Other
|
|
|
65,126
|
|
|
|
8
|
|
Healthcare
|
|
|
38,990
|
|
|
|
4
|
|
Industrial
|
|
|
34,923
|
|
|
|
4
|
|
Total
|
|
$ |
876,864
|
|
|
|
100
|
%
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
3.
Commercial Mortgage Backed Securities (Continued)
Geographic
Location
|
|
Book Value
|
|
Percentage
|
Northeast
|
|
$ |
238,682
|
|
|
|
27
|
%
|
Southeast
|
|
|
224,774
|
|
|
|
26
|
|
West
|
|
|
146,213
|
|
|
|
17
|
|
Southwest
|
|
|
118,311
|
|
|
|
13
|
|
Midwest
|
|
|
116,462
|
|
|
|
13
|
|
Northwest
|
|
|
22,329
|
|
|
|
3
|
|
Other
|
|
|
10,093
|
|
|
|
1
|
|
Total
|
|
$ |
876,864
|
|
|
|
100
|
%
|
As
detailed in Note 2, on August 4, 2005, pursuant to the provisions of FAS 115, we
made a decision to change the accounting classification of our then portfolio of
CMBS investments from available-for-sale to held-to-maturity.
While we
typically account for our CMBS investments on a held-to maturity basis, under
certain circumstances we will account for CMBS on an available-for-sale
basis. At December 31, 2007 and 2006, we had one CMBS investment that
we designated and account for on an available-for-sale basis with a face value
of $7.7 million and $10.0 million, respectively. The security earned
interest at a weighted average coupon of 8.34% and 7.87% at December 31, 2007
and 2006, respectively. At December 31, 2007 and 2006, the security
was carried at its fair market value of $8.3 million and $10.5 million,
respectively. The investment matures in February 2010.
Quarterly,
we reevaluate our CMBS portfolio to determine if there has been an
other-than-temporary impairment based upon our assessment of future cash flow
receipts. For the years ended December 31, 2007, 2006, and 2005 we
believe that there has not been any adverse change in cash flows for our CMBS
portfolio and, therefore, did not recognize any other-than-temporary
impairments. Significant judgment of management is required in this
analysis that includes, but is not limited to, making assumptions regarding the
collectibility of principal and interest, net of related expenses, on the
underlying loans.
Certain
of our CMBS investments are carried at values in excess of their market
values. This difference can be caused by, among other things, changes
in interest rates, changes in credit spreads, realized/unrealized losses and
general market conditions.
At
December 31, 2007, 58 CMBS investments with an aggregate carrying value of
$618.4 million were carried at values in excess of their market
values. Market value for these CMBS investments was $555.3 million at
December 31, 2007. In total, we had 79 CMBS investments with an aggregate
carrying value of $876.9 million that have an estimated market value of $830.4
million (this valuation does not include the value of interest rate swaps
entered into in conjunction with the purchase/financing of these
investments). Because we have the ability and intent to hold these
investments until a recovery of book value plus unamortized discounts/premiums,
which may be maturity, we do not consider these investments to be
other-than-temporarily impaired.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
3. Commercial
Mortgage Backed Securities (Continued)
The
following table shows the gross unrealized losses and fair value of our CMBS
with unrealized losses as of December 31, 2007 that are not deemed to be
other-than-temporarily impaired ($ values 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate
|
|
$ |
121.3 |
|
|
$ |
(19.1 |
) |
|
$ |
29.1 |
|
|
$ |
(1.0 |
) |
|
$ |
150.4 |
|
|
$ |
(20.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
|
144.4 |
|
|
|
(21.1 |
) |
|
|
260.5 |
|
|
|
(21.9 |
) |
|
|
404.9 |
|
|
|
(43.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
265.7 |
|
|
$ |
(40.2 |
) |
|
$ |
289.6 |
|
|
$ |
(22.9 |
) |
|
$ |
555.3 |
|
|
$ |
(63.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have
classified our loans receivable into the following general
categories:
|
·
|
Mortgage
Loans—These are secured property loans evidenced by a first mortgage which
is senior to any mezzanine financing and the owner’s equity. These loans
may finance stabilized properties, may be bridge loans to finance property
owners that require interim funding or may be construction loans. Our
mortgage loans range in duration and typically require a balloon payment
of principal at maturity. These loans may include pari passu
participations in mortgage loans. We may also originate and fund first
mortgage
loans in which we intend to sell the senior tranche, thereby creating what
we refer to as a subordinate mortgage
interest.
|
|
·
|
Subordinate
Mortgage Interests—Sometimes known as B Notes, these are loans evidenced
by a junior participation in a first mortgage, with the senior
participation known as an A Note. Although a subordinate mortgage interest
may be evidenced by its own promissory note, it shares a single borrower
and mortgage with the A Note and is secured by the same collateral.
Subordinate mortgage interests have the same borrower and benefit from the
same underlying obligation and collateral as the A Note lender. The
subordinate mortgage interest is subordinated to the A Note by virtue of a
contractual arrangement between the A Note lender and the subordinate
mortgage interest lender, and in most instances are contractually limited
in rights and remedies in the case of default. In some cases, there may be
multiple senior and/or junior interests to our interest in a single
mortgage loan.
|
|
·
|
Mezzanine
Loans—These include both property and corporate mezzanine loans. Property
mezzanine loans are secured property loans that are subordinate to a first
mortgage loan, but senior to the owner’s equity. A mezzanine loan is
evidenced by its own promissory note and is typically made to the owner of
the property-owning entity, which is typically the first mortgage
borrower. It is not secured by a mortgage on the property, but by a pledge
of the borrower’s ownership interest in the property-owning entity.
Subject to negotiated contractual restrictions, the mezzanine lender
generally has the right, following foreclosure, to become the owner of the
property, subject to the lien of the first mortgage. Corporate mezzanine
loans, on the other hand, are investments in or loans to real estate
related operating companies, including REITs. Such investments may take
the form of secured debt, preferred stock and other hybrid instruments
such as convertible debt. Corporate mezzanine loans may finance, among
other things, operations, mergers and acquisitions, management buy-outs,
recapitalizations, start-ups and stock buy-backs generally involving real
estate and real estate related entities.
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
4.
Loans Receivable (Continued)
Activity
relating to our loans receivable for the year ended December 31, 2007 was
as follows ($ values in thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
Asset
Type
|
|
Face Value(1)
|
|
Book Value(1)
|
|
Number
of Investments(1)
|
|
Coupon(2)
|
|
Yield(2)
|
|
Maturity (Years)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
$ |
234,419 |
|
|
$ |
234,419 |
|
|
|
14 |
|
|
|
7.85 |
% |
|
|
8.47 |
% |
|
|
4.0 |
|
Subordinate
mortgage interests
|
|
|
669,532 |
|
|
|
668,365 |
|
|
|
29 |
|
|
|
8.29 |
% |
|
|
8.37 |
% |
|
|
3.9 |
|
Mezzanine
loans
|
|
|
622,055 |
|
|
|
621,877 |
|
|
|
23 |
|
|
|
9.57 |
% |
|
|
9.76 |
% |
|
|
4.3 |
|
Total/Average
|
|
|
1,526,006 |
|
|
|
1,524,661 |
|
|
|
66 |
|
|
|
8.75 |
% |
|
|
8.96 |
% |
|
|
4.1 |
|
Fixed
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Subordinate
mortgage interests
|
|
|
42,309 |
|
|
|
41,486 |
|
|
|
3 |
|
|
|
7.72 |
% |
|
|
7.82 |
% |
|
|
18.2 |
|
Mezzanine
loans
|
|
|
187,161 |
|
|
|
185,751 |
|
|
|
11 |
|
|
|
9.07 |
% |
|
|
9.25 |
% |
|
|
4.9 |
|
Total/Average
|
|
|
229,470 |
|
|
|
227,237 |
|
|
|
14 |
|
|
|
8.82 |
% |
|
|
8.99 |
% |
|
|
7.4 |
|
Total/Average
- December 31, 2006
|
|
|
1,755,476 |
|
|
|
1,751,898 |
|
|
|
80 |
|
|
|
8.76 |
% |
|
|
8.97 |
% |
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
458,023 |
|
|
|
458,023 |
|
|
|
10 |
|
|
|
7.00 |
% |
|
|
7.24 |
% |
|
|
3.8 |
|
Subordinate
mortgage interests
|
|
|
281,917 |
|
|
|
278,915 |
|
|
|
12 |
|
|
|
7.32 |
% |
|
|
7.46 |
% |
|
|
4.3 |
|
Mezzanine
loans
|
|
|
640,371 |
|
|
|
638,499 |
|
|
|
16 |
|
|
|
8.03 |
% |
|
|
7.86 |
% |
|
|
3.3 |
|
Total/Average
|
|
|
1,380,311 |
|
|
|
1,375,437 |
|
|
|
38 |
|
|
|
7.54 |
% |
|
|
7.57 |
% |
|
|
3.6 |
|
Fixed
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Subordinate
mortgage interests
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mezzanine
loans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total/Average
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total/Average
|
|
|
1,380,311 |
|
|
|
1,375,437 |
|
|
|
38 |
|
|
|
7.54 |
% |
|
|
7.57 |
% |
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments &
Other(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
71,856 |
|
|
|
71,856 |
|
|
|
7 |
|
|
|
N/A
|
|
|
|
|
|
|
|
N/A
|
|
Subordinate
mortgage interests
|
|
|
448,103 |
|
|
|
446,823 |
|
|
|
14 |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Mezzanine
loans
|
|
|
323,387 |
|
|
|
327,167 |
|
|
|
13 |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total/Average
|
|
|
843,346 |
|
|
|
845,846 |
|
|
|
34 |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Fixed
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Subordinate
mortgage interests
|
|
|
80 |
|
|
|
(52 |
) |
|
|
— |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Mezzanine
loans
|
|
|
26,177 |
|
|
|
23,978 |
|
|
|
3 |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total/Average
|
|
|
26,257 |
|
|
|
23,926 |
|
|
|
3 |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total/Average
|
|
|
869,603 |
|
|
|
869,772 |
|
|
|
37 |
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
620,586 |
|
|
|
620,586 |
|
|
|
17 |
|
|
|
6.93 |
% |
|
|
7.23 |
% |
|
|
3.6 |
|
Subordinate
mortgage interests
|
|
|
503,346 |
|
|
|
500,457 |
|
|
|
27 |
|
|
|
7.40 |
% |
|
|
7.46 |
% |
|
|
3.7 |
|
Mezzanine
loans
|
|
|
939,039 |
|
|
|
933,209 |
|
|
|
26 |
|
|
|
8.15 |
% |
|
|
8.18 |
% |
|
|
3.5 |
|
Total/Average
|
|
|
2,062,971 |
|
|
|
2,054,252 |
|
|
|
70 |
|
|
|
7.60 |
% |
|
|
7.71 |
% |
|
|
3.6 |
|
Fixed
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Subordinate
mortgage interests
|
|
|
42,229 |
|
|
|
41,538 |
|
|
|
3 |
|
|
|
7.72 |
% |
|
|
7.79 |
% |
|
|
17.2 |
|
Mezzanine
loans
|
|
|
160,984 |
|
|
|
161,773 |
|
|
|
8 |
|
|
|
8.85 |
% |
|
|
8.84 |
% |
|
|
4.2 |
|
Total/Average
|
|
|
203,213 |
|
|
|
203,311 |
|
|
|
11 |
|
|
|
8.61 |
% |
|
|
8.63 |
% |
|
|
6.9 |
|
Total/Average
- December 31, 2007
|
|
$ |
2,266,184 |
|
|
$ |
2,257,563 |
|
|
|
81 |
|
|
|
7.69 |
% |
|
|
7.80 |
% |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006 values do not include one non performing loan that was
successfully resolved in the second quarter of 2007.
|
(2)
|
Calculations
based on LIBOR of 4.60% as of December 31, 2007 and LIBOR of 5.32% as of
December 31, 2006.
|
(3)
|
Represents
the maturity of the investment assuming all extension options are
executed.
|
(4)
|
During
the second quarter of 2007, one subordinate mortgage interest with a book
value of $6,866 switched from a fixed rate to a floating rate.
|
(5)
|
Includes
additional fundings on prior period originations. The figures shown in
“Number of Investments” represent the actual number of originations during
the period.
|
(6)
|
Includes
full repayments, sales, partial repayments and the impact of premium and
discount amortization and losses, if any. The figures shown in “Number of
Investments” represent only the full repayments/sales, if any.
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
4.
Loans Receivable (Continued)
Property
Type
|
|
Book Value
|
|
|
Percentage
|
|
Office
|
|
$ |
963,558 |
|
|
|
43
|
% |
Hotel
|
|
|
712,145 |
|
|
|
31
|
% |
Multifamily
|
|
|
174,490 |
|
|
|
8
|
% |
Other
|
|
|
162,730 |
|
|
|
7
|
% |
Healthcare
|
|
|
147,883 |
|
|
|
6
|
% |
Retail
|
|
|
85,072 |
|
|
|
4
|
% |
Industrial
|
|
|
11,685 |
|
|
|
1
|
% |
Total
|
|
$ |
2,257,563 |
|
|
|
100
|
% |
Geographic
Location
|
|
Book Value
|
|
|
Percentage
|
|
Northeast
|
|
$ |
887,268 |
|
|
|
39
|
% |
Various
|
|
|
599,943 |
|
|
|
27
|
% |
Southwest
|
|
|
231,416 |
|
|
|
10
|
% |
West
|
|
|
222,450 |
|
|
|
10
|
% |
Southeast
|
|
|
182,248 |
|
|
|
8
|
% |
Northwest
|
|
|
111,002 |
|
|
|
5
|
% |
Midwest
|
|
|
23,236 |
|
|
|
1
|
% |
Total
|
|
$ |
2,257,563 |
|
|
|
100
|
% |
Quarterly,
management reevaluates the reserve for possible credit losses based upon our
current portfolio of loans. Each loan in our portfolio is evaluated using our
loan risk rating system which considers loan-to-value, debt yield, cash flow
stability, exit plan, loan sponsorship, loan structure and other factors
necessary to assess the likelihood of delinquency or default. If we
believe that there is a potential for delinquency or default, a downside
analysis is prepared to estimate the value of the collateral underlying our
loan, and this potential loss is multiplied by the default
likelihood. Based upon our review of the portfolio, in the fourth
quarter of 2007 we recorded a $4.0 million reserve for possible credit losses
related to one second mortgage loan with a face value of $10.0
million. As of December 31, 2006, we concluded that a reserve for
possible credit losses was not warranted on any of our
loans.
During
the second quarter of 2007, we successfully resolved our one non-performing
loan. The loan was a first mortgage with an original principal balance of $8.0
million that reached maturity on July 15, 2000. As of December 31,
2002, the loan was written down to $4.0 million. From 2002 to March 31, 2007, we
had received $1.4 million in cash collections, which further reduced the
carrying value of the loan to $2.6 million. During the second quarter of 2007,
we received net proceeds of $10.9 million which resulted in reducing the
carrying value of the loan to zero and recording $4.0 million of a recovery of
provision for losses and $4.3 million of interest income.
In some
instances, we have a further obligation to fund additional amounts under our
loan arrangements; we refer to these funding commitments as Unfunded Loan
Commitments. At December 31, 2007, we had 11 such Unfunded Loan
Commitments for a total future funding obligation of $177.0
million.
There are
no loans to a single borrower or to related groups of borrowers that exceeded
ten percent of total assets. Approximately 29% of all performing
loans are secured by properties in New York State.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
4. Loans
Receivable (Continued)
In
connection with the loan portfolio, at December 31, 2007 and 2006, we have
deferred origination fees, net of direct costs of $2.1 million and $4.6 million,
respectively, which are being amortized into income over the life of the
loans.
Total
return swaps are derivative contracts in which one party agrees to make payments
that replicate the total return of a defined underlying asset, typically in
return for another party agreeing to bear the risk of performance of the defined
underlying asset. Under our current total return swaps, we bear the risk of
performance of the underlying asset and receive payments from our counterparty
as compensation. In effect, these total return swaps allow us to receive the
leveraged economic benefits of asset ownership without our acquiring, or our
counterparty selling, the actual underlying asset. Our total return swaps
reference commercial real estate loans and contain a put provision whereby our
counterparty has the right to require us to buy the entire reference loan at its
par value under certain reference loan performance scenarios. The put obligation
imbedded in these arrangements constitutes a recourse obligation for us to
perform under the terms of the contract.
Activity
relating to our total return swaps for the year ended December 31, 2007 was
as follows ($ values in thousands):
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Fair Market Value
(Book Value)
|
|
Cash
Collateral
|
|
Reference/Loan
Participation
|
|
Number of
Investments
|
|
Yield(1)
|
|
Maturity
(Years)(2)
|
December 31,
2006
|
|
$ |
1,815
|
|
|
$ |
1,815
|
|
|
$ |
40,000
|
|
|
|
2
|
|
|
|
20.55
|
%
|
|
|
1.4
|
|
Originations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Repayments
|
|
|
1,815
|
|
|
|
1,815
|
|
|
|
20,000
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
December 31,
2007(3)
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
20,000
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Calculations
based on LIBOR of 4.60% as of December 31, 2007 and LIBOR of 5.32% as
of December 31, 2006.
|
(2)
|
Maturity
(years) based on initial maturity date of the
commitments.
|
(3)
|
The
total return swaps currently have no outstanding balance and a $3.0
million unfunded commitment
exists.
|
The total
return swaps are treated as non-hedge derivatives for accounting purposes and,
as such, changes in their market value are recorded through the consolidated
statement of operations. At December 31, 2007 and December 31, 2006,
our total return swaps were valued at par and no such consolidated statement of
income impact was recorded.
6.
Equity Investment in Unconsolidated Subsidiaries
Our
equity investments in unconsolidated subsidiaries consist primarily of our
co-investments in investment management vehicles that we sponsor and
manage. At year end 2007, we had co-investments in two such vehicles,
Fund III and CTOPI. In addition to our co-investments, we record
capitalized costs associated with these vehicles in equity investments in
unconsolidated subsidiaries.
In 2007
we liquidated two investments that had previously been recorded as equity
investments in unconsolidated subsidiaries, CT Mezzanine Partners II, LP, or
Fund II, and Bracor. In December of 2007, we sold our interest in
Bracor. We received $43.6 million in proceeds from the sale and
recognized a gain of $15.1 million, which included $2.5 million of gains from
currency translation adjustments.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
6. Equity
Investment in Unconsolidated Subsidiaries (Continued)
Activity
relating to our equity investment in unconsolidated subsidiaries for the year
ended December 31, 2007 was as follows (in thousands):
|
|
Fund II
|
|
Fund II GP
|
|
Fund III
|
|
Bracor
|
|
CTOPI
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
635 |
|
|
$ |
573 |
|
|
$ |
2,929 |
|
|
$ |
5,675 |
(1)
|
|
$ |
— |
|
|
$ |
9,812 |
|
Equity
investment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24,122 |
|
|
|
— |
|
|
|
24,122 |
|
Loss from equity
investments
|
|
|
(152 |
) |
|
|
(538 |
) |
|
|
(119 |
) |
|
|
(1,237 |
) |
|
|
(60 |
) |
|
|
(2,106 |
) |
Sales
proceeds
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43,637 |
) |
|
|
— |
|
|
|
(43,637 |
) |
Gain on
sales
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,077 |
|
|
|
— |
|
|
|
15,077 |
|
Distributions from unconsolidated
subsidiaries
|
|
|
(483 |
) |
|
|
— |
|
|
|
(1,887 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,370 |
) |
Ending
balance
|
|
$ |
— |
|
|
$ |
35 |
|
|
$ |
923 |
|
|
$ |
— |
|
|
$ |
(60 |
) |
|
$ |
898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,264 |
|
|
$ |
— |
|
|
$ |
368 |
|
|
$ |
41 |
|
|
$ |
— |
|
|
$ |
1,673 |
|
Capitalized
costs
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
|
|
(41 |
) |
Amortization of capitalized
costs
|
|
|
(1,264 |
) |
|
|
— |
|
|
|
(289 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,553 |
) |
Ending
balance
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
79 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Balance
|
|
$ |
— |
|
|
$ |
35 |
|
|
$ |
1,002 |
|
|
$ |
— |
|
|
$ |
(60 |
) |
|
$ |
977 |
|
|
|
|
|
Includes
$258,000 of additional basis that represents a difference between our
share of net assets at Bracor and our carrying
value.
|
During
2007, in conjunction with the liquidation of Fund II, we received our final
payment of incentive fees from the fund of $962,000, bringing total incentive
fees paid to us from Fund II to $10.6 million. In addition, during
the first quarter of 2007, we expensed the remaining capitalized cost associated
with Fund II, $1.3 million from our consolidated balance sheet and $384,000
through our equity interest in Fund II’s general partner.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
6.
Equity Investment in Unconsolidated Subsidiaries (Continued)
In
accordance with the management agreement with Fund III, CTIMCO may earn
incentive compensation when certain returns are achieved for the shareholders of
Fund III, which will be accrued if and when earned. During the year
ended December 31, 2007, we recorded $5.2 million in incentive
compensation.
Activity
relating to our equity investment in unconsolidated subsidiaries for the year
ended December 31, 2006 was as follows (in thousands):
|
|
|
|
Fund
II
|
|
Fund II GP(1)
|
|
Fund
III
|
|
Bracor (2)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
— |
|
|
$ |
1,278 |
|
|
$ |
692 |
|
|
$ |
7,754 |
|
|
$ |
— |
|
|
$ |
9,724 |
|
Equity
investment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,805 |
|
|
|
5,805 |
|
Gain
(loss) from equity investments
|
|
|
— |
|
|
|
279 |
|
|
|
(119 |
) |
|
|
959 |
|
|
|
(132 |
) |
|
|
987 |
|
Currency
translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
Amortization
of capitalized costs
|
|
|
— |
|
|
|
(93 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(93 |
) |
Distributions
from unconsolidated subsidiaries
|
|
|
— |
|
|
|
(829 |
) |
|
|
— |
|
|
|
(5,784 |
) |
|
|
— |
|
|
|
(6,613 |
) |
Ending
balance
|
|
$ |
— |
|
|
$ |
635 |
|
|
$ |
573 |
|
|
$ |
2,929 |
|
|
$ |
5,675 |
|
|
$ |
9,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
2,020 |
|
|
$ |
2,036 |
|
|
$ |
— |
|
|
$ |
521 |
|
|
$ |
— |
|
|
$ |
4,577 |
|
Capitalized
costs
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
41 |
|
|
|
41 |
|
Amortization
of capitalized costs
|
|
|
(2,020 |
) |
|
|
(772 |
) |
|
|
— |
|
|
|
(153 |
) |
|
|
— |
|
|
|
(2,945 |
) |
Ending
balance
|
|
$ |
— |
|
|
$ |
1,264 |
|
|
$ |
— |
|
|
$ |
368 |
|
|
$ |
41 |
|
|
$ |
1,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Balance
|
|
$ |
— |
|
|
$ |
1,899 |
|
|
$ |
573 |
|
|
$ |
3,297 |
|
|
$ |
5,716 |
|
|
$ |
11,485 |
|
|
|
|
|
$384,000 of the equity
investment consists of capitalized costs at Fund II’s general partner
which are being amortized over the expected life of the fund.
|
(2)
|
Includes
$258,000 of additional basis that represents a difference between our
share of net assets at Bracor and our carrying
value.
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7.
Debt
At
December 31, 2007 and 2006 we had $2.3 billion and $2.0 billion of total
debt outstanding, respectively. The balances of each category of debt and their
respective all in effective cost, including the amortization of fees and
expenses were as follows ($ values in thousands):
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Face Value
|
|
|
Book
Value
|
|
|
Coupon(1)
|
|
|
All in
Cost
|
|
|
Face Value
|
|
|
Book
Value
|
|
|
Coupon(1)
|
|
|
All in
Cost
|
|
Repurchase
Obligations
|
|
$ |
911,857 |
|
|
$ |
911,857 |
|
|
|
5.56%
|
|
|
|
5.80%
|
|
|
$ |
704,444 |
|
|
$ |
704,444 |
|
|
|
6.34%
|
|
|
|
6.53%
|
|
Collateralized
debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO
I (Floating)
|
|
|
252,778 |
|
|
|
252,778 |
|
|
|
5.22%
|
|
|
|
5.67%
|
|
|
|
252,778 |
|
|
|
252,778 |
|
|
|
5.94%
|
|
|
|
6.39%
|
|
CDO
II (Floating)
|
|
|
298,913 |
|
|
|
298,913 |
|
|
|
5.09%
|
|
|
|
5.32%
|
|
|
|
298,913 |
|
|
|
298,913 |
|
|
|
5.81%
|
|
|
|
6.04%
|
|
CDO
III (Fixed)
|
|
|
259,803 |
|
|
|
261,654 |
|
|
|
5.22%
|
|
|
|
5.37%
|
|
|
|
264,594 |
|
|
|
266,754 |
|
|
|
5.22%
|
|
|
|
5.25%
|
|
CDO IV(Floating)(2)
|
|
|
378,954 |
|
|
|
378,954 |
|
|
|
5.04%
|
|
|
|
5.11%
|
|
|
|
394,055 |
|
|
|
394,055 |
|
|
|
5.74%
|
|
|
|
5.81%
|
|
Total
CDOs
|
|
|
1,190,448 |
|
|
|
1,192,299 |
|
|
|
5.13%
|
|
|
|
5.34%
|
|
|
|
1,210,340 |
|
|
|
1,212,500 |
|
|
|
5.69%
|
|
|
|
5.86%
|
|
Senior
Unsecured Credit Facility
|
|
|
75,000 |
|
|
|
75,000 |
|
|
|
6.10%
|
|
|
|
6.40%
|
|
|
|
— |
|
|
|
— |
|
|
|
—
|
|
|
|
—
|
|
Junior
subordinated debentures
|
|
|
128,875 |
|
|
|
128,875 |
|
|
|
7.20%
|
|
|
|
7.30%
|
|
|
|
51,550 |
|
|
|
51,550 |
|
|
|
7.45%
|
|
|
|
7.53%
|
|
Total
|
|
$ |
2,306,180 |
|
|
$ |
2,308,031 |
|
|
|
5.45%
|
|
|
|
5.66%
|
|
|
$ |
1,966,334 |
|
|
$ |
1,968,494 |
|
|
|
5.97%
|
|
|
|
6.15%
|
|
|
|
|
|
Calculations based on LIBOR of 4.60% as of December 31, 2007
and LIBOR of 5.32% as of December 31, 2006.
|
(2)
|
Comprised
of $364.2 million of floating rate notes sold and $14.7 million of fixed
rate notes sold.
|
The
annual face value maturities of our debt are as follows (in
millions):
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
Repurchase
obligations
|
|
$ |
644.4 |
|
|
$ |
246.2 |
|
|
$ |
21.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
911.9 |
|
CDOs
|
|
|
41.7 |
|
|
|
271.6 |
|
|
|
54.9 |
|
|
|
199.4 |
|
|
|
265.4 |
|
|
|
357.4 |
|
|
|
1,190.4 |
|
Senior
unsecured credit facility
|
|
|
— |
|
|
|
75.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
75.0 |
|
Junior
subordinated debentures
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
128.9 |
|
|
|
128.9 |
|
Total
debt
|
|
$ |
686.1 |
|
|
$ |
592.8 |
|
|
$ |
76.2 |
|
|
$ |
199.4 |
|
|
$ |
265.4 |
|
|
$ |
486.3
|
|
|
$ |
2,306.2 |
|
Repurchase
Obligations
At
December 31, 2007, we were party to nine master repurchase agreements with seven
counterparties that provide total commitments of $1.6 billion. At
December 31, 2007, we borrowed $842.2 million under these agreements and had the
ability to borrow an additional $145.4 million without pledging additional
collateral.
We were
also a party to asset specific repurchase obligations. The term of these
agreements are generally one year or less and advance rates are up to 85% with
cash costs ranging from LIBOR plus 0.45% to LIBOR plus 2.50%. At December 31,
2007, these asset specific repurchase obligations represent borrowings of $69.7
million and we had the ability to borrow an additional $2.0 million without
pledging additional collateral.
In total,
our borrowings at December 31, 2007 under repurchase agreements were $911.9
million and we had the ability to borrow an additional $147.4 million without
pledging additional collateral. Loans and CMBS with a carrying value
of $1.4 billion are pledged as collateral for our repurchase
agreements.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7.
Debt (Continued)
In August
2005, we entered into a master repurchase agreement with Bear Stearns & Co.
Inc., or Bear Stearns. The agreement provided for a maximum aggregate purchase
price of $75.0 million and has an initial term of three years,
expiring in August 2008. In December 2005, we entered into a related master
repurchase agreement with Bear Stearns, enabling us to use additional types of
collateral. The related agreement increased the combined repurchase
commitment under both facilities to $125.0 million. In February 2006,
we amended and restated our master repurchase agreements with Bear Stearns
increasing the combined commitment by $75.0 million to $200.0 million, and in
February 2007 we further increased the combined commitment by $250 million to
$450 million. The agreements expire in August 2008 and are designed
to finance, on a recourse basis, our general investment activity as well as
assets designated for one or more of our CDOs. Under the agreements,
advance rates are up to 85.0% and cash costs of funds range from LIBOR plus
0.55% to LIBOR plus 2.00%. At December 31, 2007, we had incurred borrowings
under the agreements of $336.0 million and had the ability to borrow an
additional $5.3 million against the assets collateralizing the
agreement.
In July
2005, we entered into a master repurchase agreement with Morgan Stanley Inc., or
Morgan Stanley. The agreement originally provided for a maximum aggregate
purchase price of $75.0 million. In October and November 2005, we
amended the agreement to increase the amount of its repurchase commitment to
$125.0 million and to $150.0 million, respectively. The November 2005
amendment also provided for a further increase of the repurchase commitment to
$200.0 million as of January 2006. In February 2007 we further
increased the commitment to $300.0 million. The agreement expires in
July 2009 and is designed to finance, on a recourse basis, our general
investment activity. Under the agreement, advance rates are up to
92.0% and cash costs of funds range from LIBOR plus 0.40% to LIBOR plus
2.00%. At December 31, 2007, we had incurred borrowings under the
agreements of $142.5 million and had the ability to borrow an additional $123.4
million against the assets collateralizing the borrowings under the
agreements.
In July
2005, we entered into an additional master repurchase agreement with Morgan
Stanley Inc., or Morgan Stanley. The agreement provides for a maximum aggregate
purchase price of $75.0 million and has a term of three years, expiring in July
2008. The agreement is designed to finance on a recourse basis assets designated
for one or more of our CDOs with advance rates of up to 85.0% and cash costs of
funds ranging between LIBOR plus 1.00% and LIBOR plus 1.75%. At December 31,
2007, we had incurred no borrowings under the agreement.
In
November 2006, we entered into entered into a master repurchase agreement with
JPMorgan Chase Bank, N.A. The agreement provides for a maximum aggregate
purchase price of $250.0 million and for a rolling one-year term not to exceed
three years. The agreement is designed to provide us with recourse financing for
our general loan and securities investment activity. Under the agreement,
advance rates are up to 92.0% and cash costs of funds range from LIBOR plus
0.30% to LIBOR plus 1.90%. At December 31, 2007, we had incurred borrowings
under the agreement of $208.5 million and had the ability to borrow an
additional $1.6 million against the assets collateralizing the borrowings under
the agreement.
In May
2003, we entered into a master repurchase agreement with Goldman Sachs & Co.
and Commerzbank. The agreement provided for a maximum aggregate purchase price
of $50.0 million and had an initial term of two years, expiring June 2005. In
August 2003, we amended the agreement to increase its size to $100.0 million and
extend its term to June 2006. In June 2006, we further amended the agreement
extending its term to June 2009, increasing its size to $150.0 million and
removing Commerzbank as a party to the agreement. In October 2007, we amended
and restated the agreement and concurrently executed a second master repurchase
agreement, which we call the alternate funding agreement. The
amendment increased the maximum purchase amount from $150.0 million to $200.0
million. Together the agreements are designed to provide us with
recourse financing for our general investment activity as well as assets
designated for one or more of our CDOs. Under the agreements, advance rates are
up to 88.0% and cash costs of funds range between LIBOR plus 0.60% and LIBOR
plus 2.00%. At December 31, 2007, we had incurred borrowings under the
agreements of $92.8 million and had the ability to borrow an additional $15.1
million against the assets collateralizing the agreements.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7.
Debt (Continued)
In July
2007, we entered into a master repurchase agreement with Citigroup Financial
Products Inc. and Citigroup Global Markets Inc. The agreement
provides for a maximum aggregate commitment of $250.0 million with a rolling
one-year term and individual financing commitments of up to three
years. The agreement is designed to provide us with recourse
financing for our general loan and securities investment
activity. Under the agreement, advance rates are up to 92.0% and cash
costs of funds range from LIBOR plus 0.40% to LIBOR plus 2.00%. At
December 31, 2007, we had incurred borrowings under the agreement of $41.1
million.
In March
2005, we entered into a master repurchase agreement with Bank of America. The
agreement provided for a maximum aggregate purchase price of $150.0 million and
has a term of five years, expiring in March 2010. Pursuant to the terms of the
agreement, the amount of its repurchase commitment was reduced to $75.0 million
upon the closing of our second CDO in March 2005. The agreement is designed to
finance on a recourse basis assets designated for our second CDO with advance
rates of 85.0% and a cash cost of funds of LIBOR plus 1.00%. At December 31,
2007, we had incurred borrowings under the agreement of $21.3
million.
In
October 2006, we entered into a loan-specific repurchase obligation representing
borrowings of $10.9 million with UBS Real Estate Securities. The obligation is
recourse, has a term of three years and the advance rate is 75.0% with a cash
cost of LIBOR plus 1.25%.
In March
2006, we entered into a loan-specific repurchase obligation representing
borrowings of $6.0 million with Lehman Brothers. The obligation is non-recourse,
had an initial term of one year, which we renewed for a second year and the
advance rate is 60.0% with a cash cost of LIBOR plus 2.50%.
At
December 31, 2006, we were party to repurchase agreements with seven
counterparties with total repurchase commitments of $1.2 billion and had total
outstanding borrowings of $704.4 million. The weighted average cash borrowing
cost for all outstanding borrowings under the repurchase agreements in effect at
December 31, 2006 was LIBOR plus 1.02% (6.34% at December 31, 2006). Assuming no
additional utilization under the repurchase agreements and including the
amortization of all fees paid and capitalized over the remaining term of the
repurchase agreements, the all in effective borrowing cost was LIBOR plus 1.21%
(6.53% at December 31, 2006).
Collateralized
Debt Obligations
At
December 31, 2007, we had CDOs outstanding from four separate issuances with a
total face value of $1.2 billion. Our existing CDOs are financing vehicles for
our assets and, as such, are consolidated on our balance sheet at $1.2 billion,
representing the amortized sales price of the securities sold to third parties.
In total, our two reinvesting CDOs provide us with $551.7 million of debt
financing at a cash cost of LIBOR plus 0.55% (5.15% at December 31, 2007) and an
all in effective interest rate (including the amortization of issuance costs) of
LIBOR plus 0.88% (5.48% at December 31, 2007). Our two static CDOs provide us
with $638.8 million of financing with a cash cost of 5.12% and an all in
effective interest rate of 5.23% at December 31, 2007. On a combined
basis, our CDOs provide us with $1.2 billion of non-recourse,
non-mark-to-market, index matched financing at a weighted average cash cost of
0.53% over the applicable index (5.13% at December 31, 2007) and a weighted
average all in cost of 0.74% over the applicable index (5.34% at December 31,
2007).
In July
2004 we issued our first CDO, which we refer to as CDO I, issuing and selling to
third party investors $252.8 million of notes rated AAA through BBB- and
retaining all of the below investment grade notes, as well as the equity in the
CDO issuers. CDO I is collateralized by a $324.0 million pool of commercial real
estate related assets and is a reinvesting CDO. During its four year
reinvestment period, expiring in June 2008, principal proceeds from collateral
repayments can be reinvested into replacement collateral subject to certain
criteria. We have the option to call the entire financing at par beginning in
July 2006. As a financing, CDO I has a cash cost of LIBOR plus 0.62% (5.22% at
December 31, 2007) and including the amortization of fees and expenses, an all
in effective rate of LIBOR plus 1.07% (5.67% at December 31,
2007). In 2007, Moody's, Standard & Poors’, and Fitch affirmed
all of their ratings of the notes issued by CT CDO I in connection with their
annual review of the transaction.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7.
Debt (Continued)
In March
2005 we issued our second CDO, which we refer to as CDO II, issuing and selling
to third party investors $299.0 million of notes rated AAA through
BBB- and retaining all of the below investment grade notes, as well as the
equity in the CDO issuers. CDO II is collateralized by a pool of $337.8 million
of commercial real estate related assets and is a reinvesting CDO. During its
five year reinvestment period, expiring in February 2010, principal proceeds
from collateral repayments can be reinvested into replacement collateral subject
to certain rating agency criteria. We have the option to call the entire
financing at par beginning in March 2007. As a financing, CDO II has a cash cost
of LIBOR plus 0.49% (5.09% at December 31, 2007) and including the amortization
of fees and expenses, an all in effective rate of LIBOR plus 0.72% (5.32% at
December 31, 2007). In 2007, Standard & Poors and Fitch affirmed
all of their ratings of the notes issued by CT CDO II in connection with their
annual review of the transaction.
In August
2005, we issued our third CDO, which we call CDO III, issuing and selling to
third party investors $269.6 million of notes rated AAA through BBB
for proceeds of $272.2 million. We retained all of the BBB- and below investment
grade rated notes, as well as the equity in the CDO issuers. CDO III is
collateralized by a pool of $327.6 million (face value) of CMBS and is a static
pool CDO. As such, it provides for the amortization of the CDO notes rather than
reinvestment with principal proceeds from collateral repayments. We have the
option to call the entire financing subject to yield maintenance beginning in
September 2011. As a financing, CDO III has a cash cost of 5.22% and including
the amortization of fees and expenses, an all in effective rate of 5.37% at
December 31, 2007. In 2007, Fitch upgraded seven classes of the notes
issued by CT CDO III and affirmed their ratings of the remaining
classes. And Standard & Poors affirmed all of their ratings of
the notes issued by CT CDO III in connection with their annual review of the
transaction.
In March
2006, we issued our fourth CDO, which we refer to as CDO IV, issuing and selling
to third party investors $429.4 million of notes rated AAA through BBB- and
retaining all of the below investment grade notes, as well as the equity in the
CDO issuers. CDO IV was initially collateralized by a pool of $488.6 million
(face value) of CMBS and other commercial real estate debt. The securitization
is a static pool CDO, and as such it provides for the amortization of the CDO
notes rather than reinvestment with principal proceeds from collateral
repayments. The total collateral pool is now $389.6 million and total
outstanding liabilities are $379.0 million. In terms of original balance, $16.7
million of the notes sold were fixed rate notes and $412.7 million were floating
rate. The structure includes an amortizing interest rate swap which effectively
converts the floating rate payments to a fixed rate payment. We have the option
to call the entire financing beginning in March 2011. As a financing, CDO IV has
a cash cost of 5.04% and including the amortization of fees and expenses, the
all in effective cost is 5.11% at December 31, 2007. In 2007,
Standard & Poors and Fitch affirmed all of their ratings of the notes issued
by CT CDO IV in connection with their annual review of the
transaction.
Senior
Unsecured Credit Facility
In March
2007, we closed a $50.0 million senior unsecured revolving credit facility with
WestLB AG, which we amended in June 2007, increasing the size to $100 million
and adding new lenders to the syndicate. The facility has an initial term of one
year (with a one year term out provision at our option) and a maximum term of
four years (including extension options). The facility bears interest at LIBOR
plus 1.50% (LIBOR plus 1.80% on an all in basis) and we expect to use the
facility borrowings for general corporate purposes and working capital needs,
including providing additional flexibility for funding loan originations. At
December 31, 2007, we had borrowed $75.0 million under this
facility.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
7.
Debt (Continued)
Junior
Subordinated Debentures
At
December 31, 2007, we had a total of $128.9 million of junior subordinated
debentures outstanding (that back $125 million of trust preferred securities
sold to third parties). Junior subordinated debentures are comprised
of two issuances of debentures, $77.3 million backing $75 million of trust
preferred securities sold to third parties in March 2007 and $51.6 million
backing $50 million of trust preferred securities sold to third parties in 2006.
On a combined basis the securities provide us with $125.0 million of financing
at a cash cost of 7.20% and an all in effective rate of 7.30%.
In
February 2006, our statutory trust subsidiary, CT Preferred Trust I, issued
$50.0 million of trust preferred securities to a private investor and $1.6
million of common securities to us, and we issued to the trust $51.6 million
principal amount of junior subordinated debentures. The trust preferred
securities represent an undivided beneficial interest in the assets of the trust
that consist solely of our junior subordinated debentures. The trust preferred
securities have a 30 year term, maturing in April 2036, are redeemable at par on
or after April 30, 2011 and pay distributions at a fixed rate of 7.45% for the
first ten years ending April 2016, and thereafter, at a floating rate of three
month LIBOR plus 2.65%, which correspond to the interest rate payable on the
junior subordinated debentures. The all in cost of the junior subordinated
debentures is 7.53%.
In March
2007, our statutory trust subsidiary, CT Preferred Trust II sold $75.0 million
of trust preferred securities to third parties and $2.3 million common
securities to us, and we issued to the trust $77.3 million principal amount of
subordinated debentures. The trust preferred securities have a 30 year term,
maturing in April 2037, are redeemable at par on or after April 30, 2012 and pay
distributions at a fixed rate of 7.03% (or 7.14% including the amortization of
fees and expenses) for the first ten years ending April 2017, and thereafter, at
a floating rate of three month LIBOR plus 2.25%, which correspond to the
interest note payable on the junior subordinated debentures.
Our
interests in CT Preferred Trust I and CT Preferred Trust II are accounted for
using the equity method and the assets and liabilities are not consolidated into
our financial statements due to our determination that CT Preferred Trust I and
CT Preferred Trust II are variable interest entities under FIN 46R and that we
are not the primary beneficiary of the entities. Interest on the
junior subordinated debentures is included in interest and related expenses on
our consolidated statements of income while the junior subordinated debentures
are presented as a separate item in our consolidated balance sheet.
Participations
sold represent interests in loans that we originated and subsequently sold to CT
Large Loan and third parties. We present these sold interests as both
assets and liabilities (in equal amounts) in conformity with GAAP on the basis
that these arrangements do not qualify as sales under FAS 140. At
December 31, 2007, we had seven such participations sold with a total book
balance of $408.4 million at a weighted average coupon of LIBOR plus 3.38%
(7.98% at December 31, 2007) and a weighted average yield of LIBOR plus 3.41%
(8.01% at December 31, 2007). The income earned on the loans is
recorded as interest and related income and an identical amount is
recorded as interest and related expenses on the consolidated statements of
income. At December 31, 2006 we had four such participations sold
with a total book balance of $209.4 million at a weighted average yield of LIBOR
plus 3.54% (8.86% at December 31, 2006).
9.
Derivative Financial Instruments
To manage
interest rate risk, we typically employ interest rate swaps or other
arrangements, to convert a portion of our floating rate debt to fixed rate debt
in order to index match our assets and liabilities. The net payments due under
these swap contracts are recognized as interest expense over the life of the
contracts.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
9.
Derivative Financial Instruments (Continued)
During
the year ended December 31, 2007, we entered into one cash flow hedge
agreement with a total current notional balance of $780,000. Additionally,
during the twelve months ended December 31, 2007, we paid $153,000 to
counterparties in settlement of two interest rate swaps and two interest rate
swaps matured in the fourth quarter of 2007. Recognition of these settlements
has been deferred and is being amortized over the remaining life of the
previously hedged item using an approximation of the level yield
basis.
The
following table summarizes the notional and fair values of our derivative
financial instruments as of December 31, 2007. The notional value provides
an indication of the extent of our involvement in the instruments at that time,
but does not represent exposure to credit or interest rate risk ($ values in
thousands):
Hedge
|
Type
|
|
Notional Value
|
|
|
Interest Rate
|
|
|
Maturity
|
|
Fair Value
|
|
Swap
|
Cash
Flow Hedge
|
|
$ |
318,306 |
|
|
|
5.10%
|
|
|
2015
|
|
$ |
(12,508 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
73,840 |
|
|
|
4.58%
|
|
|
2014
|
|
|
(1,242 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
18,718 |
|
|
|
3.95%
|
|
|
2011
|
|
|
(65 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
18,234 |
|
|
|
5.14%
|
|
|
2014
|
|
|
(958 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
16,894 |
|
|
|
4.83%
|
|
|
2014
|
|
|
(600 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
16,377 |
|
|
|
5.52%
|
|
|
2018
|
|
|
(1,331 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
13,136 |
|
|
|
5.05%
|
|
|
2016
|
|
|
(529 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
12,310 |
|
|
|
5.02%
|
|
|
2009
|
|
|
(263 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
7,062 |
|
|
|
5.10%
|
|
|
2016
|
|
|
(363 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
6,087 |
|
|
|
4.77%
|
|
|
2011
|
|
|
(150 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
5,104 |
|
|
|
5.18%
|
|
|
2016
|
|
|
(288 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
3,325 |
|
|
|
5.45%
|
|
|
2015
|
|
|
(240 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
2,870 |
|
|
|
5.08%
|
|
|
2011
|
|
|
(113 |
) |
Swap
|
Cash
Flow Hedge
|
|
|
780 |
|
|
|
5.31%
|
|
|
2011
|
|
|
(36 |
) |
Total/Weighted
Average
|
|
|
$ |
513,043 |
|
|
|
4.98%
|
|
|
2015
|
|
$ |
(18,686 |
) |
As of
December 31, 2007, the derivative financial instruments were reported at
their fair value of $18.7 million as interest rate hedge liabilities. Income and
expense associated with these instruments is recorded as interest expense on the
company’s consolidated statements of income. The amount of hedge ineffectiveness
was not material during any of the periods presented.
We have
the authority to issue up to 200,000,000 shares of stock, consisting of
(i) 100,000,000 shares of class A common stock and (ii) 100,000,000
shares of preferred stock. The board of directors is generally authorized to
issue additional shares of authorized stock without shareholder
approval.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
10.
Shareholders’ Equity (Continued)
Class A
common stock are voting shares entitled to vote on all matters presented to a
vote of shareholders, except as provided by law or subject to the voting rights
of any outstanding preferred stock. Holders of record of shares of class A
common stock on the record date fixed by our board of directors are entitled to
receive such dividends as may be declared by the board of directors subject to
the rights of the holders of any outstanding preferred stock.
We have
100,000,000 shares of preferred stock authorized and have not issued any shares
of preferred stock since we repurchased all of the previously issued and
outstanding preferred stock in 2001.
Our
dividend policy is subject to revision at the discretion of our board of
directors. All distributions will be made at the discretion of our board of
directors and will depend upon our taxable income, our financial condition, our
maintenance of REIT status and other factors as our board of directors deems
relevant. All dividends declared in 2006 and 2007 are ordinary
income.
We did
not repurchase any of our common stock during the year ended December 31,
2007.
The
following table sets forth the calculation of Basic and Diluted EPS for the
years ended December 31, 2007 and 2006 (in thousands, except share and
per share data):
|
|
Year ended December 31, 2007
|
|
Year ended December 31, 2006
|
|
|
Net Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net Income
|
|
Shares
|
|
Per Share
Amount
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings allocable to common stock
|
|
$ |
84,366
|
|
17,569,690
|
|
$ |
4.80
|
|
|
$ |
54,067
|
|
15,754,655
|
|
$ |
3.43
|
|
Effect
of Dilutive Securities: Options outstanding for the purchase of common
stock
|
|
|
—
|
|
120,576
|
|
|
|
|
|
|
—
|
|
168,742
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share of common stock and assumed conversions
|
|
$ |
84,366
|
|
17,690,266
|
|
$ |
4.77
|
|
|
$ |
54,067
|
|
15,923,397
|
|
$ |
3.40
|
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
10.
Shareholders’ Equity (Continued)
The
following table sets forth the calculation of Basic and Diluted EPS for the year
ended December 31, 2005 (in thousands, except share and per share
data):
|
|
Year ended December 31, 2005
|
|
|
Net Income
|
|
Shares
|
|
Per Share
Amount
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
Net
earnings allocable to common stock
|
|
$ |
44,111
|
|
15,181,476
|
|
$ |
2.91
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
Options
outstanding for the purchase of common stock
|
|
|
—
|
|
154,438
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
Net
earnings per share of common stock and assumed conversions
|
|
$ |
44,111
|
|
15,335,914
|
|
$ |
2.88
|
|
11.
General and Administrative Expenses
General
and administrative expenses for the years ended December 31, 2007,
2006 and 2005 consisted of (in thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Salaries
and benefits
|
|
$ |
14,480 |
|
|
$ |
11,450 |
|
|
$ |
10,084 |
|
Employee
stock based compensation
|
|
|
4,606 |
|
|
|
3,961 |
|
|
|
2,545 |
|
Operating
and other costs
|
|
|
4,485 |
|
|
|
2,904 |
|
|
|
3,799 |
|
Professional
services
|
|
|
3,821 |
|
|
|
4,362 |
|
|
|
3,512 |
|
Employee
promote compensation
|
|
|
2,564 |
|
|
|
398 |
|
|
|
1,999 |
|
Total
|
|
$ |
29,956 |
|
|
$ |
23,075 |
|
|
$ |
21,939 |
|
We made
an election to be taxed as a REIT under Section 856(c) of the Internal
Revenue Code of 1986, as amended, commencing with the tax year ending
December 31, 2003. As a REIT, we generally are not subject to federal,
state, and local income taxes except for the operations of our taxable REIT
subsidiary, CTIMCO. To maintain qualification as a REIT, we must distribute at
least 90% of our REIT taxable income to our shareholders and meet certain other
requirements. If we fail to qualify as a REIT, we may be subject to material
penalties such as federal, state and local income tax on our taxable income at
regular corporate rates. At December 31, 2007 and 2006, we
were in compliance with all REIT requirements.
We did
not pay any taxes at the REIT level in 2007, 2006 or 2005. However, CTIMCO, our
investment management subsidiary, is a taxable REIT subsidiary and subject to
taxes on its earnings. In 2007, CTIMCO recorded an operating loss before income
taxes of $2.0 million, which resulted in an income tax benefit of $833,000,
$783,000 of which we reserved and $50,000 of which we recorded. In 2006, CTIMCO
recorded an operating loss before income taxes of $6.7 million, which resulted
in an income tax benefit of $2.7 million, none of which we reserved and the
entire $2.7 million of which we recorded. In 2005, CTIMCO recorded net income
before income taxes of $104,000, which when combined with GAAP to tax difference
resulted in a provision for income taxes of $213,000, all of which we
recorded. In
addition to the benefit we recorded in 2007 as a result of operations at CTIMCO,
we reversed tax liability reserves at Capital Trust, Inc. and CTIMCO of $254,000
and $402,000, respectively.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
12.
Income Taxes (Continued)
As we are
operating in a manner to meet the qualifications to be taxed as a REIT for
federal income tax purposes during the 2007 tax year, we do not expect we will
be liable for income taxes or for taxes on “built-in gain” on our assets at the
federal and state level in future years, other than income taxes on our taxable
REIT subsidiaries.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax reporting purposes.
The
significant components of deferred tax assets and liabilities were as
follows:
|
|
Years ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Fund
II incentive management fee
|
|
$ |
— |
|
|
$ |
414 |
|
Unearned
compensation expense for book purposes not recognized for
tax
|
|
|
4,125 |
|
|
|
3,049 |
|
NOL
carryforwards State and City
|
|
|
1,253 |
|
|
|
1,377 |
|
NOL
carryforwards Federal
|
|
|
469 |
|
|
|
744 |
|
Other
|
|
|
716 |
|
|
|
146 |
|
Deferred
tax asset
|
|
|
6,563 |
|
|
|
5,730 |
|
Valuation
allowance
|
|
|
(2,904
|
) |
|
|
(2,121 |
) |
Net
deferred tax asset
|
|
$ |
3,659 |
|
|
$ |
3,609 |
|
The
taxable REIT subsidiaries have federal and state and New York City net operating
loss carryforwards as of December 31, 2007 of approximately
$1.3 million and $7.3 million, respectively, which expire through
2026.
The REIT
has federal net operating loss carryforwards as of December 31, 2007
of approximately $3.8 million that expire through 2011. We also have
federal capital loss carryforwards as of December 31, 2007 of
approximately $1.5 million that expire through 2008.
13.
Employee Benefit Plans
Employee
401(k) and Profit Sharing Plan
We
sponsor a 401(k) and profit sharing plan that allows eligible employees to
contribute up to 15% of their salary into the plan on a pre-tax basis, subject
to annual limits. We have committed to make contributions to the plan equal to
3% of all eligible employees’ compensation subject to annual limits and may make
additional contributions based upon earnings. Our contribution expense for the
years ended December 31, 2007, 2006 and 2005, was $198,000, $118,000
and $104,000, respectively.
We had
four benefit plans in effect at December 31, 2007: (1) the
second amended and restated 1997 long-term incentive stock plan, or 1997
Employee Plan, (2) the amended and restated 1997 non-employee director
stock plan, or 1997 Director Plan, (3) the amended and restated 2004
long-term incentive plan, or 2004 Employee Plan, and (4) the 2007 long-term
incentive plan, or 2007 Plan. The 1997 plans expired in 2007 and no new awards
may be issued
under them.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
13. Employee
Benefit Plans (Continued)
Activity under these four
plans for the year ended December 31, 2007 is summarized in the chart below
in share and share equivalents:
Benefit
Type
|
|
1997 Employee
Plan
|
|
|
1997 Director
Plan
|
|
|
2004 Employee
Plan
|
|
|
2007
Long
Term Incentive Plan
|
|
|
Total
|
|
Options(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
|
323,457 |
|
|
|
76,668 |
|
|
|
— |
|
|
|
— |
|
|
|
400,125 |
|
Granted
2007
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised
2007
|
|
|
(97,979 |
) |
|
|
(48,334 |
) |
|
|
— |
|
|
|
— |
|
|
|
(146,313 |
) |
Canceled
2007
|
|
|
(1,667 |
) |
|
|
(11,667 |
) |
|
|
— |
|
|
|
— |
|
|
|
(13,334 |
) |
Ending
Balance
|
|
|
223,811 |
|
|
|
16,667 |
|
|
|
— |
|
|
|
— |
|
|
|
240,478 |
|
Restricted
Stock(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
|
— |
|
|
|
— |
|
|
|
480,967 |
|
|
|
— |
|
|
|
480,967 |
|
Granted
2007
|
|
|
— |
|
|
|
— |
|
|
|
23,015 |
|
|
|
— |
|
|
|
23,015 |
|
Vested
2007
|
|
|
— |
|
|
|
— |
|
|
|
(80,051 |
) |
|
|
— |
|
|
|
(80,051 |
) |
Forfeited
2007
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Ending
Balance
|
|
|
— |
|
|
|
— |
|
|
|
423,931 |
|
|
|
— |
|
|
|
423,931 |
|
Stock
Units(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
|
— |
|
|
|
73,848 |
|
|
|
— |
|
|
|
— |
|
|
|
73,848 |
|
Granted
2007
|
|
|
— |
|
|
|
6,169 |
|
|
|
— |
|
|
|
14,570 |
|
|
|
20,739 |
|
Converted
2007
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Ending
Balance
|
|
|
— |
|
|
|
80,017 |
|
|
|
— |
|
|
|
14,570 |
|
|
|
94,587 |
|
Total
Outstanding Shares
|
|
|
223,811 |
|
|
|
96,684 |
|
|
|
423,931 |
|
|
|
14,570 |
|
|
|
758,996 |
|
|
|
|
|
All options are fully vested as of December 31,
2007.
|
(2)
|
Comprised
of both performance based awards that vest upon the attainment of certain
common equity return thresholds and time based awards that vest based upon
an employee’s continued employment on vesting dates.
|
(3)
|
Stock
units are granted to certain members of our board of directors in lieu of
cash compensation for services and in lieu of dividends earned on
previously granted stock units.
|
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
13.
Employee Benefit Plans (Continued)
As of
year end 2007, unvested share based compensation consisted of 423,931 shares of
restricted stock with an unamortized value of $4.1 million. Subject to vesting
provisions, these costs will be recognized as compensation expense over the next
4 years.
At our
2007 annual meeting of shareholders held on June 7, 2007, the shareholders
approved the adoption of the 2007 Plan. Under the 2007 Plan, a maximum of
700,000 shares of class A common stock may be issued. Effective upon the
adoption of shareholders, no future awards will occur under our prior plans. At
December 31, 2007, there were 685,430 shares available under the 2007
Plan.
These
shares shall be authorized but unissued shares, or shares that we have
reacquired or otherwise hold in treasury or in a trust. The number of shares
available for awards, as well as the terms of outstanding awards, are subject to
adjustment as provided in the 2007 Plan for stock splits, stock dividends,
recapitalizations and other similar events.
Shares
that are subject to an award (or to any award under the 2004 Plan) that for any
reason expires, is forfeited, cancelled or becomes unexercisable, and shares
that are for any other reason not paid or delivered under awards pursuant to the
2007 Plan or the 2004 Plan shall again be available for subsequent awards,
except as prohibited by law. The committee may not make future awards with
respect to shares that we retain from otherwise delivering pursuant to an award
either (i) as payment of the exercise price of an award, or (ii) in order to
satisfy the withholding or employment taxes due upon grant, exercise, vesting or
distribution of an award. The 2004 Plan and the 2007 Plan were
modified during 2007 to allow certain employees to defer receipt of restricted
stock.
The
following table summarizes the outstanding options as of December 31,
2007:
Exercise Price
per Share
|
|
|
Options
Outstanding
|
|
Weighted Average
Exercise Price
per Share
|
|
Weighted
Average
Remaining Life
|
|
|
|
1997 Employee
Plan
|
|
1997 Director
Plan
|
|
1997 Employee
Plan
|
|
1997 Director
Plan
|
|
1997 Employee
Plan
|
|
1997 Director
Plan
|
$10.00
- $15.00
|
|
|
|
43,530
|
|
|
|
—
|
|
|
$ |
13.41
|
|
|
$ |
—
|
|
|
|
3.01
|
|
|
|
—
|
|
$15.00
- $20.00
|
|
|
|
126,947
|
|
|
|
—
|
|
|
|
16.38
|
|
|
|
—
|
|
|
|
3.52
|
|
|
|
—
|
|
$25.00
- $30.00
|
|
|
|
53,334
|
|
|
|
16,667
|
|
|
|
28.12
|
|
|
|
30.00
|
|
|
|
0.42
|
|
|
|
0.08
|
|
Total/Weighted
Average
|
|
|
|
223,811
|
|
|
|
16,667
|
|
|
$ |
18.60
|
|
|
$ |
30.00
|
|
|
|
2.68
|
|
|
|
0.08
|
|
In
addition to the equity interests detailed above, we have granted percentage
interests in the incentive compensation received by us from the private equity
funds. At December 31, 2007, we had granted, net of forfeitures, 43% of the
Fund III incentive compensation received by us.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
13.
Employee Benefit Plans (Continued)
The
following table summarizes employee option activity (that is limited to our 1997
Employee Plan) for the years ended December 31, 2007, 2006 and
2005:
|
|
Options
Outstanding
|
|
Exercise Price
per Share
|
|
Weighted
Average Exercise
Price per Share
|
Outstanding
at January 1, 2005
|
|
|
458,998 |
|
|
|
$12.375-$30.00
|
|
|
$ |
19.67 |
|
Granted
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Exercised
|
|
|
(83,815
|
) |
|
|
$12.375-$30.00
|
|
|
|
18.75 |
|
Canceled
|
|
|
(22,223
|
) |
|
|
$30.00
|
|
|
|
30.00 |
|
Outstanding
at December 31, 2005
|
|
|
352,960 |
|
|
|
$12.375-$30.00
|
|
|
|
19.23 |
|
Granted
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Exercised
|
|
|
(29,503
|
) |
|
|
$12.375-$18.00
|
|
|
|
17.37 |
|
Canceled
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Outstanding
at December 31, 2006
|
|
|
323,457 |
|
|
|
$12.375-$30.00
|
|
|
|
19.40 |
|
Granted
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Exercised
|
|
|
(97,979
|
) |
|
|
$12.375-$18.00
|
|
|
|
21.26 |
|
Canceled
|
|
|
(1,667
|
) |
|
|
—
|
|
|
|
18.00 |
|
Outstanding
at December 31, 2007
|
|
|
223,811 |
|
|
|
|
|
|
$ |
18.60 |
|
At
December 31, 2007, 2006 and 2005, options to purchase 223,811 shares,
323,457 shares and 352,960 shares, respectively, were exercisable. At
December 31, 2007, the outstanding options have various remaining
contractual lives ranging from one month to 4.09 years with a weighted average
life of 2.68 years.
The
following table summarizes director option activity (that is limited to our 1997
Director Plan) for the years ended December 31, 2007, 2006 and
2005:
|
|
Options
Outstanding
|
|
Exercise Price
per Share
|
|
Weighted
Average Exercise
Price per Share
|
Outstanding
at January 1, 2005
|
|
|
85,002 |
|
|
|
$18.00-30.00
|
|
|
$ |
27.65 |
|
Granted
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Exercised
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Cancelled
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Outstanding
at December 31, 2005
|
|
|
85,002 |
|
|
|
$18.00-30.00
|
|
|
|
27.65 |
|
Granted
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Exercised
|
|
|
(8,334
|
) |
|
|
$18.00
|
|
|
|
18.00 |
|
Cancelled
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Outstanding
at December 31, 2006
|
|
|
76,668 |
|
|
|
$18.00-30.00
|
|
|
|
28.70 |
|
Granted
|
|
|
— |
|
|
|
—
|
|
|
|
— |
|
Exercised
|
|
|
(48,334
|
) |
|
|
$18.00-30.00
|
|
|
|
27.93 |
|
Cancelled
|
|
|
(11,667
|
) |
|
|
—
|
|
|
|
30.00 |
|
Outstanding
at December 31, 2007
|
|
|
16,667 |
|
|
|
|
|
|
$ |
30.00 |
|
At
December 31, 2007, 2006 and 2005, all of the options outstanding were
exercisable. At December 31, 2007, the outstanding options have a
remaining contractual life of one month.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
14.
Fair Values of Financial Instruments
The FASB
Statement of Financial Accounting Standards No. 107, “Disclosures about
Fair Value of Financial Instruments”, or FAS 107, requires disclosure of fair
value information about financial instruments, whether or not recognized in the
statement of financial condition, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based upon estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and the estimated future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all
non-financial instruments from our disclosure requirements. Accordingly, the
aggregate fair value amounts do not represent the underlying value of the
Company.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents:
The carrying amount of cash on hand and money market funds is considered
to be a reasonable estimate of fair value.
Commercial mortgage backed
securities: These investments are presented on a held-to-maturity basis
and not at fair value. The fair values were obtained from a securities
dealer.
Loans receivable, net: These
instruments are presented at the lower of cost or market value and not at fair
value. The fair values were estimated by using current institutional purchaser
yield requirements for loans with similar credit characteristics.
Total return swap: This
instrument is presented at fair value. The fair value was obtained from a third
party valuation.
Interest rate swap agreements:
These instruments are presented at fair value. The fair value was
obtained from a third party valuation.
Repurchase obligations: The
repurchase obligations bear interest at rates that may or may not be available
in the market currently. Given, most importantly, the short term nature of these
investments, the carrying value is a reasonable estimate of fair
value.
Collateralized debt obligations:
These obligations are presented on the basis of proceeds received at
issuance and not at fair value. The fair value was
estimated based upon the amount at which similar placed financial instruments
would be valued today.
Senior unsecured credit facility:
This instrument bears interest at rates that are similar to those
available in the market currently. Therefore, the carrying value is a reasonable
estimate of fair value.
Junior subordinated debentures:
These instruments bear interest at fixed rates. The fair value was
obtained by calculating the present value based on current market interest
rates.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
14.
Fair Values of Financial Instruments (Continued)
The
carrying amounts of all other assets and liabilities approximate the fair value
except as follows (in thousands):
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Carrying
Amount
|
|
Face
Value
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Face
Value
|
|
Fair
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
$ |
876,864 |
|
|
$ |
916,410 |
|
|
$ |
830,411 |
|
|
$ |
810,970 |
|
|
$ |
850,619 |
|
|
$ |
807,087 |
|
Loans
receivable
|
|
|
2,257,563 |
|
|
|
2,266,184 |
|
|
|
2,226,445 |
|
|
|
1,754,536 |
|
|
|
1,758,114 |
|
|
|
1,761,977 |
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDOs
|
|
|
1,192,299 |
|
|
|
1,190,448 |
|
|
|
1,067,513 |
|
|
|
1,212,500 |
|
|
|
1,210,340 |
|
|
|
1,190,612 |
|
Junior
Sub. Debentures
|
|
|
128,875 |
|
|
|
128,875 |
|
|
|
98,863 |
|
|
|
51,500 |
|
|
|
51,500 |
|
|
|
52,431 |
|
Participations
sold
|
|
|
408,351 |
|
|
|
408,434 |
|
|
|
396,900 |
|
|
|
209,425 |
|
|
|
208,905 |
|
|
|
208,905 |
|
15.
Supplemental Disclosures for Consolidated Statements of Cash Flows
Interest
paid on our outstanding debt for 2007, 2006 and 2005 was $161.2 million, $102.0
million and $34.3 million, respectively. Income taxes recovered (paid) by us in
2007, 2006 and 2005 were $1.5 million, $583,000 and ($7,000), respectively.
Non-cash investing and financing activity of $198.9 and $77.7 million for 2007
and 2006, respectively, resulted from paydowns on the loans we classify as
participations sold.
16.
Transactions with Related Parties
Effective
January 1, 2003, we entered into a consulting agreement with a director
with a term of two years and five months that expired on May 31, 2005.
During the year ended December 31, 2005 we incurred expenses of
$50,000 in connection with this agreement.
Until
2007, we paid Equity Group Investments, L.L.C. and Equity Risk
Services, Inc., affiliates under common control of the chairman of the
board of directors, for certain corporate services provided to us. These
services include consulting on insurance matters, risk management, and investor
relations. During the years ended December 31, 2006 and 2005, we incurred
$45,000 and $49,000, respectively, of expenses in connection with these
services.
We pay
Global Realty Outsourcing, Inc., a company in which we previously had an
equity investment and upon which our chief executive officer served on its board
of directors prior to the sale of the company, for consulting services relating
to monitoring assets and evaluating potential investments. During the year ended
December 31, 2005 we incurred $557,000 of expenses in connection with
these services. On December 30, 2005 we sold our equity
investment in Global Realty Outsourcing, Inc. which resulted in a $5.0
million gain.
In
September 2006, we made a founding investment in Bracor, a newly formed net
lease commercial real estate company located and operating in Brazil. Our
ultimate commitment was $30.0 million. Bracor was owned 24% by us, 47% by Equity
International, or EI, and 29% by third parties. Our Chairman, Sam Zell, is the
Chairman of EI and has an ownership position in EI. Our share of profits and
losses from Bracor were reported one quarter subsequent to the period earned by
Bracor. On December 18, 2007, we sold our ownership interest in Bracor which
resulted in a $15.1 million gain. Our ownership interest was
purchased by four investors on the same terms, including W.R. Berkley
Corporation, or WRBC. WRBC beneficially owns approximately 17.8% of
our outstanding class A common stock as of March 4, 2008 and a member of
our board of directors is an employee of WRBC.
On
November 9, 2006, we commenced our CT High Grade MezzanineSM
investment management initiative and entered into three separate account
agreements with affiliates of WRBC, for an aggregate of $250.0
million.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
16.
Transactions with Related Parties (Continued)
Pursuant
to these agreements, we invest, on a discretionary basis, capital on behalf of
WRBC in low risk commercial real estate mortgages, mezzanine loans and
participations therein. The separate accounts are entirely funded with committed
capital from WRBC and are managed by a subsidiary of our wholly-owned investment
management subsidiary, CT Investment Management Co. LLC, or
CTIMCO. Each separate account has a one-year investment period with
extension provisions. CTIMCO will earn a management fee equal to 0.25% per annum
on invested assets. On July 25, 2007, we amended the agreements to increase
the aggregate commitment of the WRBC affiliates to $350.0 million and
extend the investment period to July 2008.
On April
27, 2007, we purchased a $20.0 million subordinated interest in a mortgage from
a dealer. Proceeds from the original mortgage financing provide for the
construction and leasing of an office building in Washington, D.C that is owned
by a joint venture in which an entity 80% controlled by WRBC is one of the two
joint venture partners. We believe that the terms of the foregoing
transactions are no less favorable than could be obtained by us from unrelated
parties on an arm’s length basis.
17.
Commitments and Contingencies
We lease
premises and equipment under operating leases with various expiration dates.
Minimum annual rental payments at December 31, 2007 are as follows (in
thousands):
Years ending December 31,
|
2008
|
$ |
931
|
2009
|
|
1,377
|
2010
|
|
1,377
|
2011
|
|
1,377
|
2012
|
|
1,377
|
Thereafter
|
|
8,443
|
|
$ |
14,882
|
Rent
expense for office space and equipment amounted to $1.4 million, $990,000 and
$959,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
Future
Distribution Requirements
In 1999,
we acquired a portfolio of CMBS from a dealer at a discount. For
purposes of GAAP income recognition, we amortize the discount as interest income
over the expected life of the securities using the effective interest method, as
we do for all of our securities purchased at a discount. For income tax
purposes, specifically with respect to this portfolio, we elected to defer
the recognition of the purchase discount until we receive principal as the
securities are sold, amortize or mature. In the future, assuming principal
collection as anticipated, as these securities mature, we will recognize
the purchase discount as income for tax purposes and, as a REIT, those
amounts will be factored into our distribution requirements. For the
securities not in our CDOs, we will receive cash payments as these
securities are sold, amortize or mature. For the securities in our CDOs,
the cash flow waterfalls are designed to repay senior indebtedness with
principal repayments, resulting in a situation where we may not receive
cash as these securities are sold, amortize or mature. In these cases, we
may have a distribution requirement without receipt of the cash to service the
requirement, requiring us to fund these distribution requirements from other
sources of liquidity. As of December 31, 2007, the securities in
question have a face value of $197.2 million and were purchased at
a discount of $60.1 million. $185.7 million of these
securities
are in our CDOs and these securities were purchased at a discount of $57.8
million. Our current expectation is for the securities in the entire
portfolio to mature between 2008 and 2015 and for us to recognize, for tax
purposes, income of $124,000, $10.3 million, $4.6 million, $13.3 million, $17.7
million, $7.3 million, $484,000, and $552,000 for the years 2008-2015,
respectively.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
17.
Commitments and Contingencies (Continued)
Litigation
In the
normal course of business, we are subject to various legal proceedings and
claims, the resolution of which, in management’s opinion, will not have a
material adverse effect on our consolidated financial position or our results of
operations.
John R.
Klopp serves as our chief executive officer and president pursuant to an
employment agreement entered into on February 24, 2004. The employment agreement
provides for Mr. Klopp’s employment as chief executive officer and
president through December 31, 2008. Under the employment agreement,
Mr. Klopp receives a base salary and is eligible to receive annual
performance compensation awards of cash and restricted shares of common
stock. The agreement is subject to termination under certain
circumstances and provides for severance payments under certain of these
circumstances and contains provisions relating to non-competition during the
term of employment, protection of our confidential information and intellectual
property, and non-solicitation of our employees.
Effective
December 28, 2005, we entered into an employment agreement with Stephen D.
Plavin, pursuant to which Mr. Plavin will serve as our chief operating
officer through December 31, 2008 (subject to our option to extend the
agreement for an additional twelve months). Pursuant to the employment
agreement, Mr. Plavin receives a base salary and is eligible to receive
annual performance compensation awards of cash. The agreement is
subject to termination under certain circumstances and provides for severance
payments under certain of these circumstances and contains provisions relating
to non-competition during the term of employment, protection of our confidential
information and intellectual property, and non-solicitation of our
employees.
Effective
August 4, 2006, we entered into an employment agreement, with Thomas C.
Ruffing, pursuant to which Mr. Ruffing will serve as our chief credit
officer and head of asset management through December 31, 2008. Pursuant to
the employment agreement, Mr. Ruffing receives a minimum base salary and is
eligible to receive an annual cash bonus, subject to a minimum
level. The agreement is subject to termination under certain
circumstances and provides for severance payments under certain of these
circumstances and contains provisions relating to
non-competition protection of our confidential information and
intellectual property, and non-solicitation of our employees.
Effective
September 29, 2006, we entered into an employment agreement with Geoffrey
G. Jervis, pursuant to which Mr. Jervis will serve as our chief financial
officer through December 31, 2009 (subject to our option to extend the
agreement for an additional twelve months). Pursuant to the employment
agreement, Mr. Jervis receives a base salary and is eligible to receive
annual performance compensation awards of cash. The agreement is subject to
termination under certain circumstances and provides for severance payments
under certain of these circumstances and contains provisions relating to
non-competition during the term of employment, protection of our confidential
information and intellectual property, and non-solicitation of our
employees.
Additionally,
in connection with our purchase of a healthcare loan origination platform, we
entered into five employment agreements. Pursuant to the employment
agreements, the employees receive base salaries and minimum annual cash
bonuses.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
We have
two reportable segments. We have an internal information system that produces
performance and asset data for our two segments along service
lines.
The
Balance Sheet Investment segment includes all of our activities related to
direct loan and investment activities (including direct investments in Funds)
and the financing thereof.
The
Investment Management segment includes all of our activities related to
investment management services provided to us and third party funds under
management and includes our taxable REIT subsidiary, CT Investment Management
Co., LLC and its subsidiaries.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
18.
Segment Reporting (Continued)
The
following table details each segment’s contribution to our overall profitability
and the identified assets attributable to each such segment for the year ended,
and as of, December 31, 2007, respectively (in
thousands):
|
|
Balance
Sheet
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
|
|
Investment
|
|
|
Management
|
|
|
Activities
|
|
|
Total
|
|
Income
from loans and other
|
|
|
|
|
|
|
|
|
|
|
|
|
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and related income
|
|
$ |
253,422 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
253,422 |
|
Less:
Interest and related expenses
|
|
|
162,377 |
|
|
|
— |
|
|
|
— |
|
|
|
162,377 |
|
Income
from loans and other investments, net
|
|
|
91,045 |
|
|
|
— |
|
|
|
— |
|
|
|
91,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
|
|
— |
|
|
|
16,282 |
|
|
|
(12,783 |
) |
|
|
3,499 |
|
Incentive
management fees
|
|
|
— |
|
|
|
6,208 |
|
|
|
— |
|
|
|
6,208 |
|
Servicing
fees
|
|
|
— |
|
|
|
623 |
|
|
|
— |
|
|
|
623 |
|
Other
interest income
|
|
|
1,548 |
|
|
|
65 |
|
|
|
(530 |
) |
|
|
1,083 |
|
Total
other revenues
|
|
|
1,548 |
|
|
|
23,178 |
|
|
|
(13,313 |
) |
|
|
11,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
17,058 |
|
|
|
25,681 |
|
|
|
(12,783 |
) |
|
|
29,956 |
|
Other
interest expense
|
|
|
— |
|
|
|
530 |
|
|
|
(530 |
) |
|
|
— |
|
Depreciation
and amortization
|
|
|
1,430 |
|
|
|
380 |
|
|
|
— |
|
|
|
1,810 |
|
Total
other expenses
|
|
|
18,488 |
|
|
|
26,591 |
|
|
|
(13,313 |
) |
|
|
31,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
(provision) for losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gain
on sale of investments
|
|
|
15,077 |
|
|
|
— |
|
|
|
— |
|
|
|
15,077 |
|
Income/(loss)
from equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(1,570 |
) |
|
|
(539 |
) |
|
|
— |
|
|
|
(2,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
87,612 |
|
|
|
(3,952 |
) |
|
|
— |
|
|
|
83,660 |
|
Benefit
for income taxes
|
|
|
(254 |
) |
|
|
(452 |
) |
|
|
— |
|
|
|
(706 |
) |
Net
(loss) income allocable to class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
$ |
87,866 |
|
|
$ |
(3,500 |
) |
|
$ |
— |
|
|
$ |
84,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,212,069 |
|
|
$ |
7,837 |
|
|
$ |
(8,424 |
) |
|
$ |
3,211,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
revenues, except for $4.3 million included in interest and related income and
$15.1 million included in gain on sale of investments, were generated from
external sources within the United States. The Investment Management segment
earned fees of $12.8 million for management of the Balance Sheet Investment
segment and was charged $530,000 for inter-segment interest for the year ended
December 31, 2007, which is reflected as offsetting adjustments to other
revenues and other expenses in the Inter-Segment Activities column in the table
above.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
18.
Segment Reporting (Continued)
The
following table details each segment’s contribution to our overall profitability
and the identified assets attributable to each such segment for the year ended
and as of December 31, 2006, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet
|
|
Investment
|
|
Inter-Segment
|
|
|
|
|
Investment
|
|
Management
|
|
Activities
|
|
Total
|
Income
from loans and other
|
|
|
|
|
|
|
|
|
|
|
|
|
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and related income
|
|
$ |
175,404 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175,404 |
|
Less:
Interest and related expenses
|
|
|
104,607 |
|
|
|
— |
|
|
|
— |
|
|
|
104,607 |
|
Income from loans
and other
investments, net
|
|
|
70,797 |
|
|
|
— |
|
|
|
— |
|
|
|
70,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
and advisory fees
|
|
|
— |
|
|
|
10,387 |
|
|
|
(7,737 |
) |
|
|
2,650 |
|
Incentive
management fees
|
|
|
— |
|
|
|
1,652 |
|
|
|
— |
|
|
|
1,652 |
|
Special
servicing fees
|
|
|
40 |
|
|
|
65 |
|
|
|
— |
|
|
|
105 |
|
Other
interest income
|
|
|
1,426 |
|
|
|
43 |
|
|
|
(115 |
) |
|
|
1,354 |
|
Total
other revenues
|
|
|
1,466 |
|
|
|
12,147 |
|
|
|
(7,852 |
) |
|
|
5,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
12,458 |
|
|
|
18,354 |
|
|
|
(7,737 |
) |
|
|
23,075 |
|
Other
interest expenses
|
|
|
— |
|
|
|
115 |
|
|
|
(115 |
) |
|
|
— |
|
Depreciation
and amortization
|
|
|
2,792 |
|
|
|
257 |
|
|
|
— |
|
|
|
3,049 |
|
Total
other expenses
|
|
|
15,250 |
|
|
|
18,726 |
|
|
|
(7,852 |
) |
|
|
26,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
from equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
in Funds
|
|
|
1,016 |
|
|
|
(118 |
) |
|
|
— |
|
|
|
898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
58,029 |
|
|
|
(6,697 |
) |
|
|
— |
|
|
|
51,332 |
|
Benefit
for income taxes
|
|
|
— |
|
|
|
(2,735 |
) |
|
|
— |
|
|
|
(2,735 |
) |
Net
income allocable to class A common
stock
|
|
$ |
58,029 |
|
|
$ |
(3,962 |
) |
|
$ |
— |
|
|
$ |
54,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,649,866 |
|
|
$ |
4,720 |
|
|
$ |
(6,022 |
) |
|
$ |
2,648,564 |
|
All
revenues were generated from external sources within the United States. The
Investment Management segment earned fees of $7.7 million for management of
the Balance Sheet Investment segment and $115,000 for inter-segment interest for
the year ended December 31, 2006, which is reflected as offsetting
adjustments to other revenues and other expenses in the Inter-Segment Activities
column in the table above.
Capital
Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
19.
Summary of Quarterly Results of Operations (Unaudited)
The
following is a summary of the unaudited quarterly results of operations for the
years ended December 31, 2007, 2006 and 2005 (in thousands except per share
data):
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
59,538 |
|
|
$ |
69,696 |
|
|
$ |
66,173 |
|
|
$ |
69,428 |
|
Net
income
|
|
$ |
14,849 |
|
|
$ |
25,382 |
|
|
$ |
15,497 |
|
|
$ |
28,638 |
|
Net
income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.85 |
|
|
$ |
1.45 |
|
|
$ |
0.88 |
|
|
$ |
1.63 |
|
Diluted
|
|
$ |
0.84 |
|
|
$ |
1.43 |
|
|
$ |
0.87 |
|
|
$ |
1.62 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
32,600 |
|
|
$ |
47,050 |
|
|
$ |
47,199 |
|
|
$ |
54,316 |
|
Net
income
|
|
$ |
10,949 |
|
|
$ |
14,192 |
|
|
$ |
13,437 |
|
|
$ |
15,489 |
|
Net
income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.72 |
|
|
$ |
0.93 |
|
|
$ |
0.88 |
|
|
$ |
0.92 |
|
Diluted
|
|
$ |
0.71 |
|
|
$ |
0.91 |
|
|
$ |
0.86 |
|
|
$ |
0.91 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
23,625 |
|
|
$ |
21,847 |
|
|
$ |
24,405 |
|
|
$ |
30,000 |
|
Net
income
|
|
$ |
9,150 |
|
|
$ |
8,848 |
|
|
$ |
9,799 |
|
|
$ |
16,314 |
|
Net
income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.61 |
|
|
$ |
0.59 |
|
|
$ |
0.65 |
|
|
$ |
1.07 |
|
Diluted
|
|
$ |
0.60 |
|
|
$ |
0.58 |
|
|
$ |
0.64 |
|
|
$ |
1.06 |
|
Basic and
diluted earnings per share are computed independently for each of the periods.
Accordingly, the sum of the quarterly earnings per share amounts may not agree
to the total for the year.
On
February 6, 2008, we extended our $100 million senior unsecured credit facility
until March 21, 2009. The balance will remain outstanding as a non-revolving
term loan maturing on March 21, 2009.
Capital
Trust, Inc. and Subsidiaries
Schedule IV—Mortgage
Loans on Real Estate
As
of December 31, 2007
(Dollars
in thousands)
|
|
|
|
Interest
|
|
Final
|
|
Periodic
|
|
|
|
|
|
Face
|
|
|
Carrying
|
|
|
|
Description/
|
|
Payment
|
|
Maturity
|
|
Payment
|
|
|
Prior
|
|
|
Amount of
|
|
|
Amount of
|
|
Type of Loan/Borrower
|
|
Location
|
|
Rates
|
|
Date
|
|
Terms (1)
|
|
|
Liens(2)
|
|
|
Loans(3)
|
|
|
Loans
|
|
Mortgage
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
A
|
|
Office/
Seattle,
WA
|
|
LIBOR
+ 2.30 %
|
|
9/10/2011
|
|
|
I/O |
|
|
$ |
— |
|
|
$ |
72,291 |
|
|
$ |
72,291 |
|
All
other mortgage loans individually less than 3%
|
|
|
|
|
|
|
|
|
|
|
|
|
502,452 |
|
|
|
548,295 |
|
|
|
548,295 |
|
Total
mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
502,452 |
|
|
|
620,586 |
|
|
|
620,586 |
|
Mezzanine
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
B
|
|
Hotel/
Various
|
|
LIBOR
+ 3.65 %
|
|
5/9/2012
|
|
|
I/O |
|
|
|
1,782,392 |
|
|
|
152,290 |
|
|
|
152,290 |
|
Borrower
C
|
|
Hotel/
Various
|
|
LIBOR
+ 4.00 %
|
|
5/9/2012
|
|
|
I/O |
|
|
|
2,595,300 |
|
|
|
125,000 |
|
|
|
125,000 |
|
Borrower
D
|
|
Office/
Various
|
|
LIBOR
+ 3.75 %
|
|
2/9/2008
|
|
|
I/O |
|
|
|
2,578,105 |
|
|
|
123,364 |
|
|
|
123,364 |
|
Borrower
E
|
|
Healthcare/
Various
|
|
LIBOR
+ 12.65 %
|
|
5/9/2011
|
|
|
I/O |
|
|
|
1,221,621 |
|
|
|
86,341 |
|
|
|
86,341 |
|
Borrower
F
|
|
Mixed
Use/
Various
|
|
LIBOR
+ 3.50 %
|
|
12/14/2012
|
|
P&I(4)
|
|
|
|
488,068 |
|
|
|
84,180 |
|
|
|
84,180 |
|
All
other mezzanine loans individually less than 3%
|
|
|
|
|
|
|
|
|
|
|
|
|
9,631,517 |
|
|
|
528,848 |
|
|
|
523,807 |
|
Total
mezzanine loans
|
|
|
|
|
|
|
|
|
|
|
|
|
18,297,003 |
|
|
|
1,100,023 |
|
|
|
1,094,982 |
|
Subordinate
Mortgage Interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
other Subordinate Mortgage Interests individually less than
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
3,687,577 |
|
|
|
545,575 |
|
|
|
541,995 |
|
Total
Subordinate Mortgage Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
3,687,577 |
|
|
|
545,575 |
|
|
|
541,995 |
|
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,487,032 |
|
|
$ |
2,266,184 |
|
|
$ |
2,257,563 |
|
Explanatory
Notes:
|
|
|
|
P&I = principal and interest, IO = interest
only.
|
(2)
|
Represents
only third party liens.
|
(3)
|
Does
not include Unfunded Commitments.
|
(4)
|
Application
of net proceeds from property sales after Senior Loan is fully
repaid. Also, all excess net operating income after payment of
applicable Senior Loan debt service, will repay the Loan.
|