Attached files
file | filename |
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EX-23.1 - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex23-1.htm |
EX-32.1 - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex32-1.htm |
EX-31.1 - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex31-1.htm |
EX-31.2 - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex31-2.htm |
EX-21.1 - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex21-1.htm |
EX-32.2 - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex32-2.htm |
EX-10.36.C - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex10-36c.htm |
EX-10.34.C - BLACKSTONE MORTGAGE TRUST, INC. | e606491_ex10-34c.htm |
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
x
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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, 2009
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o
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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
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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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,
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New
York Stock Exchange
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$0.01
par value (“class A common stock”)
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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 such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
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, 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 o
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Non-accelerated
filer x
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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 $22,560,801 as of
June 30, 2009 (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 23, 2010 there were 21,834,257 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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1
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Item
1A.
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10
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Item
1B.
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30
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Item
2.
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30
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Item
3.
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30
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Item
4.
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30
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PART II
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31
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Item
5.
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31
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Item
6.
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33
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Item
7.
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34
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Item
7A.
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63
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Item
8.
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65
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Item
9.
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65
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Item
9A.
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65
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Item
9B.
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65
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PART III
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66
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Item
10.
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66
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Item
11.
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66
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Item
12.
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66
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Item
13.
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66
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Item
14.
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66
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PART IV
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67
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Item
15.
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67
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78
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F-1
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PART I
Item
1.
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Business
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References
herein to “we,” “us” or “our” refer to Capital Trust, Inc., a Maryland
corporation, and its subsidiaries unless the context specifically requires
otherwise.
Overview
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, 2009, we
have completed over $11.2 billion of investments in the commercial real
estate debt arena. We conduct our operations as a real estate investment trust,
or REIT, for federal income tax purposes and we are headquartered in New York
City.
Operating
Segments
Segment
revenue and profit information is presented in Note 20 to the consolidated
financial statements.
Current
Market Conditions
During
2009, the general economic environment deteriorated precipitously, leaving the
U.S economy and many economies around the world in a state of severe economic
recession. In addition, the global capital markets continued to be impaired
relative to pre-recession levels. The recession and capital markets turmoil have
severely impacted the commercial real estate sector, resulting in: (i)
decreased, and expected further decreases, in property level cash flows and (ii)
a general lack of capital, both debt and equity, necessary for markets to
function in an orderly manner. These factors have combined to create significant
decreases in property values and have and will continue to impact the
performance of our existing portfolio of assets.
Restructuring
of Our Debt Obligations
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement,
and certain of our trust preferred securities. While we believe that the
restructuring of our debt obligations was a positive development for us in our
efforts to stabilize our business, there can be no assurance that ultimately our
restructuring will enable the successful collection of our balance sheet assets.
For a further discussion, see the risk factors contained in Item 1A to this Form
10-K.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
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·
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Maturity
dates were modified to one year from the March 16, 2009 effective date of
each respective agreement, which maturity dates may be extended further
for two one-year periods. The first one-year extension option is
exercisable by us so long as the outstanding balance as of the first
extension date is less than or equal to a certain amount, reflecting a
reduction of twenty percent (20%), including the upfront payment described
above, of the outstanding amount from the date of the amendments, and no
other defaults or events of default have occurred and are continuing, or
would be caused by such extension. As described in Note 22 to our
consolidated financial statements, we qualified for this extension
subsequent to year-end. The second one-year extension option is
exercisable by each participating secured lender in its sole
discretion.
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·
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We
agreed to pay each secured participating lender periodic amortization as
follows: (i) mandatory payments, payable monthly in arrears, in an amount
equal to sixty-five (65%) (subject to adjustment in the second year) of
the net interest income generated by each such lender’s collateral pool,
and (ii) one hundred percent (100%) of the principal proceeds received
from the repayment of assets in each such lender’s collateral pool. In
addition, under the terms of the amendment with Citigroup, we agreed to
pay Citigroup an additional quarterly amortization payment equal to the
lesser of: (x) Citigroup’s then outstanding senior secured credit facility
balance or (y) the product of (i) the total cash paid (including both
principal and interest) during the period to our senior credit facility in
excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0
million facility amount, and (ii) a fraction, the numerator of which is
Citigroup’s then outstanding senior secured credit facility balance and
the denominator is the total outstanding secured indebtedness of the
secured participating lenders.
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·
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We
further agreed to amortize each participating secured lender’s secured
debt at the end of each calendar quarter on a pro rata basis until we have
repaid our secured, recourse credit facilities and thereafter our senior
credit facility in an amount equal to any unrestricted cash in excess of
the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment
commitments.
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·
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Each
participating secured lender was relieved of its obligation to make future
advances with respect to unfunded commitments arising under investments in
its collateral pool.
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·
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We
received the right to sell or refinance collateral assets as long as we
apply one hundred percent (100%) of the proceeds to pay down the related
secured credit facility balance subject to minimum release price
mechanics.
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·
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We
eliminated the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. Under the revised secured credit
facilities, going forward, collateral value is expected to be
determined by our lenders based upon changes in the performance of the
underlying real estate collateral as opposed to changes
in market spreads under the original terms. Beginning September
2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities,
each collateral pool may be valued monthly. If the ratio of a secured
lender’s total outstanding secured credit facility balance to total
collateral value exceeds 1.15x the ratio calculated as of the effective
date of the amended agreements, we may be required to liquidate collateral
and reduce the borrowings or post other collateral in an effort to
bring the ratio back into compliance with the prescribed ratio, which may
or may not be successful.
|
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
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·
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prohibit
new balance sheet investments except, subject to certain limitations,
co-investments in our investment management vehicles or protective
investments to defend existing collateral assets on our balance
sheet;
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·
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prohibit
the incurrence of any additional indebtedness except in limited
circumstances;
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·
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limit
the total cash compensation to all employees and, specifically with
respect to our chief executive officer and chief financial officer, freeze
their base salaries at 2008 levels, and require cash bonuses to any of
them to be approved by a committee comprised of one representative
designated by the secured lenders, the administrative agent under the
senior credit facility and a representative from our board of
directors;
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·
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prohibit
the payment of cash dividends to our common shareholders except to the
minimum extent necessary to maintain our REIT
status;
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·
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require
us to maintain a minimum amount of liquidity, as defined, of $7.0 million
in year one and $5.0 million
thereafter;
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·
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trigger
an event of default if our chief executive officer ceases his employment
with us during the term of the agreement and we fail to hire a replacement
acceptable to the lenders; and
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·
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trigger
an event of default, if any event or condition occurs which causes any
obligation or liability of more than $1.0 million to become due prior to
its scheduled maturity or any monetary default under our restructured debt
obligations if the amount of such obligation is at least $1.0
million.
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On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The warrants will become exercisable on March 16,
2012 and expire on March 16, 2019, and may be exercised through a cashless
exercise at the option of the warrant holders.
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the master repurchase agreement.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
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·
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extend
the maturity date of the senior credit agreement to be co-terminus with
the maturity date of the secured credit facilities with the participating
secured lenders (as they may be further extended until March 16, 2012, as
described above);
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·
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increase
the cash interest rate under the senior credit agreement to LIBOR plus
3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per
annum less the cash interest rate;
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·
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initiate
quarterly amortization equal to the greater of: (i) $5.0 million per annum
and (ii) 25% of the annual cash flow received from our currently
unencumbered collateralized debt obligation
interests;
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·
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pledge
our unencumbered collateralized debt obligation interests and provide a
negative pledge with respect to certain other assets;
and
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·
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replace
all existing financial covenants with substantially similar covenants and
default provisions to those described above with respect to the
participating secured facilities.
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Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as the Trust Securities mentioned above in exchange for $21.9 million face
amount of the Trust Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
Developments
during Fiscal Year 2009
Our
restructured debt obligations contain covenants that require us to cease our
balance sheet investment activities. Therefore, since the restructuring, our
investment activity has been limited to investments for our investment
management vehicles. During the year ended December 31, 2009, we originated
$145.1 million (on a gross basis) of new investments in seven separate
transactions for our investment management vehicles.
Overall,
our balance sheet portfolio of interest earning assets, comprised of loans and
securities, declined by $667.6 million during 2009. This decline was primarily
due to $444.1 million of provisions, other-than-temporary impairments, and
realized losses on sale of investments (this excludes $172.5 million of
provisions recorded on loan participations sold under generally accepted
accounting principles in the United States, or GAAP). Also, $124.8 million of
loans were sold or transferred to our secured lenders in satisfaction of our
obligations, and we realized $113.4 million of investment satisfactions and
partial repayments. This decline was offset by $9.4 million of loan fundings and
$5.4 million of non-cash amortization and other items.
As of
December 31, 2009, our $1.8 billion of interest earning assets were comprised of
$1.1 billion of loans receivable, including $17.5 million of loans classified as
held-for-sale, and $715.2 million of securities. These include 20 impaired loans
with an aggregate net book value of $131.0 million ($608.4 million gross
carrying value, net of $477.4 million of reserves), and 11 impaired securities
with an aggregate net book value of $27.4 million ($145.7 million gross carrying
value, against which we have recorded other-than-temporary impairments of $118.3
million). Of our 20 impaired loans, 12 loans with an aggregate net book value of
$96.0 million were current on interest payments as of December 31, 2009, and 8
loans with an aggregate net book value of $35.0 million were delinquent on
payments due and classified as non-performing.
As a
result of the decline in credit quality of our interest earning assets described
above and the restructuring of our debt obligations, our liquidity has been
significantly impacted during 2009. Specifically:
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·
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We
repaid $17.7 million of our secured repurchase debt obligations on March
16, 2009, in conjunction with the restructuring transaction described
above. Pursuant to the terms of the restructured agreements we repaid the
repurchase lenders $12.4 million of the net interest margin on the
underlying assets, which otherwise would have been available to us. In
addition, 100% of the principal repayments from collateral assets, $99.1
million, was used to paydown our repurchase
lenders.
|
|
·
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We
made $3.8 million of required principal amortization payments during 2009
to our senior credit facility. In addition, the cash interest rate
increased to LIBOR plus 3.00% per annum from LIBOR plus 1.75% per
annum.
|
|
·
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As
a result of breaches in interest coverage and overcollateralization tests
in our collateralized debt obligations, or CDOs, as well as the impairment
of certain of our CDO collateral, interest proceeds from our CDOs I, II,
and IV, which otherwise would have been payable to us, have been
redirected to hyper-amortize the senior notes sold. As of December 31,
2009, we are only receiving cash payments from one of our CDOs, CDO
III.
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In
addition to our balance sheet activity, our active investment management
mandates are described below:
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·
|
CT
High Grade Partners II, LLC, or CT High Grade II, is currently investing
capital. The fund closed in June 2008 with $667 million of commitments
from two institutional investors. Currently, $381 million of committed
equity remains undrawn. The fund targets senior debt opportunities in the
commercial real estate debt sector and does not employ leverage. The
fund’s investment period expires in May 2010. We earn a base management
fee of 0.40% per annum on invested
capital.
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|
·
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CT
Opportunity Partners I, LP, or CTOPI, is currently investing capital. The
fund held its final closing in July 2008 with $540 million in total equity
commitments. Currently, $385 million of committed equity remains undrawn.
We have a $25 million commitment to invest in the fund ($7 million
currently funded, $18 million unfunded) and entities controlled by the
chairman of our board have committed to invest $20 million. The fund
targets opportunistic investments in commercial real estate, specifically
high yield debt, equity and hybrid instruments, as well as non-performing
and sub-performing loans and securities. The fund’s investment period
expires in December 2010. We earn base management fees of 1.60% per annum
of total equity commitments during the investment period, and of invested
capital thereafter. In addition, we earn net incentive management fees of
17.7% of profits after a 9% preferred return and a 100% return of
capital.
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|
·
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CT
High Grade MezzanineSM,
or CT High Grade, is no longer investing capital (its investment period
expired in July 2008). The fund closed in November 2006, with a single,
related party investor committing $250 million, which was subsequently
increased to $350 million in July 2007. This separate account targeted
lower LTV subordinate debt investments without leverage. We earn
management fees of 0.25% per annum on invested
assets.
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·
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CT
Large Loan 2006, Inc., or CT Large Loan, is no longer investing capital
(its investment period expired in May 2008). The fund closed in May 2006
with total equity commitments of $325 million from eight third-party
investors. We earn management fees of 0.75% per annum of invested assets
(capped at 1.5% on invested
equity).
|
|
·
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CTX
Fund I, L.P., or CTX Fund, is no longer investing capital. CTX is a single
investor fund designed to invest in CDOs sponsored, but not issued, by us.
We do not earn fees on the CTX Fund, however, we earn CDO management fees
from the CDOs in which the CTX Fund
invests.
|
|
·
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CT
Mezzanine Partners III, Inc., or Fund III, is no longer investing capital.
The fund is a vehicle we co-sponsored with a joint venture partner, and is
currently liquidating in the ordinary course. We earn 100% of base
management fees of 1.42% of invested capital, and we split incentive
management fees with our partner, which receives 37.5% of the fund’s
incentive management fees.
|
Platform
Our
platform consists of 28 full time professionals with extensive real estate
credit, capital markets and structured finance expertise and 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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·
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intense
credit underwriting;
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|
·
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creative
financial structuring;
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|
·
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efficient
capitalization; and
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|
·
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aggressive
asset management.
|
The first
element, and the foundation of our platform, is our 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
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, we incorporate input 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 businesses. Our goal is to have the lowest cost of capital for our
businesses while maintaining appropriate debt and equity levels and structures.
As such, we seek to maintain adequate liquidity to defend the balance sheet and
investment management vehicles against reasonable 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 directly manage
workouts on loans that have been securitized.
Business
Model
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 and special servicing operations.
We have
historically allocated 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 restructuring of our secured and unsecured debt
obligations has consequences for our historical business in that the new
covenants we agreed to require us to effectively cease our balance sheet
investment activities. Going forward, until these
covenants are eliminated through the repayment or refinancing of the
restructured debt obligations, we will continue to carry out investment
activities for our investment management vehicles, consistent with our previous
strategies and the investment mandates for each respective
vehicle.
We
operate our business to qualify as a REIT for federal income tax purposes. 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.
Investment
Strategies
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.
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 serve as bridge loans providing
required interim financing to property owners or may provide construction
and development financing. Our mortgage loans vary 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 sometimes evidenced by its own
promissory note, 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 is
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 property 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. 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 special servicer approval. We also include select
investments in CDOs in this
category.
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Business
Plan
Our near
term business strategy is to continue to manage our balance sheet investments
and existing investment management vehicles through the current volatile market,
recognizing that we cannot resume our balance sheet investment activities until
we have eliminated certain covenants under our debt obligations and raised new
capital. At the same time, we are working to grow our investment management
business and special servicing business.
Competition
We are
engaged in a 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.
Government
Regulation
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.
Employees
As of
December 31, 2009, we had 28 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 financial officer is employed under
an employment contract. 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, we contract for the
services of 15 additional 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.
Item 1A.
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Risk
Factors
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FORWARD
LOOKING INFORMATION
Our
Annual Report on Form l0-K for the year ended December 31, 2009, our 2009 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 assume 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
effects of the recent turmoil in the financial markets and general
economic recession upon our ability to invest and manage our
investments;
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the
general political, economic and competitive conditions in the United
States and foreign jurisdictions where 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
constrained financial markets;
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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, including those related to the restructuring
of our debt obligations.
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Risks Related to Our
Investment Activities
We
have recently experienced significant loses and given the condition of our
balance sheet portfolio we may experience future losses.
We
experienced net losses of $576.4 million and $57.5 million in 2009 and 2008,
respectively, and currently have negative shareholders equity of $169.2 million.
Our losses have resulted principally from reserves and impairments recorded on
our investments and there can be no assurance that our investments will not
further deteriorate and lead us to record further reserves and impairments,
which may be significant and lead to future material net losses.
Our
current business is subject to a high degree of risk. Our assets and liabilities
are subject to increasing risk due to the impact of market turmoil in commercial
real estate. Our efforts to stabilize our business with the restructuring of our
debt obligations may not be successful as our balance sheet portfolio is
subject to the risk of further deterioration and ongoing turmoil in the
financial markets.
Our portfolio is comprised of debt and related
interests, directly or indirectly secured by commercial real estate. A
significant portion of these investments are in subordinate positions,
increasing the risk profile of our investments as underlying property
performance deteriorates. Furthermore, we have leveraged our portfolio at the
corporate level, effectively further increasing our exposure to loss on our
investments. The recent financial market turmoil and economic recession has
resulted in a material deterioration in the value of commercial real estate and
dramatically reduced the amount of capital to finance the commercial real estate
industry (both at the property and corporate level). Given the composition of
our portfolio, the leverage in our capital structure and the continuing negative
impact of the commercial real estate market turmoil, the risks associated with
our business have dramatically increased. Even with the March 2009 restructuring
of our debt obligations, we may not be able to satisfy our obligations to our
lenders. There can be no assurance that further restructuring will not be
required and that any such restructuring will be successful. The impact of the
economic recession on the commercial real estate sector in general, and our
portfolio in particular, cannot be predicted and we expect to experience
significant defaults by borrowers and other impairments to our investments.
These events may trigger defaults under our restructured debt obligations that
may result in the exercise of remedies that cause severe (and potentially
complete) losses in the book value of our investments. Therefore, an
investment in our class A common stock is subject to a high degree of
risk.
Given
current conditions, our restructured debt obligations are an unstable source of
financing and expose us to further erosions of shareholders equity.
Our
secured obligations mature in March 2011. There can be no assurance that we will
be able to further extend our liabilities, in which case we may lose
substantially all of our assets. Furthermore, any extension of these liabilities
would likely require further repayment and changes in economic terms that may
have a material adverse impact on us.
Our
restructured debt obligations with our lenders prohibit new balance sheet
investment activities, which prevents us from growing our balance sheet
portfolio.
Under the
terms of the restructured debt obligations, we are prohibited from acquiring or
originating new investments. This restriction precludes us from growing our
balance sheet portfolio at a time when investment opportunities that provide
attractive risk-adjusted returns may otherwise be available to us. Our interest
earning investments will continue to be reduced which will negatively impact our
net investment income. There can be no assurance that we will be able to retire
completely or refinance our restructured debt obligations so that we can resume
our balance sheet investment activities.
Our liquidity will be impacted by our restructured debt
obligations and any plans to further restructure our debt obligations or
recapitalize our business to improve liquidity may involve a high cost of
capital and significant dilution to our shareholders.
Our restructured debt obligations further reduce our
current liquidity as a result of ongoing principal payment sweeps and additional
interest payments. The reduction in liquidity may impair our ability to meet our
obligations and, given the covenants contained in our restructured debt
obligations, our ability to improve our liquidity position is constrained. In
addition, we must maintain a minimum of $5.0 million in liquidity during the
remaining term of our restructuring, a requirement that may limit our ability to
make commitments to investment management vehicles and, ultimately, that we may
not be able to maintain.
To improve our liquidity, we will need to further
restructure our debt obligations and/or recapitalize our business, for which we
can provide no assurances. We would expect any such restructuring and/or
recapitalization to require us to raise additional capital at a significantly
high cost of capital and/or with significant dilution to our
shareholders.
Our restructured debt obligations are subject to debt to
collateral value ratio maintenance covenants for which we can provide no
assurance as to our future compliance.
Under the terms of our debt restructuring, we eliminated
the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. The revised secured credit facilities
allow our secured lenders to determine collateral value based upon changes in
the performance of the underlying real estate collateral as opposed
to changes in market spreads under the original terms.
Beginning September 2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities, each
collateral pool may be valued monthly. If the ratio of a secured lender’s
total outstanding secured credit facility balance to total collateral value
exceeds 1.15x the ratio calculated as of the effective date of the amended
agreements, we may be required to liquidate collateral and reduce the
borrowings or post other collateral to bring the ratio back into
compliance with the prescribed ratio. There can be no assurances
that we will pass these tests and, as the commercial real estate markets
continue to deteriorate, we expect that passing these tests will become
more difficult. If we fail these tests, sales of assets
to return to compliance will be extremely difficult in light of the lack of
liquidity for the types of assets that serve as
collateral and, even if we locate buyers for
the collateral, the sales prices may be insufficient to
reduce the ratio of outstanding secured credit facility balance to total
collateral value. Failure to remedy these tests is an event of default
under our secured credit facilities and would trigger a cross default under
other of our financial instruments. Any such action would have a material
adverse impact on our business and financial condition and would
negatively impact our share price.
The U.S. and other financial markets have been in
turmoil and the U.S. and other economies in which we operate are in the midst of
an economic recession which can be expected to negatively impact our
operations.
The U.S.
and other financial markets have been experiencing extreme dislocations and a
severe contraction in available liquidity globally as important segments of the
credit markets are frozen as lenders are unwilling or unable to originate new
credit. Global financial markets have been disrupted by, among other things,
volatility in security prices, credit rating downgrades, the failure and near
failure of a number of large financial institutions and declining valuations,
and this disruption has been acute in real estate related markets. This
disruption has lead to a decline in business and consumer confidence and
increased unemployment and has precipitated an economic recession around the
globe. As a consequence, owners and operators of commercial real estate that
secure or back our investments have experienced distress and commercial real
estate values have declined substantially. We are unable to predict the likely
duration or severity of the current disruption in financial markets and adverse
economic conditions which could materially and adversely affect our business,
financial condition and results of operations, including leading to significant
impairment to our assets and our ability to generate income.
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 financial markets,
including the lack of available debt financing for commercial real
estate;
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tenant
bankruptcies;
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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 or collateralizing 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. In addition, our restructured debt obligations contain
covenants which limit the amount of protective investments we may make to
preserve value in collateral securing our investments.
A
prolonged economic slowdown, a lengthy or severe recession, a credit crisis, or
declining real estate values could harm our operations or may adversely affect
our liquidity.
We
believe the risks associated with our business are more severe during periods of
economic slowdown or recession like those we are currently experiencing,
particularly if these periods are accompanied by declining real estate
values. The recent
dislocation of the global credit markets and anticipated collateral consequences
to commercial activity of businesses unable to finance their operations as
required has lead to a weakening of general economic conditions and precipitated
declines in real estate values and otherwise exacerbate troubled borrowers’
ability to repay loans in our portfolio or backing our CMBS. We have made loans
to hotels, an industry whose performance has been severely impacted by the
current recession. 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 as the real estate economy continues to weaken. Continued weakened
economic conditions could negatively affect occupancy levels and rental rates in
the markets in which the collateral supporting our investments are located,
which, in turn, may have a material adverse impact on our cash flows and
operating results of our borrowers. Further, declining real estate values like
those occurring in the commercial real estate sector 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 share price.
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. Subordinate positions incur losses
before the senior positions in a capital structure and, as a result,
foreclosures on the underlying collateral can reduce or eliminate the proceeds
available to satisfy our investment. Also, in certain cases where we experience
appraisal reductions, we may lose our controlling class status, or special
servicer designator rights. 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
are obligated to fund unfunded commitments under our loan
agreements.
We are
required to fund unfunded obligations to our borrowers. Historically, prior to
our restructuring, we relied upon our lenders to fund a portion of these
commitments. Going forward, we can rely only on our immediately available
liquidity to meet these commitments. If we do not have the liquidity in excess
of the minimum amounts required under our restructured debt obligations, and the
lenders do not consent to our obtaining additional financing, if available, we
would default on these commitments and potentially lose value in these
investments and expose ourselves to litigation.
We
are subject to counterparty risk associated with our debt obligations and
interest rate swaps.
Our
counterparties for these critical financial relationships include both domestic
and international financial institutions. Many of them have been severely
impacted by the credit market turmoil and have been experiencing financial
pressures. In some cases, our counterparties have filed bankruptcy.
We
are subject to the general risk of a leveraged investment strategy and the
specific risks of our restructured indebtedness.
Our
restructured secured debt obligations are secured by our investments, which are
subject to being revalued by our credit providers. If the value of the
underlying property collateralizing our investments declines, we may be required
to liquidate our investments, the impact of which could be magnified if such a
liquidation is at a commercially inopportune time, such as the market
environment we are currently experiencing. In addition, the occurrence of any
event or condition which causes any obligation or liability of more than $1.0
million to become due prior to its scheduled maturity or any monetary default
under our restructured debt obligations if the amount of such obligation is at
least $1.0 million could constitute a cross-default under our restructured debt
obligations. If a cross-default occurs, the maturity of almost all of our
indebtedness could be accelerated and become immediately due and
payable.
We
guarantee many of our debt and contingent obligations.
We
guarantee the performance of many of our obligations, including, but not limited
to, 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 indebtedness, such as our credit and derivative
agreements, we make certain representations, warranties and affirmative and
negative covenants that restrict our ability to operate while still utilizing
those sources of credit. Currently, our restructured debt obligations prohibit
us from acquiring or originating new balance sheet investments except, subject
to certain limitations, co-investments in our investment management vehicles or
protective investments to defend existing collateral assets on our balance
sheet, and from incurring additional indebtedness unless used to pay down such obligations. In
addition, such representations, warranties and covenants include, but are not
limited to covenants which:
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limit
the total cash compensation to all employees and, specifically with
respect to our chief executive officer and chief financial officer, freeze
their base salaries at 2008 levels, and require cash bonuses to any of
them to be approved by a committee comprised of one representative
designated by the secured lenders, the administrative agent under the
senior unsecured credit facility and a representative of our board of
directors;
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prohibit
the payment of cash dividends to our common shareholders except to the
minimum extent necessary to maintain our REIT
status;
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require
us to maintain a minimum amount of liquidity, as defined, of $5.0
million;
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trigger
an event of default if our chief executive officer ceases his current
employment with us during the term of the agreement and we fail to hire a
replacement acceptable to the lenders;
and
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trigger
an event of default, if any event or condition occurs which causes any
obligation or liability of more than $1.0 million to become due prior to
its scheduled maturity or any monetary default under our restructured debt
obligations if the amount of such obligation is at least $1.0
million.
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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 for our managed vehicles and our
balance sheet assuming we are able to resume balance sheet investment activity.
In general, the availability of desirable 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 investments include 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. 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. 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 consolidated
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 light
of the financial market turmoil, we can no longer rely on a functioning market
to be available to us in order to refinance our existing debt. In March 2009, in
the face of the financial market dislocation, we restructured our recourse debt
obligations; however, there can be no assurances that our restructuring will
enable the successful collection of our balance sheet assets or that our
liquidity and financial condition will not require us to pursue a further
restructuring of our debt and/or recapitalization of our business. The risks of
a duration mismatch are further magnified by the trends we are experiencing in
our portfolio which results from extending loans made to our borrowers in order
to maximize the likelihood and magnitude of our recovery on our assets. This
trend effectively extends the duration of our assets, while the ultimate
duration of our liabilities is uncertain.
Our
loans and investments are 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 minority and/or a non-controlling 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.
The
use of our CDO financings may have a negative impact on our cash
flow.
The terms
of CDOs 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 ratio. Certain of our CDOs provide
that, if defaults, losses, or rating agency downgrades cause a decline in
collateral value or cash flow levels, the cash flow otherwise payable to our
retained subordinated classes may be redirected to repay classes of CDOs senior
to ours until the tests are brought in compliance. In certain instances, we have
breached these tests and cash flow has been redirected and there can be no
assurances that this will not occur on all of our CDOs. Once breached there is
no certainty about when or if the cash flow redirection will remedy the tests’
failure or that cash flow will be restored to our subordinated classes. Other
than collateral management fees, we currently receive cash payments from only
one of our four CDOs, CDO III, which has caused a material deterioration in our
cash flow available for operations, debt service, debt repayments and unfunded
loan and fund management commitments.
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 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 have difficulty or be unable to sell some of our loans and commercial
mortgage backed securities.
A
prolonged period of frozen capital markets, decline in commercial real estate
values and an out of favor real estate sector may prevent us from selling our
loans and CMBS. Given the terms of our March 2009 restructuring, we may be
forced to sell assets in order to meet required debt reduction levels. If the
market for real estate loans and CMBS is disrupted or dislocated, this may be
difficult or impossible, causing further losses or events of
default.
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, tax and other 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
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 and Management of CDOs
Our
investment management agreements contain “clawback” provisions which may require
repayment of incentive management fees previously received by us.
As part
of our investment management business we earn incentive fees based on the
performance of certain of our investment management vehicles. The investment
management agreements which govern our relationship with these vehicles contain
“clawback” provisions which may require the repayment of incentive fees
previously received by us. If certain predetermined performance thresholds are
not met upon the ultimate dissolution of such entities, we could be required to
refund up to $5.6 million of incentive fees previously received.
Our
March 2009 balance sheet restructuring and financial condition may adversely
impact our investment management business.
In large
part, our ability to raise capital and garner other investment management and
advisory business is dependent upon our reputation as a balance sheet manager
and credit underwriter, as well as the ability to demonstrate that we have the
resources to manage and co-invest in our internal funds. Our recent losses and
March 2009 restructuring limit our abilities in this regard. In addition,
further credit deterioration in our balance sheet portfolio and our overall
financial condition could jeopardize our status as an approved special servicer
from the three major rating agencies, which would impair our ability to generate
future servicing revenues.
We
are subject to risks and uncertainties associated with operating our investment
management business, and we may not achieve 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 develop and
operate 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 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 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.
CTIMCO’s
role as collateral manager for our CDOs and investment manager for our funds may
expose us to liabilities to investors.
We are
subject to potential liabilities to investors as a result of CTIMCO’s role as
collateral manager for our CDOs and our investment management business
generally. In serving in such roles, we could be subject to claims by CDO
investors and investors in our funds that we did not act in accordance with our
duties under our CDO and investment fund documentation or that we were negligent
in taking or refraining from taking actions with respect to the underlying
collateral in our CDOs or in making investments. In particular, the discretion
that we exercise in managing the collateral for our CDOs and the investments in
our investment management business could result in liability due to the current
negative conditions in the commercial real estate market and the inherent
uncertainties surrounding the course of action that will result in the best long
term results with respect to such collateral and investments. This risk could be
increased due to the affiliated nature of our roles. If we were found liable for
our actions as collateral manager or investment manager and we were required to
pay significant damages to our CDO and investment advisory investors, our
financial condition could be materially adversely effected.
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. Our chief executive officer, Stephen D. Plavin, and our chief credit
officer, Thomas C. Ruffing, are currently not employed pursuant to employment
agreements and the employment agreement with our chief financial officer,
Geoffrey G. Jervis, expires on December 31, 2010. There can be no assurance that
Messrs. Plavin and Ruffing, and upon expiration of his agreement, Mr. Jervis,
will enter into new employment agreements pursuant to which they agree to
long-term employment with us. In addition, the departure of Mr. Plavin from his
employment with us constitutes an event of default under our restructured debt
obligations unless a suitable replacement acceptable to the lenders is hired by
us.
Our ability to compensate our employees is limited by
our restructured debt obligations.
Our
restructured debt obligations limit the aggregate cash compensation we are able
to pay our employees (excluding our chief executive officer and chief financial
officer) to 2008 aggregate compensation levels. In the case of our chief
executive officer and chief financial officer, cash compensation must be
approved by our lenders. This may impact our ability to retain our employees or
attract new employees.
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 once our balance sheet investment activity resumes 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, based on SEC staff positions, 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. 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
certain of 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.
We
understand the SEC staff is currently reconsidering its interpretive policy
under Section 3(c)(5)(C) and whether to advance rulemaking to define the basis
for the exclusion. We cannot predict the outcome of this reconsideration or
potential rulemaking initiative and its impact on our ability to rely on the
exclusion.
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.
Changes
in accounting pronouncements may materially change the presentation and content
of our financial statements.
Our
balance sheet and statement of operations may be less meaningful if we are
required to consolidate certain entities as a result of our adoption of
Financial Accounting Standard Board Statement of Financial Accounting Standards
No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB
Statement No. 140,” or Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)”, both of which are effective for
the first annual reporting period that begins after November 15, 2009. The
adoption of these accounting pronouncements is expected to substantially
increase the financial assets and liabilities included on our balance sheet. The
adoption of these accounting pronouncements is likely to result in increased
operating costs as we develop controls and review the information necessary to
account for the assets in accordance with GAAP.
We
may not have sufficient cash flow to satisfy our tax liability arising from the
use of CDO financing.
Due to
the redirection provisions of our CDOs, which reallocate principal and interest
otherwise distributable to us to repay senior note holders, assets financed
through our CDOs may generate current taxable income without a corresponding
cash distribution to us. In order to raise the cash necessary to meet our tax
and/or distribution requirements, we may be required to borrow funds, sell a
portion of our assets at disadvantageous prices or find other alternatives. In
any case, there can be no assurances that we will be able to generate sufficient
cash from these endeavors to meet our tax and/or distribution
requirements.
In
the event we experience an “ownership change” for purposes of Section 382 of the
Internal Revenue Code, our ability to utilize our net operating losses and net
capital losses against future taxable income will be limited, increasing our
dividend distribution requirement for which we may not have sufficient cash
flow.
We have
substantial net operating and net capital loss carry forwards which we use to
offset our tax and/or distribution requirements. In the event that we experience
an “ownership change” for purposes of Section 382 of the Internal Revenue Code,
our ability to use these losses will be effectively eliminated. An “ownership
change” is determined based upon the changes in ownership that occur in our
common stock for a trailing three year period. Such change provisions may be
triggered by regular trading activity in our common stock, and are generally
beyond our control.
Risks Relating to Our Class
A Common Stock
Sales or other dilution of
our equity may adversely affect the market price of our class A common
stock.
In
connection with restructuring our debt obligations, we issued warrants to
purchase 3,479,691 shares of our class A common stock, which represents
approximately 15.6% of our outstanding common stock and stock units as of
February 23, 2010. The market price of our class A common stock could decline as
a result of sales of a large number of shares of class A common stock acquired
upon exercise of the warrants in the market. If the warrants are exercised, the
issuance of additional shares of class A common stock would dilute the ownership
interest of our existing shareholders.
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.
Our
executive officers and directors, along with vehicles for the benefit of their
families, collectively own and control 2,250,109 shares of our common stock
representing approximately 10.1% of our outstanding common stock and stock units
as of February 23, 2010. W. R. Berkley Corporation, or WRBC, which employs one
of our directors, owns 3,843,413 shares of our common stock, which represents
17.2% of our outstanding common stock and stock units as of February 23, 2010.
By virtue of their voting power, these shareholders 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. In addition, 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 acquirer or its affiliate and
us are prohibited for five years after the most recent date on which the
acquirer 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 acquirer or its affiliate attaining such
status, such as the issuance of shares of our class A common stock to WRBC, the
acquirer 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:
|
·
|
80%
of the votes entitled to be cast by shareholders;
and
|
|
·
|
two-thirds
of the votes entitled to be cast by shareholders other than the interested
shareholder and affiliates and associates
thereof.
|
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, our former chief executive officer, and
Craig M. Hatkoff, our director, and a limited liability company indirectly
controlled by a trust for the benefit of Samuel Zell, our chairman of the board,
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 acquirer, would entitle the acquirer 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 acquirer 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 acquirer 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 acquirer 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
price of our class A common stock may be impacted by many
factors.
As with
any public company, a number of factors may impact the trading 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:
|
·
|
the
level of institutional interest in
us;
|
|
·
|
the
perception of REITs generally and REITs with portfolios similar to ours,
in particular, by market
professionals;
|
|
·
|
the
attractiveness of securities of REITs in comparison to other
companies;
|
|
·
|
the
market’s perception of our ability to successfully manage our portfolio
and our March 2009 restructuring;
and;
|
|
·
|
the
general economic environment and the commercial real estate property and
capital markets.
|
Our
restructured debt obligations restrict us from paying cash dividends, which may
reduce the attractiveness of an investment in our class A common
stock.
The
restrictions on our inability to pay cash dividends, except in a limited manner,
will reduce the current dividend yield on our class A common stock and this can
negatively impact the price of our class A common stock as investors seeking
current income pursue alternative investments.
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 expect
in the future when we generate taxable income 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 our compliance with other requirements, 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. There have been recent changes to the Internal Revenue Code that
would allow us to pay required dividends in the form of additional shares of
common stock equal in value up to 90% of the required dividend. We expect that
as we undertake efforts to conserve cash and enhance our liquidity and comply
with our restructured debt obligations covenants, future required dividends
on our class A common stock will be paid in the form of class A common stock to
the fullest extent permitted. There can be no assurance as to when we will no
longer be subject to debt obligation covenants or will cease our efforts to
conserve cash and enhance liquidity to an extent we believe positions us to
resume the payment of dividends completely or substantially in
cash.
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. Notwithstanding the
availability of cure provisions in the tax code, various compliance requirements
could be failed and 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:
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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; and
|
|
·
|
we
generally would not be eligible to requalify as a REIT for four full
taxable years.
|
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. Our restructured debt obligations may cause us
to recognize taxable income without any corresponding cash income and we may be
required to distribute additional dividends in cash and/or class A common
stock.
Item 1B.
|
Unresolved
Staff Comments
|
None.
Item 2.
|
Properties
|
Our
principal executive and administrative offices are located in approximately
12,000 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 2009.
PART II
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 our class A common stock as
reported on the NYSE composite transaction tape and the per share cash dividends
declared on our class A common stock.
High
|
Low
|
Dividend
|
||||||
2009
|
||||||||
Fourth
quarter
|
$3.00
|
$1.10
|
$0.00
|
|||||
Third
quarter
|
3.47
|
1.15
|
0.00
|
|||||
Second
quarter
|
2.88
|
1.09
|
0.00
|
|||||
First
quarter
|
4.25
|
0.87
|
0.00
|
|||||
2008
|
||||||||
Fourth
quarter
|
$13.17
|
$3.42
|
$0.00
|
|||||
Third
quarter
|
19.76
|
9.78
|
0.60
|
|||||
Second
quarter
|
29.98
|
18.71
|
0.80
|
|||||
First
quarter
|
30.38
|
24.30
|
0.80
|
|||||
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
|
(1)
Comprised of a regular quarterly dividend of $0.80 per share and a special
dividend of $1.90 per share.
|
The last
reported sale price of the class A common stock on February 23, 2010 as
reported on the NYSE composite transaction tape was $1.74. As of
February 23, 2010, there were 573 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
8,718.
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. 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. As required by
covenants in our restructured debt obligations, our cash dividend distributions
are restricted to the minimum amount necessary to maintain our status as a REIT.
Moreover, such covenants, taking into consideration the recent IRS rulings which
allow REITs to distribute up to 90% of their dividends in the form of stock for
tax years ending on or before December 31, 2011, require us to make any
distribution in stock to the extent permitted.
In
addition to the foregoing restrictions, our dividend policy remains 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. In accordance with
Internal Revenue Service guidance, we are required to report the amount of
excess inclusion income earned by the Company. In 2009, we calculated excess
inclusion income to be de minimis.
Issuer
Purchases of Equity Securities
The
following table provides information regarding purchases of shares of our common
stock made by or on our behalf during the three months ended December 31,
2009.
Period
|
(a)
Total
Number
of
Shares
Purchased(1)
|
(b)
Average Price
Paid
per Share
|
(c)
Total
Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
|
(d)
Maximum
Number
(or
Approximate
Dollar
Value) of
Shares
that May
Yet
Be Purchased
Under
the Plans or
Programs
|
||||||||||||
October
1-31, 2009
|
— | $— | — | — | ||||||||||||
November
1-30, 2009
|
— | — | — | — | ||||||||||||
December
1-31, 2009
|
41,582 | 1.24 | — | — | ||||||||||||
Total
|
41,582 | $1.24 | — | — |
(1) |
All
purchases were made pursuant to elections by incentive plan participants
to satisfy tax withholding obligations through the surrender of shares
equal in value to the amount of the withholding obligation incurred upon
the vesting of restricted
stock.
|
Equity
Compensation Plan Information
The
following table summarizes information, as of December 31, 2009, 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)
|
162,226
|
$15.75
|
492,763
|
||||||||||
Equity
compensation plans not approved by security holders (2)
|
—
|
—
|
—
|
||||||||||
Total
|
162,226
|
$15.75
|
492,763
|
(1) |
The
number of securities remaining for future issuance consists of 492,763
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 2005 through
2009.
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,
|
||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(in thousands, except for per share data)
|
||||||||||||||||||||
STATEMENT
OF OPERATIONS DATA:
|
||||||||||||||||||||
REVENUES:
|
||||||||||||||||||||
Interest
and related income
|
$ | 121,818 | $ | 196,215 | $ | 254,505 | $ | 176,758 | $ | 86,753 | ||||||||||
Management
fees and other revenues
|
13,575 | 13,308 | 10,330 | 4,407 | 13,124 | |||||||||||||||
Total
revenues
|
135,393 | 209,523 | 264,835 | 181,165 | 99,877 | |||||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||||||
Interest
expense
|
79,794 | 129,665 | 162,377 | 104,607 | 37,229 | |||||||||||||||
General
and administrative expenses
|
22,102 | 24,957 | 29,956 | 23,075 | 21,939 | |||||||||||||||
Depreciation
and amortization
|
71 | 179 | 1,810 | 3,049 | 1,114 | |||||||||||||||
Impairments
|
114,106 | 2,917 | — | — | — | |||||||||||||||
Provision
for loan losses
|
482,352 | 63,577 | — | — | — | |||||||||||||||
Valuation
allowance on loans held-for-sale
|
— | 48,259 | — | — | — | |||||||||||||||
Total
operating expenses
|
698,425 | 269,554 | 194,143 | 130,731 | 60,282 | |||||||||||||||
(Loss)
gain on sale of investments
|
(10,363 | ) | 374 | 15,077 | — | 4,951 | ||||||||||||||
Gain
on extinguishment of debt
|
— | 6,000 | — | — | — | |||||||||||||||
(Loss)
income from equity investments
|
(3,736 | ) | (1,988 | ) | (2,109 | ) | 898 | (222 | ) | |||||||||||
(Loss)
income before income taxes
|
(577,131 | ) | (55,645 | ) | 83,660 | 51,332 | 44,324 | |||||||||||||
Income
tax (benefit) provision
|
(694 | ) | 1,893 | (706 | ) | (2,735 | ) | 213 | ||||||||||||
NET
(LOSS) INCOME ALLOCABLE TO COMMON STOCK:
|
$ | (576,437 | ) | $ | (57,538 | ) | $ | 84,366 | $ | 54,067 | $ | 44,111 | ||||||||
PER
SHARE INFORMATION:
|
||||||||||||||||||||
Net
(loss) income per share of common stock:
|
||||||||||||||||||||
Basic
|
$ | (25.76 | ) | $ | (2.73 | ) | $ | 4.80 | $ | 3.43 | $ | 2.91 | ||||||||
Diluted
|
$ | (25.76 | ) | $ | (2.73 | ) | $ | 4.77 | $ | 3.40 | $ | 2.88 | ||||||||
Dividends
declared per share of common stock
|
$ | — | $ | 2.20 | $ | 5.10 | $ | 3.45 | $ | 2.45 | ||||||||||
Weighted
average shares of common stock outstanding:
|
||||||||||||||||||||
Basic
|
22,379 | 21,099 | 17,570 | 15,755 | 15,181 | |||||||||||||||
Diluted
|
22,379 | 21,099 | 17,690 | 15,923 | 15,336 |
Years ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
BALANCE
SHEET DATA:
|
||||||||||||||||||||
Total
assets
|
$ | 1,936,635 | $ | 2,837,529 | $ | 3,211,482 | $ | 2,648,564 | $ | 1,557,642 | ||||||||||
Total
liabilities
|
2,105,802 | 2,436,085 | 2,803,245 | 2,222,292 | 1,218,792 | |||||||||||||||
Shareholders’
(deficit) equity
|
(169,167 | ) | 401,444 | 408,237 | 426,272 | 338,850 |
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.
Introduction
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. In managing our operations, we focus on
originating investments, managing our portfolios and capitalizing our
businesses.
Current
Market Conditions
During
2009, the state of the commercial real estate markets continued to deteriorate.
Occupancy and rental rates declined in virtually all product types and
geographic markets, and borrowers with near-term refinancing needs encountered
increased difficulty finding replacement financing. As a result, commercial
mortgage delinquencies and defaults are rising rapidly, as sponsors are unable
(or unwilling) to support projects in the face of value decline. In 2009, our
portfolio experienced significant credit deterioration, evidenced by $482.4
million of new provisions for loan losses and $111.9 million of impairments on
our securities portfolio and real estate owned. We expect this trend to continue
for the foreseeable future and expect significant challenges ahead for our
business. These challenges are discussed in the risk factors contained in Item
1A to this Form 10-K.
Restructuring
of Our Debt Obligations
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement,
and certain of our trust preferred securities. While we believe that the
restructuring of our debt obligations is a positive development for us in our
efforts to stabilize our business, there can be no assurance that ultimately our
restructuring will enable the successful collection of our balance sheet assets.
For a further discussion of our restructuring, see the risk factors contained in
Item 1A to this Form 10-K.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
|
·
|
Maturity
dates were modified to one year from the March 16, 2009 effective date of
each respective agreement, which maturity dates may be extended further
for two one-year periods. The first one-year extension option is
exercisable by us so long as the outstanding balance as of the first
extension date is less than or equal to a certain amount, reflecting a
reduction of twenty percent (20%), including the upfront payment described
above, of the outstanding amount from the date of the amendments, and no
other defaults or events of default have occurred and are continuing, or
would be caused by such extension. As described in Note 22 to our
consolidated financial statements, we qualified for this extension
subsequent to year-end. The second one-year extension option is
exercisable by each participating secured lender in its sole
discretion.
|
|
·
|
We
agreed to pay each secured participating lender periodic amortization as
follows: (i) mandatory payments, payable monthly in arrears, in an amount
equal to sixty-five (65%) (subject to adjustment in the second year) of
the net interest income generated by each such lender’s collateral pool,
and (ii) one hundred percent (100%) of the principal proceeds received
from the repayment of assets in each such lender’s collateral pool. In
addition, under the terms of the amendment with Citigroup, we agreed to
pay Citigroup an additional quarterly amortization payment equal to the
lesser of: (x) Citigroup’s then outstanding senior secured credit facility
balance or (y) the product of (i) the total cash paid (including both
principal and interest) during the period to our senior credit facility in
excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0
million facility amount, and (ii) a fraction, the numerator of which is
Citigroup’s then outstanding senior secured credit facility balance and
the denominator is the total outstanding secured indebtedness of the
secured participating lenders.
|
|
·
|
We
further agreed to amortize each participating secured lender’s secured
debt at the end of each calendar quarter on a pro rata basis until we have
repaid our secured, recourse credit facilities and thereafter our senior
credit facility in an amount equal to any unrestricted cash in excess of
the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment
commitments.
|
|
·
|
Each
participating secured lender was relieved of its obligation to make future
advances with respect to unfunded commitments arising under investments in
its collateral pool.
|
|
·
|
We
received the right to sell or refinance collateral assets as long as we
apply one hundred percent (100%) of the proceeds to pay down the related
secured credit facility balance subject to minimum release price
mechanics.
|
|
·
|
We
eliminated the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. Under the revised secured credit
facilities, going forward, collateral value is expected to be
determined by our lenders based upon changes in the performance of the
underlying real estate collateral as opposed to changes
in market spreads under the original terms. Beginning September
2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities,
each collateral pool may be valued monthly. If the ratio of a secured
lender’s total outstanding secured credit facility balance to total
collateral value exceeds 1.15x the ratio calculated as of the effective
date of the amended agreements, we may be required to liquidate collateral
and reduce the borrowings or post other collateral in an effort to
bring the ratio back into compliance with the prescribed ratio, which may
or may not be successful.
|
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
|
·
|
prohibit
new balance sheet investments except, subject to certain limitations,
co-investments in our investment management vehicles or protective
investments to defend existing collateral assets on our balance
sheet;
|
|
·
|
prohibit
the incurrence of any additional indebtedness except in limited
circumstances;
|
|
·
|
limit
the total cash compensation to all employees and, specifically with
respect to our chief executive officer and chief financial officer, freeze
their base salaries at 2008 levels, and require cash bonuses to any of
them to be approved by a committee comprised of one representative
designated by the secured lenders, the administrative agent under the
senior credit facility and a representative of our board of
directors;
|
|
·
|
prohibit
the payment of cash dividends to our common shareholders except to the
minimum extent necessary to maintain our REIT
status;
|
|
·
|
require
us to maintain a minimum amount of liquidity, as defined, of $7.0 million
in year one and $5.0 million
thereafter;
|
|
·
|
trigger
an event of default if our chief executive officer ceases his employment
with us during the term of the agreement and we fail to hire a replacement
acceptable to the lenders; and
|
|
·
|
trigger
an event of default, if any event or condition occurs which causes any
obligation or liability of more than $1.0 million to become due prior to
its scheduled maturity or any monetary default under our restructured debt
obligations if the amount of such obligation is at least $1.0
million.
|
On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The warrants will become exercisable on March 16,
2012 and expire on March 16, 2019, and may be exercised through a cashless
exercise at the option of the warrant holders.
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the master repurchase agreement.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
|
·
|
extend
the maturity date of the senior credit agreement to be co-terminus with
the maturity date of the secured credit facilities with the participating
secured lenders (as they may be further extended until March 16, 2012, as
described above);
|
|
·
|
increase
the cash interest rate under the senior credit agreement to LIBOR plus
3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per
annum less the cash interest rate;
|
|
·
|
initiate
quarterly amortization equal to the greater of: (i) $5.0 million per annum
and (ii) 25% of the annual cash flow received from our currently
unencumbered collateralized debt obligation
interests;
|
|
·
|
pledge
our unencumbered collateralized debt obligation interests and provide a
negative pledge with respect to certain other assets;
and
|
|
·
|
replace
all existing financial covenants with substantially similar covenants and
default provisions to those described above with respect to the
participating secured facilities.
|
Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as the Trust Securities mentioned above in exchange for $21.9 million face
amount of the Trust Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
Originations
We have
historically allocated 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 restructuring of our recourse
secured and unsecured debt obligations included covenants that require us to
cease our balance sheet investment activities. Going forward, until these
covenants are eliminated, we will not make new balance sheet investments, but
will continue to carry out investment activities for our investment management
vehicles, consistent with our previous strategies and investment mandates for
each respective vehicle.
Notwithstanding
the current capabilities of our investment management platform, we have
maintained a defensive posture with respect to investment originations in light
of the continued market volatility. The table below summarizes our total
originations and the allocation of opportunities between our balance sheet and
the investment management business for the years ended December 31, 2009 and
2008.
Originations(1)
|
||||
(in
millions)
|
Year
ended
December
31, 2009
|
Year
ended
December
31, 2008
|
||
Balance
sheet
|
$―
|
$48
|
||
Investment
management
|
138
|
426
|
||
Total
originations
|
$138
|
$474
|
(1) |
Includes
total commitments, both funded and unfunded, net of any related purchase
discounts.
|
Our
balance sheet investments include various types of commercial mortgage backed
securities and collateralized debt obligations, or Securities, and commercial
real estate loans and related instruments, or Loans, which we collectively refer
to as Interest Earning Assets. The table below shows our Interest Earning Assets
as of December 31, 2009 and 2008.
Interest
Earning Assets
|
||||||||||||||||
(in
millions)
|
December
31, 2009
|
December
31, 2008
|
||||||||||||||
Book
Value
|
Yield(1)
|
Book
Value
|
Yield(1)
|
|||||||||||||
Securities
held-to-maturity
|
$715 | 6.61 | % | $852 | 6.87 | % | ||||||||||
Loans
receivable, net (2)
|
1,042 | 3.68 | 1,499 | 4.17 | ||||||||||||
Loans
held-for-sale, net
|
18 | — | 92 | 2.62 | ||||||||||||
Total
/ Weighted Average
|
$1,775 | 4.82 | % | $2,443 | 5.05 | % |
(1) |
Yield on
floating rate assets assumes LIBOR of 0.23% and 0.44% at December 31, 2009
and December 31, 2008, respectively.
|
||
(2) |
Excludes loan
participations sold with a net book value of $116.7 million and $292.7
million as of December 31, 2009 and 2008, respectively. These
participations are net of $172.5 million of provisions for loan losses as
of December 31,
2009.
|
In some
cases our Loan originations are not fully funded at closing, creating an
obligation for us to make future fundings, which we refer to as Unfunded Loan
Commitments. Typically, Unfunded Loan Commitments are part of construction and
transitional Loans. As of December 31, 2009, our four Unfunded Loan Commitments
totaled $4.9 million, which will generally only be funded when and/or if the
borrower meets certain performance hurdles with respect to the underlying
collateral.
According
to the terms of our restructured debt obligations, our lenders are no longer
required to advance a portion of these commitments and our ability to fund these
Unfunded Loan Commitments will be contingent upon our having sufficient
liquidity available to us after required payments to our creditors.
In
addition to our investments in Interest Earning Assets, we have two equity
investments in unconsolidated subsidiaries as of December 31, 2009. These
represent our equity co-investments in private equity funds that we manage, CT
Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or
CTOPI.
The table
below details the carrying value of those investments, as of December 31, 2009
and 2008.
Equity
Investments
|
||||
(in
thousands)
|
December
31, 2009
|
December
31, 2008
|
||
Fund
III
|
$158
|
$597
|
||
CTOPI
|
2,175
|
1,782
|
||
Capitalized
costs/other
|
18
|
4
|
||
Total
|
$2,351
|
$2,383
|
Asset
Management
We
actively manage our balance sheet portfolio and the assets held by our
investment management vehicles with our in-house team of asset managers. While
our investments are primarily in the form of debt, we are aggressive in
exercising the rights afforded to us as a lender. These rights may include
collateral level budget approvals, lease approvals, loan covenant enforcement,
escrow/reserve management/collection, collateral release approvals and other
rights that we may negotiate. In light of the recent deterioration in property
level performance, property valuation, and the real estate capital markets, an
increasing number of our loans are either non-performing and/or on our watch
list, requiring intensive efforts on the part of our asset management team to
maximize our recovery on those investments.
As of
December 31, 2009, we had 20 Loans with an aggregate net book value of $131.0
million ($608.4 million gross carrying value, net of $477.4 million of reserves)
against which we had recorded a provision for loan losses. During the year ended
December 31, 2009, we recorded $487.7 million of provisions for loan losses,
which was offset by a recapture of $5.3 million of previous provisions for a net
provision of $482.4 million. This includes $172.5 million of provisions recorded
on loan participations sold which did not qualify for sale accounting under GAAP
and remain on our consolidated balance sheet as both assets and equivalent
liabilities. Although provisions were recorded against these assets in 2009, the
liabilities will not be eliminated until the loans are contractually
extinguished.
The table
below details the overall credit profile of our Interest Earning Assets, which
includes: (i) Loans where we have foreclosed upon the underlying collateral and
own an equity interest in real estate, (ii) Loans against which we have recorded
a provision for loan losses, or reserves, (iii) Securities against which we have
recorded an other than temporary impairment, and (iv) Loans and Securities that
are categorized as Watch List, which are currently performing but pose a higher
risk of non-performance and/or loss, that we actively monitor and manage to
mitigate these risks.
Portfolio
Performance(1)
|
||||||||
(in
millions, except for number of investments)
|
December
31, 2009
|
December
31, 2008
|
||||||
Interest
earning assets ($ / #)
|
$1,775 / 135 | $2,443 / 154 | ||||||
Real
estate owned, net (2)
($ / #)
|
$― / ― | $10 / 1 | ||||||
Percentage
of interest earning assets
|
― | % | 0.4 | % | ||||
Impaired
loans (3)
|
||||||||
Performing
loans ($ / #)
|
$96 / 12 | $12 / 2 | ||||||
Non-performing
loans ($ / #)
|
$35 / 8 | $12 / 3 | ||||||
Total
($ / #)
|
$131 / 20 | $24 / 5 | ||||||
Percentage
of interest earning assets
|
7.4 | % | 1.0 | % | ||||
Impaired
Securities ($ / #)
|
$27 / 11 | $6 / 3 | ||||||
Percentage
of interest earning assets
|
1.5 | % | 0.2 | % | ||||
Watch
List Assets
|
||||||||
Watch
List Loans (4)
($ / #)
|
$312 / 10 | $383 / 17 | ||||||
Watch
List Securities (5)
($ / #)
|
$165 / 19 | N/A | ||||||
Total
($ / #)
|
$477 / 29 | $383 / 17 | ||||||
Percentage
of interest earning assets
|
26.9 | % | 15.7 | % |
(1) |
Portfolio
statistics include Loans classified as held-for-sale, but exclude loan
participations sold.
|
||
(2) |
Includes one Loan
which has been transferred to Real Estate Held-for-Sale with a gross asset
balance of $11.3 million, against which we had recorded a $2.0 million
impairment as of December 31, 2008. This asset was sold in July 2009 for
$7.1 million.
|
||
(3) |
Amounts
represent net book value after provisions for loan
losses.
|
||
(4) | Includes one additional Loan with a book value of $6.6 million that has been retroactively classified as a Watch List Loan as of December 31, 2008 based upon revised criteria. Watch List Loans exclude Loans against which we have recorded a provision for loan losses, and Real Estate Owned. | ||
(5) | We did not begin using this performance measure until the second quarter of 2009. Accordingly, equivalent amounts are not presented as of December 31, 2008. Watch List Securities exclude Securities which have been other-than-temporarily impaired. |
During
the year ended December 31, 2009, five Loans with an aggregate outstanding
balance of $72.2 million were fully repaid. In addition, nine Loans with an
aggregate outstanding balance of $221.9 million as of December 31, 2009, which
did not qualify for extension pursuant to the corresponding loan agreements,
were extended during the year ended December 31, 2009.
Also in 2009, we negotiated two discounted partial repayments with
one of our borrowers, which resulted in a repayment of $6.0 million to us, and
the forgiveness of an additional $2.5 million of the borrower’s indebtedness.
Following this discounted repayment, we were relieved of a $3.8 million Unfunded
Loan Commitment under this loan. As a result of this transaction, we recorded a
$2.5 million loss under the provision for loan losses on our consolidated
statement of operations.
We
actively manage our Securities portfolio using a combination of quantitative
tools and loan/property level analysis to monitor the performance of the
Securities and their collateral against our original expectations. Securities
are analyzed to monitor underlying loan delinquencies, transfers to special
servicing, and changes to the servicer’s watch list population. Realized losses
on underlying loans are tracked and compared to our original loss expectations.
On a periodic basis, individual loans of concern are also
re-underwritten.
As of
December 31, 2009, we have recorded an aggregate $118.3 million
other-than-temporary impairment against eleven of our Securities, which had an
aggregate net book value at December 31, 2009 of $27.4 million. Of this total
other-than-temporary impairment, $104.3 million was related to expected credit
losses, as discussed in Notes 2 and 3 to our consolidated financial statements,
and has been recorded through earnings, and $14.0 million was related to fair
value adjustments in excess of expected credit losses, or the Valuation
Adjustment, and has been recorded as a component of other comprehensive
income/(loss) with no impact on earnings.
At
year-end, there were significant differences between the estimated fair value
and the book value of some of the Securities in our portfolio. We believe these
differences to be related to the disruption in the capital markets and the
general negative bias against structured financial products and not reflective
of a change in cash flow expectations from these securities. Accordingly, we
have not recorded any additional other-than-temporary impairments against such
Securities.
The
ratings performance of our Securities portfolio over the years ended December
31, 2009 and 2008 is detailed below:
Rating
Activity(1)
|
|||
Year
ended
December
31, 2009
|
Year
ended
December
31, 2008
|
||
Securities
Upgraded
|
1
|
6
|
|
Securities
Downgraded
|
21
|
13
|
(1) |
Represents
activity from any of Fitch Ratings, Standard & Poor’s and/or Moody’s
Investors Service.
|
We
continue to foresee trends in asset performance in 2010 that are likely to lead
to further defaults and downgrades: borrowers faced with maturities will have a
more difficult time refinancing their properties in light of the volatility and
lack of liquidity in the financial markets, and real estate fundamentals
continue to weaken as the impacts of a weak U.S. economy continue to filter into
the commercial real estate sector impacting cash flows. These trends may result
in negotiated extensions or modifications of the terms of our investments or the
exercise of foreclosure and other remedies; in any event, it is likely that we
will continue to experience difficulty with respect to our investments and will
likely incur material losses in our portfolio.
Capitalization
We
capitalize our business with a combination of debt and equity. Our debt sources,
which we collectively refer to as Interest Bearing Liabilities, currently
include repurchase agreements, CDOs, a senior credit facility and junior
subordinated notes. Our equity capital is currently comprised entirely of common
stock.
During
the first and second quarters of 2009, a substantial amount of our Interest
Bearing Liabilities, including repurchase agreements and secured debt, our
senior credit facility and junior subordinated notes, were restructured,
exchanged, terminated, or otherwise satisfied pursuant to the transactions noted
above and described in Note 9 to our consolidated financial statements. In
addition, we are subject to certain covenants under our restructured debt
obligations which, among other things, restrict our ability to incur additional
indebtedness for the foreseeable future. While we believe that the March 2009
restructuring improved the stability of our capital structure, there can be no
assurance that a further restructuring will not be required or that any such
further restructuring will be successful.
The table
below shows our capitalization mix as of December 31, 2009 and
2008:
Interest
Bearing Liabilities(1)
|
||||||||
(in
millions)
|
December
31, 2009
|
December
31, 2008
|
||||||
Recourse
debt obligations
|
||||||||
Secured credit
facilities
|
||||||||
Repurchase
obligations and secured debt(2)
|
$451 | $699 | ||||||
Senior
credit facility(2)
|
99 | 100 | ||||||
Subtotal
|
550 | 799 | ||||||
Unsecured credit
facilities
|
||||||||
Junior
subordinated notes(2)(3)
|
144 | 129 | ||||||
Total
recourse debt obligations
|
694 | 928 | ||||||
Non-recourse
debt obligations
|
||||||||
Collateralized
debt obligations(2)
|
1,097 | 1,155 | ||||||
Total
interest bearing liabilities
|
$1,791 | $2,083 | ||||||
Weighted
average effective cost of debt (4)
|
2.38 | % | 2.47 | % | ||||
Shareholders'
(deficit) equity
|
($169 | ) | $401 | |||||
Ratio
of interest bearing liabilities to shareholders' equity
|
N/A |
5.2
: 1
|
(1) |
Excludes participations sold.
|
||
(2) |
Amounts represent
principal balances as of December 31, 2009 and December 31,
2008.
|
||
(3) | During the first and second quarters of 2009, we exchanged our legacy junior subordinated notes with a face value of $128.9 million for new junior subordinated notes with a face value of $143.8 million. In connection with these transactions, we also eliminated $3.9 million of our ownership interests in the legacy statutory trusts. See Note 9 to the consolidated financial statements for additional details. | ||
(4) | Floating rate debt obligations assume LIBOR of 0.23% and 0.44% at December 31, 2009 and December 31, 2008, respectively. Including the impact of interest rate hedges with an aggregate notional balance of $417.1 million as of December 31, 2009 and $465.9 million as of December 31, 2008, the effective all-in cost of our debt obligations would be 3.47% and 3.48% per annum, respectively. |
A summary
of selected structural features of our Interest Bearing Liabilities as of
December 31, 2009 and 2008 is detailed in the table below:
Interest
Bearing Liabilities
|
||||
December
31, 2009
|
December
31, 2008
|
|||
Weighted
average life (years)
|
4.2
|
4.2
|
||
%
Recourse
|
38.7%
|
44.5%
|
||
%
Subject to valuation tests
|
25.2%
|
33.5%
|
The table
below summarizes our repurchase obligations and secured debt as of December 31,
2009 and 2008:
Repurchase
Obligations and Secured Debt
|
||||||||
($
in millions)
|
December
31, 2009
|
December
31, 2008
|
||||||
Counterparties
|
3 | 6 | ||||||
Outstanding
repurchase obligations and secured debt
|
$451 | $699 | ||||||
All-in
cost
|
L+ 1.66 | % | L+ 1.66 | % |
Our
collateralized debt obligations, or CDOs, as of December 31, 2009 and 2008 are
described below:
Collateralized
Debt Obligations
|
|||||||||||||||||
($
in millions)
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Issuance
Date
|
Book
Value
|
All-in
Cost(1)
|
Book
Value
|
All-in
Cost(1)
|
|||||||||||||
CDO
I(2)
|
7/20/04
|
$233 | 0.88 | % | $252 | 1.52 | % | ||||||||||
CDO
II(2)
|
3/15/05
|
284 | 0.99 | 299 | 1.18 | ||||||||||||
CDO
III
|
8/4/05
|
254 | 5.15 | 257 | 5.27 | ||||||||||||
CDO
IV(2)
|
3/15/06
|
327 | 0.97 | 348 | 1.15 | ||||||||||||
Total
|
$1,098 | 1.92 | % | $1,156 | 2.15 | % |
(1) |
Includes
amortization of premiums and issuance costs.
|
||
(2) | Floating rate CDOs assume LIBOR of 0.23% and 0.44% at December 31, 2009 and 2008, respectively. |
The most
subordinated components of our debt capital structure are our junior
subordinated notes. These securities represent long-term, subordinated,
unsecured financing and generally carry limited covenants. As of December 31,
2009, we had $143.8 million of junior subordinated notes outstanding with a book
value of $128.1 million and a current coupon of 1.00% per annum. The interest
rate on these notes will increase to 7.23% per annum for the period from April
30, 2012 through April 29, 2016 and then convert to a floating interest rate of
three-month LIBOR plus 2.44% per annum through maturity on April 30,
2036.
We did
not issue any new shares of class A common stock during the year. Changes in the
number of shares resulted from restricted stock grants, forfeitures and vesting,
as well as stock unit grants.
The
following table calculates our book value per share as of December 31, 2009 and
2008:
Shareholders'
Equity
|
||||||||
December
31, 2009
|
December
31, 2008
|
|||||||
Book
value (in millions)
|
($169 | ) | $401 | |||||
Shares:
|
||||||||
Class
A common stock
|
21,796,259 | 21,740,152 | ||||||
Restricted
stock
|
79,023 | 331,197 | ||||||
Stock
units
|
464,046 | 215,451 | ||||||
Warrants
& Options(1)
|
— | — | ||||||
Total
|
22,339,328 | 22,286,800 | ||||||
Book
value per share
|
($7.57 | ) | $18.01 |
(1) |
Dilutive
shares issuable upon the exercise of outstanding warrants and options
assuming a December 31, 2009 and 2008 stock price, respectively, and the
treasury stock
method.
|
As of
December 31, 2009, we had 21,875,282 of our class A common stock and restricted
stock outstanding.
Other
Balance Sheet Items
Participations
sold represent interests in certain loans that we originated and subsequently
sold to one of our investment management vehicles, CT Large Loan 2006, Inc., and
third parties. We present these sold interests as both assets and liabilities on
the basis that these arrangements do not qualify as sales under GAAP. As of
December 31, 2009, we had five such participations sold with a total gross
carrying value of $289.1 million. 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 operations. Generally, participations sold are
recorded as assets and liabilities in equal amounts on our consolidated balance
sheet. During 2009, we recorded $172.5 million of provisions for loan loses
against certain of our participations sold assets, resulting in a net book value
of $116.6 million. The associated liabilities have not been adjusted as of
December 31, 2009, and will not be eliminated until the loans are contractually
extinguished.
Interest
Rate Exposure
We
endeavor to manage a book of assets and liabilities that are generally matched
with respect to interest rates, typically 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 may 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.
Our
counterparties in these transactions are large financial institutions and we are
dependent upon the financial health of these counterparties and a functioning
interest rate derivative market in order to effectively execute our hedging
strategy.
The table
below details our interest rate exposure as of December 31, 2009 and
2008:
Interest
Rate Exposure
|
||||||||
(in
millions except for weighted average life)
|
December
31, 2009
|
December
31, 2008
|
||||||
Value
exposure to interest rates(1)
|
||||||||
Fixed
rate assets
|
$833 | $880 | ||||||
Fixed
rate debt
|
(410 | ) | (395 | ) | ||||
Interest
rate swaps
|
(417 | ) | (466 | ) | ||||
Net
fixed rate exposure
|
$6 | $19 | ||||||
Weighted
average life (fixed rate assets)
|
4.0
yrs
|
4.9
yrs
|
||||||
Weighted
average coupon (fixed rate assets)
|
6.91 | % | 6.90 | % | ||||
Cash
flow exposure to interest rates(1)
|
||||||||
Floating
rate assets
|
$1,678 | $1,949 | ||||||
Floating
rate debt less cash
|
(1,642 | ) | (1,931 | ) | ||||
Interest
rate swaps
|
417 | 466 | ||||||
Net
floating rate exposure
|
$453 | $484 | ||||||
Weighted
average life (floating rate assets)
|
1.9
yrs
|
2.9
yrs
|
||||||
Weighted
average coupon (floating rate assets)
(2)
|
3.29 | % | 3.52 | % | ||||
Net
income impact from 100 bps change in LIBOR
|
$4.5 | $4.8 |
(1) |
All
values are in terms of face or notional amounts, and include loans
classified as held-for-sale.
|
||
(2) |
Weighted
average coupon assumes LIBOR of 0.23% and 0.44% at December 31, 2009 and
2008,
respectively.
|
Investment
Management Overview
In
addition to our balance sheet investment activities, we act as an investment
manager for third parties. We have developed our investment management business
to leverage our platform, generate fee revenue from investing third party
capital and, in certain instances, earn co-investment income. Our active
investment management mandates are described below:
|
·
|
CT
High Grade Partners II, LLC, or CT High Grade II, is currently investing
capital. The fund closed in June 2008 with $667 million of commitments
from two institutional investors. Currently, $381 million of committed
equity remains undrawn. The fund targets senior debt opportunities in the
commercial real estate debt sector and does not employ leverage. The
fund’s investment period expires in May 2010. We earn a base management
fee of 0.40% per annum on invested
capital.
|
|
·
|
CT
Opportunity Partners I, LP, or CTOPI, is currently investing capital. The
fund held its final closing in July 2008 with $540 million in total equity
commitments. Currently, $385 million of committed equity remains undrawn.
We have a $25 million commitment to invest in the fund ($7 million
currently funded, $18 million unfunded) and entities controlled by the
chairman of our board have committed to invest $20 million. The fund
targets opportunistic investments in commercial real estate, specifically
high yield debt, equity and hybrid instruments, as well as non-performing
and sub-performing loans and securities. The fund’s investment period
expires in December 2010. We earn base management fees of 1.60% per annum
of total equity commitments during the investment period, and of invested
capital thereafter. In addition, we earn net incentive management fees of
17.7% of profits after a 9% preferred return and a 100% return of
capital.
|
|
·
|
CT
High Grade MezzanineSM,
or CT High Grade, is no longer investing capital (its investment period
expired in July 2008). The fund closed in November 2006, with a single,
related party investor committing $250 million, which was subsequently
increased to $350 million in July 2007. This separate account targeted
lower LTV subordinate debt investments without leverage. We earn
management fees of 0.25% per annum on invested
assets.
|
|
·
|
CT
Large Loan 2006, Inc., or CT Large Loan, is no longer investing capital
(its investment period expired in May 2008). The fund closed in May 2006
with total equity commitments of $325 million from eight third-party
investors. We earn management fees of 0.75% per annum of invested assets
(capped at 1.5% on invested
equity).
|
|
·
|
CTX
Fund I, L.P., or CTX Fund, is no longer investing capital. CTX is a single
investor fund designed to invest in CDOs sponsored, but not issued, by us.
We do not earn fees on the CTX Fund, however, we earn CDO management fees
from the CDOs in which the CTX Fund
invests.
|
|
·
|
CT
Mezzanine Partners III, Inc., or Fund III, is no longer investing capital.
The fund is a vehicle we co-sponsored with a joint venture partner, and is
currently liquidating in the ordinary course. We earn 100% of base
management fees of 1.42% of invested capital, and we split incentive
management fees with our partner, which receives 37.5% of the fund’s
incentive management fees.
|
Investment Management
Mandates, as of December 31, 2009
|
|||||||||||||||
(in
millions)
|
Incentive
Management Fee
|
||||||||||||||
Total
|
Total
Capital
|
Co-
|
Base
|
Company
|
Employee
|
||||||||||
Type
|
Investments(1)
|
Commitments
|
Investment
%
|
Management
Fee
|
%
|
%
|
|||||||||
Investing:
|
|||||||||||||||
CT
High Grade II
|
Fund
|
$285
|
$667
|
—
|
0.40%
(Assets)
|
N/A
|
N/A
|
||||||||
CTOPI
|
Fund
|
287
|
540
|
4.63%
|
(2)
|
1.60%
(Equity)
|
100%(3)
|
—%(4)
|
|||||||
Liquidating:
|
|||||||||||||||
CT
High Grade
|
Sep.
Acc.
|
344
|
350
|
—
|
0.25%
(Assets)
|
N/A
|
N/A
|
||||||||
CT
Large Loan
|
Fund
|
275
|
325
|
—
|
(5)
|
0.75% (Assets)(6)
|
N/A
|
N/A
|
|||||||
CTX
Fund
|
Fund
|
8
|
10
|
—
|
(5)
|
(Assets)(7)
|
N/A
|
N/A
|
|||||||
Fund
III
|
Fund
|
36
|
425
|
4.71%
|
1.42%
(Equity)
|
57%(8)
|
43%(4)
|
(1) | Represents total investments, on a cash basis, as of period-end. | |
(2)
|
We have committed to invest $25.0 million in CTOPI. | |
(3) | CTIMCO earns net incentive management fees of 17.7% of profits after a 9% preferred return on capital and a 100% return of capital, subject to a catch-up. | |
(4) | Portions of the Fund III incentive management fees received by us have been allocated to our employees as long-term performance awards. We have not allocated any of the CTOPI incentive management fee to employees as of December 31, 2009. | |
(5) | We co-invest on a pari passu, asset by asset basis with CT Large Loan and CTX Fund. | |
(6) | Capped at 1.5% of equity. | |
(7) |
CTIMCO
serves as collateral manager of the CDOs in which the CTX Fund invests,
and earns base management fees as CDO collateral manager. As of December
31, 2009, we manage one such $500 million CDO and earn base management
fees of 0.10% based on the notional amount of assets in the
CDO.
|
|
(8) | CTIMCO (62.5%) and our co-sponsor (37.5%) earn net incentive management fees of 18.9% of profits after a 10% preferred return on capital and a 100% return of capital, subject to a catch-up. |
Taxes
We
account for our operations using accounting principles generally accepted in the
United States, or GAAP. Below, we reconcile the differences between our
GAAP-basis reporting and the equivalent amounts prepared on an income tax
basis.
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). These entities are presented on a
consolidated basis under GAAP, however are separate tax payers. The table below
shows our consolidated GAAP net loss, as well as the contributions from each of
the REIT and the TRS on a GAAP basis:
GAAP
Net Loss Detail
|
|
(in
thousands)
|
Year
Ended
December
31, 2009
|
REIT
GAAP net loss
|
($575,086)
|
TRS
GAAP net loss
|
(1,351)
|
Consolidated
GAAP net loss
|
($576,437)
|
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.
In
addition, we are subject to taxation on the income generated by investments in
our CDOs. Due to the redirection provisions of our CDOs, which reallocate
principal proceeds and interest otherwise distributable to us to repay senior
note holders, assets financed through our CDOs may generate current taxable
income without a corresponding cash distribution to us.
The table
below reconciles the differences between GAAP net loss and estimated taxable
loss for the REIT:
REIT
GAAP to Tax Reconciliation
|
||||
(in
thousands)
|
Year
Ended
December
31, 2009
|
|||
REIT
GAAP net loss
|
($575,086 | ) | ||
GAAP
to tax differences:
|
||||
Provision for loan losses on participations sold | 172,465 | |||
Losses, allowances and provisions on investments(1) | 42,366 | |||
Equity investments(2) | 3,676 | |||
General and administrative(3) | 525 | |||
Deferred income | 1,609 | |||
Other | 440 | |||
Subtotal | 221,081 | |||
REIT
taxable loss (pre-dividend)
|
($354,005 | ) |
(1) |
Comprised
of (i) losses treated as “capital losses” for tax and (ii) 2009 GAAP
losses that will be recognized in future tax periods. This is offset by
tax losses recognized in 2009 that were recorded as GAAP losses in prior
periods.
|
|
(2)
|
GAAP to tax differences relating to our investments in CTOPI and Fund III. | |
(3) | Primarily differences associated with compensation to our directors. |
For tax
year 2009, we do not expect to pay any significant taxes at the REIT, as we have
an estimated taxable loss for the period.
As of
December 31, 2009, we have $357.0 million of net operating losses, or NOLs, and
$64.4 million of net capital losses, or NCLs, available to be carried forward
and utilized in future periods.
TRS
(CTIMCO)
CTIMCO is
a wholly owned subsidiary that operates our investment management business
(including the management of Capital Trust, Inc.) and holds certain of our
assets. As a TRS, CTIMCO is subject to corporate taxation.
The table
below reconciles GAAP net loss to estimated taxable income for the
TRS:
TRS
GAAP to Tax Reconciliation
|
||||
(in
thousands)
|
Year
Ended
December
31, 2009
|
|||
TRS
GAAP net loss
|
($1,351 | ) | ||
TRS
income tax benefit
|
(286 | ) | ||
TRS
GAAP net loss (pre GAAP tax benefit)
|
(1,637 | ) | ||
GAAP
to tax differences:
|
||||
General and administrative (1) | 1,116 | |||
Intangible assets(2) | 2,235 | |||
Other | 20 | |||
Subtotal | 3,371 | |||
TRS
taxable income (pre-NOL) (3)
|
$1,734 |
(1) |
Primarily
differences associated with stock based and other compensation to our
employees.
|
|
(2)
|
Represents
timing differences related to the write off of goodwill for GAAP in
2009.
|
|
(3)
|
We
will utilize our NOLs carried forward from prior tax periods to fully
offset this taxable income at the
TRS.
|
For tax
year 2009, we do not expect to pay any significant taxes at the TRS, as the TRS
is expected to utilize net operating loss, or NOL, carryforwards to offset its
estimated taxable income.
GAAP
Tax Provision (Consolidated)
During
2009, in our GAAP-basis consolidated financial statements, we recorded an income
tax benefit of $694,000, which was primarily due to a $408,000 tax refund. The
remaining balance was primarily a result of changes to our deferred tax asset
relating to (i) GAAP-to-tax differences for stock-based and other compensation
to our employees, (ii) changes in intangible assets, and (iii) utilization of
net operating losses.
Dividends
In 2009,
we did not pay any dividends to holders of our class A common
stock.
See
Part II - Item 5 to this Form 10-K for details on dividends.
Results
of Operations
Comparison
of Results of Operations: Year Ended December 31, 2009 vs. December 31,
2008
|
||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 121,818 | $ | 194,649 | $ | (72,831 | ) | (37.4 | %) | |||||||
Less:
Interest and related expenses
|
79,794 | 129,665 | (49,871 | ) | (38.5 | %) | ||||||||||
Income
from loans and other investments, net
|
42,024 | 64,984 | (22,960 | ) | (35.3 | %) | ||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
11,743 | 12,941 | (1,198 | ) | (9.3 | %) | ||||||||||
Servicing
fees
|
1,679 | 367 | 1,312 | 357.5 | % | |||||||||||
Other
interest income
|
153 | 1,566 | (1,413 | ) | (90.2 | %) | ||||||||||
Total
other revenues
|
13,575 | 14,874 | (1,299 | ) | (8.7 | %) | ||||||||||
Other
expenses:
|
||||||||||||||||
General
and administrative
|
22,102 | 24,957 | (2,855 | ) | (11.4 | %) | ||||||||||
Depreciation
and amortization
|
71 | 179 | (108 | ) | (60.3 | %) | ||||||||||
Total
other expenses
|
22,173 | 25,136 | (2,963 | ) | (11.8 | %) | ||||||||||
Total
other-than-temporary impairments of securities
|
(123,894 | ) | (917 | ) | (122,977 | ) | N/A | |||||||||
Portion
of other-than-temporary impairments of securities recognized
in other comprehensive income
|
14,256 | — | 14,256 | N/A | ||||||||||||
Impairment
of goodwill
|
(2,235 | ) | — | (2,235 | ) | N/A | ||||||||||
Impairment
of real estate held-for-sale
|
(2,233 | ) | (2,000 | ) | (233 | ) | 11.7 | % | ||||||||
Net
impairments recognized in earnings
|
(114,106 | ) | (2,917 | ) | (111,189 | ) | N/A | |||||||||
Provision
for loan losses
|
(482,352 | ) | (63,577 | ) | (418,775 | ) | 658.7 | % | ||||||||
Gain
on extinguishment of debt
|
— | 6,000 | (6,000 | ) | (100.0 | %) | ||||||||||
(Loss)
gain on sale of investments
|
(10,363 | ) | 374 | (10,737 | ) | N/A | ||||||||||
Valuation
allowance on loans held-for-sale
|
— | (48,259 | ) | 48,259 | (100.0 | %) | ||||||||||
Loss
from equity investments
|
(3,736 | ) | (1,988 | ) | (1,748 | ) | 87.9 | % | ||||||||
Loss
before income taxes
|
(577,131 | ) | (55,645 | ) | (521,486 | ) | 937.2 | % | ||||||||
Income
tax (benefit) provision
|
(694 | ) | 1,893 | (2,587 | ) | N/A | ||||||||||
Net
loss
|
$ | (576,437 | ) | $ | (57,538 | ) | $ | (518,899 | ) | 901.8 | % | |||||
Net
loss per share - diluted
|
$ | (25.76 | ) | $ | (2.73 | ) | $ | (23.03 | ) | N/A | ||||||
Dividend
per share
|
$ | 0.00 | $ | 2.20 | $ | (2.20 | ) | (100.0 | %) | |||||||
Average
LIBOR
|
0.33 | % | 2.69 | % | (2.36 | %) | (87.6 | %) |
Income
from loans and other investments, net
A decline
in the principal balance of our loans and securities ($365 million or 13% from
December 31, 2008 to December 31, 2009), an increase in non-performing loans and
a 88% decrease in average LIBOR contributed to a $72.8 million, or 37%, decrease
in interest income during 2009 compared to 2008. Lower LIBOR and a decrease in
leverage of $308.0 million, or 15%, from December 31, 2008 to December 31, 2009
resulted in a $49.9 million, or 39%, decrease in interest expense for the
period. On a net basis, net interest income decreased by $23.0 million, or
35%.
Management
fees from affiliates
Base
management fees from our investment management business decreased $1.2 million,
or 9%, during 2009 compared to 2008. The decrease was attributed primarily to a
decrease of $957,000 in fees from Large Loan due to the liquidation of the
portfolio in the normal course and a $314,000 one-time decrease in fees from
CTOPI due to a 2008 true-up from investors in subsequent closings. The decrease
in fees from Large Loan and CTOPI and immaterial decreases in fees from other
funds were partially offset by a $432,000 increase in fees from CT High Grade II
due to additional investment activity.
Servicing
fees
Servicing
fees increased $1.3 million in 2009 compared to 2008. Servicing fees in 2009,
including a one time payment of $1.2 million received in the first quarter, were
primarily for modifications to loans for which we are named special
servicer.
General
and administrative expenses
General
and administrative expenses include personnel costs, operating expenses and
professional fees. Total general and administrative expenses decreased $2.9
million, or 11%, between 2008 and 2009. The decrease in 2009 was primarily a
result of lower compensation costs including a $3.2 million decrease in non-cash
restricted stock expense, offset by an increase in professional
fees.
Net
impairments recognized in earnings
During
2009, we recorded a gross other-than-temporary impairment of $123.9 million on
13 of our securities that had an adverse change in cash flow expectations. Of
this amount, $109.6 million was included in earnings and the remainder, $14.3
million, was included in other comprehensive income. We also recorded an
other-than-temporary impairment of $2.2 million on our Real Estate Held-for-Sale
to reflect the property at fair value and a $2.2 million impairment of goodwill
related to our June 2007 acquisition of a healthcare loan origination platform.
In 2008, we recorded an other-than-temporary impairment of $900,000 on one of
our CMBS investments due to an adverse change in our expectation of future cash
flows from that security. We also recorded a $2.0 million impairment on our Real
estate held-for-sale to reflect our then estimate of losses to our position upon
a sale of the property.
Provision
for loan losses
During
the year ended December 31, 2009, we recorded an aggregate $482.4 million
provision for loan losses against 20 loans. This includes $172.5 million of
provisions recorded on loan participations sold which did not qualify for sale
accounting under GAAP and remain on our consolidated balance sheet as both
assets and equivalent liabilities. Although provisions were recorded against
these assets in 2009, the liabilities will not be eliminated until the loans are
contractually extinguished.
During
2008, we recorded an aggregate $63.6 million provision for loan losses against
four loans. One of the loans, against which we had recorded a $6.0 million
provision in the first quarter of 2008, was written-off during the second
quarter and the $6.0 million liability collateralized by the loan was forgiven
by the creditor.
Gain
on extinguishment of debt
During
the year ended December 31, 2009, we did not record any gains on extinguishment
of debt. During the second quarter of 2008, $6.0 million of debt forgiveness by
a creditor was recorded as a gain on extinguishment of debt.
(Loss) gain on sale
of investments
During
the year ended December 31, 2009, we recorded a $10.4 million loss on the
sale of two loans that were classified as held-for-sale. At December 31, 2007,
we had one CMBS investment that we designated and accounted for as
available-for-sale with a face value of $7.7 million. During the second quarter
of 2008, the security was sold for a gain of $374,000.
Valuation
allowance on loans held-for-sale
During
2009, we did not record any valuation allowance against loans classified as
held-for-sale. During 2008, we recorded a $48.3 million valuation allowance
against our four loans classified as held-for-sale to reflect these assets at
fair value.
Loss
from equity investments
The loss
from equity investments during 2009 resulted primarily from our share of losses
incurred at CTOPI. Our share of losses from CTOPI was $3.3 million, primarily
due to fair value adjustments on the underlying investments. The loss from
equity investments during 2008 resulted primarily from our share of operating
losses at both CTOPI, $1.7 million, and Fund III, $233,000.
Income
tax (benefit) provision
During
2009, we recorded an income tax benefit of $694,000 which was primarily due to a
$408,000 tax refund. The remaining balance was primarily a result of changes our
deferred tax asset relating to (i) GAAP-to-tax differences for stock-based
compensation to our employees, (ii) changes in intangible assets, and (iii)
utilization of net operating losses. In 2008, we recorded an income tax
provision of $1.9 million. The income tax provision was a result of changes to
our deferred tax asset resulting from GAAP-to-tax differences relating to
restricted stock compensation and net operating losses, partially offset by a
refund due to the overpayment of taxes.
Dividends
We did
not pay any dividends in 2009. In 2008, we paid a dividend of $2.20 per
share.
Comparison
of Results of Operations: Year Ended December 31, 2008 vs. December 31,
2007
|
||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||
2008
|
2007
|
$
Change
|
%
Change
|
|||||||||||||
Income
from loans and other investments:
|
||||||||||||||||
Interest
and related income
|
$ | 194,649 | $ | 253,422 | $ | (58,773 | ) | (23.2 | %) | |||||||
Less:
Interest and related expenses
|
129,665 | 162,377 | (32,712 | ) | (20.1 | %) | ||||||||||
Income
from loans and other investments, net
|
64,984 | 91,045 | (26,061 | ) | (28.6 | %) | ||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
12,941 | 3,499 | 9,442 | 269.8 | % | |||||||||||
Incentive
management fees from affiliates
|
— | 6,208 | (6,208 | ) | (100.0 | %) | ||||||||||
Servicing
fees
|
367 | 623 | (256 | ) | (41.1 | %) | ||||||||||
Other
interest income
|
1,566 | 1,083 | 483 | 44.6 | % | |||||||||||
Total
other revenues
|
14,874 | 11,413 | 3,461 | 30.3 | % | |||||||||||
Other
expenses:
|
||||||||||||||||
General
and administrative
|
24,957 | 29,956 | (4,999 | ) | (16.7 | %) | ||||||||||
Depreciation
and amortization
|
179 | 1,810 | (1,631 | ) | (90.1 | %) | ||||||||||
Total
other expenses
|
25,136 | 31,766 | (6,630 | ) | (20.9 | %) | ||||||||||
Total
other-than-temporary impairments of securities
|
(917 | ) | — | (917 | ) | 100.0 | % | |||||||||
Portion
of other-than-temporary impairments of securities recognized
in other comprehensive income
|
— | — | — | N/A | ||||||||||||
Impairment
of real estate held-for-sale
|
(2,000 | ) | — | (2,000 | ) | 100.0 | % | |||||||||
Net
impairments recognized in earnings
|
(2,917 | ) | — | (2,917 | ) | 100.0 | % | |||||||||
Provision
for loan losses
|
(63,577 | ) | — | (63,577 | ) | 100.0 | % | |||||||||
Gain
on extinguishment of debt
|
6,000 | — | 6,000 | 100.0 | % | |||||||||||
Gain
on sale of investments
|
374 | 15,077 | (14,703 | ) | (97.5 | %) | ||||||||||
Valuation
allowance on loans held-for-sale
|
(48,259 | ) | — | (48,259 | ) | 100.0 | % | |||||||||
Loss
from equity investments
|
(1,988 | ) | (2,109 | ) | 121 | (5.7 | %) | |||||||||
(Loss)
income before income taxes
|
(55,645 | ) | 83,660 | (139,305 | ) | (166.5 | %) | |||||||||
Income
tax provision (benefit)
|
1,893 | (706 | ) | 2,599 | (368.1 | %) | ||||||||||
Net
(loss) income
|
$ | (57,538 | ) | $ | 84,366 | $ | (141,904 | ) | (168.2 | %) | ||||||
Net
(loss) income per share - diluted
|
$ | (2.73 | ) | $ | 4.77 | $ | (7.50 | ) | (157.2 | %) | ||||||
Dividend
per share
|
$ | 2.20 | $ | 5.10 | $ | (2.90 | ) | (56.9 | %) | |||||||
Average
LIBOR
|
2.69 | % | 5.25 | % | (2.6 | %) | (48.8 | %) | ||||||||
Income
from loans and other investments, net
A
decrease in the principal balance of our loans and securities ($298.5 million or
11% from December 31, 2007 to December 31, 2008) along with a 49% decrease in
average LIBOR, drove a $58.8 million (23%) decrease in interest income between
2007 and 2008. These same factors, combined with generally lower levels of
leverage in 2008, resulted in a $32.7 million (20%) decrease in interest expense
for the same period. On a net basis, net interest income decreased by $26.1
million (29%).
Management
fees from affiliates
Base
management fees from our investment management business increased in 2008 by
$9.4 million (270%) due primarily to fees associated with our two newest
investment management vehicles, CTOPI and CT High Grade II.
Incentive
management fees from affiliates
We
received no incentive management fees in 2008. In 2007, incentive fees received
from Fund III totaled $5.2 million 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 also received a final incentive management fee
distribution from Fund II of $962,000 in March 2007, as Fund II’s final
remaining investment repaid and Fund II was liquidated.
Servicing
fees
Servicing
fee income for 2008 was $367,000, compared with $623,000 in 2007. In December
2008, we conveyed our interest in our healthcare origination platform to its
original owner and expensed the unamortized intangible assets related to that
transaction, which resulted in the majority of the $256,000 decline from
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 decreased 17% between 2008 and 2007 as a result of lower compensation
costs and 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. The decrease in compensation costs more than offset the modest
increases in operating expenses. Net of the impact of incentive management fees,
general and administrative expenses decreased $2.5 million (9%) from
2007.
Depreciation
and amortization
Depreciation
and amortization decreased by $1.6 million between 2007 and 2008 due primarily
to the expensing of $1.3 million of capitalized costs related to the liquidation
of Fund II and the expensing of capitalized costs from Fund III and Bracor
Investimentos Imobiliarios Ltda., or Bracor, all in 2007. Net of these one-time
transactions, depreciation and amortization remained flat from 2007 to
2008.
Net
impairments recognized in income
In 2008,
we recorded an other-than-temporary impairment of $900,000 on one of our CMBS
investments due to an adverse change in our expectation of future cash flows
from that security. We also recorded a $2.0 million impairment on our Real
estate held-for-sale to reflect our then estimate of losses to our position upon
a sale of the property.
Provision
for loan losses
During
2008, we recorded an aggregate $63.6 million provision for loan losses against
four loans. One of the loans, against which we had recorded a $6.0 million
provision in the first quarter of 2008, was written-off during the second
quarter and the $6.0 million liability collateralized by the loan was forgiven
by the creditor.
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) a reduction of the carrying
value of the loan from $2.6 million to zero, (b) a $4.0 million recovery of
prior provisions for loan losses and (c) $4.3 million of interest income. In the
fourth quarter of 2007 we recorded a $4.0 million provision for loan losses
against one second mortgage loan with a principal balance of $10.0 million. This
resulted in a net zero provision for loan losses on the 2007 consolidated
statement of operations.
Gain
on extinguishment of debt
$6.0
million of debt forgiveness by a creditor was recorded as a gain on
extinguishment of debt in 2008. We recorded no such gains for the year ended
December 31, 2007.
Gain
on sale of investments
As of
December 31, 2007, we had one CMBS investment that we designated and accounted
for as available-for-sale with a face value of $7.7 million. The security earned
interest at a weighted average coupon of 8.34% at December 31, 2007. During the
second quarter of 2008 the security was sold for a gain of $374,000. 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
W. R. Berkley Corporation, or WRBC. WRBC beneficially owns approximately 17.2%
of our outstanding class A common stock as of February 23, 2010 and a
member of our board of directors is an employee of WRBC.
Valuation
allowance on loans held-for-sale
As of
December 31, 2008, we recorded a $48.3 million valuation allowance against our
four loans classified as held-for-sale to reflect these assets at fair value. No
loans were classified as held-for-sale as of December 31, 2007.
Loss
from equity investments
The loss
from equity investments for 2008 resulted primarily from our share of operating
losses at CTOPI and Fund III. Our loss from CTOPI for 2008 was $1.6 million,
which primarily represents net unrealized losses due to the fair value
adjustments on CTOPI investments, and our loss from Fund III was $326,000. Our
loss from equity investments in 2007 was derived primarily from the operations
of Bracor, Fund II and Fund III. In 2007, our Bracor investment generated a net
loss of $1.2 million. In 2007, our Fund II investment generated a net loss of
$690,000 which included an operating loss of $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.
Income
tax provision (benefit)
In 2008,
we recorded an income tax provision of $1.9 million. The income tax provision
was a result of changes to our deferred tax asset resulting from GAAP-to-tax
differences relating to restricted stock compensation and net operating losses,
partially offset by a refund due to the overpayment of taxes. In 2007, we
recorded an income tax benefit of $706,000, a result of changes to our deferred
tax asset of $50,000 and the reversal of tax liability reserves at Capital
Trust, Inc. and CTIMCO of $254,000 and $402,000, respectively.
Dividends
Our
regular dividends for 2008 and 2007 were $2.20 per share and $3.20 per share,
respectively. In 2007 we also paid a special dividend of $1.90 per share. Total
dividends per share in 2008 and 2007 were $2.20 and $5.10, respectively,
representing a decrease of $2.90 per share.
Liquidity
and Capital Resources
Sources
of liquidity as of December 31, 2009 include cash on hand, net operating cash
flow, repayments under Loans and Securities and asset disposition proceeds. Uses
of liquidity include operating expenses, required debt repayments, Unfunded Loan
Commitments, various commitments to our managed funds and dividends necessary to
maintain our REIT status. We believe our current sources of capital, coupled
with our expectations regarding potential asset dispositions and other
transactions, will be adequate to meet our near term cash
requirements.
Our
liquidity and capital resources outlook was significantly impacted by the
restructuring of our debt obligations during the first quarter of 2009. We
agreed to pay each of our participating secured lenders additional principal
amortization equal to 65% of the net interest margin and 100% of the principal
proceeds from assets in their collateral pool, which amounts would otherwise
have been free cash flow available to us. In addition to the required repayments
to our secured lenders, we agreed to increase the cash coupon by 1.25% per annum
and to make a minimum $5.0 million repayment under our senior credit facility by
March 2010.
Cash
Flows
We
experienced a net decrease in cash of $17.4 million for the year ended December
31, 2009, compared to a net increase of $19.6 million for the year ended
December 31, 2008.
Cash
provided by operating activities during the year ended December 31, 2009 was
$39.8 million, compared to cash provided by operating activities of $54.0
million during the same period of 2008. The change was primarily due to a
decrease in our net interest margin and non-recurring restructuring costs
incurred in the first quarter of 2009, offset by additional servicing fees
collected during 2009. A significant portion of our interest earning assets
serve as collateral for our secured debt obligations (repurchase agreements and
CDOs). These interest earning assets generate a significant portion of our cash
flow, which has been redirected, either in whole or in part, towards repayment
of the applicable debt.
During
the year ended December 31, 2009, cash provided by investing activities was
$122.2 million, compared to $154.6 million provided by investing activities
during the same period in 2008. The change was primarily due to a decrease in
principal repayments of $175.4 million during the year ended December 31, 2009
compared to the year ended December 31, 2008, offset by a decrease in additional
fundings, originations, and acquisitions of $122.4 million for the same periods.
In 2009, we also received $7.7 million of proceeds from the
operation/disposition of real estate held for sale. During the year ended
December 31, 2008, we also experienced an increase of $13.1 million in
restricted cash at our CDOs.
During
the year ended December 31, 2009, cash used in financing activities was $179.4
million, compared to $189.1 million during the same period in 2008. During the
year ended December 31, 2009, the cash used in financing activities was
primarily comprised of repayments of $135.5 million under our repurchase
obligations and $58.8 million in repayments of collateralized debt obligations.
During the year ended December 31, 2008, the cash used in financing activities
was comprised of net repayments under repurchase obligations and credit
facilities of $181.8 million, repayments of collateralized debt obligations of
$35.9 million, and dividend distributions of $95.8 million, offset by $123.2
million in proceeds from the public offering of our common stock.
Capitalization
Our
authorized capital stock consists of 100,000,000 shares of $0.01 par value class
A common stock, of which 21,875,282 shares were issued and outstanding as of
December 31, 2009, and 100,000,000 shares of preferred stock, none of which were
outstanding as of December 31, 2009.
Pursuant
to the terms of our debt restructuring on March 16, 2009, we issued to JPMorgan,
Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class
A common stock at an exercise price of $1.79 per share, the closing bid price on
the New York Stock Exchange on March 13, 2009. The warrants will become
exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised
through a cashless exercise.
Repurchase
Obligations and Secured Debt
As of
December 31, 2009, we were party to three master repurchase agreements with
three counterparties, with aggregate total outstanding borrowings of $450.7
million. The terms of these agreements are described in Note 9 to our
consolidated financial statements.
Collateralized
Debt Obligations
As of
December 31, 2009, we had CDOs outstanding from four separate issuances with a
total face value of $1.1 billion. The terms of these issuances are described in
Note 9 to our consolidated financial statements.
Senior
Credit Facility
As of
December 31, 2009, we had $99.2 million outstanding under our senior credit
facility at a cash cost of LIBOR plus 3.00% and an all-in cost of 7.20%. The
terms of this agreement are described in Note 9 to our consolidated financial
statements.
Junior
Subordinated Notes
As of
December 31, 2009 we had $143.8 million of junior subordinated notes outstanding
with a book value of $128.1 million and a current coupon of 1.00% per annum. The
terms of these notes are described in Note 9 to the consolidated financial
statements.
Contractual
Obligations
The
following table sets forth information about certain of our contractual
obligations as of December 31, 2009:
Contractual
Obligations(1)
|
||||||||||||||||||||
(in
millions)
|
||||||||||||||||||||
Payments
due by period
|
||||||||||||||||||||
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||||||
Long-term
debt obligations
|
||||||||||||||||||||
Repurchase
obligations
|
$451 | $3 | $448 | $— | $— | |||||||||||||||
Collateralized
debt obligations
|
1,097 | — | — | — | 1,097 | |||||||||||||||
Senior
credit facility
|
99 | 5 | 94 | — | — | |||||||||||||||
Junior
subordinated notes
|
144 | — | — | — | 144 | |||||||||||||||
Total
long-term debt obligations
|
1,791 | 8 | 542 | — | 1,241 | |||||||||||||||
Unfunded
commitments
|
||||||||||||||||||||
Loans
|
5 | — | 3 | 2 | — | |||||||||||||||
Equity
investments(2)
|
18 | 18 | — | — | — | |||||||||||||||
Total
unfunded commitments
|
23 | 18 | 3 | 2 | — | |||||||||||||||
Operating
lease obligations
|
9 | 1 | 2 | 2 | 4 | |||||||||||||||
Total
|
$1,823 | $27 | $547 | $4 | $1,245 |
(1) |
We
are also subject to interest rate swaps for which we cannot estimate
future payments due.
|
||
(2) |
CTOPI’s
investment period expires in December 2010, at which point our obligation
to fund capital calls will be limited. It is possible that our unfunded
capital commitment will not be entirely called, and the timing and amount
of such required contributions is not estimable. Our entire unfunded
commitment is assumed to be funded by December 2010 for purposes of the
above
table.
|
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements. See below for a discussion of our critical
accounting policies.
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, or GAAP. 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 consolidated financial
statements. Actual results could differ from these estimates. During 2009,
management reviewed and evaluated its critical accounting policies and believes
them to be appropriate. Our significant 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:
Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 168, “The FASB Accounting Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162,” or FAS 168. FAS 168 establishes the FASB Accounting
Standards Codification, or the Codification, as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP, and
states that all guidance contained in the Codification carries an equal level of
authority. Rules and interpretive releases of the Securities and Exchange
Commission, or SEC, under federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification does not change GAAP,
however it does change the way in which it is to be researched and referenced.
FAS 168 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Accordingly, references to
pre-Codification accounting literature in our financial statements have been
updated.
Principles
of Consolidation
The
accompanying financial statements include, on a consolidated basis, our
accounts, the accounts of our wholly-owned subsidiaries, and variable interest
entities, or VIEs, in which we are the primary beneficiary, prepared in
accordance with GAAP. All significant intercompany balances and transactions
have been eliminated in consolidation.
VIEs are
defined as entities in which equity investors (i) do not have the
characteristics of a controlling financial interest and/or (ii) do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. A VIE is required
to be consolidated by its primary beneficiary, which is the party that (i) will
absorb a majority of the VIE’s expected losses and/or (ii) receive a majority of
its expected residual returns as a result of holding variable
interests.
Collateralized
Debt Obligations
We
currently consolidate four collateralized debt obligation, or CDO, trusts, which
are VIEs and were sponsored by us. These CDO trusts invest in commercial real
estate debt instruments, some of which we originated/acquired and transferred to
the trust entities, and are financed by the debt and equity they issue. We are
named as collateral manager of all four CDOs and are named special servicer on a
number of CDO collateral assets. As a result of consolidation, our subordinate
debt and equity ownership interests in these CDO trusts have been eliminated,
and our balance sheet reflects both the assets held and debt issued by these
CDOs to third parties. Similarly, our operating results and cash flows include
the gross amounts related to the assets and liabilities of the CDO entities, as
opposed to our net economic interests in these entities. Fees earned by us for
the management of these CDOs are eliminated in consolidation.
Our
interest in the assets held by these CDO trusts, which are consolidated onto our
balance sheet, is restricted by the structural provisions of these entities, and
our recovery of these assets will be limited by the CDO trusts’ distribution
provisions, which are subject to change due to covenant breaches or asset
impairments, as further described in Note 9. The liabilities of the CDO trusts,
which are also consolidated onto our balance sheet, are non-recourse to us, and
can generally only be satisfied from each CDOs’ respective asset
pool.
We are
not obligated to provide, nor have we provided, any financial support to these
CDO entities. Accordingly, as of December 31, 2009, our maximum exposure to loss
as a result of our investment in these entities is limited to $240.8 million,
the notional amount of the subordinate debt and equity interest we retained in
these CDO entities. After giving effect to certain transfers of these interests,
provisions for loan losses and other-than-temporary impairments recorded as of
December 31, 2009, our remaining net exposure to loss from these entities is
$69.4 million.
Securities
Portfolio
Our
securities portfolio includes investments in both commercial mortgage-backed
securities, or CMBS, and CDOs, which are considered VIEs, and we are named as
special servicer on a number of these investments. These securities were
acquired through investment, and do not represent a securitization or other
transfer of our assets. The total face amount of assets in such entities where
we are named special servicer aggregated $1.5 billion as of December 31,
2009.
We are
not obligated to provide, nor have we provided, any financial support to these
entities. Accordingly, as of December 31, 2009, our maximum exposure to loss as
a result of our investment in these entities, excluding the impact of loss
limitations due to non-recourse debt financing, is $856.4 million, the principal
amount of our securities portfolio. As of December 31, 2009, we have recorded
other-than-temporary impairments of $118.3 million against our portfolio,
resulting in a net book balance of $715.2 million on our consolidated balance
sheet.
Certain
of our securities investments have control over the issuing entity, and we could
therefore be considered to be the primary beneficiary of these VIEs.
Accordingly, these and similar instruments could be required to be presented on
a consolidated basis. However, based upon the specific circumstances of certain
of our securities that are controlling class investments and our
interpretation of the exemption for qualifying special purpose entities under
GAAP, we have concluded that the entities that have issued the controlling class
investments should not be presented on a consolidated basis. As discussed
further below, recent modifications to GAAP may impact our consolidation
conclusions regarding these entities effective January 1, 2010.
Equity
Investments in Unconsolidated Subsidiaries
Our
co-investment interest in the private equity funds we manage, CT Mezzanine
Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or
CTOPI, and others are accounted for using the equity method. These entities’
assets and liabilities are not consolidated into our financial statements due to
our determination that either (i) for entities that are VIEs we are not the
primary beneficiary of such entities’ variability, generally due to the
insignificance of our share of ownership and certain control provisions for
these entities, or (ii) for entities that are not VIEs, the investors have
sufficient rights to preclude consolidation by us. As such, we report our
allocable percentage of the earnings or losses of these entities on a single
line item in our consolidated statements of operations as income/(loss) from
equity investments.
CTOPI
maintains its financial records at fair value in accordance with GAAP. We have
applied such accounting relative to our investment in CTOPI, and include any
adjustments to fair value recorded at the fund level in determining the
income/(loss) we record on our equity investment in CTOPI.
Revenue
Recognition
Interest
income from our loans receivable is recognized over the life of the investment
using the effective interest method and is recorded on the accrual basis. Fees,
premiums, discounts and direct costs associated with these investments are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment to yield. For loans where we have unfunded commitments, we
amortize these fees and other items on a straight line basis. Fees on
commitments that expire unused are recognized at expiration. Income accrual is
generally suspended for loans at the earlier of the date at which payments
become 90 days past due or when, in the opinion of management, a full recovery
of income and principal becomes doubtful. Income is then recorded on the basis
of cash received until accrual is resumed when the loan becomes contractually
current and performance is demonstrated to be resumed.
Fees from
special servicing and asset management services are recorded on an accrual basis
as services are rendered under the applicable agreements, and when receipt of
fees is reasonably certain. We do not recognize incentive income from our
investment management business until contingencies have been eliminated.
Accordingly, revenue recognition has been deferred for certain fees received
which are subject to potential repayment provisions. Depending on the structure
of our investment management vehicles, certain incentive fees may be in the form
of carried interest or promote distributions.
See below
for a description of our revenue recognition policy for our securities
portfolio.
Securities
We
classify our securities as held-to-maturity, available-for-sale, or trading on
the date of acquisition of the investment. On August 4, 2005, we decided to
change the accounting classification of certain of our securities from
available-for-sale to held-to-maturity. Held-to-maturity investments are stated
at cost adjusted for the amortization of any premiums or discounts, which are
amortized through the consolidated statements of operations using the effective
interest method. Other than in the instance of an other-than-temporary
impairment (as discussed below), these held-to-maturity investments are shown in
our consolidated financial statements at their adjusted values pursuant to the
methodology described above.
We may
also invest in securities which may be classified as available-for-sale.
Available-for-sale securities are carried at estimated fair value with the net
unrealized gains or losses reported as a component of accumulated other
comprehensive income/(loss) in shareholders’ equity. Many of these investments
are relatively illiquid and management must estimate their values. In making
these estimates, management utilizes market prices provided by dealers who make
markets in these securities, but may, under limited circumstances, adjust these
valuations based on management’s judgment. Changes in the valuations do not
affect our reported income or cash flows, but impact shareholders’ equity and,
accordingly, book value per share.
Income
from our securities is recognized using a level yield with any purchase premium
or discount accreted through income over the life of the security. This yield is
calculated using cash flows expected to be collected which are based on a number
of assumptions on the underlying loans. Examples include, among other things,
the rate and timing of principal payments, including prepayments, repurchases,
defaults and liquidations, the pass-through or coupon rate and interest rates.
Additional factors that may affect our reported interest income on our
securities include interest payment shortfalls due to delinquencies on the
underlying mortgage loans and the timing and magnitude of expected credit losses
on the mortgage loans underlying the securities that are impacted by, among
other things, the general condition of the real estate market, including
competition for tenants and their related credit quality, and changes in market
rental rates. These uncertainties and contingencies are difficult to predict and
are subject to future events that may alter the assumptions.
Further,
as required under GAAP, when, based on current information and events, there has
been an adverse change in cash flows expected to be collected from those
previously estimated, an other-than-temporary impairment is deemed to have
occurred. A change in expected cash flows is considered adverse if the present
value of the revised cash flows (taking into consideration both the timing and
amount of cash flows expected to be collected) discounted using the security’s
current yield is less than the present value of the previously estimated
remaining cash flows, adjusted for cash receipts during the intervening period.
Should an other-than-temporary impairment be deemed to have occurred, the
security is written down to fair value. The total other-than-temporary
impairment is bifurcated into (i) the amount related to expected credit losses,
and (ii) the amount related to fair value adjustments in excess of expected
credit losses, or the Valuation Adjustment. The portion of the
other-than-temporary impairment related to expected credit losses is calculated
by comparing the amortized cost basis of the security to the present value of
cash flows expected to be collected, discounted at the security’s current yield,
and is recognized through earnings in the consolidated statement of operations.
The remaining other-than-temporary impairment related to the Valuation
Adjustment is recognized as a component of accumulated other comprehensive
income/(loss) in shareholders’ equity. A portion of other-than-temporary
impairments recognized through earnings is accreted back to the amortized cost
basis of the security through interest income, while amounts recognized through
other comprehensive income/(loss) are amortized over the life of the security
with no impact on earnings.
From time
to time we purchase securities and other investments in which we have a level of
control over the issuing entity; we refer to these investments as controlling
class investments. Generally, these and similar instruments could be
required to be presented on a consolidated basis. However, based upon the
specific circumstances of certain of our securities that are controlling
class investments and our interpretation of the exemption for qualifying
special purpose entities under GAAP, we have concluded that the entities that
have issued the controlling class investments should not be presented on a
consolidated basis. As discussed further below, recent modifications to GAAP may
impact our consolidation conclusions regarding these entities effective January
1, 2010.
Loans
Receivable, Provision for Loan Losses, Loans Held-for-Sale and Related
Allowance
We
purchase and originate commercial real estate debt and related instruments, or
Loans, generally to be held as long-term investments at amortized cost.
Management 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 impaired, we would write down the Loan
through a charge to the provision for loan losses. Impairment on these loans
is measured by comparing the estimated fair value of the underlying collateral
to the carrying value of the respective loan. These valuations require
significant judgments, which include assumptions regarding capitalization rates,
leasing, creditworthiness of major tenants, occupancy rates, availability of
financing, exit plan, loan sponsorship, actions of other lenders and other
factors deemed necessary by management. Actual losses, if any, could
ultimately differ from these estimates.
Loans
held-for-sale are carried at the lower of our amortized cost basis and fair
value. A reduction in the fair value of loans held-for-sale is recorded as a
charge to our consolidated statement of operations as a valuation allowance on
loans held-for-sale.
Repurchase
Obligations
In
certain circumstances, we have financed the purchase of investments from a
counterparty through a repurchase agreement with that same counterparty. We
currently record these investments in the same manner as other investments
financed with repurchase agreements, with the investment recorded as an asset
and the related borrowing under any repurchase agreement recorded as a liability
on our consolidated balance sheets. Interest income earned on the investments
and interest expense incurred on the repurchase obligations are reported
separately on the consolidated statements of operations.
For
fiscal years beginning after November 15, 2008, recent revisions to GAAP presume
that an initial transfer of a financial asset and a repurchase financing shall
not be evaluated as a linked transaction and shall be evaluated separately. If
the transaction does not meet the requirements for sale accounting, it shall
generally be accounted for as a forward contract, as opposed to the current
presentation, where the purchased asset and the repurchase liability are
reflected separately on the balance sheet. This revised guidance is effective on
a prospective basis, with earlier application prohibited. Given that the revised
guidance is to be applied prospectively, our adoption on January 1, 2009 did not
have a material impact on our consolidated financial statements with respect to
our existing transactions. New transactions entered into subsequently, which are
subject to the revised guidance, may be presented differently on our
consolidated financial statements.
Interest
Rate Derivative Financial Instruments
In the
normal course of business, we use interest rate derivative financial instruments
to manage, or hedge, cash flow variability caused by interest rate fluctuations.
Specifically, we currently use interest rate swaps to effectively convert
floating rate liabilities that are financing fixed rate assets, to fixed rate
liabilities. The differential to be paid or received on these agreements is
recognized on the accrual basis as an adjustment to the interest expense related
to the attendant liability. The interest rate swap agreements are generally
accounted for on a held-to-maturity basis, and, in cases where they are
terminated early, any gain or loss is generally amortized over the remaining
life of the hedged item. These swap agreements must be effective in reducing the
variability of cash flows of the hedged items in order to qualify for the
aforementioned hedge accounting treatment. Changes in value of effective cash
flow hedges are reflected in our consolidated financial statements through
accumulated other comprehensive income/(loss) and do not affect our net income.
To the extent a derivative does not qualify for hedge accounting, and is deemed
a non-hedge derivative, the changes in its value are included in net
income.
To
determine the fair value of interest rate derivative financial instruments, we
use a third party derivative specialist to assist us in periodically valuing our
interests.
Income
Taxes
Our
financial results generally do not reflect provisions for current or deferred
income taxes on our REIT taxable income. Management believes that we operate in
a manner that will continue to allow us to be taxed as a REIT and, as a result,
we do not expect to pay substantial corporate level taxes (other than taxes
payable by our taxable REIT subsidiaries). Many of these requirements, however,
are highly technical and complex. If we were to fail to meet these requirements,
we may be subject to federal, state and local income tax on current and past
income, and we may also be subject to penalties.
Accounting
for Stock-Based Compensation
Compensation
expense relating to stock-based compensation is recognized in net income using a
fair value measurement method, which we determine with the assistance of a
third-party appraisal firm. Compensation expense for the time vesting of
stock-based compensation grants is recognized on the accelerated attribution
method and compensation expense for performance vesting of stock-based
compensation grants is recognized on a straight line basis.
The fair
value of the performance vesting restricted common stock is measured on the
grant date using a Monte Carlo simulation to estimate the probability of the
market vesting conditions being satisfied. The Monte Carlo simulation is run
approximately 100,000 times. For each simulation, the payoff is calculated at
the settlement date, and is then discounted to the grant date at a risk-free
interest rate. The average of the values over all simulations is the expected
value of the restricted shares on the grant date. The valuation is performed in
a risk-neutral framework, so no assumption is made with respect to an equity
risk premium. Significant assumptions used in the valuation include an expected
term and stock price volatility, an estimated risk-free interest rate and an
estimated dividend growth rate.
Estimates
of fair value are not intended to predict actual future events or the value
ultimately realized by employees who receive equity awards, and subsequent
events are not indicative of the reasonableness of the original estimates of
fair value made by us.
Fair
Value of Financial Instruments
The “Fair
Value Measurements and Disclosures” topic of the Codification defines fair
value, establishes a framework for measuring fair value, and requires certain
disclosures about fair value measurements under GAAP. Specifically, this
guidance defines fair value based on exit price, or the price that would be
received upon the sale of an asset or the transfer of a liability in an orderly
transaction between market participants at the measurement date. Our assets and
liabilities which are measured at fair value are indicated as such in the
respective notes to our consolidated financial statements, and are discussed in
Note 16 to our consolidated financial statements.
Recent
Accounting Pronouncements
In April
2009, the FASB issued three concurrent Staff Positions, which included: (i)
Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” or FSP FAS 115-2, (ii) Staff Position No. FAS
157-4, “Determining Fair Value When the Volume and Level of Activity for an
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly,” or FSP FAS 157-4, and (iii) Staff Position No. FAS 107-1
and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments, or
FSP FAS 107-1. All three of these FASB Staff Positions are effective for periods
ending after June 15, 2009, with earlier adoption permitted for periods ending
after March 15, 2009. The adoption of FSP FAS 115-2, FSP FAS 157-4 and FSP FAS
107-1 is required to occur concurrently. Accordingly, we adopted all three of
these standards as of January 1, 2009.
FSP FAS
115-2 provides additional guidance for other-than-temporary impairments on debt
securities. In addition to existing guidance, under FSP FAS 115-2, an
other-than-temporary impairment is deemed to exist if an entity does not expect
to recover the entire amortized cost basis of a security. As discussed above,
FSP FAS 115-2 provides for the bifurcation of other-than-temporary impairments
into (i) amounts related to expected credit losses which are recognized through
earnings, and (ii) amounts related to the Valuation Adjustment which are
recognized as a component of other comprehensive income. Further, FSP FAS 115-2
requires certain disclosures for securities, which are included in Note 3 to the
consolidated financial statements. The adoption of FSP FAS 115-2 required a
reassessment of all securities which were other-than-temporarily impaired as of
January 1, 2009, the date of adoption, and resulted in a $2.2 million
reclassification from the beginning balance of retained deficit to accumulated
other comprehensive loss on our consolidated balance sheet. FSP FAS 115-2 has
been superseded by the Codification and its guidance incorporated into the
“Investments-Other” topic presented therein.
FSP FAS
157-4 provides additional guidance for fair value measures under FAS 157 in
determining if the market for an asset or liability is inactive and,
accordingly, if quoted market prices may not be indicative of fair value. The
adoption of FSP FAS 157-4 did not have a material impact on our consolidated
financial statements. FSP FAS 157-4 has been superseded by the Codification and
its guidance incorporated into the “Fair Value Measurements and Disclosures”
topic presented therein.
FSP FAS
107-1 extends the existing disclosure requirements related to the fair value of
financial instruments to interim periods in addition to annual financial
statements. The adoption of FSP FAS 107-1 did not have a material impact on our
consolidated financial statements. The disclosure requirements under FSP FAS
107-1 are included in Note 16 to the consolidated financial statements. FSP FAS
107-1 has been superseded by the Codification and its guidance incorporated into
the “Financial Instruments” topic presented therein.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
“Accounting for Transfers of Financial Assets, an amendment of FASB Statement
No. 140,” or FAS 166. FAS 166 amends various components of the guidance
governing sale accounting, including the recognition of assets obtained and
liabilities assumed as a result of a transfer, and considerations of effective
control by a transferor over transferred assets. In addition, FAS 166 removes
the consolidation exemption for qualifying special purpose entities discussed
above in relation to certain of our securities. FAS 166 is effective for the
first annual reporting period that begins after November 15, 2009, with early
adoption prohibited. While the amended guidance governing sale accounting is
applied on a prospective basis, the removal of the qualifying special purpose
entity exception will require us to evaluate certain entities for consolidation.
We believe that the presentation of our consolidated financial statements will
significantly change prospectively upon adoption of FAS 166. Specifically,
certain entities will be consolidated by us which were previously exempt due to
their status as qualified special purpose entities. FAS 166 has been superseded
by the Codification and its guidance is incorporated into the “Transfers and
Servicing” topic presented therein.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R),” or FAS 167, which amends existing
guidance for determining whether an entity is a variable interest entity, or
VIE, and requires the performance of a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE. Under this guidance, an
entity would generally be required to consolidate a VIE if it has (i) the power
to direct the activities that most significantly impact the entity’s economic
performance and (ii) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could be significant to the VIE. FAS 167 is
effective for the first annual reporting period that begins after November 15,
2009, with early adoption prohibited. We believe that the presentation of our
consolidated financial statements will significantly change prospectively upon
adoption of FAS 167. Specifically, certain entities will be consolidated by us
due to the change from a quantitative analysis to a qualitative analysis, as
well as the removal of the consolidation exception for qualified special purpose
entities discussed above. FAS 167 has been superseded by the Codification and
its guidance incorporated into the “Consolidation” topic presented
therein.
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Interest
Rate Risk
The
principal objective of our asset and 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 floating 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.
As of
December 31, 2009, a 100 basis point change in LIBOR would impact our net income
by approximately $4.5 million.
Credit
Risk
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 as of December 31, 2009. 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 floating 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
floating rates are based on rates in effect as of the reporting
date.
Expected
Maturity/Repayment Dates (1)
|
|||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
Fair
Value
|
||||||||||
(in
thousands)
|
|||||||||||||||||
Assets:
|
|||||||||||||||||
Securities
|
|||||||||||||||||
Fixed
rate
|
$40,846
|
$96,266
|
$112,038
|
$166,390
|
$51,880
|
$193,396
|
$660,816
|
$502,638
|
|||||||||
Interest rate(2)
|
6.75%
|
7.40%
|
7.06%
|
6.84%
|
6.05%
|
6.18%
|
6.70%
|
||||||||||
Floating
rate
|
$39,579
|
$3,493
|
$38,989
|
$—
|
$10
|
$1,574
|
$83,645
|
$25,024
|
|||||||||
Interest rate(2)
|
2.52%
|
1.18%
|
1.91%
|
—
|
2.25%
|
2.25%
|
2.18%
|
||||||||||
Loans receivable, net
|
|||||||||||||||||
Fixed
rate
|
$6,771
|
$27,831
|
$1,160
|
$1,246
|
$62,669
|
$31,781
|
$131,458
|
$119,348
|
|||||||||
Interest rate(2)
|
8.46%
|
8.46%
|
7.79%
|
7.78%
|
7.79%
|
8.01%
|
8.02%
|
||||||||||
Floating
rate
|
$117,615
|
$589,612
|
$184,290
|
$128,405
|
$903
|
$10,454
|
$1,031,279
|
$785,348
|
|||||||||
Interest rate(2)
|
4.11%
|
2.66%
|
3.10%
|
4.04%
|
2.19%
|
2.19%
|
3.07%
|
||||||||||
Loans held-for-sale
|
|||||||||||||||||
Floating
rate
|
$—
|
$17,567
|
$—
|
$—
|
$—
|
$—
|
$17,567
|
$17,548
|
|||||||||
Interest rate(2)
|
—
|
2.98%
|
—
|
—
|
—
|
—
|
2.98%
|
||||||||||
Debt
Obligations:
|
|||||||||||||||||
Repurchase obligations
|
|||||||||||||||||
Floating rate (3)
|
$2,656
|
$448,048
|
$—
|
$—
|
$—
|
$—
|
$450,704
|
$450,704
|
|||||||||
Interest rate(2)
|
2.09%
|
1.84%
|
—
|
—
|
—
|
—
|
1.84%
|
||||||||||
CDOs
|
|||||||||||||||||
Fixed
rate
|
$7,401
|
$38,758
|
$72,850
|
$100,173
|
$15,164
|
$31,909
|
$266,255
|
$223,919
|
|||||||||
Interest rate(2)
|
5.16%
|
5.16%
|
5.16%
|
5.19%
|
5.45%
|
6.24%
|
5.32%
|
||||||||||
Floating
rate
|
$175,673
|
$258,554
|
$131,967
|
$69,472
|
$60,714
|
$134,471
|
$830,851
|
$270,785
|
|||||||||
Interest rate(2)
|
0.54%
|
0.59%
|
0.61%
|
0.76%
|
0.86%
|
1.25%
|
0.73%
|
||||||||||
Senior credit facility
|
|||||||||||||||||
Fixed
rate
|
$5,000
|
$94,188
|
$—
|
$—
|
$—
|
$—
|
$99,188
|
$24,797
|
|||||||||
Interest rate(2)
|
3.23%
|
3.23%
|
—
|
—
|
—
|
—
|
3.23%
|
||||||||||
Junior subordinated notes
|
|||||||||||||||||
Fixed
rate
|
$—
|
$—
|
$—
|
$—
|
$—
|
$143,753
|
$143,753
|
$14,375
|
|||||||||
Interest rate(2)
(4)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||
Participations sold
|
|||||||||||||||||
Floating
rate
|
$—
|
$87,875
|
$201,334
|
$—
|
$—
|
$—
|
$289,209
|
$102,220
|
|||||||||
Interest rate(2)
|
—
|
2.08%
|
3.67%
|
—
|
—
|
—
|
3.19%
|
||||||||||
Derivative Financial Instruments: |
|
||||||||||||||||
Interest rate swaps
|
|||||||||||||||||
Notional
amounts
|
$13,383
|
$46,400
|
$81,887
|
$39,947
|
$92,872
|
$142,657
|
$417,146
|
($30,950)
|
|||||||||
Fixed pay rate(2)
|
5.06%
|
4.65%
|
4.98%
|
4.97%
|
4.97%
|
5.11%
|
4.99%
|
||||||||||
Floating receive
rate(2)
|
0.23%
|
0.23%
|
0.23%
|
0.23%
|
0.23%
|
0.23%
|
0.23%
|
(1) |
Expected repayment
dates and amounts are based on contractual agreements as of December 31,
2009, and do not give effect to transactions which have or may be expected
to occur subsequent to year end.
|
|
(2)
|
Represents
weighted average rates where applicable. Floating rates are based on LIBOR
of 0.23%, which is the rate as of December 31,
2009.
|
|
(3) | As discussed in Note 16 to our consolidated financial statements, due to the unique nature of our restructured repurchase obligations and secured debt, it is not practicable to estimate a fair value for these instruments. Accordingly, the amount included in the table above represents the current principal amount of these obligations. | |
(4) | The coupon on our junior subordinated notes will remain at 1.00% per annum through April 29, 2012, increase to 7.23% per annum for the period from April 30, 2012 through April 29, 2016 and then convert to a floating interest rate of three-month LIBOR + 2.44% per annum through maturity in 2036. |
Item 8.
|
Financial
Statements and Supplementary Data
|
The
financial statements required by this item and the reports of the independent
accountants thereon required by Item 15(a)(2) appear on pages F-2 to
F-52. 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 21 to our consolidated financial
statements.
Item 9.
|
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, 2009 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, 2009 that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
Item 9B.
|
Other
Information
|
None.
PART III
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 30,
2010 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 30, 2010 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 30, 2010 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 30, 2010 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 30, 2010 with the Securities and Exchange Commission
pursuant to Regulation 14A under the Exchange Act.
PART IV
Item
15.
|
Exhibits,
Financial Statement Schedules
|
(a) (1)
|
Financial
Statements
See
the accompanying Index to Financial Statement Schedule on
page F-1.
|
(a) (2)
|
Consolidated
Financial Statement Schedules
See
the accompanying Index to Financial Statement Schedule on
page F-1.
|
(a) (3)
|
Exhibits
|
EXHIBIT INDEX
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).
|
|
+
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 (filed as Exhibit 10.6 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 5, 2008 and incorporated herein by
reference).
|
|
+
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 2004 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 (filed as Exhibit 10.20 to Capital Trust,
Inc.’s Annual Report on Form 10-K (File No. 1-14788) filed on March 5,
2008 and incorporated herein by reference).
|
|
+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 (filed as
Exhibit 10.28 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 5, 2008 and incorporated herein by
reference).
|
|
+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 (filed as
Exhibit 10.29 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 5, 2008 and incorporated herein by
reference).
|
|
+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 (filed as
Exhibit 10.30 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 5, 2008 and incorporated herein by
reference).
|
|
+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 (filed as
Exhibit 10.31to Capital Trust, Inc.’s Annual Report on Form 10-K (File No.
1-14788) filed on March 5, 2008 and incorporated herein by
reference).
|
|
+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 (filed as
Exhibit 10.32 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 5, 2008 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
+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 (filed as
Exhibit 10.33 to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 5, 2008 and incorporated herein by
reference).
|
|
+10.34.a
|
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).
|
|
+10.34.b
|
Letter
Agreement, dated as of December 31, 2008, by and among Capital Trust,
Inc., CT Investment Management Co., LLC and John R. Klopp (filed as
Exhibit 10.34.b to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 16, 2009 and incorporated herein by
reference).
|
|
•
+10.34.c
|
Separation
and Consulting Agreement, dated as of November 19, 2009, between Capital
Trust, Inc. and John R. Klopp.
|
|
+
10.35
|
Amended
and Restated Employment Agreement, dated as of January 1, 2009, by and
between Capital Trust, Inc. and Stephen D. Plavin (filed as Exhibit 10.35
to Capital Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788)
filed on March 16, 2009 and incorporated herein by
reference).
|
|
+
10.36.a
|
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).
|
|
+
10.36.b
|
Letter
Agreement, dated as of December 31, 2008, by and among Capital Trust,
Inc., CT Investment Management Co., LLC and Geoffrey Jervis (filed as
Exhibit 10.36.b to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 16, 2009 and incorporated herein by
reference).
|
|
•
+10.36.c
|
Letter
Agreement, dated as of August 31, 2009, by and among Capital Trust, Inc.,
CT Investment Management Co., LLC and Geoffrey Jervis.
|
|
+
10.37.a
|
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).
|
|
+
10.37.b
|
Letter
Agreement, dated as of December 31, 2008, by and among Capital Trust,
Inc., CT Investment Management Co., and Thomas Ruffing (filed as Exhibit
10.37.b to Capital Trust, Inc.’s Annual Report on Form 10-K (File No.
1-14788) filed on March 16, 2009 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).
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
+
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
|
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).
|
|
+10.42
|
Summary
of Non-Employee Director Compensation (filed as Exhibit 10.51 to the
Company’s Annual Report on Form 10-K (File No. 1-14788) filed on February
28, 2007 and incorporated herein by reference).
|
|
10.43
|
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).
|
|
10.44
|
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. (filed as Exhibit 10.74 to Capital Trust, Inc.’s Annual Report
on Form 10-K (File No. 1-14788) filed on March 5, 2008 and incorporated
herein by reference).
|
|
10.45.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).
|
|
10.45.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).
|
|
10.46.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).
|
|
10.46.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).
|
|
*10.46.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).
|
|
10.46.d
|
Amendment
No. 10 to Master Repurchase Agreement, dated as of March 16, 2009, by and
among Capital Trust, Inc., CT RE CDO 2004-1 SUB, LLC, CT RE CDO 2005-1
SUB, LLC, CT XLC Holding, LLC and Morgan Stanley Bank, N.A. (filed as
Exhibit 10.46.d to Capital Trust, Inc.’s Annual Report on Form 10-K (File
No. 1-14788) filed on March 16, 2009 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
10.47.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).
|
|
10.47.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).
|
|
10.47.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).
|
|
10.47.d
|
Amended
and Restated Annex I to Amended and Restated Master Repurchase Agreement,
dated as of October 30, 2007, by and between Goldman Sachs Mortgage
Company and Capital Trust, Inc (filed as Exhibit 10.47.d to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788) filed on March
16, 2009 and incorporated herein by reference).
|
|
10.47.e
|
Agreement,
dated as of March 16, 2009, by Capital Trust, Inc. and Goldman Sachs
Mortgage Company (filed as Exhibit 10.47.e to Capital Trust, Inc.’s Annual
Report on Form 10-K (File No. 1-14788) filed on March 16, 2009 and
incorporated herein by reference).
|
|
10.47.f
|
Termination of
Master Repurchase Agreement, dated as of March 16, 2009, between Capital
Trust, Inc. and Goldman Sachs Mortgage Company (filed as Exhibit
10.47.f to Capital Trust, Inc.’s Annual Report on Form 10-K (File No.
1-14788) filed on March 16, 2009 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).
|
|
10.49.a
|
Master
Repurchase Agreement, dated as of October 24, 2008, by and among Capital
Trust, Inc., CT BSI Funding Corp. and JPMorgan Chase Bank, N.A.
(reflecting JPMorgan Chase Bank, N.A. as successor to Bear, Stearns
Funding, Inc. under the 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., as amended by that certain
Amendment No. 1, dated as of February 7, 2007, and as amended by that
certain Amendment No. 2, dated as of June 30, 2008) Company
(filed as Exhibit 10.49.a to Capital Trust, Inc.’s Annual Report on Form
10-K (File No. 1-14788) filed on March 16, 2009 and incorporated herein by
reference).
|
|
10.49.b
|
Amendment
No. 1 to Master Repurchase Agreement, dated as of March 16, 2009, by and
among CT BSI Funding Corp., Capital Trust, Inc., and JPMorgan Chase Bank,
N.A. (filed as Exhibit 10.49.b to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 16, 2009 and incorporated
herein by reference).
|
|
10.50.a
|
Master
Repurchase Agreement, dated as of November 21, 2008, by and among Capital
Trust, Inc., CT BSI Funding Corp. and JPMorgan Chase Funding Inc.
(reflecting JPMorgan Chase Bank, N.A. as successor to Bear, Stearns
International Limited under the 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., as
amended by that certain Amendment No. 1, dated as of February 7, 2007, and
as amended by that certain Amendment No. 2, dated as of June 30,
2008)
Company (filed as Exhibit 10.50.a to Capital Trust, Inc.’s Annual
Report on Form 10-K (File No. 1-14788) filed on March 16, 2009 and
incorporated herein by reference).
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
10.50.b
|
Amendment
No. 1 to Master Repurchase Agreement, dated as of March 16, 2009, by and
among Capital Trust, Inc., CT BSI Funding Corp. and JP Morgan Chase
Funding Inc. (filed as Exhibit 10.50.b to Capital Trust, Inc.’s Annual
Report on Form 10-K (File No. 1-14788) filed on March 16, 2009 and
incorporated herein by reference).
|
|
10.51
|
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 the Company’s
Current Report on Form 8-K (File No. 1-14788) filed on
March 23, 2000 and incorporated herein by
reference).
|
|
10.52
|
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 the Company’s Current Report on Form 8-K (File
No. 1-14788) filed on March 23, 2000 and incorporated herein by
reference).
|
|
10.53
|
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 the Company’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 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 the Company’s Current Report on Form 8-K (File
No. 1-14788) filed on March 23, 2000 and incorporated herein by
reference).
|
|
10.55
|
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).
|
|
10.56
|
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).
|
|
10.57
|
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).
|
|
10.58
|
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).
|
|
10.59
|
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).
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
10.60
|
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).
|
|
10.61
|
Junior
Subordinated Indenture, dated as of March 16, 2009, between Capital Trust,
Inc. and The Bank of New York Mellon Trust Company, National Association,
as Trustee (filed as Exhibit 10.61 to Capital Trust, Inc.’s Annual Report
on Form 10-K (File No. 1-14788) filed on March 16, 2009 and incorporated
herein by reference).
|
|
10.62
|
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).
|
|
10.63
|
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).
|
|
10.64
|
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).
|
|
10.65
|
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).
|
|
10.66
|
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).
|
|
10.67
|
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).
|
|
10.68
|
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).
|
|
10.69
|
Amendment
No. 3 to Master Repurchase Agreement, dated as of March 16, 2009, by and
between Capital Trust, Inc., and Citigroup Global Markets, Inc. and
Citigroup Financial Products Inc. (filed as Exhibit 10.69 to Capital
Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788) filed on March
16, 2009 and incorporated herein by
reference).
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
10.70
|
Amended
and Restated Credit Agreement, dated as of March 16, 2009, among Capital
Trust, Inc., the lenders party thereto and WestLB AG, New York Branch
(filed as Exhibit 10.70 to Capital Trust, Inc.’s Annual Report on Form
10-K (File No. 1-14788) filed on March 16, 2009 and incorporated herein by
reference).
|
|
10.71
|
Satisfaction,
Termination and Release Agreement, dated as of February 25, 2009, between
UBS Real Estate Securities Inc. and Capital Trust, Inc. (filed as Exhibit
10.71 to Capital Trust, Inc.’s Annual Report on Form 10-K (File No.
1-14788) filed on March 16, 2009 and incorporated herein by
reference).
|
|
10.72
|
Exchange
Agreement, dated as of March 16, 2009, by and among Capital Trust, Inc.,
Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd.,
Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX,
Ltd. (filed as Exhibit 10.72 to Capital Trust, Inc.’s Annual Report on
Form 10-K (File No. 1-14788) filed on March 16, 2009 and incorporated
herein by reference).
|
|
10.73
|
Pledge
and Security Agreement, dated as of March 16, 2009, by and between Capital
Trust, Inc., and WestLB AG, New York Branch (filed as Exhibit 10.73 to
Capital Trust, Inc.’s Annual Report on Form 10-K (File No. 1-14788) filed
on March 16, 2009 and incorporated herein by
reference).
|
|
10.74
|
Satisfaction,
Termination and Release Agreement, dated as of April 6, 2009, by and
between Capital Trust, Inc. and Lehman Commercial Paper Inc. (filed as
Exhibit 10.1 to Capital Trust, Inc.’s Quarterly Report on Form 10-Q (File
No. 1-14788) filed on August 4, 2009 and incorporated herein by
reference)
|
|
10.75
|
Exchange
Agreement, dated as of May 14, 2009, by and among Capital Trust, Inc.,
Kodiak CDO II, Ltd., Talon Total Return QP Partners LP, Talon Total Return
Partners LP, GPC 69, LLC, HFR RVA Opal Master Trust and Paul Strebel
(filed as Exhibit 99.1 to Capital Trust, Inc.’s Current Report on Form 8-K
(File No. 1-14788) filed on May 19, 2009 and incorporated by reference
herein).
|
|
10.76
|
Junior
Subordinated Indenture, dated as of May 14, 2009, between Capital Trust,
Inc. and The Bank of New York Mellon Trust Company, National Association,
as Trustee (filed as Exhibit 99.2 to Capital Trust, Inc.’s Current Report
on Form 8-K (File No. 1-14788) filed on May 19, 2009 and incorporated by
reference herein).
|
|
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 12 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.
|
EXHIBIT INDEX
Exhibit
Number
|
Description
|
|
•
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.
|
•
|
Filed
herewith.
|
*
|
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
2, 2010
|
/s/
Stephen D. Plavin
|
||
Date
|
Stephen
D. Plavin
|
||
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
2, 2010
|
/s/
Samuel Zell
|
||||
Date
|
Samuel
Zell
|
||||
Chairman
of the Board of Directors
|
|||||
March
2, 2010
|
/s/
Stephen D. Plavin
|
||||
Date
|
Stephen
D. Plavin
|
||||
Chief
Executive Officer and Director
|
|||||
March
2, 2010
|
/s/
Geoffrey G. Jervis
|
||||
Date
|
Geoffrey
G. Jervis
|
||||
Chief
Financial Officer
|
|||||
March
2, 2010
|
/s/
Thomas E. Dobrowski
|
||||
Date
|
Thomas
E. Dobrowski, Director
|
||||
March
2, 2010
|
/s/
Martin L. Edelman
|
||||
Date
|
Martin
L. Edelman, Director
|
||||
March
2, 2010
|
/s/
Craig M. Hatkoff
|
||||
Date
|
Craig
M. Hatkoff, Director
|
||||
March
2, 2010
|
/s/
Edward S. Hyman
|
||||
Date
|
Edward
S. Hyman, Director
|
||||
March
2, 2010
|
/s/
Henry N. Nassau
|
||||
Date
|
Henry
N. Nassau, Director
|
||||
March
2, 2010
|
/s/
Joshua A. Polan
|
||||
Date
|
Joshua
A. Polan, Director
|
||||
March
2, 2010
|
/s/
Lynne B. Sagalyn
|
||||
Date
|
Lynne
B. Sagalyn, Director
|
Index to Consolidated Financial Statements and Schedules
Management’s
Report on Internal Control over Financial Reporting
|
F-2
|
||
Management’s
Responsibility for Financial Statements
|
F-3
|
||
Report
of Independent Registered Public Accounting Firm on Internal
Controls
|
F-4
|
||
Report
of Independent Registered Public Accounting Firm on Consolidated Financial
Statements
|
F-5
|
||
Audited
Financial Statements
|
|||
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-6
|
||
Consolidated
Statements of Operations for the years ended December 31, 2009,
2008 and 2007
|
F-7
|
||
Consolidated
Statements of Changes in Shareholders’ Equity (Deficit) for the years
ended December 31, 2009, 2008 and 2007
|
F-8
|
||
Consolidated
Statements of Cash Flows for the years ended December 31, 2009,
2008 and 2007
|
F-9
|
||
Notes
to Consolidated Financial Statements
|
F-10
|
||
Schedule IV—Mortgage
Loans on Real Estate
|
S-1
|
Schedules
other than those listed are omitted as they are not applicable or the required
or equivalent information has been included in the consolidated financial
statements or notes thereto.
F-1
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER
FINANCIAL
REPORTING
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, 2009. 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, 2009 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, 2009 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, 2009 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.
Dated:
March 2, 2010
Stephen
D. Plavin
|
Geoffrey
G. Jervis
|
Chief
Executive Officer
|
Chief
Financial Officer
|
F-2
MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL
STATEMENTS
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 has 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 2, 2010
Stephen
D. Plavin
|
Geoffrey
G. Jervis
|
Chief
Executive Officer
|
Chief
Financial Officer
|
F-3
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Capital Trust, Inc.
We have
audited Capital Trust, Inc. and Subsidiaries’ internal control over financial
reporting as of December 31, 2009, 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. and Subsidiaries’ 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. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, 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 of Capital
Trust, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2009 of Capital Trust, Inc. and Subsidiaries and our report dated
March 2, 2010 expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
|
||
New
York, NY
|
||
March
2, 2010
|
F-4
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, 2009 and 2008, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial statement schedule
listed in the Index at Item 15(a). 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, 2009 and 2008, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2009, 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,
the Company changed its method of accounting for other-than-temporary
impairments of securities with the adoption of the guidance originally issued in
FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (codified in FASB ASC Topic 320,
Investments-Debt and Equity Securities), effective January 1, 2009.
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, 2009, 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 2, 2010 expressed an
unqualified opinion thereon.
/s/
Ernst & Young LLP
|
|
New
York, New York
|
|
March
2, 2010
|
F-5
Capital
Trust, Inc. and Subsidiaries
Consolidated
Balance Sheets
December
31, 2009 and 2008
(in
thousands except per share data)
|
||||||||
December
31,
|
December
31,
|
|||||||
Assets
|
2009
|
2008
|
||||||
Cash
and cash equivalents
|
$ | 27,954 | $ | 45,382 | ||||
Restricted
cash
|
155 | 18,821 | ||||||
Securities
held-to-maturity
|
715,196 | 852,211 | ||||||
Loans
receivable, net
|
1,158,244 | 1,790,234 | ||||||
Loans
held-for-sale, net
|
17,548 | 92,175 | ||||||
Real
estate held-for-sale
|
— | 9,897 | ||||||
Equity
investments in unconsolidated subsidiaries
|
2,351 | 2,383 | ||||||
Accrued
interest receivable
|
4,764 | 6,351 | ||||||
Deferred
income taxes
|
2,032 | 1,706 | ||||||
Prepaid
expenses and other assets
|
8,391 | 18,369 | ||||||
Total
assets
|
$ | 1,936,635 | $ | 2,837,529 | ||||
Liabilities
& Shareholders' (Deficit) Equity
|
||||||||
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 10,026 | $ | 11,478 | ||||
Repurchase
obligations
|
450,137 | 699,054 | ||||||
Collateralized
debt obligations
|
1,098,280 | 1,156,035 | ||||||
Senior
credit facility
|
99,188 | 100,000 | ||||||
Junior
subordinated notes
|
128,077 | 128,875 | ||||||
Participations
sold
|
289,144 | 292,669 | ||||||
Interest
rate hedge liabilities
|
30,950 | 47,974 | ||||||
Total
liabilities
|
2,105,802 | 2,436,085 | ||||||
Commitments
and contingencies
|
— | — | ||||||
Shareholders'
(deficit) equity:
|
||||||||
Class
A common stock $0.01 par value 100,000 shares authorized,
21,796
and
21,740 shares issued and outstanding as of December 31, 2009
and
2008,
respectively ("class A common stock")
|
218 | 217 | ||||||
Restricted
class A common stock $0.01 par value, 79 and 331 shares
issued
and
outstanding as of December 31, 2009 and 2008, respectively
("restricted
class A common stock" and together with class A common
stock,
"common stock")
|
1 | 3 | ||||||
Additional
paid-in capital
|
559,145 | 557,435 | ||||||
Accumulated
other comprehensive loss
|
(39,135 | ) | (41,009 | ) | ||||
Accumulated
deficit
|
(689,396 | ) | (115,202 | ) | ||||
Total
shareholders' (deficit) equity
|
(169,167 | ) | 401,444 | |||||
Total
liabilities and shareholders' (deficit) equity
|
$ | 1,936,635 | $ | 2,837,529 |
See
accompanying notes to consolidated financial statements.
F-6
Capital
Trust, Inc. and Subsidiaries
|
||||||||||||
Consolidated
Statements of Operations
|
||||||||||||
For
the Years Ended December 31, 2009, 2008, and 2007
|
||||||||||||
(in
thousands, except share and per share data)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
from loans and other investments:
|
||||||||||||
Interest
and related income
|
$ | 121,818 | $ | 194,649 | $ | 253,422 | ||||||
Less:
Interest and related expenses
|
79,794 | 129,665 | 162,377 | |||||||||
Income
from loans and other investments, net
|
42,024 | 64,984 | 91,045 | |||||||||
Other
revenues:
|
||||||||||||
Management
fees from affiliates
|
11,743 | 12,941 | 3,499 | |||||||||
Incentive
management fees from affiliates
|
— | — | 6,208 | |||||||||
Servicing
fees
|
1,679 | 367 | 623 | |||||||||
Other
interest income
|
153 | 1,566 | 1,083 | |||||||||
Total
other revenues
|
13,575 | 14,874 | 11,413 | |||||||||
Other
expenses:
|
||||||||||||
General
and administrative
|
22,102 | 24,957 | 29,956 | |||||||||
Depreciation
and amortization
|
71 | 179 | 1,810 | |||||||||
Total
other expenses
|
22,173 | 25,136 | 31,766 | |||||||||
Total
other-than-temporary impairments of securities
|
(123,894 | ) | (917 | ) | — | |||||||
Portion
of other-than-temporary impairments of securities
recognized
in other comprehensive income
|
14,256 | — | — | |||||||||
Impairment
of goodwill
|
(2,235 | ) | — | — | ||||||||
Impairment
of real estate held-for-sale
|
(2,233 | ) | (2,000 | ) | — | |||||||
Net
impairments recognized in earnings
|
(114,106 | ) | (2,917 | ) | — | |||||||
Provision
for loan losses
|
(482,352 | ) | (63,577 | ) | — | |||||||
Gain
on extinguishment of debt
|
— | 6,000 | — | |||||||||
(Loss)
gain on sale of investments
|
(10,363 | ) | 374 | 15,077 | ||||||||
Valuation
allowance on loans held-for-sale
|
— | (48,259 | ) | — | ||||||||
Loss
from equity investments
|
(3,736 | ) | (1,988 | ) | (2,109 | ) | ||||||
(Loss)
income before income taxes
|
(577,131 | ) | (55,645 | ) | 83,660 | |||||||
Income
tax (benefit) provision
|
(694 | ) | 1,893 | (706 | ) | |||||||
Net
(loss) income
|
$ | (576,437 | ) | $ | (57,538 | ) | $ | 84,366 | ||||
Per
share information:
|
||||||||||||
Net
(loss) earnings per share of common stock:
|
||||||||||||
Basic
|
$ | (25.76 | ) | $ | (2.73 | ) | $ | 4.80 | ||||
Diluted
|
$ | (25.76 | ) | $ | (2.73 | ) | $ | 4.77 | ||||
Weighted
average shares of common stock outstanding:
|
||||||||||||
Basic
|
22,378,868 | 21,098,935 | 17,569,690 | |||||||||
Diluted
|
22,378,868 | 21,098,935 | 17,690,266 | |||||||||
Dividends
declared per share of common stock
|
$ | — | $ | 2.20 | $ | 5.10 |
See
accompanying notes to consolidated financial statements.
F-7
Capital Trust, Inc.
and Subsidiaries
|
|||||||||||||||||||||||||||||
Consolidated
Statements of Changes in Shareholders' Equity (Deficit)
|
|||||||||||||||||||||||||||||
For
the Years Ended December 31, 2009, 2008 and 2007
|
|||||||||||||||||||||||||||||
(in
thousands)
|
|||||||||||||||||||||||||||||
Comprehensive
Income/(Loss)
|
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, 2006
|
$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 | ||||||||||||||||||||
Net
loss
|
($57,538 | ) | — | — | — | — | (57,538 | ) | (57,538 | ) | |||||||||||||||||||
Unrealized
loss on derivative financial instruments
|
(29,640 | ) | — | — | — | (29,640 | ) | — | (29,640 | ) | |||||||||||||||||||
Unrealized
loss on securities
|
(205 | ) | — | — | — | (205 | ) | — | (205 | ) | |||||||||||||||||||
Amortization
of unrealized gain on securities
|
(1,705 | ) | — | — | — | (1,705 | ) | — | (1,705 | ) | |||||||||||||||||||
Deferred
loss on settlement of swaps
|
(611 | ) | — | — | — | (611 | ) | — | (611 | ) | |||||||||||||||||||
Amortization
of deferred gains and losses on settlement of swaps
|
(164 | ) | — | — | — | (164 | ) | — | (164 | ) | |||||||||||||||||||
Shares
of class A common stock issued in public offering
|
— | 40 | — | 112,567 | — | — | 112,607 | ||||||||||||||||||||||
Sale
of class A common stock under dividend reinvestment plan and stock
purchase plan
|
— | 4 | — | 12,882 | — | — | 12,886 | ||||||||||||||||||||||
Sale
of shares of class A common stock under stock option
agreement
|
— | — | — | 180 | — | — | 180 | ||||||||||||||||||||||
Restricted
class A common stock earned, net of shares deferred
|
— | 1 | (1 | ) | 3,419 | — | — | 3,419 | |||||||||||||||||||||
Deferred
directors' compensation
|
— | — | — | 2,274 | — | — | 2,274 | ||||||||||||||||||||||
Dividends
declared on common stock
|
— | — | — | — | — | (48,296 | ) | (48,296 | ) | ||||||||||||||||||||
Balance
at December 31, 2008
|
($89,863 | ) | 217 | 3 | 557,435 | (41,009 | ) | (115,202 | ) | 401,444 | |||||||||||||||||||
Net
loss
|
($576,437 | ) | — | — | — | — | (576,437 | ) | (576,437 | ) | |||||||||||||||||||
Cumulative
effect of change in accounting principle
|
— | — | — | — | (2,243 | ) | 2,243 | — | |||||||||||||||||||||
Unrealized
gain on derivative financial instruments
|
17,024 | — | — | — | 17,024 | — | 17,024 | ||||||||||||||||||||||
Amortization
of unrealized gain on securities
|
(1,031 | ) | — | — | — | (1,031 | ) | — | (1,031 | ) | |||||||||||||||||||
Amortization
of deferred gains and losses on settlement of swaps
|
(95 | ) | — | — | — | (95 | ) | — | (95 | ) | |||||||||||||||||||
Other-than-temporary
impairments of securities related to fair value
adjustments in excess of expected credit losses
|
(11,781 | ) | — | — | — | (11,781 | ) | — | (11,781 | ) | |||||||||||||||||||
Issuance
of warrants in conjunction with debt restructuring
|
— | — | — | 940 | — | — | 940 | ||||||||||||||||||||||
Restricted
class A common stock earned, net of shares deferred
|
— | 1 | (2 | ) | 245 | — | — | 244 | |||||||||||||||||||||
Deferred
directors' compensation
|
— | — | — | 525 | — | — | 525 | ||||||||||||||||||||||
Balance
at December 31, 2009
|
($572,320 | ) | $218 | $1 | $559,145 | ($39,135 | ) | ($689,396 | ) | ($169,167 | ) |
See
accompanying notes to consolidated financial statements.
F-8
Capital
Trust, Inc. and Subsidiaries
|
||||||||||||
Consolidated
Statements of Cash Flows
|
||||||||||||
For
the Years Ended December 31, 2009, 2008 and 2007
|
||||||||||||
(in
thousands)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
(loss) income
|
($576,437 | ) | ($57,538 | ) | $84,366 | |||||||
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
Net
impairments recognized in earnings
|
114,106 | 2,917 | — | |||||||||
Provision
for loan losses
|
482,352 | 63,577 | — | |||||||||
Valuation
allowance on loans held-for-sale
|
— | 48,259 | — | |||||||||
Gain
on extinguishment of debt
|
— | (6,000 | ) | — | ||||||||
Loss
(gain) on sale of investments
|
10,363 | (374 | ) | (15,077 | ) | |||||||
Loss
from equity investments
|
3,736 | 1,988 | 2,109 | |||||||||
Employee
stock-based compensation
|
293 | 3,478 | 4,606 | |||||||||
Depreciation
and amortization
|
71 | 179 | 1,810 | |||||||||
Amortization
of premiums/discounts on loans and securities and deferred interest
on loans
|
(6,172 | ) | (11,505 | ) | (2,685 | ) | ||||||
Amortization
of deferred gains and losses on settlement of swaps
|
(95 | ) | (164 | ) | (262 | ) | ||||||
Amortization
of deferred financing costs and premiums/discounts on debt
obligations
|
10,059 | 5,168 | 5,247 | |||||||||
Deferred
directors' compensation
|
525 | 525 | 525 | |||||||||
Distributions
of income from unconsolidated subsidiaries
|
— | — | 56 | |||||||||
Settlement
of interest rate hedges
|
— | (352 | ) | — | ||||||||
Changes
in assets and liabilities, net:
|
||||||||||||
Accrued
interest receivable
|
1,587 | 4,341 | (204 | ) | ||||||||
Deferred
income taxes
|
(326 | ) | 1,953 | (50 | ) | |||||||
Prepaid
expenses and other assets
|
1,193 | 3,696 | (29 | ) | ||||||||
Accounts
payable and accrued expenses
|
(1,502 | ) | (6,113 | ) | 1,762 | |||||||
Net
cash provided by operating activities
|
39,753 | 54,035 | 82,174 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of securities
|
— | (660 | ) | (110,550 | ) | |||||||
Principal
collections and proceeds from securities
|
17,533 | 30,552 | 44,761 | |||||||||
Origination/purchase
of loans receivable
|
— | (47,128 | ) | (899,129 | ) | |||||||
Add-on
fundings under existing loan commitments
|
(7,698 | ) | (82,343 | ) | (159,839 | ) | ||||||
Principal
collections of loans receivable
|
108,453 | 270,802 | 753,145 | |||||||||
Proceeds
from operation/disposition of real estate held-for-sale
|
7,665 | — | — | |||||||||
Contributions
to unconsolidated subsidiaries
|
(3,704 | ) | (3,473 | ) | (24,122 | ) | ||||||
Distributions
from unconsolidated subsidiaries
|
— | — | 2,314 | |||||||||
Proceeds
from sale of equity investment
|
— | — | 43,638 | |||||||||
Increase
in restricted cash
|
— | (13,125 | ) | (3,989 | ) | |||||||
Proceeds
from total return swaps
|
— | — | 1,815 | |||||||||
Payments
for business purchased
|
— | — | (1,853 | ) | ||||||||
Net
cash provided by (used in) investing activities
|
122,249 | 154,625 | (353,809 | ) | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Decrease
in restricted cash
|
18,666 | — | — | |||||||||
Borrowings
under repurchase obligations
|
— | 185,133 | 1,503,568 | |||||||||
Repayments
under repurchase obligations
|
(135,523 | ) | (391,936 | ) | (1,296,154 | ) | ||||||
Borrowings
under senior credit facility
|
— | 25,000 | 150,000 | |||||||||
Repayments
under senior credit facility
|
(3,750 | ) | — | (75,000 | ) | |||||||
Repayment
of collateralized debt obligations
|
(58,816 | ) | (35,945 | ) | (19,892 | ) | ||||||
Issuance
of junior subordinated notes
|
— | — | 77,325 | |||||||||
Purchase
of common equity in CT Preferred Trust I & CT Preferred Trust
II
|
— | — | (2,325 | ) | ||||||||
Settlement
of interest rate hedges
|
— | (611 | ) | (153 | ) | |||||||
Payment
of deferred financing costs
|
(7 | ) | (577 | ) | (2,936 | ) | ||||||
Proceeds
from stock options exercised
|
— | 121 | 3,251 | |||||||||
Dividends
paid on common stock
|
— | (95,786 | ) | (66,362 | ) | |||||||
Proceeds
from sale of shares of class A common stock and stock purchase
plan
|
— | 123,155 | — | |||||||||
Proceeds
from dividend reinvestment plan
|
— | 2,339 | — | |||||||||
Net
cash (used in) provided by financing activities
|
(179,430 | ) | (189,107 | ) | 271,322 | |||||||
Net
(decrease) increase in cash and cash equivalents
|
(17,428 | ) | 19,553 | (313 | ) | |||||||
Cash
and cash equivalents at beginning of period
|
45,382 | 25,829 | 26,142 | |||||||||
Cash
and cash equivalents at end of period
|
$27,954 | $45,382 | $25,829 |
See
accompanying notes to consolidated financial statements.
F-9
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
1.
Organization
References
herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its
subsidiaries unless the context specifically requires otherwise.
We are a
fully integrated, self-managed, real estate finance and investment management
company that specializes in credit sensitive financial products. To date, our
investment programs have focused on loans and securities backed by commercial
real estate assets. We invest for our own account directly on our balance sheet
and for third parties through a series of investment management vehicles. From
the inception of our finance business in 1997 through December 31, 2009, we
have completed over $11.2 billion of investments in the commercial real
estate debt arena. We conduct our operations as a real estate investment trust,
or REIT, for federal income tax purposes and we are headquartered in New York
City.
2.
Summary of Significant Accounting Policies
Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 168, “The FASB Accounting Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162,” or FAS 168. FAS 168 establishes the FASB Accounting
Standards Codification, or the Codification, as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with generally
accepted accounting principals, or GAAP, and states that all guidance contained
in the Codification carries an equal level of authority. Rules and interpretive
releases of the Securities and Exchange Commission, or SEC, under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
Codification does not change GAAP, however it does change the way in which it is
to be researched and referenced. FAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009.
Accordingly, references to pre-Codification accounting literature in our
financial statements have been updated.
Principles
of Consolidation
The
accompanying financial statements include, on a consolidated basis, our
accounts, the accounts of our wholly-owned subsidiaries, and variable interest
entities, or VIEs, in which we are the primary beneficiary, prepared in
accordance with GAAP. All significant intercompany balances and transactions
have been eliminated in consolidation.
VIEs are
defined as entities in which equity investors (i) do not have the
characteristics of a controlling financial interest and/or (ii) do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. A VIE is required
to be consolidated by its primary beneficiary, which is the party that (i) will
absorb a majority of the VIE’s expected losses and/or (ii) receive a majority of
its expected residual returns as a result of holding variable
interests.
Collateralized
Debt Obligations
We
currently consolidate four collateralized debt obligation, or CDO, trusts, which
are VIEs and were sponsored by us. These CDO trusts invest in commercial real
estate debt instruments, some of which we originated/acquired and transferred to
the trust entities, and are financed by the debt and equity they issue. We are
named as collateral manager of all four CDOs and are named special servicer on a
number of CDO collateral assets. As a result of consolidation, our subordinate
debt and equity ownership interests in these CDO trusts have been eliminated,
and our balance sheet reflects both the assets held and debt issued by these
CDOs to third parties. Similarly, our operating results and cash flows include
the gross amounts related to the assets and liabilities of the CDO entities, as
opposed to our net economic interests in these entities. Fees earned by us for
the management of these CDOs are eliminated in consolidation.
F-10
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Our
interest in the assets held by these CDO trusts, which are consolidated onto our
balance sheet, is restricted by the structural provisions of these entities, and
our recovery of these assets will be limited by the CDO trusts’ distribution
provisions, which are subject to change due to covenant breaches or asset
impairments, as further described in Note 9. The liabilities of the CDO trusts,
which are also consolidated onto our balance sheet, are non-recourse to us, and
can generally only be satisfied from each CDOs’ respective asset
pool.
We are
not obligated to provide, nor have we provided, any financial support to these
CDO entities. Accordingly, as of December 31, 2009, our maximum exposure to loss
as a result of our investment in these entities is limited to $240.8 million,
the notional amount of the subordinate debt and equity interest we retained in
these CDO entities. After giving effect to certain transfers of these interests,
provisions for loan losses and other-than-temporary impairments recorded as of
December 31, 2009, our remaining net exposure to loss from these entities is
$69.4 million.
Securities
Portfolio
Our
securities portfolio includes investments in both commercial mortgage-backed
securities, or CMBS, and CDOs, which are considered VIEs, and we are named as
special servicer on a number of these investments. These securities were
acquired through investment, and do not represent a securitization or other
transfer of our assets. The total face amount of assets in such entities where
we are named special servicer aggregated $1.5 billion as of December 31,
2009.
We are
not obligated to provide, nor have we provided, any financial support to these
entities. Accordingly, as of December 31, 2009, our maximum exposure to loss as
a result of our investment in these entities, excluding the impact of loss
limitations due to non-recourse debt financing, is $856.4 million, the principal
amount of our securities portfolio. As of December 31, 2009, we have recorded
other-than-temporary impairments of $118.3 million against our portfolio,
resulting in a net book balance of $715.2 million on our consolidated balance
sheet.
Certain
of our securities investments have control over the issuing entity, and we could
therefore be considered to be the primary beneficiary of these VIEs.
Accordingly, these and similar instruments could be required to be presented on
a consolidated basis. However, based upon the specific circumstances of certain
of our securities that are controlling class investments and our
interpretation of the exemption for qualifying special purpose entities under
GAAP, we have concluded that the entities that have issued the controlling class
investments should not be presented on a consolidated basis. As discussed
further below, recent modifications to GAAP may impact our consolidation
conclusions regarding these entities effective January 1, 2010.
Equity
Investments in Unconsolidated Subsidiaries
Our
co-investment interest in the private equity funds we manage, CT Mezzanine
Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or
CTOPI, and others are accounted for using the equity method. These entities’
assets and liabilities are not consolidated into our financial statements due to
our determination that either (i) for entities that are VIEs we are not the
primary beneficiary of such entities’ variability, generally due to the
insignificance of our share of ownership and certain control provisions for
these entities, or (ii) for entities that are not VIEs, the investors have
sufficient rights to preclude consolidation by us. As such, we report our
allocable percentage of the earnings or losses of these entities on a single
line item in our consolidated statements of operations as income/(loss) from
equity investments.
CTOPI
maintains its financial records at fair value in accordance with GAAP. We have
applied such accounting relative to our investment in CTOPI, and include any
adjustments to fair value recorded at the fund level in determining the
income/(loss) we record on our equity investment in CTOPI.
F-11
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Revenue
Recognition
Interest
income from our loans receivable is recognized over the life of the investment
using the effective interest method and is recorded on the accrual basis. Fees,
premiums, discounts and direct costs associated with these investments are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment to yield. For loans where we have unfunded commitments, we
amortize these fees and other items on a straight line basis. Fees on
commitments that expire unused are recognized at expiration. Income accrual is
generally suspended for loans at the earlier of the date at which payments
become 90 days past due or when, in the opinion of management, recovery of
income and principal becomes doubtful. Income is then recorded on the basis of
cash received until accrual is resumed when the loan becomes contractually
current and performance is demonstrated to be resumed.
Fees from
special servicing and asset management services are recorded on an accrual basis
as services are rendered under the applicable agreements, and when receipt of
fees is reasonably certain. We do not recognize incentive income from our
investment management business until contingencies have been eliminated.
Accordingly, revenue recognition has been deferred for certain fees received
which are subject to potential repayment provisions. Depending on the structure
of our investment management vehicles, certain incentive fees may be in the form
of carried interest or promote distributions.
See below
for a description of our revenue recognition policy for our securities
portfolio.
Cash
and Cash Equivalents
We
classify highly liquid investments with original maturities of three months or
less from the date of purchase as cash equivalents. We place our cash and cash
equivalents with high credit quality institutions to minimize credit risk
exposure. As of, and for the periods ended, December 31, 2009 and 2008, we had
bank balances in excess of federally insured amounts. We have not experienced
any losses on our demand deposits, commercial paper or money market
investments.
Restricted
Cash
Restricted
cash as of December 31, 2009 was comprised of $155,000 held on deposit with the
trustee for our CDOs and is expected to be used to pay contractual interest and
principal. Restricted cash as of December 31, 2008 was $18.8
million.
Securities
We
classify our securities as held-to-maturity, available-for-sale, or trading on
the date of acquisition of the investment. On August 4, 2005, we decided to
change the accounting classification of certain of our securities from
available-for-sale to held-to-maturity. Held-to-maturity investments are stated
at cost adjusted for the amortization of any premiums or discounts, which are
amortized through the consolidated statements of operations using the effective
interest method. Other than in the instance of an other-than-temporary
impairment (as discussed below), these held-to-maturity investments are shown in
our consolidated financial statements at their adjusted values pursuant to the
methodology described above.
We may
also invest in securities which may be classified as available-for-sale.
Available-for-sale securities are carried at estimated fair value with the net
unrealized gains or losses reported as a component of accumulated other
comprehensive income/(loss) in shareholders’ equity. Many of these investments
are relatively illiquid and management is required to estimate their fair
values. In making these estimates, management utilizes market prices provided by
dealers who make markets in these securities, but may, under limited
circumstances, adjust these valuations based on management’s judgment. Changes
in the valuations do not affect our reported income or cash flows, but impact
shareholders’ equity and, accordingly, book value per share.
F-12
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Income
from our securities is recognized using a level yield with any purchase premium
or discount accreted through income over the life of the security. This yield is
calculated using cash flows expected to be collected which are based on a number
of assumptions on the underlying loans. Examples include, among other things,
the rate and timing of principal payments, including prepayments, repurchases,
defaults and liquidations, the pass-through or coupon rate and interest rates.
Additional factors that may affect our reported interest income on our
securities include interest payment shortfalls due to delinquencies on the
underlying mortgage loans and the timing and magnitude of expected credit losses
on the mortgage loans underlying the securities that are impacted by, among
other things, the general condition of the real estate market, including
competition for tenants and their related credit quality, and changes in market
rental rates. These uncertainties and contingencies are difficult to predict and
are subject to future events that may alter the assumptions.
Further,
as required under GAAP, when, based on current information and events, there has
been an adverse change in cash flows expected to be collected from those
previously estimated, an other-than-temporary impairment is deemed to have
occurred. A change in expected cash flows is considered adverse if the present
value of the revised cash flows (taking into consideration both the timing and
amount of cash flows expected to be collected) discounted using the security’s
current yield is less than the present value of the previously estimated
remaining cash flows, adjusted for cash receipts during the intervening period.
Should an other-than-temporary impairment be deemed to have occurred, the
security is written down to fair value. The total other-than-temporary
impairment is bifurcated into (i) the amount related to expected credit losses,
and (ii) the amount related to fair value adjustments in excess of expected
credit losses, or the Valuation Adjustment. The portion of the
other-than-temporary impairment related to expected credit losses is calculated
by comparing the amortized cost basis of the security to the present value of
cash flows expected to be collected, discounted at the security’s current yield,
and is recognized through earnings in the consolidated statement of operations.
The remaining other-than-temporary impairment related to the Valuation
Adjustment is recognized as a component of accumulated other comprehensive
income/(loss) in shareholders’ equity. A portion of other-than-temporary
impairments recognized through earnings is accreted back to the amortized cost
basis of the security through interest income, while amounts recognized through
other comprehensive income/(loss) are amortized over the life of the security
with no impact on earnings.
Loans
Receivable, Provision for Loan Losses, Loans Held-for-Sale and Related
Allowance
We
purchase and originate commercial real estate debt and related instruments, or
Loans, generally to be held as long-term investments at amortized cost.
Management is required to periodically evaluate each of these Loans for possible
impairment. Impairment is indicated when it is deemed probable that we will not
be able to collect all amounts due according to the contractual terms of the
Loan. If a Loan is determined to be impaired, we write down the Loan through a
charge to the provision for loan losses. Impairment on these loans
is measured by comparing the estimated fair value of the underlying collateral
to the carrying value of the respective loan. These valuations require
significant judgments, which include assumptions regarding capitalization rates,
leasing, creditworthiness of major tenants, occupancy rates, availability of
financing, exit plan, loan sponsorship, actions of other lenders and other
factors deemed necessary by management. Actual losses, if any, could
ultimately differ from these estimates.
Loans
held-for-sale are carried at the lower of our amortized cost basis and fair
value. A reduction in the fair value of loans held-for-sale is recorded as a
charge to our consolidated statement of operations as a valuation allowance on
loans held-for-sale.
Deferred
Financing Costs
The
deferred financing costs which are included in prepaid expenses and other assets
on our consolidated balance sheets include issuance costs related to our debt
obligations and are amortized using the effective interest method or a method
that approximates the effective interest method over the life of the related
obligations.
F-13
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Repurchase
Obligations
In
certain circumstances, we have financed the purchase of investments from a
counterparty through a repurchase agreement with that same counterparty. We
currently record these investments in the same manner as other investments
financed with repurchase agreements, with the investment recorded as an asset
and the related borrowing under any repurchase agreement recorded as a liability
on our consolidated balance sheets. Interest income earned on the investments
and interest expense incurred on the repurchase obligations are reported
separately on the consolidated statements of operations.
For
fiscal years beginning after November 15, 2008, recent revisions to GAAP presume
that an initial transfer of a financial asset and a repurchase financing shall
not be evaluated as a linked transaction and shall be evaluated separately. If
the transaction does not meet the requirements for sale accounting, it shall
generally be accounted for as a forward contract, as opposed to the current
presentation, where the purchased asset and the repurchase liability are
reflected separately on the balance sheet. This revised guidance is effective on
a prospective basis, with earlier application prohibited. Given that the revised
guidance is to be applied prospectively, our adoption on January 1, 2009 did not
have a material impact on our consolidated financial statements with respect to
our existing transactions. New transactions entered into subsequently, which are
subject to the revised guidance, may be presented differently on our
consolidated financial statements.
Interest
Rate Derivative Financial Instruments
In the
normal course of business, we use interest rate derivative financial instruments
to manage, or hedge, cash flow variability caused by interest rate fluctuations.
Specifically, we currently use interest rate swaps to effectively convert
floating rate liabilities that are financing fixed rate assets, to fixed rate
liabilities. The differential to be paid or received on these agreements is
recognized on the accrual basis as an adjustment to the interest expense related
to the attendant liability. The interest rate swap agreements are generally
accounted for on a held-to-maturity basis, and, in cases where they are
terminated early, any gain or loss is generally amortized over the remaining
life of the hedged item. These swap agreements must be effective in reducing the
variability of cash flows of the hedged items in order to qualify for the
aforementioned hedge accounting treatment. Changes in value of effective cash
flow hedges are reflected in our consolidated financial statements through
accumulated other comprehensive income/(loss) and do not affect our net income.
To the extent a derivative does not qualify for hedge accounting, and is deemed
a non-hedge derivative, the changes in its value are included in net
income.
To
determine the fair value of interest rate derivative financial instruments, we
use a third party derivative specialist to assist us in periodically valuing our
interests.
Income
Taxes
Our
financial results generally do not reflect provisions for current or deferred
income taxes on our REIT taxable income. Management believes that we operate in
a manner that will continue to allow us to be taxed as a REIT and, as a result,
we do not expect to pay substantial corporate level taxes (other than taxes
payable by our taxable REIT subsidiaries). Many of these requirements, however,
are highly technical and complex. If we were to fail to meet these requirements,
we may be subject to federal, state and local income tax on current and past
income, and penalties.
Accounting
for Stock-Based Compensation
Compensation
expense relating to stock-based compensation is recognized in net income using a
fair value measurement method, which we determine with the assistance of a
third-party appraisal firm. Compensation expense for the time vesting of
stock-based compensation grants is recognized on the accelerated attribution
method and compensation expense for performance vesting of stock-based
compensation grants is recognized on a straight line basis.
F-14
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The fair
value of the performance vesting restricted common stock is measured on the
grant date using a Monte Carlo simulation to estimate the probability of the
market vesting conditions being satisfied. The Monte Carlo simulation is run
approximately 100,000 times. For each simulation, the payoff is calculated at
the settlement date, and is then discounted to the grant date at a risk-free
interest rate. The average of the values over all simulations is the expected
value of the restricted shares on the grant date. The valuation is performed in
a risk-neutral framework, so no assumption is made with respect to an equity
risk premium. Significant assumptions used in the valuation include an expected
term and stock price volatility, an estimated risk-free interest rate and an
estimated dividend growth rate.
Estimates
of fair value are not intended to predict actual future events or the value
ultimately realized by employees who receive equity awards, and subsequent
events are not indicative of the reasonableness of the original estimates of
fair value made by us.
Comprehensive
Income / (Loss)
Total
comprehensive loss was ($572.3) million and ($89.9) million, for the years ended
December 31, 2009 and 2008, respectively. The primary components of
comprehensive loss other than net income/(loss) are the unrealized
gains/(losses) on derivative financial instruments and the component of
other-than-temporary impairments of securities related to the Valuation
Adjustment. As of December 31, 2009, accumulated other comprehensive loss was
($39.1) million, comprised of net unrealized gains on securities previously
classified as available-for-sale of $5.6 million, other-than-temporary
impairments of securities of ($14.0) million, net unrealized losses on cash flow
swaps of ($31.0) million, and $263,000 of net deferred gains on the settlement
of cash flow swaps.
Earnings
per Share of Common Stock
Basic
earnings per share, or EPS, is computed based on the net earnings allocable to
common stock and stock units, divided by the weighted average number of shares
of common stock and stock units outstanding during the period. Diluted EPS is
based on the net earnings allocable to common stock and stock units, divided by
the weighted average number of shares of common stock and stock units and
potentially dilutive common stock options and warrants.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may ultimately differ from
those estimates.
Reclassifications
Certain
reclassifications have been made in the presentation of the prior period
consolidated financial statements to conform to the December 31, 2009
presentation.
Segment
Reporting
We
operate in two reportable segments. We have an internal information system that
produces performance and asset data for the two segments along service
lines.
The
“Balance Sheet Investment” segment includes our portfolio of interest earning
assets and the financing thereof.
The
“Investment Management” segment includes the investment management activities of
our wholly-owned investment management subsidiary, CT Investment Management Co.
LLC, or CTIMCO, and its subsidiaries, as well as our co-investments in
investment management vehicles. CTIMCO is a taxable REIT subsidiary and serves
as the investment manager of Capital Trust, Inc., all of our investment
management vehicles and all of our CDOs, and serves as senior servicer and
special servicer on certain of our investments and for third
parties.
F-15
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Goodwill
Goodwill
represents the excess of acquisition costs over the fair value of the net assets
of businesses acquired. Goodwill is reviewed, at least annually, to determine if
there is an impairment at a reporting unit level, or more frequently if an
indication of impairment exists. During the second quarter of 2009, we
completely impaired goodwill, as described in Note 8. No impairment charges for
goodwill were recorded during the year ended December 31, 2008.
Fair
Value of Financial Instruments
The “Fair
Value Measurements and Disclosures” topic of the Codification defines fair
value, establishes a framework for measuring fair value, and requires certain
disclosures about fair value measurements under GAAP. Specifically, this
guidance defines fair value based on exit price, or the price that would be
received upon the sale of an asset or the transfer of a liability in an orderly
transaction between market participants at the measurement date. Our assets and
liabilities which are measured at fair value are indicated as such in the
respective notes to the consolidated financial statements, and are discussed in
Note 16.
Recent
Accounting Pronouncements
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133,” or FAS 161. FAS 161 requires enhanced disclosures about
an entity’s derivative and hedging activities, with the goal of improving the
transparency of financial reporting. FAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. FAS 161 encourages, but does not require, comparative disclosures for
earlier periods at initial adoption. The adoption of FAS 161 on January 1, 2009,
did not have a material impact on our consolidated financial statements. The
required disclosures are included in Note 11. FAS 161 has been superseded by the
Codification and its guidance incorporated into the “Derivatives and Hedging”
topic presented therein.
In June
2008, the FASB issued Staff Position EITF 03-06-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” or FSP EITF 03-06-1. Under the guidance of FSP EITF 03-06-1,
unvested share-based awards that contain non-forfeitable rights to dividends or
dividend equivalents are considered participating securities and shall be
included in the computation of earnings-per-share, or EPS, pursuant to the
two-class method. FSP EITF 03-06-1 was effective for fiscal years and interim
periods beginning after December 15, 2008, with the requirement that any
prior-period EPS presented in future consolidated financial statements be
adjusted retrospectively to conform to current guidance. We currently present
and have historically presented EPS based on both restricted and unrestricted
shares of our class A common stock. Accordingly, the adoption of FSP EITF
03-06-1 as of January 1, 2009 did not have a material impact on our consolidated
financial statements. FSP EITF 03-06-1 has been superseded by the Codification
and its guidance incorporated into the “Earnings per Share” topic presented
therein.
In April
2009, the FASB issued three concurrent Staff Positions, which included: (i)
Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” or FSP FAS 115-2, (ii) Staff Position No. FAS
157-4, “Determining Fair Value When the Volume and Level of Activity for an
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly,” or FSP FAS 157-4, and (iii) Staff Position No. FAS 107-1
and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments, or
FSP FAS 107-1. All three of these FASB Staff Positions are effective for periods
ending after June 15, 2009, with earlier adoption permitted for periods ending
after March 15, 2009. The adoption of FSP FAS 115-2, FSP FAS 157-4 and FSP FAS
107-1 is required to occur concurrently. Accordingly, we adopted all three of
these standards as of January 1, 2009.
F-16
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
FSP FAS
115-2 provides additional guidance for other-than-temporary impairments on debt
securities. In addition to existing guidance, under FSP FAS 115-2, an
other-than-temporary impairment is deemed to exist if an entity does not expect
to recover the entire amortized cost basis of a security. As discussed above,
FSP FAS 115-2 provides for the bifurcation of other-than-temporary impairments
into (i) amounts related to expected credit losses which are recognized through
earnings, and (ii) amounts related to the Valuation Adjustment which are
recognized as a component of other comprehensive income. Further, FSP FAS 115-2
requires certain disclosures for securities, which are included in Note 3. The
adoption of FSP FAS 115-2 required a reassessment of all securities which were
other-than-temporarily impaired as of January 1, 2009, the date of adoption, and
resulted in a $2.2 million reclassification from the beginning balance of
retained deficit to accumulated other comprehensive loss on our consolidated
balance sheet. FSP FAS 115-2 has been superseded by the Codification and its
guidance incorporated into the “Investments-Other” topic presented
therein.
FSP FAS
157-4 provides additional guidance for fair value measures under FAS 157 in
determining if the market for an asset or liability is inactive and,
accordingly, if quoted market prices may not be indicative of fair value. The
adoption of FSP FAS 157-4 did not have a material impact on our consolidated
financial statements. FSP FAS 157-4 has been superseded by the Codification and
its guidance incorporated into the “Fair Value Measurements and Disclosures”
topic presented therein.
FSP FAS
107-1 extends the existing disclosure requirements related to the fair value of
financial instruments to interim periods in addition to annual financial
statements. The adoption of FSP FAS 107-1 did not have a material impact on our
consolidated financial statements. The disclosure requirements under FSP FAS
107-1 are included in Note 16 to the consolidated financial statements. FSP FAS
107-1 has been superseded by the Codification and its guidance incorporated into
the “Financial Instruments” topic presented therein.
In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events,” or FAS 165. FAS 165 requires that, for listed companies,
subsequent events be evaluated through the date that financial statements are
issued, and that financial statements clearly disclose the date through which
subsequent events have been evaluated. FAS 165 is effective for periods ending
after June 15, 2009. The adoption of FAS 165 as of April 1, 2009 did not have a
material impact on our consolidated financial statements. FAS 165 has been
superseded by the Codification and its guidance incorporated into the
“Subsequent Events” topic presented therein.
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
“Accounting for Transfers of Financial Assets, an amendment of FASB Statement
No. 140,” or FAS 166. FAS 166 amends various components of the guidance
governing sale accounting, including the recognition of assets obtained and
liabilities assumed as a result of a transfer, and considerations of effective
control by a transferor over transferred assets. In addition, FAS 166 removes
the consolidation exemption for qualifying special purpose entities discussed
above in relation to certain of our securities. FAS 166 is effective for the
first annual reporting period that begins after November 15, 2009, with early
adoption prohibited. While the amended guidance governing sale accounting is
applied on a prospective basis, the removal of the qualifying special purpose
entity exception will require us to evaluate certain entities for consolidation.
We believe that the presentation of our consolidated financial statements will
significantly change prospectively upon adoption of FAS 166. Specifically,
certain entities will be consolidated by us which were previously exempt due to
their status as qualified special purpose entities. FAS 166 has been superseded
by the Codification and its guidance incorporated into the “Transfers and
Servicing” topic presented therein.
F-17
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R),” or FAS 167, which amends existing
guidance for determining whether an entity is a variable interest entity, or
VIE, and requires the performance of a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE. Under this guidance, an
entity would generally be required to consolidate a VIE if it has (i) the power
to direct the activities that most significantly impact the entity’s economic
performance and (ii) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could be significant to the VIE. FAS 167 is
effective for the first annual reporting period that begins after November 15,
2009, with early adoption prohibited. We believe that the presentation of our
consolidated financial statements will significantly change prospectively upon
adoption of FAS 167. Specifically, certain entities will be consolidated by us
due to the change from a quantitative analysis to a qualitative analysis, as
well as the removal of the consolidation exception for qualified special purpose
entities discussed above. FAS 167 has been superseded by the Codification and
its guidance incorporated into the “Consolidation” topic presented
therein.
In
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements,” or ASU 2010-06. ASU 2010-06 amends existing disclosure guidance
related to fair value measurements. Specifically, ASU 2010-06 requires (i)
details of significant asset or liability transfers in and out of Level 1 and
Level 2 measurements within the fair value hierarchy, and (ii) inclusion of
gross purchases, sales, issuances, and settlements within the rollforward of
assets and liabilities valued using Level 3 inputs within the fair value
hierarchy. In addition, ASU 2010-06 clarifies and increases existing disclosure
requirements related to (i) the disaggregation of fair value disclosures, and
(ii) the inputs used in arriving at fair values for assets and liabilities
valued using Level 2 and Level 3 inputs within the fair value hierarchy. ASU
2010-06 is effective for the first interim or annual period beginning after
December 15, 2009, except for the gross presentation of the Level 3 rollforward,
which is required for annual reporting periods beginning after December 15, 2010
and for interim periods within those years. We are currently evaluating the
impact of ASU 2010-06 on our consolidated financial statements, however do not
expect the impact to be material.
3.
Securities
Held-to-Maturity
Our
securities portfolio consists of commercial mortgage-backed securities, or CMBS,
collateralized debt obligations, or CDOs, and other securities. Activity
relating to our securities portfolio for the year ended December 31, 2009 was as
follows (in thousands):
CMBS
|
CDOs
& Other
|
Total
Book Value (3)
|
|||||||||||
December
31, 2008
|
$669,029 | $183,182 | $852,211 | ||||||||||
Principal
paydowns
|
(7,109 | ) | (8,881 | ) | (15,990 | ) | |||||||
Satisfactions
(1)
|
(1,542 | ) | — | (1,542 | ) | ||||||||
Discount/premium
amortization & other (2)
|
4,637 | (226 | ) | 4,411 | |||||||||
Other-than-temporary
impairments:
|
|||||||||||||
Recognized
in earnings
|
(27,378 | ) | (82,260 | ) | (109,638 | ) | |||||||
Recognized
in accumulated other comprehensive income
|
(10,763 | ) | (3,493 | ) | (14,256 | ) | |||||||
December
31, 2009
|
$626,874 | $88,322 | $715,196 |
(1) |
Includes
final maturities and full repayments.
|
|
(2) |
Includes
mark-to-market adjustments on securities previously classified as
available-for-sale, amortization of other-than-temporary impairments, and
losses, if any.
|
|
(3) |
Includes
securities with a total face value of $856.4 million and $884.0 million as
of December 31, 2009 and December 31, 2008, respectively.
|
F-18
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table details overall statistics for our securities portfolio as of
December 31, 2009 and 2008:
December
31, 2009
|
December
31, 2008
|
|||
Number
of securities
|
73
|
77
|
||
Number
of issues
|
53
|
55
|
||
Rating
(1)
(2)
|
BB-
|
BB
|
||
Fixed
/ Floating (in millions) (3)
|
$634
/ $81
|
$680
/ $172
|
||
Coupon
(1)
(4)
|
6.20%
|
6.23%
|
||
Yield (1)
(4)
|
6.61%
|
6.87%
|
||
Life
(years) (1)
(5)
|
3.5
|
4.6
|
(1) |
Represents
a weighted average as of December 31, 2009 and December 31, 2008,
respectively.
|
|
(2) |
Weighted
average ratings are based on the lowest rating published by Fitch Ratings,
Standard & Poor’s or Moody’s Investors Service for each security and
exclude unrated equity investments in collateralized debt obligations with
a net book value of $1.2 million and $37.5 million as of December 31, 2009
and 2008, respectively (face of $34.1 million and $37.9 million,
respectively).
|
|
(3) |
Represents
the aggregate net book value of our portfolio allocated between fixed rate
and floating rate securities.
|
|
(4) |
Calculations
for floating rate securities are based on LIBOR of 0.23% and 0.44% as of
December 31, 2009 and December 31, 2008, respectively.
|
|
(5) |
Weighted
average life is based on the timing and amount of future expected
principal payments through the expected repayment date of each respective
investment.
|
The table
below details the ratings and vintage distribution of our securities as of
December 31, 2009 (in thousands):
Rating
as of December 31, 2009
|
|||||||||||||||||
Vintage
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC
and
Below
|
Total
|
|||||||||
2007
|
$—
|
$—
|
$—
|
$—
|
$2,812
|
$—
|
$28,921
|
$31,733
|
|||||||||
2006
|
—
|
—
|
—
|
—
|
—
|
8,933
|
28,325
|
37,258
|
|||||||||
2005
|
—
|
—
|
—
|
11,865
|
1,250
|
14,630
|
22,104
|
49,849
|
|||||||||
2004
|
—
|
24,848
|
19,225
|
—
|
25,540
|
9,781
|
—
|
79,394
|
|||||||||
2003
|
9,905
|
—
|
—
|
4,976
|
—
|
13,488
|
1,162
|
29,531
|
|||||||||
2002
|
—
|
—
|
—
|
6,616
|
—
|
2,599
|
602
|
9,817
|
|||||||||
2001
|
—
|
—
|
—
|
4,843
|
14,204
|
—
|
—
|
19,047
|
|||||||||
2000
|
7,506
|
—
|
—
|
—
|
4,982
|
—
|
22,948
|
35,436
|
|||||||||
1999
|
—
|
—
|
11,436
|
1,432
|
17,360
|
—
|
—
|
30,228
|
|||||||||
1998
|
117,349
|
—
|
82,791
|
75,314
|
11,807
|
—
|
12,900
|
300,161
|
|||||||||
1997
|
—
|
—
|
35,101
|
4,876
|
8,580
|
246
|
18,778
|
67,581
|
|||||||||
1996
|
24,205
|
—
|
—
|
—
|
—
|
—
|
956
|
25,161
|
|||||||||
Total
|
$158,965
|
$24,848
|
$148,553
|
$109,922
|
$86,535
|
$49,677
|
$136,696
|
$715,196
|
F-19
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The table
below details the ratings and vintage distribution of our securities as of
December 31, 2008 (in thousands):
Rating
as of December 31, 2008
|
|||||||||||||||||
Vintage
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC
and
Below
|
Total
|
|||||||||
2007
|
|
$—
|
$—
|
$—
|
$—
|
$32,540
|
$41,525
|
$36,356
|
$110,421
|
||||||||
2006
|
|
—
|
—
|
—
|
34,502
|
14,395
|
—
|
—
|
48,897
|
||||||||
2005
|
|
—
|
—
|
—
|
47,012
|
15,000
|
—
|
—
|
62,012
|
||||||||
2004
|
|
—
|
24,879
|
28,106
|
26,120
|
9,054
|
—
|
—
|
88,159
|
||||||||
2003
|
|
9,903
|
—
|
—
|
4,972
|
6,044
|
7,691
|
1,115
|
29,725
|
||||||||
2002
|
|
—
|
—
|
—
|
6,572
|
—
|
13,382
|
—
|
19,954
|
||||||||
2001
|
|
—
|
—
|
—
|
4,871
|
14,234
|
—
|
—
|
19,105
|
||||||||
2000
|
|
7,597
|
—
|
—
|
—
|
5,515
|
—
|
27,490
|
40,602
|
||||||||
1999
|
|
—
|
—
|
11,529
|
1,441
|
17,350
|
—
|
—
|
30,320
|
||||||||
1998
|
|
122,013
|
—
|
82,455
|
74,916
|
19,347
|
—
|
5,144
|
303,875
|
||||||||
1997
|
|
—
|
—
|
35,615
|
5,585
|
8,554
|
262
|
23,340
|
73,356
|
||||||||
1996
|
|
23,750
|
—
|
—
|
—
|
—
|
—
|
2,035
|
25,785
|
||||||||
Total
|
|
$163,263
|
$24,879
|
$157,705
|
$205,991
|
$142,033
|
$62,860
|
$95,480
|
$852,211
|
As
detailed in Note 2, on August 4, 2005 we changed the accounting classification
of our then portfolio of securities from available-for-sale to held-to-maturity.
While we typically account for the securities in our portfolio on a
held-to-maturity basis, under certain circumstances we will account for
securities on an available-for-sale basis. As of both December 31, 2009 and
2008, we had no securities classified as available-for-sale. Our securities’
book value as of December 31, 2009 is comprised of (i) our amortized cost basis,
as defined under GAAP, of $723.6 million (of which $632.4 million related to
CMBS and $91.3 million related to CDOs and other securities), (ii) amounts
related to mark-to-market adjustments on securities previously classified as
available-for-sale of $5.6 million and (iii) the portion of other-than-temporary
impairments of ($14.0) million not related to expected credit
losses.
Quarterly,
we reevaluate our securities portfolio to determine if there has been an
other-than-temporary impairment based upon expected future cash flows. As a
result of this evaluation, under the guidance discussed in Note 2, during 2009,
we recorded a gross other-than-temporary impairment of $123.9 million. This
gross other-than-temporary impairment includes $109.6 million related to
expected credit losses which has been recorded through earnings, and $14.3
million of fair value adjustments in excess of expected credit losses, or
Valuation Adjustments, which have been recorded as a component of accumulated
other comprehensive income/(loss) on our consolidated balance sheet with no
impact on earnings. In 2008, we recorded an other-than-temporary impairment of
$917,000, which was recorded entirely through earnings.
To
determine the component of the gross other-than-temporary impairment related to
expected credit losses, we compare the amortized cost basis of each
other-than-temporarily impaired security to the present value of its revised
expected cash flows, discounted using its pre-impairment yield. Significant
judgment of management is required in this analysis that includes, but is not
limited to, (i) assumptions regarding the collectability of principal and
interest, net of related expenses, on the underlying loans, and (ii) current
subordination levels at both the individual loans which serve as collateral
under our securities and at the securities themselves.
F-20
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table summarizes activity related to the other-than-temporary
impairments of our securities during the year ended December 31, 2009 (in
thousands):
Gross
Other-Than-Temporary Impairments
|
Credit
Related Other-Than-Temporary Impairments
|
Non-Credit
Related Other-Than-Temporary Impairments
|
|||||||||||
December
31, 2008
|
$2,243 | $2,243 | $— | ||||||||||
Impact
of change in accounting principle (1)
|
— | (2,243 | ) | 2,243 | |||||||||
Additions
due to change in expected
cash
flows
|
123,894 | 109,638 | 14,256 | ||||||||||
Reductions
due to realized losses on
previously
impaired securities
|
(5,779 | ) | (5,779 | ) | — | ||||||||
Amortization
of other-than-temporary
impairments
|
(2,011 | ) | 464 | (2,475 | ) | ||||||||
December
31, 2009
|
$118,347 | $104,323 | $14,024 |
(1) |
Represents
a reclassification to other comprehensive income of other-than-temporary
impairments on securities which were previously recorded in earnings. As
discussed in Note 2, upon adoption of FSP FAS 115-2 these impairments were
reassessed and determined to be related to fair value adjustments in
excess of expected credit losses.
|
Certain
of our securities are carried at values in excess of their fair values. This
difference can be caused by, among other things, changes in interest rates and
credit spreads. As of December 31, 2009, 56 securities with an aggregate
carrying value of $585.3 million were carried at values in excess of their fair
values. Fair value for these securities was $389.8 million as of December 31,
2009. In total, as of December 31, 2009, we had 73 investments in securities
with an aggregate carrying value of $715.2 million that have an estimated fair
value of $527.7 million, including 65 investments in CMBS with an estimated fair
value of $455.4 million and 8 investments in CDOs and other securities with an
estimated fair value of $72.3 million (these valuations do not include the value
of interest rate swaps entered into in conjunction with the purchase/financing
of these investments, if any). We determine fair values using third party dealer
assessments of value, supplemented in limited cases with our own internal
financial model-based estimations of fair value. We regularly examine our
securities portfolio and have determined that, despite these changes in fair
value, our expectations of future cash flows have only changed adversely for
eleven of our securities, against which we have recognized
other-than-temporary-impairments.
Our
estimation of cash flows expected to be generated by our securities portfolio is
based upon an internal review of the underlying loans securing our investments
both on an absolute basis and compared to our initial underwriting for each
investment. Our efforts are supplemented by third party research reports, third
party market assessments and our dialogue with market participants. As of
December 31, 2009, we do not intend to sell our securities, nor do we believe it
is more likely than not that we will be required to sell our securities before
recovery of their amortized cost bases, which may be at maturity. This, combined
with our assessment of cash flows, is the basis for our conclusion that these
investments are not impaired, other than as described above, despite the
differences between estimated fair value and book value. We attribute the
difference between book value and estimated fair value to the current market
dislocation and a general negative bias against structured financial products
such as CMBS and CDOs.
F-21
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table shows the gross unrealized losses and fair value of our
securities for which the fair value is lower than our book value as of December
31, 2009 and that are not deemed to be other-than-temporarily impaired (in
millions):
Less
Than 12 Months
|
Greater
Than 12 Months
|
Total
|
||||||||||||||||||||||||||||
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Book
Value (1)
|
||||||||||||||||||||||||
Floating
Rate
|
$— | $— | $24.8 | ($56.0 | ) | $24.8 | ($56.0 | ) | $80.8 | |||||||||||||||||||||
Fixed
Rate
|
27.6 | (3.9 | ) | 337.4 | (135.6 | ) | 365.0 | (139.5 | ) | 504.5 | ||||||||||||||||||||
Total
|
$27.6 | ($3.9 | ) | $362.2 | ($191.6 | ) | $389.8 | ($195.5 | ) | $585.3 |
(1) |
Excludes,
as of December 31, 2009, $129.9 million of securities which were carried
at or below fair value and securities against which an
other-than-temporary impairment equal to the entire book value was
recognized in
earnings.
|
As of
December 31, 2008 our securities portfolio included 77 investments in securities
with an aggregate carrying value of $852.2 million that had an estimated market
value of $582.5 million, including 66 investments in CMBS with an estimated fair
value of $456.1 million and 11 investments in CDOs and other securities with an
estimated fair value of $126.4 million. The following table shows the gross
unrealized losses and fair value of our securities for which the fair value is
lower than our book value as of December 31, 2008 and that are not deemed to be
other-than-temporarily impaired (in millions):
Less
Than 12 Months
|
Greater
Than 12 Months
|
Total
|
||||||||||||||||||||||||||||
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Gross
Unrealized Loss
|
Book
Value (1)
|
||||||||||||||||||||||||
Floating
Rate
|
$0.2 | ($0.6 | ) | $89.0 | ($82.0 | ) | $89.2 | ($82.6 | ) | $171.8 | ||||||||||||||||||||
Fixed
Rate
|
183.8 | (36.1 | ) | 268.4 | (156.4 | ) | 452.2 | (192.5 | ) | 644.7 | ||||||||||||||||||||
Total
|
$184.0 | ($36.7 | ) | $357.4 | ($238.4 | ) | $541.4 | ($275.1 | ) | $816.5 |
(1) |
Excludes,
as of December 31, 2008, $35.7 million of securities which were carried at
or below fair value and securities against which an other-than-temporary
impairment equal to the entire book value was recognized in earnings.
|
F-22
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
4.
Loans Receivable, net
Activity
relating to our loans receivable for the year ended December 31, 2009 was as
follows (in thousands):
Gross
Book Value
|
Provision
for Loan Losses
|
Net
Book Value (3)
|
||||||||||
December
31, 2008
|
$1,847,811 | ($57,577 | ) | $1,790,234 | ||||||||
Additional
fundings
(1)
|
6,712 | — | 6,712 | |||||||||
Satisfactions
(2)
|
(72,234 | ) | — | (72,234 | ) | |||||||
Principal
paydowns
|
(27,177 | ) | — | (27,177 | ) | |||||||
Discount/premium
amortization & other
|
971 | — | 971 | |||||||||
Provision
for loan losses
|
— | (482,352 | ) | (482,352 | ) | |||||||
Realized
loan losses
|
(61,741 | ) | 61,741 | — | ||||||||
Reclassification
to loans held-for-sale
|
(58,674 | ) | 764 | (57,910 | ) | |||||||
December
31, 2009
|
$1,635,668 | ($477,424 | ) | $1,158,244 |
(1) |
Additional
fundings includes capitalized interest of $1.7 million for the year ended
December 31, 2009.
|
|
(2) |
Includes
final maturities and full repayments.
|
|
(3) |
Includes
loans with a total principal balance of $1.64 billion and $1.86 billion as
of December 31, 2009 and December 31, 2008, respectively.
|
The
following table details overall statistics for our loans receivable portfolio as
of December 31, 2009 and 2008:
December
31, 2009
|
December
31, 2008
|
||||
Number
of investments
|
61
|
73
|
|||
Fixed
/ Floating (in millions) (1)
|
$131
/ $1,027
|
$172
/ $1,618
|
|||
Coupon
(2)
(3)
|
3.72%
|
3.90%
|
|||
Yield (2)
(3)
|
3.58%
|
4.09%
|
|||
Maturity
(years) (2)
(4)
|
2.6
|
3.3
|
(1) |
Represents
the aggregate net book value of our portfolio allocated between fixed rate
and floating rate loans.
|
|
(2) |
Represents
a weighted average as of December 31, 2009 and December 31, 2008,
respectively.
|
|
(3) |
Calculations
for floating rate loans are based on LIBOR of 0.23% as of December 31,
2009 and LIBOR of 0.44% as of December 31, 2008.
|
|
(4) |
Represents
the final maturity of the investment assuming all extension options are
executed.
|
F-23
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
tables below detail the types of loans in our portfolio, as well as the property
type and geographic distribution of the properties securing our loans, as of
December 31, 2009 and 2008 (in thousands):
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Asset
Type
|
Book
Value
|
Percentage
|
Book
Value
|
Percentage
|
||||||||||||
Subordinate
interests in mortgages
|
$408,187 | 35 | % | $553,232 | 31 | % | ||||||||||
Senior
mortgages
|
338,828 | 29 | 434,179 | 24 | ||||||||||||
Mezzanine
loans
|
313,705 | 27 | 693,002 | 39 | ||||||||||||
Other
|
97,524 | 9 | 109,821 | 6 | ||||||||||||
Total
|
$1,158,244 | 100 | % | $1,790,234 | 100 | % | ||||||||||
Property
Type
|
Book
Value
|
Percentage
|
Book
Value
|
Percentage
|
||||||||||||
Office
|
$513,837 | 44 | % | $661,761 | 37 | % | ||||||||||
Hotel
|
339,708 | 29 | 688,332 | 38 | ||||||||||||
Healthcare
|
141,876 | 12 | 147,397 | 8 | ||||||||||||
Multifamily
|
28,511 | 3 | 123,492 | 7 | ||||||||||||
Retail
|
22,879 | 2 | 42,385 | 3 | ||||||||||||
Other
|
111,433 | 10 | 126,867 | 7 | ||||||||||||
Total
|
$1,158,244 | 100 | % | $1,790,234 | 100 | % | ||||||||||
Geographic
Location
|
Book
Value
|
Percentage
|
Book
Value
|
Percentage
|
||||||||||||
Northeast
|
$447,420 | 39 | % | $560,071 | 31 | % | ||||||||||
Southeast
|
269,616 | 23 | 387,500 | 22 | ||||||||||||
Southwest
|
126,935 | 10 | 295,490 | 16 | ||||||||||||
West
|
112,791 | 10 | 235,386 | 13 | ||||||||||||
Northwest
|
64,260 | 6 | 91,600 | 5 | ||||||||||||
Midwest
|
27,711 | 2 | 28,408 | 2 | ||||||||||||
International
|
54,800 | 5 | 122,387 | 7 | ||||||||||||
Diversified
|
54,711 | 5 | 69,392 | 4 | ||||||||||||
Total
|
$1,158,244 | 100 | % | $1,790,234 | 100 | % |
There are
no loans to a single borrower or to related groups of borrowers that exceeded
10% of total assets. Approximately 31% of all performing loans are secured by
properties in New York state.
Quarterly,
management evaluates our loan portfolio for impairment as described in Note 2.
As of December 31, 2009, we identified 20 loans with an aggregate gross book
value of $608.4 million for impairment, against which we have recorded a $477.4
million provision, and which are carried at an aggregate net book value of
$131.0 million. These include 12 loans with an aggregate gross carrying value of
$494.7 million which are current in their interest payments, against which we
have recorded a $398.7 million provision, as well as eight loans which are
delinquent on contractual payments with an aggregate gross carrying value of
$113.7 million, against which we have recorded a $78.7 million provision. Our
average balance of impaired loans was $70.0 million, $4.9 million, and $1.2
million during the years ended December 31, 2009, 2008, and 2007, respectively.
Subsequent to their impairment, we recorded interest on these loans of $1.0
million, $215,000, and $106,000 during the years ended December 31, 2009, 2008,
and 2007, respectively.
F-24
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
In some
cases our loan originations are not fully funded at closing, creating an
obligation for us to make future fundings, which we refer to as Unfunded Loan
Commitments. Typically, Unfunded Loan Commitments are part of construction and
transitional loans. As of December 31, 2009, our four Unfunded Loan Commitments
totaled $4.9 million, which will generally only be funded when and/or if the
borrower meets certain performance hurdles with respect to the underlying
collateral.
5.
Loans
Held-for-Sale, Net
As of
December 31, 2009, we were in the process of finalizing a sale of one of our
non-performing loans with a gross carrying value of $18.3 million to a third
party. We had previously recorded a provision for loan losses of $9.2 million
against this loan, and in the fourth quarter of 2009 recaptured $8.4 million of
the provision to reflect the expected sales proceeds. In January 2010, we
completed the sale of this loan for $17.5 million, which approximates our net
book value at December 31, 2009.
In
November 2009, we settled one loan which had previously been classified as
held-for-sale with the borrower on a discounted basis. This loan had a gross
carrying value of $14.4 million and a net carrying value of $12.0 million, which
amount was approximately equal to the proceeds received.
In April
2009, one loan which had previously been classified as held-for-sale was
transferred to the secured lender, Lehman Brothers, in satisfaction of our
obligations under our secured borrowing facility. We recorded a net loss of $7.9
million as a result of this transaction.
In March
2009, in conjunction with the restructuring of our debt obligations, four loans
with an aggregate gross carrying value of $140.4 million and a net carrying
value of $92.2 million, which had been previously classified as held-for-sale,
were transferred to the secured lenders, Goldman Sachs and UBS, at their net
book value in satisfaction of our obligations under the respective credit
facilities. See Note 9 for more details regarding our restructured debt
obligations.
The
following table details overall statistics for our loans held-for-sale as of
December 31, 2009 and 2008:
December
31, 2009
|
December
31, 2008
|
||||
Number
of investments
|
1
|
4
|
|||
Coupon
(1)
(2)
|
L +
2.75%
|
2.54%
|
|||
Yield (1)
(2)
|
2.98%
|
2.62%
|
|||
Maturity
(years) (1)
(3)
|
1.0
|
3.2
|
(1) |
Represents
a weighted average as of December 31, 2008 based on gross carrying value,
before any valuation allowance.
|
|
(2) |
Calculations
for floating rate loans are based on LIBOR of 0.23% and 0.44% as of
December 31, 2009 and 2008, respectively.
|
|
(3) | Represents the maturity of the investment assuming all extension options are executed, and does not give effect to known sales or transfers subsequent to the balance sheet date. |
6.
Real
Estate Held-for-Sale
In 2008,
we, together with our co-lender, foreclosed on a loan secured by a multifamily
property, and took title to the collateral securing the original loan. At the
time the foreclosure occurred, the loan had a book balance of $11.9 million,
which was reclassified as Real Estate Held-for-Sale (also referred to as Real
Estate Owned) on our consolidated balance sheet as of December 31, 2008 to
reflect our ownership interest in the property. Since that time, we have
received $564,000 of accumulated cash from the property, which has been recorded
as a reduction to our basis in the asset. In addition, we have also previously
recorded an aggregate $4.2 million impairment since the time of foreclosure to
reflect the property at fair value based on expected sales proceeds. In July
2009, we sold this asset for $7.1 million, which was our book value at that
time, and, accordingly, we did not record a material gain or loss on the
sale.
F-25
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
7.
Equity
Investment in Unconsolidated Subsidiaries
Our
equity investments in unconsolidated subsidiaries consist primarily of our
co-investments in investment management vehicles that we sponsor and manage. As
of December 31, 2009, we had co-investments in two such vehicles, CT Mezzanine
Partners III, Inc., or Fund III, in which we have a 4.7% investment, and CT
Opportunity Partners I, LP, or CTOPI, in which we have a 4.6% investment. In
addition to our co-investments, we record capitalized costs associated with
these vehicles in equity investments in unconsolidated subsidiaries. As of
December 31, 2009, $17.8 million of our $25.0 million capital commitment to
CTOPI remains unfunded.
Activity
relating to our equity investments in unconsolidated subsidiaries for the year
ended December 31, 2009 was as follows (in thousands):
Fund
III
|
CTOPI
|
Other
|
Total
|
|||||||||||||
December
31, 2008
|
$597 | $1,782 | $4 | $2,383 | ||||||||||||
Contributions
|
— | 3,704 | — | 3,704 | ||||||||||||
(Loss)
income from equity investments
|
(439 | ) | (3,311 | ) | 14 | (3,736 | ) | |||||||||
December
31, 2009
|
$158 | $2,175 | $18 | $2,351 |
In
accordance with the management agreements with Fund III and CTOPI, CTIMCO may
earn incentive compensation when certain returns are achieved for the
shareholders/partners of Fund III and CTOPI, which will be accrued if and when
earned, and when appropriate contingencies have been eliminated. In the event
that additional capital calls are made at Fund III, we may be required to refund
some or all of the $5.6 million incentive compensation previously received. As
of December 31, 2009, our maximum exposure to loss from Fund III and CTOPI was
$6.3 million and $8.4 million, respectively.
F-26
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
8.
Prepaid Expenses and Other Assets
Prepaid
expenses and other assets consist of the following as of December 31, 2009 and
2008 (in thousands):
December
31, 2009
|
December
31, 2008
|
|||||||
Deferred
financing costs, net
|
$5,743 | $8,342 | ||||||
Prepaid
expenses/security deposit
|
1,942 | 1,972 | ||||||
Other
assets
|
706 | 1,945 | ||||||
Common
equity - CT Preferred Trusts
|
— | 3,875 | ||||||
Goodwill
|
— | 2,235 | ||||||
$8,391 | $18,369 |
Deferred
financing costs include costs related to our debt obligations and are amortized
using the effective interest method or a method that approximates the effective
interest method, as applicable, over the life of the related debt
obligations.
Our
ownership interests in CT Preferred Trust I and CT Preferred Trust II, the
statutory trust issuers of our legacy trust preferred securities backed by our
junior subordinated notes, were accounted for using the equity method due to our
determination that they were variable interest entities in which we were not the
primary beneficiary. In connection with the debt restructuring described in Note
9, we eliminated 100% of our ownership interest in both CT Preferred Trust I and
CT Preferred Trust II through their dissolution following the exchange of our
junior subordinated notes for all outstanding trust preferred
securities.
In June
2007, we purchased a healthcare loan origination platform for $2.6 million ($1.9
million in cash and $700,000 in common stock) and recorded $2.2 million of
goodwill in connection with the acquisition. In December 2008, we transferred
the ownership interest in the healthcare loan origination platform back to its
original owners. As discussed in Note 2, we assess goodwill for impairment at
least annually unless events occur which otherwise require consideration for
impairment at an interim date. Based on an assessment of our current business,
as it relates to the previously acquired entity, we impaired goodwill completely
as of June 30, 2009.
F-27
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
9.
Debt Obligations
As of
December 31, 2009 and 2008, we had $1.8 billion and $2.1 billion of total debt
obligations outstanding, respectively. The balances of each category of debt,
their respective coupons and all-in effective costs, including the amortization
of fees and expenses, were as follows (in thousands):
December
31, 2009
|
December
31, 2008
|
December
31, 2009
|
|||||||||||
Debt
Obligation
|
Principal
Balance
|
Book
Balance
|
Book
Balance
|
Coupon(1)
|
All-In Cost(1)
|
Maturity Date(2)
|
|||||||
Repurchase
obligations and secured debt
|
|||||||||||||
JPMorgan
|
$258,535
|
$258,203
|
$336,271
|
1.75%
|
1.80%
|
March
15, 2011
|
|||||||
Morgan
Stanley
|
148,344
|
148,170
|
182,937
|
2.09%
|
2.10%
|
March
15, 2011
|
|||||||
Citigroup
|
43,825
|
43,764
|
63,830
|
1.57%
|
1.63%
|
March
15, 2011
|
|||||||
Goldman
Sachs
|
—
|
—
|
88,282
|
—
|
—
|
—
|
|||||||
Lehman
Brothers
|
—
|
—
|
18,014
|
—
|
—
|
—
|
|||||||
UBS
|
—
|
—
|
9,720
|
—
|
—
|
—
|
|||||||
Total
repurchase obligations and secured debt
|
$450,704
|
450,137
|
699,054
|
1.84%
|
1.88%
|
March
15, 2011
|
|||||||
Collateralized
debt obligations (CDOs)
|
|||||||||||||
CDO
I
|
233,168
|
233,168
|
252,045
|
0.87%
|
0.88%
|
April
23, 2012
|
|||||||
CDO
II
|
283,671
|
283,671
|
298,913
|
0.74%
|
0.99%
|
March
30, 2012
|
|||||||
CDO
III
|
252,982
|
254,156
|
257,515
|
5.23%
|
5.15%
|
February
5, 2013
|
|||||||
CDO IV (3)
|
327,285
|
327,285
|
347,562
|
0.86%
|
0.97%
|
April
5, 2013
|
|||||||
Total
CDOs
|
1,097,106
|
1,098,280
|
1,156,035
|
1.84%
|
1.92%
|
October
4, 2012
|
|||||||
Senior
credit facility - WestLB
|
99,188
|
99,188
|
100,000
|
3.23%
|
7.20%
|
March
15, 2011
|
|||||||
Junior subordinated
notes - A (4)
|
143,753
|
128,077
|
—
|
1.00%
|
4.28%
|
April
30, 2036
|
|||||||
Junior
subordinated notes -
B
|
—
|
—
|
128,875
|
—
|
—
|
—
|
|||||||
Total/Weighted
Average
|
$1,790,751
|
$1,775,682
|
$2,083,964
|
1.85%
|
2.38%
|
(5)
|
December
23, 2013
|
(1) |
Represents a weighted
average for each respective facility, assuming LIBOR of 0.23% at December
31, 2009 for floating rate debt
obligations.
|
|
(2) |
Maturity
dates for our repurchase obligations with JPMorgan, Morgan Stanley and
Citigroup, and our senior credit facility, assume we meet the necessary
conditions to exercise a one year extension option, which we have met
subsequent to year-end as described in Note 22. Maturity dates for our
CDOs represent a weighted average date based on the timing of expected
principal repayments to the respective bondholders.
|
|
(3) |
Comprised (at
December 31, 2009) of $314.0 million of floating rate notes sold and $13.3
million of fixed rate notes sold.
|
|
(4) |
Represents the junior
subordinated notes issued pursuant to the exchange transactions on March
16, 2009 and May 14, 2009. The coupon will remain at 1.00% per annum
through April 29, 2012, increase to 7.23% per annum for the period from
April 30, 2012 through April 29, 2016 and then convert to a floating
interest rate of three-month LIBOR + 2.44% per annum through maturity.
|
|
(5) |
Including the impact
of interest rate hedges with an aggregate notional balance of $417.1
million as of December 31, 2009, the effective all-in cost of our debt
obligations would be 3.47% per annum.
|
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement
and certain of our junior subordinated notes.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
F-28
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
|
·
|
Maturity
dates were modified to one year from the March 16, 2009 effective date of
each respective agreement, which maturity dates may be extended further
for two one-year periods. The first one-year extension option is
exercisable by us so long as the outstanding balance as of the first
extension date is less than or equal to a certain amount, reflecting a
reduction of twenty percent (20%), including the upfront payment described
above, of the outstanding amount from the date of the amendments, and no
other defaults or events of default have occurred and are continuing, or
would be caused by such extension. As described in Note 22, we qualified
for this extension subsequent to year-end. The second one-year extension
option is exercisable by each participating secured lender in its sole
discretion.
|
|
·
|
We
agreed to pay each secured participating lender periodic amortization as
follows: (i) mandatory payments, payable monthly in arrears, in an amount
equal to sixty-five (65%) (subject to adjustment in the second year) of
the net interest income generated by each such lender’s collateral pool,
and (ii) one hundred percent (100%) of the principal proceeds received
from the repayment of assets in each such lender’s collateral pool. In
addition, under the terms of the amendment with Citigroup, we agreed to
pay Citigroup an additional quarterly amortization payment equal to the
lesser of: (x) Citigroup’s then outstanding senior secured credit facility
balance or (y) the product of (i) the total cash paid (including both
principal and interest) during the period to our senior credit facility in
excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0
million facility amount, and (ii) a fraction, the numerator of which is
Citigroup’s then outstanding senior secured credit facility balance and
the denominator is the total outstanding secured indebtedness of the
secured participating lenders.
|
|
·
|
We
further agreed to amortize each participating secured lender’s secured
debt at the end of each calendar quarter on a pro rata basis until we have
repaid our secured, recourse credit facilities and thereafter our senior
credit facility in an amount equal to any unrestricted cash in excess of
the sum of (i) $25.0 million, and (ii) any unfunded loan and co-investment
commitments.
|
|
·
|
Each
participating secured lender was relieved of its obligation to make future
advances with respect to unfunded commitments arising under investments in
its collateral pool.
|
|
·
|
We
received the right to sell or refinance collateral assets as long as we
apply one hundred percent (100%) of the proceeds to pay down the related
secured credit facility balance subject to minimum release price
mechanics.
|
|
·
|
We
eliminated the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. Under the revised secured credit
facilities, going forward, collateral value is expected to be
determined by our lenders based upon changes in the performance of the
underlying real estate collateral as opposed to changes
in market spreads under the original terms. Beginning September
2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities,
each collateral pool may be valued monthly. If the ratio of a secured
lender’s total outstanding secured credit facility balance to total
collateral value exceeds 1.15x the ratio calculated as of the effective
date of the amended agreements, we may be required to liquidate collateral
and reduce the borrowings or post other collateral in an effort to
bring the ratio back into compliance with the prescribed ratio, which may
or may not be successful.
|
F-29
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
|
·
|
prohibit
new balance sheet investments except, subject to certain limitations,
co-investments in our investment management vehicles or protective
investments to defend existing collateral assets on our balance
sheet;
|
|
·
|
prohibit
the incurrence of any additional indebtedness except in limited
circumstances;
|
|
·
|
limit
the total cash compensation to all employees and, specifically with
respect to our chief executive officer and chief financial officer, freeze
their base salaries at 2008 levels, and require cash bonuses to any of
them to be approved by a committee comprised of one representative
designated by the secured lenders, the administrative agent under the
senior credit facility and a representative of our board of
directors;
|
|
·
|
prohibit
the payment of cash dividends to our common shareholders except to the
minimum extent necessary to maintain our REIT
status;
|
|
·
|
require
us to maintain a minimum amount of liquidity, as defined, of $7.0 million
in year one and $5.0 million
thereafter;
|
|
·
|
trigger
an event of default if our chief executive officer ceases his employment
with us during the term of the agreement and we fail to hire a replacement
acceptable to the lenders; and
|
|
·
|
trigger
an event of default, if any event or condition occurs which causes any
obligation or liability of more than $1.0 million to become due prior to
its scheduled maturity or any monetary default under our restructured debt
obligations if the amount of such obligation is at least $1.0
million.
|
The
following table details our progress towards reducing the outstanding principal
amounts under our secured credit facilities in order to meet the conditions for
the first one-year extension thereof (in thousands):
March
15, 2009 to
December
31, 2009 Change
|
||||||||||||||||||||||||||||||||
December
31, 2009
|
March
15, 2009
|
Target
|
Additional
|
|||||||||||||||||||||||||||||
Participating
Secured Lender |
Collateral
Balance (1)
|
Debt
Obligation (A)
|
Collateral
Balance (1)
|
Debt
Obligation
|
Collateral
Balance
|
Debt
Obligation
|
Debt
Obligation (B) |
Debt Reduction
Required (A-B) (2) |
||||||||||||||||||||||||
JPMorgan
(3)
|
$ | 503,506 | $ | 258,535 | $ | 562,462 | $ | 334,968 | $ | (58,956 | ) | $ | (76,433 | ) | $ | 268,872 | N/A | |||||||||||||||
Morgan
Stanley
|
387,018 | 148,344 | 411,342 | 181,350 | (24,324 | ) | (33,006 | ) | 145,688 | 2,656 | ||||||||||||||||||||||
Citigroup
|
77,648 | 43,825 | 99,590 | 63,830 | (21,942 | ) | (20,005 | ) | 50,894 | N/A | ||||||||||||||||||||||
$ | 968,172 | $ | 450,704 | $ | 1,073,394 | $ | 580,148 | $ | (105,222 | ) | $ | (129,444 | ) | $ | 465,454 | $ | 2,656 |
(1) |
Represents the
aggregate outstanding principal balance of collateral as of each
respective period.
|
|
(2) |
Represents
the amount by which we are required to reduce our debt obligations by
March 15, 2010 in order to qualify for a one-year extension, which we have
met subsequent to year-end as described in Note
22.
|
|
(3) |
The additional debt
reduction required under our agreement with JPMorgan is subject to
adjustment based on changes in the fair value of certain of our interest
rate swap agreements with JPMorgan between December 31, 2009 and March 15,
2010. Amount noted above assumes no change in the fair value of such
derivatives as of December 31, 2009.
|
On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The fair value assigned to these warrants, totaling
$940,000, has been recorded as a discount on the related debt obligations with a
corresponding increase to additional paid-in capital, and will be accreted as a
component of interest expense over the term of each respective facility. The
warrants were valued using the Black-Scholes valuation method.
F-30
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the master repurchase agreement.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
The
following table details the aggregate outstanding principal balance, carrying
value and fair value of our assets, primarily loans receivable, which were
pledged as collateral under our secured credit facilities as of December 31,
2009, as well as the amount at risk under each facility (in thousands). The
amount at risk is generally equal to the carrying value of our collateral less
the outstanding principal balance of the associated credit
facility.
|
||||||||||
Loans
and Securities Collateral Balances, as of December 31,
2009
|
||||||||||
Secured
Lender
|
Facility
Balance |
Principal
Balance |
Carrying
Value
|
Fair
Market
Value
|
Amount at
Risk (1)
|
|||||
JPMorgan
|
$258,535
|
$503,506
|
$385,825
|
$295,137
|
$134,290
|
|||||
Morgan Stanley (2)
|
148,344
|
387,018
|
200,823
|
142,377
|
52,480
|
|||||
Citigroup
|
43,825
|
77,648
|
75,585
|
53,176
|
31,760
|
|||||
$450,704
|
$968,172
|
$662,233
|
$490,690
|
$218,530
|
(1) |
Amount
at risk is calculated on an asset-by-asset basis for each facility and
considers the greater of (a) the carrying value of an asset and (b) the
fair value of an asset, in determining the total risk.
|
|
(2) |
Amounts
other than principal exclude certain subordinate interests in our CDOs
which have been pledged as collateral to Morgan Stanley. These interests
have been eliminated in consolidation and therefore have a carrying value
of zero on our balance sheet.
|
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
|
·
|
extend
the maturity date of the senior credit agreement to be co-terminus with
the maturity date of the secured credit facilities with the participating
secured lenders (as they may be further extended until March 16, 2012, as
described above);
|
|
·
|
increase
the cash interest rate under the senior credit agreement to LIBOR plus
3.00% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per
annum less the cash interest rate;
|
F-31
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
|
·
|
initiate
quarterly amortization equal to the greater of: (i) $5.0 million per annum
and (ii) 25% of the annual cash flow received from our currently
unencumbered collateralized debt obligation
interests;
|
|
·
|
pledge
our unencumbered collateralized debt obligation interests and provide a
negative pledge with respect to certain other assets;
and
|
|
·
|
replace
all existing financial covenants with substantially similar covenants and
default provisions to those described above with respect to the
participating secured facilities.
|
As of
December 31, 2009, we had $99.2 million outstanding under our senior credit
facility at a cash cost of LIBOR plus 3.00%. Since we amended and restated our
senior credit agreement on March 16, 2009, we have made amortization payments of
$3.8 million, and $3.0 million of accrued interest was added to the outstanding
balance.
Junior
Subordinated Notes
Prior to
March 2009, we had a total of $128.9 million of junior subordinated notes
outstanding (securing $125.0 million of trust preferred securities sold to third
parties), at a cash cost of 7.20% per annum.
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as the Trust Securities mentioned above in exchange for $21.9 million face
amount of the Trust Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
As of
December 31, 2009, we had a principal balance of $143.8 million ($128.1 million
book balance) of junior subordinated notes at a cash cost of 1.00% per
annum.
F-32
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Collateralized
Debt Obligations
As of
December 31, 2009, we had CDOs outstanding from four separate issuances with a
total face value of $1.1 billion. Our CDOs are financing vehicles for our assets
and, as such, are consolidated on our balance sheet representing the amortized
sales price of the securities we sold to third parties. On a combined basis, our
CDOs provide us with $1.1 billion of non-recourse, non-mark-to-market, index
matched financing at a weighted average cash cost of 0.54% over the applicable
indices (1.84% at December 31, 2009) and a weighted average all-in cost of 0.63%
over the applicable indices (1.92% at December 31, 2009). As of December 31,
2009, $409.0 million of our loans receivable and $697.9 million of our
securities were financed by our CDOs. As of December 31, 2008, $548.8 million of
our loans receivable and $746.0 million of our securities were financed by our
CDOs. During 2009, we received downgrades to 8 classes of CDO I, 5 classes of
CDO II, 13 classes CDO III, and 15 classes of CDO IV.
CDO I and
CDO II each have interest coverage and overcollateralization tests, which when
breached provide for hyper-amortization of the senior notes sold by a
redirection of cash flow that would otherwise have been paid to the subordinate
classes, some of which are owned by us. When such tests are in breach for six
consecutive months, the reinvesting feature of the CDO is suspended. The
hyper-amortization is ceased once the test is back in compliance. The
overcollateralization tests are a function of impairments to the CDO collateral.
During the first quarter of 2009, we were informed by our CDO trustee of
impairments due to rating agency downgrades of certain of the securities which
serve as collateral in all of our CDOs. The impairments resulted in a breach of
a CDO II overcollateralization test. During the second and third quarters,
additional ratings downgrades on securities combined with the non-performance of
loan collateral resulted in breaches of the CDO I
overcollateralization tests and an additional CDO II overcollateralization test
failure as well as a breach of a CDO II interest coverage test. These
breaches have caused the redirection of CDO I and CDO II cash flow that would
otherwise have been paid to the subordinate classes of the CDOs, some of which
we own.
Furthermore,
all four of our CDOs provide for the re-classification of interest proceeds from
impaired collateral as principal proceeds. During the first quarter of 2009, we
were informed by our CDO trustee of impairments due to rating agency downgrades
of certain of the securities which serve as collateral in all of our CDOs
resulting in the reclassification of interest proceeds from those securities as
principal proceeds. During the second and third quarters of 2009, additional
downgrades of securities in CDO IV resulted in additional impairments and
therefore a redirection of cash flow from us to senior note holders. Other than
collateral management fees, we currently receive cash payments from only one of
our four CDOs, CDO III.
10.
Participations
Sold
Participations
sold represent interests in certain loans that we originated and subsequently
sold to one of our investment management vehicles, CT Large Loan 2006, Inc., and
third parties. We present these sold interests as both assets and non-recourse
liabilities on the basis that these arrangements do not qualify as sales under
GAAP. We have no economic exposure to these liabilities in excess of the value
of the assets sold. As of December 31, 2009, we had five such participations
sold with a total gross carrying value of $289.1 million.
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
operations. Generally, participations sold are recorded as assets and
liabilities in equal amounts on our consolidated balance sheet. During 2009, we
recorded $172.5 million of provisions for loan loses against certain of our
participations sold assets, resulting in a net book value of $116.6 million. The
associated liabilities have not been adjusted as of December 31, 2009, because
we are prohibited by GAAP from reducing their carrying value until the loan
assets are contractually extinguished.
As of
December 31, 2008, we had five such participations sold with an aggregate gross
carrying value (for both assets and liabilities) of $292.7 million.
F-33
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table describes our participations sold assets and liabilities as of
December 31, 2009 and 2008 (in thousands):
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Participations
sold assets
|
||||||||
Gross
carrying value
|
$289,144 | $292,669 | ||||||
Less:
Provision for loan losses
|
(172,465 | ) | — | |||||
Net
book value of assets
|
$116,679 | $292,669 | ||||||
Participations
sold liabilities
|
||||||||
Net
book value of liabilities
|
$289,144 | $292,669 | ||||||
Net
impact to shareholders' equity
|
($172,465 | ) | $— |
11.
Derivative
Financial Instruments
To manage
interest rate risk, we typically employ interest rate swaps, or other
arrangements, to convert a portion of our floating rate debt to fixed rate debt
in order to index match our assets and liabilities. The interest rate swaps that
we employ are designated as cash flow hedges and are designed to hedge fixed
rate assets against floating rate liabilities. Under cash flow hedges, we pay
our hedge counterparties a fixed rate amount and our counterparties pay us a
floating rate amount, which are settled monthly, and recorded as a component of
interest expense. Our counterparties in these transactions are financial
institutions and we are dependent upon the financial health of these
counterparties and a functioning interest rate derivative market in order to
effectively execute our hedging strategy.
The
following table summarizes the notional and fair values of our interest rate
swaps as of December 31, 2009 and 2008. The notional value provides an
indication of the extent of our involvement in the instruments at that time, but
does not represent exposure to credit or interest rate risk (in
thousands):
Type
|
Counterparty
|
December
31, 2009
Notional
Amount
|
Interest Rate (1)
|
Maturity
|
December
31, 2009
Fair
Value
|
December
31, 2008
Fair
Value
|
||||||
Cash
Flow Hedge
|
Swiss
RE Financial
|
$272,653
|
5.10%
|
2015
|
($21,786)
|
($29,383)
|
||||||
Cash
Flow Hedge
|
Bank
of America
|
45,074
|
4.58%
|
2014
|
(3,005)
|
(4,526)
|
||||||
Cash
Flow Hedge
|
Morgan
Stanley
|
18,131
|
3.95%
|
2011
|
(794)
|
(1,053)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
17,933
|
5.14%
|
2014
|
(1,182)
|
(2,867)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
16,894
|
4.83%
|
2014
|
(966)
|
(2,550)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
16,377
|
5.52%
|
2018
|
(1,238)
|
(3,827)
|
||||||
Cash
Flow Hedge
|
Bank
of America
|
11,054
|
5.05%
|
2016
|
(930)
|
(1,366)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
7,062
|
5.11%
|
2016
|
(440)
|
(706)
|
||||||
Cash
Flow Hedge
|
Bank
of America
|
5,104
|
4.12%
|
2016
|
(212)
|
(430)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
3,253
|
5.45%
|
2015
|
(237)
|
(663)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
2,831
|
5.08%
|
2011
|
(120)
|
(241)
|
||||||
Cash
Flow Hedge
|
Morgan
Stanley
|
780
|
5.31%
|
2011
|
(40)
|
(60)
|
||||||
Cash
Flow Hedge
|
JPMorgan
Chase
|
—
|
5.02%
|
2009
|
—
|
(302)
|
||||||
Total/Weighted
Average
|
$417,146
|
4.99%
|
2015
|
($30,950)
|
($47,974)
|
(1) |
Represents the gross
fixed interest rate we pay to our counterparties under these derivative
instruments. We receive an amount of interest indexed to one-month LIBOR
on all of our interest rate swaps as of December 31, 2009 and 2008.
|
As of
both December 31, 2009 and 2008, all of our derivative financial instruments
were recorded at fair value as interest rate hedge liabilities on our
consolidated balance sheet. During the year ended December 31, 2009, we did not
enter into any new derivative financial instrument contracts and one derivative
financial instrument contract matured.
F-34
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The table
below shows amounts recorded to other comprehensive income and amounts recorded
to interest expense from other comprehensive income for the years ended December
31, 2009 and 2008 (in thousands):
Amount
of gain (loss) recognized
|
Amount
of loss reclassified from OCI
|
|||||||
in
OCI for the year ended
|
to income for the
year ended (1)
|
|||||||
Hedge
|
December
31, 2009
|
December
31, 2008
|
December
31, 2009
|
December
31, 2008
|
||||
Interest
rate swaps
|
$17,024
|
($29,640)
|
($20,374)
|
($9,698)
|
(1) |
Represents
net amounts paid to swap counterparties during the period, which are
included in interest expense, offset by an immaterial amount of non-cash
swap amortization.
|
All of
our hedges were classified as highly effective for all of the periods presented,
and over the next twelve months we expect approximately $18.1 million to be
reclassified from other comprehensive income to interest expense.
Certain
of our derivative agreements contain provisions whereby a default on any of our
debt obligations could also constitute a default under these derivative
obligations. As of December 31, 2009, the fair value of such derivatives in a
net liability position related to these agreements was $7.2 million. If we
breach any of these provisions we could be required to settle our obligations
under the agreements at their termination value.
As of
December 31, 2009, we were not in default under any of our debt obligations and
have not posted any assets as collateral under our derivative
agreements.
12. Shareholders’
(Deficit) Equity
Authorized
Capital
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. Subject to applicable New York Stock Exchange listing
requirements, our board of directors is authorized to issue additional shares of
authorized stock without shareholder approval. In addition, to the extent not
issued, currently authorized stock may be reclassified between class A common
stock and preferred stock.
Common
Stock
Shares of
class A common stock are 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. A total of
22,339,328 shares of common stock and stock units were issued and outstanding as
of December 31, 2009.
We did
not repurchase any of our common stock during the year ended December 31, 2009
other than the 52,986 shares we acquired pursuant to elections by incentive plan
participants to satisfy tax withholding obligations through the surrender of
shares equal in value to the amount of the withholding obligation incurred upon
the vesting of restricted stock.
Preferred
Stock
We have
not issued any shares of preferred stock since we repurchased all of the
previously issued and outstanding preferred stock in 2001.
F-35
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Warrants
As
discussed in Note 9, in conjunction with our debt restructuring, we issued to
certain of our secured lenders warrants to purchase an aggregate 3,479,691
shares of our class A common stock at an exercise price of $1.79 per share. The
warrants will become exercisable on March 16, 2012 and expire on March 16, 2019,
and may be exercised through a cashless exercise at the option of the warrant
holders. The fair value assigned to these warrants, totaling $940,000, has been
recorded as an increase to additional paid-in capital, and will be amortized
over the term of the related debt obligations. The warrants were valued using
the Black-Scholes valuation method.
Dividends
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
GAAP) to our shareholders so as to comply with the REIT provisions of the
Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. 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. As required by covenants in our restructured debt obligations, our
cash dividend distributions are restricted to the minimum amount necessary to
maintain our status as a REIT. Moreover, such covenants require us to make any
distribution in stock to the extent permitted, taking into consideration the
recent Internal Revenue Service rulings which allow REITs to distribute up to
90% of their dividends in the form of stock for tax years ending on or before
December 31, 2011.
In
addition to the
foregoing restrictions, our dividend policy remains
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. No dividends
were declared during the year ended December 31, 2009.
Earnings
Per Share
The
following table sets forth the calculation of Basic and Diluted earnings per
share, or EPS, based on the weighted average of both restricted and unrestricted
class A common stock outstanding, for the years ended December 31, 2009 and 2008
(in thousands, except share and per share amounts):
Year
Ended December 31, 2009
|
Year
Ended December 31, 2008
|
|||||||||||||||||||||||
Net
|
Wtd.
Avg.
|
Per
Share
|
Net
|
Wtd.
Avg.
|
Per
Share
|
|||||||||||||||||||
Loss
|
Shares
|
Amount
|
Loss
|
Shares
|
Amount
|
|||||||||||||||||||
Basic
EPS:
|
||||||||||||||||||||||||
Net
loss allocable to common
stock
|
$ | (576,437 | ) | 22,378,868 | $ | (25.76 | ) | $ | (57,538 | ) | 21,098,935 | $ | (2.73 | ) | ||||||||||
Effect
of Dilutive Securities:
|
||||||||||||||||||||||||
Warrants
& Options outstanding for
the purchase of common stock
|
— | — | — | — | ||||||||||||||||||||
Diluted
EPS:
|
||||||||||||||||||||||||
Net
loss per share of common
stock and assumed conversions
|
$ | (576,437 | ) | 22,378,868 | $ | (25.76 | ) | $ | (57,538 | ) | 21,098,935 | $ | (2.73 | ) |
As of
December 31, 2009, Diluted EPS excludes 162,000 options and 3.5 million warrants
which were antidilutive for the period. These instruments could potentially
impact Diluted EPS in future periods, depending on changes in our stock price.
As of December 31, 2008 Diluted EPS excludes 170,000 options which were
similarly antidilutive.
F-36
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table sets forth the calculation of Basic and Diluted EPS based on the
weighted average of both restricted and unrestricted class A common stock
outstanding, for the year ended December 31, 2007 (in thousands, except share
and per share amounts):
Year
Ended December 31, 2007
|
||||||||||||
Net
|
Wtd.
Avg.
|
Per
Share
|
||||||||||
Income
|
Shares
|
Amount
|
||||||||||
Basic
EPS:
|
||||||||||||
Net
income allocable to common
stock
|
$ | 84,366 | 17,569,690 | $ | 4.80 | |||||||
Effect
of Dilutive Securities:
|
||||||||||||
Options
outstanding for the purchase
of common stock
|
— | 120,576 | ||||||||||
Diluted
EPS:
|
||||||||||||
Net
loss per share of common
stock and assumed conversions
|
$ | 84,366 | 17,690,266 | $ | 4.77 |
As of
December 31, 2007 Diluted EPS excludes 120,000 options which were antidilutive
for the period.
13.
General and Administrative Expenses
General
and administrative expenses for the years ended December 31, 2009, 2008,
and 2007 consisted of the following (in thousands):
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Personnel
costs
|
$ | 10,641 | $ | 12,603 | $ | 14,480 | ||||||
Employee
stock based compensation
|
293 | 3,478 | 4,606 | |||||||||
Professional
services
|
5,456 | 5,297 | 5,094 | |||||||||
Restructuring
costs
|
3,042 | — | — | |||||||||
Operating
and other costs
|
2,670 | 3,501 | 3,212 | |||||||||
Employee
promote compensation
|
— | 78 | 2,564 | |||||||||
Total
|
$ | 22,102 | $ | 24,957 | $ | 29,956 |
14.
Income Taxes
We
account for our operations using accounting principles generally accepted in the
United States, or GAAP. Below, we reconcile the differences between our
GAAP-basis reporting and the equivalent amounts prepared on an income tax
basis.
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). These entities are presented on a
consolidated basis under GAAP, however are separate tax payers.
F-37
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The table
below shows our consolidated GAAP net loss, as well as the contributions from
each of the REIT and the TRS on a GAAP basis:
GAAP
Net Loss Detail
|
|||
(in
thousands)
|
Year
Ended
December 31, 2009 |
||
REIT
GAAP net loss
|
($575,086 | ) | |
TRS
GAAP net loss
|
(1,351 | ) | |
Consolidated
GAAP net loss
|
($576,437 | ) |
REIT
(Capital Trust, Inc.)
We made
an election to be taxed as a REIT under Section 856(c) of the Internal
Revenue Code, commencing with the tax year ending December 31, 2003.
As a REIT, we generally are not subject to federal, state, and local income
taxes. 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 as well
as federal, state and local income tax on our taxable income at regular
corporate rates. As of December 31, 2009 and 2008, we were in compliance with
all REIT requirements.
In
addition, we are subject to taxation on the income generated by investments in
our CDOs. Due to the redirection provisions of our CDOs, which reallocate
principal proceeds and interest otherwise distributable to us to repay senior
note holders, assets financed through our CDOs may generate current taxable
income without a corresponding cash distribution to us.
The table
below reconciles the differences between GAAP net loss and estimated taxable
loss for the REIT:
REIT
GAAP to Tax Reconciliation
|
||||
(in
thousands)
|
Year
Ended
December 31, 2009 |
|||
REIT
GAAP net loss
|
($575,086 | ) | ||
GAAP
to tax differences:
|
||||
Provision
for loan losses on participations sold
|
172,465 | |||
Losses,
allowances and provisions on investments(1)
|
42,366 | |||
Equity
investments(2)
|
3,676 | |||
General
and administrative(3)
|
525 | |||
Deferred
income
|
1,609 | |||
Other
|
440 | |||
Subtotal
|
221,081 | |||
REIT
taxable loss (pre-dividend)
|
($354,005 | ) |
(1) |
Comprised
of (i) losses treated as “capital losses” for tax and (ii) 2009 GAAP
losses that will be recognized in future tax periods. This is offset by
tax losses recognized in 2009 that were recorded as GAAP losses in prior
periods.
|
|
(2) |
GAAP
to tax differences relating to our investments in CTOPI and Fund III.
|
|
(3) |
Primarily
differences associated with compensation to our directors.
|
For tax
year 2009, we do not expect to pay any significant taxes at the REIT, as we have
an estimated taxable loss for the period.
F-38
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
As of
December 31, 2009, we have $357.0 million of net operating losses, or NOLs, and
$64.4 million of net capital losses, or NCLs, available to be carried forward
and utilized in future periods.
TRS
(CTIMCO)
CTIMCO is
a wholly-owned subsidiary that operates our investment management business
(including the management of Capital Trust, Inc.) and holds certain of our
assets. As a TRS, CTIMCO is subject to corporate taxation.
The table
below reconciles GAAP net loss to estimated taxable income for the
TRS:
TRS
GAAP to Tax Reconciliation
|
||||
(in
thousands)
|
Year
Ended
December
31, 2009
|
|||
TRS
GAAP net loss
|
($1,351 | ) | ||
TRS
income tax benefit
|
(286 | ) | ||
TRS
GAAP net loss (pre GAAP tax benefit)
|
(1,637 | ) | ||
GAAP
to tax differences:
|
||||
General
and administrative (1)
|
1,116 | |||
Intangible
assets(2)
|
2,235 | |||
Other
|
20 | |||
Subtotal
|
3,371 | |||
TRS
taxable income (pre-NOL) (3)
|
$1,734 |
(1) |
Primarily
differences associated with stock based and other compensation to our
employees.
|
|
(2) |
Represents
timing differences related to the write off of goodwill for GAAP in
2009.
|
|
(3) |
We
will utilize our NOLs carried forward from prior tax periods to fully
offset taxable income at the
TRS.
|
For tax
year 2009, we do not expect to pay any significant taxes at the TRS, as the TRS
is expected to utilize net operating loss, or NOL, carryforwards to offset its
estimated taxable income.
GAAP
Tax Provision (Consolidated)
During
2009, in our GAAP-basis consolidated financial statements, we recorded an income
tax benefit of $694,000, which was primarily due to a $408,000 tax refund. The
remaining balance was primarily a result of changes to our deferred tax asset
relating to (i) GAAP-to-tax differences for stock-based and other compensation
to our employees, (ii) changes in intangible assets, and (iii) utilization of
net operating losses.
Deferred
Income Taxes (TRS)
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities used for financial reporting purposes
and the amounts used for tax reporting purposes.
F-39
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
significant components of deferred tax assets and liabilities, which were
generated entirely by CTIMCO, were as follows (in thousands):
December
31, 2009
|
December
31, 2008
|
|||||||
NOL
carryforwards
|
$1,178 | $2,431 | ||||||
Stock-based
compensation expense
|
67 | 321 | ||||||
Intangible
assets
|
— | (1,025 | ) | |||||
Other
|
787 | 482 | ||||||
Deferred
tax asset
|
2,032 | 2,209 | ||||||
Valuation
allowance
|
— | (503 | ) | |||||
Net
deferred tax asset
|
$2,032 | $1,706 |
As of
December 31, 2009, tax years 2006 through 2009 remain subject to examination by
taxing authorities.
15.
Employee Benefit Plans
We had
four benefit plans in effect as of December 31, 2009: (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 Plan, and (4) the 2007 Long-Term Incentive Plan, or 2007 Plan. The 1997
Employee Plan and 1997 Director Plan expired in 2007 and no new awards may be
issued under them, and no further grants will be made under the 2004 Plan. Under
the 2007 Plan, a maximum of 700,000 shares of class A common stock may be
issued. Shares canceled under the 2004 Plan are available to be reissued under
the 2007 Plan. As of December 31, 2009, there were 492,763 shares available
under the 2007 Plan.
Under
these plans, our employees are issued shares of our restricted common stock
which is expensed by us over their vesting period. A portion of these shares
vest pro-rata over a three-year service period, with the remainder contingently
vesting after a four-year period based on the returns we have
achieved.
As of
December 31, 2009, unvested share-based compensation consisted of 79,023 shares
of restricted common stock with an unamortized value of $230,000. Subject to
vesting conditions and the continued employment of certain employees, these
costs will be recognized as compensation expense over the next 3
years.
F-40
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Activity
under these four plans for the year ended December 31, 2009 is summarized in the
table below in share and share equivalents:
Benefit
Type
|
1997 Employee
Plan |
1997 Director
Plan |
2004 Plan
|
2007
Plan
|
Total
|
|||||||||||||||
Options(1)
|
||||||||||||||||||||
Beginning
Balance
|
170,477 | — | — | — | 170,477 | |||||||||||||||
Expired
|
(8,251 | ) | — | — | — | (8,251 | ) | |||||||||||||
Ending
Balance
|
162,226 | — | — | — | 162,226 | |||||||||||||||
Restricted
Common Stock(2)
|
||||||||||||||||||||
Beginning
Balance
|
— | — | 289,637 | 41,560 | 331,197 | |||||||||||||||
Granted
|
— | — | — | 216,269 | 216,269 | |||||||||||||||
Vested
|
— | — | (48,495 | ) | (21,502 | ) | (69,997 | ) | ||||||||||||
Forfeited
|
— | — | (237,662 | ) | (160,784 | ) | (398,446 | ) | ||||||||||||
Ending
Balance
|
— | — | 3,480 | 75,543 | 79,023 | |||||||||||||||
Stock
Units(3)
|
||||||||||||||||||||
Beginning
Balance
|
— | 80,017 | — | 135,434 | 215,451 | |||||||||||||||
Granted/deferred/vested
|
— | — | — | 248,595 | 248,595 | |||||||||||||||
Ending
Balance
|
— | 80,017 | — | 384,029 | 464,046 | |||||||||||||||
Total
Outstanding
|
162,226 | 80,017 | 3,480 | 459,572 | 705,295 |
(1) |
All
options are fully vested as of December 31, 2009.
|
|
(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.
|
The
following table summarizes the outstanding options as of December 31,
2009:
|
Options
Outstanding
|
Weighted
Average
Exercise
Price per Share
|
Weighted
Average
Remaining
Life (in Years)
|
||||||||||
Exercise Price
per Share
|
1997 Employee
Plan
|
1997 Employee
Plan
|
1997 Employee
Plan
|
||||||||||
$10.00 - $15.00 | 35,557 | $13.50 | 0.93 | ||||||||||
$15.00 - $20.00 | 126,669 | 16.38 | 0.75 | ||||||||||
Total/Weighted
Average
|
162,226 | $15.75 | 0.79 |
In
addition to the equity interests detailed above, we may grant percentage
interests in the incentive compensation received by us from certain of our
investment management vehicles. As of December 31, 2009, we had granted a
portion of the Fund III incentive compensation received by us.
F-41
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
A summary
of the unvested restricted common stock as of and for the year ended December
31, 2009 was as follows:
Restricted
Common Stock
|
||||||||
Shares
|
Grant
Date Fair Value
|
|||||||
Unvested
at January 1, 2009
|
331,197 | $30.61 | ||||||
Granted
|
216,269 | 3.32 | ||||||
Vested
|
(69,997 | ) | 25.02 | |||||
Forfeited
|
(398,446 | ) | 21.58 | |||||
Unvested
at December 31, 2009
|
79,023 | $7.99 |
A summary
of the unvested restricted common stock as of and for the year ended December
31, 2008 was as follows:
Restricted
Common Stock
|
||||||||
Shares
|
Grant
Date Fair Value
|
|||||||
Unvested
at January 1, 2008
|
423,931 | $30.96 | ||||||
Granted
|
44,550 | 27.44 | ||||||
Vested
|
(133,384 | ) |
various
|
|||||
Forfeited
|
(3,900 | ) |
various
|
|||||
Unvested
at December 31, 2008
|
331,197 | $30.61 |
A summary
of the unvested restricted common stock as of and for the year ended December
31, 2007 was as follows:
Restricted
Common stock
|
||||||||
Shares
|
Grant
Date Fair Value
|
|||||||
Unvested
at January 1, 2007
|
480,967 | $29.56 | ||||||
Granted
|
23,015 | 51.25 | ||||||
Vested
|
(80,051 | ) | 28.38 | |||||
Forfeited
|
— | — | ||||||
Unvested
at December 31, 2007
|
423,931 | $30.96 |
The total
fair value of restricted shares which vested during the years ended December 31,
2009, 2008, and 2007 was $301,000, $2.2 million, and $3.3 million,
respectively.
16.
Fair Values of Financial Instruments
As
discussed in their respective notes to our consolidated financial statements,
certain of our assets and liabilities are measured at fair value on either a
recurring or nonrecurring basis. These fair values are determined using a
variety of inputs and methodologies, which are detailed below. As discussed in
Note 2, the “Fair Value Measurement and Disclosures” topic of the Codification
establishes a fair value hierarchy that prioritizes the inputs used in
determining fair value under GAAP, which includes the following classifications,
in order of priority:
|
·
|
Level
1 generally includes only unadjusted quoted prices in active markets for
identical assets or liabilities as of the reporting
date.
|
|
·
|
Level
2 inputs are those which, other than Level 1 inputs, are observable for
identical or similar assets or
liabilities.
|
F-42
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
|
·
|
Level
3 inputs generally include anything which does not meet the criteria of
Levels 1 and 2, particularly any unobservable
inputs.
|
The
following table summarizes our assets and liabilities recorded at fair value as
of December 31, 2009 (in thousands):
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
Total
|
Quoted
Prices in
|
Significant
Other
|
Significant
|
|||||||||||||
Fair
Value at
|
Active
Markets
|
Observable
Inputs
|
Unobservable
Inputs
|
|||||||||||||
December
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Measured
on a recurring basis:
|
||||||||||||||||
Loans
held-for-sale (1)
|
$17,548 | $17,548 | $— | $— | ||||||||||||
Interest
rate hedge liabilities
|
(30,950 | ) | — | (30,950 | ) | — | ||||||||||
Measured
on a nonrecurring basis:
|
||||||||||||||||
Impaired
loans (2)
|
$130,977 | $— | $— | $130,977 | ||||||||||||
Impaired
securities (3)
|
3,654 | — | 2,775 | 879 |
(1) |
Our
one loan held-for-sale was sold subsequent to year end, and recorded at
such sale proceeds as of December 31, 2009.
|
|
(2) |
Loans
receivable against which we have recorded a provision for loan losses as
of December 31, 2009.
|
|
(3) |
Securities
which were other-than-temporarily impaired during the three months ended
December 31, 2009.
|
The
following methods and assumptions were used to estimate the fair value of each
type of asset and liability which was recorded at fair value as of December 31,
2009:
Loans held-for-sale, net: We
determined the fair value of our one loan held-for-sale based upon the proceeds
received from its sale in January 2010.
Interest rate hedge liabilities:
Interest rate hedges were valued using advice from a third party
derivative specialist, based on a combination of observable market-based inputs,
such as interest rate curves, and unobservable inputs such as credit valuation
adjustments due to the risk of non-performance by both us and our
counterparties.
Impaired loans: The loans
identified for impairment are collateral dependant loans. Impairment on these
loans is measured by comparing management’s estimation of fair value of the
underlying collateral to the carrying value of the respective loan. These
valuations require significant judgments, which include assumptions regarding
capitalization rates, leasing, creditworthiness of major tenants, occupancy
rates, availability of financing, exit plan, loan sponsorship, actions of other
lenders and other factors deemed necessary by management. The table above
includes all impaired loans, regardless of the period in which impairment was
recognized.
Impaired securities:
Securities which are other-than-temporarily impaired have been valued by
a combination of (a) obtaining assessments from third party dealers and, in
limited cases where such assessments are unavailable or, in the opinion of
management, deemed not to be indicative of fair value, (b) discounting expected
cash flows using internal cash flow models and estimated market discount rates.
The expected cash flows of each security are based on management’s assumptions
regarding the collection of principal and interest on the underlying loans and
securities. The table above includes only securities which were impaired during
the three months ended December 31, 2009. Previously impaired securities have
been subsequently adjusted for amortization, and are therefore no longer
reported at fair value as of December 31, 2009.
F-43
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
In
addition to the above disclosures for assets and liabilities which are recorded
at fair value, GAAP also requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
position, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are estimated using present
value or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the estimated market 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. Rather, these
fair values reflect the amounts that management believes are realizable in an
orderly transaction among willing parties. These disclosure requirements exclude
certain financial instruments and all non-financial instruments.
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments, excluding those described above that are carried
at fair value, 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.
Securities held-to-maturity:
These investments, other than securities that have been
other-than-temporarily impaired, are presented on a held-to-maturity basis and
not at fair value. The fair values have been estimated by a combination of (a)
obtaining assessments from third party dealers and, in limited cases where such
assessments are unavailable or, in the opinion of management, deemed not to be
indicative of fair value, (b) discounting expected cash flows using internal
cash flow models and estimated market discount rates. The expected cash flows of
each security are based on management’s assumptions regarding the collection of
principal and interest on the underlying loans and securities.
Loans receivable, net: Other
than impaired loans, these assets are reported at their amortized cost and not
at fair value. The fair values were estimated by management taking into
consideration factors including capitalization rates, leasing, occupancy rates,
availability and cost of financing, exit plan, sponsorship, actions of other
lenders and indications of market value from other market
participants.
Repurchase obligations: These
instruments are presented on the basis of their total face balance, less
unamortized discount. As a result of our debt restructuring on March 16, 2009,
our repurchase obligations no longer have terms which are comparable to other
facilities in the market. Given the unique nature of our restructured
obligations, it is not practicable to estimate their fair value. Accordingly,
they are included at their current face value in the table below. See Note 9 for
a detailed description of our repurchase obligations.
Collateralized debt obligations:
These obligations are presented on the basis of proceeds received at
issuance and not at fair value. The fair values have
been estimated by obtaining assessments from third party dealers.
Senior credit facility: This
instrument is presented on the basis of total cash proceeds borrowed, and not at
fair value. In 2009, the fair value was estimated by management based on the
amount at which similar placed financial instruments would be valued today. In
2008, the fair value was estimated based on the interest rate that was available
in the market for similar credit facilities at that time.
Junior subordinated notes:
These instruments are presented on the basis of their total face balance,
less unamortized discount. In 2009, the fair value was estimated by management
based on the amount at which similar placed financial instruments would be
valued today. In 2008, the fair value was estimated by calculating the present
value of future cash flows based on market interest rates.
F-44
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table details the carrying amount, face amount, and approximate fair
value of the financial instruments described above (in thousands):
Fair
Value of Financial Instruments
|
||||||||||||||
(in
thousands)
|
December
31, 2009
|
December
31, 2008
|
||||||||||||
Carrying
Amount
|
Face
Amount
|
Fair
Value
|
Carrying
Amount
|
Face
Amount
|
Fair
Value
|
|||||||||
Financial
assets:
|
||||||||||||||
Cash
and cash equivalents
|
$27,954
|
$27,954
|
$27,954
|
$45,382
|
$45,382
|
$45,382
|
||||||||
Securities
held-to-maturity
|
715,196
|
856,388
|
527,662
|
852,211
|
883,958
|
582,478
|
||||||||
Loans
receivable, net
|
1,158,244
|
1,640,150
|
904,696
|
1,790,234
|
1,855,432
|
1,589,929
|
||||||||
Financial
liabilities:
|
||||||||||||||
Repurchase
obligations
|
450,137
|
450,704
|
450,704
|
699,054
|
699,054
|
699,054
|
||||||||
Collateralized
debt obligations
|
1,098,280
|
1,097,106
|
494,704
|
1,156,035
|
1,154,504
|
441,245
|
||||||||
Senior
credit facility
|
99,188
|
99,188
|
24,797
|
100,000
|
100,000
|
94,155
|
||||||||
Junior
subordinated notes
|
128,077
|
143,753
|
14,375
|
128,875
|
128,875
|
80,099
|
||||||||
Participations
sold
|
289,144
|
289,209
|
102,220
|
292,669
|
292,734
|
258,416
|
17.
Supplemental Disclosures for Consolidated Statements of Cash
Flows
Interest
paid on our outstanding debt obligations during 2009, 2008, and 2007 was $65.6
million, $110.8 million, and $161.2 million, respectively. Income taxes
recovered by us in 2009, 2008, and 2007 were $408,000, $702,000, and $1.5
million, respectively. Non-cash investing and financing activity of $(3.5)
million, $(115.7) million and $198.9 million for 2009, 2008 and 2007,
respectively, resulted from the loans we classify as participations
sold.
18.
Transactions with Related Parties
We earn
base management and incentive fees in our capacity as investment manager for
multiple vehicles which we have sponsored. Due to the nature of our relationship
with these vehicles, all management fees are considered revenue from related
parties under GAAP.
On
November 9, 2006, we commenced our CT High Grade MezzanineSM investment
management initiative and entered into three separate account agreements with
affiliates of W. R. Berkley Corporation, or WRBC, for an aggregate of $250
million. On July 25, 2007, we amended the agreements to increase the
aggregate commitment of the WRBC affiliates to $350 million. Pursuant to
these agreements, we invest, on a discretionary basis, capital on behalf of WRBC
in 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 CTIMCO. CTIMCO earns a
management fee equal to 0.25% per annum on invested assets.
On April
27, 2007, we purchased a $20 million subordinated interest in a mortgage from a
dealer. Proceeds from the mortgage financing provide for the construction and
leasing of an office building in Washington, D.C. that is owned by a joint
venture. WRBC has a substantial economic interest in one of the joint venture
partners. This loan was sold to the joint venture owner at a discount in
November 2009.
WRBC
beneficially owned approximately 17.2% of our outstanding common stock and
stock units as of February 23, 2010, and a member of our board of
directors is an employee of WRBC.
On March
28, 2008, we announced the closing of our public offering of 4,000,000 shares of
our class A common stock. We received net proceeds of approximately $113
million. Morgan Stanley & Co. Incorporated acted as the sole underwriter of
the offering. Affiliates of Samuel Zell, our chairman of the board, and WRBC
purchased a number of shares in the offering sufficient to maintain their pro
rata ownership interests in us.
F-45
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Prior to
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 included consulting on insurance matters, risk management, and investor
relations.
In July
2008, CTOPI, a private equity fund that we manage, held its final closing
completing its capital raise with $540 million total equity commitments.
EGI-Private Equity II, L.L.C., an affiliate under common control of the chairman
of our board of directors, owns a 3.7% limited partner interest in CTOPI. During
2009, we recorded $8.6 million in fees from CTOPI, $350,000 of which were
attributable to EGI Private Equity II, L.L.C. Affiliates of the chairman of our
board of directors also own interests in Fund III, an investment management
vehicle that we manage and in which we also have an ownership
interest.
During
2008, CTOPI purchased $37.1 million face value of our CDO notes in the open
market for $21.1 million.
Effective
December 1, 2009, John R. Klopp retired as our chief executive officer. In
conjunction with his departure, Mr. Klopp was retained as a consultant to the
company through November 2010, for which he will be paid $83,333 per month over
the twelve-month term. We recognized 100% of this consulting fee in 2009 as a
component of general & administrative expense.
19.
Commitments and Contingencies
Leases
We lease
our corporate office under an operating lease expiring in 2018. Minimum annual
rental payments at December 31, 2009 are as follows (in
thousands):
Years ending December 31,
|
||
2010
|
$1,070
|
|
2011
|
1,070
|
|
2012
|
1,070
|
|
2013
|
1,099
|
|
2014
|
1,129
|
|
Thereafter
|
4,328
|
|
$9,766
|
We
recognize our obligations under our lease on a straight-line basis over the term
of the lease. In 2007 we entered into a lease for additional space, which we
terminated in 2009. GAAP rent expense for office space amounted to $1.2 million,
$1.6 million, and $1.4 million for the years ended December 31, 2009,
2008, and 2007, respectively.
Unfunded
Commitments
As of
December 31, 2009 we had an unfunded capital commitment to one of our investment
management vehicles, CT Opportunity Partners I, LP, or CTOPI, of $17.8 million.
This commitment will be funded pro rata with our investors as CTOPI continues to
make investments and/or deliver its portfolio over the life of the
fund.
We also
had four unfunded loan commitments totaling $4.9 million, which will generally
only be funded when and/or if the borrower meets certain performance hurdles
with respect to the underlying collateral.
F-46
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
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 other 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
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, 2009, the securities in question have a
face value of $183.8 million and were purchased at a discount
of $42.9 million. $179.9 million of these securities are in our CDOs and
these securities were purchased at a discount of $41.1 million. Our current
expectation is for the securities in the portfolio to mature between 2010
and 2021 and for us to recognize, for tax purposes, income of $1.9 million, $7.1
million, $13.6 million, $13.2 million, $192,000, and $26,000 for the years
2010-2015, respectively ($36.0 million in aggregate).
Similarly,
due to the redirection provisions of our CDOs, which reallocate principal and
interest otherwise distributable to us to repay senior note holders, assets
financed through our CDOs may generate current taxable income without a
corresponding cash distribution to us.
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.
Employment
Agreements and Executive Compensation
As of
December 31, 2009, we no longer have employment agreements with Stephen D.
Plavin, who serves as our chief executive officer and president, and Thomas C.
Ruffing, who serves as our chief credit officer and head of asset management.
These officers currently remain at-will employees of the Company. Mr. Plavin’s
annual base salary was $500,000 in 2008 and 2009.
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, which we have exercised). Pursuant to
the employment agreement, Mr. Jervis received an annual base salary of
$350,000 for the calendar years 2008 and 2009 and is entitled to an annual base
salary of $425,000 for the calendar year 2010.
Any cash
bonuses and/or increases to base salary from 2008 levels to our chief executive
officer and chief financial officer require consent from certain of our lenders.
In December 2009, the compensation committee of our board of directors approved
an increased annual base salary effective January 1, 2010 to Messrs. Plavin and
Jervis of $550,000 and $450,000, respectively. We plan to seek and obtain
approval of the lenders in 2010 and, upon receipt of approval, these base salary
increases will be effective on a retroactive basis from January 1,
2010.
Effective
December 1, 2009, John R. Klopp retired as our chief executive officer. In
conjunction with his departure, Mr. Klopp was retained as a consultant to the
company through November 2010, for which he will be paid $83,333 per month over
the twelve-month term. We recognized 100% of this consulting fee in 2009 as a
component of general & administrative expense.
Board
of Director’s Compensation
Of the
nine members of our board of directors, eight are entitled to compensation. Our
chief executive officer also serves as a director for no compensation. In 2009,
seven of these eight board members received compensation of $75,000 each in the
form of deferred stock units and one received $75,000 in cash. Effective January
1, 2010, two of these eight directors are entitled to an annual compensation of
$75,000 each in cash and the remaining six are entitled to 50% in cash and 50%
in the form of deferred stock units. Compensation to the board of directors is
payable in four equal quarterly payments.
F-47
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
Restructured
Debt Obligations
Pursuant
to the terms of our restructured debt obligations, as detailed in Note 9, we are
required to make certain principal payments to our creditors during the first
year following the debt restructuring in order to exercise a one-year extension
option. By March 16, 2010, payments must be made to our secured creditors
participating in the restructure plan equal to approximately 17% (or $100.5
million) of the respective outstanding balances as of March 16, 2009, and a
minimum of $5.0 million must be repaid under our senior credit
facility.
As of
December 31, 2009 we had $2.7 million of repayments remaining under our
repurchase agreements to qualify for the one-year extension option in March
2010. As described in Note 22, we qualified for this extension subsequent to
year-end.
20.
Segment Reporting
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 and the financing thereof.
The
Investment Management segment includes all of our activities related to
investment management services provided to third party funds under management
and includes our taxable REIT subsidiary, CTIMCO and its
subsidiaries.
F-48
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
The
following table details each segment's contribution to our operating results and
the identified assets attributable to each such segment for the year ended, and
as of, December 31, 2009 (in thousands):
Balance
Sheet
|
Investment
|
Inter-Segment
|
||||||||||||||
Investment
|
Management
|
Activities
|
Total
|
|||||||||||||
Income
from loans and other
|
||||||||||||||||
investments:
|
||||||||||||||||
Interest
and related income
|
$121,818 | $— | $— | $121,818 | ||||||||||||
Less:
Interest and related expenses
|
79,794 | — | — | 79,794 | ||||||||||||
Income
from loans and other investments, net
|
42,024 | — | — | 42,024 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
— | 13,512 | (1,769 | ) | 11,743 | |||||||||||
Servicing
fees
|
— | 3,008 | (1,329 | ) | 1,679 | |||||||||||
Other
interest income
|
150 | 16 | (13 | ) | 153 | |||||||||||
Total
other revenues
|
150 | 16,536 | (3,111 | ) | 13,575 | |||||||||||
Other
expenses
|
||||||||||||||||
General
and administrative
|
8,083 | 15,788 | (1,769 | ) | 22,102 | |||||||||||
Servicing
fee expense
|
1,329 | — | (1,329 | ) | — | |||||||||||
Other
interest expense
|
— | 13 | (13 | ) | — | |||||||||||
Depreciation
and amortization
|
— | 71 | — | 71 | ||||||||||||
Total
other expenses
|
9,412 | 15,872 | (3,111 | ) | 22,173 | |||||||||||
Total
other-than-temporary impairments of
securities
|
(123,894 | ) | — | — | (123,894 | ) | ||||||||||
Portion
of other-than-temporary impairments of
securities
recognized in other comprehensive
income
|
14,256 | — | — | 14,256 | ||||||||||||
Impairment
of goodwill
|
— | (2,235 | ) | — | (2,235 | ) | ||||||||||
Impairment
of real estate held-for-sale
|
(2,233 | ) | — | — | (2,233 | ) | ||||||||||
Net
impairments recognized in earnings
|
(111,871 | ) | (2,235 | ) | — | (114,106 | ) | |||||||||
Provision
for loan losses
|
(482,352 | ) | — | — | (482,352 | ) | ||||||||||
Loss
on sale of investments
|
(10,363 | ) | — | — | (10,363 | ) | ||||||||||
Loss
from equity investments
|
— | (3,736 | ) | — | (3,736 | ) | ||||||||||
Loss
before income taxes
|
(571,824 | ) | (5,307 | ) | — | (577,131 | ) | |||||||||
Income
tax benefit
|
(408 | ) | (286 | ) | — | (694 | ) | |||||||||
Net
loss
|
($571,416 | ) | ($5,021 | ) | $— | ($576,437 | ) | |||||||||
Total
assets
|
$1,926,019 | $12,783 | ($2,167 | ) | $1,936,635 |
All
revenues were generated from external sources within the United States. The
“Investment Management” segment earned fees of $1.8 million for management of
the “Balance Sheet Investment” segment and $1.3 million for serving as
collateral manager of the four CDOs consolidated under our “Balance Sheet
Investment” segment, and was charged $13,000 for inter-segment interest for the
year ended December 31, 2009, which is reflected as offsetting adjustments to
other interest income and other interest expense in the inter-segment activities
column in the table above.
F-49
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (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, 2008 (in thousands):
Balance
Sheet
|
Investment
|
Inter-Segment
|
||||||||||||||
Investment
|
Management
|
Activities
|
Total
|
|||||||||||||
Income
from loans and other
|
||||||||||||||||
investments:
|
||||||||||||||||
Interest
and related income
|
$194,649 | $— | $— | $194,649 | ||||||||||||
Less:
Interest and related expenses
|
129,665 | — | — | 129,665 | ||||||||||||
Income
from loans and other investments, net
|
64,984 | — | — | 64,984 | ||||||||||||
Other
revenues:
|
||||||||||||||||
Management
fees from affiliates
|
— | 20,045 | (7,104 | ) | 12,941 | |||||||||||
Servicing
fees
|
— | 367 | — | 367 | ||||||||||||
Other
interest income
|
1,646 | 28 | (108 | ) | 1,566 | |||||||||||
Total
other revenues
|
1,646 | 20,440 | (7,212 | ) | 14,874 | |||||||||||
Other
expenses
|
||||||||||||||||
General
and administrative
|
11,232 | 20,829 | (7,104 | ) | 24,957 | |||||||||||
Other
interest expense
|
— | 108 | (108 | ) | — | |||||||||||
Depreciation
and amortization
|
— | 179 | — | 179 | ||||||||||||
Total
other expenses
|
11,232 | 21,116 | (7,212 | ) | 25,136 | |||||||||||
Total
other-than-temporary impairments of
securities
|
(917 | ) | — | — | (917 | ) | ||||||||||
Portion
of other-than-temporary impairments of
securities
recognized in other comprehensive
income
|
— | — | — | — | ||||||||||||
Impairment
of real estate held-for-sale
|
(2,000 | ) | — | — | (2,000 | ) | ||||||||||
Net
impairments recognized in earnings
|
(2,917 | ) | — | — | (2,917 | ) | ||||||||||
Provision
for loan losses
|
(63,577 | ) | — | — | (63,577 | ) | ||||||||||
Gain
on extinguishment of debt
|
6,000 | — | — | 6,000 | ||||||||||||
Gain
on sale of investments
|
374 | — | — | 374 | ||||||||||||
Valuation
allowance on loans held-for-sale
|
(48,259 | ) | — | — | (48,259 | ) | ||||||||||
Loss
from equity investments
|
— | (1,988 | ) | — | (1,988 | ) | ||||||||||
Loss
before income taxes
|
(52,981 | ) | (2,664 | ) | — | (55,645 | ) | |||||||||
Income
tax provision
|
— | 1,893 | — | 1,893 | ||||||||||||
Net
loss
|
($52,981 | ) | ($4,557 | ) | $— | ($57,538 | ) | |||||||||
Total
assets
|
$2,827,711 | $11,181 | ($1,363 | ) | $2,837,529 |
All
revenues were generated from external sources within the United States. The
“Investment Management” segment earned fees of $7.1 million for management
of the “Balance Sheet Investment” segment and was charged $108,000 for
inter-segment interest for the year ended December 31, 2008, which is
reflected as offsetting adjustments to other revenues and other expenses in the
inter-segment activities column in the table above.
F-50
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (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 (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 from affiliates
|
— | 16,282 | (12,783 | ) | 3,499 | |||||||||||
Incentive
management fees from affiliates
|
— | 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 | |||||||||||
Gain
on sale of investments
|
15,077 | — | — | 15,077 | ||||||||||||
Loss
from equity investments
|
— | (2,109 | ) | — | (2,109 | ) | ||||||||||
Income
(loss) before income taxes
|
89,182 | (5,522 | ) | — | 83,660 | |||||||||||
Income
tax benefit
|
(254 | ) | (452 | ) | — | (706 | ) | |||||||||
Net
income (loss)
|
$89,436 | ($5,070 | ) | $— | $84,366 | |||||||||||
Total
assets
|
$3,203,645 | $16,261 | ($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.
F-51
Capital
Trust, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements (Continued)
21.
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, 2009, 2008 and 2007 (in thousands except per share
data):
March 31
|
June 30
|
September
30
|
December 31
|
|||||||||||||
2009
|
||||||||||||||||
Revenues
|
$37,425 | $33,667 | $32,670 | $31,631 | ||||||||||||
Net
loss
|
$(73,146 | ) | $(6,396 | ) | $(106,457 | ) | $(390,438 | ) | ||||||||
Net
loss per share of common stock:
|
||||||||||||||||
Basic
|
$(3.28 | ) | $(0.29 | ) | $(4.75 | ) | $(17.41 | ) | ||||||||
Diluted
|
$(3.28 | ) | $(0.29 | ) | $(4.75 | ) | $(17.41 | ) | ||||||||
2008
|
||||||||||||||||
Revenues
|
$59,117 | $53,866 | $48,217 | $48,323 | ||||||||||||
Net
income (loss)
|
$14,773 | $(34,818 | ) | $13,667 | $(51,160 | ) | ||||||||||
Net
income (loss) per share of common stock:
|
||||||||||||||||
Basic
|
$0.82 | $(1.59 | ) | $0.61 | $(2.30 | ) | ||||||||||
Diluted
|
$0.82 | $(1.59 | ) | $0.61 | $(2.30 | ) | ||||||||||
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 |
Basic and
diluted earnings per share are computed independently based on the
weighted-average shares of common stock outstanding for each of the periods.
Accordingly, the sum of the quarterly earnings per share amounts may not agree
to the total for the year.
22. Subsequent
Events
We have
evaluated events subsequent to December 31, 2009, through March 2, 2010, the
date of financial statement issuance, for disclosure. Through and including
March 2, 2010, we have identified the following significant events relative to
our consolidated financial statements as of December 31, 2009 that warrant
additional disclosure.
1) In
January 2010, we completed the sale of our one loan which was classified as
held-for-sale as of year end. Proceeds from the sale amounted to $17.5 million,
which approximates our net book value at December 31, 2009. Accordingly, we did
not record a material gain or loss on the sale of this investment.
2) In
March 2010, we made the final payment necessary to Morgan Stanley to qualify for
a one-year extension under our restructured credit facility with them. As a
result of this payment, and previous qualifications under our facilities with
JPMorgan and Citigroup, we extended the maturity of all our repurchase
obligations to March 16, 2011. The mandatory amortization payments were not
increased by our lenders in conjunction with these extensions, and remain at 65%
of the net interest income generated by each lender’s collateral pool. Also, as
discussed in Note 9, in March 2009, the maturity date of our senior credit
agreement was amended to be co-terminus with the maturity date of our repurchase
obligations.
F-52
Capital
Trust, Inc. and Subsidiaries
Schedule IV—Mortgage
Loans on Real Estate
As
of December 31, 2009
(in
thousands)
Type of
Loan/Borrower(1)
|
Description/
Location
|
Interest
Payment
Rates
|
Final
Maturity
Date
|
Periodic
Payment
Terms(2)
|
Prior
Liens(3)
|
Face Amount
of Loans(4)
|
Carrying
Amount
of
Loans(5)(6)
|
|||||||
Mortgage
Loans:
|
||||||||||||||
Borrower
A
|
Office/
Florida
|
LIBOR
+ 3.75%
|
1/21/2013
|
I/O
|
$—
|
$89,058
|
$88,902
|
|||||||
Borrower
B
|
Office/
Georgia
|
LIBOR
+ 4.00%
|
10/9/2013
|
I/O
|
—
|
38,500
|
38,288
|
|||||||
Borrower
C
|
Healthcare/
Various
|
LIBOR
+ 4.50%
|
4/20/2012
|
P
& I
|
—
|
61,160
|
61,025
|
|||||||
All other mortgage
loans
individually less than 3%
|
223,735
|
181,579
|
150,613
|
|||||||||||
Total
mortgage loans:
|
223,735
|
370,297
|
338,828
|
|||||||||||
Mezzanine
Loans:
|
||||||||||||||
Borrower
D
|
Healthcare/
Various
|
LIBOR
+ 3.03%
|
5/9/2011
|
P
& I
|
1,153,079
|
80,851
|
80,851
|
|||||||
Borrower
E
|
Office/
Various
|
LIBOR
+ 2.25%
|
10/11/2011
|
I/O
|
4,362,766
|
51,385
|
51,385
|
|||||||
Borrower
F
|
Hotel/
New
York
|
LIBOR
+ 1.97%
|
5/9/2011
|
I/O
|
185,000
|
40,000
|
40,000
|
|||||||
All other mezzanine
loans
individually less than 3%
|
7,534,872
|
597,523
|
256,541
|
|||||||||||
Total
mezzanine loans:
|
13,235,717
|
769,759
|
428,777
|
|||||||||||
Subordinate
Interests in Mortgages:
|
||||||||||||||
Borrower
G
|
Hotel/
Various
|
LIBOR
+ 1.60%
|
11/6/2011
|
I/O
|
220,000
|
65,000
|
65,000
|
|||||||
Borrower
H
|
Condominium/
Washington
|
LIBOR
+ 5.15%
|
1/30/2010
|
P
& I
|
184,869
|
41,426
|
41,412
|
|||||||
Borrower
I
|
Office/
New
York
|
LIBOR
+ 3.53%
|
10/9/2011
|
I/O
|
95,000
|
39,000
|
39,000
|
|||||||
All other subordinate
interests in
mortgages individually less than 3% |
3,190,371
|
372,999
|
262,775
|
|||||||||||
Total
subordinate interests in mortgages:
|
3,690,240
|
518,425
|
408,187
|
|||||||||||
Total
loans:
|
$17,149,692
|
$1,658,481
|
$1,175,792
|
(1) |
All amounts include
both loans receivable and loans held-for-sale.
|
|
(2) |
I/O = interest only.
P & I = principal and interest.
|
|
(3) |
Represents only third
party liens.
|
|
(4) |
Does not include
Unfunded Commitments.
|
|
(5) |
The
carrying amount of mortgage loans approximates the federal income tax
basis as of December 13, 2009.
|
|
(6) |
As
of December 31, 2009, we identified 20 loans with an aggregate gross book
value of $608.4 million for impairment, against which we have recorded a
$477.4 million provision, and which are carried at an aggregate net book
value of $131.0 million. See Notes 2 and 16 for a description of our loan
impairment and valuation process.
|
S-1
Capital
Trust, Inc. and Subsidiaries
Notes
to Schedule IV
As
of December 31, 2009
(in
thousands)
1. Reconciliation
of Mortgage Loans on Real Estate:
The
following table reconciles Mortgage Loans on Real Estate for the years ended
December 31, 2009, 2008 and 2007:
2009
|
2008
|
2007
|
||||||||||
Balance
at January 1(1)
|
$ | 1,882,409 | $ | 2,257,563 | $ | 1,754,536 | ||||||
Additions
during period:
|
||||||||||||
New
mortgage loans
|
— | 47,128 | 1,215,750 | |||||||||
Additional
fundings
(2)
|
9,350 | 89,773 | 159,837 | |||||||||
Amortization of
discount, net
(3)
|
990 | 1,307 | 3,832 | |||||||||
Deductions
during period:
|
||||||||||||
Collections
of principal
|
(99,411 | ) | (255,276 | ) | (876,392 | ) | ||||||
Transfers
to real estate held-for-sale
|
— | (11,806 | ) | — | ||||||||
Provision
for loan losses
|
(482,352 | ) | (63,577 | ) | — | |||||||
Valuation
allowance on loans held-for-sale
|
— | (48,259 | ) | — | ||||||||
Mortgage
loans sold
|
(124,831 | ) | (134,444 | ) | — | |||||||
Loss
on sale of mortgage loans
|
(10,363 | ) | — | — | ||||||||
Balance
at December 31
|
$ | 1,175,792 | $ | 1,882,409 | $ | 2,257,563 |
(1) |
All
amounts include both loans receivable and loans
held-for-sale.
|
|
(2) |
Includes
capitalized interest, which is a non-cash addition to the balance of
mortgage loans, of $1.7 million, $7.4 million, and $151,000 for the years
ended December 31, 2009, 2008 and 2007,
respectively.
|
|
(3) |
Net
discount amortization represents an entirely non-cash addition to the
balance of mortgage
loans.
|
S-2