To be filed with the Securities and Exchange Commission on October 31, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 1-14788 Capital Trust, Inc. ------------------- (Exact name of registrant as specified in its charter) Maryland 94-6181186 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 410 Park Avenue, 14th Floor, New York, NY 10022 - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 655-0220 -------------- 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 ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of October 31, 2005 was 15,158,447.
CAPITAL TRUST, INC. INDEX <TABLE> <CAPTION> <S> <C> Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - September 30, 2005 (unaudited) and December 31, 2004 (audited) 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2005 and 2004 (unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity - Nine Months Ended September 30, 2005 and 2004 (unaudited) 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004 (unaudited) 4 Notes to Consolidated Financial Statements (unaudited) 5 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3: Quantitative and Qualitative Disclosures about Market Risk 24 Item 4: Controls and Procedures 25 Part II. Other Information Item 1: Legal Proceedings 26 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 3: Defaults Upon Senior Securities 26 Item 4: Submission of Matters to a Vote of Security Holders 26 Item 5: Other Information 26 Item 6: Exhibits 27 Signatures 28 </TABLE>
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2005 and December 31, 2004 (in thousands) <TABLE> <CAPTION> September 30, December 31, 2005 2004 -------------------- ------------------- (unaudited) (audited) <S> <C> <C> Assets Cash and cash equivalents $ 14,412 $ 24,583 Restricted cash 2,089 611 Commercial mortgage-backed securities 454,260 247,765 Loans receivable 815,225 556,164 Total return swap 4,000 -- Equity investment in CT Mezzanine Partners II LP ("Fund II"), CT MP II LLC ("Fund II GP") and CT Mezzanine Partners III, Inc. ("Fund III") (together "Funds") 16,503 21,376 Deposits and other receivables 3 10,282 Accrued interest receivable 7,983 4,029 Interest rate hedge assets 1,070 194 Deferred income taxes 3,734 5,623 Prepaid and other assets 13,476 7,139 -------------------- ------------------- Total assets $ 1,332,755 $ 877,766 ==================== =================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 17,818 $ 17,388 Credit facility -- 65,176 Repurchase obligations 157,774 225,091 Collateralized debt obligations ("CDOs") 823,817 252,778 Deferred origination fees and other revenue 739 836 -------------------- ------------------- Total liabilities 1,000,148 561,269 -------------------- ------------------- Shareholders' equity: Class A common stock, $0.01 par value, 100,000 shares authorized, 14,844 and 14,769 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively ("class A common stock") 148 148 Restricted class A common stock, $0.01 par value, 314 and 283 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively ("restricted class A common stock" and together with class A common stock, "common stock") 3 3 Additional paid-in capital 324,937 321,937 Accumulated other comprehensive gain 14,095 3,815 Accumulated deficit (6,576) (9,406) -------------------- ------------------- Total shareholders' equity 332,607 316,497 -------------------- ------------------- Total liabilities and shareholders' equity $ 1,332,755 $ 877,766 ==================== =================== </TABLE> See accompanying notes to unaudited consolidated financial statements. - 1 -
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three and Nine Months Ended September 30, 2005 and 2004 (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 22,751 $ 12,979 $ 57,359 $ 31,169 Less: Interest and related expenses on secured debt 10,325 3,758 23,709 8,848 Less: Interest and related expenses on step up convertible junior subordinated debentures -- 1,552 -- 6,417 ------------ ------------ ------------ ------------ Income from loans and other investments, net 12,426 7,669 33,650 15,904 ------------ ------------ ------------ ------------ Other revenues: Management and advisory fees from Funds 1,517 1,910 12,144 6,025 Income/(loss) from equity investments in Funds 467 301 (835) 1,126 Gain on sales of investments -- -- -- 300 Other interest income 137 19 374 35 ------------ ------------ ------------ ------------ Total other revenues 2,121 2,230 11,683 7,486 ------------ ------------ ------------ ------------ Other expenses: General and administrative 5,316 3,996 16,384 10,127 Depreciation and amortization 278 274 837 822 ------------ ------------ ------------ ------------ Total other expenses 5,594 4,270 17,221 10,949 ------------ ------------ ------------ ------------ Income before income taxes 8,953 5,629 28,112 12,441 Provision for income taxes (846) (229) 315 -- ------------ ------------ ------------ ------------ Net income $ 9,799 $ 5,858 $ 27,797 $ 12,441 ============ ============ ============ ============ Per share information: Net earnings per share of common stock: Basic $ 0.65 $ 0.51 $ 1.84 $ 1.46 ============ ============ ============ ============ Diluted $ 0.64 $ 0.50 $ 1.81 $ 1.43 ============ ============ ============ ============ Weighted average shares of common stock outstanding: Basic 15,125,443 11,448,503 15,110,227 8,492,967 ============ ============ ============ ============ Diluted 15,358,943 11,659,193 15,339,533 8,686,079 ============ ============ ============ ============ Dividends declared per share of common stock $ 0.55 $ 0.45 $ 1.65 $ 1.35 ============ ============ ============ ============ </TABLE> See accompanying notes to unaudited consolidated financial statements. - 2 -
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Nine Months Ended September 30, 2005 and 2004 (in thousands) (unaudited) <TABLE> <CAPTION> Restricted Accumulated Class A Class A Additional Other Comprehensive Common Common Paid-In Unearned Comprehensive Income/(Loss) Stock Stock Capital Compensation Income/(Loss) ---------------- ----------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1, 2004 $ 65 $ -- $ 141,402 $ (247) $ (33,880) Net income $ 12,441 -- -- -- -- -- Unrealized gain on derivative financial instruments (902) -- -- -- -- (902) Unrealized gain on available-for-sale securities 35,778 -- -- -- -- 35,778 Implementation of SFAS No.123 -- -- -- (247) 247 -- Issuance of restricted class A common stock -- -- 3 (3) -- -- Sale of shares of class A common stock under stock option agreement -- 1 -- 784 -- -- Vesting of restricted class A common stock to unrestricted class A common stock -- -- -- -- -- -- Conversion of class A common stock units to class A common stock -- -- -- 410 -- -- Conversion of step up convertible junior subordinated debentures to class A common stock -- 43 -- 90,048 -- -- Restricted class A common stock earned -- -- -- 814 -- -- Stock options expensed under SFAS No. 123 -- -- -- 51 -- -- Shares of class A common stock issued in public offering -- 19 -- 41,603 -- -- Shares of class A common stock issued in direct public offering -- 16 -- 37,963 -- -- Shares of class A common stock issued upon exercise of warrants -- 4 -- 8,537 -- -- Dividends declared on common stock -- -- -- -- -- -- ---------------- ----------------------------------------------------------------- Balance at September 30, 2004 $ 47,317 $ 148 $ 3 $ 321,362 $ -- $ 996 ================ ================================================================= Balance at January 1, 2005 $ 148 $ 3 $ 321,937 $ -- $ 3,815 Net income $ 27,797 -- -- -- -- -- Unrealized loss on derivative financial instruments 876 -- -- -- -- 876 Unrealized gain on available-for-sale securities, net of amortization 8,393 -- -- -- -- 8,393 Sale of shares of common stock under stock option agreements -- -- -- 1,121 -- -- Deferred gain on settlement of swap, net of amortization -- -- -- -- -- 1,011 Vesting of restricted class A common stock to unrestricted class A common stock -- -- -- -- -- -- Restricted class A common stock earned -- -- -- 1,936 -- -- Restricted class A common stock forfeited upon resignation by holder -- -- -- (57) -- -- Dividends declared on common stock -- -- -- -- -- -- ---------------- ----------------------------------------------------------------- Balance at September 30, 2005 $ 37,066 $ 148 $ 3 $ 324,937 $ -- $ 14,095 ================ ================================================================= <CAPTION> Accumulated Deficit Total ----------------------------- <S> <C> <C> Balance at January 1, 2004 $ (11,323) $ 96,017 Net income $ 12,441 12,441 Unrealized gain on derivative financial instruments -- (902) Unrealized gain on available-for-sale securities -- 35,778 Implementation of SFAS No.123 -- -- Issuance of restricted class A common stock -- -- Sale of shares of class A common stock under stock option agreement -- 785 Vesting of restricted class A common stock to unrestricted class A common stock -- -- Conversion of class A common stock units to class A common stock -- 410 Conversion of step up convertible junior subordinated debentures to class A common stock -- 90,091 Restricted class A common stock earned -- 814 Stock options expensed under SFAS No. 123 -- 51 Shares of class A common stock issued in public offering -- 41,622 Shares of class A common stock issued in direct public offering -- 37,979 Shares of class A common stock issued upon exercise of warrants -- 8,541 Dividends declared on common stock (12,533) (12,533) ----------------------------- Balance at September 30, 2004 $ (11,415) $ 311,094 ============================= Balance at January 1, 2005 $ (9,406) $ 316,497 Net income $ 27,797 27,797 Unrealized loss on derivative financial instruments -- 876 Unrealized gain on available-for-sale securities, net of amortization -- 8,393 Sale of shares of common stock under stock option agreements -- 1,121 Deferred gain on settlement of swap, net of amortization -- 1,011 Vesting of restricted class A common stock to unrestricted class A common stock -- -- Restricted class A common stock earned -- 1,936 Restricted class A common stock forfeited upon resignation by holder -- (57) Dividends declared on common stock (24,967) (24,967) ----------------------------- Balance at September 30, 2005 $ (6,576) $ 332,607 ============================= </TABLE> See accompanying notes to unaudited consolidated financial statements. - 3 -
Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine Months ended September 30, 2005 and 2004 (in thousands) (unaudited) <TABLE> <CAPTION> 2005 2004 ---------------- ----------------- <S> <C> <C> Cash flows from operating activities: Net income $ 27,797 $ 12,441 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes 1,889 (1,830) Depreciation and amortization 837 822 Loss/(income) from equity investments in Funds 835 (1,126) Stock based compensation 1,899 814 Gain on sale of investments -- (300) Amortization of premiums and accretion of discounts on loans and investments, net (2,158) (1,106) Accretion of discounts and fees on convertible trust preferred securities or convertible step up junior subordinated debentures, net -- 276 Stock option expense -- 51 Changes in assets and liabilities, net: Deposits and other receivables 279 123 Accrued interest receivable (3,954) (437) Prepaid and other assets 886 1,660 Deferred origination fees and other revenue (97) (1,761) Accounts payable and accrued expenses (354) 755 ---------------- ----------------- Net cash provided by operating activities 27,859 10,382 ---------------- ----------------- Cash flows from investing activities: Purchases of commercial mortgage-backed securities (205,565) (59,551) Principal collections on and proceeds from sale of commercial mortgage-backed securities 8,787 5,012 Principal collections and proceeds from sales on available-for-sale -- 19,561 securities Origination and purchase of loans receivable (510,015) (366,988) Principal collections and proceeds from sale of loans receivable 261,787 60,264 Purchase of total return swap (4,000) -- Equity investments in Funds (4,660) (3,500) Return of capital from Funds 7,950 6,554 Increase in restricted cash (1,478) (8,009) Purchases of equipment and leasehold improvements (23) (102) ---------------- ----------------- Net cash used in investing activities (447,217) (346,759) ---------------- ----------------- Cash flows from financing activities: Proceeds from repurchase obligations 436,393 122,422 Repayment of repurchase obligations (503,710) (91,283) Proceeds from credit facilities 104,704 169,676 Repayment of credit facilities (169,880) (179,544) Repayment of term redeemable securities contract -- (11,651) Proceeds from issuance of CDOs 571,039 252,778 Settlement of interest rate hedges 1,410 -- Payment of deferred financing costs (7,734) (6,060) Dividends paid on class A common stock (24,156) (9,663) Sale of shares of class A common stock under stock option agreements 1,121 785 Proceeds from sale of shares of class A common stock -- 79,601 Proceeds from exercise of warrants for shares of class A common stock -- 8,541 ---------------- ----------------- Net cash provided by financing activities 409,187 335,602 ---------------- ----------------- Net decrease in cash and cash equivalents (10,171) (775) Cash and cash equivalents at beginning of year 24,583 8,738 ---------------- ----------------- Cash and cash equivalents at end of period $ 14,412 $ 7,963 ================ ================= </TABLE> See accompanying notes to unaudited consolidated financial statements - 4-
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 1. Presentation of Financial Information References herein to "we," "us" or "our" refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise. We are a fully integrated, self managed finance and investment management company that specializes in credit-sensitive structured financial products. To date, our investment activities have focused primarily on the U.S. commercial real estate subordinate debt markets. We execute our business both as a balance sheet investor and as an investment manager through our CT Mezzanine Partners family of funds. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes. We are headquartered in New York City. The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management's discussion and analysis of financial condition and results of operations filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. In our opinion, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2005. The accompanying unaudited consolidated interim financial statements include our accounts, our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. Our accounting and reporting policies conform in all material respects to accounting principles generally accepted in the United States. Certain prior period amounts have been reclassified to conform to current period classifications. From time to time we purchase commercial mortgage backed securities, or CMBS, and other investments in which we have a level of control over the issuing entity; we refer to these investments as Controlling Class Investments. The presentation of Controlling Class Investments in our financial statements is governed in part by Financial Accounting Standards Board ("FASB") Interpretation No. 46 ("FIN 46"). FIN 46 could require that certain Controlling Class Investments be presented on a consolidated basis. Based upon the specific circumstances of certain of our CMBS investments that are Controlling Class Investments and our interpretation of FIN 46, specifically the exemption for qualifying special purpose entities as defined under FASB Statements of Financial Accounting Standard No. 140 ("FAS 140"), we have concluded that the entities that have issued the Controlling Class Investments should not be presented on a consolidated basis. We are aware that FAS 140 is currently under review by standard setters and that as a result of this review our current interpretation of FIN 46 and FAS 140 may change. On August 4, 2005, pursuant to the provisions of Statement of Financial Accounting Standard ("SFAS") No. 115, we made a decision to change the accounting classification of our CMBS investments from available for sale to held to maturity. In accordance with this decision, CMBS with an amortized cost of $410,047,000 and a market value of $422,259,000 were reclassified from available for sale to held to maturity. As was the case prior to this reclassification, the difference between amortized cost and expected recovery on these investments will continue to be accreted through the income statement using the level yield method accretion schedules in place prior to the reclassification. The difference between amortized cost and market value as of the reclassification date, $12,212,000, was segregated within accumulated other comprehensive income and will be amortized over the remaining life of the securities using the level yield method without impact to the income statement. We made the decision to reclassify these investments based upon our intent and ability to hold these investments to maturity. Going forward, new originations of held to maturity investments will be stated at cost plus the amortization of any premiums or discounts and any premiums or discounts will be amortized through the income statement using the level yield method. Other than in the instance of impairment, these held to maturity investments will be shown in our financial statements at their adjusted values pursuant to the methodology described above. - 5 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 2. Application of New Accounting Policy During the fourth quarter of 2004, we elected to adopt the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 using the modified prospective method provided in Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". Under the modified prospective method, we recognized stock-based employee compensation costs based upon the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 effective January 1, 2004 and have restated previously reported quarterly results to reflect the adoption. Compensation expense on awards with graded vesting is recognized on the accelerated attribution method under Financial Accounting Standards Board Interpretation No. 28. 3. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. Restricted Cash Restricted cash of $2,089,000 at September 30, 2005 is on deposit with the trustee for our reinvesting CDOs and will be used to purchase replacement collateral for the CDOs. 5. Commercial Mortgage-Backed Securities During the nine months ended September 30, 2005, we made eighteen investments in commercial mortgage-backed securities, or CMBS, with a total purchase price of $205,404,000 ($229,867,000 face value). Fourteen investments with a total purchase price of $165,460,000 ($189,918,000 face value) earn interest at fixed rates with a weighted average stated coupon of 6.26% and four investments with a total purchase price of $39,944,000 ($39,948,000 face value) earn interest at variable rates with a weighted average stated coupon of LIBOR plus 1.91% (5.77% at September 30, 2005). In addition, one CMBS investment with a face value of $1,750,000 was repaid in full during the period. At September 30, 2005, we had thirty six investments in twenty five separate CMBS issues with an aggregate face value of $493,127,000. CMBS with a face value of $98,924,000 earn interest at variable rates and have coupons averaging LIBOR plus 2.64% (6.50% at September 30, 2005). The remaining CMBS, $394,204,000 face value, earn interest at fixed rates and have coupons averaging 6.98%. In the aggregate, we purchased the CMBS at total discounts to face value of $69,431,000 and expected to recover, net of anticipated losses, $42,631,000 of that amount which we amortize over the lives of the securities. As of September 30, 2005, the remaining discount to be amortized into income over the remaining lives of the securities was $18,810,000. At September 30, 2005, the weighted average coupon of the entire CMBS portfolio was 6.88%. As of September 30, 2005, the securities were carried at market value of $455,500,000, reflecting a $12,198,000 net unrealized gain to the amortized cost of the portfolio and other than temporary write-downs taken in 2004 on two securities of $5,275,000. On August 4, 2005, pursuant to the provisions of Statement of Financial Accounting Standard ("SFAS") No. 115, we made a decision to change the accounting classification of our CMBS investments from available for sale to held to maturity. In accordance with this decision, CMBS with an amortized cost of $410,047,000 and a market value of $422,259,000 were reclassified from available for sale to held to maturity. As was the case prior to this reclassification, the difference between amortized cost and expected recovery on these investments will continue to be accreted through the income statement using the level yield method accretion schedules in place prior to the reclassification. The difference between amortized cost and market value as of the reclassification date, $12,212,000, was segregated within accumulated other comprehensive income and will be amortized over the remaining life of the securities using the level yield method without impact to the income statement. We made the decision to reclassify these investments based upon our intent and ability to hold these investments to maturity. Going forward, new originations of held to maturity investments will be stated at cost plus the amortization of any - 6 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) premiums or discounts and any premiums or discounts will be amortized through the income statement using the level yield method. Other than in the instance of impairment, these held to maturity investments will be shown in our financial statements at their adjusted values pursuant to the methodology described above. 6. Loans Receivable At September 30, 2005 and December 31, 2004, our loans receivable consisted of the following (in thousands): September 30, December 31, 2005 2004 ------------------- ------------------- First mortgage loans $ 3,038 $ 3,038 Property mezzanine loans 260,487 159,506 B Notes 551,700 393,620 ------------------- ------------------- Total loans $ 815,225 $ 556,164 =================== =================== One first mortgage loan with an original principal balance of $8,000,000 matured on July 15, 2001 but has not been repaid with respect to principal and interest. In December 2002, the loan was written down to $4,000,000 through a charge to the allowance for possible credit losses. Since the write-down, cash collections of $962,000 have reduced the carrying value of the loan to $3,038,000. In accordance with our policy for revenue recognition, income recognition has been suspended on this loan and potential interest income of $791,000 has not been recorded for the nine months ended September 30, 2005. All other loans are performing in accordance with the terms of the loan agreements. During the nine months ended September 30, 2005, we originated seven property mezzanine loans for $169,570,000 (of which $144,538,000 was funded as of September 30, 2005) and 25 B Notes for $375,477,000. In addition, we received partial repayments on five property mezzanine loans and 27 B Notes totaling $45,533,000 and three property mezzanine loans and twenty three B Notes totaling $215,420,000 were satisfied and repaid. We have outstanding unfunded loan commitments at September 30, 2005 of $25,033,000. At September 30, 2005, the weighted average interest rates for our performing loans receivable were as follows: Property mezzanine loans 9.01% B Notes 7.38% Total Loans 7.90% At September 30, 2005, $681,793,000 (84%) of the aforementioned performing loans bear interest at floating rates ranging from LIBOR plus 1.60% to LIBOR plus 7.29%. The remaining $130,395,000 (16%) of loans bear interest at fixed rates ranging from 7.00% to 11.67%. 7. Total Return Swap During the nine months ended September 30, 2005, we entered into one total return swap agreement. Under the terms of the agreement, we have posted $4,000,000 of cash collateral as security for a $20,000,000 synthetic interest in an underlying referenced loan that is secured by shares of a publicly traded REIT. We receive interest at LIBOR flat on the $4,000,000 cash collateral balance and LIBOR plus 3.75% on the $20,000,000 interest in the referenced loan and pay LIBOR plus 1.00% on the $20,000,000 referenced loan. At September 30, 2005, we are receiving LIBOR plus 13.75% on the $4,000,000 cash collateral balance (17.61% at September 30, 2005). We collected an origination fee with the execution of the agreement which adds an additional 2.95% to the return. If the price of the stock which serves as collateral for the referenced loan falls below a specified level, we will be required to increase our cash collateral to 30% of the loan balance. If the loan was to default, we would be required to purchase the loan, thereby eliminating the total return swap agreement. The total return swap is treated as a non-hedge derivative for accounting purposes and therefore changes in market value are recorded through the income statement. At September 30, 2005 the total return swap has a fair market value of $4,000,000. - 7 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 8. Equity Investment in Funds Equity Investments in Funds represents our investment in third party private equity funds managed by our wholly owned subsidiary, CT Investment Management Co., LLC, which we refer to as CTIMCO. As of September 30, 2005, CTIMCO managed two such funds, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc. which we refer to as Fund II and Fund III, respectively. We account for these investments using the equity method. At quarter end, our limited partner investment in Fund II was carried at $1,331,000 and our investment in Fund III was carried at $9,864,000, representing a 5.38% and 4.71% investment in each fund, respectively. We also own a 50% share in Fund II's general partner, CTMP II LLC. CTMP II LLC owns a 1.0% interest in Fund II that is carried at $482,000. In addition to our investments in these entities, Equity Investments in Funds includes $4,826,000 of capitalized costs associated with the organization of the investment management business. During the nine months ended September 30, 2005, through our ownership interest in the Fund II general partner, we received $7,841,000 of incentive management fees from Fund II. In connection with receipt of the incentive management fees, the amortization of certain capitalized costs at the general partner of Fund II was accelerated. For the nine months ended September 30, 2005, the total of scheduled amortization and the accelerated amortization of these previously capitalized costs that flowed through to us was $1,397,000. 9. Long-Term Debt Credit Facility At September 30, 2005, we were no longer a party to any credit facilities. Repurchase Obligations On August 16, 2005, we entered into a new three year $75,000,000 repurchase facility with a securities dealer. In addition to the August 15, 2005 repurchase facility, we entered into several additional repurchase agreements outstanding with the same securities dealer. At September 30, 2005, we had secured borrowings of $69,411,000 with the securities dealer and had the ability to borrow an additional $61,258,000 against the collateral pledged to secure borrowings under those agreements. Borrowings under these repurchase agreements bear interest at specified rates over LIBOR based upon the credit characteristics of the collateral. At September 30, 2005, borrowing rates ranged from LIBOR plus 0.35% to LIBOR plus 2.00%. On July 29, 2005, we entered into two new three year $75,000,000 repurchase facilities with a second securities dealer. At September 30, 2005, we had secured borrowings of $40,710,000 and had the ability to borrow an additional $34,737,000 against the collateral pledged to secure borrowings under these agreements. Borrowings under these repurchase agreements bear interest at specified rates over LIBOR based upon the credit characteristics of the collateral. At September 30, 2005, borrowing rates ranged from LIBOR plus 0.50% to LIBOR plus 2.00%. On March 4, 2005, we entered into a new five year $75,000,000 repurchase facility with a third securities dealer. At September 30, 2005, we had secured borrowings of $27,005,000. Borrowings under this repurchase facility bear interest at LIBOR plus 1.00%. At September 30, 2005, we were party to repurchase agreements with four securities dealers with total repurchase commitments of $650,000,000 and had total outstanding borrowings of $157,774,000. The weighted average cash borrowing cost for all the repurchase agreements outstanding at September 30, 2005 was LIBOR plus 1.06% (4.92% at September 30, 2005). Assuming no additional utilization under the repurchase agreements and including the amortization of all fees paid and capitalized over the remaining term of the repurchase agreements, the all-in effective borrowing cost was LIBOR plus 1.34% (5.20% at September 30, 2005). At September 30, 2005, if all of the assets pledged under repurchase agreements were drawn upon, we could obtain an additional $123,620,000 of financing. - 8 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Collateralized Debt Obligations On August 4, 2005, we issued our third collateralized debt obligation that we refer to as CDO III. CDO III is secured by a static pool of $341,261,000 of fixed rate subordinate CMBS. At issuance, we sold notes rated AAA through BBB with a total face value of $269,594,000 to third parties for proceeds of $272,174,000. We retained all of the unrated and below investment grade rated notes, the BBB- rated notes and the preferred equity interests. The fixed rate notes we sold carry a weighted average coupon of 5.22% and because of the $2,580,000 premium at which they were sold, have an effective cash cost to us of 5.17%. The issuance represents term and index matched, non-recourse and non-mark to market financing for the underlying collateral. We incurred $2,088,000 of issuance costs that will be amortized on a level yield basis over the average life of the CDO. Including the amortization of the issuance costs, the all in effective rate for the notes sold was 5.25%. For accounting purposes, the CDO is consolidated in our financial statements. On March 15, 2005, we issued our second collateralized debt obligation that we refer to as CDO II. CDO II is a reinvesting CDO secured by $337,755,000 of mezzanine loans, B Notes, subordinate CMBS and cash. At issuance, we sold notes rated AAA to BBB- with a face value of $298,913,000 to third parties at par. The notes we sold bear interest at a weighted average floating rate of LIBOR plus 0.49% (4.35% at September 30, 2005). We retained all of the unrated and below investment grade rated notes and the preferred equity interests. We incurred $5,223,000 of issuance costs which will be amortized on a level yield basis over the average life of the CDO. Including the amortization of the issuance costs, the all in effective rate for the notes sold was LIBOR plus 0.71% (4.57% at September 30, 2005). CDO II was structured with a five year reinvestment period that allows us to reinvest principal proceeds from collateral repayments into new investments, effectively extending the life of the financing. For accounting purposes, the CDO is consolidated in our financial statements. At September 30, 2005, we had collateralized debt obligations outstanding from three separate issuances with a total face value of $821,285,000. CDOs are recorded on the balance sheet at $823,817,000, representing the amortized sales price of the securities sold to third parties. Derivative Financial Instruments The following table summarizes the notional and fair values of our derivative financial instruments at September 30, 2005. 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, interest rate or foreign exchange market risks. <TABLE> <CAPTION> Interest Hedge Type Notional Value Rate Maturity Fair Value - ----------- -------------------- ----------------- ---------------- ------------ --------------- <S> <C> <C> <C> <C> <C> Swap Cash Flow Hedge $74,094,000 4.584% 2014 $197,000 Swap Cash Flow Hedge 19,291,000 3.950% 2011 575,000 Swap Cash Flow Hedge 18,438,000 4.589% 2015 77,000 Swap Cash Flow Hedge 8,683,000 4.648% 2018 50,000 Swap Cash Flow Hedge 7,445,000 4.470% 2013 52,000 Swap Cash Flow Hedge 5,499,000 3.118% 2007 119,000 </TABLE> During the nine months ended September 30, 2005, we received $1,410,000 from counterparties in settlement of two interest rate swaps. Recognition of these settlements has been deferred and is being amortized over the remaining life of the previously hedged item using an approximation of the level yield basis. We also entered into four new cash flow hedges during the nine months ended September 30, 2005. On September 30, 2005, the derivative financial instruments were reported at their fair value of $1,070,000 as interest rate hedge assets. - 9 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 10. Earnings Per Share The following table sets forth the calculation of Basic and Diluted EPS for the nine months ended September 30, 2005 and 2004: <TABLE> <CAPTION> Nine months Ended September 30, 2005 Nine months Ended September 30, 2004 ----------------------------------------------------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ----------------------------------------------------------- ----------------- ----------- <S> <C> <C> <C> <C> <C> <C> Basic EPS: Net earnings per share of common stock $ 27,797,000 15,110,227 $ 1.84 $ 12,441,000 8,492,967 $ 1.46 ============== =========== Effect of Dilutive Securities Options outstanding for the purchase of common stock -- 172,744 -- 123,592 Warrants outstanding for purchase of common stock -- -- -- 25,100 Stock units outstanding convertible to shares of common stock -- 56,562 -- 44,420 ---------------- -------------- -------------- ----------------- Diluted EPS: Net earnings per share of common stock and assumed conversions $ 27,797,000 15,339,533 $ 1.81 $ 12,441,000 8,686,079 $ 1.43 ================ ============= ============ ============== ================= =========== </TABLE> The following table sets forth the calculation of Basic and Diluted EPS for the three months ended September 30, 2005 and 2004: <TABLE> <CAPTION> Three Months Ended September 30, 2005 Three Months Ended September 30, 2004 ----------------------------------------------------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount ----------------------------------------------------------- ----------------- ----------- <S> <C> <C> <C> <C> <C> <C> Basic EPS: Net earnings per share of common stock $ 9,799,000 15,125,443 $ 0.65 $ 5,858,000 11,448,503 $ 0.51 ============ =========== Effect of Dilutive Securities Options outstanding for the purchase of common stock -- 173,900 -- 134,846 Warrants outstanding for purchase of common stock -- -- -- 26,308 Stock units outstanding convertible to shares of common stock -- 59,600 -- 49,536 ---------------- -------------- -------------- ----------------- Diluted EPS: Net earnings per share of common stock and assumed conversions $ 9,799,000 15,358,943 $ 0.64 $ 5,858,000 11,659,193 $ 0.50 ================ ============= ============ ============== ================= =========== </TABLE> - 10 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 11. Income Taxes We made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ended December 31, 2003. As a REIT, we are generally not subject to federal income tax. 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 in any taxable year, we will be subject to federal income tax on taxable income at regular corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At September 30, 2005, we were in compliance with all REIT requirements. During the nine months ended September 30, 2005, we recorded $315,000 of income tax expense for income attributable to taxable REIT subsidiaries. Our effective tax rate for the nine months ended September 30, 2005 attributable to taxable REIT subsidiaries was 40.2%. The difference between the U.S. federal statutory tax rate of 35% and the effective tax rate was primarily state and local taxes, net of federal tax benefit. 12. Dividends In order to maintain our election to qualify as a REIT, we must currently distribute, at a minimum, an amount equal to 90% of our REIT taxable income and must distribute 100% of our REIT taxable income to avoid paying corporate federal income taxes. We expect to distribute all of our REIT taxable income to our shareholders. Because REIT taxable income differs from cash flow from operations due to non-cash revenues or expenses, in certain circumstances, we may be required to borrow to make sufficient dividend payments to meet this anticipated dividend threshold. On September 15, 2005, we declared a dividend of approximately $8,337,000, or $0.55 per share of common stock applicable to the three-month period ended September 30, 2005, payable on October 15, 2005 to shareholders of record on September 30, 2005. 13. Employee Benefit Plans Amended and Restated 1997 Long-Term Incentive Stock Plan During the nine months ended September 30, 2005, we did not issue any options to acquire shares of class A common stock. The following table summarizes the option activity under the incentive stock plan for the quarter ended September 30, 2005: <TABLE> <CAPTION> Weighted Average Options Exercise Price Exercise Price Outstanding per Share per Share ------------------- ------------------------- ------------------ <S> <C> <C> <C> Outstanding at January 1, 2005 458,998 $12.375 - $30.00 $ 19.67 Granted in 2005 -- -- -- Exercised in 2005 (58,815) $12.375 - $30.00 $19.06 Canceled in 2005 -- -- -- ------------------- ------------------ Outstanding at September 30, 2005 400,183 $12.375 - $30.00 $ 19.75 =================== ================== </TABLE> At September 30, 2005, all of the options are exercisable. At September 30, 2005, the outstanding options have various remaining contractual exercise periods ranging from 0.25 to 6.34 years with a weighted average life of 3.72 years. - 11 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Amended and Restated 2004 Long-Term Incentive Plan During the first quarter of 2005, we issued 56,073 shares of common stock to employees as incentive compensation pursuant to the 2004 Long-Term Incentive plan. We issued 21,448 shares of common stock to John R. Klopp pursuant to his employment agreement as a result of the attainment of 2004 annual performance measures set forth in the related performance award, 50% of which are subject to further time vesting in one-third increments on each of January 1, 2006, 2007 and 2008 and 50% of which are subject to further performance vesting as performance stock and vest, if at all, on December 31, 2008 if total shareholder return exceeds 13% during the period from January 1, 2005 to December 31, 2008. We issued 34,625 shares of common stock to other employees pursuant to restricted stock and performance unit awards. Pursuant to the awards, 50% of the shares vest as restricted stock in equal one-third increments on each of February 4, 2006, 2007 and 2008 and 50% of the shares are subject to performance vesting as performance stock and vest, if at all, on February 4, 2009 if total shareholder return exceeds 13% during the period from January 1, 2005 to December 31, 2008. During the nine months ended September 30, 2005, 8,703 shares of restricted stock for which the vesting requirements had not yet been met were forfeited by employees who resigned. In connection with the forfeiture, we reversed $57,000 of compensation expense. Compensation expense for stock awards is recognized on the accelerated attribution method under Financial Accounting Standards Board Interpretation No. 28. 14. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on our outstanding debt and convertible junior subordinated debentures during the nine months ended September 30, 2005 and 2004 was $21,733,000 and $14,247,000, respectively. We paid income taxes during the nine months ended September 30, 2005 and 2004 of $5,000 and $1,011,000, respectively. - 12 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 15. Segment Reporting We operate two reportable segments. We have an internal information system that produces performance and asset data for the two segments along business lines. The Balance Sheet Investment segment includes all activities related to direct loan and investment activities (including direct investments in Funds) and the financing thereof. The Investment Management segment includes all activities related to investment management services provided to us and third-party funds under management and includes our taxable REIT subsidiary, CT Investment Management Co., LLC and its subsidiaries. The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the nine months ended, and as of, September 30, 2005, respectively (in thousands): <TABLE> <CAPTION> Balance Sheet Investment Inter-Segment Investment Management Activities Total ----------------- ---------------- ---------------- -------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 57,359 $ -- $ -- $ 57,359 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 23,709 -- -- 23,709 ----------------- ---------------- ---------------- -------------- Income from loans and other investments, net 33,650 -- -- 33,650 ----------------- ---------------- ---------------- -------------- Other revenues: Management and advisory fees -- 15,718 (3,574) 12,144 Income/(loss) from equity investments in Funds 628 (1,463) -- (835) Other interest income 318 64 (8) 374 ----------------- ---------------- ---------------- -------------- Total other revenues 946 14,319 (3,582) 11,683 ----------------- ---------------- ---------------- -------------- Other expenses: General and administrative 6,710 13,248 (3,574) 16,384 Other interest expense 8 -- (8) -- Depreciation and amortization 633 204 -- 837 ----------------- ---------------- ---------------- -------------- Total other expenses 7,351 13,452 (3,582) 17,221 ----------------- ---------------- ---------------- -------------- Income before income taxes 27,245 867 28,112 Provision for income taxes -- 315 -- 315 ----------------- ---------------- ---------------- -------------- Net income allocable to class A common stock $ 27,245 $ 552 $ -- $ 27,797 ================= ================ ================ ============== Total Assets $ 1,331,130 $ 11,469 $ (9,844) $ 1,332,755 ================= ================ ================ ============== </TABLE> - 13 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the nine months ended, and as of, September 30, 2004, respectively (in thousands): <TABLE> <CAPTION> Balance Sheet Investment Inter-Segment Investment Management Activities Total ----------------- ---------------- ---------------- -------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 31,169 $ -- $ -- $ 31,169 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 8,848 -- -- 8,848 Less: Interest and related expenses on convertible junior subordinated debentures 6,417 -- -- 6,417 ----------------- ---------------- ---------------- -------------- Income from loans and other investments, net 15,904 -- -- 15,904 ----------------- ---------------- ---------------- -------------- Other revenues: Management and advisory fees -- 8,264 (2,239) 6,025 Income/(loss) from equity investments in Funds 1,420 (294) -- 1,126 Gain on sales of investments 300 -- -- 300 Other interest income 24 240 (229) 35 ----------------- ---------------- ---------------- -------------- Total other revenues 1,744 8,210 (2,468) 7,486 Other expenses: General and administrative 4,248 8,118 (2,239) 10,127 Other interest expense 229 -- (229) -- Depreciation and amortization 634 188 -- 822 ----------------- ---------------- ---------------- -------------- Total other expenses 5,111 8,306 (2,468) 10,949 ----------------- ---------------- ---------------- -------------- Income before income taxes 12,537 (96) -- 12,441 Provision for income taxes -- -- -- -- ----------------- ---------------- ---------------- -------------- Net income $ 12,537 $ (96) $ -- $ 12,441 ================= ================ ================ ============== Total Assets $ 787,575 $ 13,537 $ (14,120) $ 786,992 ================= ================ ================ ============== </TABLE> - 14 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended, and as of, September 30, 2005, respectively (in thousands): <TABLE> <CAPTION> Balance Sheet Investment Inter-Segment Investment Management Activities Total ----------------- ---------------- ---------------- -------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 22,751 $ -- $ -- $ 22,751 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 10,325 -- -- 10,325 ----------------- ---------------- ---------------- -------------- Income from loans and other investments, net 12,426 -- -- 12,426 ----------------- ---------------- ---------------- -------------- Other revenues: Management and advisory fees -- 2,711 (1,194) 1,517 Income/(loss) from equity investments in Funds 528 (61) -- 467 Other interest income 111 26 -- 137 ----------------- ---------------- ---------------- -------------- Total other revenues 639 2,676 (1,194) 2,121 ----------------- ---------------- ---------------- -------------- Other expenses: General and administrative 2,026 4,484 (1,194) 5,316 Other interest expense -- -- -- -- Depreciation and amortization 211 67 -- 278 ----------------- ---------------- ---------------- -------------- Total other expenses 2,237 4,551 (1,194) 5,594 ----------------- ---------------- ---------------- -------------- Income before income taxes 10,828 (1,875) -- 8,953 Provision for income taxes -- (846) -- (846) ----------------- ---------------- ---------------- -------------- Net income allocable to class A common stock $ 10,828 $ (1,029) $ -- $ 9,799 ================= ================ ================ ============== </TABLE> All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $1,194,000 and $3,574,000, respectively, for management of the segment for the three and nine months ended September 30, 2005 and $8,000 for inter-segment interest for the nine months ended September 30, 2005, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. - 15 -
Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) The following table details each segment's contribution to our overall profitability and the identified assets attributable to each such segment for the three months ended, and as of, September 30, 2004, respectively (in thousands): <TABLE> <CAPTION> Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ----------------- --------------------- ---------------- <S> <C> <C> <C> <C> Income from loans and other investments: Interest and related income $ 12,979 $ -- $ -- $ 12,979 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 3,758 -- -- 3,758 Less: Interest and related expenses on convertible junior subordinated debentures 1,552 -- -- 1,552 ------------------- ----------------- --------------------- ---------------- Income from loans and other investments, net 7,669 -- -- 7,669 ------------------- ----------------- --------------------- ---------------- Other revenues: Management and advisory fees -- 2,745 (835) 1,910 Income/(loss) from equity investments in Funds 409 (108) -- 301 Gain on sales of investments -- -- -- -- Other interest income 14 40 (35) 19 ------------------- ----------------- --------------------- ---------------- Total other revenues 423 2,677 (870) 2,230 ------------------- ----------------- --------------------- ---------------- Other expenses: General and administrative 1,446 3,385 (835) 3,996 Other interest expense 35 -- (35) -- Depreciation and amortization 212 62 -- 274 ------------------- ----------------- --------------------- ---------------- Total other expenses 1,693 3,447 (870) 4,270 ------------------- ----------------- --------------------- ---------------- Income before income taxes 6,399 (770) -- 5,629 Provision for income taxes -- (229) -- (229) ------------------- ----------------- --------------------- ---------------- Net income $ 6,399 $ (541) $ -- $ 5,858 =================== ================= ===================== ================ </TABLE> All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $835,000 and $2,239,000, respectively, for management of the segment and $35,000 and $229,000, respectively, for inter-segment interest for the three and nine months ended September 30, 2004, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. - 16 -
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations. Introduction We are a fully integrated, self-managed finance and investment management company that specializes in credit-sensitive structured financial products. To date, our investment activities have focused primarily on the U.S. commercial real estate subordinate debt markets. From the commencement of our finance business in 1997 through September 30, 2005, we have completed over $5.6 billion of real estate-related investments both directly and on behalf of our managed funds. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes. Currently, we make balance sheet investments for our own account and manage a series of private equity funds on behalf of institutional and individual investors. Since commencement of our investment management business in March 2000, we have co-sponsored three funds: CT Mezzanine Partners I LLC, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer to as Fund I, Fund II and Fund III, respectively. Balance Sheet Overview During the nine months ended September 30, 2005, we made eighteen investments in commercial mortgage-backed securities, or CMBS, with a total purchase price of $205.4 million ($229.9 million face value). Fourteen investments with a total purchase price of $165.5 million ($190.0 million face value) earn interest at fixed rates with a weighted average stated coupon of 6.26% and four investments with a total purchase price of $39.9 million ($39.9 million face value) earn interest at variable rates with a weighted average stated coupon of LIBOR plus 1.91% (5.77% at September 30, 2005). In addition, one CMBS investment with a face value of $1.8 million was repaid in full during the period. At September 30, 2005, we had thirty six investments in twenty five separate CMBS issues with an aggregate face value of $493.1 million. CMBS with a face value of $98.9 million earn interest at variable rates and have coupons averaging LIBOR plus 2.64% (6.50% at September 30, 2005). The remaining CMBS, $394.2 million face value, earn interest at fixed rates and have coupons averaging 6.98%. In the aggregate, we purchased the CMBS at total discounts to face value of $69.4 million and expected to recover, net of anticipated losses, $42.6 million of that amount, which we amortize over the lives of the securities. As of September 30, 2005, the remaining discount to be amortized into income over the remaining lives of the securities was $18.8 million. At September 30, 2005, the weighted average coupon of the entire CMBS portfolio was 6.88%. As of September 30, 2005, the securities were carried at market value of $455.5 million, reflecting a $12.2 million net unrealized gain to the amortized cost of the portfolio and other than temporary write-downs taken in 2004 on two securities of $5.3 million. On August 4, 2005, pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, we made a decision to change the accounting classification of our CMBS investments from available for sale to held to maturity. In accordance with this decision, CMBS with an amortized cost of $410.0 million and a market value of $422.3 million were reclassified from available for sale to held to maturity. As was the case prior to this reclassification, the difference between amortized cost and expected recovery on these investments will continue to be accreted through the income statement using the level yield method accretion schedules in place prior to the reclassification. The difference between amortized cost and market value as of the reclassification date, $12.2 million, was segregated within accumulated other comprehensive income and will be amortized over the remaining life of the securities using the level yield method without impact to the income statement. We made the decision to reclassify these investments based upon our intent and ability to hold these investments to maturity. Going forward, new originations of held to maturity investments will be stated at cost plus the amortization of any premiums or discounts and any premiums or discounts will be amortized through the income statement using the level yield method. Other than in the instance of impairment, these held to maturity investments will be shown in our financial statements at their adjusted values pursuant to the methodology described above. - 17 -
During the nine months ended September 30, 2005, we originated seven property mezzanine loans for $169.6 million (of which $144.5 million was funded as of September 30, 2005) and 25 B Notes for $375.5 million. In addition, we received partial repayments on five property mezzanine loans and 27 B Notes totaling $45.5 million and three property mezzanine loans and twenty three B Notes totaling $215.4 million were satisfied and repaid. We have outstanding unfunded loan commitments at September 30, 2005 of $25.0 million. At September 30, 2005, we had 73 performing loans receivable with a current carrying value of $812.2 million. Six of the loans totaling $130.4 million bear interest at an average fixed rate of interest of 9.27%. The 67 remaining loans, totaling $681.8 million bear interest at a variable rate of interest averaging LIBOR plus 3.78% (7.64% at September 30, 2005). One mortgage loan receivable with an original principal balance of $8.0 million matured on July 15, 2001 but has not been repaid with respect to principal and interest. In December 2002, the loan was written down to $4.0 million through a charge to the allowance for possible credit losses. Since the write-down, we have received cash collections of $962,000 reducing the carrying value of the loan to $3.0 million. In accordance with our policy for revenue recognition, income recognition has been suspended on this loan and for the three months ended September 30, 2005, $277,000 of potential interest income was not recorded. All other loans are performing in accordance with their terms. On at least a quarterly basis, management reevaluates the reserve for possible credit losses based upon our current portfolio of loans. Each loan is evaluated using our proprietary loan risk rating system, which considers loan to value, debt yield, cash flow stability, exit plan, sponsorship, loan structure and any other factors necessary to assess the likelihood of delinquency or default. If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our loan, and this potential loss is multiplied by our estimate of the likelihood of default. Based upon our detailed review at September 30, 2005, we concluded that a reserve for possible credit losses was not warranted. At September 30, 2005, we had investments in Funds of $16.5 million, including $4.8 million of unamortized costs capitalized in connection with entering into our venture agreement with Citigroup Alternative Investments LLC and the commencement of the related fund management business. These costs are being amortized over the lives of the Funds and the venture agreement, and are reflected as a reduction in income/(loss) from equity investments in Funds. With our issuance of collateralized debt obligations, commonly known as CDOs, we have substantially restructured the manner in which we finance our business. While we still borrow under our repurchase agreements, 84% of our debt is in the form of CDOs at September 30, 2005. The CDOs we have issued generally carry lower interest rates and allow for higher levels of leverage than our previously utilized financing sources. On August 4, 2005, we issued our third collateralized debt obligation that we refer to as CDO III. CDO III is secured by a static pool of $341.3 million of fixed rate subordinate CMBS. At issuance, we sold notes rated AAA through BBB with a total face value of $269.6 million to third parties for proceeds of $272.2 million. We retained all of the unrated and below investment grade rated notes, the BBB- rated notes and the preferred equity interests. The fixed rate notes we sold carry a weighted average coupon of 5.22% and because of the $2.6 million premium at which they were sold, have an effective cash cost to us of 5.17%. The issuance represents term and index matched, non-recourse and non-mark to market financing for the underlying collateral. We incurred $2.1 million of issuance costs that will be amortized on a level yield basis over the average life of the CDO. Including the amortization of the issuance costs, the all in effective rate for the notes sold was 5.25%. For accounting purposes, the CDO is consolidated in our financial statements. On March 15, 2005, we issued our second collateralized debt obligation that we refer to as CDO II. CDO II is a reinvesting CDO secured by $337.8 million of mezzanine loans, B Notes, subordinate CMBS and cash. At issuance, we sold notes rated AAA to BBB- with a face value of $298.9 million to third parties at par. The notes we sold bear interest at a weighted average floating rate of LIBOR plus 0.49% (4.35% at September 30, 2005). We retained all of the unrated and below investment grade rated notes and the preferred equity interests. We incurred $5.2 million of issuance costs which will be amortized on a level yield basis over the average life of the CDO. Including the amortization of the issuance costs, the all in effective rate for the notes sold was LIBOR plus 0.71% (4.57% at September 30, 2005). CDO II was structured with a five year reinvestment period that allows us to reinvest principal proceeds from collateral repayments into new investments, effectively extending the life of the financing. For accounting purposes, the CDO is consolidated in our financial statements. - 18 -
At September 30, 2005, we had collateralized debt obligations outstanding from three separate issuances with a total face value of $821.3 million. CDOs are recorded on the balance sheet at $823.8 million, representing the amortized sales price of the securities sold to third parties. In total, our two floating rate CDOs provide us with $551.7 million of debt financing at a stated average interest rate of LIBOR + 0.55% (4.41% at September 30, 2005) and an all-in effective rate (including the amortization of issuance costs) LIBOR + 0.87% (4.73% at September 30, 2005). Our fixed rate CDO provides us with $269.6 million of notional balance financing (which we sold for proceeds of $272.2 million) with a cash cost of 5.22% (5.17% based upon proceeds) and an all in effective interest rate of 5.25%. At September 30, 2005, we were party to repurchase agreements with four securities dealers with total repurchase commitments of $650.0 million and had total outstanding borrowings of $157.8 million. The weighted average cash borrowing cost for all the repurchase agreements outstanding at September 30, 2005 was LIBOR plus 1.06% (4.92% at September 30, 2005). Assuming no additional utilization under the repurchase agreements and including the amortization of all fees paid and capitalized over the remaining term of the repurchase agreements, the all-in effective borrowing cost was LIBOR plus 1.34% (5.20% at September 30, 2005). At September 30, 2005, if all of the assets pledged under repurchase agreements were drawn upon, we could obtain an additional $123.6 million of financing. We were party to six cash flow interest rate swaps with a total notional value of $133.5 million as of September 30, 2005. These cash flow interest rate swaps effectively convert floating rate debt to fixed rate debt, which is utilized to finance assets that earn interest at fixed rates. We receive a rate equal to LIBOR (3.78% at September 30, 2005) and pay an average rate of 4.43%. The market value of the swaps at September 30, 2005 was $1.1 million, which is recorded as an interest rate hedge asset and as a component of accumulated other comprehensive gain/(loss) on our balance sheet. At September 30, 2005, we had 15,158,447 shares of our class A common stock outstanding. Investment Management Overview We operated principally as a balance sheet investor until the start of our investment management business in March 2000, when we entered into a venture with affiliates of Citigroup Alternative Investments to co-sponsor and invest capital in a series of commercial real estate mezzanine investment funds managed by us. Pursuant to the venture agreement, we have co-sponsored with Citigroup Alternative Investments Fund I, Fund II and Fund III. We have capitalized costs of $4.8 million net, from the formation of the venture and the Funds that are being amortized over the remaining anticipated lives of the Funds and the related venture agreement. Fund I has concluded its operations and been dissolved. Fund II had its initial closing on equity commitments on April 9, 2001 and its final closing on August 7, 2001, ultimately raising $845.2 million in equity commitments, including $49.7 million (5.9%) from us and $198.9 million (23.5%) from Citigroup Alternative Investments. Third-party private equity investors, including public and corporate pension plans, endowment funds, financial institutions and high net worth individuals, made the balance of the equity commitments. During its two-year investment period, which expired on April 9, 2003, Fund II invested $1.2 billion in 40 separate transactions. CT Investment Management Co. LLC, our wholly-owned taxable REIT subsidiary, acts as the investment manager to Fund II and receives 100% of the base management fees paid by the fund. As of April 9, 2003, the end of Fund II's investment period, CT Investment Management Co. earns annual base management fees calculated at a rate equal to 1.287% of invested capital. We and Citigroup Alternative Investments, through our collective ownership of the general partner of Fund II, which we refer to as Fund II GP, are entitled to receive incentive management fees from Fund II if the return on invested equity is in excess of 10% after all invested capital has been returned. The Fund II incentive management fees are split equally between Citigroup Alternative Investments and us. We received our first such payment totaling $6.2 million on March 29, 2005, a payment of $1.2 million on June 24, 2005 and an additional payment of $428,000 on September 26, 2005, reflecting 50% of the total incentive management fees paid to the general partner. In connection with the receipt of the incentive management fees, Fund II GP, which is 50% owned by us and the - 19 -
general partner of Fund II, expensed costs that it had previously capitalized of $2.4 million, of which $1.2 million flowed through to us. The payment of the incentive management fees by Fund II reduced the value of our investment in Fund II and Fund II GP by $1.1 million, reflecting our proportionate share of the incentive management payment. In addition, we have and will continue to pay 25% of our share of the Fund II incentive management fees as long-term incentive compensation to our employees. The amount of future additional incentive fees to be received will depend upon a number of factors, including the level of interest rates and the fund's ability to generate additional returns, which is in turn impacted by the duration and ultimate performance of the fund's assets. Potential incentive fees received as Fund II winds down could result in significant additional income from operations in certain periods during which such payments can be recorded as income. If Fund II's remaining assets were sold and liabilities were settled on October 1, 2005 at the recorded book value, and the fund's equity and income were distributed, we would record approximately $2.1 million of additional gross incentive fees. We do not anticipate making any additional equity contributions to Fund II or its general partner. Our net investment in Fund II and its general partner at September 30, 2005 was $1.8 million. As of September 30, 2005, Fund II had 7 outstanding loans and investments totaling $67.8 million, all of which were performing in accordance with the terms of their agreements. Fund III effected its initial closing on equity commitments on June 2, 2003 and its final closing on August 8, 2003, raising a total of $425.0 million in equity commitments, including our equity commitment of $20.0 million (4.7%) and Citigroup Alternative Investments' equity commitment of $80.0 million (18.8%). From the initial closing through September 30, 2005, we have made equity investments in Fund III of $15.9 million. Through September 30, 2005, Fund III had made 35 loans and investments of approximately $1.2 billion. As of September 30, 2005, Fund III had 19 outstanding loans and investments totaling $536.9 million, all of which were performing in accordance with the terms of their agreements. CT Investment Management Co. receives 100% of the base management fees from Fund III calculated at a rate equal to 1.42% per annum of committed capital during Fund III's two-year investment period (which expired June 2, 2005) and 1.42% of invested capital thereafter. We and our co-sponsor are also entitled to receive incentive management fees from Fund III if the return on invested equity is in excess of 10% after all invested capital has been returned. We will receive 62.5% and our co-sponsor will receive 37.5% of the total incentive management fees. We intend to distribute a portion (up to 40%) of our share of the Fund III incentive management fees as long-term incentive compensation to our employees. If Fund III's remaining assets were sold and liabilities were settled on October 1, 2005 at recorded book value and the Fund's equity and income were distributed, we would record approximately $5.4 million of additional gross incentive management fees. Three and Nine Months Ended September 30, 2005 Compared to Three and Nine Months Ended September 30, 2004 We reported net income of $9.8 million for the three months ended September 30, 2005, an increase of $3.9 million from the net income of $5.9 million for the three months ended September 30, 2004. We reported net income of $27.8 million for the nine months ended September 30, 2005, an increase of $15.4 million from the net income of $12.4 million for the nine months ended September 30, 2004. These increases were primarily the result of an increase in net interest income from loans and other investments, the receipt of incentive management fees from Fund II and the reduction of our cost of debt through the use of CDOs. Interest and related income from loans and other investments amounted to $57.4 million for the nine months ended September 30, 2005, an increase of $26.2 million from the $31.2 million amount for the nine months ended September 30, 2004. Average interest-earning assets increased from approximately $479.0 million for the nine months ended September 30, 2004 to approximately $963.5 million for the nine months ended September 30, 2005. The average interest rate earned on such assets decreased from 8.7% for the nine months ended September 30, 2004 to 7.9% for the nine months ended September 30, 2005. During the nine months ended September 30, 2005, we recognized $1.3 million in additional income on the early repayment of loans. The decrease in rates was due primarily to a change in the mix of our investment portfolio to include more lower risk B Notes in 2005 (which generally carry lower interest rates than mezzanine loans) and a general decrease in credit spreads obtained on newly originated investments, partially offset by a higher average LIBOR rate, which increased by 1.8% from 1.3% for the nine months ended September 30, 2004 to 3.1% for the nine months ended September 30, 2005. - 20 -
Interest and related income from loans and other investments amounted to $22.8 million for the three months ended September 30, 2005, an increase of $9.8 million from the $13.0 million amount for the three months ended September 30, 2004. Average interest-earning assets increased from approximately $638.6 million for the three months ended September 30, 2004 to approximately $1,122.5 million for the three months ended September 30, 2005. The average interest rate earned on such assets decreased from 8.1% for the three months ended September 30, 2004 to 7.9% for the three months ended September 30, 2005. During the three months ended September 30, 2005, we recognized $501,000 in additional income on the early repayment of loans. The decrease in rates was again due primarily to a change in the mix of our investment portfolio to include more lower risk B Notes in 2005 (which generally carry lower interest rates than mezzanine loans) as higher rate mezzanine loans are paid down and a general decrease in credit spreads obtained on newly originated investments, and was partially offset by a higher average LIBOR rate, which increased by 2.0% from 1.6% for the three months ended September 30, 2004 to 3.6% for the three months ended September 30, 2005. We utilize our repurchase obligations and CDOs to finance our interest-earning assets. Interest and related expenses on secured debt amounted to $23.7 million for the nine months ended September 30, 2005, an increase of $14.9 million from the $8.8 million amount for the nine months ended September 30, 2004. The increase in expense was due to an increase in the amount of average interest-bearing liabilities outstanding from approximately $281.9 million for the nine months ended September 30, 2004 to approximately $693.8 million for the nine months ended September 30, 2005 and an increase in the average rate paid on interest-bearing liabilities from 4.2% to 4.5% for the same periods. The increase in the average rate is substantially due to increases in the average LIBOR rate, which increased by 1.8% from 1.3% for the nine months ended September 30, 2004 to 3.1% for the nine months ended September 30, 2005, and was partially offset by the use of CDOs to finance a large portion of the portfolio at lower credit spreads than obtained under the credit facility and term redeemable securities contract. Interest and related expenses on secured debt amounted to $10.3 million for the three months ended September 30, 2005, an increase of $6.6 million from the $3.8 million amount for the three months ended September 30, 2004. The increase in expense was due to an increase in the amount of average interest-bearing liabilities outstanding from approximately $412.2 million for the three months ended September 30, 2004 to approximately $847.1 million for the three months ended September 30, 2005, and an increase in the average rate paid on interest-bearing liabilities from 3.60% to 4.77% for the same periods. The increase in the average rate is again substantially due to the increase in average LIBOR rate, which increased by 2.0% from 1.6% for the three months ended September 30, 2004 to 3.6% for the three months ended September 30, 2005, and was partially offset by the use of CDOs to finance a large portion of the portfolio at lower credit spreads than obtained under the credit facility and term redeemable securities contract. Prior to September 29, 2004, we also utilized the convertible junior subordinated debentures to finance our interest-earning assets. During the three and nine months ended September 30, 2004, we recognized $1.6 million and $6.4 million, respectively of expenses related to the convertible junior subordinated debentures. No expense was recorded for the three and nine months ended September 30, 2005 as the liability was extinguished in 2004 upon the conversion of one half of the principal amount due on the debentures into common stock on July 28, 2004 and the conversion of the remaining amount due on the debentures into common stock on September 29, 2004. Other revenues increased $4.2 million from $7.5 million for the nine months ended September 30, 2004 to $11.7 million for the nine months ended September 30, 2005. The increase is primarily due to the receipt of incentive management fees from Fund II of $7.8 million during the nine months ended September 30, 2005. In connection with the receipt of the incentive management fees, Fund II GP, which is 50% owned by us and is the general partner of Fund II, expensed costs that it had previously capitalized of $2.4 million, of which $1.2 million flowed through to us. This was partially offset by a decrease in base management fees and investment income from Fund II, due to lower levels of investment in 2005 as the fund winds down and a decrease in the base management fees and investment income from Fund III, as Fund III reached the end of its investment period on June 2, 2005 and the fees are now charged on invested capital as opposed to committed capital. Other revenues decreased $109,000 from $2.2 million for the three months ended September 30, 2004 to $2.1 million for the three months ended September 30, 2005. The decrease is due to lower levels of base management fees and investment income from Fund II and Fund III, which was partially offset by the receipt of incentive management fees from Fund II of $428,000 during the three months ended September 30, 2005. In connection with - 21 -
the receipt of the incentive management fees, Fund II GP, which is 50% owned by us and the general partner of Fund II, expensed costs that it had previously capitalized of $52,000, of which $26,000 flowed through to us. General and administrative expenses increased $6.3 million to $16.4 million for the nine months ended September 30, 2005 from $10.1 million for the nine months ended September 30, 2004. The increase in general and administrative expenses was primarily due to the allocation of Fund II incentive management fees for payment to employees (representing 25% of the total received, or $2.0 million), increases in employee compensation expense from the issuance of additional restricted stock and the timing of the annual bonus accrual, due diligence costs of $475,000 from an abandoned corporate acquisition and additional expenses related to the services provided under our contract with Global Realty Outsourcing, Inc. which began in April 2004. General and administrative expenses increased $1.3 million to $5.3 million for the three months ended September 30, 2005 from $4.0 million for the three months ended September 30, 2004. The increase in general and administrative expenses was primarily due to increases in employee compensation expense from the issuance of additional restricted stock, the timing of the annual bonus accrual and the allocation of Fund II incentive management fees for payment to employees (representing 25% of the total received, or $107,000). We have made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ended December 31, 2003. As a REIT, we generally are not subject to federal income tax. 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 in any taxable three months, we will be subject to federal income tax on our taxable income at regular corporate rates. We may also be subject to certain state and local taxes on our income and property. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At September 30, 2005 and 2004, we were in compliance with all REIT requirements and, as such, have not provided for income tax expense on our REIT taxable income for the three or the nine months ended September 30, 2005 and 2004. We also have taxable REIT subsidiaries which are subject to tax at regular corporate rates. During the nine months ended September 30, 2005 and 2004, we recorded $315,000 and $0, respectively, of income tax expense. This increase resulted from increased taxable income in our taxable REIT subsidiaries primarily due to incentive management fees recognized from Fund II. Liquidity and Capital Resources At September 30, 2005, we had $14.4 million in cash. Our primary sources of liquidity for the remainder of 2005 are expected to be cash on hand, cash generated from operations, principal and interest payments received on loans and investments, and additional borrowings under our repurchase obligations. We believe these sources of capital will be adequate to meet future cash requirements for 2005. We expect that during 2005, we will use a significant amount of our available capital resources to originate or purchase new loans and investments for our balance sheet. We intend to continue to employ leverage on our balance sheet assets to enhance our return on equity. We experienced a net decrease in cash of $10.2 million for the nine months ended September 30, 2005, compared to a net decrease of $775,000 for the nine months ended September 30, 2004. Cash provided by operating activities during the nine months ended September 30, 2005 was $27.9 million, compared to $10.4 million during the same period of 2004. For the nine months ended September 30, 2005, cash used in investing activities was $447.2 million, compared to $346.8 million during the same period in 2004. The change was primarily due our increased loan and investment originations partially offset by increased levels of principal collections when comparing the first nine months of 2005 to the same period in 2004. We financed the increased investment activity with additional borrowings under our repurchase obligations and CDOs. This accounted for substantially all of the change in the net cash activity from financing activities. At September 30, 2005, we had outstanding borrowings under our outstanding CDOs of $823.8 million and outstanding repurchase obligations totaling $157.8 million. At September 30, 2005, we had pledged assets that enable us to obtain an additional $123.6 million of financing under our repurchase agreements. At September 30, 2005, we had $492.2 million of credit available for the financing of new and existing unpledged assets pursuant to our credit facility and repurchase agreements. - 22 -
Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Impact of Inflation Our operating results depend in part on the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation or otherwise can affect our income by affecting the spread between our interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of our interest-earning assets and our ability to realize gains from the sale of assets and the average life of our interest-earning assets. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We employ the use of correlated hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps and interest rate caps to minimize our exposure to changes in interest rates. There can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit from any hedging contract into which we enter. Note on Forward-Looking Statements Except for historical information contained herein, this quarterly report on Form 10-Q contains 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 are included with respect to, among other things, the our current business plan, business and investment strategy and portfolio management. 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," "anticipates," "anticipated," "should," "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. Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q (filed as Exhibit 99.1 to our Annual Report on Form 10-K, filed on March 10, 2005 and incorporated therein by reference), which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q. - 23 -
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The principal objective of our asset/liability management activities is to maximize net interest income, while managing levels of interest rate risk. Net interest income and interest expense are subject to the risk of interest rate fluctuations. In certain instances, to mitigate the impact of fluctuations in interest rates, we use interest rate swaps to effectively convert variable rate liabilities to fixed rate liabilities for proper matching with fixed rate assets. Each derivative used as a hedge is matched with an asset or liability with which it has a high correlation. The swap agreements are generally held-to-maturity and we do not use derivative financial instruments for trading purposes. We use interest rate swaps to effectively convert variable rate debt to fixed rate debt for the financed portion of fixed rate assets. The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual basis. Our loans and investments, including our fund investments, are also subject to credit risk. The ultimate performance and value of our loans and investments depends upon the owner's ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due us. To monitor this risk, our asset management team continuously reviews the investment portfolio and in certain instances is in constant contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. The following table provides information about our financial instruments that are sensitive to changes in interest rates at September 30, 2005. For financial assets and debt obligations, the table presents cash flows to the expected maturity and weighted average interest rates based upon the current carrying values. For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted average variable rates are based on rates in effect as of the reporting date. <TABLE> <CAPTION> Expected Maturity Dates ------------------------------------------------------------------------------ 2005 2006 2007 2008 2009 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Assets: (dollars in thousands) Commercial Mortgage- backed Securities Fixed Rate -- -- $ 5, 135 $ 3,783 $ 5,380 $351,520 $365,818 $356,574 Average interest rate -- -- 4.96% 6.37% 9.66% 8.49% 8.37% Variable Rate $ 38 $ 6,677 $ 13,659 $ 65,001 $ 14,000 $ 1,305 $100,680 $ 99,098 Average interest rate 4.89% 4.89% 6.04% 6.12% 5.24% 36.79% 6.40% Loans receivable Fixed Rate $ 233 $ 1,055 $ 8,050 $ 47,975 $ 775 $ 73,616 $131,704 $139,246 Average interest rate 10.56% 9.90% 8.31% 11.77% 8.18% 8.01% 9.42% Variable Rate $ 22,803 $ 239,957 $202,529 $ 41,112 $ 79,106 $106,299 $691,806 $686,931 Average interest rate 8.71% 7.40% 7.66% 7.80% 6.83% 7.80% 7.54% Total Return Swap Variable Rate -- $ 4,000 -- -- -- -- $ 4,000 $ 4,000 Average interest rate -- 20.56% -- -- -- -- 20.56% Interest rate swaps Notional amounts $ 84 $ 377 5,826 $ 490 $ 28,857 $ 97,816 $133,450 $ 1,070 Average fixed pay rate 3.69% 3.77% 3.21% 4.23% 4.58% 4.46% 4.43% Average variable receive rate 3.80% 3.80% 3.80% 3.80% 3.80% 3.78% 3.78% Liabilities: Repurchase obligations Variable Rate -- $ 43,266 $ 46,793 $ 40,710 -- $ 27,005 $157,774 $157,774 Average interest rate -- 4.18% 5.74% 4.70% -- 5.03% 4.92% Collateralized debt obligations Variable Rate $ 5,000 $ 92,252 $105,871 $618,162 $821,285 $823,817 Average interest rate 6.01% 4.66% 4.69% 5.07% 4.98% </TABLE> - 24 -
ITEM 4. 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 quarterly report 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. Changes in Internal Controls There have been no significant changes in our "internal control over financial reporting" (as defined in rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. - 25 -
PART II. OTHER INFORMATION ITEM 1: Legal Proceedings None ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds None ITEM 3: Defaults Upon Senior Securities None ITEM 4: Submission of Matters to a Vote of Security Holders None ITEM 5: Other Information On August 16, 2005, Capital Trust, Inc. (the "Company") entered into a $75 million Master Repurchase Agreement (the "Repurchase Agreement") with Bear, Stearns Funding, Inc. ("Bear"). The Repurchase Agreement expires on August 15, 2008, although may terminate prior to such date in accordance with its provisions. Subject to the terms and conditions thereof, the Repurchase Agreement provides for the purchase, sale and repurchase of, inter alia, commercial mortgage loans, commercial mezzanine loans, B-notes and commercial mortgage-backed securities and other mutually agreed upon collateral and bears interest at varying rates over LIBOR based upon the type of asset included in the repurchase obligation. - 26 -
ITEM 6: Exhibits 3.1 Charter of Capital Trust, Inc. (filed as Exhibit 3.1.a to the Company's Current Report on Form 8-K (File No. 1-14788) filed on April 2, 2003 and incorporated herein by reference). 3.2 Amended and Restated Bylaws of Capital Trust, Inc. (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on January 29, 1999 and incorporated herein by reference). 3.3 First Amendment to Amended and Restated Bylaws of Capital Trust, Inc. (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q (File No. 1-14788) filed on August 16, 2004 and incorporated herein by reference). o 10.1 Master Repurchase Agreement, dated as of July 29, 2005, by and between the Company and Morgan Stanley Bank. o 10.2 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. o 10.3 Master Repurchase Agreement, dated as of August 16, 2005, by and between the Company and Bear, Stearns Funding, Inc. o 10.4 Letter Agreement, dated as of August 16, 2005, by and between the Company and Bear, Stearns Funding, Inc. 11.1 Statements regarding Computation of Earnings per Share (Data required by Statement of Financial Accounting Standard No. 128, Earnings per Share, is provided in Note 11 to the consolidated financial statements contained in this report). o 31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o 31.2 Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o 32.1 Certification of John R. Klopp, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. o 32.2 Certification of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Risk Factors (filed as Exhibit 99.1 to the Company's Annual Report on Form 10-K (File No. 1-14788), filed on March 10, 2005 and incorporated herein by reference). o Filed herewith. - 27 -
SIGNATURES Pursuant to the requirements 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. CAPITAL TRUST, INC. October 31, 2005 /s/ John R. Klopp - ---------------- ----------------- Date John R. Klopp Chief Executive Officer October 31, 2005 /s/ Geoffrey G. Jervis - ---------------- ----------------------- Date Geoffrey G. Jervis Chief Financial Officer - 28 -