Filing summary
Registrant identity: The supplied filing is Capital Trust, Inc. (NYSE: CT), not Blackstone Mortgage Trust, Inc. The filing covers the quarter and six months ended June 30, 2012; interim financial statements are unaudited.
Business context
Capital Trust was a commercial real estate finance and investment management company operating as a REIT. Following its March 2011 debt restructuring, it focused on managing third-party investment vehicles, special servicing, and recovery of its legacy portfolio. The filing reports two segments: Balance Sheet Investment and Investment Management.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Interest and related income | 2012: $6.8 million; 2011: $32.6 million | 2012: $21.5 million; 2011: $69.5 million |
| Net income from loans and investments, after interest expense | 2012: $1.4 million; 2011: $0.3 million | 2012: loss of $7.3 million; 2011: $11.0 million income |
| Other revenue | 2012: $3.0 million; 2011: $2.0 million | 2012: $6.6 million; 2011: $3.9 million |
| Net income attributable to Capital Trust | 2012: $2.3 million; 2011: loss of $1.8 million | 2012: $68.8 million; 2011: $252.7 million |
| Diluted earnings per share | 2012: $0.09; 2011: loss of $0.08 | 2012: $2.83; 2011: $10.52 |
| Operating cash flow | Not presented separately for the quarter | 2012: $6.5 million; 2011: $12.4 million |
At June 30, 2012, total assets were $584.2 million, versus $1.366 billion at December 31, 2011. Cash and cash equivalents were $34.6 million; a further $15.4 million of restricted cash was held at CT Legacy REIT. Total liabilities were $562.0 million. These included $518.1 million of securitized debt and $8.2 million of secured notes; the filing describes these obligations as non-recourse to Capital Trust. Total equity was $22.2 million, while Capital Trust shareholders’ deficit was $34.4 million. GAAP book value per share was negative $1.48; management’s non-GAAP adjusted book value per share was $3.44.
No common dividends were declared in the first half of 2012. Management said current capital sources should meet near-term cash requirements, but Capital Trust had no near-term access to much of the legacy portfolio’s cash flows. It reported no off-balance-sheet arrangements.
Material changes versus comparable periods
- Six-month interest income fell 69% and interest expense fell 51%, primarily reflecting the February 2012 deconsolidation of CT Legacy Assets and portfolio repayments. Net interest income shifted from $11.0 million to a $7.3 million loss.
- Six-month other revenue increased 68%, largely due to higher special servicing fees from loan modifications. General and administrative expense fell 39%, partly because 2011 included restructuring bonuses and higher incentive-plan expense.
- Six-month 2012 earnings included a $146.4 million gain on deconsolidation of CT Legacy Assets and a $7.7 million fair-value gain on the investment in those assets. The 2011 comparison included a $251.0 million debt-extinguishment gain. These substantial, unusual items make reported net income comparisons less indicative of recurring results.
- Debt of consolidated securitization vehicles decreased from $1.211 billion at year-end 2011 to $518.1 million at June 30, 2012; CT Legacy REIT’s former debt was no longer consolidated after the refinancing and deconsolidation.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management said it was originating investments for its investment-management business, not its own balance sheet; first-half 2012 originations were $42 million in three transactions.
- CT Legacy Assets’ new JPMorgan repurchase facility was $124 million, with $96 million outstanding at June 30, 2012. It requires paydowns to $100 million by December 2012, $80 million by June 2013, and $40 million by December 2013; the rate may rise if specified paydown conditions are missed.
- CT CDO II had an event of default in March 2012 after it did not pay all interest due to its Class B Notes. CDO covenant breaches also redirect cash to senior debt amortization, reducing cash otherwise potentially available to Capital Trust. The company said it had no obligation to support the CDOs and had provided none.
- Within consolidated securitization vehicles, watch-list assets were $110 million, or 26.9% of interest-earning assets, versus $94 million, or 9.7%, at year-end. The securities portfolio’s weighted average rating declined to B+ from BB+; seven securities were downgraded and one upgraded in the first half.
- Capital Trust disclosed potential repurchase obligations of up to $790.7 million for representations and warranties on assets contributed to its CT CDOs. It reported no repurchase claims or notices to date; a required payment could materially affect liquidity.
- Management said maintaining REIT qualification had become more difficult because of the legacy-portfolio transfer and lack of replacement investment activity. The company was compliant as of June 30, 2012, but failure to qualify could lead to taxes and penalties.
- Contingent stock and cash awards for three senior executives would vest if a strategic transaction were consummated, or definitive documentation entered, by December 31, 2012. The filing does not give a transaction outcome.
- The company reported that it prevailed on its motion and was dismissed from a previously disclosed lawsuit brought by Philips International Investments, LLC. Management judged disclosure controls effective and reported no significant changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this is a Capital Trust, Inc. filing, not a Blackstone Mortgage Trust filing.
- Assess recurring earnings apart from the deconsolidation gain, fair-value changes, and prior-year debt-extinguishment gain.
- Track liquidity available at the parent level, the JPMorgan facility’s required paydowns, and restrictions on CT Legacy REIT distributions.
- Review CT CDO II’s default status, cash-flow diversion provisions, and the risk of CDO collateral or representation-and-warranty claims.
- Evaluate the quality and valuation assumptions for legacy assets, including watch-list loans, impaired collateral, and Level 3 fair-value estimates.
- Check progress on any strategic transaction and the contingent executive awards, as well as ongoing REIT qualification and future dividend capacity.