Business context and reporting period
This is Capital Trust, Inc.’s Form 10-Q for the quarter ended September 30, 2012—not a filing under the Blackstone Mortgage Trust name. Capital Trust was a commercial real estate finance and investment-management company operating as a REIT. Following its 2011 debt restructuring, it focused on managing its legacy portfolio and third-party investment mandates. Financial statements are unaudited; cash-flow and nine-month results cover the nine months ended September 30.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $6.9m | $25.6m | $28.4m | $95.2m |
| Interest expense | $5.1m | $21.8m | $33.9m | $80.4m |
| Net interest income (expense) | $1.8m | $3.8m | $(5.5)m | $14.8m |
| Other revenues | $3.8m | $3.2m | $10.3m | $7.1m |
| Net income | $12.9m | $8.3m | $156.9m | $268.4m |
| Net income attributable to Capital Trust | $7.0m | $13.7m | $75.8m | $266.5m |
| Diluted EPS | $0.28 | $0.57 | $3.10 | $11.08 |
- Cash flow: Nine-month operating cash flow was $11.6m (prior year $19.3m); investing cash flow was $126.0m (prior year $1.947bn); financing cash flow was $(133.6)m (prior year $(1.962)bn). Cash increased $4.0m to $38.9m.
- Balance sheet and liquidity: At September 30, total assets were $581.2m versus $1.366bn at year-end 2011; total liabilities were $543.2m and total equity $38.0m. Capital Trust shareholders’ deficit was $24.6m, offset by $62.5m of noncontrolling interests. Cash included $16.1m of restricted cash held by CT Legacy REIT, not available for general corporate use.
- Debt: Reported debt included $8.3m of secured notes and $497.4m of non-recourse securitized obligations. The secured notes carry 8.2% interest, mature in 2016, and require a potential total repayment of $11.1m including the prepayment premium. Securitization debt is generally payable only from the related vehicles’ assets.
- Margins and rate exposure: Net interest income turned negative for the nine-month period. The filing does not provide a single company-wide operating margin. Management estimated that a 100-basis-point LIBOR change would affect net income by approximately $0.4m.
Material changes versus comparable periods
- Nine-month net income fell 41.6%, while income attributable to Capital Trust fell 71.5%. Comparisons were materially affected by unusual items: 2012 included a $146.4m gain on deconsolidation of CT Legacy Asset and a $19.6m fair-value gain; 2011 included a $271.0m debt-extinguishment gain.
- Interest income and expense declined sharply as legacy assets and liabilities were removed from consolidation and portfolio balances contracted. Nine-month net interest income declined by $20.3m year over year.
- Servicing fees rose to $5.6m from $2.2m for nine months, primarily from loan modification activity. Management fees were slightly lower at $4.7m versus $4.9m.
- Consolidated securitized debt declined to $497.4m from $1.211bn at December 31, 2011. The reduction in reported assets and liabilities largely reflects the February 2012 deconsolidation of CT Legacy Asset, rather than solely portfolio cash realization.
- Portfolio contraction was accompanied by material credit concerns: 35.8% of consolidated securitization vehicles’ interest-earning assets were classified as watch-list assets at September 30, versus 9.7% at year-end 2011.
Outlook, management commentary, risks and unusual items
- Proposed Blackstone transaction: A Blackstone affiliate agreed to acquire CTIMCO’s investment-management and special-servicing businesses and related fund co-investments for $20.6m, and to buy 5m Capital Trust shares for $10.0m ($2.00 per share). The proposal included a new external management agreement and a conditional $2.00-per-share special cash dividend, subject to closing conditions and shareholder approval. After the transaction, Capital Trust expected to retain its cash balance net of transaction costs and dividend, its CT Legacy REIT interest, CTOPI carried interest, and subordinate interests in three CT CDOs. The filing does not establish that the transaction had closed.
- Legacy portfolio and CDOs: CT Legacy Asset was carried as a $100.1m fair-value investment, based on discounted estimated recoveries and significant unobservable assumptions. The company reported that CT CDO I and II had breached tests that redirect cash to senior debt amortization; CT CDO II was reported in default in March 2012 after missing interest due to its Class B Notes. The company said it had not provided financial support.
- Contingencies: Representations and warranties on assets contributed to CT CDOs could require repurchases up to a stated maximum face amount of $722.5m. Capital Trust reported no repurchase demands or notices of alleged breaches to date; any required payment could materially affect liquidity. A lender’s suit concerning a defaulted loan and CTIMCO’s special-servicer role was pending, with a motion to dismiss pending.
- Other risks: Management cited the ability to maintain REIT qualification, credit and property-market deterioration, constrained access to CT Legacy REIT cash, and possible CFTC/CPO regulation relating to swaps. The company stated that it remained compliant with REIT requirements at September 30.
- Subsequent event: On November 8, 2012, all outstanding warrants were exercised cashlessly, resulting in issuance of 1,690,466 common shares. No common dividends had been declared during the first nine months of 2012.
Important facts for investors to verify
- Whether the proposed Blackstone transaction received shareholder approval and closed, and the final terms, timing, and funding of the special dividend.
- How the post-transaction company’s recurring fee income, costs, management fees, and liquidity compare with the pre-transaction business.
- CT Legacy Asset’s realized recoveries versus the $100.1m carrying value, including the valuation assumptions and the repayment timetable for its separate repurchase facility.
- The performance and covenant status of the remaining CT CDOs, especially CT CDO II’s reported default, cash-flow diversions, and the impact on Capital Trust’s retained interests.
- Any developments in the CDO representation-and-warranty exposure or the pending special-servicer litigation, and any consequences of the warrant-related share issuance for ownership and per-share measures.