BLACKSTONE MORTGAGE TRUST, INC. annual report, FY2011

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Business context and reporting period

Filing identity: The supplied filing is Capital Trust, Inc. (NYSE: CT), not Blackstone Mortgage Trust, Inc. It is a Form 10-K for the fiscal year ended December 31, 2011; the filing also reports fourth-quarter results.

Capital Trust was a commercial real estate finance and investment management company operating as a REIT. Its model combined balance-sheet lending and securities investments with third-party fund management and special servicing. After its March 2011 restructuring, it focused on managing its investment platform and liquidating the legacy portfolio held by CT Legacy REIT.

Financial results and position

  • Revenue: 2011 total revenue was $132.3 million, down 24% from $173.7 million in 2010. Interest and related income declined 26% to $117.2 million. Management fees and other revenue were $15.1 million.
  • Profit and margins: GAAP net income was $252.3 million, compared with a $185.3 million loss in 2010; net income attributable to Capital Trust was $258.1 million. The 2011 result included a $271.0 million gain on extinguishment of debt. Net interest income fell 42% to $20.2 million. The company’s non-GAAP adjusted results reported $178.4 million of adjusted net income attributable to Capital Trust, or $7.45 diluted per share; adjusted measures are company-defined and exclude specified items and securitization-vehicle effects.
  • Fourth quarter: GAAP net loss was $8.3 million, or $0.37 per share. Adjusted net income was $8.5 million, or $0.36 diluted per share, driven in part by higher servicing fees and recoveries at CT Legacy REIT.
  • Credit costs: Net impairments recognized in earnings were $49.1 million, versus $72.4 million in 2010. The company recorded a $19.3 million net recovery of loan-loss provisions, compared with a $146.5 million net provision in 2010. Legacy REIT reported $64 million of impaired loans, including $22 million of non-performing loans, and $84 million of watch-list assets at year-end.
  • Cash flow and liquidity: Cash and cash equivalents were $34.8 million at year-end, up from $24.4 million. The audited cash flow statement reports $28.1 million of operating cash flow; MD&A separately states $28.9 million, so the narrative does not provide a consistent value. Investing activities provided $2.094 billion and financing activities used $2.112 billion, largely reflecting repayments within consolidated securitization vehicles. Management said near-term cash requirements could be met from available sources, but legacy portfolio cash is restricted by debt and distribution provisions.
  • Debt and equity: Capital Trust reported no recourse debt after the restructuring. At December 31, CT Legacy REIT had $58.5 million of repurchase obligations and a $65.3 million mezzanine loan; Capital Trust had $7.8 million of non-recourse secured notes. Consolidated securitization vehicles carried $1.211 billion of non-recourse debt. Consolidated assets were $1.366 billion and liabilities $1.495 billion; Capital Trust shareholders’ deficit was $110.4 million, improved from $411.2 million at year-end 2010. These consolidated figures include entities whose assets generally can only satisfy their own obligations.
  • Dividends and sensitivity: No common dividends were declared in 2011 or 2010. The filing estimates a 100-basis-point LIBOR change would affect net income by approximately $3.2 million.

Material changes versus the prior period

  • The March 31, 2011 restructuring transferred substantially all legacy interest-earning assets and legacy repurchase obligations to CT Legacy REIT, extinguished the senior credit facility and junior subordinated notes, and eliminated Capital Trust’s recourse debt. The transaction generated a substantial portion of 2011 reported profit through the debt-extinguishment gain.
  • CT Legacy REIT received $269.6 million of portfolio repayments after the restructuring, approximately 54% of its initial net book value. Its debt obligations declined 69% from the restructuring-date balance to $123.7 million at year-end.
  • Consolidated assets and liabilities fell sharply as securitization collateral and related debt repaid. This presentation includes non-recourse vehicles and is not equivalent to Capital Trust’s direct balance-sheet exposure.
  • Investment and servicing activity shifted further toward managed vehicles: 2011 originations for investment-management accounts were $219 million across 11 transactions, versus $306 million across 20 transactions in 2010. Special servicing revenue rose, while net interest income and base management fees declined.

Outlook, commentary, risks and unusual items

Management planned to continue managing and liquidating CT Legacy REIT’s portfolio, invest for existing managed vehicles, grow third-party special servicing, and consider resuming balance-sheet investment activity or raising capital. The company gave no quantified earnings or revenue guidance. CTOPI’s investment period was extended to September 2012. In February 2012, after year-end, CT Legacy REIT refinanced its JPMorgan repurchase facility and mezzanine loan with a new $124 million facility at LIBOR plus 5.50%, with required paydowns and potential rate increases.

  • Management cited ongoing commercial real estate weakness, market volatility, property-level cash-flow deterioration and constrained capital markets. Risks include borrower defaults, collateral losses, subordinated investment losses, illiquidity, refinancing and interest-rate exposure.
  • Three of four CT CDOs had breached tests that redirected cash otherwise payable to subordinate interests toward senior debt repayment; cash payments to Capital Trust were limited. The filing warns taxable income may arise without corresponding cash distributions.
  • REIT qualification and use of tax-loss carryforwards depend on technical requirements and ownership limits. The filing reported approximately $163.1 million of net operating loss carryforwards and $120.8 million of net capital loss carryforwards, with use subject to ownership-change restrictions.
  • A New York lawsuit sought $100 million in damages relating to a property acquisition by a managed fund. Capital Trust denied the allegations and said its motion to dismiss was pending.
  • The 2011 result included the $271.0 million debt-extinguishment gain; the filing also notes restructuring awards, non-cash incentive-plan expense, impairment judgments, and hedge-accounting changes.

Most important facts for investors to verify

  1. Confirm the issuer: this filing is for Capital Trust, Inc., not Blackstone Mortgage Trust, Inc.
  2. Reconcile reported GAAP profit to the $271.0 million restructuring-related gain and review the company’s adjusted-results definitions.
  3. Distinguish direct parent liquidity and debt from restricted CT Legacy REIT balances and non-recourse securitization-vehicle assets and liabilities.
  4. Review the February 2012 $124 million refinancing terms, paydown hurdles, rate step-ups and collateral pledge.
  5. Assess impaired and non-performing loans, watch-list assets, CDO cash-flow diversions, potential representation-and-warranty repurchases and the $100 million lawsuit.
  6. Check REIT qualification, NOL/NCL availability, dividend capacity and potential dilution from 3.48 million warrants exercisable beginning March 16, 2012.