Filing summary
Entity mismatch: The supplied filing is Capital Trust, Inc. (NYSE: CT), not Blackstone Mortgage Trust, Inc. It is a Form 10-Q for the quarter ended September 30, 2011, filed November 1, 2011. The figures below summarize the filing actually provided.
Business context and reporting period
Capital Trust was a commercial real estate finance and investment management company operating as a REIT. In March 2011, it restructured its debt, transferred most legacy interest-earning assets to CT Legacy REIT, and shifted its focus toward managing its investment-management platform and liquidating the legacy portfolio. CT Legacy REIT was 52% owned by Capital Trust; its liabilities and those of consolidated securitization vehicles were generally non-recourse to the parent.
Key financial metrics
| Metric | Q3 2011 | Nine months 2011 | Comparable 2010 |
|---|---|---|---|
| Interest and related income | $25.6 million | $95.2 million | $40.3 million and $119.8 million |
| Net interest income | $3.8 million | $14.8 million | $8.7 million and $25.3 million |
| Net income (loss), consolidated | $8.3 million | $268.4 million | $(134.7) million and $(195.3) million |
| Net income (loss) attributable to Capital Trust | $13.7 million | $266.5 million | $(134.7) million and $(195.3) million |
| Diluted earnings (loss) per share | $0.57 | $11.08 | $(6.02) and $(8.73) |
| Operating cash flow | Not separately provided for the quarter | $19.3 million | $28.2 million |
Quarterly net interest income fell 56% year over year; nine-month net interest income fell 42%. The filing attributes the decline primarily to a sharply smaller portfolio and increased non-performing loans, partly offset by lower interest expense. The filing does not provide a clear consolidated operating-margin measure.
Nine-month results included a $271.0 million gain on extinguishment of debt: $174.8 million from restructuring parent debt, $75.0 million from terminating an impaired participation liability, and $21.2 million from realized losses in securitization vehicles. The filing also reported $39.8 million of net impairments in earnings and a $34.4 million recovery of loan-loss provisions. The company’s non-GAAP adjusted results reported $169.9 million of nine-month net income, but a $3.1 million adjusted net loss for Q3; these measures exclude or re-present certain items and are not substitutes for GAAP results.
Balance sheet, debt and liquidity
- At September 30, 2011, total assets were $1.54 billion and total liabilities were $1.65 billion; GAAP shareholders’ deficit was $110.9 million, including $10.7 million of noncontrolling-interest deficit. Parent book value per share was $(4.40); the company’s adjusted, non-GAAP book value per share was $3.91.
- Cash and cash equivalents were $28.2 million, including $13.7 million of restricted CT Legacy REIT cash unavailable to the parent. Cash increased $3.8 million over the nine-month period.
- Parent-level debt was $7.7 million of non-recourse secured notes. CT Legacy REIT had $66.6 million of repurchase debt and a $64.1 million mezzanine loan, both non-recourse to the parent except limited carve-outs. Consolidated securitization debt was $1.35 billion and generally non-recourse. Thus, consolidated debt totals should not be read as parent recourse debt.
- CT Legacy REIT’s mezzanine loan carried a 15% rate, with up to 7% deferrable, and matured in 2016. Its remaining repurchase facility was due in 2014 and had required repayment targets. Common dividends from CT Legacy REIT were restricted until its mezzanine loan and repurchase obligations were repaid.
- Cash flows were materially affected by consolidated vehicles: investing activities provided $1.95 billion and financing activities used $1.96 billion, largely reflecting collections and repayments of securitized assets and debt. The filing cautions that gross VIE cash flows do not represent parent-level cash availability.
Material changes, outlook and risks
- The March 2011 restructuring eliminated the parent’s recourse debt, extinguished its senior credit facility and junior subordinated notes, and shifted most legacy assets and related obligations to CT Legacy REIT. Legacy portfolio repayments in Q2 and Q3 totaled $265.9 million, about half its initial net book value.
- Management said current liquidity sources were expected to meet near-term cash requirements. Sources included parent cash, CT Legacy REIT preferred dividends initially set at $7.5 million annually, management fees and servicing fees. Management also cautioned that portfolio proceeds generally could not be distributed to common shareholders until CT Legacy REIT’s debt was repaid. No quantified earnings guidance was provided.
- Credit quality remains a key concern. At quarter-end, 6 of CT Legacy REIT’s 18 loans were impaired, with $237.8 million of loan-loss provisions; 3 loans with $43.5 million net book value were in maturity default but had no provision. CT Legacy REIT’s watch-list assets were $119 million, or 49.2% of its interest-earning assets under the filing’s measure. In consolidated securitization vehicles, watch-list assets were $321 million, or 27.2% of interest-earning assets.
- Interest-rate swaps at CT Legacy REIT ceased qualifying as cash-flow hedges after debt repayments; fair-value changes thereafter affected earnings. Management estimated a 100-basis-point LIBOR change would affect net income by approximately $4.3 million. Securitization covenant breaches also redirected cash otherwise potentially payable to the company toward senior note repayment.
- The company disclosed potential repurchase obligations of up to $907.9 million if representations or warranties on assets contributed to its four CT CDOs were found breached. It had received no such notices and had not been required to repurchase assets, but any required payment could materially affect liquidity.
- A plaintiff sought $100 million in a lawsuit related to a real estate acquisition by a fund managed by an affiliate. Capital Trust said it was vigorously defending the claims and considered them without merit; its motion to dismiss was pending.
- The company reported no dividends declared in the first nine months of 2011. It was in compliance with REIT requirements at quarter-end but warned that maintaining REIT status had become more difficult following the restructuring and reduced investment activity. It also expected approximately $2.0 million of alternative minimum taxes related to use of tax-loss carryforwards.
Most important facts for investors to verify
- Confirm the issuer identity: the filing is for Capital Trust, Inc., not Blackstone Mortgage Trust, Inc.
- Separate parent liquidity and recourse obligations from CT Legacy REIT and securitization-vehicle balances; verify dividend restrictions and debt repayment targets.
- Assess the sustainability of earnings apart from the $271.0 million debt-extinguishment gain and other impairment, recovery and restructuring items.
- Review loan defaults, impaired balances, reserves, watch-list exposures and the assumptions supporting collateral values and recoveries.
- Evaluate the potential CDO representation-and-warranty exposure and the $100 million lawsuit, including any subsequent developments.
- Check whether the expected preferred-dividend receipts and management/servicing fees are sufficient to fund parent costs, taxes and capital commitments.