-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, REdZnvBcdWsOmzxikv32+aBxrWpokOfogZ1MRgH6256dN48/C93CxiwaO84H5EC1 L+zThO16u9zVnvxG90973w== 0001116679-05-002086.txt : 20050809 0001116679-05-002086.hdr.sgml : 20050809 20050809163046 ACCESSION NUMBER: 0001116679-05-002086 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14788 FILM NUMBER: 051010296 BUSINESS ADDRESS: STREET 1: 410 PARK AVENUE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: PAUL, HASTINGS, JANOFSKY & WALKER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 cap10q-080905.txt To be filed with the Securities and Exchange Commission on August 9, 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 June 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 ----- ----- 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 August 8, 2005 was 15,118,238. CAPITAL TRUST, INC. INDEX
Part I. Financial Information Item 1: Financial Statements 1 Consolidated Balance Sheets - June 30, 2005 (unaudited) and December 31, 2004 (audited) 1 Consolidated Statements of Income - Three and Six Months Ended June 30, 2005 and 2004 (unaudited) 2 Consolidated Statements of Changes in Shareholders' Equity - Six Months Ended June 30, 2005 and 2004 (unaudited) 3 Consolidated Statements of Cash Flows - Six Months Ended June 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
Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (in thousands)
June 30, December 31, 2005 2004 -------------------- ------------------- (unaudited) (audited) Assets Cash and cash equivalents $ 14,487 $ 24,583 Restricted cash 2,827 611 Commercial mortgage-backed securities available-for-sale, at fair value 257,755 247,765 Loans receivable 713,487 556,164 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 20,732 21,376 "Funds") Deposits and other receivables 53 10,282 Accrued interest receivable 5,420 4,029 Interest rate hedge assets -- 194 Deferred income taxes 3,627 5,623 Prepaid and other assets 10,749 7,139 -------------------- ------------------- Total assets $ 1,033,137 $ 877,766 ==================== =================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 15,237 $ 17,388 Credit facility 16,991 65,176 Repurchase obligations 127,024 225,091 Collateralized debt obligations ("CDOs") 551,691 252,778 Interest rate hedge liabilities 2,381 -- Deferred origination fees and other revenue 1,138 836 -------------------- ------------------- Total liabilities 714,462 561,269 -------------------- ------------------- Shareholders' equity: Class A common stock, $0.01 par value, 100,000 shares authorized, 14,797 and 14,769 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively ("class A common stock") 148 148 Restricted class A common stock, $0.01 par value, 321 and 283 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively ("restricted class A common stock" and together with class A common stock, 3 3 "common stock") Additional paid-in capital 323,385 321,937 Accumulated other comprehensive gain 3,177 3,815 Accumulated deficit (8,038) (9,406) -------------------- ------------------- Total shareholders' equity 318,675 316,497 -------------------- ------------------- Total liabilities and shareholders' equity $ 1,033,137 $ 877,766 ==================== ===================
See accompanying notes to unaudited consolidated financial statements. -1- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three and Six Months Ended June 30, 2005 and 2004 (in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- -------------------------------------- 2005 2004 2005 2004 -------------- ----------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 18,912 $ 9,172 $ 34,608 $ 18,190 Less: Interest and related expenses on secured debt 7,631 2,454 13,383 5,090 Less: Interest and related expenses on step up convertible junior subordinated debentures -- 2,432 -- 4,865 -------------- ----------------- ----------------- ----------------- Income from loans and other investments, net 11,281 4,286 21,225 8,235 -------------- ----------------- ----------------- ----------------- Other revenues: Management and advisory fees from Funds 2,723 2,031 10,627 4,115 Income/(loss) from equity investments in Funds 120 431 (1,302) 825 Gain on sales of investments -- 300 -- 300 Other interest income 212 8 237 16 -------------- ----------------- ----------------- ----------------- Total other revenues 3,055 2,770 9,562 5,256 -------------- ----------------- ----------------- ----------------- Other expenses: General and administrative 5,314 3,163 11,069 6,131 Depreciation and amortization 280 274 559 548 -------------- ----------------- ----------------- ----------------- Total other expenses 5,594 3,437 11,628 6,679 -------------- ----------------- ----------------- ----------------- Income before income taxes 8,742 3,619 19,159 6,812 Provision for income taxes (106) 88 1,161 229 -------------- ----------------- ----------------- ----------------- Net income $ 8,848 $ 3,531 $ 17,998 $ 6,583 ============== ================= ================= ================= Per share information: Net earnings per share of common stock: Basic $ 0.59 $ 0.48 $ 1.19 $ 0.94 ============== ================= ================= ================= Diluted $ 0.58 $ 0.47 $ 1.17 $ 0.92 ============== ================= ================= ================= Weighted average shares of common stock outstanding: Basic 15,117,066 7,414,509 15,102,492 6,998,960 ============== ================= ================= ================= Diluted 15,375,401 7,588,795 15,346,720 7,168,446 ============== ================= ================= ================= Dividends declared per share of common stock $ 0.55 $ 0.45 $ 1.10 $ 0.90 ============== ================= ================= =================
See accompanying notes to unaudited consolidated financial statements. -2- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the Six Months Ended June 30, 2005 and 2004 (in thousands) (unaudited)
Restricted Accumulated Class A Class A Additional Other Comprehensive Common Common Paid-In Unearned Comprehensive Income/(Loss) Stock Stock Capital Compensation Income/(Loss) ---------------- ----------------------------------------------------------------- Balance at January 1, 2004 $ 65 $ -- $ 141,402 $ (247) $ (33,880) Net income $ 6,583 -- -- -- -- -- Unrealized gain on derivative financial instruments 2,903 -- -- -- -- 2,903 Unrealized gain on available-for-sale securities 308 -- -- -- -- 308 Implementation of SFAS No. 123 -- -- -- (247) 247 -- Issuance of restricted class A common stock -- -- 1 (1) -- -- Sale of shares of class A common stock under stock option agreements -- 1 -- 707 -- -- Conversion of class A common stock units to class A common stock -- -- -- 410 -- -- Vesting of restricted class A common stock to unrestricted class A common stock -- -- -- -- -- -- Restricted class A common stock earned -- -- -- 354 -- -- Stock options expensed under SFAS No. 123 -- -- -- 45 -- -- Shares of class A common stock issued in direct public offering -- 16 -- 37,963 -- -- Dividends declared on class A common stock -- -- -- -- -- -- ---------------- ----------------------------------------------------------------- Balance at June 30, 2004 $ 9,794 $ 82 $ 1 $ 180,633 $ -- $ (30,669) ================ ================================================================= Balance at January 1, 2005 $ 148 $ 3 $ 321,937 $ -- $ 3,815 Net income $ 17,998 -- -- -- -- -- Unrealized loss on derivative financial instruments (2,575) -- -- -- -- (2,575) Unrealized gain on available-for-sale securities 1,937 -- -- -- -- 1,937 Sale of shares of class A common stock under stock option agreements -- -- -- 183 -- -- Issuance of restricted class A common stock -- -- -- -- -- -- Vesting of restricted class A common stock to unrestricted class A common stock -- -- -- -- -- -- Restricted class A common stock earned -- -- -- 1,285 -- -- Restricted class A common stock forfeited upon resignation by holder -- -- -- (20) -- -- Dividends declared on class A common stock -- -- -- -- -- -- ---------------- ----------------------------------------------------------------- Balance at June 30, 2005 $ 17,360 $ 148 $ 3 $ 323,385 $ -- $ 3,177 ================ ================================================================= Accumulated Deficit Total ----------------------------- Balance at January 1, 2004 $ (11,323) $ 96,017 Net income 6,583 6,583 Unrealized gain on derivative financial instruments -- 2,903 Unrealized gain on available-for-sale securities -- 308 Implementation of SFAS No. 123 -- -- Issuance of restricted class A common stock -- -- Sale of shares of class A common stock under stock option agreements -- 708 Conversion of class A common stock units to class A common stock -- 410 Vesting of restricted class A common stock to unrestricted class A common stock -- -- Restricted class A common stock earned -- 354 Stock options expensed under SFAS No. 123 -- 45 Shares of class A common stock issued in direct public offering -- 37,979 Dividends declared on class A common stock (6,722) (6,722) ----------------------------- Balance at June 30, 2004 $ (11,462) $ 138,585 ============================= Balance at January 1, 2005 $ (9,406) $ 316,497 Net income 17,998 17,998 Unrealized loss on derivative financial instruments -- (2,575) Unrealized gain on available-for-sale securities -- 1,937 Sale of shares of class A common stock under stock option agreements -- 183 Issuance of restricted class A common stock -- -- Vesting of restricted class A common stock to unrestricted class A common stock -- -- Restricted class A common stock earned -- 1,285 Restricted class A common stock forfeited upon resignation by holder -- (20) Dividends declared on class A common stock (16,630) (16,630) ----------------------------- Balance at June 30, 2005 $ (8,038) $ 318,675 =============================
See accompanying notes to unaudited consolidated financial statements. -3- Capital Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six Months ended June 30, 2005 and 2004 (in thousands) (unaudited)
2005 2004 ---------------- ----------------- Cash flows from operating activities: Net income $ 17,998 $ 6,583 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes 1,996 (1,502) Depreciation and amortization 559 548 Loss/(income) from equity investments in Funds 1,302 (825) Restricted class A common stock earned 1,285 354 Gain on sale of investments -- (300) Amortization of premiums and accretion of discounts on loans and investments, net (1,192) (794) Accretion of discounts and fees on convertible trust preferred securities or convertible step up junior subordinated debentures, net -- 239 Expenses reversed on cancellation of restricted stock previously issued (20) -- Stock option expense -- 45 Changes in assets and liabilities, net: Deposits and other receivables 229 342 Accrued interest receivable (1,391) 1,100 Prepaid and other assets 1,909 1,119 Deferred origination fees and other revenue 302 (1,110) Accounts payable and accrued expenses (2,940) (1,338) ---------------- ----------------- Net cash provided by operating activities 20,037 4,461 ---------------- ----------------- Cash flows from investing activities: Purchases of commercial mortgage-backed securities (15,156) (35,037) Principal collections on and proceeds from sale of commercial mortgage-backed securities 8,008 -- Principal collections and proceeds from sales on available-for-sale -- 19,561 securities Origination and purchase of loans receivable (357,644) (47,093) Principal collections and proceeds from sale of loans receivable 210,608 24,346 Purchase of total return swap (4,000) -- Equity investments in Funds (4,660) (3,500) Return of capital from Funds 3,504 4,621 Increase in restricted cash (2,216) -- Purchases of equipment and leasehold improvements (20) (65) ---------------- ----------------- Net cash used in investing activities (161,576) (37,167) ---------------- ----------------- Cash flows from financing activities: Proceeds from repurchase obligations 256,491 60,721 Repayment of repurchase obligations (354,558) (28,671) Proceeds from credit facilities 88,891 89,500 Repayment of credit facilities (137,076) (78,368) Repayment of term redeemable securities contract -- (11,651) Proceeds from issuance of CDOs 298,913 -- Payment of deferred financing costs (5,560) (457) Dividends paid on class A common stock (15,841) (5,928) Sale of shares of class A common stock under stock option agreements 183 708 Proceeds from sale of shares of class A common stock -- 37,979 ---------------- ----------------- Net cash provided by financing activities 131,443 63,833 ---------------- ----------------- Net increase (decrease) in cash and cash equivalents (10,096) 31,127 Cash and cash equivalents at beginning of year 24,583 8,738 ---------------- ----------------- Cash and cash equivalents at end of period $ 14,487 $ 39,865 ================ =================
See accompanying notes to unaudited consolidated financial statements -4- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2005 and 2004 (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. We invest in loans, debt securities and related instruments for our own account and on behalf of private equity funds that we manage. To date, our investment programs have focused on loans and securities backed by income-producing commercial real estate assets with the objective of achieving attractive risk adjusted returns with low volatility. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes. 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 months ended June 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. 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 $2,827,000 at June 30, 2005 is on deposit with the trustee for the CDOs and will be used to purchase replacement collateral for the CDOs. -5- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 5. Commercial Mortgage-Backed Securities During the six months ended June 30, 2005, we made two investments in commercial mortgage-backed securities, or CMBS. The first security had a face value and purchase price of $5,000,000 and bears interest at a variable rate equal to the London Interbank Offered Rate, or LIBOR, plus 2.10%. The second security had a face value of $10,167,000 and purchase price of $10,156,000 and bears interest at a variable rate equal to LIBOR plus 2.00%. In addition, one CMBS investment with a face value of $1,750,000 was repaid in full during the period. At June 30, 2005, we held twenty investments in fifteen separate issues of CMBS with an aggregate face value of $278,916,000. CMBS with a face value of $76,215,000 earn interest at variable rates which average LIBOR plus 2.23% (5.45% at June 30, 2005). The remaining CMBS, $202,701,000 face value, earn interest at fixed rates averaging 7.59% of face value. In the aggregate, we purchased the CMBS at discounts. As of June 30, 2005, the remaining discount to be amortized into income over the remaining lives of the securities was $21,444,000. At June 30, 2005, including the amortization of the discount as income, the entire CMBS portfolio earned interest at a blended rate of 8.41% of face value less the unamortized discount. As of June 30, 2005, the securities were carried at market value of $257,755,000, reflecting a $5,558,000 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.. 6. Loans Receivable At June 30, 2005 and December 31, 2004, our loans receivable consisted of the following (in thousands): June 30, December 31, 2005 2004 ------------------- ------------------- First mortgage loans $ 3,038 $ 3,038 Property mezzanine loans 137,407 159,506 B Notes 573,042 393,620 ------------------- ------------------- Total loans $ 713,487 $ 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 $514,000 has not been recorded for the six months ended June 30, 2005. All other loans are performing in accordance with the terms of the loan agreements. During the six months ended June 30, 2005, we originated two property mezzanine loans for $50,010,000 (of which $21,210,000 was funded during the six months ended June 30, 2005) and 23 B Notes for $346,434,000. In addition, wereceived partial repayments on four property mezzanine loans and 26 B Notes totaling $36,358,000 and three property mezzanine loans and eleven B Notes totaling $174,250,000 were satisfied and repaid. We have outstanding unfunded loan commitments at June 30, 2005 of $28,800,000. At June 30, 2005, the weighted average interest rates in effect, including amortization of fees and premiums, for our performing loans receivable were as follows: Property mezzanine loans 9.32% B Notes 6.89% Total Loans 7.36% At June 30, 2005, $608,925,000 (86%) of the aforementioned performing loans bear interest at floating rates ranging from LIBOR plus 1.60% to LIBOR plus 8.61%. The remaining $101,524,000 (14%) of loans bear interest at fixed rates ranging from 7.00% to 11.67%. -6- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 7. Total Return Swap During the six months ended June 30, 2005, we entered into a total return swap agreement. Under the terms of the agreement, we have posted $4 million of cash collateral as security for our $20 million synthetic interest in an underlying referenced loan that is secured by shares of a publicly traded REIT. We receive interest at LIBOR flaton the $4 million cash collateral balance and LIBOR plus 3.75% on our $20 million interest in the referenced loan and pay LIBOR plus 1.00% on the $20 million referenced loan. At June 30, 2005, we are receiving an effective rate of LIBOR plus 13.75% on the $4 million cash collateral balance (17.09%). 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. 8. Equity investment in Funds During the six months ended June 30, 2005, through the general partner of Fund II, we received $7,414,000 of incentive management fees from Fund II. In connection with 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 $2,310,000, of which $1,155,000 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 $1,017,000, reflecting our proportionate share of the incentive management payment. 9. Long-Term Debt Credit Facility At June 30, 2005, we have borrowed $16,991,000 under a $150.0 million credit facility at an average borrowing rate of LIBOR plus 1.35% (4.69% at June 30, 2005). Assuming no additional utilization under the credit facility and including the amortization of all fees paid and capitalized over the remaining term of the credit facility, the all-in effective borrowing cost would have been 9.87% at June 30, 2005. We pledged $97,123,000 of assets as collateral for the borrowing against such credit facility. At June 30, 2005, the available credit remaining under the credit facility was $133.0 million of which $42.2 million may be borrowed without the need to pledge additional assets as collateral. Repurchase Obligations On March 4, 2005, we entered into a new master repurchase agreement with a securities dealer that provides us with the right to finance up to $75,000,000 of the value of certain assets. At June 30, 2005, we have pledged three assets with a book value of $36,856,000 as collateral for future repurchase obligation financing and have drawn upon one asset in the amount of $4,250,000. If we fully drew upon these pledged assets, we could obtain an additional $27,077,000 of financing. The master repurchase agreement terminates on March 4, 2010, and bears interest at specified rates over LIBOR based upon each asset financed. At June 30, 2005, we were party to four repurchase agreements with total commitments of $425 million and had total outstanding borrowings of $127,024,000. The average borrowing rate in effect for all the repurchase agreements outstanding at June 30, 2005 was LIBOR plus 0.90% (4.24% at June 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 would have been 4.39% at June 30, 2005. If all of the assets pledged under repurchase agreements were drawn upon, we could obtain an additional $29,685,000 of financing. -7- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) Collateralized Debt Obligations On March 15, 2005, we issued our second collateralized debt obligation. The issuance was secured by a pool of $337,755,000 of mezzanine loans, B Notes and CMBS owned by us. Investment grade rated notes with a face value of $298,913,000 were issued by our wholly-owned subsidiary, Capital Trust RE CDO 2005-1 Ltd., and were sold to third parties. All of the unrated and below investment grade rated notes and the preferred equity interests were retained by us. The notes sold were issued with floating rate coupons with a combined weighted average rate of LIBOR plus 0.49% (3.75% at June 30, 2005) and have a remaining expected average maturity of 7.3 years as of June 30, 2005. 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% (3.97% at June 30, 2005). For accounting purposes, the CDO is consolidated in our financial statements. Proceeds from the sale of the investment grade tranches were used to pay down the credit facility and repurchase obligations. The assets pledged as collateral for the CDO were contributed from our existing portfolio of loans and CMBS. 10. Derivative Financial Instruments The following table summarizes the notional and fair values of our derivative financial instruments at June 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.
Interest Hedge Type Notional Value Rate Maturity Fair Value - ----------- -------------------- ----------------- ---------------- ------------ --------------- Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $ (763,000) Swap Cash Flow Hedge 74,094,000 4.5840% 2014 (1,796,000) Swap Cash Flow Hedge 19,323,000 3.9500% 2011 101,000 Swap Cash Flow Hedge 5,517,000 3.1175% 2007 77,000
During the six months ended June 30, 2005, we received $373,000 from our counterparty in settlement of an interest rate swap, which has been deferred and is being amortized over the remaining life of the previously hedged item on a level yield basis. We also entered into a new cash flow hedge during the first quarter of 2005. On June 30, 2005, the derivative financial instruments were reported at their fair value of ($2,381,000) as interest rate hedge liabilities. -8- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 11. Earnings Per Share The following table sets forth the calculation of Basic and Diluted EPS for the six months ended June 30, 2005 and 2004:
Six Months Ended June 30, 2005 Six Months Ended June 30, 2004 --------------------------------------------- ------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount --------------- ------------- --------------- ------------- ----------------- ----------- Basic EPS: Net earnings per share of common stock $ 17,998,000 15,102,492 $ 1.19 $ 6,583,000 6,998,960 $ 0.94 ============== =========== Effect of Dilutive Securities Options outstanding for the purchase of common stock -- 189,210 -- 118,642 Warrants outstanding for purchase of common stock -- -- -- 4,672 Stock units outstanding convertible to shares of common stock -- 55,018 -- 46,172 --------------- -------------- -------------- ----------------- Diluted EPS: Net earnings per share of common stock and assumed conversions $ 17,998,000 15,346,720 $ 1.17 $ 6,583,000 7,168,446 $ 0.92 =============== ============== ============== ============= ================= =========== The following table sets forth the calculation of Basic and Diluted EPS for the three months ended June 30, 2005 and 2004: Three Months Ended June 30, 2005 Three Months Ended June 30, 2004 --------------------------------------------- ------------------------------------------- Per Share Per Share Net Income Shares Amount Net Income Shares Amount --------------- ------------- --------------- ------------- ----------------- ----------- Basic EPS: Net earnings per share of common stock $ 8,848,000 15,117,066 $ 0.59 $ 3,531,000 7,414,509 $ 0.48 ============== =========== Effect of Dilutive Securities Options outstanding for the purchase of common stock -- 202,278 -- 117,564 Warrants outstanding for purchase of common stock -- -- -- 9,343 Stock units outstanding convertible to shares of common stock -- 56,057 -- 47,379 --------------- -------------- -------------- ----------------- Diluted EPS: Net earnings per share of common stock and assumed conversions $ 8,848,000 15,375,401 $ 0.58 $ 3,531,000 7,588,795 $ 0.47 =============== ============== ============== ============= ================= ===========
-9- Capital Trust, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (unaudited) 12. 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 June 30, 2005, we were in compliance with all REIT requirements. During the six months ended June 30, 2005, we recorded $1,161,000 of income tax expense for income attributable to taxable REIT subsidiaries. Our effective tax rate for the six months ended June 30, 2005 attributable to taxable REIT subsidiaries was 42.4%. 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. 13. 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 June 17, 2005, we declared a dividend of approximately $8,315,000, or $0.55 per share of common stock applicable to the three-month period ended June 30, 2005, payable on July 15, 2005 to shareholders of record on June 30, 2005. 14. Employee Benefit Plans Amended and Restated 1997 Long-Term Incentive Stock Plan During the six months ended June 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 June 30, 2005:
Weighted Average Options Exercise Price Exercise Price Outstanding per Share per Share ------------------- ------------------------- ------------------ Outstanding at January 1, 2005 458,998 $12.375 - $30.00 $ 19.67 Granted in 2005 -- -- -- Exercised in 2005 (13,123) $12.375 - $18.00 13.96 Canceled in 2005 -- -- -- ------------------- ------------------ Outstanding at June 30, 2005 445,875 $12.375 - $30.00 $ 19.83 =================== ==================
At June 30, 2005, all of the options are exercisable. At June 30, 2005, the outstanding options have various remaining contractual exercise periods ranging from 0.50 to 6.59 years with a weighted average life of 3.95 years. -10- 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 second quarter of 2005, 3,220 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 $20,000 of compensation expense. Compensation expense for stock awards is recognized on the accelerated attribution method under Financial Accounting Standards Board Interpretation No. 28. 15. Supplemental Disclosures for Consolidated Statements of Cash Flows Interest paid on our outstanding debt and convertible junior subordinated debentures during the six months ended June 30, 2005 and 2004 was $13,152,000 and $9,643,000, respectively. We paid income taxes during the six months ended June 30, 2005 and 2004 of $5,000 and $1,910,000, respectively. 16. 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. -11- 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 six months ended, and as of, June 30, 2005, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ---------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 34,608 $ -- $ -- $ 34,608 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 13,383 -- -- 13,383 ------------------- ---------------- ----------------- ----------------- Income from loans and other investments, net 21,225 -- -- 21,225 ------------------- ---------------- ----------------- ----------------- Other revenues: Management and advisory fees -- 13,007 (2,380) 10,627 Income/(loss) from equity investments in Funds 100 (1,402) -- (1,302) Other interest income 207 38 (8) 237 ------------------- ---------------- ----------------- ----------------- Total other revenues 307 11,643 (2,388) 9,562 ------------------- ---------------- ----------------- ----------------- Other expenses: General and administrative 4,685 8,764 (2,380) 11,069 Other interest expense 8 -- (8) -- Depreciation and amortization 422 137 -- 559 ------------------- ---------------- ----------------- ----------------- Total other expenses 5,115 8,901 (2,388) 11,628 ------------------- ---------------- ----------------- ----------------- Income before income taxes 16,417 2,742 -- 19,159 Provision for income taxes -- 1,161 -- 1,161 ------------------- ---------------- ----------------- ----------------- Net income allocable to class A common stock $ 16,417 $ 1,581 $ -- $ 17,998 =================== ================ ================= ================= Total Assets $ 1,033,005 $ 11,353 $ (11,221) $ 1,033,137 =================== ================ ================= =================
-12- 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 six months ended, and as of, June 30, 2004, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ---------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 18,190 $ -- $ -- $ 18,190 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 5,090 -- -- 5,090 Less: Interest and related expenses on convertible junior subordinated debentures 4,865 -- -- 4,865 ------------------- ---------------- ----------------- ----------------- Income from loans and other investments, net 8,235 -- -- 8,235 ------------------- ---------------- ----------------- ----------------- Other revenues: Management and advisory fees -- 5,519 (1,404) 4,115 Income/(loss) from equity investments in Funds 1,011 (186) -- 825 Gain on sales of investments 300 -- -- 300 Other interest income 10 200 (194) 16 ------------------- ---------------- ----------------- ----------------- Total other revenues 1,321 5,533 (1,598) 5,256 ------------------- ---------------- ----------------- ----------------- Other expenses: General and administrative 2,763 4,772 (1,404) 6,131 Other interest expense 194 -- (194) -- Depreciation and amortization 422 126 -- 548 ------------------- ---------------- ----------------- ----------------- Total other expenses 3,379 4,898 (1,598) 6,679 ------------------- ---------------- ----------------- ----------------- Income before income taxes 6,177 635 -- 6,812 Provision for income taxes -- 229 -- 229 ------------------- ---------------- ----------------- ----------------- Net income $ 6,177 $ 406 $ -- $ 6,583 =================== ================ ================= ================= Total Assets $ 464,244 $ 19,294 $ (11,338) $ 472,200 =================== ================ ================= =================
-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 three months ended, and as of, June 30, 2005, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ---------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 18,912 $ -- $ -- $ 18,912 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 7,631 -- -- 7,631 ------------------- ---------------- ----------------- ----------------- Income from loans and other investments, net 11,281 -- -- 11,281 ------------------- ---------------- ----------------- ----------------- Other revenues: Management and advisory fees -- 3,916 (1,193) 2,723 Income/(loss) from equity investments in Funds 352 (232) -- 120 Other interest income 184 28 -- 212 ------------------- ---------------- ----------------- ----------------- Total other revenues 536 3,712 (1,193) 3,055 ------------------- ---------------- ----------------- ----------------- Other expenses: General and administrative 2,620 3,887 (1,193) 5,314 Other interest expense -- -- -- -- Depreciation and amortization 211 69 -- 280 ------------------- ---------------- ----------------- ----------------- Total other expenses 2,831 3,956 (1,193) 5,594 ------------------- ---------------- ----------------- ----------------- Income before income taxes 8,986 (244) -- 8,742 Provision for income taxes -- (106) -- (106) ------------------- ---------------- ----------------- ----------------- Net income allocable to class A common stock $ 8,986 $ (138) $ -- $ 8,848 =================== ================ ================= =================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $1,193,000 and $2,380,000, respectively, for management of the segment for the three and six months ended June 30, 2005 and $8,000 for inter-segment interest for the six months ended June 30, 2005, which is reflected as offsetting adjustments to other revenues and other expenses in the Inter-Segment Activities column in the tables above. -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, June 30, 2004, respectively (in thousands):
Balance Sheet Investment Inter-Segment Investment Management Activities Total ------------------- ---------------- ----------------- ----------------- Income from loans and other investments: Interest and related income $ 9,172 $ -- $ -- $ 9,172 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 2,454 -- -- 2,454 Less: Interest and related expenses on convertible junior subordinated debentures 2,432 -- -- 2,432 ------------------- ---------------- ----------------- ----------------- Income from loans and other investments, net 4,286 -- -- 4,286 ------------------- ---------------- ----------------- ----------------- Other revenues: Management and advisory fees -- 2,740 (709) 2,031 Income/(loss) from equity investments in Funds 524 (93) -- 431 Gain on sales of investments 300 -- -- 300 Other interest income 6 91 (89) 8 ------------------- ---------------- ----------------- ----------------- Total other revenues 830 2,738 (798) 2,770 ------------------- ---------------- ----------------- ----------------- Other expenses: General and administrative 1,569 2,303 (709) 3,163 Other interest expense 89 -- (89) -- Depreciation and amortization 211 63 -- 274 ------------------- ---------------- ----------------- ----------------- Total other expenses 1,869 2,366 (798) 3,437 ------------------- ---------------- ----------------- ----------------- Income before income taxes 3,247 372 -- 3,619 Provision for income taxes -- 88 -- 88 ------------------- ---------------- ----------------- ----------------- Net income $ 3,247 $ 284 $ -- $ 3,531 =================== ================ ================= =================
All revenues were generated from external sources within the United States. The Balance Sheet Investment segment paid the Investment Management segment fees of $709,000 and $1,404,000, respectively, for management of the segment and $89,000 and $194,000, respectively, for inter-segment interest for the three and six months ended June 30, 2004, 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) 17. Subsequent Events Repurchase Agreements On July 29, 2005, we entered into a $75 million Master Repurchase Agreement (the "First Master Repurchase Agreement") with Morgan Stanley Bank ("Morgan Stanley"). On July 29, 2005, our wholly-owned subsidiaries, CT RE CDO 2004-1 Sub, LLC and CT RE CDO 2005-1 Sub, LLC, entered into another $75 million Master Repurchase Agreement with Morgan Stanley (the "Second Master Repurchase Agreement" and, together with the First Master Repurchase Agreement, the "Repurchase Agreements"). The Repurchase Agreements both expire on July 29, 2008, although both may terminate prior to, or under prescribed circumstances extend for an additional year, such date in accordance with their respective provisions. Subject to the terms and conditions thereof, the Repurchase Agreements provide for the purchase, sale and repurchase of, inter alia, commercial mortgage loans, commercial mezzanine loans, B-notes, participation interests in the foregoing, 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. Collateralized Debt Obligations On August 4, 2005, we issued $341.3 million of securities comprised of $337.8 million of fixed rate notes and $3.4 million of preferred shares. We retained the BBB- rated class of the investment grade notes, all of the below investment grade notes and the preferred shares in the CDO issuer. The notes rated BBB and above, totaling $269.6 million, were purchased for proceeds of $272.2 million. Our wholly owned asset management subsidiary, CT Investment Management Co., LLC, is the collateral manager for the CDO. Collateral for the CDO consists of $341.3 million of vintage, fixed rate conduit, fusion, and large loan subordinate CMBS. Approximately 53% of the collateral was purchased at closing with the balance coming from our existing CMBS portfolio. The notes rated BBB and above yield 5.17% and represent a non-mark-to-market, term matched, index matched and non-recourse financing for us. The non-reinvesting, static pool CDO is rated by Fitch Ratings and Standard & Poor's. We will account for the transaction as a financing and record on its balance sheet all of the collateral as assets and all of the CDO notes sold as liabilities. -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 programs have focused on loans and securities backed by income-producing commercial real estate assets. From the commencement of our finance business in 1997 through June 30, 2005, we have completed over $5.1 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 six months ended June 30, 2005, we made two investments in commercial mortgage-backed securities, or CMBS. The first security had a face value and purchase price of $5,000,000 and bears interest at a variable rate equal to the London Interbank Offered Rate, or LIBOR, plus 2.10%. The second security had a face value of $10,167,000 and purchase price of $10,156,000 and bears interest at a variable rate equal to LIBOR plus 2.00%. In addition, one CMBS investment with a face value of $1,750,000 was repaid in full during the period. At June 30, 2005, we held twenty investments in fifteen separate issues of CMBS with an aggregate face value of $278,916,000. CMBS with a face value of $76,215,000 earn interest at variable rates which average LIBOR plus 2.23% (5.45% at June 30, 2005). The remaining CMBS, $202,701,000 face value, earn interest at fixed rates averaging 7.59% of face value. In the aggregate, we purchased the CMBS at discounts. As of June 30, 2005, the remaining discount to be amortized into income over the remaining lives of the securities was $21,444,000. At June 30, 2005, including the amortization of the discount as income, the entire CMBS portfolio earned interest at a blended rate of 8.41% of face value less the unamortized discount. As of June 30, 2005, the securities were carried at market value of $257,755,000, reflecting a $5,558,000 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. During the six months ended June 30, 2005, we originated two property mezzanine loans for $50,010,000 (of which $21,210,000 was funded during the six months ended June 30, 2005) and 23 B Notes for $346,434,000. In addition, we received partial repayments on four property mezzanine loans and 26 B Notes totaling $36,358,000 and three property mezzanine loans and eleven B Notes totaling $174,250,000 were satisfied and repaid. We have outstanding unfunded loan commitments at June 30, 2005 of $28,800,000. At June 30, 2005, we had 77 performing loans receivable with a current carrying value of $713,487,000. Four of the loans totaling $101,524,000 bear interest at an average fixed rate of interest of 9.80%. The 73 remaining loans, totaling $608,925,000, bear interest at a variable rate of interest averaging LIBOR plus 4.55% (7.82% at June 30, 2005). One mortgage loan receivable 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, we have received cash collections of $962,000 reducing 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 for the quarter ended June 30, 2005, $263,000 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 -17- our estimate of the likelihood of default. Based upon our detailed review at June 30, 2005, we concluded that a reserve for possible credit losses was not warranted. At June 30, 2005, we had investments in Funds of $20,732,000, including $4,478,000 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 second issuance of collateralized debt obligations, commonly known as CDOs, we have substantially restructured the manner in which we finance our business. While we still use our committed credit facility and repurchase obligations to finance balance sheet assets, 79% of our debt is in the form of CDOs at June 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 March 15, 2005, we issued our second collateralized debt obligation. The issuance was secured by a pool of $337,755,000 of mezzanine loans, B Notes and CMBS owned by us. Investment grade rated notes with a face value of $298,913,000 were issued by our wholly-owned subsidiary, Capital Trust RE CDO 2005-1 Ltd., and were sold to third parties. All of the unrated and below investment grade rated notes and the preferred equity interests were retained by us. The notes sold were issued with floating rate coupons with a combined weighted average rate of LIBOR plus 0.49% (3.75% at June 30, 2005) and have a remaining expected average maturity of 7.3 years as of June 30, 2005. 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% (3.97% at June 30, 2005). For accounting purposes, the CDO is consolidated in our financial statements. Proceeds from the sale of the investment grade tranches were used to pay down the credit facility and repurchase obligations. The assets pledged as collateral for the CDO were contributed from our existing portfolio of loans and CMBS. In total, our two CDOs provide us with $551.7 million of debt financing at a stated average interest rate of LIBOR + 0.55% (3.81% at June 30, 2005) and an all-in effective rate (including the amortization of fees) LIBOR + 0.87% (4.13% at June 30, 2005). At June 30, 2005, we have borrowed $16,991,000 under a $150.0 million credit facility at an average borrowing rate (including amortization of all fees incurred and capitalized) of 9.87%. We pledged $97,123,000 of assets as collateral for the borrowing against such credit facility. At June 30, 2005, the available credit remaining under the credit facility was $133.0 million of which $42.2 million may be borrowed without the need to pledge additional assets as collateral. At June 30, 2005, we used repurchase agreements with one counterparty to finance a substantial portion of our CMBS portfolio. Under these obligations, at June 30, 2005, we had sold CMBS with a book and market value of $190,426,000 and had a liability to repurchase these assets for $122,774,000. The average borrowing rate on this financing is LIBOR plus 0.85% (4.19% at June 30, 2005). At June 30, 2005, we used a repurchase agreement with another counterparty to finance one CMBS investment. Under this obligation, at June 30, 2005, we had sold CMBS with a book and market value of $5,000,000 and had a liability to repurchase these assets for $4,250,000. The average borrowing rate on this financing is LIBOR plus 1.00% (4.34% at June 30, 2005) and and an all-in rate (including the amortization of fees) of 5.75%. We also have up to $431.0 million of additional credit available under the credit facility and other repurchase agreements, of which $71.9 million is available from the assets currently pledged as collateral. We would need to pledge additional existing or newly acquired assets to fully utilize all of the available credit. We were party to four cash flow interest rate swaps with a total notional value of $183.9 million as of June 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 (3.30% at June 30, 2005) and pay an average rate of 4.32%. The market value of the swaps at June 30, 2005 was ($2,381,000), which is recorded as an interest rate hedge liability and as a component of accumulated other comprehensive gain/(loss) on our balance sheet. At June 30, 2005, we had 15,118,238 shares of our class A common stock outstanding. -18- 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 $4,478,000, 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. began earning 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 $6,214,000 on March 29, 2005 and an additional payment of $1,200,000 on June 24, 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 general partner of Fund II, expensed costs that it had previously capitalized of $2,310,000, of which $1,155,000 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 $1,017,000, 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 July 1, 2005 at the recorded book value, and the fund's equity and income were distributed, we would record approximately $2.4 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 June 30, 2005 was $2.1 million. As of June 30, 2005, Fund II had 8 outstanding loans and investments totaling $82.6 million, all of which were performing in accordance with the terms of their agreements. On June 2, 2003, Fund III effected its initial closing on equity commitments and on its final closing 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 June 30, 2005, we have made equity investments in Fund III of $15,920,000. Through June 30, 2005, Fund III had made 34 loans and investments of approximately $1.1 billion. As of June 30, 2005, Fund III had 25 outstanding loans and investments totaling $773.7 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 will -19- distribute a portion (up to 40%) of our share of the Fund III incentive management fees as long-term incentive compensation to our employees. Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended June 30, 2004 We reported net income of $8,848,000 for the three months ended June 30, 2005, an increase of $5,317,000 from the net income of $3,531,000 for the three months ended June 30, 2004. We reported net income of $17,998,000 for the six months ended June 30, 2005, an increase of $11,415,000 from the net income of $6,583,000 for the six months ended June 30, 2004. These increases were primarily the result of an increase in net interest income from loans and other investments and the receipt of incentive management fees from Fund II. Since June 30, 2004, we raised significant new capital, increased interest earning assets, and financed our business more efficiently through the use of CDOs. As a result, debt costs as a percentage of interest income have decreased. Interest and related income from loans and other investments amounted to $34,608,000 for the six months ended June 30, 2005, an increase of $16,418,000 from the $18,190,000 amount for the six months ended June 30, 2004. Average interest-earning assets increased from approximately $398.4 million for the six months ended June 30, 2004 to approximately $882.7 million for the six months ended June 30, 2005. The average interest rate earned on such assets decreased from 9.2% for the six months ended June 30, 2004 to 7.8% for the six months ended June 30, 2005. During the six months ended June 30, 2005, we recognized $799,000 in additional income on the early repayment of loans. Without this additional interest income, the earning rate for the 2005 period would have been 7.6%. 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 spreads obtained on newly originated investments, partially offset by a higher average LIBOR rate, which increased by 1.8% from 1.1% for the six months ended June 30, 2004 to 2.9% for the six months ended June 30, 2005. Interest and related income from loans and other investments amounted to $18,912,000 for the three months ended June 30, 2005, an increase of $9,740,000 from the $9,172,000 amount for the three months ended June 30, 2004. Average interest-earning assets increased from approximately $411.5 million for the three months ended June 30, 2004 to approximately $942.6 million for the three months ended June 30, 2005. The average interest rate earned on such assets decreased from 8.9% for the three months ended June 30, 2004 to 7.9% for the three months ended June 30, 2005. During the three months ended June 30, 2005, we recognized $799,000 in additional income on the early repayment of loans. Without this additional interest income, the earning rate for the 2005 period would have been 7.6%. 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 spreads obtained on newly originated investments, partially offset by a higher average LIBOR rate, which increased by 1.9% from 1.2% for the three months ended June 30, 2004 to 3.1% for the three months ended June 30, 2005. We utilize our existing credit facility, repurchase obligations and CDO's to finance our interest-earning assets. Interest and related expenses on secured debt amounted to $13,383,000 for the six months ended June 30, 2005, an increase of $8,293,000 from the $5,090,000 amount for the six months ended June 30, 2004. The increase in expense was due to an increase in the amount of average interest-bearing liabilities outstanding from approximately $219.3 million for the six months ended June 30, 2004 to approximately $615.9 million for the six months ended June 30, 2005, offset partially by a decrease in the average rate paid on interest-bearing liabilities from 4.7% to 4.3% for the same periods. The decrease in the average rate is substantially due to the use of CDOs to finance a large portion of the portfolio at lower rates than obtained under the credit facility and term redeemable securities contract, partially offset by the increase in average LIBOR. Interest and related expenses on secured debt amounted to $7,631,000 for the three months ended June 30, 2005, an increase of $5,177,000 from the $2,454,000 amount for the three months ended June 30, 2004. The increase in expense was due to an increase in the amount of average interest-bearing liabilities outstanding from approximately $219.9 million for the three months ended June 30, 2004 to approximately $685.0 million for the three months ended June 30, 2005, offset partially by a decrease in the average rate paid on interest-bearing liabilities from 4.5% to 4.4% for the same periods. The decrease in the average rate is again substantially due to the use of CDOs to finance a large portion of the portfolio at lower rates than obtained under the credit facility and term redeemable securities contract, partially offset by the increase in average LIBOR. Prior to September 29, 2004, we also utilized the convertible junior subordinated debentures to finance our interest-earning assets. During the three and six months ended June 30, 2004, we recognized $2,432,000 and $4,865,000, respectively of expenses related to the convertible junior subordinated debentures. No expense was recorded for the -20- three and six months ended June 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 $4,306,000 from $5,256,000 for the six months ended June 30, 2004 to $9,562,000 for the six months ended June 30, 2005. The increase is primarily due to the receipt of incentive management fees from Fund II of $7,414,000 during the six months ended June 30, 2005. In connection with 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 $2,310,000, of which $1,155,000 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 $1,017,000, reflecting our proportionate share of the incentive management payment. This was partially offset by a decrease in the 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 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 which is lower than the previous committed capital amounts. Other revenues increased $285,000 from $2,770,000 for the three months ended June 30, 2004 to $3,055,000 for the three months ended June 30, 2005. The increase is primarily due to the receipt of incentive management fees from Fund II of $1,200,000 during the three months ended June 30, 2005. In connection with 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 $260,000, of which $130,000 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 $165,000, reflecting our proportionate share of the incentive management payment. This was partially offset by a decrease in the management fees and investment income from Fund II and Fund III as discussed above. General and administrative expenses increased $4,938,000 to $11,069,000 for the six months ended June 30, 2005 from $6,131,000 for the six months ended June 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 $1,854,000), 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 $2,151,000 to $5,314,000 for the three months ended June 30, 2005 from $3,163,000 for the three months ended June 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 $300,000), 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. 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 June 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 six months ended June 30, 2005 and 2004. We also have taxable REIT subsidiaries which are subject to tax at regular corporate rates. During the six months ended June 30, 2005 and 2004, we recorded $1,161,000 and $229,000, 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 -21- At June 30, 2005, we had $14,487,000 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 credit facility, CDOs and 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 $10,096,000 for the six months ended June 30, 2005, compared to a net increase of $31,127,000 for the six months ended June 30, 2004. Cash provided by operating activities during the six months ended June 30, 2005 was $20,037,000, compared to $4,461,000 during the same period of 2004. For the six months ended June 30, 2005, cash used in investing activities was $161,576,000, compared to $37,167,000 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 six months of 2005 to the same period in 2004. We financed the increased investment activity with additional borrowings under our credit facility, repurchase obligations and CDOs. This accounted for substantially all of the change in the net cash activity from financing activities. At June 30, 2005, we had outstanding borrowings under our credit facility of $16,991,000, outstanding CDOs of $551,691,000 and outstanding repurchase obligations totaling $127,024,000. At June 30, 2005, we had pledged assets that enable us to obtain an additional $71.9 million financing. We had $431.0 million of credit available for the financing of new and existing unpledged assets pursuant to our credit facility and repurchase agreements. 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. -22- 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 June 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.
Expected Maturity Dates ------------------------------------------------------------------------------------------ 2005 2006 2007 2008 2009 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Assets: (dollars in thousands) Commercial Mortgage-backed Securities Fixed Rate -- -- $ 135 $ 1,420 $ 5,015 $ 196,131 $ 202,701 $ 183,171 Average interest rate -- -- 7.82% 7.81% 10.04% 10.54% 10.51% Variable Rate $ 75 $ 6,677 $ 3,878 $ 50,001 $ 14,000 $ 1,268 $ 75,889 $ 74,584 Average interest rate 4.24% 4.24% 4.24% 5.73% 4.62% 35.73% 5.94% Loans receivable Fixed Rate $ 395 $ 989 $ 7,981 $ 47,901 $ 697 $ 43,980 $ 101,943 $ 110,409 Average interest rate 9.99% 9.88% 8.30% 11.77% 7.95% 7.91% 9.78% Variable Rate $ 31,014 $ 278,627 $ 173,758 $ 43,080 $ 67,986 $ 25,000 $ 619,465 $ 612,678 Average interest rate 5.94% 6.95% 7.22% 7.32% 6.32% 5.32% 6.87% Total Return Swap Variable Rate -- $ 4,000 -- -- -- -- $ 4,000 $ 4,000 Average interest rate -- 20.04% -- -- -- -- 20.04% Liabilities: Credit Facility Variable Rate -- $ 16,991 -- -- -- -- $ 16,991 $ 16,991 Average interest rate -- 9.87% -- -- -- -- 9.87% Repurchase obligations Variable Rate -- $ 122,774 $ 4,250 -- -- -- $ 127,024 $ 127,024 Average interest rate -- 4.32% 6.36% -- -- -- 4.39% Collateralized debt obligations Variable Rate -- -- -- $ 88,964 $ 103,053 $ 359,674 $ 551,691 $ 551,691 Average interest rate -- -- -- 4.09% 4.15% 4.12% 4.12% Interest rate swaps Notional amounts $ 133 $ 3,681 $ 5,826 $ 1,035 $ 30,301 $ 142,958 $ 183,934 $ 2,381 Average fixed pay rate 3.68% 4.19% 3.21% 4.24% 4.56% 4.31% 4.32% Average variable receive rate 3.26% 3.33% 3.26% 3.30% 3.26% 3.31% 3.30%
-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 At the 2005 annual meeting of our shareholders held on June 14, 2005, shareholders considered and voted upon: 1. A proposal to elect nine directors (identified in the table below) to serve until the next annual meeting of shareholders and until such directors' successors are duly elected and qualify ("Proposal 1"); and 2. A proposal to ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2005 ("Proposal 2"). The following table sets forth the number of votes in favor, the number of votes opposed, the number of abstentions (or votes withheld in the case of the election of directors) and broker non-votes with respect to each of the foregoing proposals.
Proposal Votes in Favor Votes Opposed Abstentions Broker Non-Votes (Withheld) Proposal 1 Samuel Zell 12,771,866 -- 167,103 -- Thomas E. Dobrowski 12,867,894 -- 71,075 -- Martin L. Edelman 12,165,267 -- 773,702 -- Craig M. Hatkoff 12,165,741 -- 773,228 -- Edward S. Hyman 12,867,844 -- 71,125 -- John R. Klopp 12,826,120 -- 112,849 -- Henry N. Nassau 12,202,446 -- 736,523 -- Joshua A. Polan 12,847,674 -- 91,295 -- Lynne B. Sagalyn 12,868,210 -- 70,759 -- Proposal 2 12,897,298 35,975 5,696 --
ITEM 5: Other Information None -26- ITEM 6: Exhibits (a) 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). 10.1 Transition Agreement dated May 26, 2005, by and between the Company and Brian H. Oswald (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 1-14788) filed on May 27, 2005 and incorporated herein by reference). 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). o31.1 Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o31.2 Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. o32.1 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. o32.2 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. August 9, 2005 /s/ John R. Klopp - -------------- ----------------- Date John R. Klopp Chief Executive Officer August 9, 2005 /s/ Geoffrey G. Jervis - -------------- ----------------------- Date Geoffrey G. Jervis Chief Financial Officer -28- EX-31 2 ex31-1.txt EX. 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2003 I, John R. Klopp, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2005 /s/ John R. Klopp ------------------------ John R. Klopp Chief Executive Officer EX-31 3 ex31-2.txt EX. 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Geoffrey G. Jervis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 9, 2005 /s/ Geoffrey G. Jervis ------------------------ Geoffrey G. Jervis Chief Financial Officer EX-32 4 ex32-1.txt EX. 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Klopp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John R. Klopp - ---------------------- John R. Klopp Chief Executive Officer August 9, 2005 EX-32 5 ex32-2.txt EX. 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Trust, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey G. Jervis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Geoffrey G. Jervis - ---------------------- Geoffrey G. Jervis Chief Financial Officer August 9, 2005 -----END PRIVACY-ENHANCED MESSAGE-----