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BLACKSTONE MORTGAGE TRUST, INC. 10-K 2010 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 1-14788
__________________________________
Capital
Trust, Inc.
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code:(212) 655-0220
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No x
MARKET
VALUE
The
aggregate market value of the outstanding class A common stock held by
non-affiliates of the registrant was approximately $22,560,801 as of
June 30, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter) based on the closing sale price on the New York
Stock Exchange on that date.
OUTSTANDING
STOCK
As of
February 23, 2010 there were 21,834,257 outstanding shares of class A
common stock. The class A common stock is listed on the New York Stock Exchange
(trading symbol “CT”).
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates information by reference from the registrant’s definitive proxy
statement to be filed with the Commission within 120 days after the close of the
registrant’s fiscal year.
CAPITAL TRUST, INC.
PART I
References
herein to “we,” “us” or “our” refer to Capital Trust, Inc., a Maryland
corporation, and its subsidiaries unless the context specifically requires
otherwise.
Overview
We are a
fully integrated, self-managed, real estate finance and investment management
company that specializes in credit sensitive financial products. To date, our
investment programs have focused on loans and securities backed by commercial
real estate assets. We invest for our own account directly on our balance sheet
and for third parties through a series of investment management vehicles. From
the inception of our finance business in 1997 through December 31, 2009, we
have completed over $11.2 billion of investments in the commercial real
estate debt arena. We conduct our operations as a real estate investment trust,
or REIT, for federal income tax purposes and we are headquartered in New York
City.
Operating
Segments
Segment
revenue and profit information is presented in Note 20 to the consolidated
financial statements.
Current
Market Conditions
During
2009, the general economic environment deteriorated precipitously, leaving the
U.S economy and many economies around the world in a state of severe economic
recession. In addition, the global capital markets continued to be impaired
relative to pre-recession levels. The recession and capital markets turmoil have
severely impacted the commercial real estate sector, resulting in: (i)
decreased, and expected further decreases, in property level cash flows and (ii)
a general lack of capital, both debt and equity, necessary for markets to
function in an orderly manner. These factors have combined to create significant
decreases in property values and have and will continue to impact the
performance of our existing portfolio of assets.
Restructuring
of Our Debt Obligations
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement,
and certain of our trust preferred securities. While we believe that the
restructuring of our debt obligations was a positive development for us in our
efforts to stabilize our business, there can be no assurance that ultimately our
restructuring will enable the successful collection of our balance sheet assets.
For a further discussion, see the risk factors contained in Item 1A to this Form
10-K.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The warrants will become exercisable on March 16,
2012 and expire on March 16, 2019, and may be exercised through a cashless
exercise at the option of the warrant holders.
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the master repurchase agreement.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as the Trust Securities mentioned above in exchange for $21.9 million face
amount of the Trust Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
Developments
during Fiscal Year 2009
Our
restructured debt obligations contain covenants that require us to cease our
balance sheet investment activities. Therefore, since the restructuring, our
investment activity has been limited to investments for our investment
management vehicles. During the year ended December 31, 2009, we originated
$145.1 million (on a gross basis) of new investments in seven separate
transactions for our investment management vehicles.
Overall,
our balance sheet portfolio of interest earning assets, comprised of loans and
securities, declined by $667.6 million during 2009. This decline was primarily
due to $444.1 million of provisions, other-than-temporary impairments, and
realized losses on sale of investments (this excludes $172.5 million of
provisions recorded on loan participations sold under generally accepted
accounting principles in the United States, or GAAP). Also, $124.8 million of
loans were sold or transferred to our secured lenders in satisfaction of our
obligations, and we realized $113.4 million of investment satisfactions and
partial repayments. This decline was offset by $9.4 million of loan fundings and
$5.4 million of non-cash amortization and other items.
As of
December 31, 2009, our $1.8 billion of interest earning assets were comprised of
$1.1 billion of loans receivable, including $17.5 million of loans classified as
held-for-sale, and $715.2 million of securities. These include 20 impaired loans
with an aggregate net book value of $131.0 million ($608.4 million gross
carrying value, net of $477.4 million of reserves), and 11 impaired securities
with an aggregate net book value of $27.4 million ($145.7 million gross carrying
value, against which we have recorded other-than-temporary impairments of $118.3
million). Of our 20 impaired loans, 12 loans with an aggregate net book value of
$96.0 million were current on interest payments as of December 31, 2009, and 8
loans with an aggregate net book value of $35.0 million were delinquent on
payments due and classified as non-performing.
As a
result of the decline in credit quality of our interest earning assets described
above and the restructuring of our debt obligations, our liquidity has been
significantly impacted during 2009. Specifically:
In
addition to our balance sheet activity, our active investment management
mandates are described below:
Platform
Our
platform consists of 28 full time professionals with extensive real estate
credit, capital markets and structured finance expertise and our senior
management team has, on average, over 20 years of industry experience. Founded
in 1997, our business has been built on long-standing relationships with
borrowers, brokers and our origination partners. This extensive network produces
a pipeline of investment opportunities from which we select only those
transactions that we believe exhibit a compelling risk/return profile. Once a
transaction that meets our parameters is identified, we apply a disciplined
process founded on four elements:
The first
element, and the foundation of our platform, is our credit underwriting. For
each prospective investment, an in-house underwriting team is assigned to
perform an intense ground-up analysis of all aspects of credit risk. Our
underwriting process is embodied in our proprietary credit policies and
procedures that detail the due diligence steps from initial client contact
through closing. We have developed the capability to apply this methodology to a
high volume of investment opportunities, including CMBS transactions with a
large number of underlying loans, through the combination of personnel,
procedures and technology. On all levels, we incorporate input received from our
finance, capital markets, credit and legal teams, as well as from various third
parties, including our credit providers.
Creative
financial structuring is the second critical element. In our direct investment
programs, we strive to design a customized structure for each investment that
provides us with the necessary credit, yield and protective structural features
while meeting the varying, and often complex, needs of our clients. We believe
our demonstrated ability to structure creative solutions gives us a distinct
competitive advantage in the marketplace. In the structured products arena, our
broad capital markets expertise enables us to better analyze the risks and
opportunities embedded in complex vehicles such as CMBS and synthetic
securities.
Efficient
capitalization is the third integral element of our platform. We utilize
multiple debt and equity products to capitalize our balance sheet and investment
management businesses. Our goal is to have the lowest cost of capital for our
businesses while maintaining appropriate debt and equity levels and structures.
As such, we seek to maintain adequate liquidity to defend the balance sheet and
investment management vehicles against reasonable capital market and real estate
market volatility.
The final
element of our platform is aggressive asset management. We pride ourselves on
our active style of managing our portfolios. From the closing of an investment
through its final repayment, our dedicated asset management team is in constant
contact with our borrowers and servicers, monitoring performance of our
collateral and enforcing our rights as necessary. We are rated/approved as a
special servicer by all three rating agencies, allowing us to directly manage
workouts on loans that have been securitized.
Business
Model
As
depicted below, our business model is designed to produce a unique mix of net
interest income from our balance sheet investments and fee income from our
investment management and special servicing operations.
 We have
historically allocated opportunities between our balance sheet and investment
management vehicles based upon our assessment of the availability and relative
cost of capital, the risk and return profiles of each investment and applicable
regulatory requirements. The restructuring of our secured and unsecured debt
obligations has consequences for our historical business in that the new
covenants we agreed to require us to effectively cease our balance sheet
investment activities. Going forward, until these
covenants are eliminated through the repayment or refinancing of the
restructured debt obligations, we will continue to carry out investment
activities for our investment management vehicles, consistent with our previous
strategies and the investment mandates for each respective
vehicle.
We
operate our business to qualify as a REIT for federal income tax purposes. We
manage our balance sheet investments to produce a portfolio that meets the asset
and income tests necessary to maintain our REIT qualification and conduct our
investment management business through our wholly-owned subsidiary, CT
Investment Management Co., LLC, which is subject to federal, state and city
income tax.
Investment
Strategies
Since
1997, our investment programs have focused on various strategies designed to
take advantage of opportunities that have developed in the commercial real
estate finance sector.
Depending
on our assessment of relative value, our real estate investments may take a
variety of forms including, but not limited to:
Business
Plan
Our near
term business strategy is to continue to manage our balance sheet investments
and existing investment management vehicles through the current volatile market,
recognizing that we cannot resume our balance sheet investment activities until
we have eliminated certain covenants under our debt obligations and raised new
capital. At the same time, we are working to grow our investment management
business and special servicing business.
Competition
We are
engaged in a competitive business. In our investment activities, we compete for
opportunities with numerous public and private investment vehicles, including
financial institutions, specialty finance companies, mortgage banks, pension
funds, opportunity funds, hedge funds, REITs and other institutional investors,
as well as individuals. Many competitors are significantly larger than us, have
well established operating histories and may have greater access to capital,
more resources and other advantages over us. These competitors may be willing to
accept lower returns on their investments or to compromise underwriting
standards and, as a result, our origination volume and profit margins could be
adversely affected. In our investment management business, we compete with other
investment management companies in attracting third party capital for our
vehicles and many of our competitors are well established, possessing
substantially greater financial, marketing and other resources.
Government
Regulation
Our
activities in the United States, including the financing of our operations, are
subject to a variety of federal and state regulations. In addition, a majority
of states have ceilings on interest rates chargeable to certain customers in
financing transactions. Furthermore, our international activities are also
subject to local regulations.
Employees
As of
December 31, 2009, we had 28 full-time employees. Our staff is employed
under a co-employment agreement with a third party human resources firm, Ambrose
Employer Group, LLC. In addition, our chief financial officer is employed under
an employment contract. None of our employees are covered by a collective
bargaining agreement and management considers the relationship with our
employees to be good. In addition to our staff in New York, we contract for the
services of 15 additional dedicated professionals employed by a commercial real
estate underwriting services firm in Chennai, India.
Code
of Business Conduct and Ethics and Corporate Governance
Documents
We have
adopted a code of business conduct and ethics that applies to all of our
employees and our board of directors, including our principal executive officer
and principal financial and accounting officer. This code of business conduct
and ethics is designed to comply with SEC regulations and New York Stock
Exchange corporate governance rules related to codes of conduct and ethics
and is posted on our corporate website at http://www.capitaltrust.com. In
addition, our corporate governance guidelines and charters for our audit,
compensation and corporate governance committees of the board of directors are
also posted on our corporate website. Copies of our code of business conduct and
ethics, our corporate governance guidelines and our committee charters are also
available free of charge, upon request directed to Investor Relations, Capital
Trust, Inc., 410 Park Avenue, 14th Floor, New York, NY 10022.
Website
Access to Reports
We
maintain a website at http://www.capitaltrust.com. Through our website, we make
available, free of charge, our annual proxy statement, annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish them to, the SEC. The SEC maintains a website that
contains these reports at http://www.sec.gov.
FORWARD
LOOKING INFORMATION
Our
Annual Report on Form l0-K for the year ended December 31, 2009, our 2009 Annual
Report to Shareholders, any of our Quarterly Reports on Form 10-Q or Current
Reports on Form 8-K of the Company, or any other oral or written statements made
in press releases or otherwise by or on behalf of Capital Trust, Inc., may
contain 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 predict or describe our future
operations, business plans, business and investment strategies and portfolio
management and the performance of our investments and our investment management
business. 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,” “seeks,” “anticipates,” “anticipated,” “should,”
“could,” “may,” “will,” “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.
Our
actual results may differ significantly from any results expressed or implied by
these forward looking statements. Some, but not all, of the factors that might
cause such a difference include, but are not limited to:
Risks Related to Our
Investment Activities
We
have recently experienced significant loses and given the condition of our
balance sheet portfolio we may experience future losses.
We
experienced net losses of $576.4 million and $57.5 million in 2009 and 2008,
respectively, and currently have negative shareholders equity of $169.2 million.
Our losses have resulted principally from reserves and impairments recorded on
our investments and there can be no assurance that our investments will not
further deteriorate and lead us to record further reserves and impairments,
which may be significant and lead to future material net losses.
Our
current business is subject to a high degree of risk. Our assets and liabilities
are subject to increasing risk due to the impact of market turmoil in commercial
real estate. Our efforts to stabilize our business with the restructuring of our
debt obligations may not be successful as our balance sheet portfolio is
subject to the risk of further deterioration and ongoing turmoil in the
financial markets.
Our portfolio is comprised of debt and related
interests, directly or indirectly secured by commercial real estate. A
significant portion of these investments are in subordinate positions,
increasing the risk profile of our investments as underlying property
performance deteriorates. Furthermore, we have leveraged our portfolio at the
corporate level, effectively further increasing our exposure to loss on our
investments. The recent financial market turmoil and economic recession has
resulted in a material deterioration in the value of commercial real estate and
dramatically reduced the amount of capital to finance the commercial real estate
industry (both at the property and corporate level). Given the composition of
our portfolio, the leverage in our capital structure and the continuing negative
impact of the commercial real estate market turmoil, the risks associated with
our business have dramatically increased. Even with the March 2009 restructuring
of our debt obligations, we may not be able to satisfy our obligations to our
lenders. There can be no assurance that further restructuring will not be
required and that any such restructuring will be successful. The impact of the
economic recession on the commercial real estate sector in general, and our
portfolio in particular, cannot be predicted and we expect to experience
significant defaults by borrowers and other impairments to our investments.
These events may trigger defaults under our restructured debt obligations that
may result in the exercise of remedies that cause severe (and potentially
complete) losses in the book value of our investments. Therefore, an
investment in our class A common stock is subject to a high degree of
risk.
Given
current conditions, our restructured debt obligations are an unstable source of
financing and expose us to further erosions of shareholders equity.
Our
secured obligations mature in March 2011. There can be no assurance that we will
be able to further extend our liabilities, in which case we may lose
substantially all of our assets. Furthermore, any extension of these liabilities
would likely require further repayment and changes in economic terms that may
have a material adverse impact on us.
Our
restructured debt obligations with our lenders prohibit new balance sheet
investment activities, which prevents us from growing our balance sheet
portfolio.
Under the
terms of the restructured debt obligations, we are prohibited from acquiring or
originating new investments. This restriction precludes us from growing our
balance sheet portfolio at a time when investment opportunities that provide
attractive risk-adjusted returns may otherwise be available to us. Our interest
earning investments will continue to be reduced which will negatively impact our
net investment income. There can be no assurance that we will be able to retire
completely or refinance our restructured debt obligations so that we can resume
our balance sheet investment activities.
Our liquidity will be impacted by our restructured debt
obligations and any plans to further restructure our debt obligations or
recapitalize our business to improve liquidity may involve a high cost of
capital and significant dilution to our shareholders.
Our restructured debt obligations further reduce our
current liquidity as a result of ongoing principal payment sweeps and additional
interest payments. The reduction in liquidity may impair our ability to meet our
obligations and, given the covenants contained in our restructured debt
obligations, our ability to improve our liquidity position is constrained. In
addition, we must maintain a minimum of $5.0 million in liquidity during the
remaining term of our restructuring, a requirement that may limit our ability to
make commitments to investment management vehicles and, ultimately, that we may
not be able to maintain.
To improve our liquidity, we will need to further
restructure our debt obligations and/or recapitalize our business, for which we
can provide no assurances. We would expect any such restructuring and/or
recapitalization to require us to raise additional capital at a significantly
high cost of capital and/or with significant dilution to our
shareholders.
Our restructured debt obligations are subject to debt to
collateral value ratio maintenance covenants for which we can provide no
assurance as to our future compliance.
Under the terms of our debt restructuring, we eliminated
the cash margin call provisions and amended the mark-to-market
provisions that were in effect under the original terms of
the secured credit facilities. The revised secured credit facilities
allow our secured lenders to determine collateral value based upon changes in
the performance of the underlying real estate collateral as opposed
to changes in market spreads under the original terms.
Beginning September 2009, or earlier in the case of defaults on
loans that collateralize any of our secured credit facilities, each
collateral pool may be valued monthly. If the ratio of a secured lender’s
total outstanding secured credit facility balance to total collateral value
exceeds 1.15x the ratio calculated as of the effective date of the amended
agreements, we may be required to liquidate collateral and reduce the
borrowings or post other collateral to bring the ratio back into
compliance with the prescribed ratio. There can be no assurances
that we will pass these tests and, as the commercial real estate markets
continue to deteriorate, we expect that passing these tests will become
more difficult. If we fail these tests, sales of assets
to return to compliance will be extremely difficult in light of the lack of
liquidity for the types of assets that serve as
collateral and, even if we locate buyers for
the collateral, the sales prices may be insufficient to
reduce the ratio of outstanding secured credit facility balance to total
collateral value. Failure to remedy these tests is an event of default
under our secured credit facilities and would trigger a cross default under
other of our financial instruments. Any such action would have a material
adverse impact on our business and financial condition and would
negatively impact our share price.
The U.S. and other financial markets have been in
turmoil and the U.S. and other economies in which we operate are in the midst of
an economic recession which can be expected to negatively impact our
operations.
The U.S.
and other financial markets have been experiencing extreme dislocations and a
severe contraction in available liquidity globally as important segments of the
credit markets are frozen as lenders are unwilling or unable to originate new
credit. Global financial markets have been disrupted by, among other things,
volatility in security prices, credit rating downgrades, the failure and near
failure of a number of large financial institutions and declining valuations,
and this disruption has been acute in real estate related markets. This
disruption has lead to a decline in business and consumer confidence and
increased unemployment and has precipitated an economic recession around the
globe. As a consequence, owners and operators of commercial real estate that
secure or back our investments have experienced distress and commercial real
estate values have declined substantially. We are unable to predict the likely
duration or severity of the current disruption in financial markets and adverse
economic conditions which could materially and adversely affect our business,
financial condition and results of operations, including leading to significant
impairment to our assets and our ability to generate income.
Our
existing loans and investments expose us to a high degree of risk associated
with investing in real estate assets.
Real
estate historically has experienced significant fluctuations and cycles in
performance that may result in reductions in the value of our real estate
related investments. The performance and value of our loans and investments once
originated or acquired by us depends upon many factors beyond our control. The
ultimate performance and value of our investments is subject to the varying
degrees of risk generally incident to the ownership and operation of the
properties which collateralize or support our investments. The ultimate
performance and value of our loans and investments depends upon, in large part,
the commercial property owner’s ability to operate the property so that it
produces sufficient cash flows necessary either to pay the interest and
principal due to us on our loans and investments or pay us as an equity advisor.
Revenues and cash flows may be adversely affected by:
In the
event that any of the properties underlying or collateralizing our loans or
investments experiences any of the foregoing events or occurrences, the value
of, and return on, such investments, our profitability and the market price of
our class A common stock would be negatively impacted. In addition, our restructured debt obligations contain
covenants which limit the amount of protective investments we may make to
preserve value in collateral securing our investments.
A
prolonged economic slowdown, a lengthy or severe recession, a credit crisis, or
declining real estate values could harm our operations or may adversely affect
our liquidity.
We
believe the risks associated with our business are more severe during periods of
economic slowdown or recession like those we are currently experiencing,
particularly if these periods are accompanied by declining real estate
values. The recent
dislocation of the global credit markets and anticipated collateral consequences
to commercial activity of businesses unable to finance their operations as
required has lead to a weakening of general economic conditions and precipitated
declines in real estate values and otherwise exacerbate troubled borrowers’
ability to repay loans in our portfolio or backing our CMBS. We have made loans
to hotels, an industry whose performance has been severely impacted by the
current recession. Declining real estate values would likely reduce the level of
new mortgage loan originations, since borrowers often use increases in the value
of their existing properties to support the purchase of or investment in
additional properties, which in turn could lead to fewer opportunities for our
investment. Borrowers may also be less able to pay principal and interest on our
loans as the real estate economy continues to weaken. Continued weakened
economic conditions could negatively affect occupancy levels and rental rates in
the markets in which the collateral supporting our investments are located,
which, in turn, may have a material adverse impact on our cash flows and
operating results of our borrowers. Further, declining real estate values like
those occurring in the commercial real estate sector significantly increase the
likelihood that we will incur losses on our loans in the event of default
because the value of our collateral may be insufficient to cover our basis in
the loan. Any sustained period of increased payment delinquencies, foreclosures
or losses could adversely affect both our net interest income from loans in our
portfolio as well as our ability to operate our investment management business,
which would significantly harm our revenues, results of operations, financial
condition, liquidity, business prospects and our share price.
We
are exposed to the risks involved with making subordinated
investments.
Our
subordinated investments involve the risks attendant to investments consisting
of subordinated loans and similar positions. Subordinate positions incur losses
before the senior positions in a capital structure and, as a result,
foreclosures on the underlying collateral can reduce or eliminate the proceeds
available to satisfy our investment. Also, in certain cases where we experience
appraisal reductions, we may lose our controlling class status, or special
servicer designator rights. In many cases, management of our investments and our
remedies with respect thereto, including the ability to foreclose on or direct
decisions with respect to the collateral securing such investments, is subject
to the rights of senior lenders and the rights set forth in inter-creditor or
servicing agreements. Our interests and those of the senior lenders and other
interested parties may not be aligned.
We
are obligated to fund unfunded commitments under our loan
agreements.
We are
required to fund unfunded obligations to our borrowers. Historically, prior to
our restructuring, we relied upon our lenders to fund a portion of these
commitments. Going forward, we can rely only on our immediately available
liquidity to meet these commitments. If we do not have the liquidity in excess
of the minimum amounts required under our restructured debt obligations, and the
lenders do not consent to our obtaining additional financing, if available, we
would default on these commitments and potentially lose value in these
investments and expose ourselves to litigation.
We
are subject to counterparty risk associated with our debt obligations and
interest rate swaps.
Our
counterparties for these critical financial relationships include both domestic
and international financial institutions. Many of them have been severely
impacted by the credit market turmoil and have been experiencing financial
pressures. In some cases, our counterparties have filed bankruptcy.
We
are subject to the general risk of a leveraged investment strategy and the
specific risks of our restructured indebtedness.
Our
restructured secured debt obligations are secured by our investments, which are
subject to being revalued by our credit providers. If the value of the
underlying property collateralizing our investments declines, we may be required
to liquidate our investments, the impact of which could be magnified if such a
liquidation is at a commercially inopportune time, such as the market
environment we are currently experiencing. In addition, the occurrence of any
event or condition which causes any obligation or liability of more than $1.0
million to become due prior to its scheduled maturity or any monetary default
under our restructured debt obligations if the amount of such obligation is at
least $1.0 million could constitute a cross-default under our restructured debt
obligations. If a cross-default occurs, the maturity of almost all of our
indebtedness could be accelerated and become immediately due and
payable.
We
guarantee many of our debt and contingent obligations.
We
guarantee the performance of many of our obligations, including, but not limited
to, our repurchase agreements, derivative agreements, obligations to co-invest
in our investment management vehicles and unsecured indebtedness. The
non-performance of such obligations may cause losses to us in excess of the
capital we initially may have invested or committed under such obligations and
there is no assurance that we will have sufficient capital to cover any such
losses.
Our
secured and unsecured credit agreements may impose restrictions on our operation
of the business.
Under our
secured and unsecured indebtedness, such as our credit and derivative
agreements, we make certain representations, warranties and affirmative and
negative covenants that restrict our ability to operate while still utilizing
those sources of credit. Currently, our restructured debt obligations prohibit
us from acquiring or originating new balance sheet investments except, subject
to certain limitations, co-investments in our investment management vehicles or
protective investments to defend existing collateral assets on our balance
sheet, and from incurring additional indebtedness unless used to pay down such obligations. In
addition, such representations, warranties and covenants include, but are not
limited to covenants which:
Our
success depends on the availability of attractive investments and our ability to
identify, structure, consummate, leverage, manage and realize returns on
attractive investments.
Our
operating results are dependent upon the availability of, as well as our ability
to identify, structure, consummate, leverage, manage and realize returns on,
credit sensitive investment opportunities for our managed vehicles and our
balance sheet assuming we are able to resume balance sheet investment activity.
In general, the availability of desirable investment opportunities and,
consequently, our balance sheet returns and our investment management vehicles’
returns, will be affected by the level and volatility of interest rates,
conditions in the financial markets, general economic conditions, the demand for
credit sensitive investment opportunities and the supply of capital for such
investment opportunities. We cannot make any assurances that we will be
successful in identifying and consummating investments which satisfy our rate of
return objectives or that such investments, once consummated, will perform as
anticipated. In addition, if we are not successful in investing for our
investment management vehicles, the potential revenues we earn from management
fees and co-investment returns will be reduced. We may expend significant time
and resources in identifying and pursuing targeted investments, some of which
may not be consummated.
The
real estate investment business is highly competitive. Our success depends on
our ability to compete with other providers of capital for real estate
investments.
Our
business is highly competitive. Competition may cause us to accept economic or
structural features in our investments that we would not have otherwise accepted
and it may cause us to search for investments in markets outside of our
traditional product expertise. We compete for attractive investments with
traditional lending sources, such as insurance companies and banks, as well as
other REITs, specialty finance companies and private equity vehicles with
similar investment objectives, which may make it more difficult for us to
consummate our target investments. Many of our competitors have greater
financial resources and lower costs of capital than we do, which provides them
with greater operating flexibility and a competitive advantage relative to
us.
Our
loans and investments may be subject to fluctuations in interest rates which may
not be adequately protected, or protected at all, by our hedging
strategies.
Our
current balance sheet investments include loans with both floating interest
rates and fixed interest rates. Floating rate investments earn interest at rates
that adjust from time to time (typically monthly) based upon an index (typically
one month LIBOR). These floating rate loans are insulated from changes in value
specifically due to changes in interest rates, however, the coupons they earn
fluctuate based upon interest rates (again, typically one month LIBOR) and, in a
declining and/or low interest rate environment, these loans will earn lower
rates of interest and this will impact our operating performance. Fixed interest
rate investments, however, do not have adjusting interest rates and, as
prevailing interest rates change, the relative value of the fixed cash flows
from these investments will cause potentially significant changes in value. We
may employ various hedging strategies to limit the effects of changes in
interest rates (and in some cases credit spreads), including engaging in
interest rate swaps, caps, floors and other interest rate derivative products.
We believe that no strategy can completely insulate us or our investment
management vehicles from the risks associated with interest rate changes and
there is a risk that they may provide no protection at all and potentially
compound the impact of changes in interest rates. Hedging transactions involve
certain additional risks such as counterparty risk, the legal enforceability of
hedging contracts, the early repayment of hedged transactions and the risk that
unanticipated and significant changes in interest rates may cause a significant
loss of basis in the contract and a change in current period expense. We cannot
make assurances that we will be able to enter into hedging transactions or that
such hedging transactions will adequately protect us or our investment
management vehicles against the foregoing risks.
Accounting
for derivatives under GAAP is extremely complicated. Any failure by us to
account for our derivatives properly in accordance with GAAP in our consolidated
financial statements could adversely affect our earnings. In particular, cash
flow hedges which are not perfectly correlated (and appropriately designated
and/or documented as such) with a variable rate financing will impact our
reported income as gains, and losses on the ineffective portion of such
hedges.
Our
use of leverage may create a mismatch with the duration and index of the
investments that we are financing.
We
attempt to structure our leverage to minimize the difference between the term of
our investments and the leverage we use to finance such an investment. In light
of the financial market turmoil, we can no longer rely on a functioning market
to be available to us in order to refinance our existing debt. In March 2009, in
the face of the financial market dislocation, we restructured our recourse debt
obligations; however, there can be no assurances that our restructuring will
enable the successful collection of our balance sheet assets or that our
liquidity and financial condition will not require us to pursue a further
restructuring of our debt and/or recapitalization of our business. The risks of
a duration mismatch are further magnified by the trends we are experiencing in
our portfolio which results from extending loans made to our borrowers in order
to maximize the likelihood and magnitude of our recovery on our assets. This
trend effectively extends the duration of our assets, while the ultimate
duration of our liabilities is uncertain.
Our
loans and investments are illiquid, which will constrain our ability to vary our
portfolio of investments.
Our real
estate investments and structured financial product investments are relatively
illiquid and some are highly illiquid. Such illiquidity may limit our ability to
vary our portfolio or our investment management vehicles’ portfolios of
investments in response to changes in economic and other conditions. Illiquidity
may result from the absence of an established market for investments as well as
the legal or contractual restrictions on their resale. In addition, illiquidity
may result from the decline in value of a property securing these investments.
We cannot make assurances that the fair market value of any of the real property
serving as security will not decrease in the future, leaving our or our
investment management vehicles’ investments under-collateralized or not
collateralized at all, which could impair the liquidity and value, as well as
our return on such investments.
We
may not have control over certain of our loans and investments.
Our
ability to manage our portfolio of loans and investments may be limited by the
form in which they are made. In certain situations, we or our investment
management vehicles may:
Therefore,
we may not be able to exercise control over the loan or investment. Such
financial assets may involve risks not present in investments where senior
creditors, servicers or third party controlling investors are not involved. Our
rights to control the process following a borrower default may be subject to the
rights of senior creditors or servicers whose interests may not be aligned with
ours. A third party partner or co-venturer may have financial difficulties
resulting in a negative impact on such asset, may have economic or business
interests or goals which are inconsistent with ours and those of our investment
management vehicles, or may be in a position to take action contrary to our or
our investment management vehicles’ investment objectives. In addition, we and
our investment management vehicles may, in certain circumstances, be liable for
the actions of our third party partners or co-venturers.
The
use of our CDO financings may have a negative impact on our cash
flow.
The terms
of CDOs generally provide that the principal amount of investments must exceed
the principal balance of the related bonds by a certain amount and that interest
income exceeds interest expense by a certain ratio. Certain of our CDOs provide
that, if defaults, losses, or rating agency downgrades cause a decline in
collateral value or cash flow levels, the cash flow otherwise payable to our
retained subordinated classes may be redirected to repay classes of CDOs senior
to ours until the tests are brought in compliance. In certain instances, we have
breached these tests and cash flow has been redirected and there can be no
assurances that this will not occur on all of our CDOs. Once breached there is
no certainty about when or if the cash flow redirection will remedy the tests’
failure or that cash flow will be restored to our subordinated classes. Other
than collateral management fees, we currently receive cash payments from only
one of our four CDOs, CDO III, which has caused a material deterioration in our
cash flow available for operations, debt service, debt repayments and unfunded
loan and fund management commitments.
We
may be required to repurchase loans that we have sold or to indemnify holders of
our CDOs.
If any of
the loans we originate or acquire and sell or securitize through CDOs do not
comply with representations and warranties that we make about certain
characteristics of the loans, the borrowers and the underlying properties, we
may be required to repurchase those loans or replace them with substitute loans.
In addition, in the case of loans that we have sold instead of retained, we may
be required to indemnify persons for losses or expenses incurred as a result of
a breach of a representation or warranty. Repurchased loans typically require a
significant allocation of working capital to carry on our books, and our ability
to borrow against such assets is limited. Any significant repurchases or
indemnification payments could adversely affect our financial condition and
operating results.
The
commercial mortgage and mezzanine loans we originate or acquire and the
commercial mortgage loans underlying the commercial mortgage backed securities
in which we invest are subject to delinquency, foreclosure and loss, which could
result in losses to us.
Our
commercial mortgage and mezzanine loans are secured by commercial property and
are subject to risks of delinquency and foreclosure, and risks of loss that are
greater than similar risks associated with loans made on the security of
single-family residential property. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of the property rather than upon the existence of
independent income or assets of the borrower. If the net operating income of the
property is reduced, the borrower’s ability to repay the loan may be impaired.
Net operating income of an income-producing property can be affected by, among
other things, tenant mix, success of tenant businesses, property management
decisions, property location and condition, competition from comparable types of
properties, changes in laws that increase operating expenses or limit rents that
may be charged, any need to address environmental contamination at the property,
changes in national, regional or local economic conditions and/or specific
industry segments, declines in regional or local real estate values, declines in
regional or local rental or occupancy rates, increases in interest rates, real
estate tax rates and other operating expenses, and changes in governmental
rules, regulations and fiscal policies, including environmental legislation,
acts of God, terrorism, social unrest and civil disturbances.
Our
investments in subordinated commercial mortgage backed securities and similar
investments are subject to losses.
In
general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property and then
by the most junior security holder, referred to as the “first loss” position. In
the event of default and the exhaustion of any equity support and any classes of
securities junior to those in which we invest (and in some cases we may be
invested in the junior most classes of securitizations), we may not be able to
recover all of our investment in the securities we purchase. In addition, if the
underlying mortgage portfolio has been overvalued by the originator, or if the
values subsequently decline and, as a result, less collateral is available to
satisfy interest and principal payments due on the related mortgage backed
securities, the securities in which we invest may incur significant losses.
Subordinate interests generally are not actively traded and are relatively
illiquid investments and recent volatility in CMBS trading markets has caused
the value of these investments to decline.
The
prices of lower credit quality CMBS are generally less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns and underlying borrower developments. A projection of an
economic downturn, for example, could cause a decline in the price of lower
credit quality CMBS because the ability of borrowers to make principal and
interest payments on the mortgages underlying the mortgage backed securities may
be impaired. In such event, existing credit support in the securitization
structure may be insufficient to protect us against the loss of our principal on
these securities.
We
may have difficulty or be unable to sell some of our loans and commercial
mortgage backed securities.
A
prolonged period of frozen capital markets, decline in commercial real estate
values and an out of favor real estate sector may prevent us from selling our
loans and CMBS. Given the terms of our March 2009 restructuring, we may be
forced to sell assets in order to meet required debt reduction levels. If the
market for real estate loans and CMBS is disrupted or dislocated, this may be
difficult or impossible, causing further losses or events of
default.
The
impact of the events of September 11, 2001 and the effect thereon on terrorism
insurance expose us to certain risks.
The
terrorist attacks on September 11, 2001 disrupted the U.S. financial markets,
including the real estate capital markets, and negatively impacted the U.S.
economy in general. Any future terrorist attacks, the anticipation of any such
attacks, and the consequences of any military or other response by the U.S. and
its allies may have a further adverse impact on the U.S. financial markets and
the economy generally. We cannot predict the severity of the effect that such
future events would have on the U.S. financial markets, the economy or our
business.
In
addition, the events of September 11, 2001 created significant uncertainty
regarding the ability of real estate owners of high profile assets to obtain
insurance coverage protecting against terrorist attacks at commercially
reasonable rates, if at all. The Terrorism Risk Insurance Act of 2002, or TRIA,
was extended in December 2007. Coverage under the new law, the Terrorism Risk
Insurance Program Reauthorization Act, or TRIPRA, now expires in 2014. There is
no assurance that TRIPRA will be extended beyond 2014. The absence of affordable
insurance coverage may adversely affect the general real estate lending market,
lending volume and the market’s overall liquidity and may reduce the number of
suitable investment opportunities available to us and the pace at which we are
able to make investments. If the properties that we invest in are unable to
obtain affordable insurance coverage, the value of those investments could
decline and in the event of an uninsured loss, we could lose all or a portion of
our investment.
The
economic impact of any future terrorist attacks could also adversely affect the
credit quality of some of our loans and investments. Some of our loans and
investments will be more susceptible to such adverse effects than others. We may
suffer losses as a result of the adverse impact of any future attacks and these
losses may adversely impact our results of operations.
Our
non-U.S. investments will expose us to certain risks.
We make
investments in foreign countries. Investing in foreign countries involves
certain additional risks that may not exist when investing in the United States.
The risks involved in foreign investments include:
Unfavorable
legal, regulatory, economic or political changes such as those described above
could adversely affect our financial condition and results of
operations.
We may
from time to time invest a portion of our assets in non-U.S. investments or in
instruments denominated in non-U.S. currencies, the prices of which will be
determined with reference to currencies other than the U.S. dollar. We may hedge
our foreign currency exposure. To the extent unhedged, the value of our non-U.S.
assets will fluctuate with U.S. dollar exchange rates as well as the price
changes of our investments in the various local markets and currencies. Among
the factors that may affect currency values are trade balances, the level of
short-term interest rates, differences in relative values of similar assets in
different currencies, long-term opportunities for investment and capital
appreciation and political developments. An increase in the value of the U.S.
dollar compared to the other currencies in which we make our investments will
reduce the effect of increases and magnify the effect of decreases in the prices
of our securities in their local markets. We could realize a net loss on an
investment, even if there were a gain on the underlying investment before
currency losses were taken into account. We may seek to hedge currency risks by
investing in currencies, currency futures contracts and options on currency
futures contracts, forward currency exchange contracts, swaps, options or any
combination thereof (whether or not exchange traded), but there can be no
assurance that these strategies will be effective, and such techniques entail
costs and additional risks.
There
are increased risks involved with construction lending activities.
We
originate loans for the construction of commercial and residential use
properties. Construction lending generally is considered to involve a higher
degree of risk than other types of lending due to a variety of factors,
including generally larger loan balances, the dependency on successful
completion of a project, the dependency upon the successful operation of the
project (such as achieving satisfactory occupancy and rental rates) for
repayment, the difficulties in estimating construction costs and loan terms
which often do not require full amortization of the loan over its term and,
instead, provide for a balloon payment at stated maturity.
Some
of our investments and investment opportunities may be in synthetic
form.
Synthetic
investments are contracts between parties whereby payments are exchanged based
upon the performance of an underlying obligation. In addition to the risks
associated with the performance of the obligation, these synthetic interests
carry the risk of the counterparty not performing its contractual obligations.
Market standards, GAAP accounting methodology, tax and other regulations related
to these investments are evolving, and we cannot be certain that their evolution
will not adversely impact the value or sustainability of these investments.
Furthermore, our ability to invest in synthetic investments, other than through
taxable REIT subsidiaries, may be severely limited by the REIT qualification
requirements because synthetic investment contracts generally are not qualifying
assets and do not produce qualifying income for purposes of the REIT asset and
income tests.
Risks Related to Our
Investment Management Business and Management of CDOs
Our
investment management agreements contain “clawback” provisions which may require
repayment of incentive management fees previously received by us.
As part
of our investment management business we earn incentive fees based on the
performance of certain of our investment management vehicles. The investment
management agreements which govern our relationship with these vehicles contain
“clawback” provisions which may require the repayment of incentive fees
previously received by us. If certain predetermined performance thresholds are
not met upon the ultimate dissolution of such entities, we could be required to
refund up to $5.6 million of incentive fees previously received.
Our
March 2009 balance sheet restructuring and financial condition may adversely
impact our investment management business.
In large
part, our ability to raise capital and garner other investment management and
advisory business is dependent upon our reputation as a balance sheet manager
and credit underwriter, as well as the ability to demonstrate that we have the
resources to manage and co-invest in our internal funds. Our recent losses and
March 2009 restructuring limit our abilities in this regard. In addition,
further credit deterioration in our balance sheet portfolio and our overall
financial condition could jeopardize our status as an approved special servicer
from the three major rating agencies, which would impair our ability to generate
future servicing revenues.
We
are subject to risks and uncertainties associated with operating our investment
management business, and we may not achieve the investment returns that we
expect.
We will
encounter risks and difficulties as we operate our investment management
business. In order to achieve our goals as an investment manager, we
must:
If we do
not successfully operate our investment management business to achieve the
investment returns that we or the market anticipates, our results of operations
may be adversely impacted.
We may
expand our investment management business to involve other investment classes
where we do not have prior investment experience. We may find it difficult to
attract third party investors without a performance track record involving such
investments. Even if we attract third party capital, there can be no assurance
that we will be successful in deploying the capital to achieve targeted returns
on the investments.
We
face substantial competition from established participants in the private equity
market as we offer investment management vehicles to third party
investors.
We face
significant competition from large financial and other institutions that have
proven track records in marketing and managing vehicles and otherwise have a
competitive advantage over us because they have access to pre-existing third
party investor networks into which they can channel competing investment
opportunities. If our competitors offer investment products that are competitive
with products offered by us, we will find it more difficult to attract investors
and to capitalize our investment management vehicles.
Our
investment management vehicles are subject to the risk of defaults by third
party investors on their capital commitments.
The
capital commitments made by third party investors to our investment management
vehicles represent unsecured promises by those investors to contribute cash to
the investment management vehicles from time to time as investments are made by
the investment management vehicles. Accordingly, we are subject to general
credit risks that the investors may default on their capital commitments. If
defaults occur, we may not be able to close loans and investments we have
identified and negotiated which could materially and adversely affect the
investment management vehicles’ investment program or make us liable for breach
of contract, in either case to the detriment of our franchise in the private
equity market.
CTIMCO’s
role as collateral manager for our CDOs and investment manager for our funds may
expose us to liabilities to investors.
We are
subject to potential liabilities to investors as a result of CTIMCO’s role as
collateral manager for our CDOs and our investment management business
generally. In serving in such roles, we could be subject to claims by CDO
investors and investors in our funds that we did not act in accordance with our
duties under our CDO and investment fund documentation or that we were negligent
in taking or refraining from taking actions with respect to the underlying
collateral in our CDOs or in making investments. In particular, the discretion
that we exercise in managing the collateral for our CDOs and the investments in
our investment management business could result in liability due to the current
negative conditions in the commercial real estate market and the inherent
uncertainties surrounding the course of action that will result in the best long
term results with respect to such collateral and investments. This risk could be
increased due to the affiliated nature of our roles. If we were found liable for
our actions as collateral manager or investment manager and we were required to
pay significant damages to our CDO and investment advisory investors, our
financial condition could be materially adversely effected.
Risks Related to Our
Company
We
are dependent upon our senior management team to develop and operate our
business.
Our
ability to develop and operate our business depends to a substantial extent upon
the experience, relationships and expertise of our senior management and key
employees. We cannot assure you that these individuals will remain in our
employ. Our chief executive officer, Stephen D. Plavin, and our chief credit
officer, Thomas C. Ruffing, are currently not employed pursuant to employment
agreements and the employment agreement with our chief financial officer,
Geoffrey G. Jervis, expires on December 31, 2010. There can be no assurance that
Messrs. Plavin and Ruffing, and upon expiration of his agreement, Mr. Jervis,
will enter into new employment agreements pursuant to which they agree to
long-term employment with us. In addition, the departure of Mr. Plavin from his
employment with us constitutes an event of default under our restructured debt
obligations unless a suitable replacement acceptable to the lenders is hired by
us.
Our ability to compensate our employees is limited by
our restructured debt obligations.
Our
restructured debt obligations limit the aggregate cash compensation we are able
to pay our employees (excluding our chief executive officer and chief financial
officer) to 2008 aggregate compensation levels. In the case of our chief
executive officer and chief financial officer, cash compensation must be
approved by our lenders. This may impact our ability to retain our employees or
attract new employees.
There
may be conflicts between the interests of our investment management vehicles and
us.
We are
subject to a number of potential conflicts between our interests and the
interests of our investment management vehicles. We are subject to potential
conflicts of interest in the allocation of investment opportunities between our
balance sheet once our balance sheet investment activity resumes and our
investment management vehicles. In addition, we may make investments that are
senior or junior to, participations in, or have rights and interests different
from or adverse to, the investments made by our investment management vehicles.
Our interests in such investments may conflict with the interests of our
investment management vehicles in related investments at the time of origination
or in the event of a default or restructuring of the investment. Finally, our
officers and employees may have conflicts in allocating their time and services
among us and our investment management vehicles.
We
must manage our portfolio in a manner that allows us to rely on an exclusion
from registration under the Investment Company Act of 1940 in order to avoid the
consequences of regulation under that Act.
We rely
on an exclusion from registration as an investment company afforded by Section
3(c)(5)(C) of the Investment Company Act of 1940. Under this exclusion, we are
required to maintain, on the basis of positions taken by the SEC staff in
interpretive and no-action letters, a minimum of 55% of the value of the total
assets of our portfolio in “mortgages and other liens on and interests in real
estate,” which we refer to as “Qualifying Interests,” and a minimum of 80% in
Qualifying Interests and real estate related assets. Because registration as an
investment company would significantly affect our ability to engage in certain
transactions or to organize ourselves in the manner we are currently organized,
we intend to maintain our qualification for this exclusion from registration. In
the past, based on SEC staff positions, when required due to the mix of assets
in our balance sheet portfolio, we have purchased all of the outstanding
interests in pools of whole residential mortgage loans, which we treat as
Qualifying Interests. Investments in such pools of whole residential mortgage
loans may not represent an optimum use of our investable capital when compared
to the available investments we target pursuant to our investment strategy.
These investments present additional risks to us, and these risks are compounded
by our inexperience with such investments. We continue to analyze our
investments and may acquire other pools of whole loan residential mortgage
backed securities when and if required for compliance purposes.
We treat
certain of our investments in CMBS, B Notes and mezzanine loans as Qualifying
Interests for purposes of determining our eligibility for the exclusion provided
by Section 3(c)(5)(C) to the extent such treatment is consistent with guidance
provided by the SEC or its staff. In the absence of such guidance that otherwise
supports the treatment of these investments as Qualifying Interests, we will
treat them, for purposes of determining our eligibility for the exclusion
provided by Section 3(c)(5)(C), as real estate related assets or miscellaneous
assets, as appropriate.
We
understand the SEC staff is currently reconsidering its interpretive policy
under Section 3(c)(5)(C) and whether to advance rulemaking to define the basis
for the exclusion. We cannot predict the outcome of this reconsideration or
potential rulemaking initiative and its impact on our ability to rely on the
exclusion.
If our
portfolio does not comply with the requirements of the exclusion we rely upon,
we could be forced to alter our portfolio by selling or otherwise disposing of a
substantial portion of the assets that are not Qualifying Interests or by
acquiring a significant position in assets that are Qualifying Interests.
Altering our portfolio in this manner may have an adverse effect on our
investments if we are forced to dispose of or acquire assets in an unfavorable
market and may adversely affect our stock price.
If it
were established that we were an unregistered investment company, there would be
a risk that we would be subject to monetary penalties and injunctive relief in
an action brought by the SEC, that we would be unable to enforce contracts with
third parties and that third parties could seek to obtain rescission of
transactions undertaken during the period it was established that we were an
unregistered investment company and limitations on corporate leverage that would
have an adverse impact on our investment returns.
Changes
in accounting pronouncements may materially change the presentation and content
of our financial statements.
Our
balance sheet and statement of operations may be less meaningful if we are
required to consolidate certain entities as a result of our adoption of
Financial Accounting Standard Board Statement of Financial Accounting Standards
No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB
Statement No. 140,” or Statement of Financial Accounting Standards No. 167,
“Amendments to FASB Interpretation No. 46(R)”, both of which are effective for
the first annual reporting period that begins after November 15, 2009. The
adoption of these accounting pronouncements is expected to substantially
increase the financial assets and liabilities included on our balance sheet. The
adoption of these accounting pronouncements is likely to result in increased
operating costs as we develop controls and review the information necessary to
account for the assets in accordance with GAAP.
We
may not have sufficient cash flow to satisfy our tax liability arising from the
use of CDO financing.
Due to
the redirection provisions of our CDOs, which reallocate principal and interest
otherwise distributable to us to repay senior note holders, assets financed
through our CDOs may generate current taxable income without a corresponding
cash distribution to us. In order to raise the cash necessary to meet our tax
and/or distribution requirements, we may be required to borrow funds, sell a
portion of our assets at disadvantageous prices or find other alternatives. In
any case, there can be no assurances that we will be able to generate sufficient
cash from these endeavors to meet our tax and/or distribution
requirements.
In
the event we experience an “ownership change” for purposes of Section 382 of the
Internal Revenue Code, our ability to utilize our net operating losses and net
capital losses against future taxable income will be limited, increasing our
dividend distribution requirement for which we may not have sufficient cash
flow.
We have
substantial net operating and net capital loss carry forwards which we use to
offset our tax and/or distribution requirements. In the event that we experience
an “ownership change” for purposes of Section 382 of the Internal Revenue Code,
our ability to use these losses will be effectively eliminated. An “ownership
change” is determined based upon the changes in ownership that occur in our
common stock for a trailing three year period. Such change provisions may be
triggered by regular trading activity in our common stock, and are generally
beyond our control.
Risks Relating to Our Class
A Common Stock
Sales or other dilution of
our equity may adversely affect the market price of our class A common
stock.
In
connection with restructuring our debt obligations, we issued warrants to
purchase 3,479,691 shares of our class A common stock, which represents
approximately 15.6% of our outstanding common stock and stock units as of
February 23, 2010. The market price of our class A common stock could decline as
a result of sales of a large number of shares of class A common stock acquired
upon exercise of the warrants in the market. If the warrants are exercised, the
issuance of additional shares of class A common stock would dilute the ownership
interest of our existing shareholders.
Because
a limited number of shareholders, including members of our management team, own
a substantial number of our shares, they may make decisions or take actions that
may be detrimental to your interests.
Our
executive officers and directors, along with vehicles for the benefit of their
families, collectively own and control 2,250,109 shares of our common stock
representing approximately 10.1% of our outstanding common stock and stock units
as of February 23, 2010. W. R. Berkley Corporation, or WRBC, which employs one
of our directors, owns 3,843,413 shares of our common stock, which represents
17.2% of our outstanding common stock and stock units as of February 23, 2010.
By virtue of their voting power, these shareholders have the power to
significantly influence our affairs and are able to influence the outcome of
matters required to be submitted to shareholders for approval, including the
election of our directors, amendments to our charter, mergers, sales of assets
and other acquisitions or sales. The influence exerted by these shareholders
over our affairs might not be consistent with the interests of some or all of
our other shareholders. In addition, the concentration of ownership in our
officers or directors or shareholders associated with them may have the effect
of delaying or preventing a change in control of our company, including
transactions in which you might otherwise receive a premium for your class A
common stock, and might negatively affect the market price of our class A common
stock.
Some
provisions of our charter and bylaws and Maryland law may deter takeover
attempts, which may limit the opportunity of our shareholders to sell their
shares at a favorable price.
Some of
the provisions of our charter and bylaws and Maryland law discussed below could
make it more difficult for a third party to acquire us, even if doing so might
be beneficial to our shareholders by providing them with the opportunity to sell
their shares at a premium to the then current market price.
Issuance of Preferred Stock Without
Shareholder Approval. Our charter authorizes our board of directors to
authorize the issuance of up to 100,000,000 shares of preferred stock and up to
100,000,000 shares of class A common stock. Our charter also authorizes our
board of directors, without shareholder approval, to classify or reclassify any
unissued shares of our class A common stock and preferred stock into other
classes or series of stock and to amend our charter to increase or decrease the
aggregate number of shares of stock of any class or series that may be issued.
Our board of directors, therefore, can exercise its power to reclassify our
stock to increase the number of shares of preferred stock we may issue without
shareholder approval. Preferred stock may be issued in one or more series, the
terms of which may be determined without further action by shareholders. These
terms may include preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
or terms or conditions of redemption. The issuance of any preferred stock,
however, could materially adversely affect the rights of holders of our class A
common stock and, therefore, could reduce the value of the class A common stock.
In addition, specific rights granted to future holders of our preferred stock
could be used to restrict our ability to merge with, or sell assets to, a third
party. The power of our board of directors to issue preferred stock could make
it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change in control, thereby preserving the current shareholders’
control.
Advance Notice Bylaw. Our
bylaws contain advance notice procedures for the introduction of business and
the nomination of directors. These provisions could discourage proxy contests
and make it more difficult for you and other shareholders to elect
shareholder-nominated directors and to propose and approve shareholder proposals
opposed by management.
Maryland Takeover Statutes.
We are subject to the Maryland Business Combination Act which could delay or
prevent an unsolicited takeover of us. The statute substantially restricts the
ability of third parties who acquire, or seek to acquire, control of us to
complete mergers and other business combinations without the approval of our
board of directors even if such transaction would be beneficial to shareholders.
“Business combinations” between such a third party acquirer or its affiliate and
us are prohibited for five years after the most recent date on which the
acquirer or its affiliate becomes an “interested shareholder.” An “interested
shareholder” is defined as any person who beneficially owns 10 percent or more
of our shareholder voting power or an affiliate or associate of ours who, at any
time within the two-year period prior to the date interested shareholder status
is determined, was the beneficial owner of 10 percent or more of our shareholder
voting power. If our board of directors approved in advance the transaction that
would otherwise give rise to the acquirer or its affiliate attaining such
status, such as the issuance of shares of our class A common stock to WRBC, the
acquirer or its affiliate would not become an interested shareholder and, as a
result, it could enter into a business combination with us. Our board of
directors could choose not to negotiate with an acquirer if the board determined
in its business judgment that considering such an acquisition was not in our
strategic interests. Even after the lapse of the five-year prohibition period,
any business combination with an interested shareholder must be recommended by
our board of directors and approved by the affirmative vote of at
least:
The
super-majority vote requirements do not apply if the transaction complies with a
minimum price requirement prescribed by the statute.
The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors prior to the time that
an interested shareholder becomes an interested shareholder. Our board of
directors has exempted any business combination involving family partnerships
controlled separately by John R. Klopp, our former chief executive officer, and
Craig M. Hatkoff, our director, and a limited liability company indirectly
controlled by a trust for the benefit of Samuel Zell, our chairman of the board,
and his family. As a result, these persons and WRBC may enter into business
combinations with us without compliance with the super-majority vote
requirements and the other provisions of the statute.
We are
subject to the Maryland Control Share Acquisition Act. With certain exceptions,
the Maryland General Corporation Law provides that “control shares” of a
Maryland corporation acquired in a control share acquisition have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiring
person or by our officers or by our directors who are our employees, and may be
redeemed by us. “Control shares” are voting shares which, if aggregated with all
other shares owned or voted by the acquirer, would entitle the acquirer to
exercise voting power in electing directors within one of the specified ranges
of voting power. A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions, including an undertaking
to pay expenses, may compel our board to call a special meeting of shareholders
to be held within 50 days of demand to consider the voting rights of the
“control shares” in question. If no request for a meeting is made, we may
present the question at any shareholders’ meeting.
If voting
rights are not approved at the shareholders’ meeting or if the acquiring person
does not deliver the statement required by Maryland law, then, subject to
certain conditions and limitations, we may redeem for fair value any or all of
the control shares, except those for which voting rights have previously been
approved. If voting rights for control shares are approved at a shareholders’
meeting and the acquirer may then vote a majority of the shares entitled to
vote, then all other shareholders may exercise appraisal rights. The fair value
of the shares for purposes of these appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if we are not a party to the
transaction, nor does it apply to acquisitions approved or exempted by our
charter or bylaws. Our bylaws contain a provision exempting certain holders
identified in our bylaws from this statute, including WRBC, family partnerships
controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited
liability company indirectly controlled by a trust for the benefit of Samuel
Zell and his family.
We are
also subject to the Maryland Unsolicited Takeovers Act which permits our board
of directors, among other things and notwithstanding any provision in our
charter or bylaws, to elect on our behalf to stagger the terms of directors and
to increase the shareholder vote required to remove a director. Such an election
would significantly restrict the ability of third parties to wage a proxy fight
for control of our board of directors as a means of advancing a takeover offer.
If an acquirer was discouraged from offering to acquire us, or prevented from
successfully completing a hostile acquisition, you could lose the opportunity to
sell your shares at a favorable price.
The
price of our class A common stock may be impacted by many
factors.
As with
any public company, a number of factors may impact the trading price of our
class A common stock, many of which are beyond our control. These factors
include, in addition to other risk factors mentioned in this
section:
Our
restructured debt obligations restrict us from paying cash dividends, which may
reduce the attractiveness of an investment in our class A common
stock.
The
restrictions on our inability to pay cash dividends, except in a limited manner,
will reduce the current dividend yield on our class A common stock and this can
negatively impact the price of our class A common stock as investors seeking
current income pursue alternative investments.
Your
ability to sell a substantial number of shares of our class A common stock may
be restricted by the low trading volume historically experienced by our class A
common stock.
Although
our class A common stock is listed on the New York Stock Exchange, the daily
trading volume of our shares of class A common stock has historically been lower
than the trading volume for certain other companies. As a result, the ability of
a holder to sell a substantial number of shares of our class A common stock in a
timely manner without causing a substantial decline in the market value of the
shares, especially by means of a large block trade, may be restricted by the
limited trading volume of the shares of our class A common stock.
Risks Related to our REIT
Status and Certain Other Tax Items
Our
charter does not permit any individual to own more than 9.9% of our class A
common stock, and attempts to acquire our class A common stock in excess of the
9.9% limit would be void without the prior approval of our board of
directors.
For the
purpose of preserving our qualification as a REIT for federal income tax
purposes, our charter prohibits direct or constructive ownership by any
individual of more than a certain percentage, currently 9.9%, of the lesser of
the total number or value of the outstanding shares of our class A common stock
as a means of preventing ownership of more than 50% of our class A common stock
by five or fewer individuals. The charter’s constructive ownership rules are
complex and may cause the outstanding class A common stock owned by a group of
related individuals or entities to be deemed to be constructively owned by one
individual. As a result, the acquisition of less than 9.9% of our outstanding
class A common stock by an individual or entity could cause an individual to own
constructively in excess of 9.9% of our outstanding class A common stock, and
thus be subject to the charter’s ownership limit. There can be no assurance that
our board of directors, as permitted in the charter, will increase, or will not
decrease, this ownership limit in the future. Any attempt to own or transfer
shares of our class A common stock in excess of the ownership limit without the
consent of our board of directors will be void, and will result in the shares
being transferred by operation of the charter to a charitable trust, and the
person who acquired such excess shares will not be entitled to any distributions
thereon or to vote such excess shares.
The 9.9%
ownership limit may have the effect of precluding a change in control of us by a
third party without the consent of our board of directors, even if such change
in control would be in the interest of our shareholders or would result in a
premium to the price of our class A common stock (and even if such change in
control would not reasonably jeopardize our REIT status). The ownership limit
exemptions and the reset limits granted to date would limit our board of
directors’ ability to reset limits in the future and at the same time maintain
compliance with the REIT qualification requirement prohibiting ownership of more
than 50% of our class A common stock by five or fewer individuals.
There
are no assurances that we will be able to pay dividends in the
future.
We expect
in the future when we generate taxable income to pay quarterly dividends and to
make distributions to our shareholders in amounts so that all or substantially
all of our taxable income in each year, subject to certain adjustments, is
distributed. This, along with our compliance with other requirements, should
enable us to qualify for the tax benefits accorded to a REIT under the Internal
Revenue Code. All distributions will be made at the discretion of our board of
directors and will depend on our earnings, our financial condition, maintenance
of our REIT status and such other factors as our board of directors may deem
relevant from time to time. There are no assurances that we will be able to pay
dividends in the future. In addition, some of our distributions may include a
return of capital, which would reduce the amount of capital available to operate
our business. There have been recent changes to the Internal Revenue Code that
would allow us to pay required dividends in the form of additional shares of
common stock equal in value up to 90% of the required dividend. We expect that
as we undertake efforts to conserve cash and enhance our liquidity and comply
with our restructured debt obligations covenants, future required dividends
on our class A common stock will be paid in the form of class A common stock to
the fullest extent permitted. There can be no assurance as to when we will no
longer be subject to debt obligation covenants or will cease our efforts to
conserve cash and enhance liquidity to an extent we believe positions us to
resume the payment of dividends completely or substantially in
cash.
We
will be dependent on external sources of capital to finance our
growth.
As with
other REITs, but unlike corporations generally, our ability to finance our
growth must largely be funded by external sources of capital because we
generally will have to distribute to our shareholders 90% of our taxable income
in order to qualify as a REIT, including taxable income where we do not receive
corresponding cash. Our access to external capital will depend upon a number of
factors, including general market conditions, the market’s perception of our
growth potential, our current and potential future earnings, cash distributions
and the market price of our class A common stock.
If
we do not maintain our qualification as a REIT, we will be subject to tax as a
regular corporation and face a substantial tax liability. Our taxable REIT
subsidiaries will be subject to income tax.
We expect
to continue to operate so as to qualify as a REIT under the Internal Revenue
Code. However, qualification as a REIT involves the application of highly
technical and complex Internal Revenue Code provisions for which only a limited
number of judicial or administrative interpretations exist. Notwithstanding the
availability of cure provisions in the tax code, various compliance requirements
could be failed and could jeopardize our REIT status. Furthermore, new tax
legislation, administrative guidance or court decisions, in each instance
potentially with retroactive effect, could make it more difficult or impossible
for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year,
then:
Fee
income from our investment management business is expected to be realized by one
of our taxable REIT subsidiaries, and, accordingly, will be subject to income
tax.
Complying
with REIT requirements may cause us to forego otherwise attractive opportunities
and limit our expansion opportunities.
In order
to qualify as a REIT for federal income tax purposes, we must continually
satisfy tests concerning, among other things, our sources of income, the nature
of our investments in commercial real estate and related assets, the amounts we
distribute to our shareholders and the ownership of our stock. We may also be
required to make distributions to shareholders at disadvantageous times or when
we do not have funds readily available for distribution. Thus, compliance with
REIT requirements may hinder our ability to operate solely on the basis of
maximizing profits.
Complying
with REIT requirements may force us to liquidate or restructure otherwise
attractive investments.
In order
to qualify as a REIT, we must also ensure that at the end of each calendar
quarter, at least 75% of the value of our assets consists of cash, cash items,
government securities and qualified REIT real estate assets. The remainder of
our investments in securities cannot include more than 10% of the outstanding
voting securities of any one issuer or 10% of the total value of the outstanding
securities of any one issuer unless we and such issuer jointly elect for such
issuer to be treated as a “taxable REIT subsidiary” under the Internal Revenue
Code. The total value of all of our investments in taxable REIT subsidiaries
cannot exceed 20% of the value of our total assets. In addition, no more than 5%
of the value of our assets can consist of the securities of any one issuer. If
we fail to comply with these requirements, we must dispose of a portion of our
assets within 30 days after the end of the calendar quarter in order to avoid
losing our REIT status and suffering adverse tax consequences.
Complying
with REIT requirements may force us to borrow to make distributions to
shareholders.
From time
to time, our taxable income may be greater than our cash flow available for
distribution to shareholders. If we do not have other funds available in these
situations, we may be unable to distribute substantially all of our taxable
income as required by the REIT provisions of the Internal Revenue Code. Thus, we
could be required to borrow funds, sell a portion of our assets at
disadvantageous prices or find another alternative. These options could increase
our costs or reduce our equity. Our restructured debt obligations may cause us
to recognize taxable income without any corresponding cash income and we may be
required to distribute additional dividends in cash and/or class A common
stock.
None.
Our
principal executive and administrative offices are located in approximately
12,000 square feet of office space leased at 410 Park Avenue, New York, New York
10022. Our telephone number is (212) 655-0220 and our website address is
http://www.capitaltrust.com. Our lease for office space expires in October
2018.
We are
not party to any material litigation or legal proceedings, or, to the best of
our knowledge, any threatened litigation or legal proceedings, which, in our
opinion, individually or in the aggregate, would have a material adverse effect
on our results of operations or financial condition.
We did
not submit any matters to a vote of security holders during the fourth quarter
of 2009.
PART II
Our class
A common stock is listed for trading on the New York Stock Exchange, or NYSE,
under the symbol “CT.” The table below sets forth, for the calendar quarters
indicated, the reported high and low sale prices for our class A common stock as
reported on the NYSE composite transaction tape and the per share cash dividends
declared on our class A common stock.
The last
reported sale price of the class A common stock on February 23, 2010 as
reported on the NYSE composite transaction tape was $1.74. As of
February 23, 2010, there were 573 holders of record of the class A common
stock. By including persons holding shares in broker accounts under street
names, however, we estimate our shareholder base to be approximately
8,718.
We
generally intend to distribute each year substantially all of our taxable income
(which does not necessarily equal net income as calculated in accordance with
generally accepted accounting principles) to our shareholders so as to comply
with the REIT provisions of the Internal Revenue Code. If necessary for REIT
qualification purposes, we may need to distribute any taxable income remaining
after giving effect to the distribution of the final regular quarterly dividend
each year, together with the first regular quarterly dividend payment of the
following taxable year or, at our discretion, in a separate dividend distributed
prior thereto. We refer to these dividends as special dividends. As required by
covenants in our restructured debt obligations, our cash dividend distributions
are restricted to the minimum amount necessary to maintain our status as a REIT.
Moreover, such covenants, taking into consideration the recent IRS rulings which
allow REITs to distribute up to 90% of their dividends in the form of stock for
tax years ending on or before December 31, 2011, require us to make any
distribution in stock to the extent permitted.
In
addition to the foregoing restrictions, our dividend policy remains subject to
revision at the discretion of our board of directors. All distributions will be
made at the discretion of our board of directors and will depend upon our
taxable income, our financial condition, our maintenance of REIT status and
other factors that our board of directors deems relevant. In accordance with
Internal Revenue Service guidance, we are required to report the amount of
excess inclusion income earned by the Company. In 2009, we calculated excess
inclusion income to be de minimis.
Issuer
Purchases of Equity Securities
The
following table provides information regarding purchases of shares of our common
stock made by or on our behalf during the three months ended December 31,
2009.
Equity
Compensation Plan Information
The
following table summarizes information, as of December 31, 2009, relating
to our equity compensation plans pursuant to which shares of our common stock or
other equity securities may be granted from time to time.
The
following table sets forth selected consolidated financial data, which was
derived from our historical consolidated financial statements included in our
Annual Reports on Form 10-K, for the years ended 2005 through
2009.
You
should read the following information together with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and the notes thereto included in “Item 8.
Financial Statements and Supplementary Data.”
References
herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its
subsidiaries unless the context specifically requires otherwise.
Introduction
Our
business model is designed to produce a mix of net interest margin from our
balance sheet investments and fee income plus co-investment income from our
investment management operations. In managing our operations, we focus on
originating investments, managing our portfolios and capitalizing our
businesses.
Current
Market Conditions
During
2009, the state of the commercial real estate markets continued to deteriorate.
Occupancy and rental rates declined in virtually all product types and
geographic markets, and borrowers with near-term refinancing needs encountered
increased difficulty finding replacement financing. As a result, commercial
mortgage delinquencies and defaults are rising rapidly, as sponsors are unable
(or unwilling) to support projects in the face of value decline. In 2009, our
portfolio experienced significant credit deterioration, evidenced by $482.4
million of new provisions for loan losses and $111.9 million of impairments on
our securities portfolio and real estate owned. We expect this trend to continue
for the foreseeable future and expect significant challenges ahead for our
business. These challenges are discussed in the risk factors contained in Item
1A to this Form 10-K.
Restructuring
of Our Debt Obligations
On March
16, 2009, we consummated a restructuring of substantially all of our recourse
debt obligations with certain of our secured and unsecured creditors pursuant to
the amended terms of our secured credit facilities, our senior credit agreement,
and certain of our trust preferred securities. While we believe that the
restructuring of our debt obligations is a positive development for us in our
efforts to stabilize our business, there can be no assurance that ultimately our
restructuring will enable the successful collection of our balance sheet assets.
For a further discussion of our restructuring, see the risk factors contained in
Item 1A to this Form 10-K.
Repurchase
Obligations and Secured Debt
On March
16, 2009, we amended and restructured our secured, recourse credit facilities
with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan
Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or
Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global
Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan,
Morgan Stanley and Citigroup as the participating secured lenders.
Specifically,
on March 16, 2009, we entered into separate amendments to the respective master
repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to
the terms of each such agreement, we repaid the balance outstanding with each
participating secured lender by an amount equal to three percent (3%) of the
then outstanding principal amount due under its existing secured, recourse
credit facility, $17.7 million in the aggregate, and further amended the terms
of each such facility, without any change to the collateral pool securing the
debt owed to each participating secured lender, to provide the
following:
In each
master repurchase agreement amendment and the amendment to our senior credit
agreement described in greater detail below, which we collectively refer to as
our restructured debt obligations, we also replaced all existing financial
covenants with the following uniform covenants which:
On
February 25, 2009, we entered into a satisfaction, termination and release
agreement with UBS pursuant to which the parties terminated their right, title,
interest in, to and under a master repurchase agreement. We consented to the
transfer to UBS, and UBS unconditionally accepted and retained all of our
rights, title and interest in a loan financed under the master repurchase
agreement in complete satisfaction of all of our obligations, including all
amounts due thereunder.
On March
16, 2009, we issued to JPMorgan, Morgan Stanley and Citigroup warrants to
purchase 3,479,691 shares of our class A common stock at an exercise price of
$1.79 per share, which is equal to the closing bid price on the New York Stock
Exchange on March 13, 2009. The warrants will become exercisable on March 16,
2012 and expire on March 16, 2019, and may be exercised through a cashless
exercise at the option of the warrant holders.
On March
16, 2009, we also entered into an agreement to terminate the master repurchase
agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness
due under the Goldman Sachs secured credit facility. Specifically, we: (i)
pre-funded certain required advances of approximately $2.4 million under one
loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a
full release to us of another loan, and (iii) transferred all of the other
assets that served as collateral for Goldman Sachs to Goldman Sachs for a
purchase price of $85.7 million as payment in full for the balance remaining
under the secured credit facility. Goldman Sachs agreed to release us from any
further obligation under the master repurchase agreement.
On April
6, 2009, we entered into a satisfaction, termination and release agreement with
Lehman Brothers pursuant to which both parties terminated their right, title and
interest in, to and under the existing agreement. As of the date of termination,
we had an $18.0 million outstanding obligation due under the existing facility,
and our recorded book value of the collateral was $25.9 million. We consented to
transfer to Lehman, and Lehman unconditionally accepted, all of our right, title
and interest in the collateral, and the termination fully satisfied all of our
obligations under the facility.
Senior
Credit Facility
On March
16, 2009, we entered into an amended and restated senior credit agreement
governing our term loan from WestLB AG, New York Branch, participant and
administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan
Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company
Americas, which we collectively refer to as the senior lenders. Pursuant to the
amended and restated senior credit agreement, we and the senior lenders agreed
to:
Junior
Subordinated Notes
On March
16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd.,
Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and
Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior
subordinated notes in exchange for $50.0 million face amount of trust preferred
securities issued through our statutory trust subsidiary CT Preferred Trust I
held by affiliates of Taberna, which we refer to as the Trust I Securities, and
$53.1 million face amount of trust preferred securities issued through our
statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna,
which we refer to as the Trust II Securities. We refer to the Trust I Securities
and the Trust II Securities together as the Trust Securities. The Trust
Securities were backed by and recorded as junior subordinated notes issued by us
with terms that mirror the Trust Securities.
On May
14, 2009, we reached an agreement with the remaining holders of our Trust II
Securities to issue new junior subordinated notes on substantially similar terms
as the Trust Securities mentioned above in exchange for $21.9 million face
amount of the Trust Securities.
Pursuant
to the exchange agreements dated March 16, 2009 and May 14, 2009, we issued
$143.8 million aggregate principal amount of new junior subordinated notes due
on April 30, 2036 (an amount equal to 115% of the aggregate face amount of the
Trust Securities exchanged). The interest rate payable under the new
subordinated notes is 1% per annum from the date of exchange through and
including April 29, 2012, which we refer to as the modification period. After
the modification period, the interest rate will revert to a blended rate equal
to that which was previously payable under the notes underlying the Trust
Securities, a fixed rate of 7.23% per annum through and including April 29,
2016, and thereafter a floating rate, reset quarterly, equal to three-month
LIBOR plus 2.44% until maturity. The new junior subordinated notes will mature
on April 30, 2036 and will be freely redeemable by us at par at any time. The
new junior subordinated notes contain a covenant that through April 30, 2012,
subject to certain exceptions, we may not declare or pay dividends or
distributions on, or redeem, purchase or acquire any of our equity interests
except to the extent necessary to maintain our status as a REIT. Except for the
foregoing, the new junior subordinated notes contain substantially similar
provisions as the Trust Securities.
As part
of the agreement with Taberna, we also paid $750,000 to cover third party fees
and costs incurred in connection with the exchange transaction.
Originations
We have
historically allocated investment opportunities between our balance sheet and
investment management vehicles based upon our assessment of risk and return
profiles, the availability and cost of capital, and applicable regulatory
restrictions associated with each opportunity. The restructuring of our recourse
secured and unsecured debt obligations included covenants that require us to
cease our balance sheet investment activities. Going forward, until these
covenants are eliminated, we will not make new balance sheet investments, but
will continue to carry out investment activities for our investment management
vehicles, consistent with our previous strategies and investment mandates for
each respective vehicle.
Notwithstanding
the current capabilities of our investment management platform, we have
maintained a defensive posture with respect to investment originations in light
of the continued market volatility. The table below summarizes our total
originations and the allocation of opportunities between our balance sheet and
the investment management business for the years ended December 31, 2009 and
2008.
Our
balance sheet investments include various types of commercial mortgage backed
securities and collateralized debt obligations, or Securities, and commercial
real estate loans and related instruments, or Loans, which we collectively refer
to as Interest Earning Assets. The table below shows our Interest Earning Assets
as of December 31, 2009 and 2008.
In some
cases our Loan originations are not fully funded at closing, creating an
obligation for us to make future fundings, which we refer to as Unfunded Loan
Commitments. Typically, Unfunded Loan Commitments are part of construction and
transitional Loans. As of December 31, 2009, our four Unfunded Loan Commitments
totaled $4.9 million, which will generally only be funded when and/or if the
borrower meets certain performance hurdles with respect to the underlying
collateral.
According
to the terms of our restructured debt obligations, our lenders are no longer
required to advance a portion of these commitments and our ability to fund these
Unfunded Loan Commitments will be contingent upon our having sufficient
liquidity available to us after required payments to our creditors.
In
addition to our investments in Interest Earning Assets, we have two equity
investments in unconsolidated subsidiaries as of December 31, 2009. These
represent our equity co-investments in private equity funds that we manage, CT
Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or
CTOPI.
The table
below details the carrying value of those investments, as of December 31, 2009
and 2008.
Asset
Management
We
actively manage our balance sheet portfolio and the assets held by our
investment management vehicles with our in-house team of asset managers. While
our investments are primarily in the form of debt, we are aggressive in
exercising the rights afforded to us as a lender. These rights may include
collateral level budget approvals, lease approvals, loan covenant enforcement,
escrow/reserve management/collection, collateral release approvals and other
rights that we may negotiate. In light of the recent deterioration in property
level performance, property valuation, and the real estate capital markets, an
increasing number of our loans are either non-performing and/or on our watch
list, requiring intensive efforts on the part of our asset management team to
maximize our recovery on those investments.
As of
December 31, 2009, we had 20 Loans with an aggregate net book value of $131.0
million ($608.4 million gross carrying value, net of $477.4 million of reserves)
against which we had recorded a provision for loan losses. During the year ended
December 31, 2009, we recorded $487.7 million of provisions for loan losses,
which was offset by a recapture of $5.3 million of previous provisions for a net
provision of $482.4 million. This includes $172.5 million of provisions recorded
on loan participations sold which did not qualify for sale accounting under GAAP
and remain on our consolidated balance sheet as both assets and equivalent
liabilities. Although provisions were recorded against these assets in 2009, the
liabilities will not be eliminated until the loans are contractually
extinguished.
The table
below details the overall credit profile of our Interest Earning Assets, which
includes: (i) Loans where we have foreclosed upon the underlying collateral and
own an equity interest in real estate, (ii) Loans against which we have recorded
a provision for loan losses, or reserves, (iii) Securities against which we have
recorded an other than temporary impairment, and (iv) Loans and Securities that
are categorized as Watch List, which are currently performing but pose a higher
risk of non-performance and/or loss, that we actively monitor and manage to
mitigate these risks.
During
the year ended December 31, 2009, five Loans with an aggregate outstanding
balance of $72.2 million were fully repaid. In addition, nine Loans with an
aggregate outstanding balance of $221.9 million as of December 31, 2009, which
did not qualify for extension pursuant to the corresponding loan agreements,
were extended during the year ended December 31, 2009.
Also in 2009, we negotiated two discounted partial repayments with
one of our borrowers, which resulted in a repayment of $6.0 million to us, and
the forgiveness of an additional $2.5 million of the borrower’s indebtedness.
Following this discounted repayment, we were relieved of a $3.8 million Unfunded
Loan Commitment under this loan. As a result of this transaction, we recorded a
$2.5 million loss under the provision for loan losses on our consolidated
statement of operations.
We
actively manage our Securities portfolio using a combination of quantitative
tools and loan/property level analysis to monitor the performance of the
Securities and their collateral against our original expectations. Securities
are analyzed to monitor underlying loan delinquencies, transfers to special
servicing, and changes to the servicer’s watch list population. Realized losses
on underlying loans are tracked and compared to our original loss expectations.
On a periodic basis, individual loans of concern are also
re-underwritten.
As of
December 31, 2009, we have recorded an aggregate $118.3 million
other-than-temporary impairment against eleven of our Securities, which had an
aggregate net book value at December 31, 2009 of $27.4 million. Of this total
other-than-temporary impairment, $104.3 million was related to expected credit
losses, as discussed in Notes 2 and 3 to our consolidated financial statements,
and has been recorded through earnings, and $14.0 million was related to fair
value adjustments in excess of expected credit losses, or the Valuation
Adjustment, and has been recorded as a component of other comprehensive
income/(loss) with no impact on earnings.
At
year-end, there were significant differences between the estimated fair value
and the book value of some of the Securities in our portfolio. We believe these
differences to be related to the disruption in the capital markets and the
general negative bias against structured financial products and not reflective
of a change in cash flow expectations from these securities. Accordingly, we
have not recorded any additional other-than-temporary impairments against such
Securities.
The
ratings performance of our Securities portfolio over the years ended December
31, 2009 and 2008 is detailed below:
We
continue to foresee trends in asset performance in 2010 that are likely to lead
to further defaults and downgrades: borrowers faced with maturities will have a
more difficult time refinancing their properties in light of the volatility and
lack of liquidity in the financial markets, and real estate fundamentals
continue to weaken as the impacts of a weak U.S. economy continue to filter into
the commercial real estate sector impacting cash flows. These trends may result
in negotiated extensions or modifications of the terms of our investments or the
exercise of foreclosure and other remedies; in any event, it is likely that we
will continue to experience difficulty with respect to our investments and will
likely incur material losses in our portfolio.
Capitalization
We
capitalize our business with a combination of debt and equity. Our debt sources,
which we collectively refer to as Interest Bearing Liabilities, currently
include repurchase agreements, CDOs, a senior credit facility and junior
subordinated notes. Our equity capital is currently comprised entirely of common
stock.
During
the first and second quarters of 2009, a substantial amount of our Interest
Bearing Liabilities, including repurchase agreements and secured debt, our
senior credit facility and junior subordinated notes, were restructured,
exchanged, terminated, or otherwise satisfied pursuant to the transactions noted
above and described in Note 9 to our consolidated financial statements. In
addition, we are subject to certain covenants under our restructured debt
obligations which, among other things, restrict our ability to incur additional
indebtedness for the foreseeable future. While we believe that the March 2009
restructuring improved the stability of our capital structure, there can be no
assurance that a further restructuring will not be required or that any such
further restructuring will be successful.
The table
below shows our capitalization mix as of December 31, 2009 and
2008:
A summary
of selected structural features of our Interest Bearing Liabilities as of
December 31, 2009 and 2008 is detailed in the table below:
The table
below summarizes our repurchase obligations and secured debt as of December 31,
2009 and 2008:
Our
collateralized debt obligations, or CDOs, as of December 31, 2009 and 2008 are
described below:
The most
subordinated components of our debt capital structure are our junior
subordinated notes. These securities represent long-term, subordinated,
unsecured financing and generally carry limited covenants. As of December 31,
2009, we had $143.8 million of junior subordinated notes outstanding with a book
value of $128.1 million and a current coupon of 1.00% per annum. The interest
rate on these notes will increase to 7.23% per annum for the period from April
30, 2012 through April 29, 2016 and then convert to a floating interest rate of
three-month LIBOR plus 2.44% per annum through maturity on April 30,
2036.
We did
not issue any new shares of class A common stock during the year. Changes in the
number of shares resulted from restricted stock grants, forfeitures and vesting,
as well as stock unit grants.
The
following table calculates our book value per share as of December 31, 2009 and
2008:
As of
December 31, 2009, we had 21,875,282 of our class A common stock and restricted
stock outstanding.
Other
Balance Sheet Items
Participations
sold represent interests in certain loans that we originated and subsequently
sold to one of our investment management vehicles, CT Large Loan 2006, Inc., and
third parties. We present these sold interests as both assets and liabilities on
the basis that these arrangements do not qualify as sales under GAAP. As of
December 31, 2009, we had five such participations sold with a total gross
carrying value of $289.1 million. The income earned on the loans is recorded as
interest income and an identical amount is recorded as interest expense on the
consolidated statements of operations. Generally, participations sold are
recorded as assets and liabilities in equal amounts on our consolidated balance
sheet. During 2009, we recorded $172.5 million of provisions for loan loses
against certain of our participations sold assets, resulting in a net book value
of $116.6 million. The associated liabilities have not been adjusted as of
December 31, 2009, and will not be eliminated until the loans are contractually
extinguished.
Interest
Rate Exposure
We
endeavor to manage a book of assets and liabilities that are generally matched
with respect to interest rates, typically financing floating rate assets with
floating rate liabilities and fixed rate assets with fixed rate liabilities. In
some cases, we finance fixed rate assets with floating rate liabilities and, in
those cases, we may use interest rate derivatives, such as swaps, to effectively
convert the floating rate debt to fixed rate debt. In such instances, the equity
we have invested in fixed rate assets is not typically swapped, leaving a
portion of our equity capital exposed to changes in value of the fixed rate
assets due to interest rate fluctuations. The balance of our assets earn
interest at floating rates and are financed with floating rate liabilities,
leaving a portion of our equity capital exposed to cash flow variability from
fluctuations in rates. Generally, these assets and liabilities earn interest at
rates indexed to one-month LIBOR.
Our
counterparties in these transactions are large financial institutions and we are
dependent upon the financial health of these counterparties and a functioning
interest rate derivative market in order to effectively execute our hedging
strategy.
The table
below details our interest rate exposure as of December 31, 2009 and
2008:
Investment
Management Overview
In
addition to our balance sheet investment activities, we act as an investment
manager for third parties. We have developed our investment management business
to leverage our platform, generate fee revenue from investing third party
capital and, in certain instances, earn co-investment income. Our active
investment management mandates are described below:
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