Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

Commission File Number 1-14788

Capital Trust, Inc.
(Exact name of registrant as specified in its charter)

Maryland
94-6181186
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
410 Park Avenue, 14th Floor, New York, NY
10022
(Address of principal executive offices)
(Zip Code)
   
Registrant's telephone number, including area code:
(212) 655-0220
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of outstanding shares of the registrant's class A common stock, par value $0.01 per share, as of May 5, 2008 was 21,705,355.
 
 

 
 
Part I.
Financial Information
 
       
 
1
       
   
1
       
   
2
       
   
3
       
   
4
       
   
5
       
 
26
       
 
40
       
 
42
       
Part II.
Other Information
 
       
 
43
       
 
43
       
 
43
       
  43
       
 
43
       
 
43
       
 
44
       
 
45
 
 

 
 
Capital Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007
(in thousands, except per share data)
           
   
March 31,
 
December 31,
Assets
 
2008
 
2007
   
(unaudited)
 
(audited)
             
Cash and cash equivalents
  $ 122,528     $ 25,829  
Restricted cash
    15,756       5,696  
Commercial mortgage backed securities
    873,493       876,864  
Loans receivable
    2,251,614       2,257,563  
Equity investment in unconsolidated subsidiaries
    905       977  
Deposits and other receivables
    3,541       3,927  
Accrued interest receivable
    14,281       15,091  
Deferred income taxes
    4,258       3,659  
Prepaid and other assets
    20,156       21,876  
Total assets
  $ 3,306,532     $ 3,211,482  
                 
                 
Liabilities & Shareholders' Equity
               
                 
Liabilities:
               
Accounts payable and accrued expenses
  $ 29,623     $ 65,682  
Repurchase obligations
    910,049       911,857  
Collateralized debt obligations
    1,187,904       1,192,299  
Senior unsecured credit facility
    100,000       75,000  
Junior subordinated debentures
    128,875       128,875  
Participations sold
    409,324       408,351  
Interest rate hedge liabilities
    35,647       18,686  
Deferred origination fees and other revenue
    1,718       2,495  
Total liabilities
    2,803,140       2,803,245  
                 
                 
Shareholders' equity:
               
Class A common stock $0.01 par value 100,000 shares authorized, 21,284 and 17,166 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively ("class A common stock")
    213       172  
Restricted class A common stock $0.01 par value, 410 and 424 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively ("restricted class A common stock" and together with class A common stock, "common stock")
    4       4  
Additional paid-in capital
    541,405       426,113  
Accumulated other comprehensive loss
    (26,279 )     (8,684 )
Accumulated deficit
    (11,951 )     (9,368 )
Total shareholders' equity
    503,392       408,237  
                 
Total liabilities and shareholders' equity
  $ 3,306,532     $ 3,211,482  
                 
See accompanying notes to consolidated financial statements.
 
 
-1-

 

Capital Trust, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended March 31, 2008 and 2007
(in thousands, except share and per share data)
(unaudited)
   
Three Months Ended
   
March 31,
   
2008
 
2007
Income from loans and other investments:
           
     Interest and related income
  $ 56,554     $ 57,449  
     Less: Interest and related expenses
    37,944       36,100  
          Income from loans and other investments, net
    18,610       21,349  
                 
Other revenues:
               
     Management fees
    2,197       749  
     Incentive management fees
          962  
     Servicing fees
    178       67  
     Other interest income
    188       311  
          Total other revenues
    2,563       2,089  
                 
Other expenses:
               
     General and administrative
    6,901       6,812  
     Depreciation and amortization
    105       1,328  
          Total other expenses
    7,006       8,140  
                 
Income/(loss) from equity investments
    7       (703 )
Income before income taxes
    14,174       14,595  
           Income tax benefit
    (599 )     (254 )
Net income
  $ 14,773     $ 14,849  
                 
Per share information:
               
     Net earnings per share of common stock:
               
          Basic
  $ 0.82     $ 0.85  
          Diluted
  $ 0.82     $ 0.84  
                 
     Weighted average shares of common stock outstanding:
               
          Basic
    17,942,649       17,513,742  
          Diluted
    18,017,413       17,724,495  
                 
     Dividends declared per share of common stock
  $ 0.80     $ 0.80  
                 
See accompanying notes to consolidated financial statements.
 
 
-2-

 
 
 Capital Trust, Inc. and Subsidiaries
 Consolidated Statements of Changes in Shareholders' Equity
 For the Three Months Ended March 31, 2008 and 2007
 (in thousands)
 (unaudited)
 
   
Comprehensive Income
 
Class A Common Stock
 
Restricted Class A Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income/(Loss)
 
Accumulated Deficit
 
Total
Balance at January 1, 2007
        $ 169     $ 5     $ 417,641     $ 12,717     $ (4,260 )   $ 426,272  
                                                       
Net income
  $ 14,849                               14,849       14,849  
Unrealized loss on derivative financial instruments
    (1,862 )                       (1,862 )           (1,862 )
Unrealized loss on securities
    (24 )                       (24 )           (24 )
Amortization of unrealized gain on securities
    (417 )                       (417 )           (417 )
Currency translation adjustments
    (228 )                       (228 )           (228 )
Deferred loss on settlement of swap
    (19 )                       (19 )           (19 )
Amortization of deferred gains and losses on settlement of swaps
    (73 )                       (73 )           (73 )
Sale of shares of class A common stock under stock option agreement
                      352                   352  
Restricted class A common stock earned
          1             1,275                   1,276  
Dividends declared on common stock
                                  (13,968 )     (13,968 )
Balance at March 31, 2007
  $ 12,226     $ 170     $ 5     $ 419,268     $ 10,094     $ (3,379 )   $ 426,158  
                                                         
Balance at January 1, 2008
          $ 172     $ 4     $ 426,113     $ (8,684 )   $ (9,368 )   $ 408,237  
                                                         
Net income
  $ 14,773                                       14,773       14,773  
Unrealized loss on derivative financial instruments
    (16,961 )                       (16,961 )           (16,961 )
Unrealized gain on available for sale security
    277                         277             277  
Amortization of unrealized gain on securities
    (437 )                       (437 )           (437 )
Deferred loss on settlement of swap
    (419 )                       (419 )           (419 )
Amortization of deferred gains and losses on settlement of swaps
    (55 )                       (55 )           (55 )
Shares of class A common stock issued in public offering
          40             112,567                   112,607  
Shares of class A common stock issued under dividend reinvestment plan
                      1,541                   1,541  
Sale of shares of class A common stock under stock option agreement
                      180                   180  
Restricted class A common stock earned
          1             1,004                   1,005  
Dividends declared on common stock
                                  (17,356 )     (17,356 )
Balance at March 31, 2008
  $ (2,822 )   $ 213     $ 4     $ 541,405     $ (26,279 )   $ (11,951 )   $ 503,392  
 
See accompanying notes to consolidated financial statements.
 
-3-

 
Capital Trust, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2008 and 2007
(in thousands)
(unaudited)
   
Three Months Ended
 
   
March 31,
   
2008
 
2007
Cash flows from operating activities:
           
     Net income
  $ 14,773     $ 14,849  
     Adjustments to reconcile net income to net cash provided by
               
              operating activities:
               
          Depreciation and amortization
    105       1,328  
          (Income)/loss from equity investments
    (7 )     703  
          Distributions of income from equity investments in unconsolidated
               
                subsidiaries
          126  
          Restricted class A common stock earned
    1,004       1,276  
          Amortization of premiums and discounts on loans, CMBS,
               
               and debt, net
    (1,698 )     (1,037 )
          Amortization of deferred gains and losses on settlement of swaps
    (55 )     (73 )
          Amortization of finance costs
    1,370       788  
     Changes in assets and liabilities, net:
               
          Deposits and other receivables
    2,250       502  
          Accrued interest receivable
    810       (211 )
          Deferred income taxes
    (599 )      
          Prepaid and other assets
    428       283  
          Deferred origination fees and other revenue
    (650 )     517  
          Accounts payable and accrued expenses
    (5,931 )     (2,671 )
     Net cash provided by operating activities
    11,800       16,380  
                 
Cash flows from investing activities:
               
          Purchases of CMBS
          (35,729 )
          Principal collections on and proceeds from CMBS
    3,568       7,025  
          Origination, purchase and fundings of loans receivable
    (28,639 )     (367,508 )
          Principal collections on loans receivable
    34,842       93,532  
          Equity investments in unconsolidated subsidiaries
          (1,251 )
          Return of capital from equity investments in unconsolidated subsidiaries
          517  
          Proceeds from total return swaps
          1,815  
          Purchase of equipment and leasehold improvements
    (10 )     (11 )
          (Increase) decrease in restricted cash
    (10,060 )     794  
     Net cash used in investing activities
    (299 )     (300,816 )
                 
Cash flows from financing activities:
               
          Proceeds from repurchase obligations
    101,393       457,293  
          Repayment of repurchase obligations
    (103,202 )     (280,631 )
          Proceeds from credit facilities
    25,000       25,000  
          Issuance of junior subordinated debentures
          77,325  
          Purchase of common equity in CT Preferred Trust I & CT Preferred
               
              Trust II
          (2,325 )
          Repayment of collateralized debt obligations
    (4,317 )     (6,042 )
          Proceeds from participations sold
          35,782  
          Settlement of interest rate hedges
    (419 )     (19 )
          Payment of financing costs
    (94 )     (1,875 )
          Sale of class A common stock upon stock option exercise
    180       352  
          Dividends paid on common stock
    (47,492 )     (24,379 )
          Proceeds from sale of shares of class A common stock
    112,608        
          Proceeds from dividend reinvestment plan
    1,541        
     Net cash provided by financing activities
    85,198       280,481  
                 
Net increase (decrease) in cash and cash equivalents
    96,699       (3,955 )
Cash and cash equivalents at beginning of year
    25,829       26,142  
Cash and cash equivalents at end of period
  $ 122,528     $ 22,187  
 
See accompanying notes to consolidated financial statements.
 
 
-4-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
 
1.   Organization

References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.
 
We are a fully integrated, self-managed finance and investment management company that specializes in credit-sensitive structured financial products. 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 commencement of our finance business in 1997 through March 31, 2008, we have completed over $10.5 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.
 
2.   Summary of Significant Accounting Policies

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management's discussion and analysis of financial condition and results of operations filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.  In our opinion, all material adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2008.  Our accounting and reporting policies conform in all material respects to generally accepted accounting principles, or GAAP, in the United States.
 
Principles of Consolidation
The accompanying unaudited consolidated interim financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary.  All significant intercompany balances and transactions have been eliminated in consolidation. Our interests in CT Preferred Trust I and CT Preferred Trust II, the issuers of trust securities backed by our junior subordinated debentures, are accounted for using the equity method and their assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I and CT Preferred Trust II are variable interest entities in which we are not the primary beneficiary under Financial Accounting Standards Board, or FASB, Interpretation No. 46(R) "Consolidation of Variable Interest Entities", or FIN 46R. We account for our co-investment interest in the private equity funds we co-sponsored and continue to manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI, under the equity method of accounting. We also accounted for our investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, under the equity method of accounting until we sold our investment in December 2007. As such, we report a percentage of the earnings of the companies in which we have such investments equal to our ownership percentage on a single line item in the consolidated statement of income as Income from equity investments. CTOPI is an investment company (under the AICPA Investment Company Guide) and therefore it maintains its financial records on a fair value basis. We have retained such accounting relative to our investment in CTOPI pursuant to the Emerging Issues Task Force, or EITF, issue No. 85-12 “Retention of Specialized Accounting for Investments in Consolidation.”
 
Revenue Recognition
Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and is recorded on the accrual basis. Fees, premiums, discounts and direct costs in connection with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. For loans where we have unfunded commitments, we amortize the appropriate items on a straight line basis. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.
 
Fees from special servicing and asset management services are recognized as services are rendered. We account for incentive fees we earn from our investment management business in accordance with Method 1 of EITF D-96, “Accounting for Management Fees Based on a Formula”. Under Method 1, no incentive income is recorded until all contingencies have been eliminated.
 
 
-5-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
Cash and Cash Equivalents
We classify highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents.  At March 31, 2008 and December 31, 2007, a majority of the cash and cash equivalents consisted of overnight deposits in demand deposit accounts.  As of, and for the periods ended, March 31, 2008 and December 31, 2007, we had bank balances in excess of federally insured amounts.  We have not experienced any losses on our demand deposits, commercial paper or money market investments.
 
Restricted Cash
Restricted cash at March 31, 2008 was comprised of $15.8 million that is on deposit with the trustee for our collateralized debt obligations, or CDOs, and is expected to be used to pay contractual interest and principal and to purchase replacement collateral for our reinvesting CDOs during their respective reinvestment periods. Restricted cash at December 31, 2007 was $5.7 million.
 
Commercial Mortgage Backed Securities
We classify our commercial mortgage backed securities, or CMBS, pursuant to FASB Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, or FAS 115, on the date of acquisition of the investment. On August 4, 2005, we made a decision to change the accounting classification of our CMBS investments from available-for-sale to held-to-maturity. Held-to-maturity investments are stated at cost adjusted for the amortization of any premiums or discounts and any premiums or discounts are amortized through the consolidated statements of income using the effective interest method.  Other than in the instance of impairment, these held-to-maturity investments are shown in our financial statements at their adjusted values pursuant to the methodology described above.
 
We may also invest in CMBS and certain other securities which may be classified as available-for-sale. Available-for-sale securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income/(loss) in shareholders’ equity. Many of these investments are relatively illiquid and management must estimate their values. In making these estimates, management utilizes market prices provided by dealers who make markets in these securities, but may, under certain circumstances, adjust these valuations based on management’s judgment. Changes in the valuations do not affect our reported income or cash flows, but impact shareholders’ equity and, accordingly, book value per share.
 
Income on these securities is recognized based upon a number of assumptions that are subject to uncertainties and contingencies. Examples include, among other things, the rate and timing of principal payments, including prepayments, repurchases, defaults and liquidations, the pass-through or coupon rate and interest rates. Additional factors that may affect our reported interest income on our mortgage backed securities include interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and magnitude of credit losses on the mortgage loans underlying the securities that are impacted by, among other things, the general condition of the real estate market, including competition for tenants and their related credit quality, and changes in market rental rates. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter the assumptions.
 
We account for CMBS under EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, or EITF 99-20. Under EITF 99-20, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience and the present value of the revised cash flows using the current expected yield is less than the present value of the previously estimated remaining cash flows, adjusted for cash receipts during the intervening period, an other than temporary impairment is deemed to have occurred. Accordingly, the security is written down to fair value with the resulting charge being included in income and a new cost basis established with the original discount or premium written off when the new cost basis is established. In accordance with this guidance, on a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, we calculate a revised yield based upon the current amortized cost of the investment, including any other than temporary impairments recognized to date, and the revised cash flows. The revised yield is then applied prospectively to recognize interest income. Management must also assess whether unrealized losses on securities reflect a decline in value that is other than temporary, and, accordingly, write down the impaired security to its fair value, through a charge to income. Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying loans.
 
 
-6-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
During the fourth quarter of 2004, we concluded that two of our CMBS investments had incurred other-than-temporary impairment and we incurred a charge of $5.9 million through the income statement.  At March 31, 2008, we believe there has not been any adverse change in cash flows relating to existing CMBS investments; therefore we did not recognize any additional other than temporary impairment on any CMBS investments.  Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying loans.
 
From time to time we purchase CMBS and other investments in which we have a level of control over the issuing entity; we refer to these investments as controlling class investments. The presentation of controlling class investments in our financial statements is governed in part by FIN 46R. FIN 46R could require that certain controlling class investments be presented on a consolidated basis. Based upon the specific circumstances of certain of our CMBS investments that are controlling class investments and our interpretation of FIN 46R, specifically the exemption for qualifying special purpose entities as defined under FASB Statements of Financial Accounting Standard No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, or FAS 140, we have concluded that the entities that have issued the controlling class investments should not be presented on a consolidated basis. We are aware that FAS 140 is currently under review by standard setters and that, as a result of this review, our current interpretation of FIN 46R and FAS 140 may change.
 
Loans Receivable and Reserve for Possible Credit Losses
We purchase and originate commercial real estate debt and related instruments, or Loans, to be held as long term investments at amortized cost. Management must periodically evaluate each of these Loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the Loan. If a Loan were determined to be permanently impaired, we would write down the Loan through a charge to the reserve for possible credit losses. Given the nature of our Loan portfolio and the underlying commercial real estate collateral, significant judgment on the part of management is required in determining permanent impairment and the resulting charge to the reserve, which includes but is not limited to making assumptions regarding the value of the real estate that secures the loan. Each Loan in our portfolio is evaluated at least quarterly using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors deemed necessary by management to assess the likelihood of delinquency or default. If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our Loan, and this potential loss is multiplied by the default likelihood to determine the size of the reserve. Actual losses, if any, could ultimately differ from these estimates.
 
Deferred Financing Costs
The deferred financing costs which are included in prepaid and other assets on our consolidated balance sheets include issuance costs related to our debt and are amortized using the effective interest method or a method that approximates the effective interest method.
 
Repurchase Obligations
In certain circumstances, we have financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty. We currently record these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under any repurchase agreement as a liability on our consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on the consolidated statements of income. There is a position under consideration by standard setters, based upon a technical interpretation of FAS 140, that starting in fiscal 2009 these transactions will not qualify as a purchase by us. We believe, consistent with industry practice, that we are accounting for these transactions in an appropriate manner; however, if these investments do not qualify as a purchase under FAS 140, we would be required to present the net investment (asset balance less the repurchase obligation balance) on our consolidated balance sheets together with an embedded derivative with the corresponding change in fair value of the derivative being recorded in the consolidated statements of income. The value of the derivative would reflect not only changes in the value of the underlying investment, but also changes in the value of the underlying credit provided by the counterparty. Income from these arrangements would be presented on a net basis. Furthermore, hedge instruments related to these assets and liabilities, currently deemed effective, may no longer be effective and may have to be accounted for as non-hedge derivatives. As of March 31, 2008, we had entered into 26 such transactions, with a book value of the associated assets of $657.1 million financed with repurchase obligations of $445.7 million.
 
 
-7-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
Interest Rate Derivative Financial Instruments
In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. Specifically, we currently use interest rate swaps to effectively convert variable rate liabilities, that are financing fixed rate assets, to fixed rate liabilities. The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability. The swap agreements are generally accounted for on a held-to-maturity basis, and, in cases where they are terminated early, any gain or loss is generally amortized over the remaining life of the hedged item. These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment. Changes in value of effective cash flow hedges are reflected in our financial statements through accumulated other comprehensive income/(loss) and do not affect our net income. To the extent a derivative does not qualify for hedge accounting, and is deemed a non-hedge derivative, the changes in its value are included in net income.
 
To determine the fair value of derivative instruments, we use third parties to periodically value our interests.
 
Income Taxes
Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income. Management believes that we operate in a manner that will continue to allow us to be taxed as a REIT and, as a result, do not expect to pay substantial corporate level taxes (other than taxes payable by our taxable REIT subsidiaries which are accounted for in accordance with FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, or FAS 109). Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and we may also be subject to penalties.
 
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109”, or FIN 48.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation was effective January 1, 2007 for us. The adoption of FIN 48 did not have a material impact on our financial results.
 
Accounting for Stock-Based Compensation
We account for stock based compensation in accordance with FASB Statement of Financial Accounting Standards No. 123(R) “Share Based Payment,” or FAS 123(R).  Upon adoption of FAS 123(R), as of January 1, 2006, we have elected to utilize the modified prospective method, and there was no impact from this adoption.  Compensation expense for the time vesting of stock based compensation grants is recognized on the accelerated attribution method and compensation expense for performance vesting of stock based compensation grants is recognized on a straight line basis.  Compensation expense relating to stock-based compensation is recognized in net income using a fair value measurement method.
 
Comprehensive Income
We comply with the provisions of the FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, or FAS 130, in reporting comprehensive income and its components in the full set of general purpose financial statements. Total comprehensive (loss)/income was ($2.8) million and $12.2 million, for the periods ended March 31, 2008 and 2007, respectively.  The primary components of comprehensive income other than net income were the unrealized gain/(loss) on derivative financial instruments and CMBS.  At March 31, 2008, accumulated other comprehensive (loss)/income was ($26.3) million, comprised of unrealized gains on CMBS of $8.3 million, unrealized losses on cash flow swaps of $35.6 million, and $1.0 million of deferred realized gains on the settlement of cash flow swaps.
 
Earnings per Share of Common Stock
Earnings per share of common stock are presented based on the requirements of the FASB Statement of Accounting Standards No. 128, “Earnings per Share”, or FAS 128. Basic EPS is computed based on the net earnings applicable to common stock and stock units divided by weighted average number of shares of common stock and stock units outstanding during the period. Diluted EPS is based on the net earnings allocable to common stock and stock units, divided by weighted average number of shares of common stock and stock units and potentially dilutive common stock options.
 
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may ultimately differ from those estimates.
 
 
-8-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
Reclassifications
Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the March 31, 2008 presentation.
 
Segment Reporting
We operate in two reportable segments. We have an internal information system that produces performance and asset data for the two segments along service lines.
 
The “Balance Sheet Investment” segment includes our portfolio of interest earning assets (including our co-investments in investment management vehicles) and the financing thereof.
 
The “Investment Management” segment includes the activities of our wholly-owned investment management subsidiary, CT Investment Management Co. LLC, or CTIMCO and its subsidiaries. CTIMCO is a taxable REIT subsidiary and serves as the investment manager of Capital Trust, Inc., all of our investment management vehicles and all of our CDOs and serves as senior servicer and special servicer on certain of our investments and for third parties. In addition, CTIMCO owns certain of our assets.
 
Business Combination
On June 15, 2007, we purchased a healthcare loan origination platform, located in Birmingham, Alabama. We paid a $2.6 million initial purchase price ($1.9 million in cash and $707,000 in common stock), and we have a contingent obligation to pay up to an additional $1.8 million ($1.1 million in cash and $700,000 in common stock) on March 15, 2009, if the acquired business meets certain performance criteria. We have recorded $2.1 million of goodwill associated with the initial purchase price.
 
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of net assets of businesses acquired.  Goodwill is reviewed annually in the fourth quarter to determine if there is impairment at a reporting unit level or more frequently if an indication of impairment exists.  No impairment charges for goodwill were recorded in the first quarter of 2008.
 
New Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” or FAS 157.  FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FAS 157 applies to reporting periods beginning after November 15, 2007. As discussed above, we report the changes in the value of effective cash flow hedges and our available for sale securities through accumulated other comprehensive income/(loss). We adopted FAS 157 as of January 1, 2008. As a result of the adoption of FAS 157, the fair value of our interest rate hedge liabilities decreased by $1.5 million due to the valuation adjustment related to our credit.
 
 
-9-

 

Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
The table below details the fair value measurements at March 31, 2008 (in millions):
 
         
Fair Value Measurements at Reporting Date Using
                       
         
Quoted Prices in
       
Significant
         
Active Markets for
 
Significant Other
 
Unobservable
   
Fair Value at
 
Identical Assets
 
Observable Inputs
 
Inputs
Description
 
March 31, 2008
 
(Level 1)
 
(Level 2)
 
(Level 3)
 (in millions)
                       
                         
Available-for-sale securities
  $ 8.3     $     $ 8.3     $  
                                 
Interest rate hedge liabilities
    (35.6 )           (35.6 )      
                                 
Total
  $ (27.3 )   $     $ (27.3 )   $  
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or FAS 159.  FAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  FAS 159 applies to reporting periods beginning after November 15, 2007. We adopted FAS 159 as of January 1, 2008.
 
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”, or FAS 161.  The use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. Accordingly, FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. FAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  We are currently evaluating the potential effect of the adoption of FAS 161 on our consolidated financial statements.
 
 
-10-


 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)

3.   Commercial Mortgage Backed Securities

Activity relating to our CMBS investments for the three months ended March 31, 2008 was as follows ($ values in thousands):
 
                           
Weighted Average
Asset Type
 
Face Value
 
Book Value
 
Number of
Securities
 
Number of Issues
 
Rating (1)
 
Coupon(2)
 
Yield(2)
 
Maturity
(Years)(3)
                                                 
December 31, 2007
                                               
Floating Rate
  $ 171,620     $ 170,543       14       11    
BB
      8.16 %     8.19 %     2.6  
Fixed Rate
    744,790       706,321       65       47    
  BB+
      6.69 %     7.14 %     7.5  
Total/Average
    916,410       876,864       79       58    
 BB+
      6.97 %     7.35 %     6.5  
                                                               
Originations
                                                             
Floating Rate
                                               
Fixed Rate
                                               
Total/Average
                                               
                                                                 
Repayments & Other (4)
                                                               
Floating Rate
    26       (103 )              
 N/A
   
 N/A
 
 N/A
 
 N/A
 
Fixed Rate
    4,045       3,474                
 N/A
   
 N/A
 
 N/A
 
 N/A
 
Total/Average
    4,071       3,371                
 N/A
   
 N/A
 
 N/A
 
 N/A
 
                                                                 
March 31, 2008
                                                               
Floating Rate
    171,594       170,646       14       11    
BB
      6.26 %     6.28 %     2.5  
Fixed Rate
    740,745       702,847       65       47    
BB
      6.68 %     7.13 %     7.3  
Total/Average
  $ 912,339     $ 873,493       79       58    
BB
      6.60 %     6.96 %     6.3  
 
     
(1)   
Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $37.9 million face value ($37.2 million book value) of unrated equity investments in collateralized debt obligations.
(2)    Calculations based on LIBOR of 2.70% as of March 31, 2008 and LIBOR of 4.60% as of December 31, 2007.
(3)    Represents the maturity of the investment assuming all extension options are executed. 
(4)    Includes full repayments, sales, partial repayments, mark-to-market adjustments on available for sale securities, and the impact of premium and discount amortization and losses, if any.  The figures shown in “Number of Securities” and “Number of Issues” represent only the full repayments/sales, if any. 
 
 
-11-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
  
The tables below detail the ratings, vintage, property type and geographic distribution of the collateral securing our CMBS at March 31, 2008 (in thousands):
 
Ratings
 
Book Value
Percentage
AAA
 
$
126,729
 
15%
AA
   
27,769
 
3%
A
   
187,245
 
21%
BBB
   
265,268
 
30%
BB
   
114,744
 
13%
B
   
57,979
 
7%
CCC
   
4,991
 
1%
CC
   
4,334
 
1%
D
   
47,237
 
5%
NR
   
37,197
 
4%
Total
 
$
873,493
 
100%
Vintage
 
Book Value
Percentage
2007
 
$
109,619
 
13%
2006
   
48,815
 
6%
2005
   
61,662
 
7%
2004
   
94,753
 
11%
2003
   
29,386
 
3%
2002
   
19,608
 
2%
2001
   
18,980
 
2%
2000
   
41,475
 
5%
1999
   
30,216
 
3%
1998
   
311,623
 
36%
1997
   
73,650
 
8%
1996
   
33,706
 
4%
Total
 
$
873,493
 
100%
Property Type
 
Book Value
Percentage
Retail
 
$
234,218
 
27%
Office
   
194,296
 
22%
Hotel
   
167,527
 
19%
Multi-Family
   
144,005
 
16%
Other
   
69,497
 
8%
Industrial
   
32,402
 
4%
Healthcare
   
31,548
 
4%
Total
 
$
873,493
 
100%
Geographic Location
 
Book Value
Percentage
Northeast
 
$
217,495
 
25%
Southeast
   
214,427
 
25%
Midwest
   
148,171
 
17%
West
   
144,465
 
16%
Southwest
   
113,569
 
13%
Northwest
   
24,040
 
3%
Other
   
11,326
 
1%
Total
 
$
873,493
 
100%
As detailed in Note 2, on August 4, 2005, pursuant to the provisions of FAS 115, we made a decision to change the accounting classification of our then portfolio of CMBS investments from available-for-sale to held-to-maturity.
 
While we typically account for our CMBS investments on a held-to-maturity basis, under certain circumstances we will account for CMBS on an available-for-sale basis.  At March 31, 2008 and December 31, 2007, we had one CMBS investment that we designated and account for on an available-for-sale basis with a face value of $7.4 million and $7.7 million, respectively.  The security earned interest at a weighted average coupon of 8.34% at March 31, 2008 and December 31, 2007.  At March 31, 2008 and December 31, 2007, the security was carried at its fair market value of $8.3 million.  The investment matures in February 2010.
 
 
-12-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
Quarterly, we reevaluate our CMBS portfolio to determine if there has been an other-than-temporary impairment based upon our assessment of future cash flow receipts.  For the three months ended March 31, 2008, we believe that there has not been any adverse change in cash flows in our CMBS portfolio and, therefore, did not recognize any other-than-temporary impairments.  Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.
 
Certain of our CMBS investments are carried at values in excess of their market values.  This difference can be caused by, among other things, changes in interest rates, changes in credit spreads, realized/unrealized losses in the underlying securities and general market conditions.  At March 31, 2008, 66 CMBS investments with an aggregate carrying value of $690.4 million were carried at values in excess of their market values.  Market value for these CMBS investments was $577.6 million at March 31, 2008. In total, we had 79 CMBS investments with an aggregate carrying value of $873.5 million that have an estimated market value of $772.0 million (this valuation does not include the value of interest rate swaps entered into in conjunction with the purchase/financing of these investments). We regularly examine the CMBS portfolio and have determined that there have been no change in our expectations  of cash flows from our CMBS portfolio since our last financial report.  Our assessment of cash flows, combined with our ability and intent to hold our CMBS investments to maturity (at which point we expect to recover book value plus amortized discounts/premiums, which may be at maturity), is the basis for our conclusion that these investments are not impaired despite the differences between estimated fair value and book value.  We attribute the difference between book value and estimated fair value to the current market dislocation and a general negative bias for structured products such as CMBS.
 
The following table shows the gross unrealized losses and fair value of our CMBS with unrealized losses as of March 31, 2008 that are not deemed to be other-than-temporarily impaired (in millions):
 
   
Less Than 12 Months
 
Greater Than 12 Months
 
Total
                                                       
   
Book Value
 
Estimated Fair Value
 
Gross Unrealized Loss
 
Book Value
 
Estimated Fair Value
 
Gross Unrealized Loss
 
Book Value
 
Estimated Fair Value
 
Gross Unrealized Loss
                                                       
Floating Rate
  $ 125.5     $ 91.3     $ (34.2 )   $ 45.2     $ 37.3     $ (7.9 )   $ 170.7     $ 128.6     $ (42.1 )
                                                                         
Fixed Rate
    232.1       199.6       (32.5 )     287.6       249.4       (38.2 )     519.7       449.0       (70.7 )
                                                                         
Total
  $ 357.6     $ 290.9     $ (66.7 )   $ 332.8     $ 286.7     $ (46.1 )   $ 690.4     $ 577.6     $ (112.8 )
 
 
-13-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
4.   Loans Receivable

Activity relating to our loans receivable for the three months ended March 31, 2008 was as follows (in thousands):
 
                     
Weighted Average
Asset Type
 
Face Value
 
Book Value
 
Number of Investments
 
Coupon(1)
 
Yield(1)
 
Maturity (Years)(2)
                                     
December 31, 2007
                                   
Floating rate(3)
                                   
Mortgage loans
  $ 620,586     $ 620,586       17       6.93 %     7.23 %     3.6  
Subordinate mortgage interests
    515,797       508,900       28       7.31 %     7.37 %     3.7  
Mezzanine loans
    939,038       937,209       26       8.19 %     8.22 %     3.5  
Total/Average
    2,075,421       2,066,695       71       7.59 %     7.71 %     3.6  
Fixed rate
                                               
Mortgage loans
                                   
Subordinate mortgage interests
    29,779       29,094       2       7.92 %     8.09 %     24.2  
Mezzanine loans
    160,984       161,774       8       8.85 %     8.84 %     4.2  
Total/Average
    190,763       190,868       10       8.70 %     8.73 %     7.3  
                                                 
Total/Average - December 31, 2007
    2,266,184       2,257,563       81       7.69 %     7.80 %     3.9  
                                                 
Originations(4)
                                               
Floating rate
                                               
Mortgage loans
    19,239       19,239             5.23 %     5.83 %     2.9  
Subordinate mortgage interests
    8,353       8,353             7.78 %     8.52 %     2.1  
Mezzanine loans
    1,815       1,815             6.20 %     6.20 %     4.7  
Total/Average
    29,407       29,407             6.02 %     6.62 %     2.8  
Fixed rate
                                               
Mortgage loans
                                   
Subordinate mortgage interests
                                   
Mezzanine loans
                                   
Total/Average
                                   
                                                 
Total/Average
    29,407       29,407             6.02 %     6.62 %     2.8  
                                                 
Repayments & Other(5)
                                               
Floating rate
                                               
Mortgage loans
    2,686       2,686             N/A       N/A       N/A  
Subordinate mortgage interests
    2,059       1,549             N/A       N/A       N/A  
Mezzanine loans
    31,075       30,796       1       N/A       N/A       N/A  
Total/Average
    35,820       35,031       1       N/A       N/A       N/A  
Fixed rate
                                               
Mortgage loans
                      N/A       N/A       N/A  
Subordinate mortgage interests
    20       (3 )           N/A       N/A       N/A  
Mezzanine loans
    286       328             N/A       N/A       N/A  
Total/Average
    306       325             N/A       N/A       N/A  
                                                 
Total/Average
    36,126       35,356       1       N/A       N/A       N/A  
                                                 
March 31, 2008
                                               
Floating rate
                                               
Mortgage loans
    637,139       637,139       17       5.05 %     5.36 %     3.4  
Subordinate mortgage interests
    522,091       515,704       28       5.54 %     5.60 %     3.4  
Mezzanine loans
    909,778       908,228       25       6.25 %     6.27 %     3.4  
Total/Average
    2,069,008       2,061,071       70       5.70 %     5.82 %     3.4  
Fixed rate
                                               
Mortgage loans
                                   
Subordinate mortgage interests
    29,759       29,097       2       7.91 %     8.08 %     24.1  
Mezzanine loans
    160,698       161,446       8       8.85 %     8.85 %     4.0  
Total/Average
    190,457       190,543       10       8.70 %     8.73 %     7.1  
                                                 
Total/Average - March 31, 2008
  $ 2,259,465     $ 2,251,614       80       5.96 %     6.06 %     3.7  
 
     
(1)   
Calculations based on LIBOR of 2.70% as of March 31, 2008 and LIBOR of 4.60% as of December 31, 2007.
(2)    Represents the maturity of the investment assuming all extension options are executed.
(3)    During the first quarter of 2008, one subordinate mortgage interest with a book value of $12.4 million switched from a fixed rate loan to a floating rate.
(4)    Includes additional fundings on prior period originations.  The figures shown in “Number of Investments” represent the actual number of originations during the period.
(5)   Includes full repayments, sales, partial repayments and the impact of premium and discount amortization and losses, if any.  The figures shown in “Number of Investments” represent only the full repayments/sales, if any. 
 
 
-14-

 
 
Capital Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(unaudited)
 
The tables below detail the property type and geographic distribution of the properties securing our loans receivable at March 31, 2008 (in thousands).
 
Property Type
Book Value
Percentage
Office
 
$
969,612
 
43%
Hotel
   
690,106
 
31%
Multi-Family
   
162,950
 
7%
Healthcare
   
147,883
 
7%
Retail
   
71,095
 
3%
Industrial
   
10,856
 
0%
Other
   
199,112
 
9%
Total
 
$
2,251,614
 
100%
 
Geographic Location
Book Value
Percentage
North East
 
$
888,156
 
39%
Various
   
586,056
 
26%
South West
   
459,659
 
20%
South East
   
193,377
 
9%
North West
   
118,263
 
5%
Mid West
   
6,103
 
1%
Total
 
$
2,251,614
 
100%
 
Quarterly, management reevaluates the reserve for possible credit losses based upon our current portfolio of loans. Each loan in our portfolio is evaluated using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors necessary to assess the likelihood of delinquency or default.  If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our loan, and this potential loss is multiplied by the default likelihood.  Based upon our review of the portfolio, in the fourth quarter of 2007 we recorded a $4.0 million reserve for possible credit losses related to one second mortgage loan with an unpaid principal balance of $10.0 million.  As of March 31, 2008, we believe that no additional reserves for possible credit losses were warranted on any of our loans.
 
During the first quarter of 2008, three of our loans had performance issues.  At March 31, 2008, the loan against which we had previously recorded a $4.0 million reserve was classified as non performing due to its failure to pay interest.  A second loan matured during the first quarter of 2008 and was not repaid; prior to quarter end, we agreed to the terms of an extension of the loan through February 2009 subject to certain events occurring in April 2008.  The contemplated events occurred and the extension was put into effect in April 2008.  A third loan did not make its contractual interest payment in March 2008 and we have entered into discussions with the borrower to take title to the collateral property.  We did not accrue interest on the loan against which we have taken a reserve, but we continued to accrue interest on the other two loans through quarter end based upon our assessment that principal and interest due as of quarter end will be collected.
 
In some instances, we have a further obligation to fund additional amounts under our loan arrangements; we refer to these funding commitments as Unfunded Loan Commitments.  At March 31, 2008, we had 10 such Unfunded Loan Commitments for a total future funding obligation of $146.7 million.
 
In connection with the loan portfolio, at March 31, 2008, we have deferred origination fees, net of direct costs of $1.4 million which are being amortized into income over the life of the loans.
 
At March 31, 2008, we had $1.4 million included in deposits and other receivables which represented a partial  repayment that was paid prior to March 31, the proceeds of which had not been remitted to us by our servicers at quarter end.