-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMNwUYOOxg5MMBBoR08VDqI7fk/GniCofN0DRva6quirjVSNPYBO8+DDO9dJPZfL DNn1ViiJLDII5nE94MHcQw== 0001116679-05-001367.txt : 20050510 0001116679-05-001367.hdr.sgml : 20050510 20050510110723 ACCESSION NUMBER: 0001116679-05-001367 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050504 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL TRUST INC CENTRAL INDEX KEY: 0001061630 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14788 FILM NUMBER: 05814504 BUSINESS ADDRESS: STREET 1: 410 PARK AVENUE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2126550220 MAIL ADDRESS: STREET 1: PAUL, HASTINGS, JANOFSKY & WALKER LLP STREET 2: 75 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 8-K 1 cap8k.txt MAY 4, 2005 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): May 4, 2005 ------------ CAPITAL TRUST, INC. (Exact Name of Registrant as specified in its charter) Maryland 1-14788 94-6181186 - --------------------------- ------------------ --------------------- (State or other jurisdiction (Commission File (IRS Employer of incorporation) Number) 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 --------------- N/A ---------- (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 2.02 Results of Operations and Financial Condition On May 4, 2005, Capital Trust, Inc. (the "Company") issued a press release reporting the financial results for its fiscal quarter ended March 31, 2005. A copy of the press release is attached to this Current Report on Form 8-K ("Current Report") as Exhibit 99.1 and is incorporated herein solely for purposes of this Item 2.02 disclosure. On May 5, 2005, the Company held a conference call to discuss the financial results of the Company for its fiscal quarter ended March 31, 2005. A copy of the transcript of the call is attached to this Current Report as Exhibit 99.2 and is incorporated herein solely for purposes of this Item 2.02 disclosure. The transcript has been selectively edited to facilitate the understanding of the information communicated during the conference call. The information in this Current Report, including the exhibits attached hereto, is being furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of such section. The information in this Current Report, including the exhibits, shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act, regardless of any incorporation by reference language in any such filing. Item 9.01 Financial Statements and Exhibits (c) Exhibits Exhibit Number Description 99.1 Press Release dated May 4, 2005 99.2 Transcript from first quarter earnings conference call held on May 5, 2005 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CAPITAL TRUST, INC. By: /s/ John R. Klopp ------------------- Name: John R. Klopp Title: Chief Executive Officer Date: May 10, 2005 Exhibit Index Exhibit Number Description -------------- ----------- 99.1 Press Release dated May 4, 2005 99.2 Transcript from first quarter earnings conference call held on May 5, 2005 EX-99 2 ex99-1.txt EX. 99.1 - PRESS RELEASE Exhibit 99.1 [GRAPHIC OMITTED] Contact: Rubenstein Associates Robert Solomon: (212) 843-8050 Capital Trust Reports First Quarter 2005 Results ------------------------------------------------ NEW YORK, NY - May 4, 2005 - Capital Trust, Inc. (NYSE: CT) today reported first quarter 2005 net income of 60 cents per share (diluted), compared to 46 cents per share for the comparable period of the prior year. "We are pleased to report operating results in line with our expectations. Balance sheet originations topped $200 million for the quarter and we issued our second CDO in March," said John Klopp, Capital Trust's CEO. "We also received our first incentive management fees from Fund II, reflecting the ongoing strength of our investment management business." The Company will conduct a management conference call at 10:00 a.m. Eastern Time on May 5 to discuss first quarter 2005 results. Interested parties can access the call toll free by dialing (877) 707-9631. The conference ID is "CAPITAL." A recorded replay will be available from 12:00 p.m. on May 5 through midnight on May 19. The replay call number is (888) 214-9525. Selected financial highlights are outlined below: Balance Sheet - ------------- Total assets were $1.0 billion at March 31, 2005, a $123.0 million (14.0%) increase from $877.8 million at December 31, 2004. New loan originations, net of repayments, generally accounted for the first quarter increase in assets. During the three months ended March 31, 2005, the Company made 13 new loan and CMBS investments aggregating $206.1 million and received five loan satisfactions totaling $61.7 million and partial repayments on 30 assets totaling $21.4 million. Capital Trust Page 2 Total interest bearing liabilities were $665.6 million at March 31, 2005, an increase of $122.6 million from December 31, 2004. In March, the Company issued its second issue of collateralized debt obligations issued by Capital Trust RE CDO 2005-1 and secured by $337.8 million of B Notes, Mezzanine Loans and CMBS from the balance sheet. The Company sold $298.9 million of floating rate investment grade CDOs with a weighted average coupon of LIBOR plus 0.49%, or LIBOR plus 0.70% including the amortization of all fees and expenses. The structure is non mark-to-market, non-recourse and provides for a five-year reinvestment period that allows the principal proceeds from repayments of the collateral assets to be reinvested in qualifying replacement assets. Capital Trust's wholly owned asset management subsidiary, CT Investment Management Co., LLC, is the collateral manager for the CDO. CDO 2005-1 is a complimentary financing vehicle to the Company's first issue of CDOs issued in July of 2004 by Capital Trust RE CDO 2004-1. Each CDO transaction represents the most efficient form of debt financing available to the Company for the type of collateral that it is designed to finance. The combination of the two CDO financings enhances the returns on our core investment program, as well as allows the Company the ability to generate attractive risk adjusted returns on a broader spectrum of investment opportunities. With the Company's second CDOs issuance, it has substantially restructured the manner in which it finances its business. Proceeds from the CDO 2005-1 financing were used to pay down outstanding borrowings on the Company's credit and repurchase facilities. As of March 31, 2005, the Company had no recourse borrowings and 83% of its debt is in the form of CDOs. Based on GAAP shareholders' equity, book value per share was $20.78 at March 31, 2005, compared to $20.79 at December 31, 2004. Included in these calculations are 195,524 and 173,549 shares representing in-the-money options at March 31, 2005 and December 31, 2004, respectively, in addition to the shares outstanding. The new loan originations in the first quarter, which were financed entirely with debt, resulted in an increase to the Company's debt-to-equity ratio from 1.7-to-1 at December 31, 2004 to 2.1-to-1 at March 31, 2005. At March 31, 2005, the Company has approximately $115.9 million of liquidity to invest in new interest earning assets. As the Company continues to utilize existing liquidity to fund its investment activity, the debt-to-equity ratio will increase further. Capital Trust Page 3 Investment Management - --------------------- The Company currently acts as investment manager for two private equity funds, CT Mezzanine Partners III, Inc. ("Fund III") and CT Mezzanine Partners II LP ("Fund II"). Fund III commenced its investment period in June of 2003 and through March 31, 2005 the Company had originated $966 million of new loans on behalf of Fund III, including $166 million of originations in the first quarter of 2005. Over the term, the Company will earn co-investment income, base management fees and, potentially, incentive management fees from Fund III. The Company earns base management fees calculated on the basis of committed equity capital during Fund III's investment period, which expires in June 2005, after which base management fees will be calculated on the basis of invested capital. At March 31, 2005, Fund III had $667.8 million of outstanding loans and investments and the Company had contributed $13.0 million (65.0%) of its total $20 million capital commitment. Fund II ended its investment period in April 2003 and the Company will continue to manage the Fund II portfolio assets until they are repaid or otherwise liquidated in the ordinary course of business. At March 31, 2005, Fund II had $82.5 million of outstanding loans and investments remaining. The Company earns co-investment income, base management fees (calculated on the basis of invested capital) and incentive management fees from Fund II. As of December 31, 2004, 100% of the partners' capital had been returned and the preferred return had been achieved. When Fund II made its first distribution in 2005, a $12.4 million incentive management fee payment was made to the general partner (of which the Company is a 50% owner) and the Company received $6.2 million. As a result of the payment, the Company's co-investment in Fund II was reduced to $3.2 million as of March 31, 2005. Operating Results - ----------------- For the quarter ended March 31, 2005, the Company reported total revenues of $22.2 million and net income of $9.2 million, representing basic earnings per share of 61 cents and diluted earnings per share of 60 cents. The calculation of basic earnings per share is based on 15.1 million weighted average shares outstanding, while diluted earnings per share is based on 15.3 million weighted average shares outstanding, reflecting the potential dilution from in-the-money stock options and units. For the same period in 2004, the Company reported total revenues of $11.5 million and net income of $3.1 million (46 cents per share based on 6.7 million weighted average diluted shares outstanding). The increase in net income was primarily the result of an increase in net interest income and the receipt of incentive management fees from Fund II. Interest income for the quarter increased by $6.7 million due to an increase in average interest earning assets from approximately $385.3 million for the three months ended March 31, 2004 to approximately $822.2 million for the three months ended March 31, 2005. Offsetting this increase in average assets was a reduction in the average interest rate earned on assets, from 9.4% for the three months ended March 31, 2004 to 7.6% for the three months ended March 31, 2005. The decrease in rates was due to a Capital Trust Page 4 change in the mix of the Company's investment portfolio to include a greater proportion of lower risk B Notes in 2005 (which generally carry lower interest rates than mezzanine loans) and a general decrease in spreads obtained on newly originated investments, partially offset by a higher average LIBOR rate (2.6% for the three months ended March 31, 2005 vs. 1.1% for the three months ended March 31, 2004). Interest and related expenses on secured debt increased by $3.1 million for the three months ended March 31, 2005 when compared to the same period in 2004 due to a higher level of average outstanding interest-bearing liabilities ($546.2 million for the three months ended March 31, 2005 vs. $218.8 million for the three months ended March 31, 2004) offset by a decrease in the average rate paid on those liabilities from 4.8% to 4.2%. The decrease in the average rate is substantially due to the use of CDOs to finance a large portion of the portfolio at lower rates than obtained under previous borrowings, partially offset by the increase in average LIBOR. Prior to September 29, 2004, the Company also utilized the convertible junior subordinated debentures to finance our interest-earning assets. During the three months ended March 31, 2004, we recognized $2.4 million of expenses related to the $92.4 million of convertible junior subordinated debentures. No expense was recorded for the three months ended March 31, 2005 as the liability was extinguished in 2004 upon the conversion of one half of the principal amount due on the debentures into common stock on July 28, 2004 and the conversion of the remaining amount into common stock on September 29, 2004. Other revenues increased by $4.0 million from $2.5 million for the three months ended March 31, 2004 to $6.5 million for the three months ended March 31, 2005. The increase is primarily due to the receipt of incentive management fees from Fund II of $6.2 million during the first quarter of 2005. In connection with this receipt, the general partner of Fund II expensed costs capitalized in the formation of Fund II which decreased CT's equity investment, and the Company recorded the effects of the preferred distribution on its co-investments in Fund II as a reduction in its equity investment and expensed the payment to employees of 25% of the related incentive management fees, reducing the contribution to net income by approximately $3.4 million. Further reducing the contribution to net income was the recording of $1.7 million of income tax expense related to the receipt of incentive management fees. The net effect of the receipt of the incentive management fee was a $1.1 million increase in net income. Also during the quarter, management fees and co-investment income from Fund II decreased due to lower levels of investment in 2005 as the fund winds down. General and administrative expenses increased $2.8 million to $5.8 million for the three months ended March 31, 2005 from $3.0 million for the three months ended March 31, 2004. The increase in general and administrative expenses was primarily due to the allocation of Fund II incentive management fees for payment to employees (representing 25% of the total received, or $1.6 million as discussed in the previous paragraph), increases in non-cash employee compensation expense from restricted stock grants, and additional expenses related to the services provided under the contract with Global Realty Outsourcing, Inc. which began in April 2004. Capital Trust Page 5 Dividends - --------- On March 21, 2005, the Company's Board of Directors declared a first quarter 2005 cash dividend of 55 cents per share of class A common stock, an increase of five cents per share from the 50 cents declared in the previous quarter. The cash dividend was paid on April 15, 2005 to stockholders of record on March 31, 2005. Forward-Looking Statements - -------------------------- The forward-looking statements contained in this news release are subject to certain risks and uncertainties including, but not limited to, new origination volume, the continued credit performance of the Company's loan and CMBS investments, the asset/liability mix, the effectiveness of the Company's hedging strategy and the rate of repayment of the Company's portfolio assets, as well as other risks indicated from time to time in the Company's Form 10-K and Form 10-Q filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Capital Trust, Inc. is a finance and investment management company that specializes in credit-sensitive structured financial products. To date, the Company's investment activities have focused primarily on the U.S. commercial real estate subordinate debt markets. Capital Trust executes its business both as a balance sheet investor and as an investment manager through its CT Mezzanine Partners family of funds. Capital Trust is a real estate investment trust traded on the New York Stock Exchange under the symbol "CT." The company is headquartered in New York City. Tables to follow Capital Trust, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 2005 and December 31, 2004 (in thousands)
March 31, December 31, 2005 2004 -------------------- -------------------- (unaudited) (audited) Assets Cash and cash equivalents $ 22,248 $ 24,583 Restricted cash 8,830 611 Commercial mortgage-backed securities available-for-sale, at fair value 244,214 247,765 Loans receivable 680,028 556,164 Equity investment in CT Mezzanine Partners II LP ("Fund II"), CT MP II LLC ("Fund II GP") and CT Mezzanine Partners III, Inc. ("Fund III") (together "Funds") 20,983 21,376 Deposits and other receivables 713 10,282 Accrued interest receivable 5,123 4,029 Interest rate hedge assets 3,232 194 Deferred income taxes 3,739 5,623 Prepaid and other assets 11,639 7,139 -------------------- -------------------- Total assets $ 1,000,749 $ 877,766 ==================== ==================== Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued expenses $ 16,656 $ 17,388 Credit facility -- 65,176 Repurchase obligations 113,884 225,091 Collateralized debt obligations ("CDOs") 551,691 252,778 Deferred origination fees and other revenue 326 836 -------------------- -------------------- Total liabilities 682,557 561,269 -------------------- -------------------- Shareholders' equity: Class A common stock, $0.01 par value, 100,000 shares authorized, 14,793 and 14,769 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively ("class A common stock") 148 148 Restricted class A common stock, $0.01 par value, 325 and 283 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively ("restricted class A common stock" and together with class A common stock, "common stock") 3 3 Additional paid-in capital 322,648 321,937 Accumulated other comprehensive gain 3,964 3,815 Accumulated deficit (8,571) (9,406) -------------------- -------------------- Total shareholders' equity 318,192 316,497 -------------------- -------------------- Total liabilities and shareholders' equity $ 1,000,749 $ 877,766 ==================== ====================
- 6 - Capital Trust, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended March 31, 2005 and 2004 (in thousands, except per share data) (unaudited)
2005 2004 ------------------ ------------------- Income from loans and other investments: Interest and related income $ 15,696 $ 9,018 Less: Interest and related expenses on credit facilities, term redeemable securities contract and repurchase obligations 5,752 2,636 Less: Interest and related expenses on step up convertible junior subordinated debentures -- 2,433 ------------------ ------------------- Income from loans and other investments, net 9,944 3,949 ------------------ ------------------- Other revenues: Management and advisory fees from Funds 7,904 2,084 Income/(loss) from equity investments in Funds (1,422) 394 Other interest income 25 8 ------------------ ------------------- Total other revenues 6,507 2,486 ------------------ ------------------- Other expenses: General and administrative 5,755 2,968 Depreciation and amortization 279 274 ------------------ ------------------- Total other expenses 6,034 3,242 ------------------ ------------------- Income before income taxes 10,417 3,193 Provision for income taxes 1,267 141 ------------------ ------------------- Net income allocable to common stock $ 9,150 $ 3,052 ================== =================== Per share information: Net earnings per share of common stock Basic $ 0.61 $ 0.46 ================== =================== Diluted $ 0.60 $ 0.46 ================== =================== Weighted average shares of common stock outstanding Basic 15,087,753 6,583,412 ================== =================== Diluted 15,320,451 6,730,074 ================== =================== Dividends declared per share of common stock $ 0.55 $ 0.45 ================== ===================
- 7 - EX-99 3 ex99-2.txt EX. 99.2 - CONFERENCE CALL TRANSCRIPT Exhibit 99.2 Capital Trust Q1 2005 Earnings Call ----------------------------------- May 5, 2005 Conference Coordinator: Hello and welcome to the Capital Trust first quarter 2005 results conference call. Before we begin, please be advised that the forward-looking statements expressed in today's call are subject to certain risks and uncertainties including, but not limited to, the continued performance, new origination volume and the rate of repayment of the Company's and its Funds' loan and investment portfolios; the continued maturity and satisfaction of the Company's portfolio assets; as well as other risks contained in the Company's latest Form 10K and Form 10Q filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. There will be a Q&A session following the conclusion of this presentation. At that time, I will provide instructions for submitting a question to management. I will now turn the call over to John Klopp, CEO of Capital Trust. John Klopp: Good morning everyone. Thank you for joining us and for your continuing interest in Capital Trust. Last night we reported our results for the period ended March 31, 2005 and filed our 10-Q. It was a very busy quarter once again and a very good start to the year. GAAP net income was $9.2 million (or 60(cent) per share fully diluted), slightly down from $9.5 million in Q4 (when we had some fairly significant non-cash, non-recurring items) and Page 2 roughly triple our earnings from last year's first quarter. Brian will give you the details in a moment. Our business can be boiled down to three essential ingredients: originating new investment opportunities, managing our risk exposure and efficiently financing our assets. When we get it right, the combination allows us to produce steady, growing streams of current income for our shareholders and investors, which we believe is CT's primary mission. On all three fronts, we had significant success in the first quarter of 2005. In an admittedly tough origination environment, we closed $206 million of new investments for the balance sheet plus another $166 million for Fund III. We also had a number of payoffs during the quarter and, unfortunately, the payoffs came early and the originations came relatively late, so pure timing cut into our net interest income somewhat. Overall, we are pleased with our production numbers for the first quarter and our pipeline for the second quarter is very strong. For the balance sheet, our focus continues to be on lower risk B Notes which carry lower credit spreads but, when leveraged efficiently, produce great risk-adjusted ROE's. At a point in the cycle when everyone is worried about frothy valuations and rising interest rates, we have purposely dialed down our risk profile and the results are clear: average loan-to-value is lower, debt service coverage is higher and, with the exception of that one old $3 million loan we spoke about on our last conference call, 100% of our assets in all of our portfolios are performing. Efficient leverage is the third key ingredient, and we are very pleased with the execution that we accomplished on our second CDO in mid-March. Designed to be a Page 3 complement to our first CDO last summer, this one allows us to finance higher-grade collateral on an extremely cost-effective basis. With an investment grade advance rate of 88.5% at a cost of LIBOR + 49 basis points, this new financing drives our ability to pursue lower risk assets while still achieving our return targets. CDOs have dramatically transformed the way we finance our business. Compared to a year ago when virtually all of our debt took the form of fairly short term, mark-to-market, recourse credit facilities, today 83% of our liabilities are term-matched, non mark-to-market CDOs and the Company has no recourse debt on its balance sheet. At the same time, the all-in cost of our liabilities has decreased from 4.9% to 4.2% while average LIBOR has increased 150 basis points. If you add in the subordinated debentures, the decrease is even more impressive: 6.5% to 4.2% today. In addition to driving down the cost of our capital, increased leverage capacity means increased liquidity, and at March 31, CT has over $100 million of available liquidity to make new investments. As the year unfolds, our job is to deploy that capital into accretive investments. In the first quarter, we also received our first incentive management fee payments from CT Mezzanine Partners II, roughly 4 years after the fund made its initial investment. As Fund II continues to wind down, additional incentive management fees will be collected. We believe that our investment management business is an important component of Capital Trust's business model, allowing us to leverage our equity capital and our platform to create a steady stream of co-investment income, base management fee income and, over time, incentive management fees. The investment period of Fund Page 4 III expires this summer, and we are currently hard at work designing our next fund offering. The proof is in the pudding, and we increased our dividend again in the first quarter, from 50(cent) per share to 55(cent). As we always say, we will continue to assess our payout as the year progresses and we will set our dividend at a level that we feel is comfortably sustainable. I will now pass it over to Brian to go over the financials in greater detail. Brian Oswald: Thank you John and good morning everyone. Since John has discussed the highlights for the quarter, I'll get right into the numbers. First, the balance sheet: At quarter end, total assets topped $1 billion increasing 14% from $878 million at December 31, 2004. The primary drivers of the increase were new loan originations of over $200 million. Offsetting these increases were loan amortization and repayments totaling $77 million. In March, we issued our second CDO secured by $337.8 million of B Notes, Mezzanine Loans and CMBS. This financing is designed to allow us to originate lower risk business at lower spreads and create attractive returns on equity. In this CDO transaction, the Company sold $298.9 million of floating rate investment grade notes with a weighted average coupon of LIBOR plus 49 basis points, or LIBOR plus 70 basis points when the amortization of all fees and expenses is included. The structure is term and index matched, non mark-to-market, non-recourse and provides for a five-year Page 5 reinvestment period that allows the principal proceeds from repayments of collateral assets to be reinvested in qualifying replacement assets. With our second CDO issuance, we have restructured the manner in which we finance our business. Proceeds from the CDO financing were used to pay down outstanding borrowings on the Company's credit and repurchase facilities. As of March 31, 2005, we had no recourse borrowings and 83% of our debt was in the form of CDOs. We plan to continue to use CDO's in the future to efficiently finance existing assets and new business. We also continue to achieve reduced spreads on our existing credit facility and repurchase obligations, allowing us to further reduce the cost of our borrowings. We reported net income of $9.2 million for the quarter ended March 31, 2005, more than a 200% increase over the $3.0 million reported for the same period in the prior year. On a per share basis, net income of 60 cents per share for the first quarter of this year represents an increase of 14 cents per share over the first quarter of 2004. The major drivers of this increase were the higher levels of net interest income from the increase in average interest earning assets and reductions in financing costs, plus the receipt of incentive management fees from Fund II. The issuance of two CDOs allowed us to finance our significant asset growth while still maintaining a high level of liquidity. Average interest earning assets increased from $385 million in the first quarter of 2004 to $822 million in the first quarter of 2005. As credit spreads in the market continue to tighten and we focus our balance sheet more on senior B Notes, the average rate on our interest earning assets decreased 1.8% year over year from 9.4% in the first quarter of 2004 to 7.6% in the first quarter of 2005. Utilizing the two CDO financings, converting the subordinated debentures to common Page 6 stock and negotiating reduced spreads on other debt, we were able to reduce the average rate paid on our interest bearing liabilities (including the subordinated debentures) by 35% from 6.5% in the first quarter of 2004 to 4.2% in the first quarter of 2005. Other revenues increased by $4.0 million from $2.5 million for the three months ended March 31, 2004 to $6.5 million for the three months ended March 31, 2005. The increase is primarily due to the receipt of incentive management fees from Fund II of $6.2 million during the first quarter of 2005. In connection with this receipt, the general partner of Fund II expensed a portion of the costs that it capitalized when it formed Fund II. This expensing decreased CT's equity investment by approximately $1 million. In addition, the Company recorded the effects of the incentive management fee payment on its limited and general partner co-investments in Fund II as a reduction in the Company's equity investment of approximately $850,000. Also during the quarter, management fees and co-investment income from Fund II decreased due to lower levels of investment in 2005 as the fund winds down. Other income statement effects of the receipt of the incentive management fees included a contractual payment to employees of 25% of the related incentive management fees or $1.6 million, which is included in G&A, and the recording of $1.7 million of income tax expense related to the receipt of incentive management fees through our taxable REIT subsidiary. The net effect of the receipt of the incentive management fee was a $1.1 million increase in net income. Comparing this quarter to last quarter, interest income was up $304,000 due to an increase in average earning assets, which increased from $775 million in the fourth quarter to $822 million in the first, and an increase in average LIBOR, offset by a Page 7 decrease in average spreads as we continue to originate lower risk assets. Furthermore, virtually all $200 million of new loan originations occurred at the end of the quarter and will have full impact in future quarters. Comparing this quarter to last quarter, interest expense increased primarily due to increases in LIBOR offset by the new CDO financing which occurred late in the quarter and will generate additional savings in future periods. We remain committed to maintaining an asset/liability mix which minimizes the negative effects of changes in interest rates on our future results. In the current interest rate environment, we are maintaining a net positive floating rate exposure on our balance sheet, with $174 million more floating rate assets than floating rate liabilities. Based upon assets, liabilities and hedges in place at March 31st and taking into account floors in place on some of our loans receivable, each increase in LIBOR of 100 basis points would increase annual net income by approximately $1.8 million. As a result of the new investment activity in the first quarter, our debt-to-equity ratio increased during the quarter from 1.7-to-1 at December 31, 2004 to 2.1-to-1 at March 31, 2005. As we continue to utilize existing liquidity to fund our investment activity, we expect that our debt-to-equity ratio will increase further. Our liquidity position remains very strong, and we currently have approximately $115.9 million of liquidity, including cash on hand and available borrowings under our committed credit facilities. We believe that this level of liquidity is more than adequate to fund our near term needs, including originations of new loans and investments for our balance sheet. Page 8 In March, we declared a dividend of 55 cents per share, up 5 cents or 10% from the 50 cents of the previous quarter, payable to holders of record on March 31st. The dividend was paid on April 15th. Our book value per share of $20.78 at March 31st includes 196,000 shares representing in-the-money options, in addition to the 15.1 million shares outstanding at that time. This compares with the $20.79 reported at December 31, 2004, which included 174,000 shares of in-the-money options, in addition to the 15.1 million shares outstanding at that time. That wraps it up for the financials, and at this point, I'll turn it back to John. John Klopp: Thanks, Brian. At this point, we will open it up for any of your questions. Conference Coordinator: If you would like to ask a question, please press star and one on your touchtone phone. To withdraw your question, press the pound sign. Again, if you would like to ask a question, please press star and one on your touchtone phone at this time. Our first question comes from Donald Destino with JMP Securities. Please go ahead. Donald Destino: Brian mentioned what happens to earnings with a 100 basis point increase to LIBOR; can you talk about how increases to short term rates affect credit and how you can feel comfortable that your coverage ratios are going to hold up in a higher rate environment? Page 9 John Klopp: It is a very good question because looking at the impact of increasing short term rates on the income statement in a vacuum can be dangerous. We feel very comfortable about the ultimate impact on the credit of our portfolio assets for two primary reasons: The first factor is the absolute standard in the marketplace for the kinds of floating rate assets that we originate that the borrower be required to implement some form of interest rate management at the loan level. This means that the lenders require caps or swaps to be put in place for the entire amount of the loan, including our subordinate portion, at the outset, or else the loan does not get made. Therefore, there is interest rate protection against the divergence that would occur if rates increased while cash flow did not increase that is included at the loan level in our underlying assets. The second factor is the cash flow yields that we underwrite in our investment programs. In other words, as we have said repeatedly, we finance cash flow, we underwrite the properties and size our exposure on a cash flow coverage basis and if you look at the NOI (or net operating income) from the underlying collateral compared to our last dollar of debt, we have very significant cash flow coverage to our debt position. NOI divided by last dollar of debt effectively gives you a metric that translates into how well these assets perform in a higher interest rate environment and we feel very comfortable that the underlying cash flow from our collateral is more than adequate to withstand a fairly significant increase in rates. We do not assume, and have not assumed in the last couple of years when rates have been historically quite low, that that situation will continue because that is not a good way to make sure that an exit is possible at the maturity date of the asset. Page 10 Donald Destino: Can you talk a little bit about the warehousing risk, if any, you take making loans that will ultimately end up being put into a CDO but have to be warehoused on the balance sheet to fill that execution? John Klopp: We have been able to negotiate and put in place very cost effective warehousing lines with the expectation that they will be used to finance assets that will be dropped into the CDOs when underlying collateral in that pool repays. So in a warehousing context, there is some difference but there is not a significant difference between the cost of our financing during a warehouse period and the cost when we ultimately drop assets into the CDO. We are financing floating rate assets with floating rate liabilities. Therefore, we do not have the same kind of risk that you might have if you were warehousing fixed rate collateral which bears risk of both interest rate movement and/or spread movement because effectively, we have locked in the spread on our financing making us index matched floating to floating. Donald Destino: That is actually the last part of my question. If you are not taking a ton of risk because you are making loans that are being financed on the warehouse with an expectation that it makes sense to finance them at spreads that are available in the CDO market, what happens if spreads widen before you execute those CDOs and you end up with loans that aren't going to return what you were hoping when you originated? John Klopp: Page 11 It is actually the opposite because we have locked in the cost or the spread of our financing for an extended period of time. Our newest CDO has a five year reinvestment period which means that we can use it as a revolving credit facility. If spreads increased as a result of increasing rates, shifting curves, or dynamics in the credit market, we would still have locked in the spread on our financing. We would originate assets under that scenario at wider spreads and make more money. Conference Coordinator: We'll move next to Don Fandetti from Smith Barney. Please go ahead. Don Fandetti: Can you provide an update on spreads in the B Note/mezz market over the last 90 days? John Klopp: Steve Plavin is here, our Chief Operating Officer who runs our investment business on a day to day basis. He is the closest to the market so let's hear his thoughts. Steve Plavin: The trend on spreads is that they continue to tighten. The degree of tightening has begun to narrow a little bit; it is the absolute level of the spread that has gotten quite low. The greatest degree of spread tightening has been on the loans that have the most universal appeal, loans secured by a midtown Manhattan asset for example. We have seen spreads stabilize for assets that are not primary assets in primary markets and assets that are tougher for the German banks and the insurance companies to underwrite. The origination environment actually is very robust right now. The challenge is the deals that have the broadest appeal to the widest number of prospective mezzanine lenders. Page 12 Don Fandetti: Just to clarify, have spreads on the B Notes that you are targeting really moved much this quarter versus last quarter? Steve Plavin: We target a broad array of assets in our investment programs. The large urban asset spreads are continuing to tighten but we also have a program originating smaller B Notes and mezzanine loans that have not seen spreads continue to tighten like those of the large urban assets. In fact, our small loan spreads are relatively stable while the larger urban asset spreads continue to tighten. Don Fandetti: You have done a good job in terms of managing your prepayments and they have been fairly low. Can you talk about your outlook going forward on prepayments? John Klopp: The truth is that they are not particularly easy to predict or manage. On a quarter to quarter comparison basis, sometimes you will see more repayments or faster repayments in terms of timing within a quarter as we experienced in the first quarter of this year. For example, we received some relatively large prepayments fairly early in this quarter. We worked very hard to originate a very good flow of new assets on the balance sheet and yet a lot of that was back-end loaded. It is not as predictable or as manageable as you are giving us credit for, to be honest. That said, we work with the borrowers to try to keep assets on the books. We have had a couple of instances, both on balance sheet and in our funds, where it was clear that the borrower had the capacity to refinance at a lower spread simply because the asset Page 13 had improved and the market spread had moved. We are in contact with those borrowers as constantly as we can be and we have been able to save a few of those assets. The way we saved them was by being willing, and able (with our financing), to cut our spreads somewhat. Don Fandetti: Is there anything you can help us think about in terms of your earlier conversation about locking in your spreads or your debt cost on your CDO? Let's say the market continues to tighten and spreads roll down for a period of time, essentially your spread on your CDO just compresses. Any commentary there? John Klopp: We have seen a diminution of the relentless spread tightening, at least in the last 90 days or so. We are not seeing the same kind of pressure that we had seen through the course of 2004. If spreads continue to tighten dramatically that could squeeze our returns using CDOs because we have effectively locked in the cost of borrowing. But let's be clear, the cost of the financing that we have put in place creates very adequate, very nice ROEs in the current spread environment allowing us to tolerate some degree of spread tightening. If you see how far spreads have already come in, they are very tight now compared to historical levels and I don't know how much further they can come in. Don Fandetti: My last question is a financial question regarding your 10Q; it looks like you have $83 million of floating rate loans maturing in '05. Are they clustered in any particular quarter or back-end weighted? John Klopp: Page 14 The maturities are reasonably spread throughout the year. Brian Oswald: We do not expect to see any large repayments in the next quarter. John Klopp: Keep in mind that floating rate assets do not carry a lot of call protection. We put contractual maturities in the schedule in our 10Qs and 10Ks and, back to your previous question, we can get prepayments that occur on a non-scheduled basis. Brian Oswald: The contractual maturities in our financials are generally the initial maturity and most of these loans have extension options allowing them to remain outstanding longer than the contractual maturity date. Don Fandetti: Any thoughts in terms of CTL real estate assets or are you guys just going to remain a lender? John Klopp: We have thought about and explored complementary businesses that use our skills in the categories of credit underwriting and financial structuring. CTLs could theoretically fit that bill in terms of an adjacent area that has similar kinds of requirements for success. But there is nothing at this point that we are pursuing in that sector. One of the things that we have always liked about our business is the diversity and the spreading of risk which results from multi-tenant situations. We have always Page 15 tried to avoid binary risk assets and, depending upon how you do it in the CTL sector, you could be taking on single credit risk which can have interesting results. Conference Coordinator: Again, if you would like to ask a question, please press star and one on your touchtone phone at this time. We'll move next to Dan Welden from Jefferies. Please go ahead. Dan Welden: Could you outline the characteristics of what you think Fund IV might look like? John Klopp: It will have similar characteristics to our previous funds. Our goal is to create investment strategies that are designed to produce high levels of current income with downside protection and relatively low volatility by investing in the real estate structured finance area. We are still thinking and working on it but I think you will see something from us in the coming months. Dan Welden: In terms of the direction of the credit quality you are going to target, you have said that you have gone up in the spectrum to avoid some of the competition occurring lower in the spectrum. As you look further out and try to broaden your reach, do you think your CDO would be focused even further up in the spectrum toward triple-Bs? John Klopp: The exercise over the last year has been to expand our reach both up and down the credit spectrum but particularly up the credit stack towards assets that carry somewhat Page 16 lower risk and that can be financed with the new CDO technology to produce good solid risk adjusted returns. We are certainly getting more involved in B Notes and that takes you closer and closer to triple-B rated securities. We own a fairly large portfolio of CMBS on our balance sheet today and we would certainly look at other strategies to extend and continue investing in that area. Conference Coordinator: Our next question comes from Jerry Kahn with William Harris Investors. Please go ahead. Jerry Kahn: With regard to Fund III, the investment period is about to end, how much more do you have that you could invest and what is the likelihood that you'll get that done or that you will keep pace with the first quarter or how is that going? John Klopp: We are busy and doing well in Fund III. It has not been easy, as we have said on prior calls. Jerry Kahn: But you did get out $166 million in Q1; that was pretty good. John Klopp: That is pretty good. And we feel good about that number. We also feel good about the underlying assets behind the production volume. We think that we are on track. Let me give you a little context. Fund II had its 24-month investment period from the spring of '01 to the spring of '03. We made 40 separate investments aggregating just Page 17 about $1.2 billion. We think we are on track to come close to that same total gross production number for Fund III over its investment period which is June of '03 through June of '05. Spreads are certainly compressed and as a result, we believe that the total returns will be down a bit when comparing Fund II to Fund III. But still, on a risk adjusted basis and on a comparative basis to other investment alternatives, we think the yields will be good and the credit quality has been very strong. Jerry Kahn: If you hit that target, that is $1.2 billion, right? John Klopp: Yes. Jerry Kahn: Okay. And I have another question for you. Looking at your FFO of 60 cents, can you help me adjust that for the effect of the incentive fees? The way I look at it you earn a little over $6 million but you have to pay out $1.2 million plus you had taxes. How much of that $6.2 million actually ended up in FFO? And on the other hand, you reduced your investment in Fund II so I am not sure how to get to the right numbers. John Klopp: In terms of FFO, our reported numbers are really geared towards GAAP net income which is a little bit different. We received $6.2 million in cash incentive management fees. A portion of that had been previously allocated to employees (approximately $1.5 million or 25%). We took some non-cash expenses or charges Page 18 which essentially wrote off previously capitalized costs and we have provided for taxes in our financial statements for GAAP purposes. When you boil that down, the net impact on a GAAP earnings basis was, as we said in the press release, a little over $1 million or about 7 cents a share for the quarter. Back that out and you get to the 53-54 cent range without the incentive management fee for the first quarter on a GAAP basis. Conference Coordinator: We will take a follow up question from Donald Destino with JMP Securities. Please go ahead. Donald Destino: Last quarter, you talked a little bit about having some additional interest in fixed rate CMBS product. Any update there? John Klopp: Nothing substantive in the first quarter; our primary focus was on getting the CDO done and adding those assets. Clearly, one of our objectives is to lengthen out our duration because one of the issues in our current book of business is that the assets are relatively short and not call protected. Again, one of our objectives is to explore ways to lengthen out the duration of our asset base and explore investment areas that are comparable and complementary to what we do now. Longer term CMBS is one of the things on our agenda but in the first quarter there were no real changes in our portfolios and no real initiatives in that direction, but we are ready. One of the exercises last year was getting our special servicer ratings in place as well as increasing our asset management infrastructure and systems, and all of that is now in place. As we move forward through the year we will focus on that sector. Page 19 Donald Destino: Allow me two more, one maybe long and one hopefully very quick question. Could you handicap the possibility over the next 18 months that you would be in the investment period of more than one managed fund, in other words, you would be pursuing a couple of strategies at the same time rather than focusing on investing in one fund at a time? John Klopp: Yes. I think that is possible. It is clearly something that we are working on and the non-answer as to what Fund IV is going to look like is part of us trying to design a program which is reflective of the market opportunities that are out there, sensitive to the desires of our private equity fund investors, and makes sense relative to our balance sheet investment activities which are also part of the mix for Capital Trust. The short answer is yes. I am not sure that I would put a percentage or a handicap on it, but that clearly is something that we are looking at and would hope to be able to achieve. The investment management business gives us operating leverage that is an important component part of our overall business plan. Donald Destino: Got it. Finally, in terms of the delta between the all-in cost and the actual coupons on your first CDO relative to your second CDO, the first CDO looks like the expenses above and beyond the coupons were a lot lighter. Am I not interpreting that correctly or is there some reason why the second one would be less expensive than the first one and is there any further improvement available there? John Klopp: Page 20 The add-on was relatively comparable. Let's go through the math. The raw cost for CDO 1 was LIBOR plus 63 and the calculated all-in cost was LIBOR plus 104. For the second CDO, the raw cash cost was under 50 basis points over LIBOR, LIBOR plus 49, and when we add in all the fees including the upfront distribution cost, legal costs and other fees, the all in effective cost was about LIBOR plus 70 as we stated in the press release. Actual costs were down a little in CDO 2. Having done it once before, we were able to do it more effectively and efficiently with slightly lower underwriting costs. Also, there is a longer reinvestment period in the second CDO, a five-year reinvestment period as opposed to four in last summer's transaction, which allows us to have a longer period of re-usage on the financing which is important because it allows for a longer amortization period. Donald Destino: Got it. Thank you. Conference Coordinator: It appears there are no further questions. John Klopp: Thank you all for your interest and your confidence in Capital Trust. We will see you next quarter. Conference Coordinator: That concludes the Capital Trust First Quarter 2005 Conference Call. A recorded replay of the conference call will be available from noon today, May 5th, through Page 21 midnight on May 19th. The replay call number is 888-214-9525 or 402-220-4936 for international callers. Thank you and have a great day. 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