Capital Trust: The Fog Begins To Clear

| About: Blackstone Mortgage (BXMT)

Capital Trust (CT) released its latest financials before the market opened Wednesday. The stock tanked Wednesday but recovered Thursday to close at $3.38. Last year, Capital Trust went through a major restructuring as a result of which all recourse debt was eliminated. CT also began providing financial data in a more relevant format. Each quarterly financial report since the restructuring gives us more information about the basic value and trajectory of this company.

In analyzing CT, we can virtually ignore the consolidating financials because they include data from special purpose entities (CDOs) which is meaningless when consolidated. Although the net asset value of some of these entities appears to be negative, the borrowings of these entities are non-recourse and so, for the purpose of calculating the net value of CT, the value of such entities can never be less than zero.

I have approached the valuation of CT two ways. First of all, in the last quarter, cash and net asset value increased by roughly $6.6 million largely due to management fees and income from investments. It is unclear whether there is a seasonal factor and more quarterly data will dispel the fog but projecting that quarterly result would produce an annual cash flow available to owners of roughly $26 million or a little more than $1 per diluted share. Valuing the company at balance sheet cash ($34 million or $1.40 per fully diluted share) plus 6 times owner cash flow gives us a value of $7.40 per share.

I have also tried to put together a conservative sum of the parts valuation. CT has $34 million cash. Its interest in CT Opportunity Partners is worth some $10 million. It has calculated that its equity interest in CT Legacy REIT is worth $41.6 million. It also has preferred stock in CT Legacy REIT which should produce $6-7.5 million per year - I value this at $20 million. CT Investment Management appears to be producing fees of $15 million a year - I value this at $60 million. It has huge NOLs and NCLs which I value at $25 million. Its interests in underwater special purpose entities cannot be less than zero and probably has some residual option value but we will leave that at zero. Anyhow, the total is $181 million or, coincidentally, a little more than $7 a share.

CT still doesn't pay a dividend and I may be too generous in some of my valuations. Quarterly financial reports should be monitored closely by actual and potential investors. The commercial mortgage real estate investment trust sector took a pounding during the panic of 2008 and some of the stocks still offer opportunities for value investors. These companies are, unfortunately, not as transparent as Business Development Companies and involve a degree of risk and uncertainty that many investors may eschew.

The fact that, as a value investor, I find myself prowling in this part of the woods is a testament to the fact that, at this stage of the market cycle, value investors are like the frustrated hunter in Texas who opined that, "We done shot all the slow rabbits!"

Disclosure: I am long CT.

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