Can Capital Trust's Latest Earnings Be Taken at Face Value?

Mar. 5.08 | About: Blackstone Mortgage (BXMT)

Capital Trust (CT) reported fourth-quarter and full-year 2007 GAAP earnings of $1.62 per diluted share for the fourth quarter, blowing away consensus estimates of $1.00/share. On a GAAP basis, Capital Trust significantly outperformed competitors CapitalSource (NYSE:CSE) and iStar Financial (SFI), both of whom reported quarterly losses.

In all fairness, Capital Trust has a history of solid operating performance and has delivered good risk-adjusted returns. Unsuspecting shareholders, however, may not be hearing the whole story - at least not until CT files its 10-K next Friday.

CMBS exposure has raised concerns for the investment banks, and spreads on the CMBX are hitting record territory day after day. Yet CT reported no "other-than-temporary" impairment on its $877 million of mezzanine (BB+ and BBB- rated) CMBS. Meanwhile, iStar took a $133 million charge for its corporate loan portfolio, but Capital Trust's income statement showed no such impairment charges.

What about derivative losses? CapitalSource took an enormous charge for loss on its derivative contracts, but again, Capital Trust's income statement is silent on the issue. The income statement does, however, include a one-time gain on the sale of an equity method investment, which provided for more than half of CT's quarterly net income.

A careful review of Capital Trust's balance sheet shows that the accumulated comprehensive income swung by $16.5 million, presumably as a result of an increase in unrealized losses. When combined with the one-time gain of $15.1 million on investment sales, Capital Trust could have swung to a fourth-quarter loss of $3 million for the quarter.

CT's accounting appears to be within the boundaries of GAAP, and the Company continues to operate with relatively low leverage compared to its peers. Nonetheless, it's hard to believe that Capital Trust believes it could fully recover the carrying value of its loan and CMBS portfolios in the current credit environment.

Disclosure: None