When UBS downgraded Capital Trust (CT) five weeks ago, citing the company’s low reserve levels and its belief that CT will have to take meaningful reserve charges in future quarters, analyst Tayo Okusanya couldn't have known how right he would be.
Capital Trust recently posted an unexpected loss of $1.59/share for the second quarter and adjusted income of $0.73/share, well short of the $0.84/share earnings consensus.
CT's shocking loss came courtesy of a net $50 million exposure to mezzanine loans secured by Harry Macklowe-owned office buildings in Manhattan.
To be fair, Capital Trust did mention this exposure in its first quarter conference call, noting that:
Our Macklowe exposure is $50 million on the balance sheet...recent comps in the market support our position in the capital structure and we continue to believe that our investment is money good.
Oops. According to the second-quarter press release,
subsequent to quarter-end, the Company made the decision to record a $50 million reserve against this [Macklowe] loan based upon management's assessment of the probability of recovery.
Whether it was really Capital Trust management that suddenly discovered the need for a full reserve or the urging of auditors Ernst & Young, we'll never know.
What we do know, however, is that in addition to this quarter's $50 million probable loan loss, Capital Trust also owns a $12 million pari-passu participation in a first mortgage on a Southern California multifamily project that did not make its contractual interest payment during the first quarter. However, despite commencing foreclosure procedures, CT did not record a reserve against this loan "given its expectation for a full recovery of principal."
Right. And I bet they have an office building in Manhattan to sell me as well. In any case, Capital Trust's reluctance to recognize its losses leaves its stock on shaky ground. Shares were off 9% after hours in light trade.