I have written about Capital Trust (CT) in the past and have suggested it as a speculative investment at $2.78 and at $3.38. On Friday, the shares were up 64 cents or 20% and closed at $3.77. Blackstone Group (NYSE:BX) has announced that it will buy Capital Trust Investment Management for $20 million; CT will pay a one-time $2 a share dividend shortly and BX will purchase 5 million shares for $2 a share (BX will not receive the dividend on these shares).
I described the "fog" associated with evaluating CT and, when I think about fog, I remember one particularly challenging experience. My parents foolishly entrusted my younger siblings to my care on a boating trip in Peconic Bay. We were in an 18-foot runabout when an impenetrable fog set in. I was concerned because the entrance to Shinnecock Canal is hard to find in the fog and there are rocks on each side. Fortunately, a much larger boat came by heading in the right general direction and I decided to simply follow it in. After proceeding for a few minutes, the larger boat slowed down turned and came by us with the skipper asking, "Do you have any idea where the entrance to Shinnecock Canal is?" It is one of the reasons I do not always follow the "smart money."
Anyhow, CT has made a remarkable recovery from the dark days of 2009. CT is a commercial mortgage real estate investment trust and it specializes in mezzanine financing. During the good old days, it employed considerable leverage and, when panic spread through the market, the value of its assets declined precipitously. For a while, there were issues of viability. It was able to free itself from recourse debt and thus virtually eliminate the danger of a collapse. Now it has sold off its management arm. The question for investors is whether the "stub", the assets remaining after the transaction are worth $2 a share.
By my calculations, there will be some 29.4 million shares (24.4 million existing shares plus the 5 million acquired by BX) and CT will be left with some $15 million in cash (starting with $34 million and adding $20 million for the sale of CTIMCO and $10 million for the sale of the stock and subtracting $49 million for the dividend). There is some confusion about exactly which assets will be left behind, but my calculations are that CT Legacy Reit and CT Opportunity Partnership 1 will be left behind with a combined value of $42.2 million. CT will still have the residual interests in three CDOs which I have been unable to evaluate. I am not sure about the status of the preferred stock interest in CT Legacy REIT or its valuation. At any rate, even without the preferred stock and valuing the CDOs at zero, the value of the assets comes to roughly $2 per share. I would like to see a very detailed release describing precisely what is going to be left behind and estimating its value, but I think that the upside is greater than the downside.
CT appears to have worked out reasonably well. Other stocks in the same genre (commercial mortgage REITs recovering from a near-death experience) are Gramercy Capital (GKK) and RAIT Financial (NYSE:RAS); these stocks are volatile and sometimes difficult to figure out but, if bought on dips, they can pay off handsomely.