Capital Trust Looks Attractive With No Recourse Debt

| About: Blackstone Mortgage (BXMT)
This article is now exclusive for PRO subscribers.

I have written about the commercial mortgage real estate investment trust (REIT) sector and the confusing nature of its balance sheets. Many of these entities employ special purpose entities (sometimes called variable interest entities) with large amounts of assets and liabilities. These entities are usually consolidated into the REIT's balance sheet and this often produces confusion and a relatively meaningless set of numbers. This problem, and the fact that there have been a number of non-performing loans in their portfolios, has led the group to have some very sharp declines in price and has undermined investor confidence.

In recent months, some of the companies in this sector have taken steps which appear to be turning around not only fundamental performance but also investor confidence. On Friday (an ugly day in the stock market), Gramercy Capital (GKK) was up nearly 13% on an announcement that it had resolved a long standing dispute with lenders which will leave it in possession of certain properties and will relieve it of massive debt obligations. In recent months, RAIT Financial (NYSE:RAS) has seen a steady level of insider buying and, although the market is still not in love with this stock, the insider buying may presage a recovery.

Capital Trust (CT) concluded negotiations with its lenders this Spring and essentially relieved itself of all recourse debt at the corporate level. It still manages and owns interests in various special purpose entities which have large scale debt obligations of their own. But liability under these obligations is generally limited to the assets of each special purpose entity and would not reach CT itself. For this reason, it is interesting to examine exactly what assets CT is left with and how their value compares with the market cap of the stock.

As of the end of the last reporting period, CT had $28 million in cash. It also owns CTIMCO, the management company which manages the debt in the special purpose entities and has the capability to manage similar portfolios. I have conservatively valued it at 8 times earnings of $1.5 million for a total of $12 million. CT also owns 52 percent of the common stock in CT Legacy REIT, an entity formed as part of a settlement with creditors. CT has presented data which supports a valuation of this interest (net of encumbrances) of $45 million. CT has an investment in CT Opportunity Partners, an entity which is still deploying assets. I value this interest at cost or $11 million. CT also owns preferred stock in CT Legacy REIT which I value conservatively at $7.5 million (essentially one year's worth of dividends). Finally, CT also owns residual interests (it gets paid after the senior interests) in three CDOs and a large net operating loss carry forward ... I have not found any data in the latest quarterly report or elsewhere which provides insight into the valuation of these interest.

Some of these valuations involve a degree of speculation but I have tried to be conservative in areas where there is uncertainty. The company has gone a long way in the direction of providing meaningful data in its quarterly report and conference call, but more clarification in certain areas would be helpful. For example, there appears to be little or no data which could be used to support a valuation of GT's residual interest in its CDO's. The terms and prospects for dividends for the GT Legacy preferred stock are also opaque.

At any rate, giving no value at all to two important assets - the NOL carry forward and the residual interests in the CDOs, we still get a value of $103.5 million. With 24.7 million fully diluted shares, this comes to $4.18 a share which compares favorably with Friday's closing price of $2.78. I would not be at all surprised if in the next few weeks or months there are opportunities to buy it at even lower prices. And investors should be aware that the commercial mortgage REIT sector is wild and wooly and littered with corpses of investors who took a terrible beating.

But, of course, that is the atmosphere which creates value opportunities and CT appears to be one of them.

Disclosure: I am long CT, GKK, RAS.