Blackstone Mortgage Trust Inc (BXMT) 2004 Q2 法說會逐字稿

Welcome to the Capital Trust second-quarter 2004 results conference call. Before we begin please be advised that the forward-looking statements expressed in today's call are subject to certain risks and uncertainties including but not limited to the continued performance, new origination volume and the rate of repayment of the Company's and its funds loan and investment portfolio. The continued maturity and satisfaction of the Company's portfolio assets as well as other risks contained in the Company's latest Form 10k and Form 10-Q filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. There will be a Q&A session following the conclusion that this presentation. At that time, I will provide instructions for submitting a question to management.

I will now turn the call over to John Klopp, CEO of Capital Trust.

Thank you and good morning everyone. Thank you for joining us and for your continued interest in Capital Trust. The last 4 months including July, have been one of the busiest and most productive periods in CT's history. Last night we reported our results for the quarter ended June 30th and filed our 10-Q. Brian Oswald, our CFO, will review the detailed numbers in just a moment. But first I want to provide some context on what's been keeping us so busy.

In short, we made $266 million of new balance sheet investments. We closed our first CDO, and we completed 2 separate equity offerings all in this last period. Let's begin with asset originations. The bulk of our new assets came in the form of a $250 million portfolio that we purchased from GMAC in late July. Comprised of 40 floating rate B notes and one mezzanine loan, the GMAC portfolio acquisition is significant unto itself, more than doubling the number of loans on our balance sheet and increasing our interest-earning assets by 63 percent compared to June 30.

More importantly, however, are the facts that this acquisition broadens the scope of our business into small balance lending and cements our relationship with GMAC, a leader in the floating-rate market. We expect that this relationship will produce a continuous flow of new originations for CT and we are already processing a significant pipeline of similar B note opportunities from other conduit lenders.

We match the GMAC portfolio with a perfect financing vehicle by simultaneously executing a groundbreaking CDO. Not only a first for us, our CDO was also the first of its kind for the market in 2 respects; the first CDO secured primarily by B Notes and mezzanine loans and the first commercial real estate CDO with a reinvesting feature. To take a step back, a CDO is in its simplest form a securitized financing collateralized by some form of debt obligation.

In this case we aggregated $73 million of collateral from our own balance sheet with the 250 million of assets from the GMAC portfolio acquisition and issued 252 million of floating-rate notes rated AAA through BBB- to third-party investors. This financing provides compelling economics, a roughly 80 percent advance rate at a cash cost of funds of just over LIBOR plus 60 basis points. And superior structure compared to our existing secured credit facilities; term matched, non marked-to-market and no recourse.

With this new form of financing, we've dramatically improved our cost of capital making as a stronger competitor in our existing markets and opening new opportunities to the Company that had not been previously available.

In May we welcomed W. R. Berkley Corporation as an important strategic investor in Capital Trust when they purchased 1.6 million shares of CT stock in a direct placement. For those who may not know W. R. Berkley is a New York listed public insurance holding company founded over 30 years ago by Bill Berkley and based in Greenwich, Connecticut. Josh Polan (ph) of Berkley has joined our revamped Board of Directors and we look forward to their advice and counsel.

Following the Berkley transaction in July, we completed a 4 million share public offering comprised of roughly half primary shares sold by the Company and half secondary sales by holders of our convertible trust preferred securities. As a result of these two offerings, shareholders equity increased by $125 million and book value increased to over $18 per share. We also made significant strides in improving float and liquidity of our stock, one of our ongoing objectives.

Also during the quarter we substantially added to our due diligence and asset management platform and received approvals from all 3 rating agencies to act as a special servicer. Together these 2 initiatives will allow us to be more efficient and effective investors in small balance loans, portfolios and securitized products which are the areas where we see the greatest opportunities today.

All of these accomplishments require continuous effort from our staff and I want to take this opportunity to thank them for their hard work and long hours. The series of transactions that they have completed in this very busy period has significantly enhanced CT's future earnings power and in turn our ability to accomplish our primary mission; growing dividends per share.

While we do not provide forward guidance, our policy is to center our dividend payouts at a level that we fail is comfortably sustainable and consistent with maintaining REIT status. As the impact of our recent asset acquisitions kick in, we will reassess our current run rate of 45 cents per quarter and make a decision on any changes to our dividend by year end.

In a market environment that seems to get only more competitive, Capital Trust is in its best shape since we started the company in 1997. Our balance sheet pipeline is very active and we are processing a number of B Note opportunities similar to the GMAC assets. In fact, today we are scheduled to close on 14 new investments totaling approximately $105 million; $85 million for the balance sheet and $20 million for Fund III.

In spite of increased competition the credit quality in all of our portfolios remain strong. Going forward we're confident that we have the human and capital resources to find the best risk adjusted opportunities and expand our investment strategies in the new complementary products. We are particularly pleased with the confidence that our existing and new shareholders have shown in supporting our recent equity offerings.

Now I'm going to turn it over to Brian to go through the numbers in greater detail. Brian?

Thank you John and good morning everyone. Before I get into the details for the second quarter, I'd like to take some time to discuss the CDO transaction and the public offering that both closed in late July. On July 20, we completed 2 simultaneous transactions which together we refer to as the CDO. In the first transaction we purchased 40 floating-rate B Notes and 1 mezzanine loan from GMAC for $251.2 million. These loans were priced to yield approximately LIBOR plus 459 basis points before adjustment for any anticipated credit losses.

In the second transaction we contributed the GMAC assets along with assets of approximately $73 million from our own portfolio to a wholly-owned subsidiary and issued 320.8 million of floating-rate CDO's. Of the 320.8 million, 252.8 million was rated investment grade and sold to third-party investments with the balance retained by CT. The CDO is callable after 2 years and includes a 4-year reinvestment period during which we can reinvest any principal payments received in new qualifying investments. This feature allows us to use the vehicle for the next 4 years as the equivalent of a revolving credit facility.

The investment-grade securities were issued with a blended average coupon of LIBOR plus 62 basis points or LIBOR plus 106 basis points after the amortization of fees and expenses.

The net balance sheet effective the CDO transaction is an increase in loans and debt by approximately $250 million each. CT will be initially recording a return of LIBOR plus 325 basis points on the purchased assets after adjusting the cash flows for potential losses on the purchased assets. The initial anticipated affected of the CDO transaction is an increase in annual net income of approximately $5.5 million.

On July 28th we announced the closing of a public offering of 4,025,000 shares of CT common stock at a price of $23.75. We sold 1,888,289 primary shares including 525,000 shares pursuant to an overallotment option exercised by the underwriters. Net proceeds will be approximately $42 million after payment of all expenses.

In addition to the primary shares that we sold holders of 50 percent of our convertible trust preferred securities converted their securities to 2,136,711 shares of common stock and sold these shares in the offering. The conversion and sale will eliminate approximately $4.5 million of interest expense on an annual basis.

Now let's go back and discuss the second-quarter. We reported net income of $3.5 million for the quarter ended June 30, 2004. On a per-share basis, this represents 47 cents fully diluted up 1 cent from the amounts reported for both the first quarter of 2004 and the second quarter of 2003.

On the balance sheet, total assets increased by 18.1 percent from 400 million at December 31st, to 472 million at June 30th. During the first half of the year, we purchased $35 million of CMBS, made 47.1 million of new loans and received 24.3 million of loan amortization and repayments. In June we sold our remaining $12.4 million of Freddie Mac securities recognizing a gain of $300,000.

We initially purchased these securities to facilitate our compliance with the investment company and with the reason investment activity they were no longer needed for compliance. With the closing of the CDO transaction in July we have already far exceeded our stated goal of increasing net assets by $100 million in 2004.

In May and June of this year we completed a direct public offering to W. R. Berkley Corp. In this 2 tranch transaction we sold 1,635,000 shares of common stock to affiliates of Berkeley and issued warrants for them to purchase an additional 365,000 shares. All of the shares were priced at $23.40 per share and the price then netted up after expenses to $38 million.

Our debt to equity ratio decreased significantly from March 31st to June 30th as a result of the new equity provided by the Berkeley transaction which was initially utilized to pay down debt. On March 31st our debt to equity ratio was 3.5 to 1 and at June 30th, it stands at 2.3 to 1.

Our liquidity position remains strong and subsequent to the CDO transaction and the public offering we currently have approximately $80 million of liquidity including 5 million of cash on hand and 75 million of available borrowings under our committed credit facilities. We believe this level of liquidity is adequate to fund our near-term needs including redemption of the outstanding convertible subordinated debentures and fund additional balance sheet growth.

We intend to call the remaining convertible subordinated debentures on September 30th, 2004, upon which the securities are open for redemption at (indiscernible). This call could affect the Company based upon 2 possible outcomes. If the holders take the cash we would use $45 million of our existing liquidity to pay off the debentures and going forward our interest expense will be reduced by $2.8 million annually.

If the holders elect to convert the debentures to common stock, our interest expense will be reduced by $4.5 million with an additional 2.1 million shares would be issued.

Our book value varies based on a number of factors including sales of common stock and changes in the market value of our CMBS investments we hold as available for sale securities. While we marked these assets to fair value, the marks are accomplished through equity without any effect on our P&L. We anticipate holding these securities to maturity and fully realizing their face value. This will result in our reversing these unrealized losses over time as we approach the maturity of the securities.

Our calculation of book value per share at $16.35 at June 30th includes 174,000 shares representing in the money options and warrants in addition to the 8.4 million shares outstanding at that time.

Factoring in the public offering from July, book value will increase to $18.04 cents per share and if the remaining CTP holders convert their securities to common stock, book value per share will further increase to $18.47 per share. We are committed to maintaining an asset liability mix which minimizes the negative effects of changes in interest rates on our future results.

In the current interest rate environment, we are maintaining a net positive floating rate exposure on our balance sheet with 90.1 million more floating rate assets than floating rate liabilities. Based upon the assets, liabilities and hedges in place at June 30th and taking into account floors in place on some of our loans receivable, an increase in LIBOR of 100 basis points would increase annual net income by $547,000. Further, a 300 basis point spike in LIBOR would positively impact our earnings by approximately $2.3 million.

Switching over to the income statement, diluted earnings per share for the quarter was 47 cents compared to 46 cents for the quarter ended March 31st, 2004. From the balance sheet investment business, net interest income was up $337 as the assets originated in the first quarter earned interest for the entire second quarter and interest expense was down as we utilized the proceeds from the Berkeley transaction to reduce secured debt.

As the Freddie Mac securities were repaying at a very exhilarated rate and no longer necessary for investment company at compliance, we chose to liquidate the position during the quarter and recognized the $300,000 gain on the sale. This gain accounted for the increase in other income.

General and administrative expenses were $216,000 higher compared to that of the prior quarter due to increased compensation accruals as annual bonuses are accrued based on a percentage of expected annual net income before bonuses.

Finally, the provision for income taxes was lower than that of the previous quarter as our taxable REIT subsidiaries had lower levels of income than in the prior quarter due to the expected runoff of Fund II and higher levels of G&A expenses.

Within our investment and management business, we earned based (ph) management fees and have the potential to receive significant future incentive management fees.

As disclosed in the 10-Q, if Fund II assets were sold and its liabilities settled on July 1st, 2004 at the recorded book value which is net of an allowance for possible credit losses and the fund equity in income were distributed, we would record approximately $7.6 million of incentive income representing our share of the incentive management fees.

This amount will change based upon the duration and performance of the assets in the fund. We do not anticipate recognizing any of the incentive compensation until 2005.

Fund III has a similar incentive management fee structure. We began deploying the funds 400 million of committee capital in June 2003 and have originated over $520 million of loans and investments through June 30th. At June 30th, Fund III had 13 outstanding loans and investments totaling $386.1 million after repayments and sell downs. Both Fund II and Fund III's investment portfolios are 100 percent performing and have not experienced any losses.

Combining the 2 business units, CT reported net income of $3.5 million for the quarter ended June 30th, compared to 3.1 million for the quarter ended March 31st, and 2.6 million for the quarter ended June 30th, 2003. In June we declared a dividend of 45 cents per share payable to the holders of record on June 30th which was paid on July 15th.

That wraps it up for the financials and at this point I will turn it back to John.

Thank you, Brian. At this moment, we would like to open it up for any and all questions.

(OPERATOR INSTRUCTIONS) Don Destino (ph) from JMP Securities.

Congratulations on a great quarter and what looks like a great outlook. I have a couple of questions actually. The first about the GMAC transaction. John, can you talk a little bit about why you were afforded that opportunity? I realize that GMAC has been selling credit risk for a while now but given how much capital we've seen come into this market I would assume there were a lot of bidders. Was that an auction process that you won or a negotiated deal and why you were able to win that transaction?

I guess the background you alluded to, GMAC has been in the process of a bit of revamping their activities a bit over the last 6 months or so. We were aware of that and had been working with them -- talking to them on a continuous basis since really the end of last year. This was not exactly a pure auction. It would not be the way I would describe it because of the complexity and magnitude of the transaction including both the asset and the liability side which came sort of as a prepackaged concept when it came to us. There were several other parties that we know of that GMAC spoke to. We simply jumped on it very fast and very hard, made a very strong bid and put all of our resources behind this transaction because we saw it as very significant and very accretive for us. And were able to basically win it. I think because of that dedication of resources that we put on it from day one.

Got it. Second question is related. In the past you've seen that when there's been a new type of collateral backing a CDO that very quickly that has become a much more common issuance. Do you expect that now that you guys have been broken ground on mez and B Note backed CDOs that that will become a more common funding source for those assets, both for you and for other people?

Absolutely. The world we live in is such that new things like this; new structures in the financial markets are knocked off almost immediately and in fact there has been already or is in the process of being offered a similar -- not exactly the same type of transaction by another collateral manager which is comprised -- the collateralization of it is comprised of B Notes and some CMBS. Similar but a little bit different. We do anticipate that this will provide an additional funding source for us and our activities and for other participants in the market; no question about it. We are actively exploring how this technique -- the CDO marketplace can be used both to finance our existing activities and also as a tool to expand into new and other kinds of products.

More quick ones. Do you think that because the (technical difficulty) kind of a groundbreaking CDO that it will cost you something in terms of basis points and that when you come back now that there has been a precedent set that there may be tighter spreads for future mez and B Note backed CDOs?

My sense at the moment is that I think the short answer is, no. We did certainly spend an enormous amount of brain damage and upfront costs to get this done. If you look at some of the disclosures we made, the raw coupon costs on the investment grade notes was roughly LIBOR plus 60; when you add in and amortize the up front fees and expenses of completing the financing transaction, that probably increases to a little over a LIBOR plus 100. I would imagine we could cut that component of it down in subsequent offerings because we would simply be more efficient in going about such an exercise. I don't think there will be a significant near-term compression in spreads.

Got it. Finally on the investment management business. Just a quick update; do you still expect to finish the investment period for Fund III or do expect Fund III to be fully invested mid next year? And then any update on your current thoughts on a fund for a different asset class outside of mez and B Notes?

I think that the context is that what we're finding in the marketplace is the most intense area of competition is for those assets which are right down the alley of Fund III's investment strategies, specifically the large, medium-term floating-rate mezzanine lending on high-quality stabilized existing products. That is where I think the recent influx of competition has been the most intense and as a result we are finding it more difficult to find good assets for Fund III. I think as Brian said, in the first 12 months, 12.5 months since we opened Fund III in June of last year, we've actually completed about $520 million of new investments in gross and that very good given the competition in the marketplace.

And we've just, as we've said, closed on another transaction today. We're finding things to do for Fund III but it is increasingly hard and getting harder, it seems. So what the expectation is as to full deployment by the end -- by the scheduled end of the investment period in June of '05, we're still assessing. It’s kind of hard to get a lot of visibility on that but we are working very hard to get that money out.

In terms of follow-on investment management products, we continue to work on a number of different ideas that we believe are complementary and which our platform can support. We mentioned some significant increases in our capabilities in the due diligence and asset management and special servicing areas -- all of which have been accomplished in the last couple of months. I think that sets the stage for more portfolio type acquisitions, more CMBS type investments and whether that is done on the balance sheet or in the form of some kind of a managed account, we are still making that assessment and will I think make some decisions in the coming months.

Thank you very much.

Ronald McKinney (ph) of Smith Barney.

Brian and John, congratulations. What a difference a year makes. You guys are really cranking. John, you've really touched on just briefly on the question that I had and that some background and color on the competitive atmosphere in your space. If there is anything else you can further add with regard to my inquiry, I'd appreciate it.

I don't think there is much more to add. It certainly appears that there is an almost unending flow of capital toward this set of opportunities, both private money and money that has been raised in the public equity markets. It's a very large business. It's a very large sector. There are many different ways to operate within this sector and obviously I guess what you are seeing us do at the moment for our balance sheet is twist the dial a little bit to go where we think the better opportunities are. And that focus recently has been a little higher in the capital stack, more B Note as opposed to Mezzanine and a little smaller loan orientation because we think that there's simply -- somewhat less competition in that sector. In turn when married with the CDO technology that allows us to put in place very efficient, very cost-effective financing to support those assets, that's where we think a primary opportunity is today.

The competition is out there; there's no question about it. It always has been. We've been at this now since 1997 and we have managed as the market opportunity has evolved to keep with it or hopefully a step ahead of it as we've gone forward and we think we can continue to do that.

John, that's great. I appreciate it and once again congratulations.

Dan Sannon (ph) of Jefferies.

It's actually Rick, how are you?. A couple of questions. First of all, given the revolving nature -- revolving nature of the CDO what would your expectations be in terms of reassessing that market down the road? Obviously it's not going to take you 4 years to go back. Are you planning this will be an annual event or sort of what is the timing there? And also could you give some indication on the yield on the loans that you guys are closing today just to give us a sense of where pricing is and how things have shifted a little bit?

It's hard for us to give you great clarity on how frequently we may be able to go back to the CDO marketplace. We are actively accumulating additional assets which we are warehousing on our balance sheet and which can be dropped in to the reinvestment feature of the CDO that we just closed to keep that bucket full.

We are also actively exploring a number of different asset avenues, origination avenues that we think are amenable to using this kind of financing to aggregate and term match. It's a little difficult, to be honest with you, to tell you exactly how frequently and in turn in what form we may come back and access the CDO marketplace again. But we are finding good opportunities of similar size and risk profile for the GMAC assets -- obviously the assets that we're closing today in part are very similar but we are also exploring how we may be able to use the CDO 0 technology to expand into other complementary adjacent kinds of products and use that as the financing technique.

In terms of spreads, the mix of business that we're closing today kind of covers the spectrum of what we do. We are closing a number of B Note acquisitions that are very similar to the GMAC assets and are priced in the same basic range. Some variability, but in the same range. We are purchasing a securitized bond, a CMBS asset today which is BBB- rated and which is a little bit different but essentially has the same underlying character of assets in both of those, the B Note and the bond that we're buying are balance sheet assets. And we're closing a $20 million Fund III mezzanine loan on an office property in Florida that is very similar to the risk profile that Fund III has been pursuing in the last year or so. And in turn, has the same kind of spread characteristics that Fund III looks for.

Okay.

Is not enough, Mr. Shane?

That is helpful. Thanks guys.

Evan Dreyfus (ph) from Talon (ph).

Just a couple quick housekeeping questions and you probably went over this and I missed it. But, if the remaining converts convert to equity is the fully diluted share count approximately 14 million?

I would say it is approximately 14.5 million. What we have outstanding today approximately -- this is post the offering -- approximately 12.5 million shares. The number of shares if all of the remaining convertible trust preferred converted to common aggregates 2.1 million shares.

Thank you. Just a couple other quick questions. On the CDO, the equity and debt tranches that are held by Capital Trust I suspect are held at your REIT subsidiary?

They are held in a separate subsidiary. That is a subsidiary of the REIT subsidiary.

In terms of just mechanics on that CDO, you talked about your LIBOR 320 spread. How does it work? You fund let's say on the first day of the quarter at the last day of the quarter -- is there a payout to your investments or does it pay every 6 months?

It actually pays monthly on the 20th of the month.

These are typical of the rest of our loans -- both balance sheet and in the funds. They are almost entirely floating rates therefore LIBOR indexed so it is LIBOR plus a spread. They are entirely monthly pay instruments and essentially notwithstanding the wholly-owned subsidiary structure to accomplish the CDO, these are assets that are on our balance sheet fully consolidated and flows directly through to Capital Trust's income statement on a current basis.

So back to the net income and potential dividend increase for this year you have 5 months and 10 days of this extra spread?

That would be correct.

Does the W.R. Berkley, the 365,000 warrants -- is that still outstanding or is that 325 that they bought additionally part of the warrants?

No. The warrants are in addition to the 1.635 million shares that they have purchased. Those warrants have a life that expires 12-31-'04. So it expires by the end of this year and have a strike price equal to the purchase price of the Berkley shares in May and June and that is $23.40. They are not exercised at this point in time.

Thank you very much.

Ken Clemalla (ph) from Newberry Partners (ph).

If we look at the GMAC transaction -- if you use a normalized leverage, where does your return on equity come out on that transaction?

We are hesitating just in terms of what we have disclosed in what various venues. I think if you do that math and you look at the net additional assets at the net spread, net of the potential for anticipated credit losses on the assets that we have acquired, I think what you will calculate is that the return on our net deployed equity should be in the low to mid teens.

Thank you. One other question on the Berkeley transaction you called a strategic. What was the -- if you could give us a little color on that -- why is it strategic and is this a passive investment for them?

I won't speak for them. It's active in the sense that we -- one of their people has joined our Board and we anticipate and have already experienced their active interest and involvement in our business. I think that anything we do and the in turn, they have certainly given us the sense that they are a long-term investor in for the long haul. Anything else that we do together with them is yet to be discussed and determined. Certainly nothing contractual and nothing in the works at this point but Berkeley is a very good, very savvy, long-term investor and we're very happy to have them.

Good job. Thank you.

Don Destino from JMP Securities.

Actually asked and answered. Thank you.

(OPERATOR INSTRUCTIONS) Jed Nestorf (ph) from Force Capital (ph).

A couple of quick questions. First, who manages W.R. Berkley's commercial real estate investment portfolio?

The individual with whom -- the individuals with whom we interface are Bill Berkeley, who is the Chairman and Founder and CEO and Josh Poland, who does a variety of different things as I understand it including overseeing some of their commercial real estate investments. Beyond that, I simply can't answer for you, Jed.

Interesting answer. In terms of the B Note market, are you seeing any regional banks participate in B Note buying? Maybe you could also comment on whether or not you are seeing more commercial capital people like a CIT or GMAC or those people particularly aggressive -- those sorts of buyers?

Regional banks I would say, no, we have not seen much activity in the B Note sector from domestic regional banks. We certainly have seen action from foreign banks particularly from German banks and depending on the loan to value and the duration of the instrument, we've seen a fair amount of activity from a lot of the insurance companies. But regional banks, I would say no.

The credit companies, if I understand the second part of your question, more the CITs and I guess in turn the GMACs of the world, yes are investors but generally tend to make whole loan investments for their own portfolio, hold to maturity and are less involved in the securitized fractionalized business that we are.

Thanks very much guys.

Henry Stockton (ph) from Bear Stearns.

You quoted a couple of numbers for book value per share. One was an 18.47 number. What is the denominator in that book value per share calculation?

Brian is going to give you a precise number.

Does that include, in other words -- is that the 14.5 including the conversion and all of that stuff?

Yes, it's 14,636,000 shares.

The other question I got is I think you got at a net interest margin for the CDO of LIBOR plus 350 basis points after credit losses which gives you 5.5 million in net income. Is that right? Is that asset yield minus liability expense divided by average earning assets? Is that your LIBOR plus 350?

Let me see if I can break it down. I think the number that Brian gave was net of and potential credit losses -- it is 325 over. The cost -- the fully loaded cost of the debt that supports those assets is roughly 100, 105 over LIBOR.

What is your leverage ratio? What is your asset to equity ratio for that deal?

The advance rate which is the way we look at it, against the assets that are the collateral for the CDO is approximately 80 percent meaning the amount of the investment grade liabilities that are supported by the total collateral pool equal approximately 80 percent of that total collateral pool.

So it's about 4 to 1 leveraged then, right?

Yes.

That is what trickles down to this 18 percent, this 15 percent to 18 percent ROE number that the other guy asked about?

Yes but I didn't think that 15 to 18 percent passed my lips. But yes.

And then in the prospectus, the final -- even the red (ph) talks about a loan objective on Fund III of $1 billion. Just bear with me -- could you just kind of talk about that and how you are going to reach it and all that stuff on Fund III?

Yes, I think we've already mentioned it a bit. I think what we are doing -- what we're finding is that it exceedingly hard to reach that full deployment target for Fund III in the current competitive environment. We raised $425 million of committed equity capital. The fund has a maximum leverage parameter of 2-to-1 debt-to-equity so it could, if fully maxed out essentially make in excess of $1 billion of investments. In the first 12 years of its investment period, -- I'm sorry 12 months, we closed about $520 million of gross investments which is a good pace given what we're finding out there. But is behind where we would like to be. We are currently doing our damnedest to find assets that fit the risk and return and leverage parameters of Fund III. Where we end up by the end of June and is again as I said before it's hard to give a hard and fast projection at this point in time because the fund is relatively opportunistic. It focuses on large ticket transactions and it’s very tough out there. It's very competitive right now but we are finding good investments that fit the fund's profile and working very hard.

I get the feeling that your earned balance sheet activity is probably going to be more fruitful?

On a relative basis there is more activity on the balance sheet today than there is in the fund. That would be an accurate statement.

One other thing. You guys just did a great job in the quarter. I'm really impressed. Thanks a lot.

Thank you.

Evan Dreyfus from Talon.

Just another quick question. A technical question. When it comes to the dividend right now, the 45 cents a quarter. That 45 cents -- is that really all the income from the REIT or are we taking from some of your spread business to subsidize that dividend?

I think maybe we'll have to go back and forth here a couple of times, Evan. The spread business (technical difficulty) (multiple speakers)

On balance sheet where it's not in the REIT.

That is what I was going to say. The spread business, the balance sheet business that produces net interest margin is housed on the balance sheet. What we've run through our taxable REIT subsidiaries is essentially our investment management business to the extent that that provides fee income both now, based management fees and in the future potentially incentive management fees. Those fees constitute bad or do not constitute good REIT income; therefore, we run them through the taxable REIT subsidiary and they flow up to the parent company which is the REIT. But they flow through that taxable subsidiary and therefore to the extent the taxable sub generates positive income, we pay taxes on it. So --

What I'm getting at is the $1.80 that you pay out a year -- the 14.5 or 6 million shares is 26 million. Is the income that your REITs subsidiary produces 27 or 8 million so you have to pay the 26 or are we taking some of the taxable income and putting it over there? I'm just trying to figure out technically what you are required by IRS rules to pay out right now on your REIT subsidiary?

The taxable REIT subsidiary does not generated a significant income. They have been operated basically at a breakeven level. Almost all of the -- in fact to date all of the revenue that's been distributed has been from the REIT.

Thank you very much.

Thank you.

There are no more questions at this time. That concludes the Capital Trust second-quarter 2004 conference call. A replay of this call will be available from 12:00 PM today through Midnight on August 31st. The replay call number is 888-567-0676, or 402-530-0418 for international callers. Thank you for participating.

Thank you everyone.