Blackstone Mortgage Trust Inc (BXMT) 2004 Q4 法說會逐字稿

Welcome to the Capital Trust fourth-quarter and year-end 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 (indiscernible) 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 10-K 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 of this presentation. At the 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.

Good morning, everyone. Thank you for joining us and for your continuing interest in Capital Trust. Last night we reported our results for the fourth quarter and full year, and filed our 10-K. Brian will run you through the detailed numbers in just a moment, but first I want to step back to review the year that Capital Trust had in 2004, and give you a sense of where we are going in 2005.

Judged by almost any metric, 2004 was a banner year for our Company. To recap the highlights, we originated 1.1 billion of total new investments, including 550 million in 73 separate transactions for our balance sheet. Net of repayments, total assets increased by 478 million, from just under 400 million at 12/31/03 to just over 875 million at year-end '04.

Book equity more than tripled from 96 million to 316 million, while book value per share increased 44% to $20.79 at year-end. Net income increased by 60% year-over-year; and on a much larger equity base, net income per share totaled $2.14, comfortably above our target. Most important, we increased our dividend from $0.45 to $0.50 in the fourth quarter, reflecting our confidence in CT's business going forward.

That confidence stems in part from several more strategic initiatives that we also completed in 2004. In July we issued our first CDO to finance Capital Trust's purchase of a large portfolio of B Notes from GMAC, plus some existing assets from our balance sheet.

Our first was also a first for the emerging real estate CDO sector, the first CDO collateralized entirely by B Notes and mezzanine loans, and the first to incorporate a four-year reinvestment period. A powerful tool for those who can access this market, CDO financing allows us to dramatically reduce our cost of capital and match fund our assets with nonrecourse nonmarked to market debt.

Several weeks ago we announced the launch of our second CDO; and while we cannot provide much more detail today because of the rules governing private placements, you should expect additional news on this deal in the very near future. I don't know if we can keep up the same pace, but we do expect to be a regular serial issuer in the CDO financing marketplace.

Last summer we also received approvals from all three major rating agencies to act as a special servicer for securitized commercial mortgage loans. Coupled with enhancements to our asset management infrastructure and systems, this initiative was designed to support our push into smaller balance mezzanine loans and B Notes, which fueled much of our asset growth in 2004. Going forward we intend to increase our focus on longer-term fixed-rate CMBS, and the special servicer ratings will allow us to directly control the resolution of any problem assets as we invest in larger pools of smaller balance loans.

Two years ago, we announced a new strategic plan for Capital Trust. The objective of that plan was to create an integrated finance and investment management company whose primary mission was to produce a steady, growing stream of dividend income to its shareholders. In 2003 we elected REIT status, restarted our balance sheet investment activity, and successfully launched Fund III. In 2004 we broadened our investment strategies, significantly increased our scale and equity capital base, and launched our CDO initiative.

In 2005 we will build on this positive momentum by advancing on several fronts. First, we will leverage our platform by pushing into complementary investment products that utilize our established network and our core skills in credit underwriting and financial structuring. Our primary focus will be on longer-term fixed-rate products, including subordinate CMBS.

Second, we will leverage our balance sheet, utilizing CDO technology to drive down our cost of capital and improve our asset liability match. We want to establish Capital Trust as the premier brand in the real estate CDO market, just as we have in the mezzanine lending area.

Third, we will enhance our presence in the equity capital markets by sequentially increasing the float and liquidity of our stock. We made great progress on this front with our public offering last summer, but know that we have more work to do.

Overall we are very pleased with the quarter and the year, and very excited about the prospects for 2005. We have the team in place to implement the next phase of our plan and look forward to the challenge. I'm going to turn it over now to Brian Oswald to run through the specific numbers, and then we will turn it back for questions from all of you.

Thank you, John. Good morning, everyone. Since John has discussed the highlights for the year, I will get right into the numbers. First the balance sheet. During the year total assets increased over 100%, from 400 million in December 2003 to 878 million at the end of 2004. The primary drivers were new originations of loans and CMBS totaling $550 million and increased valuations in our CMBS portfolio.

Our CMBS investments are carried as available for sale and are therefore valued at their estimated fair value, with net unrealized gains and losses reflected in our book equity as a component of accumulated other comprehensive income. The general tightening of spreads on subordinated CMBS and improvements in the credit characteristics of certain of our bonds resulted in a $35 million increase in the valuation of our CMBS during the year. Offsetting these increases were loan amortization and repayments totaling $116.4 million, which is consistent with the levels of the previous year.

We financed this asset growth with a combination of debt and equity. The biggest change in CT's business in 2004 was the first use of CDOs to finance our assets. This financing vehicle has allowed us to originate lower risk business at lower spreads, and by using increased leverage maintain our historical returns on equity. We plan to use CDOs in the future to effectively finance existing assets and new business. We also negotiated reduced spreads on our existing credit facility and repurchase obligations, allowing us to further reduce the cost of our borrowings.

In 2004 we returned to the equity markets to complete two major transactions. The first was a direct public offering of 2 million shares of common stock to W. R. Berkley Corporation completed in stages in May, June, and September of last year. The net proceeds on the shares issued were $46.5 million.

As John alluded or as John spoke of, during the summer we closed and underwritten public offering of 4,025,000 shares of common stock at a price of $23.75 per share. We sold approximately 1.9 million primary shares, raising $41.6 million after payment of all expenses. In addition to the primary shares that were sold, holders of half of our subordinated debentures converted their securities into approximately 2.1 billion common shares and sold those shares in the offering. The remaining holders of the debentures converted their securities on September 29 into an additional 2.1 million shares of common stock. Going forward these conversions will eliminate approximately $9 million of interest expense on an annual basis.

The debt and equity transactions completed during 2004 gave us the liquidity to finance the significant increase in our interest-earning assets. Average interest-earning assets increased from $359 million in 2003 to $553 million in 2004. As credit spreads in the general market tightened and we focused our balance sheet (indiscernible) on B Notes, the average rate on our interest-earning assets decreased 1.5% from 9.9% in 2003 to 8.4% in 2004.

Utilizing the CDO financing, converting the subordinated debentures into common stock, and negotiating reduced spreads on other debt, we were able to reduce the average (inaudible) interest-bearing liabilities including the subordinated debentures by 1.7% from 6.8% in 2003 to 5.1% in 2004. The effects of the cheaper financing will continue to be felt in 2005, as the CDO financing and subordinated debenture conversion did not happen until the second half of 2004, and we did not realize the full effect of these reduced borrowing costs until the fourth quarter of 2004. The average rate paid on interest-bearing liability was 3.9% in the fourth quarter.

We reported net income of $9.5 million for the quarter ended December 31, 2004, compared to $3.6 million for the same period in the prior year. Net income for the year ended December 31, 2004, was $22 million, compared to $13.5 million in the prior year. On a per-share basis, net income of $0.63 per share represents an increase of $0.13 per share compared the third quarter of 2004, and an increase of $0.09 per share from the fourth quarter of 2003. For the year ended December 31, 2004, net income totaled $2.14 per share compared $2.23 cents for the same period in the prior year.

Getting into the details in comparing this quarter to last quarter, net interest income was up $2.4 million due to the substantial increase in average earning assets, which increased from 639 million in the third quarter to 775 million in the fourth quarter, as we originated over he million in new assets and got a full quarter's effect of the originations from the third quarter.

Interest expense decreased $434,000 as we utilized additional equity to reduce secured debt, converted the subordinated debentures to equity, and utilized the CDO, which carries a lower interest cost than other secured debt. The increase in other income resulted from the reversal of the reserve for possible credit losses at Fund II, which increased the income from equity investments in funds by $774,000.

General and administrative expenses were $1.1 million higher than in the prior quarter, due primarily to increased compensation accruals, as annual bonuses are accrued based on the percentage of expected net income before bonuses. Also, G&A in the fourth quarter included $500,000 of professional accounting service fees relating to internal control documentation and testing.

Each quarter, management reevaluates the reserve for possible credit losses based upon the current portfolio of loans. A detailed review of the entire portfolio was completed at December 31, 2004; and based upon positive changes in the condition of certain loans and the evaluations completed on the remainder of the portfolio, we concluded that a reserve for possible credit losses was no longer warranted, and the $6.7 million reserve was recaptured.

As discussed earlier, our CMBS investments are carried as available for sale and are therefore valued at their estimated fair value unless an other than temporary impairment is deemed to have occurred. While most of our CMBS securities performed as expected in 2004 and saw significant improvements in their value, changes in the expected cash flow on two of our CMBS bonds during the fourth quarter of 2004 resulted in our concluding that these CMBS had incurred other than temporary impairment.

While these CMBS were already marked to fair value through equity, the classification as other than temporarily impaired required us to record a charge of $5.9 million through the income statement. This classification had no effect on net equity of the Company, just in the placement of the valuation the equity section. We expect a full recovery from our other securities and did not recognize any other than temporary impairment on the remaining CMBS investments.

As outlined in our press release, (inaudible) net income and earnings per share in both 2003 and 2004 were impacted by several items which the Company does not believe are recurring in nature. In the fourth quarter of 2004 these include the reversal of the reserve for possible credit losses of $6.7 million; the other than temporary impairment charge of $5.9 million taken on two CMBS investments; the reversal of the reserve for possible credit losses at Fund II; and the payment of $500,000 of professional accounting fees relating to internal control documentation and testing, of which the Company believes that $300,000 should not be recurring. In 2003, $2.8 million of additional income was recognized on the early repayment of several large loans which we deemed to be non-recurring.

After these adjustments, diluted earnings per share as adjusted for non-recurring items is $2.02 for the year ended December 31, 2004, versus $1.78 for the prior year and $0.54 for both the fourth quarter of 2004 and the fourth quarter of 2003. The final page of the press release details the calculation of these amounts.

Within our Investment Management business, we earn base management fees and have the potential to receive significant future incentive management fees. As disclosed in the 10-K, if Fund II's assets were sold and its liabilities settled on January 1 at the recorded book value, and the fund equity and income were distributed, we would record approximately $9.5 million of gross incentive income representing our share of the incentive management fees. This amount will change based on the duration and performance of the remaining assets in the Fund.

While no incentive management fees have been recognized to date, as of December 31, 2004, 100% of the partner's capital has been returned and the preferred return has been achieved. As a result, the next distribution to the partners will result in the Company receiving incentive management fees.

Fund III has a similar incentive management fee structure. We began deploying the Fund's $425 million of committed capital in June of 2003 and have originated $800 million of loans and investments through December 31, $587 million of which were originated in 2004. At year-end Fund III had 19 outstanding loans and investments totaling $602.4 million after repayments and sell-downs.

Both Fund II and Fund III's investment portfolios are 100% performing and have not experienced any losses.

We remain 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 $147 million more floating rate assets than floating rate liabilities.

Based upon assets, liabilities, and hedges in place at December 31, and taking into account the floors in place on some of our loans receivable, each increase in LIBOR of 100 basis points would increase annual net income by $1.5 million. Conversely, a 100 basis point drop in LIBOR would decrease our earnings by approximately $1.2 million.

Our liquidity position remains strong, and we currently have $68 million of liquidity, including cash on hand and available borrowings under our committed credit facilities. We believe that this level of liquidity is adequate to fund our near-term needs, including funding our equity commitments to Fund III and originations of new loans and investments for our balance sheet.

As a result of the new equity and conversion of the subordinated debentures, our debt to equity ratio decreased significantly during the year, from 3.0 to 1 at December 31, 2003, to 1.7 to 1 at December 31, 2004. The 1.7 to 1 ratio at December 31 is an increase from the 1.5 to 1 ratio at September 30, as we continue to leverage the equity raised earlier this year.

In December we declared a dividend of $0.50 per share, up $0.05 or 11% from the $0.45 of the previous quarter payable to holders of record on December 31. This dividend was paid on January 15.

Our book value per share varies on a number of factors, and the increase in 2004 was driven by our sales of common stock, conversion of subordinated debentures, and changes in the market value of our CMBS investments. Our calculation of book value per share, $20.79 at December 31, includes 174,000 shares representing in the money options in addition to the 15.1 million shares outstanding at the time. This is $6.37 per share or 44% higher than $14.42 reported at December 31, 2003. That wraps it up for the financials; and at this point I'll turn it back to John.

Thanks, Brian. Let's open it up for questions.

(OPERATOR INSTRUCTIONS) Don Destino from JMP Securities.

First question is just a point of clarification. When you reversed the loan loss reserve, I know you guys had just kind of one troubled loan, I think in Mexico. Is that an indication that you think that that loan is fully written down, and that you will get the rest of your money out at book value?

I think the answer is yes, eventually. We have been struggling to realize on that one nonperforming loan that we have on Capital Trust's balance sheet for a fairly long time now. We think we're making progress, and we think that the ultimate value of the collateral perhaps significantly exceeds our carry value of that loan.

As you recall I think perhaps, Don, it was an originally $8 million loan. We wrote it off to $4 million a couple years ago. We reduced the book carry value further by about $900,000, based on cash that we have collected from borrowers and guarantors. So we are carrying that one nonperforming loan on CT's balance sheet at $3.1 million today.

Yes, broader answer, the reversal of the reserve for potential credit losses reflected our assessment of the overall stability and quality of the balance sheet portfolio with only that one loan nonperforming.

So it sounds like, and I know you're not going to project it, but a recovery is possible on that loan?

I am definitely not going to project it, but we believe that a recovery on that loan is possible and will occur. I think the issue is timing.

Okay. Next question is regarding your comment about getting more involved with fixed-rate CMBS product. I guess two questions. Number one is, where in the credit backed are you looking to play? And two, if you could talk a little bit about what value add Capital Trust can bring to that asset class? Because obviously like everything else in commercial real estate debt, we're seeing a lot of competition and tightening spreads.

I guess in sort of reverse order there is no question about it. There's competition in every subsector these days, much more than we have seen in prior years. That extends from the traditional area where Capital Trust has focused, which is larger balance floating rate mezzanine loans, across the spectrum and includes what I guess are generally known as B pieces, subordinate CMBS.

We do believe that we have the capability and the infrastructure in place to expand our investment strategies out of our traditional focus areas. We believe that that includes not just floating rate assets but fixed-rate assets, and not just single bar or custom crafted loans but also securities. We have the network and the connections. We have the internal skills of the credit underwriting and financial structuring. And we have the asset management capability to handle a much larger portfolio than we currently have, even when you include both our balance sheet portfolio and the portfolios in our managed funds.

In terms of how we and when we intend to move forward in that initiative, I would simply say during the course of 2005. We have been preparing ourselves for a higher degree of focus on longer-term fixed-rate, more structured assets since really the beginning of last year; and we think we are ready.

I have a couple more but I will get back in queue and let somebody else ask the questions.

Richard Shane with Jefferies & Co. Mr. Shane, your line is reopened.

Sorry, a little technical difficulty here this morning in San Francisco. Obviously the thing that is very favorable for you at this point is that the CDO market for issuers is incredibly robust. What are you seeing in terms of competition for assets to put into the CDOs? Is that a concern headed later into '05? Are you continuing to be as aggressive, or do you think you may pull back a little bit?

I think the competition is intense, but I don't think that is really new news. I think it is a situation that we have been dealing with for the last couple of years. Notwithstanding that increased competition from a variety of different sectors, we continue to be able to find what we believe are credit solid, good, risk-adjusted return assets. We have done that by continuously scouring across different types of assets, different submarkets. As you have seen in 2004, our focus has been a little bit different than in the prior years, a little bit more towards smaller balance assets, a little bit more towards B Notes as opposed to mezzanine.

We certainly believe that the competition is going to stay at least for the near term. Finding good assets is certainly a very important part of the total key here going forward. The CDO market is very hot right now, no question about it. In fact it is probably driving spreads to some greater or lesser extent on the asset side, because people are originating -- as are we -- with a view towards a CDO execution as the way to finance those assets.

We think we're very well positioned to get more than our fair share in an admittedly competitive marketplace. We intend to continue to shift our focus to where we think the best risk-adjusted returns are. I think you'll see us adapt that mix during 2005.

Got it. John, one follow-up question now that we've actually got out phones working again. With rates starting to move up pretty sharply in the last couple weeks, on a real-time basis what is happening in the CDO market? Are you seeing any inclinations that demand is abating because people are no longer looking for that excess yield you're getting from the CDOs? Are they shifting back into more traditional alternatives? Or have we seen that yet?

I really don't think so, Rick. We are seeing continued pretty ferocious demand in the CDO marketplace. We are seeing continued across the board demand for yield products, particularly when they are collateralized by underlying hard assets. That is really the business that we have been in from the beginning of Capital Trust. So I don't see it shifting yet.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS) Robert Promisel, Adelante.

Quick question for you about just the investment environment that you're in. I'm curious about your perspective on the value of the collateral underlying your loans; and whether you're getting comfort about stable to higher values based on either an improvement in the operating margin of the underlying assets or just the higher multiple applied by the marketplace to those hard assets.

Clearly valuations have been shifting, have been shifting in very interesting ways the last couple years, and again reflecting across the board demand for hard assets with current yield. You are seeing at least for high-quality stable existing income-producing real estate, very strong valuations in the marketplace.

We have always taken the view that our business is to underwrite cash flow, to be a subordinate debt provider, not an equity partner. Looking for significant equity cushion underneath us to provide downside protection. If you look at the metrics on our portfolio, as we do all the time, I think we have been able to maintain a very strong cash flow coverage, a very strong equity subordination. In fact our portfolio at the balance sheet level at CT has really actually decreased in terms of loan to value ratios as we have focused more in the aggregate on B Note types of investments as opposed to, again, the more traditional mezzanine loan.

So we are certainly aware of and in the midst of what is going on in the real estate equity markets and the valuations of real estate product. But I think we have been pretty careful. We are trying, at least, to maintain those standards that we have set out from the beginning.

As a follow-up what are your thoughts on exposure to various property types here? Some that are perhaps more attractive than others from a lender's perspective?

Again as you track over time our various portfolios on balance sheet and in the funds, you'll see that the property type concentrations have shifted to some extent. Today we are less concentrated in office buildings than we had been in prior years, in large part because what we have seen is the valuation increases have been very significant in office products. and the competition for loans has been intense.

I guess at the other end of the spectrum, we have increased our percentage concentration to the hospitality industry. Over the last couple of years our perception has been that there have been better deals to be done on hotels than perhaps, as a general oversimplification, in the office sector. That, too, has gotten more competitive in recent months. But over the course of the last period we have found lower advance rates, higher cash flow coverages, tighter terms on hotel loans, particularly portfolio transactions as opposed to single asset transactions. And we have taken advantage of that.

Going forward we are definitely involved in all of the underlying product categories, at least the major product categories, and look at it on more of an opportunistic basis, deal-specific, than sectoral.

Two last quick questions. One, do you think you will expand or invest overseas in order to find value? Similarly, do you think you'll increase your exposure to development assets in order to find value over the next year or so?

I think if you want the simple one-word answers, over 2005 in all likelihood, no and no. I think over a longer period of time there may well be opportunities for us outside of the four corners of the United States. But I think that we believe our principal focus for 2005 will continue to be inside the United States.

In terms of development assets, obviously people have made money on new development financing over the last couple of years; and we have basically stayed on the sidelines, believing that our business is, again, to repeat, underwriting cash flow in place, as opposed to future sales or future cash flow that is not in place. So maybe we have missed some good deals over the last couple of years by not financing ground-up development. But I think that in all likelihood at this point in the process we are not going to shift our focus.

Okay, thanks.

A follow-up from Don Destino with JMP Securities.

John, two more questions. On the third-quarter call you talked about difficulty finding loans for Fund III, and that you might not fully deploy all of the committed capital. I guess two questions about that. First is, can you give an update on that? Is that still your view? Secondly, how does that influence your plans for Fund IV, in terms of size, or whether or not you'll do a Fund IV (inaudible) mezzanine IV?

Let me take the component parts. I would say that on a relative basis we still believe that it is harder to find assets that fit the strategy for Fund III than it is to fit the somewhat broader mandate that I think we have at Capital Trust for our balance sheet. But compared to the last quarter's conference call, I guess I would say we feel a little bit better.

If you step back with respect to Fund III, as of 12/31/04 now, we had as of that point completed about $800 million of total originations for Fund III, close to $600 million in the course of '04, some fairly significant activity and volume in the fourth quarter, and year-to-date again to a good pipeline of closings completed and transactions under way. So we feel better about where we are in terms of our ability to deploy a significant portion of the capital in Fund III. We are pushing hard towards the scheduled expiration of the investment period, which is June of '05.

We are still chewing on what Fund IV might look like in terms of another mezzanine investment product, both in terms of its investment targeting, the type of vehicle, and the size of any capital raise. We want to be sure that we have calibrated whatever that vehicle might be to where we see the current opportunity and where we foresee the opportunity over the next couple years. So I don't really have anything for you at this point in time, but we are thinking hard.

Got you. Last one, with incentive fees looking fairly imminent, would it be a safe assumption that those are earnings that you would just retain? You're not going to pay those out in dividends?

I think that the Board will look at our dividend policy, as we have on a regular, continuous basis. I think that we are going to wait and see when and how much the incentive management fees really produce; and then decide how to really combine the obvious alternatives, which are to pay out on a regular quarterly basis, pay out on a special dividend basis, or retain those excess earnings.

The business model for Capital Trust that we have tried to establish over the last couple years, as you know, is one that combines both a balance sheet investment business that produces net interest margin, and a fund management business that produces two flavors of income, baseline management fees and -- when we are successful -- incentive management fees.

As we work our way into a more mature point in that strategic plan implementation, we are hoping that we get to a point where serial funds produce more regular incentive management fee or promote income. As we get to that scale point, I think that we will continue to look at what the dividend policy for Capital Trust is, in terms of dealing with those incentive management or promote items in our income statement.

Got it. Thank you very much.

Steve Brown with Neuberger Berman.

Would you go over those numbers again for the trust's exposure to a 100 basis point move in LIBOR, and its impact on FFO per share?

Yes, Brian?

A 100 basis point shift up would result in about a $1.5 million increase in earnings, about $0.10 per share. Going down, because there's some floors in place, it only would drop earnings by $1.2 million; or that is about $0.08 per share.

Okay, so your earnings stream is sort of inversely levered toward interest rates right now; meaning that if rates go up, your earnings go up.

Yes.

Very good, thank you very much.

(OPERATOR INSTRUCTIONS) Jerry Kahn (ph) with William Harris Investments.

When you talked about the charge for other than temporary impairment of the CMBS area, discuss if you would a little more about the balance of the portfolio, and what sort of impairments they have that might be temporary that you have not had to take yet.

I guess I'll step back a little bit and then I will probably turn it back over to Brian. But just to give you some context, the majority of our CMBS portfolio was purchased in a portfolio transaction in 1999, sort of in the wake of the credit market upheavals of 1998. We have held the portfolio since we purchased it with some minimal trimming around the edges. In general, as an overall investment, that portfolio has performed remarkably well. I think that what you have seen in 2004 in terms of credit spread tightening and increase in valuation for the portfolio has been very significant and indicative of the overall quality of the portfolio.

There are two small bonds that we own in that portfolio which, based upon a very detailed scrub down in the fourth quarter and some new information regarding the underlying loans in those two bonds, for accounting purposes what we did was we made a determination that those two bonds, only those two bonds, had incurred what is called an other than temporary impairment.

Which essentially means that, while we mark all of our bonds to market with third-party valuations on a quarterly basis, and those valuation changes run through our balance sheet and are reflected in our book value per share, when you cross that line and are deemed to have an other than temporary impairment you take what you have already basically taken through the balance sheet and run it through the income statement. It is a non-cash charge, but is reflective of an expectation that full recovery on those two bonds may well not occur.

But we have no other issues in the rest of the portfolio. They continue to perform very well, and going forward we feel very good about the CMBS portfolio that is part of our balance sheet.

How much is left in that? How much is left with the balance, roughly?

$250 million.

Yes, 260 million.

I had another question if I could go on for a minute. If you used your numbers, and take out the special items -- which I think was a very good presentation on your part, by the way -- you ended up with a very good year. But in the fourth quarter you were flat. Is there anything that accounted for especially strong quarter a year ago or something? How can you explain that?

In the prior year, if you look at the prior year you'll see that our general and administrative expenses were only $2.8 million, as compared to 5.1 this year. Most of that was the timing of the bonus accrual in the prior year. We had a very, very good third quarter in which we recognized the $2.4 million additional income from the repayment of a loan early. It was a fixed-rate loan that paid off and had yield maintenance on it.

As a result of that we recognized a large portion of the bonus accrual for the year in the third quarter. Therefore there was not as much to be recognized in the fourth quarter, which is why the fourth quarter of last year was so much better than if you had more of a normalized bonus accrual for the year.

All right, thank you. One last question further. You've reduced your leverage significantly. But part of your strategy I think is to increase it again. What sort of a leverage level are you comfortable with?

I think that we will continue to assess that based upon what we think is the risk profile of the left-hand side of our balance sheet. At this point in time, as we have reduced the overall portfolio risk on the left-hand side, we feel like we are still under-levered at this point in time and would be comfortable -- but again this will change as we change the nature of the assets that we invest in -- we would be comfortable at closer to a 3 to 1 leverage ratio. Maybe even higher given the quality of the assets that we have, the credit quality. We are moving to lever out the balance sheet as we go forward in deploying the capital that we raised in 2004.

Thank you.

It appears that we have no more further questions at this time. Do you guys have any closing comments?

No, other than thank you very much for your time and attention, and we'll talk to you soon.

Okay, that concludes the Capital Trust fourth-quarter and year-end 2004 conference call. A recorded replay of the call be available from noon today through midnight on March 25. The replay number is 888-274-8337; or for international callers, you can call 402-220-2329. Thank you and have a great day.