Blackstone Mortgage Trust Inc (BXMT) 2007 Q2 法說會逐字稿

Hello and welcome to the Capital Trust second-quarter 2007 results conference call. Before we began 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 fund loan and investment portfolios; the continued maturity and satisfaction of the Company's portfolio assets as well as other risks obtained 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 that time I will provide instructions for submitting a question to management. I would now like to turn the call over to Mr. John Klopp, CEO of Capital Trust.

Thank you, Kevin. Good morning, everyone; thank you for joining us once again and for your continued interest in Capital Trust. Last night we reported our numbers for the second quarter and filed our 10-Q. In the face of increased volatility and market turbulence CT again delivered solid results, net income of $25.4 million or $1.43 per share, a new record for Capital Trust. New originations were $687 million for the balance sheet and $842 million for our investment management vehicles, both new records.

The credit quality of all of our portfolios remains strong with no losses or reserves for losses incurred. And after talking about it on every quarterly conference call for as long as I can remember, I'm happy to report that we finally resolved our one and only nonperforming asset, an $8 million original principal loan in Baja, Mexico generating a $10.9 million recovery during the quarter on a loan that we carried at $2.6 million. And subsequent to quarter end we also received upgrades son seven classes of our CDO3, a $264 million balance sheet financing collateralized by a pool of largely fixed-rate CMBS that we issued in August of 2005.

On the capital front we upsized our senior unsecured credit facility from $50 million to $100 million and just this week closed on a new $250 million repo facility, bringing our total secured financing commitment up to $1.9 billion. In our investment management business we raised one new private equity fund, upsized the committed capital in our high-grade separate account by $100 million and increased our overall assets under management by 162%.

Lastly, in June we completed the acquisition of PRN Capital, a new healthcare lending platform that we believe over time will allow us to become a significant factor in this appealing sector. Digging a little deeper, Q2 earnings were boosted by our recovery on the Baja nonperforming loan. But even factoring that and other non-recurring items out, core recurring earnings were solid in the $0.85 per share range.

New originations were a record, but we also had a record $478 million of repayments. So balance sheet net asset growth was somewhat muted. So far in Q3 repayments have slowed significantly and we expect that trend to continue given current market conditions.

The PRN Capital acquisition will add to our G&A and be slightly dilutive to earnings in the next few quarters until the impact of new originations kicks in. But we believe this is a smart strategic investment that will pay off in the long-term. All in all we believe that Q2 was a period of strong performance and substantial accomplishment.

Notwithstanding all of the above, fear and loathing have now taken hold in the financial market and the question is how does this all impact Capital Trust. The credit meltdown in the sun prime residential market and the liquidity meltdown in the corporate leveraged loan market have clearly affected both the perception and reality of our world. Real impacts include wider spreads on CMBS and, more recently, floating-rate loans, spooked CDO buyers and, finally, tighter underwriting standards.

The stock market has reacted largely on perception by relentlessly selling everything in any way credit related including CT. In a period when risk across all markets is being reassessed and repriced the difficult task is to separate perception from reality. For Capital Trust and other companies like us the true test comes down to those same issues of credit quality and financial stability.

On the credit front we feel good about the risk in our portfolios and believe that our assets will continue to outperform the market. As the lending markets overheated in the last two years we consciously dialed down our risk profile, sacrificing spreads for downside protection. Our loan portfolio is predominantly backed by office, hospitality and multifamily rental properties owned by strong and experienced sponsors. Our exposure to residential land is limited to one $10 million loan and our book of or for sale condominium loans totals $164 million and is performing well.

Our CMBS portfolio is comprised primarily of older vintage bonds that were carefully selected and underwritten and the ratings performance reflects that quality with 80 upgrades versus five downgrades in the last 18 months. While individual assets will inevitably encounter issues, we believe that our credit discipline will clearly distinguish CT in the period ahead. We believe that the right hand side of our balance sheet is equally strong, insulating us from market fluctuation and providing adequate liquidity to take advantage of new opportunities.

Our $1.2 billion of existing balance sheet CDO liability provides duration matched non mark to market financing for substantially all of our long-term fixed-rate assets and attractively priced revolving financing for a portion of our floating-rate book. While the current market for CRE CDOs can be characterized as difficult at best, we believe that this market will ultimately find its new level and open up for experienced collateral managers and sponsors.

In the meantime, we have close to $1 billion of available committed secured credit capacity from eight counterparties including the new $250 million facility closed with a new lender this week. While the cost of these credit facilities is somewhat higher than our in place CDOs, we have always priced our assets to generate acceptable ROEs even if CDO financing was not available.

The senior managers of Capital Trust are, like many of you, all major shareholders at CT and the [swoon] at our stock has been painful. But one thing I've learned after 10 years is that you can't always explain or affect the price on the screen. So our plan is to keep doing what we've been doing -- selecting good assets that provide attractive risk-adjusted returns and maintaining a strong balance sheet.

We expect that the disruption in the capital markets will persist for a while, but that ultimately assets and liabilities will reprice and reach a new equilibrium. We expect that transaction volume will slow somewhat, but the flipside of that coin is that we also expect the duration of our existing assets will lengthen. In the short-term we expect that distressed assets and some distressed sellers will create extraordinary opportunities for those who have the experience and capital to move quickly. And in the long-term we expect that this painful cleansing process will be good for our industry and very good for Capital Trust.

With that I'm going to turn it over to Geoff Jervis, our CFO, to go through the specifics on the numbers.

Thank you, John, and good morning, everyone. Let's get started with the balance sheet. Total assets increased by 8% during the quarter to $3.2 billion from $2.9 billion at the end of Q1. The primary drivers of asset growth were new originations of interest-earning assets which we continue to define as loans, CMBS and total return swaps. For the second quarter interest-earning assets grew by approximately $234 million to $3.1 billion. Gross balance sheet originations of interest-earning assets totaled $687 million including $15 million of unfunded commitments for new fundings of $672 million.

During the period we experienced $478 million of partial and full repayments and an offsetting $45 million of new advances on previously unfunded commitments. Combinations of originations less unfunded commitments, repayments and new advances netted to the $234 million increase in interest-earning assets for the period.

Balance sheet originations were comprised of $75 million of CMBS and $612 million of loans, $15 million unfunded and $205 million of participation sold to the CT large loan fund. The weighted average all-in effective rate on new originations was 8.85%. At June 30th the entire $3.1 billion portfolio of interest-earning assets had a weighted average all-in effective rate of 8.25%. From a credit standpoint the average rating of the CMBS portfolio remains BB+ and the weighted average last dollar loan to value for the loan portfolio remains at 69%.

Looking inside the origination numbers, new CMBS were comprised of $39 million of rated securities and $36 million of non rated equity investments we made in two CT sponsored and CTIMCO managed off balance sheet CDOs. The first was our co-investment in the CTX CDO that we executed for the new CTX Fund which I will discuss later in the call. And the second was an investment in the B and equity securities in an $830 million whole loan B Note and mezzanine loan CDO that we co-sponsored with Morgan Stanley.

Both of the CDOs were structured to be off balance sheet and the Company has no recourse to any of the obligations of any off balance sheet CCO or investment management vehicle. As noted in the press release and 10-Q, the average yield on our CMBS originations was almost 11% for the quarter, elevated by the higher yields on the CDO investments.

Over to loans, new loans were comprised of $155 million of whole loans and $457 million of B Notes and mezzanine loans. The weighted average spread on the loan originations was 8.6% comprised of 8.23% for the whole loans and 8.72% for B Notes and mezzanine loans. Whole loan last dollar LTVs were 69% and our B Notes and mezzanine loan last dollar LTVs were 73%.

Looking across the entire portfolio, credit performance remains strong in all investment categories. The CMBS portfolio experienced four upgrades and no downgrades and inside the loan portfolio all assets are performing. We booked no provision for loan losses this quarter and feel very comfortable with the quality of the portfolio.

In fact, as John mentioned, during the quarter we successfully resolved our only nonperforming loans, the Baja, Mexico loan. This loan was a first mortgage with an original principal balance of $8 million that reached maturity on July 15, 2000. In December 2002 the loan was written down to $4 million. From that time until March 31st of this year we collected $1.4 million in cash which further reduced the carrying value of the loan to $2.6 million.

During the second quarter of 2007 we received net proceeds of $10.9 million which resulted in reducing the carrying value of the loan to zero and recording $4 million of a recovery of provision for losses and $4.3 million of interest income. Total recoveries on the $8 million loan totaled over $13 million and net of our expenses the Baja loan produced roughly a 6% internal rate of return.

Moving down the balance sheet, equity investments in unconsolidated subsidiaries increased to $12.1 million at the end of the second quarter. The increase was due to $3 million of fundings associated with our investment in Bracor which were offset by the continued impact of ordinary course repayments at Fund III on our co-investment. Going forward we expect to fund our remaining Bracor commitment over the next few periods. As to Fund III, we expect to continue to experience repayments and, as of June 30th, the Fund had only four investments with total assets of $121 million with all assets performing well.

As we've disclosed in the 10-Q, the growth promote value to us embedded in Fund III, assuming liquidation at quarter end, was $8.1 million. Collection of the Fund III promote is of course dependent upon, among other things, continued performance at the fund and the timing of payoff. That said, we currently expect to begin collecting Fund III promotes starting in late 2007. Any Fund III promote will be accompanied by our expensing a portion of capitalized cost as well as payments to employees of their share of promotes received.

At quarter end, in addition to Fund III we managed three other investment management vehicles -- CT large loan, CT high-grade and our newest addition to the investment management platform, the CTX Fund. The CTX Fund is designed to capitalize on certain opportunities such as synthetic CMBS that we are unable to address directly on balance sheet because of our REIT status or other such regulatory issues. The Fund's mandate is to co-invest in the equity and supported debt tranches of certain CT sponsored and managed CDOs secured by commercial real estate assets.

During the quarter we sponsored our first CTX CDO, a CDO secured by a portfolio of single name CMBS credit default swaps and cash assets with a total national or face amount of $490 million that since closing in May has ramped -- has fully ramped to $500 million. At issuance we sold $488 million of securities to third parties and the CTX Fund and CT retained the $12 million of subordinate notes and equity, split 40% to CT and 60% to the CTX Fund. Going forward splits on this type of asset will be 25% to CT and 75% to the CTX Fund.

Activity in our other investment management vehicles was also strong during the second quarter. CT Large Loan, our $325 million equity fund that co-invests with the balance sheet on large transactions, made four investments bringing the assets in the fund to $255 million at quarter end. CT High-Grade, our $250 million high-grade fee note and mezzanine loan separate account made five investments bringing the assets in the fund to $208 million at the end of the period. Subsequent to quarter end we upsized the equity commitment in the CT High-Grade fund by $100 million to $350 million.

On the right hand side of the balance sheet, total interest bearing liabilities, defined as repurchase obligations, CDOs, our unsecured credit facility and trust preferred securities were $2.4 billion at June 30th and carried a weighted average cash coupon of 6.03% and a weighted average all-in effective rate of 6.24%.

In terms of activity during the quarter, we increased our unsecured credit facility by $50 million to a total of $100 million bringing five new lenders into the syndicate. And subsequent to quarter end we entered into a new $250 million master repurchase agreement with Citigroup, bringing our total committed secured financing facilities to $1.9 billion, new facilities designed to provide us with financing for our general loan and securities investment activity. In addition, also subsequent to quarter end, we extended the term of our $300 million repurchase facility with JPMorgan through October 31, 2008.

Our repurchase obligations continue to provide us with a revolving component of our liability structure from a diverse group of counterparties. At the end of the second quarter our borrowings totaled $965 million and we had $1.6 billion of commitments from seven counterparties. We remain comfortably in compliance with all of our facility covenants and, inclusive of the new Citigroup facility, with almost $900 million of unutilized capacity on our repo lines, we are confident that we have the immediately available debt capital to fund our near and midterm growth.

Our CD liabilities at the end of the second quarter totaled $1.2 billion. This amount represents the notes that we have sold to third parties in our four balance sheet CDO transactions to date. At June 30th the all-in cost of our CDOs was 5.89%. All of our CDOs are performing, fully deployed and in compliance with their respective interest coverage, over collateralization and reinvestment test. At quarter end total cash in our CDOs recorded as restricted cash on our balance sheet was $3.8 million.

In addition, subsequent to quarter end we received upgrades on seven classes of CT CDO III from Fitch ratings. Of the 14 rated classes seven were uprooted by one to two notches and the remaining seven classes had their pre-existing ratings affirmed. Fitch attributed the rating action to the improved credit quality of the portfolio and seasoning of the collateral. CT CDOs three was issued in August of 2005 and is collateralized by a portfolio of Vintage 1996 to 1999 fixed-rate CMBS.

As previously mentioned, we increased our unsecured credit facility by $50 million to $100 million and brought in five new lenders to the syndicate. This facility has an initial term of one year with two one year extension options. And at the end of any one year we have a one year term out option, effectively making the life of this facility a minimum of two years and a maximum of four years. At quarter end we had $75 million drawn under this facility.

The final component of interest-bearing liabilities is $149 million of trust preferred securities and we did not issue any new trust preferreds during the period. In total our $129 million of trust preferred securities provides financing at a cash cost of 7.2% and 7.3% on an all-in basis, and these rates are fixed for the first 10 years of these securities.

One more item of note in liabilities is participation sold. At June 30th we had $334 million of participation sold on the balance sheet recorded as both assets, as loans receivable and liabilities as participation sold and the pass-through rate on these participations was 8.56%.

Over at the equity section, shareholders' equity was $452 million at June 30th and our book value per share was $25.52. Book value moved significantly during the quarter from $426 million at March 31st up approximately $26 million. The major components of the change were a $9 million net increase in the value of our interest rate swaps and net income from the resolution of Baja of approximately $8.3 million.

Our debt-to-equity ratio, defined as the ratio of interest-bearing liabilities to book equity, decreased slightly to 5.2 to 1 compared to 5.3 to 1 at the end of the first quarter of 2007. We remain comfortable with our level of leverage and, as we have said in the past, these levels will migrate depending upon the types of assets we originate and the structure of liabilities we raise.

As always we remain committed to maintaining an index and term matched asset liability mix. At the end of the quarter we had approximately $426 million of net positive floating rate exposure on a notional basis on our balance sheet. Consequently an increase in LIBOR of 100 basis points would increase annual net income by approximately $4.3 million. Conversely a 100 basis point drop in LIBOR would decrease our earnings by that same amount. Our liquidity position remains strong and at the end of the second quarter we had $28 million of cash, $136 million of immediately available borrowings under our repo facilities and $25 million of availability under our unsecured credit facility for total liquidity of $190 million.

Turning to the income statement, we reported net income of $25.4 million or $1.43 per share on a dilutive basis for the second quarter of 2007, representing growth of 57% on a per-share basis from the second quarter of 2006. The primary drivers of net income growth for the quarter were increases in net interest income which in turn resulted from the increase in interest-earning assets in addition to the impact of the resolution of Baja.

Other revenues for the second quarter, primarily management and advisory fees from our funds, were $899,000, in line with the comparable quarter in 2006. Underneath the surface the components of fee income changed as management fees from CT Large Loan, CT High-Grade and CTX Fund increased offsetting the decrease in base management fees from Fund II and Fund III. We expect these revenue streams to continue to grow in the coming quarters.

Moving down to other expenses, G&A was $7.8 million for the quarter and increase of $2.1 million from the second quarter of 2006. This increase is primarily a result of higher levels of employment cost as well as increased professional fees. Specifically, in conjunction with the resolution of Baja and its impact to net income, we increased compensation expense by $1 million for the period.

Depreciation and amortization decreased by $2 million year-over-year due primarily to the write-off of $1.8 million of capitalized cost in the second quarter of 2006 as we expensed all the capitalized costs related to an investment management joint venture. Below other expenses you will notice that we have a recovery of provisions for losses of $4 million, a recovery recorded in the second quarter of 2007 related to, as previously mentioned, the successful resolution of the Baja loan.

We received net proceeds of 10.9 million (technical difficulty) associated with the loan which resulted in the following -- reducing the carrying value of the loan from $2.6 million to 0; recording a $4 million recovery of a provision for losses; and recording a $4.3 million increase to interest income.

In both the second quarter of 2007 and 2006 we did not pay any taxes at the REIT level; however CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings. In the second quarter of 2007 CTIMCO recorded an operating loss before income taxes of $1.5 million resulting in an income tax benefit which was fully reserved. In the second quarter of '06 CTIMCO recorded an operating loss before income taxes of $1.6 million which resulted in an income tax benefit of $770,000.

As is typically the case, our income for the period included items that we would consider non-recurring. During the second quarter nonrecurring items included the impact of Baja, the impact of early repayment of loans including exit fees, prepayment penalties and accelerated discount or premium amortization, increased G&A and the impact from our equity investments. None of these impacts' recurring net income per share was in the mid $0.80 per share range, as John mentioned.

In terms of dividends, our policy is to set our regular quarterly dividend at a level commensurate with the recurring income generated by our business. At the same time, in order to take full advantage of the dividends' paid deduction of a REIT we endeavor to pay out 100% of taxable income. In the event that taxable income exceeds our regular dividend payout ratio we will make additional distributions in the form of special dividends.

We paid a regular quarterly cash dividend of $0.80 in the second quarter, a 14% increase year-over-year. In isolation, the resolution of the Baja loan increases taxable income by $8.3 million or slightly in excess of $0.45 per share and will likely create a distribution of that same amount when we calculate the special dividend at year end.

Before I turn it back to John for Q&A I want to spend a moment on the impact of our recent acquisition of PRN Capital, the healthcare lending platform in Birmingham, Alabama. Our initial purchase price for the platform was $2.6 million and dependent upon the team meetings certain performance hurdles they will be (technical difficulty) March of 2009 for up to an additional $1.8 million for a total potential purchase price of $4.4 million. The $2.6 million initial purchase price was funded $1.9 million in cash from available liquidity and $700,000 in stock, and the contingent purchase price, should it be earned, will be two-thirds cash and one-third stock.

Going forward we expect PRN Capital to run at a rate of $1 million per quarter of G&A and, as they originate loans, will begin to recognize net revenues from their operations. By our estimates PRN Capital will achieve breakeven by Q2 2008 and will be a significant contributor to net income in the periods thereafter. That wraps it up for the financials and at this point I'll turn it back to John.

Thanks, Geoff. Now for the fun part. Kevin, let's open it up for Q&A.

(OPERATOR INSTRUCTIONS). David Fick, Stifel Nicolaus.

Good morning. U.S. issued common equity in October of last year, 2 million shares at about $45 a share. If we presume that the markets, as you indicated in your comments, stay troubled for the next period of months without quantifying that, how long can you run and how far can you go I guess is the question given your existing liquidity before your asset base begins to shrink?

We have a significant amount of existing available liquidity right now, David and we think that that liquidity will take us for quite a while. We think that it obviously depends upon the pace of investments. In general we believe that the overall pace of transactions at least for the short-term is likely to slow a bit and therefore our volume may flow a-bit. In turn and not unimportantly, we're being extremely selective, as we always are on a credit basis, but in today's environment also very much on a spread basis.

The other thing I would tell you is that unique I think to Capital Trust, as you well know, is we have both a balance sheet business and an investment management business and the best management business has been designed to allow us to continue to leverage our platform even in times when the public markets are a little bit more difficult. We expect to continue to grow that investment management business which gives us added capacity.

What would you say your net origination and investment volume would be over the next six months or so?

We have not and do not intend to give guidance on originations or on earnings. In general I think, as I said, we believe that we are in a position where we can be and intend to be very selective in terms of asset acquisitions. We also think that given the dynamics in the marketplace, as I said, that our existing book is likely to lengthen out in terms of duration. So I would say the answer is less, but I'm not going to go beyond that.

Okay. Your repo facility including your newly negotiated, what types of covenants do you have in terms of dividend coverage and what sort of triggers are there that could at some point create a call?

The primary covenants that we have are an EBITDA to fixed charge ratio as well as a debt-to-equity ratio and we are -- we clear both by a very, very, very wide margin.

And those measures are book and not market I presume?

Correct.

Okay. Can you talk a little bit about your dividend status, your view of safety of the dividend, of growth in the dividend going forward?

I can absolutely talk about that in the same context that we always talk about it. Our policy has been to set our dividend at what we think is a comfortably sustainable recurring run rate, that's how we have done it in the past, that's how we're doing it today and we intend to continue with that policy. What that means is that we factor out nonrecurring, we factor out things that we don't think are predictable and sustainable in a very, very conservative context and that's where we set our quarterly dividend.

It probably doesn't service the best in terms of the fact that we've been paying out special dividends which many people would say kind of disappear in the mix, but that's the way we're comfortable running our business and that's the way we're going to continue.

Okay, so you're comfortable with current levels going forward and fully expect to maintain at least the established dividend?

Yes.

Okay, thank you.

Thank you.

Don Fandetti, Citigroup.

Good quarter. A couple of quick questions. I wanted just get an idea of what you're hearing from the big banks, the big commercial real estate lenders, what's their sort of psychology these days?

Steve, do you want to try to take that one? Steve Plavin.

Don, I think that it varies from bank to bank; they're certainly more cautious. I think they've widened out spreads because of the uncertainty of bond spreads, where they will be able to execute their CMBS transactions. But we're still seeing new opportunities from the Street, from their inventory as well as from new loans they're pursuing. So definitely a note of caution, definitely things slowing down, but right now they're all for the most part are open for business.

Okay. And Steve or John, in terms of -- I think, John, you had mentioned that you'd expect the CRE CDO market to open back up. What do you think the catalyst is for that and what gives you that confidence?

You know what, I don't know what the catalyst is. I'm being totally candid. I don't know what the catalyst is. Right now the market is there but it's exceedingly difficult and choppy and buyers who have been burned elsewhere on sub prime or ABS generally are very cautious in terms of their willingness to jump in. Having said that, if you look at CRE CDOs, the underlying credit performance has been absolutely impeccable and I think that you may see in the not too distant future people coming back in as a credit quality alternative relative to their other choices. Exactly what makes that happen and exactly when, Don, I'm not smart enough to know.

Okay. Fair enough, thank you.

Rick Shane, Jefferies & Co.

Sort of pursuing Don's question a little bit more in terms of inventory, there was a pretty significant bright point in the market April 10th in terms of underwriting standards. Two questions. One is how is the market differentiating inventory pre April 10th and post April 10th? And is there a level that you would be interested in buying sort of pre April 10th paper? Can you buy it cheap enough and is there a big enough pricing differential out there? And when do you think realistically we've cleared all that off the dealer desks?

The April 10th date or whatever you think the appropriate date is when underwriting changed as a result of Moody's report and also some of the increased pressure from [BP buyers]. That's primarily a fixed-rate CMBS phenomenon. We stopped buying 2007 fixed-rate CMBS much earlier in the year. We have not resumed buying 2007 CMBS, although we will look at it very opportunistically.

As it relates to floating-rate loans, that market hasn't behaved in the exact same pattern as the fixed-rate loan market. We're seeing now changes in the credit profile of the loans that are being originated as floating-rate loans. And I think that you will see in periods going forward loan level leverage being reduced. All that notwithstanding, we do believe there will be opportunities to acquire loans and interest at loans as a result of pressure and dealer inventories and from distressed borrowers and lenders. And we are looking forward to seeing some of those opportunities in periods going forward.

Okay. I realize it's somewhat of a subjective question, so a more specific answer is probably unrealistic, but thank you.

Don Destino, KKR.

I actually thought I had pulled myself out because Don and Rick did a good job of asking my questions, but I'll think of another quick one which is -- John, you said that you expected to be extended or the duration to extend, are you getting any opportunities to redeploy some of the attractive capital in your replenishable CDOs?

Yes is the answer. We have $1.2 billion of total CDO liabilities outstanding in four separate transactions, two of them are effectively static pool transactions where we finance term matched finance long-term fixed-rate assets and two of them are reinvesting CDOs that essentially are capable of being rolled over into new assets. We are seeing repayments across the entire spectrum.

When they occur in those CDOs we are capable of dropping new assets in and taking advantage of old financing rates because those spreads are locked in obviously. And we do see that opportunity going forward no question about it. It doesn't happen overnight however, it happens over time. Our reinvesting CDOs we have been able to keep totally full and we expect we'll be able to do that going forward.

And do you think that there's -- that's a feature that needs to be there I assume for floating-rate CDOs, that's not something that you think might have to go by the wayside in the current environment as things kind of firm up and you go out to issue new CDOs?

If I understand your question, I think the answer is, no. The floating-rate side of the marketplace for the last couple of years, when CEOs have been available to the commercial real estate finance market, the floating-rate versions had these reinvesting features included in virtually -- I think it was all of them. And it's basically a necessary component to make sense of a floating-rate CDO given the duration of the underlying asset. It's nice because it creates effectively a revolving credit type of feature for those fixed spread liabilities.

Got it. Thanks a lot.

Jeff [Bronchick], RCB Investment Management.

Asked and answered, sorry. Thank you.

(OPERATOR INSTRUCTIONS). David Boardman, Wachovia.

Just two questions, one dealing with the floating-rate loan market. With leverage being reduced on new transactions, underwriting starting to look better, how does competition in that market change and does a different lender set maybe the insurance platforms, pension funds or something step in where other competition steps out?

I think we've certainly seen anecdotally that the fast money has stepped back if not out. We've had an influx of capital into this business over the last couple of years from virtually every direction conceivable, not just the traditional portfolio, institutional lenders, not just the specialty shops like ours who have been set up specifically to pursue this kind of business, but a bunch of sort of yield hungry hedge funds and others that have come in and have clearly at the margin impacted both the spreads and the credit underwriting criteria in the marketplace. And I think we expect that those guys will at the margin again step back or step out.

There's been a fair amount of conversation as it relates to the CMBS marketplace with widening spreads as the market tries to digest the product that is currently moving through the snake. A lot of conversations that the insurance companies are seeing this as a very attractive time to step back in, take advantage of the wider spreads. And you're seeing I think some of that. But again, the market is trying to find a level right now and it's not clear that it has quite found it yet. So we shall see. Do we expect competition to evaporate in this marketplace? Unfortunately I would say the answer to that is, no.

Where do we stand today on the originated loans that were going to go to the CMBS channel, those pre Moody's? I know there was at times (inaudible) saying there's $50 billion still left to be put through the channel, where do we stand today?

Maybe Steve knows more specific numbers than I do. It is, as I said before, moving through the snake rather slowly. People expected that a lot of that could get cleared by the end of the summer and I think as we are approaching the end of August I think you'll see that a lot of that -- what has been referred to as sort of orphan collateral -- does get priced albeit wider and does get sold. We're not at the end but I think we're close to the end of that process on the fixed-rate conduit CMBS side.

One last question, thank you for your time. Can you help me understand how much flexibility or power the banks have with your repurchase agreements to in a worst-case scenario just pull them outright, change advance rates to make them uneconomical? How much power do they have or how much flexibility do the banks have in regard to that?

We have -- obviously these are all contracts, so the banks are committed to the terms of these facilities through their maturity and so they have very little power. These are mark to market facilities, but that would be the only sort of near term power that they have.

Thanks.

Jim [Wenton], Laidlaw.

One fast question, could you bring us up-to-date on the prospects in Brazil and when you think they'll kick in with some significance? Thank you.

Sure. We made an investment, I think as you all know, close to a year ago as a founding equity partner in a company called Bracor. Bracor is a private company that is in the net lease real estate business in Brazil. They are buying and building single tenant properties, industrial office and some retail across the entire landscape of Brazil and the business we believe is going very well.

There's been enormous opportunity because at least traditionally there has been a vacuum of capital in that marketplace, particularly for assets such as this. And without going through it in great detail, we think both the macro and the micro opportunities there are very strong. Bracor is on plan, actually ahead of plan in terms of growth and deployment of capital, and we believe that that will be, once it essentially ramps up, it will be a very interesting and very profitable business.

James Shanahan, Wachovia.

Thank you, good morning. Shocking developments here in the marketplace and I applaud you for -- you put up a good quarter and you've gone through the motions here talking about your business. I'm not sure that all investors really care much about that right now, but I guess I'm curious. The focus is on credit and liquidity right now in the marketplace and there's been some pretty widespread and indiscriminate selling of a lot of specialty finance commercial real estate stocks in this marketplace.

And I was thinking more about the liquidity and I'm wondering if in your experience going back as long as you've been in this business, 10 to 15 years some of you, do you recall a period like this where the market was pulling liquidity and can you comment on how it is the same as that time or different now?

The time that is comparable is 1998 and we were certainly there and we were definitely in the business and the impacts on us I guess in some ways were feeling similar, yet obviously the source of the issue was quite different at that point in time. The result was that there was a retreat of liquidity, a very abrupt retreat in terms of the CMBS and loan market. We came through that time frame at which we had $1 billion plus or so of assets with no credit issue and basically no margin call at a point in time when CRE CDOs weren't even invented yet and all of our financing was in the form of committed lines of credit, essentially similar to what we have in place today for a portion of our financing.

I will also say that shortly thereafter ensued one of the best investment environments we have ever experienced in which we were able to take advantage of some others who needed liquidity and take advantage of spread widening that then came back in rather abruptly also. So we think there are similarities in terms of what we're going through right now and we believe that there will be great opportunities for companies like ours notwithstanding the -- I'll use your word, indiscriminate selling that is occurring in the stock market right now based on perception of risk and -- I don't know what it's based on, but it's clearly pretty relentless.

What were the signs that occurred following the crisis in the fall of '98? What were the signs that things were returning to normal or recovering to some degree, what should we be looking out for?

I think it's as simple probably as spreads reached a level where people moved back in and moved back in pretty hard. Liquidity has not disappeared in this marketplace, it has just gone elsewhere and it is clearly in a mode of fear and uncertainty, uncertainty as to where spreads are going and therefore where value of spread oriented product will be tomorrow and next week and the week after.

At some point that liquidity will -- the pricing will find its level, the liquidity will move back in. And I think over a little bit longer time frame there will be -- perception will change and the ultimate underlying reality will take hold. The underlying reality in our marketplace is that the credit quality remains good. We don't have a sub prime resi mortgage melt down and this is really a liquidity issue at this point in time, and I think those are the rather amorphous signs that will call the turn.

Thank you, hopefully you'll keep executing and come out stronger. Good luck.

That's the plan. Thank you.

And it appears we have no further questions at this time.

Well, then I think we'll sign off with simply saying thank you all for your interest. I think we had a very large crew on this call, not surprisingly. So keep watching and we'll keep doing it. Thank you.

this does conclude today's teleconference. You may disconnect at any time. Thank you and have a great day.