Blackstone Mortgage Trust Inc (BXMT) 2007 Q4 法說會逐字稿

Hello and welcome to the Capital Trust fourth quarter and year end 2007 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 rates of repayment of the Company's and it's funds loan and investment portfolios, the continued maturation 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 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. Please go ahead.

Thank you. Good morning everyone. Thank you for joining us, and for your continued interest in Capital Trust. Last night we reported our numbers for the fourth quarter, and filed our 10-K. Needless to say 2007 was one hell of a year. During a period of unprecedented volatility and disruption in the capital markets, CT once again delivered outstanding results for it's shareholders.

Our net income topped $84 million, up 56% year-over-year. On a per share basis, earnings increased 40%, to $4.77, compared to $3.40 in 2006. Dividends paid reached $5.10 per share, up 48% over the prior year, and capped off by our $1.90 special dividend that we paid in early January. All of these accomplishments represent records for this Company, and we are very proud of our financial performance in 2007. However the world is a very different and much more dangerous place today, and our stock is trading at half what it was just a year ago.

Commercial Real Estate has now been identified as the next credit shoe to drop, so we need to look further than the historical numbers to understand how Capital Trust, and other companies like us, will perform in 2008 and beyond. Therefore I will spend a few extra minutes, before I turn it over to Geoff to review the financials.

On one hand, origination and issuance volume have plummeted, spreads are at all-time wides. The CDO market has disappeared. Wounded repo lenders are pulling back, and in the words of one analyst, the business model for commercial mortgage rates is dead.

On the other hand, competition has evaporated. Spreads are at all-time wides, dealers are stuck with billions of unsold inventory, forced sellers of all types are dumping out good product at almost any price, and it is the best time in recent memory to be a commercial real estate debt investor. Are we on the eve of destruction, or at the beginning of the golden age? The answer is both in this challenging and confusing environment.

We believe there will be three things critical to survival and long term success. Managing credit, maintaining financing, and raising new capital. On all three fronts, we also believe that Capital Trust is uniquely positioned to succeed. First, managing credit. During 2007, all of our investments continued their strong performance, with zero delinquencies or defaults in the loan portfolios, and 28 upgrades, versus 3 downgrades in our CMBS portfolio. Through aggressive, one could say, relentless asset management, we resolved our one non-performing loan, generating $11 million of proceeds, compared to a carrying value of $2.6 million, and an original principle balance of $8 million.

At year end, 100% of our assets were performing, but in Q4 we did take a $4 million reserve against one loan, our first provision in quite some time. The asset in question, the only land loan that we hold directly on our balance sheet is a $10 million participation interest in a second lien and financing, collateralized by four master plan communities in California. Always wary of land loans, but obviously in this case not wary enough. We financed this investment with a $6 million non-recourse repo from the dealer who sold us the loan.

While the ultimate outcome for this credit will only become clear later this year, given the weakness in the housing market, we chose to preemptively take a reserve equal to our maximum exposure of $4 million. As 2008 rolls on, we anticipate that more credit problems in the CRE sector will inevitably emerge. And CT cannot expect to be completely immune to the market. We do believe that our conservatism in the crucial up-front asset selection process will serve us well.

Our loan portfolio has an average last dollar loan to value ratio of 67%, reflecting our decision to dial down risk, and focus on more senior investments, as the markets got more and more frothy. Our exposures to land, condos, and homebuilders, the most obvious and immediate problem areas, are very limited. Our near maturities, where borrowers could be forced to refinance in a dysfunctional market, are also very few.

We do have a piece of the Macklowe EOP financing, but believe that given the quality of the collateral, and our position in the capital structure, our investment is money good. Since I am sure you have all read about it in the Wall Street Journal repeatedly, and know that this is a live deal, I will tell you now that for confidentiality reasons, we will not be answering any questions on the Macklowe situation. Overall, we have scrubbed and rescrubbed each of our investments, and feel good about the credit quality of our book of assets. We are absolutely confident that the CT portfolios will outperform the markets in these difficult times.

The second key factor is maintaining financing. In this environment, how you finance your balance sheet, can be equally important as to how you selected your assets. We have been using leverage, and managing our asset/liability mix, since we started Capital Trust almost 11 years ago. Until 2004, there was basically no such thing as a CRE CDO, and we successfully financed our business using lines of credit from banks and Wall Street dealers, through all those early years, and through several market disruptions.

When CDOs arrived, they provided a very efficient and stable funding alternative, and CT was an early and active user, completing the Mezzanine first loan transactions in July of 2004, and ultimately closing 4 CDOs, issuing $1.25 billion of liabilities to match funds substantially all of our longer-term fixed rate assets, and finance a significant portion of our floating rate loan. Given the problems that have occurred in the residential and ABS markets, we do not think CDOs will be available to us any time soon. However we do have $1.6 billion of in-place committed credit facilities, from 9 separate counterparties, all of which have had multi-year relationships with CT.

During 2007, we renewed or obtained new facilities in the amount of $900 million, and we continue to secure fresh financing commitments to support our new investment initiatives. As we experienced in 1998, when the markets get choppy, the lenders pull back. Exercising mark to market provisions and making margin calls, stiffening the terms for any new facilities, and cutting the number of borrowers they are willing to do business with.

With good credit, short assets, and long relationships, we will well-positioned with our lenders, and as always maintain ample liquidity to defend our book against interim spread marks. At 12/31 we had $200 million of ready liquidity, an amount that we feel is adequate to withstand additional sustained turbulence in the market. To put this number in context, our total margin calls since February of 2007 have been $63 million, and we feel very good about our liquidity at this time. Going forward, we believe that Capital Trust's demonstrated ability to attract debt financing will be one of our continuing competitive advantages.

Lastly, raising capital. With all its challenges, we also believe this credit crisis is creating unprecedented opportunity, for investors with access to capital, and the expertise to prudently deploy it. In the near term, dealer inventory backlogs and forced liquidation by leveraged investors, present the most compelling opportunities.

As the year progresses, delinquencies and defaults will begin to rise, and the combination of lower advance rates and wider spreads, will pressure refinancing, even for good properties and sponsors. Longer-term lenders will be back in the driver's seat, and the market will be characterized by more conservative valuations, lower advance rates, tighter structures, and better pricing.

However while the credit pendulum has definitely swung, asset selection and underwriting will continue to be the keys to success. In this environment, we believe that Capital Trust is uniquely positioned to raise the capital necessary to exploit these opportunities. Years ago we designed our business to create an integrated finance and investment management company, capable of investing both for its own account, and on behalf of third parties, through managed investment vehicles.

The purpose was to leverage our platform, produce a mix of net interest margin and fee income, and create a straddle between the public and private capital markets. Since 2000 we have raised over 2.5 billion of private equity capital in 7 separate vehicles, from a stable of sophisticated in institutional and individual accounts, most of whom have been repeat investors with Capital Trust.

Going forward, we expect to continue to raise private, and when we feel the pricing is appropriate, public capital, to take advantage of opportunities in the market. The announcement of the closing of CT Opportunity Partners I, represents the next step in this ongoing strategy. Launched in the fourth quarter, this new Private Equity fund currently has just under $400 million of committed equity capital, and is designed to exploit a range of more opportunistic investments, that result in the market's dislocation.

We are working on several other targeted strategies, and hope to have more to say about our investment management businesses in the coming months. We have no delusions that 2008 will be easy or fun. We think the markets will get worse before they get better, that the recovery will take a long time, and that new normal, whatever that is, will be different than anything we have seen before. We know that we have our work cut out for us managing our credits, rolling over our financing, and raising the capital necessary, to take advantage of opportunities and grow our business. We are ready for the challenge.

With that, I will turn it over to Geoff to review the financials.

Thank you John, and good morning everyone. Before we begin I want to point out that our new fund, CT Opportunity Partners I is still in it's marketing phase, and until we have completed the capital raise, our comments will be limited to what we have written in our 10-K, press release, and the text of our scripts. We cannot and will not be able to answer any questions about that fund, or any of the other invested management products that we are currently raising.

Let's start with Originations. For the year, we originated $2.5 billion of new investment commitments, comprised of $1.1 billion for the balance sheet, and $1.4 billion for our investment management vehicles. We dramatically slowed the pace of our originations during the year at both the balance sheet and the funds, as the dislocation in the capital markets took hold. In the first half of 2007, we originated $2 billion versus $500 million in the second half of the year. Looking specifically at the balance sheet, fourth quarter originations were $149 million, 40% of total originations for the quarter, comprised of investments in loans that can be characterized as discounted inventory trades with dealers.

On the investment management front, fourth quarter originations were $200 million, or 60% of total originations comprised entirely of loans originated for CT High Grade, CT Large Loans, and the new CT Opportunity Partners funds. These transactions were a combination of discounted inventory trades with dealers, as well as one newly originated loan. As the numbers show the mix of balance sheet to investment management origination has changed, and the majority of our originations in the fourth quarter were for funds that we managed. Going forward, we expect investment management activity to accelerate, as we now have three investment management vehicles in their investment period. CT Large Loans, CT High Grade, and the new Opportunity funds. In addition we are actively pursuing additional investment management mandates, that we expect will further increase the scope of our platform.

Moving on to the balance sheet activity at Capital Trust. During the year, total assets increased to over 20% from $2.6 billion at the end of 2006, to $3.2 billion at the end of 2007. The primary drivers of asset growth were new originations of interest earning assets that totaled $1.5 billion for the year. On a net basis, interest earning assets grew by approximately $567 million, from $2.6 billion to $3.1 billion. Originations of Interest Earning Assets were partially offset by repayments of approximately $919 million for the year, netting to the previously mentioned $567 million increase.

At December 31st, the entire $3.1 billion portfolio of Interest Earning Assets, had a weighted average all-in effective rate of 7.67%. From a credit standpoint, the average rating of the CMBS portfolio remained BB+, and the weighted average loss of our loan to value for the loan portfolio was 66.5%. During the year the CMBS portfolio experienced 28 upgrades, and only 3 downgrades. After giving effect to the year's ratings activity, almost 70% of the portfolio is rated investment grade, with 40% of the portfolio rated single A, AA, or AAA. And all of the ratings that I mentioned here is based upon the lowest rating available for each bond.

The CMBS portfolio continues to outperform our underwriting projections, and for the record we do not own any RMBS, subprime or otherwise in the portfolio. Over to the loans, our $2.3 billion portfolio continues to perform well, with no non-performing assets at year end. During the fourth quarter, we took a $4 million loss reserve against a $10 million second mortgage loan, and given the way that we financed the loan, our maximum economic exposure to this loan is $4 million. In addition during 2007 we resolved our 1 nonperforming loan, a first mortgage loan with an original principal balance of $8 million, generating a total recovery of over $11 million.

Moving down to equity investments, we have two equity investments in unconsolidated subsidiaries as of December 31st. Both are co-investments in funds that we sponsor. A $923,000 investment in Fund III, and an unfunded commitment to the new Opportunity fund. Our equity commitment to the new fund is $25 million, and we expect to fund our commitment over the fund's 3-year investment period.

In 2007 we liquidated two investments that had previously been recorded as equity investments, Fund II and Bracor. In March of 2007, the last remaining asset in Fund II repaid, and the fund made it's final distribution, which included $962,000 of incentive management fees that we received. In December of 2007 we sold our interest in Bracor, receiving $43.6 million in proceeds from the sale, and recognizing a gain of $15.1 million.

As we have disclosed in the 10-K, we received our incentive management fee payment of $5.6 million, from Fund III during the fourth quarter. In addition to amounts already received, we expect to earn $2.6 million in additional promotes, assuming continued performance of the loan, and repayments as expected. The Fund III promote has and will be accompanied by our expensing a portion of capitalized costs, as well as payments to employees of their share of the promotes received.

On the right hand side of the balance sheet, total interest bearing liabilities, defined as repurchase obligations, CDOs, our unsecured credit facilities, and trust preferred securities were $2.3 billion at December 31st, and carried a weighted average cash coupon of 5.45%, and a weighted average all-in effective rate of 5.68%.

During the year, we renewed or obtained new repurchase financing commitments totaling $900 million. We entered into a $250 million repurchase agreement with Citigroup, extended the term of our term of our $250 million repurchase facility with JPMorgan, increased the total commitment from Bear Stearns by $250 million, to $450 million, increased Morgan Stanley's commitment by $100 million, to $375 million, and upsized our existing committed facility with Goldman Sachs by $50 million, to $200 million.

Our repurchase obligations continue to provide us with a revolving component of our liabilities structure, from a diverse group of counterparties, at the end of the year, our borrowings totalled $912 million, against $1.6 billion of commitments from 9 counterparties. We remain comfortably in compliance with all of our facility covenants, and have $613 million of unutilized capacity on our repo lines. In 2008 our repurchase facilities with Bear and JPMorgan are set to roll, facilities under which we borrowed $545 million at year end.

While there is no guarantee that our lenders will continue to extend credit to us, we are confident, based upon our current dialogue with our lenders, that these facilities will be extended, albeit on terms more reflective of the current market. Our repurchase obligations are marked to market, and we have posted collaterals to our lenders, as the fair value of the assets pledged to them as security, has migrated as spreads have widened. To date, inclusive of 2008, we have received a total of $63 million of margin costs.

Our CDO liabilities at the end of the year totaled $1.2 billion. This amount represents the notes that we have sold to third parties in our 4 balance sheet CDO transactions. At December 31st, the all-in cost of our CDOs was 5.34%. All of our CDOs are performing, fully deployed, and in compliance with their respective interest coverage, overcollateralization, and reinvestment tests.

At year end, total cash in our CDOs reported as restricted cash on our balance sheet was $5.7 million. In addition we received upgrades on seven classes of CT CDO III from Fitch ratings. Of the 14 rated classes, seven were upgraded by 1 to 2 notches, and the remaining seven classes had their preexisting ratings affirmed. Fitch attributed the ratings actions to the improved credit quality of the portfolio, and seasoning of the collateral.

At December 31st, we have borrowed $75 million under our $100 million unsecured credit facility, with a syndicate led by WestLB. Subsequent to year end, we executed our option to extend the facility for an additional year now maturing in 2009, with a pricing of LIBOR plus 1.75%. The final component of interest bearing liabilities is $125 million of trust preferred securities, of which $75 million were issued during the year in our second trust preferred offering. In total our $125 million of trust preferred securities, provide us with long-term financing at a cash cost of 7.2%, or 7.3% on an all-in basis.

Over to the equity section, shareholders' equity was $408 million at December 31st, and our book value per share was $22.97. Book value decreased during the year from $426 million at the end of 2006, to $408 million at year end, down approximately $18 million. The major component of the change was a $20 million net decrease in the value of our interest rate swaps.

Looking at the net asset value of the Company, based upon the fair value of our assets and liabilities, as disclosed in the 10-K, total net asset value was $500 million, or $28.14 per share, 23% above GAAP book value. As always, we remain committed to maintaining an index and term matched asset liability mix. At the end of the year, we had approximately $468 million of net positive floating rate exposure on a notional basis on our balance sheet, consequently, a change in LIBOR of 100 basis points, would impact annual net income by approximately $4.7 million.

Given the movement in short term rates over the past few months, one month LIBOR currently sits at 3.08%, while LIBOR averaged 5.25% in 2007, a change of over 200 basis points, our net income has and will continue to endure significant pressure, due to lower LIBOR. Our liquidity position remains strong, and at the end of the year, we had $204 million of total liquidity, comprised of $32 million of cash, $147 million of immediately available borrowings under our repo facilities, and $25 million of availability under our credit facilities.

Turning to the income statement, we reported net income of $84.4 million, or $4.77 per share, on a diluted basis for the year. Interest income for the year was $253 million, and interest expense totaled $162 million, with a resulting net interest income of $91 million.

Other items of note during the period, management and advisory fees from our investment management business increased in 2007 by $850,000, or 32%. As base management fees from CT Large Loans, CT High Grade, and CTX funds, and the Opportunity fund, offset the decrease in fees as Fund II and Fund III, as these vehicles liquidated in the normal course. We expect these revenue streams to continue to grow in the coming quarters.

Incentive management fees increased substantially during 2007, primarily due to incentive fees received from Fund III. Incentive management fees from Fund III totaled $5.6 million, $5.2 million of which we recorded in 2007. In addition, we received our final incentive management fee distribution from Fund II of $962,000 in March, as the last investment repaid, when Fund II was liquidated. Servicing fee income was $623,000, compared to $105,000 in 2006, as we recognized revenue related to the servicing contracts acquired in June, as part of our purchase of PRN Capital, our healthcare lending platform.

Moving down to other expenses, G&A was $30 million in 2007, an increase of $6.9 million from 2006. The major components of the increase were the payment of $2.6 million of Employee Performance Compensation associated with our receipt of Fund II and Fund III promotes, and the additional employee compensation expense associated with PRN Capital.

Depreciation & Amortization was $1.8 million in 2007, inclusive of non-recurring write-offs of $1.3 million of capitalized costs related to the liquidation of Fund II in the first quarter of 2007. Net of one-time write offs, Depreciation & Amortization was $510,000 in 2007. Moving down to the recovery of provision for losses, in the second quarter of 2007, we recorded a $4 million recovery, related to the successful resolution of a non-performing loan. And in the fourth quarter, we recorded a $4 million provision of loss against one second mortgage loan, with a principle balance of $10 million.

With regard to the gain on sale of investment line items, in the fourth quarter 2007 we sold the Bracor investment, with a $15.1 million gain recorded. Moving further down the income statement to the income loss from equity investments, our loss from equity investments was derived primarily from recording our share of losses from the operations of Bracor, Fund II, and Fund III for the year.

In both 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 2007 CTIMCO reported an operating loss before income taxes of $2 million, which resulted in income tax benefit of $833,000, $782,000 of which we reserved, and $50,000 of which we recorded. In addition to the reported tax benefit at CTIMCO, we reversed $656,000 of previously booked tax liability reserves, at both CTIMCO and Capital Trust.

As we have done in the past, we disclosed the impact of income statement items that were considered non-recurring. For the year these non-recurring items totaled $25.5 million, the largest of which was the gain on sale from our Bracor investment. Adjusting for these items, recurring diluted net income per share was in the $3.32 per share range.

For the fourth quarter, these non-recurring items totaled $11 million. Adjusting for these items, recurring dilutive net income per share for the quarter was $0.83 per share. 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 the REIT, we endeavor to payout 100% of taxable income. In the event that taxable income exceeds our regular dividend payout rate, we will make additional distributions in the form of special dividends.

We paid regular quarterly dividends of $0.80 per share for the first through fourth quarters, or a total regular dividends of $3.20, a 14% increase over 2006 regular dividends, and in addition, at year end, we paid a special dividend of $1.90 per share, for total dividends of $5.10 per share, an increase of 48% over 2006 total dividends. Finally, yesterday we declared a first quarter 2008 regular cash dividend of $0.80 per share, payable on April 15th to stockholders of record on March 31st. That wraps up for the financials.

Now I will turn it back to John.

Thank you Geoff. Kevin, I think at this point we should open it up for Q&A.

(OPERATOR INSTRUCTIONS) We will take our first question from David Fick with Stifel Nicolaus. Your line is now open.

Good morning gentlemen. John, I especially appreciated your initial comments on the marketplace. I am wondering in light of these comments, how you see your business model shifting? Sounds like you will be doing a lot less direct origination, and a lot more investment in other peoples' cooking, if you will? What will that mean to your staffing requirements and your G&A going forward?

Thanks, David. I think that the immediate opportunity right now is, in fact, inventories that are held on the balance sheet of dealers, and which have so far remained unsold, and secondary market transactions coming out of a whole variety of, a panoply of leveraged investors who are, in this environment, being forced to sell. There isn't a lot at the moment of new origination business going on, at least not in the securitized world. I do not think that will last forever, it is certainly the situation today.

One of the deals that we originated in the fourth quarter, specifically into one of our funds, was a new origination, but that is one of the few that we have seen in the recent months, and we that new originations in this environment are likely to be down.

In terms of where we do our business, I think we have made it pretty clear that at least at the moment, we see more activity on the investment management side of our business, less on our balance sheet, but again, that will shift over time as opportunities emerge.

Doesn't that require a shift in talent in terms of who you have doing the originations?

I think the answer is no. We have built this platform from the beginning of Capital Trust, to be able to address a variety of different types of investments. We have never been really a one-trick pony, that focuses solely, for example, on B pieces, or solely on any other single component of the marketplace.

Our people are in place and capable of addressing what we see as the full range of opportunities. We are obviously going be careful about making sure that our infrastructure is geared to the level of business that we see out there. At the moment, we think that our people and our platforms are adequate to handle the business that we see going forward, and in fact, we think fully geared to take advantage of opportunities.

Great. My last question. You mention that as we go forward, you look to try to maintain a matched funded book, and I am wondering how you expect to do that on the right side of your balance sheet, given the absence of any CDO opportunity?

Geoff, do you want to take it?

Sure. David, I think you have to look at what investments we are making, that we are financing on our repo lines, and those are primarily short-term, floating rate, Mezzanine loans, B notes, and whole loans. So what we are not doing is we are not making CMBS investments, 10-year fixed rate CMBS investments financed on the repo lines. Our repo lines have terms between 1 and 5 years. We expect those terms in general to shorten in this market, but we are comfortable, especially considering so much of the financing that you are getting on new originations is dealer financing. We are very comfortable that we will be able to sustain our levels of financing, especially on our new originations.

Thank you.

We will take our next question from the line of Rick Shane with Jefferies Group. Your line is now open.

Guys, thanks for taking my question. When we look at the repo funded assets and price fluctuations, you talked about $200 million of readily available liquidity. Can you walk us through the sensitivity analysis, on how we should look at that? Obviously since the quarter has ended, we have seen a greater dislocation in terms of asset prices. How does that change things? And what types of, walk us through perhaps, what types of assets you have there, and what types of price fluctuations you can handle without having a liquidity problem, and then put that in the context of what is happening in the market, please?

Rick, thanks. I will start with the general, and then kick it to Geoff for more specifics. In terms of background, kind of what Geoff alluded to in the previous question. We basically used CDOs to match-fund our long-term fixed rate assets, and substantially all of our fixed rate assets, currently are financed on a match-funded, term-matched, index-matched basis with our CDOs. What we have under our floating rate committed lines of credit, the repo financing that is a component part of our total balance sheet are essentially short floaters. And most of them in the form of loans.

So with that sort of as the background, I think that is what we have learned over the years and years that we have been at this, that it is very difficult or very painful, to mismatch long-term assets with short-term financing. In essence that is not what we have done, with that as the background, Geoff.

Sure. If you look at the assets that are financed on the repos, they are almost exclusively loan products, of B notes, Mezzanine loans, and whole loans. They are almost exclusively floating rate. And maximum duration on these loans and originations was about 5 years. So the maximum duration on the portfolio right now sits somewhere between 3 and 4 years.

On the repo side, again our repo facilities have 1 to 5 year maturities, in addition to however you want to apply the use of our trust preferred, or other liabilities against these. But looking specifically at the repos, we believe we have a pretty good match. It is not a perfect match, that is for sure, but a pretty good match between the tenor of our liabilities, and the tenor of our assets.

And the reason we are comfortable with the mismatch that is embedded there, is because the assets are short-term, the assets are floating rate, the assets are primarily loan products. You want to get into what can we endure with respect to future deterioration of the market, I would just point you to the fact that all of our lenders have been extremely attentive, as you would expect, to the fair values of the assets we have pledged to them.

From February '07 to today our total marks to market are $63 million. At year-end we had over $200 million of cash, in order to defend the book from these marks. We have paid out a special dividend since year-end, which was in the range of $45 million of cash, so we are sitting at around $150 million of cash today. But obviously, we can endure a significant amount of additional volatility, over 2X what we have already endured, just with our existing cash and available leverage.

Geoff, that is very helpful. You make the comment that, and this might put this in some context for us. You have experienced $63 million of marks since February of last year. How much of that has occurred since December 31st of this year, when all of a sudden commercial real estate is becoming a greater concern?

Less than a third.

Why do you think it has not been more severe this year, given rising concerns in the commercial real estate sector?

I think that part of the issue is that what people see in the papers, and what comes across the screen every day, is largely related to the securities market, and the volatility whether it is CMBS or otherwise, is multiples of what has been experienced, and either whether you are looking at this dislocation, or any of the other ones we have entered in 1998, 2000, 2001, relative to where the lenders are certainly focused on market rates, but they are much more willing to look at the underlying property performance, with respect to viewing a credit on its fair value.

Great. That is very helpful, guys, thank you.

We will take our next question from the line of Don Fandetti with Citigroup. Your line is now open.

Hi, John. I wanted to ask a question. Obviously you have been in the business quite some time. A lot of experience and the books held up very well at CT. I wanted to gauge here your level of concern for the CRE market? Can you just give us an idea of where you think things could go on the downside?

I mean, clearly, well yes, thank you for noting how long I have been around. I really appreciate that, Don. (laughter) We are clearly concerned about the marketplace. There is no question about it. And yet I don't feel at this point that the world is ending.

And I think that comes from some degree, as you said, of perspective, having been through this multiple different times, for more years than I would like to remember at this moment. What we are seeing in terms of fundamentals, at least in terms of our view on it, meaning our portfolio, is that cash flows have not changed. That underlying fundamental driver of value, of cash flow, has really not been affected as of yet. What has changed clearly is people's perspective on values, and in fact, cap rates driven to some greater or lesser extent by the cost of financing. There is no question about it.

We are beginning to see values come down. It is unclear where that will settle out, and it is absolutely not across the board and even. Better quality properties are holding their value better, and lesser quality properties that probably had overshot will take more of a hit. You guys and everybody else are now opining on what the total diminution in value will be in the Commercial Real Estate world, which is a herculean task, and a laudable one, but very difficult to generalize, at least in my view.

There is no question that values are off, and they will probably continue to come off. At least so far, we have not seen the degradation in the underlying cash flows. And that makes us a little bit more optimistic as to where we end up, I don't think this lack of liquidity will last forever. It will come back in some way, shape, or form. And when it does, I think people will still want to own well-located, well-leased commercial real estate as part of their investment portfolios, and as a result, I think we believe, I believe that this is a very painful transition. It ain't done yet, but we will ultimately get through it.

Okay. Thanks for your perspective.

Thank you.

We will take our next question from Omotayo Okusanya, UBS. Your line is now open.

Hello?

Hello?

Yes. Now I can hear you.

Great. Good morning everyone. I wanted to go back to the question about the repo lines. Geoff could you talk a little bit about how the lenders themselves are looking at valuing the short-term loans on the repo lines, so they get comfortable with valuations, and are not making irrational decisions about valuations and potential margin costs?

Sure, I think it is a two-fold process for them. Number one they make an assessment on where the market is by the activity that they see on B notes, Mezz loans, whole loans, trading in the secondary market, and/or new originations. Granted I think everybody understands the massively decreased volumes that are in a huge number of data points.

Secondly, what I was saying to Rick earlier, was that they dive deep into the credits, the underlying leases, the profile of the tenants, the location of the property, the sponsor quality. That is an argument and a discussion you have with your lenders, when you are talking about loan products.

I think that is a big difference between direct loan products and securities. Because on the securities side, I think the structuring element certainly adds a level of complexity, and gets the conversation away from the quality of the underlying products, and really the data points you have are CMBX, and other widely priced indices, and people are not really talking about credit. At least not on an individual asset by asset basis.

So you do not see them kind of taking typical sources of valuation on the security side, like the CMBX and everything, and trying to calculate what the loan should be worth, and then coming up with a valuation that way?

I don't think that what I said is dramatically different than that. Yes, they are looking in the market and seeing where products are trading, and to some degree, they are looking at the indices. We are not immune from that at all. What I wanted to say relative to a securities portfolio, our repo finance portfolio is much less volatile.

I will take the opportunity to get on the soap box, we are living in a mark to market world which in certain instances, does not make a whole lot of sense, when you are a hold to maturity investor, which is what we are. I won't go too far, but we have slipped to a place, where the world is dominated by, it seems, the perception of what something can be sold at tomorrow at 10:00 a.m., as opposed to what is intrinsically worth. There are some very, very fundamental issues with that.

Great. I appreciate it. Thank you.

We will take our next question from the line of Jeff Bronchick with RCB. Your line is now open.

Good morning, gentlemen. Just one question. How aggressively have you thought about expanding the investment management business? It seems the size of you, versus is size of the market is tiny, and the size of you versus the possible size of the opportunities is potentially tiny. How have you thought about being an investment manager, as opposed to an on-balance sheet player? How has that maybe changed recently?

Well, I guess I tried to say it a bit. We set this business up and created this business model a number of years ago, to really incorporate into one package, into one integrated company, into one internally managed company, a combination of balance sheet, finance company, with investment management practice. The reasons we did that, I think I have gone over. I think that it makes for a much more interesting and powerful business mix, to be able to do both.

I will absolutely admit to you and agree with you, that the scale of our investment management business to date, has not been what it could be. And is certainly not correlated to the size of the opportunity. We think the opportunity is huge at this point in time.

We think we have got the right platform to be able to take advantage of that opportunity, and we fully intend to push forward, and grow our investment management business in the coming months, and in the coming years. I think you will see it become a bigger portion of our total business, and I hope that it is a more diversified, and more broad pallet of strategies, and products and vehicles, that addresses a broader spectrum of investors than with do today. A couple years from now versus where you see us today. But I agree with you. I think the opportunity is there for the taking, and we will try to take it in the next coming months.

I know you didn't want to talk about Macklowe, but do you have a dollar number on the exposure there?

Absolutely I am going stick to my knitting, and not talk about Macklowe, but thank you for asking.

Looking out at '08, assuming there is no material on-balance sheet changes, and just due to the normal turnover of financing, do you need to do any additional financing in 2008? Or is what you have set up on your credit lines enough, if you just truly had to ride out the next year?

Well, I think as Geoff mentioned, we have some facilities that are coming due, which we fully intend to roll over. If your question is one of magnitude, the answer is that we have more than enough capacity on the debt side. If your question is one of the need for additional equity capital, we don't see it, if the scenario is what you have described which is a ride-it-out type of scenario. I think that we will see where the market goes and what the opportunities are, and where the pricing is, and we will assess it at that point in time.

I am printing out the 10-K. On your press release, has the Company marked its assets and liabilities to market? Using the values in the 10-K, the NAV of the company would have been $500 million, or $28 a share, a 23 increase over GAAP book value. How would you proportion that increase? Is it your assets are worth more than GAAP book, or your liabilities have gone down, and you get that little FASB shift?

The answer is, and this is in the 10-K disclosure on the fair values of our assets and liabilities. In summary, if you combine the market value of our CMBS and our loan portfolio, which again, we are held to maturity lender. It is off relative to carrying value, it is $77 million below carrying value, and our liabilities, if you mark those to market are $166 million below carrying value. Therefore the net is the roughly $90 million difference, between recorded value and asset value, so it is a combination of marking the assets and the liabilities both to market, which on our financial statement, is not done on either side.

Right. God bless the accounts. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) And we will take a follow up question from David Fick with Stifel Nicolaus.

My follow-up was actually answered. Thank you.

Thank you.

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

Well then, thank you very much. We will get back to work. We appreciate your interest in Capital Trust, and we appreciate you sticking with us through these tough times. Have a good day.