RAIT Financial Trust Q3 2007 Earnings Call Transcript

Nov. 5.07 | About: RAIT Financial (RAS)

RAIT Financial Trust (NYSE:RAS)

Q3 2007 Earnings Call

November 5, 2007 3:30 am ET

Executives

Andres Viroslav - Director of Corporate Communication

Daniel Cohen - Chief Executive Officer

Betsy Cohen - Chairman of the Board

Jack Salmon - Chief Financial Officer

Analysts

Marsella Martino - Keybanc Capital Market

Robert Napoli - Piper Jaffray

Andrew Wessel - JPMorgan

Lee Cooperman - Omega Advisor

Jason Arnold - RBC Capital Markets

David Fick - Stifel Nicolaus

Michael Cohen - Sunova Capital

David Chiaverini - BMO Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the ThirdQuarter 2007 RAIT Financial Trust Earnings Conference Call. My name is Towandaand I’ll be your coordinator for today. At this time, all participants are in alisten-only mode. We will conduct a question-and-answer session towards the endof the conference (Operator Instructions).

As a reminder, this conference is being recorded for replaypurposes. At this time, I would now like to turn the call over to Mr. AndresViroslav, Director of Corporate Communication. Please proceed, sir.

Andres Viroslav

Thank you, Towanda, and good afternoon to everyone. Thankyou for joining us today to review RAIT Financial Trust's third quarter 2007financial results. On the call with me today are Daniel Cohen, Chief ExecutiveOfficer, Betsy Cohen, Chairman of the board and Jack Salmon our Chief FinancialOfficer.

This afternoon's call is being webcast on our website at www.raitft.com. There will be a replay of thecall beginning at approximately 5:30 pm Eastern Time today. The dial-in for thereplay is 888-286-8010 with a confirmation code of 37183341.

Before I turn the call over to Daniel, I would like toremind everyone that there maybe forward-looking statements made in this call.These forward-looking statements reflect RAIT's current views with respect tofuture events and financial performance. Actual results could differsubstantially and materially from what RAIT has projected.

Such statements are made in good faith pursuant to the SafeHarbor provisions of the Private Securities Litigation Reform Act of 1995.Please refer to RAIT's press release and filings with the SEC for factors thatcould affect the accuracy of our expectations or cause our future results todiffer materially from those expectations.

Participants may discuss non-GAAP financial measures in thiscall. A copy of RAIT's press release containing financial information, otherstatistical information and our reconciliation of non-GAAP financial measuresto the most directly comparable GAAP financial measure is attached to RAIT'smost recent current report on form 8-K available at RAIT's website www.raitft.com under Investor Relations.RAIT's other SEC filings are also available through this link.

RAIT does not undertake to update forward-looking statementsin this call or with respect to matters described herein except as may be requiredby law.

Now, I’d like to turn the call over to RAIT CEO, DanielCohen. Daniel?

Daniel Cohen

Thank you, Andres for your introduction and usefulinformation and thank all of you for joining us, and welcome to RAIT FinancialTrust third quarter 2007 financial results conference call.

In the third quarter, we earned $0.54 per share on adjustedearnings, which is a metric we use primarily to determine our distributablecash. Our tangible book value stood at $11.63 per share, our economic book valueat $13.27 per share.

Our economic book value represents, we believe, the valuewhich we have available in our portfolio to use to earn, and adds back to thetangible book value the excess amounts that we have charged against thenon-recourse financing which supports our assets, beyond the amount that wehave at risk.

On $13.27 of economic book value, the $0.54 of adjustedearnings represents a return on equity of 16%. In light of the unprecedentedconditions in the securitization marketplace, we took a charge through earningsin excess of $4 per share, based on third quarter credit events in our TruPSportfolio.

Our borrowers, homebuilders and mortgage REITs facedunprecedented conditions in this liquidity crunch. The change in our ownfinancing and the availability and dependability of our financing led us tosell assets at a loss and pay down our repo balances from $912 million at theend of June to $212 million at the end of September, while still having over$170 million cash ourselves.

We paid down approximately $700 million of short-termborrowings. This effort forced us to temporarily curtail our lending, whichresulted in lower domestic origination fees. Which resulted in lesscompensation and G&A expenses being offset in deferred in the quarter.

Still, our portfolio generated sufficient earnings and cashflow to pay our current dividend and we have now resumed our lending to takeadvantage of market opportunities in the fourth quarter. We are seeingopportunities in this liquidity-constrained environment for lenders in general.

We have been impacted by the losses in our TruPS portfolio,and our TruPS portfolio value has deteriorated. However, it is funded withterm-funded debt and our losses are limited to our cash investments and ourfinancing vehicles.

Yeah, between our available fund as of quarter end in theUnited States and Europe, we had over $1 billion in cash resources orrestricted cash under management available to make future investments. This wasessentially pre-funded term debt.

We will earn both increased management and origination feeson this fund as well increasing our net interest income and therefore recurringcash flows. In the current quarter, we expect to originate more loan volume andwe expect that our expenses will be reduced further, as we cut some costs inanticipation of slower growth but still growth.

We will fund this growth out of redeployment of funds undermanagement. We continue to get repayments on our debt and have these fundsavailable that I talked about to deploy going forward. From vehicles, whichhave pre-committed debt financing.

We have $1.8 billion of commercial real estate loans in twocommercial real estate financing structures. The loans themselves havedurations between 1 and 10 years and an average life of 3.7 years. As loans inthese vehicles pay off, we expect to finance new assets at higher interestrates.

Even though our borrowing costs will remain fixed. We have$1.4 billion of debt, which carries an average rate of LIBOR plus 50, so when Isay fixed, fixed relative to a floating rate spread, which will remain in placefor these financing structures for an average duration of seven to 10 years.

In the quarter, we believe that it was prudent, given theuncertainty in the financial markets, to retain some of the adjusted earningsthat otherwise would have been available to pay a dividend, we wound up thequarter with over $170 million of cash.

While we do not expect to be able to return to the dividendlevels paid at the beginning of this year in the foreseeable future, we expectto continue to generate fees and cash flow supported by the net investmentincome of the current portfolio to continue the current dividend. We alsoexpect the fund available to either repurchase stock under our buyback program,or pay down debt opportunistically.

Now to the impact of the market conditions on us in credit.The unprecedented lack of liquidity in the marketplace resulted in the closingof the structured finance markets to most new debt issuances, especially bydomestic residential mortgage in home -- by domestic residential mortgage REITsand other companies.

It impacted our portfolio of trust preferreds. As a result,we took a $247 million net charge for asset impairment. Certainly, these lossesare significant and come in an environment, where the credit crunch, theliquidity crunch, really and the unprecedented stress in the mortgagemarketplace affected or borrowers, both mortgage REITs and home builders.

Jack will provide more detail on our methodology and thetemporary and other -- temporary asset impairments recorded for the quarters.

What do we think of our continuing credit exposure? Webelieve that the credit environment does continue to be challenging. However,our total economic capital at risk in each one of our financing transactions islimited in non-recourse, and we continue to monitor carefully our borrowers andbelieve that the continuing cash flows that we have should be continuable.

Our commercial loan portfolio of $2.2 billion is diversified,a major generator of cash flow for us, and a secured primarily by incomeproducing properties.

When I say I mean that only 1.6% of our portfolio is securedby non-income producing property. And that project itself, it's one project, isguaranteed by the borrowers. We have no condo conversion loans in ourportfolio.

We are cautious in today's credit environment and recentlyundertook reunderwriting our entire portfolio to benchmark the performance ofthe properties against what our initial expectations were in terms ofcontinuing cash flow from the underlying properties.

New opportunities are coming to us today that seem veryattractive, within our underwriting criteria and in which we expect to haveimproved deals, as we experience pay downs from older situations.

What is our outlook for growth? There are domestic trustpreferred securities investments have been negatively impacted this quarter, wedo see potential for growth in both our commercial real estate and Europeanprograms.

It should be both somewhat on balance sheet as well asmanaging funds for others. Fundamentals for commercial real estate remainstable in the sector and most of the marketplaces in which we have invested.The availability of financing through the debt capital market has been slow torecover.

Today, our company is surrounded by good opportunities tofund secured commercial real estate loans, loans that we like and with returnswe haven't seen for a number of years. We currently manage a revolvingportfolio of $2.2 billion of commercial real estate loans with permanentfinancing in place.

Within this portfolio, we see opportunities as we have loanspay off, we can make new loans at substantially higher rates. Our target ROEsof course have also gone up, and we are building our pipeline. We believe thatwe will be able to manage a stable portfolio of commercial real estate loanswith increasing rates over the near future.

For the longer-term, we are actively pursuing additionalsource of financing for our commercial real estate business including expandingand growing our commercial banking relationships and potentially partneringwith institutions that are looking to co-invest in the commercial assets weoriginate.

Of course, we make our investments from our freely availablecash only in the context of the good returns, we see available for use in freecash to repurchase our own stock and potentially also to retire our debt.

In Europe, we completed financing for €900 million ofcorporate and secured loans. This should be a good vehicle -- this should be agood area for us for both fee and asset generation. Our group in Europecontinues to generate significant fee income for the company.

We managed approximately €1 billion of assets and should beat €1.5 billion of assets under management by the end of quarter two, 2008. Themanagement fees, we generate there will generate over €5 million of annual feeincome. The assets are performing as expected.

As we move forward, we should see our portfolio investmentsin cash flow continue in an environment where we reduced our short-termborrowings and should be able to establish good opportunities going forward.

With that, I'd like to turn the call over to Jack, so he cango through the financials in more detail. Jack?

Jack Salmon

Thank you, Daniel. I'm going to review our third quarterfinancial results. This will provide you with additional insight to therevaluation of our portfolio and the resulting effects it had on our adjustedearnings and dividends.

First, from a financial results standpoint, total revenue inthe third quarter was $56 million, which was in line with the second quartertotal revenue of $56.7 million. This quarter, had $11.3 million of fee incomefrom management fees and origination fees on our non-consolidated portfolios,primarily in Europe.

We had lower origination fees on our domestic commercialloans, resulting in less capitalization of compensation and direct costs ofproducing these assets and higher operating expenses in the third quarter.

Our adjusted -- we adjusted the carrying values of certainintangible assets, leading to higher amortization expense of $17.5 million forthe quarter as a whole and $46.1 million on a year-to-date basis. Thisamortization is added back to determine our adjusted earnings.

As a result, we are reporting income from operations of $16million for the quarter, and $68.2 million for the nine months ended September30th, 2007. Now our primarily earnings driver is our net investment income,which was $41.6 million on investment assets of $12.3 billion at September30th.

This compares to net investment income of $52.4 millionduring the second quarter on investments of approximately $12.9 billion. Thedifference relates to credit impairments that caused us to place approximately$362 million of loans on a non-accrual status.

Thereby reducing net investment income by $5.1 millionduring the quarter, and also we increased our allowances for losses byapproximately $6.1 million related primarily to our commercial real estateportfolio.

As a result, our GAAP net loss of $4.02 per share reflectsthe permanent charges for asset impairments in our trust portfolio, write-downsin our available for sale securities and write-offs of intangible assets at anaccelerated basis, which totaled to $247 million net loss. This loss was net of$96 million, which was allocated to our minority interest investors.

From a balance sheet and equity standpoint, the accumulatedCI balance includes the cumulative effect of changes in interest rates underour existing hedging agreements of approximately $35 million on a year-to-datebasis. This is primarily related to our trust portfolio.

Our borrowing costs are priced off of LIBOR. We hedgeagainst the potential interest rate effects of changes in this base indexrates. This has led us to approximately $142 million decrease in the fair valueof our cash flow hedges as LIBOR increased during the quarter in comparison tothe first six months of 2007.

Our hedging had $107 million favorable impact as of June30th, '07 so you can see there was a dramatic effect of interest rates duringthe quarter and although this volatility was significant, because we haveeffective hedges in place; the effect on earnings was minimal. We expect thisto continue and have continued effective hedges in place for the fourth quarterand beyond.

Turning my attention to the investment portfolio and thesteps that Daniel mentioned that we took to revalue our assets there areseveral comments I would like. First of all in our commercial real estateportfolio we currently have approximately $2.5 billion of investments and madeappropriately$250 million of new investment during the third quarter.

The new loan production for the year is approximately $1.3billion, as compared to total production in 2006 of $1.1 billion. The CREinvestments include approximately $40 million of loans on non-accrual basisrepresenting about 1.6% of the total balance.

We financed approximately $1.8 million of these investmentsthrough two match funded CRE transactions that are generating returns on our$400 million of net investment of over 17% on an annualized basis.

Our second portfolio was the trust portfolio, which standsat approximately $5.4 billion of assets. All of the available for salesecurities in these portfolios have been revalued as we do every quarter, froma credit perspective.

To determine our estimated fair value of September 30th,2007 assets let me complete the current estimate of fair value and there anindication that significant impairment had occurred, we further determinedwhether such impairment was either temporary or permanent in nature.

For the permanent impairment portion, we recorded a P&Lcharge based on management's estimate of the magnitude of the probable loss netof the ultimate recover we identified for each asset. This is the primary causeof the write-down that we recorded in P&L this quarter.

We experienced payment defaults as of the most recent paymentdate on the trust portfolio, which is October 30, five issuers that had anaggregate face value of appropriately $315 million. Now these issuers representa majority of the assets that had a permanent impairment charge recorded as ofSeptember 30.

Current market conditions also led us to look at theestimated fair values of all the other securities in our portfolio and as ofSeptember 30th, 2007 we have recorded approximately $187 million of cumulative,temporary investments as we normally do through a recorded charge in othercomprehensive income, commonly known as OCI.

Turning to our residential portfolio, as of September 30th,that portfolio stood at $4.2 billion in assets, which is down aboutapproximately $150 million since June of '07 based on normal prepayments of theunderlying mortgages. These high-grade adjustable rate mortgage portfolioscontinue to demonstrate expected credit performance with approximately 1.7% ofdelinquent loans on average greater than 30 days.

This is fairly consistent with the same results we had as ofJune 30th. However, the cumulative cash losses are approximately $500,000 andwe maintain a reserve of approximately $8.9 million for these loans. We believethis reserve is adequate and these loans are reported at amortized costs.

Finally, during the third quarter, we formed a second Europeanbase subordinated debt portfolio, which will hold approximately €900 million ofsecurities upon full deployment of the capital. At closing we fundedapproximately 465 million of assets in Euros and have locked in the cost ofcapital for the future fundings of these new investments.

Basically the cash that was borrowed at that time isavailable to make investments over the next six to nine months. We invested€17.5 million in the capital of the fund-consolidated entity. As a result weexpect to generate management fees and origination fees in addition to ourreturns on our equity investment over the coming years.

The total European assets under management at September 30thwere approximately €987 million. Which would generate just under $3 million of managementfees on an annual basis.

Next I would like to discuss our adjusted earnings. Adjustedearnings is a non-GAAP measure that compares to our net loss or net income percommon share. We've reported a $244 million net loss for the third quarter of 2007,compared to an $18.4 million of net income in the comparative quarter of 2006.Primarily this has been attributed to the asset impairment charge we've spokenabout.

On a per share basis, this translates into a GAAP loss of$4.02 per common share. We have supplemented the GAAP information in the pressrelease by reporting our estimated REIT taxable income of approximately $26.9million or $0.44 per common share. This compares to $18.2 million or $0.64 percommon share in the same quarter in 2006.

There are primarily three reconciling differences thataccount for this difference in adjusted pretaxable income compared to GAAPtaxable income and they are as follows. First, the add back of the $247 millionnon-cash asset impairment charge net of its related minority interest effect.This is not a deduction for tax purposes and therefore its added back to ouradjusted earnings.

Secondly, we have an add back for the non-cash amortizationof the intangible asset of the $17.5 million I spoke about. And thirdly, ourtaxable income adds back approximately $9.7 million of taxable losses generatedby our entity, which do not affect our REIT taxable income for the corporateentity.

Under this presentation of adjusted earnings we haveincluded a $247 million non-cash charge for asset impairment, depreciation of$1.9 million and amortization of intangible assets of $17.5 million, togetherwith the other non-cash components shown in the reconciliation.

As a result, adjusted earnings for the quarter were $33.0million, reflecting the non-cash reconciling items and resulted in $0.54 ofadjusted earnings per common share. This corresponds to the third quarterdividend of $0.46 per common share that was paid on October 12th, 2007.

On a year-to-date basis we've generated 2.28 of adjustedearnings per common share and paid dividends of $2.10 per common share.Finally, I would like to describe other financial information that we put intothe press release. This is additional information for investors and will alsobe covered in our q to be filed later this week. The first topic is liquidityand capital resources.

During the third quarter we made significant progress on ourgoal to reduce our exposure to short term debt. Through a combination of assetsales, long-term debt financing, application of committed restricted cash andcash flow from operations, together with the cash resources we had available atthe beginning of the quarter, we repaid approximately $700 million ofshort-term debt by September 30th, 2007.

This debt financed our residual interest in our residentialmortgage portfolio and the temporary holdings we had of investment grade debtsecurities from our most recent transactions. However, during the quarter, weissued approximately $167 million of this retained debt securities using thoseproceeds to help repay the related repurchase debt.

As of September 30th, we had $345 million of indebtedness,including the 212 million of outstanding short term REPO debt, $50 million oflong-term trust preferred securities that we have issued, and approximately $82million in secured bank debt under committed commercial bank credit facilities.We continue to maintain adequate liquidity through these sources together withthe capital from anticipated banks and institutional capital providers thatDaniel mentioned.

Lastly, I’d like to comment about economic book value pershare. We like to address this concept associated with presenting economic bookvalue per share because we believe given the nature of the asset impairments, whichhave affected our GAAP earnings.

There is a lower amount of earnings charged from an economicstandpoint; and therefore, we're presenting economic book value per share. AReconciles-off our tangible book value per share of $11.53 as of September 30th,2007, the tangible book value per share includes the full impact of the assetimpairment evaluation adjustment on a GAAP basis.

However these GAAP charges down effect pre-taxable income orour adjusted earnings until such time of the underlying securities are sold ordisposed of and the estimated loss is been realized.

Therefore, economic book value reflects the adjustments totangible book value for adding back the losses we have recorded in excess ofour maximum potential cash loss. Upon the ultimate disposition of assets, theseeconomic losses will be realized, but we'll be limited by the non-recoursenature of the financing structures that we have in place.

RAIT may realize an accounting gain for GAAP purposes atthat time as we recover the negative basis in these assets. So, as of September30th, 2007 our economic book value per share of $13.27 reflects the adjustmentof approximately $100 million representing losses we have recognized from assetimpairments that are in excess of our maximum economic loss on our investmentsand this concludes the financial report.

And I would like to turn this back over to Daniel.

Daniel Cohen

Okay. Thank you very much, Jack. As we look forward tomoving past this asset impairments we are pleased to be able to address ourrecurring adjusted earnings and our ability to produce cash.

We continue to produce cash and look forward to otherquarters where we report to you without the asset impairment that we have here.If I can open the floor now, if I can ask the operator to open the microphoneto questions, thank you very much

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from theline of Marsella Martino with Keybanc Capital Markets. Please proceed.

Marsella Martino - Keybanc Capital Market

Good afternoon. Can you just give a little bit more detailon the non-accrual loans that you recognized this quarter, maybe the types ofloans that they were?

Daniel Cohen

Jack?

Jack Salmon

Sure. As I said, we have approximately $362 million of loanson non-accrual basis; approximately $40 million of that is our commercialportfolio and the balance is in our trust portfolio. And in total, there areless than a dozen loans that we're talking about.

Marsella Martino - Keybanc Capital Market

Okay. So, no specific type of loan in the commercial orgeography?

Betsy Cohen

Marsella, sorry. There are a series of loans that areprimarily -- the primary amount is $35 million and it's guaranteed by a Groupof what we think are financially deep investors. It took longer to develop intoa point of disposition, and so we decided to put it on non-accrual.

Marsella Martino - Keybanc Capital Market

Okay. And you talked about, you seeing a lot ofopportunities out there. Can you specifically speak to the mezzanine market,what you're seeing out there? Have you seen an investors leave that space, anddoes that open it up for you guys who have always been pretty strong in thatarea.

Betsy Cohen

I think there are fewer lenders in the marketplace…

Marsella Martino - Keybanc Capital Market

Okay.

Betsy Cohen

And that combined with the CMBS market, which has tightenedup in many ways, makes it more valuable to borrower to take a loan during --for a short period of time at a higher spread.

And there are not much of those pressure on the margins oron the spreads, whereas a result of the massive amount of capital that hasflowed into this marketplace with much less capital in the marketplace, both onthe primary or whole loan basis, as well as on the mezzanine basis, there aresignificantly more attractive and wider spreads that are available to us.

Jack Salmon

We're seeing also on bridge loan side a natural opportunityfor us to partner up with commercial banks which we're starting to do, as wemove through our existing pipeline right now and provide relatively low loan tovalue mezzanine financing, a lot of cash from acquirers into the properties andgood rates and good returns for us on the mezzanine side.

Betsy Cohen

It's almost like the good old days.

Marsella Martino - Keybanc Capital Market

Okay. Great. Thank you very much.

Jack Salmon

Thank you.

Operator

And your next question comes from the line of Bob Napoliwith Piper Jaffray. Please proceed.

Robert Napoli - Piper Jaffray

Good afternoon, couple of questions. I guess, once the yieldon the commercial mortgage portfolio as reported is reduced this quarter, declinedfrom 9.7% to 8.9% quarter-over-quarter. I was trying to understand what causedthat?

Jack Salmon

Yeah, I think the main difference, Bob, is a slight increasein cost of funds. I think our spreads are holding up fairly well on the assetside and there's a slightly higher cost of funds from interest costs.

Robert Napoli - Piper Jaffray

Okay.

Jack Salmon

But also a bigger concentration of bridge lending on ourbalance sheet.

Betsy Cohen

I think that that's absolutely true. The mix is different,as you can see in the press release, the percentage of multi-family housingloans is greater than it usually is and you may remember from quarters past,that this number pops around really as a result often of mix.

We felt that the multi-family housing segment offered moreopportunity just at this moment, even if it is slightly lower spread, not onlybecause we think that it's a good sector in the markets in which we are, butalso because in addition to standard financing, we find ourselves able toaccess some of the government programs on behalf of our borrowers and thereforeincrease our ultimate yield, and the exit is easier as well.

So, for a variety of reasons, I think that we increase andwe have an increased percentage in our portfolio of multi-family and thatalways lowers the yield a bit.

Robert Napoli - Piper Jaffray

Okay. And generally, with lower risk, I guess.

Betsy Cohen

It matches the risk, yes.

Robert Napoli - Piper Jaffray

The Impairment, maybe a little bit more color on what's lefton the balance sheet and what the risks are of additional impairments thisquarter. I mean is, we're getting the two-step impairments from biginstitutions like Merrill Lynch and Citibank.

I guess, and what retained interests are left on the balancesheet from the CDO’s and maybe give me a little more color on why we should beconvinced that you’ve absolutely taken a very conservative posture on yourmarks?

Daniel Cohen

Well, we’ve tried to take an accurate posture on our marks,that's all that we can do. And the situation that we have is very differentfrom the situations that other people who obtain these two-step write-downs. Wetook the and our portfolios are comprised of first loss pieces and pieces wherewe are; we take a limited amount of risk.

So, if there's $1 billion portfolio, we may take 5 or 10%,that's our maximum loss that we've taken. So in six of our financing vehiclesthat we use in the trust preferred side, we limit our risk and therefore wecan't have this two-step write-down, because unlike Merrill Lynch and Citicorp,who retain the senior pieces, the super seniors which are much larger and havethe ability to have economic loss of the entire amount often 90% of the entirestructure, we have the much smaller pieces.

So our losses are capped at that level. You know, we believethat we have taken a good and conservative stance on this and that ourcollection efforts will pay off in terms of maximizing our recoveries in thesituations that we feel are questionable and at that that our constantengagement in that process hopefully will result in better than what we thinkare accurate reflections of the losses that we might take.

Robert Napoli - Piper Jaffray

Can you tell me what dollar amount of retained pieces areleft on the balance sheet?

Daniel Cohen

Well, we have, Jack?

Jack Salmon

We have approximately $375 million of retained interest onour balance sheet at September 30th of '07 and that's across all of ourstructures, where the risk exists.

Robert Napoli - Piper Jaffray

What was that again the last quarter, Jack?

Jack Salmon

$375 million at September 30.

Robert Napoli - Piper Jaffray

And June, what was it at June 30th?

Jack Salmon

I'd have to go back and look. I don't have that number infront of me.

Betsy Cohen

I was just going to say, though, that's across all businesslines, Bob.

Robert Napoli - Piper Jaffray

Okay.

Betsy Cohen

So it's not limited to domestic TruPS.

Robert Napoli - Piper Jaffray

And what is it that's related to domestic TruPS, that's whatI'm looking for.

Daniel Cohen

It's a substantial portion of that. You have to rememberthat the most of that was in two CDOs, within two vehicles, that had the $450million of restricted cash in it as of September 30th.

So, that most of our investment was in CDOs that hadsubstantial ramp-up to go as of September 30th and that are making a freshinvestments for over 30% of that and we're the most recently closed of theseinvestments and the ones that have much lower concentrations of other vehicles.

And of mortgage companies and home builders, and don't haveconcentrations of companies that we would put on our watch list.

Robert Napoli - Piper Jaffray

Okay. I think did I hear you correctly, Dan, you said thatat this point you intend to maintain that $0.46 dividend?

Daniel Cohen

We believe that our cash flow, which would, continues andshould allow us to support that dividend going forward.

Robert Napoli - Piper Jaffray

Okay. And on a growth basis, I mean, you're growing twobusinesses from here at this point, the domestic commercial real estatebusiness and the European businesses; is that correct?

Daniel Cohen

Yes.

Robert Napoli - Piper Jaffray

And can you give me some feel for kind of the incrementalgrowth, some kind of a broad range or something, whatever you feel comfortablewith, for the fourth quarter and beyond?

Daniel Cohen

Well, we've started lending in our pipeline again. What Ican tell you is that our ROE expectations are very high, as you can see from ifwe continue a $0.46 dividend at our current stock price, the opportunity to buyback our stock is very attractive to us.

And so, in terms of expanding our own free cash, our ownavailable cash usage, the cash we have free on our balance sheet in terms ofgrowing this businesses, we will do it somewhat. But we anticipate that -- andwhat we've been working on is working with partners and commercial lenders tohelp us expand this business through our origination practices, both in Europeand in the United States.

In Europe, we have a lot of unused cash that will be able todeploy through the end of basically pre-funded loans, that was the $600 millionplus number that we have to deploy in Europe -- $650 million that we have todeploy in Europe. That we will be deploying over the next six to nine months.And in the United States, we still have some un-deployed capital.

We do get pay downs regularly and we do expect pay downs inour portfolio, both those inside the financing vehicles and in the UnitedStates we'll maintain those balances, we think, maybe not so necessarily growthe footings, per se, but change the asset types and change the ROEs and theROAs in that portfolio. And look to expand that portfolio by partnering withpeople that can appreciate and have use for the types of lending that we can doin the commercial real estate side.

And we're working -- we've made decent progress in that areaand shouldn't -- should hopefully be able to talk to you in the next conferencecall about that more in detail.

Robert Napoli - Piper Jaffray

Okay. So modest growth of the owned portfolios, partneringwith others that have balance sheets. And what ROE, what have you raised your-- how many basis points have you raised your ROE target?

Daniel Cohen

Well, we haven't -- when I say that we raised our ROEtarget, we don't have a hard and fast ROE target, per se. But if you look atthe -- where our stock has been and the dividend yield that we have on that,that's the type of ROE that we're looking for if we're going to be deployingfunds.

Robert Napoli - Piper Jaffray

Okay. Thank you.

Daniel Cohen

From our available free cash.

Robert Napoli - Piper Jaffray

Thank you.

Operator

Your next question comes from the line of Andrew Wessel withJPMorgan. Please proceed.

Andrew Wessel - JPMorgan

Hey, guys. I wanted to just kind of touch on what Bob wastalking, but I don't know if we got the full extent yet in terms of remainingexposures to Taberna. I think the argument can be made that a lot of thediscounted book right now is from -- probably from expected continued write-downsthere and if that can be disproven, I think it would be a real benefit.

So, in terms of being able to kind of quantify what equitydo you still have exposed? What triple B's do you still own? I guess you canbreak it up into two groups, Taberna 2 through 7, which looks like you off mostoff that given the $300million gross payoff and then and then, Taberna 8 and 9,what do you still have? How much it on repurchase agreements, etcetera?

Daniel Cohen

We don't have anything on repurchase agreements, per se,although we do have some securities in a warehouse that we've moved outsubstantial amounts over the last few weeks. Overall, we have $100 million ofexposure left in Taberna 2 through 7, ranging in priority of payments from whatyou call double A, which is a third priority of payment, all the way downthrough the equity.

And most of it -- and actually, none of that really, -- noneof that really is equity. I apologize. That's in the triple B and above range.And then we have $275 million in Taberna 8 and 9, two groups that have $450million worth of cash.

I know that we've had exposure to mortgage companies thathave had problems in this credit environment and certainly nobody wants to haveany exposure to the mortgage sector today, or to the home building sector.

That having been said, we believe that these are two CDOsthat each of them are not levered 20 to one, they're not levered 10 to one,they're levered about 5.2 to one and we have a lot of capital in them. At theend of last quarter, almost a third of it in cash and the opportunity to bevery selective in those portfolios.

As we continue to collect payments and get earnings fromthose CDOs, I think that's where we -- you know, that's how -- the proof is inthe pudding there, unfortunately, in that. I wish I could give you a perfectscenario that could explain to you the future is perfect, but today I thinkeverybody's attitude on credit is relatively negative.

That having been said, we feel comfortable with ourinvestments to generate cash and as you can see in this quarter, adjustedearnings in excess of the dividend that we expected to pay. And that in termsof our continued dividend, we're not entirely dependent upon the earnings fromthose two CDOs where our ROEs on average are much lower than what we'veexperienced because the leverage is not nearly as high.

Andrew Wessel - JPMorgan

Sure, that makes sense, in terms of getting to that $100million that's left in 2 through 7, its HH or BBB. So, if I look at on the presentationyou gave back at Neri (ph) saying that there was in 2 through 7you had about$310 million total debt and equity exposure.

And so you're saying you have $100 million left. So we canassume that 200, little over $200 million of the total impairment, the grossimpairment made during the quarter was from Taberna 2 through 7. I guess thequestion then becomes what was the other $130 million of impairment on a grosslevel what was that attributable to?

Daniel Cohen

The part you're missing in the analysis, Andrew is that ofthe $300 million or so that you were just referring to.

Andrew Wessel - JPMorgan

Yeah.

Daniel Cohen

Approximately $95 million was allocated to the minorityinterest, so.

Andrew Wessel - JPMorgan

Got you.

Daniel Cohen

Our share of the impairment is about to $240 million netnumber you started out with.

Andrew Wessel - JPMorgan

Good deal. So there's still that $100 million, I guess whenyou go through your analysis. I mean, you're looking at still AA through BBBand the allocation of problem assets across those various CDOs makes you feellike the BBB still have full recoverable value.

Daniel Cohen

We actually don't look at an asset; we don't look at itinvestment-by-investment, security-by-security, but rather assets underlyingthe individual security. There happen to be certain collateralized setobligation funding vehicles that have a higher concentration of problematichomebuilders or mortgage companies, and that's where we've taken our biggesthits.

It's not evenly distributed among the whole entirepopulation of the portfolio; so we do feel comfortable with where we are hereand we do feel comfortable that we're going to continue earning a return onthese assets after, as this, as we move through this what we think is the, isthe period of the most stress.

And continue to monitor carefully our borrowers and manageour exposures and don't, manage our exposures going forward.

Andrew Wessel - JPMorgan

Okay. Great. And then in terms of just Taberna Europe 2, canI clarify so only you have €17.5 million of exposure to that entiresecuritization in terms of debt, equity, any exposure that you have.

Daniel Cohen

Yes.

Andrew Wessel - JPMorgan

Okay. Great. Thank you very much.

Daniel Cohen

Thank you.

Operator

Your next question comes from the line of Lee Cooperman withOmega Advisor. Please proceed.

Lee Cooperman - Omega Advisor

Yeah. Thank you. I apologize for asking this question, butthe general rule when I have a stock yield 25%, selling at 60% of economic bookvalue. I would like to give management an opportunity to repeat some of thethings they've already said.

So, first, not in any order of importance, but there's somepeople that think that the business model doesn't work going forward in acredit restrained world. And what I would like to do is get all these questionsout at one time.

I'm just kind of wondering how you guys think about thebusiness model, you've addressed it by saying you have better lendingopportunities than you've ever had; but no does the business model work in thekind of credit environment like we're in currently and will likely remain infor a while?

Second basically, what is the aggregate or let's sayapproximate value of low earning assets in the portfolio that you could swapfor 25% yielding, and 60% of economic book value paper? In other words, orderof magnitude that you could move out of some portfolio holdings into your ownequity?

Third, and not looking to make a specific forecast but justmore of a general kind of observation, is the $0.54 number for the thirdquarter in your mind a plateau that can go either way or do you have a degreeof optimism that we are at a trough now and that over time that these earnings level,this $0.54 number could be improved over time?

And finally, I think you've addressed it but maybe I'll askit a different way, based upon your October results, which are behind you andyour outlook for the present quarter. Would it be the intention of managementto recommend to the Board the sustaining of the current dividend of $0.46?Thank you for any help you could give.

Daniel Cohen

Okay. Any follow-up questions on that?

Lee Cooperman - Omega Advisor

I could give you a few more. But I don't want to take moretime.

Daniel Cohen

No, no it's okay. I'm just joking. As for the question…

Lee Cooperman - Omega Advisor

So was I.

Daniel Cohen

As the question, amount of work. We've gathered a lot ofterm funding for long-term and in as much as we have made loans some of themrevolve, both in our Taberna 8 and 9 CDOs and as well as where we have a largenumber of assets, which are shorter term assets, not long-term trust preferredassets, which I would like to point out to everybody.

And in as much as we have $1.4 billion of financing forcommercial real estate that will revolve on a continuous period for anotherfive and-a-half years. Just revolving through that portfolio at higher spreadsallows us to continue forward.

In terms of a business model working, certainly if ourbusiness model were to issue large amounts of debt and have new highly leveredstructures in this environment and create new debt right now in today'senvironment, that we can't do today.

We're not saying that we can do. Our business model, though,in terms of asset generation, both in Europe and Asset Management both inEurope, allows us to pursue other paths, to hopefully do what companies like todo, which is grow the earnings.

We are a company that has a track record both in innovation,some of which has resulted in unanticipated period, we underwrotetrust-preferred assets to 30-year horizon and we had more than a 30 yearhorizon event and also in terms of conservative lending practices on thecommercial lending side and great credit officers overall.

In, as much as we can apply that to growing our dividendboth in terms of growing the fee income and in terms of looking at goodopportunities and using our skills and our experience in multiple creditenvironments to push through the type of multi-family loans that we have intothe Fredy, 223F programs, the Fanny Mae, second bite of the apple programs,other things like that, that's a model.

That I think that will be able to move forward with. So wehave a large portfolio that will manage, that will revolve, that will increasethe returns on assets on. Did I answer that question?

Leon Cooperman - Omega Advisors

That's the first question. Then the second question, not inorder, but if you looked at your October results and your expectations for thefourth quarter, I'll repeat all the questions, do we feel comfortable with themanagement be of the mind to recommend to the board the maintenance of theexisting dividend and I guess maybe inferentially answered one of thequestions, is the $0.54 in Q3 is based upon which to grow or a plateau that cango either way?

Jack Salmon

Well, I'm going to answer those questions directly. Thenwe're going to return to the business model because Betsy would like to alsoaddress that. In terms of the, there's so many questions.

In terms of the dividend, we have a $0.46 dividend. That'sour baseline dividend. That's why we authorized the dividend. We would not haveasked the Board, management would not have asked the Board to authorize adividend that we did not think would be a baseline to grow in the future.

We received cash flow in the month of October that'ssubstantial and we have substantial cash resources and therefore, while we haveanother month until we recommend the dividend, there's no reason for me tothink that we wouldn't be recommending that our dividend recommendationwouldn't be in line with what we think that we can grow.

It's our job as a Management Team to grow that dividend backfrom this point. As to Betsy, why don't, you wanted to address the businessmodel question.

Betsy Cohen

I was just going to add what Daniel, set out very cogently,the fact that we have all been focusing with absolute appropriateness on the assetsand the asset quality of a particular segment in the marketplace in ourportfolio.

But really not focusing as part of the business model on thevalue of the liability, fixed liabilities, which we have. And I think thatthey're significant, if we were, I hate to use the word bank on a day liketoday.

But if we were a financial institution and we had seven to10 year CDs at the kinds of rates that we have fixed financing and we had theability to revolve the loans on a short-term basis and not only earn fees andmanagement fees, but be lending within a credit cycle, I think that there wouldbe tremendous value attributed to that.

Daniel has spoken about the fact, and Jack, that a portionof the funds that we have available to us are not even lent out yet. So we'relending, we're in the position if you again think of us as a financialinstitution of lending with very open eyes and having learned what the newfinancial rules are and have a broad portfolio to create in an environment inwhich there is significantly less capital being diverted to this segment.

So all of those things I think in one measure or another areimportant to the validity of the miss model.

Leon Cooperman - Omega Advisors

Got you. And not in anyway attempting to get to into aforecasting game, but the question I'm trying to figure out is the $0.54, isthat a level that you folks feel comfortable you can grow from so it's a troughrather than a plateau that could break either way, would you guys bedisappointed if looking at a year from now your earnings weren’t -- youradjusted earnings weren't running more than $0.54 times four?

Daniel Cohen

We expect to grow our earnings over the course of a year.

Leon Cooperman - Omega Advisors

Okay.

Daniel Cohen

Will they be substantially higher…?

Jack Salmon

…in the fourth quarter?

Leon Cooperman - Omega Advisors

No, no, I said a year from now.

Daniel Cohen

Yeah, a year from now, we expect to grow our earnings overthe course of a year.

Leon Cooperman - Omega Advisors

No, that’s question because of the realized capital is kingright now, so shedding capital might not be prudent, but you know, if you had6% yielding assets in the portfolio that you could swap for 25% yieldingassets, EG or common stock, it would be extremely accretive. Is there anymeaningful amount, it's more like $10 million or less rather than a biggernumber?

Jack Salmon

Lee, as you have always counseled us to be prudent…

Leon Cooperman - Omega Advisors

Yes.

Jack Salmon

…with our liquidity, we will be prudent with our liquidity.We wound up the quarter with cash. That having been said, we do believe ourstock is a good buy. And as we believe that at these prices, it really is hardfor us to find alternative usage for free cash so as much as we can free upassets, where we can see repayments or we can see other things happening,because unlike we're not invested in tradable assets.

We sold a lot of our tradable assets in order to pay downour repo lines, as quickly as possible. And as much as we can monetize assetsas prices that make sense, you will see us looking to reduce our share count.

Leon Cooperman - Omega Advisors

But still I know you guys have been working very hard. Ijust want to tell you that the shareholders appreciate it and it's been a toughperiod and hopefully the end will all be happier.

Jack Salmon

Well, thank you very much.

Operator

And your next question comes from the line of Jason Arnoldwith RBC Capital Markets. Please proceed.

Jason Arnold - RBC Capital Markets

Hi, good afternoon. I just had actually a quick follow-upquestion on what Bob and Andrew were getting at. On the $275 million remainingexposure on Taberna 8 and 9, what was that composed of in terms of a breakoutof equity tranch versus BBB, BB all like that stuff?

Daniel Cohen

We'll have that detail for you Jason, in our Q when it'sfiled and we'll be glad to follow-up with you.

Jason Arnold - RBC Capital Markets

Okay. Fair enough. On the Europe deal, the $17.5 million youinvested in the equity piece there, what's the return on equity on thatinvestment?

Daniel Cohen

Well, as you know, Jason, as I said, we have $650 millionleft to deploy in that asset, so it depends really what we get in terms of theassets. The returns there should probably be without accounting for managementfees, somewhere in the 15% plus range. So that's without accounting for thefees that we get for managing that. So…

Betsy Cohen

…with the management fees themselves as detailed in thedescription of the transaction could provide you with the excess, if you wantto think of it that way, yield on that investment.

Jason Arnold - RBC Capital Markets

Okay. And then, I was wondering, if you could give us anupdate on the CDO market, it looks like you guys have somewhere around $400some odd million to be deployed in current deals and what's the outlook forgrowth there, what do you anticipate going forward?

Jack Salmon

You know, CDO is a bad word today. And I can't tell you thatI expect a lot of issuance of new CDOs of any type, whether they have goodcredit performance or not. So we do see collateralized loan obligations andcollateralized debt obligations that are backed by good collateral being ableto be priced slowly over the next year or so.

But that -- in terms of looking at what we're doing, ourbusiness plan does not include the securitization of assets. It would be a --well, that's not true. In Europe, we actually anticipate that next year we'llbe able to do a securitization again of assets that we believe will be wellreceived and…

Betsy Cohen

I think on the CRE side we are substituting for what hasbeen served by the CDO or financing vehicle a -- what Daniel describedpreviously, which is either managed funds for others or a combination of jointventure and bank debt, which will supplant the CDO structure until that marketcomes back, if it does

Daniel Cohen

Yeah, so I think that we’re looking at lower leveragealternative structures. The asset spreads are expanding, not to the point whereit makes it attractive relative to our target ROEs.

Given, where our stock is; but given, what we expect todevelop over time and working with partners and having the ability to sourceassets and analyze assets, you know, very unusual or maybe not unusual, butdifficult to identify smaller assets.

We think that we have a strong franchise in both Europe andthe U.S. and that should allow us to develop other funding mechanisms out ofthis. So, CDO’s, per se, we don't -- we believe the marketplace will be 20% ofwhat it was, our CRE/CDO product meeting.

The types of loans that we do, they're good loans, theyshould be well-funded. It should be something people should want to invest in,and we expect that to continue. And we’ve always -- we're looking for newformats for term funding. Is that -- was that understandable?

Jason Arnold - RBC Capital Markets

No that helps out, thank you. And just one other quick onehere, in terms of the valuation of your balance sheet on a GAAP basis, youknow, I know there's a difference between your economic investments and GAAP?

But going forward with FAS 157, what percentage would beconsidered -- of the current balance sheet would be considered managementestimated value, like a level three versus a level two or level one?

Jack Salmon

Jason, we are in the process of looking at that analysis andwe'll be adopting that at first quarter '08. So we have nothing to report atthis point on fair value adjustment.

Jason Arnold - RBC Capital Markets

Okay. Thank you so much.

Daniel Cohen

Yeah, thank you Jason.

Operator

And your next question comes from the line of David Fick ofStifel Nicolaus. Please proceed.

Daniel Cohen

Hi, David, how are you?

David Fick - Stifel Nicolaus

I'm fine. Thanks. Good afternoon. I'm a little confusedabout some of your answers on the business plan because you know, if you lookat your sources of capital today, virtually none of them would be available toyou for replacement purposes.

So, what you're talking about is churning your existingcapital in terms of executing a business plan, perhaps with some higher spreadsgoing forward to get a little bit of earnings growth.

But you couldn't build this thing as you are currentlyformatted now. So my fundamental questions are why wouldn't you cut thedividend at a minimum, you talk about cash being king, that's obviously true.Why wouldn't you preserve as much cash as possible? And why wouldn't youconsider de-REITing at this point?

Daniel Cohen

I think, we appreciate your questions. In terms of lookingat that, the first thing that we look at is what do we think our continuingadjusted earnings are which is what we think is a measure for our distributablecash?

If we believe that we can continue not even at the $0.54 ashare level, but even at the $0.46 share level, it is hard. While cash is king,there's a limit to the value of being king. And in today's environment, thereturns that you can get are not in the level of the returns that you can getin terms of overall you see it occasionally, selectively.

And we are building a pipeline of assets that we think arefinanceable at the types of return on equity and low risk possibilities that wecan have going forward. As to de-REITing, that's not even a question. That's aquestion that is available to the shareholders and not to management.

Our bylaws are very clear. The company can only de-REITingif majority of the shareholders vote for that deREITing. We don’t expect thatto be the desire of the company, nor do we see any reason to do so.

Betsy Cohen

I think you also have underestimated the length of theliabilities. You say you couldn't build it today, but the average -- these arenew liability structures. So the average life for them is long.

We've said to you and so we're not going to be able topredict what will happen in the next five to seven years. I think that we havealso said, and maybe just not clearly enough, that we anticipate being able todo a fixed liability structure in Europe within the year and that we arebuilding financing sources that are not merely turning the portfolio.

Although, that's a profitable thing to do, but ratherinvolve the infusion of new funds; although, they may not all show up on ourbalance sheet. So I think that we have a variety of sources for continuingfunding in addition to the liability structures, which have a long life.

Daniel Cohen

And that's really our goal as a management team, is to beable to develop alternative structures. We've been working on this already fora few months now. And so while we had, we hoped to add more clarity to this bythe next time that we have our conference call.

David Fick - Stifel Nicolaus

I appreciate that there are a lot of questions that aretough to answer, given that you've been fighting alligators in a liquiditycrisis.

Daniel Cohen

Yeah, I don’t think David, that's not what I said. And youknow I appreciate it if you didn't imply that's what I said. What I said wasthat as we go forward in today's environment, we're developing new programs andthey're not complete and defined yet.

David Fick - Stifel Nicolaus

I was complimenting you. I'm sorry. But I know you've had alot on your plate and new things will emerge and you know, you're at a pointnow where you have the opportunity to think about other things beyond justsurviving and I think you're to be commended for getting here.

Betsy Cohen

Thank you very much.

Daniel Cohen

Thank you very much, David. But…

David Fick - Stifel Nicolaus

I understand. Everybody's sensitive and on edge now. But, Iguess my next question is you still have $35 million in warehouse deposits. Iwas under the impression that was related to the euro CDO, and didn’t changequarter-over-quarter, what is that?

Daniel Cohen

We have certain assets on our warehouse line, which we hadat the end of -- we expect to dispose over the course of this quarter and thatis cash that is securing those assets.

David Fick - Stifel Nicolaus

Okay. As it relates to the Taberna goodwill, why would therebe any retained value there. Why would there be anything maintained on thebalance sheet, as opposed to written-off at this stage?

Daniel Cohen

Well, again we did a complete analysis, as you're requiredto do, at least on an annual basis and revalued the assets from the originalpurchase accounting. So the adjustment I spoke about reflects the adjustmentfor final purchase accounting from 2006 merger and it had about a $50 milliondecrease to good will. That level of good will has been deemed not impaired.

David Fick - Stifel Nicolaus

Okay. And you will assess that quarter-by-quarter as you goforward?

Daniel Cohen

These are events occur on an annual basis, yes.

David Fick - Stifel Nicolaus

All right. The investment and other retail properties, canyou review for us what that is and why now?

Daniel Cohen

Yeah, well, we're commercial lenders and when we make acommitment to make an investment that we're very excited about, and even if weweren't excited about it, we follow through on our investments.

We think this is a great partnership for us and it allows todevelop very nicely. I'm going to turn it over to Betsy to continue.

Betsy Cohen

I think that you know, I've often said to you that we thinkof ourselves as a knowledge based company. One of the things we know how to do,as Daniel said, is develop new liability structures and that's one of thethings we're working on.

One of the elements that we felt might be missing from ouroverall knowledge was as much a retail information as we would like to have. Wehad an opportunity to partner with people that we thought are among the best inthe country, to provide us not only with the information that will allow us tomake better loans.

But those, which will allow us to make corrections withinlending situations earlier because of the vast amount of experience thatthey've had. It's going to have a third benefit to us as well, in that they areproviding us with an opportunity to see within that sector, to see newopportunities and we think that that's a very good thing.

They have, as you know better than anyone, they have anunderlying opportunity with counters to provide equity financing and so we willbe right in the stream of information and opportunity in that program.

David Fick - Stifel Nicolaus

This was something that predated this summer?

Betsy Cohen

We had been talking to urban for six months, seven months. Ijust couldn't date it for you, to tell you the truth.

Daniel Cohen

And I think it will be an exciting piece of our platformgoing forward. We think the ROEs on this particular investment will well exceedour ROE threshold, even for a $0.46 dividend per quarter on our current stockprice.

David Fick - Stifel Nicolaus

Great. Well thank you. Keep it up.

Betsy Cohen

Thank you.

Daniel Cohen

Thank you, David.

Operator

Your next question comes from the line of Michael Cohen withSunova Capital. Please proceed.

Michael Cohen - Sunova Capital

Hi Betsy, Hi Daniel. Thank you for taking my question.

Daniel Cohen

Hi, Michael. Just to clarify, we're not relatives.

Michael Cohen - Sunova Capital

I'm aware.

Betsy Cohen

To your benefit, Michael.

Michael Cohen - Sunova Capital

But you two are.

Betsy Cohen

To your benefit, Michael.

Michael Cohen - Sunova Capital

Although I have a son named Daniel. You know, on your Augustcall I think you did an excellent job of walking through the sort of equityexposure as well as the BB exposure to Taberna.

I know a lot of people have asked the question today. Ididn't quite get, follow kind of the numbers and so I went back to thetranscript. You guys had $191 million of equity and $86 million of BB debtrelated to Taberna. And of the, I guess $247 million of charges, would thatessentially go against those two numbers? Is that the way to think about that?

Daniel Cohen

Essentially, those numbers you're quoting related to T2through 7.

Michael Cohen - Sunova Capital

Right.

Daniel Cohen

And so the charges that we take primarily fall into thosecategories, yes.

Michael Cohen - Sunova Capital

Okay. And then the warehouse that or the thing -- I believethere were some assets that were funded with repo funding that obviously youguys have paid down. What was the nature of the assets that were on repofunding and what's the status of them today, if you could --?

Daniel Cohen

As I said in my comments, there are two primary categoriesof assets that we use repo financing for. One was the residual interest in ourresidential mortgage portfolios and the second was securities that we hadcreated in association with our most recent CDOs, which we held temporarily.

Some of those securities have subsequently been issued to themarket and then that caused the ability to pay down the repos and we paid downthe repos as required on every other financing.

Michael Cohen - Sunova Capital

So those were securities that were essentially accumulatingradically sort of in a warehouse but not in a warehouse?

Daniel Cohen

Not in a warehouse. This is the debt securities in ourtransactions, which did not get issued at closing and have been issued on asecondary basis. So, in order to close the transaction we needed the cash. Thecash that we closed the transaction was borrowed on short-term repo. When thesecurities were issued, the short-term repo's were repaid in full.

Michael Cohen - Sunova Capital

Okay. Great. And the -- do have you any other exposuresbesides the double B and the equity piece that you've written down to theTaberna 2 through 7, either on the debt side?

Jack Salmon

We own some triple B securities and we own some AAsecurities as well.

Michael Cohen - Sunova Capital

Okay. And how large is that and were those impaired at all?

Jack Salmon

No. No, they weren't. They weren't impaired. As we went -- Ithink we answered the question before as to the additional $100 million ofexposure. I think we'll go through it more detailed, hopefully we'll givebackground in the Q as well, there will be a lot of background too.

Betsy Cohen

It will be filed at the end of the week.

Michael Cohen - Sunova Capital

Great. Thank you so much. Have a nice day.

Jack Salmon

Thank you, Michael.

Operator

And your next question comes from the line of DavidChiaverini with BMO Capital Markets. Please proceed.

David Chiaverini - BMO Capital Markets

Thank you, a couple of questions. The first one is I knowyou addressed it in your prepared remarks but could you describe again thecompensation expense, why that jumped up to $10 million plus this quarter?

Daniel Cohen

There were two elements. One of it was it tracked to acertain extent, the fee income that increased, that was recognized, didn'tincrease, but it was offset somewhat by the fee income. The other thing is thatas required by FAS 91, when we recognize fee income, it recognizes as it's anoffset to compensation and G&A expense.

So that if you look at our ongoing cash compensation and noncash compensation, all-in compensation, we think it's probably this quarter isan anomaly and doesn't really represent the cash compensation, because of thefee accounting arrived at these levels. We expect that our cash compensationshould be substantially lower, between -- Jack?

Jack Salmon

That's including the non cash product. 7.5 is in all-incompensation cost on a basis and then the good percentage of that is a third ofthat is non cash meaning, restricted stock from historical grants that arevesting.

David Chiaverini - BMO Capital Markets

Okay. Okay. That's helpful. And then regarding Taberna 8 and9, it's my understanding that you haven't received the management fees upthrough the third quarter. Is it true that the fourth quarter is when you'regoing to get paid for the first time for Taberna 8 and 9?

Jack Salmon

It was not that we didn't receive them. The first scheduledpay date for Taberna 8 was this past quarter and we were paid those fees today,as a matter of fact.

David Chiaverini - BMO Capital Markets

So that will fall in the fourth quarter?

Jack Salmon

It will be fourth quarter results, that's correct.

Betsy Cohen

October the end of October, which is the fourth quarterevent.

David Chiaverini - BMO Capital Markets

And that's Taberna 8 and 9 or just 8?

Jack Salmon

There are fees on Taberna 8 and 9, but most of Taberna 9 thelargest that will be first quarter of '08.

David Chiaverini - BMO Capital Markets

Okay. And those fees, how much do those fees, the Taberna 8fees amount to? Is that a couple million or several million?

Jack Salmon

We'll have to get that detail for you. We'll be glad to dothat after the call.

David Chiaverini - BMO Capital Markets

Okay. That's all, thanks.

Daniel Cohen

Thank you very much, David.

Operator

At this time, I would now like to turn the call over to Mr.Daniel Cohen for the closing remarks.

Daniel Cohen

Well, the closing remarks are thank you very much forattending our conference call, third quarter conference call. I hope that weclarified any questions that you had and I hope that we provided insight intowhy we think we should be able to, management should be able to move thecompany forward from the levels of distributions that we've set today andcontinue to work on new growth initiatives.

And continuing the improvement of the yields on ourportfolio that we have already in place with long-term funded debt. So thankyou very much. And I will talk to you in the next quarter.

Operator

Ladies and gentlemen, that concludes the presentation. Youmay now disconnect and have a wonderful evening…

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