Capital Trust Q3 2007 Earnings Call Transcript

Nov. 7.07 | About: Blackstone Mortgage (BXMT)

Capital Trust, Inc. (CT) Q3 2007 Earnings Call November 7, 2007 10:00 AM ET

Executives

John Klopp - CEO

Geoff Jervis - CFO

Steve Plavin - COO

Analysts

David Boardman - Wachovia

Don Fandetti - Citigroup

Rich Shane - Jefferies and Company

David Fick - Stifel Nicolaus.

Marsella Martino - KeyBanc Capital

Tayo Okusanya - UBS

Operator

Hello, and welcome to the Capital Trust Third Quarter 2007Results Conference Call. Before we begin, please be advised that theforward-looking statements expressed in today's call are subject to certainrisks and uncertainties, including, but not limited to, the continuedperformance, new origination volume and the rate of repayment of the Company'sand its funds, loan and investment portfolios; the continued maturity andsatisfaction of the Company's portfolio assets, as well as, other riskscontained in the Company's latest Form 10-K and Form 10-Q filings with theSecurities and Exchange Commission.

The Company assumes no obligation to update or supplementforward-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 tomanagement.

I will now turn the call over to John Klopp, CEO of CapitalTrust. Please go ahead, sir.

John Klopp

Thank you. Good morning, everyone. Thank you for joining usonce again and for your continued interest in Capital Trust. Last night, wereported our numbers for the third quarter and filed our 10-Q. During a periodof continued upheaval in virtually all sectors of the financial market, CapitalTrust produced steady earnings, strong credit performance and a solid balancesheet.

Geoff will run you through the detailed numbers in just amoment, but here are the headlines: Net income of $15.5 million or $0.87 perdiluted share; new originations of $110 million with only $65 million for thebalance sheet, substantially and purposely down from our previous pace as we dialback originations in anticipation of better opportunities that we see coming inthe months ahead. More on that in a moment.

Continued credit quality across all of our portfolios withzero losses on provisions during the quarter. In an environment when downgradesseem to be ever present, we received upgrades on seven classes of our CDO IIIBonds, reflecting improved credit quality and seasoning of the underlyingcollateral.

And in a market where liquidity is king, we added $250million of new borrowing capacity from a new line vendor, increased the capitalwhen one of our investment management vehicles by $100 million, and ended thequarter with more immediately available balance sheet liquidity than we haveever had.

Lastly, and of great importance to us, we paid a regularquarterly dividend of $0.80 per share against our net income of $0.87. On acumulative basis, 2007 dividends, so far, are $2.40 per share versusyear-to-date net earnings of $3.14 per share, reflecting a payout ratio of only76%.

With new write-downs of residential and CDO exposuresannounced or rumored by banks and broker dealers almost everyday, it's clearthat the crisis tripping the financial markets has not yet fully run itscourse. Closer to home, CMBS spreads have reached an all- time wide in the lastweek, the CMBS index is gyrating wildly and concerns are arising about theultimate impact on commercial real estate values.

But behind the scenes, however, there is evidence that thenew reality is sinking in. Banks are beginning to mark down unsold loans thatthey hold on their books to market clearing levels, and borrowers are beginningto accept that new loans will only be available at wider spreads, lower advancerates and tougher terms.

We believe the time to pounce will come soon, but we alsobelieve that this is a market with disciplined asset selection. And creditunderwriting will be the key to long-term success. These are the strengths thatCapital Trust was built on, and we expect they will continue to serve us wellgoing forward.

We maintained our discipline during the wild ride up in thelast 18 months, and the quality of our existing book of assets reflects thosesometimes painful decisions. We steered away from new issue CMBS assubordination levels formatted and underwriting standards deteriorated.

As a result, our upgrades to downgrade ratio has been 18:1over the timeframe. In our loan book, we cautiously drove down our risk profilefocusing on more Senior B notes, and today have a portfolio with a last dollarLTV of 69% capable of withstanding significant value erosion before ourpositions are at risk.

We avoided largely the Condo craze, choosing only thoseprojects that we felt were in strong supply-constrained markets and keeping aclose eye on rental value in our underwriting as a back stop to our exposure.

We never get comfortable with land loans, so we have onlyone $10 million investment, and are financing that in typical CT style; havesubstantial subordinate capital below us.

We stuck to high-quality institutional properties owned bystrong and experienced sponsors and believe that our portfolios will continueto outperform the market. We have applied that same discipline to the way werun our balance sheet and asset and liability mix.

The vast majority of our longer term fixed rate assets arematch funded with CDOs, which comprise over 50% of our interest bearingliabilities. The asset that we have financed with mark-to-market repofacilities are primarily short duration credit good quarters, which experiencedmuch lower price volatility in times of spread widening.

In addition, our repo financing takes the form of committed linesof credit from a diversified group book of lenders, most of whom have years ofsuccessful experience with Capital Trust. Those lenders are sticking with usnow, just as they did in 1998. And we have always religiously maintained morethan adequate liquidity to defend our book in the event of unforeseen events.

As I mentioned at the top, the true bottom-line for us isthe dividend that we paid to our shareholders. We set our regular quarterlydividend at a level that we believe is comfortably supportable from recurringincome generated by our business, and pay out any excess at yearend in the formof a special, perhaps it's not the best strategy to maximize share price in theshort-term, but one that we think ensures sustainability over the long haul.

A good friend and great investor reminded me recently ofthat classic question, "What's the difference between being early andbeing wrong?" Answer, none. Between our balance sheet resources and ourinvestment management capabilities we believe that Capital Trust is wellpositioned to exploit opportunities that result from this period of turmoil.

I'm going to keep it short today and I'll turn it over nowto Geoff, so we have lots of time at the end for questions in this interestingtime. Geoff?

Geoff Jervis

Thank you, John, and good morning, everyone. I'll begin withthe balance sheet. Total assets of the company were $3.1 billion as at 9/30, adecline of $89 million or 3%, when compared to where we were at the end of thesecond quarter. And as John explained, the decline was due to our strategicdecision to be a spectator during the recent market volatility.

During the period, we originated $65 million of balancesheet loans including $2 million of unfunded commitments for new fundings of $63million. And we funded an additional $42 million of new advances on ourexisting portfolio. This activity was offset by repayment during the periodthat totaled $212 million, netting to roughly $100 million decrease ininterest-earning assets for the period.

At September 30th, the entire $3 billion portfolio ofinterest-earning assets had a weighted average all-in effective rate of 8.04%.From a credit standpoint, the average rating of the CMBS portfolio remains BB+and the weighted average last dollar loan to value for the loan portfolio was69%.

Looking inside the origination numbers, new loans werecomprised of $22 million of whole loans and $43 million of B Notes andmezzanine loans. The weighted average all-in effective rate on the originationswas 8.19% and the average last dollar loan to value was 71%.

Looking across the entire portfolio, credit performanceremains strong in all investment categories. The CMBS portfolio experienced 12upgrades and no downgrades during the period and inside the loan portfolio allassets are performing. We booked no provision for loan losses this quarter andfeel very comfortable with the quality of the portfolio.

Moving down the balance sheet, equity investments inunconsolidated subsidiaries increased to $17 million at the end of the thirdquarter. Activity included $5 million of fundings associated with ourinvestment in Bracor that we upsized from an initial commitment of $15 millionto $30 million during the period, offset by the continued impact of repaymentson our equity co-investments at Fund III.

Inside Fund III, we expect to continue to experiencerepayments, and as of September 30, the Fund had only four remaininginvestments with total assets of $140 million, with all assets performing well.

As we have disclosed in the 10-Q, the gross promote value tous embedded in Fund III, assuming liquidation at quarter end, was $8.2 million.Collection of the Fund III promote is, of course, dependent upon, among otherthings, continued performance at the fund and the timing of payoff. That said,we currently expect to begin collecting Fund III promotes starting as soon asthe fourth quarter of 2007 and on into 2008. Any Fund III promote will beaccompanied by our expensing a portion of capitalized cost, as well as,payments to employees of their share of promotes received.

At quarter end, in addition to Fund III, we managed threeother investment management vehicles, CT Large Loan, CT High-Grade and the CTXFund. Activity in our other investment management vehicles, like the balancesheet, was relatively quite with CT High-Grade, our previously $250 million,now $350 million, High-Grade B Note and Mezzanine Loan Account, making one newinvestment bringing total assets in the account to $232 million at the end ofthe period.

Over to the right hand side of the balance sheet, totalinterest bearing liabilities, defined as repurchase obligations, CDOs, areunsecured credit facility and trust preferred securities were $2.3 billion at September30, and carried a weighted average cash coupon of 5.86% and a weighted average oneffective rate of 6.08%.

During the quarter, we entered into a new $250 millionMaster Repurchase agreement with Citigroup, bringing our total committedsecured financing facilities to $1.8 billion. The new facility is designed toprovide us with financing for our general loan and securities investmentactivity.

In addition, we extended the term of our $300 millionrepurchase facility with JP Morgan through October 31 of 2008, and in the lastweek upsized our existing credit facility with Goldman Sachs by $50 millionfrom a $150 million to $200 million.

Our repurchase obligations continue to provide us with arevolving component of our liability structure from a diverse group ofcounterparties. At the end of the third quarter, our borrowing totaled $889million against $1.8 billion of commitments from nine counterparties.

We remain comfortably in compliance with all of our facilitycovenants, and with $1 dollars of unutilized capacity on our repo lines, we areconfident that we have the immediately available debt capacity to fund our nearand midterm growth.

Our CDO liabilities at the end of the third quarter totaled$1.2 billion. This amount represents the notes that we have sold to thirdparties in our core balance sheet CDO transactions to date. At September 30th,the all-in cost of our CDOs was 5.75%.

All of our CDOs are performing, fully deployed, and incompliance with their respective interest coverage, over collateralization andreinvestment tax. At quarter end, total cash in our CDOs recorded as restrictedcash on our balance sheet was $3.7 million.

In addition, we received upgrades on seven classes of CT CDOIII from Fitch ratings. Of the 14 rated classes, seven were upgraded by one totwo notches, and the remaining seven classes had their pre-existing ratingsaffirmed. Fitch attributed the rating action to the improved credit quality of theportfolio and seasoning of the collateral.

The final components of interest-bearing liability are $100million unsecured credit facility with borrowings of $75 million at quarter endand a $129 million to trust preferred securities. There is no new activity inthese accounts during the period.

One more item of note in liabilities is participation sold.At September 30th we had $330 million of participations sold on the balancesheet recorded as both assets, as loans receivable and liabilities as participationsold and the pass-through rate on these participations was 8.37%.

Over to the equity section, shareholders' equity was $440million at September 30th and our book value per share was $24.84. Book valuedecreased during the quarter from $452 million at June 30th to $440 million atquarter end down by approximately $12 million. The major component of thechange was a $40 million net decrease in the value of our interest rate swaps.

Our debt-to-equity ratio, defined as the ratio ofinterest-bearing liabilities to book equity remained at 5.21. We remaincomfortable with our level of leverage, and as we have said in the past, theselevels will migrate depending upon the types of assets we originate and thestructure of liabilities that we raise.

As always, we remain committed to maintaining an index andterm matched asset liability mix. At the end of the quarter we hadapproximately $411 million of net positive floating rate exposure on a notionalbasis on our balance sheet and consequently an increase in LIBOR of 100 basispoints would increase annual net income by approximately $4.1 million. Andconversely, a 100 basis point drop in LIBOR would decrease our earnings by thatsame amount.

Our liquidity position remains strong and at the end of thesecond quarter we had $28 million of cash, $166 million of immediatelyavailable borrowings under our repo facilities and $25 million of availabilityunder our credit facility for total liquidity of $219 million.

Turning to the income statement, we reported net income of $15.5million or $0.87 per share on a dilutive basis for the third quarter of 2007. Interestincome for the period was $64.7 million. Interest expense totaled $43.7million, which resulted in net interest income of $21 million.

Other items of note during the period, management andadvisory fees from our funds, was $1.1 million, an increase of almost $400,000when compare to the third quarter of 2006. And management fee from CT LargeLoan, CT High-Grade and CTX Fund increased, slightly offset by the decrease inbase management fees from Fund III. We expect these revenue streams to continueto grow in the coming quarters.

Servicing fee income during the third quarter of 2007 was$173,000 compared to none in the third quarter of 2006, as we recognize revenuerelating to the servicing contracts acquired as part of our purchase of thehealthcare origination platform in June.

Moving down to other expenses, G&A was $6.8 million forthe quarter an increase of $961,000 from the third quarter of 2006. Thisincrease is primarily the result of higher levels of employment cost, resultingfrom the increase in headcount associated with the healthcare platform, as wellas increased professional fees.

Depreciation and amortization was only $61,000 in the thirdquarter, a decrease of almost $300,000 when compared to last year. Dueprimarily to be elimination of the depreciation expense associated with thecapitalized costs that have been fully amortized from prior investmentmanagement joint ventures.

Moving further down the income statement to the income lossfrom equity investments, the $109,000 loss from equity investment in the thirdquarter resulted primarily from a net loss of a $157,000 at Bracor,representing our share of operating losses for the period from April 1, 2007through June 30, 2007, as we report Bracor's operating results on a one fiscalquarter lag.

In both the third quarter of 2007 and 2006, we did not payany taxes at the REIT level. However, CTIMCO, our investmentmanagement subsidiary, is a taxable REIT subsidiary and subject to taxes on itsearnings. In the third quarter of 2007, CTIMCO reported an operating lossbefore income taxes of $2 million, which resulted in our reporting a $50,000 taxbenefit.

As we've done in the past, we disclosedthe impact of items that we considered non-recurring to our net income. For theperiod, these non-recurring items were de-minimis and the recurring income wasin the mid $0.80 per share range.

In terms of dividends, our policy is toset a regular quarterly dividend at a level commensurate with the recurringincome generated by our business. At the same time, in order to take fulladvantage of the dividends' paid deduction of a REIT. We endeavor to pay out a 100%of taxable income. In the event that taxable income exceeds our regulardividend payout rate, we will make additional distributions in the form ofspecial dividends.

We paid a regular quarterly cashdividend of $0.80 in the third quarter, a 7 % increase year-over-year. Throughthe nine months, we've paid total dividends of $2.40 per share, representing anet income payout ratio of 76%.

That wraps up the financials, and atthis point, I'll turn it back to John.

JohnKlopp

And I guess at this point, we'll turn itover to you to ask any and all questions. Carmen?

Question-and-AnswerSession

Operator

(Operator Instructions) We'll take our first question fromDavid Boardman, from Wachovia. Please go ahead.

David Boardman -Wachovia

Good morning and thank you very much for taking my questionregarding investment activity within the quarter, and then you're going forwardhere, I mean, spread did blow out in the quarter probably continuing here, butthe originations within the quarter really didn’t, kind of, witness that? Wherewould spread be today on the whole loan B Note mezzanine side compared to whereyour book currently sets?

Geoff Jervis

Okay. I think I can give you an answer, as it relates to thegeneral trends in spread. I agree with your statementthat spreads are continuing to widen. There has been some volatility with aperiod where it looks like spreads are flattening out over in a two or threeweek period, but then as the index flow outs and as the street gets morenervous with these spread widening again.

So I think the trend is still to the wider side. It'sprobably on the capital structure and anywhere from 50 basis points to 250basis points wider.

David Boardman -Wachovia

Regarding your hotel portfolio concentration, I think it wasthe end of last quarter in the 26%, considering economic growth may be slowingdown, are any concerns regarding……

Geoff Jervis

No, I think the hotels in our portfolio continue to performwell. RevPar week-by-week, month-by-month RevPar across most markets is stillpositive. I do think that there is a significant economic recession activity,hotel performance will be impacted, but we don't see any imminent risks in ourhotel portfolio at this point.

David Boardman -Wachovia

And what’s your liquidity, I mean, you certainly seem tohave a lot of dry powder to put to work whenever you are so skewed, are thereany constrains or aspects of yourcommitted facility that would possibly limit your ability to pretty much ploughmoney into whatever you see fit?

John Klopp

Well, I would just say that obviously our repo providershave to agree on that credit that we pose to them. So I'd say that would be theconstraint.

David Boardman -Wachovia

Thank you very much for taking my questions.

John Klopp

Thank you.

Operator

We'll take our next question from Don Fandetti, fromCitigroup. Please go ahead.

Don Fandetti -Citigroup

Hi, John. Quick question, if you look at CMBS obviouslyspreads of that are notably, I know is mostly liquid index. But do you thinkthe market it wrong on that side or do think we're headed to a major correctionin commercial [off takes].

John Klopp

Well I am not sure that CMBS at the moment is a particularlygood indicator or a particularly correlated index to anything. There seems tobe an awful lot of action in the index, people trying to get short, make bets,anticipate downturns in this business and that doesn't seem to be a goodcorrelation with the cash market, although obviously there is some.

I think the better question is the second half of yourswhich is where do we see things going irrespective of CMBS and clearly there isuncertainty at this point in time as to where values really are going, giventhe on-going credit issues in the various different financial markets and theirultimate potential impact on the U.S. economy.

I think there is no question about it that values havebacked off, but I also think that it's quite different in terms of its impact.The better quality, better product is holding value better, at least so far.The lesser quality stuff is probably falling more. But at least at this pointin time underline performance, in terms of cash flows has held pretty strong,and we are cautiously optimistic about valuation going forward. Steve?

Steve Plavin

I think things is about when you look at the index, whilethe index trading duly reflects the perception of the quality of the first half2007 CMBS originations, during a period of time when values were peaking andunderwriting was at it's most aggressive point. So, we are not fixed half's --of first half 2007 CMBS, but I do think the index does reflect that as well.

Don Fandetti -Citigroup

Okay, and John I think on the Q2 call you said that you didbelieve that the CRE CDO market would open back up, are you more positive orless positive today?

John Klopp

I don't think I'm any different in terms of the view than Iwas three months ago. The CRE CDO market is basically closed today toeverybody. I think that has an awful lot to do with stuffs going on in othermarkets as opposed to commercial real estate CDO market, because if you look atthe underlying performance of collateral, ours and others, it continue so farto be very, very strong.

I do not know, we do not know when that market, and how thatmarket will reopen, but my sense is, it's going to take a while and when itcomes back it's going to come back on different terms than we had before,certainly less leverage more plains and [other] structures and with the focusmuch more than we had in the past, on the quality of the manager, which has, Ithink we saw over the course of preceding year or two or so. Virtually anybodywho could assemble collateral could execute a CDO. I do not see that happeninggoing forward.

Don Fandetti -Citigroup

We have seen, I think, one other company in this space to thesingle buyer through the CDOs, is that an option or not necessarily for CT?

John Klopp

Geoff?

Geoff Jervis

I think that there are a lot of opportunities out there with-- unfortunately the single buyer typically may rap or so the state of thatcommunity, I think impacts that transaction going forward. But I think thatthere certainly are some – again, as John said, some more [vanilla] CDOs and by[vanilla] they probably will not have the same marketing aspect. They probablywon't sell down as much of the liabilities, but I think CDOs will come back. Ithink you are going to be surprised how quickly they do. I think there a lot ofideas that are in the queue right now that people are just waiting for theopportunity to consummate these transactions.

Don Fandetti -Citigroup

Okay. Thanks for the answers.

Geoff Jervis

Thank you.

Operator

We'll take our next question from Rich Shane of Jefferies andCompany. Please go ahead, your line is open.

Rich Shane -Jefferies and Company

Thanks for taking my question. A couple of different thingshere, it looks like there were pay downs or principal pay downs in CT LargeLoan, is that correct? So it actually didn't grow during the quarter?

John Klopp

That is correct. There were pay downs across all of the portfolios,but obviously the pace of pay down has declined in this current marketenvironment.

Rich Shane -Jefferies and Company

Okay. And is the expectation, and this ties in really to mysecond question, John you made the comment that there is no difference betweenbeing right or being wrong. Should we expect to be more conservative in termsof deploying CT Large Loan? We had previously assumed it was going to be fullydeployed by the end of third quarter. Obviously that's not the case. Do youthink you are going to be slower there as well?

John Klopp

I think short answer, yes. Steve you can give the longeranswer, if you choose?

Steve Plavin

Well, I think the opportunities for largeloan relates primarily the deals that have already been deals that have alreadybeen struck and identified in the market. Some of the deals are a littlebit challenging given the timing of when they are originated. The LBO activity,going forward, obviously it's going to be greatly reduced. And so we don't feellot of new opportunities coming on the pike for large loans like what we saw inthe first half of the year. But we are looking at the inventory of existingdeals, and when the time is ripe, we’ll probably make an investment or two inthose deals.

Rich Shane - Jefferiesand Company

And so, basically what you are saying is that you think thatthere is probably some product on dealer desks that needs to be discounted, andmay be, as we get towards the end of the year, they are willing to take thosemarks, you might have an opportunity?

John Klopp

Yes.

Rich Shane -Jefferies and Company

Okay. And strategically, John, getting back to your commentabout early versus wrong, you know, obviously you guys have maintained a lot ofdiscipline and the comment was made that if you look every two weeks it feelslike spreads have widened out, and we've reached a new level and then all of asudden they start to widen out again. What keeps -- how do you maintain thediscipline of being on the sidelines, and what's going to be the event or thecatalyst, for you to say, you know, what we’ve done here and now it’s time toweigh back in?

John Klopp

Well. I don't know, if you are ever going to know that weare “done” and I think the issue is when we find transaction that we are comfortablewith from a risk standpoint and which we believe have been priced at a levelwith returns makes sense relative to that risks and makes sense relative to howwe can finance it, in other words, produce a Return on Equity that we think iscommensurate then we will pull the trigger. We are beginning to find those newlevels on some of the existing products.

We are beginning to see the pricing on new originationsreflect that set of criteria for us. I don't think there's going to be a bellthat goes off that says we're at the bottom, I think it's going to be choppierthan that. But as we wade our way through this process, I think we definitelyexpect to find good opportunities to deploy our capital and the capital of ourpartners in our investment management vehicles.

Rich Shane -Jefferies and Company

And maybe the -- I'd just refine that question a little bit.Are there specific negative catalyst that you guys are looking for between nowand either the end of the year or early next year, whether it's auditor effector dealers needing the dumb product or anything like that.

John Klopp

Well, we certainly have seen year-ends, fiscal yearends forthe broker-dealers calendar, for the banks be in previous years of crisis, be acatalyst, there is no question about it. Cleaning up before statement date,often in fact, taking the hits, before the statement data and then moving theinventory shortly thereafter has certainly been a pattern in the past. So yes,time does matter. And we think we're approaching those dates and there is goingto be more product that issues forth and has liberated off of the currentholders balance sheets.

Rich Shane -Jefferies and Company

Okay, great. That's very helpful. I appreciate you guysanswering these questions.

John Klopp

Thank you.

Operator

We'll take our next question from David Fick from StifelNicolaus. Please go ahead.

David Fick - StifelNicolaus

Good morning. Stepping back for a minute, you talked aboutbeing somewhat bullish that the CDO market will return. But if you look at themajority of your capital structure today, whether it's equity or CDOs andexcluding your floating rate debt, virtually none of it would be available toyou on replacement basis right now. And so you couldn't build your engine thisway. And I am hearing you to talk of a conservative game in terms of net assetgrowth, but there's no funding, and I am hearing you talk about alternativesources of or -- but no specificity there. What is really the future of themodel?

Geoff Jervis

Okay, I think the future of the model goes back to the way,let just step back. First of all we do believe CDOs are going to come back.Whether or not they come back at a balance sheet is unclear. Okay, so we are100% prepared to continue to run this business without the financingalternative that was a [acquired] as debt obligation. We ran this business from1997 to 2004 without CDOs and we are capable of doing it for the next 10 yearsas well.

I think what you need to do if you would like to run a bookbased upon a shorter-term repo financing is, you need to have a much keener eyetowards matching of index indurations and you need to have more liquidity. AndI think as we mentioned at a discussion of this in the 10-Q that we expectuntil other alternatives make themselves available we expect to run to thisbook with a high level of liquidity and I think that's -- we have do know todefend your book when it is repo finance.

David Fick - StifelNicolaus

All right, and in terms of value what are the implicationsof your statement that you're going to be more cautious and sit on sidelinesuntil you see adjustment in market levels. What you are saying I think is thatcap rates have to move. And if that's the case, what does that mean for yourcurrent book?

Geoff Jervis

We think that there is equity question in the deals that wehave on our book towards the end, the kinds of drop in cap rates that we'reanticipating, I think values have already declined, I think 5% to sort of 15%.I think it's a good range to apply across the board, obviously with everysituation being unique. So, we are continuing to look at the fundamentalperformance of markets and collateral across all of ourportfolios very intently to make sure to see if there is -- we see early signsof any erosion of performance, and if so, we make the proper defensive move.

David Fick - StifelNicolaus

But so far, you are seeing virtuallynothing. You are not having to re-negotiate deals or grant extensions or adjustfee structure or anything?

JohnKlopp

No.

David Fick - StifelNicolaus

Okay. My last question is, I guess forGeoff, you have to hold the maturity strategy, but I am wondering if there isany potential impact that you've identified from FAS 159?

GeoffJervis

No, I think that we have a healthymaturity -- we've elected healthy maturity for our interest bearing assets, andwe expect to continue to hold these maturities. We are very comfortable withthat position, and obviously, given the letter of gap, we have the intentionand capability of holding the asset maturity as well.

JohnKlopp

And we made that decision obviouslyquite a long time ago.

David Fick - StifelNicolaus

Alright. Okay. Thanks.

GeoffJervis

Thank you.

Operator

We'll take our next question from MarsellaMartino from KeyBanc Capital. Please go ahead.

MarsellaMartino - KeyBanc Capital

Good morning. As you talk about andthink about originations going forward and you see opportunities out there, isthere any areas in terms of like asset classes that you think, provide somegood opportunities for you or anything that you'll particularly focus on?

GeoffJervis

I don't think we’ve focused on anyparticular asset class here. We just try and remain very opportunistic lookingfor transactions, in general, which meet our risk and return profile. So welook across all of the asset classes, I mean, we have been avoiding -- as youmay have noticed in John’s comments, assets related to for sale of housingland and condominiums for quite some time, and I don't know whether we are goingto be the first ones to try and pick the exact [volume] of that market whenthey jump back and set more of category that we will be continue to be veryconservative in investing it. But in terms of the other major asset classes, wethink there will be opportunities in all of them, you know, in selectedsituations.

MarsellaMartino - KeyBanc Capital

And then just one small housekeeping, I think G&A on alinked-quarter basis declined a little bit, anything there, and was lastquarter kind of an anomaly?

John Klopp

No, there was nothing there. I think it was justprofessional fees and our accruals on those really accounted for much of thedifference.

MarsellaMartino - KeyBanc Capital

Okay. Great. Thank you.

Operator

Our next question comes from Tayo Okusanya from UBS. Pleasego ahead.

Tayo Okusanya - UBS

Yes. Good morning my question about the CRE CDO market hasbeen answered, but in regards to the CMBS portfolio that helps the maturity,could you tell us what the fair market value of that portfolio is right now ifyou were to mark-to-market?

John Klopp

Yes. Actually we go through that process at least everyquarter, and it is in the back of the queue in the risk disclosure chart. And the fair value at quarterend was $853 million.

Tayo Okusanya - UBS

Versus 884 which is in the book?

John Klopp

That's right. That’s a $30 million difference.

Tayo Okusanya - UBS

Great. Thank you very much.

Geoff Jervis

Thank you.

Operator

Next, we have a follow-up from David Boardman of Wachovia.Please go ahead.

David Boardman -Wachovia

Just kind of piggyback off of Don's question, we sawsomebody in this space today not do a CDO, if you will, through one buyer, butkind of re-negotiate a warehouse line or repo line and have no mark-to-marketfeature, and it looks like maybe except higher cost of funds. I am justwondering if you could just talk about that, and is that something that youwould look like and then frame up how you feel about trading higher costs forthat mark-to-market valuation elimination?

John Klopp

Certainly a trade off, we would look at as it was presentedto us, but in general if somebody offered me a down mark-to-market line withsome reasonable increasing cost I think we would find it pretty attractive.

David Boardman -Wachovia

Fair enough. All right, have a good day.

Operator

At this time we have no further questions queued.

John Klopp

Well. Then thank you again for your interest in CapitalTrust and we'll talk to you next quarter. Thanks.

Operator

Ladies and gentlemen this concludes today's teleconference.You may disconnect at any time.

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