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Executives

Marc Holliday – President, Chief Executive Officer & Director

Robert R. Foley – Chief Financial Officer

Hugh Hall – Chief Operating Officer & Director

Analysts

Donald Fandetti – Citigroup

David Fick – Stifel Nicolaus & Company, Inc.

Douglas Harter – Credit Suisse

Richard Shane – Jefferies & Company

Gramercy Capital Corp. (GKK) F4Q07 Earnings Call January 17, 2008 2:00 PM ET

Operator

Thanks for joining us and welcome to Gramercy Capital Corp. fourth quarter and full year 2007 earnings results conference call. This conference call is being recorded. At this time the company would like to remind the listeners that during the call management may make forward-looking statements. Actual results may differ from predictions that management may make today. Additional information regarding the factors that can cause such differences appear in the MD&A section of the company’s form 10-K and other reports filed with the Securities and Exchange Commission.

Also during today’s conference call the company may discuss non-GAAP financial measures as defined by SEC regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed in the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company’s website at www.GramercyCapitalCorp.com by selecting the press release regarding the company’s fourth quarter earnings.

Before turning the call over to Marc Holliday, President and Chief Executive Officer of Gramercy Capital Corp, we would like to ask those of you participating in the Q&A portion of the call to please limit your questions to two per person. Thank you. Go ahead Mr. Holiday.

Marc Holiday

Okay. Thank you for joining me this afternoon along with the rest of the management team for providing us the opportunity to recap fourth quarter earnings and to take your questions after some brief comments from myself and Bob Foley. I say brief comments because many or most of you I’m sure were able to attend or listen in to Gramercy 2007 annual investor conference held on December 3, 2007. We want to thank the almost 300 people that either attended or dialed into that conference as it provided us with the form to review in detail the ways in which Gramercy is adapting it’s business plan to meet the challenges and to take advantage of the opportunities within the credit markets and address specific strategies for how Gramercy expects to continue to achieve our sector leading growth in FFO and total return to shareholders.

Results of the fourth quarter were very much in line with our stated objectives. Those objectives consisted of moderating our investment production as compared to quarters past while insuring that such production was of a high relative value nature. I think we demonstrated our ability to do just that by originating a little more than $300 million worth of new debt investments and an average blended spread of 569 basis points over LIBOR. This production is notable not only for its widened asset yields but also because we were able to obtain these yields while benefiting from multiple layers of equity subordination and credit enhancement to support the GKK positions that we took primarily in December when we made those investments. You will recall last summer we stated our definite intentions to build up substantial capacity by hoarding cash and syndicating loan positions and to deploy such capital at the end of the year into new higher return investments which would generate organic year-over-year earnings growth to carry us into and through 2008. We achieved our goals.

Current cash or near cash liquidity is $531 million with another $626 million of potential warehouse capacity on top of that. And yet not withstanding the drag of maintaining these high cash balances throughout the second half of the year and the near term diluted effect of back-to-back equity raises in September and November totaling more than $200 million. We nonetheless achieved our earnings goals for this year. A target we had raised several times throughout 2007 and we enter 2008 in the most liquid position the company has ever been in. You can take a glass as half empty or a glass is half full view of these achievements as good as they were and as numerous as they were as we were all disappointed that the efforts I just summarized with you in 2007 did not result in positive shareholder returns but we are certainly mindful that Gramercy far and away exceeded peers again in 2007.

From December 29, 2006 to date Gramercy’s total return is somewhere in the range of 7.9%, -7.9% total return to shareholders while during that same period of time our specialty finance sector on average is down 40%. Our loan portfolio continues to perform with very few exceptions in the most challenging refinancing market we’ve faced since Gramercy’s formation. In the fourth quarter we continued the conservative reserve policy we’ve spoken about on prior calls adding another net $2.75 million dollars to loan loss reserves bringing the total to $8.7 million. We continue to believe conservatism and prudence is the best policy in this environment and fully expect some degree of stress in the transitional loan portfolio given the difficulty bar with space and securing new financing. Our philosophy in these situations is not to differ problems into the future via extensions but rather insisting that our sponsors who are either behind business plan or not taking drastic enough action repay or rebalance us or both. This strategy will inevitably lead to some defaults however we believe our reserves and rigorous underwriting on the front end and asset management during the life of the loan will continue to allow us to minimize losses.

This is in the face of the competing market forces that we face in 2007 where on the one hand the company had extraordinary performance starting with record levels of investments at the beginning of the year, moving towards a successful execution of $1.1 billion CDO during the summer, the sale of Gramercy’s interest in one Madison Avenue resulting in $92 million gain, the raising of common equity in September combined with a moderation of the new investments and accelerations of syndications that I have mentioned and then the entering into of a binding agreement with American Financial Realty Trust for a $3.5 billion merger of these two companies and then also culminating now at year end with a payment of $2.63 dividend to shareholders and a 39% increase in the company’s earnings for the year. So obviously as you can see the achievements were of the highest level.

On a relative basis our total returns achievements were of the highest level but we clearly understand the task that we have before us in keeping this high level performance going through 2008. We’re fully aware of it. We feel we have a business plan that will permit us to do it and it’s really what we strive to do every day we come in through the doors. So going into 2008 the market bias continues to be negative and therefore Gramercy’s strategy continues to be very defensive in nature. Accordingly Gramercy’s net production was down by $110 million on the heels of approximately $140 million of syndications that were executed by Gramercy to either diversify large loan risk, shed low spread investments or investments with future funding obligations and to mitigate credit risks. By shrinking the loan portfolio and/or holding growth in check combined with a deployment of cash into higher asset spreads we are able to maintain or even accelerate earnings growth while at the same time reducing Gramercy’s exposure by taking advantage of higher pricing.

With that said the availability of opportunistic investments whether coming via directly originated high yield loans or rescue loans or via discounted paper coming from dealers in the secondary market, that product is scarcer than expected given the current tumble in the credit markets. Dealers are being very measured in there approach to writing down positions and selling them to end users like Gramercy and secondary markets. Because there is still an abundance supply of inexpensive equity in many commercial markets borrowers seem to be availing themselves of this equity to rebalance and or pay down loans that would otherwise become problem loans and in certain cases using there own resources to keep loans out of trouble given what many commercial real estate participants still see as fundamentally good supply and demand metrics in many of the primary commercial markets and non-residential property classes.

If this trend continues such behavior could begin to have a stabilizing effect on the credit market sometime towards the middle to end of 2008 however, that is not to say we won’t bear witness to some examples of high profile flame outs along the way which will result in significant losses to commercial real estate positions that involve highly leveraged borrowers with short term capital structures trying to refinance themselves at a point in time that the credit markets are still greatly dislocated. While we believe there are examples of that that abound we do not have such examples within our portfolio and particularly have shied away from some of the deals that have received most of the notoriety in today’s market but as I said earlier that doesn’t insulate us or any one from the risk entailed in this market as we roll forward into 2008. In either event company’s with strong and experienced management teams will have a distinct competitive advantage in this market by being able to contain and mitigate the risk in there existing portfolios while at the same time being able to bring such expertise to bear to these troubled situations in order to create high relative value investments.

Gramercy has and will continue to evidence proficiency in this area. Obviously the lending securities and asset management groups will have there eye on the ball throughout 2008 but the real focus emphasis and push right now is toward capitalizing, closing and then integrating the AFR net lease real estate platform into Gramercy. We continue to be very, very enthusiastic about this real estate strategy in general and the AFR investment in particular. Now that the protracted period of pursuit is behind us and the joint proxy has been filed our task at hand is to obtain the votes of both sets of shareholders scheduled to occur on February 13, 2008 and then to prepare for the closing transition. Along those lines I am even more enthusiastic today then the day we announced the deal that this was absolutely the right transaction for this company at the right time and with the right structural framework. We were very pleased at the time to have structured the deal in a way that we believe would result in the 7.5 to 8% going Cap rate on these credit worthy net lease assets that we intend to retain in the hold portfolio post closing but even more pleased to hold that portfolio in a dramatically falling interest rate environment. Our belief that there would be significant opportunity to grow this platform given the current market environment is proving true as we are now actively looking at several opportunities with financial institutions who are ramping up there interests and doing trades along the lines of what AFR specializes in, in order to raise additional tier one capital. Furthermore the number one attraction in the deal is proving to be balance sheet flexibility which is evidencing itself in sales, joint ventures and financing capacity.

In terms of sales we are working closely with AFR and monitoring its execution of a sizable sales program which to date has resulted in $52 million of closed transactions with another $30 million under contract. We expect by the closing of the AFR transaction in March 2008 that somewhere between $200 million and $300 million of total product will have been sold at or around our allocated cost basis affirming to us that the deal we struck at a level that was fair and reasonable for both sets of shareholders. We are currently in discussions with several potential joint venture partners looking to both evaluate the value add portfolio and new business opportunities and we are encouraged by the early feedback we are receiving from some of our institutional relationships.

Lastly we are in the market to fill out our acquisition financing for the closing not with standing the deal is not financing contingent and are pleased to report that we are receiving offers that spreads and all in costs of funds below what we’d originally projected confirming to us that Gramercy will have the opportunity now and in the future to finance the AFR real estate portfolio and to generate available proceeds that can either be reinvested into new equity opportunities or into the increasingly profitable loan business.

I believe you are starting to see the benefits of this transaction in the higher relative multiples that we are achieving as compared to the balance of the company’s in our sector and this should become much more pronounced over time as we close the transaction and have an opportunity to demonstrate or evaluate capabilities. I would hope that the listeners today will give us somewhat of a free pass pertaining to questions on the AFR portfolio as I did mention we have a joint proxy that was filed and distributed to shareholders of Gramercy and AFR and we are awaiting the results of a scheduled vote that I mentioned earlier. So obviously we’ll be limited in terms of the questions we can address. Hopefully I would expect to have much more to say on our next scheduled call regarding the AFR transaction in April 2008. As a final footnote we have begun the process of staffing up the stand alone real estate platform within Gramercy. As you may recall I stated that the team will consist of certain individuals from Gramercy and SL Green being dedicated to the AFR real estate platform and AFR business model along with a number of employees in Jenkintown who have been interviewed extensively since the time or our announcement and have or will be receiving offers of continuing employment during the months of January and February in line with our original time line. And finally new hires from the outside which we believe will allow us to round out what will become a best of breed operator within this market niche. Thank you for your time and I would now like to turn the call over to Bob Foley.

Robert R. Foley

Thanks Marc. I will stick to the highlights and significant changes in balances and the financial statements and if I don’t cover something in which you are interested please ask once we have concluded our formal remarks. My topics will focus on income statement and the balance sheet, our investment activity, liquidity and let me move on to the income statement. Total revenues were unchanged last quarter. Investment income was down marginally due to the restrained investment activity on a net basis that Marc described and declining LIBOR that was offset in part by wider spreads on our new investment activity. The gross investment activity was pretty strong actually at the $316 million that Marc mentioned but we did close most of our opportunistic loan purchases late in the quarter and we syndicated roughly 40% of that for the reasons that Marc detailed so the full benefit of the earnings power of those investments won’t really be evident to you or to us until the first quarter of 2008. Effective spreads on new loan investments widened to 569 basis points from 482 basis points last quarter. Rental revenue nearly doubled for the quarter due to a full quarters worth of earnings on the 292 Madison fee ownership positions that we did and described last quarter. The gain on sale increased by about $5.5 million that’s due to two factors. First interest earnings on the very substantial cash balances that we retained during the quarter. Recall that we raised about $126 million in equity in late September another $100 million in late November; those raises were intended to butrice our capital base and to fund investment growth including the pending AFR merger and we’ve elected to maintain a strong liquidity position throughout the year. So investment earnings were very strong and in fact the average month end cash balances during the entire fourth quarter were about $424 million. The other component of that gain was the result of a repurchase at a discount of some single layer rated GKK CDO bonds that we were able to find in the market and I will talk a little bit about that later.

Management fees rose slightly due to the common equity that we raised late in September and again in November. MGNA declined by about $656,000 that’s due primarily to a reduction in stock based comp expense. We remain comfortable with our overall expense ratio at which we operated the company during the year. The provision for loan loss was $2.75 million. On a net basis we recorded a gross provision of $3.28 million. We reversed a $500,000 reserve related to a loan that we paid in full during the quarter.

Turning quickly to the balance sheet; As Marc said cash is king and Gramercy built and maintained very high cash levels throughout the second half of the year. At year end we held $454 million of cash on our balance sheet and then our CDO’s which positions the company extremely well for the impending AFR merger and for the more opportunistic debt investing when we determine that market conditions warrant it. Other assets increased about $18.1 million and that’s due primarily to differed costs in connection with the AFR merger. Borrowings under our secured credit facilities actually declined by about $118 million that’s due to two factors, first our strong preference for funding our investment business using the longest maturity debt capital that we can which continues to be our CDO portfolio and the application of cash from loan prepayments and loan syndications during the quarter. We had no outstandings at all under our $175 million unsecured credit facility.

CDO bonds outstanding declined by $22.7 million that’s in connection with the small repurchase I described earlier. Those bonds have not been retired they do remain outstanding but pursuant to GAAP are presented as a reduction in the gross liability to third party bond holders. The decline in the incentive fee payable largely reflects the payment during the fourth quarter of fees due after the third quarter’s very strong operating performance. The $72.3 million increase in dividends payable is largely due to the $2.00 per share special dividend that arose from the $92 million gain produced by our sale during the third quarter of the 45% JV interest in One Madison. The recurring and special dividends on our common shares and the dividend on our preferred shares were all paid earlier this week.

As you know, we have always been committed to match funding our business and to hedging away interest rate risk and mismatch. Since most of our very cost efficient debt liabilities are floating rate instruments benchmarked to LIBOR, we always swap those liabilities that are used to fund our fixed rate investments. GAAP does require us to Marc-to-market our swaps which we have done in the past and continue to do. It doesn’t permit us currently to Marc-to-market the associated liabilities nor the assets that are match funded with those liabilities. At December 31st we recorded a change of about $45.3 million and the fair value of our derivative instruments which our interest rate hedges against liabilities that we have allocated to fund our longer term fixed rate investments, the vast majority of which are AAA rated CMBS.

All of the CMBS and virtually all of our fixed rate loan investments are financed for term in our three CDO’s and the off setting entry for that flows through other comprehensive income in the equity section and explains that change for the quarter. The aggregate notional amount of derivatives from this at the end of the quarter was $1.2 billion. That’s the same as last quarter. The value of these hedges changed obviously in response to continued declines in interest rates but have no impact on the return on equity of the match funded position. And, if you look just at the associated liabilities our recent buy in of that small amount of CDO bonds that I mentioned earlier makes pretty clear that the low cost CDO liabilities that we have are very valuable to us in the current market and that if GAAP is currently applied, did allow us to Marc-to-market those liabilities the adjustment would more likely than not well offset the change in which we see in our financial statement. Additional paid in capital rose by about $1.25 million that’s due to the most recent direct private placement of common equity with the Morgan Stanley investment fund that occurred in late November.

Turning quickly to the investment portfolio as far as debt investments are concerned we closed slightly more than $300 million in loans. That includes one directly originated first mortgage loan and five purchases of loans at a discount in the secondary market. More than half that investment activity took place late in December and as I said earlier, the earnings benefit of these investments which had a weighted average spread to LIBOR of about 569 basis points won’t really be felt until this quarter. 93% of our fourth quarter loan production was mezzanine oriented but as Marc described earlier they were typically the senior most or the second most senior strip in the mezzanine capital stack and interestingly the last dollar appraised LTV for those mezz transactions which were about 60% is actually slightly less than the 61% LTV on the first mortgage loan that we did during the quarter. We did garner good pricing from motivated sellers. Although as Marc said the number of truly motivated sellers appears to us to be modest at this time. Most Wall Street firms and commercial banks have been very restrained in the volume of their sales or the magnitude of there discounting. But, we have been working our network and we’ve been identifying motivated sellers and then we’ve been using our skills to cull through the deals, identify them, underwrite them and purchase the best combination of risk and return that we can. In several instances in connection with those purchases we were able to achieve very favorable seller financing terms, in many instances with no Marc-to-market risk associated with them.

A couple of quick comments about the loan portfolio from a qualitative standpoint. First, it didn’t change that much. The largest geographic concentration remains in the North Eastern United States at 43% followed by the West Coast at about a quarter of our portfolio. Unsurprisingly, New York remains our favorite market at about 33% of our portfolio. By property type office remains our largest concentration at about 37%, by form of investment first mortgage loans still lead the way at about 68%, that’s down only slightly from 71% last quarter for the reasons I described earlier. Our real estate securities group acquired about $16.3 million of AA rated CMBS during the quarter with vintages that ranged from 2004 through 2006. We were very selective in that business during the quarter. All of those investments are match funded in our CDOs. From our liquidity standpoint we continue to recycle capital to optimize returns to equity, diversify our portfolio, create two way flows with other investments and generate liquidity to seize opportunistic investment opportunities. Syndications and repayments are important components of our liquidity strategy. In syndications we sold two loans with aggregate commitment amounts of about $35 million. That was a significant step in helping to reduce unfunded commitments to lend from about $382 million from last quarter to almost $300 million this quarter end. And, by syndicating loans we’re able to capture some of the larger secondary market loan deals on better economic terms by lining up co-investors before we close the deals and we did that this quarter as well. In fact, the average size of our secondary market deal on a gross basis was about $56 million. After the sell down it was about $30. Repayments during the quarter totaled $269.5 million and we look pretty carefully at that activity that was generated by a mix of borrower driven property sales and a number of interestingly, refinancings. So, that is it for the financial statements. I will turn it back to Marc who I know has some concluding remarks.

Marc Holiday

Yes and before we do that I think we should also just open it up for some questions at this time. So operator I would turn it back to you right now for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Don Fandetti with Citigroup. Please proceed.

Donald Fandetti – Citigroup

Hugh or Bob I just let me get your thoughts on sort of the broader commercial real estate debt market and the liquidity. Do you think that liquidity will come back in? I just wanted to get your thoughts on the market [inaudible] etcetera.

Hugh

It is very difficult to forecast when any semblance of call it normal liquidity return. It is pretty, today was not a great day in the debt markets and it continues to be sort of negative rumors swirling around about SIBs which is a real drag on the willingness of people to jump in. We have been very measured in our approach and what we have been buying focusing on good credit and the utilization of our term financing but, in terms of a broader increase in demand that’s going to really support a functioning market and a bigger scale, there are no discernable signs that we see in the sort of the short tern that that’s going to come together.

There is enormous interest in various pockets of capital, a lot of it from opportunistic investors etc, putting together pools of money. Although, that tends to be more focused on the riskier end of the spectrum so there are lots of folks who are trying to put together money to buy, call it BBB on down, that sort of thing. What’s really missing in this market is AAA buyers. That’s the vast bulk of the capital structure that they could put together and those are the guys that in many ways that have been hurt most but, with things like the news with NBIA etc floating around out there it’s hard to see where those AAA institutional investors are going to step in and buy and with the dealers curtailing the amount of leverage they can provide it’s hard for leveraged investors to come in and be that source of capital.

Donald Fandetti – Citigroup

Okay great. And then Bob, lastly the add back to FFO for the CDO purchase, was that clear cut? Or, did you think about not adding it back?

Robert R. Foley

We thought it was fine. How’s that? It’s just what GAAP tells you to do.

Donald Fandetti – Citigroup

Well, I guess the implication is that there would be a big hole but, I guess as you said the new investments were back end weighted and so you sort of feel like there’s an offset there. Is that the implication?

Marc Holiday

Well I think you asked two questions; the second is no that’s not the implication and the first is the accounting treatment is very clear cut in fact. And then, from I guess what you are saying an FFO standpoint is very true, our investment activity was very back ended. We closed almost 60% of our investment activity between Christmas and New Years.

Robert R. Foley

Don, I wouldn’t characterize it as a whole I mean we are sitting on $530 million in cash. We could deploy that tomorrow and solve what you would describe as any hole. We measure our activity quarter-by-quarter looking at exactly the amount and types of business we want to do which for the fourth quarter included the repurchase of those bonds, in order to you know, be at the earnings guidance and in some cases exceed the earnings guidance because we had I think ratcheted earnings guidance three or four times throughout 2007. But, we want to be pretty measured with this so I think the word hole is probably not accurate because we could generate an extraordinary amount of liquidity earnings tomorrow. I think our goal is to as I said in my remarks, and have been saying for six months recording liquidity and really just doing that which we feel is appropriate in a market that’s falling and continues to fall. And certainly anyone that is of the opinion that it has reached bottom or near term reaching bottom, we don’t know but we’re not going to be the pioneers trying to figure it out. We’re going to wait for the objective evidence of bottom and then start to deploy our capital in more judicious amounts. I think that was just part of an overall plan with the guidance Bob gave and Greg said there was pretty cut and dry when we saw the opportunity to buy our bonds we jumped on it because we think it’s probably the best relative value investment we made in the fourth quarter. No different than when SL Green buys its stock back and Gramercy may consider buying its stock back some day and look at it as sort of the same analysis. So, that’s I think that’s how we kind of view the bond buy back.

Operator

Your next question comes from the line of David Fick with Stifel. Please proceed.

David Fick – Stifel Nicolaus & Company, Inc.

You bought your mezz loans this quarter at a 581 dip spread compared to 658 last quarter. Was that a quality shift or just a discount? I guess the real question is what’s the effective rate there?

Marc Holiday

David I think that’s indicative of us moving more senior in the capital structure with our mezz positions. We are generally able to buy more senior positions still at attractive spreads that work for us on levered basis. So, the nominal spreads may have been off from some wider higher yielding positions we bought in the quarter before but generally the last dollar LTV is significantly lower.

David Fick – Stifel Nicolaus & Company, Inc.

Bob, you mentioned that of the Marc on your off setting debt would have offset the OCI adjustment you had to make on this quarter. Is that CMBS or CDO equity? And, what was the Marc of percentage terms? And, wouldn’t FAS 157 when you implement it offset it?

Robert R. Foley

Well the comment I made was really focused on where do we see, based on our very active involvement in the CMBS and structured finance market, where do we see bonds of similar structure and credit risk? Although, we would argue that our bonds are probably less than we’ve seen in some others but, where do we see those trade? Then applying some estimates to those to come up with those values. We feel pretty comfortable with those levels and pretty confident that that would happen. In terms of your question about FAS, 159 would be sort of a controlling pronouncement here which is applicable for those companies that elect for 2008 and beyond. That’s probably not a pronouncement that we or any or many, I would say many, of our publicly traded peers would be adopting, which would really be a full Marc-to-market.

David Fick – Stifel Nicolaus & Company, Inc.

I’m sorry what was the percentage Marc on the assets that you marked?

Robert R. Foley

I’m not sure I understand. In other words what is?

David Fick – Stifel Nicolaus & Company, Inc.

The percentage of the asset value what was the Marc?

Robert R. Foley

The discount to par on the bonds? Well I mean, we bought the bonds in about 82 or 83. And those were A rated.

Operator

Your next question comes from the line of Douglas Harter with Credit Suisse. Please proceed.

Douglas Harter – Credit Suisse

I was wondering if you could sort of help us take a look at the credit quality of your portfolio? Give us some measures like the watch list loans or non-performing loans as it compares with the previous quarter?

Robert R. Foley

Sure. Let me take those in reverse order. In terms of the watch list we carefully monitor every loan asset and all of our securities positions we meet every week to review assets. So, I think a traditional distinction in terms of what’s on or off the watch list is not probably all that relevant or constructive here. I can tell you very specifically that D31 we had one loan that had an unpaid principal balance of about $29 million, Marc mentioned it at the investor day. It’s an office building in downtown San Francisco that is in default. And then, we had one loan, one other loan that was late on interest in December but paid in early January and that’s it.

Douglas Harter – Credit Suisse

The rest of the loans are paying?

Robert R. Foley

The rest of the loans are paying as agreed. That’s not to say that we’re not, as Marc said much earlier in the conversation, that we manage situations very carefully. He talked about aggressively forcing borrowers to rebalance loans in situations where that’s required. We take a very aggressive and attentive approach with our loan portfolio and we always have. Obviously, for the last year or so given the changing market conditions that kind of discipline is that much more valuable and I think if you ask around people tell you we are very, very attentive about the positions that we have.

Marc Holiday

I don’t know if you were there in December but I mentioned specifically some land exposure that we had in California that were and are performing but, were clearly on the watch list. I think those were three separate credits, all of which we feel good about. I don’t know if any of those, do we have reserves against any of those three in California or are they all non-reserved?

Robert R. Foley

Yes, we have reserves against one of them.

Marc Holiday

So one of the three is modestly reserved the other two not so that gives you an idea of how we look at those deals. There is one lodging deal up here in the North East that is both in hotel and fractional ownership that is current and actually had pretty substantial equity infusion in December and January but we took some reserves against that in the quarter and monitor it. When we say watch list, we watch everything and in a market like this even the best stuff because you want to make sure that you’re delivering the right message to borrowers about what the expectations are for timely pay off, etcetera, etcetera.

Operator

(Operator Instructions) Your next question comes from the line of Rich Shane with Jefferies & Company. Please proceed.

Richard Shane – Jefferies & Company

Two sort of disconnected questions. The first is in terms of the repurchase of the CDO debt, how was that sourced? Was that something that proactively went out? Was it a reverse inquiry or was it something you spoke to a dealer about?

Marc Holiday

No we went out proactively although that is an overused word, looking for bonds.

Rick Shane – Jeffries and Company

Do you continue to do so at this point?

Marc Holiday

We were aware of the secondary trading activity of other bonds and said, “My God if these guys bonds are trading there obviously, we should look at that.” So, we went out and chased down through dealers bonds in the hands of accounts that might want to sell them. Because the yields are obviously tremendous and we obviously like the credit.

Robert R. Foley

And through our real estate securities group we are in contact with desks all over the place every day with two way flow.

Richard Shane – Jefferies & Company

Okay the second question is looking much, much further down the road and I’m going to preface this, recognize between cash and available liquidity there’s a billion dollars there. Let’s assume that the CDO market continues to be shut down and I’m assuming giving how proactive you guys are that you are out there looking at alternative strategies for funding going forward knowing that someday you will go through that billion dollars. What do you think is out there? How do you guys want to approach this?

Robert R. Foley

I think for us I alluded to it a little earlier, we are going to have a $3.5 billion dollar real estate portfolio that we are going to be adding value to and recycling capital and that to me is by far and away the most efficient form of capital and those proceeds are pungable. So we can redeploy it into new business on the real estate side. We can redeploy into loans and re-lever with financing that will be available to us. But, term financing we see even today, in today’s tough market is already going to be available to us and we haven’t even closed and haven’t had the opportunity to improve the properties or increase the rent rolls. So, clearly balance sheet financing, term financing, unsecured financing, joint ventures in sales of real estate assets will bring a whole element of term to the capital structure and balance sheet for the loan business rather than relying on seller financing or pre-originated product, which by the way is not bad financing, it’s match term and there’s no funding risk because your obtaining it from the [inaudible] who you’re buying it from – but, we don’t want to have a business created around it, that’s just opportunistic but clearly having the real estate platform was intended to be and is even more pronounced today intended to be, a big funding source for our overall Gramercy business. It’s not a huge leap I have to make in order to be able to state that that’s exactly where we think we will be able to get some real leverage and effeminacy from. And in addition, waiting for markets to settle down to the point where more traditional forms of loan funding capital will return.

Richard Shane – Jefferies & Company

Marc, that is very helpful. Can you put in context given originations of [Lplus569]. Is the term financing available to you? Does it get you to your [inaudible] rate? Does it get you above it? Does it get you slightly below? Can you put that in context?

Robert B. Foley

Andrew kind of alluded to it on an earlier answer to a question. We haven’t really increased our returns per say much beyond high teens to twenties levered. All we’ve done is we’ve crunched down our positions to lower in the capital stack to take more secure positions. We’re not swinging for the fences to make 25’s and above although, you could in today’s market. Clearly, there is more money to be made if you want to take more market risk. But right now we’re finding we can take positions with lots of equity and debt subordination in product that is as good or some cases better than on average than what we’ve been seeing and make those same returns. That is the kind of business that we’re chasing. So the answer is we’re making the same returns we’re just making it in a much better relative value fashion.

Operator

We have a follow-up question from the line of David Fick with Stifel. Please proceed.

David Fick – Stifel Nicolaus & Company, Inc.

You had indicated and I know you don’t want to go too far into the AFR thing but, I think you had indicated as much as $400 million would be your objective and now we’re talking about two to three. What has shifted there?

Marc Holliday

It’s just a bunch of timing. So we are positioning, may see $100 million of those sales spill out past the first quarter.

David Fick – Stifel Nicolaus & Company, Inc.

Okay. And then I guess it’s a question for Bob. My final question, as you’re replacing assets in the collateral on the CDO pulls and putting new assets into your own ramps. What does that process entail in terms of external review and is it changing in this market?

Robert R. Foley

Good question and actually I am going to pass to Hugh because most recently he’s involved.

Huge Hall

The rate of the process of getting stuff into the CDO’s is not actually that complicated. It’s a two part process. One, is we actually have sort of an automatic inclusion features in our CDO’s which basically allows us to put stuff in and then there’s a quarterly review by the agencies and a rating process for the assets. The agencies approach to the assets has remained relatively consistent. What you’ve heard in the market about the rating agencies changing there criteria has to do in a large part with how they model projected losses and sort of a definition of ratings on the fixed rate deals, which have very thin [inaudible] to them and so therefore more rating volatility and they are kind of under more pressure. While we think that the rating agencies have clearly curtailed the leverage that they would put into the system for the same rating the marginal change is not enormous. I mean if you look at our first CDO it was 80% financing, the second one was 90. You know the same deal might be issued today at 5% less advance rate. But, that’s not an enormous change when you look at sort of the overall market. So, we don’t think there is downgrade risks in the bonds per say and we take the approach that the ratings has been relatively consistent when you go asset by asset. So very easy to get stuff in, we think the utility over time is going to operate in a band that we are actually very comfortable with how the agencies are operating.

Operator

There are no further questions in the queue. I would now like to turn the call back over to Marc Holiday for closing remarks.

Marc Holiday

Anyway thank you everyone for dialing in. Again, appreciate everyone going through this for and hour on the heels of a pretty lengthy December presentation. I would urge and encourage anyone that wants more information on AFR and/or 2008 specific objectives which we really didn’t cover at any length today it’s all there in our taped and written presentation. We are happy to take any follow up questions if anybody has any after this call. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a good day.

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