JER Investors Trust F2Q08 (Qtr End 6/30/08) Earnings Call Transcript

JER Investors Trust, Inc. (JRT)

F2Q08 Earnings Call

August 7, 2008 9:00 am ET

Executives

Jeff Cirillo – Vice President

Joseph E. Robert, Jr. - Chairman of the Board & Chief Executive Officer

Mark Weiss – President & Director

Keith W. Belcher - Vice Chairman of the Board & Executive Vice President

J. Michael McGillis - Chief Financial Officer, Vice President & Treasurer

Analysts

Lee Cooperman – Omega Advisors

[Michael Saporan – Saporan]

[Robert Schwartzberg – Compass Point Research]

Michael Sloan – Harvey Partners

[Paul Birdhouse – Cornerstone Investment Group]

Michael Moran - Moran & Osborn

Presentation

Operator

Ladies and gentlemen and welcome to the second quarter 2008 JER Investors Trust, Inc. earnings conference call. My name is Erica and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Cirillo, Vice President.

Jeff Cirillo

This presentation will include statements that constitute forward-looking statements including with regard to the company's revenues and earnings per share, the anticipated effects of today's announcements and the company's growth. Wherever possible the company has identified these forward-looking statements by words such as anticipates, believes, intends, estimates, expects, projects and similar phrases. These forward-looking statements are based upon assumptions the company believes are reasonable and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Because such statements inherently involve risks and uncertainties actual or future results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to changes in economic conditions generally and the real estate and bond markets specifically, legislative and regulatory changes, the availability of capital, our ability to obtain future financing arrangements, changes in interest rates and interest rate spreads, changes in Generally Accepted Accounting Principles, market trends, policies and rules applicable to REITs, the application and interpretation of the rules and regulations of the Investment Company Act, the subjectivity inherent in any weighted analysis underlying the company's assumptions and estimates with respect to the future and other risks detailed in the company's periodic filings with the Securities and Exchange Commission.

The company cannot predict what factors may arise or how such factors may cause its results to differ materially from those contained in any forward-looking statements. Such statements speak only of the date on which such statements are made. The company undertakes no obligation to update these statements with revisions or changes after the date of this call.

In addition this presentation includes non-GAAP financial measures. In accordance with Regulation G a presentation of the most directly comparable measures calculated and presented in accordance with GAAP as well as a reconciliation of the differences between such measures are available on the company's website at www.JER.com.

With that I would like to now introduce Joe Robert, Chairman and CEO.

Joseph E. Robert, Jr.

Good morning and thank you again for participating on this morning’s conference call to discuss the second quarter 08 results for JER Investors Trust. First as I usually do let me introduce the management team that’s with me on the conference call. Mark Weiss, who is our President. Mark will discuss four major topics beginning with an update on the current market environment then and Keith Belcher, who heads our CMBS investments will discuss the performance of our real estate loans and our CMBS collateral. Mark will also review with your liquidity and debt position and finally he will discuss the upcoming maturity schedule which is relatively small compared to the overall size of our portfolio. After Mark you will then hear from Mike McGillis, who is our Chief Financial Officer. Mike will describe the overall financial performance of our company during the second quarter of 08.

For the past several quarters I’ve talked to you about the joint themes of credit and liquidity. On the credit front I’m very pleased to report that every one of our real estate loan investments continues to perform. Similarly as Mark and Keith will discuss in more detail the loans underlying our CMBS investments continue to perform in line with initial expectations and our delinquency rates remain low. We obviously need to remain vigilant but I think this solid credit performance to date through the current cycle is a testament to our management team and our credit minded culture.

Regarding liquidity we proactively took steps to sell some of lower yielding assets to pay off repurchase debt and shore up our liquidity position. This continues our strategy of thickening the walls of the fortress and preparing for the unknown. Having lived through many cycles since 1972 I have a saying that I like to use with our management team and that is the windshield is much bigger than the rear view mirror. Clearly the market has been sideswiped by all that we have been through over the last 12 months. We believe that focusing on themes such as liquidity credit and taking advantage of vehicles such as our debt fund with CalPERS continue to be the best way to position JRT in this environment.

With that I’ll turn it over to Mark.

Mark Weiss

As Joe mentioned I will cover four main topics. First a market update, second the credit performance of our portfolio, third our liquidity and repo balances and lastly our upcoming maturities. As you know the market continues to experience severe dislocation more so on liquidities and spreads but spreads have not been completely immune. During the second quarter particularly in late April and May there was a renewed optimism that the credit crisis might be winding down. Those hopes were dashed in June and July. If anything liquidity has become even more dear. One of the reasons we started the process of assets sales in April despite the relative strength of the market at that time was one of preparing for the worst while hoping for the best. While it is always a difficult decision to sell high quality assets at a depressed point in the cycle we believe this was the right strategy.

From a spread perspective CMBS spreads at the triple B minus level are probably up about 50 to 100 basis points since March 31^st to approximately 1,850 to 1,900 basis points. These spreads have been vacillating over the last several months with no strong conviction in either direction. It feels like movements in spreads really are based more on daily economic events rather than underlying real estate fundamentals. From an origination perspective there continues to be virtually no lending at the securitization shops. CMBS issuance volume was down from $114 million in 2007 to $11 billion in the first six months of the year or a drop of 90%. [Inaudible] are questioning whether the market will even reach the $20 billion level for the full year 2008 compared to over $188 billion in 2007.

What little lending is occurring is coming from two primary sources. First the on balance sheet lenders like the European banks and the insurance companies are originating fixed rate loans in the 60% to 70% leverage range. Second lower leverage floating rate loans from traditional banks on properties that are well located and considered Class A are being originated to these souls in the bank’s indication market. Unfortunately until general liquidity reenters the banking system we don’t expect commercial real estate lending to get back to more normalized levels.

Now transitioning from an overview of the general market I would now like to focus on JRT in specific. Let’s start with credit quality. I’m extremely pleased by the performance of our portfolio. Specifically on our real estate loan portfolio we have 13 positions which are all currently performing. On our CMBS portfolio our 60 day and over delinquency rate currently stands at 36 basis points which is generally consistent with our last quarter and is also consistent with the overall CMBS conduit market. Obviously there’s no way to predict the future but clearly the dramatic delinquencies and defaults seen on the residential side have yet to cross over to the commercial side in any meaningful way. That said, we are extremely vigilant in our monitoring of the portfolio and we are looking for pockets of weakness in certain sectors such as retail or hotels which might be the first to be adversely affected by a slowdown in consumer spending and negative consumer sentiment.

At this point I’d like to turn it over to Keith to give you more specifics on our assets and our special servicing portfolio.

Keith W. Belcher

As Mark indicated our 60 plus day delinquency rate of 36 basis points on the CMBS portfolio remains very low. In terms of actual loan losses there were no significant realized losses during the second quarter and our total cumulative losses are approximately $2.7 million. This compares favorably with our underwriting and ongoing loan losses are modeled into our CMBS cash flow projections. In terms of the current loans in special servicing out of the total bps portfolio of approximately 3,500 loans with an unpaid balance of approximately $48 billion we currently have only 27 loans totaling $265 million in special servicing. This represents approximately 55 basis points against the total portfolio and is an increase from the $206 million that we reported on our last call. However this increase was expected as we expect additional loans to come into special servicing as the portfolio ages. Of the 27 loans in special servicing nine loans totaling $91 million are current, 15 loans totaling $162 million are delinquent and three loans totaling $13 million have been foreclosed.

In terms of loan concentrations and trends none of the loans in special servicing are overly large. The largest loan is $33 million and that particular loan has been brought current and will be returned to the master service for this month. There are no product type trends as we have a mix of multi-family, retail, office and hotel loans in special servicing. If anything I would say that we’ve had a slight overweighting of multi-family loans. However the special servicing portfolio size is too small to note any real trends. We are continuing our ongoing surveillance as Mark indicated and we continue to revise our loss assumptions as we receive updated financials and as we consider changes in the economy and changes within the real estate markets. In that regard we are seeing more stress in the retail sector with the slowdown of consumer spending and the number of store closing announcements has increased. We consider the impact of these store closings in developing our loss projections as well as other factors and will continue to update our loan loss assumptions as appropriate.

One last comment on the CMBS portfolio before I turn it back over to Mark and that is that we have seen the rating agencies downgrade transactions across the sector and we’ve not been immune. Notwithstanding the fact that our current delinquencies and our actual realized losses remain very low over the last three months they have downgraded bonds within six of our 21 bps deals. The downgrades have all been relatively minor with ratings typically moved down by one notch. For instance a single B plus bond being downgraded to a single B flat bond.

With that I’ll turn it back over to Mark.

Mark Weiss

I would like to add something to what Keith has just said. In a healthy real estate market asset management and special servicing is considered important. In a decelerating real estate market asset management and special servicing is considered essential and a tremendous value. JER is one of the leading special servicers of CMBS in the United States and maintains the highest special servicer rating classifications from Standard & Poor’s and Fitch ratings. We think this will benefit JER shareholders throughout this downturn and produce positive results in the long term.

Now turning to liquidity, I am pleased to say that since March 31^st we have reduced our repo debt from $196 million to $101 million today while unrestricted cash has increased from $13 million to $38 million today. This is due in large part to our proactive decision to reduce our marginal repo debt to what we consider to be prudent levels. Beginning in the second quarter we took the step of selling two low yielding assets. These were traditional fixed rate first mortgage loans originally purchased for their high credit quality and their ability to strengthen and diversify a future collateralized debt obligation or CDO. The two assets that were sold allowed us to pay down $67 million in debt while generating in excess of $18 million in additional liquidity. The net proceeds were at or slightly above where the assets in the associated financing liabilities were marked on our books compared to the marks at the end of the previous quarter.

I believe these sales at prices in line with our net marks demonstrate our realism when it comes to appropriately facing the pricing realities in today’s market when marking our assets. Interestingly by selling these two low yielding assets, repaying the associated debt and terminating the corresponding swaps the earnings per share and cash flow will actually increase almost $0.02 a share per quarter on a go forward basis. From equity coverage position the remaining assets currently backing our repo facilities have a current market value of about $170 million yielding a loan to value of approximately 59% and a debt service coverage on a cash basis including all fees is a very strong 3.7 times.

Now given that the liquidity crisis really shows no signs of abating, I want to reiterate a topic initially on our last earning calls and that’s the upcoming maturities in our real estate loan and CMBS portfolios. We have no maturities of any loans in either portfolio in 2008. Of our 13 loan positions only one loan for $30 million has a final maturity in 2009 with the next final maturity for $10 million not occurring until November of 2010. With regard to our CMBS portfolio of the $48 billion of loans we managed by virtue of JER acting as a special servicer for such trust approximately $550 million matures in 2009 of which just over $100 million matures prior to the third quarter of 2009. We are extremely pleased with the low number of maturities we are facing over the next 12 to 18 months given the potential stress that near term maturity could cause our borrowers in today’s difficult capital markets environment.

Finally before I get the inevitable question let me make a comment about our dividend. Our policy has been and still remains not to comment on future dividends. We have said, however, that we try to set the dividend at a level that is representative of what our quarterly operating cash flow is. As such when we reduced our dividend to $0.30 a quarter we tried to anticipate current sales and de-leveraging of the balance sheet.

With that let me turn the microphone over to Mike McGillis.

J. Michael McGillis

Good morning everybody. Let me start off the discussion on our financial condition and performance for the second quarter of 2008 by reinforcing some of the changes we made to our financial reporting model during the first quarter of 2008. As a result of adopting FAS 159 for our CDO related financial assets and liabilities as of January 1, 2008, two discontinuing hedge accounting for our non-CDO interest rate swaps as of March 31, 2008 and three classifying certain of our real estate loans as held for sale which we started at the end of 2007 essentially all of our financial assets and liabilities except for our junior subordinated debentures are now being reported on a fair value basis. We believe that this results in more transparent balance sheet reporting and reported stockholders’ equity will more closely reflect the current fair value of all of our assets and liabilities.

However these changes to our financial reporting model results in significant [inaudible] earnings volatility as we now recognize period to period changes in values in these financial assets and liabilities through our income statement. As a result of this GAAP earnings volatility we began reporting adjusted funds from operation or AFFO as a supplemental measure of our operating performance for investors to consider as they evaluate our profitability and our ability to cover our regular dividend from operating cash flows.

With that let me start by reviewing our balance sheet. At June 30, 2008 we have total assets of approximately $948 million. Our cash balance was $45 million and included $1 million in restricted cash. As discussed by Mark due primarily to proceeds from the sale of one of our whole loans in late July and repayment of related repo agreement borrowings and termination of related interest rate swaps margin call activity in our Q2 2008 dividend payment our unrestricted cash position at August 4^th, 2008 was approximately $38 million. Our primary asset class continues to be CMBS. At June 30, 2008 CMBS represented $491 million in fair value compared to $497 million at March 31, 2008. At June 30, 2008 $391 million or 80% of our CMBS were financed by our CDOs, $91 million were financed through repurchase agreements and $9 million were unlevered.

At June 30, 2008 the weighted average GAAP yield in our CMBS portfolio is approximately 20% on a loss adjusted basis which is consistent with the March 31, 2008 weighted average loss adjusted yields. Our CMBS portfolio cash flow projections generally continue to be in line with our original underwriting and delinquencies and underlying collateral remain at low levels. From a taxable income standpoint the tax cost basis of our CMBS portfolio was approximately $1.06 billion with no loss yields which is the basis for determining taxable income from our CMBS investments of approximately 11%.

Now turning to real estate loans we ended the quarter with 13 loans which we carry on our balance sheet at fair value of $396 million compared to $450 million at March 31, 2008. The decline is primarily due to the sale of one loan in June, 2008. There are no delinquencies or monetary defaults on any of our real estate loans. Within our real estate loan portfolio real estate loans held for investment which have an estimated fair value of $254 million at June 30, 2008 compared to $261 million at March 31, 2008 are financed by our second CDO and pursuant to FAS 159 we’ve elected to account for these investments using the fair value option effective January 1, 2008.

Our real estate loans held for sale which have an estimated fair value of $142 million at June 30, 2008 compared to $189 million at March 31, 2008 are financed by our repurchase agreement with Goldman Sachs. During the quarter we sold one fixed rate real estate loan for $36 million with was generally in line with our March 31, 2008 carrying value and we received net principal repayments in our real estate loans of $3 million. We used the proceeds from the loan sale to repay $26 million in outstanding purchase agreement borrowings and just over $1 million in swap termination costs. The weighted average yield on our real estate loans based on an amortized cost balance of $459 million at June 30, 2008 and current LIBOR rates for floating rate loans was approximately 5.9% at June 30, 2008.

Investments in unconsolidated subsidiaries were $3 million compared to $41 million at March 31, 2008. The decline is primarily due to the sale of our investment in charter school joint venture in April, 2008 offset by capital contributions of just under $2 million to the US Debt Fund during the quarter. Finally with respect to debt and other liabilities we ended the quarter with total liabilities of $685 million consisting of $432 million of CDO notes payable at the fair value which have a corresponding face amount of $975 million, $151 million of repo borrowings which have now been paid down to $101 million, $62 million of junior subordinated debentures, $27 million of liabilities related to the fair value of our interest rate swaps, $8 million of dividends payable and $5 million of miscellaneous trade payables and accrued interest payable. We are in compliance with the requirements of the applicable loan documents related to our CDOs and repurchase agreements and there are no outstanding or current default [inaudible].

As Keith mentioned earlier the rating agencies have downgraded certain of our CMBS investments. These downgrades do not impact the interest or overcollateralization tests on CDO One. However they do impact the overcollateralization tests on CDO Two. As of June 30, 2008 overcollateralization test cushion ranging from approximately $350 million to $430 million in the aggregate on the notes payable issued by the CDO. These downgrades which affect $31 million of face amount of CMBS collateralizing CDO Two will reduce that level of cushion. The CDO Two indenture does however provide us with the ability to replace collateral subject to certain criteria and processes that could provide us the ability to recover such loss cushion if necessary.

Our GAAP shareholders’ equity increased to $263 million or $10.15 per share as of June 30, 2008 from $256 million or $9.88 pr share as of March 31, 2008. Our estimate of the fair value balance sheet and related fair value of stockholders’ equity as of June 30, 2008 is approximately $294 million or $11.35 per share compared to $285 million or $11.02 per share as of March 31, 2008. The primary difference between our GAAP equity and the estimated fair value of equity relates to marking our junior subordinated debentures to estimated fair value and writing off the remaining balance of deferred debt issue costs. At the end of our June 30, 2008 earnings release there’s schedules reconciling our debt balance sheet and stockholders’ equity to our fair value balance sheet as well as a reconciliation of our GAAP stockholders’ equity to adjusted stockholders’ equity among other items.

With respect to the statement of operations in comparing second quarter 2008 results versus the first quarter of 2008 results we’ll focus primarily on AFFO. We’ll report AFFO because we consider it a meaningful supplemental measure of our operating performance and more reflective of our operating cash flows than net income determined in accordance with GAAP. At the back of the earnings release is a reconciliation between GAAP net income and AFFO. AFFO during the second quarter of 2008 decreased to $8.6 million or $0.33 per share from $10.6 million or $0.41 per share reported during the first quarter of 2008. The decrease in AFFO was primarily due to the April, 2008 sale of our investment in the charter school venture, repayment of high yielding mezzanine loans during the first few months of 2008 and additional costs in the second quarter related to maintaining certain of our repurchase agreements.

With respect to GAAP net income of $29 million or $1.13 per share during the quarter ended June 30, 2008 it was a result of income before other gains and losses of $15 million and other gains net which totaled $14 million. Note that as a result of discontinuing hedge accounting on our interest rate swaps income before other gains and losses of $15 million does not include cash carry costs related to our interest rate swaps which were $4.7 million during the quarter and are reflected as a component of other gains net in our income statement. We include cash carry costs on interest rate swaps in the determination of AFFO. In addition as a result of the CMBS impairment charges taken the first quarter of 2008 we reset the amortized cost basis and yields in our CMBS investments. This resulted in non-cash CMBS income of $1.7 million during the quarter which is included as a component of income before other gains and losses but not considered in the determination of AFFO. These two items are the primary differences between income before other gains and losses of $15 million and AFFO of $8.6 million during the quarter.

In our earnings release is a table which breaks down the composition of the $14 million of other gains and losses net for the three and six months ended June 30, 2008 into the following categories. One, changes in fair value of assets and liabilities that follow fair value accounting; two, realized losses on sales of real estate loans held for sale and termination of interest rate swaps; three, recognition of unrealized losses previously deferred and classified within accumulated other comprehensive income loss as of December 31, 2007; and four, cash payments in our interest rate swaps.

Finally in June, 2008 we declared a second quarter dividend of $.30 per share [inaudible] 2008.

With that, Operator, let’s go to questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Lee Cooperman – Omega Advisors.

Lee Cooperman – Omega Advisors

Just two questions, in July of this year you mentioned in your release a real estate loan classified as held for sale with a face amount of $65 million for $54.8 million. Was it carried at $65 million and therefore you’ve booked a loss of $10 million and if not carried at $65 million what was the carrying value? Secondly, how much pressure are you facing on the $100.6 million of existing repos to pay them back and do you feel comfortable that you can generate the liquidity to pay them back if you had to?

J. Michael McGillis

Let me respond to the first question related to the loan that we sold in July. We actually carried it on our balance sheet at a level below the $54.8 million sale price at June 30, 2008 so we had already recognized that P&L charge through the income statement and in our equity base. Then with respect to our repo balances of $101 million, right now about $42 million of that relates to repurchase agreement borrowings on our CMBS facilities with JP Morgan and Bear Stearns. Those facilities are in the process of being extended and consolidated until August, 2009. We’re in the process of finalizing legal documentation on that extension and consolidation of those facilities and we feel like that will be completed in the near future.

With respect to the remaining repo borrowings of approximately $60 million, those are in our Goldman Sachs facility. We have the unilateral ability to extend that facility through October 1, 2009. I would say our relationship with Goldman and with JP Morgan and Bear has been very good throughout this process like you would expect lenders to do. They marked assets at a level where they think fair value is in the market. We have historically found their fair valuation process to be very responsible and generally in line with where we come up with our own fair values internally.

Operator

Your next question comes from [Michael Saporan – Saporan].

[Michael Saporan – Saporan]

Joe and any of your team, just out of looking at the picture over the next six to 12 months and understanding that it’s pretty muddled, I’m sure in your minds there are regions and asset classes that look very appealing assuming you have the ability to acquire and then there are regions and asset classes that you wouldn’t touch right now. Could you comment a little bit about what you’re looking at?

Mark Weiss

We are very focused. The great thing about having a $48 billion portfolio which we manage is it gives us a good window and insight into what’s going on in the country and as Keith said and I said during the call, we’re very concerned and focused on the retail and hotel sectors in particular given that the consumers stop spending retail sales will drop and that could have an impact on the retail commercial real estate side. Obviously on the hotel side with plane capacity being taken out of the system, with people driving less and with less disposable income you can see more near term impacts on hotels. We’re very focused on that. That doesn’t mean that if we saw a great retail opportunity to lend against or hotel we wouldn’t do it, but we’re very cautious in those sectors. And then from a geography perspective, I think it really depends. For example obviously we’re not going to be lending in all likelihood on condos in Florida and we’re probably not going to be lending on office buildings in some of the depressed areas of the Midwest like Detroit which is having a difficult time with the economy.

So again we won’t make a blanket statement about specific locations. We’re cautious , but if see the right opportunity within that location, within that sector, we would invest. But again seeing what we have seen and given the fact not only do we manage $48 billion but through our private equity funds obviously we own a lot of real estate around the country and we’re seeing trends. So we’re trying to take all of that data in mind when we look at new investments.

Operator

Your next question comes from [Robert Schwartzberg – Compass Point Research].

[Robert Schwartzberg – Compass Point Research]

I had a couple questions. Can you talk at all about the activity in your CalPERS joint venture? That’s question one. And question two is your press release mentions $9.5 million of margin calls which were paid. What lines were those paid against and what was the underlying asset which is being financed and what’s the status of those repo maturities now and the amount of assets that are backing those repo lines?

Mark Weiss

Let me take the first question and I’ll let Mike take the second. In terms of our CalPERS fund, we’re about 50% invested in that fund and that ranges anything from CMBS securities to CMBS to mezzanine loans on real estate assets. So it’s a little bit all across the board. I think we’re something like 13 transactions right now, but we still see good opportunities in the marketplace, we’re trying to take advantage of it. We’re being mindful of the current environment that we’re living in in terms of the real estate market and the consumer spending. But again we do think having cash in this environment is a very good place to be. We’re being prudent. We formed the fund in December of last year and we’ve only put out about 50%. We think that’s prudent in this market. We’re happy with the investments we made but we’re still seeing some strong opportunities to invest. With that, let me turn it to Mike to answer the margin question.

J. Michael McGillis

The margin calls came on our CMBS repo lines and as of June 30, the fair value of those CMBS was about $90 million. We currently have [inaudible] $42 million of borrowings against those assets and most of those margin calls were really related to a combination of two things. One is just general Treasury rate increases as well as spread widening on some of the marks on more recent vintages of CMBS bonds that we own and that would be 2007 vintage CMBS bonds. As I said earlier we’re in the process of extending and consolidating the two CMBS repo lines that we have right now with JP and Bear and we expect that extension to go through August of 2009. We do expect there will be some advance rate compression as a result of that extension and consolidation and there’ll be some nominal level of margin call or further repayment associated with that.

[Robert Schwartzberg – Compass Point Research]

Can I ask a follow up about the magnitude of that repayment and would you anticipate it being less than the $9.5 million which you just paid?

J. Michael McGillis

Yes.

[Robert Schwartzberg – Compass Point Research]

My last question as it relates to the CalPERS, you mentioned being 50% invested, when did those assets come on in the quarter or did they have a meaningful impact to earnings in the second quarter? Would you anticipate more of an impact in the third quarter?

J. Michael McGillis

The impact in the second quarter was not all that significant. We would expect the earnings from the CalPERS fund to become more significant as that portfolio gets fully invested. Remember, we’re $10 million of the $220 million of equity for that fund and to date it’s about 50% invested. So relative to our balance sheet it’s still a relatively small position.

Operator

Your next question comes from Michael Sloan – Harvey Partners.

Michael Sloan – Harvey Partners

I was just hoping you could give us a little bit more color on the loan that’s maturing in 09, what type of property that is, where it’s located and is that one of the loans in special servicing or not? I’m not sure if you gave us which quarter that was going to mature in?

Mark Weiss

The answer is it’s maturing in early 2009. It’s a property in New York. We don’t go into great specifics on the specific assets but I think we’re comfortable with our basis and where we are on that transaction at the moment.

Operator

Your next question comes from [Paul Birdhouse – Cornerstone Investment Group].

[Paul Birdhouse – Cornerstone Investment Group]

I just wanted to ask kind of a follow up to an earlier question regarding your being cautious and particularly looking for any downturn in retail and hotel bookings as a reason for continued weakness or perhaps weakness spreading into the commercial side. What would it take for you on the other hand to say that we are finally getting beyond the credit crunch and crises of this last year? What would be some of the leading indicators to you all that would be forecasting that perhaps we’re finally getting through this and that we can put this in the rearview mirror?

Mark Weiss

One of the nice things again about being externally managed by JER is the private equity business that we’re actively involved in and owning and managing assets around the country. I think we have an incredible window because we own everything from multi-family to retail to all different levels of hotels. I think looking at the trends there, if we were to see big upticks in occupancy or rev PAR moving up or incredibly active leasing coming back on the office and the retail side or second homes being snapped up again, I think that would be clearly one leading indicator that the market has turned. Clearly in terms of the lending market you need to see an active lending market come back in terms of valuations of real estate. If real estate can’t be financed by definition values fall until the lending can come back to create that market again so we’re clearly looking at it and again because that’s what we do for a living, we’re very much on the forefront of that. I think it’s a combination of seeing what’s going on in the economy which directly translates into leasing occupancy and other and then looking at the credit markets and looking at lending coming back into the markets.

We talked to a variety of lenders from the European banks to insurance companies to the securitization shops all the time and there is just very, very little lending going on right now. I think the credit departments are still very tough with them and they’re still trying to manage their balance sheets, and some in a lot of cases taking down their balance sheets as opposed to taking up their balance sheets. Until you see all of that turn we’re still going to remain very cautious in terms of what we do with our cash and how we manage our debt.

[Paul Birdhouse – Cornerstone Investment Group]

Just a follow up to that, and I know the past is no guarantee of the future by any means but just based on your extensive experience in working through these kinds of cycles in the past, have you got a general timeframe that where most of this cycle unwinds and we begin on another upswing? Can you say that that’s a one to two year timeframe for all of that to work its way through? Is it generally longer than that or what’s you take on that?

Mark Weiss

I wish I had a good crystal ball for that. As I said in my remarks we prepare for the worst and hope for the best. Let’s put it this way, we are not anticipating any turnaround in 08 and we’re hopeful that there’ll be one at some point in 2009. But we’re hunkering down in case it’s longer than that. We’re hopeful but I don’t have any prognostication for when that actually happens.

Operator

Your next question comes from Michael Moran - Moran & Osborn.

Michael Moran - Moran & Osborn

My question is a general big picture question. It seems like the last six months really you have been kind of in a defensive mode because of the margin calls on your repo lines. You really haven’t had the liquidity to take advantage of any of the market conditions and I guess I don’t see that changing in the foreseeable future and I’d like your comment on that. And then I’d like to again maybe get some more color or more comment on how much additional pressure do you see on your margin lines? You’ve moved them down a little over $100 million. Six months from now do you feel that that’s a level that they can be maintained? Do you feel like you’re going to have more pressure in terms of margin calls and moving your margin lines down?

Mark Weiss

In terms of the margin, the one thing I will say is that we have been as Mike said as we go through this with our Goldman line and now our JP and Bear line, the advance rates have been cut as we renewed those lines. I think we feel pretty good that our advance rates are at market at this point. That doesn’t mean they can’t change in the future and also in terms of market value of assets, we don’t know where it’s going in the future. I think from a positive perspective you saw triple B minus spreads, they were 450 at the end of the third quarter, 900 at the end of the fourth quarter, 1,800 at the end of the first quarter. So you kept see it doubling and in this quarter you’ve maybe seen them go up 50 or 100 basis points. It feels like we’re hitting a level that’s maintainable and so we’re optimistic that we’re not going to get hurt too badly by dramatic changes in valuation.

That said, again that’s one of the reasons we’ve been focusing on selling some assets. Not only did we take down $67 million of debt with the sale of those two assets, that obviously is $67 million that we can’t be repoed against or margined against now, but in addition, we took another $18 million out of that and stuck it on the balance sheets to deal with anything that happens in the future. We’re very focused on that to try and be defensive as you say and frankly I think we’ve been defensive for more than six months. I think we’ve been defensive for almost 12 months. As Joe said on several earnings I think back starting in June, July of last year as Joe said we started building the thickness of the walls on our fortress because we didn’t know where the world was going and obviously at that time triple B minus spreads in July and July were a couple hundred basis points, then it got to 459, 1,800. We didn’t think it would ever get that bad, but we’re sort of thrilled that we took the defensive posture that we did. So we’re really beginning at the end of the second quarter of last year. So I’d say we’ve been on the defensive for a year and we think it’s actually been the right strategy to take.

Michael Moran - Moran & Osborn

Am I correct that you really don’t have the liquidity to take advantage of any market conditions? Because really you’ve been in the posture of let’s even say the last year of paying down your repo lines, and do you see that changing in the future?

Mark Weiss

One of the reasons that we raised the outside fund that we manage with CalPERS as the lead investor is because exactly of that inability let’s say or difficulty in doing things on balance sheets because we were really focusing on paying down debt and preserving our liquidity. That said we did see great opportunities in the marketplace which is why we raised the fund to be able to take advantage and as I said we put out about 50% of that equity over the last six, seven months.

Michael Moran - Moran & Osborn

But again that’s going to be $10 million out of a $220 million fund, so that’s going to be a fairly small contribution to the overall earnings.

Mark Weiss

We’ll get an asset management fee on that and then in theory if the assets perform and if the wind down of the assets [inaudible] which could be very meaningful to the REIT at that time.

Operator

This concludes the question-and-answer portion of the call and now I would like to turn it over to Mr. Joe Robert for closing remarks.

Joseph E. Robert, Jr.

Thank you very much for participating today. As always if you have further questions, feel free to call and we will talk to you on the next earnings call. Thank you.

Mark Weiss

Thanks.

Operator

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

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