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Article by DailyStocks_admin    (05-30-08 06:14 AM)

JER Investors Trust Inc. CEO Joseph EJR Robert bought 29500 shares on 5-20-2008 at $8.34

BUSINESS OVERVIEW

General

JER Investors Trust Inc. is a specialty finance company organized by J.E. Robert Company, Inc. (the “J.E Robert Company”), primarily to originate and acquire real estate debt securities and loans and fee interests in net leased real estate assets. We were formed in April 2004 and we completed our initial public offering in July 2005. We are externally managed and advised by JER Commercial Debt Advisors LLC, an affiliate of J.E. Robert Company. J.E. Robert Company and its affiliates are a fully integrated real estate investment management firm. We capitalize on the knowledge and substantial resources of J.E. Robert Company and its affiliates and take advantage of the growing volume and complexity of commercial real estate structured finance products by investing primarily in loans and debt securities that we believe will yield the highest risk-adjusted returns. Our target investments include commercial real estate structured finance products such as commercial mortgage backed securities (commonly known as CMBS), mezzanine loans and B-Note participations in mortgage loans, as well as whole commercial mortgage loans, loans to real estate companies, preferred equity, and net leased real estate. Although we have not done so to date, we may also invest in residential mortgages and related securities. We pursue a selective investment strategy, targeting specific transactions based on an analysis of debt structure and taking into account the underlying real estate and borrower credit risk. We are organized and conduct our operations in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

J.E. Robert Company was founded in 1981 to provide expertise to public and private financial institutions in resolving real estate loan workout situations. Since its founding, the firm has been active in all facets of the commercial real estate debt markets, including sourcing, due diligence, valuation, acquisition, asset management and disposition. J.E. Robert Company primarily conducts its real estate investment management activities on a global basis through a series of private equity funds, which we refer to as the JER Funds.

Since 1991, J.E. Robert Company has served as the special servicer or asset manager on numerous securitized pools of non-performing and performing commercial loans. The primary function of the special servicer is to manage any loans that default or become delinquent at their maturity. Accordingly, the special servicer function is critical with respect to maximizing the return of principal and interest from the underlying loans. J.E. Robert Company currently has the highest special servicer ratings of “CSS1” and “strong” from Fitch Investors Service, Inc. and Standard & Poor’s rating services, respectively. J.E. Robert Company is currently the special servicer for 21 of the 26 CMBS pools in which we have made investments as of December 31, 2007.

During the second half of 2007 and through the first quarter of 2008, severe credit and liquidity issues in the subprime residential lending and single family housing sectors negatively impacted the asset-backed and corporate fixed income markets, as well as the equity securities of financial institutions, homebuilders and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced substantially decreased liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economic growth increased. These concerns continue and risk premiums in many capital markets remain at or near all-time highs with liquidity extremely low compared to historical standards or virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including us, have curtailed new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, we are focused on actively managing credit risk and maintaining liquidity.

Our Investment Strategy

Our strategy is to hold a diversified portfolio of commercial real estate debt investments, including CMBS, mezzanine loans, B-Notes, whole commercial mortgage loans, first mortgage loan participations and net leased real estate assets. We also intend to invest in preferred equity and loans to real estate companies. Although we have not done so to date, we may also invest in residential mortgages and related securities. Our strategy is to maximize the difference between the yields on our investments and the cost of financing these investments. We actively manage our assets with goals of generating cash available for distribution, facilitating capital appreciation and providing attractive total returns to our stockholders.

We invest in commercial real estate structured finance products that provide rates of return that we believe are appropriate taking into account the underlying real estate and credit risk. Our investments generally are secured, directly or indirectly, by individual real estate properties or pools of properties that generally provide loan to value ratios in the range of approximately 60% to 95% at the time we acquire or originate them.

We finance our investments through a variety of techniques including repurchase agreements, secured and unsecured credit facilities, collateralized debt obligations, or CDOs, and other structured financings. In addition, we employ a match-funded debt strategy through the use of hedging instruments such as interest rate swaps, caps, or a combination thereof which allows us to reduce the impact of changing interest rates on our cash flow and earnings.

We selectively pursue investments where we believe cash flows have been mispriced, including the purchase of discounted securities in sectors that have fallen out of favor due to economic pressures, regulatory issues or illiquidity. We acquire assets primarily for income. Through our management agreement with JER Commercial Debt Advisors LLC, our manager, we draw on J.E. Robert Company’s and its affiliates’ expertise and significant business relationships with participants in the real estate securities industry to enhance our access to these investments, which may not be broadly marketed.

We broadly diversify our portfolio by asset type, tenant, tenant industry, location and servicer. We believe that diversification reduces the risk of capital loss and also enhances the terms of our financing.

Our Investment Guidelines

Our board of directors has adopted the following guidelines for our investments and borrowings and we will follow such guidelines unless waived or changed, subject to approval by the board of directors:


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no investment shall be made that would cause us to fail to qualify as a REIT for federal income tax purposes;


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no investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act;


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no more than 20% of our equity, determined as of the date of each investment, shall be invested in any single asset unless waived by our independent board of directors;


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our debt-to-equity ratio, calculated based on total liabilities divided by stockholders’ equity (excluding the effects of accumulated other comprehensive income (loss)), generally shall be between approximately four-to-one and six-to-one, depending on the characteristics of our portfolio;


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we shall not co-invest with our manager or any of its affiliates unless our investment committee determines that (i) the co-investment is otherwise in accordance with these investment guidelines and (ii) the terms of the co-investment are at least as favorable to us as to our manager or the affiliate (as applicable) making such co-investment; and


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no more than 10% of our equity, determined as of the date of an investment, shall be invested in assets located outside of the United States or in non-U.S. dollar denominated securities.

Targeted Investments

Our investment program focuses on the following real estate products:


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CMBS;


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mezzanine loans;


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B-Notes;


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mortgage loans;


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net leased real estate assets;


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bridge loans;


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preferred equity; and


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loans to real estate companies.

Although we have not done so to date, we may also invest in residential mortgages and related securities. Various types of real property or ownership interests in entities that own real property will serve as the underlying collateral for our investments, including retail property, offices, industrial properties, apartments, condominiums, specialty-use real estate assets including healthcare facilities, educational facilities, hotels and land. We have provided or may in the future provide loans to all kinds of borrowers, including corporations, partnerships, individuals and special purpose entities. We have no current plans to invest in non-U.S. denominated securities but may decide to invest in such securities in the future. Although we intend to invest as described herein, our actual investment allocations depend on changing market conditions. As a result, we cannot predict with any certainty the percentage of our assets that will be invested in each category at any given time.

Many of these asset classes may also be suitable investments for one or more of the private equity funds managed by J.E. Robert Company and its affiliates, which we refer to as JER Funds, or other existing or future investment entities controlled by J.E. Robert Company and its affiliates, giving rise to potential conflicts of interest.

We seek to identify those opportunities available in the market that can be acquired at attractive pricing and that provide opportunities to manage corresponding liabilities to mitigate financial risks. We purchase and originate mortgage loans and our manager or J.E. Robert Company services our investments. We believe the competition, investment underwriting analysis, risk and profit margin and collateral evaluation for originated loans and purchased loans are similar. Mortgage loans that we originate are generally sourced through direct relationships with owners and operators of real estate which have been developed by J.E. Robert Company. Loans that we purchase are sourced through our manager’s and J.E. Robert Company’s direct relationships with loan sellers, including investment banks, commercial banks, brokerage firms and life insurance companies.

J.E. Robert Company and its affiliates currently manage and invest in other real estate-related investment entities. Our chairman and chief executive officer and two members of our board and each of our executive officers also serve as officers of our manager and other J.E. Robert Company affiliates. Certain senior officers of J.E. Robert Company, some of whom are also our officers and directors, and their affiliates beneficially own all of the outstanding membership interests of our manager. In addition, affiliates of J.E. Robert Company, in their capacity as general partners of the JER Funds, are currently in the process of making investments in a wide range of commercial real estate equity and debt assets for various JER Funds.

The weighted average yield represents the expected yield to maturity by investment type based on the amortized cost of such investments at December 31, 2007. The aggregate sum of interest income for each investment type is divided by the net cost basis at December 31, 2007 for the investment type.

We may change our investment strategy and policies without a vote of our stockholders. We may acquire assets from our manager or its affiliates, including securities issued by our manager or its affiliates, upon approval of all of our independent directors. These transactions must also comply with our general investment guidelines.

CMBS

We invest in commercial mortgage backed securities, or CMBS, which are typically pass-through certificates created by the securitization of a single mortgage loan or a pool of mortgage loans that are collateralized by commercial real estate properties. We believe the investment opportunity in CMBS currently lies in our ability to prudently underwrite and purchase the “first-loss” tranches and non-investment grade bonds, capitalizing on our manager’s ability to price and manage the underlying real estate risk. Typically, the more senior classes are entitled to priority distributions from the trust’s income to make required interest and principal payments on such tranches. Losses from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest which they are entitled.

The securitization process is governed by one or more of the rating agencies (Fitch, Moody’s and Standard & Poor’s), which determine the respective bond class sizes, generally based on a sequential payment structure. Bonds that are rated from AAA to BBB by the rating agencies are considered “investment grade.” Bond classes that are subordinate to the BBB class are considered “non-investment grade.” The respective bond class sizes in a securitization are determined based on the review of the underlying collateral by the rating agencies. The payments received from the underlying loans are used to make the payments on the CMBS. Based on the sequential payment priority, the risk of nonpayment for AAA-rated CMBS is lower than the risk of non-payment for non-investment grade bonds. Accordingly, the AAA-rated class is typically sold at a lower yield compared to the non-investment grade classes, which are sold at higher yields. We have historically and continue to expect to invest primarily in the BBB and non-investment grade CMBS classes.

Each securitization typically requires the owner of the most subordinate CMBS class to appoint a special servicer. The primary function of the special servicer is to manage any loans that default prior to maturity or become delinquent at maturity. Accordingly, the special servicer function is critical with respect to maximizing the return of principal and interest from the underlying loans.

An affiliate of our manager, J.E. Robert Company, has been a special servicer since 1991, and has been engaged as special servicer or asset manager on numerous securitized transactions. Typically, the governing documents of a securitization require that the special servicer be approved by one or more of the rating agencies. J.E. Robert Company currently has the highest special servicer ratings from Fitch and S&P, based on analyses of its staff expertise, reviews of its policies and procedures and evaluations of the quality of its resolution results. With respect to those securitization transactions where we control the non-investment grade CMBS and have the right to appoint the special servicer, we have appointed J.E. Robert Company as special servicer. J.E. Robert Company is currently the special servicer for 21 of the 26 CMBS pools in which we have made investments as of December 31, 2007.

Mezzanine Loans

We originate and invest in mezzanine loans (including mezzanine construction loans) to owners of real property encumbered by first lien mortgages, in which case our mezzanine loans generally are secured by junior liens on the subject properties and/or by liens on the partnership or membership interests in the borrower’s property-owning entities. Subject to negotiated contractual restrictions, the mezzanine lender generally has the right, following foreclosure, to become the sole indirect owner of the property subject to the lien of the primary mortgagor. Mezzanine debt can also be either junior or senior, denoting the collateral priority that may apply.

We structure our mezzanine loans so that we receive a stated fixed or variable interest rate on the loan. Our mezzanine loans may have prepayment lockouts, origination fees, deferred interest, penalties, exit fees, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment.

B-Notes

We may invest in B-Notes generated from structured transactions that may or may not be rated by a recognized rating agency. B-Notes are junior participations in a first mortgage loan on a single property or group of related properties. The senior participation is known as an “A-Note.” An individual loan may have multiple B-Notes. Although a B-Note may be evidenced by its own promissory note, it shares a single borrower and mortgage with the A-Note and is secured by the same collateral. B-Note lenders have the same obligations, collateral and borrower as the A-Note lender, but in most instances are contractually limited in rights and remedies in the event of a default. The B-Note is subordinate to the A-Note by virtue of a contractual or intercreditor arrangement between the A-Note lender and the B-Note lender. For the B-Note lender to actively pursue its available remedies (if any), it must, in most instances, purchase the A-Note, or maintain its performing status in the event of a default on the B-Note. The B-Note lender may in some instances require a security interest in the stock or partnership interests of the borrower as part of the transaction. If the B-Note holder can obtain a security interest, it may be able to accelerate gaining control of the underlying property, subject to the rights of the A-Note holder. Both A-Notes and B-Notes are senior to the mezzanine debt tranches described above, though B-Notes may be junior to another junior participation in the first mortgage loan.

B-Notes share certain credit characteristics with subordinated CMBS, in that both reflect an interest in a first mortgage and are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding senior securities or the A-Notes. As opposed to a typical CMBS secured by a large pool of mortgage loans, B-Notes typically are secured by a single property or single portfolios of properties, and the associated credit risk is concentrated in that single property or single portfolios of properties. B-Notes also share certain credit characteristics with second mortgages, in that both are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or the A-Note. We may acquire B-Notes in negotiated transactions with the originators on large single and portfolio private debt placements, as well as in the secondary market. The B-Note market has grown substantially in recent years with the expansion of the securitization market, and J.E. Robert Company and its affiliates have established relationships with many of the primary originators of B-Note products, which we believe gives us access to investment opportunities from these parties.

Mortgage Loans

We originate and invest in mortgage loans that we originate directly or that we purchase from various sellers, including investment banks, life insurance companies, commercial banks, brokers and other owners. These loans are generally secured by commercial or residential properties in the United States in which we believe we can achieve attractive risk adjusted returns. These loans typically have maturities ranging from one to ten years. We may also acquire portfolios of performing mortgages at a discount where we believe we can achieve appropriate risk adjusted returns.

Net Leased Real Estate Assets

We invest in net leased real property and also consider larger transactions involving portfolios of net leased assets, taking into account concentration issues with tenants and the residual value of the underlying assets. We also may buy mortgage loans secured by real estate under long-term leases to credit worthy tenants. These generally include portfolios of amortizing mortgage loans or mortgage loans in which some residual risk exists at the end of the term of the loan. These portfolios may include geographically diverse tenants and borrowers.

Bridge Loans

We may offer bridge loans to borrowers who are seeking short-term capital typically to be used in an acquisition of real estate. The bridge loans we originate will predominantly be secured by first mortgage liens on the property and contemplate a takeout with the borrower, using the proceeds of a conventional mortgage loan to repay our bridge loan. We may also receive origination fees and other deferred compensation in connection with our bridge loans. We believe providing these bridge loans leads to future investment opportunities for us, including mortgage loans, mezzanine debt and preferred equity investments.

Preferred Equity

We may make preferred equity investments in property-owning entities, generally in situations where the borrower’s capital structure does not allow for secured mezzanine financing because of restrictions imposed by senior lenders or other debt covenants. These investments are unsecured. Although preferred equity holders do not have priority relative to creditors, preferred equity holders have a prior claim relative to the common equity on cash flow and/or capital event proceeds, and often have covenant protections, such as negative pledges and overall debt limitations, to protect their equity position. These investments are generally priced in a manner similar to a mezzanine investment, though often with a premium because of the lack of collateral. Should an event of default occur, preferred equity holders have the right to replace junior equity holders to become the primary owner of the property subject to the lien of the primary mortgage. Like true owners, preferred equity investors have the option to support the loan during temporary cash flow shortfalls and dilute other common equity holders. We may also be able to negotiate special voting rights to help mitigate risks.

Loans to Real Estate Companies

We may also make loans to real estate-related operating companies, including REITs. These investments may take the form of secured debt, unsecured debt and other hybrid instruments such as convertible debt. Corporate mezzanine loans may finance, among other things, operations, mergers and acquisitions, management buy-outs, recapitalizations, start-ups and stock buy-backs generally involving real estate and real estate-related entities.

Investments in Joint Ventures and Funds

We may also invest in joint ventures or funds that invest primarily in the investments described above.

We have classified seven real estate loans not held as collateral by CDO I or CDO II which were previously classified as held to maturity as held for sale as of December 31, 2007 in order to provide a potential source of additional liquidity for general corporate purposes including debt repayment and acquisitions, among other items. As a result, these loans have been marked to the lower of cost or market value, on an individual loan basis, resulting in an unrealized loss of $13.9 million during the year ended December 31, 2007 which is reflected in the consolidated statement of operations. Although the real estate loans held for sale were in an unrealized loss position at December 31, 2007, these loans were not considered impaired as all required payments are still expected to be received based on the loans contractual terms. These loans had a face amount of $237.9 million with an unamortized cost basis of $235.5 million, an estimated fair value of $221.6 million, and outstanding repurchase agreement borrowings of $165.8 million, as of December 31, 2007.

During the year ended December 31, 2007, the Company invested $167.8 million, net of $2.2 million in net discounts, in three fixed rate real estate loans. The loans bear interest ranging from 5.8% to 6.4% and have maturity dates between December 2016 and January 2017. In addition, during the year ended December 31, 2007, the Company invested $245.2 million, net of $0.6 million in discounts, in seven floating rate real estate loans. The loans bear interest based on LIBOR plus a spread ranging from 1.8% to 3.5% and have initial maturity dates between February 2009 and June 2011.

During the year ended December 31, 2007, the Company received repayments of $191.2 million related to outstanding principal balances on certain real estate loans. In connection with certain loan repayments totaling $76.2 million during the year ended December 31, 2007, the Company received $0.5 million in contractually scheduled interest income in accordance with the loan agreements.

Net Leased Real Estate Assets. On December 22, 2006, we acquired a portfolio of six net leased real estate assets through a sale-leaseback transaction, and on June 29, 2007, we acquired an additional six net leased real estate assets for an aggregate purchase price of $38.7 million increasing our total cost basis to $77.5 million. On October 30, 2007 we sold a 50% interest in the entity that owns all twelve of the net leased real estate assets for $39.2 million. The sale resulted in no gain or loss. As a result, as of December 31, 2007, we owned 50% of the equity interests in JERIT CS Fund I (the “Joint Venture”) which owns the twelve net leased real estate assets and we account for this investment on the equity method of accounting. The Joint Venture agreement provides for a division of cash on a 50%-50% basis between us and the Joint Venture partner. A wholly-owned subsidiary of the Company provides asset management services to the Joint Venture entity for a management fee equal to 1.875% of the annual rent on the net leased real estate assets. All major decisions require Joint Venture partner approval. During the year ended December 31, 2007, we recognized $25 of management fees from the joint venture entity which is recorded in other income on the accompanying consolidated statement of operations.

The Joint Venture has leased the twelve assets pursuant to a single master lease with one tenant, and the lease has an initial lease term of twenty-five years. At the conclusion of the lease term, the lease agreement provides several options to the parties involved, including a put/call option and the extension of the lease term at the option of the lessee for an additional ten years. In addition, the lease agreement requires minimum rental payments with annual rent escalations beginning in the third year of the lease equal to the greater of 3% or CPI. The Joint Venture accounts for this lease as an operating lease under SFAS No. 13.

On March 25, 2008, we signed a definitive agreement to sell our remaining interest in the Joint Venture for approximately $39.5 million. The sale is scheduled to close in early April 2008, however there are no assurances that the transaction will be completed on the terms agreed to, or at all.

Investment in US Debt Fund. On December 11, 2007, we and JER Fund IV, an investment fund managed by the J.E. Robert Company, entered into a limited partnership agreement pursuant to which we and JER Fund IV agreed to co-manage a new private equity fund, known as JER US Debt Co-Investment Vehicle, L.P. (the “US Debt Fund”). The California Public Employees’ Retirement System committed $200.0 million and we and JER Fund IV each committed $10.0 million to the US Debt Fund. We account for our investment in the US Debt Fund under the equity method of accounting.

The US Debt Fund will invest in loans secured, directly or indirectly, by real estate, including, B-Notes, mezzanine loans and whole mortgage loans, and also in preferred equity, CMBS and CMBS-related products such as CMBX and credit default swaps (the “Targeted Investments”). Excluded investments from the US Debt Fund include non-performing loans, fee-simple ownership interests, single family residential mortgages and related securities (sub-prime, conforming, jumbo or Alt-A), whole loans originated directly by us or JER Fund IV, and net leased real estate assets.

Targeted Investments that meet the investment guidelines of the US Debt Fund are allocated directly and exclusively by J.E. Robert Company to the US Debt Fund until the earlier of April 11, 2008 or the date on which 90% of the US Debt Fund’s committed capital has been invested or otherwise committed. Thereafter, if the US Debt Fund is not fully invested or committed and through the earlier of December 11, 2008 or until 90% of the US Debt Fund’s committed capital has been invested or otherwise committed, we and/or JER Fund IV will be permitted to share Targeted Investments on a 50%-50% pari passu basis with the US Debt Fund.

Other investments. We had no B-Notes, bridge loans, preferred equity, or loans to real estate companies at December 31, 2007.

CEO BACKGROUND

Joseph E. Robert, Jr. has been our chairman and chief executive officer since 2004, and is the founder, chairman and chief executive officer of J.E. Robert Company. He is responsible for establishing the strategic direction of the firm and developing and managing key relationships for deal origination and capital sourcing. Mr. Robert served as vice chairman of the board of the National Realty Committee, was a member of its executive committee and is a founding member of the Real Estate Roundtable. He is chairman of the Washington Scholarship Fund. He serves on the National Board of Advisors of Children’s Scholarship Fund and on the Policy Advisory Board of the Fisher Center of Real Estate and Urban Economics of the University of California. Mr. Robert is a member of the international advisory board of EuroHypo, a German based commercial mortgage bank.

Keith W. Belcher is a managing director of J.E. Robert Company and our manager, and has been vice chairman of our Board of Directors and our executive vice president since 2004. Mr. Belcher also serves on our investment committee. Mr. Belcher joined J.E. Robert Company in 1991. Mr. Belcher is responsible for all commercial mortgage backed securities (“CMBS”) acquisitions made by J.E. Robert Company and performs the same function for us. He also oversees the asset management of the underlying assets in CMBS issuances assigned to J.E. Robert Company as special servicer. Previously, Mr. Belcher managed J.E. Robert Company’s asset management contracts with the RTC, which exceeded $3.5 billion in asset value. Mr. Belcher holds a B.B.A. degree in finance and a B.A. degree in economics from Southern Methodist University.

Mark S. Weiss is a managing director of J.E. Robert Company, president of our manager and also serves as our president. Mr. Weiss joined J.E. Robert Company in 2006. Mr. Weiss also serves on our investment committee. He has primary responsibility for subordinate real estate debt opportunities, commercial mortgage backed securities, loan origination activities, capital sourcing and, together with Mr. Robert, setting the strategic direction of the Company. Prior to joining us, Mr. Weiss spent 16 years at Goldman Sachs, most recently as a managing director for commercial and residential mortgage originations and securitizations. Mr. Weiss received a B.A. in Economics and Math from Dartmouth College and an M.B.A. from the Wharton School of the University of Pennsylvania.

Daniel J. Altobello has been a director since 2004. Since 1991, Mr. Altobello has been chairman of Altobello Family LP. Mr. Altobello also served as chairman of the board of Onex Food Services, Inc., the parent corporation of Caterair International, Inc. and LSG/SKY Chefs from 1995 to 2001. From 1989 to 1995, Mr. Altobello was the chairman, chief executive officer and president of Caterair International Corporation. He currently serves on the board of directors of MESA Air Group, Diamond Rock Hospitality Trust and Friedman, Billings, Ramsey Group, Inc. In addition, Mr. Altobello serves on the boards of directors for a number of non-public entities, including the Advisory Board of Thayer Capital Partners. Mr. Altobello holds a B.A. degree from Georgetown University and an M.B.A. from Loyola College in Maryland.

Daniel J. Altobello has been a director since 2004. Since 1991, Mr. Altobello has been chairman of Altobello Family LP. Mr. Altobello also served as chairman of the board of Onex Food Services, Inc., the parent corporation of Caterair International, Inc. and LSG/SKY Chefs from 1995 to 2001. From 1989 to 1995, Mr. Altobello was the chairman, chief executive officer and president of Caterair International Corporation. He currently serves on the board of directors of MESA Air Group, Diamond Rock Hospitality Trust and Friedman, Billings, Ramsey Group, Inc. In addition, Mr. Altobello serves on the boards of directors for a number of non-public entities, including the Advisory Board of Thayer Capital Partners. Mr. Altobello holds a B.A. degree from Georgetown University and an M.B.A. from Loyola College in Maryland.

Peter D. Linneman has been a director since 2004. Dr. Linneman is the Albert Sussman Professor of Real Estate, Finance and Public Policy at the Wharton School of Business, the University of Pennsylvania. A member of Wharton’s faculty since 1979, Dr. Linneman served as the founding chairman of Wharton’s real estate department, the director of Wharton’s Zell-Lurie Real Estate Center for 13 years and the founding co-editor of The Wharton Real Estate Review. Dr. Linneman is currently the principal of Linneman Associates. He serves on the board of directors of Equity One, Inc., the Crosland Group and Sunbelt Management. Dr. Linneman holds a Ph.D. in economics from the University of Chicago.

W. Russell Ramsey has been a director since 2004. He is also the chairman and chief executive officer of Ramsey Asset Management, a hedge fund manager based in the Washington, D.C.-area, which he founded in 2001. Prior to 2001, Mr. Ramsey was president and co-chief executive officer of Friedman, Billings, Ramsey Group, Inc., which he co-founded in 1989. He is also on the National Geographic Society’s Council of Advisors, and serves as chairman of The George Washington University’s board of trustees. He received a B.S. in Business Administration from The George Washington University.

Frank J. Caufield has been a director since 2004. He is a co-founder of Kleiner Perkins Caufield & Byers (“KPCB”). KPCB is one of the largest and most prominent venture capital firms in the United States. Since 1978, it has invested in over 250 companies that today have revenues of over $150 billion and employ over 300,000 people. Mr. Caufield has served on the boards of Quantum Corporation, Caremark, Inc., Megabios, Verifone, Inc., Wyse Technology, Quickturn Corporation, and AOL, Inc., as well as many other private and public companies. He also served as the chairman of the Child Abuse Prevention Society of San Francisco. He is currently the lead independent director of Time Warner. He also serves as a director of The U.S. Russia Investment Fund, Refugees International, the Council on Foreign Relations and the San Francisco Film Society. Prior to the formation of KPCB, Mr. Caufield was a general partner and manager of Oak Grove Ventures, a venture capital partnership located in Menlo Park, California. He is a past president of both the Western Association of Venture Capitalists and the National Venture Capital Association. Mr. Caufield is a graduate of the United States Military Academy and holds an M.B.A. from the Harvard Business School.

James V. Kimsey has been a director since 2004. Mr. Kimsey is the Founding CEO of America Online, Inc. In 1996, he became AOL chairman emeritus and turned his energies to new challenges in business, philanthropy and personal diplomacy through the creation of the Kimsey Foundation. He currently holds a presidential appointment to the Kennedy Center Board of Trustees and is chairman of the International Commission on Missing Persons. He is a member of the board of directors of Thayer Capital, the American Film Institute, Innisfree, the JFK Center for Performing Arts, the Washington Scholarship Fund, the International Crisis Group, and the US Russia Investment Fund, as well as civic and charitable organizations. He serves on the Executive Committee of the Washington National Opera and the National Symphony. Mr. Kimsey is a graduate of the United States Military Academy.

Dwight L. Bush has been nominated to be a director of our company by our board of directors. Mr. Bush is currently managing partner of D. L. Bush & Associates, a financial advisory and investment firm. He formerly served as chairman, president and CEO of Urban Trust Bank, an affiliate of the RLJ Companies. Mr. Bush has nearly 30 years of corporate banking, private equity, mergers and acquisition, and strategic financial management experience. His career includes roles as a financial transaction professional and as a corporate officer. Mr. Bush was also a principal at Stuart Mill Capital, LLC. Prior to joining Stuart Mill Capital, Mr. Bush was vice president, corporate development and chief credit officer for Sallie Mae. Mr. Bush joined Sallie Mae after a 15 year career at The Chase Manhattan Bank where he worked in a variety of capacities before departing as a managing director in 1994. Mr. Bush is a member of the Board of Directors of EntreMed, Inc. Among other things, Mr. Bush is also a member of the Boards of Trustees of the GAVI Fund, Cornell University and The National Symphony Orchestra.

MANAGEMENT DISCUSSION FROM LATEST 10K

General

JER Investors Trust Inc. is a specialty finance company organized by J.E. Robert Company primarily to originate and acquire real estate debt securities and loans and fee interests in net leased real estate assets. We were formed in April 2004 and we completed our initial public offering in July 2005. We are externally managed and advised by JER Commercial Debt Advisors LLC (our “manager”), an affiliate of J.E. Robert Company. J.E. Robert Company and its affiliates are a fully integrated real estate investment management firm. We capitalize on the knowledge and substantial resources of J.E. Robert Company and its affiliates to take advantage of the growing volume and complexity of commercial real estate structured finance products. We invest primarily in loans and debt securities that we believe will yield high risk-adjusted returns. Our target investments include commercial real estate structured finance products such as commercial mortgage backed securities (commonly known as CMBS), mezzanine loans and B-Note participations in mortgage loans, as well as whole commercial mortgage loans, loans to real estate companies, preferred equity, and net leased real estate. Although we have not to date, we may also invest in single-family residential mortgages and related securities. We pursue a selective investment strategy, targeting specific transactions based on an analysis of debt structure and taking into account the underlying real estate and borrower credit risk. We are organized and conduct our operations in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

J.E. Robert Company was founded in 1981 to provide expertise to public and private financial institutions in resolving real estate loan workout situations. Since its founding, the firm has been active in all facets of the commercial real estate debt markets, including sourcing, due diligence, valuation, acquisition, asset management and disposition. J.E. Robert Company primarily conducts its real estate investment management activities on a global basis through a series of private equity funds, which we refer to as the JER Funds.

We are organized and conduct our operations to qualify as a REIT for Federal income tax purposes. As a REIT, among other restrictions and limitations, we will generally not be subject to Federal income tax on that portion of our income that is distributed to stockholders if we distribute at least 90% of our REIT taxable income to our stockholders by the due date of our federal income tax return and comply with various other requirements.

Trends

During the second half of 2007 and the first quarter of 2008, severe credit and liquidity issues in the subprime residential lending and single family housing sectors negatively impacted the asset-backed and corporate fixed income markets, as well as the equity securities of financial institutions, homebuilders and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced decreased liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economic growth increased. These concerns continue and risk premiums in many capital markets remain at or near all-time highs with liquidity extremely low compared to historical standards or virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including us, have curtailed new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, we are focused on actively managing credit risk and maintaining liquidity.

Credit Market and Spreads: The value of our real estate securities and loans are influenced by changes in spreads, which measure the yield demanded by the market on securities and loans relative to a specific benchmark, generally a risk free rate of return for a comparable term. Credit spreads applicable to our targeted investments will periodically fluctuate based on changes in supply and demand, the availability of financing for such investments and other market factors. We expect demand to vary based on investor perception of the associated credit risk in current underwriting practices, the adequacy of ratings provided by the rating agencies, the availability and terms of financing for such investments and investor assessment of the current and future real estate market fundamentals. Demand may be further influenced by investor expectations regarding the ability to finance these assets, currently or in the future. We generally expect that credit spreads will increase during periods of perceived higher credit risk and decline during periods of perceived lower credit risk, and increase during periods where financing is not readily available and decrease when financing is readily available. While we expect that supply will vary from quarter to quarter, we expect the securitization market over the long-term to generally remain a key source of real estate lending capacity and liquidity.

CMBS Issuance and Valuation: We believe the total issuance for CMBS, inclusive of non-investment grade securities, will be significantly less in 2008 than in recent years. In fact, in 2008 through March 15, 2008, only two CMBS transactions totaling $3.6 billion were issued. This compares to total first quarter 2007 issuances of approximately $55.6 billion. This is a direct result of the dramatic slowdown in the pace of lending by CMBS originators.

The slow down in originations has also resulted in a dramatic reduction of new opportunities in the mezzanine, B-note mortgage loan, bridge loan, preferred equity and non-investment CMBS markets. As originations at traditional high leverage lenders decline and there is a reduction in the volume of real estate transactions generally, new investment opportunities in this sector have been reduced accordingly. We believe market supply will not increase significantly until stability in the real estate lending market returns.

Recently, significant disruptions in the global credit markets have had a substantial effect on market participants. These disruptions have led to, among other things, a significant decline in the fair value of many mortgage related investment securities, as well as a significant contraction in commercial paper and other short-term and long-term funding sources. As a result, many investment vehicles indicate difficulty valuing certain of their holdings as a result of market illiquidity.

During this period, we have seen a significant widening of credit spreads in both the subordinate CMBS market which includes bonds rated BB+ through NR classes, and in the investment grade tranches of BBB- and above. For example, the credit spread over applicable swap rates for a typical BBB- CMBS new-issue bonds was estimated to exceed 900 basis points as of December 31, 2007 compared to approximately 425 basis points as of September 30, 2007 and 95 basis points as of December 31, 2006. Subsequent to December 31, 2007, there has been a significant decline in new issue CMBS volume and credit spreads have continued to increase based on reported pricing levels. Additionally, we have seen widening of credit spreads on real estate loans, including B-Notes, mezzanine loans and whole loans. Given the current volatility in the capital markets, we cannot predict changes in the market value of collateral and potential margin call requirements, if any, under our repurchase agreement facilities.

Primarily as a result of such spread widening, we have had margin calls on our repurchase agreement facilities based upon fair market value determinations of the underlying collateral. During the year ended December 31, 2007, such margin calls totaled $73.8 million, and there have been $65.8 million of margin calls subsequent to December 31, 2007 through March 28, 2008.

Competition: Over the long-term, we expect to face increased competition for our targeted investments. However, overall, we expect the market for these investments, as well as the continuing trend of tranching and further retranching commercial mortgage loans into new securities that are packaged and resold, will continue over the long term to provide us with a variety of investment opportunities. In the short to medium term, there are likely to be periods of growth and contraction in the market. However, over the long-term, we believe borrowers need a full range of financing opportunities to make acquisitions, particularly on larger assets where substantial equity commitments are required.

We believe that the overall subordinated debt market, which includes B-notes, mezzanine debt and preferred equity, has grown because purchasers of commercial real estate are increasingly using subordinated debt financing to reduce their required equity investment and to attain greater leverage on their equity. However, at the same time, over the long term, we believe that there is and will continue to be significant competition among providers of subordinated debt financing, which could result in declining interest rate spreads on B-note, mezzanine debt and preferred equity investments. There are also likely to be periods of growth and contraction in the market and significant changes in credit spreads and overall interest rates on b-notes, mezzanine debt and preferred equity investments. Finally, with an increase in competition for our targeted investments, we believe some lenders may be willing to accept relatively higher levels of risk with respect to the type of assets that collateralize the loans as well as the terms under which they are willing to lend monies. If we are unwilling to accept the relatively higher levels of risk associated with these loans, we may not be able to acquire or originate investments associated with such relatively higher risk loans. Alternatively, if we are willing to accept the relatively higher levels of risk associated with these loans and do acquire or originate investments that are associated with such loans, we may increase our overall risk of impairment and loss associated with such loans.

Rising Interest Rate and Financing Environment: We believe that interest rates are likely to increase over the long term and there are likely to be periods of significant fluctuation in interest rates. With respect to our existing and future floating rate investments, we believe such interest rate increases should result in increases in our net interest income. Similarly, we believe such an increase in interest rates should generally result in an increase in our net interest income on future fixed interest rate investments made by us. Conversely, in periods of rising interest rates, existing investments may be exposed to more credit risk due to potentially higher capitalization rates resulting in a possible decline in collateral property values potentially decreasing the proceeds from a refinancing as well as the impact of higher debt service requirements for floating rate loans. Further, in periods of rising interest rates, prepayments on mortgage loans generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. With respect to our existing fixed rate investments, we believe our strategy of financing such assets through a match-funded collateralized debt obligations (“CDOs”), combined with utilizing interest rate swaps prior to the execution of a CDO, allows us to mitigate potential reductions in net interest income. Nevertheless, depending upon market conditions, we may not be able to successfully match fund liabilities associated with our investments. Most recently, we have seen a significant widening of borrowing spreads and dramatic decreases in available leverage in the commercial real estate market and the related commercial real estate commercial debt obligations (“CRE CDOs”) market such that the CMBS and CDO markets are effectively closed for new issuances. The current state of the CMBS and CRE CDO markets could have a negative impact on our leveraged returns and our ability to successfully match fund liabilities associated with our investments.

Issuances of Common Stock

In June 2004, we sold 11,500,000 shares of common stock in a private placement offering for net proceeds of approximately $160.1 million. Additionally, we issued 335,000 shares of common stock to our manager and an aggregate of 6,000 shares of restricted common stock to our independent directors pursuant to our Nonqualified Stock Option and Incentive Plan (the “Plan”) at the time of the closing of the private placement. In July 2004, when James Kimsey and Frank Caufield joined our Board of Directors, we issued each of them 2,000 additional shares of restricted common stock pursuant to the Plan.

In July 2005, the Securities and Exchange Commission (“SEC”) declared effective our registration statement on Form S-11 (No. 333-122802) (the “Registration Statement”) relating to (a) our initial public offering (the “IPO”) of up to 13,832,025 shares of common stock, including 1,832,025 shares of common stock pursuant to an over-allotment option granted to the underwriters and (b) the offering by selling stockholders of 213,499 shares of common stock through the underwriters. On July 19, 2005, we issued a total of 12,000,000 shares of common stock in the IPO, at a price to the public of $17.75 per share. We did not receive any proceeds from the sale by the selling stockholders of 213,499 shares of common stock, at a price to the public of $17.75 per share.

In August 2005, the underwriters exercised their option to purchase an additional 1,832,025 shares of common stock at $17.75 to cover over-allotments. The net proceeds to us on the sale of 12,000,000 shares in the IPO and the 1,832,025 pursuant to the over-allotment option was $226.4 million after deducting the underwriting discount and offering expenses. The net proceeds of the IPO were primarily used to pay down indebtedness.

During 2007, we granted 137,000 shares of restricted stock to certain officers and employees of an affiliate of our manager, of which 3,000 shares have been forfeited. In May 2006, we granted Mark Weiss, our president, 60,000 shares of restricted stock and 150,000 stock options on our common stock. As of December 31, 2007, we had a total of 25,901,035 shares of common stock issued and outstanding. As of December 31, 2007, we had granted an aggregate of 40,000 shares of restricted stock to our independent directors.

Critical Accounting Policies

Our most critical accounting policies relate to investment consolidation, revenue recognition, securities valuation and impairment, loan loss provisions, derivative accounting and income taxes. Each of these items involves estimates that require management to make judgments that are subjective in nature. We rely on J.E. Robert Company and its affiliates’ experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. Under different conditions, we could report materially different amounts using these critical accounting policies.

Investment Consolidation. For each investment we make, we evaluate the underlying entity that issued the securities we acquired or to which we made a loan in order to determine the appropriate accounting. We refer to guidance in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46(R), Consolidation of Variable Interest Entities, in performing our analysis. FIN 46(R) addresses the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which voting rights are not effective in identifying an investor with a controlling financial interest. An entity is considered a variable interest entity (“VIE”) and subject to consolidation under FIN 46(R) if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns. Variable interest entities within the scope of FIN 46(R) are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, its expected returns, or both.

Our ownership of the subordinated classes of CMBS from a single issuer gives us the right to control the foreclosure/workout process on the underlying loans (“Controlling Class CMBS”). FIN 46(R) has certain scope exceptions, one of which provides that an enterprise that holds a variable interest in a qualifying special-purpose entity (“QSPE”) does not consolidate that entity unless that enterprise has the unilateral ability to cause the entity to liquidate. SFAS No. 140 provides the requirements for an entity to be considered a QSPE. To maintain the QSPE exception, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. A trust’s QSPE status can be impacted in future periods by activities of its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent our CMBS investments were issued by a trust that meets the requirements to be considered a QSPE, we record the investments at the purchase price paid. To the extent the underlying trusts are not QSPEs, we follow the guidance set forth in FIN 46(R) as the trusts would be considered VIEs.

We have analyzed the governing pooling and servicing agreements for each of our subordinated class CMBS investments and believe the terms are consistent with industry standards and the QSPE criteria. However, there is uncertainty with respect to QSPE treatment due to ongoing review by accounting standard setters, potential actions by various parties involved with the QSPE, as discussed above, as well as varying and evolving interpretations of the QSPE criteria under SFAS No. 140. Future guidance from the standard setters may require us to consolidate CMBS trusts in which we have invested.

Results of Operations

Comparison of the years ended December 31, 2007, 2006 and 2005 (in millions)

Net income was $23.1 million, or $0.90 per diluted share, and $31.7 million, or $1.23 per diluted share, for the year ended December 31, 2007 and 2006, respectively. Net income was $19.6 million, or $1.08 per diluted share for the year ended December 31, 2005.

Revenues

The increase in revenues during the year ended December 31, 2007 compared to the year ended December 31, 2006 is primarily due to increased balances of interest-bearing assets due to acquisitions of CMBS and real estate loans as well as increased lease income on net leased real estate assets due to acquisitions. For the year ended December 31, 2007, $97.5 million was earned on fixed rate investments, while the remaining $37.1 million was earned on floating rate investments, compared to $50.9 million and $23.1 million for the same period in 2006, respectively. We classify income from floating rate investments as that which is tied to a published index, e.g. LIBOR. At December 31, 2007, our floating rate investments included a cost basis of $342.3 million in real estate loans, $87.6 million in cash and cash equivalents and $6.7 million in restricted cash primarily related to collateral amounts held related to one of our pay-fixed interest rate swaps. For the year ended December 31, 2007, interest income earned on CMBS and real estate loan investments acquired during the year was $11.7 million and $18.1 million, respectively. In addition, interest income earned during the year ended December 31, 2007 on CMBS and real estate loan investments acquired during the year ended December 31, 2006 increased $18.1 million and $10.4 million, respectively, due to the timing of acquisitions and repayments on our mezzanine loans. Interest income for the year ended December 31, 2007 on real estate loan investments purchased in prior periods decreased $4.9 million due to mezzanine loan repayments. During year ended December 31, 2007, investments in real estate assets provided $6.4 million in lease income, which is included in the $97.5 million earned on fixed rate investments during the period. Lease income also includes $1.9 million and $48 in non-cash straight-line rental income for the year ended December 31, 2007 and 2006 recognized pursuant to SFAS No. 13.

The increase in interest income during the year ended December 31, 2006 compared to the year ended December 31, 2005 is primarily due to increased balances of interest-bearing assets due to acquisitions and interest income on cash proceeds relating to CDO II. For the year ended December 31, 2006, $50.9 million was earned on fixed rate investments, while the remaining $23.1 million was earned on floating rate investments, compared to $24.0 million and $12.3 million for the same period in 2005, respectively. For the year ended December 31, 2006, interest income earned on CMBS investments and real estate loans acquired during the year was $13.5 million and $6.3 million, respectively. In addition, interest income earned during 2006 on CMBS investments and loan investments purchased in 2005 increased $14.7 million and $1.8 million, respectively, compared to 2005 revenues due to increased balances of interest-bearing assets due to acquisitions. Interest income earned during 2006 on CMBS investments and loan investments purchased in 2004 decreased $1.5 million and $2.5 million, respectively, compared to 2005 due to CMBS dispositions and mezzanine loan repayments. During the year ended December 31, 2006, investments in real estate assets provided $0.2 million in lease income, which is included in the $50.9 million earned on fixed rate investments during the year.

Expenses

Interest Expense. Interest expense was $76.0 million and $26.7 million for the year ended December 31, 2007 and 2006, respectively. Interest expense for the year ended December 31, 2007 consisted primarily of $15.2 million of interest on CDO I, which closed in November 2005, $41.2 million of interest on CDO II, which closed in October 2006, $14.0 million of interest expense on repurchase agreements, $3.1 million of interest on our junior subordinated debentures, which were issued in April 2007, $2.0 million of amortization of deferred financing fees related to repurchase agreements and deferred debt issuance costs related to our CDOs and $0.5 million of interest expense related to the amortization of swap termination costs. The $26.7 million of interest expense for the year ended December 31, 2006 was comprised primarily of $15.2 million related to CDO I which closed in November 2005, $8.1 million related to CDO II which closed in October 2006, $2.4 million of interest on repurchase agreements and $0.8 million of amortization on deferred financing fees related to our repurchase agreements. The increase in interest expense for the year ended December 31, 2007 compared to the same period in 2006 is primarily due to the $708.3 million increase in notes payable related to CDO II, increased average borrowings on repurchase agreements and interest on our junior subordinated debentures.

Interest expense was $5.9 million for the year ended December 31, 2005. The $5.9 million of interest expense for the year ended December 31, 2005 was comprised primarily of $3.3 million of interest expense related to repurchase agreements, $2.2 million related to CDO I and amortization of deferred financing fees related to repurchase agreements of $0.5 million. The increase in interest expense for the year ended December 31, 2006 compared to 2005 is primarily due to the $708.3 million increase in notes payable related to CDO II and the full-year impact of the $266.3 million in notes payable related to CDO I.

Management and Incentive Fees. Base management fees are calculated as a percentage of stockholders’ equity adjusted to exclude the effect of any unrealized gains and losses or other items that do not affect realized net income. Our manager is also entitled to receive quarterly incentive fees equal to 25% of our Funds From Operations (as defined in the management agreement), or FFO, in excess of minimum FFO targets (as defined in the management agreement).

The decrease in base management fees for the year ended December 31, 2007 compared to the same period in 2006 is due to a lower equity base in 2007 compared to 2006, principally driven by distributions in excess of net income. The increase in base management fees in 2006 compared to the prior periods is related to the increase in the average equity balance outstanding during 2006 as a result of the IPO completed on July 13, 2005. The increase in incentive fees for the year ended December 31, 2007 was due to FFO exceeding the minimum targets defined in the management agreement during each of the first three quarters of 2007.

Depreciation on Real Estate Assets . The increase in depreciation on real estate assets of $1.1 million for the year ended December 31, 2007 as compared to the same period in 2006 was due to our real estate asset acquisitions in December 2006 and June 2007. There were no such assets held and no depreciation expense during the year ended December 31, 2005.

General and Administrative Expense. The increase in general and administrative expenses of $0.4 million for the year ended December 31, 2007 versus the same period in 2006 was due primarily to higher collateral administration fees and professional services offset by lower due diligence costs. Specifically, collateral administration fees increased $1.4 million primarily due to fees paid to an affiliate of our manager associated with CDO II, which closed in October 2006 while professional services increased $0.8 million primarily due to legal fees, valuation services and general consulting services. This overall increase was offset by a $1.9 million decrease in due diligence expenses due to the mix of acquisitions in during 2007 which generally had lower due diligence costs and the impact of sellers credits against due diligence expenses in 2007. Included in general and administrative expenses are additional affiliate expenses related to overhead and out-of-pocket expense reimbursements aggregating $0.6 million in each of the years ended December 31, 2007 and 2006.

The increase in general and administrative expenses of $2.6 million for the year ended December 31, 2006 versus the same period in 2005 was due primarily to higher professional fees, due diligence costs and collateral administration fees. Specifically, professional fees increased $1.3 million related to audit and tax services primarily related to external audit, Sarbanes-Oxley compliance costs, internal audit and interest rate risk management advisory fees. Due diligence fees related to increased investment activities on unconsummated transactions increased $0.3 million and fees on consummated transactions increased $0.2 million and collateral administration fees paid to an affiliate of our manager associated with CDO II, which closed in October 2006, increased $0.3 million. Included in general and administrative expenses are additional affiliate expenses related to overhead and out-of-pocket expense reimbursements aggregating $0.6 million and $0.5 million for the years ended December 31, 2006 and 2005 respectively.

Our management agreement also provides that we are required to reimburse our manager for certain general and administrative expenses incurred by our manager on our behalf, including our pro rata share of overhead expenses of the manager required for our operations. In November 2006, effective retroactively to January 1, 2006, the independent members of the board of directors approved an amendment to the management agreement to provide that in 2007, and in each calendar year thereafter, subject to approval by the independent members of the board of directors, the allocable overhead reimbursement will be $0.5 million multiplied by the sum of (a) one plus (b) the percentage increase in the Consumer Price Index (the “CPI”) for the applicable year over the CPI for the calendar year 2006. For each of the years ended December 31, 2007 and 2006, overhead reimbursements were approximately $0.5 million. Our manager may also be paid or reimbursed for the costs of providing other services that outside professionals or consultants otherwise would provide on our behalf. If such services are provided by the manager, the reimbursement for such services will be no greater than what management believes would be paid to outside professionals, consultants, or other third parties on an arm’s length basis. In accordance with the provisions of our management agreement, we incurred reimbursements for overhead and other services provided by our manager of $0.6 million for the years ended December 31, 2007 and 2006 and $0.5 million for the year ended December 31, 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Comparison of the three months ended March 31, 2008 and 2007 (in millions)

Net loss was $66.8 million, or $(2.60) per diluted share, during the three months ended March 31, 2008 compared to net income of and $9.8 million, or $0.38 per diluted share, for the three months ended March 31, 2007, respectively.

Revenues

The increase in revenues during the three months ended March 31, 2008 compared to the three months ended March 31, 2007 is primarily due to increased balances of interest-bearing assets due to acquisitions of CMBS and real estate loans offset, in part, by lower interest income on cash due to reduced cash balances, on average, and lower levels of income and equity in earnings from unconsolidated joint ventures, net. For the three months ended March 31, 2008, $25.3 million was earned on fixed rate investments, while the remaining $6.5 million was earned on floating rate investments, compared to $20.7 million and $9.2 million for the same period in 2007, respectively. We classify income from floating rate investments as that which is tied to a published index, e.g. LIBOR. At March 31, 2008, our floating rate investments included a cost basis of $338.2 million in real estate loans, $12.7 million in cash and cash equivalents and $1.1 million in restricted cash primarily related to the remaining CDO II loan replenishment pool. For the three months ended March 31, 2008, interest income earned during the three months ended March 31, 2008 on CMBS and real estate loan investments acquired during the three months ended March 31, 2007 increased $2.6 million and $2.1 million, respectively, due to the timing of acquisitions and repayments on our mezzanine loans. In addition, interest income earned during the three months ended March 31, 2008 on CMBS and real estate loan investments purchased in 2007 subsequent to March 31, 2007 was $1.0 million and $1.5 million, respectively. Interest income for the three months ended March 31, 2008 on real estate loan investments purchased in prior periods decreased $2.3 million due to mezzanine loan repayments as well as a $1.0 million aggregate reduction in interest income from real estate loans related to lower average LIBOR rates and amortization of premiums and discounts. During the three months ended March 31, 2008, investments in unconsolidated joint ventures provided $1.1 million in income from our investments in the Charter Schools joint ventures and $(0.2) million in income from our investment in the US Debt Fund, which is included in the $25.3 million earned on fixed rate investments during the period. Also, for the three months ended March 31, 2008, fee income from our investments in unconsolidated joint ventures of $0.1 million is included in the $25.3 million earned on fixed rate investments during the period. Equity in earnings from consolidated joint ventures income also includes $0.4 million in non-cash straight-line rental income for the three months ended March 31, 2008 while $0.4 million of non-cash straight-line rental income is included in lease income for the three months ended March 31, 2007 pursuant to SFAS No. 13.

Expenses

Interest Expense. Interest expense was $15.4 million and $15.6 million for the three months ended March 31, 2008 and 2007, respectively. Interest expense for the three months ended March 31, 2008 consisted primarily of $4.0 million on CDO I, which closed in November 2005, $7.2 million on CDO II, which closed in October 2006, $2.9 million on repurchase agreements, $1.1 million on our junior subordinated debentures, which were issued in April 2007, $0.2 million of amortization of deferred financing fees related to repurchase agreements. The $15.6 million of interest expense for the three months ended March 31, 2007 was comprised primarily of $4.4 million related to CDO I which closed in November 2005, $10.0 million related to CDO II which closed in October 2006, $1.0 million on repurchase agreements, $0.4 million of amortization of deferred financing fees related to our repurchase agreements and deferred debt issue costs related to our CDOs and $0.1 million related to the amortization of swap termination costs. Due to the adoption of SFAS No. 159, effective January 1, 2008, interest expense related to our CDO I and II interest rate swaps is recorded in other gains (losses) for the three months March 31, 2008. During the three months ended March 31, 2007, interest expense includes $(0.3) million of interest expense related to our CDO I and CDO II interest rate swaps. After adjusting for this, the decrease in interest expense is primarily related to lower LIBOR rates in 2008 compared to 2007, offset, in part by increased average balances outstanding on repurchase agreements in the three months ended March 31, 2008 and our April 2007 issuance of trust preferred securities.

As a result of no longer applying hedge accounting for our interest rate swaps pursuant to SFAS No. 133, interest expense may fluctuate in the future. However, this fluctuation will be offset in other gains (losses) as these interest rate swaps still act as economic hedges of variable interest rate debt.

Management and Incentive Fees. Base management fees are calculated as a percentage of stockholders’ equity adjusted to exclude the effect of any unrealized gains and losses or other items that do not affect realized net income. Our manager is also entitled to receive quarterly incentive fees equal to 25% of our Funds From Operations (as defined in the management agreement), or FFO, in excess of minimum FFO targets (as defined in the management agreement).

The decrease in management fees is primarily due to decreases in incentive fees for the three months ended March 31, 2008 compared to 2007 due to FFO exceeding the minimum thresholds defined in the management agreement during the same period in 2007 whereas the minimum thresholds were not achieved in 2008.

Depreciation on Real Estate Assets . For the three months ending March 31, 2008, we did not record any depreciation expense as we accounted for our investment in the joint venture that owns the real estate assets under the equity method of accounting. During the three months ended March 31, 2007, prior to entering into the joint venture and when we owned 100% of the real estate assets, depreciation expense was approximately $0.2 million and included in the consolidated statements of operations

General and Administrative Expense. The decrease in general and administrative expenses of $0.3 million for the three months ended March 31, 2008 versus the same period in 2007 was due primarily to lower due diligence costs offset, in part, by higher legal and professional services expenses. Specifically, due diligence fees decreased $0.6 million primarily due to lower CMBS and real estate loan acquisition volume as we did not acquire any new investments in the three months ended March 31, 2008 while legal and professional services expenses increased $0.3 million primarily due to legal fees, external audit, Sarbanes-Oxley compliance, valuation services and general consulting services. Included in general and administrative expenses are additional affiliate expenses related to overhead and out-of-pocket expense reimbursements to our manager aggregating $0.1 million in each of the three months ended March 31, 2008 and 2007.

Our management agreement also provides that we are required to reimburse our manager for certain general and administrative expenses incurred by our manager on our behalf, including our pro rata share of overhead expenses of the manager required for our operations. In November 2006, effective retroactively to January 1, 2006, the independent members of the board of directors approved an amendment to the management agreement to provide that in 2007, and in each calendar year thereafter, subject to approval by the independent members of the board of directors, the allocable overhead reimbursement will be $0.5 million multiplied by the sum of (a) one plus (b) the percentage increase in the Consumer Price Index (the “CPI”) for the applicable year over the CPI for the calendar year 2006. For each of the three months March 31, 2008 and 2007, overhead reimbursements were approximately $0.1 million, respectively. Our manager may also be paid or reimbursed for the costs of providing other services that outside professionals or consultants otherwise would provide on our behalf. If such services are provided by the manager, the reimbursement for such services will be no greater than what management believes would be paid to outside professionals, consultants, or other third parties on an arm’s length basis. In accordance with the provisions of our management agreement, we incurred reimbursements for overhead and other services provided by our manager of $0.2 million and $0.1 million for the three months ended March 31, 2008 and 2007, respectively.

Unrealized Gain on CDO Financial Assets and Liabilities: For the three months ended March 31, 2008, we recorded a $66.9 million unrealized gain, net, related to the fair value election of CDO related financial assets and liabilities pursuant to SFAS No. 159.

Loss on Impairment of CMBS . Our valuation and income recognition processes involves estimating loss adjusted cash flows over the expected term of the securities and determining an effective yield to maturity based on those cash flow estimates. For CMBS, if there is an adverse change in the net present value of projected cash flows from those estimated in the previous period, and the fair value of the security is below its amortized cost basis, we will reduce the amortized cost basis to fair value, pursuant to EITF 99-20. For assets in which we did not elect the FVO, this would result in an other than temporary impairment charge on the consolidated statement of operations. During the three months ended March 31, 2008 and March 31, 2007, we recorded other than temporary non-cash impairment charges related to its CMBS investments of $99.6 million and $0, respectively. The 2008 other than temporary impairment charges include a $2.1 million charge related to declines in the projected net present value of future cash flows pursuant to EITF 99-20. Additionally, we reforecasted the timing of collection of interest shortfalls of approximately $1.8 million that we projected to receive during the first quarter of 2008. These interest shortfalls are associated with individual loans within the CMBS pools and in some cases the shortfalls are expected to be fully recovered at the time of the resolution of the loan. For loans that are expected to incur losses upon resolution, the shortfall amounts have been incorporated into the forecasted loss amounts which are included in our cash flow projections for each respective bond. The bonds associated with these shortfalls were in an unrealized loss position of $6.4 million as of the end of the first quarter before recognizing the $99.6 million other than temporary impairment charge reflected in the consolidated statement of operations. The remaining non-cash CMBS impairment charge of $97.5 million relates to other than temporary declines in fair value which is due to widening of credit spreads for CMBS investments which began in the first half of 2007 and accelerated throughout the first quarter of 2008, resulting in both increased severity of the level of unrealized losses as well as increased duration of such losses.

As a result of the write-down in value of our CMBS assets financed by CDOs due to adoption of FVO and the write-down in value of our CMBS assets not financed by CDOs due to other than temporary impairment, the overall costs basis has been reduced to reflect the current estimated fair value with a corresponding increase in the yield on such CMBS investments. Accordingly, the weighted average yields on CMBS assets have increased from 8,7% at December 31, 2007 to 20.0% at March 31, 2008, due to a reduction in cost basis, without a corresponding reduction in projected future cash flows which are generally consistent with original underwriting. For example, according to information received from the master servicer, delinquency rates on collateral for our CMBS portfolio in which we own the first-loss position remain at low levels with a 60 day delinquency rate of approximately 32 basis points. As a result, we have no securities in an unrealized loss position at March 31, 2008.

Unrealized Loss on Loans Held for Sale. As of March 31, 2008, seven of our real estate loans with a cost basis of $231.4 million are classified as available for sale in order to provide additional potential sources of liquidity to us. Pursuant to SFAS No. 65, we carry such real estate loans on our consolidated balance sheet at the lower of cost or fair value, and as a result, during the three months ended March 31, 2008, we recorded charges related to increases in unrealized losses on such loans since December 31, 2008 aggregating $28.4 million.

Unrealized Loss on Non-CDO Interest Rate Swaps. During the first quarter of 2008, we determined that four interest rate swaps, aggregating $211.0 million in notional balance, intended to hedge anticipated future and current floating rate financings were no longer effective as such future long-term financings not considered probable at this time due to continued market disruptions. As a result, we recorded a charge of $15.6 million and reflected the change in market value during the three months ending March 31, 2008 of these interest rate swaps in unrealized loss on non-CDO interest rate swap agreements in the consolidated statement of operations. We recorded this charge as a result of uncertainty related to the Company’s ability to obtain future long-term match funded financing due to continued market disruptions as well as the potential for sales of certain real estate loans held for sale which would ideally be financed by such borrowings. As of March 31, 2008 the combined fair value of the four interest rate swaps was $(15.5) million.

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