10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

Commission File Number 1-14788

Capital Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland	94-6181186
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
410 Park Avenue, 14th Floor, New York, NY	10022
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code: (212) 655-0220

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x     No  o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No   x  

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of outstanding shares of the registrant’s class A common stock, par value $0.01 per share, as of July 31, 2007 was 17,509,459.

CAPITAL TRUST, INC.

INDEX

Part I.	Financial Information
	Item 1:	Financial Statements
		Consolidated Balance Sheets – June 30, 2007 (unaudited) and December 31, 2006 (audited)
		Consolidated Statements of Income – Three and Six Months Ended June 30, 2007 and 2006 (unaudited)
		Consolidated Statements of Changes in Shareholders’ Equity – Six Months Ended June 30, 2007 and 2006 (unaudited)
		Consolidated Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006 (unaudited)
		Notes to Consolidated Financial Statements (unaudited)
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk
	Item 4:	Controls and Procedures
Part II.	Other Information
	Item 1:	Legal Proceedings
	Item 1A:	Risk Factors
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3:	Defaults Upon Senior Securities
	Item 4:	Submission of Matters to a Vote of Security Holders
	Item 5:	Other Information
	Item 6:	Exhibits
	Signatures

Capital Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2007 and December 31, 2006

(in thousands)

	June 30,		December 31,
	2007		2006
	(unaudited)		(audited)
Assets
Cash and cash equivalents	$	24,479	$	26,142
Restricted cash	3,787		1,707
Commercial mortgage backed securities	891,367		810,970
Loans receivable	2,197,529		1,754,536
Total return swaps	—		1,815
Equity investment in unconsolidated subsidiaries	12,109		11,485
Deposits and other receivables	6,565		3,128
Accrued interest receivable	15,550		14,888
Interest rate hedge assets	10,570		2,565
Deferred income taxes	3,609		3,609
Prepaid and other assets	23,151		17,719
Total assets	$	3,188,716	$	2,648,564
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable and accrued expenses	$	30,364	$	38,061
Repurchase obligations	964,807		704,444
Collateralized debt obligations	1,199,748		1,212,500
Participations sold	334,244		209,425
Senior unsecured credit facility	75,000		—
Junior subordinated debentures	128,875		51,550
Interest rate hedge liabilities	39		1,688
Deferred origination fees and other revenue	3,550		4,624
Total liabilities	2,736,627		2,222,292
Commitments and contingencies
Shareholders’ equity:
Class A common stock, $0.01 par value, 100,000 shares authorized, 17,065 and 16,933 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively (“class A common stock”)	171		169
Restricted class A common stock, $0.01 par value 445 and 481 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively (“restricted class A common stock” and together with class A common stock, “common stock”)	5		5
Additional paid-in capital	421,764		417,641
Accumulated other comprehensive gain	22,154		12,717
Accumulated earnings/(deficit)	7,995		(4,260		)
Total shareholders’ equity	452,089		426,272
Total liabilities and shareholders’ equity	$	3,188,716	$	2,648,564

See accompanying notes to unaudited consolidated financial statements.

1

Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Income

Three and Six Months Ended June 30, 2007 and 2006

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended  June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Income from loans and other investments:
Interest and related income	$	68,797		$	46,219		$	126,247		$	77,851
Less: Interest and related expenses	40,192			26,267			76,293			43,536
Income from loans and other investments, net	28,605			19,952			49,954			34,315
Other revenues:
Management fees	582			627			1,331			1,235
Incentive management fees	—			84			962			212
Servicing fees	45			—			112			—
Other interest income	272			120			582			351
Total other revenues	899			831			2,987			1,798
Other expenses:
General and administrative	7,832			5,701			14,644			10,826
Depreciation and amortization	60			2,063			1,388			2,340
Total other expenses	7,892			7,764			16,032			13,166
Recovery of provision for losses	4,000			—			4,000			—
Income/(loss) from equity investments	(230		)	403			(933		)	722
Income before income taxes	25,382			13,422			39,976			23,669
(Benefit)/provision for income taxes	—			(770		)	(254		)	(1,471		)
Net income	$	25,382		$	14,192		$	40,230		$	25,140
Per share information:
Net earnings per share of common stock:
Basic	$	1.45		$	0.92		$	2.29		$	1.63
Diluted	$	1.43		$	0.91		$	2.27		$	1.62
Weighted average shares of common stock outstanding:
Basic	17,558,493			15,396,496			17,536,245			15,388,326
Diluted	17,728,180			15,536,948			17,715,810			15,525,586
Dividends declared per share of common stock	$	0.80		$	0.70		$	1.60		$	1.30

See accompanying notes to unaudited consolidated financial statements.

2

Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Six Months Ended June 30, 2007 and 2006

(in thousands)

(unaudited)

						Restricted				Accumulated
				Class A		Class A		Additional		Other
	Comprehensive			Common		Common		Paid-In		Comprehensive			Accumulated
	Income/(Loss)			Stock		Stock		Capital		Income/(Loss)			Deficit			Total
Balance at January 1, 2006				$	149	$	4	$	326,299	$	14,879		$	(2,481	)	$	338,850
Net income	$	25,140		—		—		—		—			25,140			25,140
Unrealized gain on derivative financial instruments	13,206			—		—		—		13,206			—			13,206
Amortization of unrealized gain on securities	(814		)	—		—		—		(814		)	—			(814		)
Sale of shares of class A common stock under stock option agreements	—			—		—		219		—			—			219
Deferred gain on settlement of swap, net of amortization	—			—		—		—		1,100			—			1,100
Restricted class A common stock earned	—			—		—		1,831		—			—			1,831
Dividends declared on class A common stock	—			—		—		—		—			(19,918		)	(19,918		)
Balance at June 30, 2006	$	37,532		$	149	$	4	$	328,349	$	28,371		$	2,741		$	359,614
Balance at January 1, 2007				$	169	$	5	$	417,641	$	12,717		$	(4,260	)	$	426,272
Net income	$	40,230		—		—		—		—			40,230			40,230
Unrealized gain on derivative financial instruments	9,644			—		—		—		9,644			—			9,644
Unrealized gain on available for sale security	110			—		—		—		110			—			110
Amortization of unrealized gain on securities	(837		)	—		—		—		(837		)	—			(837		)
Currency translation adjustments	810			—		—		—		810			—			810
Issuance of stock relating to asset purchase	—			—		—		707		—			—			707
Sale of shares of class A common stock under stock option agreements	—			—		—		952		—			—			952
Deferred gain/(loss) on settlement of swap, net of amortization	—			—		—		—		(290		)	—			(290		)
Restricted class A common stock earned	—			2		—		2,464		—			—			2,466
Dividends declared on class A common stock	—			—		—		—		—			(27,975		)	(27,975		)
Balance at June 30, 2007	$	49,957		$	171	$	5	$	421,764	$	22,154		$	7,995		$	452,089

See accompanying notes to unaudited consolidated financial statements.

3

Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six months ended June 30, 2007 and 2006

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	40,230		$	25,140
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,388			2,340
(Income)/loss from equity investments	933			(722		)
Distributions from equity investments	320			633
Restricted class A common stock earned	2,464			1,831
Amortization of premiums and accretion of discounts on loans, CMBS, and debt, net	(1,022		)	(635		)
Amortization of deferred gains on interest rate hedges	(137		)	(86		)
Stock based compensation	—			(45		)
Changes in assets and liabilities, net:
Deposits and other receivables	1,616			5,236
Accrued interest receivable	(662		)	(2,462		)
Deferred income taxes	—			(692		)
Prepaid and other assets	1,930			960
Deferred origination fees and other revenue	(1,074		)	2,104
Accounts payable and accrued expenses	2,676			(2,073		)
Net cash provided by operating activities	48,662			31,529
Cash flows from investing activities:
Purchases of commercial mortgage-backed securities	(110,550		)	(359,280		)
Principal collections on and proceeds from sale of commercial mortgage-backed securities	29,968			11,344
Origination and purchase of loans receivable	(1,005,084		)	(453,559		)
Principal collections on loans receivable	442,442			181,992
Equity investments in unconsolidated subsidiaries	(3,919		)	—
Return of capital from investments in unconsolidated subsidiaries	1,616			2,295
Purchase of total return swaps	—			(4,138		)
Proceeds from total return swaps	1,815			4,000
Purchases of equipment and leasehold improvements	(307		)	—
Payments for business purchased	(2,560		)	—
Payment of capitalized costs	(115		)	—
Decrease/(increase) in restricted cash	(2,080		)	(2,080		)
Net cash used in investing activities	(648,774		)	(619,426		)
Cash flows from financing activities:
Proceeds from repurchase obligations	1,163,636			534,529
Repayment of repurchase obligations	(903,272		)	(570,403		)
Proceeds from credit facilities	100,000			—
Repayment of credit facilities	(25,000		)	—
Issuance of junior subordinated debentures	77,325			51,550
Purchase of common equity in CT Preferred Trust I & CT Preferred Trust II	(2,325		)	(1,550		)
Proceeds from issuance of collateralized debt obligations	—			429,398
Repayments of collateralized debt obligations	(12,598		)	(2,632		)
Proceeds from participations sold	239,742			155,950
Settlement of interest rate hedges	(153		)	1,186
Payment of deferred financing costs	(2,218		)	(3,799		)
Sale of shares of class A common stock under stock option agreements	952			219
Reimbursement of offering expenses	—			123
Stock issuance for business purchased	707			—
Dividends paid on class A common stock	(38,347		)	(21,415		)
Net cash provided by financing activities	598,449			573,156
Net decrease in cash and cash equivalents	(1,663		)	(14,741		)
Cash and cash equivalents at beginning of year	26,142			24,974
Cash and cash equivalents at end of period	$	24,479		$	10,233

See accompanying notes to unaudited consolidated financial statements

4

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1.     Organization

References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

We are a fully integrated, self-managed finance and investment management company that specializes in credit sensitive structured financial products. To date, our investment programs have focused on loans and securities backed by commercial real estate assets. We invest for our own account directly on our balance sheet and for third parties through a series of investment management vehicles. From the commencement of our finance business in 1997 through June 30, 2007, we have completed over $10.0 billion of investments in the commercial real estate debt arena. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes and we are headquartered in New York City.

2.     Summary of Significant Accounting Policies

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the financial statements and the related management discussion and analysis of financial condition and results of operations filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.  In our opinion, all material adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2007.  Our accounting and reporting policies conform in all material respects to accounting principles generally accepted in the United States.

Principles of Consolidation

The accompanying unaudited consolidated interim financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries and our interests in variable interest entities in which we are the primary beneficiary.  All significant intercompany balances and transactions have been eliminated in consolidation. Our interests in CT Preferred Trust I and CT Preferred Trust II, the issuers of our junior subordinated debentures, are accounted for using the equity method and their assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I and CT Preferred Trust II are variable interest entities in which we are not the primary beneficiary under Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN 46. We account for our co-investment interest in a private equity fund we co-sponsored and continue to manage, CT Mezzanine Partners III, Inc., or Fund III, under the equity method of accounting. We also account for our investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, under the equity method of accounting. As such, we report a percentage of the earnings of Fund III and Bracor equal to our ownership percentage on a single line item in the consolidated statement of operations as income from equity investments.

Revenue Recognition

Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and is recorded on the accrual basis. Fees, premiums, discounts and direct costs in connection with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration. For loans where we have unfunded commitments, we amortize the appropriate items on a straight line basis. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

Fees from special servicing and asset management services are recognized as services are rendered. We account for incentive fees we can potentially earn from our investment management business in accordance with Method 1 of Emerging Issues Task Force Topic D-96. Under Method 1, no incentive income is recorded until all contingencies have been eliminated.

5

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

2.     Summary of Significant Accounting Policies, continued

Cash and Cash Equivalents

We classify highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents.  At June 30, 2007 and December 31, 2006, a majority of the cash and cash equivalents consisted of overnight investments in commercial paper.  As of, and for the periods ended, June 30, 2007 and December 31, 2006, we had bank balances in excess of federally insured amounts.  We have not experienced any losses on our demand deposits, commercial paper or money market investments.

Restricted Cash

Restricted cash is comprised of $3.8 million that is on deposit with the trustee for our collateralized debt obligations, or CDOs, and is expected to be used to pay contractual interest and principal and to purchase replacement collateral for our reinvesting CDOs during their respective reinvestment periods.

Commercial Mortgage Backed Securities

We classify our commercial mortgage backed securities, or CMBS, investments pursuant to FASB Statement of Financial Accounting Standards No. 115, or FAS 115, on the date of acquisition of the investment. On August 4, 2005, we made a decision to change the accounting classification of our CMBS investments from available for sale to held to maturity. Held to maturity investments are stated at cost plus the amortization of any premiums or discounts and any premiums or discounts are amortized through the consolidated statements of income using the level yield method.  Other than in the instance of impairment, these held to maturity investments are shown in our financial statements at their adjusted values pursuant to the methodology described above.

We may also invest in CMBS and certain other securities which may be classified as available for sale.  Available for sale securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income/(loss) in shareholders’ equity.  Many of these investments are relatively illiquid and management must estimate their values.  In making these estimates, management utilizes market prices provided by dealers who make markets in these securities, but may, under certain circumstances, adjust these valuations based on management’s judgment.  Changes in the valuations do not affect our reported income or cash flows, but impact shareholders’ equity and, accordingly, book value per share.

Income on these securities is recognized based upon a number of assumptions that are subject to uncertainties and contingencies.  Examples include, among other things, the rate and timing of principal payments, including prepayments, repurchases, defaults and liquidations, the pass-through or coupon rate and interest rates.  Additional factors that may affect our reported interest income on our mortgage backed securities include interest payment shortfalls due to delinquencies on the underlying mortgage loans and the timing and magnitude of credit losses on the mortgage loans underlying the securities that are impacted by, among other things, the general condition of the real estate market, including competition for tenants and their related credit quality, and changes in market rental rates.  These uncertainties and contingencies are difficult to predict and are subject to future events that may alter the assumptions.

We account for CMBS under Emerging Issues Task Force 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, or EITF 99-20.  Under EITF 99-20, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and/or credit loss experience and the present value of the revised cash flows using the current expected yield is less than the present value of the previously estimated remaining cash flows, adjusted for cash receipts during the intervening period, an other-than-temporary impairment is deemed to have occurred.  Accordingly, the security is written down to fair value with the resulting change being included in income and a new cost basis established with the original discount or premium written off when the new cost basis is established.  In accordance with this guidance, on a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and/or credit loss experience, we calculate a revised yield based upon the current amortized cost of the investment, including any other-than-temporary impairments recognized to date, and the revised cash flows.  The revised yield is then applied prospectively to recognize interest income.  Management must also assess whether unrealized losses on securities reflect a decline in value that is other-than-temporary, and, accordingly, write down the impaired security to its fair value, through a charge to earnings.

6

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

2.     Summary of Significant Accounting Policies, continued

Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectibility of the principal and interest, net of related expenses, on the underlying loans.

During the fourth quarter of 2004, we concluded that two of our CMBS investments had incurred other than temporary impairment and we incurred a charge of $5.9 million through the income statement.  At June 30, 2007 we believe there has not been any adverse change in cash flows since December 31, 2004, therefore we did not recognize any additional other than temporary impairment on any CMBS investments.  Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectibility of the principal and interest, net of related expenses, on the underlying loans.

From time to time we purchase CMBS and other investments in which we have a level of control over the issuing entity; we refer to these investments as controlling class investments, or Controlling Class Investments.  The presentation of Controlling Class Investments in our financial statements is governed in part by FIN 46.  FIN 46 could require that certain Controlling Class Investments be presented on a consolidated basis.  Based upon the specific circumstances of certain of our CMBS investments that are Controlling Class Investments and our interpretation of FIN 46, specifically the exemption for qualifying special purpose entities as defined under FASB Statements of Financial Accounting Standard No. 140, or FAS 140, we have concluded that the entities that have issued the Controlling Class Investments should not be presented on a consolidated basis.  We are aware that FAS 140 is currently under review by standard setters and that, as a result of this review, our current interpretation of FIN 46 and FAS 140 may change.

Loans Receivable and Reserve for Possible Credit Losses

We purchase and originate commercial real estate debt and related instruments, or Loans, to be held as long term investments at amortized cost.  Management must periodically evaluate each of these Loans for possible impairment.  Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the Loan.  If a Loan were determined to be permanently impaired, we would write down the Loan through a charge to the reserve for possible credit losses.  Given the nature of our Loan portfolio and the underlying commercial real estate collateral, significant judgment on the part of management is required in determining the permanent impairment and the resulting charge to the reserve, which includes but is not limited to making assumptions regarding the value of the real estate that secures the loan.  Each Loan in our portfolio is evaluated at least quarterly using our loan risk rating system which considers loan-to-value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and other factors deemed necessary by management to assess the likelihood of delinquency or default.  If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our Loan, and this potential loss is multiplied by the default likelihood to determine the size of the reserve.  Actual losses, if any, could ultimately differ from these estimates.

Deferred Financing Costs

The deferred financing costs which are included in other assets on our consolidated balance sheets include issuance costs related to our debt and are amortized using the effective interest method or a method that approximates the effective interest method.

Repurchase Obligations

In certain circumstances, we have financed the purchase of investments from a counterparty through a repurchase agreement with that same counterparty.  We currently record these investments in the same manner as other investments financed with repurchase agreements, with the investment recorded as an asset and the related borrowing under any repurchase agreement as a liability on our consolidated balance sheet. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on the consolidated statements of income.  There is a position under consideration by standard setters, based upon a technical interpretation of FAS 140, that these transactions will not qualify as a purchase by us.  We believe, consistent with industry practice, that we are accounting for these transactions in an appropriate manner; however, if these investments do not qualify as a purchase under FAS 140, we would be required to present the net investment (asset balance less the repurchase obligation balance) on our balance sheet together with an embedded derivative with the corresponding change in fair value of the derivative being recorded in the consolidated statements of income.

7

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

2.     Summary of Significant Accounting Policies, continued

The value of the derivative would reflect not only changes in the value of the underlying investment, but also changes in the value of the underlying credit provided by the counterparty.  Income from these arrangements would be presented on a net basis.  Furthermore, hedge instruments related to these assets and liabilities, currently deemed effective, may no longer be effective and may have to be accounted for as non-hedge derivatives.  As of June 30, 2007 we had entered into 23 such transactions, with a book value of the associated assets of $630.6 million financed with repurchase obligations of $451.7 million. Adoption of the aforementioned treatment would result in a reduction in total assets and liabilities on our consolidated balance sheet of $451.7 million and $395.8 million at June 30, 2007 and December 31, 2006, respectively.

Interest Rate Derivative Financial Instruments

In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations.  Specifically, we currently use interest rate swaps to effectively convert variable rate liabilities, that are financing fixed rate assets, to fixed rate liabilities.  The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability.  The swap agreements are generally accounted for on a held to maturity basis, and, in cases where they are terminated early, any gain or loss is generally amortized over the remaining life of the hedged item.  These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment.  Changes in value of effective cash flow hedges are reflected in our financial statements through accumulated other comprehensive income/(loss) and do not affect our net income.  To the extent a derivative does not qualify for hedge accounting, and is deemed a non-hedge derivative, the changes in its value are included in net income.

To determine the fair value of derivative instruments, we use third parties to periodically value our interests.

Income Taxes

Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income.  Management believes that we operate in a manner that will continue to allow us to be taxed as a REIT and, as a result, do not expect to pay substantial corporate level taxes (other than taxes payable by our taxable REIT subsidiaries which are accounted for in accordance with FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, or FAS 109).  Many of these requirements, however, are highly technical and complex.  If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and we may also be subject to penalties.

In June 2006, the FASB issued Financial Interpretation No. 48, or FIN 48.  This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation was effective January 1, 2007 for the company. The adoption of FIN 48 did not have a material impact on our financial results.

Accounting for Stock-Based Compensation

We account for stock based compensation in accordance with FASB Statement of Financial Accounting Standards No. 123(R).  We have elected to utilize the modified prospective method, and there was no material impact from this adoption.  Compensation expense for the time vesting of stock based compensation grants is recognized on the accelerated attribution method under FASB Interpretation No. 28, and compensation expense for performance vesting of stock based compensation grants is recognized on a straight-line basis.

Comprehensive Income

We comply with the provisions of the FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, or FAS 130, in reporting comprehensive income and its components in the full set of general-purpose financial statements. Total comprehensive income was $50.0 million and $37.5 million, for the periods ended June 30, 2007 and 2006, respectively.  The primary component of comprehensive income other than net income was the unrealized gain/(loss) on derivative financial instruments and CMBS.  At June 30, 2007,

8

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

2.     Summary of Significant Accounting Policies, continued

accumulated other comprehensive income was $22.2 million, comprised of unrealized gains on CMBS of $9.2 million, unrealized gains on cash flow swaps of $10.5 million, $1.6 million of deferred realized gains on the settlement of cash flow swaps, and $812,000 of currency translation adjustments.

Earnings per Share of Common Stock

Earnings per share of common stock are presented based on the requirements of the FASB Statement of Accounting Standards No. 128, or FAS 128.  Basic EPS is computed based on the income applicable to common stock and stock units divided by weighted average number of shares of common stock and stock units outstanding during the period.  Diluted EPS is based on the net earnings applicable to common stock and stock units, divided by weighted average number of shares of common stock and stock units and potentially dilutive common stock options.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may ultimately differ from those estimates.

Reclassifications

Certain reclassifications have been made in the presentation of the prior periods consolidated financial statements to conform to the June 30, 2007 presentation.

Segment Reporting

We operate in two reportable segments. We have an internal information system that produces performance and asset data for the two segments along service lines.

The “Balance Sheet Investment” segment includes all of our activities related to direct loan and investment activities (including our co-investments in investment management vehicles and our investment in Bracor) and the financing thereof.

The “Investment Management” segment includes the activities related to investment management services provided by CT Investment Management Co., LLC, or CTIMCO, and its subsidiaries.  CTIMCO is a taxable REIT subsidiary and is our special servicer and the investment manager of Capital Trust, Inc., and all of our investment management vehicles.

Related Party Transactions

On November 9, 2006, we commenced our CT High Grade MezzanineSM investment management initiative and entered into three separate account agreements with affiliates of W. R. Berkley Corporation, or WRBC, for an aggregate of $250 million.  On July 25, 2007, we amended the agreements to increase the aggregate commitment of the WRBC affiliates to $350 million.  Pursuant to these agreements, we invest, on a discretionary basis, capital on behalf of WRBC in low risk commercial real estate mortgages, mezzanine loans and participations therein.  WRBC beneficially owns approximately 14.2% of our outstanding class A common stock as of July 29, 2007 and a member of our board of directors is an employee of WRBC. The separate accounts are entirely funded with committed capital from WRBC and are managed by a subsidiary of our wholly-owned investment management subsidiary, CT Investment Management Co. LLC, or CTIMCO.  Each separate account has a one-year investment period with extension provisions. CTIMCO will earn a management fee equal to 0.25% per annum on invested assets.

On April 27, 2007, we purchased a $20 million subordinated interest in a mortgage from a dealer.  Proceeds from the original mortgage financing provide for the construction and leasing of an office building in Washington, D.C.  The mortgage borrower is a joint venture between two parties, one of which is 80% controlled by W.R. Berkley Corporation, or WRBC.  WRBC beneficially owns approximately 14.2% of our outstanding class A common stock as of July 29, 2007 and a member of our board of directors is an employee of WRBC.

We believe that the terms of the foregoing transactions are no less favorable than could be obtained by us from unrelated parties on an arm’s length basis.

Business Combination

On June 15, 2007, the company purchased a healthcare loan origination platform with 18 employees, located in Birmingham, Alabama. The company paid a $2.6 million initial purchase price ($1.9 million in cash and $707,000 in stock) and has a contingent obligation to pay an additional $1.8 million ($1.1 million in cash and $700,000 in stock) on March 15, 2009 if the acquired business meets certain performance criteria. The company has recorded $2.1 million of goodwill associated with the initial purchase price.

9

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

3.     Commercial Mortgage Backed Securities

Activity relating to our CMBS investments for the six months ended June 30, 2007 was as follows ($ values in thousands):

							Weighted Average
					Number of	Number of						Maturity
Asset Type	Face Value		Book Value		Securities	Issue	Rating (1)	Coupon(2)		Yield(2)		(Years) (3)
December 31, 2006
Floating Rate	$	86,012	$	84,807	11	9	BBB-	7.42	%	7.51	%	2.0
Fixed Rate	764,607		726,163		66	48	BB+	6.68	%	7.13	%	8.5
Total/Average	850,619		810,970		77	57	BB+	6.75	%	7.17	%	7.8
Originations - Six Months
Floating Rate	109,621		109,617		7	4	BB-	9.66	%	9.66	%	3.8
Fixed Rate	1,000		933		1	1	BB+	6.13	%	6.57	%	3.3
Total/Average	110,621		110,550		8	5	BB-	9.63	%	9.63	%	3.8
Repayments & Other (4) - Six Months
Floating Rate	19,605		19,627		4	—	N/A	N/A		N/A		N/A
Fixed Rate	10,369		10,526		1	1	N/A	N/A		N/A		N/A
Total/Average	29,974		30,153		5	1	N/A	N/A		N/A		N/A
June 30, 2007
Floating Rate	176,028		174,797		14	13	BB	8.87	%	8.92	%	2.9
Fixed Rate	755,238		716,570		66	48	BB+	6.67	%	7.13	%	8.1
Total/Average	$	931,266	$	891,367	80	61	BB+	7.09	%	7.48	%	7.0

(1) Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $37.4 million of unrated equity investments in collateralized debt obligations.

(2) Calculations based on LIBOR of 5.32% as of June 30, 2007 and LIBOR of 5.32% as of December 31, 2006.

(3) Represents the maturity of the investment assuming all extension options are executed.

(4) Includes full repayments, sale, partial repayments, mark-to-market adjustments, and the impact of premium and discount amortization and losses, if any.  The figures shown in “Number of Securities” and “Number of Issues” represent the full repayments/sales, if any.

We acquire rated and unrated subordinated investments in CMBS.  As detailed in Note 2, on August 4, 2005, pursuant to the provisions of FAS 115, we made a decision to change the accounting classification of our then portfolio of CMBS investments from available for sale to held to maturity.

While we typically account for our CMBS investments on a held to maturity basis, under certain circumstances we will account for CMBS on an available for sale basis.  At June 30, 2007, we had one CMBS investment that we designated and account for on an available for sale basis with a face value of $10.0 million. The security earns interest at a fixed rate of 7.87%.  As of June 30, 2007, the security was carried at its fair market value of $10.5 million. The investment matures in February 2010.

Quarterly, we reevaluate our CMBS portfolio to determine if there has been an other-than-temporary impairment based upon our assessment of future cash flow receipts.  For the six months ended June 30, 2007, we believe that

10

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

3.     Commercial Mortgage Backed Securities, continued

there has not been any adverse change in cash flows for our CMBS portfolio and, therefore, did not recognize any other-than-temporary impairments.  Significant judgment of management is required in this analysis that includes, but is not limited to, making assumptions regarding the collectibility of principal and interest, net of related expenses, on the underlying loans.

Certain of our CMBS investments are carried at values in excess of their market values.  This difference can be caused by, among other things, changes in interest rates, changes in credit spreads, realized/unrealized losses and general market conditions.  At June 30, 2007, 59 CMBS investments with an aggregate carrying value of $591.3 million were carried at values in excess of their market values.  Market value for these CMBS investments was $571.2 million at June 30, 2007.

11

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

4. Loans Receivable

Activity relating to our loans receivable for the six months ended June 30, 2007 was as follows ($ values in thousands):

							Weighted Average
						Number of					Maturity
Asset Type	Face Value(1)		Book Value(1)			Investments(1)	Coupon(2)		Yield (2)		(Years)(3)
December 31, 2006
Floating rate(4)
Mortgage loans	$	234,419	$	234,419		14	7.85	%	8.47	%	4.0
Subordinate mortgage interests	669,532		668,365			28	8.29	%	8.37	%	3.9
Mezzanine loans	622,055		621,877			23	9.57	%	9.76	%	4.3
Total/Average	1,526,006		1,524,661			65	8.75	%	8.96	%	4.1
Fixed rate
Mortgage loans	—		—			—	—		—		—
Subordinate mortgage interests	42,309		41,486			4	7.78	%	7.85	%	16.0
Mezzanine loans	187,161		185,751			11	9.07	%	9.25	%	4.9
Total/Average	229,470		227,237			15	8.80	%	8.96	%	7.2
Total/Average - December 31, 2006	1,755,476		1,751,898			80	8.75	%	8.96	%	4.5
Originations(5) - Six Months
Floating rate
Mortgage loans	367,259		367,259			9	7.69	%	8.01	%	3.9
Subordinate mortgage interests	221,342		221,192			9	8.23	%	8.27	%	4.8
Mezzanine loans	416,632		416,632			9	8.69	%	8.68	%	3.4
Total/Average	1,005,233		1,005,083			27	8.22	%	8.35	%	4.0
Fixed rate
Mortgage loans	—		—			—	—		—		—
Subordinate mortgage interests	—		—			—	—		—		—
Mezzanine loans	—		—			—	—		—		—
Total/Average	—		—			—	—		—		—
Total/Average	1,005,233		1,005,083			27	8.22	%	8.35	%	4.0
Repayments & Other(6)- Six Months
Floating rate
Mortgage loans	13,817		13,817			1	N/A		N/A		N/A
Subordinate mortgage interests	298,830		297,918			8	N/A		N/A		N/A
Mezzanine loans	231,968		231,950			9	N/A		N/A		N/A
Total/Average	544,615		543,685			18	N/A		N/A		N/A
Fixed rate
Mortgage loans	—		—			—
Subordinate mortgage interests	40		(26		)	—	N/A		N/A		N/A
Mezzanine loans	15,119		15,793			2	N/A		N/A		N/A
Total/Average	15,159		15,767			2	N/A		N/A		N/A
Total/Average	559,774		559,452			20	N/A		N/A		N/A
June 30, 2007
Floating rate
Mortgage loans	587,861		587,861			22	7.75	%	8.07	%	4.1
Subordinate mortgage interests	592,044		591,639			29	8.02	%	8.01	%	3.9
Mezzanine loans	806,719		806,559			23	9.18	%	9.24	%	3.7
Total/Average	1,986,624		1,986,059			74	8.41	%	8.53	%	3.9
Fixed rate
Mortgage loans	—		—			—	—		—		—
Subordinate mortgage interests	42,269		41,512			4	7.72	%	7.80	%	17.7
Mezzanine loans	172,042		169,958			9	8.99	%	9.13	%	4.5
Total/Average	214,311		211,470			13	8.74	%	8.87	%	7.1
Total/Average - June 30, 2007	$	2,200,935	$	2,197,529		87	8.44	%	8.56	%	4.2

(1)December 31, 2006 values do not include one non performing loan that was successfully resolved in the second quarter of 2007.

(2)Calculations based on LIBOR of 5.32% as of June 30, 2007 and LIBOR of 5.32% as of December 31, 2006.

(3)Represents the maturity of the investment assuming all extension options are executed.

(4)During the period one subordinate mortgage interest with a book value of $6,866 switched from a fixed rate to a floating rate.

(5)Includes additional fundings on prior period originations.  The figures shown in “Number of Investments” represent the actual number of originations during the period.

(6)Includes full repayments, sales, partial repayments and the impact of premium and discount amortization and losses, if any.  The figures shown in “Investments” represent the full repayments/sales, if any.

12

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

4. Loans Receivable, continued

During the second quarter of 2007, we successfully resolved our only non performing loan. The loan was a first mortgage with an original principal balance of $8.0 million that reached maturity on July 15, 2000.  In December 2002, the loan was written down to $4.0 million. From 2002 to March 31, 2007 we had received $1.4 million in cash collections, which further reduced the carrying value of the loan to $2.6 million. During the second quarter of 2007, we received net proceeds of $10.9 million which resulted in reducing the carrying value of the loan to zero and recording $4.0 million of a recovery of provision for losses and $4.3 million of interest income.

In some instances, we have a further obligation to fund additional amounts under our loan arrangements, or Unfunded Loan Commitments.  At June 30, 2007, we had 15 such Unfunded Loan Commitments for a total future funding obligation of $277.5 million.

In connection with the aforementioned loans, at June 30, 2007, we have deferred origination fees, net of direct costs of $3.5 million which are being amortized into income over the life of the loans.

At June 30, 2007, we had $5.1 million included in deposits and other receivables which represented loans that were satisfied and repaid prior to June 30, the proceeds of which had not been remitted to us by our servicers at quarter end.

Quarterly, management reevaluates the reserve for possible credit losses based upon our current portfolio of loans. Each loan in our portfolio is evaluated using our loan risk rating system which considers loan to value, debt yield, cash flow stability, exit plan, loan sponsorship, loan structure and any other factors necessary to assess the likelihood of delinquency or default.  If we believe that there is a potential for delinquency or default, a downside analysis is prepared to estimate the value of the collateral underlying our loan, and this potential loss is multiplied by the default likelihood. At June 30, 2007, a detailed review of the entire portfolio was completed, and we concluded that a reserve for possible credit losses was not warranted.

5.Total Return Swaps

Total return swaps are derivative contracts in which one party agrees to make payments that replicate the total return of a defined underlying asset, typically in return for another party agreeing to bear the risk of performance of the defined underlying asset.  Under our current total return swaps, we bear the risk of performance of the underlying asset and receive payments from our counterparty as compensation.  In effect, these total return swaps allow us to receive the leveraged economic benefits of asset ownership without our acquiring, or our counterparty selling, the actual underlying asset.  Our total return swaps reference commercial real estate loans and contain a put provision whereby our counterparty has the right to require us to buy the entire reference loan at its par value under certain reference loan performance scenarios.  The put obligation imbedded in these arrangements constitutes a recourse obligation for us to perform under the terms of the contract.

Activity relating to our total return swaps for the six months ended June 30, 2007 was as follows ($ values in thousands):

								Weighted Average
	Fair Market Value (Book Value)		Cash Collateral		Reference/Loan Participation		Number of Investments	Yield(1)		Maturity (Years)(2)
December 31, 2006	$	1,815	$	1,815	$	40,000	2	20.55	%	1.4
Originations- Six Months	—		—		—		—	—		—
Repayments- Six Months	1,815		1,815		20,000		1	N/A		N/A
June 30, 2007(3)	$	—	$	—	$	20,000	1	N/A		N/A

(1) Calculations based on LIBOR of 5.32% as of June 30, 2007 and LIBOR of 5.32% as of December 31, 2006.

(2) Maturity (years) based on initial maturity date of the commitments.

(3) The total return swaps currently have no outstanding balance and a $3.0 million unfunded commitment exists.

The total return swaps are treated as non-hedge derivatives for accounting purposes and, as such, changes in their market value are recorded through the consolidated statements of income.  At June 30, 2007, our total return swaps were valued at par and no such consolidated statement of income impact was recorded.

13

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

6. Equity Investment in Unconsolidated Subsidiaries

Pursuant to a venture agreement with a joint venture partner, or the Venture Agreement, entered into in 2000 and subsequently amended in 2003, we have co-sponsored two private equity funds:  CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., or Fund II and Fund III. On March 30, 2007, Fund II was liquidated and as of June 30, 2007, Fund III is the only active fund operating under the aforementioned joint venture.  We are a co-investor in  Fund III and our wholly-owned subsidiary, CTIMCO, serves as the investment manager to the fund.  The fund has concluded its investment period and is liquidating in the ordinary course.  In connection with entering into the Venture Agreement and the formation of the funds, we capitalized certain costs.  These costs are being amortized over the expected life of the fund.

In September 2006, we made a founding investment in Bracor Investimentos Imobiliarios Ltda., or Bracor, a newly formed net lease commercial real estate company located and operating in Brazil.  Our total commitment is $15.0 million and at June 30, 2007, we had funded $9.8 million of our commitment.  Bracor is owned 24% by us, 47% by Equity International Properties, Ltd., or EIP, and 29% by third parties.  Our chairman, Sam Zell, is the chairman of EIP and has an ownership position in EIP.  Bracor’s operations are conducted in Brazilian Reais and changes in the USD/Reais exchange rate will impact the carrying value of our investment.  At June 30, 2007, the currency valuation adjustment for our investment was $812,000 that included a $810,000 change for the six months ended June 30, 2007 and was recorded as an adjustment to accumulated other comprehensive income/(loss) in shareholders’ equity.  Our share of profits and losses from Bracor will be reported one quarter subsequent to the period earned by Bracor.

Activity relating to our equity investment in unconsolidated subsidiaries for the six months ended June 30, 2007 was as follows ($ values in thousands):

	Fund II			Fund II GP			Fund III			Bracor(1)			Total
Equity Investment
Beginning Balance	$	635		$	573		$	2,929		$	5,675		$	9,812
Equity investment	—			—			—			3,919			3,919
Company portion of fund income	(152		)	(534		)	229			(484		)	(941		)
Currency translation adjustments	—			—			—			810			810
Amortization of capitalized costs	—			—			—			—			—
Distributions from funds	(483		)	—			(1,453		)	—			(1,936		)
Ending Balance	$	—		$	39		$	1,705		$	9,920		$	11,664
Capitalized Costs
Beginning Balance	$	1,264		$	—		$	368		$	41		$	1,673
Capitalized costs	—			—			—			114			114
Amortization of capitalized costs	(1,264		)	—			(76		)	(2		)	(1,342		)
Ending Balance	$	—		$	—		$	292		$	153		$	445
Total Balance	$	—		$	39		$	1,997		$	10,073		$	12,109

(1) Includes $258,000 of additional basis that represents a difference between our share of net assets at Bracor and our carrying value.

In conjunction with the liquidation of Fund II, we received our final payment of incentive fees from the fund of $962,000, bringing total incentive fees paid to us from Fund II to $10.6 million.  In addition, during the first quarter of 2007, we expensed the remaining capitalized cost associated with Fund II, $1.3 million from our balance sheet and $384,000 through our equity interest in Fund II GP.

14

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

7.Debt

At June 30, 2007 and December 31, 2006, we had $2.4 billion and $2.0 billion of total debt outstanding, respectively. The balances of each category of debt and their respective coupons and all in effective costs, including the amortization of fees and expenses were as follows ($ values in thousands):

	June 30, 2007								December 31, 2006
	Face Value		Book Value		Coupon(1)		All In Cost		Face Value		Book Value		Coupon(1)		All In Cost
Repurchase Obligations	$	964,807	$	964,807	6.25	%	6.47	%	$	704,444	$	704,444	6.34	%	6.53	%
Collateralized Debt Obligations
CDO I (Floating)	252,778		252,778		5.94	%	6.38	%	252,778		252,778		5.94	%	6.39	%
CDO II (Floating)	298,913		298,913		5.81	%	6.03	%	298,913		298,913		5.81	%	6.04	%
CDO III (Fixed)	262,306		264,311		5.22	%	5.34	%	264,594		266,754		5.22	%	5.25	%
CDO IV(Floating)(2)	383,746		383,746		5.74	%	5.81	%	394,055		394,055		5.74	%	5.81	%
Total CDOs	1,197,743		1,199,748		5.69	%	5.89	%	1,210,340		1,212,500		5.69	%	5.86	%
Senior Unsecured Credit Facility	75,000		75,000		6.82	%	7.12	%	—		—		—		—
Junior Subordinated Debentures	128,875		128,875		7.20	%	7.30	%	51,550		51,550		7.45	%	7.53	%
Total	$	2,366,425	$	2,368,430	6.03	%	6.24	%	$	1,966,334	$	1,968,494	5.97	%	6.15	%

(1) Calculations based on LIBOR of 5.32% as of June 30, 2007 and LIBOR of 5.32% as of December 31, 2006.

(2) Comprised of $368.8 million of floating rate notes sold and $14.9 million of fixed rate notes sold.

Repurchase Obligations

At June 30, 2007, we were party to nine master repurchase agreements with seven counterparties that provide total commitments of $1.6 billion. At June 30, 2007, we borrowed $906.6 million under these agreements and had the ability to borrow an additional $128.8 million without pledging additional collateral.

We were also a party to asset specific repurchase obligations. The term of these agreements are generally one year or less and advance rates are up to 75% with cash costs ranging from LIBOR plus 0.45% to LIBOR plus 2.50%. At June 30, 2007, these asset specific repurchase obligations represent borrowings of $58.2 million and we had the ability to borrow an additional $7.1 million without pledging additional collateral.

In total our borrowings at June 30, 2007 under repurchase agreements were $964.8 million and we had the ability to borrow an additional $135.9 million without pledging additional collateral.

In February 2007, we amended and restated our master repurchase agreements with Bear Stearns increasing the combined commitment by $250 million to $450 million.  The agreements expire in August 2008 and are designed to finance, on a recourse basis, our general investment activity as well as assets designated for one or more of our CDOs.  Under the agreements, advance rates are up to 85.0% and cash costs of funds range from LIBOR plus 0.55% to LIBOR plus 2.00%.  At June 30, 2007, we had incurred borrowings under the agreements of $323.4 million and had the ability to borrow an additional $30.8 million against the assets collateralizing the borrowings under the agreement.

In February 2007, we amended and restated one of our master repurchase agreements with Morgan Stanley increasing the commitment by $100 million to $300 million.  The agreement expires in July 2009 and is designed to finance, on a recourse basis, our general investment activity.  Under the agreement, advance rates are up to 85.0% and cash costs of funds range from LIBOR plus 0.40% to LIBOR plus 2.00%.  At June 30, 2007, we had incurred borrowings under the agreements of $147.7 million and had the ability to borrow an additional $70.1 million against the assets collateralizing the borrowings under the agreements.

15

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

7.Debt, continued

Collateralized Debt Obligations

At June 30, 2007, we had CDOs outstanding from four separate issuances with a total face value of $1.2 billion.  Our existing CDOs are financing vehicles for our assets and, as such, are consolidated on our balance sheet, representing the amortized sales price of the securities we sold to third parties.  In total, our two reinvesting CDOs provide us with $551.7 million of debt financing at a cash cost of LIBOR plus 0.55% (5.87% at June 30, 2007) and an all in effective interest rate (including the amortization of issuance costs) of LIBOR plus 0.87% (6.19% at June 30, 2007).  Our two static CDOs provide us with $648.1 million of financing with a cash cost of 5.53% and an all in effective interest rate of 5.62% at June 30, 2007.  On a combined basis, our CDOs provide us with $1.2 billion of non-recourse, non-mark-to-market, index matched financing at a weighted average cash cost of 0.49% over the applicable index (5.69% at June 30, 2007) and a weighted average all in cost of 0.69% over the applicable index (5.89% at June 30, 2007).

Senior Unsecured Credit Facility

In March 2007, we closed a $50 million senior unsecured revolving credit facility with WestLB AG, which we amended in June 2007, increasing the size to $100 million and adding new lenders to the syndicate. The facility has an initial term of one year (with a one year term out provision at our option) and a maximum term of four years (including extension options). The facility bears interest at LIBOR plus 1.50% and we expect to use the facility borrowings for general corporate purposes and working capital needs, including providing additional flexibility for funding loan originations. At June 30, 2007, we had borrowed $75 million under this facility.

Junior Subordinated Debentures

At June 30, 2007, we had a total of $128.9 million of junior subordinated debentures outstanding.  Junior subordinated debentures are comprised of two issuances of debentures, $77.3 million in March 2007 and $51.6 million in February 2006. On a combined basis the securities provide us with financing at a cash cost of 7.20% and an all in effective rate of 7.30%.

In March 2007, we sold $75 million of trust preferred securities through a subsidiary, CT Preferred Trust II.  The trust preferred securities have a 30 year term, maturing in April 2037, are redeemable at par on or after April 30, 2012 and pay distributions at a fixed rate of 7.03% (7.14% including the amortization of fees and expenses) for the first ten years ending April 2017, and thereafter, at a floating rate of three month LIBOR plus 2.25%.

Our interests in CT Preferred Trust I and CT Preferred Trust II are accounted for using the equity method and the assets and liabilities are not consolidated into our financial statements due to our determination that CT Preferred Trust I and CT Preferred Trust II are variable interest entities under FIN 46 and that we are not the primary beneficiary of the entities.  Interest on the junior subordinated debentures is included in interest expense on our consolidated statements of income while the junior subordinated notes are presented as a separate item in our consolidated balance sheet.

8.      Participations Sold

Participations sold represent interests in loans that we originated and subsequently sold to third parties.  We present these sold interests as secured borrowings in conformity with GAAP on the basis that these arrangements do not qualify as sales under FAS 140.  At June 30, 2007, we had six such participations sold with a total book balance of $334.2 million at a weighted average yield of LIBOR plus 3.24% (8.56% at June 30, 2007).  The income earned on the loans is recorded as interest income and an identical amount is recorded as interest expense on the consolidated statements of income.

16

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

9. Derivative Financial Instruments

To manage interest rate risk, we typically employ interest rate swaps or other arrangements, to convert a portion of our floating rate debt to fixed rate debt in order to index match our assets and liabilities.  The net payments due under these swap contracts are recognized as interest expense over the life of the contracts.

During the six months ended June 30, 2007, we paid $153,000 to counterparties in settlement of two interest rate swaps.  Recognition of this settlement has been deferred and is being amortized over the remaining life of the previously hedged item using an approximation of the level yield basis.

The following table summarizes the notional and fair values of our derivative financial instruments as of June 30, 2007. The notional value provides an indication of the extent of our involvement in the instruments at that time, but does not represent exposure to credit or interest rate risk ($ values in thousands):

Hedge	Type	Notional Value		Interest Rate		Maturity	Fair Value
Swap	Cash Flow Hedge	$	320,713	5.10	%	2015	$	5,632
Swap	Cash Flow Hedge	73,942		4.58	%	2014	2,380
Swap	Cash Flow Hedge	18,845		3.95	%	2011	917
Swap	Cash Flow Hedge	18,301		5.14	%	2014	272
Swap	Cash Flow Hedge	16,894		4.83	%	2014	597
Swap	Cash Flow Hedge	16,377		5.52	%	2018	(38		)
Swap	Cash Flow Hedge	14,789		5.05	%	2016	306
Swap	Cash Flow Hedge	12,310		5.02	%	2009	46
Swap	Cash Flow Hedge	8,007		4.77	%	2011	94
Swap	Cash Flow Hedge	7,062		5.10	%	2016	177
Swap	Cash Flow Hedge	6,328		4.78	%	2007	15
Swap	Cash Flow Hedge	5,104		5.18	%	2016	104
Swap	Cash Flow Hedge	4,134		4.76	%	2007	10
Swap	Cash Flow Hedge	3,325		5.45	%	2015	1
Swap	Cash Flow Hedge	2,870		5.08	%	2011	19
Swap	Cash Flow Hedge	780		5.31	%	2011	(1		)
Total/Weighted Average		$	529,781	4.98	%	2014	$	10,531

As of June 30, 2007, the derivative financial instruments were reported at their fair value of $10.6 million as interest rate hedge assets and $39,000 as interest rate hedge liabilities.  Income and expense associated with these instruments is recorded as interest expense on the company’s consolidated statements of income. The amount of hedge ineffectiveness was not material during any of the periods presented.

17

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

10.  Earnings Per Share

The following table sets forth the calculation of Basic and Diluted EPS for the six months ended June 30, 2007 and 2006 (in thousands, except share and per share amounts):

	Six Months Ended June 30, 2007					Six Months Ended June 30, 2006
	Net Income		Shares	Per Share  Amount		Net Income		Shares	Per Share  Amount
Basic EPS:
Net earnings per share of common stock	$	40,230	17,536,245	$	2.29	$	25,140	15,388,326	$	1.63
Effect of Dilutive Securities:
Options outstanding for the purchase of common stock	—		179,565			—		137,260
Diluted EPS:
Net earnings per share of common stock and assumed conversions	$	40,230	17,715,810	$	2.27	$	25,140	15,525,586	$	1.62

The following table sets forth the calculation of Basic and Diluted EPS for the three months ended June 30, 2007 and 2006 (in thousands, except share and per share amounts):

	Three Months Ended June 30, 2007					Three Months Ended June 30, 2006
	Net Income		Shares	Per Share  Amount		Net Income		Shares	Per Share  Amount
Basic EPS:
Net earnings per share of common stock	$	25,382	17,558,493	$	1.45	$	14,192	15,396,496	$	0.92
Effect of Dilutive Securities:
Options outstanding for the purchase of common stock	—		169,687			—		140,452
Diluted EPS:
Net earnings per share of common stock and assumed conversions	$	25,382	17,728,180	$	1.43	$	14,192	15,536,948	$	0.91

11.Income Taxes

We made an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code of 1986, as amended, commencing with the tax year ending December 31, 2003. As a REIT, we generally are not subject to federal income tax except for the operations of our taxable REIT subsidiary, CTIMCO. To maintain qualification as a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders and meet certain other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income tax on our taxable income at regular corporate rates. Under certain circumstances, federal income and excise taxes may be due on our undistributed taxable income. At June 30, 2007, we were in compliance with all REIT requirements.

12.Shareholders’ Equity

On June 15, 2007, we declared a dividend of approximately $14.0 million, or $0.80 per share of common stock applicable to the three-month period ended June 30, 2007, which was paid on July 13, 2007 to shareholders of record on June 30, 2007.  All dividends paid during the period presented were ordinary income.

18

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

12.Shareholders’ Equity, continued

On February 28, 2007, we declared a dividend of approximately $14.0 million, or $0.80 per share of common stock applicable to the three-month period ended March 31, 2007, which was paid on April 13, 2007 to shareholders of record on March 31, 2007.

13.Employee Benefit Plans

We had four benefit plans in effect at June 30, 2007:  (1) the second amended and restated 1997 long-term incentive stock plan, or 1997 Employee Plan, (2) the amended and restated 1997 non-employee director stock plan, or 1997 Director Plan, (3) the amended and restated 2004 long-term incentive plan, or 2004 Employee Plan and (4) the 2007 long-term incentive plan, or 2007 Plan.  Activity under these four plans for the six month period ended June 30, 2007 is summarized in the chart below in share and share equivalents:

Benefit Type	1997 Employee  Plan		1997 Director Plan		2004 Employee  Plan		2007 Long Term  Incentive Plan	Total
Options(1)
Beginning Balance	323,457		76,668		—		—	400,125
Granted	—		—		—		—	—
Exercised	(47,979	)	(8,334	)	—		—	(56,313	)
Canceled	(1,667	)	—		—		—	(1,667	)
Ending Balance	273,811		68,334		—		—	342,145
Restricted Stock(2)
Beginning Balance	—		—		480,967		—	480,967
Granted	—		—		23,015		—	23,015
Vested	—		—		(59,118	)	—	(59,118	)
Forfeited	—		—		—		—	—
Ending Balance	—		—		444,864		—	444,864
Stock Units(3)
Beginning Balance	—		73,848		—		—	73,848
Granted	—		6,169		—		3,024	9,193
Converted	—		—		—		—	—
Ending Balance	—		80,017		—		3,024	83,041
Total Outstanding Shares	273,811		148,351		444,864		3,024	870,050

(1)All options are fully vested as of June 30, 2007.

(2)Comprised of both performance based awards that vest upon the attainment of certain common equity return thresholds and time based awards that vest based upon an employee’s continued employment on vesting dates.

(3)Stock units are given to certain members of our board of directors in lieu of cash compensation for services and in lieu of dividends earned on previously granted stock units.

At our 2007 annual meeting of shareholders held on June 7, 2007, the shareholders approved the adoption of the 2007 Plan. Under the 2007 Plan, a maximum of 700,000 shares of class A common stock may be issued. Effective upon the adoption of shareholders no future awards will occur under the company’s prior plans. At June 30, 2007, there were 696,976 shares available under the 2007 Plan.

Compensation expense for stock awards is recognized on the accelerated attribution method under FASB Interpretation No. 28.

19

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

13.Employee Benefit Plans, continued

The following table summarizes the outstanding options as of June 30, 2007:

Exercise Price per Share	Options Outstanding		Weighted Average Exercise Price per Share				Weighted Average Remaining Life
	1997 Employee  Plan	1997 Director  Plan	1997 Employee  Plan		1997 Director  Plan		1997 Employee  Plan	1997 Director  Plan
$10.00 - $15.00	43,530	—	$	13.40	$	—	3.51	—
$15.00 - $20.00	143,613	—	16.43		—		3.84	—
$20.00 - $25.00	—	—	—		—		—	—
$25.00 - $30.00	86,668	68,334	28.85		30.00		0.80	0.59
Total/W. Average	273,811	68,334	$	19.88	$	30.00	2.83	0.59

In addition to the equity interests detailed above, we have granted percentage interests in the incentive compensation received by us from certain investment management vehicles that we manage.  At June 30, 2007, we had granted to employees, net of forfeitures, 43% of such incentive compensation received by us from Fund III.

14.Supplemental Disclosures for Consolidated Statements of Cash Flows

Interest paid on our outstanding debt during the six months ended June 30, 2007 and 2006 was $74.8 million and $41.6 million, respectively. Income taxes recovered (paid) by us during the six months ended June 30, 2007 and 2006 were $1.5 million and ($197,000), respectively.  Non-cash investing and financing activity of $114.9 million during the six months ended June 30, 2007 resulted from paydowns on the loans we classify as participations sold.

At June 30, 2007, we had $5.1 million included in deposits and other receivables which represented loans that were satisfied and repaid prior to June 30, 2007, the proceeds of which had not been remitted to us by our servicers.  The reclassification from loans receivable to deposits and other receivables resulted in a non-cash investing activity.

20

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

15.Segment Reporting

We have two reportable segments.  We have an internal information system that produces performance and asset data for the two segments along service lines.

The “Balance Sheet Investment” segment includes all activities related to direct investment activities (including direct investments in Funds) and the financing thereof.

The “Investment Management” segment includes all activities related to investment management services provided to us and third party funds under management and includes our taxable REIT subsidiary, CTIMCO and its subsidiaries.

The following table details each segment’s contribution to our overall profitability and the identified assets attributable to each such segment for the six months ended, and as of, June 30, 2007, respectively (in thousands):

	Balance Sheet Investment			Investment Management			Inter-Segment Activities			Total
Income from loans and other investments:
Interest and related income	$	126,247		$	—		$	—		$	126,247
Less: Interest and related expenses	76,293			—			—			76,293
Income from loans and other investments, net	49,954			—			—			49,954
Other revenues:
Management fees	—			9,124			(7,793		)	1,331
Incentive management fees	—			962			—			962
Servicing fees	112			—			—			112
Other interest income	792			46			(256		)	582
Total other revenues	904			10,132			(8,049		)	2,987
Other expenses:
General and administrative	10,193			12,244			(7,793		)	14,644
Other interest expense	—			256			(256		)	—
Depreciation and amortization	1,264			124			—			1,388
Total other expenses	11,457			12,624			(8,049		)	16,032
Recovery of provision for losses	4,000			—			—			4,000
Income/(loss) from equity
Investments	(399		)	(534		)	—			(933		)
Income (loss) before income taxes	43,002			(3,026		)	—			39,976
(Benefit) provision for income taxes	(254		)	—			—			(254		)
Net (loss) income allocable to class A common stock	$	43,256		$	(3,026	)	$	—		$	40,230
Total Assets	$	3,161,614		$	37,748		$	(10,646	)	$	3,188,716

All revenues, except for $4.3 million included in interest and related income, were generated from external sources within the United States.  The “Investment Management” segment earned fees of $7.8 million for management of the “Balance Sheet Investment” segment and was charged $256,000 for inter-segment interest for the six months ended June 30, 2007 which is reflected as offsetting adjustments to other revenues and other expenses in the inter-segment activities column in the table above.

21

Capital Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

15.   Segment Reporting, continued

The following table details each segment’s contribution to our overall profitability and the identified assets attributable to each such segment for the six months ended, and as of, June 30, 2006, respectively (in thousands):

	Balance Sheet  Investment		Investment Management			Inter-Segment Activities			Total
Income from loans and other investments:
Interest and related income	$	77,851	$	—		$	—		$	77,851
Less: Interest and related expenses	43,536		—			—			43,536
Income from loans and other investments, net	34,315		—			—			34,315
Other revenues:
Management fees	—		5,242			(4,007		)	1,235
Incentive management fees	—		212			—			212
Other interest income	331		20			—			351
Total other revenues	331		5,474			(4,007		)	1,798
Other expenses:
General and administrative	6,440		8,393			(4,007		)	10,826
Depreciation and amortization	2,210		130			—			2,340
Total other expenses	8,650		8,523			(4,007		)	13,166
Income/(loss) from equity investments	772		(50		)	—			722
Income before income taxes	26,768		(3,099		)	—			23,669
(Benefit)/provision for income taxes	—		(1,471		)	—			(1,471		)
Net income (loss) allocable to class A common stock	$	26,768	$	(1,628	)	$	—		$	25,140
Total Assets	$	2,168,885	$	7,859		$	(1,818	)	$	2,174,926

All revenues were generated from external sources within the United States.  The “Investment Management” segment earned fees of $4.0 million for management of the “Balance Sheet Investment” segment and $0 for inter-segment interest for the six months ended June 30, 2006.

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ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

References herein to “we,” “us” or “our” refer to Capital Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10 Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Our accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results could differ from these estimates.  There have been no material changes to our Critical Accounting Policies described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2007.

Introduction

Our business model is designed to produce a mix of net interest margin from our balance sheet investments and fee income plus co-investment income from our investment management operations — with our primary goals being the generation of stable net income and dividend growth.  In managing our operations, we focus on originating investments, managing our portfolios and capitalizing our businesses.

Originations

We allocate investment opportunities between our balance sheet and investment management vehicles based upon our assessment of risk and return profiles, the availability and cost of capital, and applicable regulatory restrictions associated with each opportunity.  The combination of balance sheet and investment management capabilities allows us to maximize the scope of opportunities upon which we can capitalize.  The table below summarizes our gross originations and the allocation of opportunities between our balance sheet and the investment management business for the six month period ended June 30, 2007 and the year ended December 31, 2006.

Gross Originations(1)(2)	Six months ended		Year ended
(in thousands)	June 30, 2007		December 31, 2006
Balance sheet	$	1,164,257	$	2,054,233
Investment management	842,315		65,000
Total originations	$	2,006,572	$	2,119,233

(1)Includes total commitments both funded and unfunded.

(2)Includes $204,654  and $237,964 of participations sold recorded on our balance sheet relating to participations that we sold to CT Large Loan for the six months ended June 30, 2007 and the year ended December 31, 2006, respectively. We have included these originations in balance sheet originations and not in investment management originations in order to not double count these originations.

On our balance sheet, our investments include CMBS, commercial real estate debt and related instruments, or Loans, and total return swaps which we collectively refer to as our Interest Earning Assets.  Originations of Interest Earning Assets for our balance sheet for the six months ended June 30, 2007 and the year ended December 31, 2006 are detailed in the table below:

Balance Sheet Originations	Six months ended June 30, 2007				Year ended December 31, 2006
(in thousands)	Originations(1)		Yield(2)	LTV / Rating(3)	Originations(1)		Yield(2)	LTV / Rating(3)
CMBS	$	110,621	9.63%	BB-	$	394,703	6.45%	BBB-
Loans(4)	1,053,636		8.35%	69.3%	1,655,392		9.19	72.1%
Total return swaps	—		—	—	4,138		19.55	N/A
Total / Weighted Average	$	1,164,257	8.47%		$	2,054,233	8.62%

(1)Includes total commitments both funded and unfunded.

(2)Yield on floating rate originations assumes LIBOR at June 30, 2007 and December 31, 2006, of 5.32% and 5.32%, respectively.

(3)Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $37.4 million of unrated equity investments in collateralized debt obligations.

(4)Includes $204,654 and $237,964 of participations sold recorded on our balance sheet relating to participations that we sold to CT Large Loan for the six months ended June 30, 2007 and the year ended December 31, 2006, respectively. We have included these originations in balance sheet originations and not in investment management originations in order to not double count these originations.

23

The table below shows our Interest Earning Assets at June 30, 2007 and December 31, 2006.  In any period, the ending balance of Interest Earning Assets will be impacted not only by new balance sheet originations, but also by repayments, advances, sales and losses, if any.  As the table below shows, we grew Interest Earning Assets by $524 million, or 20%, from year end 2006 to June 30, 2007.

Interest Earning Assets	June 30, 2007						December 31, 2006
(in thousands)	Book Value		Yield(1)		LTV / Rating(3)		Book Value(2)		Yield(1)		LTV / Rating(3)
CMBS	$	891,367	7.48	%	BB+		$	810,970	7.17	%	BB+
Loans	2,197,529		8.56		69.5	%	1,751,898		8.96		70.4	%
Total return swaps	—		—		—		1,815		20.55		N/A
Total / Weighted Average	$	3,088,896	8.25	%			$	2,564,683	8.40	%

(1)Yield on floating rate Interest Earning Assets assumes LIBOR at June 30, 2007 and December 31, 2006, of 5.32% and 5.32%, respectively.

(2)December 31, 2006 values do not including one non performing loan that was successfully resolved in the second quarter of 2007.

(3)Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security and exclude $37.4 million of unrated equity investments in collateralized debt obligations.

Some of our originations are not fully funded at closing, creating an obligation for us to make future fundings, which we refer to as Unfunded Loan Commitments.  Typically, Unfunded Loan Commitments are part of construction or transitional loans and, as the proportion of such loans has increased in our portfolio, so has the amount of our Unfunded Loan Commitments.  At June 30, 2007, our gross Unfunded Loan Commitments were $277.5 million and, net of in place financing commitments from our lenders, our net Unfunded Loan Commitments were $57.8 million.

In addition to our investments in Interest Earning Assets, we have two equity investments in unconsolidated subsidiaries as of June 30, 2007. The first is an equity co-investment in a private equity fund that we manage, CT Mezzanine Partners III, Inc., or Fund III.  The second is an equity investment we made in 2006 in a Brazilian net lease commercial real estate company, Bracor Investimentos Imobiliarios Ltda., or Bracor, that we helped co-found.  The table below details the carrying value of those investments, as well as their capitalized costs.

Equity Investments
(in thousands)	June 30, 2007			December 31, 2006
Fund II	$	—		$	1,208
Fund III	1,705			2,929
Bracor	9,920			5,675
Capitalized costs/other	484		(1)	1,673		(2)
Total	$	12,109		$	11,485

(1)Includes $292,000 and $153,000 of capitalized costs associated with Fund III and Bracor, respectively.

(2)Includes $1.3 million, $368,000 and $41,000 associated with Fund II, Fund III and Bracor, respectively.

24

Asset Management

We actively manage our balance sheet portfolio and the assets held by our investment management vehicles.  While our investments are primarily in the form of debt, which generally means that we have limited influence over the operations of the collateral securing our portfolios, we are aggressive in exercising the rights afforded to us as a lender.  These rights can include collateral level budget approval, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate.  The table below details balance sheet Interest Earning Assets loss experience and the percentage of non-performing investments at June 30, 2007 and December 31, 2006.

Portfolio Performance
(in thousands)	June 30, 2007	December 31, 2006
Interest Earning Assets	$3,088,896	$2,564,683
Losses
$ Value	$0	$0
Percentage	0.0%	0.0%
Non-performing loans(1)
$ Value	$0	$2,638
Percentage	0.0%	0.1%

(1)At December 31, 2006, our non-performing loans were comprised of one defaulted first mortgage with an original principal balance of $8.0 million that has since been successfully resolved.

Commencing in 2005, we put in place a proprietary risk rating system to assess and track the risk of each of our loans.  There was no material change to the weighted average risk rating of the portfolio between June 30, 2007 and December 31, 2006.  Based upon the changes in conditions of these loans and the evaluations completed on the remainder of the portfolio, we concluded that a reserve for possible credit losses was not warranted on any of our loans for the six months ended June 30, 2007.

We actively manage our CMBS investments using a combination of quantitative tools and loan/property level analysis in order to monitor the performance of the securities and their collateral versus our original expectations.  Securities are analyzed on a monthly basis for delinquency, transfers to special servicing, and changes to the servicer’s watchlist population.  Realized loan losses are tracked on a monthly basis and compared to our original loss expectations.  On a periodic basis, individual loans of concern are also re-underwritten.  Updated collateral loss projections are then compared to our original loss expectations to determine how each investment is performing.  Based on our review of the portfolio, we concluded that no impairments were warranted in the six months ended June 30, 2007.

The ratings performance of our CMBS portfolio over the six months ended June 30, 2007 and the year ended December 31, 2006 is detailed below:

	Six months ended	Year ended
CMBS Rating Activity(1)	June 30, 2007	December 31, 2006
Upgrades	13	67
Downgrades	2	3

(1)Represents activity from any of Fitch Ratings, Standard & Poor’s and/or Moody’s Investors Service.

25

Capitalization

Our balance sheet investment activities are capital intensive and the availability and cost of capital is a critical component of our business.  We capitalize our business with a combination of debt and equity.  Our debt sources, which we refer to as Interest Bearing Liabilities, currently include repurchase agreements, CDOs, a senior unsecured credit facility, and junior subordinated debentures (which we also refer to as trust preferred securities).  Our equity capital is currently comprised entirely of common equity.  The chart below shows our capitalization mix as of June 30, 2007 and December 31, 2006:

Capital Structure
(in thousands)	June 30, 2007			December 31, 2006
Repurchase obligations	$	964,807		$	704,444
Collateralized debt obligations	1,199,748			1,212,500
Senior unsecured credit facility	75,000			—
Junior subordinated debentures	128,875			51,550
Total Interest Bearing Liabilities	$	2,368,430		$	1,968,494
Cost of debt(1)	6.24		%	6.15		%
Shareholders’ Equity	$	452,089		$	426,272
Ratio of Interest Bearing Liabilities to Shareholders’ Equity	5.2:1			4.6:1

(1) Floating rate liabilities assume LIBOR at June 30, 2007 and December 31, 2006, of 5.32% and 5.32%, respectively.

We use leverage to enhance our returns on equity, attempting to:  (i) maximize the differential between the yield of our Interest Earning Assets and the cost of our Interest Bearing Liabilities, and (ii) optimize the amount of leverage employed.  The use of leverage, however, adds risk to our business, magnifying our shareholders’ exposure to asset level risk by subordinating our equity interests to our debt capital providers.  The level of leverage we utilize is based upon the risk associated with our assets, as well as the structure of our liabilities.  In general, we will apply greater amounts of leverage to lower risk assets and vice versa.  In addition, structural features of our leverage, such as recourse, mark-to-market provisions and duration, factor into the amounts of leverage we are comfortable applying to our assets.  Our sources of recourse financing generally require financial covenants, including restrictions on corporate guarantees, the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth.  A summary of selected structural features of our debt as of June 30, 2007 and December 31, 2006 is detailed in the table below:

Interest Bearing Liabilities
(in thousands)	June 30, 2007		December 31, 2006
Weighted average maturity (1)	4.0	yrs.	4.0	yrs.
% Recourse	46.5	%	36.9	%
% Mark-to-market	40.7	%	35.8	%

(1) Based upon balances as of June 30, 2007 and December 31, 2006.

A prominent trend in our Interest Bearing Liabilities since 2004 is the increased use of CDOs to finance our portfolio.  Our CDOs are non-recourse, non-mark-to-market, index matched financings that generally carry a lower cost of debt and allow for higher levels of leverage than our other financing sources.  We expect to continue to utilize CDOs to finance both our balance sheet and our investment management businesses going forward.  During the first half of 2007, we did not issue any new CDOs for our balance sheet, however, we continued contributing assets to our previously issued reinvesting CDOs, which have reinvestment periods extending through July 2008 for CDO I and April 2010 for CDO II.  Our CDO liabilities as of June 30, 2007 and December 31, 2006 are described below:

Collateralized Debt Obligations
(in thousands)			June 30, 2007				December 31, 2006
	Issuance Date	Type	Book Value		All in Cost		Book Value		All in Cost
CDO I(1)	7/20/04	Reinvesting	$	252,778	6.38	%	$	252,778	6.39	%
CDO II (1)	3/15/05	Reinvesting	298,913		6.03		298,913		6.04
CDO III	8/04/05	Static	264,311		5.34		266,754		5.25
CDO IV(1)	3/15/06	Static	383,746		5.81		394,055		5.81
Total			$	1,199,748	5.89	%	$	1,212,500	5.86	%

(1) Floating rate CDO liabilities assume LIBOR at June 30, 2007 and December 31, 2006, of 5.32% and 5.32%, respectively.

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Repurchase obligation financings provide us with an important revolving component to our liability structure.  Our repurchase agreements provide stand alone financing for certain assets and interim, or warehouse financing for assets that we plan to contribute to our CDOs.  At any point in time, the amounts and the cost of our repurchase borrowings are based upon the assets being financed — higher risk assets will attract lower levels of leverage at higher costs and vice versa.  The table below summarizes our repurchase agreement liabilities as of June 30, 2007 and December 31, 2006:

Repurchase Agreements
($ in thousands)	June 30, 2007			December 31, 2006
Repurchase commitments	$	1,600,000		$	1,200,000
Counterparties	7			7
Outstanding repurchase borrowings	$	964,807		$	704,444
All in cost	L + 1.15		%	L + 1.21		%

In March 2007, we closed a $50 million senior unsecured revolving credit facility with WestLB AG, which we amended in June 2007, increasing the size to $100 million and adding new lenders to the syndicate. The facility has an initial term of one year (with a one year term out provision at our option) and a maximum term of four years (including extension options). The facility has a cash cost of LIBOR plus 1.50% (7.12% on an all-in effective basis) and we expect to use the facility borrowings for general corporate purposes and working capital needs, including providing additional flexibility for funding loan originations. At June 30, 2007, we had borrowed $75 million under this facility.

The most subordinated component of our debt capital structure is junior subordinated debentures or trust preferred securities.  These securities represent long term, subordinated, unsecured financing and generally carry limited operational covenants.  At June 30, 2007 we had issued $128.9 million of junior subordinated debentures in two separate issuances. Junior subordinated debentures provide us with financing at a cash cost of 7.20% and an all in effective rate of 7.30%.  In March 2007, we sold $75 million of trust preferred securities through a subsidiary, CT Preferred Trust II.  These trust preferred securities have a 30 year term, maturing in April 2037, are redeemable at par on or after April 30, 2012 and pay distributions at a cash cost of 7.03% and an all-in effective rate of 7.14% for the first ten years ending April 2017, and thereafter, at a floating rate of three month LIBOR plus 2.25%.

During the first six months of 2007 we did not raise new common equity. Changes in the number of shares were due to option exercises, restricted stock grants and vesting, and stock unit grants during the period.

Shareholders’ Equity

	June 30, 2007		December 31, 2006
Book value (in thousands)	$	452,089	$	426,272
Shares
Class A common stock	17,064,595		16,932,892
Restricted stock	444,864		480,967
Stock units	83,041		73,848
Options(1)	122,658		230,399
Total	17,715,158		17,718,106
Book value per share	$	25.52	$	24.06

(1) Dilutive shares issuable upon the exercise of outstanding options assuming a June 30, 2007 stock price and the treasury stock method.

At June 30, 2007, we had 17,509,459 of our class A common stock outstanding including unearned restricted stock.

Interest Rate Exposure

We endeavor to manage a book of assets and liabilities that are matched with respect to interest rates, financing floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities.  In some cases, we finance fixed rate assets with floating rate liabilities and, in those cases, we generally use interest rate derivatives, such as swaps, to effectively convert the floating rate debt to fixed rate debt.  In such instances, the equity we have invested in fixed rate assets is not typically swapped, leaving a portion of our equity capital exposed to changes in value of the fixed rate assets due to interest rate fluctuations.   The balance of our assets earn interest at floating rates and are financed with floating rate liabilities, leaving a portion of our equity capital exposed to cash flow variability from fluctuations in rates.  Generally, these assets and liabilities earn interest at rates indexed to one month LIBOR.

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The table below details our interest rate exposure as of June 30, 2007 and December 31, 2006:

Interest Rate Exposure
(in thousands)	June 30, 2007			December 31, 2006
Value Exposure to Interest Rates(1)
Fixed rate assets	$	969,621		$	1,000,942
Fixed rate liabilities	(406,072		)	(331,434		)
Interest rate swaps	(529,781		)	(560,240		)
Net fixed rate exposure	$	33,768		$	109,268
Weighted average maturity (assets)	7.9yrs			8.2yrs
Weighted average coupon (assets)	7.13%			7.18%
Cash Flow Exposure to Interest Rates(1)
Floating rate assets(2)	$	2,162,581		$	1,606,969
Floating rate debt less cash	(2,266,330		)	(1,816,476		)
Interest rate swaps	529,781			560,240
Net floating rate exposure	$	426,032		$	350,733
Net income impact from 100 bps change in LIBOR	$	4,260		$	3,507

(1) All values are in terms of face or notional amounts.

(2) December 31, 2006 values do not including one non performing loan that was successfully resolved in the second quarter of 2007.

Other Balance Sheet Items

From time to time we originate loans for our balance sheet and sell a participation in these loans (senior, junior or pari passu) to third parties or to one or more of our investment management vehicles.  In accordance with GAAP, we record these sold participations as assets (as if we owned the participation we sold) and record a matching amount as a liability under the account Participations Sold.  In addition, we record interest earned on these participations sold as interest income with a matching amount recorded as interest expense.  On a net basis, these participations sold have no impact to our shareholder’s equity or our net income.  At June 30, 2007, we had $334.2 million of participations sold, which accrued interest at a rate of LIBOR plus 3.24% (or 8.56%).

Investment Management Overview

In addition to our balance sheet investment activities, we act as an investment manager for third parties.  The purpose of our investment management business is to leverage our platform, generating fee revenue from investing third party capital and in certain instances co-investment income.  Our third party investment management mandates are designed to be complementary to our balance sheet programs and are built around opportunities that we do not pursue directly on balance sheet due to their scale/concentration, risk/return profile and/or regulatory constraints.  In some instances, we co-invest in our investment management vehicles (as described below).  At June 30, 2007, we managed three private equity funds and one separate account through our wholly-owned, taxable, investment management subsidiary, CT Investment Management Co., LLC, or CTIMCO.

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Investment   Management Mandates
							Incentive Management Fee (1)
	Type	Total Equity Commitments (in millions)		Co- Investment%	Base Management Fee		Company %	Employee %(2)
Fund III	Fund	$	425	4.71%	1.42% (Equity)		57%	43%
CT Large Loan	Fund	$	325	(4)	0.75% (Assets)	(3)	N/A	N/A
CT High Grade	Sep. Acct.	$	250	0%	0.25% (Assets)		N/A	N/A
CTX Fund	Fund	$	50	(4)	(5)		(5)	(5)

(1) Fund III earns incentive management fees of 20% of profit after a 10% preferred return on capital and a 100% return of capital, subject to a catch up.

(2) Portions of the Fund III incentive management fees received by us have been allocated to our employees as long term performance awards.

(3) Capped at 1.5% of equity.

(4) Capital Trust, Inc. co-invests on pari passu, asset by asset basis with CT Large Loan Fund and CTX Fund.

(5) CTIMCO serves as collateral manager of the CDOs in which the CTX Fund invests and CTIMCO earns base and incentive management fees as CDO collateral manager.

Fund III is a co-sponsored vehicle with a joint venture partner.  We have a co-investment in the fund and we split incentive management fees with our partner – our partner receives 37.5% of Fund III incentive management fees.  The other funds, CT Large Loan and CTX Fund, and our separate account, CT High Grade, are exclusively sponsored by us and we do not co-invest in these vehicles.  The table below describes the status of our investment management vehicles as of June 30, 2007 and December 31, 2006.

Investment Management Snapshot
(in thousands)	June 30, 2007		December 31, 2006
Fund III
Assets	$	121,262	$	194,818
Equity	23,274		50,223
Incentive fee collected	—		—
Incentive fees projected(1)	8,078		7,511
Status(2)	Liquidating		Liquidating
CT Large Loan
Assets	$	254,618	$	157,262
Equity	130,349		79,416
Status(3)	Investing		Investing
CT High Grade
Assets	$	207,839	$	64,929
Equity	207,839		64,929
Status(3)	Investing		Investing
CTX Fund
Assets(4)	$	490,315	N/A
Equity	$	7,362	N/A
Status(3)	Investing		N/A

(1) Assumes assets were sold and liabilities were settled on July 1, 2007 at the recorded book value, and the fund’s equity and income was distributed for the respective period ends.

(2) Fund III’s investment period ended in June 2005.

(3) CT Large Loan, CT High Grade, and CTX Fund investment periods expire in May 2008, November 2007, and April 2008, respectively.

(4) Represents the total notional cash exposure to CTX CDO I collateral.

We expect to continue to grow our investment management business, sponsoring additional investment vehicles consistent with the theme of developing mandates that are complementary to our balance sheet activities.

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Comparison of Results of Operations: Three Months Ended June 30, 2007 to June 30, 2006 (in thousands, except for per share data)

	2007			2006			$ Change			% Change
Income from loans and other investments:
Interest and related income	$	68,797		$	46,219		$	22,578		48.9	%
Less: Interest and related expenses	40,192			26,267			13,925			53.0	%
Income from loans and other investments, net	28,605			19,952			8,653			43.4	%
Other revenues:
Management fees	582			627			(45		)	(7.2	)%
Incentive management fees	—			84			(84		)	N/A
Servicing fees	45			—			45			N/A
Other	272			120			152			126.7	%
Total other revenues	899			831			68			8.2	%
Other expenses:
General and administrative	7,832			5,701			2,131			37.4	%
Depreciation and amortization	60			2,063			(2,003		)	(97.1	)%
Total other expenses	7,892			7,764			128			1.6	%
Recovery of provision for losses	4,000			—			4,000			N/A
Income/(loss) from equity investments	(230		)	403			(633		)	(157.1	)%
(Benefit)/provision for income taxes	—			(770		)	770			N/A
Net income	$	25,382		$	14,192		$	11,190		78.8	%
Net income per share - diluted	$	1.43		$	0.91		$	0.52		57.1	%
Dividends per share	$	0.80		$	0.70		$	0.10		14.3	%
Average LIBOR	5.32		%	5.09		%	0.23		%	4.5	%

Income from loans and other investments

Growth in Interest Earning Assets ($1.0 billion or 50% from June 30, 2006 to June 30, 2007) and a $4.3 million interest payment from the successful resolution of our only non performing loan, along with a 4.5% increase in average LIBOR, drove a $22.6 million (49%) increase in interest income between the second quarter of 2006 and the second quarter of 2007.  These same factors, combined with generally higher levels of leverage, resulted in a $13.9 million, or 53%, increase in interest expense for the same period.  On a net basis, net interest margin increased by $8.7 million, or 43%, which was the primary driver of net income growth from the second quarter of 2006 to the second quarter of 2007.

Management  fees

Base management fees from the investment management business were flat as management fees from CT Large Loan, CT High Grade and CTX Fund offset the decrease in the base management fees from Fund II and Fund III.

Incentive management fees

No incentive management fees were received during the second quarter of 2007. In the second quarter of 2006, we received $84,000 of Fund II incentive management fees.

General and administrative expenses

General and administrative expenses include compensation and benefits for employees, operating expenses and professional fees.  Total general and administrative expenses increased 37% between the second quarter of 2006 and the second quarter of 2007, primarily as a result of higher levels of employment costs as well as increased professional fees.

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Depreciation and amortization

Depreciation and amortization decreased by $2.0 million between the second quarter of 2006 and the second quarter of 2007 due primarily to the write off of $1.8 million of capitalized costs in the second quarter of 2006 as we expensed all of the capitalized costs relating to an investment management joint venture.

Recovery of provision for losses

The $4.0 million recovery recorded in the second quarter of 2007 related to the successful resolution of our only non performing loan. We received net proceeds of $10.9 million that resulted in the following: a) reduced the carrying value of the loan from $2.6 million to zero b) recorded a $4.0 million recovery of a provision for losses and c) recorded $4.3 million of interest income.

Income/(loss) from equity investments

The loss from equity investments in the second quarter of 2007 resulted primarily from a net loss of $325,000 at Bracor, representing our share of operating losses for the period from January 1, 2007 through March  31, 2007 (we report Bracor’s operating results on a one fiscal quarter lag).  During the second quarter of 2006, income from equity investments was primarily comprised of co-investment income from Fund II and Fund III.

Income taxes

We did not pay any taxes at the REIT level in either second quarter 2006 or 2007.  However, CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings.  In the second quarter of 2007, CTIMCO recorded an operating loss before income taxes of $1.5 million, resulting in an income tax benefit which was fully reserved.  In the second quarter of 2006, CTIMCO recorded an operating loss before income taxes of $1.6 million, which resulted in an income tax benefit of $770,000, which we recorded.

Net income

Net income grew by $11.2 million or 79% from the second quarter of 2006 to the second quarter of 2007, based in large part upon increased net interest income generated by a higher level of Interest Earning Assets and $8.3 million of income from the successful resolution of our only non performing loan. On a diluted per share basis, net income was $1.43 and $0.91 in the second quarter of 2007 and 2006, respectively, representing an increase of 57%.

Dividends

Our second quarter 2007 and 2006 dividends were $0.80 and $0.70 per share, respectively. The increase of $0.10 per share (14%) was driven by growth in our recurring income from operations.

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Comparison of Results of Operations: Six Months Ended June 30, 2007 to June 30, 2006 (in thousands, except for per share data)

	2007			2006			$ Change			% Change
Income from loans and other investments:
Interest and related income	$	126,247		$	77,851		$	48,396		62.2	%
Less: Interest and related expenses	76,293			43,536			32,757			75.2	%
Income from loans and other investments, net	49,954			34,315			15,639			45.6	%
Other revenues:
Management fees	1,331			1,235			96			7.8	%
Incentive management fees	962			212			750			353.8	%
Servicing fees	112			—			112			N/A
Other	582			351			231			65.8	%
Total other revenues	2,987			1,798			1,189			66.1	%
Other expenses:
General and administrative	14,644			10,826			3,818			35.3	%
Depreciation and amortization	1,388			2,340			(952		)	(40.7	)%
Total other expenses	16,032			13,166			2,866			21.8	%
Recovery of provision for losses	4,000			—			4,000			N/A
Income (loss) from equity investments	(933		)	722			(1,655		)	(229.2	)%
(Benefit) provision for income taxes	(254		)	(1,471		)	1,217			(82.7	)%
Net income	$	40,230		$	25,140		$	15,090		60.0	%
Net income per share - diluted	$	2.27		$	1.62		$	0.65		40.1	%
Dividends per share	$	1.60		$	1.30		$	0.30		23.1	%
Average LIBOR	5.32		%	4.85		%	0.47		%	9.7	%

Income from loans and other investments

Growth in Interest Earning Assets ($1.0 billion or 50% from June 30, 2006 to June 30, 2007) and an $4.3 million interest payment from the successful resolution of our only non performing loan, along with a 9.7% increase in average LIBOR, drove a $48.4 million (62%) increase in interest income between  2006 and 2007.  These same factors, combined with generally higher levels of leverage, resulted in an $32.8 million, or 75%, increase in interest expense for the same period.  On a net basis, net interest margin increased by $15.6 million, or 46%, which was the primary driver of net income growth.

Management  fees

Base management fees from the investment management business increased as management fees from CT Large Loan, CT High Grade, and CTX Fund offset the decrease in the base management fees from Fund II and Fund III.  Fund II paid its final base management fee to us during the first quarter of 2007.

Incentive management fees

We received a final incentive management fee distribution from Fund II of $962,000 in March 2007 as the fund’s last investment repaid and the fund was liquidated.  In 2006, we received $212,000 of Fund II incentive management fees.

General and administrative expenses

General and administrative expenses include compensation and benefits for employees, operating expenses and professional fees.  Total general and administrative expenses increased 35% between the six months ended June 30,  2006 and the six months ended June 30, 2007, primarily as a result of higher levels of employment costs as well as increased professional fees.

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Depreciation and amortization

Depreciation and amortization decreased by $952,000 between the six months ended June 30, 2006 and the six months ended June 30, 2007 due primarily to the write off of $1.8 million of capitalized costs in the second quarter of 2006 as we expensed all of the capitalized costs relating to an investment management joint venture. This was partially offset by the write off of $1.3 million of capitalized costs related to the liquidation of Fund II in the first quarter of  2007.

Recovery of provision for losses

The $4.0 million recovery recorded in the second quarter of 2007 related to the successful resolution of our only non performing loan. We received net proceeds of $10.9 million that resulted in the following: a) reduced the carrying value of the loan from $2.6 million to zero b) recorded a $4.0 million recovery of a provision for losses and c) recorded $4.3 million of interest income.

Income/(loss) from equity investments

The loss from equity investments in the six months ended June 30, 2007 resulted primarily from the amortization of $384,000 of capitalized costs passed through to us from the general partner of Fund II and a net loss of $484,000 at Bracor, representing our share of operating losses for the period from October 1, 2006 through March 31, 2007 (we report Bracor’s operating results on a one fiscal quarter lag).  During the six months ended June 30, 2006, income from equity investments was primarily comprised of co-investment income from Fund II and Fund III.

Income taxes

The $254,000 tax benefit recorded for the six months ended June 30, 2007 was a result of the reversal of a tax liability reserve at Capital Trust, Inc.  We did not pay any taxes at the REIT level in either the six months ended June 30, 2006 or 2007.  However, CTIMCO, our investment management subsidiary, is a taxable REIT subsidiary and subject to taxes on its earnings.  In the six months ended June 30, 2007, CTIMCO recorded an operating loss before income taxes of $3.0 million, resulting in an income tax benefit which was fully reserved.  In the six months ended June 30, 2006, CTIMCO recorded an operating loss before income taxes of $3.1 million, which resulted in an income tax benefit of $1.4 million, which we recorded.

Net income

Net income grew by $15.1 million or 60% from the six months ended June 30, 2006 to the six months ended June 30, 2007, based in large part upon increased net interest income generated by a higher level of Interest Earning Assets and $8.3 million of income from the successful resolution of our only non performing loan.  On a diluted per share basis, net income was $2.27 and $1.62 in the six months ended June 30, 2007 and 2006, respectively, representing an increase of 40%.

Dividends

Our dividends declared for the six months ended June 30, 2007 and 2006 were $1.60 and $1.30 per share, respectively. The increase of $0.30 or 23% was driven by growth in our recurring income from operations.

Liquidity and Capital Resources

We expect to continue to use a significant amount of our available capital resources to originate or purchase new loans and investments for our balance sheet.  We intend to continue to employ leverage on our balance sheet to enhance our return on equity. At June 30, 2007, our net liquidity was as follows:

Net Liquidity
($ in thousands)	June 30, 2007
Available cash	$	24,479
Available borrowings	160,905
Net unfunded commitments	(57,775		)
Net liquidity	$	127,609

At June 30, 2007, we had $24.5 million in cash, $3.8 million in restricted cash and $135.9 million of immediately available liquidity from our repurchase agreements ($128.8 million from master repurchase agreements and $7.1 million from asset specific repurchase agreements) and $25 million from our senior unsecured credit facility.  Our

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primary sources of liquidity during the next 12 months are expected to be cash on hand, cash generated from operations, principal and interest payments received on loans and investments, additional borrowings under our repurchase agreements and senior unsecured credit facility, and funds raised through CDO issuances, stock offerings, junior subordinated debenture issuances and other capital raising activities.  We believe these sources of capital will be adequate to meet both short term and long term cash requirements.

We experienced a net decrease in cash of $1.7 million for the six months ended June 30, 2007, compared to a net decrease of $14.7 million for the six months ended June 30, 2006.  Cash provided by operating activities during the six months ended June 30, 2007 was $48.7 million, compared to cash provided by operating activities of $31.5 million during the same period of 2006.  The change was primarily due to increased net interest income due to our increased investment originations.  For the six months ended June 30, 2007, cash used in investing activities was $648.8 million, compared to $619.4 million during the same period in 2006.  The change was primarily due to our receiving $276.9 million more in principal repayments during the six months ended June 30, 2007 compared to the six months ended June 30, 2006, as well as originating $298.7 million more in Interest Earning Assets. For the six months ended June 30, 2007, cash provided by financing activities was $598.4 million, compared to $573.2 million during the same period in 2006.  The change was primarily due to our net borrowing activity on repurchase obligations and the proceeds in March 2006 from the issuance of CDO IV, and activity on other debt.

At June 30, 2007, under our repurchase agreements, we had pledged assets that enable us to borrow an additional $135.9 million. We had $643.4 million of credit available for the financing of new and existing unpledged assets pursuant to these sources of financing.  Furthermore, at June 30, 2007, we had $25 million of liquidity available under our senior unsecured credit facility. At June 30, 2007, we had outstanding borrowings under our CDOs of $1.2 billion and outstanding repurchase obligations totaling $964.8 million.  The terms of these agreements are described in Note 7 of the consolidated financial statements.  Additional liquidity will be generated when assets that are currently pledged under repurchase obligations are contributed to our CDOs.  CDOs generally have higher borrowing advance rates than corresponding repurchase obligations. At June 30, 2007, we had additional liquidity of $3.8 million in our CDOs in the form of restricted cash.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Impact of Inflation

Our operating results depend in part on the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities.  Changes in the general level of interest rates prevailing in the economy in response to changes in the rate of inflation or otherwise can affect our income by affecting the spread between our interest-earning assets and interest-bearing liabilities, as well as, among other things, the value of our interest-earning assets and our ability to realize gains from the sale of assets and the average life of our interest-earning assets.  Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control.  We employ the use of correlated hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps and interest rate caps to minimize our exposure to changes in interest rates.  There can be no assurance that we will be able to adequately protect against the foregoing risks or that we will ultimately realize an economic benefit from any hedging contract into which we enter.

Note on Forward-Looking Statements

Except for historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward-looking statements are included with respect to, among other things, our current business plan, business and investment strategy and portfolio management. These forward-looking statements are identified by their use of such terms and phrases as “intends,” “intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,” “expected,” “project,” “projected,” “projections,” “plans,” “anticipates,” “anticipated,” “should,” “designed to,” “foreseeable future,” “believe,” “believes” and “scheduled” and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Important factors that we believe might cause actual results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The principal objective of our asset/liability management activities is to maximize net interest income, while managing levels of interest rate risk.  Net interest income and interest expense are subject to the risk of interest rate fluctuations.  In certain instances, to mitigate the impact of fluctuations in interest rates, we use interest rate swaps to effectively convert variable rate liabilities to fixed rate liabilities for proper matching with fixed rate assets.  The swap agreements are generally held-to-maturity and we do not use interest rate derivative financial instruments for trading purposes.  The differential to be paid or received on these agreements is recognized as an adjustment to the interest expense related to debt and is recognized on the accrual basis.

Our loans and investments, including our fund investments, are also subject to credit risk.  The ultimate performance and value of our loans and investments depends upon the owner’s ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due us.  To monitor this risk, our asset management team continuously reviews the investment portfolio and in certain instances is in constant contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

The following table provides information about our financial instruments that are sensitive to changes in interest rates at June 30, 2007.  For financial assets and debt obligations, the table presents cash flows (in certain cases, face adjusted for expected losses) to the expected maturity and weighted average interest rates based upon the current carrying values of the remaining assets and liabilities.  For interest rate swaps, the table presents notional amounts and weighted average fixed pay and variable receive interest rates by contractual maturity dates.  Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract.  Weighted average variable rates are based on rates in effect as of the reporting date.

	Expected Maturity Dates
	2007			2008			2009			2010			2011			Thereafter			Total			Fair Value
	(dollars in thousands)
Assets:
CMBS
Fixed Rate	$	7,706		$	47,494		$	7,026		$	17,639		$	76,233		$	578,526		$	734,624		$	705,928
Average interest rate	6.68		%	6.68		%	6.69		%	6.68		%	6.64		%	6.45		%	6.49		%
Variable Rate	$	10,270		$	25,501		$	33,053		$	86,961		—			$	19,945		$	175,730		$	174,469
Average interest rate	8.86		%	9.10		%	9.55		%	10.72		%	—			11.70		%	10.27		%
Loans receivable
Fixed Rate	$	8,397		$	61,468		$	17,967		$	1,997		$	24,864		$	99,618		214,311			$	215,073
Average interest rate	8.61		%	8.15		%	7.67		%	7.56		%	7.48		%	7.36		%	7.68		%
Variable Rate	$	174,528		$	992,594		$	532,587		$	92,970		$	10,357		$	183,588		1,986,624			$	1,987,431
Average interest rate	8.35		%	8.24		%	8.91		%	9.14		%	9.17		%	8.12		%	8.47		%
Total return swaps
Variable Rate	—			—			—			—			—			—			—			—
Average interest rate	—			—			—			—			—			—			—			—
Interest rate swaps
Notional amounts	$	16,738		$	41,825		$	49,553		$	14,280		$	50,023		$	357,362		$	529,781		$	10,531
Average fixed pay rate	4.84		%	5.08		%	4.77		%	5.04		%	4.66		%	5.04		%	4.98		%
Average variable receive rate	5.32		%	5.32		%	5.32		%	5.32		%	5.32		%	5.32		%	5.32		%
Liabilities:
Repurchase obligations
Variable Rate	$	351,524		$	344,336		$	247,697		$	21,250		—			—			$	964,807		$	964,807
Average interest rate	6.02		%	6.26		%	6.55		%	6.32		%	—			—			6.25		%
CDOs
Fixed Rate	$	8,120		$	5,030		$	4,396		$	2,603		$	38,609		$	218,439		$	277,197		$	265,064
Average interest rate	5.18		%	5.65		%	5.69		%	5.28		%	5.10		%	5.33		%	5.31		%
Variable Rate	$	15,885		$	121,226		$	201,423		$	151,803		$	191,314		$	238,895		$	920,546		$	912,674
Average interest rate	5.69		%	5.66		%	5.94		%	5.72		%	5.91		%	5.78		%	5.81		%
Senior unsecured credit facility
Variable Rate	—			$	75,000		—			—			—			—			$	75,000		$	75,000
Average interest rate	—			6.82		%	—			—			—			—			6.82		%
Junior Subordinated Debentures
Fixed Rate	—			—			—			—			—			$	128,875		$	128,875		$	122,528
Average interest rate	—			—			—			—			—			7.20		%	7.20		%

36

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no significant changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

37

PART II. OTHER INFORMATION

ITEM 1:	Legal Proceedings
	None
ITEM 1A:	Risk Factors
	There have been no material changes to the risk factors previously disclosed in Item 1A of our annual report on Form 10-K for the year ended December 31, 2006, filed on February 28, 2007 with the Securities and Exchange Commission.
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds
	In connection with our purchase on June 15, 2007 of certain assets from PRN Marshall Capital, LLC (“PRNM”), The Survey Companies, LLC (“Survey”, and together with PRNM, the “Company Sellers”), Richard J. Brockman and Lawrence D. Katz, among other things, we issued an aggregate of 16,275 shares of our class A common stock to the Company Sellers who subsequently transferred such shares to various owners of the Company Sellers (the “Stock Issuance”). The Stock Issuance and subsequent transfers were exempt from registration in reliance on Sections 4(2) and 4(1) of the Securities Act of 1933, as amended, respectively.
ITEM 3:	Defaults Upon Senior Securities
	None
ITEM 4:	Submission of Matters to a Vote of Security Holders
	At the 2007 annual meeting of our shareholders held on June 7, 2007, shareholders considered and voted upon:
	1. A proposal to elect nine directors (identified in the table below) to serve until the next annual meeting of shareholders and until such directors’ successors are duly elected and qualify (“Proposal 1”);
	2. A proposal to approve and adopt our 2007 long-term incentive plan (“Proposal 2”); and
	3. A proposal to ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2007 (“Proposal 3”).
	The following table sets forth the number of votes in favor, the number of votes opposed, the number of abstentions (or votes withheld in the case of the election of directors) and broker non-votes with respect to each of the foregoing proposals.

Proposal	Votes in Favor	Votes Opposed	Abstentions (Withheld)	Broker Non-Votes
Proposal 1
Samuel Zell	15,448,914	—	533,223	—
Thomas E. Dobrowski	15,673,179	—	308,958	—
Martin L. Edelman	13,266,179	—	2,715,958	—
Craig M. Hatkoff	15,561,044	—	421,093	—
Edward S. Hyman	15,674,519	—	307,618	—
John R. Klopp	15,606,411	—	375,726	—
Henry N. Nassau	15,674,825	—	307,312	—
Joshua A. Polan	15,617,455	—	364,682	—
Lynne B. Sagalyn	15,674,230	—	307,907	—
Proposal 2	10,751,361	2,760,519	683,898	1,786,359
Proposal 3	15,520,294	444,297	17,544	—

38

ITEM 5: Other Information

On November 9, 2006, we commenced our CT High Grade MezzanineSM investment management initiative and entered into three separate account agreements with affiliates of W. R. Berkley Corporation, or WRBC, for an aggregate of $250 million.  On July 25, 2007, we amended the agreements to increase the aggregate commitment of the WRBC affiliates to $350 million.  Pursuant to these agreements, we invest, on a discretionary basis, capital on behalf of WRBC in low risk commercial real estate mortgages, mezzanine loans and participations therein.  WRBC beneficially owns approximately 14.2% of our outstanding class A common stock as of July 29, 2007 and a member of our board of directors is an employee of WRBC. The separate accounts are entirely funded with committed capital from WRBC and are managed by a subsidiary of our wholly-owned investment management subsidiary, CT Investment Management Co. LLC, or CTIMCO.  Each separate account has a one-year investment period with extension provisions. CTIMCO will earn a management fee equal to 0.25% per annum on invested assets.

39

ITEM 6:Exhibits

·	10.1	First Amendment to Credit Agreement, dated as of June 1, 2007, by and among Capital Trust, Inc., the lenders identified therein and WestLB AG, New York Branch.
+	10.2	Capital Trust, Inc. 2007 Long-Term Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-14788) filed on June 12, 2007 and incorporated herein by reference).
·	31.1	Certification of John R. Klopp, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
·	31.2	Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
·	32.1	Certification of John R. Klopp, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
·	32.2	Certification of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
·	99.1	Risk Factors

·              Filed herewith

+              Represents a management contract or compensatory plan or arrangement

40

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAPITAL TRUST, INC.
July 31, 2007	/s/ John R. Klopp
Date	John R. Klopp
	Chief Executive Officer
July 31, 2007	/s/ Geoffrey G. Jervis
Date	Geoffrey G. Jervis
	Chief Financial Officer

41

EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO CREDIT AGREEMENT

FIRST AMENDMENT TO CREDIT AGREEMENT (this “Agreement”), dated as of June 1, 2007, among CAPITAL TRUST, INC., a Maryland corporation (the “Borrower”), certain LENDERS party hereto and WESTLB AG, NEW YORK BRANCH (“WestLB”), as administrative agent on behalf of certain lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”).

RECITALS:

A.  The Borrower, the Administrative Agent and certain lenders (the “Lenders”) are parties to a Credit Agreement dated as of March 22, 2007 (as may be hereafter further amended, modified, supplemented or restated from time to time, the “Credit Agreement”; and, except as otherwise herein expressly provided, all capitalized terms used herein shall have the meaning assigned to such terms in the Credit Agreement), which Credit Agreement provides, among other things, for revolving Loans to be made by the Lenders to the Borrower in an aggregate principal amount not exceeding $50,000,000.

B.  Pursuant to Section 9.04 of the Credit Agreement and an Assignment and Assumption Agreement dated as of May 30, 2007, (i) WestLB assigned a portion of its Commitment and the Loans outstanding to Fortis Capital Corp. (“Fortis”), and (ii) Fortis assumed all of the obligations required to be performed by it as a Lender under the terms and provisions of the Credit Agreement.

C.  The parties hereto desire to, among other things, increase the aggregate amount of the Commitments and add new Lenders.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

Section 1.  Amendment of Credit Agreement.  Effective as of the Effective Date (as defined below), the Credit Agreement is hereby amended as follows:

(a)           The definition of “Commitment” in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and replaced with the following:

“Commitment” means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender’s Revolving Credit Exposure hereunder, as such commitment may be (a) reduced or increased from time to time pursuant to Section 2.06 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.  The initial amount of each Lender’s Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable.  The initial aggregate amount of the Lenders’ Commitments is $100,000,000;

(b)           Schedule 2.01 to the Credit Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto.

Section 2.  New Lenders.  Morgan Stanley Bank, Bear Stearns Corporate Lending, Inc., Deutsche Bank Trust Company Americas, and Wells Fargo Bank, National Association each hereby irrevocably and unconditionally agrees, effective as of the Effective Date, to be bound by, and to perform all of the obligations required to be performed by it as a Lender under the terms and provisions of the Credit Agreement, and agree that it shall, from and after the Effective Date, be (and be deemed to be) a Lender under the Credit Agreement in all respects and for all purposes as set forth therein, with a Commitment identified on Exhibit A attached hereto.

Section 3.  Conditions to the Effectiveness of this Agreement.  The effectiveness of this Agreement is subject to the conditions precedent that the Administrative Agent shall have received the following items (such date of receipt of all such items, the “Effective Date”):

(a)           This Agreement, executed by the parties hereto;

(b)           Payment of all of the Administrative Agent’s reasonable out-of-pocket costs and expenses incurred in connection with this Agreement.

Section 4.  Borrower’s Representations.  The Borrower hereby represents and warrants to the Administrative Agent and the Lenders, as follows:

(a)  Each of the representations and warranties of the Borrower set forth in the Credit Agreement, as amended by this Agreement, is true and correct on and as of the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date);

(b)  As of the date hereof and immediately after giving effect to this Agreement and the actions contemplated thereby, no Default has occurred and is continuing;

(c)  The execution of this Agreement is within the Borrower’s corporate powers and has been duly authorized by all necessary corporate and, if required, stockholder action.  This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law; and

(d)  The execution of this Agreement (a) does not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or

2

any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries.

Section 5.  Ratification.  Except as modified herein, the Credit Agreement is hereby ratified and confirmed on behalf of the parties hereto and thereto.

Section 6.  Miscellaneous.

(a)  GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

(b)  Amendments, Etc.  The terms of this Agreement may be waived, modified and amended only by an instrument in writing duly executed by the Borrower and the Administrative Agent (with any required consent of the Lenders pursuant to the Credit Agreement).  Any such waiver, modification or amendment shall be binding upon the Borrower, the Administrative Agent and each Lender.

(c)  Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Borrower, the Administrative Agent and each Lender.

(d)  Captions.  The captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement.

(e)  Counterparts.  This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart.  Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

(f)  Severability.  If any provision hereof is invalid and unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent and the Lenders in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction.

[Signature pages follow]

3

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

BORROWER
CAPITAL TRUST, INC., a Maryland corporation
By	/s/   Geoffrey G. Jervis
	Name:	Geoffrey G. Jervis
	Title:	Chief Financial Officer

ADMINISTRATIVE AGENT:
	WESTLB AG, NEW YORK BRANCH,
	By	/s/ Dee Dee Sklar
		Name: Dee Dee Sklar
		Title: Managing Director
	By	/s/ Stephen M. Toth
		Name: Stephen M. Toth
		Title: Director

LENDERS:
	WESTLB AG, NEW YORK BRANCH,
	By	/s/ Dee Dee Sklar
		Name: Dee Dee Sklar
		Title: Managing Director
	By	/s/ Stephen M. Toth
		Name: Stephen M. Toth
		Title: Director

FORTIS CAPITAL CORP.
	By:	/s/ Alan Krouk
		Name: Alan Krouk
		Title:  Managing Director
	By:	/s/ Barry Chung
		Name: Barry Chung
		Title:  Senior Vice President

MORGAN STANLEY BANK
	By:	/s/ Daniel Twengo
		Name: Daniel Twengo
		Title: Authorized Signatory

BEAR STEARNS CORPORATE LENDING, INC.
	By:	/s/ Victor Bulzacchelli
		Name: Victor Bulzacchelli
		Title: Vice President

DEUTSCHE BANK TRUST COMPANY
AMERICAS
	By:	/s/ James Rolison
		Name: James Rolison
		Title: Director
	By:	/s/ Linda Wong
		Name: Linda Wong
		Title: Director

WELLS FARGO BANK, NATIONAL
ASSOCIATION
	By:	/s/ David Grossman
		Name: David Grossman
		Title: Vice President

Exhibit A

SCHEDULE 2.01

Commitments

LENDER	COMMITMENT
WestLB AG, New York Branch	$	25,000,000
Fortis Capital Corp.	$	25,000,000
Morgan Stanley Bank	$	12,500,000
Bear Stearns Corporate Lending, Inc.	$	12,500,000
Deutsche Bank Trust Company Americas	$	10,000,000
Wells Fargo Bank, National Association	$	15,000,000
TOTAL	$	100,000,000

EX-31.1

Exhibit 31.1

CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John R. Klopp, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2007

  /s/ John R. Klopp

John R. Klopp

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Geoffrey G. Jervis, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Capital Trust, Inc.;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2007

 /s/ Geoffrey G. Jervis

Geoffrey G. Jervis

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capital Trust, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Klopp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ John R. Klopp

John R. Klopp

Chief Executive Officer

July 31, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Capital Trust, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Geoffrey G. Jervis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

  /s/ Geoffrey G. Jervis

Geoffrey G. Jervis

Chief Financial Officer

July 31, 2007

EX-99.1

Exhibit 99.1

FORWARD LOOKING INFORMATION AND RISK FACTORS

Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, our Annual Report on Form l0-K for the year ended December 31, 2006, our 2006 Annual Report to shareholders, any of our other Quarterly Reports on Form 10-Q or Current Reports on Form 8-K of the Company, or any other oral or written statements made in press releases or otherwise by or on behalf of Capital Trust, Inc., may contain forward looking statements within the meaning of the Section 21E of the Securities and Exchange Act of 1934, as amended, which involve certain risks and uncertainties. Forward looking statements predict or describe our future operations, business plans, business and investment strategies and portfolio management and the performance of our investments and our investment management business. These forward looking statements are identified by their use of such terms and phrases as “intends,” “intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,” “expected,” “project,” “projected,” “projections,” “plans,” “seeks,” “anticipates,” “anticipated,” “should,” “could,” “may,” “will,” “designed to,” “foreseeable future,” “believe,” “believes” and “scheduled” and similar expressions. Our actual results or outcomes may differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement was made. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise.

Our actual results may differ significantly from any results expressed or implied by these forward looking statements. Some, but not all, of the factors that might cause such a difference include, but are not limited to:

·the general political, economic and competitive conditions, in the United States and foreign jurisdictions wherein we invest;

·the level and volatility of prevailing interest rates and credit spreads;

·adverse changes in the real estate and real estate capital markets;

·the deterioration of performance and thereby credit quality of property securing our investments, borrowers and, in general, the risks associated with the ownership and operation of real estate that may cause cash flow deterioration to us and potentially principal losses on our investments;

·a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;

·adverse developments in the availability of desirable loan and investment opportunities whether they be due to competition, regulation or otherwise;

·events, contemplated or otherwise, such as natural disasters including hurricanes and earthquakes, acts of war and/or terrorism (such as the events of September 11, 2001) and others that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investment;

·the cost of operating our platform,  including, but not limited to, the cost of operating a real estate investment platform and the cost of operating as a publicly traded company;

·authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board and the Securities and Exchange Commission; Internal Revenue Service, the New York Stock Exchange, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might to business; and

·the risk factors set forth below.

Risks Related to Our Investment Program

Our existing loans and investments expose us to a high degree of risk associated with investing in commercial real estate related assets.

Real estate historically has experienced significant fluctuations and cycles in performance that may result in reductions in the value of our real estate related investments. The performance and value of our loans and investments once originated or acquired by us depends on many factors beyond our control. The ultimate performance and value of our investments is subject to the varying degrees of risk generally incident to the ownership and operation of the commercial properties which collateralize or support our investments. The ultimate performance and value of our loans and investments depends upon, in large part, the commercial property owner’s ability to operate the property so that it produces cash flows necessary to pay the interest and principal due to us on our loans and investments. Revenues and cash flows may be adversely affected by:

·changes in national economic conditions;

·changes in local real estate market conditions due to changes in national or local economic conditions or changes in local property market characteristics;

·competition from other properties offering the same or similar services;

·changes in interest rates and in the availability of mortgage financing;

·the ongoing need for capital improvements, particularly in older building structures;

·changes in real estate tax rates and other operating expenses;

·adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes, hurricanes and other natural disasters, acts of war or terrorism, which may decrease the availability of or increase the cost of insurance or result in uninsured losses;

·adverse changes in zoning laws;

·the impact of present or future environmental legislation and compliance with environmental laws; and

·other factors that are beyond our control and the control of the commercial property owners.

In the event that any of the properties underlying our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments, our profitability and the market price of our class A common stock would be negatively impacted.

We may change our investment strategy without shareholder consent, which may result in riskier investments than our current investments.

As part of our strategy, we may seek to expand our investment activities beyond real estate related investments. We may change our investment activities at any time without the consent of our shareholders, which could result in our making investments that are different from, and possibly riskier than, our current real estate investments. New investments we may make outside of our area of historical expertise may not perform as well as our current portfolio of real estate related investments.

We are exposed to the risks involved with making subordinated investments.

Our subordinated investments involve the risks attendant to investments consisting of subordinated loan and similar positions. In many cases, management of our investments and our remedies with respect thereto, including the ability to foreclose on or direct decisions with respect to the collateral securing such investments, is subject to the rights of senior lenders and the rights set forth in inter-creditor or servicing agreements. Our interests, and those of the senior lenders and other interested parties may not be aligned.

We may not be able to obtain the level of leverage necessary to optimize our return on investment.

Our return on investment depends, in part, upon our ability to grow our balance sheet portfolio of invested assets and those of our investment management vehicles through the use of leverage at interest rates that are lower than the interest rates earned on our investments. We generally obtain leverage through the issuance of collateralized debt obligations, or CDOs, repurchase agreements and other borrowings. Our ability to obtain the necessary leverage on attractive terms ultimately depends upon the quality of the portfolio assets that collateralize our indebtedness. Our failure to obtain and/or maintain leverage at desired levels, or to obtain leverage on attractive terms, would have a material adverse effect on our performance or that of our investment management vehicles. Moreover, we are dependent upon a few lenders to provide financing under repurchase agreements for our origination or acquisition of loans and investments and there can be no assurance that these agreements will be renewed or extended at expiration. Our ability to obtain financing through CDOs is subject to conditions in the debt capital markets which are impacted by factors beyond our control that may at times be adverse and reduce the level of investor demand for such securities.

We are subject to the risks of holding leveraged investments.

Leverage creates an opportunity for increased return on equity, but at the same time creates risk for us and our investment management vehicles. For example, leveraging magnifies changes in our net worth. We and our investment management vehicles will leverage assets only when there is an expectation that leverage provide a benefit, such as enhancing returns, although we cannot assure you that the use of leverage will prove to be beneficial. Increases in credit spreads in the market generally may adversely affect the market value of our investments. Because borrowings under our repurchase agreements and some other agreements are secured by our investments, which are subject to being marked to market by our credit providers, the borrowings available to us may decline if the market value of our investments decline. Moreover, we cannot assure you that we will be able to meet mark-to-market capital calls or debt service obligations in general and, to the extent such obligations are not met, there is a risk of loss of some or all of our investments through foreclosure or a financial loss if we or they are required to liquidate assets, the impact of which could be magnified if such a liquidation is at a commercially inopportune time.

Some of our leverage and contingent obligations are guaranteed by us.

We guarantee the performance of some of our obligations, including but not limited to some of our repurchase agreements, derivative agreements, obligations to co-invest in our investment management vehicles and unsecured indebtedness. Non performance on such obligations may cause losses to us in excess of the capital we initially have invested/committed under such obligations and there is no assurance that we will have sufficient capital to cover any such losses.

We are subject to terms under our secured and unsecured credit agreements that may impose restrictions on our operation of the business.

Under our secured and unsecured credit agreements, such as our repurchase agreements and derivative agreements, we have made certain representations, warranties and affirmative and negative covenants that may restrict our ability to operate while still utilizing those sources of credit. Such representations, warranties and covenants include but are not limited to restrictions on corporate guarantees, the maintenance of certain financial ratios, including our ratio of debt to equity capital and our debt service coverage ratio, as well as the maintenance of a minimum net worth, restrictions against a change of control of our company and limitations on alternative sources of capital.

Our success depends on the availability of attractive investments and our ability to identify, structure, consummate, manage and realize returns on attractive investments.

Our operating results are dependent upon the availability of, as well as our ability to identify, structure, consummate, manage and realize returns on, credit sensitive investment opportunities. In general, the availability of desirable credit sensitive investment opportunities and, consequently, our balance sheet returns and our investment management vehicles’ returns, will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the market and demand for credit sensitive investment opportunities, and the supply of capital for such investment opportunities. We cannot assure you that we will be successful in identifying and consummating investments which satisfy our rate of return objectives or that such investments, once consummated, will perform as anticipated. In addition, if we are not successful in investing for our investment management vehicles, the potential revenues we earn from management fees and co-investment returns will be reduced. We may expend significant time and resources in identifying and pursuing targeted investments, some of which may not be consummated.

The real estate investment business is highly competitive. Our success depends on our ability to compete with other providers of capital for real estate investments.

Our business is highly competitive and significantly more competition has entered our market over the past few years. Competition may cause us to accept economic or structural features in our investments that we would not have otherwise accepted and it may cause us to search for investments in markets outside of our traditional product expertise. We compete for attractive investments with traditional lending sources, such as insurance companies and banks, as well as other REITs, specialty finance companies and private equity vehicles with similar investment objectives, which may make it more difficult for us to consummate our target investments. Many of our competitors have greater financial resources and lower costs of capital than us, which provides them with greater operating flexibility.

Our loans and investments may be subject to fluctuations in interest rates which may not be adequately protected, or protected at all, by our hedging strategies.

Our current balance sheet investment program emphasizes loans with both “floating” interest rates and fixed interest rates. Floating rate investments earn interest at rates that adjust from time to time (typically monthly) based upon an index (typically LIBOR), allowing this portion of our portfolio to be insulated from changes in value due specifically to changes in rates. Fixed interest rate investments, however, do not have adjusting interest rates and, as prevailing interest rates change, the relative value of the fixed cash flows from these investments will cause potentially significant changes in value. Depending on market conditions, fixed rate assets may become a greater portion of our new loan originations. We employ various hedging strategies to limit the effects of changes in interest rates, including engaging in interest rate swaps, caps, floors and other interest rate derivative products. No strategy can completely insulate us or our investment management vehicles from the risks associated with interest rate changes and there is a risk that they may provide no protection at all. Hedging transactions involve certain additional risks such as counterparty risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot assure you that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us or our investment management vehicles against the foregoing risks. In addition, cash flow hedges which are not perfectly correlated (and appropriately designated/documented as such) with a variable rate financing will impact our reported income as gains, and losses on the ineffective portion of such hedges will be recorded.

Our use of leverage may create a mismatch with the duration and index of the investments that we are financing.

We attempt to structure our leverage such that we minimize the difference between the term of our investments and the leverage we use to finance such an investment. In the event that our leverage is shorter term than the financed investment, we may not be able to extend or find appropriate replacement leverage and that would have an adverse impact on our liquidity and our returns. In the event that our leverage is longer term than the financed investment, we may not be able to repay such leverage or replace the financed investment with an optimal substitute or at all, which will negatively impact our desired leveraged returns.

We attempt to structure our leverage such that we minimize the difference between the index of our investments and the index of our leverage—financing floating rate investments with floating rate leverage and fixed rate investments with fixed rate leverage. If such a product is not available to us from our lenders on reasonable terms, we may use hedging instruments to effectively create such a match. For example, in the case of fixed rate investments, we may finance such an investment with floating rate leverage, but effectively convert all or a portion of the attendant leverage to fixed rate using hedging strategies.

Our attempts to mitigate such risk are subject to factors outside of our control, such as the availability to us of favorable financing and hedging options, which is subject to a variety of factors, of which duration and term matching are only two such factors.

Our loans and investments may be illiquid which will constrain our ability to vary our portfolio of investments.

Our real estate investments are relatively illiquid and some are highly illiquid. Such illiquidity may limit our ability to vary our portfolio or our investment management vehicles’ portfolios of investments in response to changes in economic and other conditions. Illiquidity may result from the absence of an established market for investments as well as the legal or contractual restrictions on their resale. In addition, illiquidity may result from the decline in value of a property securing these investments. We cannot assure you that the fair market value of any of the real property serving as security will not decrease in the future, leaving our or our investment management vehicles’ investments under-collateralized or not collateralized at all, which could impair the liquidity and value, as well as our return on such investments.

We may not have control over certain of our loans and investments.

Our ability to manage our portfolio of loans and investments may be limited by the form in which they are made. In certain situations, we or our investment management vehicles may:

·acquire investments subject to rights of senior classes and servicers under inter-creditor or servicing agreements;

·acquire only a participation in an underlying investment;

·co-invest with third parties through partnerships,  joint ventures or other entities, thereby acquiring non-controlling interests; or

·rely on independent third party management or strategic partners with respect to the management of an asset.

Therefore, we may not be able to exercise control over the loan or investment. Such financial assets may involve risks not present in investments where senior creditors, servicers or third party controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior creditors or servicers whose interests may not be aligned with ours. A third party partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals which are inconsistent with ours and those of our investment management vehicles, or may be in a position to take action contrary to our or our investment management vehicles’ investment objectives. In addition, we and our investment management vehicles may, in certain circumstances, be liable for the actions of our third party partners or co-venturers.

We may not achieve our targeted rate of return on our investments.

We originate or acquire investments based on our estimates or projections of overall rates of return on such investments, which in turn are based upon, among other considerations, assumptions regarding the performance of assets, the amount and terms of available financing to obtain desired leverage and the manner and timing of dispositions, including possible asset recovery and remediation strategies, all of which are subject to significant uncertainty. In addition, events or conditions that we have not anticipated may occur and may have a significant effect on the actual rate of return received on an investment.

As we acquire or originate investments for our balance sheet portfolio, whether as new additions or as replacements for maturing investments, there can be no assurance that we will be able to originate or acquire investments that produce rates of return comparable to rates on our existing investments.

We may not be able to acquire suitable investments for a CDO issuance, or we may not be able to issue CDOs on attractive terms, which may require us to utilize more costly financing for our investments.

We intend to capitalize on opportunities to finance certain of our investments through the issuance of CDOs. During the period that we are acquiring these investments, we intend to finance our purchases through repurchase agreements. We use these repurchase agreements to finance our acquisition of investments until we have accumulated a sufficient quantity of investments, at which time we may refinance them through a securitization, such as a CDO issuance. As a result, we are subject to the risk that we will not be able to acquire a sufficient amount of eligible investments to maximize the efficiency of a CDO issuance. In addition, conditions in the debt capital markets may make the issuance of CDOs less attractive to us even when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these investments, we may be required to utilize other forms of potentially less attractive financing.

We may not be able to find suitable replacement investments for CDOs with reinvestment periods.

Some of our CDOs have periods where principal proceeds received from assets securing the CDO can be reinvested for a defined period of time, commonly referred to as a reinvestment period. Our ability to find suitable investments during the reinvestment period that meet the criteria set forth in the CDO documentation and by rating agencies may determine the success of our CDO investments. Our potential inability to find suitable investments may cause, among other things, lower returns, interest deficiencies, hyper-amortization of the senior CDO liabilities and may cause us to reduce the life of our CDOs and accelerate the amortization of certain fees and expenses.

The use of CDO financings with over-collateralization and interest coverage requirements may have a negative impact on our cash flow.

The terms of CDOs will generally provide that the principal amount of investments must exceed the principal balance of the related bonds by a certain amount and that interest income exceeds interest expense by a certain amount. Generally, CDO terms provide that, if certain delinquencies and/or losses or other factors cause a decline in collateral or cash flow levels, the cash flow otherwise payable on our retained subordinated classes may be redirected to repay classes of CDOs senior to ours until the issuer or the collateral is in compliance with the terms of the governing documents. Other tests (based on

delinquency levels or other criteria) may restrict our ability to receive net income from assets pledged to secure CDOs. We cannot assure you that the performance tests will be satisfied. With respect to future CDOs we may issue, we cannot assure you, in advance of completing negotiations with the rating agencies or other key transaction parties as to the actual terms of the delinquency tests, over-collateralization and interest coverage terms, cash flow release mechanisms or other significant factors upon which net income to us will be calculated. Failure to obtain favorable terms with regard to these matters may adversely affect the availability of net income to us. If our investments fail to perform as anticipated, our over-collateralization, interest coverage or other credit enhancement expense associated with our CDO financings will increase.

We may be required to repurchase loans that we have sold or to indemnify holders of our CDOs.

If any of the loans we originate or acquire and sell or securitize through CDOs do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, we may be required to repurchase those loans or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify persons for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could adversely affect our financial condition and operating results.

The commercial mortgage and mezzanine loans we originate or acquire and the commercial mortgage loans underlying the CMBS in which we invest are subject to delinquency, foreclosure and loss, which could result in losses to us.

Our commercial mortgage and mezzanine loans are secured by commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, changes in national, regional or local economic conditions and/or specific industry segments; declines in regional or local real estate values and declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, and changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

Our investments in subordinated CMBS and similar investments are subject to losses.

In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit, if any, and then by the most junior security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest (and in some cases we are invested in the junior most classes of securitizations), we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related mortgage backed securities, the securities in which we invest may incur significant losses.

The prices of lower credit quality CMBS are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns and underlying borrower developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality CMBS because the ability of borrowers to make principal and interest payments on the mortgages underlying the mortgage backed securities may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

We may invest in troubled assets that are subject to a higher degree of financial risk.

We may make investments in non-performing or other troubled assets that involve a higher degree of financial risk. We cannot assure you that our investment objectives will be realized or that there will be any return on our investment. Furthermore, investments in properties subject to work-out conditions or under bankruptcy protection laws may, in certain circumstances, be subject to additional potential liabilities that could exceed the value of our original investment, including equitable subordination and/or disallowance of claims or lender liability.

The impact of the events of September 11, 2001 and the resulting effect on terrorism insurance expose us to certain risks.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the U.S. and its allies may have a further adverse impact on the U.S. financial markets and the economy generally. We cannot predict the severity of the effect that such future events would have on the U.S. financial markets, the economy or our business.

In addition, the events of September 11, 2001 created significant uncertainty regarding the ability of real estate owners of high profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002, or TRIA, and the subsequent enactment of the Terrorism Risk Insurance Extension Act of 2005, which extended the TRIA through the end of 2007, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we invest in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

The economic impact of any future terrorist attacks could also adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others, such as hotel loans, which may experience a significant reduction in occupancy rates following any future attacks. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our results of operations.

We are subject to risks related to our international investments and the amount and percentage of our operations and investments outside the United States may increase significantly over time.

We make investments in foreign countries. Investing in foreign countries involves certain additional risks that may not exist when investing in the United States. The risks involved in foreign investments include:

·exposure to local economic conditions, local interest rates, foreign exchange restrictions and restrictions on the withdrawal of foreign investment and earnings, investment restrictions or requirements, expropriations of property and changes in foreign taxation structures;

·potential adverse changes in the diplomatic relations of foreign countries with the United States and government policies against investments by foreigners;

·changes in foreign regulations;

·hostility from local populations, potential instability of foreign governments and risks of insurrections, terrorist attacks, war or other military action;

·fluctuations in foreign currency exchange rates;

·changes in social, political, legal, taxation and other conditions affecting our international investment;

·logistical barriers to our timely receiving the financial information relating to our international investments that may need to be included in our periodic reporting obligations as a public company; and

·lack of uniform accounting standards (including availability of information in accordance with U.S. generally accepted accounting principles).

Unfavorable legal, regulatory, economic or political changes such as those described above could adversely affect our financial condition and results of operations.

There are increased risks involved with construction lending activities.

We originate loans for the construction of commercial and residential use properties. Construction lending generally is considered to involve a higher degree of risk than to other types of lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion of a project, the dependency upon the successful operation of the project (such as achieving satisfactory occupancy and rental rates) for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity.

Some of our investments and investment opportunities are in synthetic form.

Synthetic investments are contracts between parties whereby payments are exchanged based upon the performance of an underlying reference obligation. In addition to the risks associated with the performance of the reference obligation, these synthetic interests carry the risk of the counterparty not performing its contractual obligations. Market standards, GAAP accounting methodology and tax regulations related to these investments are evolving, and we cannot be certain that their evolution will not adversely impact the value or sustainability of these investments. Furthermore, our ability to invest in synthetic investments, other than through a taxable REIT subsidiaries, may be severely limited by the REIT qualification requirements because synthetic investment contracts generally are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests.

Risks Related to Our Investment Management Business

We are subject to risks and uncertainties associated with operating our investment management business, and we may not achieve from this business the investment returns that we expect.

We will encounter risks and difficulties as we operate our investment management business. In order to achieve our goals as an investment manager, we must:

·manage our investment management vehicles successfully by investing their capital in suitable investments that meet their respective investment criteria;

·actively manage the assets in our portfolios in order to realize targeted performance;

·create incentives for our management and professional staff to the task of developing and operating the investment management business; and

·structure, sponsor and capitalize future investment management vehicles that provide investors with attractive investment opportunities.

If we do not successfully operate our investment management business to achieve the investment returns that we or the market anticipates, our results of operations may be adversely impacted.

We may expand our investment management business to involve other investment classes where we do not have prior investment experience. We may find it difficult to attract third party investors without a

performance track record involving such investments. Even if we attract third party capital, there can be no assurance that we will be successful in deploying the capital to achieve targeted returns on the investments.

We face substantial competition from established participants in the private equity market as we offer mezzanine and other investment management vehicles to third party investors.

We face significant competition from large financial and other institutions that have proven track records in marketing and managing investment management vehicles and otherwise have a competitive advantage over us because they have access to pre-existing third party investor networks into which they can channel competing investment opportunities. If our competitors offer investment products that are competitive with products offered by us, we will find it more difficult to attract investors and to capitalize our investment management vehicles.

Our investment management vehicles are subject to the risk of defaults by third party investors on their capital commitments.

The capital commitments made by third party investors to our investment management vehicles represent unsecured promises by those investors to contribute cash to the investment management vehicles from time to time as investments are made by the investment management vehicles. Accordingly, we are subject to general credit risks that the investors may default on their capital commitments. If defaults occur, we may not be able to close loans and investments we have identified and negotiated which could materially and adversely affect the investment management vehicles’ investment program or make us liable for breach of contract, in either case to the detriment of our franchise in the private equity market.

Risks Related to Our Company

We are dependent upon our senior management team to develop and operate our business.

Our ability to develop and operate our business depends to a substantial extent upon the experience, relationships and expertise of our senior management and key employees. We cannot assure you that these individuals will remain in our employ. The employment agreement with our chief executive officer, John R. Klopp, expires on December 31, 2008, unless further extended. The employment agreement with our chief operating officer, Stephen D. Plavin, expires on December 28, 2008, unless further extended by us to 2009. The employment agreement with our chief financial officer, Geoffrey G. Jervis, expires on December 31, 2009, unless further extended by us to 2010. The employment agreement with our chief credit officer, Thomas C. Ruffing, expires on December 31, 2008. The loss of the services of our senior management and key employees could have a material adverse effect on our operations.

There may be conflicts between the interests of our investment management vehicles and us.

We are subject to a number of potential conflicts between our interests and the interests of our investment management vehicles.  We are subject to potential conflicts of interest in the allocation of investment opportunities between our balance sheet and our investment management vehicles. In addition, we may make investments that are senior or junior to, participations in, or have rights and interests different from or adverse to, the investments made by our investment management vehicles. Our interests in such investments may conflict with the interests of our investment management vehicles in related investments at the time of origination or in the event of a default or restructuring of the investment. Finally, our officers and employees may have conflicts in allocating their time and services among us and our investment management vehicles.

We must manage our portfolio in a manner that allows us to rely on an exclusion from registration under the Investment Company Act of 1940 in order to avoid the consequences of regulation under that Act.

We rely on an exclusion from registration as an investment company afforded by Section 3(c)(5)(C) of the Investment Company Act of 1940. Under this exclusion, we are required to maintain, on the basis of positions taken by the SEC staff in interpretive and no-action letters, a minimum of 55% of the value of

the total assets of our portfolio in “mortgages and other liens on and interests in real estate,” which we refer to as “Qualifying Interests,” and a minimum of 80% in Qualifying Interests and real estate related assets. Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we are currently organized, we intend to maintain our qualification for this exclusion from registration. In the past, when required due to the mix of assets in our balance sheet portfolio, we have purchased all of the outstanding interests in pools of whole residential mortgage loans, which we treat as Qualifying Interests based on SEC staff positions. Investments in such pools of whole residential mortgage loans may not represent an optimum use of our investable capital when compared to the available investments we target pursuant to our investment strategy and these investments present additional risks to us, and these risks are compounded by our inexperience with such investments. We continue to analyze our investments and may acquire other pools of whole loan residential mortgage backed securities when and if required for compliance purposes.

We treat our investments in CMBS, B Notes and mezzanine loans as Qualifying Interests for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C) to the extent such treatment is consistent with guidance provided by the SEC or its staff. In the absence of such guidance that otherwise supports the treatment of these investments as Qualifying Interests, we will treat them, for purposes of determining our eligibility for the exclusion provided by Section 3(c)(5)(C), as real estate related assets or miscellaneous assets, as appropriate.

If our portfolio does not comply with the requirements of the exclusion we rely upon, we could be forced to alter our portfolio by selling or otherwise disposing of a substantial portion of the assets that are not Qualifying Interests or by acquiring a significant position in assets that are Qualifying Interests. Altering our portfolio in this manner may have an adverse effect on our investments if we are forced to dispose of or acquire assets in an unfavorable market and may adversely affect our stock price.

If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company and limitations on corporate leverage that would have a material adverse impact on our investment returns.

We may expand our franchise through business acquisitions and the recruitment of financial professionals, which may present additional costs and other challenges and may not prove successful.

Our business plan contemplates expansion of our franchise into complementary investment strategies involving other credit sensitive structured financial products. We may undertake such expansion through business acquisitions or the recruitment of financial professionals with experience in other products. We may also expend a substantial amount of time and capital pursuing opportunities to expand into complementary investment strategies that we do not consummate. The expansion of our operations could place a significant strain on our management, financial and other resources. Our ability to manage future expansion will depend upon our ability to monitor operations, maintain effective quality controls and significantly expand our internal management and technical and accounting systems, all of which could result in higher operating expenses and could adversely affect our current business, financial condition and results of operations.

We cannot assure you that we will be able to identify and integrate businesses or professional teams we acquire to pursue complementary investment strategies and expand our business. Moreover, any decision to pursue expansion into businesses with complementary investment strategies will be in the discretion of our management and may be consummated without prior notice or shareholder approval. In such instances, shareholders will be relying on our management to assess the relative benefits and risks associated with any such expansion.

Risks Relating to Our Class A Common Stock

Because a limited number of shareholders, including members of our management team, own a substantial number of our shares, they may make decisions or take actions that may be detrimental to your interests.

By virtue of their direct and indirect share ownership, John R. Klopp, a director and our chief executive officer, Craig M. Hatkoff, a director and former officer, and other shareholders indirectly owned by trusts for the benefit of our chairman of the board, Samuel Zell, have the power to significantly influence our affairs and are able to influence the outcome of matters required to be submitted to shareholders for approval, including the election of our directors, amendments to our charter, mergers, sales of assets and other acquisitions or sales. The influence exerted by these shareholders over our affairs might not be consistent with the interests of some or all of our other shareholders. As of July 29, 2007, these shareholders collectively own and control 2,202,383 shares of our class A common stock representing approximately 10.8% of our outstanding class A common stock.

W. R. Berkley Corporation, or WRBC, owns 2,490,900 shares of our class A common stock which represents approximately 14.2% of our outstanding class A common stock as of July 29, 2007. An officer of WRBC serves on our board of directors and, therefore, has the power to significantly influence our affairs. Through its significant ownership of our class A common stock, WRBC may have the ability to influence matters submitted for shareholder approval. The influence exerted by WRBC over our affairs might not be consistent with the interests of some or all of our other shareholders.

The concentration of ownership in our officers or directors or shareholders associated with them may have the effect of delaying or preventing a change in control of our company, including transactions in which you might otherwise receive a premium for your class A common stock, and might negatively affect the market price of our class A common stock.

Some provisions of our charter and bylaws and Maryland law may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price.

Some of the provisions of our charter and bylaws and Maryland law discussed below could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders by providing them with the opportunity to sell their shares at a premium to the then current market price.

Issuance of Preferred Stock Without Shareholder Approval.   Our charter authorizes our board of directors to authorize the issuance of up to 100,000,000 shares of preferred stock and up to 100,000,000 shares of class A common stock. Our charter also authorizes our board of directors, without shareholder approval, to classify or reclassify any unissued shares of our class A common stock and preferred stock into other classes or series of stock and to amend our charter to increase or decrease the aggregate number of shares of stock of any class or series that may be issued. Our board of directors, therefore, can exercise its power to reclassify our stock to increase the number of shares of preferred stock we may issue without shareholder approval. Preferred stock may be issued in one or more series, the terms of which may be determined without further action by shareholders. These terms may include preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption. The issuance of any preferred stock, however, could materially adversely affect the rights of holders of our class A common stock and, therefore, could reduce the value of the class A common stock. In addition, specific rights granted to future holders of our preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The power of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current shareholders’ control.

Advance Notice Bylaw.   Our bylaws contain advance notice procedures for the introduction of business and the nomination of directors. These provisions could discourage proxy contests and make it more difficult for you and other shareholders to elect shareholder-nominated directors and to propose and approve shareholder proposals opposed by management.

Maryland Takeover Statutes.   We are subject to the Maryland Business Combination Act which could delay or prevent an unsolicited takeover of us. The statute substantially restricts the ability of third parties who acquire, or seek to acquire, control of us to complete mergers and other business combinations without the approval of our board of directors even if such transaction would be beneficial to shareholders. “Business combinations” between such a third party acquiror or its affiliate and us are prohibited for five years after the most recent date on which the acquiror or its affiliate becomes an “interested shareholder.” An “interested shareholder” is defined as any person who beneficially owns 10 percent or more of our shareholder voting power or an affiliate or associate of ours who, at any time within the two-year period prior to the date interested shareholder status is determined, was the beneficial owner of 10 percent or more of our shareholder voting power. If our board of directors approved in advance the transaction that would otherwise give rise to the acquiror or its affiliate attaining such status, such as the issuance of shares of our class A common stock to WRBC, the acquiror or its affiliate would not become an interested shareholder and, as a result, it could enter into a business combination with us. Our board of directors could choose not to negotiate with an acquirer if the board determined in its business judgment that considering such an acquisition was not in our strategic interests. Even after the lapse of the five-year prohibition period, any business combination with an interested shareholder must be recommended by our board of directors and approved by the affirmative vote of at least:

·80% of the votes entitled to be cast by shareholders; and

·two-thirds of the votes entitled to be cast by shareholders other than the interested shareholder and affiliates and associates thereof.

The super-majority vote requirements do not apply if the transaction complies with a minimum price requirement prescribed by the statute.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that an interested shareholder becomes an interested shareholder. Our board of directors has exempted any business combination involving family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family. As a result, these persons and WRBC may enter into business combinations with us without compliance with the super-majority vote requirements and the other provisions of the statute.

We are subject to the Maryland Control Share Acquisition Act. With certain exceptions, the Maryland General Corporation Law provides that “control shares” of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiring person or by our officers or by our directors who are our employees, and may be redeemed by us. “Control shares” are voting shares which, if aggregated with all other shares owned or voted by the acquiror, would entitle the acquiror to exercise voting power in electing directors within one of the specified ranges of voting power. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions, including an undertaking to pay expenses, may compel our board to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the “control shares” in question. If no request for a meeting is made, we may present the question at any shareholders’ meeting.

If voting rights are not approved at the shareholders’ meeting or if the acquiring person does not deliver the statement required by Maryland law, then, subject to certain conditions and limitations, we may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. If voting rights for control shares are approved at a shareholders’ meeting and the acquiror may then vote a majority of the shares entitled to vote, then all other shareholders may exercise appraisal rights. The fair value of the shares for purposes of these appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if we are a party to the transaction, nor does it apply to acquisitions approved or exempted by our charter or bylaws. Our bylaws contain a provision exempting certain holders identified in our bylaws from this statute, including WRBC, family partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and a limited liability company indirectly controlled by a trust for the benefit of Samuel Zell and his family.

We are also subject to the Maryland Unsolicited Takeovers Act which permits our board of directors, among other things and notwithstanding any provision in our charter or bylaws, to elect on our behalf to stagger the terms of directors and to increase the shareholder vote required to remove a director. Such an election would significantly restrict the ability of third parties to wage a proxy fight for control of our board of directors as a means of advancing a takeover offer. If an acquiror was discouraged from offering to acquire us, or prevented from successfully completing a hostile acquisition, you could lose the opportunity to sell your shares at a favorable price.

The market value of our class A common stock may be adversely affected by many factors.

As with any public company, a number of factors may adversely influence the price of our class A common stock, many of which are beyond our control. These factors include, in addition to other risk factors mentioned in this section:

·the level of institutional interest in us;

·the perception of REITs generally and REITs with portfolios similar to ours, in particular, by market professionals;

·the attractiveness of securities of REITs in comparison to other companies; and

·the market’s perception of our growth potential and potential future cash dividends.

An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which would adversely affect the market price of our class A common stock.

One of the factors that will influence the price of our class A common stock will be the dividend yield on our stock (distributions as a percentage of the price of our stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our class A common stock to expect a higher dividend yield, which could adversely affect the market price of our class A common stock.

Your ability to sell a substantial number of shares of our class A common stock may be restricted by the low trading volume historically experienced by our class A common stock.

Although our class A common stock is listed on the New York Stock Exchange, the daily trading volume of our shares of class A common stock has historically been lower than the trading volume for certain other companies. As a result, the ability of a holder to sell a substantial number of shares of our class A common stock in a timely manner without causing a substantial decline in the market of the shares, especially by means of a large block trade, may be restricted by the limited trading volume of the shares of our class A common stock.

Risks Related to our REIT Status and Certain Other Tax Items

Our charter does not permit any individual to own more than 9.9% of our class A common stock, and attempts to acquire our class A common stock in excess of the 9.9% limit would be void without the prior approval of our board of directors.

For the purpose of preserving our qualification as a REIT for federal income tax purposes, our charter prohibits direct or constructive ownership by any individual of more than a certain percentage, currently 9.9%, of the lesser of the total number or value of the outstanding shares of our class A common stock as a means of preventing ownership of more than 50% of our class A common stock by five or fewer individuals. The charter’s constructive ownership rules are complex and may cause the outstanding class A common stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual. As a result, the acquisition of less than 9.9% of our outstanding class A common stock by an individual or entity could cause an individual to own constructively in excess of 9.9% of our outstanding class A common stock, and thus be subject to the charter’s ownership limit. There can be no assurance that our board of directors, as permitted in the charter, will increase, or won’t decrease, this ownership limit in the future. Any attempt to own or transfer shares of our class A common stock in excess of the ownership limit without the consent of our board of directors will be void, and will result in the shares being transferred by operation of law to a charitable trust, and the person who acquired such excess shares will not be entitled to any distributions thereon or to vote such excess shares.

The 9.9% ownership limit may have the effect of precluding a change in control of us by a third party without the consent of our board of directors, even if such change in control would be in the interest of our shareholders or would result in a premium to the price of our class A common stock (and even if such change in control would not reasonably jeopardize our REIT status). The ownership limit exemptions and the reset limits granted to date would limit our board of directors’ ability to reset limits in the future and at the same time maintain compliance with the REIT qualification requirement prohibiting ownership of more than 50% of our class A common stock by five or fewer individuals.

There are no assurances that we will be able to pay dividends in the future.

We intend to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances that we will be able to pay dividends in the future. In addition, some of our distributions may include a return of capital, which would reduce the amount of capital available to operate our business.

We will be dependent on external sources of capital to finance our growth.

As with other REITs, but unlike corporations generally, our ability to finance our growth must largely be funded by external sources of capital because we generally will have to distribute to our shareholders 90% of our taxable income in order to qualify as a REIT, including taxable income where we do not receive corresponding cash. Our access to external capital will depend upon a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings, cash distributions and the market price of our class A common stock.

If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and face a substantial tax liability. Our taxable REIT subsidiaries will be subject to income tax.

We expect to continue to operate so as to qualify as a REIT under the Internal Revenue Code. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial or administrative interpretations

exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

·we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to shareholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;

·any resulting tax liability could be substantial, could have a material adverse effect on our book value and would reduce the amount of cash available for distribution to shareholders; and

·unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to shareholders would be reduced for each of the years during which we did not qualify as a REIT.

Fee income from our investment management business is expected to be realized by one of our taxable REIT subsidiaries, and, accordingly, will be subject to income tax

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our expanstion opportunities.

In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature of our investments in commercial real estate and related assets, the amounts we distribute to our shareholders and the ownership of our stock. We may also be required to make distributions to shareholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investments in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer unless we and such issuer jointly elect to be treated as a “taxable REIT subsidiary” under the Internal Revenue Code. The total value of all of our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.

Complying with REIT requirements may force us to borrow to make distributions to shareholders.

From time to time, our taxable income may be greater than our cash flow available for distribution to shareholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Internal Revenue Code. Thus, we could be required to borrow funds, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity.

We utilize “taxable mortgage pools” to finance  our investments.

Certain securitizations, such as our CDOs, are considered taxable mortgage pools, or TMPs, for federal income tax purposes. TMPs are generally subject to an unavoidable federal tax on the portion of their income deemed to be excess inclusion income, or EII. As a REIT, we are exempt from taxation at the corporate level on such EII as long as we own 100% of the equity interests in the securitization (as

defined for tax purposes). Notwithstanding the foregoing, we will be subject to taxation at the corporate level on any EII allocated to certain shareholders treated as disqualified organizations under applicable tax rules (generally tax-exempt entities, including federal, state, and foreign governmental entities).

In certain instances, we have either pledged our equity interests in these TMPs as collateral under our repurchase agreements or have contributed these interests to other TMPs—in both cases subjecting the pools to the potential loss of their tax exempt status in the event that we were forced to sell our interests or our interests were foreclosed  upon  by a third party that was not afforded the same exemption as us.

Despite our general corporate level exemption from taxation on EII, our shareholders (other than disqualified organizations, described above) are subject to taxation on the EII that we earn. The Internal Revenue Service has not given clear guidance as to the appropriate method for the calculation of EII and, absent such clear guidance, we have calculated EII based upon what we believe to be a reasonable method. Our estimation of EII is disclosed in our year end financial statements. In addition, pursuant to recently issued guidance from the Internal Revenue Service, we are required to allocate EII to our shareholders in proportion to dividends paid and to inform our shareholders of the amount and character of the EII allocated to them. Given the lack of guidance concerning calculation of EII, there can be no assurances that we have calculated excess inclusion income in a manner satisfactory to the Internal Revenue Service.