CV 10Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007

¨	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: 001-33050

CBRE REALTY FINANCE, INC.

(Exact name of registrant as specified in its charter)

Maryland

30-0314655

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

185 Asylum Street, 37^th Floor, Hartford, Connecticut 06103

(Address of principal executive offices) (Zip Code)

(860) 275-6200

(Registrant’s telephone number, including area code)

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 ¨

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.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

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

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 30,718,802 as of May 14, 2007.

CBRE REALTY FINANCE, INC.

INDEX


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006 (audited)	1

	Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006 (unaudited)	2

	Consolidated Statement of Stockholders’ Equity and Comprehensive Loss for the Three Months Ended March 31, 2007 (unaudited)	3

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (unaudited)	4

	Notes to Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4T.	Controls and Procedures	34
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
	Signatures	36

PART I. FINANCIAL INFORMATION

ITEM 1.

Consolidated Financial Statements

CBRE REALTY FINANCE, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share and share data)


	March 31, 2007 (Unaudited)			December 31, 2006 (Audited)
	March 31, 2007 (Unaudited)			December 31, 2006 (Audited)
Assets:
Cash and cash equivalents	$	46,653		$	17,933
Restricted cash		60,133			59,520
Loans and other lending investments, net		1,215,370			1,090,874
Commercial mortgage-backed securities, at fair value		284,882			222,333
Real estate, net		65,728			66,277
Investment in joint ventures		54,993			41,046
Derivative assets		1,339			373
Accrued interest		8,293			6,656
Other assets		26,766			17,677

Total assets	$	1,764,157		$	1,522,689


Liabilities and Stockholders’ Equity:
Liabilities:
Bonds payable	$	508,500		$	508,500
Repurchase obligations		664,966			433,438
Mortgage payable		52,561			52,194
Derivative liabilities		5,392			7,549
Management fee payable		701			712
Dividends payable		6,454			5,814
Accounts payable and accrued expenses		27,565			4,739
Other liabilities		50,759			47,060
Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities		50,000			50,000


Total liabilities		1,366,898			1,110,006

Commitments and contingencies		—			—
Minority interest		731			813

Stockholders’ Equity:
Preferred stock, par value $.01 per share; 50,000,000 shares authorized, no shares issued or outstanding at March 31, 2007 and December 31, 2006, respectively		—			—
Common stock par value $.01 per share; 100,000,000 shares authorized, 30,731,342 and 30,601,142 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		307			306

Additional paid-in capital		421,076			420,986
Accumulated other comprehensive loss		(12,024	)		(1,469	)
Accumulated deficit		(12,831	)		(7,953	)

Total stockholders’ equity		396,528			411,870

Total liabilities and stockholders’ equity	$	1,764,157		$	1,522,689

The accompanying notes are an integral part of these financial statements.

CBRE REALTY FINANCE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(Amounts in thousands, except per share and share data)


	For the Three Months Ended March 31, 2007			For the Three Months Ended March 31, 2006
Revenues:
Investment income	$	25,540		$	11,088
Property operating income		1,656			672
Other income		382			600

Total revenues		27,578			12,360
Expenses:
Interest expense		17,545			5,489
Management fees		2,064			1,427
Property operating expenses		901			216
Other general and administrative (including $91 and $872, respectively of stock-based compensation)		1,795			2,477

Depreciation and amortization		826			253

Total expenses		23,131			9,862

Loss on sale of investment		(287	)		(152	)
Gain (loss) on derivatives		(107	)		3,310

Income from continuing operations before equity in net income of unconsolidated joint ventures		4,053			5,656
Equity in net loss of unconsolidated joint ventures		(2,530	)		—

Net income before minority interest		1,523			5,656

Minority interest		(52	)		(9	)

Net income	$	1,575		$	5,665

Weighted-average shares of common stock outstanding:
Basic		30,161,774			20,000,000

Diluted		30,389,938			20,161,429

Earnings per share of common stock:
Basic	$	0.05		$	0.28

Diluted	$	0.05		$	0.28

Dividends declared per share of common stock:	$	0.21		$	—

The accompanying notes are an integral part of these financial statements.

CBRE REALTY FINANCE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE

LOSS

(UNAUDITED)

For the Three Months Ended March 31, 2007

(Amounts in thousands, except share data)


	Common Stock			Additional Paid In-Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total			Comprehensive Loss
	Shares	Par Value		Additional Paid In-Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total			Comprehensive Loss
Balance at December 31, 2006	30,601,142	$	306	$	420,986		$	(1,469	)	$	(7,953	)	$	411,870		$	—
Issuance of restricted shares of common stock	130,200		1		(1	)		—			—			—			—
Stock based compensation	—		—		91			—						91			—
Net income	—		—		—			—			1,575			1,575			1,575
Net unrealized loss on commercial mortgage backed securities	—		—		—			(5,603	)		—			(5,603	)		(5,603	)
Net unrealized loss on cash flow hedges	—		—		—			(4,952	)		—			(4,952	)		(4,952	)
Cash dividends declared or paid	—		—		—			—			(6,453	)		(6,453	)		—

Balance at March 31, 2007	30,731,342	$	307	$	421,076		$	(12,024	)	$	(12,831	)	$	396,528		$	(8,980	)

The accompanying notes are an integral part of these financial statements.

CBRE REALTY FINANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in thousands)


	For the Three Months Ended March 31, 2007			For the Three Months Ended March 31, 2006
Operating activities
Net income	$	1,575		$	5,665
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in unconsolidated joint ventures		2,530			—
Premium (discount) amortization, net		105			405
Other amortization		679			136
Depreciation		343			123
Stock-based compensation		91			872
Realized loss on sale of investment		287			151
Realized gain (loss) on derivatives		50			(2,798	)
Unrealized gains on derivatives		57			(512	)
Changes in operating assets and liabilities:
Restricted cash		(388	)		(241	)
Accrued interest		(1,637	)		149
Other assets		5,161			2,260
Management fee payable		(11	)		14
Accounts payable and accrued expenses		14,782			(1,646	)
Other liabilities		237			(972	)

Net cash provided by operating activities		23,861			3,606


Investing activities:
Purchase of commercial mortgage-backed securities		(72,309	)		(12,525	)
Repayment of commercial mortgage-backed securities principal		229			2
Proceeds from sale of available for sale securities		4,085			—
Origination and purchase of loans		(143,209	)		(132,946	)
Repayments of loan principal		1,171			6,586
Proceeds from sale of loans		17,103			44,642
Real estate acquisition		(231	)		(32,733	)
Investment in unconsolidated joint ventures		(16,476	)		(34,711	)
Restricted cash		(1,775	)		(86,847	)
Other liabilities		3,461			2,175

Net cash used in investing activities		(207,951	)		(250,707	)


Financing activities:
Proceeds from issuance of collateralized debt obligations		—			508,500
Proceeds from borrowings under repurchase agreements		231,528			145,354
Repayments of borrowings from repurchase agreements		—			(400,874	)
Proceeds from mortgage loans		367			24,196
Proceeds from settlement of derivatives		—			5,486
Deferred financing and acquisition costs paid		(14,739	)		(9,314	)
Restricted cash		1,550			—
Minority interest		(82	)		464
Dividends paid to common stockholders		(5,814	)		(2,674	)

Net cash provided by financing activities		212,810			271,138

Net increase in cash and cash equivalents		28,720			24,037
Cash and cash equivalents, beginning of the period		17,933			49,377

Cash and cash equivalents, end of period	$	46,653		$	73,414

Supplemental disclosure of cash flow information
Interest paid	$	16,811		$	10,498
Income taxes paid	$	—		$	—
Interest capitalized	$	137		$	—

The accompanying notes are an integral part of these financial statements.

CBRE REALTY FINANCE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2007

(Dollars in thousands, except per share and share data)

NOTE 1—ORGANIZATION

CBRE Realty Finance, Inc. (the “Company”) was organized in Maryland on May 10, 2005 as a commercial real estate specialty finance company focused on originating acquiring, investing in, financing and managing a diversified portfolio of commercial real estate-related loans and securities, including whole loans, bridge loans, subordinate interests in whole loans, or B Notes, commercial mortgage-backed securities (“CMBS”), mezzanine loans, and joint venture interests in entities that own commercial real estate, primarily in the United States. The Company commenced operations on June 9, 2005. The Company is a holding company that conducts its business through wholly-owned or majority-owned subsidiaries.

The Company is externally managed and advised by CBRE Realty Finance Management, LLC (the “Manager”), an indirect subsidiary of CB Richard Ellis Group, Inc. (“CBRE”), and a direct subsidiary of CBRE Melody & Company (“CBRE/Melody”). As of March 31, 2007, CBRE also owned an approximately 4.6% interest in the outstanding shares of the Company’s common stock. In addition, certain of the Company’s executive officers and directors and certain executive officers and directors of CBRE and CBRE/Melody owned an approximately 5.5% interest in the outstanding shares of the Company’s common stock.

The Company has elected to qualify to be taxed as a real estate investment trust (“REIT”) for U. S. federal income tax purposes commencing with the Company’s taxable year ended December 31, 2005. As a REIT, the Company generally will not be subject to federal income tax on that portion of income that is distributed to stockholders if at least 90% of the Company’s REIT taxable income is distributed to the Company’s stockholders. The Company conducts its operations so as to not be regulated as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

As of March 31, 2007, the net carrying value of investments held by the Company was approximately $1.57 billion, including origination costs and fees and net of repayments and sales of partial interests in loans and CMBS, with a weighted average spread to 30-day LIBOR of 324 basis points for the Company’s floating rate investments and a weighted average yield of 6.92% for the Company’s fixed rate investments.

NOTE 2—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The consolidated financial statements include the Company’s accounts and those of the Company’s subsidiaries, which are wholly-owned or controlled by the Company or entities which are variable interest entities (“VIE”) in which the Company is the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”). All significant intercompany transactions and balances have been eliminated in consolidation.

NOTE 3—NEW ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued Statement of Financial Accounting Standard No. 155, (“SFAS No. 155”), “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.” FAS No. 155 (i) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirement of FASB Statement No. 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an imbedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends FASB Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest on other than another derivative financial instrument. The Company adopted SFAS No. 155 effective January 1, 2007 and it had no material effect on its future financial results.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The Company adopted FIN48 effective January 1, 2007 and it had no material effect on its future financial results.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, (“SFAS No. 157”), “Fair Value Measurements.” This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect, if any, that this pronouncement will have on its future financial result.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” Entities are now permitted to measure many financial instruments and certain other assets and liabilities on an instrument-by instrument basis. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157. Calendar year-end entities that wish to elect the Fair Value Option for 2007 will need to do so in the first quarter of 2007. The Company did not early adopt and is currently evaluating the effect, if any, that this pronouncement will have on its future financial result.

NOTE 4—LOANS AND OTHER LENDING INVESTMENTS, NET

The aggregate carrying values allocated by product type and weighted average coupons of the Company’s loans and other lending investments as of March 31, 2007 and December 31, 2006, were as follows:


	Carrying Value⁽¹⁾ ($ in thousands)				Allocation by Investment Type				Fixed Rate: Average Yield				Floating Rate: Average Spread over LIBOR⁽²⁾
	2007		2006		2007		2006		2007		2006		2007	2006
Whole loans⁽³⁾, fixed rate	$	664,469	$	581,520	55	%	53	%	6.48	%	6.37	%	—	—
Whole loans⁽³⁾, floating rate		150,172		147,846	12	%	14	%	—		—		230bps	227bps
Mezzanine loans, fixed rate		117,753		111,402	10	%	10	%	8.48	%	8.52	%	—	—
Mezzanine loans, floating rate		119,449		99,452	10	%	9	%	—		—		453bps	453bps
Subordinate interests in whole loans, fixed rate		40,811		40,869	3	%	4	%	9.19	%	9.19	%	—	—
Subordinate interests in whole loans, floating rate		122,716		109,785	10	%	10	%	—		—		388bps	429bps

Total / Average	$	1,215,370	$	1,090,874	100	%	100	%	6.90	%	6.85	%	347bps	352bps

(1)	Loans and other lending investments are presented after scheduled amortization payments and prepayments, and are gross of premiums, discounts and unamortized fees.

(2)	Benchmark rate is 30-dayLIBOR.

(3)	Includes originated whole loans, acquired whole loans and bridge loans.

The carrying value of the Company’s loans and other lending investments is gross of premiums, unamortized fees, and discounts of $5,852 and $6,369 at March 31, 2007 and December 31, 2006, respectively.

The Company has identified one mezzanine loan as of March 31, 2007, as a variable interest in a VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company’s consolidated financial statements. As of March 31, 2007, the Company’s maximum exposure to loss would not exceed the carrying amount of this investment, or $42,345.

As of March 31, 2007 and 2006, the Company had not recorded an allowance for loan losses.

Non-Performing Loans

Non-performing loans include all loans on non-accrual status and repossessed real estate collateral. The Company transfers loans to non-accrual status at such time as: (1) management determines the borrower is incapable of curing, or has ceased efforts towards curing the cause of a default; (2) the loan becomes 90 days delinquent; (3) the loan has a maturity default; or (4) the net realizable value of the loan’s underlying collateral approximates the Company’s carrying value of such loan. Interest income is recognized only upon actual cash receipt for loans on non-accrual status. During the three months ended March 31, 2007, the Company funded an additional $4,400 to its $31,800 non-performing asset to cure the default on the senior loan, pay real estate taxes and pay for attorney and appraisal services relative to the loan. At March 31, 2007, the balance of this non-performing asset was $36,200. In addition, in April 2007 the Company funded an additional $800 on the senior loan to further protect its investment. On May 9, 2007, the Company foreclosed on the underlying asset and the Company will own the asset and control the exit strategy. The Company believes, and third party appraisals support, that there is collateral value in excess of the book value for this asset.

Watch List Assets

The Company conducts a quarterly comprehensive credit review, resulting in an individual risk classification being assigned to each asset. This review is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an “early warning system.” During the three months ended March 31, 2007, the Company funded an additional $1,800 to cure the default on the senior loan, pay real estate taxes and pay for attorney and appraisal services relative to the loan. At March 31, 2007, the balance of this watch list asset was $21,800. In addition, in April 2007 the Company funded an additional $300 on the senior loan to further protect its investment. On May 4, 2007, the Company foreclosed on the underlying asset and subject to an estimated 30-60 day judicial ratification process, the Company will own the asset and control the exit strategy. The Company believes, and third party appraisals support, that there is collateral value in excess of the book value for this asset.

Geographic Concentration Risk

At March 31, 2007 and December 31, 2006, the Company’s loan and other lending investments had the following geographic diversification, as defined by the National Council of Real Estate Investment Fiduciaries (“NCREIF”):


	March 31, 2007				December 31, 2006
Region	Carrying Value		% of Total		Carrying Value		% of Total
West…………………………….	$	461,472	38	%	$	418,284	38	%
East…………………………….		347,650	29	%		302,313	28	%
South…………………………….		228,999	19	%		234,012	21	%
Midwest…………………………		99,550	8	%		86,563	8	%
Nationwide………………………		77,699	6	%		49,702	5	%

Total…………………………	$	1,215,370	100	%	$	1,090,874	100	%

NOTE 5—CMBS

The following table summarizes the Company’s CMBS investments, aggregated by investment category, as of March 31, 2007, which are carried at estimated fair value:


Security Description	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
CMBS Class BBB	$	207,990	$	637	$	(2,554	)	$	206,073
CMBS Class BB		49,786		377		(608	)		49,555
CMBS Class B		26,432		330		(137	)		26,625
CMBS Class NR		2,733		—		(104	)		2,629

Total securities available-for-sale	$	286,941	$	1,344	$	(3,403	)	$	284,882

The following table summarizes the Company’s CMBS investments, aggregated by investment category, as of December 31, 2006, which are carried at estimated fair value:


Security Description	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
CMBS Class BBB	$	135,693	$	2,617	$	(1	)	$	138,309
CMBS Class BB		54,039		865		(275	)		54,629
CMBS Class B		26,350		440		(83	)		26,707
CMBS Class NR		2,708		—		(20	)		2,688

Total securities available-for-sale	$	218,790	$	3,922	$	(379	)	$	222,333

The Company has 37 CMBS investments that are in an unrealized loss position at March 31, 2007, four of which have been in a continuous unrealized loss position for greater than twelve months. The unrealized loss of the four CMBS investments in a continuous unrealized loss position for greater than twelve months is $393 and the unrealized loss of the thirty-three CMBS investments that have been in a continuous loss position for less than twelve months is $3,010, as of March 31, 2007. The Company had four CMBS investments in a continuous unrealized loss position for greater than twelve months as of December 31, 2006. The Company’s review of such securities indicates that the decrease in fair value was not due to permanent changes in the underlying credit fundamentals or in the amount of interest expected to be received. The unrealized losses are primarily the results of changes in market interest rates subsequent to the purchase of the CMBS investments. Therefore, management does not believe any of the securities held are other-than-temporarily impaired at March 31, 2007. The Company expects to hold all the investments until their expected maturity.

During the three months ended March 31, 2007, the Company sold one CMBS investment, compared to none during the quarter ended March 31, 2006. The Company received net proceeds of $4,085 that generated a realized loss of $287.

During the three months ended March 31, 2007 and 2006, the Company accreted $443 and $169 of the net discount paid for these securities in interest income, respectively.

The actual maturities of CMBS are generally shorter than stated contractual maturities. Actual maturities of these securities are affected by the contractual lives of the underlying assets, periodic payments of principal, and prepayments of principal.

The following table summarizes the estimated maturities of the Company’s CMBS investments as of March 31, 2007 according to their estimated weighted average life classifications:


Weighted Average Life	Estimated Fair Value		Amortized Cost		Weighted Average Coupon
Greater than one year and less than five years	$	86,757	$	86,279	7.20	%
Greater than five years and less than ten years		176,961		179,022	5.67	%
Greater than ten years		21,164		21,640	5.60	%

The following table summarizes the estimated maturities of the Company’s CMBS investments as of December 31, 2006 according to their estimated weighted average life classifications:


Weighted Average Life	Estimated Fair Value		Amortized Cost		Weighted Average Coupon
Greater than one year and less than five years	$	81,950	$	81,426	7.28	%
Greater than five years and less than ten years		117,505		114,904	5.70	%
Greater than ten years		22,878		22,460	5.57	%

The weighted average lives of the Company’s CMBS investments at March 31, 2007 and December 31, 2006, respectively, in the tables above are based upon calculations assuming constant principal prepayment rates to the balloon or reset date for each security.

NOTE 6—REAL ESTATE, NET

Springhouse Apartments LLC (“Springhouse”)

On December 15, 2005, the Company invested $8,289 for a 95% interest in Springhouse, a joint venture between the Company and The Bozzuto Group (“Bozzuto”). Springhouse acquired an existing garden-style apartment community consisting of 220 units located in Laurel, Maryland for $31,923. The Company determined that Springhouse is a VIE and that the Company is the primary beneficiary and has consolidated the entity from the date of investment. At March 31, 2007, Springhouse’s balance sheet was comprised of land of $8,191, buildings, net of depreciation, of $23,883, other assets of $998, mortgage note payable of $25,622 and other liabilities of $335.

Loch Raven Village Apartments-II, LLC (“Loch Raven”)

On March 28, 2006, the Company invested $8,980 for a 95% interest in Loch Raven, a joint venture between the Company and Bozzuto. Loch Raven acquired an existing garden-style apartment community consisting of 495 units located in Baltimore, Maryland for $32,733. The Company determined that Loch Raven is a VIE and that the Company is the primary beneficiary and has consolidated the entity from the date of investment. At March 31, 2007, Loch Raven’s balance sheet was comprised of land of $7,464, buildings, net of depreciation, of $25,624, other assets of $2,202, mortgage note payable of $26,939 and other liabilities of $561.

Minority interest on the Company’s consolidated balance sheet of $731 represents Bozzuto’s 5% interest in Springhouse and Loch Raven.

NOTE 7—UNCONSOLIDATED JOINT VENTURES

The Company has non-controlling, unconsolidated ownership interest in entities that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described in such agreements.

32 Leone Partners, LLC (“32 Leone Lane”)

On May 24, 2006, the Company invested $2,293 for an 80% non-managing member interest in 32 Leone Lane, a joint venture between the Company and The Heritage Management Company (“Heritage”). The Company contributed an additional $72, during the three months ended March 31, 2007. 32 Leone Lane is a 287,000 square foot industrial warehouse located in the Chester Industrial Park, a 300-acre business park, and lies in Southern Orange County, New York. The Company determined that 32 Leone Lane was not a VIE and that as a result of the Company’s non-managing member interest is not consolidated into the Company’s balance sheet. At March 31, 2007, 32 Leone Lane’s balance sheet was comprised of land of $1,721, buildings, net of depreciation, of $9,599, other assets of $891, mortgage note payable of $10,125 and other liabilities of $84.

KS-CBRE Shiraz LLC (“Shiraz Portfolio”)

On March 17, 2006, the Company invested $16,840 for a 90% non-managing member interest in the Shiraz Portfolio, a joint venture between the Company and Everest Partners LLC (“Everest”). The Shiraz Portfolio is a portfolio of eight office and industrial properties comprising approximately 680,300 square feet located in Route 128, Route 3 and Interstate 495 submarkets in Boston, Massachusetts. The Company determined that the Shiraz Portfolio was not a VIE and that as a result of the Company’s non-managing member interest is not consolidated into the Company’s balance sheet. In March 2007, purchase accounting was finalized at the partnership level. At March 31, 2007, the Shiraz Portfolio’s balance sheet was comprised of land of $15,790, buildings, net of depreciation, of $59,518, intangible assets, net of amortization, of $1,115, intangible lease liability, net of amortization, of $339, other assets of $3,393, mortgage note payable of $61,503 and other liabilities of $805.

KS-CBRE GS LLC (“GS Portfolio”)

On March 17, 2006, the Company invested $9,268 for a 90% non-managing member interest in the GS Portfolio, a joint venture between the Company and Everest. The GS Portfolio is a portfolio of nine office and industrial properties comprising approximately 526,355 square feet located in Route 128 and Route 3 submarkets in Boston, Massachusetts. The Company determined that the GS Portfolio was not a VIE and that as a result of the Company’s non-managing member interest is not consolidated into the Company’s balance sheet. In March 2007, purchase accounting was finalized at the partnership level. At March 31, 2007, the GS Portfolio’s balance sheet was comprised of land of $8,484, buildings, net of depreciation, of $32,733, intangible assets, net of amortization, of $639, intangible lease liability, net of amortization, of $373, other assets of $2,845, mortgage note payable of $33,373 and other liabilities of $717.

Prince George’s Station Retail LLC (the “Retail Property”)

On January 12, 2006, the Company converted its $5,728 bridge loan into a 90% non-managing member interest in the Retail Property, a joint venture between the Company and Taylor Development and Land Company (“TDL”). The Company contributed an additional $3,837 during the fifteen months ended March 31, 2007. The Retail Property is a 166 square feet retail property located in Hyattsville, Maryland. The Company determined that the Retail Property was not a VIE and that as a result of the Company’s non-managing member interest is not consolidated into the Company’s balance sheet. At March 31, 2007, the Retail Property’s balance sheet was comprised of construction in process costs of $30,487, other assets of $1,524, mortgage note payable of $17,162 and other liabilities of $4,216.

Nordhoff Industrial Park LLC (“Nordhoff”)

On August 17, 2006, the Company invested $3,800 for a 95% non-managing member interest in Nordhoff , a joint venture between the Company and SEV Chatsworth LLC. Nordhoff consists of a five-building industrial park comprising approximately 97,265 square feet located in the San Fernando Valley. The Company determined that Nordhoff was not a VIE and that as a result of the Company’s non-managing member interest is not consolidated into the Company’s balance sheet. At March 31, 2007, Nordhoff’s balance sheet was comprised of land of $5,294, buildings, net of depreciation, of $12,464, other assets of $726, mortgage note payable of $14,715 and other liabilities of $271.

CBRE 1515 Market GP, LLC (“1515 Market Street”)

On January 12, 2007, the Company invested $16,548 for a 90% non-managing member interest in 1515 Market Street, a joint venture between the Company and The Stockton Partners (“Stockton”). 1515 Market Street is a 507,000 square foot class A office building, located across from Philadelphia’s City Hall in the County of Philadelphia, Pennsylvania. The Company determined that 1515 Market Street was not a VIE and that as a result of the Company’s non-managing member interest is not consolidated into the Company’s balance sheet. At March 31, 2007, 1515 Market Street balance sheet was comprised of land of $11,400, buildings, net of depreciation, of $66,047, other assets of $13,444, mortgage note payable of $70,000 and other liabilities of $2,614.

NOTE 8—REPURCHASE OBLIGATIONS, MORTGAGE PAYABLE AND CDO BONDS PAYABLE

The following is a table of the Company’s outstanding borrowings as of March 31, 2007:


	Stated Maturity	Interest Rate		Balance 3/31/07
Mortgage note payable (Springhouse)⁽¹⁾	12/14/2008	7.07	%	$	25,622
Mortgage note payable (Loch Raven)⁽¹⁾	4/1/2009	5.96	%		26,939
DB Warehouse Facilities	3/31/2008	5.82	%		14,336
Bank of America Warehouse Facilities⁽²⁾	4/2/2007	6.13	%		57,304
Wachovia Warehouse Facility	8/24/2009	6.10	%		593,326
CDO I bonds payable	3/25/2046	5.83	%		508,500

Total				$	1,226,027

⁽¹⁾	Non-recourse to the Company.

⁽²⁾	These facilities were repaid and closed on April 2, 2007.

Mortgage Notes Payable

On December 14, 2005, Springhouse obtained a $26,175 mortgage loan in conjunction with the acquisition of real estate located in Prince George’s County, Maryland. The loan is guaranteed by Bozzuto, the Company’s joint venture partner, matures on December 14, 2008, and bears interest at 30-day LIBOR plus 1.75%. As of March 31, 2007 and December 31, 2006, respectively, the outstanding balance was $25,622 and $25,610.

On March 28, 2006, Loch Raven obtained a $29,170 mortgage loan in conjunction with the acquisition of real estate located in Baltimore, Maryland. The loan is guaranteed by Bozzuto, the Company’s joint venture partner, matures on April 1, 2009, and bears interest at a fixed rate of 5.96%. As of March 31, 2007 and December 31, 2006, respectively, the outstanding balance was $26,939 and $26,584.

Warehouse Facilities

The Company finances its portfolio of securities and loans through the use of repurchase agreements.

DB Warehouse Facility

On August 30, 2005, the Company entered into two facilities with Deutsche Bank AG, Cayman Islands Branch (“Deutsche Bank”) that provided $650,000 of aggregate borrowing capacity.

The Company has a $400,000 master repurchase agreement (the “DB Warehouse Facility”), which had an initial repurchase date of August 29, 2006. The Company’s TRS is also a party to this agreement and the Company and its TRS are jointly and severally liable thereunder. The repurchase date is currently being automatically extended for an additional day on a daily basis, without any action required to be taken by the lender or the Company, until the lender delivers to the Company in writing a termination notice of such daily automatic extension feature. In such event, the repurchase date shall be the day 364 days after the date of the written termination notice. Advances under this facility bear interest only, which is reset monthly, with a pricing spread of 50 basis points over 30-day LIBOR. Based on the Company’s investment activities, this facility provides for an advance rate of between 80% and 90% based upon the collateral provided under a borrowing based calculation. This facility finances our whole loan originations and acquisitions. As of March 31, 2007 and December 31, 2006, the outstanding balance under this facility was approximately $14,336 and $14,336, respectively, with a current weighted average interest rate of 5.82% and 5.85%, respectively. As of March 31, 2007, the Company had approximately $385,664 of additional capacity under this facility to fund future investments. The borrowings under this facility are collateralized by the following investments (dollars in thousands):


Investment Type	Number of Investments	Carrying Value
Whole Loans	1	$	16,000

The Company also had a $250,000 repurchase agreement with Deutsche Bank which expired on November 29, 2006.

The DB Warehouse Facility contains certain covenants, the most restrictive of which are requirements that the Company maintains a minimum tangible net worth of no less than $125,000, a minimum debt service coverage of not less than 1.5 to 1 in the aggregate, a ratio of indebtedness-to-tangible net worth not to exceed 3.5 to 1, and minimum cash or marketable securities of not less than (i) $10,000 for a debt-to-book ratio above 2 to 1; (ii) $5.0 million for a debt-to-book equity ratio between 1 to 1 and 2 to 1; and (iii) $3,000 for a debt-to-book equity ratio of below 1 to 1. The Company was in compliance with all covenants and restrictions as of March 31, 2007 and December 31, 2006.

Bank of America Warehouse Facilities

In January and February, 2006, the Company entered into two facilities with Banc of America Securities, LLC and Bank of America, N.A. (the “Bank of America Warehouse Facilities”) that provided $450,000 of aggregate borrowing capacity.

The Company has a $200,000 master repurchase agreement, which had an initial repurchase date of (1) January 26, 2007 or (2) the date on which a second CDO transaction sponsored by the Company closes. The repurchase date shall be extended for up to two additional 364-day periods following the initial repurchase date at the buyer’s sole discretion, provided that, if the Company intends to extend the repurchase date, (i) the buyer agrees to such extension within 30 days of receipt of our written notice to extend the repurchase date, which shall have been delivered to the lender at least 90 days but no more than 120 days prior to the initial repurchase date and (ii) with respect to the second extension, no default or an event of default (as defined in the repurchase agreement) has occurred or be continuing. In such event, the maturity date shall be the day 364 days after the date of the written termination notice. On January 25, 2007 the repurchase date was extended until the earliest of (a) April 15, 2007 or (b) the date on which a second CDO transaction sponsored by the Company closes. On April 2, 2007, in conjunction with the second CDO transaction, all outstanding obligations were paid and the facility was closed. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads of 50 to 170 basis points over 30-day LIBOR. Based on the Company’s investment activities, this facility provides for an advance rate of between 55% and 95% based upon the collateral provided under a borrowing based calculation. This facility finances the Company’s origination or acquisition of whole loans, subordinate mortgage interests and CMBS. As of March 31, 2007 and December 31, 2006, the outstanding balance under this facility was approximately $57,304 and $57,304, respectively, with a current weighted average interest rate of 6.13% and 6.16%, respectively. As of March 31, 2007, the Company had approximately $142,696 of additional capacity under this facility to fund future investments. The borrowings under this facility are collateralized by the following investments (dollars in thousands):


Investment Type	Number of Investments	Carrying Value
Subordinated Debt	1	$	20,000
CMBS	11	$	47,123

In addition, the Company has a $250,000 master repurchase agreement, which had an initial repurchase date of February 12, 2007. This repurchase date shall be extended for up to two additional 364-day periods following the initial repurchase date at the buyer’s sole discretion, provided that, if the Company intends to extend the repurchase date, (i) the buyer agrees to such extension within 30 days of receipt of the Company’s written notice to extend the repurchase date, which shall have been delivered to the lender at least 90 days but no more than 120 days prior to the initial repurchase date and (ii) with respect to the second extension, no default or an event of default (as defined in the repurchase agreement) has occurred or be continuing. The Company’s TRS is also a party to this agreement and the Company and the Company’s TRS are jointly and severally liable thereunder. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads of 50 to 120 basis points over 30-day LIBOR. Based on the Company’s investment activities, this facility provides for an advance rate of between 55% and 92.5% based upon the collateral provided under a borrowing base calculation. This facility finances whole loan originations and acquisitions. In conjunction with the second CDO transaction, the facility was closed on April 2, 2007. As of March 31, 2007, nothing was outstanding under this facility.

The Bank of America Warehouse Facilities contain certain covenants, the most restrictive of which are requirements that the Company maintains a minimum tangible net worth of no less than $250,000, a minimum debt service coverage of not less than 1.5 to 1 in the aggregate, a ratio of total liability to total assets greater than 0.80 to 1.0, and minimum cash and marketable securities of not less than $10,000. The Company was in compliance with all covenants and restrictions as of March 31, 2007 and December 31, 2006.

Wachovia Warehouse Facility

In July 2006, the Company entered into a mortgage loan purchase agreement with Wachovia Bank, N.A. (“Wachovia”) that provided $175,000 of aggregate borrowing capacity, or the Wachovia Warehouse Interim Facility. The borrowings under this facility were paid off on October 4, 2006 and the facility was terminated.

In August 2006, the Company entered into a master repurchase agreement with Wachovia (the “Wachovia Warehouse Facility”) that provided $300,000 of aggregate borrowing capacity. On December 15, 2006 and February 8, 2007, the aggregate borrowing capacity was increased to $500,000 and $700,000, respectively, and the increase period expires on May 1, 2007. After the expiration of the increase period the maximum borrowing capacity will be $300,000. The Wachovia Warehouse Facility has an initial fixed repurchase date of August 24, 2009, which may be extended for a period not to exceed 364 days upon our written request to the buyer at least 30 days, but no more than 60 days, prior to the initial repurchase date, if (i) no default or event of default (as defined in the repurchase agreement) has occurred or is continuing and (ii) upon our payment to the buyer of a certain extension fee. Based on the Company’s investment activities, this facility provides for an advance between 50% and 95% based upon the collateral provided under a borrowing based calculation. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads from 20 to 200 basis points over 30-day LIBOR. This facility finances the Company’s origination or acquisition of whole loans, subordinate mortgage interests and CMBS. As of March 31, 2007 and December 31, 2006, the outstanding balance under this facility was approximately $593,326 and $361,798, respectively, with a weighted average borrowing rate of 6.10% and 6.03%, respectively. On April 2, 2007, in conjunction with the second CDO transaction, the Company paid off $517,701 of the outstanding debt. As of March 31, 2007, the Company had $106,674 of capacity under this facility to fund future investments. The borrowings under this facility were collateralized by the following investments (dollars in thousands):


Investment Type	Number of Investments	Carrying Value
Whole Loans	18	$	483,348
Subordinated Debt	3	$	83,545
CMBS	26	$	126,035

The Wachovia Warehouse Facility contains certain covenants, the most material of which are requirements that the Company maintains a minimum tangible net worth of no less than the sum of $250,000, a ratio of total liability to total assets greater than 0.80 to 1.0 (for the $300,000 Wachovia Warehouse Facility) and 75% of the net proceeds of the issuance by the Company of any capital stock of any class and minimum cash and marketable securities of not less than $10,000. Additionally, at no time shall the consolidated interest coverage ratio of the Company for the immediately preceding fiscal quarter be less than 1.3 to 1.0 during the fiscal quarter ended on March 31, 2007 and the fiscal quarter ending June 30, 2007. On May 9, 2007, the Company received from Wachovia a one-time waiver of two financial covenants which the Company was not in compliance with as of March 31, 2007: (i) the Company is prohibited from making distributions in excess of 100% of the Company’s adjusted FFO for the immediately preceding fiscal quarter and (ii) the Company may not incur standard trade payables in excess of $500,000. The Company was in compliance with all other covenants and conditions as of March 31, 2007 and with all covenants and conditions as of December 31, 2006.

CDO Bonds Payable

On March 28, 2006, the Company closed its first CDO issuance (“CDO I”) and retained the entire BB rated J Class with a face amount of $24,000 for $19,200, retained the entire B-rated K Class with a face amount of $20,250 for $14,150 and also retained the non-rated common and preferred shares of CDO I, which issued the CDO bonds with a face amount of $47,250 for $51,740. The Company issued and sold CDO bonds with a face amount of $508,500 in a private placement to third parties. The proceeds of the CDO issuance were used to repay substantially all of the outstanding principal balance of the Company’s two warehouse facilities with Deutsche Bank of $343,556 and all of the outstanding principal balance of the Bank of America Warehouse Facilities of $16,250 at closing. The CDO bonds are collateralized by real estate debt investments, consisting of B Notes, mezzanine loans, whole loans and CMBS investments, which is recorded in the Company’s unaudited consolidated balance sheet in restricted cash at March 31, 2007. The Company’s Manager will act as the collateral manager for the Company’s CDO subsidiary but will not receive any fees in connection therewith. CDO I is not a qualified special purpose entity (“QSPE”) as defined under FASB Statement No. 140, (“SFAS 140”) “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” due to certain permitted activities of CDO I that are not consistent with activities of a QSPE permitted under SFAS 140, such as having the ability to sell impaired securities and acquire replacement securities with the proceeds at the discretion of the collateral administrator. CDO I is consolidated in the financial statements of the Company and the Company has accounted for the CDO I transaction as a financing. The collateral assets that the Company transferred to CDO I are reflected in the Company’s balance sheet. The bonds issued to third parties are reflected as debt on the Company’s balance sheet at March 31, 2007. As of March 31, 2007, CDO bonds of $508,500 were outstanding, with a weighted average interest rate of 5.83%.

In March 2007, Wachovia Bank N.A., acted as the exclusive structurer and placement agent with respect to the Company’s second CDO transaction (“CDO II”) totaling $1,000,000, which priced on March 2, 2007, and closed on April 2, 2007. The Company sold $880,000 of bonds with an average cost of 90-day LIBOR plus 40.6 basis points and retained 100% of the equity interests in the Company’s CDO subsidiary that issued the CDO notes consisting of preferred and common shares. The notes issued by the Company’s CDO subsidiary are secured initially by a portfolio of whole loans, B Notes, mezzanine loans and CMBS. The Company’s Manager will act as the collateral manager for the Company’s CDO subsidiary but will not receive any fees in connection therewith. The Company is the advancing agent in connection with the issuance of the CDO notes. CDO II is not a QSPE as defined under SFAS 140 due to certain permitted activities of CDO II that are not consistent with activities of a QSPE permitted under SFAS 140, such as having the ability to sell impaired securities and acquire replacement securities with the proceeds at the discretion of the collateral administrator. CDO II will be consolidated in the financial statements of the Company and the Company will account for the CDO II transaction as a financing. The collateral assets that the Company transferred to CDO II will be reflected in the Company’s balance sheet. The bonds issued to third parties will be reflected as debt on the Company’s balance sheet at June 30, 2007. In connection with the CDO II transaction, the Company terminated 24 and partially unwound five effective cash flow hedges, or interest rate swaps, with a total notional amount of $398,383. A total termination value of approximately $8,045 was paid to the Company’s counterparties on April 2, 2007. Additionally, the Company entered into 15 interest rate swaps and three basis swaps with aggregate notional amounts of approximately $622,957 and $235,053, respectively.

Accounting Treatment for Certain Investments Financed with Repurchase Agreements

The Company has certain CMBS and loan investments (the “collateral assets”) purchased from a counterparty that are financed through a repurchase agreement with the same counterparty. The Company believes that in accordance with FASB Concept Statement No. 6, (“CON 6”) “Elements of Financial Statements,” it is entitled to obtain the future economic benefits of the collateral assets and it is obligated under the repurchase agreement. Therefore, the Company currently records the collateral assets and the related financing gross on its balance sheet, and the corresponding interest income and interest expense gross on its income statement. In addition, any change in fair value of the commercial mortgage backed securities included in the collateral assets, is reported through other comprehensive income since these are classified as available for sale securities in accordance with FASB Statement No. 115, (“SFAS 115”) “Accounting for Certain Investments in Debt and Equity Securities.”

However, an alternative view could be taken that in a transaction where assets are acquired from and financed under a repurchase agreement with the same counterparty, the acquisition may not qualify as a sale from the sellers’ perspective. In such a case, the seller may be required to continue to consolidate the assets sold to the Company. Under this view, the Company would be precluded from presenting the assets gross on its balance sheet and would instead treat its net investment in such assets as a derivative. Under this view, the interest rate swaps entered into by the Company to hedge its interest rate exposure with respect to these transactions would no longer qualify for hedge accounting, but would be marked to market through the income statement.

This potential change would not affect the economics of the transactions but would affect how the transactions are reported in our financial statements. If the Company were to apply this view to its transactions, for the quarter ended March 31, 2007 and year ended December 31, 2006, the change in net income per common diluted share would be immaterial and our total assets and total liabilities would each be reduced by $66,312 and $14,854, respectively.

NOTE 9—Junior Subordinated Debentures

In July 2006, the Company completed the issuance of $50,000 in unsecured trust preferred securities through a newly formed Delaware statutory trust, CBRE Realty Finance Trust I (“CRFT I”), which is one of the Company’s wholly-owned subsidiaries. The securities bear interest at a fixed rate of 8.10% for the first ten years ending July 2016. Thereafter the rate will float based on the 90-day LIBOR plus 249 points. The base management fee that the Company pays to the Manager pursuant to the management agreement is based on gross stockholders’ equity which our board of directors had previously determined to include the trust preferred securities. The Company paid a base management fee on the trust preferred securities to the Manager from July 26, 2006 to September 27, 2006 in the amount of approximately $174. However, beginning September 28, 2006, the Company no longer pays such a fee on trust preferred securities to the Manager.

CRFT I issued $1,550 aggregate liquidation amount of common securities, representing 100% of the voting common stock of CRFT I to the Company for a total purchase price of $1,550. CRFT I used the proceeds from the sale of trust preferred securities and the common securities to purchase the Company’s junior subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations. The Company realized net proceeds from the offering of approximately $48,784.

NOTE 10—COMMITMENTS AND CONTINGENCIES

Litigation

The Company currently is neither subject to any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company.

Unfunded Commitments

The Company currently has unfunded commitments to fund loan advances and joint venture equity contributions. The table below summarizes our unfunded commitments as of March 31, 2007:


	Total Commitment Amount		Current Funded Amount		Total Unfunded Commitment
Loans	$	316,259	$	259,155	$	57,104
Joint Venture Equity		78,117		75,655		2,462

Total	$	394,376	$	334,810	$	59,566

NOTE 11—RELATED PARTY TRANSACTIONS

Management Agreement

The Company’s Management Agreement provides for an initial term through December 2008 and will automatically renew for a one-year term each anniversary date thereafter, subject to certain termination rights. After the initial term, the Company’s independent directors will review the Manager’s performance annually and the Management Agreement may be terminated subject to certain termination rights. The Company’s executive officers and directors own approximately 26.1% of the Manager.

The Company pays the Manager a base management fee monthly in arrears in an amount equal to 1/12 of the sum of (i) 2.0% of the Company’s gross stockholders’ equity (as defined in the Management Agreement) of the first $400,000 of the Company’s equity; and (ii) 1.75% of the Company’s equity in an amount in excess of $400,000 and up to $800,000; and (iii) 1.5% of the Company’s equity in excess of $800,000. The Manager uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are the Company’s officers, receive no cash compensation directly from the Company. For the three months ended March 31, 2007 and 2006, respectively, the Company paid $2,069 and $1,413 to the Manager for the base management fee under this agreement. As of March 31, 2007 and December 31, 2006, respectively, $681 and $686 of management fees were accrued.

In addition to the base management fee, the Manager may receive quarterly incentive compensation. The purpose of the incentive compensation is to provide an additional incentive for the Manager to achieve targeted levels of Funds From Operations (as defined in the Management Agreement) and to increase the Company’s stockholder value. The Manager may receive quarterly incentive compensation in an amount equal to the product of: (i) twenty-five percent (25%) of the dollar amount by which (A) the Company’s Funds From Operations (after the base management fee and before incentive compensation) per share of common stock for such quarter (based on the weighted average of shares outstanding for such quarter) exceeds (B) an amount equal to (1) the weighted average of the price per share of the Company’s common stock in the Company’s June 2005 private offering and the prices per share of the Company’s common stock in any subsequent offerings (including the Company’s initial public offering), multiplied by (2) the greater of (a) 2.25% or (b) 0.75% plus one-fourth of the Ten Year Treasury Rate (as defined in the Management Agreement) for such quarter, multiplied by (ii) the weighted average number of shares of the Company’s common stock outstanding during such quarter. The Company will record any incentive fees as a management fee expense in the period when earned and when payments of such amounts have become probable and reasonably estimable in accordance with the Management Agreement. For the three months ended March 31, 2007 and 2006, respectively, no amounts were paid or were payable to the Manager for the incentive management fee under this agreement.

The Management Agreement also provides that the Company will reimburse the Manager for various expenses incurred by the Manager or its affiliates on the Company’s behalf, including but not limited to costs associated with formation and capital raising activities and general and administrative expenses. Without regard to the amount of compensation received under the Management Agreement, the Manager is responsible for the wages and salaries of the Manager’s officers and employees. For the three months ended March 31, 2007 and 2006, respectively, the Company paid approximately $120 and $203 to the Manager for expense reimbursements. As of March 31, 2007 and December 31, 2006, respectively, $96 and $27 of expense reimbursements were accrued and are included in other liabilities.

Affiliates

As of March 31, 2007, an affiliate of the Manager, CBRE Melody of Texas, LP and its principals, owned 1.1 million shares (which were purchased in the Company’s June 2005 private offering) of the Company’s common stock, 300,000 shares of restricted common stock, and had options to purchase an additional 500,000 shares of common stock.

GEMSA Servicing

GEMSA Loan Services (“GEMSA”) is utilized by the Company as a loan servicer. GEMSA is a joint venture between CBRE/Melody & Company and GE Capital Real Estate. The Company’s fees for GEMSA’s services for the quarter ended March 31, 2007 and 2006 amounted to $53 and $7, respectively.

NOTE 12—STOCKHOLDERS’ EQUITY

Capital Stock

The Company’s authorized capital stock consists of 150,000,000 shares of capital stock, $0.01 par value per share, of which the Company have authorized the issuance of 100,000,000 shares of common stock, $0.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share.

On September 27, 2006, the Company priced its initial public offering (“the Offering”) of common stock, with public trading of the Company’s common stock commencing on September 28, 2006. The Offering was for 11,012,624 shares of its common stock at a price of $14.50 per share, which includes the exercise in full of the underwriters’ option to purchase an additional 1,436,429 shares of common stock. Of these shares, 9,945,020 were sold by the Company and 1,067,604 were sold by selling stockholders. Net proceeds from both the Offering and the over-allotment option, after underwriting discounts and commissions of $8,652 and other offering expenses of $2,361, were $133,190, which the Company received on October 3, 2006. The net proceeds were used to repay outstanding indebtedness under the Wachovia Warehouse Interim Facility. As of March 31, 2007 and December 31, 2006, 30,731,342 and 30,601,142 shares of our common stock were issued and outstanding, respectively.

Comprehensive Income

The following table summarizes the Company’s comprehensive income for the three months ended March 31, 2007, and 2006, respectively:


	For the Three Months Ended March 31, 2007			For the Three Months Ended March 31, 2006
Net income	$	1,575		$	5,665
Unrealized gain (loss) on CMBS securities available for sale and cash flow hedges		(10,555	)		4,095

Comprehensive Income	$	(8,980	)	$	9,760

Equity Incentive Plan

The Company established a 2005 equity incentive plan, (“2005 Equity Incentive Plan”) for officers, directors, consultants and advisors, including the Manager, its employees and other related persons. The 2005 Equity Incentive Plan authorizes (i) the grant of stock options that qualify as incentive stock options under Section 422 of the Code, or ISOs; (ii) the grant of stock options that do not qualify, or NQSOs and (iii) grants of shares of restricted common stock. The exercise price of stock options will be determined by the compensation committee and fully ratified by the board of directors, but may not be less than 100% of the fair market value of a share on the day the option is granted. The total number of shares subject to awards granted under the 2005 Equity Incentive Plan may not exceed 2,000,000. As of December 31, 2005, approximately 600,000 shares of restricted stock and 1,000,000 options to purchase shares of the Company’s common stock were granted, or reserved for issuance under the 2005 Equity Incentive Plan.

In March 2007, 130,200 shares of restricted stock and options to purchase 66,500 shares of the Company’s common stock with an exercise price of $13.08 per share were issued to certain employees of the Company’s Manager under the 2005 Equity Incentive Plan. Options granted under the 2005 Equity Incentive Plan are exercisable at the fair market value on the date of the grant and, expire five years from the date of the grant, subject to termination of employment. These options are not transferable other than at death and are exercisable ratably over a three year period commencing one year from the date of the grant.

As of March 31, 2007, 271,945 awards were available for issuance, and 786,322 restricted shares and 941,733 options have been issued, net of forfeitures, under the 2005 Equity Incentive Plan.

The fair value of the options was estimated by reference to the Black-Scholes-Merton formula, a closed-form option pricing model. Given the short history of the Company as a publicly-traded company, the Company estimated the volatility of its stock based on available information on volatility of stocks of other publicly held companies in the industry. Since the 2005 Equity Incentive Plan has characteristics significantly different from those of traded options, and since the assumptions used in such model, particularly the volatility assumption, are subject to significant judgment and variability, the actual value of the options could vary materially from management’s estimate. The assumptions used in such model as of March 31, 2007 are provided in the table below:


Input Variables	June 2005 Grant			January 2006 Grant			August 2006 Grant			September 2006 Grant			March 2007 Grant
Remaining term (in years)		3.2			3.8			4.4			4.5			4.9
Risk-free interest rate		4.5	%		4.5	%		4.5	%		4.5	%		4.5	%
Volatility		20.8	%		20.6	%		21.8	%		21.8	%		22.0	%
Dividend yield		7.9	%		7.9	%		7.9	%		7.9	%		7.9	%
Estimated Fair Value	$	0.69		$	0.72		$	0.83		$	0.83		$	1.23

The assumptions used in such model as of March 31, 2006 are provided in the table below:


Input Variables	June 2005 Grant			January 2006 Grant
Remaining term (in years)		4.2			4.8
Risk-free interest rate		4.8	%		4.8	%
Volatility		20.8	%		20.5	%
Dividend yield		9.5	%		9.5	%
Estimated Fair Value	$	0.99		$	0.94

NOTE 13—INCOME TAXES

NOTE 14—DERIVATIVES

In the normal course of business, the Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an anticipated transaction. In those cases, hedge effectiveness criteria also require that it is probable that the underlying transaction is expected to occur. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction and how ineffectiveness of the hedging instrument, if any, will be measured. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

The Company’s derivative products typically include interest rate swaps. The Company expressly prohibits the use of unconventional derivative instruments and using derivative instruments for trading or speculative purposes. Further, it has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

The Company uses interest rate swaps and basis swaps to hedge all or a portion of the interest rate risk associated with its borrowings. The counterparties to these contractual arrangements are Credit Suisse International, Deutsche Bank AG, New York, and Wachovia Bank N.A., with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by counterparty, the Company is potentially exposed to credit loss. However, the Company anticipates that the counterparties will not fail to meet their obligations under the interest rate swap agreements. On the date the Company enters into a derivative contract, the derivative is designated as: (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized liability (“cash flow” hedge); (2) a hedge of exposure to fair value of a recognized fixed-rate asset; or (3) a contract not qualifying for hedge accounting (“free standing” derivative).

To determine the fair value of derivative instruments, the Company used a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives and long-term investments, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

The following table summarizes the fair value of the derivative instruments held as of March 31, 2007:


Contract	Estimated Fair Value at March 31, 2007
Derivatives designated as cash flow hedges	$	(4,224	)
Free-standing hedges		171

In connection with CDO II, the Company terminated 24 and partially unwound five effective cash flow hedges, or interest rate swaps, with a total notional amount of $398,383. A total termination value of approximately $8,045 was paid to the Company’s counterparties on April 2, 2007. Additionally, the Company entered into 15 interest rate swaps and three basis swaps with aggregate notional amounts of approximately $622,957 million and $235,053, respectively.

The following table summarizes the fair value of the derivative instruments held as of December 31, 2006:


Contract	Estimated Fair Value at December 31, 2006
Derivatives designated as cash flow hedges	$	(7,739	)
Free-standing hedges		255

NOTE 15—EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net income by the weighted average number of shares of common stock outstanding during each period. In accordance with SFAS No. 128 “Earnings Per Share,” certain shares of nonvested restricted stock are not included in the calculation of basic EPS (even though shares of nonvested restricted stock are legally outstanding). Diluted earnings per share takes into account the effect of dilutive instruments, such as common stock options and shares of unvested restricted common stock, but use the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding (treasury stock method). The following table presents a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2007:


	Three Months Ended March 31, 2007
Basic:
Net income	$	1,575
Weighted-average number of shares outstanding		30,162
Basic earnings per share	$	0.05
Diluted:
Net income	$	1,575
Weighted-average number of shares outstanding		30,162
Plus: Incremental shares from assumed conversion of dilutive instruments		228
Adjusted weighted-average number of shares outstanding		30,390
Diluted earnings per share	$	0.05

The following table presents a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2006:


	Three Months Ended March 31, 2006
Basic:
Net income	$	5,665
Weighted-average number of shares outstanding		20,000
Basic earnings per share	$	0.28
Diluted:
Net income	$	5,665
Weighted-average number of shares outstanding		20,000
Plus: Incremental shares from assumed conversion of dilutive instruments		161
Adjusted weighted-average number of shares outstanding		20,161
Diluted earnings per share	$	0.28

NOTE 16—DIVIDENDS

On March 15, 2007, the Company declared dividends of $0.21 per share of common stock, payable with respect to the three month period ended March 31, 2007, to stockholders of record at the close of business on March 30, 2007. The Company paid these dividends on April 16, 2007.

NOTE 17—SUBSEQUENT EVENTS

In March 2007, Wachovia Bank N.A., acted as the exclusive structurer and placement agent with respect to the Company’s second CDO transaction totaling $1,000,000, which priced on March 2, 2007, and closed on April 2, 2007. The Company sold $880,000 of bonds with an average cost of 90-day LIBOR plus 40.6 basis points and retained 100% of the equity interests in the Company’s CDO subsidiary that issued the CDO notes consisting of preferred and common shares. The notes issued by the Company’s CDO subsidiary are secured initially by a portfolio of whole loans, B Notes, mezzanine loans and CMBS. The Company’s Manager will act as the collateral manager for the Company’s CDO subsidiary but will not receive any fees in connection therewith. The Company is the advancing agent in connection with the issuance of the CDO notes. CDO II is not a QSPE as defined under SFAS 140 due to certain permitted activities of CDO II that are not consistent with activities of a QSPE permitted under SFAS 140, such as having the ability to sell impaired securities and acquire replacement securities with the proceeds at the discretion of the collateral administrator. CDO II will be consolidated in the financial statements of the Company and the Company will account for the CDO II transaction as a financing. The collateral assets that the Company transferred to CDO II will be reflected in the Company’s balance sheet. The bonds issued to third parties will be reflected as debt on the Company’s balance sheet at June 30, 2007. In connection with the CDO transaction, the Company terminated 24 and partially unwound five effective cash flow hedges, or interest rate swaps with a total notional amount of $398,383.

On April 25, 2007, the Company announced that Keith Gollenberg, chief executive officer, president and a director of the Company, resigned as a member of the Board of Directors of the Company (the “Board of Directors”) and stepped down from his role as chief executive officer and president of the Company, effective immediately. Ray Wirta, non-executive chairman of the Board of Directors, was appointed executive chairman of the Board of Directors, and interim chief executive officer and president of the Company. Additionally, the Company announced that in the near term it will no longer pursue equity real estate investments through joint ventures, and will concentrate solely on the fixed-income arena. The Company has invested $76,000 in equity real estate assets and will continue to manage these assets in accordance with their original business plan, subject to taking advantage of early opportunities to profitably exit them.

On May 4, 2007, the Company foreclosed its subordinated mortgage on the Rodgers Forge property, with a carrying amount of $22,100 as of April 30, 2007. The Company was the successful bidder at the foreclosure sale, which is now subject to judicial confirmation.

On May 9, 2007, the Company foreclosed on its security interest in the ownership interest in the Pavilion property, with a carrying amount of $37,000 as of April 30, 2007.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Unless the context requires otherwise, all references to “we,” “our,” and “us” in this quarterly report mean CBRE Realty Finance, Inc., a Maryland corporation, and our wholly owned subsidiaries.

We are a commercial real estate specialty finance company organized in May 2005 that is focused on originating, acquiring, investing in, financing and managing, a diversified portfolio of commercial real estate-related loans and securities, including whole loans, subordinate interests in whole loans, which we refer to as B Notes, commercial mortgage-back securities, which we refer to as CMBS, mezzanine loans, joint venture investments, and other real estate or real estate-related investments.

We are a holding company that conducts its businesses through wholly-owned or majority-owned subsidiaries. We are externally managed and advised by CBRE Realty Finance Management, LLC, which we refer to as our Manager, an indirect subsidiary of CB Richard Ellis, Inc., which we refer to as CBRE, and a direct subsidiary of CBRE Melody & Company, which we refer to as CBRE/Melody.

We have elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2005. Accordingly, we generally will not be subject to U. S. federal income taxes if we meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our net taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) to our stockholders. However, we have a taxable REIT subsidiary, which we refer to as our TRS, which will incur federal, state and local taxes on the taxable income from their activities.

Our objective is to grow our portfolio and provide attractive total returns to our investors over time through a combination of dividends and capital appreciation. Our business primarily focuses on originating, acquiring, investing in, financing and managing a diversified portfolio of commercial real estate related loans and securities. Our initial investment focus is on opportunities in North America.

We have invested, on a relative value basis, in transactions in a variety of markets and secured by many different property types. We have also focused our investments in markets and transactions where we believe we have an advantage due to knowledge and insight provided by our affiliation with CBRE.

We believe that we have access to many investment and finance opportunities that emerge from our affiliation with CBRE. We source our investments through two primary channels: our unique relationship with the CBRE/Melody origination system, which we refer to as the affiliated CBRE system; and the origination capabilities of our management team, including their relationships with borrowers, sellers of whole loans and various financial institutions and other financial intermediaries, which we refer to as our internal origination system. The combination of these systems allows us to consider a high volume of investment opportunities which allows us to be highly selective about which opportunities we pursue.

In each financing transaction we undertake, we seek to control as much of the capital structure as possible. We generally seek to accomplish this through the direct origination of whole loans and other investments, the ownership of which permits a wide variety of syndication and securitization executions. By providing a single source of financing to a borrower, we intend to streamline the lending process, give greater certainty to the borrower and retain the portion of the capital structure that will generate what we believe to be the most attractive and appropriate total returns based on our risk assessment of the investment. Providing a broad array of financing solutions combined with our access to a national network of relationships and information allows us to target and adjust our investment focus depending upon how we view markets and property types in various geographic regions.

Because of the high relative valuation of debt instruments in the current market and a generally increasing interest rate environment, we have managed our exposure to interest rate changes that could affect our liquidity. We generally match our assets and liabilities in terms of base interest rates (generally 30-day LIBOR) and expected duration. We issued collateralized debt obligations, or CDOs, which enabled us to secure term financing and match fund our assets and liabilities to achieve our financing and return objectives.

As of March 31, 2007, we held investments of approximately $1.57 billion, including origination costs and fees, and net of repayments and sales of partial interests in loans. As of March 31, 2007, our investment portfolio consisted of the following (dollars in thousands):


						Weighted Average
Security Description	Carrying Value		Number of Investments	Percent of Total Investments		Coupon		Yield to Maturity		LTV
Whole loans⁽¹⁾	$	814,641	34	51.9	%	6.90	%	6.69	%	67	%
B Notes		163,527	7	10.4	%	9.19	%	9.20	%	72	%
Mezzanine loans		237,202	12	15.1	%	9.49	%	9.17	%	77	%
CMBS		284,882	65	18.2	%	6.15	%	7.12	%	—
Joint venture investments⁽²⁾		69,167	8	4.4	%	—		—		—

Total	$	1,569,419	126	100.0	%

⁽¹⁾	Includes originated whole loans, acquired whole loans and bridge loans.

⁽²⁾	Includes our equity investment in two limited liability companies which are deemed to be VIEs and which we consolidate in our audited financial statements because we are deemed to be the primary beneficiary of these VIEs under FIN 46R.

We expect approximately 40% to 60% of our annual production to be sourced though the affiliated CBRE system. The following table depicts our investment activity for the three months ended March 31, 2007 and the year ended December 31, 2006 and the percentage of such investment activity sourced through the affiliated CBRE System (dollars in millions):


	2007			2006
Total Investments	$	225.3		$	1,041.3
Percentage Sourced through Affiliated CBRE System		38.4	%		62.6	%
Percentage Sourced through Internal Origination System		7.3	%		4.9	%

Outlook

Our business strategy of originating and acquiring investments is affected by general U.S. commercial real estate fundamentals and the overall U.S. economic environment. Further, our strategy is influenced by the specific characteristics of the underlying real estate assets that serve as collateral for our investments. We have designed our strategy to be flexible so that we can adjust our investment activities and portfolio weightings given changes in the U.S. commercial real estate capital and property markets and the U.S. economy.

We believe that the real estate business is influenced by a number of general economic and specific real estate factors. Those factors include, among other things, the level and direction of interest rates, inflation, capital flows, job creation, income levels and new supply of real estate properties. We believe most of these are moving in a positive direction. The U.S. economy grew at a 3.5% rate in the fourth quarter of 2006, up from a 2.0% rate in the third quarter of 2006, although economic growth slowed to 1.3% in the first quarter of 2007, hurt by a slumping housing market and weak trade. The monetary policy decisions of the Federal Open Market Committee, or FOMC, in 2006 were intended to foster sustainable economic expansion and to promote a return to low and stable inflation. In that regard, we believe that the economic outlook for 2007 and 2008 appears favorable with the predominant policy concern being that inflation will fail to moderate as projected. The U.S. economy has been producing new jobs at a positive pace, income levels are increasing and new supply of space is being constrained by a variety of costs, including increased costs of new construction. Our general view is that most commercial real estate product classes should continue to perform well given the current economic environment and real estate fundamentals.

Interest rates are still at historically low levels with little or no indication that they will rise in the near future. The yield curve indicates that interest rates will likely decline in the future, although on May 9, 2007, the FOMC left interest rates unchanged for a seventh straight time and held the federal funds rate at 5.25%. Although rising interest rates can have a negative effect on the broad economy and the real estate markets, we do not believe that we will experience a sizeable or swift increase in interest rates over the next few years. Due to our focus on match funding investments, our portfolio should continue to perform well in an increasing interest rate environment. The commercial real estate debt market has experienced very low default rates and we expect this trend to continue.

Capital flows to real estate increased in 2006 and are likely to continue to grow in 2007. As an asset class, real estate continues to appeal to a broad mix of investors having a diverse set of investment objectives including current yield and capital appreciation. We believe that real estate continues to look attractive to investors on both an absolute basis and relative to alternative investments. The increased capital flows have resulted in increased competition and lower asset spreads in most of 2006 on debt instruments but also have reduced our cost of funds. The recent volatility in the fixed income market has led to a modest widening of asset spreads than the previous prevailing levels. These capital flows will likely continue even as interest rates moderate.

The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006

Revenues

Investment income increased by $14.4 million to $25.5 million for the three months ended March 31, 2007, from $11.1 million for the three months ended March 31, 2006, as the overall investment portfolio increased to $1.57 billion at March 31, 2007 from $675.9 million at March 31, 2006. Primarily, the increase in the first quarter of 2007 was generated by the increase in carrying value of our whole loans ($8.7 million), B Notes ($1.5 million), mezzanine loans ($1.3 million) and CMBS ($3.2 million).

Real estate operating income increased by $1.0 million to $1.7 million for the three months ended March 31, 2007, from $0.7 million for the three months ended March 31, 2006, which primarily represents rental income from our two consolidated joint ventures.

Other income decreased by $0.2 million to $0.4 million for the three months ended March 31, 2007, from $0.6 million for the three months ended March 31, 2006, which represents interest earned on cash balances primarily from overnight repurchase investments.

Expenses

Interest expense increased by $12.1 million to $17.6 million for the three months ended March 31, 2007, from $5.5 million for the three months ended March 31, 2006, of which $7.2 million represents interest on our CDO I financing, which had a weighted average spread to 30-day LIBOR of 51 basis points (or 5.83%), $3.5 million represents interest on borrowings on our warehouse facilities, which had a weighted average spread to 30-day LIBOR of 78 basis points (or 6.10%), $0.5 million represents interest on our consolidated real estate joint venture mortgages, and $1.0 million represents interest on our trust preferred securities. The remaining balance in interest expense is comprised of $0.4 million of net swap interest income related to our derivative contracts, $0.4 million of amortization of deferred financing costs related, primarily, to the closing of our warehouse facilities and our CDO I financing, $0.1 million of servicing fees.

Management fees increased by $0.7 million to $2.1 million for the three months ended March 31, 2007 from $1.4 million for the three months ended March 31, 2006, attributable to the equity raised through our September 2006 initial public offering, or IPO, which represent fees paid or payable to our Manager under our management agreement.

General and administrative expenses decreased by $0.7 million to $1.8 million for the three months ended March 31, 2007, from $2.5 million for the three months ended March 31, 2006. The decrease was attributable to $0.1 million from professional fees, insurance, and general overhead costs and offset by an increase of $0.2 million from purchase and acquisition investment activity. Stock-based compensation expenses decreased $0.8 million for the three months ended March 31, 2007. This represents the cost of restricted stock and options granted to our Manager, our executive officers and directors and our Manager. The restricted stock and options for our directors will vest one year from the date of grant and for all other grantees will vest equally over a three-year period. The shares of restricted stock receive dividends as declared and paid. The compensation expense recorded for the three months ended March 31, 2007 represents a ratable portion of the expense based on the fair value of these shares and options over their vesting period.

The management fees, expense reimbursements, formation costs and the relationship between our Manager, our affiliates and us are discussed further in “—Related Party Transactions.”

Loss on sale of investments

Loss on sale of investments increased by $0.1 million to $0.3 million for the three months ended March 31, 2007, from $0.2 million for the three months ended March 31, 2006. The loss in 2007 is related to the sale of a CMBS investment and the loss in 2006 is related to the sale of a senior note.

Gains on derivatives

Gains on derivatives decreased by $3.4 million to a $0.1 million loss for the three months ended March 31, 2007 from a $3.3 million gain for the three months ended March 31, 2006, of which the decrease was attributable to $2.8 million from terminated interest rate swaps and $0.5 million was an unrealized gain related to our interest rate swaps in the first quarter of 2006 as well as a $0.1 million loss comprised of realized and unrealized gains related in the first quarter of 2007.

Equity in net loss of unconsolidated joint ventures

Equity in net loss of unconsolidated joint ventures increased by $2.5 million to $2.5 million for the three months ended March 31, 2007 from zero for the three months ended March 31, 2006, primarily resulting from five joint ventures having operations in the current quarter while the prior period only reflected partial operations for two joint ventures. The first quarter of 2007 had depreciation and amortization of $2.9 million, including $1.8 million impact from our joint venture partner, Everest Partners, which consisted of finalized purchase accounting adjustments on the Shiraz and GS Portfolio investments, offset by $0.4 million of property operating income.

Risk Management

Non-Performing Loans

Non-performing loans include all loans on non-accrual status and repossessed real estate collateral. We transfer loans to non-accrual status at such time as: (1) we determine the borrower is incapable of curing, or has ceased efforts towards curing the cause of a default; (2) the loan becomes 90 days delinquent; (3) the loan has a maturity default; or (4) the net realizable value of the loan’s underlying collateral approximates our carrying value of such loan. Interest income is recognized only upon actual cash receipt for loans on non-accrual status. During the three months ended March 31, 2007, we funded an additional $4.4 million to its $31.8 million non-performing asset to cure the default on the senior loan, pay real estate taxes and pay for attorney and appraisal services relative to the loan. At March 31, 2007, the balance of this non-performing asset was $36.2 million representing 2.05% of total assets, compared to $31.8 million, or 1.28% of total assets at December 31, 2006, and no repossessed real estate collateral. In addition, in April 2007 we funded an additional $0.8 million on the senior loan to further protect our investment. On May 9, 2007, we foreclosed on the underlying asset and we will own the asset and control the exit strategy. We believe, and third party appraisals support, that there is collateral value in excess of the book value for this asset.

Watch List Assets

We conduct a quarterly comprehensive credit review, resulting in an individual risk classification being assigned to each asset. This review is designed to enable us to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an “early warning system.” During the three months ended March 31, 2007, we funded an additional $1.8 million to cure the default on the senior loan, pay real estate taxes and pay for attorney and appraisal services relative to the loan. At March 31, 2007, the balance of our watch list asset was $21.8 million representing 1.23% of total assets, compared to $19.5 million, or 1.28% of total assets at December 31, 2006, and no repossessed real estate collateral. In addition, in April 2007 we funded an additional $0.3 million on the senior loan to further protect our investment. On May 4, 2007, we foreclosed on the underlying asset and subject to an estimated 30-60 day judicial ratification process, we will own the asset and control the exit strategy. We believe, and third party appraisals support, that there is collateral value in excess of our book value for this asset.

Liquidity and Capital Resources

Overview

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund loans and other investments, pay dividends and for other general business needs. Our primary sources of funds for short-term liquidity, including working capital, distributions and additional investments consist of (i) funds raised from our June 2005 private offering and our IPO; (ii) funds raised from our July 2006 issuance of trust preferred securities (iii) cash flow from operations; (iv) borrowings under our master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch, which we refer to as the DB Warehouse Facility and one master repurchase agreement with Wachovia Bank, N.A., which we refer to as the Wachovia Warehouse Facility; (v) proceeds from our CDOs or other forms of financing or additional securitizations or CDO offerings; (vi) proceeds from additional common or preferred equity offerings or offerings of trust preferred securities; and (vii) proceeds from principal payments on our investments. We believe these sources of funds will be sufficient to meet our short-term liquidity requirements.

Our ability to meet our long-term liquidity requirements will be subject to obtaining additional debt financing and equity capital in addition to the sources designated for our short-term liquidity requirements. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business, results of operations and ability to make distributions to our stockholders. Depending on market conditions, we expect that our borrowings will be in the range of 70% and 80% of the carrying value of our total assets. Our borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, maintain a certain portion of our assets free from liens and to secure such borrowings with our assets. These conditions would limit our ability to do further borrowings. If we are unable to make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document, our lender may accelerate the maturity of our debt or require us to pledge more collateral. If we are unable to pay off our borrowings in such a situation, the lender could foreclose on our assets that are pledged as collateral to such lender or such lender could force us into bankruptcy. Any such event would have a material adverse effect on our liquidity and the value of our common stock.

To qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. However, we believe that our capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated liquidity requirements, including funding new investments, paying distributions to our stockholders and servicing our debt obligations.

Capitalization

On September 27, 2006, we priced our Initial Public Offering, or IPO, of common stock, with public trading of our common stock commencing on September 28, 2006. We sold 11,012,624 shares of our common stock in our IPO at a price of $14.50 per share, which includes the exercise in full of the underwriters’ option to purchase an additional 1,436,429 shares of common stock. Of these shares, 9,945,020 were sold by us and 1,067,604 were sold by selling stockholders. Net proceeds from both our IPO and the over allotment option, after underwriting discounts and commissions of approximately $8.7 million and other offering expenses of approximately $2.4 million, were approximately $133.2 million, which we received on October 3, 2006. The net proceeds were used to repay debt on the Wachovia Warehouse Interim Facility (as defined below). The shares are included in the outstanding share count as of September 30, 2006 with the net proceeds recorded as contra equity (common stock subscriptions receivable) on the balance sheet.

On March 7, 2007, 130,200 shares of restricted stock and options to purchase 66,500 shares of our common stock with an exercise price of $13.08 per share were issued to certain employees of the Manager under the 2005 equity incentive plan. Options granted under the 2005 equity incentive plan are exercisable at the fair market value on the date of the grant and, expire five years from the date of the grant, subject to termination of employment. These options are not transferable other than at death and are exercisable ratably over a three year period commencing one year from the date of the grant.

As of March 31, 2007, 786,322 shares of restricted common stock, net of forfeitures, and options to purchase 875,233 shares of common stock, net of forfeitures, and options to purchase 66,500 shares of common stock, net of forfeitures, with an exercise price of $15.00 per share and $13.08 per share, respectively, have been issued under our 2005 equity incentive plan. These restricted shares and options have a vesting period of three years from the date of grant (except with respect to 2,668 restricted shares which vested one year from the date of grant). As of March 31, 2007, 271,945 awards were available for issuance under our 2005 equity incentive plan.

Warehouse Lines

DB Warehouse Facility

On August 30, 2005, we entered into two facilities with Deutsche Bank AG, Cayman Islands Branch, or Deutsche Bank, that provided $650.0 million of aggregate borrowing capacity.

We have a $400.0 million master repurchase agreement, or the DB Warehouse Facility, which had an initial repurchase date of August 29, 2006. Our TRS is also a party to this agreement and we and our TRS are jointly and severally liable thereunder. The repurchase date is currently being automatically extended for an additional day on a daily basis, without any action required to be taken by the lender or us, until the lender delivers to us in writing a termination notice of such daily automatic extension feature. In such event, the repurchase date shall be the day 364 days after the date of the written termination notice. Advances under this facility bear interest only, which is reset monthly, with a pricing spread of 50 basis points over 30-day LIBOR. Based on our investment activities, this facility provides for an advance rate of between 80% and 90% based upon the collateral provided under a borrowing based calculation. This facility finances our whole loan originations and acquisitions. As of March 31, 2007 and December 31, 2006, the outstanding balance under this facility was approximately $14.3 million and $14.3 million, respectively, with a current weighted average interest rate of 5.82% and 5.85%, respectively. As of March 31, 2007, we had approximately $385.7 million of additional capacity under this facility to fund future investments. The borrowings under this facility are collateralized by the following investments (dollars in thousands):


Investment Type	Number of Investments	Carrying Value
Whole Loans	1	$	16,000

We also had a $250.0 million repurchase agreement with Deutsche Bank which terminated on November 29, 2006.

The DB Warehouse Facility contains certain covenants, the most restrictive of which are requirements that we maintain a minimum tangible net worth of no less than $125.0 million, a minimum debt service coverage of not less than 1.5 to 1 in the aggregate, a ratio of indebtedness-to-tangible net worth not to exceed 3.5 to 1, and minimum cash or marketable securities of not less than (i) $10.0 million for a debt-to-book ratio above 2 to 1; (ii) $5.0 million for a debt-to-book equity ratio between 1 to 1 and 2 to 1; and (iii) $3.0 million for a debt-to-book equity ratio of below 1 to 1. We were in compliance with all covenants and restrictions as of March 31, 2007 and December 31, 2006.

Bank of America Warehouse Facilities

In January and February, 2006, we entered into two facilities with Banc of America Securities, LLC and Bank of America N.A., or the Bank of America Warehouse Facilities, that provided $450.0 million of aggregate borrowing capacity.

We have a $200.0 million master repurchase agreement, which has an initial repurchase date of (1) January 26, 2007 or (2) the date on which a second CDO transaction sponsored by us closes. The repurchase date shall be extended for up to two additional 364-day periods following the initial repurchase date at the buyer’s sole discretion, provided that, if we intend to extend the repurchase date, (i) the buyer agrees to such extension within 30 days of receipt of our written notice to extend the repurchase date, which shall have been delivered to the lender at least 90 days but no more than 120 days prior to the initial repurchase date and (ii) with respect to the second extension, no default or an event of default (as defined in the repurchase agreement) has occurred or be continuing. In such event, the maturity date shall be the day 364 days after the date of the written termination notice. On January 25, 2007 the repurchase date was extended until the earliest of (a) April 15, 2007 or (b) the date on which a second CDO transaction sponsored by us closes. On April 2, 2007, in conjunction with the second CDO transaction, all outstanding obligations were paid and the facility was closed. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads of 50 to 170 basis points over 30-day LIBOR. Based on our investment activities, this facility provides for an advance rate of between 55% and 95% based upon the collateral provided under a borrowing based calculation. This facility finances our origination or acquisition of whole loans, subordinate mortgage interests and CMBS. As of March 31, 2007 and December 31, 2006, the outstanding balance under this facility was approximately $57.3 million and $57.3 million, respectively, with a current weighted average interest rate of 6.13% and 6.16%, respectively. As of March 31, 2007, we had approximately $142.7 million of additional capacity under this facility to fund future investments. The borrowings under this facility are collateralized by the following investments (dollars in thousands):


Investment Type	Number of Investments	Carrying Value
Subordinated Debt	1	$	20,000
CMBS	11	$	47,123

In addition, we have a $250.0 million master repurchase agreement, which had an initial repurchase date of February 12, 2007. This repurchase date shall be extended for up to two additional 364-day periods following the initial repurchase date at the buyer’s sole discretion, provided that, if we intend to extend the repurchase date, (i) the buyer agrees to such extension within 30 days of receipt of our written notice to extend the repurchase date, which shall have been delivered to the lender at least 90 days but no more than 120 days prior to the initial repurchase date and (ii) with respect to the second extension, no default or an event of default (as defined in the repurchase agreement) has occurred or be continuing. Our TRS is also a party to this agreement and we and our TRS are jointly and severally liable thereunder. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads of 50 to 120 basis points over 30-day LIBOR. Based on our investment activities, this facility provides for an advance rate of between 55% and 92.5% based upon the collateral provided under a borrowing base calculation. This facility finances whole loan originations and acquisitions. In conjunction with the second CDO transaction, the facility was closed on April 2, 2007. As of March 31, 2007, nothing was outstanding under this facility.

The Bank of America Warehouse Facilities contain certain covenants, the most restrictive of which are requirements that we maintain a minimum tangible net worth of no less than $250.0 million, a minimum debt service coverage of not less than 1.5 to 1 in the aggregate, a ratio of total liability to total assets greater than 0.80 to 1.0, and minimum cash and marketable securities of not less than $10.0 million. We were in compliance with all covenants and restrictions as of March 31, 2007 and December 31, 2006.

Wachovia Warehouse Facility

In July 2006, we entered into a mortgage loan purchase agreement with Wachovia Bank, N.A., or Wachovia, that provided $175.0 million of aggregate borrowing capacity, or the Wachovia Warehouse Interim Facility. The borrowings under this facility were paid off on October 4, 2006 and the facility was terminated.

In August 2006, we entered into a master repurchase agreement with Wachovia, or the Wachovia Warehouse Facility, that provided $300.0 million of aggregate borrowing capacity. On December 15, 2006 and February 8, 2007, the aggregate borrowing capacity was increased to $500.0 million and $700.0 million, respectively, and the increase period expires on May 1, 2007. After the expiration of the increase period the maximum borrowing capacity will be $300.0 million. The Wachovia Warehouse Facility has an initial fixed repurchase date of August 24, 2009, which may be extended for a period not to exceed 364 days upon our written request to the buyer at least 30 days, but no more than 60 days, prior to the initial repurchase date, if (i) no default or event of default (as defined in the repurchase agreement) has occurred or is continuing and (ii) upon our payment to the buyer of a certain extension fee. Based on our investment activities, this facility provides for an advance between 50% and 95% based upon the collateral provided under a borrowing based calculation. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads from 20 to 200 basis points over 30-day LIBOR. This facility finances our origination or acquisition of whole loans, subordinate mortgage interests and CMBS. As of March 31, 2007, and December 31, 2006, the outstanding balance under this facility was approximately $593.3 million and $361.8 million, respectively, with a weighted average borrowing rate of 6.10% and 6.03%, respectively. On April 2, 2007, in conjunction with the second CDO transaction, we paid off $517,701 of the outstanding debt. As of March 31, 2007, we had $106.7 million of capacity under this facility to fund future investments. The borrowings under this facility were collateralized by the following investments (dollars in thousands):


Investment Type	Number of Investments	Carrying Value
Whole Loans	18	$	483,348
Subordinated Debt	3	$	83,545
CMBS	26	$	126,035

The Wachovia Warehouse Facility contains certain covenants, the most material of which are requirements that we maintain a minimum tangible net worth of no less than the sum of $250.0 million, a ratio of total liability to total assets greater than 0.80 to 1.0 (for the $300.0 million Wachovia Warehouse Facility) and 75% of the net proceeds of the issuance by us of any capital stock of any class and minimum cash and marketable securities of not less than $10.0 million. Additionally, at no time shall the consolidated interest coverage ratio by us for the immediately preceding fiscal quarter be less than 1.3 to 1.0 during the fiscal quarter ended on March 31, 2007 and the fiscal quarter ending June 30, 2007. On May 9, 2007, we received from Wachovia a one-time waiver of two financial covenants which we were not in compliance with as of March 31, 2007: (i) we are prohibited from making distributions in excess of 100% of our adjusted FFO for the immediately preceding fiscal quarter and (ii) we may not incur standard trade payables in excess of $500,000. We were in compliance with all other covenants and conditions as of March 31, 2007 and with all covenants and conditions as of December 31, 2006.

Accounting Treatment for Certain Investments Financed with Repurchase Agreements

We have certain CMBS and loan investments, or the collateral assets, purchased from counterparties that are financed through a repurchase agreement with the same counterparty. We believe that in accordance with FASB Concept Statement No. 6, or CON 6, “Elements of Financial Statements,” we are entitled to obtain the future economic benefits of the collateral assets and we are obligated under the repurchase agreement. Therefore, we currently record the collateral assets and the related financing gross on our balance sheet, and the corresponding interest income and interest expense gross on our income statement. In addition, any change in fair value of the CMBS included in the collateral assets, is reported through other comprehensive income since these are classified as available for sale securities in accordance with FASB Statement No. 115, or SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.”

However, an alternate view could be taken that in a transaction where assets are acquired from and financed under a repurchase agreement with the same counterparty, the acquisition may not qualify as a sale from the seller’s perspective. In such a case, the seller may be required to continue to consolidate the assets sold to us. Under this view, we would be precluded from presenting the assets gross on our balance sheet and would instead treat our net investment in such assets as a derivative. Under this view, the interest rate swaps entered into by us to hedge our interest rate exposure with respect to these transactions would no longer qualify for hedge accounting, but would be marked to market through the income statement.

This potential change would not affect the economics of the transactions but would affect how the transactions are reported in our financial statements. If we were to apply this view to our transactions, for the quarter ended March 31, 2007 and December 31, 2006, the change in net income per common diluted share would be immaterial and our total assets and total liabilities would each be reduced by $66.3 million and $14.9 million, respectively.

Collateralized Debt Obligations

For longer-term funding, we intend to utilize securitization structures, particularly CDOs, as well as other match-funded financing structures. CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as whole loans, B Notes, mezzanine loans, CMBS and REIT debt. We believe CDO financing structures are an appropriate financing vehicle for our targeted real estate asset classes, because they will enable us to obtain long-term cost of funds and minimize the risk that we have to refinance our liabilities prior to the maturities of our investments while giving us the flexibility to manage credit risk.

Deutsche Bank Securities Inc. acted as the exclusive structurer and placement agent with respect to a CDO transaction totaling approximately $600.0 million, which closed on March 28, 2006. We retained 100% of the equity interests in our CDO subsidiary that issued the CDO notes consisting of preference and common shares as well as 100% of the non-rated debt tranches. The notes issued by our CDO subsidiary are secured initially by a portfolio of whole loans, B Notes, mezzanine loans and CMBS. Our Manager acted as the collateral manager for our CDO subsidiary but did not receive any fees in connection therewith. We acted as the advancing agent in connection with the issuance of the CDO notes. As of March 31, 2007, our CDO subsidiary is leveraged as follows:


	Carrying Amount at 3/31/07		Stated Maturity	Interest Rate		Weighted Average Expected Life (years)
CDO I Bonds	$	508,500	3/25/2046	5.83	%	7.4

In March 2007, Wachovia Bank N.A., acted as the exclusive structurer and placement agent with respect to our second CDO transaction totaling $1.0 billion, which priced on March 2, 2007, and closed on April 2, 2007. We sold $880.0 million of bonds with an average cost of 90-day LIBOR plus 40.6 basis points and retained 100% of the equity interests in our CDO subsidiary that issued the CDO notes consisting of preference and common shares. The notes issued by our CDO subsidiary are secured initially by a portfolio of whole loans, B Notes, mezzanine loans and CMBS. Our Manager will act as the collateral manager for our CDO subsidiary but will not receive any fees in connection therewith. We are the advancing agent in connection with the issuance of the CDO notes. In connection with our second CDO transaction, we terminated 24 and partially unwound five effective cash flow hedges, or interest rate swaps, with a total notional amount of approximately $398.4 million. A total termination value of approximately $8.0 million was paid to our counterparties on April 2, 2007. Additionally, we entered into 15 interest rate swaps and three basis swaps with aggregate notional amounts of approximately $623.0 million and $235.1 million.

Mortgage Indebtedness

On December 14, 2005, our consolidated joint venture, Springhouse Apartments, LLC, obtained a $26.2 million loan in connection with the acquisition of real estate located in Prince George’s County, Maryland. The loan is collateralized by the aforementioned property, is guaranteed by Bozzuto and Associates Inc., our joint venture partner, matures on December 14, 2008, and bears interest at 30-day LIBOR plus 1.75%. As of March 31, 2007 and December 31, 2006, the outstanding balance was $25.6 million and $25.6 million, respectively, at a rate of 7.07% and 7.10%, respectively.

On March 28, 2006, our consolidated joint venture, Loch Raven Village Apartments-II, LLC, obtained a $29.2 million loan in connection with the acquisition of real estate located in Baltimore, Maryland. The loan is collateralized by the aforementioned property, is guaranteed by Bozzuto and Associates Inc., our joint venture partner, matures on April 1, 2009, and bears interest at a fixed rate of 5.96%. As of March 31, 2007 and December 31, 2006, the outstanding balance was $26.9 million and $26.6 million, respectively.

Junior Subordinated Debentures

In July 2006, we completed the issuance of $50.0 million in unsecured trust preferred securities through a newly formed Delaware statutory trust, CBRE Realty Finance Trust I, or CRFT I, which is one of our wholly-owned subsidiaries. The securities bear interest at a fixed rate of 8.10% for the first ten years ending July 2016. Thereafter the rate will float based on the 90-day LIBOR plus 249 points. The base management fee that we pay to our Manager pursuant to the management agreement is based on gross stockholders’ equity which our board of directors had previously determined to include the trust preferred securities. We paid a base management fee on the trust preferred securities to the Manager from July 26, 2006 to September 27, 2006 in the amount of approximately $0.2 million. However, beginning September 28, 2006, we no longer pay such a fee on trust preferred securities to the Manager.

CRFT I issued $1.55 million aggregate liquidation amount of common securities, representing 100% of the voting common stock of CRFT I to us for a total purchase price of $1.55 million. CRFT I used the proceeds from the sale of trust preferred securities and the common securities to purchase our junior subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations. We realized net proceeds from the offering of approximately $48.8 million.

Contractual Obligations

The table below summarizes our contractual obligations as of March 31, 2007. The table excludes contractual commitments related to our derivatives, which we discuss in “Qualitative and Quantitative Disclosures about Market Risk,” and the incentive fee payable under the management agreement that we have with our Manager, which we discuss in Related Party Transactions because those contracts do not have fixed and determinable payments.


	Contractual commitments (in thousands) Payments due by period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
CDO I bonds payable	$	508,500	$	—	$	—	$	—	$	508,500
Wachovia Warehouse Facility		593,326		593,326		—		—		—
Bank of America Warehouse Facilities		57,304		57,304		—		—		—
DB Warehouse Facility		14,336		14,336		—		—		—
Mortgage payable⁽¹⁾		52,561		—		52,561		—		—
Trust preferred securities		50,000		—		—		—		50,000
Base management fees⁽²⁾		8,151		8,151		—		—		—

Total	$	1,284,178	$	673,117	$	52,561	$	—	$	558,500

⁽¹⁾	Non-recourse to us.

⁽²⁾	Calculated only for the next 12 months based on our current gross stockholders’ equity, as defined in our management agreement.

Off-Balance Sheet Arrangements

As of March 31, 2007, we had approximately $55.0 million of equity interests in six joint ventures as described in Note 7 to our financial statements for the three months ended March 31, 2007, included elsewhere in this Quarterly Report on Form 10-Q for the three months ended March 31, 2007. As of December 31, 2006, we had approximately $41.0 million of equity interests in five joint ventures.

Dividends

To qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our net taxable income, determined before taking into consideration the dividends paid deduction and net capital gains. We intend to continue to pay regular quarterly dividends to our stockholders. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our secured credit facilities, we must first meet both our operating requirements and scheduled debt service on our warehouse lines and other debt payable.

Related Party Transactions

Management Agreement

On June 9, 2005, we entered into a management agreement with our Manager, which provides for an initial term through December 31, 2008 with automatic one-year extension options for each anniversary date thereafter and is subject to certain termination rights. After the initial term, our independent directors will review our Manager’s performance annually and the management agreement may be terminated subject to certain termination rights. Our executive officers own approximately 26.1% of the Manager. We pay our Manager an annual management fee monthly in arrears equal to 1/12 of the sum of (i) 2.0% of our gross stockholders’ equity (as defined in the management agreement), or equity, of the first $400.0 million of our equity and (ii) 1.75% of our gross stockholders’ equity in an amount in excess of $400.0 million and up to $800.0 million and (iii) 1.5% of our gross stockholders’ equity in excess of $800.0 million. Additionally, from July 26, 2006 to September 27, 2006, we considered the outstanding trust preferred securities as part of gross stockholders’ equity in calculating the base management fee. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us. For the quarter ended March 31, 2007 and 2006, we paid approximately $2.1 million and $1.4 million, respectively, to our Manager for the base management fee under the management agreement. As of March 31, 2007, $0.7 million of management fees were accrued and constituted the management fee payable on our balance sheet.

In addition to the base management fee, our Manager may receive quarterly incentive compensation. The purpose of the incentive compensation is to provide an additional incentive for our Manager to achieve targeted levels of Funds From Operations (as defined in the management agreement) (after the base management fee and before incentive compensation) and to increase our stockholder value. Our Manager may receive quarterly incentive compensation in an amount equal to the product of: (i) twenty-five percent (25%) of the dollar amount by which (A) our Funds From Operations (after the base management fee and before the incentive fee) per share of our common stock for such quarter (based on the weighted average number of shares outstanding for such quarter) exceeds (B) an amount equal to (1) the weighted average of the price per share of our common stock in our June 2005 private offering and the prices per share of our common stock in any subsequent offerings (including our IPO), multiplied by (2) the greater of (a) 2.25% or (b) 0.75% plus one-fourth of the Ten Year Treasury Rate (as defined in the management agreement) for such quarter, multiplied by (ii) the weighted average number of shares of our common stock outstanding during the such quarter. We will record any incentive fees as a management fee expense in the period when earned and when payments of such amounts have become probable and reasonably estimable in accordance with the management agreement. No amounts had been paid or were payable for incentive compensation under the management agreement as of March 31, 2007 and December 31, 2006.

The management agreement also provides that we will reimburse our Manager for various expenses incurred by our Manager or its affiliates for documented expenses of our Manager or its affiliates incurred on our behalf, including but not limited to costs associated with formation and capital raising activities and general and administrative expenses. Without regard to the amount of compensation received under the management agreement, our Manager is responsible for the wages and salaries of its officers and employees. For the quarter ended March 31, 2007 and 2006, we paid or had payable $0.2 million and $0.2 million, respectively, to our Manager for expense reimbursements, of which $0.1 million were accrued and are included in other liabilities on our balance sheet as of March 31, 2007.

GEMSA Servicing

GEMSA Loan Services, L.P., which we refer to as GEMSA, is utilized by us as a loan servicer. GEMSA is a joint venture between CBRE/Melody and GE Capital Real Estate. GEMSA is a rated master and primary servicer. Our fees for GEMSA’s services are at market rates.

For the quarter ended March 31, 2007 and 2006, we paid or had payable an aggregate of approximately $53,000 and $7,000, respectively, to GEMSA in connection with its loan servicing of a part of our portfolio.

Affiliates

As of March 31, 2007, an affiliate of the Manager, CBRE Melody of Texas, LP and its principals, owned 1.1 million shares of our common stock (which were purchased in our June 2005 private offering), 300,000 shares of restricted common stock, and had options to purchase an additional 500,000 shares of common stock.

Funds from Operations

Funds from Operations, or FFO, which is a non-GAAP financial measure, is a widely recognized measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper on FFO approved by the Board of Governors of NAREIT in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated/uncombined partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. We also use FFO as one of several criteria to determine performance-based equity bonuses for members of our senior management team. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs, providing perspective not immediately apparent from net income. We consider gains and losses on the sale of debt investments to be a normal part of our recurring operations and therefore do not exclude such gains or losses while arriving at FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.

FFO for the quarter ended March 31, 2007 and 2006 are as follows (dollars in thousands):


	For the Quarter Ended March 31, 2007			For the Quarter Ended March 31, 2006
Funds from operations:
Net income	$	1,575		$	5,665
Adjustments:
Depreciation		826			123
Gain (losses) from debt restructuring		—			—
Gain (losses) from sale of property		—			—
Funds from discontinued operations		—			—
Real estate depreciation and amortization—unconsolidated ventures		3,168			—

Funds from operations	$	5,569		$	5,788

Cash flows provided by operating activities	$	23,861		$	3,606
Cash flows used in investment activities	$	(207,951	)	$	(250,707	)
Cash flows provided by financing activities	$	212,810		$	271,138

Critical Accounting Policies

Our critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies concern our accounting and valuation of our investments, revenue recognition and derivative valuation and are as follows.

Loans and Investments

Loans held for investment are intended to be held to maturity and, accordingly, are carried at amortized cost, including unamortized loan origination costs and fees, and net of repayments and sales of partial interests in loans, unless such loan or investment is deemed to be impaired. At such time as we invest in joint venture and other interests that allow us to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing, we must determine whether such investment should be accounted for as a loan, real estate investment or equity method joint venture in accordance with AICPA Practice Bulletin No. 1 on acquisition, development and construction, or ADC, arrangements.

Specific valuation allowances are established for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral is determined by an evaluation of operating cash flow from the property during the projected holding period, and estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, discounted at market discount rates. If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb probable losses. As of March 31, 2007, no impairment has been identified and no valuation allowance has been established.

Our Manager evaluates our assets on a regular basis to determine if they continue to satisfy our investment criteria. Subject to certain restrictions applicable to REITs and to maintain our exclusion from regulation as an investment company, we sell our investments opportunistically and use the proceeds of any such sales for debt reduction, additional acquisitions or working capital purposes.

Variable Interest Entities

In December 2003, Financial Accounting Standards Board Interpretation, or FIN, No. 46R “Consolidation of Variable Interest Entities,” or FIN 46R, was issued as a modification of FIN No. 46 “Consolidation of Variable Interest Entities.” FIN 46R, which became effective in the first quarter of 2004, clarified the methodology for determining whether an entity is a VIE and the methodology for assessing who is the primary beneficiary of a VIE. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. If an entity is determined to be a VIE, it must be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. Generally, expected losses and expected residual returns are the expected negative and positive variability, respectively, in the fair value of the variable interest entities’ net assets.

When we make an investment, we assess whether we have a variable interest in a VIE and, if so, whether we are the primary beneficiary of the VIE. These analyses require considerable judgment in determining the primary beneficiary of a VIE since they involve subjective probability weighting of various cash flow scenarios. Incorrect assumptions or estimates of future cash flows may result in an inaccurate determination of the primary beneficiary. The result could be the consolidation of an entity acquired or formed in the future that would otherwise not have been consolidated or the non-consolidation of such an entity that would otherwise have been consolidated.

FIN 46R has certain scope exceptions, one of which provides that an enterprise that holds a variable interest in a qualifying special-purpose entity, or QSPE, does not consolidate that entity unless that enterprise has unilateral ability to cause the entity to liquidate. SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” or SFAS 140, provides the requirements for an entity to be considered a QSPE. To maintain the QSPE exception, the entity must continue to meet the QSPE criteria both initially and in subsequent periods. An entity’s QSPE status can be impacted in future periods by activities by its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent our CMBS investments were issued by an entity that meets the requirements to be considered a QSPE, we record the investments at purchase price paid. To the extent the underlying entities are not QSPEs, we follow the guidance set forth in FIN 46R as the entities would be considered VIEs.

We have analyzed the governing pooling and servicing agreements for each of our CMBS investments and believe that the terms are industry standard and are consistent with the QSPE criteria. However, there is uncertainty with respect to QSPE treatment due to ongoing review by accounting standard rulemakers, potential actions by various parties involved with the QSPE, as discussed above, as well as varying and evolving interpretations of the QSPE criteria under SFAS 140. Additionally, accounting standard rulemakers continue to review the FIN 46R provisions related to the computations used to determine the primary beneficiary of a VIE.

We have identified one mezzanine loan as a variable interest in a VIE and have determined that we are not the primary beneficiary of this VIE and as such the VIE should not be consolidated in our consolidated financial statements. Our maximum exposure to loss would not exceed the carrying amount of this investment of $42.3 million. Our maximum exposure to loss, including CMBS, as a result of our investments in these VIEs was $327.2 million as of March 31, 2007.

We have determined that two of our joint venture investments are VIEs in which we are deemed to be the primary beneficiary and under FIN 46R have consolidated these investments as real estate investments. The primary effect of the consolidation is the requirement that we reflect the gross real estate assets and liabilities, and the property operating income and expense of these entities in our financial statements.

Valuation and Impairment of Commercial Mortgage-Backed Securities

CMBS are classified as available-for-sale securities and are carried on our balance sheet at fair value. As a result, changes in fair value are recorded as a balance sheet adjustment to accumulated other comprehensive income, which is a component of stockholders’ equity, rather than through our income statement. Estimated fair values are based on market prices from a third party that actively participate in the CMBS market. We also use a discounted cash flow model that utilizes prepayment and loss assumptions based upon historical experience, economic factors and the characteristics of the underlying cash flow in order to substantiate the fair value of the securities. The assumed discount rate is based upon the yield of comparable securities. We also may, under certain circumstances, adjust these valuations based on our knowledge of the securities and the underlying collateral. These valuations are subject to significant variability based on market conditions, such as interest rates and credit spreads. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the recorded amount of our investment. As fair value estimates may vary to some degree, we must make certain judgments and assumptions about the appropriate price used to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in different valuations. If available-for-sale securities were classified as trading securities, there could be substantially greater volatility in earnings from period-to-period as these investments would be marked to market and any reduction in the value of the securities versus the previous carrying value would be considered an expense on our income statement.

In accordance with Emerging Issues Task Force, or EITF, 99-20, we also assess whether unrealized losses on securities, if any, reflect a decline in value which is other than temporary and, accordingly, write the impaired security down to its value through earnings. For example, a decline in value is deemed to be other than temporary if it is probable that we will be unable to collect all amounts due according to the contractual terms of a security which was not impaired at acquisition. Temporary declines in value generally result from changes in market factors, such as market interest rates, or from certain macroeconomic events, including market disruptions and supply changes, which do not directly impact our ability to collect amounts contractually due. Significant judgment is required in this analysis. To date, no such write-downs have been made.

Revenue Recognition

Interest income on loan investments is recognized over the life of the investment using the effective interest method. Fees received in connection with loan commitments are deferred until the loan is funded 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.

Income recognition is generally suspended for debt investments at the earlier of the date at which payments become 90 days past due or when, in our opinion, 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. While income recognition is suspended, interest income is recognized only upon actual receipt.

Interest income on CMBS is recognized using the effective interest method as required by EITF 99-20. Under EITF 99-20 management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and our purchase prices. On a quarterly basis, these estimated cash flows are updated and a revised yield is calculated based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies. These include the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans, and the timing of and magnitude of credit losses on the mortgage loans underlying the securities have to be estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and our interest income.

If the current period cash flow estimates are lower than the previous period, and fair value is less than the carrying value of CMBS, we will write down the CMBS to fair market value and record the impairment charge in the current period earnings. After taking into account the effect of the impairment charge, income is recognized using the market yield for the security used in establishing the write-down.

Reserve for Possible Credit Losses

The expense for possible credit losses in connection with debt investments represents the increase in the allowance for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and project diversification, the size of the portfolio and current economic conditions.

We must periodically evaluate each of these loans for possible impairment. Loans and other investments are considered impaired, for financial reporting purposes, when it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the original agreement, or, for loans acquired at a discount for credit quality when it is deemed probable that we will be unable to collect as anticipated. Significant judgment is required both in determining impairment and in estimating the resulting loss allowance. Changes in market conditions, as well as changes in the assumption or methodology used to determine fair value, could result in a significant change in the recorded amount in our investment. As of March 31, 2007, one mezzanine loan is 120 days delinquent with respect to the scheduled payments of interest. All other loans are current with respect to scheduled payments of principle and interest. No impairment has been identified and no valuation allowance has been established.

Derivative Instruments

We recognize all derivatives on the balance sheet at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, arc considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recorded in the income statement. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly as required by SFAS Statement No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by FASB Statement No. 138 “Accounting for Certain Derivative Instruments and Hedging Activities of an Amendment of FASB 133” and FASB Statement No. 149 “Amendment of Statement 133 on Derivative Instrument and Hedging Activities.” Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges under SFAS 133. We currently have no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates. The results of such variability could be a significant increase or decrease in our derivative assets, derivative liabilities, book equity, and/or earnings.

Stock-Based Payment

We have issued restricted shares of common stock and options to purchase common stock, or equity awards, to our directors, our Manager, employees of our manager and other related persons. We account for stock-based compensation related to these equity awards using the fair value based methodology under FASB Statement No. 123(R), or SFAS 123(R), “Share Based Payment” and EITF 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” Compensation cost for restricted stock and stock options issued is initially measured at fair value at the grant date, remeasured at subsequent dates to the extent the awards are unvested and amortized into expense over the vesting period on a straight-line basis.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and real estate values. The primary market risks that we are exposed to are real estate risk, interest rate risk, market value risk and prepayment risk.

Real Estate Risk

Commercial mortgage assets, commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors), local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event net operating income from such properties decreases, a borrower may have difficulty repaying our loans, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. Even when the net operating income is sufficient to cover the related property’s debt service, there can be no assurance that this will continue to be the case in the future.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the three months ended March 31, 2006 and 2007 would have increased our net interest expense by approximately $1.0 million and $0.3 million, respectively, and increased our investment income by approximately $1.1 million and $0.5 million, respectively.

Our operating results will depend in large part on differences between the income from our loans and our borrowing costs. We generally match the interest rates on our loans with like-kind debt, so that fixed rate loans are financed with fixed rate debt and floating rate loans are financed with floating rate debt, directly or through the use of interest rate swaps or other financial instruments. The objective of this strategy is to minimize the impact of interest rate changes on our net interest income. Currently most of our borrowings, with the exception of the two most junior classes of our CDO bonds (aggregating $44.25 million) and one of our consolidated joint venture mortgages payable of $26.9 million are variable-rate instruments, based on 30-day LIBOR.

In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.

We invest in CMBS, which are designated as available-for-sale on our balance sheet. The majority of our CMBS investments is fixed rate securities and is partially financed with floating rate debt. In order to minimize the exposure to interest rate risk we utilize interest rate swaps to convert the floating rate debt to fixed rate debt, which matches the fixed interest rate of the CMBS.

As of March 31, 2007, we have 23 interest rate swap agreements and three basis swap agreements outstanding with an aggregate current notional value of $926.9 million and $235.1 million, respectively, to hedge our exposure on forecasted outstanding LIBOR-based debt. The market value of these interest rate swaps and basis swaps is dependent upon existing market interest rates and swap spreads, which change over time. If there were a 100 basis point decrease in forward interest rates, the fair value of these interest rate swaps and basis swaps would have decreased by approximately $42.7 million at March 31, 2007. If there were a 100 basis point increase in forward interest rates, the fair value of these interest rate swaps and basis swaps would have increased by approximately $40.0 million at March 31, 2007.

One of our consolidated joint ventures entered into an interest rate cap with a notional amount of $25.0 million with a strike price of 4.16% and a maturity date of December 15, 2007.

Our hedging transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparty to our derivative arrangements are Credit Suisse International, Deutsche Bank AG, and Wachovia Bank N.A., with a senior unsecured debt credit rating of Aa3 by Moody’s with which we and our affiliates may also have other financial relationships. As a result, we do not anticipate that the counterparty will fail to meet their obligations. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.

We utilize interest rate swaps to limit interest rate risk. Derivatives are used for hedging purposes rather than speculation. We do not enter into financial instruments for trading purposes. The following table sets forth our derivative instruments as of March 31, 2007:


Type of Hedge	Notional Amount		Swap Rate		Trade Date	Maturity Date	Estimated Value at March 31, 2007
Pay-Fixed Swap	$	9,100	5.1320	%	2/15/2006	2/17/2012	$	(55	)
Pay-Fixed Swap		182,155	5.0550	%	3/16/2006	10/25/2011		(841	)
Pay-Fixed Swap		16,100	5.0850	%	3/16/2006	3/1/2011		(81	)
Pay-Fixed Swap		26,951	5.1930	%	3/28/2006	4/13/2016		(395	)
Pay-Fixed Swap		44,736	5.6630	%	5/12/2006	2/25/2018		(1,914	)
Pay-Fixed Swap		4,250	5.5240	%	7/7/2006	7/11/2011		(116	)
Pay-Fixed Swap		74,500	5.2720	%	8/2/2006	9/1/2011		(1,312	)
Pay-Fixed Swap		1,172	5.1910	%	8/17/2006	9/1/2011		(17	)
Pay-Fixed Swap		36,075	5.1710	%	9/19/2006	9/25/2011		(374	)
Pay-Fixed Swap		1,856	5.1150	%	10/19/2006	11/1/2011		(21	)
Pay-Fixed Swap		28,151	4.9470	%	12/15/2006	10/25/2011		(44	)
Pay-Fixed Swap		5,950	5.1930	%	1/30/2007	2/1/2012		(90	)
Pay-Fixed Swap		2,125	5.0360	%	2/7/2007	2/7/2012		(18	)
Pay-Fixed Swap		11,070	5.0000	%	2/16/2007	3/1/2012		(75	)
Pay-Fixed Swap		336,279	4.9090	%	3/2/2007	4/7/2021		951
Pay-Fixed Swap		28,290	4.8420	%	3/2/2007	10/7/2011		3
Pay-Fixed Swap		25,000	4.8420	%	3/2/2007	10/7/2011		(1	)
Pay-Fixed Swap		13,500	4.8420	%	3/2/2007	4/9/2012		9
Pay-Fixed Swap		25,000	4.8420	%	3/2/2007	1/9/2012		10
Pay-Fixed Swap		23,610	4.8420	%	3/2/2007	4/9/2012		16
Pay-Fixed Swap		16,200	4.8420	%	3/2/2007	7/7/2015		137
Pay-Fixed Swap		2,835	4.8420	%	3/2/2007	10/7/2011		1
Pay-Fixed Swap		12,000	4.8420	%	3/2/2007	1/9/2012		3
Basis Swap		97,603	5.3375	%	3/2/2007	1/7/2010		(20	)
Basis Swap		21,000	5.3325	%	3/2/2007	9/15/2011		4
Basis Swap		116,450	5.3350	%	3/2/2007	4/7/2010		(19	)
LIBOR Cap		25,000	4.1575	%	12/15/2005	12/15/2007		206

Total	$	1,186,958					$	(4,053	)

Prepayment Risk

As we receive repayments of principal on loans and other lending investments or CMBS, premiums paid on such investments are amortized against interest income using the effective yield method through the expected maturity dates of the investments. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely discounts received on such investments are accreted into interest income using the effective yield method through the expected maturity dates of the investments. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.

Geographic Concentration Risk

As of March 31, 2007, approximately 29%, 19%, 38% and 8% of the outstanding balance of our loan investments had underlying properties in the East, the South, the West, and the Midwest, respectively, as defined by the National Council of Real Estate Investment Fiduciaries, or NCREIF, while the remaining 6.0% of the outstanding loan investments had underlying properties that are located throughout the United States.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Further, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors based primarily by our net income as calculated for tax purposes, in each case, our activities and balance sheet are measured with reference to historical cost and or fair market value without considering inflation.

Forward-Looking Information

This report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. We intend such forward-looking statements to be covered by the safe harbor provisions for froward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks along with the following factors that could cause actual results to vary from our forward-looking statements:

•

our future operating results;

•

our business operations and prospects;

•

general volatility of the securities markets in which we invest and the market price of our common stock;

•

changes in our business strategy;

•

availability, terms and deployment of capital;

•

availability of qualified personnel;

•

changes in our industry, interest rates, the debt securities markets, the general economy or the commercial finance and real estate markets specifically;

•

the performance and financial condition of borrowers and corporate customers;

•

increased rates of default and/or decreased recovery rates on our investments;

•

increased prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities;

•

changes in governmental regulations, tax rates and similar matters;

•

legislative and regulatory changes (including changes to laws governing the taxation of REITs);

•

availability of investment opportunities in real estate-related and other securities;

•

the degree and nature of our competition;

•

the adequacy of our cash reserves and working capital; and

•

the timing of cash flows, if any, from our investments.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

For a discussion of quantitative and qualitative disclosures about market risk, see the “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

Item 4T.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information 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 based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). Notwithstanding the foregoing, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we may have investments in certain unconsolidated entities. Because we do not control these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 because we are not an “accelerated filer,” as defined by Rule 12b-2 under the Exchange Act. We are in the process of continuously improving our internal controls over our financial reporting process and procedures of our financial reporting so that our management can report on these processes and procedures when required to do so.

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.

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 our Annual Report on Form 10-K for the year ended December 31, 2006 filed on March 26, 2007 with the Securities and Exchange Commission, or the Commission.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Securities

None.

Use of Proceeds from Sale of Registered Securities

On September 27, 2006, the Commission declared effective our Registration Statement on Form S-11 (File No. 333-132186) relating to our initial public offering (the “IPO”). The offering date was September 27, 2006. The IPO was underwritten by Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Wachovia Capital Markets, LLC, and Citigroup Global Markets Inc. acting as joint book-running managers, and JMP Securities, acting as co-manager. We sold 11,012,624 shares of our common stock at a price of $14.50 per share, which includes the exercise in full of the underwriters’ option to purchase an additional 1,436,429 shares of common stock. Of these shares, 9,945,020 were sold by us and 1,067,604 were sold by selling stockholders. Net proceeds from both the IPO and the over-allotment option, after underwriting discounts and commissions of $8.7 million and other offering expenses of $2.4 million, were $133.2 million, which we received on October 3, 2006. None of the underwriting discounts and commissions or offering expenses were incurred or paid, directly or indirectly, to directors or officers of ours or their associates or to persons owning 10% or more of our common stock or to any affiliates of ours. We have applied the proceeds we received from the IPO to pay down repurchase agreement obligations in accordance with the planned use of proceeds.

Item 3:

Defaults Upon Senior Securities

None.

Item 4:

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

On March 13, 2007, in connection with the Wachovia Warehouse Facility, an amendment was made to the Guarantee Agreement between CBRE Realty Finance, Inc. and CBRE Realty Finance Holdings, LLC. The amendment modified the fixed charge coverage ratio covenant in the Guarantee Agreement. A copy of the Guarantee Agreement and the amendment are attached hereto as Exhibits 10.5 and 10.6 to this Quarterly Report on Form 10-Q for the three months ended March 31, 2007.

Item 6:

Exhibits


3.1		Articles of Amendment and Restatement of CBRE Realty Finance, Inc., incorporated by reference to the Company’s Registration Statement on Form S-11 (File No. 333-132186), as amended.

3.2		Amended and Restated Bylaws of CBRE Realty Finance, Inc., incorporated by reference to the Company’s Registration Statement on Form S-11 (File No. 333-132186), as amended.

10.1		Amendment No. 3 to Master Repurchase Agreement, among CBRE Realty Finance Holdings IV, LLC, CBRE Realty Finance TRS Warehouse Funding III, LLC and Wachovia Bank National Association, dated as of February 8, 2007, incorporated by reference to the Company’s Current Report on Form 8-K filed with the Exchange Commission on February 12, 2007.

10.2		Collateral Management Agreement, between CBRE Realty Finance CDO 2007-1, Ltd. and CBRE Realty Finance Management, LLC, dated as of April 2, 2007, incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 6, 2007.

10.3		Indenture, among CBRE Realty Finance CDO 2007-1, Ltd., CBRE Realty Finance CDO 2007-1, LLC, LaSalle Bank National Association and CBRE Realty Finance, dated as of April 2, 2007, incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 6, 2007.

10.4		Seller Transfer Agreement, among CBRE Realty Finance Holdings III, LLC, CBRE Realty Finance Holdings IV, LLC and CBRE Realty Finance CDO 2007-1, Ltd. dated as of April 2, 2007, incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on April 6, 2007.

10.5		Guarantee Agreement, between CBRE Realty Finance, Inc. and CBRE Realty Finance Holdings, LLC, dated August 24, 2006, filed herewith.

10.6		Amendment No. 1 to Guarantee Agreement, between CBRE Realty Finance, Inc. and CBRE Realty Finance Holdings, LLC, dated March 13, 2007, filed herewith.

31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2		Certification of by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1		Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2		Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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.

CBRE Realty Finance, Inc.

/s/ RAY WIRTA

Ray Wirta

Interim President and Chief Executive Officer

Date: May 15, 2007

/s/ MICHAEL ANGERTHAL

Michael Angerthal

Chief Financial Officer

Date: May 15, 2007

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CV (CVHL) Inactive 10-Q2007 Q1 Quarterly report

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