You should read the following discussion in conjunction with the unaudited consolidated interim financial statements, and related notes included herein. Overview
We are a Maryland corporation that was formed in June 2003 to invest in multi-family and commercial real estate-related bridge loans, junior participating interests in first mortgages, mezzanine loans, preferred and direct equity and, in limited cases, discounted mortgage notes and other real estate-related assets, which we refer to collectively as structured finance investments. We have also invested in mortgage-related securities. We conduct substantially all of our operations through our operating partnership and its wholly-owned subsidiaries.
Our operating performance is primarily driven by the following factors:
• Net interest income earned on our investments - Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings. If the yield earned on our assets decreases or the cost of borrowings increases, this will have a negative impact on earnings. However, if the yield earned on our assets increases or the cost of borrowings decreases, this will have a positive impact on earnings. Net interest income is also directly impacted by the size of our asset portfolio.

• Credit quality of our assets - Effective asset and portfolio management is essential to maximizing the performance and value of a real estate/mortgage investment. Maintaining the credit quality of our loans and investments is of critical importance. Loans that do not perform in accordance with their terms may have a negative impact on earnings.

• Cost control - We seek to minimize our operating costs, which consist primarily of employee compensation and related costs, management fees and other general and administrative expenses. As the size of the portfolio increases or there are increases in foreclosures and non-performing loans and investments, certain of these expenses, particularly employee compensation expenses and asset management related expenses, may increase.

We are organized and conduct our operations to qualify as a real estate investment trust ("REIT") for federal income tax purposes. A REIT is generally not subject to federal income tax on its REIT-taxable income that it distributes to its stockholders, provided that it distributes at least 90% of its REIT-taxable income and meets certain other requirements. Certain of our assets that produce non-qualifying income are owned by our taxable REIT subsidiaries, the income of which are subject to federal and state income taxes. We recorded a $15.1 million provision for income taxes related to the assets that are held in taxable REIT subsidiaries during the nine months ended September 30, 2007. No such provision for income taxes was recognized for the nine months ended September 30, 2008.
Sources of Operating Revenues
We derive our operating revenues primarily through interest received from making real estate-related bridge, mezzanine and junior participation loans and preferred equity investments. For the three and nine months ended September 30, 2008, interest income earned on these loans and investments represented approximately 95% and 98% of our total revenues, respectively. For the three and nine months ended September 30, 2007, interest income earned on these loans and investments represented approximately 90% and 87% of our total revenues, respectively.
Property operating income is derived from our real estate owned. For the three months and nine months ended September 30, 2008, property operating income represented approximately 3% and 1% of our total revenues, respectively. No such income was recognized for the three and nine months ended September 30, 2007.

Interest income may also be derived from profits of equity participation interests. For the nine months ended September 30, 2008, interest on these investments represented approximately less than 1% of our total revenues. No such income was recognized for the three months ended September 30, 2008. For the three and nine months ended September 30, 2007, interest on these investments represented approximately 10% and 13% of our total revenues, respectively.
We derived interest income from our investments in CRE collateralized debt obligation bond securities. For the three months and nine months ended September 30, 2008, interest on these investments represented approximately 2% and 1% of our total revenues, respectively. For the three and nine months ended September 30, 2007, no such income was recognized.
Additionally, we derive operating revenues from other income that represents loan structuring and miscellaneous asset management fees associated with our loans and investments portfolio. For the three and nine months ended September 30, 2008 and September 30, 2007, revenue from other income represented less than 1% of our total revenues.
Income or Loss from Equity Affiliates and Gain on Sale of Loans and Real Estate We derive income or losses from equity affiliates relating to joint ventures that were formed with equity partners to acquire, develop and/or sell real estate assets. These joint ventures are not majority owned or controlled by us, and are not consolidated in our financial statements. These investments are recorded under either the equity or cost method of accounting as appropriate. We record our share of net income and losses from the underlying properties on a single line item in the consolidated income statements as income from equity affiliates. For the three and nine months ended September 30, 2008, loss from equity affiliates totaled approximately $1.6 million and $2.2 million, respectively. For the three and nine months ended September 30, 2007, income from equity affiliates totaled approximately $3.1 million and $29.2 million, respectively. The $29.2 million during the nine months ended September 30, 2007 included a $24.2 million gain recognized on the sale of one of the properties of one of our equity affiliates and $5.0 million of income from excess proceeds received from the sale and refinance of properties in the portfolio of another of our equity affiliates during the nine months ended September 30, 2007.
We also may derive income from the gain on sale of loans and real estate. We may acquire (1) real estate for our own investment and, upon stabilization, disposition at an anticipated return and (2) real estate notes generally at a discount from lenders in situations where the borrower wishes to restructure and reposition its short term debt and the lender wishes to divest certain assets from its portfolio. No such income has been recorded to date. Critical Accounting Policies
Please refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2007 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Accounting Estimates and Critical Accounting Policies" for a discussion of our critical accounting policies. During the nine months ended September 30, 2008, there were no material changes to these policies, except for the updates described below. Revenue Recognition
Interest income is recognized on the accrual basis as it is earned from loans, investments and securities. In many instances, the borrower pays an additional amount of interest at the time the loan is closed, an origination fee, and deferred interest upon maturity. In some cases, interest income may also include the amortization or accretion of premiums and discounts arising from the purchase or origination of the loan or security. This additional income, net of any direct loan origination costs incurred, is deferred and accreted into interest income on an effective yield or "interest" method adjusted for actual prepayment activity over the life of the related loan or security as a yield adjustment. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Several of the loans provide for accrual of interest at specified rates, which differ from current payment terms. Interest is recognized on such loans at the accrual rate

subject to management's determination that accrued interest and outstanding principal are ultimately collectible, based on the underlying collateral and operations of the borrower. If management cannot make this determination regarding collectibility, interest income above the current pay rate is recognized only upon actual receipt. Additionally, interest income is recorded when earned from equity participation interests, referred to as equity kickers. These equity kickers have the potential to generate additional revenues to us as a result of excess cash flows being distributed and/or as appreciated properties are sold or refinanced. We recorded interest on such loans and investments of $0.3 million for the nine months ended September 30, 2008, compared to $30.0 million for the nine months ended September 30, 2007. For the three months ended September 30, 2007, we recorded $7.0 million of interest from such loans and investments. No such income had been recognized for the three months ended September 30, 2008.
Derivatives and Hedging Activities
In accordance with SFAS No. 133, the carrying values of interest rate swaps and the underlying hedged liabilities are reflected at their fair value. As of December 31, 2007 we retained the services of Chatham Financial Corporation, a Statement on Auditing Standards No. 70 ("SAS 70"), "Service Organizations" compliant, third party financial services company to determine these fair values. Changes in the fair value of these derivatives are either offset against the change in the fair value of the hedged liability through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Derivatives that do not qualify for cash flow hedge accounting treatment are adjusted to fair value through earnings.
During the nine months ended September 30, 2008, we entered into six additional interest rate swaps, that qualify as cash flow hedges, having a total combined notional value of approximately $121.6 million. No such swaps had been entered into for the three months ended September 30, 2008. In addition, during the three months ended September 30, 2008, we had two interest rate swaps expire with a total notional value of approximately $31.0 million. The fair value of our qualifying hedge portfolio has decreased by approximately $4.4 million from December 31, 2007 as a result of a change in the projected LIBOR rates and credit spreads of both parties, partially offset by the effect of the additional swaps.
Because the valuations of our hedging activities are based on estimates, the fair value may change if our estimates are inaccurate. For the effect of hypothetical changes in market interest rates on our interest rate swaps, see "Interest Rate Risk" in "Quantitative and Qualitative Disclosures About Market Risk", set forth in Item 3 hereof.
Recently Issued Accounting Pronouncements For a discussion of the impact of new accounting pronouncements on our financial condition or results of operations, see Note 2 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof. Changes in Financial Condition
Our loan and investment portfolio balance, including our held-to-maturity securities, at September 30, 2008 was $2.5 billion, with a weighted average current interest pay rate of 7.57% as compared to $2.6 billion, with a weighted average current interest pay rate of 8.18% at December 31, 2007. At September 30, 2008, advances on financing facilities totaled $2.1 billion, with a weighted average funding cost of 5.76% as compared to $2.3 billion, with a weighted average funding cost of 6.16% at December 31, 2007.
During the quarter ended September 30, 2008, we originated one new bridge loan for $13.1 million, and two mezzanine loans totaling $27.5 million. During the quarter, seven loans paid off on properties that were either sold or refinanced by a third party with an outstanding balance of $90.4 million, four loans partially repaid totaling $28.7 million and two loans were refinanced during the quarter totaling $33.9 million. In addition, seven loans totaling approximately $103.5 million were extended during the quarter in accordance with the extension options of the corresponding loan agreements.

Restricted cash decreased $70.4 million, or 51% to $68.7 million at September 30, 2008 compared to $139.1 million at December 31, 2007. Restricted cash is kept on deposit with the trustees for our collateralized debt obligations ("CDOs"), and primarily represents proceeds from loan repayments which will be used to purchase replacement loans as collateral for the CDOs. The decrease was primarily due to the redeployment of funds during 2008 from proceeds received near the end of 2007 from the full satisfaction of loans held in the CDO and the transfer of loans from other financing facilities to the CDOs.
Other assets increased $21.3 million, or 25%, to $105.0 million at September 30, 2008 compared to $83.7 million at December 31, 2007. The increase was primarily due to a $16.5 million third party member receivable recorded during the second quarter of 2008 in connection with the POM transaction. This amount reflects the third party member's pro-rata portion of the $49.5 million debt recorded from the consolidated entity in notes payable. This was also due to a $10.0 million increase in funding additional cash collateral for a portion of our interest rate swaps whose value has declined as a result of reductions in the projected LIBOR rates. See Item 3 "Quantitative and Qualitative Disclosures About Market Risk" for further information relating to our derivatives. This was partially offset by a decrease of $4.2 million in deferred financing costs associated with the amortization of costs associated with our financing sources.
Securities held to maturity were $59.1 million at September 30, 2008, and reflects the purchase of $82.7 million of investment grade CRE collateralized debt obligation bonds for $58.1 million during the second quarter. A portion of the $24.6 million discount received on the purchases of these bonds will be accreted into interest income on an effective yield adjusted for actual prepayment activity over the estimated life remaining of 6.0 years of the securities as a yield adjustment. We did not have any securities held-to-maturity at December 31, 2007. See Note 5 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof for a further description of these transactions.
Real estate owned, net was $46.6 million at September 30, 2008, representing the net carrying value of an office property which we foreclosed on during the second quarter of 2008. In addition, we recorded a $41.4 million first lien on the property in mortgage notes payable. See Note 3 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof for a further description of these transactions.
Prepaid management fee increased $7.3 million, or 38%, to $26.3 million at September 30, 2008 due to a $7.3 million incentive management fee paid on the $33 million of cash received in June 2008 from the agreement to transfer 16.67% of our 24.17% interest in Prime Outlets Member LLC ("POM"), one of our equity affiliates. Upon the closing of this transaction, which is expected to occur on or before June 26, 2009, we will exchange our 16.67% interest in POM for approximately $37 million of preferred and common operating partnership units in another REIT, at which time the deferred management fee will be recognized as expense. See Note 6 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof for further description of this transaction.
Other liabilities decreased $2.7 million, or 4%, from $67.4 million at December 31, 2007 compared to $64.7 million at September 30, 2008. The decrease was primarily due to a $6.9 million decrease in accrued interest payable primarily due to a reduction in LIBOR rates and a decline in the outstanding balance of our financing facilities. This was combined with a $3.5 million decrease in margin loan balances on our available for sale securities and interest rate swaps cash collateral. This was largely offset by a $5.4 million increase in unrealized losses on the fair value of our interest rate swaps, due to a reduction in LIBOR rates, with a corresponding offset to other comprehensive loss as well as a $1.2 million increase in net interest payable on interest rate swaps also due to a reduction in LIBOR rates.
During the three months ended September 30, 2008, we recorded a $12.7 million other-than-temporary impairment charge against our available-for-sale securities representing an adjustment to their fair value at September 30, 2008. These securities had a fair value of $4.0 million and $15.7 million at September 30, 2008 and December 31, 2007, respectively. As of September 30, 2008, these securities have been in an unrealized loss position for less than twelve months. Generally accepted accounting principles in the United States (GAAP) require that these securities are evaluated periodically to determine whether a decline in their value is other-than-temporary, though it is not intended to indicate a permanent decline in value. We believe that based on recent market events and the unfavorable prospects for near term recovery of value, that there is a lack of evidence to support the conclusion that the fair value decline is temporary. Prior to the three months ended September 30, 2008,

changes in the fair market value of our available-for-sale securities were considered unrealized gains or losses and were recorded as a component of other comprehensive income or loss.
In June 2008, ACM, our manager, exercised its right to redeem its 3,776,069 operating partnership units in the operating partnership for shares of our common stock on a one-for-one basis. As a result, ACM's operating partnership ownership interest in us was reduced to zero and the balance of minority interest was charged directly to equity in additional paid-in capital, as of June 30, 2008. See Notes 8 and 12 of the "Notes to the Consolidated Financial Statements" set forth in Item 1 hereof for a further description of this transaction.
In June 2008, we issued an aggregate of 70,000 shares of restricted common stock under the stock incentive plan to certain employees of ours and ACM. One third of the 70,000 shares of restricted stock granted to each of the employees were vested as of the date of grant, another one third will vest in June 2009, and the remaining third will vest in June 2010.
In April 2008, 14,000 restricted shares were issued to non-management members of the board of directors under the stock incentive plan. One third of the restricted stock granted was vested as of the date of grant, another one third will vest in April 2009, and the remaining third will vest in April 2010.
In April 2008, we issued 216,740 shares of restricted common stock under the stock incentive plan to certain employees of ours and ACM. One fifth of the restricted stock granted to each of these employees were vested as of the date of grant, the second one-fifth will vest in April 2009, the third one-fifth will vest in April 2010, the fourth one-fifth will vest in April 2011, and the remaining one-fifth will vest in April 2012.
ACM was paid an aggregate of 559,354 shares of common stock for its fourth quarter 2007 and first and second quarter 2008 incentive management fees during the nine months ended September 30, 2008.

Comparison of Results of Operations for the Three Months Ended September 30, 2008 and 2007
The following table sets forth our results of operations for the three months ended September 30, 2008 and 2007:

                                                     Three Months Ended
                                                       September 30,                        Increase/(Decrease)
                                                  2008                2007                Amount             Percent
                                                        (Unaudited)
Revenue:
Interest income                               $ 51,423,427        $ 70,471,815        $  (19,048,388 )            (27 )%
Property operating income                        1,422,330                   -             1,422,330              100 %
Other income                                        17,208               1,806                15,402               nm


Total revenue                                   52,862,965          70,473,621           (17,610,656 )            (25 )%


Expenses:
Interest expense                                28,198,310          39,625,100           (11,426,790 )            (29 )%
Employee compensation and benefits               1,906,843           2,332,028              (425,185 )            (18 )%
Selling and administrative                       2,581,132           1,387,924             1,193,208               86 %
Property operating expenses                      1,385,594                   -             1,385,594              100 %
Depreciation and amortization                      256,370                   -               256,370              100 %
Other-than-temporary impairment,
available-for-sale securities                   12,747,306                   -            12,747,306              100 %
Provision for loan losses                        3,000,000                   -             3,000,000              100 %
Management fee - related party                  (1,217,148 )         5,686,538            (6,903,686 )             nm


Total expenses                                  48,858,407          49,031,590              (173,183 )             nm


Income before (loss) income from equity
affiliates, minority interest and
provision for income taxes                       4,004,558          21,442,031           (17,437,473 )            (81 )%
(Loss) income from equity affiliates            (1,606,505 )         3,139,809            (4,746,314 )             nm


Income before minority interest and
provision for income taxes                       2,398,053          24,581,840           (22,183,787 )            (90 )%
(Loss) income allocated to minority
interest                                          (177,833 )         3,841,671            (4,019,504 )             nm


Income before provision for income taxes         2,575,886          20,740,169           (18,164,283 )            (88 )%
Provision for income taxes                               -                   -                     -               nm

Net income                                    $  2,575,886        $ 20,740,169        $  (18,164,283 )            (88 )%

nm - not meaningful

Revenue
Interest income decreased $19.0 million, or 27%, to $51.4 million for the three months ended September 30, 2008 from $70.5 million for the three months ended September 30, 2007. This decrease was due in part to the recognition of $7.0 million of interest income attributable to a 16.7% carried profits interest from excess proceeds received from the sale of certain assets in the portfolio of one of our equity affiliates for the three months ended September 30, 2007.

Excluding this transaction, interest income decreased $12.1 million, or 19%, compared to the same period in the prior year. This decrease was primarily due to a 16% decrease in the average yield on assets from 9.27% for the three months ended September 30, 2007 to 7.82% for the three months ended September 30, 2008. This decrease in yield was the result of a decrease in LIBOR over the same period and a reduction in the yield on new originations compared to higher yielding loan payoffs from the same period in 2007. This was partially offset by a portion of our portfolio having LIBOR floors and fixed rates of interest. In addition, interest income from cash equivalents decreased $1.7 million to $0.9 million for the three months ended September 30, 2008 compared to $2.6 million for the three months ended September 30, 2007 as a result of decreased average restricted cash balances, as well as decreases in interest rates from 2007 to 2008.
Property operating income of $1.4 million for the three months ended September 30, 2008 represents operating income associated with the operations of an office building recorded as real estate owned net. There was no property operating income for the three months ended September 30, 2007.
Other income increased $15,402 to $17,208 for the three months ended September 30, 2008 from $1,806 for the three months ended September 30, 2007. This is primarily due to increased miscellaneous asset management fees on our loan and investment portfolio.
Expenses
Interest expense decreased $11.4 million, or 29%, to $28.2 million for the three months ended September 30, 2008 from $39.6 million for the three months ended September 30, 2007. This decrease was primarily due to a 25% decrease in the average cost of these borrowings from 6.84% for the three months ended September 30, 2007 to 5.14% for the three months ended September 30, 2008 due to a reduction in average LIBOR on the portion of our debt that was floating over the same period. In addition, there was a 5% decrease in the average balance of our debt facilities from $2.3 billion for the three months ended September 30, 2007 to $2.2 billion for the three months ended September 30, 2008 as a result of decreased leverage on our portfolio due to the paying down of certain outstanding indebtedness by repayment of loans, the transfer of assets to the Company's CDO vehicles which carry a lower cost of funds and from available capital.
Employee compensation and benefits expense decreased $0.4 million, or 18%, to $1.9 million for the three months ended September 30, 2008 from $2.3 million for the three months ended September 30, 2007. This decrease was primarily due to a decrease in employee salaries and benefits, partially offset by an increase in the ratable portion of unvested restricted stock awards granted to employees subsequent to September 30, 2007. These expenses represent salaries, benefits, stock-based compensation related to employees, and incentive compensation for those employed by us during these periods.
Selling and administrative expense increased $1.2 million, or 86%, to $2.6 million for the three months ended September 30, 2008 from $1.4 million for the three months ended September 30, 2007. These costs include, but are not limited to, professional and consulting fees, marketing costs, insurance expense, director's fees, licensing fees, travel and placement fees, and stock-based compensation relating to the cost of restricted stock granted to our directors and certain employees of our manager. This increase was primarily due to increased general corporate legal expenses and professional fees associated with certain transactions, as well as increased costs related to restricted stock awards granted to directors and certain employees of the our Manager, ACM.
Property operating expenses of $1.4 million for the three months ended September 30, 2008 represents all expenses related to the operations of an . . .