UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: March 31, 2005


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

For the transition period from to
Commission file number: 333-86972

SPECIALTY TRUST, INC.

(Formerly Specialty Mortgage Trust, Inc.)

(Exact name of Registrant as specified in its Charter)


Maryland		88-0382463
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

6160 Plumas St.
Reno, Nevada		89509
(Address of principal executive offices)		(Zip Code)

(775) 826-0809
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and 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 þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the last practicable date.


Common Stock ($.01 par value)		8,559,341 as of May 11, 2005

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1	Financial Statements — Specialty Trust, Inc. and Subsidiaries (Unaudited)		3

	Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004		3

	Consolidated Statements of Earnings for the Three Months Ended March 31, 2005 and 2004		4

	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2005 and the Year Ended December 31, 2004		5

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004		6

	Notes to Consolidated Financial Statements		7

Item 2	Management’s Discussion and Analysis of Financial Condition And Results of Operations		15

Item 3	Quantitative and Qualitative Disclosures about Market Risk		25

Item 4	Controls and Procedures		26

PART II. OTHER INFORMATION

Item 1	Legal Proceedings		27

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3	Defaults Upon Senior Securities		27

Item 4	Submission of Matters to a Vote of Security Holders		27

Item 5	Other Information		27

Item 6	Exhibits		27
Signatures			28
Exhibit 31.1			29
Exhibit 31.2			30
Exhibit 32.1			31
Exhibit 32.2			32
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS (UNAUDITED)

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	(UNAUDITED)
	March 31, 2005		December 31, 2004
ASSETS
ASSETS

Cash and Cash Equivalents	$	458,813	$	14,879,417
Restricted Cash		—		1,001,536
Accrued Interest Receivable		1,659,061		1,175,049
Accounts Receivable		68,307		68,578
Land Held for Residential Development		1,951,880		1,879,432
Real Estate Owned (Held for Sale)		8,427,397		9,621,495
Mortgage Loans Held for Investment, net of allowance for loan losses of $1,371,153 and $1,130,138 and unearned discount of $78,585 and $112,625 at March 31, 2005 and December 31, 2004, respectively		109,480,417		93,350,933
Other Assets		190,449		159,628

Total Assets	$	122,236,324	$	122,136,068


LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Dividends Payable	$	—	$	2,274,946
Accounts Payable — Related Party		207,713		61,233
Accounts Payable and Accrued Expenses		128,699		198,043
Accrued Interest Payable		54,861		65,475
Deferred Revenue		428,371		—
Collateralized Notes		34,143,066		41,242,610
Lines of Credit		5,285,000		—

Total Liabilities	$	40,247,710	$	43,842,307


STOCKHOLDERS’ EQUITY
Common Stock; $0.01 par value; 50,000,000 shares authorized, 8,416,767 and 8,272,529 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively	$	84,168	$	82,725
Additional Paid-in Capital		78,939,994		77,432,753
Retained Earnings		2,964,452		778,283

Total Stockholders’ Equity		81,988,614		78,293,761

Total Liabilities and Stockholders’ Equity	$	122,236,324	$	122,136,068

See accompanying notes to consolidated financial statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)


	Three Months Ended
	March 31, 2005		March 31, 2004
Revenue
Interest and Dividend Income:
Mortgage Loans	$	3,510,828	$	2,667,263
Cash Accounts		18,521		29,500
Dividend Income		10,108		—

		3,539,457		2,696,763

Interest Expense:
Lines of Credit		11,904		3,513
Collateralized Notes		541,893		473,156

Total Interest Expense		553,797		476,669


Net Interest and Dividend Income		2,985,660		2,220,094

Provision for Loan Losses		241,015		23,366


Net Interest and Dividend Income After Provision for Loan Losses		2,744,645		2,196,728
Gain/(Loss) on Sale of Real Estate Owned		5,873		(47	)
Other Income		—		34,601

Net Revenues		2,750,518		2,231,282


Expenses
General and Administrative		79,616		166,556
Management and Directors’ Fees		348,572		187,346
Other Expenses		136,161		103,687

Total Expenses		564,349		457,589


NET EARNINGS	$	2,186,169	$	1,773,693


Basic Earnings per Share	$	0.26	$	0.23


Diluted Earning per Share	$	0.26	$	0.23

See accompanying notes to consolidated financial statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)

Year ended December 31, 2004 and three months ended March 31, 2005


					Additional
	Common Stock				Paid-in			Retained
	Shares		Amount		Capital			Earnings			Total
Balance, January 1, 2004		7,684,813	$	76,848	$	71,828,838		$	220,805		$	72,126.491

Net Earnings and Comprehensive Income		—		—		—			9,112,960			9,112,960

Stock Options Exercised		33,163		332		213,838			—			214,170

Dividends Reinvested on Common Stock		548,553		5,485		6,028,605			—			6,034,090

Stock Granted		6,000		60		65,940			—			66,000

Dividends Declared on Common Stock		—		—		(704,468	)		(8,555,482	)		(9,259,950	)


Balance, December 31, 2004		8,272,529	$	82,725	$	77,432,753		$	778,283		$	78,293,761


Net Earnings and Comprehensive Income		—		—		—			2,186,169			2,186,169

Stock Options Exercised		7,375		74		3,119			—			3,193

Dividends Reinvested on Common Stock		133,863		1,339		1,471,152			—			1,472,491

Stock Granted		3,000		30		32,970			—			33,000


Balance, March 31, 2005		8,416,767	$	84,168	$	78,939,994		$	2,964,452		$	81,988,614

See accompanying notes to consolidated financial statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	March 31, 2005			March 31, 2004
Cash flows from operating activities:
Net Earnings	$	2,186,169		$	1,773,693
Adjustment to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Amortization		—			16,940
Provision for Loan Losses		241,015			23,366
Amortization of Loan Fees on Mortgage Loans		(34,040	)		(23,740	)
(Gain)/Loss on Sale of Real Estate Owned		(5,873	)		47
Non-cash Stock Compensation		33,000			16,500
Changes in Assets and Liabilities:
Accrued Interest Receivable		(484,012	)		(101,647	)
Accounts Receivable		271			56,656
Other Assets		(30,821	)		—
Accounts Payable (including Related Party) and Accrued Interest Payable		66,522			(99,882	)

Net Cash Provided by Operating activities		1,972,231			1,661,933

Cash flows from investing activities:
Investment in Real Estate Owned		(219,433	)		(138,882	)
Proceeds from Sale of Real Estate Owned		33,386			372,368
Investment in Land Held for Residential Development		(166,873	)		(43,001	)
Proceeds from Sale of Land Held for Residential Development		94,425			323,198
Purchase of Mortgage Loans Held for Investment		(39,571,614	)		(13,475,538	)
Principal Repayments of Mortgage Loans Held for Investment		25,049,544			22,359,166

Net Cash (Used In)/Provided by Investing Activities		(14,780,565	)		9,397,311

Cash flows from financing activities:
Proceeds from Common Stock Options Exercised		3,193			129,975
Cash Dividends Paid		(802,455	)		(784,056	)
Proceeds from Lines of Credit		5,285,000			—
Proceeds from Collateralized Notes		—			10,023,000
Interest Reinvested on Collateralized Notes		404,047			363,960
Principal Payments on Collateralized Notes		(7,503,591	)		(8,177,885	)
Change in Restricted Cash		1,001,536			—

Net Cash (Used In)/Provided by Financing Activities		(1,612,270	)		1,554,994

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(14,420,604	)		12,614,238
Cash and Cash Equivalents at Beginning of Period		14,879,417			2,593,407

Cash and Cash Equivalents at End of Period	$	458,813		$	15,207,645


Supplemental Cash Flow Information:
Cash Paid for Interest	$	564,411		$	477,592

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Collateralized Notes Refinanced at Maturity	$	—		$	1,845,115

Mortgage Loans received upon sale of Real Estate Owned including reduction to Real Estate Owned of $1,413,531 and increase to Deferred Revenue of $428,371	$	1,814,389		$	—

Dividends Reinvested for Common Stock	$	1,472,491		$	1,521,388

Common Stock Grants	$	33,000		$	33,000

See accompanying notes to consolidated financial statements.

SPECIALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Specialty Trust, Inc. and Subsidiaries (the “Company”) is a Maryland corporation, which acquires and holds interests in mortgage loans secured by property located in Nevada, Arizona, Colorado, California, and Utah. The Company’s strategy is to acquire land loans, construction loans, commercial building loans and nonconforming single-family and small multifamily residential loans. The Company has elected to be treated as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended. The mortgage loans are originated and serviced by Specialty Financial (the “Manager”), a private mortgage finance company operating in Nevada, wholly owned by Nello Gonfiantini III, the Company’s President and Chairman of its Board of Directors. The Company was incorporated on October 21, 1997 and began operations on January 31, 1998.

The unaudited consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10Q. In the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. The results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or for any other period. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

The unaudited consolidated financial statements for the three months ended March 31, 2005 include the accounts of the Company and its wholly owned subsidiaries, Specialty Acquisition Corporation (SAC), a taxable REIT subsidiary and Specialty Acquisition Corp. II (SAC II), a qualified REIT subsidiary. SAC was formed on May 2, 2002 to enable the Company to perform development activities to land it had foreclosed upon (Note 4), and to maintain the Company’s qualified REIT status. SAC II was formed on January 17, 2003 to enable the Company to hold property (Note 6). All inter-company accounts and transactions have been eliminated upon consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The one accounting estimate that materially affects the financial statements is the allowance for loan losses.

Land Held for Residential Development

Land Held for Residential Development consists of real estate acquired through foreclosure and is carried at the lower of cost or the property’s estimated fair value, less estimated costs to sell.

Real Estate Owned

Real Estate Owned consists of real estate acquired through foreclosure and is carried at the lower of cost or the property’s estimated fair value, less estimated costs to sell.

Stock Options

The Company accounts for stock based compensation under the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standard (SFAS) 123, “Accounting for Stock-Based Compensation,” which requires the measurement of stock compensation expense using the fair value method of accounting.

Mortgage Loans

The Company has both the intent and the ability to hold mortgage loans until maturity. Therefore, mortgage loans are classified and accounted for as held for investment and are carried at cost.

The mortgage loans are originated by the Manager, in the name of the Manager, and simultaneously sold, in whole or in part, to the Company. Loan servicing is retained by the Manager.

The Company follows SFAS 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure.” Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect the contractual interest and principal payments of a loan according to the contractual terms of the loan agreement. SFAS 114 requires that impaired loans be measured at the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The Company generally obtains a third party appraisal on the underlying collateral for impaired loans to determine the amount of impairment, if any. SFAS 118 clarifies interest income recognition and the disclosure requirements of SFAS 114.

The Company does not recognize interest income on loans once they are determined to be impaired until the interest is collected in cash. Cash receipts are allocated to interest income, except when such payments are specifically designated as principal reduction or when the Company does not believe the Company’s investment in the loan is fully recoverable.

Revenue Recognition

Revenue is recognized on performing loans when interest has been earned according to the terms of the loan. However, revenue ceases to be recognized when the loan becomes 90 days delinquent, when foreclosure proceedings have been initiated, or when the Loan-to-Value ratio exceeds 100%, whichever event occurs first.

Mortgage loan origination fees in excess of 2.5% charged to a borrower for and upon the origination, extension or refinancing of a mortgage loan are paid to the Company, effectively discounting the purchase price of the loan and are amortized by the effective interest method over the contractual life of the loan. These amounts are classified as unearned discounts. Mortgage loan origination fees up to 2.5% are earned by the Manager prior to the purchase of the mortgage loans by the Company.

Earnings per Share

Basic Earnings Per Share (EPS) is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net earnings by the weighted-average common shares and potentially dilutive securities outstanding during the period. For the diluted EPS calculation, the weighted average common shares and potentially dilutive securities outstanding

include the average number of shares of common stock outstanding, adjusted for the dilutive effect of unexercised stock options using the treasury stock method.

Allowance for Loan Losses

The Company maintains an allowance for loan losses on mortgage loans. Additions to the allowance are based on an assessment of certain factors including, but not limited to, a review of collateral values, borrower payment ability and general economic conditions. Additions to the allowance are provided through a charge to current earnings. Actual losses on loans are recorded as a charge-off or a reduction to the loan loss allowance. Subsequent recoveries of amounts previously charged off are added back to the provision for loan losses.

Evaluation of the adequacy of the allowance for loan losses is based primarily on the Company’s periodic assessment and grading of the loan portfolio. Additional factors considered by the Company include the consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, current economic conditions, the fair value of underlying collateral and other regulatory or legal issues that could affect loan losses. While the Company uses available information to recognize losses on loans, future adjustments to the allowance for loan losses may be necessary based on changes in economic conditions and the impact of such changes on the Company’s borrowers.

Income Taxes

The Company’s financial results generally do not reflect provisions for current or deferred income taxes. Management believes that the Company has and intends to continue to operate in a manner that will allow the Company to be taxed as a REIT and as a result, does not anticipate the payment of substantial corporate level taxes. Many of these requirements, however, are highly technical and complex. If the Company were to fail to meet any of these requirements, it would be subject to federal income tax.

SAC, the Company’s wholly owned taxable REIT subsidiary, is generally subject to corporate level income tax on its income and will generally be able to distribute only its net after tax earnings to the Company as dividends. Management believes that the deferred tax assets related to net operating losses will most likely not be recovered.

SAC II, the Company’s qualified REIT subsidiary, is a corporation and the REIT owns 100% of the stock. As a qualified REIT Subsidiary, SAC II is not treated as a separate corporation from the REIT for tax purposes. Therefore, its activities are treated as activities of the REIT and subject to the REIT qualification tests and prohibitive transaction limits. All of its assets, liabilities and items of income, deduction and credit are included in the Federal income tax return in the related tax line items for the REIT.

NOTE 2. MORTGAGE LOANS HELD FOR INVESTMENT

Mortgage Loan Products

The Company has four mortgage loan products consisting of land, construction, commercial building and nonconforming. The mortgage loan products have stated interest rates ranging from 9.0% to 18.0%. Due to the nature of the effective interest rates among the four loan products, the Company does not compile or report revenues by product type.

Pursuant to existing loan agreements, the Company is committed to fund additional loan advances totaling $41,000 as of March 31, 2005.

Allowance for Loan Losses

The Company sets aside an allowance for loan losses through periodic charges to earnings. The Company believes sufficient reserves have been provided in the allowance to absorb probable losses in the loan portfolio at

March 31, 2005 and December 31, 2004.

The following table presents a roll forward of the allowance for loan losses:


	Three Months Ended March 31,
	2005		2004
Balance at beginning of period	$	1,130,138	$	1,424,256
Provision for Loan Losses		241,015		23,366
Charge Offs		—		—

Balance at end of period	$	1,371,153	$	1,447,622

NOTE 3. DELINQUENT LOANS

At March 31, 2005, the Company had no loans that were delinquent for principal or interest.

At December 31, 2004, the Company had two loans that were 30 days past due totaling approximately $5.5 million in principal and accrued interest. In accordance with its revenue recognition policy, Management has accrued the delinquent interest on these loans.

NOTE 4. LAND HELD FOR RESIDENTIAL DEVELOPMENT

In February 2001, the Company foreclosed on a mortgage loan in default and obtained ownership of the residential land development project (the “Project”) securing the loan. The Company’s recorded investment in the loan at the time of foreclosure was approximately $2.7 million. The Company obtained a third-party appraisal of the Project at the time of the foreclosure, which was used by management to value the Project at approximately $2.5 million, net of estimated costs to sell. A loss of $225,000 was recorded upon recording the initial carrying value of the Project upon foreclosure. The three phases comprising the Project, which totaled 117 lots, were in various stages of completion. The appraisal provided an allocation of the fair value as follows: (i) phase I’s 15 lots at $30,000 each, (ii) phase II’s 61 lots at approximately $15,000 each, and (iii) phase III’s 41 lots at approximately $15,000 each. The appraisal was based on the current condition of the lots and did not consider costs, which the Company or its assignee would incur to prepare these lots for the commencement of homebuilding. The Company subsequently contributed the Project to SAC, its wholly owned taxable REIT subsidiary.

In June 2002, SAC entered into an agreement with a third-party homebuilder to transfer title of the lots to the homebuilder in exchange for an upfront payment, in cash, equal to a portion of the original appraised value of the uncompleted lots. Additionally, the homebuilder is responsible to pay SAC the difference between the agreed value per lot and the cash previously received, upon sale of the homes to third parties. SAC is also entitled to 50% of the profits, if any, realized by the homebuilder upon closing of the sale of each home, as well as repayment of infrastructure costs borne by the Company prior to the agreement.

SAC receives a security interest in each lot transferred to the homebuilder, subordinate to the senior interest held by the homebuilder’s construction lender. SAC is not obligated for any future costs of the Project once a completed lot is delivered to the homebuilder. This arrangement is accounted for as a real estate investment by which cash received upfront upon delivery of the completed lots reduces SAC’s investment in the land held for residential development. Upon the sale of completed homes by the homebuilder to an independent third-party, SAC records proceeds as a reduction to land held for residential development as Phases I and II of the development are expected to result in minimal profit. After the investment has been fully recovered, SAC will recognize profit equal to its share of the profits realized and received from home sales and may record a provision for income taxes if SAC is anticipated to generate taxable income for the year.

All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon payment to SAC of $565,943. In

order to complete the lots, SAC incurred site mapping and other engineering costs, real estate taxes and insurance costs all of which were capitalized. Three homes were sold during the quarter ended March 31, 2005 leaving fifteen homes to sell in Phases I and II as well as the Phase III land. The following table provides a roll-forward of this account:


Balance at December 31, 2004	$	1,879,432
Capitalized Costs		166,873
Net proceeds from sale of homes		(94,425	)

Balance at March 31, 2005	$	1,951,880

On June 30, 2003, the homebuilder neglected to exercise his option to purchase Phase III of the Project. The Company has subsequently listed the property for sale and has received offers on the land subsequent to March 31, 2005, such offers are in excess of the book value of the Phase III land.

NOTE 5. REAL ESTATE OWNED (HELD FOR SALE)

As of March 31, 2005 and December 31, 2004, real estate owned totaled $8.4 million and $9.6 million respectively. The properties acquired were as follows:

•	A personal residence in Telluride, Colorado acquired in September of 2003 with a loan balance of approximately $1.7 million. The Company has incurred approximately $1.6 million in costs to prepare the personal residence for sale, all of which was capitalized to real estate owned.

•	Two parcels of raw land in Mesquite, Nevada acquired in August of 2003 with loan balances of approximately $2.6 million and $2.5 million. Portions of land were sold on various dates in 2004 and 2005.

•	A personal residence in Castle Rock, Colorado acquired in July of 2004 with a loan balance of $2.3 million.

During the quarter ended March 31, 2005, the Company sold two portions of the raw land located in Mesquite, Nevada. The Company carried back mortgages on these sales totaling approximately $1.8 million resulting in a deferred gain of approximately $428,000. The deferred gain will be recognized as principal payments are received on the underlying mortgages based on the installment method of accounting.

NOTE 6. QUALIFIED REIT SUBSIDIARY

As of January 17, 2003, the Company formed SAC II, a qualified REIT subsidiary. A qualified REIT subsidiary is a corporation in which a REIT owns 100% of the stock and which is not a taxable REIT subsidiary. As a qualified REIT Subsidiary, SAC II is not treated as a separate corporation from the REIT for tax purposes. Therefore, its activities are treated as activities of the REIT and subject to the REIT qualification tests and prohibitive transaction limits. All of its assets, liabilities and items of income, deduction and credit are included in the related tax line items for the REIT.

As of and for the three months ended March 31, 2005, there was no activity recorded in SAC II.

NOTE 7. COLLATERALIZED NOTES

On August 16, 2004, Post Effective Amendment No. 2 to the Company’s registration statement was declared effective by the Securities and Exchange Commission (SEC) changing the amount of collateralized notes available for sale to $189,521,000 (including amounts remaining unsold under the prior registration) from the original $250,000,000, which had been declared effective by the SEC on January 18, 2001. The collateralized

notes are secured by mortgage loans at least one and one-half times the aggregate principal amount outstanding on the collateralized notes. If there are not sufficient, qualifying mortgage loans in the loan portfolio to attain the required collateral levels, the Company is required to pledge restricted cash to the trustee of the notes in order to collateralize the notes at the required level.

The outstanding collateralized notes have maturities ranging from three months to five years from the date of issue and bear a fixed rate of interest ranging from 3.25% to 7.50% at March 31, 2005 and December 31, 2004. The effective yield of collateralized notes outstanding at March 31, 2005 and December 31, 2004 was 5.90% and 5.77%, respectively. At March 31, 2005 and December 31, 2004, the collateralized notes were secured by $58.6 million and $42.5 million respectively, of mortgage loans pledged as collateral.

In November 2004, the Company’s Board of Directors determined that continuing the Company’s publicly offered collateralized note program would subject the Company to significant costs and expenses, including costs of complying with the Sarbanes-Oxley Act of 2002 that would exceed the benefits derived from the public issuance of the notes. As a result, the Board directed that the public collateralized note program be terminated. On December 15, 2004, Post Effective Amendment No. 3 to the Company’s registration statement was declared effective by the Securities and Exchange Commission (“SEC”) thereby deregistering $165,915,000 collateralized notes which represented all of the remaining registered but unsold collateralized notes. The Company expects to be able to begin offering collateralized notes on a private basis in June 2005.

NOTE 8. RELATED PARTY

On October 23, 1997, the Company entered into a Management Agreement with the Manager. The Agreement was subsequently updated through the Second Amended and Restated Management Agreement dated January 1, 2004. The Manager is responsible for the day-to-day operations of the Company and performs such services and activities relating to the assets and operations of the Company as are provided for in the Agreement. The Manager originates the mortgage loans in the name of the Manager, and sells the loans, in whole or in part, to the Company. The Manager retains the servicing of the mortgage loans.

The Manager receives mortgage placement fees or points, usually charged to the borrower for and upon origination, extension or refinancing of loans, up to 2.5% of the loan balance, with any additional fees or points paid to the Company. The Manager receives a fee for loan servicing equal to one-half of one percent per annum of all loans serviced. These fees are earned directly by the Manager and are deducted from the interest or late payments paid to the Company to cover the Manager’s costs to manage the portfolio, effectively reducing the yield to the Company.

Under the Amended Agreement dated January 1, 2004, the Manager receives a monthly base management fee equal to one-half of one percent of the Mortgage Asset Portfolio at the end of the preceding quarter which includes Mortgage Loans net of allowances and unearned discounts, Real Estate Owned and Land Held for Residential Development. In addition, the Manager receives, as incentive compensation for each fiscal quarter, an amount equal to 50% of the tax — based net income before the dividend deduction of the Company, in excess of a threshold return determined annually by the Board of Directors. The Board of Directors determined the threshold return to be 11% for the year ending December 31, 2005. If the Company’s tax-based net income does not exceed the threshold return on an annualized basis, the Manager does not receive incentive compensation for that year. The Manager earned $187,620 of such incentive fee during the quarter ended March 31, 2005.

Fees earned by the Manager for the three months ended March 31, 2005 and 2004, are as follows:


	Three Months Ended
	March 31,
	2005		2004
Loan Origination and Extension Fees	$	598,925	$	556,500

Loan Servicing Fees		123,157		110,557

Late Payment Charges		44,876		7,324


Subtotal	$	766,958		674,381

Base Management Fee		131,065		130,467

Incentive Compensation Bonus		187,620		—


Total Compensation	$	1,085,643	$	804,848

The loan origination fees are received by the Manager as part of the initial funding of the loan. Loan servicing fees reduce the amount of interest income recognized by the Company as the Manager withholds the servicing fee from interest payments received from borrowers. Late payment charges are received directly by the Manager from the borrower. The Base Management Fee is paid monthly to the Manager by the Company, and the Manager’s incentive compensation is calculated in accordance with the Agreement. Both the Base Management Fee and the incentive compensation are recorded in the line item, Management and Directors Fees, in the Company’s financial statements.

In addition, SAC currently has an agreement with a realtor related to the development of the land held for residential development discussed in Note 4. SAC will pay a realtor finder’s fee of $300 per lot and a 3.5% sales commission for each home sold. The realtor is an employee of a real estate company, which is owned by an independent director and member of the Company’s Audit Committee. As of March 31, 2005 and December 31, 2004, SAC did not have any outstanding payables to the realtor related to the finder’s fee. Total fees paid to the real estate company for the three months ended March 31, 2005 and 2004 were approximately $32,639 and $67,481 respectively.

NOTE 9. EARNINGS PER SHARE

The following is a reconciliation of earnings per share (in thousands, except per share amounts):


	Three Months Ended
	March 31,
	2005		2004
Basic:

Net earnings applicable to common stock	$	2,186	$	1,774


Weighted average number of shares — basic		8,417		7,822


Earnings per share — basic	$	0.26	$	0.23


Diluted:

Net earnings applicable to diluted earnings per share	$	2,186	$	1,774


Weighted average number of shares — basic		8,417		7,822

Weighted average shares of dilutive stock options using average period stock price under the treasury stock method		2		14

Weighted average number of shares — diluted		8,419		7,836

Earnings per share — diluted	$	0.26	$	0.23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial Statements and Notes.

Safe Harbor Statement

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Statements in this discussion regarding Specialty Trust, Inc., and the business, which are not historical facts, are “forward-looking statements” that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, please refer to “Risk Factors” commencing on Page 12 of our Prospectus included in the Registration Statement on Form S-11 (File No. 333-86972) relating to our Collateralized Notes Program.

Company Overview

The Company is a mortgage finance company specializing in acquiring nonconforming residential and commercial real estate mortgage loans for the purpose of holding the loans in its portfolio. The Company funds its loans chiefly through equity and to a lesser degree with short-term debt. This short-term debt consists of secured bank lines of credit and the Collateralized Note Program.

The Company’s business objective and strategy is to build and hold a portfolio of mortgage loans for investment that generates net income for distribution to stockholders. Loans are made principally to borrowers in the States of Nevada, Arizona, Colorado, California and Utah whose needs are generally not being served by traditional financial institutions. The Company’s strategy is to focus on land loans, construction loans, commercial building loans and nonconforming single-family and small multi-family residential loans. Management generally limits the amount of investment in any single mortgage loan or in mortgage loans to one borrower to 10% of the total assets (approximately $12 million), although the Board of Directors may approve exceptions. Most loans will have terms of one to three years. The mortgage loans may be secured by unimproved as well as improved real property and non-income producing property as well as income-producing real property. Some mortgage loans may be secured by a borrower’s leasehold interest in real property. The loans generally produce higher yields than those obtained on traditional single-family residential mortgage loans, but are subject to higher risks of default and loss.

The Company is structured as a real estate investment trust (REIT), thereby generally eliminating federal taxes at the corporate level on income that is distributed to stockholders. Because the Company is not structured as a traditional lender that accepts deposits, it is subject to substantially less regulatory oversight and incurs lower compliance expenses as compared to banks, thrift institutions and many other holders of mortgage loans.

Specialty Financial serves as the Company’s manager and is responsible for loan originations, loan servicing, and day-to-day operations, subject to the supervision of the Company’s Board of Directors.

Significant Aspects of First Quarter 2005 and Year End 2004

At March 31, 2005, the Company owned approximately $110.9 million of mortgage loans, approximately $10.4 million of land held for residential development and foreclosure property. Total assets were approximately $122.2 million. These assets are financed with approximately $34.1 million of collateralized notes, $5.3 million of lines of credit, and approximately $82.0 million of equity.

As of March 31, 2005, the Company’s equity-to-assets ratio was 67.1%, the debt-to-equity ratio was 48.1% and the annualized return on equity for the three months ended March 31, 2005 was 11.1%.

At December 31, 2004, the Company owned approximately $94.6 million of mortgage loans, approximately $11.5 million of land held for residential development and foreclosure property. The Company’s total assets were approximately $122.1 million. The assets were financed with approximately $41.2 million of collateralized notes, and approximately $78.3 million of equity.

As of December 31, 2004, the Company’s equity-to-assets ratio was 64.1%, the debt-to-equity ratio was 52.7%, and the average return on equity for the year ended December 31, 2004 was 12.1%.

Critical Accounting Policies

The Company’s management is responsible to insure that its policies and methodologies are in accordance with U.S. generally accepted accounting principles. During the first quarter of 2005, management reviewed and evaluated the Company’s critical accounting policies and believes them to be appropriate.

The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SAC and SAC II. The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. These estimates are based, in part, on management’s judgment and assumptions regarding various economic conditions believed to be reasonable based on facts and circumstances existing at the time of reporting. In preparing these consolidated financial statements, management has used their best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. The Company does not believe that there is a great likelihood that materially different amounts would be reported related to accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates.

The following summarizes the components of the Company’s consolidated financial statements where understanding accounting policies is critical to understanding and evaluating reported financial results, especially given the significant estimates used in applying the policies. The discussion is intended to demonstrate the significance of estimates to the financial statements and the related accounting policies. Detailed accounting policies are described in Note 1 to the Company’s consolidated financial statements.

Revenue Recognition

Revenue is recognized on performing loans when interest has been earned according to the terms of the loan. However, revenue is no longer recognized when the loan has become delinquent for 90 days, when foreclosure proceedings have been initiated, or when the loan-to-value ratio exceeds 100%, whichever event occurs first. Management believes the Company’s revenue recognition policies are appropriate to reflect the substance of the underlying transactions.

Allowance for Loan Loss

The Company maintains an allowance for loan losses on its mortgage loans. Additions to the allowance are based on an assessment of certain factors including, but not limited to, a review of collateral values, borrower payment ability and general economic conditions. Management believes that the Company’s policies and methodology are appropriate to reflect the potential loss on the current loan portfolio.

Impairment of Long-Lived Assets

Real estate investments held represent “long-lived” assets for accounting purposes. The Company periodically reviews long-lived assets for impairment in value whenever an event or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In management’s opinion, and based on their estimates, real estate owned and land held for development are considered to be held for sale and are not carried at amounts in excess of their estimated fair value. Land held for residential development is carried at the lower of cost or fair value less estimated costs to sell. Fair value is derived using estimates and assumptions relating to eventual sales prices and estimates for costs to complete. Management believes the assumptions used in determining fair value

are based on the best information available at the time of analysis.

Income Taxes

On May 2, 2002, the Company formed Specialty Acquisition Corp. (SAC) a wholly owned taxable REIT subsidiary effective January 1, 2003. A taxable REIT subsidiary is generally subject to corporate level income tax on its income and will generally be able to distribute only its net after tax earnings to the Company as dividends. Management believes that the deferred tax assets related to net operating losses will most likely not be recovered.

As of January 17, 2003, the Company formed Specialty Acquisition Corp. II (SAC II) a qualified REIT subsidiary. A qualified REIT subsidiary is a corporation in which a REIT owns 100% of the stock and which is not a taxable REIT subsidiary. As a qualified REIT Subsidiary, SAC II is not treated as a separate corporation from the REIT for tax purposes. Therefore, its activities are treated as activities of the REIT and subject to the REIT qualification tests and prohibitive transaction limits. All of its assets, liabilities and items of income, deduction and credit are included in the federal income tax return for the REIT.

Changes in Financial Condition

Assets

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents and restricted cash decreased by approximately $15.4 million (97%) as of March 31, 2005, compared to December 31, 2004. The timing of loan fundings and the timing of debt or equity issues generally determine the amount of cash held by the Company. The Company’s goal is to keep cash invested in loans or other financial instruments and therefore to keep cash balances low whenever possible.

Accrued Interest Receivable

Accrued interest receivable increased by approximately $484,000 (41%) as of March 31, 2005 compared to December 31, 2004 primarily as the result of an overall increase in the loan portfolio and the Company’s investment in loans with a deferred interest component as of March 31, 2005. Under these loans, borrowers pay a reduced rate of interest during the loan term while interest accrues at a substantially higher rate. The deferred interest is due upon maturity of the loan.

Land Held for Residential Development

Land held for residential development increased by approximately $72,000 (4%) as of March 31, 2005 compared to December 31, 2004 as a result of costs incurred related to Phase III of the Project classified as land held for residential development. Land held for residential development consists of three phases of undeveloped lots (the “Project”), which were obtained by the Company through foreclosure in February 2001. This Project originally included 117 lots, which were in various stages of completion at the time of foreclosure. An appraisal was obtained at the time of foreclosure which provided an allocation of the fair value as follows: (i) phase I’s 15 lots at $30,000 each, (ii) phase II’s 61 lots at approximately $15,000 each and (iii) phase III’s 41 lots at approximately $15,000 each. The appraisal was based on the current condition of the lots and did not consider costs, which the Company or its assignee would incur to prepare these lots for the commencement of homebuilding. The Company subsequently contributed the Project to Specialty Acquisition Corp. (SAC), its wholly owned taxable REIT subsidiary formed in May 2002.

In June 2002, SAC entered into an agreement with a third-party homebuilder to transfer title to the lots on a phased basis to the homebuilder in exchange for an upfront cash payment equal to a portion of the original

appraised value of the uncompleted lots. Additionally the homebuilder is responsible to pay SAC the difference between the original appraisal value per lot and the cash previously received, upon sale of the homes to third parties. SAC is also entitled to 50% of the profits, if any, realized by the homebuilder upon closing of the sale of each home built, as well as repayment of infrastructure costs borne by the Company prior to the agreement. SAC receives a security interest in each lot transferred to the homebuilder, subordinate to the senior interest held by the homebuilder’s construction lender. SAC is not obligated for any future costs of the Project once a completed lot is delivered to the homebuilder. This arrangement is accounted for as a real estate investment by which cash received upfront upon delivery of the completed lots reduces SAC’s investment in the land held for residential development. Upon the sale of lots and completed homes by the homebuilder to a third-party, SAC will record proceeds as a reduction to the land held for residential development under the cost recovery method.

All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon payment to SAC of $565,943. In order to complete delivery of the lots, SAC incurred site mapping costs, other engineering costs, real estate taxes, and insurance costs in 2002, all of which were capitalized. Three completed homes were sold during the three months ended March 31, 2005. The following table is a roll-forward of this account:


Balance at December 31, 2004	$	1,879,432
Capitalized costs		166,873
Net proceeds from sale of homes		(94,425	)

Balance at March 31, 2005	$	1,951,880

On June 30, 2003, the homebuilder neglected to exercise his option to purchase Phase III of the Project. The Company has subsequently listed the property for sale.

Real Estate Owned

Real estate owned decreased by approximately $1.2 million (12%) as of March 31, 2005 compared to December 31, 2004. This decrease was due primarily to the sale of a portion of property located in Mesquite, Nevada.

Mortgage Loans

Mortgage loans held for investment net of allowance for loan losses and unearned discounts increased by approximately $16.1 million (17%) as of March 31, 2005 compared to December 31, 2004 due primarily to the purchase of new mortgage loans during the quarter. The allowance for loan losses was increased by approximately $241,000 during the quarter ended March 31, 2005 due to an increase in the overall mortgage loan portfolio as a result of an increase in loan originations in the current quarter.

Other Assets

Other assets increased by approximately $31,000 (19%) as of March 31, 2005 compared to December 31, 2004 primarily due to an increase in line of credit fees and other prepaid expenses.

Liabilities

Dividends Payable

Dividends payable decreased by approximately $2.3 million (100%) as of March 31, 2005 compared to December 31, 2004 due primarily to the dividends declared prior to December 31, 2004 being paid in cash or reinvested during the quarter.

Accounts Payable and Accrued Expenses, Accounts Payable — Related Party and Accrued Interest Payable

Accounts payable and accrued expenses and accounts payable related party increased by approximately $67,000 (20%) as of March 31, 2005 compared to December 31, 2004. This increase was due primarily to the accrual of management incentive compensation as of March 31, 2005.

Deferred Revenue

Deferred revenue increased by approximately $428,000 due primarily to the recording of a deferred gain upon carry-back of a mortgage loan on the sale of real estate owned.

Collateralized Notes

Collateralized notes decreased by approximately $7.1 million (17%) as of March 31, 2005 compared to December 31, 2004 due to the maturity and payout of notes during the quarter. No new collateralized notes were issued during the period due to the Company’s deregistration of the collateralized note program in 2004.

Lines of Credit

Lines of credit increased by approximately $5.3 million as of March 31, 2004 compared to December 31, 2004 due to the Company utilizing its lines during the quarter and not utilizing its lines as of December 31, 2004. The Company relies on its lines of credit, along with other sources, to meet short term liquidity and funding needs.

Results of Operations

The rate volume analysis set forth in the following table analyzes changes in net interest income for the periods indicated by their rate and volume components.


	Three months Ended
	March 31, 2005
	Over/Under
	March 31, 2004
	Net
	Change			Rate		Volume
Interest Income
Mortgage Loans	$	843,565		$	175,494	$	668,071
Cash Accounts		(10,979	)		37,364		(48,343	)

Total		832,586			212,858		619,728

Interest Expense
Line of Credit		8,391			8,391		—
Collateralized Notes		68,737			35,086		33,651

Total		77,128			43,477		33,651

Change in net interest income	$	755,458		$	169,381	$	586,077

The Company’s operating results include all of the reported income of its mortgage finance operation. A comparison of the three months ended March 31, 2005 to the three months ended March 31, 2004 follows:

Interest Income, Mortgage Assets

Interest income, mortgage assets increased by approximately $844,000 (32%) for the three months ended March 31, 2005, as compared to the same period in prior year, due primarily to an increase in the overall loan portfolio.

Interest Income Cash Accounts

Interest income, cash accounts decreased by approximately $11,000 (37%) for the three months ended March 31, 2005, respectively, due primarily to the decrease of cash balances on hand as of March 31, 2005 compared to the prior period.

Dividend Income

Dividend income increased by approximately $10,000 due to the Company earning dividends on balances that it held in a restricted cash account for a portion of the quarter ended March 31, 2005.

Interest Expense — Lines of Credit

Interest expense on lines of credit increased by approximately $8,000 (239%) for the three months ended March

31, 2005, as compared to the same period in prior year, primarily due to the Company utilizing more of its lines of credit during the three months ended March 31, 2005.

Interest Expense — Collateralized Notes

Interest expense on collateralized notes increased by approximately $69,000 (15%) for the three months ended March 31, 2005, as compared to the same period in prior year. The increase was primarily due to the additional issuance of collateralized notes over those outstanding as of March 31, 2004 offset by a decrease in interest expense due to the deregistration of the Company’s collateralized note program. As a result of the deregistration, the Company cannot issue any additional collateralized notes for public sale. The Company expects to be able to offer its notes for private sale starting in June 2005.

Provision for Loan Losses

Provision for loan losses increased by approximately $218,000 (931%) for the three months ended March 31, 2005, as compared to the same period in prior year. This increase was primarily due to a increase in the required allowance for loan losses based on the Company’s increased mortgage portfolio and risk rating process.

General and Administrative

General and administrative decreased by approximately $87,000 (52%) for the three months ended March 31, 2005, respectively, as compared to the same period in prior year. This decrease occurred due to a reduction in professional fees as a result of the Company’s deregistration of its collateralized note program.

Management and Directors’ Fees

Management and directors’ fees increased by approximately $161,000 (86%) for the three months ended March 31, 2005, as compared to the same period in the prior year. This was primarily due to an increase in the management incentive fees paid to the manager in the current quarter.

Other Expenses

Other expenses increased by approximately $32,000 (31%) for the three months ended March 31, 2005, as compared to the same period in prior year. The increase was primarily due to the Company incurring costs related to real estate owned properties and land held for residential development.

Interest Rate/Market/Credit Risk

Management of the Company seeks to manage the interest rate risk, credit risk and market risk of the Company’s portfolio. By originating short-term loans (generally less than three years), management can significantly reduce the risk of changing interest rates. Additionally, management continues to monitor the quality of the loans through the consistent application of internal underwriting guidelines and loss mitigation practices in the Company’s servicing procedures. In this way, management seeks to control credit risk. The majority of the Company’s loans are located in Nevada; however, the Company has also acquired loans in Arizona, Colorado, California and Utah to help diversify the portfolio and reduce the risk of investing in one market.

The following table sets forth the weighted average yield earned on the Company’s assets and the weighted average expense of the Company’s liabilities for the periods shown.


	Annualized
	Three Months Ended
	March 31,
	2005			2004
Interest Income
Mortgage Loans		12.76	%		12.00	%
Cash Accounts		1.64	%		1.08	%

Interest Expense
Lines of Credit		5.75	%		4.00	%
Collateralized Notes		5.89	%		5.48	%
Net Interest Spread		7.19	%		5.26	%

Liquidity and Capital Resources

Management of the Company manages short-term liquidity (defined as funding needs to cover commitments and anticipated uses occurring over the next 12 months) in a number of ways. First, the scheduled interest payments from the mortgage portfolio produce monthly cash flow, which can be used to originate new loans and to pay dividends to stockholders. This source provided approximately $3.5 million during the three months ended March 31, 2005 and $11.9 million during the 12 months ended December 31, 2004, respectively.

Secondly, the payoff and the prepayment of loans provide additional liquidity to the portfolio. Historically, the Company has experienced annual loan payoffs and prepayments of approximately 30% to 35% of its outstanding portfolio. More recently, the Company has experienced more accelerated payoffs due to more loans having shorter maturities. The payoff of mortgage loans provided approximately $25.0 million during the three months ended March 31, 2005.

The following table illustrates the scheduled maturities of mortgage loan investments subsequent to March 31, 2005:


Maturity	Amount
April 1, 2005 to December 31, 2005	$	31,414,263
2006		54,210,647
2007		25,305,245

	$	110,930,155

Under existing mortgage loans, the Company is obligated to fund additional loan amounts totaling $41,000 as of March 31, 2005.

Thirdly, the Company had the ability to issue collateralized notes to provide additional liquidity. Starting May 7, 2002, the Company was permitted to offer collateralized notes with maturities of up to five years. Management has utilized collateralized notes to meet a portion of the Company’s short-term funding needs in the past. However, on November 24, 2004, the Company filed an amendment to its registration effectively deregistering the collateralized note program. As a result, no additional collateralized notes can be publicly offered under the program. The Company expects to be able to begin offering the collateralized notes on a private basis in June 2005.

The following table reflects the maturities of collateralized notes as of March 31, 2005:


Maturity	Amount
April 1, 2005 to December 31, 2005	$	34,143,066

	$	34,143,066

Lastly, the Company had three committed lines of credit with commercial banks to provide another level of liquidity as of March 31, 2005. The Company can borrow $5.5 million, $6.5 million and $7.0 million on three separate lines of credit to provide funding for new mortgage loans, for an aggregate of $19.0 million in available credit. The $5.5 million is available through May 15, 2006. The $6.5 million is available through June 15, 2005. The $7.0 million line is available through October 15, 2005. All lines of credit are collateralized by a secured interest in mortgage loans and require the Company to maintain certain financial covenants. Such covenants include restrictions on (i) any change in business activities from those the Company is presently engaged in, and (ii) any change in executive and management personnel that would result in reduced qualifications and experience compared to present personnel. Such covenants also contain requirements for (i) minimum tangible net worth, (ii) maximum debt to equity ratio, (iii) fixed charge coverage ratio, and (iv) a maximum allowable for lines of credit of $20 million. The Company was in compliance with these covenants as of March 31, 2005.

Management believes that the combination of these sources of capital allows them to manage the short-term liquidity needs of the Company in virtually any business situation and thereby efficiently use the Company’s capital resources.

With respect to the Company’s long-term liquidity, the Company does not have any commitments that require funding during periods beyond the next 12 months. There are no commitments for material capital expenditures or other long-term debt obligations. Management believes the same sources that are relied upon for short-term liquidity needs will be sufficient to fund long-term needs as well.

Risk Management and the Allowance for Loan Losses

The loan portfolio is the Company’s primary asset subject to credit risk. To account for this credit risk, the Company sets aside an allowance or reserve for credit losses through periodic charges to earnings. These charges are shown in the Company’s Statement of Earnings as provision for loan losses. Credit risk is managed and monitored through the use of prudent lending standards, a thorough review of potential borrowers, and an on-going review of payment performance. Asset quality administration, including early identification of problem loans and timely resolution of problems, further enhances the management of credit risk and the minimization of loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. Charged-off loans are subject to periodic review, and specific efforts are taken to achieve maximum recovery of principal and interest.

Management reviews the adequacy of the allowance for loan losses on a quarterly basis to determine whether the allowance is adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Valuation of the adequacy of the allowance for loan losses is based primarily on management’s periodic assessment and grading of the loan portfolio as described below. Additional factors considered by management include the consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, current economic conditions, the fair value of underlying collateral, and other regulatory or legal issues that could affect loan losses.

Loans are initially risk graded prior to loan origination. They are reviewed quarterly and will be re-graded if the circumstances of the loan have materially changed. Numerous factors are considered such as renewal, loans to the same borrower, identified facts demonstrating heightened risk of nonpayment, or if they have become delinquent. The loan review, or grading process attempts to identify and measure problem and watch list loans. Problem loans are those loans with higher than average risk with workout and/or legal action probable within one

year. These loans are reported quarterly to the Company’s Board of Directors for action. Watch list loans are those loans considered to have weakness detected in character, capacity to repay or balance sheet concerns, which prompt management to take corrective action at the earliest opportunity. Problem and watch list loans generally exhibit one or more of the following characteristics:

	•	Adverse financial trends and conditions

	•	Decline in the entire industry

	•	Managerial problems

	•	Customer’s failure to provide financial information or other collateral documentation

	•	Repeated delinquency, overdrafts or renewals

The Loan Review Committee of the Board of Directors reviews every significant problem loan and assessments are performed at least quarterly to confirm the risk rating to that loan, proper accounting and the adequacy of loan loss reserve assigned.

After reviewing the loan portfolio, management will allocate or assign a portion of the allowance for loan loss to groups of loans and to individual loans to cover management’s estimate of probable loss. Allocation is related to the grade of the loan and includes a component resulting from the application of the measurement criteria of SFAS 114 “Accounting by Creditors for Impairment of a Loan” and SFAS 118 “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures.” Management then compares the amounts allocated for probable losses to the current allowance. To the extent that the current allowance is insufficient to cover estimated probable losses, management records an additional provision for credit loss. If the allowance is greater than required at that point in time, the provision is adjusted accordingly.

While management uses available information to recognize losses on loans, future adjustments to the allowance for loan loss may be necessary based on changes in economic conditions and the impact of such changes on the Company’s borrowers.

Consistent with US GAAP and with the methodologies used in estimating the unidentified losses in the loan portfolio, the allowance for loan loss consists of two components as discussed below.

First, the allowance includes a component resulting from the application of the measurement criteria of SFAS 114 and SFAS 118.

The second or “general” component of the allowance for loan loss is intended to absorb inherent losses that may not be provided for by the first component. The primary reason that the first component might not be sufficient to absorb the losses present in the portfolio is due to the inherent limitations to any credit risk grading process. Even for experienced loan reviewers, grading loans and estimating losses involves a significant degree of judgment regarding the present situation with respect to individual loans and the portfolio as a whole. In addition, it is possible that grading and loan review may be performed without the assurance that all relevant facts are available to the reviewer. For example, troubled borrowers may inadvertently or deliberately omit important information from correspondence with the reviewer regarding the borrower’s financial condition and the diminished strength of repayment sources.

Management believes sufficient amounts have been provided in the allowance for loan loss to absorb probable losses in the loan portfolio at March 31, 2005.

Non-Performing Loans and Potential Problem Loans

In accordance with the Company’s revenue recognition policy, the accrual of interest income is discontinued when a loan becomes 90 days past due as to required principal or interest payments. If collectibility is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than recorded as interest income. Accrued interest recorded during the 90-day period remains accrued if management determines that the underlying

collateral supports recovery of principal and accrued interest. At March 31, 2005, the Company did not have any loans that had delinquent principal or interest.

Land Held for Residential Development and Real Estate Owned (Held for Sale)

Land held for residential development and real estate owned (held for sale) consists of real estate acquired through foreclosure and is carried at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated selling costs. Costs related to the improvements to the property are capitalized. Any other costs are expensed.

Inflation

A substantial portion of the Company’s assets and liabilities are financial in nature. As a result, interest rates and other factors drive the Company’s performance far more than inflation does. Changes in interest rates do not necessarily correlate with changes in inflation rates. The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP, while dividends are based on taxable income. In each case, the Company’s Statements of Operations and Balance Sheets are measured with reference to historical cost or fair value without considering inflation.

Forward Looking Statements

When used in this Quarterly Report on Form 10-Q, in future SEC filings, or in other written or oral communications, the words or phrases “will likely result,” “are expected to,” “will continue”, “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 1934 Act, as amended, and as such may involve known and unknown risks, uncertainties and assumptions.

These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, risks relating to: increases in prepayment rates on the mortgage loans; changes in short-term interest rates; the Company’s ability to use borrowings to finance its assets; risks associated with investing in real estate, including changes in business conditions and the general economy; changes in government regulations affecting the Company’s business; and the Company’s ability to maintain its qualification as a REIT for Federal income tax purposes. These risks, uncertainties, and factors could cause the Company’s actual results to differ materially from those projected in any forward-looking statements it makes.

All forward-looking statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Readers are cautioned that the Company’s actual results could differ materially from those set forth in such forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The Company is a party to various financial instruments that are subject to market risk. These instruments include commercial mortgage loans, land loans, nonconforming single-family and small multifamily residential mortgage loans, borrowings under lines of credit and the issuance of Collateralized Notes. These financial instruments involve elements of interest rate risk. The loan portfolio is also subject to real estate market risk.

Management has not entered into, nor do they intend to enter into, any financial instruments for trading or speculative purposes. As the Company has no investments outside of the United States, it is not subject to foreign currency exchange rate risk. Management does not hedge the Company’s exposure to changes in the fair value of loans through the use of derivative instruments. Instead, Management has managed these exposures through careful underwriting and servicing of the Company’s loans. Further, management targets as potential customers borrowers with relatively significant equity value in their property.

For the most part, the Company’s loans provide for either monthly payments of interest only with a payment of principal in full at the end of the loan term, or monthly payments of interest only with principal payments upon lot releases and principal in full at the end of the loan term. Because of the high yield of the Company’s loans, management does not believe that a 100-200 basis point increase or decrease in general interest rates (from those prevailing at March 31, 2005) would have a significant impact on the fair value of the Company’s fixed rate loan portfolio. A significant increase in interest rates could, however, make it more difficult for the borrowers to sell or refinance their respective properties. This could have a material adverse effect on the Company, either through loan defaults or the need to grant extensions of the maturity dates, thereby delaying repayment. Additionally, a real estate market decline in Nevada, Arizona, Colorado, California, or Utah could have a material adverse impact on the Company. If real estate values were to decline, borrowers might find it difficult, if not impossible, to repay some or all of the principal and accrued interest in connection with a sale or refinancing of the underlying properties. A number of factors could lead to a real estate market decline including, but not limited to, a slowdown in the growth of the economy, increasing commercial interest rates and supply and demand factors. It is not possible for management to quantify the potential loss in earnings or cash flows that might result from a real estate market decline.

Management has attempted to mitigate these risk exposures by carefully underwriting and servicing the Company’s loans. The underwriting decision to provide a loan to an applicant is based primarily upon the loan-to-value ratio for the underlying collateral. Thereafter, the Manager uses early intervention, aggressive collection and loss mitigation techniques in the servicing process. While management has attempted to mitigate these risk exposures, there can be no assurance that these efforts will be successful.

ITEM 4. CONTROLS AND PROCEDURES

	(a)	Disclosure Controls and Procedures

		The principal executive officer and principal financial officer of Specialty Trust, Inc. conclude that Specialty Trust, Inc.’s disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as of the end of the period covered by this report.

	(b)	Changes in Internal Control Over Financial Reporting

		There have been no significant changes in Specialty Trust, Inc.’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934 that occurred during Specialty Trust, Inc.’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Specialty Trust, Inc’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

At March 31, 2005, other than litigation by the Company in the ordinary course of business involving foreclosures or other exercise of its rights as a creditor, there were no material pending proceedings to which the Company was a party or of which any of its property was subject.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The Company sold an aggregate of 133,863 shares of common stock to existing stockholders during the first quarter pursuant to its Dividend Reinvestment Plan. The price was $11.00 per share. The sales were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS


Exhibit No.		Document
3.1*		Articles of Incorporation

3.3*		Bylaws

3.3.1*		Amendment to Bylaws

31.1		Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-oxley Act of 2002.

Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement on Form S-11 (Registration No. 333-44860) filed by Specialty Trust, Inc. with the Securities and Exchange Commission on August 30, 2000.

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.


	SPECIALTY TRUST, INC.

Dated: May 13, 2005	By:	/s/ Nello Gonfiantini III

		Nello Gonfiantini III
		Chairman and President

		(Signed in the capacity of (i) duly
		authorized officer of the registrant )

Dated: May 13, 2005	By:	/s/Tanya McCaffery

		Tanya McCaffery
		Interim Chief Financial Officer

		(Signed in the capacity of (i) duly
		authorized officer of the registrant and
		(ii) principal financial officer of the
		registrant)

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SPECIALTY TRUST INC 10-Q