##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2004 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto
Commission file number: 333-86972 SPECIALTY TRUST, INC. (Formerly Specialty Mortgage Trust, Inc.)
  Maryland
(State or other jurisdiction of
Incorporation or organization)
    
    88-0382463
(I.R.S. Employer
Identification No.)6160 Plumas St.
Reno, Nevada
(Address of principal executive offices)
    
    89509
(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 x
    
    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 x
 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)
    
    8,119,092 as of November 1, 2004




---



INDEX PagePART I. FINANCIAL INFORMATIONItem 1
    
    Financial Statements  Specialty Trust, Inc. and Subsidiaries (Unaudited)
    
    
    3Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003
    
    
    3Consolidated Statements of Earnings for the Three Months and Nine Months
Ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Stockholders Equity and Comprehensive
Income for the Nine Months Ended September 30, 2004 and the Year
Ended December 31, 2003
    
    
    5Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition And
Results of Operations
    
    
    15Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4
    
    Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    27Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3
    
    Defaults Upon Senior Securities
    
    
    27Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5
    
    Other Information
    
    
    27Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    29Exhibit 31.1
    
    
    30Exhibit 31.2
    
    
    31Exhibit 32.1
    
    
    32Exhibit 32.2
    
    
    33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS (UNAUDITED) SPECIALTY TRUST, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)September 30, 2004
    
    December 31, 2003ASSETSASSETSCash and Cash Equivalents
    
    $
    15,496,204
    
    
    $
    2,593,407Restricted Cash
    
    
    12,350,631
    
    
    
    Accrued Interest Receivable
    
    
    772,857
    
    
    
    875,474Accounts Receivable
    
    
    67,661
    
    
    
    70,313Land Held for Residential Development
    
    
    1,689,422
    
    
    
    2,377,457Real Estate Owned (held for sale)
    
    
    9,710,688
    
    
    
    7,913,160Mortgage Loans Held for Investment, net of
allowance for loan losses of $1,069,598 and $1,424,256 and
unearned discount of $93,164 and $103,966 at September 30, 2004 and December 31, 2003, respectively
    
    
    81,646,469
    
    
    
    94,081,942Other Assets
    
    
    472,196
    
    
    
    546,941Total Assets
    
    $
    122,206,128
    
    
    $
    108,458,694LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESDividends Payable
    
    $
    2,435,727
    
    
    $
    2,305,444Accounts Payable  Related Party
    
    
    22,578
    
    
    
    119,284Accounts Payable and Accrued Expenses
    
    
    206,582
    
    
    
    326,844Accrued Interest Payable
    
    
    67,809
    
    
    
    56,952Deferred Revenue and Other Liabilities
    
    
    
    
    
    
    113,400Collateralized Notes
    
    
    43,145,467
    
    
    
    31,881,866Collateralized Notes  Related Party
    
    
    
    
    
    
    1,528,413Total Liabilities
    
    $
    45,878,163
    
    
    $
    36,332,203STOCKHOLDERS EQUITYCommon Stock; $0.01 par value; 50,000,000 shares authorized,
8,119,092 and 7,684,813 shares issued and outstanding as of
September 30, 2004 and December 31, 2003, respectively
    
    $
    81,191
    
    
    $
    76,848Additional Paid-in Capital
    
    
    76,246,774
    
    
    
    71,828,838Retained Earnings
    
    
    
    
    
    
    220,805Total Stockholders Equity
    
    
    76,327,965
    
    
    
    72,126,491Total Liabilities and Stockholders Equity
    
    $
    122,206,128
    
    
    $
    108,458,694
 The accompanying notes are an integral part of these unaudited statements. 3




---



##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
 Three Months Ended
    
    Nine Months EndedSeptember
    
    September
    
    September 30,
    
    September 30,30, 2004
    
    30, 2003
    
    2004
    
    2003RevenueInterest Income:Mortgage Loans
    
    $
    3,213,630
    
    
    $
    2,905,338
    
    
    $
    8,611,438
    
    
    $
    8,651,667Cash Accounts
    
    
    55,313
    
    
    
    2
    
    
    
    119,467
    
    
    
    613,268,943
    
    
    
    2,905,340
    
    
    
    8,730,905
    
    
    
    8,651,728Interest Expense:Lines of Credit
    
    
    
    
    
    
    77,877
    
    
    
    3,513
    
    
    
    337,280Notes Payable
    
    
    
    
    
    
    475
    
    
    
    
    
    
    
    3,371Collateralized Notes
    
    
    549,230
    
    
    
    373,128
    
    
    
    1,533,888
    
    
    
    956,369Total Interest Expense
    
    
    549,230
    
    
    
    451,480
    
    
    
    1,537,401
    
    
    
    1,297,020Net Interest Income
    
    
    2,719,713
    
    
    
    2,453,860
    
    
    
    7,193,504
    
    
    
    7,354,708(Reversal of Provision)/Provision for Loan Losses, net
    
    
    (176,254
    )
    
    
    (359,523
    )
    
    
    (94,658
    )
    
    
    123,388Net Interest Income After
Provision for Loan Losses
    
    
    2,895,967
    
    
    
    2,813,383
    
    
    
    7,288,162
    
    
    
    7,231,320Gain(Loss) on Sale of Real Estate Owned
    
    
    319,812
    
    
    
    89,712
    
    
    
    319,765
    
    
    
    (118,604
    )Other Income(Loss)
    
    
    460
    
    
    
    (36,853
    )
    
    
    68,560
    
    
    
    15,391Net Revenues
    
    
    3,216,239
    
    
    
    2,866,242
    
    
    
    7,676,487
    
    
    
    7,128,107ExpensesGeneral and Administrative
    
    
    215,890
    
    
    
    137,440
    
    
    
    506,203
    
    
    
    393,166Manager and Directors Fees
    
    
    159,518
    
    
    
    108,395
    
    
    
    495,983
    
    
    
    372,679Other (Recoveries)/Expenses
    
    
    (79,463
    )
    
    
    174,058
    
    
    
    130,003
    
    
    
    457,500Total Expenses
    
    
    295,945
    
    
    
    419,893
    
    
    
    1,132,189
    
    
    
    1,223,345NET EARNINGS
    
    $
    2,920,294
    
    
    $
    2,446,349
    
    
    $
    6,544,298
    
    
    $
    5,904,762Basic Earnings per Share
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.83
    
    
    $
    0.80Diluted Earning per Share
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.83
    
    
    $
    0.79
 The accompanying notes are an integral part of these unaudited statements. 4




---



##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (UNAUDITED)
 Common Stock
    
    AdditionalPaid-in
    
    RetainedShares
    
    Amount
    
    Capital
    
    Earnings
    
    TotalBalance, January 1, 2003
    
    
    7,183,004
    
    
    $
    71,830
    
    
    $
    67,447,861
    
    
    $
    
    
    
    $
    67,519,691Net Earnings and Comprehensive
Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,252,745
    
    
    
    8,252,745Stock Options Exercised
    
    
    19,503
    
    
    
    195
    
    
    
    47,318
    
    
    
    
    
    
    
    47,513Dividends Reinvested on
Common Stock
    
    
    476,306
    
    
    
    4,763
    
    
    
    5,234,600
    
    
    
    
    
    
    
    5,239,363Stock Granted
    
    
    6,000
    
    
    
    60
    
    
    
    65,940
    
    
    
    
    
    
    
    66,000Dividends Declared on
Common Stock
    
    
    
    
    
    
    
    
    
    
    (966,881
    )
    
    
    (8,031,940
    )
    
    
    (8,998,821
    )Balance, December 31, 2003
    
    
    7,684,813
    
    
    $
    76,848
    
    
    $
    71,828,838
    
    
    $
    220,805
    
    
    $
    72,126,491Net Earnings and Comprehensive
Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,544,298
    
    
    
    6,544,298Stock Options Exercised
    
    
    24,293
    
    
    
    243
    
    
    
    132,091
    
    
    
    
    
    
    
    132,334Dividends
Reinvested on Common Stock
    
    
    403,986
    
    
    
    4,040
    
    
    
    4,439,806
    
    
    
    
    
    
    
    4,443,846Stock Granted
    
    
    6,000
    
    
    
    60
    
    
    
    65,940
    
    
    
    
    
    
    
    66,000Dividends Declared on
Common Stock
    
    
    
    
    
    
    
    
    
    
    (704,468
    )
    
    
    (6,280,536
    )
    
    
    (6,985,004
    )Balance, September 30, 2004
    
    
    8,119,092
    
    
    $
    81,191
    
    
    $
    75,762,207
    
    
    $
    484,567
    
    
    $
    76,327,965
 The accompanying notes are an integral part of these unaudited statements. 5




---



##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003Cash flows from operating activities:Net Earnings
    
    $
    6,544,298
    
    
    $
    5,904,762Adjustment to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:Amortization
    
    
    60,424
    
    
    
    40,030(Reversal of Provision)/Provision for Loan Losses, net
    
    
    (94,658
    )
    
    
    123,388Amortization of Loan Fees on Mortgage Loans
    
    
    (67,052
    )
    
    
    118,604Gain on Sale of Real Estate Owned
    
    
    (216,912
    )
    
    
    (67,450
    )Non-cash Stock Compensation
    
    
    66,000
    
    
    
    49,500Changes in Assets and Liabilities:Accrued Interest Receivable
    
    
    102,617
    
    
    
    (184,374
    )Accounts Receivable

    
    
    2,652
    
    
    
    (24,481
    )Other Assets
    
    
    14,320
    
    
    
    8,794Deferred Loan Points
    
    
    
    
    
    
    75,000Accounts Payable (including Related Party) and Accrued Interest Payable
    
    
    (206,111
    )
    
    
    19,871Deferred Revenue and Other Liabilities
    
    
    (113,400
    )
    
    
    17,500Net Cash Provided by Operating activities
    
    
    6,092,178
    
    
    
    6,081,144Cash flows from investing activities:Investment in Real Estate Owned
    
    
    (1,020,387
    )
    
    
    (105,120
    )Proceeds from Sale of Real Estate Owned
    
    
    1,558,760
    
    
    
    3,142,739Investment in Land Held for Residential Development
    
    
    (51,677
    )
    
    
    (166,090
    )Proceeds from Sale of Land Held for Residential Development
    
    
    739,712
    
    
    
    191,920Purchase of Mortgage Loans Held for Investment
    
    
    (67,307,246
    )
    
    
    (60,475,229
    )Principal Repayments of Mortgage Loans Held for Investment
    
    
    77,785,441
    
    
    
    47,560,743Net Cash Used in Investing Activities
    
    
    11,704,603
    
    
    
    (9,851,037
    )Cash flows from financing activities:Proceeds from Common Stock Options Exercised
    
    
    132,334
    
    
    
    47,008Cash Dividends Paid
    
    
    (2,410,875
    )
    
    
    (2,709,623
    )Net Payments on Lines of Credit
    
    
    
    
    
    
    (3,371,000
    )Proceeds on Collateralized Notes
    
    
    35,751,000
    
    
    
    13,755,235Interest Reinvested on Collateralized Notes
    
    
    1,120,258
    
    
    
    785,003Debt Issue Costs
    
    
    
    
    
    
    (65,185
    )Principal Payments on Collateralized Notes
    
    
    (27,136,070
    )
    
    
    (4,720,549
    )Restricted Cash
    
    
    (12,350,631
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    (4,893,984
    )
    
    
    3,720,889NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    12,902,797
    
    
    
    (49,004
    )Cash and Cash Equivalents at Beginning of Period
    
    
    2,593,407
    
    
    
    92,684Cash and Cash Equivalents at End of Period
    
    $
    15,496,204
    
    
    $
    43,680Supplemental Cash Flow Information:Cash Paid for Interest
    
    $
    1,526,544
    
    
    $
    1,266,029Supplemental Disclosure of Non-Cash Investing and Financing Activities:Dividends Reinvested for Common Stock
    
    $
    4,443,846
    
    
    $
    3,870,572Foreclosure of Property
    
    $
    2,118,989
    
    
    $
    10,224,992Charge off
of Allowance for Loan Losses
    
    $
    260,000
    
    
    $
    416,457Note Received for Sale of Foreclosed Property
    
    
    
    
    
    $
    125,000
 The accompanying notes are an integral part of these unaudited statements. 6




---



##### Table of Contents



SPECIALTY TRUST, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2004
(Unaudited)
 NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION Specialty Trust, Inc., formerly Specialty Mortgage Trust, 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 nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004 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, 2003. The unaudited consolidated financial statements for the nine months ended
September 30, 2004 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. The prior period financial statements contain certain reclassifications to
conform to the current period classifications. These reclassifications had no
effect on net earnings. 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. 7




---



##### Table of Contents



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 on 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. 8




---



##### Table of Contents



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 other. Substantially all mortgage loan products have
similar stated interest rates ranging from 12.0% to 13.5%. Due to the similar
nature of the effective interest rates among the four loan products, the
Company does not compile or report revenues by product type. 9




---



##### Table of Contents



Pursuant to existing loan agreements, the Company is committed to fund
additional loan advances totaling $807,687 as of September 30, 2004. 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 September 30, 2004
and December 31, 2003. The following table presents a roll forward of the allowance for loan losses: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    
    1,505,852
    
    
    
    2,132,030
    
    
    
    1,424,256
    
    
    
    1,815,576(Reversal of
Provision)/Provision for Loan
Losses
    
    
    (176,254
    )
    
    
    (359,523
    )
    
    
    (94,658
    )
    
    
    123,388Charge Offs
    
    
    (260,000
    )
    
    
    (250,000
    )
    
    
    (260,000
    )
    
    
    (416,457
    )Balance at end of period
    
    
    1,069,598
    
    
    
    1,522,507
    
    
    
    1,069,598
    
    
    
    1,522,507
 NOTE 3. DELINQUENT LOANS At September 30, 2004, the Company had no loans that were past due for
principal or interest. The Company also does not have any delinquent accrued
interest as of September 30, 2004. At December 31, 2003, the Company had three loans that were 153 to 364 days
past due, totaling approximately $6.6 million in principal and accrued
interest. The Company accrued interest on these three loans until the loans
were 90 days past due; however, in accordance with the Companys revenue
recognition policy, the Company ceased accruing additional interest income when
these loans became 90 days past due. Accrued interest recorded during the
90-day period remains accrued if management determines that the underlying
collateral supports recovery of the Notes, principal and accrued interest. The
accrued interest on one delinquent loan was reversed because management
determined that the underlying collateral did not support recovery of the
interest. The accrued interest recorded on the other delinquent loans at
December 31, 2003 was approximately $91,000. Management has evaluated the
collectability of these delinquent loans in light of the types and dollar
amounts of the loans, adverse situations that may affect the borrowers ability
to repay, prevailing economic conditions and the underlying collateral securing
the loan and determined that the amounts are collectible. 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. 10




---



##### Table of Contents



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 reduces land held for residential development
based on all cash proceeds received under the cost recovery method. After the
investment has been fully recovered, SAC will recognize revenue 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. Five homes were sold during the quarter ended
September 30, 2004. The following table provides a roll-forward of this
account: Balance at December 31, 2003
    
    $
    2,377,457Capitalized Costs
    
    
    51,677Net proceeds from sale of homes
    
    
    (739,712
    )Balance at September 30, 2004
    
    $
    1,689,422
 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. NOTE 5. REAL ESTATE OWNED (HELD FOR SALE) As of September 30, 2004 and December 31, 2003, real estate owned totaled $9.7
million and $7.9 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.  
    
    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.  
    
    A commercial property located in Las Vegas, Nevada acquired in August
of 2002 with a loan balance of $950,000. This property was sold in
July, 2004.  
    
    A personal residence in Castle Rock, Colorado acquired in July of
2004 with a loan balance of $2.3 million. At September 30, 2004, the Company had write-downs of $260,000 related to the
Castle Rock, Colorado property in the net balance of real estate owned. At
December 31, 2003, the Company had write-downs of $250,000 related to the
Mesquite, Nevada properties in the net balance of real estate owned. 11




---



##### Table of Contents



NOTE 6. QUALIFIED REIT ASSET 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 nine months ended September 30, 2004, 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.
As of September 30, 2004 total restricted cash of approximately $12.4 million
was pledged to the trustee. The outstanding collateralized notes have maturities ranging from 3 months to
five years from the date of issue and bear a fixed rate of interest ranging
from 2.25% to 7.50% at September 30, 2004 and December 31, 2003. The
effective yield of collateralized notes outstanding at September 30, 2004 and
December 31, 2003 was 5.77% and 5.58%, respectively. At September 30, 2004 and
December 31, 2003, the collateralized notes were secured by $46.3 million and
$52.0 million respectively, of mortgage loans pledged as collateral. 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, 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 an annualized return to the Company equal to 12%. 12




---



##### Table of Contents



Fees earned by the Manager for the three months and nine months ended September
30, 2004 and 2003, are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Loan Origination and Extension Fees
    
    $
    904,873
    
    
    $
    839,120
    
    
    $
    1,758,860
    
    
    $
    1,864,070Loan Servicing Fees
    
    
    135,392
    
    
    
    106,121
    
    
    
    349,509
    
    
    
    325,416Late Payment Charges
    
    
    42,934
    
    
    
    1,610
    
    
    
    50,288
    
    
    
    11,165Subtotal
    
    
    1,083,199
    
    
    
    946,851
    
    
    
    2,158,657
    
    
    
    2,200,651Base Management Fee
    
    
    126,144
    
    
    
    
    
    
    
    375,216
    
    
    
    Incentive Compensation Bonus
    
    
    
    
    
    
    83,417
    
    
    
    
    
    
    
    273,692Total Compensation
    
    $
    1,209,343
    
    
    $
    1,030,268
    
    
    $
    2,533,873
    
    
    $
    2,474,343
 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. The Managers incentive compensation is
calculated in accordance with the Agreement and is recorded in the line item,
Manager and Directors Fees, in the Companys financial statements. There are several related parties who previously held Collateralized Notes
issued by the Company. As of December 31, 2003, they owned $1,528,413 in
Collateralized Notes, which represents approximately 4.6% of the total
Collateralized Note balance. As of September 30, 2004, there were no
Collateralized Notes held by related parties. 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 September 30, 2004 and December 31, 2003, 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 nine months ended September 30, 2004
and 2003 were approximately $165,000 and $166,000 respectively. 13




---



##### Table of Contents



NOTE 9. EARNINGS PER SHARE The following is a reconciliation of earnings per share (in thousands, except
per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic:Net earnings applicable to common stock
    
    $
    2,920
    
    
    $
    2,446
    
    
    $
    6,544
    
    
    $
    5,905Weighted average number of shares  basic
    
    
    8,095
    
    
    
    7,556
    
    
    
    7,838
    
    
    
    7,404Earnings per share  basic
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.83
    
    
    $
    0.80Diluted:Net earnings applicable to diluted earnings per share
    
    $
    2,920
    
    
    $
    2,446
    
    
    $
    6.544
    
    
    $
    5,905Weighted average number of shares  basic
    
    
    8,095
    
    
    
    7,556
    
    
    
    7,838
    
    
    
    7,404Weighted average shares of dilutive stock
options using average period stock price
under the treasury stock method
    
    
    10
    
    
    
    25
    
    
    
    10
    
    
    
    25Weighted average number of shares  diluted
    
    
    8,105
    
    
    
    7,581
    
    
    
    7,848
    
    
    
    7,429Earnings per share  diluted
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.83
    
    
    $
    0.79
 NOTE 10- SUBSEQUENT EVENT Subsequent to September 30, 2004, the Company funded additional mortgage loans
in sufficient amounts to collateralize the Collateralized Notes per required
limits. Therefore, the amounts that were included in Restricted Cash at
September 30, 2004 and pledged to the trustee of the note program were released
from restriction. 14




---



##### Table of Contents



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 Third Quarter 2004 and Year End 2003 At September 30, 2004, the Company owned approximately $82.8 million of
mortgage loans, approximately $1.7 million of land held for residential
development and $9.7 million in real estate owned and held for sale. Total
assets were approximately $122.2 million. These assets are financed with
approximately $43.1 million of recourse short-term debt, and approximately
$76.3 million of equity. As of September 30, 2004, the Companys equity-to-assets ratio was 62.5%, the
debt-to-equity ratio was 56.5% and the annualized return on equity for the nine
months ended September 30, 2004 was 15.7%. 15




---



##### Table of Contents



At December 31, 2003, the Company owned approximately $95.6 million of mortgage
loans, approximately
$2.4 million of land held for residential development and $7.9 million of real
estate owned and held for sale. Total assets were approximately $108.5
million. The assets were financed with approximately $33.4 million in
collateralized notes, and approximately $72.1 million of common equity. As of December 31, 2003, the Companys equity-to-assets ratio was 66.5%, the
debt-to-equity ratio was 46.3%, and the average return on equity for the year
ended December 31, 2003 was 11.4%. 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 third quarter of 2004, 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 16




---



##### Table of Contents



are based on the best information available at the time of analysis. 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. 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 increased by approximately $25.2
million (974%) as of September 30, 2004, compared to December 31, 2003. The
timing of loan fundings and the timing of debt or equity issues generally
determine the amount of cash held by the Company. Our goal is to keep cash
invested in loans or other financial instruments and therefore to keep cash
balances low whenever possible. As of September 30, 2004, approximately $12.4
million of cash was pledged as collateral for Collateralized Notes to the
trustee of our Collateralized Note program. Accrued Interest Receivable Accrued interest receivable decreased by approximately $103,000 (12%) as of
September 30, 2004 compared to December 31, 2003 primarily as the result of an
overall decrease in the loan portfolio. Land Held for Residential Development Land held for residential development decreased by approximately $688,000 (29%)
as of September 30, 2004 compared to December 31, 2003 as a result of increased
home sales. 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 17




---



##### Table of Contents



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. Forty one completed
homes were sold during the nine months ended September 30, 2004. The following
table is a roll-forward of this account: Balance at December 31, 2003
    
    $
    2,377,457Capitalized costs
    
    
    51,677Net proceeds from sale of homes
    
    
    (739,712
    )Balance at September 30, 2004
    
    $
    1,689,422
 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 increased by approximately $1.8 million (23%) as of September
30, 2004 compared to December 31, 2003. This increase was due primarily to the
acquisition of an additional property in Castle Rock, Colorado through
foreclosure. Mortgage Loans Mortgage loans held for investment net of allowance for loan losses and
unearned discounts decreased by approximately $12.4 million (13%) as of
September 30, 2004 compared to December 31, 2003. The allowance for loan
losses was decreased by approximately $355,000 during the quarter ended
September 30, 2004 due to the charge off of a specific reserve to real estate
owned and a decrease in the average risk rating for the remaining portfolio. The Companys mortgage loan portfolio has declined from its level at year-end
2003 due to paydowns and increased competition for new loan originations. The
generally high level of liquidity in the banking system has resulted in
competition from commercial banks and other financial institutions that
typically do not focus on the types of mortgage loans acquired by the Company.
The Company has elected to maintain its underwriting standards and threshold
return requirements rather than making concessions solely to support the level
of the loan portfolio. The Company cannot predict when the present market
conditions may improve. Other Assets Other assets decreased by approximately $75,000 (14%) as of September 30, 2004
compared to December 31, 2003 primarily due to the amortization of debt
offering costs. Liabilities Dividends Payable Dividends payable increased by approximately $130,000 (6%) as of September 30,
2004 compared to December 31, 2003 due primarily to a corresponding increase in
the number of shares outstanding. Accounts Payable and Accrued Expenses and Accounts Payable  Related Party Accounts payable and accrued expenses and accounts payable related party
decreased by approximately $217,000 (49%) as of September 30, 2004 compared to
December 31, 2003. This decrease was due primarily to the 18




---



##### Table of Contents



management fee payable to the Manager being higher, as of December 31, 2003
than as of September 30, 2004. In addition, professional fees related to the
preparation of Form 10K were accrued as of December 31, 2003 and paid during
2004. Deferred Revenue and Other Liabilities Deferred revenue and other liabilities decreased by approximately $113,000
(100%) due primarily to the recognition of a deferred gain upon payoff of the
related mortgage loan. Collateralized Notes and Collateralized Notes  Related Party Collateralized notes increased by approximately $9.7 million (29%) as of
September 30, 2004 compared to December 31, 2003 due to increased issuance of
such notes caused by increased demand. Demand increased primarily because the
stated interest rates of the notes are significantly higher than the average
rates paid by banks. Our Collateralized Notes were authorized for public sale
on January 19, 2001. 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
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2004Over/Under
    
    Over/UnderSeptember 30, 2003
    
    September 30, 2003Net
    
    
    
    
    
    
    
    
    
    NetChange
    
    Rate
    
    Volume
    
    Change
    
    Rate
    
    VolumeInterest IncomeMortgage Loans
    
    $
    308,292
    
    
    $
    839,543
    
    
    $
    (531,251
    )
    
    $
    (40,229
    )
    
    $
    1,107,864
    
    
    $
    (1,148,093
    )Cash Accounts
    
    
    55,311
    
    
    
    40
    
    
    
    55,271
    
    
    
    119,407
    
    
    
    30
    
    
    
    119,377Total
    
    
    363,603
    
    
    
    839,583
    
    
    
    (475,980
    )
    
    
    79,178
    
    
    
    1,107,894
    
    
    
    (1,028,716
    )Interest ExpenseLine of Credit
    
    
    (77,877
    )
    
    
    
    
    
    
    (77,877
    )
    
    
    (333,767
    )
    
    
    
    
    
    
    (333,767
    )Trade Payable
    
    
    (475
    )
    
    
    
    
    
    
    (475
    )
    
    
    (3,371
    )
    
    
    
    
    
    
    (3,371
    )Collateralized Notes
    
    
    176,102
    
    
    
    25,092
    
    
    
    151,010
    
    
    
    577,519
    
    
    
    42,906
    
    
    
    534,613Total
    
    
    97,750
    
    
    
    25,092
    
    
    
    72,658
    
    
    
    240,381
    
    
    
    42,906
    
    
    
    197,475Change in net
interest income
    
    $
    265,853
    
    
    $
    814,491
    
    
    $
    (548,638
    )
    
    $
    (161,203
    )
    
    $
    1,064,988
    
    
    $
    (1,226,191
    )
 The Companys operating results include all of the reported income of its
mortgage finance operation. A comparison of the nine months and the
three months ended September 30,
2004 to the nine months and the three months ended September 30, 2003 follows: Interest Income, Mortgage Assets and Interest Income Cash Accounts Interest income, mortgage assets decreased by less than 1% for the nine months
ended September 30, 2004, as compared to the same period in prior year, due
primarily to the offset of a reduction in the overall loan portfolio and the
receipt of a substantial amount of delinquent interest. The portion of the
interest that was more than 90 days delinquent was approximately $590,000 and
was not previously accrued on the books of the Company in accordance with the
Companys revenue recognition policy. Interest income, mortgage assets
increased by approximately $308,000 (11%) for the three months ended September 30,
2004, as compared to the same period in prior year, due primarily to the
receipt of a substantial amount of delinquent interest as discussed above. 19




---



##### Table of Contents



Interest income, cash
accounts increased by approximately $55,000 and $119,000
for the three and nine months ended September 30, 2004, respectively, due
primarily to the increase of cash balances on hand as of September 30, 2004
over the prior period. Interest Expense  Lines of Credit Interest expense on lines of credit decreased by approximately $78,000 (100%)
and $334,000 (99%) for the three and nine months ended September 30, 2004,
respectively, as compared to the same period in prior year, primarily due to
the Company not utilizing its lines of credit during 2004. Interest Expense  Collateralized Notes Interest expense on collateralized notes increased by approximately $176,000
(47%) and $578,000 (60%) for the three and nine months ended September 30,
2004, respectively, as compared to the same period in prior year. The increase
was primarily due to the additional issuance of collateralized notes. Reversal of Provision and Provision for Loan Losses (Reversal of provision)/provision for loan losses decreased by approximately
$183,000 (51%) and $218,000 (177%) for the three and nine months ended
September 30, 2004, as compared to the same period last year. This decrease was
primarily due to a decline in the required allowance for loan losses based on
the Companys current mortgage portfolio and risk rating process. Gain/(Loss) on Sale of Real Estate Owned Gain/(Loss) on sale of real estate owned increased by approximately $230,000
(256%) and $438,000 (370%) for the three and nine months ended September 30,
2004, respectively, as compared to the same period last year. This increase was
primarily due to the sale of property in the current year resulting in a gain
while the sale of property in the prior year resulted in a loss on sale. The
company also recognized a gain during the current quarter that was previously
deferred as the gain recognition met Statement of Financial
Accounting Standards No. 66
(SFAS 66) requirements. General and Administrative General and administrative increased by approximately $78,000 (57%) and
$113,000 (29%) for the three and nine months ended September 30, 2004,
respectively, as compared to the same period last year. This increase was
primarily due to increased professional fees related to the Post Effective
Amendment No. 2 to the S-11 filed during the current quarter. Manager and Directors Fees Manager and directors fees increased by approximately $51,000 (47%) and
$123,000 (33%) for the three and nine months ended September 30, 2004,
respectively, as compared to the same period in the prior year. This was
primarily due to an increase in the management fees paid to the manager in the
current year. In the prior year, the management fee consisted of incentive
compensation and in the current year the management fee consisted of the base
management fee with no incentive compensation. Other (Recoveries)/Expenses Other (recoveries)/expenses decreased by approximately $254,000 (146%) and
$327,000 (72%) for the three and nine months ended September 30, 2004,
respectively, as compared to the same period in prior year. The decrease was
primarily due to the reimbursement of foreclosure costs and related expenses
upon sale of property through bankruptcy proceedings related to one of the
companys mortgage loans. 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 20




---



##### Table of Contents



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. 21




---



##### Table of Contents



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
    
    AnnualizedThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest IncomeMortgage Loans
    
    
    15.32
    %
    
    
    11.56
    %
    
    
    13.09
    %
    
    
    11.51
    %Cash Accounts
    
    
    .96
    %
    
    
    .20
    %
    
    
    1.01
    %
    
    
    .73
    %Interest ExpenseLines of Credit
    
    
    0.00
    %
    
    
    4.24
    %
    
    
    2.83
    %
    
    
    4.24
    %Notes Payable
    
    
    0.00
    %
    
    
    6.01
    %
    
    
    0.00
    %
    
    
    4.34
    %Collateralized Notes
    
    
    5.47
    %
    
    
    5.12
    %
    
    
    5.53
    %
    
    
    5.29
    %Net Interest Spread
    
    
    6.75
    %
    
    
    6.64
    %
    
    
    5.70
    %
    
    
    6.55
    %
 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 $8.7 million during the nine months ended September 30, 2004 and
$11.7 million during the 12 months ended December 31, 2003, 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. Since
the portfolios loan terms are usually one to three years, the rate of
principal payoffs is significant. With a current portfolio of approximately
$82.8 million, management would anticipate annual cash flows from principal pay
downs of approximately $27.6 million. Based on the timing of the loan maturity,
the actual cash flow may differ substantially. As the Company continues to
issue Collateralized Notes, the loan portfolio will be able to be increased as
will the cash flow from principal pay downs. Typically, these funds are used to
originate new mortgage loans, but there are no restrictions on the use of the
funds. The following table illustrates the scheduled maturities of mortgage loan
investments subsequent to September 30, 2004: Maturity
    
    AmountOctober 1, 2004 to December 31, 2004
    
    $
    15,266,7032005
    
    
    24,790,5132006
    
    
    42,752,015$
    82,809,231
 Under existing mortgage loans, the Company is obligated to fund additional loan
amounts totaling $807,687 as of September 30, 2004. Thirdly, the Company has the ability to issue collateralized notes to provide
additional liquidity. Starting May 7, 2002, as a result of the 2002
Registration, the Company was permitted to offer collateralized notes with
maturities of up to five years. Although not a committed source, management
may utilize collateralized notes to meet a portion of the Companys short-term
funding needs under normal market conditions. 22




---



##### Table of Contents



The following table reflects the maturities of collateralized notes as of
September 30, 2004: Maturity
    
    AmountOctober 1, 2004 to December 31, 2004
    
    $
    9,729,5842005
    
    
    26,207,0412006
    
    
    4,941,7702007
    
    
    340,6792008
    
    
    952,901Thereafter
    
    
    973,492$
    43,145,467
 Lastly, the Company had two committed lines of credit with commercial banks to
provide another level of liquidity as of September 30, 2004. The Company can
borrow $6.5 million and $7.0 million on two separate lines of credit to provide
funding for new mortgage loans, for an aggregate of $13.5 million in available
credit. 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 September 30, 2004. 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 construction loans in
the Companys portfolio and collateralized notes with maturities greater than
one year are the only 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 23




---



##### Table of Contents



collateral, and other regulatory or legal issues that could affect loan losses. Loans are initially risk graded prior to loan origination. They are re-graded
quarterly. 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, provision expense 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 September 30,
2004. 24




---



##### Table of Contents



Non-Performing Loans, Potential Problem Loans, and Other Real Estate Per the Companys revenue recognition policy, the accrual of interest income is
discontinued when a loan becomes 90 days past due as to principal or interest.
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 September 30, 2004, 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. 25




---



##### Table of Contents



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
September 30, 2004) 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. 26




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES  (a)
    
    Disclosure Controls and ProceduresThe undersigned 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
ReportingThere 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. The rest of this page is intentionally left blank 27




---



##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS.  At September 30, 2004, 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 did not repurchase any of its equity securities
during the third quarter of 2004, and has not adopted any plan for
such repurchases. The Company sold an aggregate of 140,746 shares of common stock to
existing stockholders during the third quarter pursuant to its
Dividend Reinvestment Plan. The price was $11.00 per share. A total
of 3,763 stock options were exercised during the quarter. 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 AND REPORTS ON FORM 8-K.  (a)
    
    Exhibits Exhibit No.
    
    Document3.1*
    
    Articles of Incorporation3.3*
    
    Bylaws3.3.1*
    
    Amendment to Bylaws31.1
    
    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.  (b)
    
    Reports on Form 8-K  No reports on Form 8-K have been filed during the
third quarter of 2004. 28




---



##### Table of Contents



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: November 15, 2004
    
    By:
    
    /s/ Nello Gonfiantini IIINello Gonfiantini IIIChairman, President, and Secretary(Signed in the capacity of (i) duly
authorized officer of the registrant)Dated: November 15, 2004
    
    By:
    
    /s/ Tanya McCafferyTanya McCafferyInterim Chief Financial Officer(Signed in the capacity of (i) duly
authorized officer of the registrant and
(ii) principal financial officer of the
registrant)
 29