iStar Inc (STAR) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and good day. Welcome to iStar Financial's second-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. With that being said, at this time for our opening remarks and introductions, I would like to turn the conference over to iStar Financial's Vice President of Investor Relations and Marketing, Mr. Andy Backman. Good morning, sir, and please go ahead.

Thank you, Brent, and good morning, everyone. Thank you for joining us today to review iStar Financial's second-quarter 2006 earnings report. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Jay Nydick, President; and Katy Rice, Chief Financial Officer. This morning's call is being webcast on our corporate website at istarfinancial.com in the "Investor Relations" section. There will be a replay of the call beginning at 1:30 PM Eastern Time today. The dial-in for the replay is 1-800-475-6701 with the confirmation code of 834645.

Before I turn the call over to Jay, I need to reminder everyone that statements in this earnings call which are not historical facts may be deemed forward-looking statements. Factors that could cause actual results to differ materially from iStar Financial's expectations are detailed in our SEC reports. Now I'd like to turn the call over to Jay. Jay.

Thanks, Andy, and thank you all for joining us today. I'm pleased to report the second quarter was a strong one for our Company with a noticeable pickup in investments, both in number and in dollar volume and some more good news on the right side of the balance sheet. We continue to pick out the best risk-adjusted return opportunities from the wide range of deal flow we enjoy and are very pleased with both the strong yields and strong credit protections we were able to structure in this quarter's closings. As it has been for some time, the mix was dominated by senior loans with significant equity invested subordinate to us and relatively moderate loan to cost levels. Our growing platform is putting us in front of an increasingly large set of high-quality borrowers and we are finding ways to meet their needs with truly custom tailored financings that differentiate us from much of the other capital in our sector.

I will walk through some of the market dynamics we are focused on in a minute but let me briefly go through the key metrics for the quarter first.

Looking at earnings, we saw a nice pickup from last year's second quarter, with AEPS coming in at $0.91 per share. There's a little bit of noise in that number which Katy will go through, but we did see growing interest income from our loan portfolio primarily driving the earnings this quarter.

On originations, we closed 29 separate transactions and funded just under $850 million on new and previously committed transactions. We also made a number of forward commitments, bringing total commitments for the quarter to over 1.6 billion and giving us some locked-in volume going forward.

With regard to return on equity and spreads, we had another good quarter with spreads solidly in our target zone and return on equity finishing just under 21% despite running at leverage levels that look exceedingly conservative in today's market.

Lastly on credit, our portfolio remains well-positioned with metrics that continue to demonstrate the excellent risk-adjusted returns available from our business model.

So with that brief summary, let me turn it over to Katy now for a full recap of the quarter.

Thanks, Jay. Good morning, everyone. Let's start with our results. As Jay mentioned, our adjusted earnings came in at $0.91 per diluted common share. Our AEPS was higher this quarter due to an increase in interest income from previous quarter's loan originations as well as an increase in other income, a portion of which was generated from a onetime fee associated with a lease termination agreement that we entered into with one of our CTL customers this quarter. I will touch upon this further in a few minutes.

Our net investment income rose to $111.3 million, up over 16% from the second quarter of 2005, which is primarily due to the year-over-year growth in our loan portfolio. As Jay mentioned, our return on equity for the quarter was 20.9%.

Our net finance margin for the quarter was 338 basis points, down from 359 basis points last quarter. As we discussed last quarter, net finance margin does not take into account the timing of investments, repayments and the matched funding of our floating-rate debt throughout the quarter. While we believe this metric will provide you with a more consistent data point that is easier for you to calculate, there will be more quarter-to-quarter variability due to the timing of the various inputs, as was the case this quarter. The primary driver for the decrease in the net finance margin this quarter was not a decline in our spreads but rather the fact that we had a lower ratio of floating-rate assets to floating-rate debt this quarter and LIBOR increased 48 basis points this quarter.

This corresponds to what we're seeing from our match-funding analysis. Last quarter, we had more floating-rate assets than debt and the result was that 100 basis point increase in LIBOR would have increased our earnings by 120 basis points. This quarter we are more evenly match-funded with 100 basis point increase in LIBOR, decreasing our earnings by just 13 basis points. So we expect to see quarterly variability that is simply related to the timing of the inputs and is not indicative of a trend in either our asset or liability spreads. It will most likely be more instructive to look at net finance margin data over longer periods than simply quarter-to-quarter comparisons.

We had a strong quarter from an originations perspective with $1.63 billion in new financing commitments in 29 separate transactions, of which $709 million was funded. 89% of our originations this quarter were first mortgages, participation in first mortgages and senior debt commitments. However, we also closed several fixed-rate mezzanine transactions. We did not close any CTL transactions this quarter. We funded approximately $140 million of prior commitments this quarter. Our repayments and prepayments remained fairly steady, totaling $481 million. And we sold one small non-core CTL asset for approximately $12.8 million. All of this activity resulted in net asset growth of $355 million for the quarter. As we mention frequently, our origination volume and repayment and prepayment activity tend to be somewhat lumpy and can vary from quarter to quarter. This is the primary reason we decided to move away from providing quarterly guidance last year. In fact, we expect prepayments to be higher next quarter than this quarter as some of the prepayments have been delayed until later this year.

Our credit statistics remain solid. Second-quarter interest coverage was 2.1 times and our fixed charge coverage was 1.9 times. Our leverage at the end of the second quarter was 2.2 times debt to book equity plus accumulated depreciation, depletion and loan loss reserves. This is still below our current target, which is in the mid-2 times range.

Our AutoStar platform continues to build its business and client base and now has assets of approximately $700 million. Our TimberStar team is focused on closing and integrating the $1.17 billion International Paper Southwest transaction that was announced last quarter. We expect to close this transaction in late September and have committed between $150 and $200 million in equity, depending on the final structure of the financing.

We continue to work closely with Oak Hill Advisors to source and review transactions that require both corporate and real estate underwriting expertise.

And last but not least, our European team continues to build their business with three transactions totaling $123 million this quarter. These transactions included both first mortgage and mezzanine debt with collateral located in Germany and the UK.

As I mentioned earlier, included in this quarter's earnings was a fee associated with the early termination of a multi-asset CTL, which we acquired as part of our acquisition of TriNet in 1998. This income was partially offset by the write-off of unamortized deferred operating lease income, as well as an impairment charge of $7.6 million related to certain of the assets subject to the lease. Overall, this lease termination resulted in nonrecurring income this quarter of approximately $4 million or about $0.035 per diluted common share. The lease termination impacted several line items of the income statement this quarter, including other income and income from discontinued operations. We'll outline the lease termination in more detail in our 10-Q, which will be filed in the next couple of weeks.

Now let's turn to risk management and credit quality. This quarter, there was a slight improvement in our risk ratings for both the loan and CTL portfolios. Our last dollar loan to value for the entire structured finance portfolio was 64%, so our borrowers continue to have significant equity investments to support our loans.

At the end of the quarter, our nonperforming loans represented 0.32% of our total assets, down from the prior quarter. We removed one loan and one CTL and we added one loan to our watchlist this quarter, resulting in watchlist assets representing 0.16% of total assets.

We believe that the credit quality of our CTL portfolio remains strong and that the impairment we discussed earlier represents an isolated incident rather than a credit trend in the portfolio. In fact, when we look at the risk ratings on our CTL assets, there has been a significant decline with respect to higher risk assets over the past three years. Our CTL portfolio remains well leased at 95.8% with the weighted average remaining lease term of 10.6 years. Lease expirations in 2006 remain small and represent just 1.8% of our annualized total revenue for the second quarter of 2006.

Our activities in the capital markets this quarter included a successful renewal of our unsecured credit facility. We increased the capacity from $1.5 to $2.2 billion. The new facility has a five-year term with pricing based on our current credit rating of LIBOR plus 52.5 basis points, down from LIBOR plus 70 basis points and a 12.5 basis point facility fee, down from 15 basis points. Thirty-five lenders participated in the new line, including seven new participants. The new line also has a multi currency capability, which will make it easier for us to match fund our growing business in Europe.

Now, I'll finish up with our earnings guidance. As you probably saw in the press release this morning, we are increasing our earnings guidance for 2006. We now expect diluted AEPS of $3.45 to $3.55. In addition, we expect diluted earnings per share of $2.50 to $2.60 and continue to believe that our net asset growth for 2006 will be in the $1.5 billion range. In addition to the onetime earnings impact of the lease termination, our current guidance expectations reflect delayed prepayments from the first half of this year, which are now expected to occur in the second half of the year. Further, the yields on our year-to-date originations are generally in line with yields on our repaid assets so far this year and are somewhat higher than our original model assumptions for the year. We continue to expect to fund our growth with a combination of unsecured debt and equity and the timing of our issuances will be based on our pipeline and our projected funding needs. So with that, let me turn it back to Jay.

Thanks, Katy. Okay, let me talk for a moment about some of the opportunities we're seeing and plan to go after in the coming quarters. First as we mentioned in our annual report, we've found the best return opportunities in our business often come about when a sector is under pressure and the contrarian opportunity arises. Experience has taught us many of the best assets in a pressured sector can represent significantly better value propositions than the market recognizes. And iStar has a long and successful history of helping finance those best in class opportunities when they arise. Right now, the housing sector is clearly the industry most under pressure in the real estate world. There's no question in our minds that lending services that have been aggressively investing in this sector for the past several years are now going to have to pull back. This will likely create a window of opportunity that will be highly attractive. We believe iStar is well-positioned to meet the needs of the high-quality borrowers in this sector, who will also be trying to take advantage of that pullback. And in fact, we have already begun to see smart money starting to move cautiously into the sector with a long-term investment horizon that matches up quite well with our own long-term financing horizon. We also like the fact that this window may stay open a little longer than some of the others we have identified in the past. All of which represented great risk-adjusted returns but in many cases where the window ended up closing rather quickly.

Okay before I give away all our secrets, let's go ahead and open it up for questions.

(OPERATOR INSTRUCTIONS). JMP Securities, Don Destino.

Congrats on the quarter. Couple of 5,000 foot questions. First one probably for Katy. Katy, now that we can call you guys an entrenched unsecured investment-grade company, is there any opportunity to talk with the rating agencies about possibly adding a secured debt component to your funding strategy? Can you now maybe segment off some equity and say look we're going to take this amount of capital and use it to subordinate some amount of CDO's and increase leverage and returns that way?

Good question, Don. The model on the unsecured debt is really a corporate leverage model and the agencies are not adverse to some levels of secured debt. I think we find it much more efficient at this point to fund our assets in the unsecured debt market and frankly the costs on an all-in basis with fees and all the rest is actually either comparable or cheaper. So I don't think that would be a strategy that would get us more leverage. I think it would just be demonstrating the liquidity of our assets.

And then second question, as you look at the impetus or what is motivating your repayments and prepayments and you compare them to what's driving your origination, can you talk about what the correlation is there? Are the same things that are driving your originations driving your repayments? Or put another way, is there some reason to think that the origination volumes can stay as healthy as they look when we would suspect eventually, the repayments slow a little bit?

I actually think there is not a lot of correlation, Don. What we are doing on the origination side is really an outgrowth of the platform we've built over the last five years. We're just seeing a lot more deal flow and being able to pick and choose the best deals among that, wherever they may come. And I think the ability to analyze across multiple markets, multiple parts of the capital structure, multiple borrowers is giving us the ability to find things that we clearly view at the time of closing were not any better than market deals. The market is still competitive; the repays are still coming from people recognizing the high quality of many of the projects we are involved, recognizing the high-quality sponsorship. And oftentimes once our call protection breaks, we're pretty vulnerable to getting repaid. In some cases, we're able to retain those deals, but I would say relative to historical numbers, we lose more of our existing borrowers on a refi or a sale than we would like and we're not sure that trend has changed or is going to change in the near term. So I think the repay story continues to be pretty similar over the last couple of years.

It's the origination story that feels really good right now, which is just the shear number of transactions coming through our hands that look interesting and that we can solve the needs of the borrower feels pretty good right now.

Don Fandetti, Citigroup.

Jay, I was interested in your housing comment. Can you talk a little bit more about the timing? Is this an '06 event and also would you just be providing debt financing or is this equity, a little more color there.

Sure, again, I'm going to tiptoe around this a little bit because it is an area that we think there is going to be very interesting opportunities although I don't think they're fully formed in the market yet. What we have seen is a number of lenders get very concentrated. They clearly are going to have to slow or even pull back from those markets. We have seen this pattern before. What it generally means are high-quality assets and high-quality sponsors who are somewhat less high and dry. We saw it most pronounced I guess a couple of years ago in the movie theater industry, where we were financing the best assets in the market at 5, 6, 7 times debt service coverage ratios at pricing that we'll never see again. So what usually happens is when a wave of capital pulls back from the market, it leaves a couple of gems out there. And because we have such low exposure in many of these markets, we can have a lot of freedom to look at opportunities and really pick and choose the ones that represent that best in class opportunity.

That could be standing inventory that somebody needs to borrow against to do something else. It can be projects where there's just great sponsorship in a great location and there is an uncertainty as to timing. They need the flexibility of a long-term lender to stand with them through maybe a cyclical downturn. We've seen this dynamic in our history a number of times and it usually leads to good opportunities. And again, we have the flexibility to be very particular, pick and choose our sponsors and deals very carefully. And we're not isolating a geographic location; we're not isolating a particular type. We're looking at an overall sector and saying capital is flowing out of that sector, let's go find the best opportunities. So it's a theme we have made a ton of money on for our shareholders in the past. We just sense it; you read about it in the paper every day. The capital is going to come out of this sector. Our eyes are wide-open. We're going to find stuff to do.

Ok. Secondly, you're clearly more interested in Europe, given your recent deal flow. Some of the other folks in this space on the private side in particular have been in Europe for a couple years. What makes you so excited now? And can you talk a little bit about the deal flow specifically there?

Sure. We are taking an approach in Europe to really team up with we think are some of the smartest equity investors. That is giving us an opportunity to not only leverage relationships we have here who have gone over there with their equity capital but also find partners over there who have been on the ground who have invested their capital for long periods at a time and what we're doing is leveraging off their expertise much more so than our own. What we bring to the mix again is this custom tailored focus. A reputation I think for integrity and for creativity, a reputation domestically that has transferred over there with a number of our customers. So I think right now, our team over there is very focused on finding people they want to be in business with over the next 10, 20 years and working with them very closely on transactions. Again, not trying to extract the best last dollar risk adjusted return but finding good, solid deals, putting our capital in place, showing them how creative and flexible we can be. And already we've started to see some fruits of those relationships. So we feel pretty good that much of the heavy lifting to build our reputation, to build our infrastructure, to build our balance sheet capabilities was done in the U.S. but a lot of it can translate to Europe very quickly and it's really going to be a customer focused model over there.

Okay. I think -- just lastly in terms of the CTL portfolio, Katy, last quarter and this quarter there was just a little bit of noise. Should we expect these types of items to be flowing through over the next few quarters or are they unpredictable?

Yes and as I mentioned I don't think we think of the lease termination in this quarter as a trend. Really an isolated incident with a tenant that has been in the airline catering industry, which is obviously struggling. So I don't think we view it as a trend at all. In fact as I mentioned, if you look at the risk rating for the CTL portfolio, particularly with respect to what we call the 4's and the 5's, which are the riskier assets, which also include assets that simply have very short lease terms remaining, that number has come down very dramatically over the last three years and has been very stable in the last year or so. So we feel good about the overall credit of the portfolio.

Obviously, we ask you never to hold us to a standard of perfection but we do think we deal with issues that come up in an intelligent way and hopefully in this case, with respect to the impairment in a fairly conservative manner.

Just lastly the sale on the quarter I know was noncore. Any color on the cap rate you can provide?

It was a property up in Massachusetts. We took a $2.3 million gain and I think the cap rate was --

It's actually a pretty good cap rate for the buyer. The issue is the tenant in that will not sign a lease longer than a couple of years. So every couple of years, you're in a lease negotiation. That's not really a great fit with our business model, Don. So, I think the borrower got probably around an 8 cap but that building is going to need some maintenance and CapEx. So when you look on a free cash flow cap rate it is probably not quite as good as the NOI cap rate you saw.

Did you have any follow-ups, Mr. Fandetti?

I am all set.

Wachovia Securities, Jim Shanahan.

I don't want to spend too much time on this topic but I would like to understand this better. Can you talk about this CTL asset? What was the original cost and accumulated depreciation on this asset that you discussed? And just really give me some more color on what the size of the early termination fee was as well as the size of the impairment charge?

Sure. This is an asset that we acquired as part of the TriNet portfolio. TriNet had entered into the lease in 1993; encumbered by 12 properties around the country. I think the total square footage was around [525,000] square feet but these are sort of 35 to 55,000 square foot warehouse type facilities. As I mentioned, the tenant was in airline catering business. Most of these properties were located on or adjacent to airports.

Our book value in the first quarter on these assets was about $48 million. When the tenant terminated their lease, and we had been in lots of discussions with them because obviously that business has been suffering for quite some time, our tenant was actually acquired by a partnership that included a very significant foreign airline at one point several years ago. They continue to make lease payments and we had an open dialogue with them. But I think as the business has continued to deteriorate, they decided to restructure their U.S. business and as part of that restructuring, came to us to terminate their lease. So at that point, we obviously did a thorough analysis of what we were going to do with each of these assets.

The tenant actually wants to utilize some of the assets and we entered into a lease on three of the assets with the existing tenant and we are planning to sell six of the properties. And as we looked at those properties, we had both a third-party appraiser as well as our asset management team really review the operating conditions in those markets. And we determined with those six properties that the aggregate impairment was about $7.6 million.

Let me give you a little bit of background just to give you a sense of how iStar deals with its portfolio. I don't know what TriNet paid for this in 1993 but I know we marked this deal in 1998 somewhere in the $55 million range. At that time, it was a well capitalized credit in a growing industry. A large private equity group had teamed up with the foreign carrier that Katy mentioned to buy the company in a private buyout with billions of dollars behind, in a capital structure from the equity. What is interesting is that the company actually became an investment-grade credit at one point, which was great for us. It then suffered from 9/11 and lost its investment-grade rating. And we were going to negotiate a $20 million letter of credit. So on a $55 million basis, almost 40% of our basis was covered in an LC that we did not have but we negotiated to get.

That's what's protected our basis here. The new owner had put a lot of money into one or two facilities. They will continue to use those facilities but several of the other facilities simply became outdated. I think we structured our protection here perfectly to protect ourselves in the eventuality that did in fact come to play which was they said, look we just don't need these facilities anymore. And I think we continued to have a decent relationship with them despite all the twists and the turns and I think we protected our capital pretty well in an industry that's gone through a lot of changes.

Just to summarize then, there was a $7.6 million impairment which had to do with the third-party -- the determination of the true current market value of the property relative to your carrying value?

Correct.

But then there was a termination fee. Doing the math here, does that mean the termination fee was over $10 million?

Well, it was about -- we cashed the $20 million LC but then we also had straight-line rents that we had to write off. So the net of all that and it's a little bit complicated because there's 12 assets; we will walk you through it in the Q. But the net effect is about a $4 million nonrecurring effective income, which is about $0.035 this quarter.

Does that mean then -- and I'm sorry to spend so much time on it -- does that mean that if we were to observe a sale of these properties in the next couple of quarters that you would anticipate there being no significant gain or loss associated with those assets, the remaining nine assets?

That's correct.

Understood. By the way -- I just had one final question. Was this a watchlist asset at the first quarter and is this the addition to the watchlist now?

It was a watchlist asset in prior quarters and we took it off the watchlist once we resolved the lease termination.

David Boardman, Wachovia.

Recently you did I think it was around a $200 million loan on a condo development in Las Vegas. I was just wondering if you could talk about how you sourced this transaction, maybe mention how you got comfortable with the sponsor there and really why Vegas, why now? And is this sort of type of loan kind of in the same vein of what you've been mentioning earlier regarding the housing market and maybe presenting some good opportunities?

I guess one of the fortunate things is when you have no exposure in a market and a market gets a lot of bad press, you can actually go look at it with clear eyes, no portfolio issues to deal with. We are pretty selective around the country on this type of transaction, obviously even more so in Vegas. But when you've got a project that a borrower has built almost the exact same building, who has the subs tied up who knows his market cold and is putting a lot of capital at risk to protect our position, those tenant opportunities at the kind of spreads we're getting, whether they are in Vegas or whether they are in Minneapolis, we're going to look at; we're going to look at them pretty hard. I think that kind of risk return is hard to replicate in the markets today. As I said, with no other exposure like that in the market, we can pick and choose. There's plenty of opportunities in Vegas. We think this is the best of the ones we saw.

Okay. Regarding nonrefundable deposits, I think I had seen those around 75%. Is that true? How does that work? Are those locked in or when can -- I guess what's the total amount that people have already decided to take a building on their nonrefundable deposits? Could you just go through maybe how that works in Nevada, because I think -- are those state specific?

You need to be very careful about in states like California, all but 3% is refundable. So I don't care how much they have up, you really don't have an irrevocable piece of capital. Vegas is actually good. In Vegas, most of the units have a 20% deposit; unless the borrower fails on performance, that money is locked in. So in this case, it's probably north of 100,000 units has already been put down on -- don't hold me to these numbers -- but something like 85, 90% of the units. So you're talking about the true risk exposure and we typically sensitize transactions like this with some level of fall-out, even at that 20% level. We talk about having a basis in assets that is spectacularly below market. And so we generally view those types of opportunities where the sponsor has all the other characteristics I mentioned. Depending on the price, we think there can be interesting opportunities.

In most markets we only see one or two opportunities that meet our standards. So again unlike most others, I think our portfolio is pretty much has the position right now that if we can find deals like that, we can do them. We don't have any concentration issues. This is still a very, very small part of the book. But boy in the last three months, six months and we expect in the next 6 to 12 months, you'll definitely see capital leave this marketplace. And we will nibble.

Susan Berliner, Bear Stearns.

Yes, I'm sorry to kind of pound on this housing thing. I guess if you can just give a little more color. I mean how big could this get as a percentage of the overall Company? Are you still thinking of the housing market continuing to deteriorate and if you can give any more color how you're kind of looking at various markets. For example, would you entertain something in Florida?

Housing markets are going to get pounded for the next 12 months. You may view that as bad news, Sue; we look at that as good news. Capital moving out of a market like that will leave great opportunities. Now you're going to have to be able to analyze a lot to find the one or two that are really great. So I'm not going to sit here and tell you that every deal that comes in our door over the next 12 months we're going to do. In fact we're going to be very darn selective. But in South Florida, we have almost no exposure. So are we willing to look in South Florida? Sure.

Do we expect to see opportunities in South Florida? Absolutely. Do we expect some of our smartest money borrowers to be moving into South Florida to pick up those pieces? Absolutely. So again, I can just tell you over 15 years, we have seen this dynamic again and again and again. And not only are we not afraid of it but we know that it actually uncovers some of the best opportunities.

Now you've got to have all the things that we have. You've got to be able to move quickly; you've got to have an exceptional team, experienced team. You have got to have relationships with those customers because frankly, they're going to want to know that you're not going to fail on them at the end of the day. And this is not a business that some of the hot money is going to be headed towards.

So I think we've got the right platform for it. I think we have a proven track record of being very careful with our capital in these markets. But boy when you sit and look at the risk-adjusted returns relative to things in some of the other markets in our country, I've got to tell you, it's pretty attractive. How big could it get? I don't know.

Most of our business lines never get to be more than 5 or 10% of our business. Unless it's a really exceptional opportunity, that seems to be kind of where the window closes on us. So, I'm not to going to predict where we're going to end up on that piece. Right now I would say Vegas and South Florida are tiny in our portfolio. We have room to look there. We will look hard.

And we're very sensitive to concentration. And I think again that's something that differentiates us right now is we see a lot of people with lots of concentration in some of the markets that are going to slow for sure and we don't have that concentration. So I think we've got room to be selective. It is going to be a fraction of our business. And again, looking at historical results, we've always found looking back that these are the times you make the best deals.

Jay, could that also -- two other questions. Could that also mean potentially financing land and also would you consider entertaining joint ventures for some of the private builders as they get somewhat distressed?

Private builders, yes. Again, for us, the metrics are pretty simple. How much capital do they have? How strong are they as a borrower? How much of an expert are they in the market? What's their track record of supporting transactions? As I said, I think the market is not going to be pretty for quite a while here. Everybody knows it.

Those people who have a lot of expertise in these markets probably are already [along] those markets and they're going to have a hard to time going to their credit committees and say let's double down. Typically in the financial world that story doesn't work very well.

So, if you don't have exposure and you have been watching and you do have the expertise, I think you're going to get first crack at some pretty attractive deals. Whether those come for the publics or the privates, again, we don't differentiate that as much as we say, do you have the capital, do you have the expertise, do you have the reputation and integrity to be a borrower and want to do business with.

On your first question, just repeat it for me?

In terms of financing land purchases.

Sure. Obviously tougher to do that business. Harder to get your metrics where you can line up and feel really good about it. We will go with high-quality sponsors if they are doing transactions that meet all the things I just mentioned. But obviously that business is a lot harder for us to get our hands around and likely be a smaller proportion of anything we do.

(OPERATOR INSTRUCTIONS). UBS, Shane [Finemore].

I just wondered if you could just make a comment generally about the credit quality of the savings portfolio and how you are seeing that develop over the last 6 to 12 months as things are slowing down?

Yes, Shane, I think with the respect to the overall portfolio, that's kind of the metric that we look at in our risk ratings and what we report in our risk ratings.

There's a bit of mix shift in there, right?

Pardon?

But there is a bit of mix shift there, right?

Yes, actually well the biggest mix shift has been frankly to the first mortgage and senior debt side. As you know, we haven't originated as many CTLs in the last several years because we're not as excited about what we view as the risk reward there. So the big shift in the portfolio over the last several years has really been on the senior debt side. And as you can see, I think our loan to value overall in the portfolio remains very, very low. So we don't anticipate significant issues in terms of credit.

Jim Shanahan, Wachovia Securities.

We recently learned of an interesting yacht marina type of investment that you are involved in. Is it possible with the size of the pleasure craft business that this could be a much larger perhaps a portfolio of investment opportunities for you?

Jim, it can be. In fact, the sponsor has brought us other transactions. We feel like we have done an enormous amount of work on the industry. From some prior transactions we have done, we have actually seen this product type before. This sponsor and his partner are known to a very good borrower of ours. And we were able to check them out quite effectively. The bottom line is we want to get our feet -- no pun intended -- our feet a little more wet on this before we make this into a much larger opportunity. So we have actually turned away some recent opportunities in this sector. There's plenty of stuff to do, but we think it's a product type we just want to get a little more familiar with from inside as opposed to just doing all our work as an outside observer and we'll see how it goes. If it does go well, I think there will be more opportunities.

Is the business that you're turning away, are these investments, these lending opportunities, are they still getting done away from you and are these public or private companies that are getting involved? Or do you happen to know who is?

It's your company.

Good question.

And thank you, Mr. Shanahan. Mr. Backman, there are no further questions. I will turn the call back to you for any closing remarks.

Great, thank you, Brent, and thank you, everybody, for joining us today. If you do have any further questions, please feel free to contact me directly. Brent, would you be so kind as to give the replay instructions?

Indeed I would be happy to and thank you very much, sir. Ladies and gentlemen, Mr. Sugarman is making today's conference available for digitized replay. It's for two full weeks starting at 1.30 Eastern daylight time July the 27th all the way through 11.59 PM August the 10th. To access AT&T's Executive Replay Service please dial 800-475-6701. At the voice prompt, enter today's conference ID of 834645. Internationally, please dial 320- 365-3844 again with the conference ID of 834645. That does conclude our earnings release for this second quarter. Thank you very much for your participation as well as for using AT&T's Executive Teleconference Service. You may now disconnect.