iStar Inc (STAR) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Good morning and good afternoon. Welcome to today's conference call, iStar Financial's first-quarter 2007 earnings conference. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to iStar Financial's Vice President of Investor Relations and Marketing, Mr. Andrew Backman. Good morning, Mr. Backman, and please go ahead, sir.

Thank you, Brent, and good morning to everyone. Thanks for joining us today to review iStar Financial's first-quarter 2007 earnings report.

With me today are Jay Sugarman, Chairman and Chief Executive Officer; Jay Nydick, our President; Tim O'Connor, Chief Operating Officer; and Katy Rice, our Chief Financial Officer.

This morning's call is being Web-cast on our Web site 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 a confirmation code of 870635.

Before I turn the call over to Jay, I need to remind 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 would like to turn the call over to iStar Financial's Chairman and CEO, Jay Sugarman. Jay?

Thanks, Andy. Welcome, everybody. Let me start with an overview of the first quarter. Then, after Katy gives you the financial details, I will come back to discuss our view of the overall market, a couple of market related topics and some information on one of our new initiatives.

First on the earnings front, we had a solid first quarter. Adjusted earnings came in at $119 million or $0.93 per share and revenues grew strongly on a year-over-year basis. We also had a strong origination quarter, closing over 40 separate transactions in a range of asset types and geographic locations and spending approximately $1.3 billion. Again, the bulk of the originations continued to be loans that are senior in the capital structure.

With regards to the return on equity and spreads, we had a good quarter with spreads and net interest margins right in our target zone and return on equity finishing just under 20%. Lastly, on the credit side, values continued to increase on many of the assets that serve as collateral for our loans and in our CTL portfolio, so the overall portfolio loan-to-value statistics continue to be strong and the value of the CTL portfolio continues to increase.

Now, let me turn it over to Katy for a full recap of the quarter.

Thanks, Jay, and good morning. As Jay said, we had a good start to the year with first-quarter adjusted earnings coming in at $119 million or $0.93 per diluted common share. Our net investment income came in at $126 million, which was up approximately $16 million, or 15% from the first quarter of last year. The increase was primarily due to continued growth in our loan portfolio. We continue to see very good deal flow across the businesses with new commitments reaching $1.7 billion for the quarter in a record 44 separate transactions. About 80% of our first-quarter originations were first mortgage, participation in first mortgages and senior debt commitments.

Corporate tenant leased assets represented just 1% of our first-quarter commitments and only 30% of our total portfolio at quarter's end. Given the continued liquidity in the market, we are still not seeing many compelling corporate tenant lease opportunities with the appropriate risk reward profile we require as a firm.

Our total funding for the quarter were $1.4 billion, which included $274 million from prior commitments. Repayments and prepayments were lower this quarter, at only $314 million as a number of expected pre and repayments slipped into the second quarter. As a result, we would expect prepayments and repayments to be significantly higher during the second quarter.

During the first quarter, we sold two non-strategic corporate tenant leased assets for a total of $34.8 million. All of this activity resulted in net asset growth of approximately $1.1 billion for the first quarter. As Jay mentioned, our return on equity came in at 19.2%, still above our mid teens target. Our net finance margin was essentially in line with last quarter at 327 basis points. The margins in our lending business continue to hold up well and we continue to mitigate some spread compression with our overall lower cost of funds.

Overall credit statistics remain solid. First-quarter interest coverage was 2x and our fixed charge coverage was 1.8x, both unchanged from the prior quarter. Our leverage at the end of the first quarter was 2.5x debt to equity plus accumulated depreciation, depletion and loan loss reserves versus 2.3x for the prior quarter.

Given our historical experience, credit track record, national franchise, large, diverse asset base and the aggressive market environment for asset-backed debt, we continue to believe that our capital model is extremely conservative and we would expect over time to increase our leverage prudently. Recently, we were pleased to see S&P's report that was issued a couple of weeks ago, which includes the risk-based capital model that they recently developed for iStar. We are continuing to work with Fitch on their annual update for the Company and their capital allocation model and are waiting to hear back from Moody's on this topic.

Before I turn to risk management, let me comment on G&A expenses this quarter. For the quarter, G&A, including stock-based compensation expenses, was up approximately $8 million to $37.6 million for the quarter. This increase from the fourth quarter of last year was due primarily to expenses associated with restricted stock grants made in the first quarter, fees associated with our recent bond consent solicitation, as well as taxes associated with investments made through some of our taxable REIT subsidiaries.

Year over year, G&A expenses were up primarily due to higher payroll expenses, as we increased the size of the firm by almost 20%. In addition, we incurred other costs associated with growing the business, including office-related expenses related to our pending move within our New York headquarters, as well as marketing expenses associated with ramping up our AutoStar and European businesses. So, that is the summary for the first-quarter financials.

Now, let me cover risk management and credit quality. At the end of the quarter, there were no material changes to the overall risk ratings for the structured finance portfolio, or the CTL portfolio. The weighted average principal risk rating for our structured finance assets improved slightly, coming in at 2.64 for the first quarter versus 2.74 for the prior quarter. The weighted average risk rating on our CTL portfolio decreased slightly to 2.45 from 2.37.

At the end of the first quarter, we removed three assets from our watchlist and added three assets. One asset that was on the watchlist last quarter was moved to our NPL list. Watchlist assets at the end of the quarter represented 1.27% of total assets versus 1.34% in the prior quarter. At the end of the quarter, we had three loans on our NPL list, representing just 0.64% of our total assets. We continue to believe that we have adequate collateral to support the book value for each of our watchlist and NPL assets.

We did not have any write-offs in the quarter but as we have mentioned in the past, we expect to experience some level of losses within the portfolio, despite our strong credit track record. We continue to believe that these events will be asset-specific and will not constitute a systemic change or trend within the portfolio.

Finally, as we mentioned in our earnings press release, we have taken title to the one million-square-foot Comerica Tower, a class A office building in the Central Business District of Detroit. This was the Midwest office asset we discussed on our last two earnings calls. The building recently experienced unexpected tenant vacancies, which resulted in a reduction in near-term cash flow. As the senior lender on this asset, we negotiated a consensual deed in lieu with the prior owner. We are currently comfortable with our basis in this asset, which is approximately $160 million. The building continues to command a strong tenant base, including Comerica, and two of the city's largest law firms.

Given our in-house experience and expertise in owning, leasing and managing commercial real estate assets, we are well equipped to take ownership and to manage this building.

Let me wrap up with a discussion of our capital markets activities and our guidance expectations. During the quarter, we issued just over $1 billion of senior unsecured bonds and while the fixed income markets have been somewhat choppy, we were pleased with the investor receptivity to our recent bond issuance, not only with respect to the number of accounts but the quality of the domestic and international accounts that participated in the transaction. We continue to expect to fund our business with a combination of unsecured debt and equity and as we said in the past, the timing of any issuances depends on our pipeline and the level of repayments and prepayments we expect, both of which tend to be somewhat lumpy. In addition, given our steady ramp-up in Europe, we continue to expect a European bond issuance either in euro or sterling later this year.

With respect to our earnings guidance, we are reiterating our 2007 diluted AEPS guidance of $3.80 to $4.00 and our diluted GAAP earnings per share of $2.70 to $2.90, based on net asset growth of approximately $3 billion for the year.

So, with that, let me turn it back to Jay.

Thanks, Katy. Let me talk for a minute about the market and the issues and opportunities we see out there. Clearly, the market remains competitive with a good deal of negative sentiment in some sectors and some locations. The sub-prime concerns continue to make headlines. But we are watching for any spillover effects in the credit or commercial real estate markets. And just to be clear, since we have no exposure to sub-prime assets, we are really looking more for new opportunities that might come out of the dislocations than worrying about its direct effects.

One indirect effect already taking place is a widening of spreads in various CMBS markets and CMBS derivative markets. Generally, this is a precursor to widening spreads in the loan origination market but it is still too early to tell if the market reaction is a permanent one. With the Street chock full of loans, we do expect a little more rational market if the economy slows during the next two quarters.

One thing that has not changed for us is our goal of expanding our European platform by partnering with top tier investors in the European arena. Today, we announced the strategic joint venture with London & Regional Properties and Moor Park Capital Partners to expand our presence and invest across Europe in a wide range of sale leaseback, OpCo/PropCo and structured finance opportunities. Both of these companies are well known to us and we are delighted to be part of what we expect to be a dynamic investment platform led by highly successful investors in the real estate sector.

One other topic we are touching on is the recent mention in the press about LBOs as Financial Services companies. For those of you who know us, being a strong investment-grade borrower is pretty much sacrosanct. So, I want to put to rest any concerns about us doing a transaction at the expense of our credit ratings. That is really not the kind of transaction that we think would capture the full value of our franchise for our shareholders.

With that, let me open it up for questions, operator.

(OPERATOR INSTRUCTIONS). Susan Berliner, Bear Stearns.

I was wondering if you guys could touch on -- I know your residential and apartment portfolio increased again this quarter. And I guess just with all the noise in housing, if you could comment, break it down, which are apartments and what percentage is residential. And, Jay, if you can give us any idea of what opportunities you potentially see with the demise in housing.

Well, let me start with that, and then Katy can fill in some of the details. I think we have said for the past several quarters we think housing is clearly under stress. As you know from our long history, places that are under stress oftentimes offer the best chance to control pricing and control the structure. There is a pretty wide swath of markets being impacted by just sentiment across the board being pretty negative, all the way from the homebuilders up to high-rise developers. So I think we continue to believe there are opportunities in that sector. We are spending a lot of time digging, looking, pushing rocks around, trying to find opportunities that we think represent really attractive risk-adjusted returns.

Some of the hallmarks of that business, obviously, discounts of replacement costs, rising costs of steel and concrete continue to make replacement costs, particularly of high-rise product, more difficult to replace. A lot of deals do not make sense any more. So, we think supply is going to be constrained going forward. There is oversupply in a number of markets that will have to work its way through the system. All the kind of fodder we have seen in the past leads to opportunities that we are pretty well positioned to take advantage of.

I guess my view is, we might be a touch early here in terms of thinking about the marketplace. But, it is one area that we have seen the chance to really control price, really control structure. And in a market that is as liquid as this one, I think it still represents an interesting place to poke around. With respect to specific numbers on residential, Katy, what have we got?

Yes, I think as of the end of the first quarter, the total, and you see in the back of the press release, is just under 18% of our total portfolio. Which we think is actually a number that is a lot larger than it has been in the past. But we have typically not been a big apartment residential player, primarily because the opportunities over the last five years have been very, very limited. We do have some construction exposure in that part of the portfolio. It is about 10%. And very little of it though is in markets that we feel are experiencing, as Jay mentioned, a lot of softness, like South Florida.

Next question, please.

Douglas Harter, Credit Suisse.

I was wondering if you could talk about the office property that you took back. Does that come out of non performers or is that still in there? And also, I guess if you answer that first.

Yes, from a balance sheet perspective, it will move from the non loans, effectively, to we are going to put it into the corporate tenant lease line item. Obviously, for a smaller asset or an asset of that size, we are not going to create a new category on the balance sheet in terms of real estate. So, while it is technically not a CTL as we would define it, we think that is where it makes sense to put it while we create the plan for the asset over the next couple of years.

Great, thanks. And then also if you could talk about the increase that you experienced in other income in the quarter?

Other income was up, primarily due to a reasonably large distribution. Even though prepayments were not up, it was really as the result of a distribution from a loan that we have that has a participation feature. So, it was a, almost a $19 million other income item from that loan.

Thank you.

Jim or James Shanahan, Wachovia.

Katy, can you comment, please a follow-up to Doug's question. The value, I think of the loans outstanding on that property that he mentioned was $150 million. Do you believe that the value of that building is greater than $150 million? And, if so, how much more valuable?

Yes. I think we do feel that the value of the building is in excess of our carrying value. Obviously, the building is experiencing a short-term cash flow decline, but it is a class A+ building, albeit in a difficult market. But I think this is an opportunity for us to take control of the building and create a plan going forward that we think will make sense for the building. It may take several years to re-lease the building with the quality of the tenants that we are looking for. But, we do think long term, the building has significant value.

I will just mention one thing just for those of you who have been with us for a while, we debate fairly often which is better -- having the best asset in a bad market at a low basis or the worst asset in a great market at a high basis.

I guess one of the things we have learned over the years is that, while the probability of an issue in a bad market obviously is higher, typically, we have seen IRRs that stay positive even through unexpected events. And we would expect the same to be true of that investment is that, ultimately, it will be almost assuredly a positive IRR and probably at the end of the day, a reasonably good investment. So, we do not regret the bet that was made a while back. But obviously, the borrower here was surprised by a couple tenant vacancies, and we are perfectly comfortable that we can refill the building and take the time to do so.

A quick follow-up. And I guess I was reading that in the Central Business District in Detroit, vacancy rates are running about 30%. What would the vacancy rate be on that building now with the departure of Ernst & Young and Comerica?

About 70% occupied currently.

Okay, so, that sounds like kind of in line with the market.

I would ask a question on the CTL portfolio. In Form 10-K, the Company disclosed that there were 14 leases in that portfolio expiring in '07; this represented about 10% of in-place operating lease income. Can you comment on the status of those assets? Specifically, do you expect all the leases to be renewed with existing tenants or another current leases at, below, or above current market rates?

The loss, the lease in the portfolio is really geography specific. We have got some areas where clearly rents are moving. We have other areas where you are not going to see that effect. I think historically, our re-leasing success has been pretty strong -- probably in the 60% to 80% range, depending on, again, product type and location. There are some markets that we are probably going to have a more of a struggle to renew some of those leases. So we are not going to bat 1000 for sure. We will definitely bat at better than 50% and we will see how it comes out.

Thanks, and one final question. On the sale of the CTL assets, can you comment on what the accumulated depreciation was associated with those assets?

Sure, we will get that for you. Why do not we go to the next question?

(OPERATOR INSTRUCTIONS). David Fick, Stifel Nicolaus.

Just a couple follow-ups on the Comerica building. Is the 70% occupancy number for the building that you mentioned inclusive of the space that E&Y and Comerica will be vacating? Or how much more will that be?

It includes the space that is currently leased to Comerica. Some of that space they may be vacating. It is not clear today as to how much they will ultimately vacate. If you follow the release that they made locally, they are moving their headquarters all into Dallas. They are unsure as to how many people are going to be left behind and what their space requirement will be in Detroit.

So, that lease is out through 2012.

I thought there was an '09 expiration element of that lease.

No, it is 2012. We extended the lease with them.

How about E&Y -- the space that they are planning to leave next year?

E&Y is already out of the building. That is one of the vacancies that hit the building in the past year. They moved down the street. So they are currently out of the building and when we site vacancy or occupancy in the building, it already assumes that they have left.

Okay. So you are effectively in this at about $150 a foot?

Yes.

And Heinz was the owner who walked on it? You remain confident that you are fully covered at this point or is this something that you are assessing for potential additional reserves?

No. We do an analysis. Obviously, we do this every quarter with assets but particularly with respect to taking an asset back and based on the, I think, a reasonable plan for the asset, we do not believe that the long-term value is impaired.

Okay, great. One last question. There was an industry blurb that indicated that your CIO, Roger Cozzi and EVP of Acquisitions, Jeffrey Digel recently left. Could you comment on that and what you are doing with respect to those positions?

Sure. Jeff and Roger have been long-standing members of the team here. Jeff retired at the end of last year. He continues to stay on in a consulting capacity for us and we will hold on to him as long as we can but he is officially retired. Roger has been here a long time; decided he wanted to work more on the private equity side of the world. His position will be replaced shortly from somebody internally. So we think we are well covered there, as well.

Don Fandetti, Citigroup.

A couple of quick questions, Jay or Katy. Can you talk about the economics of the European venture? How much capital you will put in? Will any of the assets be on your balance sheet? Will most be in the JV? Just a little color there.

Sure. As I said, we are pretty excited about that venture. As you know, our strategy over in Europe has been to be very partner-centric. We think we have teamed up with two people not only who have proven to be great investors -- London and Regional is really led by the Livingstone Brothers, who have a history of being ahead of the markets over there, being very innovative in structuring transactions where there is both an operating component and a real estate component. Obviously, that is very familiar ground for iStar.

The other partner there is a group called Moore Park, led by three gentlemen that the head of our European platform has worked with and for in the past. So we go into that relationship with a very deep comfort level with both of those parties. Initially, we are putting up a third of the capital. London Regional will be putting up two-thirds. We are straight up with them.

Moore Park is the operating partner in the transaction. It is three gentlemen who came from a European investment bank, bring their own set of contacts, relationships, and deal knowledge with them. But we think together, the three groups -- this is a very powerful and dynamic investment platform that will continue some of the initiatives we have done in the U.S., some of the initiatives that Moore Park and London & Regional have done in their area. And we really believe putting those together creates a pretty special place.

Right now, our commitment is EUR100 million. I would tell you that in our own minds, it is a relatively open-ended opportunity. That is just to get it started. We are already seeing transaction flow that we think is representative of the power of the platform. So, I would be surprised if we do not make materially a larger investment over time with these two parties.

Great. And, Katy, on the participation income, I think you had said there was $19 million of the other income. Can you give us some background on that asset? Do you have any other assets that have participation?

We do not have many of these but this was part of a much larger transaction that we did in 2005?

Late '05.

Late '05, which was relatively complex. And I think we and the sponsor worked very closely together to structure a transaction that allowed that sponsor to really win the deal. And so we took a much larger role than we may normally do, both in terms of assisting him, as well in creating a small participation for iStar. So, he has refinanced some of the assets and that is really what was generating gains on that investment.

I think we have talked about the transaction in the past. It was one of the largest deals we did in '05. It is going to be a triple digit IRR kind of return. The risk on that deal was very much mitigated out of the box. So, these distributions are pretty much gravy. But right now, the sponsor is having a lot of success driving both cash flows, and, obviously, the capital markets being as favorable as they are, extracting value relatively quickly from those increases in operating performance.

Will you have -- I think I know what deal you are referencing. Will you have an associated prepayment of a loan at some point in the future on this, or has that already happened?

Part of it has already happened.

Almost all of it.

Almost all of it. Okay, great. And then just lastly, as an update on Oak Hill, if any of the volatility in the corporate credit or CLO market had a positive or negative impact on Oak Hill?

Well, it certainly did for their results last year. They had very, very strong results in 2006. Obviously, a lot of their fees are performance-based. So, it is really a December 31 measurement date. You know, some percentage of their fees are asset management type fees that grow as they grow assets under management but I think it is a little early to tell how they are going to do this year.

James Fotheringham, Goldman Sachs.

Thank you. Good morning, just a quick question for Katy on G&A costs. A big jump sequentially. But what proportion of the increase was driven by headcount growth relative to marketing and office-related expenses, if you could break that out? And also, just a comment on how sustainable is this increase in marketing costs, especially considering your new ventures in Europe? And also, how sustainable is the increase in the office-related costs?

The majority of the increase is related to -- particularly year-over-year -- is related to compensation and payroll expenses. Obviously, increasing the firm by almost 20% in terms of headcount had a significant impact, and that includes people really across the board. People in Europe, people on the various platforms, as well as really creating groups within the firm to manage a lot of the functions that we managed as a much smaller team before. So, I think we are bearing the cost of sort of moving into being a mid-sized firm right now, and we will grow into those costs hopefully throughout the year.

Some portion of it, although you will see a little bit more of an uptick, are related to new office space. But really the biggest piece is compensation. In that number in addition was a onetime expense -- the bond consent solicitation, which was about $2.5 million. And then, in addition, we are, from a GAAP perspective, starting to -- we need to take a deferred tax expense related to our investment in Oak Hill, which we had not taken in the prior year. And that is a -- almost $1 million expense as well.

Bruce Harting, Lehman Brothers.

When you talk about residential, do you have a servicing platform for residential? And what -- can you talk a little bit more what you might see yourselves doing in the next year or two?

And then, you made the comment that the private equity structure would not work for you. And I just wonder -- how do I form that? Hedge fund or private equity build-out within your organization, is that possible within your structure, to get more fee income? Or does that not work under the yield model of the REIT? Thanks.

Okay, Bruce, let me break that down for you. First, on the -- the idea of residential -- we want to be careful and make sure people understand. We are not investing in anything single-family securities, single-family mortgage loans. So in terms of servicing, the transactions we are talking about are commercial in nature. Again, they tend to be quite large. They tend to be well-sponsored. So the actual servicing is not dramatically different. We have hired some specialists in this sector to come on board and help us underwrite some of the market dynamics. But, there is really not a lot of difference in terms of the actual process. Most of the underwriting disciplines are commercial related in nature. The construction projects are very high-end. Typically, we are using the same architect, engineering, in-house expertise we use for almost every product type. So I would caution everybody to make sure they understand, this is not -- when we say residential, we are not talking about prime, Alt-A, sub-prime; that is really not what we are talking about. We are talking about the commercial side of the residential market.

In terms of our structure, again, it is not that we would preclude anybody from helping us realize the value of the Company. It is that losing our credit ratings as part of a transaction would be a gigantic mistake. And so there is really no issue for us in terms of, if somebody came in and said we will increase your balance sheet capability and increase your ability to borrow on an unsecured basis at your cost of funds, I do not care whether that is public, private, international, whatever it would be, that is fine.

But there has been some talk about would you sacrifice your credit ratings to increase your leverage in a private transaction. And I just want to make sure people understand, our business model is sacrosanct and it is premised on having a high investment-grade rating that allows us to move faster, more nimbly for our customers, to keep on balance sheet all of the proprietary information we generate and control. So, that has not changed. I just wanted to make sure people understood where we were coming out on that.

Your third topic, about what can we do inside the envelope is an interesting one. You have seen us obviously continue to expand our platform. We continue to believe as we grow in size that new opportunities are popping up between the cracks of our businesses that we think we have a chance to exploit. There are certain situations where our structure does prevent us from capturing those opportunities and that is a constant topic here of how best to get that value for our shareholders in one way, shape or form. But right now I still think the vast majority of our business can and does fit inside the enterprise as it is currently constructed.

Okay, thanks, Jay

Let me quickly move back to the question that someone asked earlier on the accumulated depreciation of the $38 million of assets we sold this quarter. The gain you can see on the income statement of about $1.4 million and those assets were part of another transaction which was not held on the balance sheet for a long period of time. So, the accumulated depreciation was effectively almost de minimus.

Susan Berliner, Bear Stearns.

Katy, I was wondering if you could address I guess your leverage target. I know in the past it has been 2.5x. Now you are so much larger and it seems that S&P has a much higher limit. If you can kind of talk about where you see that headed over time?

Sure. Yes, we are in the process of refining our model and I would say that the model that you see that S&P has published a couple weeks ago, which is similar to ours in terms of being asset-based, each asset class has a different proven leverage level, and each asset class has a different asset-backed market level, which is always what our model has been premised on. I think the changes for us is really a recognition of the very substantial changes to the real estate asset-backed -- commercial real estate asset-backed markets in the last five years. And the rating agency models on the asset-backed side have advanced very, very quickly -- have become much more sophisticated. Many more asset types are included in their models, and they have really refined their thinking with respect to leverage on the different asset classes, as well as the importance of pooling and diversification.

So, with some of that, we think actually in some ways, that market has become a little over extended. And you are now seeing I think the agencies probably making some corrections in that direction on the asset-backed side. But as we have always said, we do not want to operate at the high end of that margin but we have not updated our capital model for many years and think that at this point with our size and diversification, a more market-based model is appropriate. And I think our model is, while we are still refining it, is not that different than what you see, particularly the overall numbers with respect to S&P.

Okay. Okay, great. One last question. I guess you guys finally broke out your international exposure. I was wondering if you had any update on your European platform in terms of how much you guys have originated thus far.

Sure. As of the end of the first quarter, we have just over $700 million of assets. That is on a dollar basis in 22 different transactions.

James Shanahan, Wachovia.

Thank you, Katy, for the information on the accumulated depreciation. Follow-ups -- one regarding prepayments -- very light this quarter, yet there was no change in your net asset growth forecast. It seems to imply at least some expectation here that prepayments are going to increase significantly from what was an extremely low number. Can you give some guidance on where you think prepayments are likely to trend in the second and third quarters this year?

Yes. As I mentioned, a number of the prepayments or repayments that we thought were going to occur in Q1 have flipped, just due to normal transaction deal type issues that come up when a lot of complication to actually close a deal and get lawyers and everybody in the room. Nothing -- no problem; it is just simply a flip in time. And a couple of larger ones that we were expecting in the first quarter will -- and some of them have actually already occurred in the second quarter. So we do expect pretty flat net asset growth. Prepayments could be in the $1.2 billion range in Q2. But then we would expect them to moderate very substantially in Q3 and Q4, back to the sort of 250 to $300 million level. So, I think one of the things that we really try to caution people is, you should not really look too hard at each quarter. A lot of that is just timing of when either originating deals or when they repay. So I think from a year -- a total year on an annual basis, we are expecting -- still expecting net asset growth of $3 billion.

Thanks very much for that, and then thanks again for taking my follow-ups. I just had one more. We have observed some spread volatility in the CMBS and CRE, CDO markets. Can you comment on what you are seeing in the senior debt markets, particularly related to your Company?

You mean our senior debt?

Your senior debt, yes, ma'am.

Yes, I think the overall credit market has been a bit choppy and I think spreads across the finance sector have widened out a little bit. So, I think we do see anywhere from 5 to maybe as much as 10 bips on the long end of widening.

With that, Mr. Sugarman, Ms. Rice, I will turn the call back to you for any closing remarks. There are no further questions.

Great! Thank you all for joining us today. I am going to turn it over to Andy again for just the closing.

Great. Thanks, Jay. Thanks, everybody, again for joining us this morning. As always, if you do have any additional questions on today's release or call, please feel free to contact me directly here in New York. And Brent, would you please give the conference call replay instructions once again? Thank you.

Indeed, I would be happy to. Thank you, everyone. Ladies and gentlemen, Mr. Sugarman is making today's call available for digitized replay for two full weeks starting at 1:30 PM Eastern daylight time April the 24th all the way through 11:59 PM, May the 8th. To access AT&T Executive Replay Service, please dial toll-free 800-475-6701. At the voice prompt, enter today's conference ID -- 870635.

That does conclude our earnings release for this first quarter. Thank you very much for your participation as well as for using AT&T's Executive Teleconference Service. You may now disconnect.