Starwood Property Trust Inc (STWD) 2009 Q4 法說會逐字稿

Greetings and welcome to the Starwood Property Trust 4th quarter and year end 2009 earnings conference call. (Operator Instructions)

It is my pleasure to introduce your host, Brad Cohen at ICR. Thank you, Mr. Cohen. You may begin.

Thank you. Today I would like to remind everyone that part of the discussion this morning will include forward-looking statements. The statements are based on the briefs of management, regarding the operations and results of the operation of the company, as well as general economic conditions. Accordingly, the statements are not guarantees of future performance and undue reliance should not be placed on them. We refer all of you to Starwood Property Trust's 4th quarter and year end 2009 earnings release and filings with the SEC for a more detailed discussion of important factors that could cause actual results to differ materially from those contained in the Company's forward-looking statements. The Company disclaims any obligations to update its forward-looking statements.

Also during the call, the Company will be discussing core earnings which is a non-GAAP financial measure. Please see the Company's press release for a reconciliation of core earnings to net income, the most directly comparable GAAP measure. On the call today is Mr. Barry Sternlicht, Chairman and Chief Executive Officer and Barbara Anderson, Chief Financial Officer. It is now my pleasure to turn the call over to Starwood's Chief Financial Officer, Barbara Anderson.

Thank you, Brad. Hello everyone and welcome to Starwood Property Trust's year end call. Today I will be sharing our 4th quarter and year end 2009 financial results and investment activities with you. After my remarks, I'll turn the call over to Barry to discuss our view on current market conditions, and then we'll have a question and answer session. Last night, we reported core earnings of $0.01 per share for the 4th quarter and a loss of $0.01 per share for the period from commencement of operations on August 17, 2009 through year end. On a GAAP basis, we reported per share losses of $0.02 and $0.06 respectively for the same period. At the time of the IPO, the Company granted roughly a million share equivalents of stock-based compensation that vest over a three year period. As the unvested share awards are antidiluted, they will excluded from fully diluted earnings per share calculations. Our net interest margin and interest income from cash balances came in at $5.5 million for the quarter and roughly $6.6 million from the IPO to year end. This is reflective of the more accelerated pace of deployment that we talked about in the third quarter call.

In face, we completed $258 million of net investments in the 4th quarter, primarily in first mortgages that Starwood originated or acquired and the balance in CMBS, and have completed an additional $536 million investments to date in 2010. As result of this deployment and the visibility to our income stream, our board of directors declared a dividend of $0.22 per share for the first quarter of 2010. At year end, we had $645 million, and currently have just under $110 million of cash on hand. We are in the process of obtaining a $280 million matched term financing on the recently acquired TIAA portfolio loans with maturities exceeding 12 months. Beyond that, we could access additional capacity of approximately half a billion or more by levering our remaining and to be acquired unencumbered asset base. Touching on G&A briefly, this quarter's reported expenses of $1.3 million is still slightly lower than our expected run rate. I will now turn the call over to Barry to share his thoughts on the market and our current opportunities.

Thank you Barbara, good morning everyone. I want to introduce Leo Huang who's with us here, former head of Goldman Sachs commercial mortgage desk to work exclusively on the REIT's activities, and also introduce Andrew Sossen, who joined us from KKR Financial to be our chief council who works exclusively on the REITs behalf in our firm. We also recently hired, recently being Monday, an executive who spent 10 years on the west coast originating mortgages for Bank of America, so we continue to build out our staff to take advantage of the opportunities we see. We're very pleased with what we've accomplished to date. You have to remember when we started in the IPO in August, we weren't allowed to have any transactions that were firm in our book. So, we've invested nearly $1 billion dollars of gross assets, about $825 million of capital, since we started, which is about six, seven months ago. That is about 90% of our IPO proceeds.

So at the moment , we are sitting between earnings and remaining cash from the IPO about $110 million in cash. What we consider permanent capital, in our investment stack has a duration of roughly six years. So, I think given the rallies in the credit markets, we actually have a book worth of premium to book today. And, If we sold some positions that we originated, including our TALF positions, we'd do so at a profit today. They are mostly first mortgages, as Barbara said, 0% to 60% LTV, nearly a 13% IRR unleveraged, except that does include the TALF positions. And while some of that is not cash on cash, some of it is accretion in bonds, particularly on stuff we acquired, the cash on cash does approach the IRR because of amortization of payments made in the loans. We've done everything you could do, we've acquired securities, we've acquired loans, we've originated loans, we've initiated our own pipeline of deals. I would say that the environment is different than we probably thought back in August. I think our investments in TALF, which totaled $25 million of equity in our $825 million invested capital, are really not material, they're terrific, they're a one-time wonder. It was a gift from the federal government, which was I think smart. It did ignite the markets, but it's not a sustainable business.

So, we are focused on building a business, which is why we've hired Andrew, we've hired our west coast origination expert, we hired Leo and we're hiring other people, as well as dedicating a lot of our acquisitions to add to pipeline of deals. We have been looking also at building businesses within the REIT that are sustainable and that will develop an exclusive pipeline for us. So, we've signed two joint ventures with platform origination JVs that will focus on smaller loan balances, which in the origination of small loan balances for the REIT. That we believe will be less competitive and provide us with a steady pipeline of deals for the REIT, and we're working on other businesses which will give us lines of business that will focus on filling holes in the capital markets and the system that are really not available today, even today. We have excellent visibility in to the markets. I can't say we've missed much of what has taken place in the last seven months. I think we're showing up for almost every bid, and if we lose something it's usually because we didn't see the value in doing it. We are really relying on underwriting skills,more than 25 years of doing real estate deals in every asset class in the United States. And that allows us to dial up and down cap stack, and find the appropriate risk adjusted return. Our strategy from the start has been very straight forward.

It's a simple story. It's a stable, reliable, recurring dividend stream. We are not doing loans owned in this vehicle because of the cost associated with that and the timing -- the unreliable timing of taking back properties and the complicated story we need to tell. So we're going to be safety in yield, predictable growing income stream, and we think our risk adjusted returns are absolutely compelling in a world starved for yield. So, we are extremely pleased with what has taken place so far. So I'm going to rehash what Barbara said because I'm not sure you would've understood it. We have $110 million of cash. We are in the process -- we've assigned term sheet, to leverage the Teachers portfolio, which will produce yield leverage yields of 12% to 13% on the portion of the portfolio which is roughly 80% of it that matures after a year. We looked a at the short loans of three loans that mature in the next 12 months as cash alternatives. But in essence, we've already begun discussions with each of those lenders to try to refinance and extend those loans. Regardless, they are a good way to deploy cash rather than investing in short -- we were earning about 60 basis points on our cash balances because we were never taking any risk with that capital.

So when we lever Teachers, we'll have another $280 million, we will get probably $100 million back from the three short Teachers loans, less anything we can extend. And we will be able to lever the whole loans that are in our portfolio and predictably probably another $125 million to $150 million of cash will come back to us. So we'll have $600 odd million of dry powder, even though we only have $100 million left, which is quite valuable because our pipeline today still exceeds $1.3 billion. We have circled two investments and completing due diligence that are $120 million that will provide yields between 12% and 13%. So we will be technically out of money if we do not finish our leveraging of the Teachers portfolio. And, as soon as that money is invested and identified, we will lever the portfolio.

And, we've also been working on our credit facility for the REIT -- a revolver -- and that is coming along quite nicely. We didn't put in place early because the non-use fees were quite high and would have been a drag on our performance. And, we kind of expected that both spreads and number of competitors to provide that facility would increase,as the credit markets rallied and, in fact, has taken place, so we are quite pleased about that too. We have swapped the Teachers loans, and expecting to -- because we want to match fund everything we do -- the swap rate is 1-1-5? 1 point -- I'm

1.155%

1.155%, so that is put in place. We expect that we will draw down on the facility, the financing facility for Teachers, as we need cash. And again, we will, I think we will have a revolver in place or credit facility in place for the REIT fairly shortly. I want to talk quickly about Teachers. It's an excellent portfolio, quite extraordinary actually, those loans were originated back in 2001, too, so the reason they're short lived is we're in the last three years of 10 year mortgages. The debt yields which you saw at 18% are unlike anything we've seen in the marketplace. Today you're seeing debt yields of 10, 11, 9 as people become comfortable that cap rates are really 7 and 8, and in some cases 5 and 6, if you're multis or a New York City office buildings right now. We got -- it had 20 loans in it. It was very diversified by asset class and by geography. We don't mind the fact that these loans were short. We have a corporate view that interest rates on the whole will rise over the next five years, given the state of our deficits and need of capital in the United States. So we were reluctant to originate loans long that have low coupons, even if we could lever them to meet our target rates of return.

The opportunity to actually redeploy this capital within 2 to 3 years, isn't a bad thing, as I said, including this, average duration is six years, so we have some duration in the portfolio already. This actually brought it down given the size of the transaction. When I say average duration, that's assuming $126 million of permanent equity in the Teachers portfolio that's the $400 million roughly of longer dated maturities levered at 70%. So given that, we think interest rates will rise and maybe spreads will come in a bit. We still think we will be able to redeploy this capital at higher returns down the road, and we have an option, obviously. The portfolio -- we looked at it in the proprietary origination platform, too, since we will meet with every borrower and work to see if we can extend the loans even in advance of their stated maturities. We were very happy with that transaction, and I think it was -- it showed the uniqueness of our platform and the advantages of scale, because we really couldn't -- most of the smaller finance companies couldn't really compete with that, and I think that was very exciting for us.

Going back to our pipeline and our strategy on investing, we are being very picky. We've not done anything offshore. We want to keep the strategy pretty straight forward. We have nine offices around the world, four in the U.S., five around the world. Because of the nuances of the markets, we not really looked offshore, we could. But again, you wouldn't see us doing anything in Japan. Yields are too low. It would have to be Europe, and there we expect a modest economic recovery, probably somewhat behind the United States. We do think property values have stabilized in most markets, and I was quoted as saying that property values are probably down plus or minus 10% of where they are going to be in this interest rate environment at least. And as rates creep up, you will see cap rates adjust north, I would think, since people are looking at positive leverage being the only way to buy anything and providers of debt won't do negative levers today, thank god. So given that, we are thinking that the global search for yield will stabilize property values. Having said that, we think the recapitalization of the credit markets is like the second inning.

There is $1.2 trillion of debt rolling forward. It could be $1.1 trillion. $400 billion of that is going to evaporate -- just not going to be refinanced -- the property values have declined. A significant portion of that will be rolled and extended. But a lot of it rolled and extended -- servicers can do one or two year. So, you have only seen the very beginning of the recapitalization of the commercial mortgage markets. Given that, we expect a title wave of refinancings, or attempted refinancings, as loans mature and as interest rates creep up, because most people who are floating can certainly pay their current interest expense, but these loans can't mature to par. We think we will be very busy. And we are cognizant of that, that's another reason why having some loans mature shorter is okay with us. I do think that if you think of the peak of the real estate market is 2007, many of the deals financed with 3-1-1 three-year terms and two one-year extension. So that's a 2012 peak cycle, and we are still 2010 last I checked. So, this will be a multiyear cycle, with transactions volumes down nearly 80%. I looked at a hotel statistic that was $19 billion of transactions in 2007. I think $1.2 billion last year. With that kind of decrease in transaction volume, you don't see a lot of financing need and the markets which were doing $400 billion of financings might have done $60 billion last year.

In that context, the life companies were disproportionately important and they've been quite aggressive. Which, frankly, for our strategy is not a bad thing. Having somebody other than TALF provide a senior loan allows us to deploy the B-note, the A2-note, the mezzanine mortgage and still provide the debtor with interest rates this low -- a very attractive combined yield. So, one of the investments we have circled is exactly that, where our mezzanine will be 12% to 13%, and it'll be a senior provided by a bank, which is going to securitize it. And that combined envelope is attractive to the seller or the debtor. And for that reason, I think it's better for us to have somebody other than the federal government be the only source of a senior mortgage today. The world is screaming for yield. So, you are seeing some capital come back to the markets. We're flexible. We'll adjust our strategy as needed. And I think, again, as not an insurance company and as not a large commercial bank, we can have relationships with borrowers. The other loan that circled, actually, is a proprietary exclusive deal originated by another fellow we just hired, and it's one of his relationships. So, it'll be a -- if we close it -- an 8% first mortgage and an extraordinary attractive price per foot on an office building in the US.

So, I think to the extent we can rely on relationships, we're flexible, we can meet the needs of borrowers, we have a nice story to tell and, and they can deal with a individual here that's not a big bureaucracy. An, if it's a story, we will rely on our real estate underwriting skills, and as the market evolves, I think we might be taking participations and kickers and assets. So right now, we are doing just fine. I'm not unhappy about the -- there is competition, that's why we're trying to build up our proprietary origination arm. But we're also, given our scale, we are able to provide those second mortgages and B-notes and mezzanine financings across the country. We also, safety again is our theme, so we don't want any mismatches in our book. We are quite sensitive to that. I don't see us doing a lot of these FDIC portfolios, the stressed debt portfolios, unless they have performing loan features to them. We will be bidding and just did buy a performing note from an auction, and it can be a restructured note. It can be a note that we will restructure to a performing loan by shaving perhaps its principle balance down to working with the borrower to restructure the mortgage.

As far as our dividend policy, In the spirit of safety and yields, we are not going to pay a dividend really that we can't cover, that we don't have significant visibility of. We are not going to drink our own blood. So, we are going to to ramp our dividend as our book matures and as we reach more permanent capital structure. You can see, if you take our analysis, and you probably can work to what our earnings power is, and it's quite significant in this asset base. On the overhead, it's exactly as underwrote slightly inside of that. It's fixed, so it will not increase really as our book increases. I don't see any issue there whatsoever. And it does help to be bigger here because, obviously it's a much smaller drag on the overall yield of the company.

So just to summarize the environment and to head off a few questions that I'm sure I'll be asked. It's not exactly what we imagined. The credit markets have rallied hard. We have excellent visibility in to the market and excellent deal flow. I don't think we are missing anything. All the banks know to call us if they have a need of a mezzanine provider. I think you're seeing CMBS markets come back, small, couple of deals are teed up. Nothing big. Probably healthy. Again it does provide the banks the ability to originate or at least warehouse. I don't even think they are taking principal risk. They are basically a conduit to the CMBS market. It's a good thing, because again there will be a junior piece of those deals and most of those providers are out of the market. And, timing is everything.

We certainly will be creative and responsive to changes in the marketplace. The conduits that are back are quite small, and to my knowledge, have not been that successful. Again, we've had a lot of transaction volume, and until this wall of maturities rolls, you are not going to see this huge need for refinancings, other than small balance loans, which -- again the structure of the real estate markets is fundamentally different than it was three years ago. With GE Capital Textron, CIT, the regional banks -- most of these credit providers out of the market, there is going to be a hole. And you don't see it because transaction volumes are so low, but there's going to be a need for capital in the real estate markets, and we never wanted to own the most senior security. We never wanted to own the 0% to 45%, 50% loan. That wasn't going to meet our objectives or targets for our shareholders. So, it's not a bad thing. I think that's really going to conclude my comments. I think as a firm, we are relying on our principal -- as principals in the equity side, I think it's extremely important in today's market to thoroughly underwrite the real estate.

The good news is we are getting the time to do so. We can originate in week if we need to, which is quite helpful in a competitive advantage versus our perhaps more longer underwriting process at a life company or commercial bank. But that's really what we get paid to do, and that, I think, will create excess return given the amount of risk. I do think yields of 13% in the first mortgage from 0% to 60% is extraordinary given the yield environment we are in today. And, I do think that this book would be worth quite a bit north of book already should we turn around and sell it. We are happy to have the securitization markets, perhaps, to take out our whole loan originations, the most senior piece (inaudible), which is the perfect environment for us. Without a credit facility, we could do that too, and that's kind of a wonderful thing. So with that, I guess we'll take questions.

Thank you. (Operator instructions) Our first question today is from the line of Don Fandetti with Citigroup.

Good morning. Quick question for you Barry. I think if the IPO -- sort of the targeted leverage ROE I should say -- was in a 12% range, obviously the market dynamics a little bit different. Just curious where you see that going stabilizing, are we looking at sort of a high single digit, if you could provide some color on that because, obviously, the Teachers deal has a nice levered return, but after fees it looks like it's a high single digit return.

No, don't think so. I don't think -- the Teachers deal was unusual because of the incredible credit quality of those assets. I mean, those were practically AAA loans. But if you take out the short end of the curve, the stuff that matures in the next year, it will be a 12% to 13% levered yield. I'm not sure I understand your comment after fees, Don. There is no fees, it's just our overhead. And we have done the swaps. It's basically locked.

I guess just to clarify, if I could, meaning to the shareholders, the fees at the REIT level.

So 12%, minus 1.5% is 10.5% minus about, I think it's 50 basis points of overhead, would net -- that's correct, it would net around, whatever that is -- 10%. We want to pay the 8%. I think that's kind of where we are. Again we are in this ramp period where we had cash earning nothing. We want to get up to our targeted dividend return which was 8%. Hopefully paying more than that, 10% or 12%, and hopefully given the credit quality of the book, the thing will trade to a 6%. And that's basically in a world with no yield if you look where the REITs are trading on a dividend yield basis. This entity has a life cycle that should be there.

Again, we are focused on building a business not just a portfolio of loans, so while TALF was an interesting trade, it's ending. The government won't be bringing it back, and it's not --- turning a 16 on AAAs is a wonderful thing, but that won't be happening for much longer. I think we are creating a mixed book. We bid on something yesterday which I'm not sure we will get, but it is 10-year duration, and it's 1.4 times (inaudible) profits, so it's a huge return on the loan because the duration. The leases in place are fully guaranteed, by a credit worthy entity. So, that won't have our 12.5% target, but something else might. It's a mix. To the extent we can -- I'm not ready to give up on our 12% leverage yields yet. But again if we can pay a stable, 7%, 8%, 9%, 10% dividend yield, I think we'll have achieved our objectives with the Company.

That's all I had.

Can I add one other thing? I mean I didn't mention it -- I can mention it. We've invested in a service or two in order to receive a proprietary look at the (inaudible), by the way. A look at their book, their own loans that are rolling and extending. We made a small strategic investment in a servicer, and that recently closed. So I think on strategy, we are continuing to lack at 13 cylinders and trying to get five of them firing at the same time, and we will have a very diversified book ultimately.

Our next question is coming from the line of Ken Bruce with Merrill Lynch.

Good morning, Barry. I think you win the award for covering the most ground in the shortest period of time. I'm hoping you can add a little bit of additional information on what the pipeline looks like in terms of the size break down between the first, possible second -- any information you can help us with on that.

Yeah, we are losing some deals. We've lost a bunch of investments, not only to the other finance companies, but to life companies too. We've had investment in the west coast of an office building where we teamed up with a senior and we provided the junior, and the borrower wanted one-stop shopping, so they needed to execute. A lot of borrowers are still having the opportunity to buy back their loan as at discount, and that's a joy for us. The hotel deal we did actually started with the group sponsor, and Leo brought in the deal. The sponsor was buying back a bunch of his debt, and during the term of our -- sort of making a loan on a loan. And then, during the term of our exclusivity, they were able to get the keys, so it wound up being a first mortgage on these -- I think it's 16 hotels?

17.

Seventeen hotels out of 50% LDU, or something like that, and it's locked for five years at 9-something percent. Nine and a half. So, I'm looking through this list of deals, they're refis, they're I'd say split two-thirds nonhotel, a third hotel. Our book is about a third hotels -- a little less than a third. As far as the loans it's a third. It's probably like 20% overall. I'm looking up as I say that to just check that number. We have industrial stuff. Some city center office buildings, which will be shocking if we can be competitive on that. But, we are staying in assets that are in real markets, not the tertiary markets, although it's all about price per foot. We like our attachment points. We'd make the loan, even in a suburban market -- we might underwrite 20% vacancy rates. We're really focused on the rollover and the tenant quality, and what is going to happen during our duration and what happens the year after we are supposed to get repaid.

The two investments we have -- that are in the pipeline circle -- one's a mixed use center, and the other one is an office building, as I think I mentioned. And looking through this about dozen deals that we have in our pipeline, some of which we recently just bid on. Oftentimes the borrowings are a little slower than we like right now. They are working on equity issues or recap or tax issues. We've agreed to do something, and then they say okay, wait. Or they think we've agreed to do something, we tee it up a term sheet, and the we are getting -- I would say we are getting, where they can, they're shopping us. That's just the market. That's what you expect to happen. And again, we try to figure it out like how do we get a proprietary competitive advantage in the refi. I think there are some people who are nervous about us.

The Teachers deal was a really good deal for us, because it shows the power of the vehicle. People wouldn't have thought we could buy a portfolio at a coupon like that. So they wouldn't have come to us because they think we are look for 40% yields. We're not. We have the ability to lever it, obviously, and produce the returns we need for the shareholder base. Once the baby is walking here, and with $1 billion in investments in six months, I think we're definitely walking. I think the market is going, we will see a lot more phone calls, a lot more correspondent relationships, and we're hoping our two Jvs will produce a steady stream of deals for us.

So in terms of the actual pipeline, you've got two deals circled, another 12 that are in essence in the pipeline and a bunch of possibilities.

We don't give you possibilities because that's billions, right? Conversations aren't pipelines. They have to be a real deal, and a guy saying I might want to -- for example , there is a recap of CMBS deal working on. It's not in our pipeline, but we've been working on, we've sent term sheets out. I mean, it's just not in the pipeline. It's a big deal, we could deploy this capital in the next three months, all of it. And have to come back, but that's the happy little news, because that will mean that the portfolio is probably producing leverage in excess of 12% -- 13%, 14%, and that's gross of overhead and gross of the management fee, but the portfolio should be producing a pretty hefty yield. They will support a dividend too -- increase.

It really depends, it's hard because these deals are large and they are lumpy, and we may buy something on due diligence that we will walk. We couldn't easily predict what would close and what would not close. We lost a deal. I think in the last quarter we had a deal that -- I'm looking at Leo -- that was substantial that we didn't get done. We've seen I think most everything in the market, again we are not looking and we're not seeing international investments and we're not going to do -- I think the three or four companies that went public around the same period we did, all have slightly different strategies. And, which I think is now becoming more apparent. And we are doing what we said we were going to

Then you touched on this, do you believe that with the $25 million in dry powder that, after you deploy that, at that stage that will be effectively what you believe the optimal capital structure looks like, just given what you know today, and that will be the point where you are needing to come back to market?

Let's back up -- $25 million in dry powder. We have....

$625 million.

Oh, $625 million -- say six. That requires the loans being -- leverage being placed on our whole loan book that we already have, and we've used a 55% kind of LTV on that stuff. Not because we couldn't get 70, but we just wanted to be conservative. We are not going to run the company with no money. You can't step out of the market and say we are going to do a raise. We haven't discussed with the board, and we haven't figured out when we would come back to market. I don't think -- it's not going to be for a while. But look, if there is great investment out there, we will do it if we have the capital. I'm sure given our relationships on the street, we could probably find someone to help us lever the portfolio so we could do a secondary if we need to. I don't think for the foreseeable future, I think obviously (inaudible) filed the S1 and I think -- S11 -- and I think (inaudible) vehicle, I think is also reaching the end of its capacity.

I think we have a lot of ammo left. The good news is, we are chasing that dividend -- the targeted dividend of 8% pretty aggressively now. So with like the Teachers portfolio, until we get the leverage and have an opportunity for the rest of the cash, why would we lever it. So, we're kind of balancing that. We would rather deploy it at 8% or 7.75% than lever it and sit on cash earning 0. It's a bit of a balance sheet management act right now. As soon as we get these, we get these deals circled -- if we invest $120 million, and we said that's 12% to 13%, we are out of cash. We absolutely have to get the leverage in place on the Teachers portfolio and then lever the other lines and then either extend those short Teachers loans $100 million or wait for them to mature. But since we don't have that cash, I wouldn't include that cash right now in available cash. I guess we could sell the loan if we really had to. Actually there was a recent auction, and Leo was watching it very carefully, of a short piece of paper, right?

On a regional mall asset.

And it sold at what?

It sold at a 102 plus dollar price for...

Effective yield of?

An effective yield of less than 1% to the open and less than 4% to the stated maturity.

So that made us feel good because we invested cash at 5- 6%, whatever it was. Versus the one of a single bid for very secure piece of paper that everyone knew was money good. Just I think smart. So we feel good.

I understand you've got some balance sheet management opportunities to take advantage of, and I guess what I'm looking to see is if you see within the context of that $625 million, if you think that's ultimately where you can get levered up to or you think financing markets are cooperating and maybe there's some additional lift above that before you're coming back to market recognizing you got a lot of things that are going to be recycling capital over the next year or so to augment that. I'm just trying to get a sense of how you view the capital markets and whether they are cooperating with you.

The capital markets are a lot more receptive. It's not easy. The credit facility we're talking about, the $500 million credit facility. We have major banking relationships, and I'm not aware of that many people who would do it right now. It's not like there is 14 guys to choose from, maybe there is 2-3, but there's not 14. They are are not giving the house away yet. The banks are certainly, their cost of funds is not what it used to be, and their spreads are higher than they ought to be, and their fees are way too high, of course. I think we are not going to run a very high levered vehicle. It's not consistent with safety and yield. We lever the TALF stuff and we did two year paper with five year financing. How much more conservative could we be?

We assumed in our A2s that they would be extended two years. Full extension, took to it the actual state of maturity. The IRR's are like 18% or 19%. But we've given you the yield fully extended for two years, and we have five year financing on it. This is all safety and safety and yield safety and yield, and risk adjusted yield for the shareholders given other alternatives, junk bonds, which are mid single digits, investment grade, which are 5.5%, and even where govees are. So, it's a neat hole in the market., I think it's exactly what we said we were going to do. At the moment, I don't think we have -- we are not going to get 14s guys, we're not going to get an unlevered 14 today. If we do, we went to 80%, 90% LTD, and we are not doing that. We are looking very carefully at the market parameters for underwriting because they've tightened. Debt yields have come in on assets.

I think as people gotten comfortable with cap rates being where they are, and deals. And that's why I think being in both the equity and debt is so helpful to us, we see we know where stuff is trading. That multi-deal that EQR did at 5.5 yield, there is plenty of multis trading around 6 caps right now. And, some of it inside of that, obviously. Office buildings, good leased office building, (inaudible) sell 6.5 cap. Got a great lease in place, great tenant. Long-term lease, Might sell inside of 6.5 cap. That's about the global screaming search for yield. Everyone wants yield. There is no yield. I hope the fed raises rates. We expect they will but they probably will only do that after the election. Knowing that is coming, we are trying to build a lasting vehicle, we are balancing the urgency to put out capital against the fact that rates are going to be higher if you believe the black swan (inaudible) everyone ought to be short treasuries right? That's conventional wisdom. I think over-under, we don't need to do if to it, but we certainly are cognizant of the fact that we're probably in a more likely rising trade environment than a falling environment.

Last question. How are you thinking about the split between or cooperation between the REIT and the private funds? Are you seeing a lot of overlap at this stage? Do you see much opportunity for co- investments there, or have you segregated them in your mind?

That's worked really well, actually. We just did a first mortgage on a deal. It was part of a pool. It was like a 29 IRR. It gets split, the hard line is 14%. It's 75% to the REIT and 25% to the fund. That hasn't been an issue. We are where the IRR is less than 14, and we just put it all in the REIT. If it's over 14 it gets split 7 5- 25 REIT private funds. That's not been again, it's interesting to see how this vehicle, the REIT, has filled a hole in our shop. It allows us to see everything. So we are getting -- the whole team, we have 26 people in acquisitions in the United States alone, I think that's the right number, might be higher, we keep hiring, so I think it's helpful because we can see we where financing is and we can look at where we want to play in the cap stack. The only place it created some kind of trickiness is if we saw an FDIC portfolio that was full of performing loans, and then half of it was nonperforming, then we have to split the enchilada. That hasn't happened because a lot of the performing loans aren't going to be performance for months until they explode.

If we expect to get the keys, it's not going in the REIT right now. We are looking to whether we canned bid those loans to restructure them and make them performing, which is a competitive advantage because the REIT can bid to lower yields than other opportunity funds can. If we can figure out how to restructure a loan for a borrower and make it performing, we'd have tremendous competitive advantage. A lot of the performing loans are being sold bank to bank by the FDIC. You're not seeing them in pools right now. So that -- you are seeing performing only in name when everybody knows the collateral value is way under the face value of the mortgage. One of the challenges you compare what each of these companies are doing today's is beauty is in the eye of the underwriter. Other's might think so, and that's what makes it a ball game.

To some extent, yield to maturity, if you don't think it's going to mature there, yield to stated face is different than necessarily yield to maturity today. It's really where you think cap rates are and quality of the real estate. Leo will be attending a conference coming up and show you photographs of the assets. These are nice assets in the collateral pools. These are really, you would be happy to office shop or live in some of this stuff. We don't have an asset class. We haven't done land loans. But not to say we wouldn't at some point. If we thought it was compelling and, but right now we haven't seen anything that's not a line of business we are in to yet.

Great, thank you for your comments.

Sure thing.

Thank you. Our next question is from the line of David Schick of Stifel Nicolaus.

You answered most questions, I'm wondering Barry can you talk about your thought process vis-a-vis the follow on. You mentioned it sometime off, but what would your minimum pricing threshold be to do another equity transaction?

I'm not going to comment because I hope the stock response to the dividend increases. I think that's -- none of the I will say the three companies that went out, -- none of the companies have yet met their dividend targets. They are in ramp stage. I think we are very clearly a yield vehicle. Growth and income, growth and income, safety and yield, so that's where our positioning is in the marketplace. I think I don't want to answer that. I think you know what the issue is. We treat our shareholders like our long-term partners and we certainly wouldn't want to dilute them. Hopefully won't have to deal with it.

All right. Can you tell us who the operator of the Extended Stay Hotel portfolio is?

Yeah this is an independent portfolio I will tell you who it is. We don't really have a need to not tell you. It is Extended Stay Hotels, but the hotels are not -- they are not part of the bankruptcy. They are independent hotels that were not part of the estate. I think the -- do you recall what the debt yield was 14-15 debt yield -- 9.5 first mortgage locked. The guy bought back his loan at a big discount obviously lost his equity. That created this I think great debt yield on troth earnings. So very stable, very good assets -- 15 of them diversified by geography. Attachment point on a price per key is insanely low. We're really happy with the loan. We see a lot of hotel deals by the way, and we've lost a bunch of hotel deals. I've been surprised at the availability of refinancing money for hotels. Shocked actually.

You talked a lot appropriately about the Teachers transaction, I'm just wondering how you handicap your availability to capture the extensions there, and if you are in conversations already?

We are in conversations already, particularly the short notes. We are beginning dialogues on -- when guy's loan doesn't mature for four years, he is not really that interested in chatting with you. Some of the stuff is so good, you know, that mall loan at 8% with an 18 debt yield, 19 debt yield. The good news is if we are going to be competitive on the refi, it's a much higher LTV, much higher proceed levels to the borrower. So you can probably get a guy whose loan matures -- that's our pitch by the way -- is like lock in interest rates today. We'll lend you money at whatever it is, 7 and three quarters, 8 for five years, you only have two years left, lock them in while you can. Extend your maturity and sleep at night.

We will do 10 years -- I don't care -- if the right coupon is attractive. That is the only thing you can do with these guys is say take advantage of the low rates. Why take the refi risk in two-and-a-half years. We don't have any ability to force them to do it. If we rolled a quarter of that book I would be delighted right? Half would be a home run. I think anything over that, given what we see as a portfolio, is probably not that likely. The malls that are in there are never going to meet our return criteria, unless the borrower who doesn't need our capital or expensive capital -- unless something changes, I don't see the malls rolling.

I'm going the turn that question back around on you, you mentioned your hesitancy to put financing in place that would just produce more cash, but at the same time, you want to match and lock -- you mentioned that object. Is it better to lock in financing sooner and how soon do you think that will be?

We swapped a debt for Teachers so that is locked. But, to the extent that we did a 10-year extension, we would, again, swap it out and lock it. It is an optionality, right? To have the option of -- if interest rates were 9% in 2.5 years and a Teachers loan rolled, and we had originated at 7 and 3 quarters, it's underwater. We have a loss on a long-dated piece of paper. It won't be bad paper. It's just going to obviously, if you had to sell it it's not worth par. Having that optionality of refinancing that Teacher's book into a higher interest rate market is pretty attractive to us. Good news is if rates are slightly lower, credit spreads are probably in. We really don't -- if you think the economy is coming back, the odds of rates being lower are just not that high. I think we --

I'm sorry, you didn't understand my question. I'm talking about locking in your financing on that.

On what? On Teachers?

Yeah.

It's locked. We did a swap.

For how long?

We match funded the maturities of the loan -- the underlying loans. So a two-year loan, three-year loan, four-year loan, five-year loan -- whatever the maturities was, they have match funded, and we assumed three months prepayment, I think.

And you did it Individually. Okay

Individually. Yes, we did it individually.

Our next question is from the line of Steve Delaney with JMP Securities.

Good morning thanks for taking my question. Barry, you mentioned the two joint ventures that you've set up with platform lenders to do small balance lending. Can you talk about -- well, one, define the range of how small is small, and also since a lot of the people tend to be regional,l is there a specific geographic strategy you are targeting here?

Well, one is west coast based with national platform, but they're west coast based. My guess is you will see more stuff on the west coast. The other one is Chicago in here. So less than $25 million.

Okay.

Is the target for that stuff. I hope we don't see $8 million loans. But there is a benefit to that stuff because it will create diversification for us. But I'm going to rely on Leo and his capital markets expertise on securitizing the seniors out that small of book because the individual loans won't make our target returns, so they would have to be relevered.

You have to restructure it somehow.

We have to restructure it.

Are you at some point...

That's where there is probably velocity today and less competition. So that's where we're looking for -- there's going to be enormous demand in a pyramid of size of deals. There's got to be little deals being done, and that's the heart of what is now broken in the market, which are the small regional community banks.

Exactly, and their boards are going to be very risk averse going forward about CRE loans, given what they've been through.

Exactly.

Those that survive. At some point, are you going to identify those partners? take it you have not at this point.

No, we haven't, and I don't know why we would.

Okay, and I was just....

(Inaudible) identify their loans to you.

There you go. And, why tell the competition who you're working with. And just all I had left were a couple of housekeeping things for Barbara.. Barbara, you mentioned I wasn't involved in early on on the road show so I apologize for my lack of history here, but you mention your $1.3 million run rate on G&A was below sort of the full rate you had indicated. Was that more like $1.5 million a quarter, $6 million a year, is there a specific figure out there?

Yes. Yes, that's exactly it, about $1.5 million per quarter or $6 million a year is what we expect our run rate to be.

The reason it doubles is employees because it has Barbara and Andrew now. It has -- everything is roughly fixed. You have D&O costs.

Audit.

Audit tax. All that stuff. We will have small expense on a systems upgrade probably coming down the pike here. So that won't be that material. But it's also should be one time.

Okay. And Barbara, there wasn't a balance sheet in the press release, obviously we will have that in the K, but can you just tell me your total shares that are out including your -- the million restricted shares and what your total GAAP equity was?

$12.31.

Oh yes, $12.31 sure.

The issued shares are the 47,583,800. Then we have -- that was the originally issued -- then we have another 1,051,000 in change of the unvested RSU's in stock grant, and actually I shouldn't say unvested because in the K you will see there was pieces that vested at $12.31.

Okay, and the total equity, the GAAP equity?

The GAAP equity was $888 million approximately.

Okay, and when you use the term fully diluted book value, the difference between your $8.66 and $18.66, $18.26, are you just loading in all those unvested restricted shares in the calculation?

Absolutely.

Okay. Thanks folks. Appreciate the time this morning.

Thank you very much.

Thank you, there are no further questions at this time. I would like to now turn the floor back over to Mr. Sternlicht for closing comments.

The only thing I'll mention in closing is that the Teachers deal closed March 1. So, you're still going to have this funny situation where even first quarter financials aren't going to show a ramped company yet. Be aware of that that the financials statements are required but they're sort of funny because they are obsolete by the time we issued them. So, we've been having all kinds of questions about -- discussions with Andrew and arm wrestling about what we can talk about. When we get to a stabilized run rate, it will be a lot easier to understand the company. Thank you for your time today. We appreciate it. And, we look forward to speaking with you again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation