Starwood Property Trust Inc (STWD) 2010 Q1 法說會逐字稿

Greetings and welcome to the Starwood Property Trust's first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brad Cohen of ICR. Thank you. Mr. Cohen, you may now 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 operations 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 first quarter 2010 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. Good morning, all, and welcome to Starwood Properties Trust first-quarter call. Today I'll be sharing our first-quarter 2010 financial results and investment activities with you. After my remarks, I'll turn the call over to Barrie to discuss current market conditions and then we will have a question-and-answer session.

For the first quarter ended March 31, 2010, we reported core earnings of $7.5 million or $0.15 per share, a $0.14 increase over fourth quarter 2009. On a GAAP basis, we recorded net income of $5.9 million or $0.12 per common share.

We have almost 1 million dilutive shares outstanding. However, for the quarter, the rounded earnings per share amounts were the same.

Our net interest margin and interest income from cash balances for the quarter was $12.4 million, up from $4.4 million in the fourth quarter. We're starting to see the results of investing the majority of our capital raised at the IPO back in August. Our Board declared a dividend of $0.25 for the second quarter, representing a sequential quarterly increase of almost 14%.

During the quarter, we invested approximately $563 million which includes the purchase of a portfolio of performing commercial loans from the Teachers Insurance and Annuity Association of America for $510 million and other investments totaling approximately $53 million. To date, our investment portfolio includes par value investments of approximately $769 million of mortgages, $297 million in CMBS, RMBS and other marketable securities and a $6 million equity investment in a real estate related company.

Some specifics about our assets. We currently have roughly $589 million invested in first mortgages with a face value of $614 million at a weighted average coupon of 8% and a weighted average life of 2.7 years.

We have an additional $145 million invested in subordinated mortgages with a face value of $155 million at a weighted average coupon of 7.6% and a weighted average life of 4.1 years. Our CMBS portfolio includes approximately $203 million in AAA-rated CMBS with an average coupon of 5.6%, securing $171 million of TALF financing at an average 3.8% rate. The TALF financed CMBS are owned through a joint venture with our share being 75%.

We have another $56 million face value of unlevered CMBS with an average coupon of 5.2% and expected weighted average life of over six years. On March 31, 2010 we had approximately $108 million of cash and cash equivalents on hand and availability under our term loan facility of approximately $255 million.

In addition, we have over $100 million of loans maturing over the next six months and are actively negotiating additional financing lines to provide liquidity going forward. With that, let me turn the call over to Barry to share his thoughts on the market and provide some perspective on our current opportunities.

Thank you, Barbara, and good morning everyone. I'm pretty pleased with the pace of our investments during the quarter. We have been very methodical in how we've approached the market and we're bidding on almost everything that's out there, including many of the financings and transactions you've seen some of the other finance companies do.

So our goal is to deploy the IPO proceeds rapidly and catch up to our bogey (inaudible) dividend yield for the Company and then once the cash was deployed, to lever the portfolio in a methodical manner so we don't (inaudible) on cash. During the period, you've seen us invest in some RMBS securities which are less than a year maturity, just to raise the earnings capability of our cash balances.

They've also kept the duration of our portfolio fairly short. As you know, the teachers portfolio had almost a 19% -- 18, 19% debt yield on the paper. It was AAA paper and earning, now that it's levered with the facility, the $200 million facility which is match funded [I learn] almost 12.5% return on the equity as we draw the line, stabilized with I think AAA risk.

So 12.5 with AAA is pretty good. Maybe we're a little slow spoiled because the credit markets have really moved aggressively. There's a global search for yield and risk seems to have fallen out of the equation again.

This is good and bad. I would say mostly good for us, as we think the property markets stabilized and the credit markets stabilized, it looks like securitization will be coming back. That is a way for us to get rid of the [A1] note of our first mortgages which is frankly the best way. It's better than [typically aligned] because it's by definition match funded.

And so we're looking at whether we should participate with our seniors that we have the unlevered portfolio and the securitization led by one of the Wall Street firms and that is likely -- and likely outcome -- what's good about that is the spreads will be even tighter than we modeled when we originated that paper.

So what that means is that sitting in the subordinated tranches or the B1 note, maybe it used to be a AA or a single A, that we really have to rely on our underwriting skills. We think the real estate markets are not great.

So we think cash flows need to be underwritten. You need to understand the tenant base if it's retail. You need to understand the recourse provisions of your loans.

And we rely on our real estate background and underwriting. Not all loans are created the same. Recently in the things we've done that we didn't win, we bid a portfolio of FDIC notes, first home loans, from a recent pool in scale and we were beaten by quite a margin, even though we bid the portfolio unleveraged from the FDIC. So we are -- on the other hand, the markets are very lumpy and we could put out $500 million in two weeks, given the nature of the loans.

What's happening now is some of the banks are beginning to sell more of their debt, because -- certainly the insurance companies -- because their capital ratios are back in balance and frankly, the losses aren't so great. We can be pretty competitive in that market, particularly when we complete, which I expect will be in the next couple of weeks, the credit facility for the REIT.

Because right at the moment, we don't have a lot of cash. So the most important thing to do is complete the credit facility, which we are well advanced on and making sure we have a facility that is long in duration and will allow us some flexibility on collateral selection that we can actually use. It's not great to have a credit facility you cannot actually draw.

Certainly you are going to have to pay for the unused balances. There are also very significant changes coming to the banking regulations, it looks like, particularly on the hold of the banks.

And so we are now engaged in multiple discussions with multiple lenders, where we can be the person taking the risk note and we'd be delighted, because we are a natural holder of that paper. So we are being patient.

We realize we are a little behind maybe some of the Street estimates on deploying capital, but frankly, we have $40 million in this vehicle. We invested the money, we're a major shareholder. We are investing the money like it's our own, because it is our own, a significant portion of it is.

And we think patience is a virtue, particularly in these choppy markets. We do expect that as the volume of transactions pick up, the banks start selling some of the notes, the insurance companies continue to sell notes, that there's probably not enough sophisticated capital to take the risk portion of the capital stack.

So we are really excited about that and you will probably begin to see us take participations in deals as we climb up higher in the LTV to meet our objectives and our long-term objectives of building a robust and diversified portfolio. The other thing we are doing quite actively is looking at corporate transactions for our REIT.

And where they involve acquisitions of other companies or even other public companies, if we can find something that meets our needs, we're going to do that. So we are working on many fronts, not just originating mortgages and buying debt, as well as now building out our relationships across the lending world.

We are of scale. We have significant cash that we can deploy without going back to the market and we are cognizant of where the stock is (inaudible) our IPO in addition. So we don't have to do anything right now, go back to the market anytime soon at the moment.

I think investing is all about risk and reward and I think we are very focused on the cash flow streams of these assets that we underwrite. You do have a situation where many cash flows particularly in the office market are reversionary.

In-place rents are higher than market rents. If we don't think market rents are going to catch up, then going in cash on cash returns are irrelevant if you cannot produce the -- you can't get the loan paid off at par at the end or at least what you expected when you bought it.

So the portfolio today is fairly diverse by geography, by tenant mix, by kind of assets. We are rare aware of building a diverse asset base.

We do have a spectrum of durations that -- some of them are quite long. And we want to keep it fairly diverse and in major markets, and we have very pretty pictures. But I think we will also -- we will go into other opportunities if there is safety.

I think our bogey right now is -- can be slightly below an 8, maybe 7.5 on a first mortgage loan, given what we expect the world to do, as the seniors tighten even further and the securitization markets develop, it can go down and still be competitive and still receive our yields. And we are very cognizant of the risks in the market and our view continues to be that rates will go up.

So to lend money today at 6% of first mortgage debt we think is a mistake for us long term if we're going to lend it with duration. So we're not going to do that. At the moment, we will tell you if we're going to change our strategy; but right now, that's not our strategy. We're not going to make a five-year loan at 6%.

Barbara mentioned some CMBS that we have, the TALF stuff and everything we have done was for safety. We have a five-year facility with TALF. It's not the three-year facilities, even though the paper typically was two years, but we modeled it to be fully extended.

I do think the special servicers and the entire CMBS market is beginning to erupt, if you will. It's beginning to have borrowers go to specials, saying I need to do something, and the specials are beginning to pay attention to it.

So if you look at the market, delinquencies are going to rise dramatically we think post election, when short rates are likely to go up. Maybe they'll hit 2 or 3% and LIBOR, or they should at least. If they do, you'll see a lot more pain and suffering and we want have some ammo left to go take advantage of that opportunity.

So we are being relatively picky, as well as continuing to build out our joint venture infrastructure to originate loans for us nationally and many conversations are going on right now, and there's some very large loans in the pipeline. We have over $1 billion of originations, [$979 million] to be exact in our pipeline and we expect to close a couple hundred million, I would say, easily. Again, we don't have the capacity to do all that unless this facility gets completed and there's is some other opportunities. We will complete the facility shortly.

With that, I would say we're optimistic. We feel really good about the Company's position and we feel really good about everything we own.

We are seeing most everything that trades of scale in the marketplace and for the most part, I would say we're probably seeing 85% of the transactions, which probably tells you something about the slow volume. It's a case that many borrowers are just sitting with LIBOR at 1% or 0% and short rates of 1%. They don't have to do anything until rates go up and they get squeezed.

So most borrowers are just sitting still and for us, what we're not doing is buying paper at LIBOR plus 100, that a current pay rate would be like 1%. And we don't want to do that yet, even if the IRRs are good because we can't pay the dividend. We're trying -- one other comment I would make about the dividend.

We have gotten into an odd situation where we;re announcing the forward dividend, the second-quarter dividend in the first quarter earnings call. We obviously feel we can cover this dividend, the $0.25 dividend currently in the second quarter based on our pipeline and what we have accomplished to date.

Could go higher if we get more done than we expect, but we're trying to get back to paying a dividend that we are earning. So we're going to probably revert to a trailing dividend, we will talk about a dividend after we earn it, because we don't want to pay out capital.

So going forward, we are going to change our methodology. It is a little to announce the second-quarter dividend on the first earnings conference call. For the most part, we have not chosen to get way ahead of our payout capability and [not eat into] the capital balance of the Company.

One other comment, anticipating a question. Our G&A is running roughly in line with our underwriting of about $6 million. It's slightly higher in the quarter for some one-time stuff like the annual report and some of the other expenses.

We do have a little lumpiness in the G&A which comes from dead deal costs, pursuing opportunities we bid on as I mentioned, not only that large FDIC portfolio, but there are other situations that we lose. And we expected to close a couple other transactions that we lost at the last minute.

Borrowers are sometimes today opting for lower proceeds and cheaper coupons, and we are competing by a little higher proceeds that we're very comfortable underwriting and trying to preserve the returns that we need. But I think you'll see us continue to be quite creative, working on loans right now in places like New York where you might be in a preferred equity position with a 15 coupon and a kicker.

And as borrowers need to do things and banks begin to say no more extensions; you have got to pay us back, there will be plenty of opportunities; still a couple of trillion dollars of debt maturing in the next couple years and we still want to build a global finance company, we are just going to be patient to do it. So with that, I think we will take any questions anyone may have.

(Operator Instructions) James Shanahan, Wells Fargo.

My question relates to the yields on the portfolio. Can you tell me, Barbara, as of March 31 what the weighted average yield is on separately your fixed-rate first mortgage loan portfolio and your subordinated debt portfolio?

I'm sorry, Jim, I don't have that information here with me.

We will call you back, Jim, and provide that for you.

Okay, super. And just some guidance I guess if possible on what the outlook is for additional capital? Do you anticipate raising additional capital or would kind of depend on market opportunities and stock price and other factors? Just to hear your thoughts (multiple speakers)

Pretty soon we're going to have to -- we have almost $600 million of capacity we think which is $100 million of cash, I guess as Barbara mentioned, that was at the end of the quarter, $280 million on the term loans that will draw that facility, which was not drawn at the end of the quarter. It will be drawn probably at the end of this quarter, something like that.

And then there's this $100 million of cash coming back from the short teachers loans, which we thought was a really cute way to put our capital to earn like a 7% yield for one year in AAA credit. So that's about $480 million and then we levered the remaining first mortgages that we have on the facility, the credit facility where we have -- we continue to negotiate on.

We think it totals almost $600 million, maybe more, of capacity. We won't use all of it, but maybe $500 million before we have to go back to the market. The market is so lumpy and one of our competitive advantages given our scale is that we can do $150 million first, and then that might mean that we'll keep a $35 million piece of it and sell off $120 million senior.

But we can and do, given our scale, we want to do big loans. So it's imperative to get the credit facility complete, but at the moment, we're trying to balance. We do not want to sit on $500 million worth of cash.

So we don't want to draw these lines unless we have a good use for the cash immediately. And I think stabilized, this portfolio is well into double digits stabilized yield, pre-G&A, pre-management fees.

So what we own today meets all of our requirements and all of our criteria to produce the better than 12% yields we talked about at the IPO. But we're not there yet because we don't have the leverage on it because we don't have any use for the cash.

So it's a balance, it's sort of a dancing act. We want to only draw that cash when we're going to -- we're going to close a $60 million loan probably the end of the week on an office building in the Midwest market. It's like 70-something dollars per foot, being underwritten to an 8% first mortgage yield, which levered will get us into the double digits easily, probably 12 or 13%.

We have two loans that will close probably within 30 days. One is on a retail center, it was an $80 million construction cost, our loan will be like $25 million, also at [two and eight]. And we have another loan closing, it could be as large as $65 million and it's on a hotel property, and that should close also.

It's a big loan. It's $130 million. We are slicing it in half and we sold off half of it to another lender because we just didn't want to put that much money into one deal.

So, you know, we are pretty active. We have a decent short-term pipeline and very -- literally there's -- Thursday's there a bid on a bunch of notes that we will be quite aggressive on that one of the life companies is selling.

So we are -- we can't -- I know it's hard for you to model, because it's hard for us to model, and we can put out the rest of our capacity in 30 days. Or it could take us to the end of the year. We just don't know and it's hard to model for that reason, and it's frustrating for you, and it's certainly frustrating for us.

But I'm comforted by the fact that we are really taking our time and being very patient and making sure we like what we originate. Because we really don't want any problems in the portfolio.

And we are cognizant, when we go back to market, we're going to have to show you everything we did. We want you to understand everything we did, and you want us to feel good about being a steward for shareholder capital. So we are not doing anything too exotic here and we are making sure that we can pay our dividend out of current cash flow.

Thank you, Barrie. One more quick follow-up. On the hotel property that you mentioned, the $135 million, your $65 million loan; I assume you sold off a senior participation there. What would be the yield on that?

Actually, we're splitting the loan in half, not horizontally, but vertically. They take half and we take half. It's very good.

It's a very good yield. We'll tell you after we close it. But it's an unusual situation and it's actually kind of what we are supposed to be doing. It's complicated. It's actually a foreign bank that will be closing it, but we don't want to get too ahead of ourselves, so we're not going to talk about it anymore. By the way, you have Andrew (inaudible) in here who is Chief Counsel who is sweating.

Steve Delaney, JMP Securities.

I was wondering if you could comment a little further on the multi-borrower CMBS market that's starting to open up here with RMBS and the JPMorgan deal talk that's coming in June.

Barry, would Starwood Capital consider creating its own multi-borrower shelf, so you have better control over the quality of everything that's going in? I guess that's part one of the question.

And then part two, not sure how these new structures are going to be, but in the old days, we called them the (inaudible) borrowers, I guess buying below the -- certainly everything below investment grade and probably single A down. Could you be a little clear on if you participate piggyback with a Wall Street bank, exactly what tranches would the REIT, Starwood Property Trust, hold in terms of its investment in the transaction?

On the first question, we have had multiple conversations with some of the Street firms that are queuing up securitizations and they all would like our paper, because they don't have many pieces of paper around, and we're not big enough to do our own deal. We could be down the road, but right now we're not big enough to do our own deal.

And the pricing will be better, the bigger the pool and the more diverse transactions are. From our perspective, Leo is here and he could comment on it if he would like to. I don't know, Leo, do you look at the other loans in the pool to decide which guy you're going to go with in terms of (multiple speakers)

How we will think about our strategy with the (inaudible) securitization is I think in the near term, we will slice senior portions of our loans and contribute them into securitizations sponsored by a Street dealer, where we will retain the subordinate risk of our loans only. So separate from a (inaudible) process, we will treat it as a -- in essence, it's really a levered with respect to our loans (multiple speakers)

You will create a B note (multiple speakers)

Yes, we will create B notes in a term, match funded, non-recourse basis in utilizing the capital markets capacity and we think that's something that's attractive to supplement our line financing approach.

We will try to slice -- of course we have to work with the Street (inaudible) securitization but we will try to slice it to create at least a 12 in the B note, 12% yield.

Maybe on my follow-up question was kind of your target. So, okay, this really helps because I was -- when you were first talking about it, the banks now have all this skin in the game rules from top to bottom, and it sounds like they're trying to find strategic partners to kind of take especially some of the lower stuff.

So I understand where you are now. If you're taking a loan you originated and just contributing an A note, you've got total control over what risk you retain and you're not going in and buying the subordinate CMBS out of the new issue deal.

Yes, we're looking forward to putting in the risk requirement rules for the bank.

I want to mention something about Barbara's comment too and I hope everyone is still on the call, is that there was a pool -- how large was it? $50 million.

56 par value.

Barry Sternlicht $56 million par value -- I think she mentioned they were 5% yield or something like that.

That's a coupon.

That's a coupon. Yield to maturity on that paper is like way into the double digits. So it's not -- that's not our yield to maturity on that paper. That was the coupon, but they were bought at big discounts to par.

So they were one-off pieces of paper that we bought on bonds and various things and many of them have appreciated. As I said this in -- somewhere and I don't know if it's actually in the release. But in the portfolio we own today, if we were to liquidate the REIT is worth higher than the book. It's pretty valuable at the moment. The markets have moved so far, we have almost $1 billion of paper that's out there. We're not marking our book -- our book to book, if you well.

(multiple speakers) to CMBS?

Barry Sternlicht Leo can talk about the CMBS, but it's probably up 6, 7 (multiple speakers)

There's been meaningful appreciation. We monitor the markets for both future opportunities plus to gauge our positions. Given the run in the credit markets, we acquired our TALF positions in generally a par or less and our CMBS position -- we've built a portfolio that we continue to see tranches subordinate to us trade at 10 points or more than our acquisition price for our piece of senior in the stack.

Then we have that large distribution center loan which is $110 million funded. Is that right?

Yes, $110 million of (multiple speakers) $156 million of face, which we acquired at the end of summer early in the formation of a REIT to --

It was like a 13% on a first mortgage with massive coverage and it's got huge duration. It's like 15 years or something like that.

So we can sell that paper probably for a $20 million gain today, maybe $30 million, maybe more. I don't know. I mean the credit markets have gone a little ballistic.

So I think we have a $50 million gain, more than that, in the book if we were to liquidate. So if we can't do anything, we'll just go home, put up the white flag. I'm not really concerned about debt and equity. Honestly, I mean there's a lot to do. It is competitive, but you've just got to be more creative than the next guy.

Barry Sternlicht Thank you for the comments. Appreciate it.

Thank you. There are no further questions at this time. I would like to turn the floor back over Mr. Sternlicht for any closing comments or additional remarks you may have.

Well it's going to be an important quarter for us going forward. We've got to commit -- get our credit facility completed and deploy some capital that we have available and then hopefully we can raise the dividend and the stock will respond, and we will watch obviously what happens to our comp set as some of these companies are actually running out of capital and have to go back to the markets.

But we are not going to be in that position for a while. And we're pretty comfortable that we're going to be able to respond to the challenges and the opportunities in the marketplace. So thank you everybody and have a good week.

Ladies and gentleman, this does conclude today's conference. You may disconnect your lines at this time and we thank you all for your participation. Have a wonderful day.