Starwood Property Trust Inc (STWD) 2010 Q3 法說會逐字稿

Greetings and welcome to the Starwood Property Trust third-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, Andrew Sossen, General Counsel at Starwood Property Trust. Thank you, Mr. Sossen, you may begin.

Thank you. Good morning, everybody, and welcome to Starwood Property Trust's conference call for the third quarter 2010.

Yesterday we released our financial results for the quarter ended September 30 and filed our Form 10-Q with the Securities and Exchange Commission. These documents are available in the Investor Relations section of the Company's website at www.StarwoodPropertyTrust.com.

Before the call begins I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the Company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The Company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.SEC.gov.

Joining me on the call today are Barry Sternlicht, the Company's Chief Executive Officer; Jerry Silvey, the Company's Interim Chief Financial Officers; Boyd Fellows, the Company's recently named President; Stew Ward, Chief Financial Officer for the Company's external manager; and Jim Allen, the Chief Accounting Officer of Starwood Capital Group.

With that I am now going to turn the call over to Jerry Silvey.

Thank you, Andrew, and good morning, everyone. This is Jerry Silvey, the Interim Chief Financial Officer of Starwood Property Trust. This morning I will be reviewing Starwood Property Trust's third-quarter 2010 results and investment activities. Following my comments Barry will discuss current market conditions and views on both the current economic environment and recent events.

We had a very exciting quarter on three different fronts. First, we have expanded our team at the Company's external manager to include 10 additional seasoned real estate lending professionals and Barry will talk more about this later.

Secondly, we have enhanced the liability side of our balance sheet with the closing of a new $350 million financing facility and the completion of our first contribution to a commercial mortgage securitization. In addition, we are working on several additional financing facilities which we expect to close in the near term.

Third, we have continued to generate compelling investments during the quarter and after expanding our portfolio of targeted investments improving its return to over 12.8%. During the quarter we originated $203 million of incremental investments and closed an additional $69 million after quarter end. We are especially pleased with the risk profile of this portfolio as it is diversified by geography as well as by asset class and has an average last dollar LTV on the underlying collateral of under 65%.

So let me tell you how the portfolio performed. For the quarter ended September 30, 2010, we reported core earnings of $27 million or $0.56 per common share. This included a $93 million -- $9.3 million or $0.19 per share gain from the sales treatment under GAAP for two of the five assets we contributed to a commercial mortgage securitization in August. On a GAAP basis we reported net income of $22.7 million or $0.47 per diluted common share.

Our net interest margin for the third quarter was $22.8 million, up from $18 million in the second quarter representing a 27% quarter-over-quarter increase. The net interest margin on our existing portfolio as of today for a full quarter is approximately $23.5 million.

This quarterly run rate reflects a full quarter's contributions from both the $203 million of investments completed in the third quarter, some of which were completed in late September, and the additional $69 million of capital deployed to date in the fourth quarter. This run rate ignores repayments on our portfolio and any incremental investments yet to be made during the fourth quarter. It's simply a snapshot of our net interest margin generated as of today from the existing portfolio for a full quarter.

The current run rate of the portfolio, the investment pace to date, and our pipeline gives us the visibility to declare a $0.40 dividend for the fourth quarter which will be paid in January 2011. This represents an increase of $0.07 or 21% over the prior quarter's dividend and represents an 8% dividend yield on the Company's IPO price and a 7.7% dividend yield on yesterday's closing share price.

I would like to share a few points about the components of our quarterly earnings. First, as previously mentioned in August, we closed our first participation in the CMBS where we contributed five senior loans with a book value of $80 million and received $92 million in proceeds while retaining $94 million of related junior interest.

We recorded a sale for three of the five assets representing $38 million of proceeds and generated a gain of $9.3 million or $0.19 per diluted share. And in conjunction with this we recorded a $54 million financing liability for the remaining two contributed loans.

We view this as a very efficient and inexpensive way of financing our first mortgage positions in a non-recourse matched term manner. We expect to utilize this securitization market as a financing tool on future first mortgage loan originations.

Second, we have started accruing for the manager's incentive fee. This quarter we accrued $1.6 million for the incentive fee; however, it will not be payable until the Company has generated four consecutive quarters of core earnings exceeding an 8% return. This incentive fee is not included in the calculation of core earnings.

Third, we utilized foreign exchange forward swaps to hedge the face amount of our non-dollar-denominated loans and a significant portion of the corresponding net interest payment stream. However, as we discussed last quarter, when converting the carrying amount of the non-dollar-denominated loan at spot and valuing the full hedge position for accounting purposes there is a net $1 million unrealized loss for the quarter that is reflected in the income statement. This is simply an accounting timing difference which will reverse over the life of the loans with no impact on the cash flows or the ultimate profits to be received from the investment.

Shifting to the balance sheet, GAAP book value per share was $19.09 on September 30 and $18.81 on a fully diluted basis. We estimate that the unrealized depreciation of the fair value of the portfolio's assets would add another $0.69 per common share to these numbers, bringing fair market value to approximately $19.78 per common share or $19.50 per fully diluted common share.

I will now walk through the composition of our investment portfolio. We believe that the composition and the quality of our portfolio is safer than the predecessor commercial mortgage REITs and represents a very attractive risk-adjusted return for our investors. In fact, our portfolio of target investments has a weighted average last dollar LTV to the underlying collateral of less than 65% while generating a leveraged return of over 12.8%.

Including subsequent quarter end investments we disclosed yesterday, we have approximately $1.3 billion invested in first mortgages, subordinated debt, and mortgage securities. Our portfolio of target assets currently totals $1.2 billion and is generating a 12.8% return.

To break this down further $525 million of our total current investments are in first mortgages, which have a weighted average coupon of 8.1%. $459 million of these first mortgages have been levered with $281 million of financing which has a 61% weighted average advance rate and a weighted average fixed rate cost of debt of 3.91%. This results in a 12.9% levered return.

The remaining $66 million of first mortgages are currently unlevered and have an 8.5% coupon that generates a total return of 11.5%. As a reminder, the coupon is measured as cash return on face value whereas the overall return on the loan will also reflect entry and exit fees and accretion of any purchase discounts.

In addition to the first mortgages, we currently have $419 million of total investments in subordinated debt. A portion of this portfolio is levered with $74 million of financing which has a fixed rate cost of 4.16% resulting in an overall levered return of 12.9% on the entire subordinated portfolio.

Our CMBS investments, which are currently categorized as available for sale on the balance sheet, totaled $276 million. Of this amount $209 million is our TALF related multi-asset CMBS which has been financed with $171 million of non-recourse debt and generates a 16.5% levered return. The additional $67 million of CMBS instruments are unlevered single-borrower securities which are generating an 11.3% return.

We have also been utilizing high-quality short duration RMBS and CMBS securities as a way to enhance or achieve an enhanced return on our excess cash positions which have not yet been invested in our target asset portfolio. As of September 30, 2010, these securities aggregated $78.8 million and also have been categorized as available for sale on the balance sheet.

On the liability side, to date we have placed roughly $472 million of debt on our investments excluding the securitization financing of $54 million, which have been match-funded to the duration of the underlying collateral. It's important to note that both the underlying assets and related debt are fixed rate so we have match-funded with respect to fixed versus floating rate debt.

As previously announced, we closed a partial recourse financing facility in the amount of $350 million and $5 million of that has been drawn to date with the remaining amount available to fund future senior mortgage purchases at a spread to LIBOR ranging from 175 bps to 600 bps depending on the type of asset purchased and the rate of advance on the loan. In addition, we are working on several additional financing facilities to be used on first mortgage loan originations.

On the liquidity front, as of yesterday November 9 we had $143 million of available cash and $185 million of net equity invested in CMBS and RMBS which are predominantly liquid securities. With this and our unused credit facilities, we have additional capacity to invest and we have a deep pipeline we are pursuing to deploy it.

So with that background I would like to turn the call over to Barry to comment on market conditions and provide some additional perspective on our progress.

Thanks, Jerry, and thanks, Andrew, and thanks, everyone, for joining us this morning. I am joined in the room with probably one of the most important things we did this quarter, which is with Boyd Fellows and Stew Ward who are heading the team that joined our external manager several weeks ago.

With them came 10 people, including the two gentlemen, and together they are quite an experienced team in the commercial real estate industry. They have originated over 5,000 commercial real estate loans which they estimate total over $50 billion over the last 15 years.

We made this move with a very significant investment in hiring these guys because I personally have known Boyd for almost 20 years. In building our company and taking it to the next level, which is our goal to be a $5 billion or $6 billion commercial real estate lending company, we needed to build up our origination platform as the market opens up and loans roll over and there are more origination opportunities.

So we chose to make this rather significant investment in their team. And based on their experience -- they started from scratch a major commercial real estate lending platform at Countrywide Financial having left Nomura. The team is unusual because they have been together for so long and they are one of the only, maybe one of the few, if any, CMBS group which remained profitable throughout the market turmoil of 2007 and 2008, which we attribute to their disciplined approach to credit and their sophisticated hedging strategies.

So Boyd and Stew are joined by Warren DeHaan, who is our Chief Origination Officer going forward, and by Chris Tokarski, who is our Chief Credit Officer. Also joining them are [Carrie Carpenter], [Rob Riddick], [Marissa Lizak], [Lilian Brandt], [Brad Greinah], and [Anthony Marconi]. Right now we have been spending the last several weeks integrating them into the Starwood team and them getting to know us and us getting to know them.

But we are very excited and expect that this will put our, I think, industry-leading origination platform into high gear. We are working on several exciting joint ventures with financial institutions and one of them has been completed but we are not at liberty to talk to you about it. But it should provide a significant pipeline for the REIT going forward which is proprietary.

So I think that is really important for our company and I am really excited that we got that done. I am also very excited about the dividend. It's nice to achieve your goal at the IPO. We said we would produce an 8% return. You can tell from Jerry's extensive comments that we are going to -- we have the capacity to easily exceed that earning 12.5% or better on our permanent securities.

Also, there is one thing I would mention about our press release. We call the B notes that we originate subordinated first mortgages but these are really first mortgages that are chopped into a senior.

I will mention the $42 million subordinated note on the four retail centers located in Pennsylvania and Ohio which we think will generate a 16% return. We actually originated $142 million loan and simultaneous with our closing we sold off $100 million senior to a money center bank. Were we bigger we probably would have just put that on our line.

So our originations, while it looked a little low to some of you, are actually $100 million or more higher because we actually slice these things right when we close -- not as some of these loans have closed we close the whole thing and then securitize it. That one, which was $142 million loan, was closed and sliced immediately.

Our theme from the IPO, I read in my comments from last quarter, has been patience and discipline. I hope you get that from us now if you have been listening to us for the last four quarters. It's lumpy; our business is lumpy. We have a tremendous pipeline, however, and would expect to easily cover the $0.40 dividend which we will pay in January from closings that we expect to take place this month and next.

And we mentioned our pipeline is over $1 billion. We feel highly confident over $0.5 billion of that will close in the next 60 days meeting and achieving or exceeding our yield targets. The markets are wide open, however.

I am very worried about the markets. I feel we are a bid in a bubble. I see some undisciplined lending being driven by -- I might call them alternative investors. These aren't the shadow finance companies we saw before but these are people who are getting a little carried away.

If you look at what has happened to real estate, it's exactly what happened in 2007 and 2008 when cap rates were plunging so LTVs were going up without cash flows. And based on that lenders seem quite willing to lend aggressively now and that is making us very worried. So we are picking between the rubble and finding opportunities that we can underwrite and relying on our extensive real estate experience to underwrite the real estate assets.

We are very focused on the cash flow and very less sensitive to what people tell us the LTVs are. We do think in this lower interest rate environment there is not going to be much pressure on cap rates rising, but we are worried about LTVs that go up simply because cap rates are falling. And that is really a function of quantitative easing and the other policies of the Fed which are driving people in search for yield.

We are very cognizant, as you look at the two larger investments we made this quarter, we are trying to take wide B notes. B notes that go from 50% to 75% or 45% to 75%. We are not making investments at 13 that go from 72% to 73% of a capital stack because we are paying particular attention to the reset of the senior security that we are selling off. We want to know that if it resets to 5% instead of 3.5% or 5.5% that we feel comfortable that we are going to wind up with a loan and not only equity of the asset.

So we are very disciplined; we told you we would be. Our company is about safety and a growing dividend yield. It's a total return vehicle. We have given you a safe collateral pool as we could dream up.

We have taken no credit risk really. We have swapped out the currencies, including the principal and the coupons, and we are match-funding, by duration, our investments. And we are matching fixed to fixed and floating to floating. So we have done about as good a job as we can managing and that is significantly different than the resi REITs that are out there today paying very high dividends but have very mismatched books.

So the profile of our dividend is completely different than the other vehicles, God bless them, but this is a different kind of company. We are also different than our peers in our space.

One of the things that we look for in our company is how we build sustainable competitive advantage. I think hiring of the team from Coastal was part of that. We consider our size a competitive advantage; we are one of the few guys who can originate a $200 million mortgage. And I would consider our 20-year history of underwriting real estate deals, 25, and knowledge of the real estate markets and our relationships a sustainable competitive advantage.

We will expect to flex up and down the cap stacks today as we move forward, taking advantage of our knowledge of property and willing to do higher LTV loans if we think the cash flows are particularly secure or even taking equity kickers. We have not done that yet but there are transactions that we have looked at; we have contemplated that.

The other thing I would say is our liquidity remains pretty good. We don't really feel like we have to sell our CMBS; they are yielding at or better than our target returns. But our RMBS book, which has actually performed tremendously for us, is available for sale if we need to and we have over $450 million of liquidity left on our lines. Although if we close our other transactions we are talking about, we will use up most of that liquidity.

The last thing I would say, again, I am going to highlight is transparency. I think Jerry's comments are incredible detail. Other than telling you the exact date of maturity I think we have provided everything we could probably provide to you that is reasonable for you to do your analysis, which I think is important because if you have confidence in us you will make us a core holding in your portfolios.

The last thing, I was looking through my comments of last quarter and I said that when we IPO'd we thought we could make senior first mortgage loans at 8 and still produce at 12. Then I said we could do 7 last quarter and produce at 12. I think now you are going to be in the 6s and still produce at 11 or 12 in your junior note and the reason is now that you are seeing spreads come in.

So before you are seeing -- there is numerous lenders now that are willing to make the senior mortgage people want the AAA security, there is tremendous appetite for it. There is less appetite for the junior notes and so you are going to see spreads come in. In the old days AAA in real estate were 30 or 40 or 50 and over. They are still [250] over.

So while -- as spreads come in we will be able to make more and more competitive senior loans, mortgage loans and that has been a very exciting development for us that sustains us in the marketplace. At the end of the day we were born to take the place of GE Capital and [Textron] and [Sinova] and TriMont to become the shadow finance company and that is what I expect we will become over time.

So I will make one other comment about the pipeline. I think it's really strong and we are very pleased. We continue to look at corporate opportunities that might fit in our taxable sub, but overall I think we are very happy and we hope you are pleased too.

With that, I have no further comments but we will take your questions. Operator?

(Operator Instructions) Don Fandetti, Citigroup.

Good morning. Barry, it's kind of interesting to hear this early on that the market has gotten so frothy. It kind of makes you wonder what is going to happen in a year or two. But I was just curious on the $500 million that you might close, is that going to be more smaller transactions or is that a portfolio and what is driving all this deal flow? If you could just sort of highlight what is really driving this.

You know, I said $500 million; it's greater than that. These are bigger loans actually. These are big deals and I think that is one of our strengths. They take longer to close but they are worth doing.

We have kind of shied away from doing $10 million deals. Now with Boyd's team in place we can pick up the pace of the small investments. What you are really seeing today in the pipeline is really the Starwood Capital Group's 40% acquisition team sourcing loans nationwide.

And obviously our name is getting out there. People are talking to us. We are getting calls and they know we can execute. We are typically ahead of our borrowers; we can move faster than they can. Having said that, like on the one deal, we are simply waiting for [stopholds] and we continue to wait for stopholds. These stopholds are from municipalities and they are going to move at their pace, not our pace.

So we are doing our work, but we also -- we know we are not an insurance company. They have their place in the market but we can move really fast and we are very flexible. So I think the relationships that we have, the relationships that Boyd and Stew and Warren and Chris have, it's going to be a pretty powerful company I think.

I am very excited about the scale of the deals that are in the pipeline. They are $100 million plus transactions. That will be the whole loan and they will be sliced but that is the whole loan. So I would say, I don't know, people are finding us and they are finding our financing competitive so that is the most important thing. Also, I think they know we will close.

Then on the JVs that obviously you can't talk specifics on, but we see companies in this space generally kind of looking at those JVs to do larger deals. Is this driven to do larger transactions or to more broaden your product scope?

Boyd, do you want to comment on that? You better come down here if you are going to comment on that.

The JV that you referred to?

It's not driven to do larger deals but why don't you explain, without revealing anyone. Do what you feel comfortable talking about.

Sure, there is limitations to how much we want to talk about but the bottom line is that there are other organizations out there that have the capabilities to source commercial real estate loans and they are not as well positioned to fund them and execute. And so for those groups, we will align ourselves with them and then we will provide them capital and execution capability that they don't otherwise have.

And I think it is a function of, especially in -- this particular institution we are talking about is quite large, but there are smaller institutions that are saying I have the origination capability but I can't take this concentration risk. So I have a $40 million shopping center loan that is maybe a small bank and I want to keep 10 and we are the participant; we will take 30. And we will underwrite it so there is no put or anything.

We just basically decide -- we cherry pick those deals. If it's a scalable deal and they don't have the balance sheet to do it, we do it and so that is just another way to build a pipeline.

I think, ultimately, the best deals are the origination deals, although we have bought some great paper. But that is competitive. I do see -- I am worried, I am worried about some of the deals I am seeing done. Some of this -- there is one deal going down now that is gigantic and I just can't fathom.

When you won't buy the assets at the price the debt envelope is then you got a problem. This is all being created by the senior being done, the most senior AAA being done very tight with very deep -- 3.5% today with a five-year at 1% looks pretty good, except I think all of us expect rates to go up. We expect rates to go up.

We have an interesting book because we do have maturities of a couple hundred million in 2013 and we are kind of happy about that. We don't think we will be facing a lower interest rate environment and most likely we will be facing a higher interest rate environment. And the duration is going to be an asset for us.

So we laid the book out purposefully the way we have because we thought rates would be higher in two years. Maybe spreads will be tighter but rates, base rates will be higher. So I think that is good too.

Thanks.

Gabe Poggi, FBR Capital Markets.

Good morning, guys. Great quarter. Quick question, how do you guys view the opportunity set between domestically and euro-zoned, specifically the UK? I know you guys have made a couple of investments in the UK. If you could just talk about kind of the broad palette between here and there and differences. Thanks.

Hi, Gabe, good morning. A couple things. We are not going to go places we can't hedge the currency. As much as we would like to we can't, so we are not going to Brazil with our vehicle even though I would love to. They could use some (inaudible) down there; not this vehicle. So those countries that we can't hedge we are not interested in.

In Europe you are beginning to see some sales but there hasn't been much. Most of these wards of the state have not done very much. We did one equity transaction with one of the largest banks that is sort of in government and in the UK and they told me it was one of two deals they did last year. So we bought a hotel in London from them. There just hasn't been a lot.

Having said that there are a lot of conversations going on now. Hopefully, you will see some movement of the loan books of some of these guys. They are talking about it now for the first time, but we aren't seeing a lot of transactions and they have a lot of internal issues they have to deal with.

So for the most part, even a poorly performing real estate loan is better than they get in cash. They are thinking, well, I can earn 1.5% but what am I going to do with the money? So I think that is a problem in the entire US banking system.

Particularly these loss sharing deals that the government has done because the institution doesn't want to realize the loan or take the loss because when we pay them cash or we pay them $0.80 and they get the $0.20 from the government they get $1. They got to put out the $1 or it just dilutes their earnings and they get no return on it.

So until loan demand picks up the volume of new originations or the loan sales from these regional and assisted banks aren't going to step up. The FDIC last year sold only, I think, $10 billion of loans to third parties. 95% of what they did or 98% went bank to bank assisted deals, so all this stuff is in the assisted deals but the banks aren't selling.

We are actually talking to some of the larger assisted bank deals that were done. They are looking for loans. They are desperately trying to put out capital and they know that they would like to get off these injured loans that are surviving on loss sharing and put the money to work in a fresh loan with a good LTV with a sponsor like us behind them. So in one transaction that we are working on that will be $150 million first in this institution which is a loss share bank will take $50 million of the $150 million, a money center will take the other $100 million.

So it's going to happen; it's just not happening yet. That is all good news. That is all in front of us and hopefully we will have the problem of not having enough people to cover the opportunities that we are finding.

Thank you. That is helpful.

(Operator Instructions) Joshua Barber, Stifel Nicolaus.

Good morning. I know that, Barry, you touched upon the yield on the original IPO price. I am just curious if you can give us some of your thoughts on where you would like to yield to go based on share price appreciation or where you think that the shares have potential to go?

I look at my personal portfolio, I look at our real estate deals, I look at where treasuries are, I look at where high yield is -- this is an extraordinary portfolio at the moment. We will see what happens as we move forward but this is absurd.

An 8% dividend yield or a 7.7%, whatever it is at the stock price, given the risk profile of this is a joke. These are secured interest most of them and the CMBS portfolio is you put your kids' trust funds in this stuff. I mean it's as good as it gets.

So I think the key to driving the dividend yield, which I think should be more like 6% -- obviously we are going to continue to hopefully grow the dividend but as the stock can trade down to a six that will come with the turnover, building a bigger float, getting the stock into more of some retail hands, letting the retail know about the Company. We did a three-day non-deal roadshow, as you know, probably -- was it late, early September?

Yes.

And we realized that people didn't realize we had spent $1.5 billion. The reason we hadn't come back to market was we were efficiently relevering the portfolio. We knew about some repayments that were in the teacher's portfolio that gave us additional collateral.

All of our investments are doing great. We have earned better than a 10% IRR in less than one year duration in RMBS paper. So we are pretty pleased with the results of our investing. Our team has done a great job; I am just the coach. They are really excited about the vehicle and about its growth prospects.

I do think that if we have a low interest rate environment this stock can trade -- look at the other REITs, they are trading at 3.5% dividend yields and we can grow this yield. This yield will grow as we deploy capital. So I am -- you tell me, but we have done the model out a year; we think we can beat it. We won't tell you what it is but it shows a higher dividend.

And I think -- I do think that the book value, the adjusted book value we gave you at $19.70 or something like that, $19.66, $19.78, whatever it is, that is conservative. I think if you -- we hit an auction for this book it trades north of $20. And where are you going to get this portfolio today?

So some of these deals, this is shopping center deal with the four cross centers with two really good malls and to (inaudible) centers they are (technical difficulty) they don't count as anything? That is a ridiculous return. I can't get that in equity deals today.

I am looking at equity deals. I got to release the building, got to put in tenant improvements, I got to assume market rent gross of 5% and I get a 16 IRR on my equity deal. I get a 16 IRR on a debt deal at 75% with a big wide piece of the capital structure -- risk/reward wise what would you rather own? Tell me. Why would you own -- have to get growth in rents?

You are not seeing growth in income-producing properties in rents, other than multi-families which are beginning to turn around in almost any city other than New York and maybe DC. Everywhere else we are all thinking rents will go up but vacancy rates in office are 17%. It's not like the market is that tight. Now obviously midtown Manhattan is a different story but we can't lend all our money in midtown Manhattan. Wish we could, but probably don't want to do that from a diversification standpoint.

Well, I guess hope always springs eternal. In light of some of your comments also about the market getting a little frothy, do you think there is some potential there for you guys to do your own securitization or is the market not quite that frothy yet?

I am so happy you asked that question; we were just talking about that last week. Yes. We did mention -- Jerry mentioned briefly that we are negotiating at least two additional credit facilities. And I would expect we would have them in place momentarily.

They will enable us to do that kind of packaging ourselves. Financing, obviously the dream is to finance at the corporate level and hold the whole first mortgage and just finance at the entity level against them. We will have to be careful about maturities and mismatching and stuff like that, but in general that would be the most efficient way for us to finance the Company and the safest from an entity level standpoint.

Although it does -- it has its benefits and its burdens, right? That effectively crosses deals that aren't crossed, so this is a very efficient financing the way we are doing it but always owning the whole first mortgages also has its benefit. So I am not sure it's going to be one or the other.

But you are right at some point we would like to do it. We wouldn't mind doing our own securitization. Right now we are partners with the guys taking the seniors so it works for us right now. They are banking us and we are willing to provide them products.

Okay. One last question regarding the new management team led by Boyd. Is that team working only for the REIT? What is the division of their time regarding other Starwood capital entities?

100% of the time for the REIT. There are 10 of them and they are based actually in San Francisco, but Boyd has been -- and then they are moving in with our office, our capital group office, which is I think 10 or so people in San Francisco. So we just got a new space for them. Go visit them, they will be really nice but they are here every Monday when we do our deal pipelines.

I knew Boyd with he was at Nomura which was -- we closed the Westin acquisition in 1995 and he was on the other side of the table. It turned out to be an incredible investment for Nomura and a 7-to-1 for Starwood so it was a very good deal. But I got to know Boyd from sitting across the table from him at the time and I would say he is a very detailed guy.

The team is really quite something and very unusual. These guys have basically worked together now at Nomura, at Coastal, or at Countrywide, at Coastal, and now here. So they have been together -- combined they probably have over 100 years of experience with lending. And they probably have seen everything that can go right and they certainly have seen everything go wrong.

We were talking about it last night. Boyd and I had dinner and we were talking about things that go wrong, which is important not to make too many -- you will make some mistakes but it's nice to have people who have made them to keep you from making more of them.

That is very helpful. Thanks very much.

(Operator Instructions)

If we are good then we appreciate it. Thanks. We look forward to talking to you next quarter and have a good holiday, a good Thanksgiving. Bye-bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.