Starwood Property Trust Inc (STWD) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Starwood Property Trust first-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. A 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, Brad Cohen with ICR. Thank you. Mr. Cohen, you may begin.

Thank you. I'd like to welcome everyone to Starwood Property Trust conference call for the first-quarter 2011. With me this morning are Barry Sternlicht, the Company's Chairman and Chief Executive Officer; Boyd Fellows, the Company's President; Stew Ward, the Company's Chief Financial Officer; and Andrew Sossen, the Company's General Counsel.

This morning, the Company released its financial results for the quarter ended March 31, 2011, and filed its Form 10-Q with the Securities and Exchange Commission. These documents are available on the Investor Relations section of the Company's website at www.starwoodpropertytrust.com.

Before the call begins, I'd 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 in the course of this call.

Additionally, non-GAAP financial measures will be discussed on this conference call. The Company's 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 the Company's filings with the SEC at www.sec.gov.

With that, I'm now going to turn the call over to Mr. Stew Ward. Stew?

Thank you, Brad, and good morning. This is Stew Ward, the Chief Financial Officer of Starwood Property Trust. This morning, I'll be reviewing Starwood Property Trust's first-quarter 2011 results, and highlight several noteworthy items pertinent to the quarter in our business. Following my comments, Barry will discuss current market conditions, and provide his views on both the current economic environment and the state of our business.

This quarter, we reported $31.4 million of core earnings, up 55% over core earnings of $20.2 million for the fourth quarter of 2010. Net interest margin was $31.4 million, up 28% from the $24.5 million reported in the fourth quarter of 2010. Core earnings per share were $0.43, up from $0.37 for the fourth quarter of 2010, with the share count fully reflective of our December 2010 secondary offering. Included in the quarter were securitization gains associated with the sale of three loans and a CMBS securitization led by Goldman Sachs in March. In aggregate, gain on sale income totaled $8 million, or $0.11 per share. We expect a gain on sale income will be a recurring contributor to our core earnings.

We had a number of significant accomplishments during the quarter worthy of mention. First, origination and acquisition of target assets was strong, particularly at the end of the quarter, with total closings of $403 million. This increases total asset to the Company to roughly $2.25 billion (Sic -- see press release), with approximately $1.75 billion (Sic -- see press release) in target held for investment assets and $206 million of loans targeted for securitization sale. I think it is important to note that included in this total were nearly 100% of the material pipeline assets that were the impetus behind our December 2010 secondary equity offering.

Second, as you may recall, our fourth-quarter 2010 earnings release contained disclosure that detailed what our leveraged portfolio returns could be, if and when optimally leveraged. As the first quarter drew to a close, we reached the targeted leverage level on our held-for-investment portfolio. As a result, the expected return on the portfolio now stands at approximately 12.5%. It's also important to highlight that these returns are generated by a portfolio with an average last dollar loan to value ratio of 65%.

The third item I'll mention relate to an important expansion of our financing capacity. As we outlined in our earnings release, we entered into a one-year, $100 million revolving asset repurchase arrangement with Wells Fargo to provide financing liquidity secured by our RMBS assets. This facility is important because it provides one-day access to funds we use to better optimize our day-to-day liquidity needs. We've been actively using this facility to reduce the cash drag associated with growth of our balance sheet, to better manage the expansion of our securitization activities, and to improve the efficient utilization of our other secured financing facilities.

Now let me bring you up-to-date on our current investment capacity. As of May 6, 2010, we had $175 million of available cash; $270 million of undrawn financing line capacity; and approximately $160 million of net equity invested in CMBS, RMBS, and loans targeted for near-term securitization sale. With this, we have the capacity in the coming months to acquire approximately $300 million of unlevered subordinate and mezzanine loans, or, with our credit facilities, approximately $700 million of leverageable first mortgage loans.

The current run rate of the portfolio, the investment pace to date, and a probability weighted near-term pipeline in excess of $1 billion, gives us visibility to declare a $0.44 dividend for the second quarter, which will be paid on July 15, 2011 to shareholders of record on June 30. This represents an increase of $0.02 per share over the prior quarter's dividend and represents an 8.8% annualized dividend yield on the offering price in the Company's IPO; and a 7.7% annualized dividend yield on yesterday's closing share price of $22.71.

I'd now like to turn the call over to Barry for his comments on the markets, our pipeline, and our business.

Thanks, Stew, and good morning, everyone. Andrew Sossen, our Chief Counsel, has a flu-induced cold, or something like that, so he didn't speak this morning; but he's been a critical element of our team.

I am most excited about the progress the Firm is making, led by the team that we've assembled with almost 30 dedicated assets -- I think it's 31 -- that work exclusively on behalf of the REIT today. And then we leverage those capabilities with the 170-odd Starwood capital personnel that are around the world. I think it's really important that we build the team that can execute the business plan. I think we've done a really good job there. I'm really happy with Boyd and his team. And this is Stew's first call as CFO, and it's been great.

As I mentioned in my quote in the press release, property prices have increased fairly dramatically in some markets. And that is enabling borrowers to sell. Many people facing loan maturities now and the end of extensions with servicers are beginning to sell assets. That provides an opportunity for us to originate loans, which is something we've been waiting for since our IPO 20 months ago. We really haven't seen this volume of originations and/or banks willing to sell loans, or even do DPOs since we began in business.

The reason is banks can recover up towards of $0.90 on the dollar today on the loans that they have warehoused and not sold. Before, they might have sold those loans for $0.50 or $0.60. So, there's a lot of volume in the market today and we expect it to grow, not shrink, going forward -- particularly in the -- our euro arena, with the coming sales from the European banks. So we think there's going to be a lot of activity. We look at our pipeline, we're seeing more interesting transactions in Europe, where perhaps capital is a little scarcer than it is in the US.

But we really must be careful today. I think we are seeing a asset bubble or a debt bubble. We're seeing transactions where sometimes the debt to me looks like equity. And just because it's called debt, people are stepping up and buying these mezzanine or junior notes that are being sold often by The Street.

They're being funded by a senior, which probably won't reset to where it is today. So, in other words, their market has evolved now that they're often not floors in LIBOR, and you're seeing loans of 250 over LIBOR and 250 over0, means you can write a 9% mezzanine. But if, in fact, in three or four years, if interest rates are higher, that mezzanine might get squeezed.

So there's certain types of investments we're avoiding in this market. We're often avoiding -- we have this predilection to actually earning what we pay out of the dividend. And so when we see LIBOR loans at LIBOR plus 150, and which can't pay our -- meet our dividend requirements, or current cash dividend requirements, we rarely step up to buy that universe of loans. Because we're going to earn two or three, and the entire return is going to come from the pay off of the loan, which could be uncertain. So we'd much rather focus on situations where we can earn currently higher returns.

I would say that this market also requires that we underwrite, underwrite, and underwrite the properties. And I was looking back at the first-quarter conference call in my comments. We mentioned a large loan that had been delayed in the quarter. It got delayed in this quarter, but it finally closed. It was a large loan; it was worth waiting for, but it speaks to the unpredictability of quarter-to-quarter cash flows for us. That's why we were able to give you, though -- because we see our pipeline -- a pretty good read for the first time ever on what our range of earnings might be for the year. And that's because of the quality of the pipeline, the number of loans under contract.

I'll speak to the pipeline for one second. We have nearly three times the number of loans by loan count in the pipeline, and a 50% larger pipeline than we had at the end of the first quarter. I'd say that lodging-related transactions are only 20% of our pipeline as opposed to almost greater than 70% that they were in December. So I think it's larger; it's more diversified. And that goes back to my comment about the breadth of the team that Boyd leads in originating loans.

We've also originated, in the last quarter, in the last six months, about two-thirds of what we've financed. And one-third has been acquisitions. I expect that ratio to probably stay close to the same going forward, which is exciting, because originations as a business acquisitions is probably a moment in time. And I think we're going to get better and better at it -- which leads me to a comment that Stew made.

Now, we have entered, and we talked about it in the first-quarter call -- the last quarter call; I guess this is the first quarter call -- we talked about being in the securitization business. And in the quarter, we entered the business and made several loans, and we expect to make several loans in the second quarter. In fact, the comment about our liquidity includes loans that we intend to sell in the securitization, and that will optimize returns to shareholders.

We think it's really a good business for us. It keeps our people busy and keeps us active across the spectrum of risk. Boyd and his team have several decades of experience in that business. It does require a big balance sheet, because you principle large loans. And after three or four weeks, we put them on the credit facilities. And hopefully, we securitize those loans in the quarter so the gains are made in the quarter.

Sometimes -- and we anticipate this situation this quarter -- some of these loan securitizations will fall to the following quarter, which gets a little tricky for predictability of earnings. Because we wait for the Wells's or the JPMorgan's or the Goldman Sachs's or the Deutsche Bank's to actually do the securitizations. It's not necessarily in our control when they go to market; they need to assemble pools of loans in order to complete a securitization.

So, that is a little tricky from a quarter-to-quarter standpoint, but I will say that we like to say we're building a castle, not a yurt, not a pitch tenant; that every investment we make is a foundation for further investments. We'll take our time. We can close a deal in seven days or it could take us months, like the Nesbitt portfolio took.

That situation, for example, was classic for us, because it required the making of three different loans in order to facilitate the first mortgage on the five hotels that we wanted to end up with. The three loans -- when we went to market in December to raise the $494 million, we expected that loan maybe to close within two weeks. It took three months. And the reason was, as we peeled back the onion, we had other issues to solve with the borrower. And we want to clean up his entire balance sheet, not have a situation where he would be in a position to maybe have some issues that might jeopardize our loan.

And so we asked him to sell a property, to pay off some debt, which he did; and several other structural changes were made to that loan in order to complete it. And it was worth the wait. We have a great piece of paper, which we now have leveraged with one of our line lenders.

But I think that speaks to the market. It's really helpful to come from an equity background, to be educated in the property markets, to have been doing this for accumulatively several hundred years -- our team -- and my own experience going back over 25 years in the property markets.

We've always said we wanted to build a safe and predictable Company that would grow and produce a very attractive yield. As Stew mentioned, I think the single most impressive thing about our portfolio is that it has a weighted average attachment point from 0% to 67% -- which is a huge difference in a margin of safety from owning, let's say, a portfolio of B notes that might be off somebody else's securitization that might go from 78% to 80% LTV. Our permanent holdings range from 45% to 70% LTVs, and they are very wide, fat mortgages. They are -- I call them A2 notes, not B notes. But that's because that's what I call them.

But they're really first mortgages sliced in half, is a big difference between that and buying a Street-manufactured B note, when -- basically, a cost of capital game of he who pays the highest price, wins. And it's a very thin piece of paper -- particularly if you have any concerns about the reset in the senior down the road three or four years from now, when most of this paper that we own will mature.

It's also quite impressive, I think, from the IPO, which was such a different market, that we produced a portfolio of $1.750 billion (Sic -- see press release), yielding 12.5%. When you look at property prices today that, in some markets, their cap rates are plunging below 5%, I can't often draw a scenario where, in this safety, when you really don't need anything to happen but the properties to stay worth what they are today and worth that in five years, I don't know a scenario in which you can earn a 12.5% current yield on $1.750 billion (Sic -- see press release) of capital -- especially when you look at the comparable duration of the treasury maturities today, which are less than 1.8%.

So we are earning 1,000 basis points in excess of treasuries, when high yield markets is at record lows. And we think that is absolutely compelling risk reward for our shareholder base. It's done with modest leverage when you compare the -- and in matched duration in book -- and hedged, fully hedged, with foreign currency exposure. And you look at the resi REITs, which obviously have higher dividends, but they have a mismatched book, typically, of short loans against longer duration agency paper.

So we are a different animal with a different risk profile. I'd also say that -- and I mentioned in my comments -- that big is better. And it becomes abundantly clear to us as we look at our pipeline, that big in this business is much better. I mentioned it last quarter -- there are diseconomies of scale; that is not true, really, in a finance business. The repayment of any one loan will not interrupt our dividend.

If we are bigger, the ability to wholesale a large loan, take down a transaction like we did $165 million first mortgage; $150 million first mortgage -- that distinguishes ourselves from other companies in our space, and really, it gives us a place in the marketplace along side of the life companies and some of the other lenders. As I mentioned, if it's easy, they'll do it. They'll win. If it's complicated and doesn't fit the box, we are a likely candidate.

And Boyd tells me that we're basically seeing most every large complicated deal sold in the market, and we're getting phone calls from all the lenders in the marketplace. So, being big and having capacity to move quickly, using our experience and underwriting skills -- we're going to underwrite everything, as I mentioned. Again, I want to keep saying that, because if we see some paper fly through the markets today like they used to, and sometimes it's gone before we can open the underwriting package.

And being able to wholesale loans is a lot higher return for the shareholders than buying the manufactured mezzanine off The Street, off of their origination and their securitization. So, it behooves us to be bigger.

And also, I'd say, that bigger allows us to -- the bigger loans are often on higher-quality assets. And that's the kind of -- if you look through our Annual Report, you'll see on the inside and back covers, photographs of assets that we've lent against them. They're very handsome. They're very good-looking, and nothing I'd be embarrassed to show my mom. And there's a huge margin of safety, then, in making these kinds of loans on high-quality assets; but you need to be big to make them, because those assets tend to be worth more.

I will say that the quarter was influenced by the delay in closings of, particularly, one large loan, because we have to complete our underwriting. And it did take a while to get the borrower to sell the assets that were necessary, in order to improve the credit to the point where they wanted to make the loan.

We feel pretty good, again, about our visibility in our pipeline, and are pretty certain about some of the deals that are closing that are under our term sheet. And I will say that we're going to -- we did provide the annual guidance, but the earnings will not be as smooth this year. And we will give you further guidance as it develops.

They will be up and down, depending upon the timing of the securitizations. We anticipate that will be a recurring income stream for us. And it's critical for our shareholders to understand that we -- it's a very high ROE business, after tax -- it's done on a taxable sub. But it is a little tricky to predict the timing of those gains, which will, again, be a core component of our earnings going forward.

I'll finish by saying, as we look forward, the Company is gaining momentum. We have great relationships and we're mining the data base. Our website is going live -- Boyd?

End of the week.

End of the week. We invite you all to go check it out. And with that web capability, we'll be emailing Boyd and team's 10,000-plus relationships. And it is a -- having not been a lender, per se, I'm surprised at how relationship-based the lending markets are.

I also say, again, that Europe is going to be an increasing place for us to find product. At the moment, we're feeling pretty good about things. So, I'd say that speed, flexibility, our relationships, our creativity in lending, and our scale are competitive advantages in the marketplace today, and probably sustainable. And we're very excited about the future of the Firm right now.

So, thanks. We'll take questions.

(Operator Instructions). Gabe Poggi, FBR.

A quick question for you in regards to -- you guys have a portfolio that has an average LTV of 65%, yet you guys are still able to generate a 12.5% total return. Barry, you talked about the makings of an asset debt bubble. I'm wondering out into kind of secondary, tertiary markets -- obviously, not New York or D.C., et cetera -- but are you guys still able to find -- and I would assume the answer is yes, based on the pipeline -- but, Barry, similar pitches to hit, where you can get that low LTV but still generate that kind of return, despite the competitive landscape?

Well, you've got to look under a lot of rocks. (laughter) There's a lot of stuff we just can't play in.

I'd say the pipeline is really good. I think LTV sometimes climb a little higher today, to be honest. And that's where the underwriting takes place. But it's interesting, Gabe -- if you think about the -- what the equity players are betting on -- let's say you're buying a building in Boston, for example, and they're looking at rent growth of significant proportions. So, a 75%, 80% LTV, if the equity guys are right, is going to be a 50%, 60% LTV in five years, if your paper lasts that long. If they're wrong, hopefully, it will be flat and you'll be at 75%, 80%.

I think we see -- we are looking exactly at those attachment points. And the dream for us is, if we got bigger, we could probably get some corporate finance lines, some lines at the Company level. That would allow us to be more efficient with our capital, particularly part 100% of our securitization paper on it. The securitization deals generate nothing while we own them or while we warehouse them, because they -- we hedge out all rate and interest rate exposures. So, they're all gain on sale -- there's no income that comes during the hold period.

So, to answer your question more directly, I think -- I look at our pipeline, we're finding deals. Are we looking harder? Yes. And are the LTV's going to climb above 65%? Yes. But having said that, we're working on a situation where it's a little unusual but it will be a 50% LTV deal. And the coupon will be lower; it won't be 12.5%, but we'll blend the transactions together. We'll do a deal that might be a 13% or 14%, and blend that with a 50% and a 9.5, 10. Because we think in the world, that's a great risk reward, particularly on that asset.

And we've bid aggressively -- I think it was in the quarter -- on a hotel -- on a pool of loans being sold by the FDIC. And we teamed the private funds with the public company, and we bid pretty aggressively on the loan pool and lost it. So, we are being creative and working hard. Our hit ratio is probably slightly lower, but we seem to be finding enough paper. I think there's $100 billion of loan originations, and we think we have, like, a 1% or 1.5% market share. (laughter) That's probably okay. There's a lot of loans that don't meet our return requirements.

Thanks. That's very helpful. One other follow-up. And maybe, Stew, this is for you. Are you guys seeing the CMBR -- at least the forward calendar for CMBS issuance pick up? We kind of hit a lull, in light of global macro events in the back half of the year, looking a little more robust. The first quarter was obviously robust and the second quarter has been a little tepid. Just wanted to get some incremental color on what you see kind of as the forward pipeline in CMBS land.

Yes, I think, from what I understand, the seven or eight major players are all having pretty robust originations at this point in time. I think some of the lull was a result of the fact that there is a lot of efficiencies to increasing the size of the transactions, from the $750 million to $1 billion range, to the 2-plus-billion-dollar range, you get better diversification and you get lower deal costs per dollar, all those types of things. And yet the early CMBS transactions were done in that $750 million to $1 billion range because the dealers, quite frankly, were worried about their ability to place the paper.

The investor base is rounding out pretty nicely. And so I think some of the lull is the fact that people are actually aggregating for larger future deals. And, like I said, our originations are picking up, and from what we understand, our competitors are as well. And deal flow in general seems to be pretty good. So, I think the second half of the year will be quite good.

Great. Thanks, guys. Good quarter.

(Operator Instructions).

All right. Well, if there are no more questions, we thank everyone for dialing in. And again, we'd say our pipeline is very good. And we expect -- I will say that we expect -- if we're doing mezzanines, I want to make it clear that we can't lever them very easily on the lines. The lines are really meant for first mortgage loans. We have very few -- we have a very small bucket of mezzanine capital available for making originating mezzanine loans at the start. That's another reason why we try to do first mortgages. But I wanted to clarify that in Stew's comments.

So, thank you again, and we look forward to talking next quarter.

This does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.