Starwood Property Trust Inc (STWD) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Starwood Property Trust second-quarter 2011 earnings conference call. All participants are now in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Andrew Sossen, Chief Operating Officer and General Counsel at Starwood Property Trust. Please go ahead, sir.

Thank you very much. Good morning, everyone, and welcome to Starwood Property Trust's conference call for the second quarter 2011. With me this morning are Barry Sternlicht, the Company's Chairman and Chief Executive Officer; Boyd Fellows, the Company's President; and Stew Ward, the Company's Chief Financial Officer.

This morning the Company released its financial results for the quarter ended June 30, 2011. This document is available in the investor relations section of our 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 in the course of this call.

Additionally, certain 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 Stew.

Thank you, Andrew, and good morning. This is Stew Ward, the Chief Financial Officer of Starwood Property Trust. This morning I will be reviewing Starwood Property Trust's second-quarter 2011 results and highlight several noteworthy items pertinent to the quarter and 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 $36.1 million of core earnings, up 15% over core earnings of $31.4 million for the first quarter of the year. Net interest margin increased to $41.1 million, up 28% from the prior quarter. Core earnings per share were $0.43, equaling the $0.43 recorded for the first quarter.

We had a number of significant accomplishments during the quarter worthy of mention. First and of most importance, origination and acquisition of investments was particularly strong during the quarter with total closings of $819 million encompassing 23 transactions including $793 million of target investments, by far the most active quarter since the inception of the REIT. June was the most active month of the quarter with $518 million in closings. Closings in April and May were $136 million and $165 million respectively.

Originations made up $614 million or 75% of the total and represented 19 of the 23 transactions. Originations now compose 46% of our total portfolio of target investments, up from 14% at this time last year. With the addition of these investments, total investments of the Company now stand at $2.5 billion with approximately $2 billion in target held for investment assets and $297 million of loans we intend to sell into securitizations.

As we outlined in the earnings release, the current expected annualized return on the targeted asset portfolio stands at 11.8%. We think this return level is extremely attractive in light of the portfolio's last dollar exposure level of less than 68% loan to value.

Secondly, we had a highly successful secondary offering in May which raised net proceeds of $475.9 million through the issuance of 22 million new shares of stock. The impetus behind the May capital raise was the $1 billion plus pipeline of attractive investments we were evaluating at the time. Over 90% of the $819 million close for the quarter were part of that pre-raised pipeline.

The third item I will mention relates to important expansions of our financing capacity. As we outlined in our earnings release, we enter into two separate financing facilities with an aggregate borrowing capacity of $267 million. The first facility, $150 million revolving warehouse line, expands our capacity to finance assets targeted for securitization.

Despite the well-publicized recent turmoil in the commercial mortgage backed securities market, this market is still a viable and efficient place to secure low-cost match term financings for many of our subordinate loans.

The second facility gives us one-day access to $117 million in borrowing capacity. This facility is secured by a large subordinate loan asset we originated in the first quarter. This facility, along with a similar facility secured by our RMBS assets, helps reduce the cash drag associated with growth of the balance sheet and improves our day-to-day liquidity management operations.

Now let me bring you up to date on our current investment capacity. As of the end of July, we had $61 million of available cash, $132 million of approved but undrawn financing line capacity, and approximately $100 million of net equity invested in liquid securities. With this, we have the capacity to acquire approximately $220 million of unlevered subordinate and mezzanine loans or utilizing the remaining capacity under our existing financing facilities, $550 million to $600 million of leverageable first mortgage loans.

Additionally, during the third quarter we anticipate receiving an additional $109 million of net proceeds from securitization sales and anticipated loan payouts, which will add further to our capacity to fund new target investments.

With the current expected return on the portfolio, the investment pace to date, and a near-term pipeline of roughly $600 million of investments under term sheet gives our Board visibility to declare a $0.44 dividend for the third quarter, which will be paid on October 14, 2011 to shareholders of record on September 30. This equals the dividend paid for the second quarter and represents a 9% annualized dividend yield on yesterday's closing share price of $19.64.

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

Thank you, Stew. Good morning, everyone. Let me take a moment to congratulate Andrew Sossen on his promotion to Chief Operating Officer of the Company. He has done a great job for us.

Let me start by reversing the order of comments. Let me talk about the current economic environment. Anybody who really knows me knows that I have been saying I didn't think 2012 would hold up to 2011. I didn't think the back half of 2011 would be as good as the front half of 2011. That turned out to be pretty weak.

I think it's a combination of things. As you enter 2012, you're going to see the expiration of the business tax credit and what recovery we have had has been driven by deficit spending as well as businesses loading up on 100% write-offs of capital goods that is part of the plan as well as the payroll tax deduction expiration. In 2012, those go away. At least they are diminished dramatically. The payroll tax goes away completely and while the emerging markets of the world have been pulling the US economy and certainly our multinationals along, whether it's Brazil, China and India, all of them are raising interest rates and dampening their economic growth at the same time.

You are also seeing a housing market, which is certainly isn't running away from us on the upside. It is better probably than the press says. But it has created headline news is not good and you still see home prices falling, although there's a lot of noise in all the reported numbers. Some of the short sales really distort the numbers. The more normal selling process is seeing price increases particularly in some markets around the country.

What this has led to as the market has gathered that the economy is not that strong, is a sharp rally in rates. It is the exact opposite of what most people would have thought would happen when the government stopped purchasing bonds at June 30. And so there's no yield in the world. And real estate is a proxy for yield, and frankly that should have made our $2 billion plus book of paper much more valuable, not less valuable.

But all the banks and all the financial complex in the stock market has definitely given up ground based on what people perceive as turmoil in the credit markets. We will come back to that in the second.

But our stock now is yielding over 9% and if you think about that, Stew mentioned the last dollar LTV at 68%. I would guess that a lot of our paper is AAA and that probably trades stripped out in, I don't know, sub 4%, 5% in the market. At 68%, those are original LTVs. I can tell you because we've got phone calls from borrowers seeking to repay loans and are willing to pay prepayment penalties to get out of these loans and refinance their debt. That our mark on book at $19.68 is actually low.

And so the Company if it liquidated would be worth more than $20 a share. It's painful to see the stock down here -- we are major shareholders, as you know, but it's a long -- it's a marathon, not a bunny race, and we will get through it.

In general the Company had a super quarter originating $800 million of loans. I have been looking at some of the bank originations and we originated more loans and did more business than many banks with management teams 50 times the size of ours. We do have now 40 people dedicated to the efforts of the REIT. We've beefed up our asset management accounting and our loan origination capabilities.

It has been a very interesting quarter also. If you look at the numbers that Stew gave you, which are not in the press release, about 75% of the closings were done in June. That obviously affected the quarter. They would have been higher had they -- the closings occurred in either of the earlier two months.

We have always had trouble exactly forecasting our closings because we are the lender, not the borrower. We don't get to force money on people. But the run rates of those closings and the embedded gains in our portfolio which we are sitting on give us confidence to pay our dividend at $0.44 and continue the dividend.

We did not raise the dividend despite the fact that we probably could have in deference to the trickiness that has occurred in the markets in the last 60 days. So let me talk about that for a second.

As you all know, this probably started when a large firm advised the government not to take the AIG bid on the Maiden Lane RMBS book. Many people entered the -- created somewhat havoc in the RMBS markets. People got caught on the wrong side of that when the market couldn't absorb the sales of those individual securities. Hedged out using CMBS indexes and they started to gap out and the train began to run in the other way.

It's interesting about the markets these days. I have to say as I look at all of the markets whether it's gold or currencies or interest rates, the market is headed the way -- in the opposite of the way most people have thought. It heads in the direction that causes the most pain. So the yen is at record lows and most people wouldn't have thought it would be there. The 10-year is 270. I don't think anyone would have thought it was at 270.

The euro is 142. Most people might have thought with all the Greek bonds at 16% that the euro would be at par or parity with the dollar. It is a weird world right now and what has happened in the CMBS markets probably doesn't make any sense at all relative to the fact that yields on property or cap rates are plunging and there is beaucoup floods of money looking to buy core assets. And property yields, given where interest rates are, we all can finance our properties at spreads and yields we have never seen. We have bought some multis in our equity shop, financing them at 4.8% a month ago. You can finance them at 4.3% today. So that would lead to more aggressive pricing and yet the CMBS markets have been going the other direction.

So the gains we anticipated in the third quarter from the securitization of loans are probably not likely to be there in scale and we were anticipating north of $10 million of gains in the third quarter. Now we don't really know. We don't anticipate losing money on this book, but we did think we had embedded gains in the book which we had given you in our earnings release.

We have other gains we can take in the portfolio, but some of the CMBS positions we hold are trading let's say at $0.92 and with 100% certainty, I can tell you they are parity paper and will be taken out.

So the markets gapped out especially with the two securitizations that were being done in the market, one of which I think was a fairly sloppy execution led by Goldman Sachs, which you have read about in the paper. That saw the AAAs gap out from about 1.40 to a blended cost of North of 1.80. That's the move that actually removed and quite unexpectedly hit our -- will hit our earnings for the third quarter. Having said that, again, these loans -- to remind you, we invested net equity -- Stew gave you a number of like $290 million or something like that -- $297 million. Net equity really we think is about $100 million or about 4% of our portfolio. There is a $100 million first on the Columbia Sussex portfolio which is with most certainty going to result in a gain on the sale. It was a superb deal that we did and we are not including that because that will be sold through an upcoming securitization.

We are looking -- the worst case is the problem we had with $100 million of net equity in the way we hedged this securitization business, we actually earn nothing on that capital. So we only earn money when we sell the bonds. The good news is we're hedged. The bad news is when you see all these sloppy hedges in our earnings, they basically offset themselves, rate hedges and credit spread hedges and whatnot.

But if you do the simple math that we had had that $100 million not locked up in securitizations but instead earning let's say 11% or 11.8%, which is the average of the target assets, let's use 11%. It's $11 million of earnings or $0.13 a share for the year or roughly $0.04 a quarter. And that would've taken $0.43 to $0.47 and covered our dividend and then some. So that is the story.

We will fix this problem as we go forward. These loans are not bad loans. We have loans on properties at 65%, 70% LTVs and they originated 5.5% to pick up three to five points in the securitization. So we're not going to lose money but we are not going to make the money we anticipated unless of course the markets rally and we do have the benefit of patience. We don't have to do anything really. We can hold our positions. We are not in this for as we said one quarter.

But that business has been more volatile than probably we thought. And when we saw the market begin to move away from us, we basically stopped the securitization business. There was an article I think 60 days ago it started with -- it pulled out of the market. We actually didn't completely pull out of the market. We just widened our spreads to a point where we weren't going to be necessarily competitive and in fact we weren't. We didn't find ourselves and didn't have any anxiousness to put more securitization loans on the book.

But we have turned our attention to the more traditional and the original model of the firm which is to write our own first mortgages with including the B Note or the A2 note or whatever you call our junior notes that we retain in securitizations and these are credit facilities and -- which we have a line. It is a five-year line, so it's not -- there's no mismatch of duration. And we can use that line and we are reloading that line, so we don't have to enter the securitization markets to sell off the A notes.

There was a comment by one of the analysts this morning that we might get stuck with the loans that we were putting in the Goldman Sachs securitization. That is not the case. We can choose to put them in somebody else's securitization, in the new Goldman securitization. It's really a question of do we want -- do we think the market is properly pricing AAA CMBS at 180 over LIBOR. When assets backs are like 10 and 15 basis points over LIBOR and AAAs used to be 45 and five-year notes are trading at, what, 135? You can't have AAA CMBS at 180.

So this is maximum pain. A lot of hedge funds are caught on the wrong side of this. They had assumed that spreads would continue to straight line down, which they were doing. They have levered these positions in some cases 6, 7 to 1. And when spreads went the other way, it was a great trade for a while, 200, 190, 180, 160, 150, 140 leverage, you were making whopping returns for your hedge fund. But when they gapped out, all hell broke loose in the CMBS markets.

And actually the indexes and the spreads are moving not in sync right out. So the market really is a mess, but we think it will clear up in the next two or three months and we are just going to be patient and make sure that we manage our capital in the right manner.

Meantime, the alternative -- the other side of this is it's really good for us. We think that the Street is caught with hundreds of millions of dollars of losses. We actually where Stew and his team put on a wild hedge that prevented us from losing a lot of money probably at the end of the day, but most of the Street and most of our peers in this business did not have hedges like this in place, to our knowledge.

So I think we have heard about people losing their jobs on the street. It's probably a little unfair for those people, but there is a serious amount of pain on the street, which means they are not going to be originating new loans. And that should allow us to make the loans that we haven't been able to make as the conduits have stepped into the market and became very competitive in certain assets.

So we think it's a net benefit to us. We do have a 40-person team dedicated to originating loans. We are beginning to see performing pools of loans but one of the things we bid on during the quarter which we were not successful in buying was the RBS EUR1.4 billion book of loan sales and we big quite aggressively through the REIT and partnered with the opportunity funds and even though we would've thought we had competitive advantage, we were not successful in doing that.

But that's and other portfolios like that are now appearing for us. We are seeing many portfolios of performing loans from banks and typically they have a higher LTV than we would like, but if we can achieve our returns and we are comfortable in the asset valuations using our equity underwriting background, we will step up and buy some of these portfolios going forward.

So we are going to carefully monitor the situation right now in the markets. We are going to look carefully at what's happening to the spread. We do have nearly $500 million or $600 million of capacity to buy first mortgage loans. The CMBS book is liquid. The RMBS book is liquid if we want the capital. They are both earning reasonable returns on themselves.

Where we are getting hurt right now is the money that's tied up in the loans that are held for securitization because it does not earn anything while we have it hedged out.

So we can create earnings. We can sell positions. We know where the earnings are in our book. We think we're going to get repaid on a couple of positions that could be sizable relatively quickly. The markets are galloping ahead, as I said on value. So our 68%, I haven't really looked at it but if I went through it with our team, I would say that it was probably more like 60% LTV.

As I mentioned, even the CMBS markets have been hit hard enough that the papers -- like we have paper marked at $0.92 that if we told you what it was you would agree with me it's par paper.

So we have an extremely valuable portfolio. It's more valuable now where interest rates were than it was at the start of the quarter. So we will be very careful on how -- if we have to access the credit market or the equity markets, we are going to be very, very careful and right now we don't see the need to do that in the near term.

So with that, I guess we will take any questions.

(Operator Instructions) Bose George, KBW.

Good morning. I had a couple of questions. First, when we think about the run rate on your earnings, should we just -- should we think it takes a couple of months for you to exit the positions and the loans you are planning to securitize? Then you redeploy that, say, in the fourth? And then that basically gets you kind of the $0.12 or whatever -- that earnings back into your run rate.

Could you repeat the question? I'm sorry.

Actually I was trying to think about -- when we think about your run rate earnings after this quarter, should we assume it takes a couple of months for you to get the capital that's tied up in the loans that you are planning to securitize for you to get out of those positions and then deploy that later in the year? And so than the return on that $100 million, whatever it is, $0.12 --? (multiple speakers) next year or towards the end of the year?

You know, it's interesting. It's a real quandary, right? It's hard to protect the quarter because of it. If the credit markets --gapped out on a poorly structured deal and a lot of pressure and if -- they could gap in just as tightly or better if the markets stabilize. And maybe the deficit reduction package now in place, maybe the credit markets will come back to normal. They did not do Maiden Lane II. So the RMBS markets have resumed some more semblance of normalcy. The CMBS markets might do the same. I just can't understand how spreads could stay here given where alternative asset classes and yields are.

But it does create a quandary. Should we go ahead and put the paper in a securitization and just get the capital back, earning very little? Or take a bet that the markets gap in or go back to where they should be let's say 150, 140, 130 on AAAs and then have $3 million to $9 million, $10 million of earnings in that paper. It's a real tricky thing and we're going to have to play it by ear.

We are also -- we're going to take the long view. We actually looked at our dividend rate over the life of the firm to date and we have paid our dividend from earned capital over the life of the firm. So we are not paying -- we are not drinking our blood.

And as I mentioned, I would say the odds of at least one of the several loans that will be repaid are very high. So -- and when they are repaid, we know that the equity of one of our deals just traded -- one of our -- we made a loan on the Carlyle Hotel. I think the exposure was 130 and as you read yesterday, over the weekend it traded for $550 million to the Chinese. That was repaid yesterday.

So some of these loans are going to get repaid and we will have earnings because of that and we're not putting them in our base model and that's one of the reasons you see the earnings number, the range so wide, because in fact, if these things pop, you could see $0.05, $0.08, $0.06, and so we are anticipating probably one of three, all three to get repaid that we are aware of. We got a phone call from a borrower yesterday saying he'd like to prepay his loan. Could we work it out? Obviously with rates down here, everybody wants to pay back everything.

So the book is quite valuable, as I mentioned, and it's a very good book and we are -- moved our whole origination squad out 100 basis points or 50 to 75 basis points. Hopefully with the banks and the Street out of the game right now and the conduit sitting with mountains of loans in a toilet bowl backed up to the ceiling, the only real competition we will have would be life companies. But typically they are tighter on LTVs than we are.

So we will climb higher in the equity book. We are also looking at our first deals with participations in them, which is interesting. We do that maybe in the multi-asset class where some of the asset classes where we're not going to get a lot of paper. The good news about the book right now I think I looked recently -- Stew, correct me, or Boyd -- we're like 40% hotels and the balance other asset classes. So we are pretty balanced on 43% by asset class. It's not a hotel book at all.

And there is some really interesting deals in the market that we are hopefully going to get closed that actually are not in our term sheet pipeline that we gave you. I would not anticipate all that $600 million that we gave you at closing. In fact because of our -- what do you want to say? -- our conservative approach to the long-term value of the enterprise, we are going to be pretty tough on taking loans into the portfolio right now.

So that is our dilemma. You nailed it. When do we free up this $100 million or $130 million so we can earn money on it, but are we being foolish selling into a gapping out market or should we wait until the markets comes then? We think it will come in. We think the Goldman deal was I would say I can say this. They can call me and tell me they hate me. I think it was poorly structured. They chose two of the more difficult rating agencies and Fitch and Moody's were clearly a more mainstream.

We thought there was an issue on the -- and we argued with them that there was an issue on the subordination from one of the agencies. They disagreed and the markets proved that we were right.

So we will see how this all works out in the long run, but I think -- I wouldn't take one trade as the end or the beginning of a market. The CMBS market is real. It's going to be back. It's going to be strong and there's just no way this market shuts down with the need for yield in the world today. No way.

Thanks for that color. I just wanted to -- the point you made about the rates on the new loans going out whatever 7500 basis points. Should we think about that as being sort of incremental to your return or is that basically offset at the moment by the leverage the market is offering you?

No, I would say, look, the book is yielding -- the target book is yielding like 12 and because rates are down in our -- most of our lines we swap out off LIBOR to match fund to paper. I think we are probably consistent with that. I think there was a lot of pressure pulling our target yields down, if you will, and probably we are able to hold that a little better than we might have been able to before. So I wouldn't look at -- I have used 11.5, 12 as sort of a run rate on permitting capital. That's probably correct. Stew, Boyd, do you agree?

Yes, exactly.

Great, thank you.

Joshua Barber, Stifel Nicolaus.

Good morning. I was wondering if you can tell me where your gain on -- realized gains from the first quarter came from. What sales were those?

The first quarter?

I'm sorry, in the second quarter.

I don't know if we give that level of detail. I actually don't -- there he.

We haven't this quarter.

Right, we had -- we had some CMBS positions -- we unwound. But they weren't [permitting]. When you look at our paper, look at the yield on the remaining equity, at today's market and if it's below the target rates, we will sell it. So that was also the Nesbitt loan which we originated. We sold a piece of it and realized quite a large gain. I would call that core earnings. That's our basic business. The Nesbitt deal, if you will recall, was three different facilities.

And we have some good news in our portfolio, almost all of that stuff is performing magnificently. Nesbitt, I think we had -- is it a $20 million, $25 million bridge loan? Which was secured by two hotels, the Walnut Creek Marriott, which is on the market, and we were underwriting him selling it for like $30 million. I think he's going to sell it for north of $40 million. So that was a very good risk reward.

We will make a lot of money on that particular loan and it was very creative financing. It took us six months to close it. It was 4.2 --

Percent cost of fund, way less than we pro forma-ed.

Yes, the actual way we levered it was a 4.2% cost of funds which was significantly inside what we thought we were going to wind up with and that created a gain.

Josh, we will be filing our 10-Q later this week, which will have obviously some additional information in the financials around these sales.

I would say, Josh, there's a lot of them. As we look at our earnings and there's a lot of paper we can sell for gains, so --

Okay, in terms of your guidance, you had touched before on you don't really expect those gains to materialize in the third quarter. Is it possible that you will have actually some losses from that just given where spreads have been? I know you touched on that somewhat, but --

We don't think so.

You don't think so?

We don't think so. Even right here at 180 over the AAAs, we weren't going to lose money. If we lose money, de minimis, offset by gains in the Deutsche Bank securitization that we anticipate, so I think it's de minimis. And really, honestly, we shouldn't sell. We should let the deal be restructured, rerated, and hold the paper a little longer. It's painful. It's $0.04 a share a quarter, but on the other hand, what's the point of getting jammed? If we need the cash immediately, then maybe we can work something out and we would participate in the securitization.

These securitizations, I have to say it's not a business that I had much history in, but they are very pretty complex little beasts and involve a lot of multi-party negotiations, a lot of moving pieces. And in the -- this one was a little sloppy.

We were very successful with a Goldman securitization last year and made a lot of money. And I think it was the third quarter also. It was like $0.56 or something. And we booked --

Like $0.19 off of that execution.

Yes, we made $0.19 off the execution. So it's a good business. But you've got to be careful. I'm glad we were hedged, but it's painful that we -- I am not unhappy that the Goldman deal blew up. I didn't think we were priced properly for our paper. So actually we were thinking of withdrawing our loans. We were having that conversation. We said this isn't appropriate pricing for these properties. So regardless, I think everyone is a little smarter.

Okay, does the recent volatility I guess give you some further pause about how you want to finance the business going forward? And do you want to stay in the CMBS business longer-term but do you think the business today at least for the next three months is probably more capital-intensive than we would have thought three or four months ago?

So the CMBS business is the securitization business and I think we are dialing that back for the foreseeable future. That's probably six months. Whether we reexamine at the beginning of the year, we will see. I think we think the gap -- the chaos in that market provides better opportunities for us to do our core business, which is making the loans that we -- finding mezzanine loans, making the loans that we can sell a senior piece or apply for the senior on one of our credit facilities which is a warehouse. And Boyd and his team are thinking about gathering all of the seniors that are on these lines and doing our own CEO and our own securitization of that paper, which we will work with our lenders to accomplish.

I would say that the business is capital-intensive, but we are pretty -- we are focused on shareholder value. So we are kind of going to go with the right pace to build the accretion and to build the dividend for the shareholders. So I don't think it's different, though. I don't think -- you are talking about $100 million, which is on an asset equity base of close to $2 billion. That's the capital tied up in this business.

Whether we sell the $100 million or not, it hurts earnings not to have it earning anything, but it doesn't -- it's not like the nature of our business has changed dramatically, I don't think.

Okay, last question regarding the repo facilities. I know historically you guys have used a little bit longer-term facilities to better match duration. How are you thinking about those shorter-term facilities and what would they be used for just given the duration in your portfolio?

You mean like the new facility that Stew talked about? It is on a particular piece -- the $117 million of short paper is on a particular paper that we think is going to get repaid, actually. So we were using that draw up and down to manage cash. We actually use our RMBS book the same way. It's $80 million gross -- but the net equity right now I think is $24 million or so -- (multiple speakers) $22 million.

So we dial that -- we pay down that debt. We buy up a lot of that debt and manage our liquidity. The numbers Stew gave you leave us with $50 million to $75 million of cash reserves all the time, so we do have a base in our numbers of cash cushion. So Stew is not giving you 100 cents every dollar of last capacity. He is running the Company with about a $75 million cash balance or liquidity balance, so we won't -- that's the way we run the business.

Great, thank you very much.

Stephen Laws, Deutsche Bank.

Thanks for taking my questions. I apologize if this has already been asked, but I was hoping you could hit on maybe the competitive landscape as far as at the smaller deal sizes versus where you guys are playing, who you are running into, and kind of what advantages you guys think you are seeing from the scale of your origination team, the size of your balance sheet? And then the ability to go into some of the larger deals that you have been able to do?

Let me start and then I will let Boyd comment. I think first of all, our competitive advantages are knowledge of the markets, speed of execution, flexibility in structuring, our willingness to maybe stretch on LTV that we haven't had to do it very often. We've tried, but we haven't been successful. But those are sustainable competitive advantages, and the fact that we can do a $300 million loan and we have shareholders that are interested in buying stock in the Company.

So if we had a large deal, we might be able to accomplish a private placement of some scale with LPs. You can't earn 9% on anything today with this risk profile. So that is a way to do that.

I also think one thing we are going to see from us and we are going to have to figure out what it means long-term is there is a lot of demand for money like ours in Europe and there's going to be more originations probably in Europe. There's almost no mezzanine market in Europe right now and that's something that we are going to continue to focus on.

One of my most senior equity partners, Jeff Dishner, is moving to London August 18 and one of the reasons he is there is also we are hiring an executive just to source yields for us in Europe for the REIT. So we think while those markets are sort of moribund, there are -- in static environments, there's opportunities to lend money at the kinds of yields that we think will be attractive to us and our shareholder base.

But Boyd, more specifically, who do you see us competing with generally? I will let you go ahead.

I would say that with respect to deal size, we have also dialed that up, meaning that our minimum size transactions that we are looking for are $30 million or $50 million as opposed to anything in the $20 million and below, we're pretty -- we would pass on those.

And then in terms of our competitors, it's interesting. The obvious large players who also participate in our space like Blackstone and Fortress really don't originate anything. They are acquirers. They tend to buy things that other people have originated. When you go to the short list of players who actually go out and try to originate B Notes, mezz, and transitional loans like we do, it's a very short list.

Loan core, it's a short list. So we actually feel pretty comfortable and believe that the competitive landscape is skewed to our favor again. And the CMBS market, you had JPMorgan and Goldman and a few guys like that drifting into our space, sometimes competing on loans and right now when you go down our pipeline and you say who we are competing against, none of those guys are really active right now. So the competitive landscape has really moved to our benefit.

Let's talk about one particular transaction, which is the Anglo-Irish transaction, $9.8 billion of loans being sold right now. I mean, we just aren't big enough to compete. Right? We --one of our problems to play in any capacity there are a few loan pools in that deal that are being bid by the banks. We could participate either compete with them and/or partner with them, but we just don't have the capital to do that right now. Our ability even to provide mezzanine to a buyer is probably a couple hundred million bucks and that's it right now. Or we'd have to do an equity raise, obviously.

So we are going to be patient. That's not a bad execution. We are certainly capable and are looking at the pools ourselves, but at the moment, that would be a deal that's too big for us. However, there's an opportunity for the REIT to earn a reasonably good return, complicated assets on the other hand.

Great, thanks a lot for taking my questions.

(Operator Instructions). Joel Houck, Wells Fargo.

Okay, thanks and good morning. The question regarding to future equity offerings, obviously your earlier comments about the fair value $19.68 and I think you said you think the Company is worth more than $20 a share, but given kind of the opportunities in the market, in your markets as well as the potential dislocation, what's you guy's appetite to raise equity below book? Can you talk about that?

We don't have a lot of appetite to raise money below book. I think we own $60 million of stock in house. At some point you buy your own stock. The truth is, in all the -- it's interesting. In the equity world, when the equity REITs recapitalized, all of them were issuing stock below book or fair value of their assets. When Simon went to market at $18 a share, FelCor, everybody re-equitized and all of them did quote unquote dilutive equity raises on share value of their books.

The market liked it. The market thought these guys were going to grow for a year and a half. They did nothing. They just sat and waited for the world and then when private buyers stepped up, the REITs followed them into the market and started buying things again. Most obvious were the hotel REITs with the three blind pools buying everything in sight.

And then the [host] and the LaSalle stepping in and mimicking them and getting aggressive and stepping back in the market. So there's multiple ways we can raise equity. We can do a private raise, hopefully tight to the book value of the Company. We can do a convert, either debt or equity. At a premium, obviously the conversion price would be a premium to book. And different shareholder base, different set of people, something we are considering because the yield on the Company is down a little bit, the coupon is higher than I would like it to be for those executions. And I think if we had a very accretive transaction that we thought would be significant to the Company, we can't totally rule out an equity raise. But it's -- we are cognizant of other raises in the space that have not bode well for shareholders and we have to decide is it really what we are going to do? I can't tell you we have an answer right now.

I was kind of hoping that perhaps after the earnings release, the damage from the backup in the market was overreaction -- overreacted to by the market and people would find their dividend enticing, delectable, and other wonderful words and the stock might rally to a more appropriate value.

But we will see what happens over the long term and then we will have to decide. It's not -- we are very much aware of where book value is for this Company, that's for sure.

All right. Thanks for the comments, guys.

Ken Bruce, Bank of America Merrill Lynch.

Thanks, good morning. You know, you have generated quite a bit of value within your retained portfolio and I guess with the backup here in the market and the disruptions generally speaking across CMBS, that whole originate to distribute model looks a little bit more risky.

Understanding your earlier comments, do you think that you are out of that business for now? Do you think that's literally a temporary issue and six months from now and maybe the market has calmed down and you can kind of reintroduce that as part of the business, or do you think that maybe that maybe is off your business plan?

I would say we are out temporarily. I don't think we are out forever. I think it is a real business and again, we would originate a loan for securitization if we could price it at 7% instead of 5.5%. So there is -- even today in the market there are loans we would do for that space. We just have to do them where the spreads are today and price it appropriately.

Boyd points out a bigger problem, which is we can't hedge it the way we could have and maybe, Boyd, you can comment on that and that actually is a nonstarter for us. But go ahead.

So before we got into the sell all CMBS business, one of the baseline criteria we said was that we had to come up with a hedge methodology that we were comfortable with. We were able to negotiate a proprietary total rate of return swap with a couple of counterparties on the Street that we think -- we thought would work well and it did in fact work well. And we were able to -- but there was a limit to how much of that they would do. And so we were able to hedge the transactions that we currently have on our books but the counterparties who offered those hedges have also ceased to offer that hedge product to us anymore. That was among the reasons that we pulled back was that we could no longer hedge that kind of business or hedge it very, very well.

I want to make a clarification because it's confusing even to me. We are pulling out of the conduit business, which are lower coupon loans where your gains are hedged and gains are made on the sale and contributed to securitization. We are certainly not pulling out of the lending business, where we do sell a senior note off into a securitization permanently. And we just -- we don't -- we earn 11.25, 11.8, 12.5. We size those positions. They are wide enough and juicy enough that we size it to figure out how big a piece of paper we want to retain and then we sell off the senior. That business is not going away. The securitization market is not going to disappear. And the CMBS market is not going to disappear.

I think one poorly structured deal does not -- will not kill a market. It was unfortunate, maybe -- let's just skip talking about it anymore.

Okay, I understand. So just the conduit side is going to be on hold for the foreseeable future, and things as they come down, you will readdress that?

We refer to it as the sell-all conduit. The loans that we intend to sell all.

Sell all, you sell 100% of the paper. That part, the conduit.

Understood. So the value that you have been creating within the traditional portfolio continues to be very attractive, as you pointed out. And that is probably helped in this market just by virtue of others pulling out. So that all sounds --.

Ken, the sell-all book, the sell-all book is 4% of our equity. So it's not like we were cowboys in this space. We were pretty disciplined. And to the extent that we can't hedge the paper anymore, we are going to be out for as long as we can hedge it for sure. So we're not going to go write a loan at 5.5% and run the risk of gapping and spreads and other nonsense, because that will cause us to -- it's too tough a market to go in there unhedged.

Right, understood. So that's -- again, you have always taken a very disciplined approach to risk management, and so that seems very consistent with your historical management of the firm. The amount of capital you've got wrapped up there is not excessive. You've got some earnings that you will come back at some point or you will have to decide to cut and run if that's the best course of action.

So this is just, at least as of today, you should just kind of look at this as a one-time blip and try to move past it. And we will continue to look at that pipeline for what the growth opportunity looks like, and hopefully equity markets will be a little bit more -- will be a better kind of environment for potential capital raised in the future and you can continue to grow.

Exactly.

I suspect that you haven't really changed your view in terms of what you ultimately think the opportunity set here is over the longer term and you are just going to pontificate a little bit about what you see in -- Europe.

I could say in part the opposite. I would say that there is $1 trillion of debt maturing in the next three years in the United States alone. A lot of it is performing and a lot of it is going to require equity infusions to recapitalize and all of those are opportunities for the REIT to step in.

Most of that paper was extended. Whether the bank extended it or the special servicer extended it, it has all been extended and now the grim reaper is coming. The maturities, final maturities are coming up. If you think about it, there were loans originated at the peak of the market in 2007 were three-year loans with two one-year extensions. They expire, final extension, 2012. If they have an extra year, the servicer will make it a 2013 loan.

So we are waiting and all the equity funds are being raised. They recapitalize the real estate markets in the United States and that will come. Maybe there's $1 trillion of it. A lot of it is good. A lot of it is performing. Most of it is performing, but even if it is performing, it does not mean it can mature to par. When LIBOR is zero and you have 1.5 point spread, some of these loans were done at 70 basis points spreads. They can pay, but they cannot pay off the loan.

So where we can get involved there, we get calls from people that they need to fill a capital stack. Those are really the best opportunities for us. I would say that stuffs is accelerating, not decelerating. You look at the volume of transactions in the market, if you were with us in '09, nothing was happening. We raised money, but there were no trades, so you can't finance something if it's not selling.

Today the pace of acquisitions and dispositions is rising rapidly. And there's many more financings being done, so that's good for us on the whole and then is a fertile field because Europe is just -- if the US is in inning five of its recap, Europe is in inning one or two.

So I think there's plenty of opportunities and the question is will we be able to access the markets to take advantage of them and continue to grow the dividend and build the company? I hope so.

By the way, the other thing we are looking at and we have said it in most of the calls are corporate transactions and some of them could involve equity issuance. So they would help us build a bigger equity base, allow us to go out and get new credit facilities and not have to access the capital markets at all.

So we are very excited about those if we can get them done, but we use the same discipline there that we do originating loans, very tough to get it through the management team here.

Right, right. Okay. So just the volatility is what it is, stay the course, and things look attractive from just the general portfolio point of view?

Absolutely.

Thank you.

A follow-up from Bose George.

Yes, I just wanted to follow-up on the CMBS market. When do you think the next deal happens? Do you think subordination levels are different from the deals that happened earlier this year?

This is Stew. From our perspective, there wasn't anything ever wrong with the transaction in the first place, the loans that were in the transaction. What was wrong was the rating agency choice and the subordination levels were clearly rejected by the marketplace. I am not 100% sure. I don't think anybody's sure exactly where it's going to roll out, but we would anticipate that there will be a deal and then at some point in either the third or early fourth quarter, loans will come back either in their current form or aggregated with other loans. I don't think that there's going to be a CMBS transaction done in the next year and a half that doesn't include virtually all the rating agencies. I think if anything, the market has reacted negatively to the whole notion that there are five major agencies and that the sponsors of the transactions are able to shop the agencies against one another.

I think the best way to sort of combat that is to put everybody on the deal. Then the ratings will be representative of sort of the lowest common denominator across the transaction. I think those will be well sponsored. They will be well -- they will be well followed and well received by the marketplace.

In fact, these transactions even the one that was pulled by where eventually S&P pulled it, there was good investor demand ultimately for that transaction. After they reviewed the collateral and those kinds of things, what they wanted was a significant pricing concession because they thought that the agency choices in the overall subordination levels were just too low. But again, it wasn't a wholesale rejection of the concept of CMBS or the whole concept of the ratings and things, it was this whole notion of shopping them against one another and trying to sort of carve the system. I think -- again, I don't know but my bet is that you will see them but they are going to involve everybody and they will certainly involve my guess Moody's and who's really the most well-respected in things.

And so I'll bet yes, by the end of this quarter or early next quarter, the show will be back on the road.

Thanks for that.

(Operator Instructions). Bill Grant, Morgan Stanley.

Hi, Barry. Could you just expand a bit more just on the quandary facing the REIT and tied in with the share price? You've done that in your previous comments, but basically it may very well and it certainly seems to be a very good time to deploy capital. But as you have pointed out in a yield-starved world, the share price certainly hasn't been insulated from the bad news.

So maybe if you could just like talk about that and itemize some of the alternative forms of debt financing if -- that you could access if you want to remain active deploying capital.

Said it a little bit before, I think what we need to do is probably get out and do a roadshow, which we probably should do in October and tell our story out to the marketplace with a $2.5 billion book. We IPO-ed at 20. We had no dividend yields. Today we have done $2.5 billion of deals and paid 9% and the stock is lower than the IPO. So go figure. Plus we have done exactly what we said we would do and we probably executed better than I thought we would do on our LTVs. And certainly grew faster than I would have thought.

I mean, it is a pretty significant book of loans, which is quite valuable and as you point out in a yield-starved world, I would think that -- so we have got to get out. We have a big team. We should be out meeting the institutions and telling our story better in the retail channels.

I think yes, there are really good opportunities out there. So we have to figure out how we are going to finance them and whether it is a convert or whether it's a private placement or whether we have a transaction that is super accretive to the shareholder base with meeting our risk requirements or a corporate transaction that might involve a stock swap and equity issuance of shares to buy the business would recontinue to equitize the base and allow us to continue to borrow money. We would love to get an unsecured credit facility at the REIT. The market is getting closer. Not quite there yet, but it will be there and there are lots of things we're going to try to do to continue to grow.

And one thing that's really, really important is our short-term paper. One of the things that we are looking at hard is we have a paper maturity in 18 months. Let's sell it and then later deploy the capital for three years or four years or five years. And so we can do that. We can do that with almost any of our paper. So short paper is one of the first places we will also look for liquidity.

One of our CMBS deals I would say there's a 95% shot the company is going to go public and it will get paid off. It has a dividend blocker in it, so it has to get paid off or their company won't be able to do anything.

So there's a lot of situations like that that we anticipate inflows from loan repayments and/or loan sales but our quandary is a quandary. We -- should we liquidate the CMBS book or the conduit book and take the -- it is not a lump, we just won't earn anything. We thought we were going to earn close to, what, $9 million or $10 million in this book? Right? So there is a lot of -- that was a market with 145 AAAs, not 181.

So do we get out? Are we going to look like idiots leaving $10 million on the table? Should we have sold it? If our shareholder base, the one we have, I think is long-term focused and hopefully will allow us to adjust our balance sheet and what we are doing to what the market is telling us and we will just be a good steward of capital. I don't know anything else to say.

We can -- we are going to do the right thing for the shareholders and at least we are certainly aligned with our shareholder base.

I don't think the market stays here. I don't think that AAAs stay at 180. In fact, we would like to buy them at 180. I don't think they stay here.

All right, thanks, everyone. We hope you have enjoyed talking with us. Andrew and Stew and Boyd and the team are available for phone to answer any of your questions going forward. Please call us and we would love to share our thoughts. Thank you and have a great day.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.