Starwood Property Trust Inc (STWD) 2011 Q3 法說會逐字稿

Good day, and welcome to the Starwood Property Trust third quarter 2011 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Andrew Sossen, Chief Operating Officer and General Counsel. Please go ahead, sir.

Good morning, everyone. I'd like to welcome you to our conference call for the third quarter of 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 September 30, 2011 and filed its Form 10-Q with the Securities and Exchange Commission. In addition, for the first time we posted a supplemental earnings deck on our website. These documents are all available in the Investor Relations Section of our 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 statement 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.

Thanks, Andrew. 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 third quarter 2011 financial results, and we'll highlight several noteworthy items pertinent to both the third quarter and our business. Following my comments, Barry will discuss the market conditions we've been facing and provide his views on both the current market environment and the state of our business and opportunities we see looking forward.

This quarter we reported $39.3 million of core earnings, up 9% over core earnings of $36.1 million for the second quarter of the year. Net interest margin increased to $50.8 million, up 23% from the prior quarter. Core earnings per share were $0.42, a penny below the $0.43 reported for the second quarter.

Despite the increase in both core earnings and net interest margin, at the end of the quarter there was a difference between core earnings of $0.42 and reported GAAP net income of $0.15 per share, worth discussing. This difference stems from unrealized declines in the value of our held-for-sale conduit loans and related derivatives that resulted from the extreme disruption experienced by the CMBS market since late June. We made mention of this turmoil in our second quarter 10-Q and earnings release when we disclosed that as of July 31st the estimated value of our held-for-sale conduit loans had declined by $7 million.

As most of you are likely aware, we have historically used the securitization markets as a source of advantageously priced, nonrecourse, match term financing for many of the fixed rate mortgage loans we originate. Our business model is to originate the whole loan and then carve off and either securitize or sell a senior portion of the loan, leaving us with a higher yielding subordinate loan component.

For example, we previously originated a $59 million first mortgage on an office building in Chicago with a coupon of 8%. We subsequently contributed a $37.3 million A note to a securitization, producing an effective cost of funds of less than 5%, and retained a $21.7 million B note with a yield in excess of 13%.

Earlier this year, in an effort to improve the competitive position of our growing direct origination platform, we also began originating sell all fixed rate conduit loans where the entire balance of the loan is intended to be sold in the securitization markets. At the beginning of the third quarter we had $277 million of loans targeted for securitization, $9 million sell all conduit loans with a total balance of $177 million, and $100 million senior A note, which we had previously carved off $192 million first mortgage loan. Two separate securitization transactions, including these loans were scheduled for late July and early August.

Now under GAAP we account for these loans at fair value on our balance sheet rather than historical cost, with changes in the market value of the loans, whether realized or unrealized, reflected as a gain or loss in our income statement for the quarter. Consistent with that approach we also reflect the value of interest rate and credit hedges associated with these loans at fair value on the balance sheet, with value changes also reflected as quarterly gains or losses in the income statement.

Now with this as background, I want to talk about how we were impacted by the market turmoil in the CMBS market that began in late June, which in many ways rivaled events of 2007 and 2008. In August we sold four loans with an aggregate balance of $154.4 million in a Deutsche Bank sponsored securitization. As described in the press release we issued on August 30th, we essentially broke even on this transaction.

More importantly, in mid July we had six loans with an aggregate balance of $123 million scheduled for sale in the Goldman Sachs' 2011 GC4 securitization. Following an extremely rocky marketing period, buyers were selected in a transaction priced on July 22nd. However, a week later in an unprecedented move Standard & Poor's publicly withdrew its credit ratings for the transaction, which caused the transaction not to close.

In my nearly 30 years in the business this is the first time that I know of that this type of thing has ever happened. Consistent with market practice, we terminated both our interest rate and credit hedges when the transaction priced, fully expecting the securitization sale to close. Unfortunately, we were unable to replace the credit hedge contracts due to their proprietary nature.

By the end of the third quarter continued deterioration in CMBS pricing levels resulted in further unrealized mark-to-market losses on these six loans and their associated rate hedges, such that as of September 30 the estimated value of the loans and associated hedges stood at $12.7 million below our investment basis.

I think it's important to make a few comments to put these numbers in perspective. First, $7 million of this quarter's aggregate $19.8 million write-down is the recapture of mark-to-market gains from prior quarters.

Second, we are very comfortable with the credit quality of the six loans that were slated for the Goldman securitization. The portfolio has an average loan-to-value of 69%, with none higher than 76%, and an average debt service coverage of 1.8 times. We're highly confident that all these loans will pay as scheduled.

Third, if we hold these six loans and their related interest rate hedges to maturity and they repay as scheduled we'll earn a leverage yield of 5.9%, and none of the unrealized mark-to-market losses will ever be realized.

And, lastly, these six loans represent only 5% of our total target investment, and involve an equity commitment of roughly one-half percent of our total equity. This is not a material portion of our overall business and, in fact, we ceased originating sell all conduit loans in mid June.

I know that was a lot of detail but given the amount involved and the numerous questions we've received from both shareholders and analysts we felt it was important enough to warrant a significant explanation.

One more set of financial metrics that merit mention is that as of September 30th the fair value of our net assets was $19.14 per issued and outstanding share or $18.90 per fully diluted share. As of the same date, GAAP book value was $18.82 per issued and outstanding share or $18.59 per fully diluted share. The decline in book value from the prior quarter was predominantly driven by the unrealized losses I just discussed, as well as unrealized market value declines in our securities portfolio that we are required by GAAP to be included in other comprehensive income.

Now let me take a bit more time to outline some other significant details for the quarter. Origination and acquisition of investments slowed significantly. We became even more disciplined and cautious during the third quarter as we navigated through the significant volatility in the commercial real estate credit markets, an environment that as I've mentioned ended up being significantly more extreme than most industry participants expected.

Although we added to our investment portfolio during the quarter, several significant transactions didn't close, either from adverse due diligence findings or our desire to widen pricing and, or reduce loan proceeds in response to accelerated turmoil in the markets.

For the quarter we closed $194 million of [bole] investments, including $69 million of target investments. With the addition of these investments our total now stands at $2.4 billion. As was outlined in the earnings release, the current expected annualized return on the target portfolio stands at 11.6%. We think that this represents an extremely attractive risk adjusted return in light of our target portfolio's average last dollar loaned to value ratio of approximately 66%.

Another important development for the quarter was that $200 million upsize of our primary loan financing facility. The overall size of the facility is now $550 million. Importantly, this facility gives us a competitive advantage through its flexibility with respect to both property type and collateral structure. Additionally, this facility is not subject to market spread related margin calls. It provides a really attractive cost of funds and has a remaining term of four years.

As you likely know, in August we announced $100 million share repurchase program. As our stock price weakened we began to repurchase shares and in aggregate repurchased 626,000 shares at an average price of $16.99.

I'd also like to mention that for the first time this quarter to help our shareholders we are providing substantially expanded loan level disclosure in a supplement accessible in the Investor Section of the website. We think it is important to provide our investors an even more transparent view of our portfolio and believe that you'll find this information a great addition to the portfolio averages and credit scoring metrics we've historically provided. We also think a review of the information will make you more comfortable that our portfolio provides an extremely attractive risk adjusted return.

Now let me bring you up to date on our current investment capacity. We currently have $61 million of available cash, $133 million of approved but undrawn financing line capacity, and $180 million of net equity invested in liquid securities. Additionally, we expect net investment repayment proceeds of $30 million in the fourth quarter. With this we have the capacity to acquire approximately $225 million of unleveraged subordinate or mezzanine loans or utilizing the remaining capacity under our existing financing facilities, $450 million to $550 million in leverageable first mortgage loans.

As announced in our press release, our Board has declared a $0.44 dividend for the third quarter, which will be paid on January 13th, 2012 to shareholders of record on December 31st, 2011. This equals the dividend paid for the second and third quarters and represents a 9.26% annualized dividend yield on yesterday's closing share price of $19.01.

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

Thanks, Stew. Thanks, Andrew. Good morning, everyone. I was trying to think of the analogy of what kind of car our Company is, it's like -- I said a Ferrari that was navigating around potholes, but we're not as fancy as a Ferrari. So Stew and I decided we were like a '62 Corvette because we're very basic in what we try to do here. And try to move the continuum forward we had to sort of sidestep the potholes that have developed in the capital markets in the quarter.

It was really an interesting quarter. What you saw was a deterioration in the RMBS market, since spread into the CMBS hedging markets, and then into the CMBS securities, themselves. And buyers backed away from what they perceived to be risky securities across the entire credit spectrum, including high yield and other issuances. They all [GAAPed] out.

And so we had to slow-down. And this is a long road, not a short sprint for us, as we had to widen pricing on deals in the shop, and relook at proceed levels in the light of what was happening in the markets, despite the fact that obviously Treasury's rallied and [tape] yields should have tightened, not widened. But dealing with the reality of the quarter it was a question of let's go slow, let's see what's happening in the world, let's not be heroes, and let's make sure we [ring fence] our exposure in the conduit business that we'd entered and then left.

As Stew pointed out, the last loan we originated as a conduit loan was in mid June, and since then we've shut-down that business because nobody really knew where pricing was or what would happen in the CMBS markets ultimately.

Actually, since the end of the quarter the equity markets have rallied, the credit markets have come in, too. And, in fact, going forward you might see gains in the books that will impact our GAAP earnings and not our core earnings going forward. Most likely, as we claw back some of the discounts we've taken of the mark-to-market against this relatively tiny book of held-for-sale loans.

As you can see, Stew mentioned the supplement, which is new for you, which is a state-of-the-art disclosure I think for any enterprise, like us. You can see a page that's -- outlines of six loans totaling about $120 something million with only $28 million of equity involved in them. So you can see them loan by loan, you can see their debt service coverage at 1.8 times, you can see that they're on average, weighted average of a 69% LTV. So there's no -- I think it's ring fenced, done, we're moving forward, and there'll be no losses realized if we hold those loans to maturity, and they are good duration. And, frankly, [in accordance] yield of 11.6 on $2 billion of assets, it's just thousands or more basis points over the five-year Treasury with diminimous risk, which is what the point of all that disclosure to you was.

But, actually, what looks to be a tough quarter I think is really good news for us. I think we're really happy with what we're seeing out there, which is, as you know, institutions like Credit Suisse have shut their conduit business. Other conduit originators that were competing in the marketplace for originating loans for balance sheet lenders have basically shut-down, too. So that has gone back to our business the way we IPO'd in August in of '09. In fact, I'd suggest that interest margin on future loans will expand. The increase of our lending facility of $550 million from $350 million will allow us to continue to play and finance those loans. And we're definitely seeing a widening of spreads, less competition.

And I will mention one other thing, Europe, it's like drinking from a hose. There is so many opportunities for us in Europe and the positions are so large, that probably the most important challenge to us is how are we going to access and take advantage of that, how are we going to get the capital to take advantage of those opportunities, both here and abroad going forward.

As you know, we -- our load is major shareholders in the Company to issue stock below book, and it would have to be an amazing event to want to do something like that. So we're looking at alternatives, what might they be. One of the things we did I think, I'm not sure it's happened very often but as an (inaudible) we did step-in and buy stock. We would have bought more had the stock stayed in the position it was. It did rally with the equity markets. But we are very cognitive that when our stock gets that cheap and our yield is that good on the capital that the best loan we can make is probably just buying in our own stock.

And, as I mentioned, there are really excellent opportunities today in the marketplace, and so some of the things we're thinking about, whether we want to do a convert or we want to do a preferred, [professional] preferred, or do we want to do a partnership with institutions where we would originate loans and the REIT would share with them in those loans to the extent that it had the capital to do so, some of which will come from obviously the repayment of loans and existing book. But we think better than that there are some other corporate opportunities that we're looking at quite aggressively that could provide the capacity for us to continue to grow our business in interesting ways that will create shareholder value long term.

So I would say, overall, that we've probably backed our pricing up 50 basis points, maybe 75 across the spectrum, and at the same time core funding rates on our facilities are probably a little lighter, a little lower than they were. And I think the market is splitting again into the haves and the have nots. And given the scale of our Company, the speed at which we can react, our understanding of the real estate markets, it's fun because it's exactly what we told you we'd do two years ago when we IPO'd. We're sort of back to that kind of market.

Now the CMBS markets are open. They're open in a small way. There is a recent deal done by Deutsche Bank --

And Wells Fargo.

-- and Wells Fargo, but lenders, balance sheet lenders, the traditional money center banks that were participating in the CMBS market are very concerned about proceeds now and are lending only a very tight LTV. And on top of that oftentimes we're getting phone calls now to layer in additional debt and because, of course, the senior is cheap, we can get our -- meet our target returns in the junior notes or the mezzanine notes.

And I think across the whole credit complex people have backed off. In Europe there simply isn't enough money. There is no mezzanine market to speak of in Europe. And as these loans trade and anybody -- and the banks want to take a -- sell a product, they can't -- nobody can get debt. So it presents a great opportunity, unfortunately, we need a lot of money to take advantage of it in the scale we should. So we'll have to talk about that with our shareholder base and figure out how we're going to access that ourselves.

I think, also, that as you may know we've started (inaudible) some of those most senior executives to London recently, and he's expanded the shop, hiring some people from some other loan institutions. And the pace of -- it truly is an astonishing amount of things to do, which we have to figure out how to do, and how that's going to benefit our shareholder base.

I think Stew's disclosure was quite long and very expansive. I think between the share repurchase and the updated disclosure package we were listening to our shareholder base and being quite responsive to help you understand the Company. We've said it's an amazing yield on I'd like to say I think of as a AA almost investment grade collection of loans, but so now you can look at it yourself and make your own determination about the risk we're taking.

I'd say also that we're looking at our dividend. We want to continue to grow our dividend. Some of our -- some of the situation in the quarter was the fact that we backed up loans, sellers did not adjust their pricing or their expectations of proceeds fast enough. They were thinking that that was a very quick blip, that pricing was going to be GAAP'd out, would come back in as a GD10s and the whole credit complex structure would get tight. It didn't. Banks got more realistic, and but a lot of trades didn't happen, particularly a fairly large trade we were working on where the seller had an ask and we had a bid, and they widened as the world collapsed and they didn't change their pricing. So we said [asti-luego], we'll see you when you come back to reality.

So there's a lot of that going on right now as people try to figure out is the credit complex, or when will the credit complex come in. And I think the answer to that is it won't come in until Europe finishes whatever the hell they're doing over there, whatever the sausage is they're making, and it's going to take them awhile before the credit complex comes in. And it's really the cost of funds is going to stay up while CDS spreads are as wide as they are across both now domestic banks, like B of A, and obviously European banking complex systems.

So, with that, I'm actually pretty optimistic. I'm really happy about the fact that we feel good about the loans we're making. We sort of moaned about some of the competition and the stretching of loans that other underwriters we were seeing pre June, we thought it was getting a little silly. We don't have any train wrecks from that period. As you know, the conduit stuff was -- I think was the right thing to do at the time, and I'm glad we did it only to the extent we did it, and I'm glad the Team was able to ring fence our exposure and the hedges are back in place, and unfortunately have an unrealized loss but it's not really a loss, it's just an accounting loss.

So, with that, by the way, one thing I'd say about our disclosure, you'll see a loan-by-loan analysis. And I think we've looked at our marks, and I think they're conservative. So I'm not sure even today where pricing is, I think I would say that (inaudible) I'd say those marks are conservative. Certainly, as a whole.

So Boyd, myself and Stewart, Andrew, we're all here to answer any questions you want this morning.

(Operator Instructions)

And, gentlemen, if you're ready we can take our first question?

Sure.

We'll take that from Ken Bruce, Bank of America Merrill Lynch.

Thanks. Good morning.

Hi, Ken.

You touched on an area that I'm quite interested in seeing if you could add some additional color on just as it relates to the capital raising. You guys have been creative in the past. I'm wondering are there, aside from all the kind of normal routes to raising equity are there other ways that you could look at acquiring other corporates that might allow you to grow the equity base in a little bit more shareholder friendly way?

Yes and yes.

Can you elaborate on that, all?

Not really. Andrew, my Counsel, is sitting next to me, he kicks me. No, there's some interesting things. I mean there are, as we've talked about over time, lines of business -- we've talked a little bit about the triple net business, for example. And the issue there is the amortization on the balance sheet debt. We're conservative, so even if the yield on the properties is great, let's say in excess of 8, but the debt is amortizing because of the duration of the triple net leases, there'll be income and we'll post income but we wouldn't have the matching cash flow necessarily to pay the dividend that we're supposed to pay. So it's something where these portfolios have triple net and companies that we look at, it's best that we can find debt on those triple net that's not heavily amortizing, which is tricky.

So we're trying not to do something -- we want to pay and grow our dividends, hopefully, for a very long time. So, and here's our thought. I mean if we set-up a sidebar partnership with an institution that we originate for, it keeps everyone busy in shop, protects the book value of the entity. And, in fact, my major thesis, as you know or maybe don't know, is that the end of whatever is happening in the world yield is still going to be quite valuable, and good yield will be extremely valuable and stable yield.

So that at that point when people recognize the risk profile of our dividend stream and our patience and discipline in creating the loans, this stock should trade to more like a 7 yield or a 6.5 yield, take its place as an alternative for cash for many institutions that can lever that in the margin markets and earn double-digit returns as a nice base for their hedge funds or even their [long only] funds.

So to dilute the Company doesn't seem very intelligent. So we keep ourselves busy with institutional shareholders, and we invite block institutions to come into the stock in direct deals, block trades, and get the diversity of all of the existing book without impacting the stock. Again, it's all about pricing to do those trades, and either way, we're working on both. We're having conversations with institutions about partnerships with them and continuing to originate loans. But particularly since the scale of the opportunities are just -- it's better to be bigger, it's always been better to be bigger in this business. The best deals are bigger deals today. They're the ones that clog-up the system that don't have buyers for. The $50 million deal or $100 million deal or 100 million Pound deal, or 100 million, 150 million.

We're calling -- actually, we, ourselves, are calling other money managers, and we are doing this right now in a deal in Europe where we're just going to split the deal with them just because it's too big for us. And the last time we did that, I'll point out, is when we invited a foreign bank into the Hyatt Regency construction loan, which I'm happy to say opened, and Andrew went to the opening. We originated an 11% first mortgage loan, and I think the loan is worth like $20 million more than we have -- it's a five-year loan, and the hotel looks fantastic, it opened, no hitches, whatsoever. And they've tried to -- they want to prepay our loan, and we're like no chance. But, well, there's a chance if they paid us a lot of money, but it would be impossible to replicate that today. And I think those opportunities are around again. And so we're -- not only are we moving our pricing and our spreads, we're trying to improve the quality of what we're lending against. Once again, I think we can do it.

Right. I understand that, and I agree with your assessment on the market's lack of appreciation for the stock, and how that could improve. I guess the opportunities are here now and obviously waiting for that could be frustrating. I was just wondering and I think if I understand it right, the tripled net lease opportunity is really a book value retention strategy, and I'm wondering is there ways that even though your valuation may not be good it's better than many others -- are there ways that you could actually use your currency as a tool to either acquire assets or other companies that would allow you to expand the capital base?

Yes.

You're not going to elaborate?

You're right. I mean we're better -- we're trading better than our peers, and I think we got caught up, as you know, all of the finance companies, whether it was a bank, a commercial mortgage REIT, or residential mortgage REIT, I mean everybody got swept-up in the banking crisis, and also in this sector of what are they doing in Washington with the residential mortgage resale. I don't think a lot of people differentiate between us and them. And I think we got hit with that, too, because people thought they might regulate the commercial mortgage REITs, which really isn't on the table.

Okay, well, thanks for your comments and your disclosure. It's very helpful. Appreciate it.

Thanks, Ken.

Moving on, we'll take our next question from Joshua Barber from Stifel Nicolaus.

Hi, good morning, and thanks for the extra information in the supplemental. Can you guys comment a little bit on your 2012 loan maturity profile? It looks like you have a pretty significant amount of your book rolling then. Can you talk about, A, the time difference of that, in other words, are there a lot of loans that are maturing in the first six months of the year, the last six months of the year? And do you think that a lot of those coupons today could actually be reinvested at higher levered returns?

The -- yes, as you can see on page 11 of the disclosure, we have a fairly significant maturity next year, about $300 million. And our job is to originate loans to that bucket of loans that are maturing. I believe most of those are the original [Teachers] deal.

And we would point out that this schedule really shows the legal maturity of the loans and doesn't necessarily assume any extension options. We have one loan, fairly sizable, $75 plus million of equity, a $200 million loan that although it legally matures next year the borrower has the option to extend it for an additional three years. So it shows up on this chart as money coming back next year, but our expectation is that the borrower will be extending, will be taking advantage of each of those extension options, and it would be showing up in 2015 or 2016.

It raises an interesting nuance of what we do, which is the higher the LTV that we originate, the more likely we can roll the loan. But say for the loan less likely we get to keep it, a maturity, because somebody will roll-in and do a loan at 4.5% or 4.8%.

So I have to get you, Stew will have to come back to you with the -- we can improve this on the next bucket. We could tell you the yield on those maturing buckets, almost like the rents of the maturing tenants. I'm guessing it's going to be accretive to lay that capital out, because I'm thinking that was the Teachers portfolio which we did pretty tight.

Teachers in that, and now that I think about it the bulk of it -- the mezz on that deal is about [950].

Yes, so it should be very accretive to us when we lay that capital out. And we just have to time our originations to those maturities and obviously it's an art form because you're not exactly sure you can prepay at maturity, 30 days before, or most of those loans would probably be open for prepayment within 90 days, their maturity, so.

But there is a large loan that's included in that, as Andrew mentioned. I don't think we --

(Inaudible) in May.

Yes, not that one, it's the security we own, the big first mortgage.

So one thing on that chart that we've talked about changing is, for example, if we make a typical floor loan that's three years and with two years as extension, it technically matures in three years and the borrower has the right to extend. On this chart it's reflected as if it matures in three years. Hilton, for example, actually has already matured, and they keep having extension rights. So we're calling it $185 million coming back next year as the debt matures, but they have the right to extend. So you could look -- if you look at it to full extension it'd be four years further out of $185 million.

Okay, that's helpful. Can you also talk about the strategy of just investing in RMBS in the meantime? I'm assuming that you guys are still just using them as a cash alternative. Is that still going to be highly rated RMBS? It sounds like you're buying some stuff there at a discount, is it really worth I guess investing in that stuff short term?

Oh, definitely. It's doing a great job.

Yes, I mean the RMBS markets are a bigger mess than the CMBS markets, and are offering extremely attractive returns right now on short paper. So we're kind of back, you know, we didn't tell you this, but I think it was in '09 I think we earned 19% on our RMBS book, our goal was to earn 6%. And we had three different firms check the pricing, and they were -- they actually thought we earned in excess of 20%.

So to tell you the truth I mean that strategy has been a good place to keep cash so we don't have to earn zero on it, and we're very -- we do not -- there's not a lot of creativity in what we do there. It's -- but the markets because we are a small player with small lots we find oddball securities. We have a very competent manager there, and he's done very well.

So we use that -- we borrow against that, it is our version of an ATM, it's our working capital facility. So we unlever it and lever it, unlever it and lever it, and we borrow -- what did we borrow, like 200 over?

Well, inside of that, you know --

The stuff is well rated, and so we borrow very inexpensively against that, and it's turned out to be a good place to put excess capacity. And when we stopped, you know, we raised money thinking we were going to make some of these loans. We're sitting on a bunch of cash we didn't want to have. And, actually, we have a lot of capacity, undrawn capacity on some of our loans, that have been approved. So they're just like blinds, we can pull them at any time.

And, again, we're building a castle with a strong foundation, we're not -- we're just, we're not -- there's some very large pools domestically that we're looking at. We've bid on several pools of loans that combine nonperformers and performers. Prior to this crisis we were getting outbid, but we're a survivor, we have capital, and we're getting maybe a disproportionate number of phone calls right now. So we're pretty okay, we're pretty pleased with where we stand.

Okay, last question, you'd mentioned partnering up either doing some sort of corporate partnerships for loans and the like. Is there a possibility that you would do that with Starwood Capital, the external manager, on some of those loans?

No, no. I mean this is -- these are actually Starwood Capital investors and other entities we have that have approached us and said we like what you do in the REITs, can we give you $200 million and you can invest it? I think Colony has done something like this with a sidecar partnership. I don't like to do it in general. A lot of REITs, you know, [Vernado] has a fund that they run. A lot of REITs have these -- [and DDR] had one with -- you see it, and it does stretch your capital base, it keeps management busy through periods of lower equity availability, but in general I don't love to do it.

I don't, you know, the loans could be worse than the companies or better, and so we don't really have much choice if the alternative would be to do a big raise and potentially absorb a hit to the share price, which again I think we own more of our stock than any, certainly of any management team in this space, and any -- most any individual shareholder. So I mean why would we blow ourselves up? It doesn't make a lot of sense.

We have to -- so, you know, I think -- I do think opportunities are really, really good right now, so I wish we had $500 million of compressed cash to deploy in the vehicle, but at the moment we don't. We're going to do our road show and talk to people, and we haven't been out in awhile, so we're going to do that next week. And hopefully we'll see some of our core -- well, we will see most all our senior large shareholders. And we'll have a dialogue with them. We're partners with our shareholders.

Thanks very much.

Moving on, we'll take our next question from Bose George, KBW Investment.

Hey, good morning. Say, I just wanted to follow-up on the comment you made on pricing being up 50 to 75 basis points. Just wanted to clarify is that rate being up or is that the spread, just wanted to make sure?

The spread is widening.

The absolute rate that the borrowers are paying, has that gone up at all?

Yes, there's a scarcity of capital. I mean Starwood Capital is buying, looking at refinance a portfolio of office buildings and have to do it in 60 days. And we have a loan from an insurance company at like 7.3. I would tell you that loan would have been 5.95 in June. And I wish we could make the loan. I mean it's fantastic, below replacement cost, great, leased -- 99% leased real estate in the Bay area, but it's very hard to find a guy to lend you $300 million. And I'm like appalled by the spread, and half of me is happy. The part that's Starwood Property Trust is happy, and the part that's Starwood Capital Group is bummed.

So there's just not a lot of capacity right now in the marketplace. The only real big balance sheet lenders left are the life companies, and they've had a very busy year. I don't think they've had a bigger year in the property markets. And you've not seen -- you're not seeing the whole complex, the European banks are pulling out of the U.S. for the most part, and you're not seeing, just you are seeing a contraction in credit available to the property sector for sure.

Okay, good. That makes sense. And then just given your -- these opportunities and your current investment capacity when -- what kind of timeframe should we think of in terms of that being run through, as well?

I'm sorry, I didn't really understand the question?

I mean you guys noted how much investment capacity you have, sort of capital --

We have deals under contract that are -- that would use most of our capacity, and if we haven't figured out what to do after that, you know, we're going to see where the stock is, but we'll have to figure out how we're going to continue to grow or just wait for the loan maturities or Boyd and Team get to go to Hawaii for a little period of time and work on their surfing.

No, we'll deal with that issue when we get there. We like what we have under contract. Frankly, I'd like to have closed it yesterday. I mean we're never in charge of -- we don't get to determine when a borrower closes a loan. So, but we're very pleased with what we've got under contract. We just closed, what -- a $34 million multi loan with a yield of like 11.5, 12%.

Yes.

I mean that's just great. we couldn't do that nine months ago, seven months ago, six months ago. It wasn't in the market. You couldn't do it. So there's no way. And that was, again, speed, somebody needed security, a certainty of closing. They know our Team, they get it done. So a $34 million multi loan, wow, that's just great. You see a lot of hotel paper, of course, but that's been an interesting place.

It's really good for us, if we had a billion dollars today I'd be really happy because we could put it out, but we did have to get through this potholes of the financial market, and now the road seems pretty clear. And, if anything, I think you'll see tightening over the next six to nine months. I think the markets will tighten. As you saw last week the high yield markets had record inflows and the risk on, risk off trades are ripping through all sectors of the capital markets and the commodity market, too.

Great. Thank you.

Moving on, we'll take our next question from Joel Houck, Wells Fargo.

The disclosure on page six, if we could kind of focus on that? Can you tell us generally, I mean I know there's a lot of loans on this page, but are these stabilized cash flows that go into the LTVs or are there some that are projected cash flows based on up leasing and things like that?

Yes, I mean in general not -- they're -- they'd be -- yes, other than the -- there's virtually no proforma income incorporated into any of this. This is, you know, we have very strong real estate expertise as a manager, and that's Starwood Property Trust, and these numbers have been scrutinized.

I mean with almost, with maybe the one exception being that we have a -- that there's, as Barry mentioned earlier, there's -- we have a fairly good-sized loan on a newly opened hotel properties in New Orleans, and so that would by definition be some kind of proforma income, but that's construction loan and it's valued conservatively at sort of replacement cost. And, in fact, given the way the construction was it's valued significantly less than what it would cost you to build it today.

I think that's loan one, isn't it?

No, that's the Hilton.

It's loan seven.

Yes, it'd be loan seven.

Yes.

But otherwise, no, these are good, conservative, reasonable estimates, and all of -- you know, when you're a lender you don't have any of the upside associated really with improvements, underwriting and valuing, cash flow, and in general I think, Barry, you actually reviewed the cap rates that we were using and were pretty comfortable that they were conservative, as well?

And I'll point out, like what we don't have on this chart, which we can add, is some of the credit quality. We see retail at the bottom with higher LTVs, those are AAA, AA, it's Walgreens. So we did them highly leveraged when we started because of their 25-year leases to Walgreens, so they're very safe loans. And then the industrials you can see are guaranteed by [Sener Re] for full repayment of the note.

So there's sort of like -- it's a funny chart. We actually could have -- to really show you what's going on maybe next time we'll make them wider and tinier, depending on the size of the loan because a $2 million loan is getting the same weighting as a $175 million.

Sort of a visually --

Visually you're not seeing what we want you to see, which is the weighted average risk profile of the portfolio. So maybe we'll do a little widening and screening of the pieces of paper.

But you can see it's pretty diversified and very safe. For those of you who are just seeing it for the first time, if you have it in front of you, the dark blue is the part of the loan that the mortgage -- that the REIT retains, has kept. And in some cases we bought a mezzanine on top of a senior. In other cases we did a securitization and, or drew down one of our facilities on a long-term basis to earn the higher yielding junior note. But you can see we have a lot of first mortgages, a whole stack.

And it's pretty good. I think there's no -- you know, in fact, I opened one loan, I was questioning the cap rate assumption. It's a building, an office building, and I think it was getting a 9 cap on it, and I told our Chief Credit Officer, [Pekarski], I said I can't buy anything in the market with a 9, 9.25 cap. The lease is actually above market, so that's why he used the cap, even though I think it goes for seven years or something like that. So I think, that's why I say they're conservative, I was thinking I've never seen a 9 cap on a fully leased urban CBD office market that would price the building at $100 or $120 a foot, when it costs $300 a foot to replace. So I was pretty comfortable with these marks. And our Board went through them, too, at the Board meeting yesterday.

I mean it looks -- the portfolio looks bulletproof. I'm wondering, I mean you have indicated some of these loans fully amortize over the next 13 years. You have a sense of maybe next time you could kind of add-in which ones are amortizing versus bullets, that might be helpful, as well?

Okay, we can do that.

We can do that. If you look at the chart on the prior page, it's also a really interesting -- you're talking about the portfolio being bulletproof -- on page five I think it is, what we did was we took the -- Barry was commenting on how there's no weighting by dollars, so what we did was we took the entire portfolio and we essentially took every loan and took, let's say you had $100 million loan, we took the number of dollars of that loan that would fall into each LTV bucket and then added them up.

So if you look at this picture what it's saying is that $200 million of our portfolio fall into the zero to 10% LTV bucket. And you can just -- it goes to your point of it's bulletproof. I mean if you look at it, it's just an extremely diminimous percentage that's up above 80%. And, as Barry pointed out, most of the stuff or a good chunk of the stuff above 90 is actually guaranteed by AA credit. When you look at this chart it just lays out our cash flows in the LTV buckets where they are.

So then, of course, if you were doing a CDO on our portfolio you get the benefit of cross-collateralization, and essentially our dividend is a CDO security. I mean it's kind of linking all those cash flows together, and we support it with -- that's why it seems like the markets don't understand what we do. There's no leverage at the corporate level, right? We don't -- we haven't taken any leverage at the corporate level. We could, and we could cross these papers that way, but we haven't done that. It's another thing we could use right now and get more capacity, but we're watching the states of some of these companies that get their leverage levels up -- maybe, not right now, maybe.

Yes, well, like unfortunately financial services company and everything has some discount to reality, so.

Yes, but you're watching -- I'm watching the [resi REITs] and watching the (inaudible) and their bouncing debt to equity ratio is five to one, seven to one, nine to one. And the mismatches and obviously the twists hit their NIM as they bought down the long end of the curve. And we don't have any of those issues, those issues are not our issues. Especially now that Treasury's are tight, swaps are coming a little, but quotes -- the competition for loans is better right now. And I think it's going to stay this way for awhile.

I don't see the way I see the banking complex right now, I don't see these guys going hog-wild. They are -- I just had dinner with Jamie Diamond the other night, and these guys are, as you know, I mean you guys work for a lot of these institutions, you don't know what the rules of engagement are. It's hard to flex your balance sheets right now. You don't know what you're holding, what you're selling, what -- the markets are thin. So, for us, it's a good thing. I mean we're -- if we had a billion dollars today we'd IPO and raise $100 million again we could deploy it at very good rates. Just I think not too dissimilar to the book we have right now.

Yes. No, it's great book. I appreciate the extra disclosure. Thanks, guys.

You're welcome.

Moving on, we'll take our next question from Gabe Poggi from FBR.

Hey, good morning, guys. This is kind of a 20,000-foot question, it has a lot of moving pieces, but relative to the U.S., what you guys see today domestically and then in Europe, can you kind of give a spread to LTV comparison? In other words, you can lay-out money here at X but then what you can do over there from an acquisition perspective? I think that'd be helpful. Thank you.

Yes, like here, the tight, the really safe stuff is tight over there still, it's tight here. So what I'm saying is if you're at a 40% LTV loan, 55%, 50% LTV loan, there's still competition at the low end, and we're probably not -- we're just not the right player for the perfect loan. We're not going to -- our cost of capital is too high.

But I think that you can get -- let's say you're going to layer it in (inaudible) paper here, I would even today I'd say normally you're probably going to 70%, 68%, 74% LTV. What we think would be stable or bottom LTV, probably going up. I mean value of property is going up, LTV would be going down over time.

I think in Europe you can get the same yield, 10% in the stack, so 65%. Because the loan goes from 50 to 65 instead of 55, 60, to 70, 75. But I think the real trick in underwriting Europe is what is the V, like where are our cap rates on these properties. The property market is still attracting quite a bit of capital, private capital. And then there's -- you have the deeper cities, the London's are different than the -- than Brighton and Leeds. So Paris is different than [Lyonne].

So and you have more confidence in underwriting the loan, but the cash flows I think are fairly stable in much of what you see in Europe. We're going to -- our stuff, we'll deploy the same discipline. We're not big on lease-up risk from a lender standpoint. Having said that, we're also creative. I mean if we saw an empty building and the loan was $25 a foot and rents were $50 we would make the loan. Those are loans we can make.

One of our challenges in Europe, especially in the mezzanine is that the seniors want to get all the cash, so to the senior. And we're looking at a deal right now financing for a fund where there's a senior, which will be cheap, inside 4.5%, and it is like less than 50% LTV, this is a big pool of loans they're buying. And, but they want to have, they want -- we can get a juicy, really juicy junior note, like let's say between 10% and 15% juicy. But they don't want to -- they wanted to pick. And we can only do so much of that because -- all the cash pays off the senior, your loan is getting more senior, and they will be able to start paying you at some point. But we're not really good at 100% accretion in a deal, so obviously we could do some of them if we loved it but it'd have to be the equity like returns to do it. And we would do it but not a lot of it, so.

That's helpful. Thank you.

Moving on, we'll take our next question from Stephen Laws, Deutsche Bank.

Hi, good morning. A lot of my questions have already been hit on, but -- and I apologize if I missed comments to any of these. But can you talk to maybe where book value has moved since quarter end? And then, also, maybe a little bit more detail on the $1.2 million I believe in the investment acquisition costs?

Book value, I think from -- I don't have a number right here in front of me, but in general book value is down by about the difference between -- Dave is helping me find the numbers -- it should be down --

Quarter end.

Oh, since this quarter end or since 6-30?

Since 9-30, so maybe like at October end? I mean I would imagine it's recovered some.

Yes, I would say book value would be up. We probably marked -- well, I guess book value -- or do you mean fair value per share? Fair value per share is definitely up. I mean we marked the portfolio down about $30 million net last quarter. And that would -- we'd be recovered by half of that today probably.

Yes, I agree.

At least.

Great, that's helpful.

Yes, as far as book value goes, I mean that's really just a function of the difference between our dividend and GAAP net income. And, like I mentioned in my comments, we had a fairly -- usually that GAAP is very small, it reflects a couple sort of immaterial items, but one of the reasons I spent so much time this time in my discussion was that all those unrealized losses just because of the rules associated with GAAP accounting get reflected in book, so we had a fairly sizable decline in book value, again as a result of the unrealized losses. But as far as market value, the value of our book, we are definitely up probably at least half of what the write-down was since -- as of 9-30.

If you had to mark it as of 9-30 and the market got better after 9-30 (inaudible).

Yes, substantially.

Substantially better.

Great. and then the acquisition costs for the quarter -- I may have missed it, but were those costs that went into pursuing deals that you guys decided not to close on and moved away from, or what does that relate to?

Yes, you know, we had a big, a very large deal we worked on in Europe, in two different pools, and we lost.

Well, one, one was just exactly what you described in the meeting. We looked at a pool that was almost $500 million in loans that was being sold by a bank, and we spent a lot of money, close to half a million dollars.

It was proprietary, it was an exclusive trade.

And we decided after due diligence that we wanted to kick like $50 million or $80 million of the loans, and we widened our pricing, dropped the price by 3 or 4 points, and they walked. But we held our ground. It was exactly what you described, and that shows up in G&A.

And that, you know, honestly, because we knew the institution very well, we kind of thought, we would normally run at that deal cost of that scale but we thought -- we really did think they'd take the price cut because it was justified. But they were living in la-la land, so we didn't do it.

And the other one was a -- four firms were invited to bid on a pool of performing loans offshore at a bank, and we did a lot of work to buy that portfolio. And the exercise was not a bad one because we were invited to buy another portfolio from them, we think of higher quality loans on an exclusive basis direct with them based on the work we did on the portfolio that you see the deal cost for. And we're continuing to work on that portfolio, but we still have not agreed with them. They want to sell it to us but we're holding our ground on pricing. And they want about 75 BPS tied to pricing than we want to give them.

We have a core number that we need to make, you know, we have our -- the dividend, we have the management fee, and we have our G&A expenses, and there's a number there that we just don't want to -- we won't go below unless we -- like we have a loan at 9.5 because it's so ridiculously priced, and we bought into it, the hell with it. But, in general, we don't do that.

Well, great, I appreciate the color there. And then can you maybe expand on your comments slightly about the competition? You've talked a good bit about it already with Europe kind of moving away from the U.S., but maybe are you seeing anybody out there that was more competitive and now due to leverage restraints, possibly even impacted by having to mark down equity at 9-30, having even more leverage restraints, that have had to kind of move away from the market? Or are those people being impacted really kind of in a smaller loan niche than where you guys play?

Well, a lot of guys started to field their conduit businesses again. And to my knowledge most of those conduit lines have been pulled, tightened, closed. And I mentioned Credit Suisse firing their entire [AVS] Group. You see Blackstone, Blackstone has a special situation, it's a distressed fund, they're quite aggressive. For awhile they were setting the pricing. I would say they're a price leader on the mezzs, particularly. You see Cerberus. So you see who you'd expect to see. And they're with private capital.

And I tell you, I mean the -- in a world where the 10-year is two, and the five-year is one, a 9 is a pretty damn good yield, you can't get it in the high yield market on a decent, a reasonable LTV mezz. It's just doesn't quite work for us. It's not a (inaudible) we had to cross. We haven't decided we're going to lower our targets yet and, frankly, right now I feel we would have had to do that probably if the world hadn't reshuffled itself a couple months ago. So right now we're not that worried about it. We'll do a 10.5, 11, but we've gone the other way. The most recent loans we did was 11.7, almost 12 on a multi. That's not -- we never had done that in the last 18 months.

One twist on the competition is that we're also just seeing with -- together are players who are competing with us, but they're not pushing LTV the way they were in the spring. In the spring it felt when we were on these calls, like we would eventually have to tell you that our weighted average LTV would be going higher. And, in fact, it's going lower. I mean it's surprising that we can get the kind of returns we're getting. Barry mentioned it, but there's less competition and there's certainly -- people are just not pushing that envelope.

I'd say that we're [clubbing] up more, too. I mean I think we're getting more calls from the bank that says I want to make the senior, will you take the junior? And I think we're seeing more of that I'd say than we had recently, where the banks want to make the loan but they just don't want to have any non AAA security in their book. So they just stop, like they're done. And there's some good players out there. It's not like it's a big world, and we're not that big an enterprise, so there's a lot of deals.

Those life companies are still around. We've got capital, we've got a pretty aggressive loan on a [tel portfolio] I thought. Not on proceeds, proceeds were 55%. It'd be a 20 debt yield for the life company on this portfolio. And, but the coupon will be like sub 5, but it's 55% LTV. Now if we want to [geets] the return of that portfolio we could layer in a 12% mezz any day of the week, if they'd let us. We can't, we won't do that with ourselves.

We are, you know, we did one loan where we took 49% of the (inaudible) which Star Capital is one of the owners of that, but [Apollo] controls the paper, not us, and they set the pricing, not us. And if there's ever an issue we never, we do not vote, it's Apollo who will run that deal. And we would, there are other situations that we see that are like that, where we're like, holy shit, I'd love to own this paper, but we haven't had that -- crossed that page either.

Great, it looks like the patience paid-off with the investments in the third quarter, and opportunities today. So thanks, again, for the disclosure and for taking my questions.

Any time. A final question, I think. Thank you.

Yes, we'll take our final question from [Sloan Bolan] from Goldman Sachs.

Hi, there. Barry, I just had one question on Europe. You touched on scale being a consideration for expanding over there, what the opportunity might be. I was wondering, one, if you could elaborate on that scale would be or how you would think about that? And then, second, what we should look for in terms of how assets or how loans get originated in Europe, whether we're still too early in the process or how that plays out?

We're not too early. I mean we are looking at deals. We are capital constrained, and so we're thinking about how does one efficiently attack the market. You're not too early. I mean I think there are big questions in the markets. England is different than the Continent. And then there are big questions of where do you want to go? I mean are we going to make loans with Italy? I don't think so. Are we gong to make loans in Spain? Yes, I would make a loan in Spain on a triple -- office building 99% leased for 20 years, so U.S. credit to pay this in dollars.

So I wouldn't say no to anything. We've actually saw a deal in Russia, but with a double -- a gas company, it's a beautiful building, but we're not going there. So I don't want to have to explain why we did it. It's not worth it to you. So there's other opportunities.

So I'd say that, again, it's -- we're very careful on our underwriting in Europe because of the direction of the cash flows. I think if you're worried about U.S. cash flows or rents staying stable or slightly rising, you can't feel necessarily that all the cities in Europe are going to see stable rental yields. Although the markets, probably remain fairly good. There I think you'll see rents come down in London, I mean because of the rate of supply and I think some guys overextended in the financial sector.

So I think you've got to be careful if you're writing (inaudible) London office. The London retail is pretty good but it's probably going to go over the hill here, I mean consumer spending is going down in the UK. So you've just got to be careful, and that's okay, that's what we do. And I think we don't have to be heroes over there. I mentioned already I think the LTVs, we can go to 65% and carve-out a 15% piece of paper for ourselves, 15 being [60] to 65, not the yield on the paper.

So a lot of borrowers they don't want to -- say, look at our -- these junior notes that we say, like I don't want to borrow at that rate, but then look at the envelope, the cost of funds overall is still acceptable. And it's pretty good, it's probably 6, instead of 5, but it's 6, it's not 9. Because they can take your paper. That's why you want to originate the whole loan and not a mezz loan because to the borrower, he sees 6, he's going to take it, we can carve it out and earn 12 to 13 in the junior portion of it is of no business of his and he doesn't feel bad, as long as he got his 6 or 6.25, or 7. But anyway the best part is when the guy has to do something he has to do it fast, and that's where we have to have money to do that, to execute those.

Okay, and then just the question on scale, as you think about that opportunity relative to your current book in the U.S. and then --

I can't even tell you. I mean there's so few lenders in these markets right now I can't even imagine. I'd tell you a number you'd be scared.

Okay, but even what your --

(Inaudible.)

Right. but your own level of comfort with how big of a portion of Starwood Property Trust it could become?

I think we said at some point that if it got over a certain amount we'd probably spin-out a European version of ourselves. So I don't think we're interested in having -- we have a competitive advantage, we're swapping the currencies back to dollars and it scrapes about 50 to 75 to 100 basis points off of the yield.

But actually when the markets get real competitive, and you've seen people like [Valpost] open offices over there, that's a disadvantage to us. So having some other vehicle might be helpful to us, but right now the markets aren't even ready for that. So it's -- if it's wait and see here, it's like you're sitting on the bench smoking a cigarette waiting for [Merkle Sarcozi] and Papandreou or whatever, to figure out what they're going to do with their unions. It's hard, but there, I was talking to our -- last night I was talking to our head of Europe, and there's a lot of stuff going on. It's -- obviously, staffing, how are you going to staff it?

All right, thanks, guys. We really appreciate your questions and appreciate your support, and we're here -- the guys are here to answer questions you may have going forward. And we look forward to talking to you next quarter. Thank you.

Thank you. That will conclude today's conference. We thank you for your participation.