Starwood Property Trust Inc (STWD) 2011 Q4 法說會逐字稿

Good day and welcome to the Starwood Property Trust fourth 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. And at this time I would like to turn the conference over to Mr. Andrew Sossen, Chief Operating Officer and General Counsel. Please go ahead, Sir.

Good morning. My name is Andrew Sossen. I am the Company's Chief Operating Officer and General Counsel. I would like to welcome everyone to Starwood Property Trust earnings call. 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 and year ended December 31, 2011, and filed its Form 10-K with the Securities and Exchange Commission. In addition, the Company has once again posted supplemental financial information to its website. These documents are available on 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 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 prepared 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 a Stew Ward, the Chief Financial Officer of Starwood Property Trust. This morning I will be reviewing the Starwood Property Trust fourth quarter and annual financial results for 2011, and we will highlight several note-worthy items pertinent to the fourth quarter 2011, the first quarter of 2012, and our business overall. Following my comments, Barry will discuss current market conditions, the state of our business, and the opportunities we see as we look forward.

For the fourth quarter 2011 we reported $39.8 million of core earnings, slightly above core earnings of $39.3 million for the third quarter. On a per-share basis, we earned core earnings of $0.42 per diluted share. Core earnings for the year totaled $146.6 million or $1.70 per diluted share, more than double the level for 2010 of $67.2 million. Net interest margin for the quarter increased to $52.1 million, up 3% from the third quarter. For the year, net interest margin totaled $176.2 million, also more than double the 2010 level of $77.8 million. GAAP net income for the quarter and year was $0.44 and $1.38 per share, respectively.

As of December 31, 2011, the fair value of our assets was $19.10 per diluted share. For the same date, GAAP book value per diluted share was $18.68. Both of these figures are above the September 30 levels of $18.90 and $18.59, respectively, due primarily to the increase in asset values associated with the tightening of credit spreads that began this past October following this summer's market turmoil.

Now, let me outline some other significant details for the fourth quarter and 2012 to date. During the fourth quarter and most notably late in December we closed $563.5 million of total investments including $542.3 million of target investments bringing total funding for the year to roughly $2 billion. With the addition of these investments, our total target portfolio now stands at $2.45 billion. The target portfolio has a current ROA of 9.7% and an expected annualized leverage return on equity of 12.1%. We think this represents compelling risk adjusted return for shareholders in light of the portfolio's average last dollar loan-to-value ratio of approximately 67%.

Dominating our fourth quarter activities was our investment in 26 commercial mortgage loans with a face value of $333 million. The portfolio consists of 23 senior first mortgages and three second mortgages secured by office, retail, multifamily and assisted living assets that encompass more than 3 million square feet of space in 13 states. At closing, the portfolio had a weighted average loan-to-value ratio of 63%, weighted average debt yield of 11.7%, and a weighted average remaining term of 54 months.

In conjunction with this transaction, we entered into a new $236 million financing facility provided by an unrelated financial institution to finance the acquisition. We expect the portfolio to produce a leveraged return on equity in excess of 12% and are very pleased with the quality, diversity and return profile the acquisition adds to our target portfolio. As noted in our earnings release, this investment and others in the bulk of the other investments in the fourth quarter did not close until late in December and we, therefore, will not feel the full impact of these investments until the first quarter.

Since the beginning of the new year we have also been quite busy. We closed or committed to close four significant transactions since January 1. First, in two separate transactions, the second of which is scheduled to close by the end of this week, we will increase by $347 million our holdings in one of our most attractive assets. The asset is the senior most component of our multi-tranche whole company financing of a premier worldwide hotel company. By our estimate, we have a last dollar loan-to-value exposure of less than 40%, a debt yield in excess of 22%, and with the financing facilities we have put in place, an expected leverage-to-equity return in the range of 10.75% to well north of 12% depending upon the timing of repayment.

Last week we co-originated $130 million financing along with two money center banks for a major hotel operator. The loan is secured by a mix of 10 full service, select service and extended stay properties. The transaction is an illustration of one prong of our origination strategy in which a bank or life insurance company provides a senior loan component and we provide the junior or mezzanine component of the capital stack. In this instance, the two banks will split a $90 million first mortgage and we will provide a $40 million mezzanine loan. Our mezzanine loan will yield in excess of 12%.

Lastly, yesterday we participated in the refinancing of one of our existing British Sterling denominated mezzanine positions which is secured by four properties in the United Kingdom. We provided GBP60 million or approximately $90 million of mezzanine capital in an overall debt stack of GBP1 billion provided by a bank syndicate. The payoff of our existing loan will produce incremental income in the first quarter of 2012 of approximately $12.5 million or $0.13 per share associated with the acceleration of, as yet, unamortized purchase discount. As you likely know, in August we announced a $100 million share repurchase program. As our stock price weakened, we began to repurchase shares and for the year repurchased an aggregate of 626,000 shares at an average price of $17.

Now, let me bring you up to date on our current investment capacity. As of February 28, we have $134 million of available cash, $80 million of financing draws approved or pending approval, and $77 million of net equity invested in liquid securities. Additionally, we expect net asset repayment proceeds of about $100 million between now and the end of June. With this, we have the capacity to acquire up to $300 million of unlevered subordinate and mezzanine loans, or utilizing existing or pending new financing facilities, acquire or originate between $450 million and $550 million of leveragable first mortgage loans in the coming months.

As announced in our press release, our Board has declared a $0.44 dividend for the first quarter of 2012 which will be paid on April 13, 2012, to shareholders of record on March 30, 2012. This equals a dividend paid for the second, third and fourth quarters of 2011 and represents an 8.76% annualized dividend yield on yesterday's closing share price of $20.10. I would now like to turn the call over to Barry for his comments.

Thank you, Stew. Thank you, Andrew. Good morning, everyone. I just want a back up for one second and clarify something. The British Sterling loan that was refinanced, it was our loan that was refinanced, the company was also refinancing, so it is a double refinancing if you will and will realize $12 million or more greater gain in the first quarter which you will see in our second quarter results. Also, obviously the book value didn't include the gain that Stew mentioned. So, the book values are estimates of time and best estimates. Also, the debt stack here, it's mentioned GBP95 million of GBP1billion refinancing, but actually the mezzanine was GBP280 million, so the width of the mezzanine is quite large, it's not 90% senior and 10% mezzanine, it's more like 70%/30% or 65%/35% or something like that.

So, I want to talk a little bit about the quarter and the market in general right now. I think this quarter's highlight was what I would call the Bernanke Rally which was a statement that interest rates would be kept low to 2014. Immediately the equity markets, the credit markets rallied and continue to rally hard. People obviously with trillions of dollars of cash on the sidelines, both in the banking system and the corporate America, money is flowing quickly looking for yield and the world is starved for yield, there is not yield anywhere. Some of the sovereigns that were expecting to our government -- is expected to raise rates have not, and it will be in places like India or even in some places like Brazil that are actually cutting rates. China is cutting rates.

You've seen a tremendous rally in the credit markets. We directly benefit from that by the valuable portfolio we have created, but even indirectly as you recall last time we chatted with you, we had a book that we originate last summer of syndication portfolio which has a net equity of less than $15 million and I think a face value of 270 or so. That book is completely more or less rally to par and we expect to move that equity, which is yielding less than our optimal target rates in the next 30 days or so. So, that's great. We will recycle our cash into higher yielding assets and it is nice to see the recovery of I think what we told you was a $19 million mark-to-market on cash loss should be gone. So that is great.

Of course, with the rally in the credit markets putting paper out has gotten to be as challenging as it always has been, certainly was in the first eight months of last year and I do think that we have to be careful. I think we have exhibited great patience. I absolutely think we have a phenomenal asset base. I was surprised myself that we have done $4 billion in transactions from the start up base since we went inception and over $2 billion last year.

If you look at the book that we originated, we'd been more active than probably all but 15 banks in the United States. We have 32 dedicated, 33 dedicated people to be affairs of the REIT these days and we search high and wide for not only paper but really good paper, so we've been extremely disciplined. I think, I've said this before and you will see in the supplement as you go and take time, and if you need people to explain that to you, Stew and Andrew will explain any of the exhibits in detail to you in the supplement which is best-in-class disclosure, which we told you we would be transparent when we started the Company.

You'll see that about 58% of our paper is less than 50% LTV. And if that is the case, that would trade today at something like a LIBOR plus 150, which swaps out to what, around 3%.

Yes, around that.

3%. And then the balance of our paper should be -- and the whole LTV of the Company, weighted average LTV is like 68%, it's yielding like 25%, to net 12. That is extraordinary quality of yield and we are striving to keep the quality that good and if you look at the two investments we made, the two very large investments we made in the quarter, they are at least as good as the things we've done in the past. So we are careful and we are taking educated risk with our real estate underwriting background.

It has been very gratifying to see the portfolio that the shareholders own today. The portfolio is, as I said, is really high quality. It is very diversified. Stew didn't mention, we have done an enormous amount of work in the asset management team reviewing our book and we have no issues in the portfolio. In fact, most of the credit quality has improved across the board as cash flows have risen and/or LTVs have fallen. We anticipated that. The other subtle thing we have been doing is extending the maturity of the portfolio. The 33 loans we originated had an average life of almost five years. So, we have been rolling -- and if you do $4 billion, you would only have $2.4 billion of targeted assets, then you obviously are rolling loans.

In the quarter, Stew mentioned the English deal which was rolled or refinanced. We didn't actually put out as much money as we had invested. There was too much demand for the paper. Spread came in a little tighter than we wanted. We didn't fully roll the whole position, we rolled about three-quarters of it, something like that. There's another investment that we made domestically that will be refinanced now also that we were able to do the refinancing. So, that was originally part of our strategy. We originate loans or buy paper that we can participate in the refinancing and we have successfully done that now a couple times in scale. So that's fantastic, too.

And the asset management review, which we probably put together some kind of metrics so we can show you more of the credit quality than we can just through LTVs, is very gratifying. The deal in England, I should mention on the refinance, was a realized 17 IRR, 17.5 gross IRR on roughly almost $200 million of capital in US dollars. So, that's pretty good investing, I think, in this world with a 2% 10-year and a five-year at 0.8.

One of the things I think also that we are really excited about, but we don't really know the final outcome of, is the changes going on in the banking system and the new Dodd Frank regulations and what they will mean for our business and for banks' business because we are a natural partner for the banking system. One of the things they are talking about is having the B-piece owner or buyer never be able to sell that paper. That is good for us because we actually are hold for maturity kind of guys and not good for most banks that want to keep their loans liquid. So, the natural outcome of that, if that turns out to be the law, is that we would originate the paper and sell off the seniors and partner with the banks.

I'd say in the 2.5 years we've been in existence, I think that is probably one of the greatest things that the team has done has build a strong relationships across the entire banking system and now even the life company system and I think it is the scale of the enterprise again that gives us competitive advantage. We're looking to do $50 million, $100 million pieces of paper and we are picky and the market knows that. Also, I think they like having us in the junior class because they see us as an added layer of protection for the bank which really isn't looking to take risk and the capital reserves that are required for AAA versus non-rated securities are kind of onerous, but we don't mind. And that's what we are here to do, is look for superior return for relatively modest risk.

I think we will see the outcome of this, but what we have to do is position the Company to be the go-to guy for those big B-pieces. [Call them] B-pieces and I hate that word because I think of B-pieces which still exist when they are 78% to 82% of the cap stack or 70% to 72%. There are thin pieces of huge securitization, that is not what we do, that is not what we have ever done. We are taking loans that are 40% or 50% LTV and taking them to 70%. They are very wide swatches of the capital stack. It is a very different business than writing a mezzanine that's 1% of LTV wide. You can get it right, you can get it wrong, but your margin of safety is materially different.

I think final comments and then we will take questions. Probably Europe is the most interesting market in the world today for debt. It's a market where the senior is available and they is no mezzanine market at all. So, we've been quite busy quoting deals and looking at opportunities in the European arena. That's something we are going to have to figure out. We are at a little bit of a competitive disadvantage to European-based lenders because we are hedging the currency and they are not. And we also -- one of the challenges, we can originate a lot of paper but it comes back really fast. We are trying to lock in high yields for long periods of time and not have to refinance in face of the rollover schedule. But, as I've always said in every time I've met the shareholders is, and some of you are probably shareholders, we are better bigger because of repayment of a loan does not materially alter our earnings power and the bigger you are, the less volatile it will be and the less variability there will be, and the less the drag the cash balance of the Company are on earnings for the quarter.

So, with scale comes diversity, comes balance sheet power, ultimately the Company, what we desperately need is a credit facility at the corporate level so we can warehouse our own whole loans and I think the odds of getting that and being that powerful in the marketplace would grow as our equity base grew. So this is a business where scale matters and being bigger is better for 100 different reasons and we are gratified to now be the largest commercial mortgage REIT in the US by equity market cap and with the portfolio we have created with a very talented group of people working on your behalf. So, thanks very much and we will take questions and if Boyd has any comments he can throw them in.

I'm good.

Okay, we will take questions.

(Operator Instructions) We'll take our first question from Sloan Bohlen from Goldman Sachs.

Good morning, guys. Barry made the comment about having a credit facility at the corporate level. My first question is how far off are you before you can get to that? Is it a matter of a critical mass?

And then, second to that, as you guys put a pretty good amount of capital in the works here just post fourth quarter, what do you think you would like in terms of you talked about maybe having $400 million to $500 million worth of capital you can put to work today. Beyond that, is there cash you would like to raise coming back to the equity markets now that you are trading above book? How should we think about that?

A big shoulder alongside our shareholders, I think the market expected us to raise money and we would like to tell our story and we have some -- we are being as efficient as we can now with our cash and capital, running the Company with the required cash balance for our credit facilities and our hedges in the portfolio and hopefully not a lot more. We want to match our capital raises to deals so that they are not dilutive and we immediately put the capital to work.

I think the first part of your question is -- so, by the way, we are going to run as tight as we can without being crazy and without putting the enterprise at any kind of risk. So, part of that also is when we have loans rolling like we knew about the refinancing in Europe and the refinancing in the domestic loan that is of scale, we could either have $100 million come in or we could wind up rolling it and not have $100 million at all.

It makes the business a little tricky because you obviously you want to put that cash out immediately and don't want it to earn nothing. I would think that we could get a credit facility this year. I would like to say as early as maybe six months and hopefully by the end of the year.

Ultimately, the right vehicle for us is to be able to warehouse the seniors ourselves and securitize them ourselves and do a series of trusts or financing for us and that would be -- because if securitization has BPs we would keep it since we don't particularly know the rate, and that would be, why would we want -- it would make us more competitive in the marketplace. We could lower our quotes to borrowers and we would pass on all the savings to be perfectly efficient.

We are a very tax efficient vehicle, right now, and we have 50, 60 basis points of overhead and that's really it. I think the world -- a lot of lenders have come back. It is not where it was I would say in February, March, April of last year when we were really getting nervous about our ability to create these kinds of yields, but the CMBS markets are willing to get open but again, as you know, the dealers don't want to house inventory. So, they are very aggressive minutes to day that they would do a securitization. The (inaudible) take a loan to get it through the rating agency they will say they want to take on the risk.

So I think, look, we've done a lot of interesting things like we pulled those loans off of Europe company securitization and now we got par for them. Were going to get par for them. That turned out to be a controversial but smart move and we didn't think the pricing was right. The paper was good. It's just the credit market spreads out. So, now they've come back in and all is good in wonderland.

Do you want to add anything guys? I think the credit facility, I think the banks are looking at our book and the more seasoned it is the more they feel comfortable that they have virtually no exposure. And we are talking about a $200 million or $300 million revolver.

We don't need $1.5 trillion, we just need a working capital facility basically and that would give us the speed. If we had that speed, and one of the great problems we have is even if we are going to partner up with a money center bank or a life company and sell it down, we move faster than they do and we can -- speed is a competitive advantage in the lending marketplace. I've been doing this for so long and the team has been doing this in their respective heritage background for so long. Some of these we know, we may have bid on the thing recently.

One of the things we do in our equity shop is as soon as we lose a deal we turn around and offer the guy a financing solution because we have already underwritten it, but we can't get the lenders to move as fast and that levels the playing field we would like to unlevel the playing field. We would like to be the guys that can commit as quickly as we could. That's the benefit of having $500 million sitting around on your balance sheet.

The bad news is it is quite an earnings drag to do that. It is not horrific, but it certainly impacts your ability to earn what you think you're going to earn. You're going to see the full earnings power of the vehicle in the first quarter because this first quarter we will have run this business pretty tightly.

Okay. That's helpful. And then, Barry, maybe just one if I can try and read in between the lines on your comments on Europe. Your comment about being bigger is better, does that suggest perhaps that you would err on the side of entering the European market with the current [SGWD] vehicle or -- in the past you mentioned that hedge scrape issue is maybe an issue where you would form another structure to do that business?

We haven't made any conclusions. So far we are favorable of operating I would guess 15% or 10% of the book?

Closer to 15%. I guess now we rolled this down right, about 10%, right?

10%. So, the thing about Europe is, again, the thing that is sometimes lost that better assets are bigger, the loans are bigger. They are higher quality asset and they require a lot of capital. When we went public we talked about the dearth of capital in the US and at that time, way back when, there were no senior loans. Now, in Europe you have senior loans and no junior loans and no banks with all the three can write the mezzanines and they were more aggressive lenders than our banks.

It's natural for European banks, the German banks to lend 80% to 90% capital stack. So, the trick is, of course, underwriting the cash flows which in some cases though there's no new supply in many cities. Rents are flat and may fall as demand shrivels if there is a recession. So, you have to be super careful, but the paper is very large and it's great.

It represents -- we want to grow as long as it's growth for smart, it's smart growth. We're not going to grow, as you've seen, we're not going to issue equity if we don't need it and hopefully as the market understands the quality of the yield, the stock will trade up where I originally thought it might and people will be convinced we can continue to do this and they will use it as a place to put cash and we have -- we do I'm gratified, I think we traded 1 million shares a day.

I think we are one of the more liquid REITS. I think we have the most liquid REIT in our sector and maybe the top 20, 30 of all REITS, including the equity REITS on a daily trading volume. There's roughly 100 million, 90 million-something shares outstanding so we are pretty liquid, which is a good for shareholders. It would be better if we were bigger.

Okay. And I just have one quick one of for Stew. You guys gave some detail on the new repurchase agreement and the different cost there versus the old one. Can you maybe give some color around the secured financings you did, particularly the $236 million one?

Sure. It is a facility, it's a non-revolving facility at an advance rate of about 75%. Got a cost of funds of roughly LIBOR plus 300. We utilized, like we always do, the portfolio was comprised of about, I think if I remember, about 60% of the assets are fixed rate, 40% are floating rate, but we would effectively -- we used interest rate swaps or lateral swaps to hedge our financing costs associated with the fixed component of that portfolio. It's got a term of I think it was a three-year facility with two one-year extensions, so it's got up to five years of maturity. Our guess is that the bulk of the assets will be prepaid by that point in time.

Some of the assets do have contractual maturities that are longer than that, but have opened prepayment periods and those kinds of things that would suggest that the borrowers will probably be looking for a refinance some time in the next two to three years so we don't really expect any material overhang associated with those loans.

And, like I said, it has a feature that is also similar to the largest affiliate that we have with Wells Fargo which is it is only mark to market from a credit perspective. It doesn't have any mark to market provisions that would be associated with credit spreads and so it's a much less volatile from a margin call perspective than a lot of standard warehouse facilities.

It's interesting that portfolio has a bunch of multi-family loans in it and we had a bid to buy them at price premium to what we paid and we held them because of the diversity they provide for the portfolio. And as you think about an amortizing portfolio, these are seasoned loans by the way, 63% LTV, the facility is 75% of 63% is, what, 45% or something like that LTV?

They got up to 300 so they are happy, we are happy, it works and the guys are quite busy. I would say probably four athletes in the firm spend all their time talking to the senior lenders because we need them to play in the game with us. And so it is a very symbiotic relationship.

Often, our biggest competition today are the same guys providing the seniors to us and we can win sometimes either because of speed, because the borrower wants to know who owns of the junior note and knows we'll hold it for maturity, right, so they have a relationship with us. It's not going to be lost in some fee or some special servicer someday, it is with us.

And also we might be able to add $5 to the proceeds because we are not underwriting to any strict bank, we are underwriting to our knowledge of value of the tenant base, knowledge of the assets. We may be able to move fast, but we certainly do our due diligence and if anybody wants to come in on a shareholder basis and look at some of the investment memos, they go through quite a rigorous process to get approved. Kind of makes me think we should run a bank some day.

All right guys. Thank you very much.

(Operator Instructions) We'll move on to Joshua Barber from Stifel Nicolaus.

Hello, good morning. I'm trying to get a clarification on the UK mezzanine loan. That position is actually going down at this point, right, and there's no new casualties put in to it?

Pardon me?

I said there's no new capital being put in to that asset or --

Josh, we had a GBP93 million mezzanine loan which was rolled in to a GBP60 million kind of B-note.

So, yes, GBP33 million, $60 million-odd comes back to us.

Okay. And is your LTV in that new stack going up or down or pretty much staying the same?

It's interesting. It's staying the same and there's another property being added to the collateral pool, so we would say the quality is going up. And as we debated, the transaction, the borrower put in close to GBP170 million, $250 million to refinance to get rid of the swaps and hedges they had in place.

So, you would know the borrower. They are quite well known. And we are comforted with their putting in $250 million into the deal again and they are adding a significant amount of money to add the fifth asset into the collateral pool which you have an indirect pledge of, it's not direct.

Okay. That makes sense. The $13 million gain that you're getting, is that included in your $175 million to $190 million guidance for core earnings or was that included?

Yes, it's included.

Okay.

There's a hedge in that and we have to figure that out. There is a loss on the hedge and a gain from the repayment. We are still working on how we're going to account for that.

Is the $13 million just gross but it could be offset by something else?

Yes, I would say one of the things you should know -- no, that's actually net. There may be a bigger gains because we are rolling the hedge, right? So, we will see how it all works out in the end.

One thing I would say is that as the portfolio grows and gets more granular, we are going to see recurring, nonrecurring gains, right? As people pay us off early and they either pay their prepayment penalties, the lower your LTV the good news is the safer the loan, the bad news is the more anxious he is to refinance it. So, in these 33 loans we bought at the end of the quarter, if these guys can, they are going to try, as you would, try to roll your loan and extend it and lock in today's low interest rate.

The other macro thing we are trying to do is while we have the Bernanke put on rates for 2014 we are aware of the fact that when Operation Twist expires in June, it is possible to curve seasons again. We would kind of like to do floating to floating and I would like to keep the book as floating as possible.

The banks want to lend floating anyway and as long as we preserve our spread, keeping the book floating with floating financing beneath is a perfect hedge and if the rates go up, you are not going to face any kind of, in my view, any kind of deterioration of the value of your fixed-income insurance.

Now, if it's 12 fixed, we're probably fine, but sometimes we are keeping it floating to floating you will lend at LIBOR plus 1,000 or whatever your junior note and you finance LIBOR plus 300, you are banking LIBOR plus 800 floating, rates go up, you're giggling. So, hopefully your LTVs will support the higher interest expense for the borrower.

Right. Have you had any success along those lines structuring some call protection or at least season amounts of call block outs with some of your new --?

I would say that's probably the biggest problem we have in originating loans is we see lots of yields with 18 month duration and 12 months duration and seven months duration. People -- the good news is we are creating 12s, we are not buying 12s. We are creating 12s through our leverage facility, so to the borrower we can do loans -- we quoted a deal yesterday as scale 6.25 L plus 550 and that works for us.

We can make that work with our credit facilities and create the kind of ROE's we want. We can be pretty competitive and I think the biggest problem we have right now is the seniors not keeping up with us at the pace we need and I think our team is charged with trying to fix that issue. That is our biggest impediment to growth is that. But I think you will see, when you look at our earnings estimate, they are easy to do for the reason -- we don't know about the repayment in advance.

And, as I mentioned in the book value, that was simply a mark on credit; that was not a -- we kind of heard that this paper might be refinanced but we didn't put par on the balance sheet at the time. The book value of the Company is obviously not $19.30, it's more like $20 or something like that at the moment.

All right great. Thank you very much.

We'll take our next question from Jade Rahmani from KBW.

Good morning and thanks for taking the question. Can you comment on what you're seeing with respect to CMBS market pricing and how do you think of the economics of potential leverage returns through CMBS compared with other funding sources?

I was trying to think, you asked a two-tiered question. The short of it is that the CMBS market is coming back. Spreads have tightened, but Barry alluded to earlier mentioned that we have been developing and broadening our relationships with the bank and the street, and so as it comes back, the number of transactions that are coming in our door where various dealers are calling us and saying we're principalling the CMBS transaction but we would like you guys to take the bottom has increased dramatically, so that is going in our favor.

It will be interesting see the volume of CMBS that gets done this year. The market, as you know, shut down and then capacity was taken off the street, the 50 people that Credit Suisse hired were let go. Other shops are trying to gear up, Cantor for example, and Goldman is doing some securitization work. Deutsche is pretty aggressive, but it's a big world, trillion dollar markets.

There's enough opportunity for everybody and I think the rebirth of the CMBS market is healthy for the market. It allows that senior spread to come in tighter and allow us to refinance, make tighter and tighter quotes.

The IRR paper that was originated as conduit loans, that's going to go to a guy who's going to print securitization with it. And I think, it's interesting, as we look on the equity side when we are getting quotes from conduit shops versus life companies, the proceeds are large, are higher on the conduit shops.

The life companies are still considerably more conservative than a guy who thinks he can originate and sell it on. And that's why the changes in the bank regs are so interesting for us because better or worse I think the odds are nine out of 10 this goes better for us. This does not probably get worse for us and as the government says to the bank, if you are going to have deposits, you're going to take less and less risk. I would suggest it's probably a net significant positive for us the way it is looking right now.

One benefit of these transactions, we were looking at one yesterday, it's relatively small, let's say it's $10 million $15 million of equity that gets put out but it will be out for 10 years. So, a lot of the conduit deals, Barry talked about the issue with volatility in our assets getting repaid and one really good part about the conduit deals that we do, the B-note in a conduit transaction is long.

Okay, thanks for that. And then can you just comment on current loan pricing versus last quarter? Last quarter I think you noted pricing was up 50 to 75 basis points. Can you indicate where you think absolute rates are being paid by borrowers currently versus last quarter?

They are a little tighter.

Yes, I would say that the market, just like the CMBS market, has come in. In our market it has come in. The good news, as we have said before, the gross spreads on loans have come in but our ability to either sell A-notes or get leverage for ourselves has also improved, so our net ROE's on transactions, while it's probably come in a little bit it hasn't come in as much as the market has.

And, again, you would probably rather have a healthy market if you had to choose the two. I think the markets have and the fact that Bernanke states do what you want to for a couple of years. That's definitely opened a spigot of competition. And, again, structurally a lot of the shadow banking system is still not there.

I guess the new kid on the block that we are seeing aggressively expand their book is GE. We've not seen GE Capital. I thought Jeffrey Immelt said he was not going to do this. He was going to shrink GEC's position, but I would say we've seen him quite active in the market.

They took down, for example, the Duke deal that Goldman Sachs did, the $108 -- that [Glaxstone] did, $108 a foot. They took down the whole senior themselves. It was like $700 million or $800 million, so GE Capital has been very active and we haven't seen them historically. They have been more dormant and probably net sellers, but they have gone the other direction.

Great. Thanks a lot.

(Operator Instructions) We'll take our next question from David Wilson from Neuberger Berman.

Good morning. Barry, you alluded to in Europe big opportunity and I understand the perspective on that, but you also said you have to be careful because of the potential for rents coming down. Can you talk about the risk side of it a little bit over the next couple of years either from rents or RevPAR if it's a hotel coming down?

Yes.

There many people out there concerned about genuine deflation for a number of years.

Yes, I think it's a serious concern. As we all try to think about the implications of $4.5 trillion, I guess they got another $530 billion--odd today into LTRO. Can you solve debt with more debt? So, on the positive you have reasonably very good markets. It's always been harder to out supply the European property markets in the US and, for the most part, the markets are not over built yet. Rents can be quite volatile in Europe.

In places like London they've gone up and down probably 40% through the cycle. And their demand recession, not supply although London particular actually does get some over built cycles. So, it is country by country. There are countries you would lend and buy notes in, there are other countries you should avoid. Some countries are incredibly friendly to borrowers and you are going to be restructured out of your grasp.

Our focus is not to get the asset. Our focus is to create great, predictable income streams in performing notes and so the scale of what is happening in Europe is you're an '09. It is '09 in the US. The banks can't take the hits, their reserves are much less than ours, their equity bases are thinner, they have no chief deposit bases to borrow against. They have to borrow wholesale. They could have negative interest margin on real estate loans.

They are borrowing their cost on 5% to borrow short to fund their businesses and they can't lend at 5%, but the LTRO is brilliant. It was there. I call it reverse TARP. Instead of throwing the money into the banks, the banks give them assets and they give them the money. So, they don't have to actually say to JPMorgan you need to take $25 billion and Goldman you take $25 billion and you take $10 million, which they couldn't do under the LTV treaty.

So they created a vehicle that nobody thought about and so far it's got $1 trillion of paper in it and they are just printing away and everyone seems to be happy because it was politically an easy thing to do. They didn't say I'm saving the bank in Belgium. They said any of you guys need LTV, you can throw assets to us.

So, I think on a property basis you have Germany, which you know is the healthiest of the European economies, and the property markets reflect that. We just passed on a very large residential deal in Germany not because we thought there was an issue on LTV but because the pay rate was eight and they wanted the ability to accrue four. We just said, you know what, we can just wait for better days. That was a marginal call on our part. That is a good deal.

It's multies in Germany are very good and rents are going up and obviously no one person moving out can interrupt your cash flow stream. Because of the accrual feature and our desire to pay dividends with cash and not accruals, we decided not to do that right now, but it is a reasonably attractive paper.

We have an office in London. It's not staffed at the moment by REIT professionals; it's our acquisition team from Starwood Capital Group, but they are actively looking for loans for the REIT. And I think if you -- because there's no yield in the world, property has a put under it, value has a put under it, and so we are an alternative for yields as a sector.

So, there is going to be money and you pick the country and you pick the asset class and you try to make sure that you're not going to have rents half of what you had before. I don't think you're going to see that.

I think in the office markets are complicated. Some are obviously like the US, much better than others. And in the retail markets you're not going to see a lot of paper probably, although there are some very over leveraged retail deals. They are all over leveraged because the banks lent 80% to 90%.

The cash flow may be stable, but there's no way to refinance the stack and that's where we come in and they are -- the retail is doing fine at the moment in most major markets. Hotels, especially in markets like London and Paris. We own a portfolio of hotels in Paris, we have 27 Meridiens sprinkled around Europe. We can tell you how Prague, Warsaw, Rome, Barcelona, Nuremberg, Hamburg are doing as well as London and more conventional places. Hotels are doing okay.

The markets are not -- the economy is not cratered yet and I probably think it is going to do what it's doing. It's going to muddle along here and where you are seeing big pickup in RevPAR is in cities where the Chinese have an influence and are traveling because they fill the lower-end hotels and the whole -- toothpaste tube fills from the bottom up.

They take all the Holiday Inns and the Holiday Inn guys move up to the Courtyards. The Courtyards move in to the full-service Marriotts and they move in to the (inaudible). So the markets are filling from the bottom up. Kind of an interesting phenomena, and the Chinese, as they lack (inaudible) requirements, their most trafficked nation is now, other than Macau, is France. So they are changing the dynamics of these markets. You are seeing this even in New York City, by the way. That's a long-term trend that is going to continue.

That's a very long answer to your question, but something we think about a lot as we look at these opportunities are we catch falling knives. There is no question it's any one in Europe. For those of you who don't know because I was recently offshore, I was saying anyone that looked at me with a blank stare, just the first inning of a nine-inning game if you know what baseball was.

Does that answer your questions, Sir?

It does. Thank you.

Thank you. We will move on to Joel Houck with Wells Fargo Securities.

I am interested in that question.

Mr. Houck, please go ahead, your line is open.

He's gone to sleep. I put him to bed.

Can you guys hear me?

Yes.

Hi. This is (inaudible) for Joel Houck. How are you this morning? I had a question about the Dodd/Frank. You had mentioned that partnering with the banks that was becoming more attractive. Do think that the B-pieces will become a greater portion of the portfolio and what you think that could look like in the future?

I don't want to speculate on that because nobody really knows what they're going to do. Is it a B-piece? What is the B-piece today? A B-piece is from 70% to 73% of the portfolio, and we are going to go -- I'm not saying that the B-pieces that were bought by other players in the market are bad, by the way, I just think ours is superior from risk-adjusted standpoint because they have a wider position on the capital stack.

I think the macro calls the same. The property probably has got -- the LTV doesn't change if you own 70% to 73% and we own 50% to 73%, just the value of our piece is greater than that piece because it's a wider piece of the capital stack. But I don't really want to speculate on -- I do think anyone can really speculate on Dodd/Frank. I'm not sure anyone in Congress who knows what they're going to do.

Fair enough. And, secondly, you had mentioned that you've seen GE come in a little bit into the marketplace. Do you see any other larger players coming in as well?

Really, they're the biggest. As you know, if you follow the stats, life companies are very aggressive. They haven't seen interest margins like this in their careers. But I don't -- of names of the guys with the scale balance sheets that are new, I think the statistics, and I could be wrong, were the life companies strongly put out $40 billion and last year they did like $60 billion which is a lot. But they are a significant portion of the market and because values have fallen and caps (inaudible) total debt in real estate is down.

So, and most of the buyers today, don't forget the significant portion of borrowers have been core buyers who are leveraging 30% and 40% and that paper we never see. That paper trades so tight, there is no mezzanine, no B-piece, no nothing.

So it is a fraction of the borrowers that we can deal with, which is perfectly fine. I think there's some -- we're seeing, the good news, very good news for us which is the regional banks are selling and, as you know, the money center banks, other than maybe one, has done a have done a pretty good job of moving the real estate portfolio, performing and nonperforming and now they are just holding.

But the regional banks still maintain about the same amount of real estate as a portion of their balance sheet as they did before because they really couldn't sell. Now they are selling and looking to help refinance, so as their bank balance sheets have improved and LTR -- TARP has worked and these banks are recapitalizing, their stocks have gone up, you're seeing a lot more activity out of regional banks.

Okay, thanks guys. I appreciate it.

And, ladies and gentlemen, it appears we have no further questions. I would like to turn the conference back over to Mr. Barry Sternlicht for any final or closing remarks.

Well, we are excited to have you listen to us and thank you for your questions, and we look forward to talking to you again next quarter. Thank you very much.

And, once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.