Starwood Property Trust Inc (STWD) 2012 Q1 法說會逐字稿

(Operator Instructions). Good day, and welcome to the Starwood Property Trust, Inc. first quarter, 2012 earnings conference call. (Operator Instructions). At this time I would turn it over to Mr. Andrew Sossen, Chief Operating Officer and General Councel. Please go ahead, sir.

Good morning, everyone, and welcome to Starwood PropertyTrust, Inc. earnings call for the quarter ending March 31, 2012. With me this morning are Barry Sternlicht, the Companies Chairman and Chief Executive Officer, Boyd Fellows, the Companies President and Stew Ward, the Companies Chief Financial Officer. This morning, the Company released its financial results for the quarter ending March 31, 2012 and filed it's form 10-Q with the SEC.

In addition, the Company has once again posted supplemental financial information to its website. These documents are available in the Investor Section of the Companies website at www.StarwoodPropertyTrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.

These statements are based on Management's current expectations and beliefs, and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements. I refer you to the Company's filing's made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially than those expressed or implied in any forward looking statements made today.

The Company undertakes no duty to update any forward looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The Company's presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

Reconciliations of these non-GAAP financial measures to the most comparable measures in accordance with GAAP, can be accessed through the Company's filings through SEC at www.SEC.gov. With that, I am now going to turn the call over to Stew.

Thank you, Andrew, and good morning. This is Stew Ward, the Chief Financial Officer of Starwood Property Trust. This morning I will be reviewing Starwood Property Trust financial results for the first quarter of 2012.

I will also highlight several items pertinent to both the first and second quarters, as well as our overall business. 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 first quarter of 2012 we reported $55 million of core earnings and 38% above the $39.8 million posted for the fourth quarter of 2011. On a per share basis this translates to $0.58 per diluted share, again, significantly above the $0.42 per share reported for the fourth quarter.

The quarter increase included a $12.2 million gain associated with the early prepayment at par of a large UK based mezzanine loan we purchased at a substantial discount in mid 2010. Importantly, core earnings excluding one time items increased to $0.44 per diluted share, from the $42 per diluted share for the fourth quarter of 2011, reflecting the full effect of $333 million loan portfolio acquisition we closed during the last week in December of 2011, as well as the significant first quarter investment and financing activities I will discuss shortly.

As of March 31, 2012, the fair value of our net assets was $19.52 per diluted share. For the same date, GAAP book value per diluted share was $18.96. Both of these figures are above the December 31 levels of $19.10 and $18.68 respectfully.

The primary driver in both case was a continued improvement in the credit markets and credit spreads that began last October, following last summer's market turmoil. Now let me outline some of our significant activities for both the fourth quarter as well as the second quarter to date.

Since the beginning of the year we've been very active closing new investments, with total year to date closing of $592.2 million, including $521.5 million in the first quarter and $70.7 million so far in the second quarter. The largest of these transaction involves a significant upsize of our position in the senior most component of a multi-traunch whole company financing of a premiere worldwide hotel company.

In three separate transactions completed in February, March and April, we acquired $427.8 million of additional paper at an aggregate discount price of $396.9 million, bringing our total growth carrying value of the investment in the asset to approximately $578 million. All three transactions utilized financing provided by the selling institutions. Our total equity investment in this asset now stands at approximately $176 million.

As we've mentioned in the past, and as outlined in supplemental disclosure we consider this asset one of our best risk adjusted returns in the portfolio. By our estimate, we have a last dollar loan to value exposure of less than 40%, a debt yield in excess of 22% and expected leverage equity to return to 10.75% to 12% plus depending upon the timing of repayment. Other note worthy investments for the first quarter, include the following. In early February, we originated a $40 million mezzanine loan secured by a 10 property portfolio of full service, and extended stay hotels located in eight states with an expected yield in excess of 12%.

In late February, we acquired a $95.4 million Sterling denominated subordinate note secured by four resorts in the UK. This transaction was part of a newly originated overall corporate refinancing in which we had a preexisting $143.9 million investment, which was repaid and was the source of the $12.2 million one time gain I discussed earlier. Our estimated yield on the new asset is approximately 11.3%, inclusive of currency hedging costs.

In March, we originated a $59 million first mortgage loan secured by an office campus south of San Francisco in Silicon Valley. This loan is targeted for financing on a revolving facility with wells Fargo and expected to produce leverage equity of returns of approximately 11.5%. With the addition of these investments, our total target portfolio now stands at $2.82 billion as of March 31, 2012, with a current return on assets of 9% and expected annualized leverage return on equity of 12.6%.

This represents compelling risk adjusted return for investors in light of the portfolio average last loan to value ratio of approximately 64%. Several other transactions completed during either the first quarter or ensuing weeks sense the end of March are worthy of mention. First, at the end of March, we sold our remaining inventory of held for sale first mortgage conduit loans originally targeted for securitization. We realized an aggregate profit of approximately $1 million, net of hedge unwind costs.

At the time of the sale, the loans had a curing value of $128.6 million, and a net equity investment of $36.5 million. Although the equity investment of these loans only represented 2% of our overall equity, they contributed significantly to the volatility of our GAAP net income during the second half of 2011. Second, on April 20, after the quarter's close, we sold 20 million shares of common stock at a price of $19.88 per share, resulting in growth proceeds to the Company of $397.7 million.

On April 30, the underwriters exercised their options to purchase an additional net of 3 million shares, bringing total proceeds for the offering to $457.3 million. The new capital was accretive to existing shareholders since the transaction was executed at a time when our stock was trading at premium to book value. On a pro-forma basis, adjusting our 331 book value per diluted share for the new shares, total value, book value per diluted share increases by $0.18 to $19.14 per share.

Analogously, the fair value of our net assets increases to approximately $19.59 per diluted share, $0.07 above the March 31 level of $19.52. The last item I'll mention concerns a minor modification we're making to our definition of core earnings, a non-GAAP financial measure of earning we use in conjunction to standard GAAP measures to best reflect the sustainable earnings run rate of the Company. The financial results for the first quarter will incorporate this change. Generally speaking, unrealized gains and losses included in net income are reversed in the calculation of core earnings.

Core is meant to reflect realized events. During the first quarter, a series of currency unwind transactions associated with the prepayment of the previously discussed UK based mezzanine loan were structured in such a way that a locked-in currency loss of $10 million would have been characterized as unrealized for the purposes of calculating core earnings. This would have had the effect of improperly inflating core earnings by $10 million in the first quarter.

The new amended definition gives Management, with the approval of independent Directors, the latitude to make certain adjustments when necessary to properly represent complex situations that don't easily map the simple current period GAAP items. You'll see in this quarter's statement of reconciliation of net income to core earnings, a line item labeled subtraction for loss from effective hedge termination which specifically deducts this $10 million loss in the calculation of core earnings for this quarter.

Now, let me bring you up to date on our current investment capacity. As of May 4, we have $185.5 million of available cash, $372.3 million on financing draws approved or pending approval, and $73.4 million of net equity invested in liquid securities. With this, we have the capacity to acquire an additional $530 million to $700 million in new investments.

Additionally, over the remaining three quarters of 2012, the Company expects to receive aggregate cash proceeds from loan and security repayments, net of required debt payments of approximately $191 million. As announced in our Press Release, our Board declared a $0.44 dividend for the second quarter of 2012, which will be paid on July 13, 2012 to shareholders of record on June 29, 2012.

This equals the dividend paid for the last four consecutive quarters, and represents 8.61% annualized dividend yield on yesterday's closing share price of $20.45. I would now like to turn it or over to Barry for comments.

Thanks Stew and Andrew. Good morning, everyone. Also, here is Boyd Fellows, President of the REIT, and I'll turn to Boyd in a second to talk about the pipeline comment. Let me say it was a very good quarter for us.

We actually looked this up because of I've seen releases from some banks, and it looks like Star Financial is the 21st largest lender in the United States, including life companies, we originated $2.1 billion of credit in the last 12 months. Don't hold me to that, but it's a nice quote I can tell my mom this evening.

It was a solid quarter because we did something I think we had never done before, we increased book value at record earnings and we drove down the LTV of our portfolio. So that's a trifecta, that's about as good as it gets in this business.

I think we've proven we were solid stewards of shareholder capital, and from the very start we have considered our shareholders capital to be our own and the quarter had highlights that credit markets did a round trip when they obviously spreads have tightened.

Interesting, some players just left the market in the fall, like Credit Suisse, which shut down their conduit business, and others have come forward but in general, what we once had in our books as Stew mentioned, is a $19 million loss with a the pique of the credit crisis last summer, and we sold those loans at a $1 million gain, so we have a very clean book today, and with the equity offering lots of financial flexibility, we have the ability with proceeds like we just received to pay off credit facilities and we can then draw on them as we lever our book continue to drive earnings forward.

The other interesting thing about the quarter and the environment is the discussion in Washington, which I did go to the Treasury Department to talk about the retention rules for banks, and what's going to happen in the future of commercial mortgage back securitization. We advocated for the originator retaining the risk or the B note.

This would be very similar to dust lenders, where they have risk on the multi-family side where they originate loans and if you look at the statistic, the lawsuits have been vastly lower than people who have nothing at stake in originating multi-family loans. The evidence is right before you, if you look at the data and don't understand why it would be any different originating commercial mortgages.

The banks are not a big fan of this, but the idea is whoever makes the sausage should eat the sausage and while it might drive up over the short term and credit spreads, it probably in the long run would lead to a healthier market, obviously as an originator of capital, of loans and somebody who is happy to eat what we make, we are a big fan of the originator retaining the risk and it would be a big windfall for finance companies like ourselves, where we would originate a loan and sell off an A note of my size into the credit markets, which could be sold off in a securitization.

But the issue today in the securitization markets is the pricing is going to the (inaudible) the markets adjusting to the guide. Sometimes as a leased knowledge and a willing simply to price the credit most aggressively without in some cases doing the underwriting that a real estate equity shop, like ourselves, would do. I think from start we talked about predictability and talked about transparency and talked about discipline.

I think we've been all three. You've seen us go in and out of the market, increase upsize positions, sell down positions, and we have already round tripped in the last year almost $1.4 billion since the beginning of 2011. Since the beginning of 2011, which you didn't see, we had $1.4 billion of loans repaid or sold and we've redeployed that capital effectively.

So that's why you're $4.6 billion of loans and you have a permanent book of $2.8 billion because we've handled repayments of several loans which we obviously knew were coming. I will make a comment about our one time gain in the quarter, as we grow and as the credit market shifts and properties increase in value and transaction volumes increase, we might see, I call them recurring, nonrecurring gains as the loans are paid off and the earnings are taken into our core earnings and they are cash earnings, real cash.

We will, as we mentioned in our earnings release, and Stew gave out detail, the Board has decided we will pay special dividends in the fourth quarter, that will be our current policy, to adjust our dividend for the earnings of the Company, since we can't not easily predict the timing and the level of these pay-off and gains we might be taking.

We will have to adjust that and to meet regs and true up our dividend in the fourth quarter which will boad well for shareholders. As I look forward, what will be happening so us, one of our key goals is to become more and more efficient at what we do. We have said all along, and I think our shareholders agree, that bigger is better. We build a bigger base, that will allow us to secure hopefully in the near future, some corporate financing lines for ourselves.

That would be a windfall because right now when we originate a whole loan, let's say we might be yielding 6.5% or 7%, we take that and it's diluted to earnings while we have it, before we can sell off a senior note and produce the whole piece, which is the 10.5% to 12.5% to 13% piece of paper. If we have that line, we can put the entire A note on to the line and slice and dice it later. So that would be goal number one, to secure corporate financing lines this year, which will drive down our cost to capital and increase the efficiency to model.

The second piece is for us to maybe do our own CDO, pull together our own mortgages and sell off the CDO and keep the CDO equity. Again, we're trying to put great risk adjusted returns to the widest slice of the capital stack that we can. So we're not interested in retaining a 1% note and selling off the rest.

We're interested in putting a lot of capital to work at very compelling risk adjusted returns which are today 1000 basis points higher than the 10-year Treasury and 1100 basis points higher than the 5-year Treasury. So with a 64% LTV on our book, we think we represent an unusual value in the corporate marketplace today. And last thing, I think you are going to see us pick up the pace of international investing.

Some of these transactions off-shore, where there are great opportunities in debt markets, are very large. We will hedge them, and we will hedge our currency exposure as we have in the past. Stew mentioned the accounting gimmick of unwinding our hedges on the UK portfolio and by the way, while we rolled that loan, the borrower who is a household name added over $100 million of equity to the credit, and another asset to the collateral pool.

So the yield on that paper went down slightly. But the credit exposure we thought was much better and we got, I think, we extended it three to five years, I can't remember or two one year extensions. With that, I think you will see also I think competition is increasing in the credit markets. I don't expect LTVs will stay at 64%, I think that's an anomaly.

We're here to actually take some additional real estate risk. Those are the best yields in the world today, are climbing to the 70%, 75% and in some cases 80% LTV if we like the transactions. Given the solid base, we're willing to do that, particularly as we move into asset classes which are probably a little bit under represented in our book like office, multi-s, maybe industrial.

So that's something you'll see as we grow, but since our base is so big adding a few loans in the higher LTV won't move our LTV very much and given a lot of assets are transitional, that's where companies like ours make our living, taking that risk of building 60% leased or 70% leased is where we should be lending and earning that excess spread for our shareholders, given our comfort in these markets and our underwriting price per pound of real estate assets still trading below replacement costs.

Do you want to comment?

Sure. This is Boyd (inaudible) our pipeline. As Barry said, the world is competitive but our scale continues to be a big competitive advantage for us and two perfect examples of transactions. We expect to close two loans today or tomorrow that will total over $400 million.

They're both office loans, portfolios of offices. One is in New York City for a total of $170 million. It's a classic example of our scale. We're taking down the entire mortgage and then as Barry said we'll hold that mortgage and we will sell an A note off eventually.

That's one deal and another deal, we're co-originating with two other partners in Washington, D.C. This loan is a total of $238 million, with us taking the junior $73 million. Interestingly enough, as Barry said, the LTVs will be rising, but both of these loans have LTVs are right before where our portfolio average is about 65%. So we're excited about those transaction and we hope they will close today or tomorrow.

So one other comment I would make, as you know, we've talked about using our vehicle for acquiring other businesses and I think you have heard us mention the triple net lease business which would create a depreciation shield and allow us to shelter earnings. To date, we have not found anything that we wanted to acquire in scale and that's based primarily because the debt on those portfolios is usually, has heavy AM, often straight line AM, and so, while you have a reportable earnings, you don't have much distributable cash.

While we have to adjust our dividend and it hasn't really found, we haven't found anything compelling enough at the moment to pull the trigger. One area that we are looking at, and we added short sentence to the last prospectus offering is the single family home market, shows many characteristics of what we are doing with the current yield and our appreciation which would be interesting and there is some depreciation shield involved, too. So that is something we're exploring, as well. So with that, we will take any questions.

(Operator Instructions). We'll go first to Joshua Barber with Stifel Nicolaus.

Good morning. I was wondering if you could comment a little bit more on your European exposure and how that factors in going forward. I know I saw where Star had recently hired a new Lending Team over there. Can you talk about what that means for the REIT and in which areas you're seeing the best opportunities.

So, as you know, Europe is a mess and we have specific country-focus, which we won't talk about, but we have 9% of our book today is net in international invests, primarily in the UK, and that's going to be our biggest focus going forward. There's a lot of refinancings to do and very few lenders that will go beyond a 45%, 50% LTV. So a lot of these, just like in the US, the asset and capitalization have to be restacked.

There are not that many mezz lenders over there. It's a really good opportunity for us. We're very wary of demand destruction that will open up vacancy in markets and ultimately drive rents down. So we have to be super careful.

That one loan we talked about that we rolled in the quarter, those are the fore most unusual resorts I've ever seen. I think they operate at 95% occupancy and are booked a year in advance and they grew cash-throw right through the recession. So we are looking for unique opportunities to lend and deepen the capital stack, and we can get pretty high levered yields commensurate with what you get in the States, maybe a little bit higher, probably wider.

But they often are bigger numbers, a hundred million pounds is $160 million of a big mezz note. We've actually, as you looked in our earnings we sold off a piece of the mezz's that we originated, and we expect sort of a quid pro quo to get another loan from that shop but we'll split it with them and we teamed with four or five other guys on several investments already. Like our business here, it's kind of hard to know the timing of these closings.

People are waiting on one transaction right now which is of that scale and we'll see if the buyer performs, but we're not stretching into the equity, at least we're not trying to over there. We're trying to stay pretty deep in the stack and do what we've been doing, creating tremendously attractive risk adjusted returns for shareholders.

Turning to something else. Can you talk about where you think your balance sheet can go over the next year or two? I mean your leverage is less than one times debt to equity.

What would you see that becoming over the next year or two? And you made some comments about getting additional balance sheet flexibility either through corporate lines or something else. Can you talk about how that factors into out you're thinking about the balance sheet?

We hope to have something announced in the next 30 days on our balance sheet. We have several unleveraged, as you mentioned, positions that can serve as collateral for the facility that will allow us to recycle capital more efficiently. It's hard to predict because the bigger we get, the more safe the lenders feel. So could we put together if we had a $3 billion, $4 billion equity base with $500 million credit facility, I think easily.

Could it be bigger? Possibly. Do we want to lever the book a lot. The JP Morgan produced the first (inaudible) of an NPL portfolio just a few weeks ago.

The world is changing so rapidly as the world searches for yield, that it's hard to predict what is out there for us. As long as we, I didn't mention and I had it in any motes, that we have no issues in our portfolio. We have 94 investments today, and we have a very thorough Asset Management Team reviewing loans, and we have no issues.

We talked about even creating a loss reserve but there's nothing to loss reserve against, and it would create interesting volatility for us. But at the moment all is good and we think it's a great portfolio and we could probably liquidate it north of our fair market value. We're not stretching though valuations but if you look at the value and the rally and the credit market, our biggest concern, are big retainment and the biggest risk is having a quarter where we're sitting on cash and we get a lot of repayments that we didn't anticipate.

That's not that likely, but it is possible, particularly in some of the corporate transaction we've lent against, where there are dividend blockers in place, and guys may have to refinance just to pay themselves a dividend, so the supplement includes a management estimated repayment schedule of debt, but again, that's our estimate. So we're not certain, particularly as I mentioned, of the public securities where we finance the company. We can't know what they're thinking and we won't know what the equity markets are for their respective IPOs.

Do you think there's a good chance for having a second generation CDO, or something similar in the next six months?

Yes. One of our peers will do one and we'll watch, like we watch the NPL securitization, and see how that's received in the market but yes, I would think you'll see second generation CDOs, yes.

Thanks very much.

The market wants yield in these books.

Thank you very much.

We will go next to Gabe Poggi, with FBR Capital Markets.

Good morning, guys. Two quick questions for you. Barry and Stew and everybody talked about the idea of bigger is better.

You guys had talked about on the last conference call, co-originating opportunities with life co's and the conduit players, and Boyd you mentioned an opportunity in the DC market where you're doing that. Are you seeing more of those bigger transaction opportunities and how do you think about toggling between those big, the big transactions and then just kind of smaller dollar amount transactions?

It's interesting. The parent company started at capital and we have 102 lending relationships, and we're working on another deal which Boyd didn't mention where we're pricing the mezz where the guy is short on his senior, so we're helping him find more senior debt through our relationships with a dozen or more banks that could probably qualify.

He has these missing one syndicate lender in his senior. So I would say that, and Boyd can comment also, it's all evolving and the market is getting more and more comfortable with us and we still have a one patina which is some borrowers think we still want their assets and we do not do NPLs here. We're trying to be predictable and very transparent and very easy.

So we don't want the assets. This is not NPLs here. We're not buying NPL loans. But there's a lot of paper out there, and there's a lot of guys and, as you know, we're not telling you anything we don't know.

There's a lot of paper rolling and a lot of demand for debt, all up and down the capital stack. So we're kind of feeling good and we're hoping to keep our yields as high as they've been in the past without, again, we can produce much higher yields, though, instead of going from 45% to 70% of the cap stack, we would be going from 65% to 70% of the cap stack. A couple things that happened in the quarter, we bid that FDICB note, right? And we were blown out of the water.

We were beat by 3 points on a $60 price. We were the cover so they left 3 points on the table, too. Which was an interesting portfolio.

There are guys out there trying to get to, you know they're taking slivers of the cap stacks and it's just a different risk profile and it may be the same yield, but it's the totally different risk profile, the leverage from 70% to 73% of the cap stack where our book from $0.00 to 66% average or whatever has the same coupon or totally different risk and very hard for the market, the equity market and certainly on retail shelves to understand what they're buying.

They're not buying a sliver in the cap stack but a big wide swath, I look at our book and I said this before, this is significant amount of our paper, maybe half of our book is triple AAA and it could yield 150 over or 170 over. It is a very unusual looking portfolio.

One quick follow up to that, you mentioned kind of obviously additional relationships as the portfolio seasons, and I assume you can point that to the process of getting a revolver kind of outline the process of that and I don't know if you said something Barry, something in the next 30 days, and I didn't know if that was specific to a revolver or an additional facility similar to what you have but if you could elaborate there, that, could be helpful. Thank you.

It would be a different kind of facility and hope to use it as a revolver and it will be secured by some of our assets which are currently not pledged and that's all we'll say about that right now, if that's okay. We'll get done and give you a Press Release.

Fair enough. Thank you.

You're welcome.

And we will go next to Ken Bruce with Bank of America Merrill Lynch.

Thanks, good morning. You have, if you step back and look at the last couple of years you guys have done a tremendous job of delivering on what you initially set out to do.

The market is evolving and I'm wondering, as you see more capital coming into the space and risk profiles change around or term profiles changing around, if you feel like there's still as much opportunity as you initially thought, just forces you to work harder in terms of how to position yourself in the capital stack, or how you finance A notes and the like to achieve that or how do you kind of look at the market study versus maybe just a couple of years ago?

I'll step in. I think it's cyclical. There have been two times since we went public in August of 2009 where I thought there was nothing to do and got really hard. Now is not actually one of those times.

But we really need to have to be big. We really need it be able to control the whole loan, as Boyd said, to quote $170 million first, and chop it up is such a better execution for our shareholders, even if it's momentarily diluted until we can place the A note. That is the way we can compete in the marketplace. Otherwise, we're like everyone else with $30 million in their pocket.

And those mezz's, pre packed, are going below 9 in some cases. I just saw a mezz on an equity deal that we have at L plus 600, that's not very big, it's our mezz but we're not there. The good news is we are in a trillion dollar market and we are a $3 billion company. We won't be at every dance.

The other thing that has come to help us is we are relationship based. We are going to be with these notes for the duration, and we can go left with the borrower or right or add more debt to the assets. I think the Hyatt Regency, one of our oldest loan originations, if you remember we did the Hyatt New Orleans and we sold a piece down to a foreign bank but they wanted another couple million bucks.

The hotel, which we thought would do like $20 million in EBITDA, I think the loan was $140 million gross, and we kept half of it, we were smaller then.. I think the hotel did $30 million gross, so it's rocking and we're delighted to add more to that asset and we'll do it with amendment and we're done. So for borrowers who really want a relationship and we're not securitizing our paper, we're a fantastic execution for that. So we don't fit everybody, but I think our team, originators are quite lovable and the people get to know them and they'll show them deals and we'll get some deals and we're very, you know if it's on the margin, we just don't do it and we're being very flexible though, that's always been our calling card.

You know I would add that we're a new company and we're building momentum as we go. Barry referred to the real estate lending business, it's a relationship business and as we, each quarter, do another $500 million, what is happening is the borrowers out there realize we perform. So you have a combination of two things. One is the borrowers realizes if we do something, we actually will do you it.

Which is not always consistently the way it works in the real estate lending business, and all of the various banks and insurance companies that we co-originate with have the same result, the same feeling. So a number of these deals we're winning because whether it's well city, B of A, they're comfortable now that if we're their partner co-originating we're going to show up funds, and we've now closed and co-originated loans, multiple loans with virtually every large bank.

We have now negotiated our way through credit agreements with them several time. All of the creates a foundation that we're now going to continue to move forward with.

When you think about the potential for a CDO structure, do you lose any of the flexibility or control over how you deal with those relationships?

I don't think so. We'll retain the equity, right, so it's a financing vehicle. So we've never executed one, but you can take all the loans that are placed online and basically pay them off with a CDO and reboot the line. It's not, it's just a question of what the pricing would be and how accretive it would to the line. That's been the issue to date.

It's something creative to our borrowing.

As we originate loans and pile up things for a CDO, we keep the first for the office building in New York for example and put it aside, and then we use that senior as a base for a CDO, we just have to see if it's a more efficient way to finance. It does free up a lot of capacity for us with our existing lenders, also, which would be nice. That they have, the market, we're involved in two banks in the equity side. People are having a (expletive) of a time originating loans today, the bank.

So you see a bank like CapSource does a couple hundred million dollars organizations for the quarter, and there isn't that much demand. I think a lot of existing lenders are just rolling loans because if you look at the outstanding bucket of the CMBS in the world today it's down a couple hundred billion. And the whole debt and real estate market is because values are down.

So there's not the credit, there's deleverraging going on in the real estate world and the nature of buyers today, guides are saying I'm okay earning 12 or 13 levered return in the equity, and even some cases 7 or 8, so they're not borrowing a lot. So the nature of the core capital coming into the market is not borrowing 80%. There are guys that want to borrow 90%, and there are deals getting refinanced that I think are at 105% LTD and those are the ones we are trying to stay away from.

My last question, and this is probably a sensitive subject for you Barry, but when you look at Starwood, it's generated an attractive yield in the last couple of years and it's been growing, if you look at that relative to some of the residential mortgage peers which have higher absolute return, that tends to be obviously levered and differences in risk, but the investors, as you pointed out, don't necessarily appreciate those differences and it's got to be a little bit of a competitive issue just in terms of attracting capital to Starwood.

How do you think through that? Does that put pressure on you to rethink how you operate the business or you think we have to go through enough time where leverage strategies run across some tougher times that shows the risk and that will maybe kind of lead the market to a different path?

Yeah. The whole capital markets have different risk rewards spectrums when it comes to dividends, you have the C Corps and the REIT's 3% dividend yield and there are still some that have reached their record highs. And I would argue that you're buying apartment buildings at 4 cap and 5 caps and malls at 5 caps and you won't get a 12. If you take our dividend and lever it, borrow 40% on margin, you'll earn a 12 referring, essentially investment grade paper which you cannot reproduce.

If there's one thing, my Mom is a former stockbroker and she likes those 14% leveraged yields of the REIT's. She actually likes our 8.5 dividend yield also, but there's no comparison. They're levered 5 to 1, 6 to 1, and 7 to 1 and stocks like Crimea, to pick one, have lost 25% of the capital value from 4 to I think 3 or 260 or something. So you're getting 14 and you are losing 33% of your principle. Obviously that has not been the case for us.

We think as property values appreciate, our entire book is deleverraging and the LCD it's getting better, the cash flows are rising. And so, we're basically, we're apples and oranges, and sort of relatively un-levered to levered in a better example or might be an HPT, which has a tremendous retail following and 5 or 6 spin-offs of itself and has, I guess, around 8 dividends, and they have issues in their portfolio with lease coverage, but the one thing about that company, which I'm jealous of, is that their stock is held primarily by retail investors and we are not.

If there's one thing we need to fix from an external standpoint is to drive our stock price higher and to get a dividend more accurately reflects the risk and the portfolio. We to do a better job of getting those streets retail mom and pops to buy our stock and put it away. Because there's such a search for yield. I thought, my mistake, as we started this 2.5 years later is that the dividend is not fixed and the stock is now 25 or 6.

I thought the market would drive this risk profile and this dividend yield down further than it's done. That's kind of surprised me. And I think there's been other mistakes in the space that have hurt the sector, guys doing rights issues, fractions of books and kind of penalizing the space, which is a viable finance company, viable business here.

There's a real opportunity to provide financing to core real estate and other asset classes and we're looking at another asset class in real estate where we can make 9% plus first mortgage loans and there's a real place for finance company and they are gone, for the most part. And we can find a nice, happy place in the market. But I am surprised that we have not attracted the retail base, given we have retail brand name and it's something we'll rectify going forward.

Thank you for your comments and nice quarter, guys.

(Operator Instructions). We'll go to Joel Houck with Wells Fargo.

Thanks, and good morning. One of the things that I would echo that Ken was mentioning, I don't think investors appreciate the fact that all your assets are primary financed and that's not the case with the res. They have to roll the repo quite often (inaudible). Hopefully investors on the call, new investors, tend to appreciate that over time.

The question I had is related to the accelerated discount accretion, the $0.13 gain in the quarter. Obviously, that is real cash in core earnings, but it's clear you're not going to use that as a special dividend to true up year end. So the question is, what in terms of the existing portfolio is still embedded. We could see similar events like this for pre payments, or have you structured in prepayment penalties or exit fees in some of the loans that are originated?

Yeah. They're all over the place, and we originate loans with yield maintenance and prepayment penalties, and we buy loans at a discount, we bought some stuff in the high 80s and it's now 94 and we could sell tomorrow and create a gain. We're not assuming, we take the, we think it's power of paper.

We're creating that gain into our earnings over time, but if it gets paid off early, there's an acceleration of the gain and that's what you saw happen in that UK deal. The IRRs in these deals are really good, like 18, 19, 20 for virtually unleveraged paper. We can give you, it's fun to do it, it actually (expletive) me off. The IRRs are higher than the equity deals we are doing.

The terms are going good and have been for some time as these loans get repaid early and don't forget, you have fees upfront for originating these deals and the borrower is paying due diligence costs. The only thing we need is a dead deal cost if we don't make it. Even there, if he changes courses, we are paid for our due diligence. So we don't have a lot of dead deal costs rippling through earnings.

I don't think we have a number because it involves so many assumptions of repayment. But most loans today, we don't do very short paper. The deal is going to be out for like six months or a year, we won't do it. One of the keys, that's why you have to do the whole loan, by the way.

If you do a whole loan at 6.5, 7%, whatever the numbers we need to produce the return, depending on how big of an A note we sell. The borrower is happy to borrow at 6 and walk away for five years. He's not happy to borrow at 12 and walk away for 5 years. We need to make that sausage away from him so he doesn't see it and create that yield for ourselves.

I think there might be a number Stew can put out, but we are, as you though when we started we thought rated would rise faster earlier so we kept our durations shorter. Lately, we've been extending our durations, and Stew has a number.

If you look in the queue on page 15, there's a chart, probably in the, might be in the Press Release as well, there's a chart that has details both carrying value as well as face amount of our target portfolio. I'm looking at March, sorry. Here we go. Page 14.

You look at those as of March 31, we had an aggregate carrying value of the target portfolio of $2.38 billion and an aggregate face amount of 2.48 billion. So we have about just in unamortized discount, we have a $100 million that will either be incorporated into earnings from a level yield perspective and we follow GAAP in a very technical way.

But as Barry mentioned, to the extent the loans prepay earlier than we were modeling effectively, and we take a conservative but not ridiculously conservative approach to the way that they are going to repay, then there will be acceleration. That $12 million gain is a loan that we over time we had been modeling as maturing on its originally scheduled maturity date which was about a year from now. Anyway, in aggregate we have $100 million in discount.

Just one thing to add, that $100 million that Stew mentioned is our loan portfolio, one of our largest investments that we've talked about that has been carried as a CMBS position and there's about another $43 million of discount in that. So the portfolio as a whole, probably close to $140 to $150 million. I f you tried to quantify the repayment penalties and back-end fees.

Those are also modeled. It is a lot. We have extension fees, a variety of things and we incorporate some of those into the level yield to the extent to which they're due under every possible scenario but to the extent they're not, for example, extension fees and those kind of things, they're not explicitly, they're not incorporated into the level yields, per say.

We bought a $400 million pool of loans from one of the money center banks last quarter, not this quarter, and we underwrote it knowing we probably were really light on the payment fees that we'll get from that portfolio and that was the generation of my comment that you'll see recurring on recurring fee gains that are hard to model and that's why it's hard to set a dividend on that because you don't know when it will happen, but the good news is our dividend will be rising, it looks like.

That was the heart of the matter, that the $0.44 dividend looks really safe and secure, given it's hard to predict in any one quarter when it comes in, but over time, it would seem the economics of what you structured so far is much higher than kind of the current return on the portfolio. So I appreciate the additional color around the quantitative aspect, thank you.

Good question, thank you.

(Operator Instructions). We will go next to (inaudible).

Thanks for taking my question.. Can you hear me? Last quarter you indicated a pipeline in excess of $1 billion. Whereas this quarter you provided $425 million of investments in due diligence under term sheets. I wanted to find out if the difference was primarily the first quarter investment activity and if you could speak to the size of the pipeline beyond what you're doing diligence on?

We decided to take that sentence out of the earnings release because it didn't tell you very much. The pipeline itself, we probably have $5 billion worth of deals currently evaluating and we didn't want to overstate it. So the last few quarters we said if we have at least $1 billion because telling you we had $5 billion or $6 billion sounded ridiculous, even though it was true, and we still have a large pipeline we're evaluating but as Barry commented before, many of those deals will never happen.

And so what we've decided to do is use a much more discrete and factual basis to disclose the pipeline which is to tell you how many deals have term sheets signed that we believe are likely to close and that's very factual. Behind that, the pipeline actually is very robust and we feel really good as I mentioned earlier. We hope to close two transactions in the next 24 hours, one is a $238 million loan in DC which will be 73 of our $73 million and $170 million and those are in the pipeline and hopefully they're a lot more behind it.

Again, you don't exactly know what to say, because you don't know. I mentioned this deal in the UK and we're sitting right at the table and we're still not sure it's closing and it's fairly significant. So we'll know more but we have a term sheet that accepted the term sheet, but we don't know if they'll show up with their equity so it's a dance. The good news is the book is so big now and the cash, it's not earning all the capacity that's been freed up on the lines.

We paid off 3% debt and 3.5% debt and 4% debt but at least it's earning something. We're earning what we would have paid as interest expense. It's still diluted money.

We waited and waited and waited until we felt absolutely we had to do the offering to fund the pipeline and you can see why these two deals that Boyd just mentioned where the reason we did the equity offering. And to exercise the shoe, which we're okay with, we didn't really want them to exercise the shoe and they did and it's fine. We'll put somebody to work as we have in past but it's okay. I mean, the Company is strong, great book.

Great. On the timing of the capital deployment and your guidance, I wanted to just clarify if the guidance does anticipate second quarter and third quarter dilution with respect to the adjusted $0.44 core number you gave and if you would, I mean be you did earlier mention that the dividend should be on a trajectory to go up, but if you care to comment on your comfort with the current dividend level.

We're comfortable with the current dividend and it will true up what we need to pay out in the fourth quarter, but the current run rates pay an extra dividend and the, we do not, I think the way we do this, Stew, we don't anticipate future capital offerings and future need for any more capital.

It is reflective of the equity deal with just did in April, and it's reflective from a range perspective on sort of success or failure of the current pipeline, with some reasonable scenarios that bound that, but it doesn't incorporate sort of future growth of the equity, a bunch of unidentified, where we might be originating loans by next December, that kind of thing. It's a more short term.

In the next three month look kind of thing. And we try not to get ahead of ourselves.

Okay. In your supplemental slides, you give a schedule of legal maturities and expected pre payments, and the legal maturity slide, the 2012 balance went up significantly while the expected repayment balance was unchanged. Can you discuss what drove those items?

As I mentioned in my remarks, the larger loans or assets we put on in the first quarter are conceptionally opened for repayment now. It was again, a large, we've added discount basis to one of our favorite positions in the, it's a corporate financing that Barry mention. We expect that thing as a active maturity of 40 months, 42 months from now.

When we run the projected return, we assume it runs to maturity. I think that's in the expected maturity, is that it runs but there are a number of other, it is open for prepayment today. So it would conceptually show up that full amount in 2012. And it could prepay at any point in time, probably, between those two dates.

Just to be clear, think the equity in that position is $175 million, to $176 million. The schedule doesn't show the whole position.

I think it would. It would show the full asset.

So the equity is $176 million and this is corporate financing and this will probably be paid off, the maturity is 15.

Right.

We think they'll pay it off in 2014. This will probably be paid off with an IPO, or maybe not. I mean, it's not, it's cheap for them and works for us. So we are able to finance that position pretty attractively. So that's how we get the yield we wanted and we own a lot of things with 22 debt yield.

Another great point on that asset, investment basis, the dollar price is in the low ninety's so if it did prepay we would have a fairly large

$40 million or $50 million.

That's a gain we mentioned earlier.

As of today.

So that's a good hedge in the event that that did happen.

It would be a windfall. The IRR would be 20% and deploy capital and like a homerun. But we have to figure out what do with $176 million plus.

It's another reason why that's one of our favorite investments in the portfolio, or one of them.

Anyway.

We are able to do that because we are able to get good financing from our friends on the street who helped us with those positions and we could note, this is not something you can do at home. Don't try this at home, you won't get this financing. Thanks everybody.

Appreciate your time today and we are here, myself, Stew, Boyd and Andrew and the rest of the team. Come visit us in our San Francisco office where I spent a week last week and see the team out there and also here in Connecticut. Thanks everyone. Have a great one.