Starwood Property Trust Inc (STWD) 2012 Q2 法說會逐字稿

Good day and welcome to the Starwood Property Trust second quarter 2012 earnings conference call. (Operator Instructions). 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.

Thank you, operator. Good morning everyone. I would like to welcome you to Starwood Property Trust earnings call for the second quarter 2012. With me this morning are Barry Sternlicht, the Company's Chairman and Chief Executive Officer; Boyd Fellows, the Company's President; and to Stew Ward, the Company's Chief Financial Officer. This morning the Company released its financial results for the quarter ended June 30, 2012, and filed it's Form 10-Q for with the Securities and Exchange Commission.

In addition the Company has once again posted supplemental financial information to its website. These documents are available in the Investor Relations section of the Company's website at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements in the course of this call are not based on historically information and may constitute forward-looking statements. These statements are based on managements current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those describe in these forward-looking statements.

I refer you to the Company's filings made with the SEC for a more detail 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 under take no duty 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 i in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be access with the Company's filings with the 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, Chief Financial Officer of Starwood Property Trust. This morning I will be reviewing Starwood Property Trust financial results for the second quarter 2012. I will also highlight several items pertinent to both the second and third quarters as well as our overall business. Following my comments, Barry will discuss current market conditions, (Inaudible) our business, and the opportunities we see as we look forward.

For the second quarter 2012 we reported core earnings of $50 million or $0.45 per diluted share. On a per share basis this is in line with the $0.58 per diluted share we reported for the first quarter when adjusted for the $0.13 per share onetime gain realized in the first quarter due to the early repayment of a large UK base mezzanine loan. 2012 year-to-date core earning total $105 million or $1.02 per share. On a per share basis this represents a 19% increase over the $0.86 per share recorded for the same period of the prior year.

GAAP net income for the three months ended June 30 was $44.5 million or $0.40 per diluted share. Slightly above the $0.39 per share recorded during the same period for the prior year. As of June 30, 2012 the fair value of our net assets was $19.65 per diluted share. For the same date GAAP book value per diluted share was $19.13. Both of these figures are above the March 31st levels of $19.52 and $18.96 respectively.

In fact the fair value level of $19.52 per share is the highest since (Inaudible). The primary drivers in both cases were improvement in assets evaluations associated with the continued improvement in credit markets and spreads and the positive impact of the accretive $457 million equity raise we completed in April.

Now let me outline some of our significant activities for both the second quarter and third quarter to-date. During the second quarter we closed $433.1 million of new investments. The most significant transaction of the quarter involved the origination of $170 million first mortgage loan on 2 Class B office buildings in the SoHo district of New York City. The transaction had an initial funding of $135 million and provides the borrower future advances of $35 million to pay for redevelopment costs, tenant improvements and leasing commission.

We anticipate closing the sale of a senior component of the loan to a major money center bank within the next 30 days. This will leave us with a subordinate debt piece that yield approximately 11.7% and represents a slice of the capital stack between 45% and 64% loan-to-value.

Other note worthy transactions for the quarter include the origination of a $73 million mezzanine loan collateralized by a portfolio of 6 office buildings in the Washington D.C. area and the origination of a $30 million mezzanine loan collateralized by a prominent office building in Philadelphia. These 2 investments are expected to produce annualized returns of 12% and 10.5% respectively.

We also have been very active since the beginning of the third quarter closing new investments totaling $249 million. These new transactions included the origination of a $51.5 million first mortgage secured by 3 hotels located in Charlotte, North Carolina; Princeton, New Jersey; and Lynchburg, Virginia that we anticipate leveraging through the sell of an A note to a banking institution.

This transaction as well as the previously discussed loan we closed in downtown New York highlights one of our core competitive advantages. We have the size, scale and dedicated staff necessary to offer one stop financing solutions to our borrowers by originating a whole loan and the subsequently manufacturing and retaining a compellingly priced subordinate component of the debt stack throughthe sale or syndication of a senior component of the loan to a bank or life company.

With the additions of these investments our target portfolio stand as of last Friday at $3 billion with a current return on assets of 8.9%,a leverage return on equity using our current financing balance of 11.2%, and pro forma fully leveraged return on equity of 12.8%. We think this represents compelling risk adjusted returns for investor in a near zero interest rate world and in light of the portfolio average last dollars loan-to-value ratio of approximately65%.

Our activity since the end of first quarter have also including several interesting developments on the financing and capital fronts worth mentioning. In April with a compelling near term pipeline of potential investments we sold 30 million shares of common stock at a net price of $19.88 per share resulting in gross proceeds of $457.3 million. Importantly pricing at this new capital was accretive to existing shareholders as the transaction was executed at a time when our stock was trading at a premium to book value.

On June 22, we filed an ATM equity program which allows us to shares from time to time with an aggregate sales proceeds of up to $250 million. We have not yet sold shares under this program but consider this an important tool with which to efficiently size and time capital raises consistent with our capital needs. We have also recently expanded our financing options in two important ways. First in early July we closed an $80 million repurchase facility with a new banking relationship.

The closing of this facility allows us to transfer assets previously financed on our primary Wells and Citibank revolving facilities essentially freeing up an additional $80 million of revolving capacity and diversifying our source of financing liquidity. This facility has an initial 3 year term and can be extended for two addition 1 year periods.

Of more significance this past week we closed a $250 million Corporate Star revolver. This facility is unique in a number of ways for us, but importantly now gives us the ability to finance our origination of first mortgage loans on the day they close avoiding liquidity and earnings drag associated with the 45 day to 90 day lag we normal experience while we either seek financing approval from our conventional secured financing providers or negotiate with potential purchasers of A notes. This facility will allow us to operate the platform more efficiently from a liquidity perspective which is something on which we relentlessly focus.

Now let me bring you up to date on our current investment capacity. As of August 6th we have $63 million of available cash, $183.5 million of approved but undrawn financing capacity, and $172.2 million of net equity invested in RMBS securities. With this we have the capacity to acquire or originate an additional $300 million to $500 million in new investments.

This capacity expected to be augmented over the next two quarters with aggregate cash proceeds from loan and security repayments net of any debt required debt repayments of approximately $60 million. Proceeds from A notes sale of approximately $130 million and additional financing facilities we are evaluating associated with certain potential pipeline investments.

As announced in our press release, our Board has declared $0.44 dividend for the third quarter of 2012 which will be paid on October 12, 2012, to shareholders of record on September 28, 2012. The equals the dividend paid for the last 5 consecutive quarters and represents a 7.8% annualized dividend yield on yesterday's closing share price of $22.48. We are also raising guidance for the full year 2012 core earnings per share to a range of $1.80 to $1.95. I will now turn the call over to Barry for his comments.

Thank you, Andrew. Thank you, Stew. Good morning everyone. I have to say this is about our three year anniversary of our existence of a firm, almost to the day actually, and I think it is really quite remarkable that we started with a $900 million pool of cash and we have originated or acquired over $5 billion of assets some of which have been recycled over the last 3 years.

And I think it is really the core strength of the Company that with now nearly a 40 person dedicated team and augmented by the 160 people in Starwood Capital Group we have been able to source, find, structure, sell down, and create this extraordinary pool of loans in a market where there is no yield. I said it in last call when you look at a 65% LTV book that stabilized fully leverage will yield over 12% you know a few things.

First if you take the loans that are zero to 50% LTV those are triple A, and they should be yielding LIBOR plus 50 in this market today, so the excess yield that created (Inaudible) by the team is extraordinary and really my congratulations to the entire team for this execution in this market place.

And then the most noteworthy thing for the Company or major milestone was this first unsecured credit facility for the Company. It shows a shift of both the power of scale of the enterprise but also a shift in our lending relationships looking at our scale of things it really face no issues, and we have never had an issue for the first three years of our existence on ay of the loans we have originated. None of them have ever gone in to monetary default.

So I think our underwriting has proven to be a unique blend of both the equity teams and the debt teams getting together and scraping and arguing and fighting and clawing over structure and over LTV has really paid off for the shareholders which is fantastic. When we went public we told you we would be predictable, we would safe, we would produce a compelling yield and we would do it in a explainable manner with state of the art transparency.

As you can see from our map of supplement which is unbelievable, we are doing those things, so I think it is great. And we think you ought to know what you own. We are a big shareholder along with you. We are very comfortable owning this stock in this rateless world.

It is really interesting market today. Rate have been all over the place. The 10 year was way below 134 I think it hit, it is 160 today, who would have thought it could easily be 3.25 in 12 months which is where it was about 14 months. So we are originating loans sort of the way we always we did despite the rally in bonds. Our LIBOR spreads have been able to come in primarily because senior lending has been tightening.

Spreads in senior lending have gotten tighter and tighter. Floors by banking institutions have been removed because there is virtually ferocious demand to put out capital and when bank removes a floor on a LIBOR loan all the banks followed, and that has allowed us to lower our spreads and still be competitive in the market place, but it is not perfect.

I was talking to the boys and Stew earlier today we said the most compelling thing the most important competitive advantage we have is when we can do the whole loan. We can originate a loan at LIBOR plus 5 which is obviously diluted to our dividend yield but we can lever that and create a double-digit yield in the junior note.

I always want to distinguish what we are doing, because I always challenge the team on why we didn't participate in the bp acquisition or some of our competitors have done a lot of buying bp in securitization. You have look again the width of our mezzanines. They are quite wide. They go from 45 to 65, or 50 to 70. They are very wide swaps of paper, and essentially when we are doing that and we originate the asset or we own the asset and we are originating the loan if there is a default we actually would love to own our asset at the basis of which we wrote the loan. In these bp securitizations you might find a piece of paper from 70% to 73% LTV and it operates as a first loss position, so any one loan underneath going bad and you are the first guy to absorb it.

They may have the same coupon, but they have totally different risk reward profiles and the more sophisticated you are and the more you understand our story the more I think you will like what we do and you will take some surety that we can keep doing itwhich has been interesting. I think the pipeline looks pretty good.

We are looking all over the world at investments. I think one of our challenges going forward will be what to do about the growing pipeline of debt opportunities in Europe. It is probably the biggest hole there is in the mezzanine market. It is something that papers can be quite large, and we are sort of a competitive disadvantage slightly because we are hedging these assets back into dollars and that probably creates net a 100 basis points of the IRR.

There are other people that aren't doing that, so to the extent we have to compete with them that is a disadvantage. So we are thinking about what if anything we are going to do as the pipeline in Europe continues to grow, and again the appetite, the size of the piece of paper are enormous. There is really no junior debt. There is still appetite.

You can still get loans LIBOR plus 415 of senior. But we continue to be astonished at the spread differential between Europe and the United States right now, which shouldn't be surprising given the banking situation in Europe, and the fact that most lenders in Europe are pulling back to their shores. The French to the French shores and the Spanish trying to shore up their own sovereign debt and the British banks backing the British properties. The German banks some of them are completely gone from the market have been quasi-nationalized.

We are also watching regulation in our industry. We are very involved and very anxious to see where the hold requirements windup for originators. We are a huge proponent that people should hold or hold a junior note or bp or retention of what they originate. I can't imagine a better alignment of interest. There is a proven case of how this work in the dust lending business. Look at the dust lenders where they have a 5% guarantee essentially on the loan.

The top junior 5%, they basically guarantee. The default rates on those loans is dramatically better than loans that are originated in the conduit market and collapsed in the real estate correction. So you can see that when you are forced to have some hold or some skin in the game it has been a healthier better market for investors, and I can't see any reason the Treasury and the Fed wouldn't force banks to keep a piece and by the way it is obviously self serving we would love to originate those loans and then they can take down any size they want of our loan and (Inaudible) decline the stack and then sell it on, but we are originator, and we are a holder. We eat what we originate, and we like that.

And I think also one of the other things that has happened over the last 3 years is we get phone calls now. People who were initial afraid of Starwood Capital that we were piranhas that we would make a loan and then try to take the property back. But I think as we have done deals with people like Blackstone and others people have gotten comfortable that we really are simply trying to originate performing loans and that has been our business from the start, and we don't want the keys not in this vehicle. As you know that creates lack of transparency a lot of costs we can't predict and volatility in our earning, and has been a business we decided to stay away from and we have done so date.

I also want to point out that even though we originated $5.1 billion I think the permanent book is $3 billion now after the -- so we have round tripped over $2 billion of capital In our 3 years which is quite efficiency. I think one of the things we are trying to do is utilize. We have a lot of low yielding first mortgages still in our portfolio. You can see it in the columns in our earnings release in the column ROA unleveraged yield, the second column is return on assets is an unlevered yield.

The leverage return is as they are levered today, and the last column which reads optimal leverage return, is if we drew the facilities we have arranged on that capital you can see the power of the leverage, but we don't need the leverage so we are not borrowing it. And what we have been doing every time we raise money is we pay off these lines against these positions so the ROA, ROE, ROIA assets ROE of the entity drops and then it rises and it is creating -- it is not optimal. Again as we grow and as any one loan maturing becomes less critical we can more efficiently manage our balance sheet.

I also think it is kind of cool our book value is highest it has ever been. Hopefully at a current pace we will pass the IPO price as book value which is sweet. It is hard to do obviously when you have to pay out all of your earnings, and that leads me to another point which (Inaudible) mentioned is that we will have to examine whether we have to do a special fourth quarter dividend based on our earnings projection and what we see happening in the market and the pace of what we are doing. That is something the Board will have to decide.

And actually it will be what it will be. It will be whatever the REIT requirement are for us. We decide we do so with a special dividend and not a raise of bar every quarter with moving the annual dividend. We also continue to look at other verticals staple business. These our lines of business that we think are holes in the capital markets to fill. We are exploring a number of industries to which first mortgage financing is not available today. There are other areas where banking law changes will provide significant pipeline opportunity for us.

We are pretty pleased with where we sit today. There is a very large commercial money center bank that says they have fortress balance sheet . I think we have a pretty good fortress book of loans. We are seeing as I said a lot of transactions. Again, our biggest issue is maximizing being able to take down large whole loans. We are $2.5 billion over the biggest commercial mortgage REIT in the country, but we are a tinny-winy Company.

If you are going to do $150 million loan it is hard to do, and those are the loans we want. They are better properties. The SoHo loan $170 million bucks in Manhattan. And those are some of the highest rents in Manhattan. That is the kind of deals we need to do, and to do that we need to have the capacity to write that whole line and then sell off the junior note.

Again, I will also say this corporate facility is not to be undersold. This is a big deal. It will allow us to as Stew said to manage our capital much better. We now can make that whole loan at 5.25%, and not be dilutive. It will be accretive to that financing facility. So there is about 5 banks that participated in that syndicate, and we want to thank all of them. We could not have done that 3 years ago, actually we wouldn't even have come close.

I will say on the portfolio side, again, when we talked about going public and predictable and safe we have really monitored the diversity of what we are doing by state by product type and while we still have some hotel concentration, it is an asset class we know pretty well. We still remain very diversified. You can see by originations we have done some office deals in places like New York, who would have thought, and the LTVs have been exceptional. we have no commercial NPLs. We didn't expect to have any. So we think we are in a good place today.

I think our dividend yield is quite compelling I wish my hedge fund portfolio was producing 7%, 8% unlevered. You can lever our stock and earn up to 15 today if you margin our stock. That would make us the best performing large macro fund in the world. And I giggle. I asked our guys to produce the IRR on the paper that is round tripped into our Company because if we were hedge fund we would really be able to retire.

We have done a really good job I think for shareholder, and I am slapping my team on the back because we don't often celebrate our successes. But we have done a really nice job. And I look at apartment REITs that are probably yielding unlevered 4% and we are producing twice that and that is the best asset class for NOI growth. So if you think cash flows are going to double for apartments, they won't. There will be new construction, and they never get to the 7%, 8% unleveraged yield that our mortgage REIT is producing today and it gets worse from there. Obviously yield is valuable but as long as we can continue to produce this kind of risk adjusted return, I think we have a great future in front of us.

Thank you very much we will take questions.

Thank you. (Operator Instructions). We will go first to Joshua Barber with Stifel Nicolaus.

Hi, good morning. Would you be able to talk a little bit more about your RMBS investment strategy? It looks like you are buying private label RMBS at pretty decent face discounts, but you are still counting them as available liquidity. So is it that the investments are attractive today but you would sell out for the right price or is this actually a part of the longer term strategy here?

Yes and yes. We are have been doing it for 3 years. We have very comfortable with our sub manager on that. If we had to liquidfy, we could. It is a very good cash management strategy for us. The guys doing it are experts in the field, and we monitor what they do all the time. Stew can talk more about that. We are very comfortable and obviously I think our book value is higher than the fair market value. I don't think we have been aggressive in stating our fair market value. Obviously rates have fallen and LTVs are probably lower than we said they are, we only review that really once a year.

I think in the RMBS book we know that what is going on in residential real estate the equity company owns nearly 20,000 lots and we have a home builder in our portfolio. We thought RMBS was under priced, and we were happy to continue to invest aggressively in the space. Especially in, you are right, the private non agency paper. Where we thought that residual values were too low. People were really taking a (Inaudible) and pricing was bizarrely cheap. While it is only 170 three year about what 8% of our equity 7% of our equity, it is not that big. We have used it historically we have been able to unlevered it very easily. We can get very high leverage against the portfolio if want. Very low cost and it is the lowest cost debt. How high can the leverage go?

The way the current facility works as much as 75% of the value of the collateral. We are well inside of that. We are in the $280 million to $290 million, I think we have $125 million drawn. We have probably revolved the balance 5 or 6 types of month depending on to manage our cash.

As we get cash -- one of the things we started out with was really focus on short paper we decided was no principal (Inaudible). We said keep it at 1 year 2 year paper and we have done that. We have extended the maturity slightly, but again we can lever it up. As you heard, we have over $111 million additional borrowing capacity against the RMBS book we have as stated and that creates a lot of liquidity for us.

Okay. But it is still fair that you are seeing it as a cash management tool and not -- I mean you are buying RMBS with a $60 million face discount I don't know if you get all of that back, but if you think you can get some of that back in the next year (Inaudible).

We like what we are doing. We like what we are doing. I'm not going to talk about how we are doing this. But we are very comfortable here. Yes, you are right this is a cash management tool.

Okay. Can you also remind what your total built in exposure is today and what the total I guess face value discount is after the second quarter acquisition?

Equity is a $170 million. Total asset investment basis of about $565 million $566 with about $400 million of financing against it so $170 million net. I think the face on that is our average face is about 91, so call it $650 million or some number about like that $660 million in face.

And trading today around 97.

If you look in our supplement it is among the lowest (Inaudible) LTVs of any assets we own.

It is 6 points on $500 million so $30 million of gains embedded that hasn't been realized something like that.

Okay. And some of that might run through the third quarter.

(Inaudible).

On realized mark to market.

I suppose that is true. Do we do that?

We do it on a level yield basis.

We are not straight lining with market crisis. We basically accreting the discount over.

Okay. You don't have to mark that to market even though it is a CMBS. Got it.

Well, it is marked on top of that, but what goes through what we describe as core earnings is just the accrual.

Understood. Thanks very much.

(Operator Instructions). We will go next to Stephen Laus withDeutsche Bank.

Hi, thanks for taking my questions. Can you talk a little bit about the financing market. It seems like you guys have done a good job getting new lines put in place it is going to allow you to continue to grow the portfolio, importantly avoid the cash flow drag mentioned on the A note origination. Can you talk about what you are seeing out there is it something you have guys have put in place with your scale and platform that you are benefiting from or lenders getting more open with financing lines counter parties open with credit facilities.

The one thing I would say is a hidden issue for us is the original lines we built the Company with are actually way over market today. The spreads have probably come in 100 basis points from what we originally did,but we are stuck. And that is good news because eventually they will roll off. The good news is we got a 5 year facility when nobody could and that match funded all of our paper, but the bad news was had we taken the risky route and done a one year facility in rolling one years we would have ridden the LIBOR curve down the spread market down because I think spreads have tightened. What do you guys want to say about the question about financing stabilities, Stew?

I think your comment is a good one that we could probably replicate if it was financially reasonable to do the secured facility, I don't know if they are 100 tighter but they are tighter a bit. This corporate facility the corporate style facility for lack of the a better description I think is pretty unique to us. I would be surprised if anybody else in our space could get something like this done.

It is largely predicated on the transparency of the asset book that we are able to put so it is their look through to what effectively is their collateral and the diversity of our book and our sheer scale. And from a pricing perspective it is a little expensive, but again we are only talking about utilizing it for a 45 to 60 day period, so in the scheme of a 5 year investment 4 year investment it is insanely efficient relative to going unleveraged for that 90 day period. Again I would be surprised if somebody else could get one.

I think one of the things we learned which we didn't understand as well as we probably might have when we went public is the cash drag on our earnings and having because of the lumpiness of the origination market having $100 million sitting around 10 basis points or whatever it earns was really a problem and shaved cents off our earnings. SO this is a milestone and hopefully we can replicate it with another line as we grow, and we won't have that cash drag. We have also decided to run the Company with about, what, $75 million --

$75 million to $100 million.

-- of cash for a rainy day. That also is also something that is okay, again as we get bigger that number doesn't really have to change that is really just to cover dividends and margin exposures and stuff like that. Hedges on the foreign currency we have and stuff. Those 2 things are things we didn't appreciate as much. The former is going to be handled to an tremendous extent by this corporate facility. We said we would put it in place last quarter or we intimated that we were close, so we are happy to get it done.

(Inaudible) increase the capacity there. You commented on growth there. How do you look at growth with the (Inaudible) raising more capital? It seems like you have some capacity left to originate new investments. When you look at how big you can get is there a point where it is just hard to continue sourcing enough investments to match the pay off pay down rate of the portfolio or how do you look at those two metrics against each other?

Actually the one really good thing we have is the fairly light repayment schedule now in front of us which is really one of the lowest for the next 12 months, I think it is the lowest we have had since we went public. If you recall the first major deal we did was the teacher transaction. It had a lot of short term loans in that portfolio and they all have come and gone and be reinvested. We like the stock going up we want to let the stock run as far as it can.

We still think we should be in retail hands, and they should buy this down to a lower dividend or reflect the risk profile of the coupon. So we are happy to use the ATM which is a [dribble] strategy. We are happy to use secured facility. We are happy to step out of market. If we go to market, it is because we have accretive stuff to do with capital and that could hopefully drive their earnings growth. We don't want to step in to the stock every time it trades premium to book that is not what we are trying to do. We are trying to grow our business.

We recognize it is a risk reward, it is a balance between our desire to grow and get scale and get efficient and get more credit facilities and the shareholders needed a break from those continued rate stock and disrupt the stock price. We are as you know a material shareholder here , so we are in the same -- ever single person at Starwood including the secretary, drivers, (Inaudible) the janitor they own stock in the REIT. We are trying to drive this enterprise forward. And I think it is nice when the stock responds positively to what we are doing.

Great. I look forward to the next 2 quarters, and thanks for taking my questions.

(Operator Instructions). We will go next to Jade Rahmani with KBW.

Hi, thank you. This is actually Ryan O'Steen on for Jade. Just to go back to the pipeline. Any changes or how would you characterize this kind of pace or velocity of activity going forward in the back half of the year, increasing or decreasing. And secondly on mix. You talked a little bit about Europe. Any other changes in regards to assets class, or size, geography, et cetera?

Not on geography. I mean it is still all over place, and not on size. Things show up -- if a $100 million deal shows up we can close -- if it shows up on a Monday, we can close it if we can wrestle it to the ground. It would be fair to say that we are talking about, I think this is the third cycle since we have gone public where there has spread compression and where are we on origination should we settle for 10.5 or 11.8 to 12 in the junior note. Obviously we can create that note. We want the width of the note.

We can create the 12 but you might be riding a smaller chunk of the capital stack. I think for security and safety so we would rather do the 10.5 wide than a 12 thin if you understand what I am saying,and yet we have not done that to date really. We have been able to hold our targets. It does depend on what assets class we are underwriting. So would we do a 10.5 or 10 on an apartment deal, absolutely. If we with could do that, that would be heroic because you just can't find apartment mezzanine really to speak off because the debt yields are so tight and the assets are trading at sub 5 cap, so why would any one borrow at 10. But there are exceptions to that,transition multi and stuff, but then they will come back.

And that is also the question we have, and we keep asking ourselves is the duration of what we do. We have been trying to get paper that has some now term to it. It is not easy to make a loan and have it come back in 18 months or 12 months. As somebody mentioned the Hilton paper , that is probably the only place that we continue to think about when the sponsor might repay that or change the structure.

There are reasons to believe it will be years, but there are also reasons to believe that until the hotel stocks traded huge premiums to their current trading value and there is more clarity and outlook for the world, they are not going to try to do an ITO there. The goods news and the bad news is we would earn a really whopping IRR. It would probably be 14%, 15% if it is paid off early, and that would be a home run although the negative is we would have to reinvest the cash.

How are we doing? I think we are seeing a lot of deals and we have a network of originators and I think we are trying to figure out exactly where we should be pricing as the capital markets really ebb and flow. CS shuts down their condruit operations three guys jump into the business. If you see what is happening in the banking market and we have a number of private investments in banks at Star Capital they are having a (Inaudible) of a time originating mortgages.

We are originating more paper than both banks we are involved with. And we are obviously a minority shareholders in those banks. They are $2.5 billion institutions. They can't originate loans, and what they are finding out is that the commercial banks the bigger guys are stepping into what used to be regional markets and writing a $25 million first mortgage on small office building. So there is a scramble for real estate debt among the banks today. And if it is safe, you can bet we can't possibly do it. If it is really, really safe, like 45% LTV loan. (Inaudible) step up. it is competitive craziness out there, but so far we are able to continue operate.

And we get inbound calls from guys saying will you take the junior note of this origination. Those are our happiest days. We like that. But we also want them to call us exclusively. We don't want them to shop 15 people. We won't win that. I will tell you right now there are guys on the street with private funds and they will be at 8 for these mezzanine we can't compete with these guys. And not only that they are raising billions and billions of dollars doing 8s and mezzanines and making a fortune doing it. So we are going to tell you when we are going to change our pricing strategy if ever because we have talked about it internally.

Are we better being a $5 billion $10 billion enterprise with a portfolio yielding 10 as oppose to a $3 billion enterprise with a portfolio yielding 11.8 or 12 or 12.5. I don't know the answer to that. I actually tend to believe we are better off being bigger. It is just a more efficient vehicle and we can raise capital. And again the repayment of any one loan if we were bigger is no big deal. At the size we are which is really big I think we are 2.5 times the next guy in our space we still will have the drag of a major repayment.

Great, appreciate the comments.

Sure.

(Operator Instructions). We will go to our last question from Joel Houck with Wells Fargo.

My question has to do with your outlook given we are in a low rate environment probably going to stay there for some time your end markets seem to be very strong. What is your view in terms of adding duration to the portfolio? It would obviously require you to move down a bit in capital structure, but as you pointed out we are in a yield starved world. It seems like the risk reward profile particularly for companies like Starwood that have proprietary origination are very favorable right now. Just curious as to your view point going forward.

We are probably reverses course on this. The other thing we have danced around which is when we started we thought rates were going to go up. So we kept our durations shorter on purpose because we thought we could reinvest the capital off of higher LIBOR where the curves were back then. Now you are right if the worlds interest rates go up, countries go broke. So I think we are turning the western world in to Japan. And because of that I think we would extend duration and lower coupons to do it and the curve is pretty flat.

So you are right. Again Boyd and Stew and Chris Tokarski and Warren de Haan who formed the core of the origination group and Terry Carpenter. They haven't really said let's do something sub double digits, but you can see that at some point that is probably something we are going to have to look at. We are going to have to look at that. We don't feel like we have to go there today.

I invest shareholder money like it is our own. I think we all do. So we would say 10 fantastic in a world with a 10 year is one six, a 10 on a five year pieceof paper. The five year is getting 88 basis points or something. By the way the markets are telling us that. And what is happening is the seniors, as you know because you work for Wells, the seniors are getting tighter and tighter and tighter and you are the largest real estate lender in the nation. You can talk to your on desk.

We can lower our spreads. We were commenting today we can do a loan of LIBOR plus 475 LIBOR plus 500 LIBOR 525 and create the paper we need, right. That would have been LIBOR plus 650 three years ago or even 675, 700. Because those seniors have come in so hard and we watch the pricing of the CMBS markets and where these loans are getting done. Triple A is continuing to come in again they are no where near where they used to be, but if they continue to head in that direction we will be able to keep our spreads.

I think there is a lag in the market frankly. But every time there is a scare everybody backs out again and that is our finest moments because then borrowers have to refinance and we can go into the market write the loan take our time and get rid of the senior.

There has been like 3 or 4 cycles already where the markets blew up, last year August, September there was a gaping out of spreads all the banks halted there conduit some of them went out of the conduit business all together because they were faced with large losses. Credit Suisse is one that comes to mind. There just hasn't been a ton of demand. I would say overall demand for real estate debt has not been that high because of the nature of buyers today. You have seen mostly core buyers buying buildings and they don't want 50%, 60%, 70% leverage.

So until you see investors on the capital side and you have seen a few deals you have seen Braxton do a bunch of deals, bigger deals. Where they write the (Inaudible) and shop out for mezzanine, so far we are 0 for 100. we have not bought a single one of these pieces of paper, and they have been shopping these mezzanine at 80% LTVs at like 8. We can't compete there. We won't be competitive, and I don't expect we will be going there.

As you know our hurdle rate is 8 on our incentive fees as an enterprise, and that is not the reason we hold the 8 as a holy grail, but you have to have the management fee. You can see that does guide us to what we are willing to do. As long as it is available and right now we are originating $0.5 billion a quarter that is pretty good. As long as it is available we will continue doing what we are doing

All right. Good, I appreciate the color. Lastly, do you have guys have a weighted average diluted share count for the quarter?

The average is like112. The average is 112. (Inaudible). Here it is. 112.184 million.

All right. Thank you very much guys.

Take care. Bye-bye. Thanks everyone. Have a great summer. Speak to you soon.

That concludes our question-and-answer session. That concludes today's conference. Thank you for your participation.