Starwood Property Trust Inc (STWD) 2012 Q3 法說會逐字稿

Good day, everyone. Welcome to the Starwood Property Trust Third Quarter 2012 Earnings Conference Call. All participants are now in listen-only mode. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Sosson, Chief Operating Officer and General Council. Please, go ahead, sir.

Thank you very much. Good morning, everybody. Welcome to Starwood Property Trust's Third Quarter 2012 Conference Call. This morning we released financial results for the quarter ending September 30, 2012, and filed our form 10-Q with the Securities and Exchange Commission. These documents are available in the Investor Relations section of our website at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.

These statementsare 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 statement.

I refer you to the Company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

The Company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call.

Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Reconciliations of these non-GAAP financial measures to the most comparable prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Joining me on the call today are Barry Sternlicht the Company's Chief Executive Officer, Stew Ward, the Company's Chief Financial Officer, and Boyd Fellows, the Company's President, and Mike Berry, the Company's Chief Accounting Officer. With that, I am now going to turn the call over to Stew.

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

I'll also highlight several items pertinent to both the third and fourth quarters, as well as our overall business.

Following my comment, Barry will discuss current market conditions, the state of our business, and the opportunities we see as we look forward.

For the third quarter of 2012, we reported core earnings of $58.7 million, 16% above the $50.4 million posted for the second quarter of 2012.

On a first share basis, this translates to $0.50 per diluted share. Again, significantly above the $0.45 per share reported for the fourth quarter of 2012.

This quarter-to-quarter increase is the result of a combination of both improvements in net interest margins, as well as gains associated with the sale of securities.

Importantly, that, interest margin excluding one time items, increased 7% to $60.5 million from $56.6 million for the prior quarter. This improvement reflects the effect of the very robust third quarter investment activity I will discuss shortly.

As of September 30, 2012, the fair value of our net assets was $20.13 per diluted share. For the same date, GAAP book value for diluted share was $19.56.

On a pro forma basis, adjusting for the effect of the $418 million capital raise completed last month, these figures increased to $20.48 per shared, and $19.98 per share, respectively. Both of these figures represent theirhighest levels since the inception of the REIT.

The primary drivers for these increases are the improvements in asset valuations associated with continued improvement in the credit market, as well as the accretive impact of our most recent equity rates.

Now let me outline some of the significant activities for both the third quarter, as well as the fourth quarter to date. During the third quarter, we closed $599 million of new investments, with an additional $515 million in new investments closed since quarter end.

This brings our new business totals to over $1.1 billion in the last 120 days. We think these are impressive totals, and demonstrate the continued maturation of our origination and financing capacity, as well as the power of the overall Starwood capital presence in the real estate capital markets.

I think it is important to discuss a few of the most relevant transactions from the last 120 days to illustrate these points. First, this past month we closed the largest single loan transaction in the REIT's history.

In this transaction, we co-originated a $475 million first mortgage and mezzanine financing by an acquisition and redevelopment project in the Times Square area of Manhattan.

The REIT will retain a majority interest in both the first mortgage and the mezzanine loans. We anticipate the REIT will earn unleveraged equity returns in excess of 11%, with the potential for additional upside through both various features in the loan, and the potential to increase returns, significantly, when and if we sell an A-note. Few lenders of this scale access the capital and expertise to comfortably originate a loan of this size and complexity.

Additionally, at various points in the quarter and early October, we originated three separate loan transactions totaling $237.5 million in funding commitment that we either financed, or are in the process of financing, via a sale of a senior component of the loan or an A-note.

We have made mention of leveraging our whole loan position through A-note sales in the past. This strategyis playing an increasingly important role in our overall financing mix.

In recent months, the sale of A-notes has been a particularly attractive form of financing for certain large transactions, with pricing and leverage levels to [appear] to those available in the warehouse financing market.

Additionally, they typically result in perfectly matched term-financing under all repayment scenarios. However, the efficient execution of an A-note sales and syndication effort requires a sizable investment in senior capital market staff and system.

With an equity based $2.7 billion, and transaction flow well in excess of $500 million per quarter, we have the size, scale and transaction flow necessary to dedicate the appropriate resources to this end, something that most of our competitors are unable to do.

With the addition of these and other investments in the third quarter and fourth quarter to date, our total target portfolio, as of today, stands at about $3.6 billion,with a current run on assets 9%, return on equity using our current financing balances, of 11.3% and a pro forma fully-leveraged return on equity of 12.2%.

We think the portfolio represents compelling risk-adjusted returns for investors in light of today's lower yield environment, and the portfolio's average last dollar loan-to-value ratio of approximately 63%. Last items from the third quarter I'll mention involve two new additions to our financing capacity.

First, in early July, we closed a $78 million repurchase facility with a new lender. The closing of this facilityallows us to transfer assets previously financed on our primary Wells Fargo and Citibank revolving facility, freeing up an additional $80 million of revolving capacity, and diversifying our sources of financing liquidity.

Of more significance in early August, we closed a $250 million corporate style revolver. This facilityis unique in a number of ways for us, but, importantly, gives us the ability to finance our originations of first mortgages on the day they close,avoiding the liquidity and earnings drag associated with the 45 day to 90 day lag we normally experience, while we either seek approval from our conventional secured financing provider, or we negotiate with potential purchasers of A-notes.

This facility helps us operate the platform more efficiently from a liquidity perspective, which is something we spend a great deal of time and effort on. Let me bring you up-to-date on the current investment capacity.

As of November 5th, we had $186 million of available cash, $228 million of approved but undrawn financing capacity, and $142 million of net equity invested in RMBS securities.

With this and access to the corporate revolver, we have the capacity to acquire or originate an additional $450 million to $600 million in new investments.

This capacityis expected to be augmented over 2012 and during the first quarter of 2013, with aggregate cash proceeds from loan and security repayments, [net] of any required debt repayments of approximately, $75 million and proceeds from A-note sales of approximately $125 million.

As announced in our press release, our board declared a $0.44 dividend for the fourth quarter of 2012, which will be paid on January 15, 2013 to shareholders of record on December 31st of 2012.

This equals the dividend for the past six quarters, and represents a 7.6% annualized dividend yield on yesterday's closing price of $23.12. I would like to now turn the call over to Barry for his comments.

Thanks, Stew. I guess it's a good morning everyone. I guess it'sthe day after, and those of you who were looking for change, my condolences. I guess -- I think, myself, I am thinking about the implications on the credit markets of the election, and the rally in the treasury this morning, and its implications for growth for the country, because itis going to affect credit spreads and interest rates over the near term and maybe over the whole term of the next four years.

In the aftermath of the day after, I would say that the Company had a pretty good quarter; I mean a very solid quarter. We've started out in the business saying we would be predictable, consistent and transparent, and we remain predictable, consistent and transparent, which ought not to surprise our shareholder base and quote me on how things are going.

You saw a huge rally in the credit markets on the heels of Bernacki's reelection campaign for Obama, which was QE3, and rise in the equity markets, then a the rally across the whole credit complex, and RMBS and CMBS.

And, obviously, our book should have increased in value consistent with that. We don't really market like that, so what we market in our fair market value is really the public bonds we own, or that which actively trade, and we -- and hit near par execution, or hit par this quarter after the credit rally.

I think on a stand-alone basis STWD is now one of the largest real estate lenders in the nation. I look at the loan originations of banks and companies like CapSource that are out there, and some investments we have in the banking sector. Originating $500 million to $600 million a quarter makes you a material lender in today's real estate market.

And I think, what we've been able to do, consistently, is utilize all the skills of our team, that's the team that's dedicated to the REIT, as well as the 40-odd acquisition executives of Starwood Capital Group.

In fact, the Times Square loan was originated by the a Starwood Capital executive who was digging through the markets of New York and uncovered that opportunity for us.

The markets are extremely competitive, and we have been doing this over three years, now. They go in cycles of being very tight, people back up, get nervous, bank management pull back, but this rally, which has been sustained, has a really required us to sharpen our pencils on how tight the seniors are going to get priced.

Today, with CMBS spread more or less collapsing, they still remain wide of where they werepre-crisis, and significantly wide of the similar rated corporate credit.

My gut is real estate credit, given there's no yield in the [world] will continue to be priced, contracts, spreads will continue to narrow, and pricing will remain competitive, which is fine so long as we can originate the whole loan, as Stew talked about, because buying mezzanines prepackaged from the street is fine.

But they are not going to achieve the double-digit yields we've grown accustomed to, especially as less sophisticated investors wander into these offerings on the street and buy very thin B-notes, or where I used to call two notes, meaning that they go from 72% to 78% of a capitol stack at sub 10%. Whereas if you look at the note we'll cut out of the Times Square deal, it will be from 40% to 70%, plus of the capitol stack. Some of the investments we made in the quarter on two office buildings, both done with Blackstone, actually, will be fairly wide B-notes and have a totally different risk profile than buying a very thin B-note at a thin meaning 72% to 73%, 78% to 79% of the capitol stock at a lower yield. The benefit and the most important thing is for us to be big, and be able to write big notes.

And I'd say, at the moment, that's the biggest hole in the market is the size of the loans. There are not that many lenders willing to do single originations on large, large deals. They want to spread the risk. I'm going tocome to why that is, structurally, in one second.

I want to comment one quickly on Europe opening up. Europe is beginning to loosen. Banks are beginning to try to move around their balance sheets.

You see it more and more. What we are finding is our equity desk is bidding on deals, and losing, and around turning around and offering finance (inaudible) for the buyers.

That opportunity is so big that we are thinking of raising a Europe only fund, because -- and that will co-invests with the REIT, for a number of reasons.

One is the scale of what has to happen in Europe, but, more importantly, the hedging issues. We are --historically hedged all currency and coupon, principal and maturity exposure through -- and swapped it back into dollars. We don't want to take currency risk, and the REIT accrued enormous volatility, and confuse us and you.

But that puts us at a competitive disadvantage to local lenders and people lending in the local currency. It can be as much as 150 basis points off an IRR, depending upon the duration of the hedge. Both forthe pound and Euro, it isn't a terrible thing to have a local currency product.

Having said that, we are going to continue in the meantime, which isn't available at the moment, to look at these investments as we did in the quarter, making a mezzanine loan in the Starman portfolio.

We will continue to look at them, but we are concerned, also, that the scale of those investments, and how it changes the risk profile of what really, traditionally, has been a mostly domestic REIT.

I also think we have, based on the last quarter and this quarter and this quarter to date, the battle between the quality assets we are lending and the spread.

At the moment, what I've told Boyd and the team is that we prefer quality to spread. We don't want toxic assets at 14s. We want good assets at 10s or 11s if we can get them. And we'll sacrifice that for quality and spread.

That goes to our goal of being predictable, consistent, offering compelling risk adjusted yield, and compelling dividend value to our shareholder base, which is extraordinary, actually. I will get to the dividend, shortly, too. You actually have seen, I'd say, a capitulation of buyers. Buyers are buying.

There is no yield anywhere. This is the last complex where yields exist, whether it's consumer loans, or corporate credit, even sovereign debt, which I'd argue is the worst credit in our debt.

You have seen it collapse and buyers capitulate and buy down, whether it's high yield or any security to levels we have never seen before to get a piece of -- there's an article in the Journal this morning about corporate credit versus sovereigns for Exxon and the U.S. government.

I also think we have honed one skill, which is we can do big. Wecan do it fast. And we can do it unconventional structure, all of which is sustainable competitive advantages for us, if we have the balance sheet. I will make a comment on our equity raise.

I think we raised a little bit more money than we probably needed at the moment, and with our facility with the unsecured line, about $250 million. It does give us flexibility, but we are circling several $400 million plus first mortgage loans.

And there's no way to do these big deals and run an excess return if we don't have the capacity. One of the reasons we get these investments is, particularly now, is speed and certainty.

I got an inbound call yesterday from a large household name real estate firm that was to throw out a [consortium] of four lenders for $400 million deal, actually a $500 million deal, and would like to -- would widen the spread, considerably, if they could deal with one lender, which is us.

We can accommodate their needs and our needs use balance sheet guarantees and other things and achieve the returns we want. That's kind of vintage us.

I'm going to spend another minute on this Times Square investment since it was so large, and talk about -- again, it was originated and split between Starwood REIT and Starwood Opportunity Funds.

That is only the third deal, I believe, since we were born that we've split -- had to split between the Opportunity Funds and the REIT. The metric for splitting a transaction is that the IRR -- expected IRR is greater than 14%. In this case, I can say it would be materially greater than 14%.

There is a substantial equity kicker included in the first mortgage, which we haven't valued, but if I had to go over/under, I would certainly buy it for a considerable amount of money, as the equity players in the transaction did.

One of these people we competed against in the origination and for the deal was Renato. Having been life-long friends now with Mike Fascitelli and Steve Ross, we did sell down 25% of the position, both the senior and the mezz to Renato, post closing.

Because there was -- they have, obviously, enormous knowledge of the New York City market, and sort of insurance policy, and made us feel good even though it is, obviously, diluted because we have cash on our balance sheet that could have earned the 11% plus coupon on the first mortgage. Structurally, the markets have changed in the United States.

I was preparing some comments for a conference the other day, and it struck me that 73% of all the banking assets in the United States are now at six banks -- so, too big to fail. We have them. We've created the entire banking system is stuck in six banks. 73% of all banking assets are six banks. That goes to pricing and collusion among the banks.

In France, you have four banks that basically dominate the market. Actually, the lowest common denominator sets pricing on a syndicate. And to the extent the banks, actually, don't want to take the whole risk, themselves, and don't compete with each other, we can step in and layer in the -- probably a wider coupon with better a execution for a borrower.

Like I said yesterday, I got my first call to that effect. You also don't see a lot of foreign banks. You know what's happening in the banking market is that the banks are pulling back to their sovereign borders.

You don't see French banks here, anymore. You occasionally see the Canadian banks, even though I think they will come back.

I am not aware of why they wouldn't be here. I canname one German bank in the market. Then you will see a Chinese bank, occasionally, but they will do only super-safe, low leveraged deals. The banking system has become, for large loans, very concentrated.

You can name the six guys in the -- and one of them is not very active in real estate at the moment to speak of. You have five players, really. And I see four players because one of the -- there are twoinvestment banks included in that.

There are number five and six -- Morgan Stanley and Goldman Sachs, in reverse order by the way. And one is more active than the other making balance sheet loans this is the market, today.

The life companies are also here, and you see some new players like AIG entering the market. What is driving the credit complex and pricing in CMBS -- it is the CMBS market, because it has opened up.

There isn't as much product in the market, but buyers are ravaged for yield. The other probably interesting thing about the banking system, today is their lack of desire to hold inventory.

They continue to try to price and pace their acquisitions or lending on deals. They have not a large gap between the securitization of a loan and the -- origination of the loan and the securitization. That alsocreates opportunities for us, because wedon't mind holding onto the loan.

And right now, we are holding on to, for example, that first mortgage on Times Square, which we will sell down at some point. But right now, the coupon is fine and better than we can earn on cash. So we are going to hold on to that.

We are not quite as efficient as I would like to be as a box producing maximum earnings. But we have a very efficient player in the capital market, overall.

I would also point out Stews comment about LTVs, loan-to-values [in the portfolio] that are heading lower. 63% is the current LTV of the portfolio funded average.

That is going to go even lower. If I am right, and right now an equity player we see the gap between cap rates, and the cost of financing is stupid wide.

Probably wide enough that you can earn high single-digit, low double-digit yields on cash deployed in the equity side of a transaction. That probably is going to come in too. I don't see the credit complex. I don't see rates backing up

I think we are in for very slow growth over the next year. I think it will be lower than this year [GBT] growth. I think rates probably do stay down. And if they stay down I just see more of the same. I see cap rates drifting down.

Also not -- the credit -- the real estate markets are probably on margin okay. They are not [rent] on racing away. They are not -- markets are emptying out. There is no demand destruction. And tenants are jockeying for space and corporates are refinancing their balance sheets.

In general, I think the credit quality of your tenants is improving, and net demand for space is pretty consistent -- not great but not bad. I do think, think given there is no yield in the world, you might see continued compression in cap rates across many income asset groups going forward. That will help our LTV going forward, and make our book even better, which goes to book value.

It was the first time since the IPO, I believe, that our book value is now higher than our original IPO price, which is $20 per share. Whereat, like, $20.31 or something like that after the offering. That is great. We can always liquidate the book. If I go over or under I will tell you it's over.

I don't think we've been aggressive on our [marks]. I'm always surprised now when I see what people are lending at, and where people are buying notes. Two other things that give us some confidence in the coming year. One is our rollover schedule.

The scheduled debt maturities, and what management expects to be repaid over the next, let's say, 14 months is quite reasonable. Probably less than we faced the last 12 months, and that is good. There is a couple situations in there that could be open to prepayment. We don't think they will be repaid, so we think that is good.

That allows us to deploy what capital we have to additional transactions not just rolling over capital that's coming due. So I'm going to touch on the dividend then I'll wrap it up. We mentioned in the earnings release that the dividend was [accreted] $0.44. We also mentioned, in the next sentence, that we are going to pay a special dividend.

We said earnings will be between $1.85 and $1.95. I'd expect that we would announce this dividend in December so that it would make -- you would have it before the record date, and certainly before if pay date of January 15th . We are discussing with the board. We want to see a few things, how they work out going forward.

But we believe we should reward our shareholders for the scale of the company and for your support. So we are going to pay an additional dividend, and as we mentioned, that is consistent with what we told you, I think, two quarters ago, when we said we would look at the dividend, now, on an annual basis, and true it up at the end of the year.

With that, I think I have said my notes, and we are going to take questions from me or Boyd or Stew or Mr. Berry or even Andrew. Actually (inaudible) for us. I hope you're smiling while you say that. So go ahead. We'll take questions.

Thank you, sir. (Operator Instructions). Our first question comes from Gabe Poggi with FBR.

Good morning, guys. Thanks for taking the time for the question. Barry, you hit most of my questions. At just kind of a20,000-foot level, you are seeing some -- I don't want to say competitors, but other kind of structured finance entities do securitization and I know you talked about it in the past. What are your thoughts there are, considering we are going to be, arguably, in a tighter credit spread environment, which is good for the liability side of the securitization. How you guys are thinking about that going forward would be helpful. Thank you.

Thanks, Gabe, and good morning. I am glad you mention that, becauseI challenge Boyd with that comment like every two weeks that we should be packaging our seniors and selling them doing the securitization ourselves.

That was the evolution of our [CAPREIT] crisis. And we -- obviously, it's a question of how we're going to get a secure execution. But -- and we have to aggregate enough facility -- but it'sinteresting that we are working on renegotiating some of our credit facilities.

Because the largest one we have is the original credit facility from August of 2009. It's at a credit spread that was written in August of 2009. Obviously, there is no way on earth that is the right credit spread today for us.

Now, to get -- it is an unusual line. It has duration and other nice features to it, which is very uncommon. Almost a five year facility, but we are doing that. The team is working on having discussions with the lender.

I would love to see us do the securitization of our seniors, and do our own trust, if you will. We are certainly large enough. On the other hand, if we can get better execution just selling senior off to a life company then that's a nice, simple way to go.

In a way we do need to continue to drive down the cost of our financing, the seniors, the As, and that is obviously now an avenue that is open to us, which was not nine months ago. We are watching.

A lot of the deals getting done are quick pay deals. They are NPLs with fast pay. The [effective] duration of the paper is short, less than18 months or two years max, something like 4% coupons.

The effective leverage of that is not what we need. We need a multi-year, three to five year facility, and we need to not prepay, because we want to keep our dividend -- have the cash pay our dividend. We keep talking about other businesses like the triple net lease business.

As we've combed through every portfolio, I think, for sale including public companies. The challengegoes to our conservative nature, which is that many of these triple lease portfolios have self amortizing debt overthe life, the average life, or even the stated life of the leases, so that you have GAAP income but you have no cash.

All of your cash is going to pay off the debt, and pay the coupon, and then realizing the actual amounts of loans against those (inaudible) facilities.

While you have GAAP earnings you don't have cash to pay the dividend. We just don't want to do that. Even though there'sa theory that the building will be worth X when it matures, the lease rolled over and seven, 10, 15 years. Why bother?

Why set ourselves up to pay out cash today, and then pray we have cash tomorrow? We are -- one of the other things where, as we grow, we are going to work on real hard is smoothing out our rollover schedule and stated maturity of our debt. Weare looking at longer some dated things, today, including ground leases and other situations where we can raise the leverage level, but own them for long periods of time and have a very attractive, we think, risk-adjusted yield on our capital. So that was a little more than you asked for.

That is all helpful color. Thanks so much, and another good quarter.

Thanks, Gabe.

(Operator Instructions). Our next question comes from Joshua Barber from Stifel Nicolaus.

Hi. Thanks. Good morning. Most of my questions have been answered. Just one quick one, Barry. You made the comments about rates continuing to stay low, and what that eventually does to cap rates and debt cost.

Can you talk about how you are underwriting exit cap rates, especially, as it comes to longer term loans? You talked about getting some extra security. But where you -- how muchabove market are you guys putting exit cap rates for your longer duration assets, today?

It could be asset by asset, and depends on the duration of the transaction. I think we are not assuming cap rates compressed in our underwriting. In many cases, weare probably widening them out 50 basis points.

It is really one of the things we do, and it is interesting, I do think what is helping us is our equity background blended with the Boyd and team's debt backgrounds and structure and credit analysis. We are in these markets all of the time. We -- the equity shop has invested $2.5 billion this year, total cost

We, in 18 transactions, we kind of know what is going on in these markets all of the time,. And an office building in New York will take the Times Square transaction, retail, l which is what that property will be and the billboard, which will derive significant income.

And there is a hotel pack but we will leave that out. The retail component, you know, could trade probably sub 5 cap today, probably around a 4. You won't actually know where the cap rate will be until you see the nature of the leases, and the how duration steps, other situations, other nuances in the lease terms. But you have seen comparable trades at 4 and sub 4.

You are seeing so much money from offshore investors that look at a 10 year treasury was [1.7] yesterday, but probably 155 today, or something like thatThey are looking at and equity at 3.5, 4 yield as compelling because they own a lot of treasury.

In that case, I think our residual cap rate, you know, and I am going to make this up, at 5 cap create a $1 billion valuation. Our loan is 475.

We are guessing what the income would be. It is an educated, but -- so we use a 5 cap, not 4 cap. The borrower thinks is going to sell it at 4 or 4.25. Apartments in New York trading at 4.25. I think we areall sort of not used to cap rates. They were here before, by the way.

They were here in 2007, when interest rates were significantly higher, driven by the financing market's ability to lend against no cash flow. Now they are being driven by the fact that actually, at 4.5 they can achieve (inaudible) leverage, which is shocking. That supports the cap rates at these levels.

If they want to borrow. Most of these guys don't really want to borrow. If they borrow, they borrow 30%, and they borrow 200 over with no floor. And they borrow at interest only for five years. We are financing a portfolio of office buildings we are buying, and I think the syndicate of the bank to a CMVF is 376 for five years, interest only -- 10 year loan, five years interest only and five years floating.

Five years -- I guess is a 15 to 30 year [amo] on the back five years. I don't remember. But the point -- the coupon is 378. There's nothing for us to do in that transaction.

That happens to be a 100%leased office buildings with good credit. We have to pick our spots. The good news is, the markets are trillions, not tens of millions or billions.

In trillions we can find things to do. We have to be patient and, fortunately, we have been able to manage our cash well. And we are fascinated by the conundrum of having cash so we can execute quickly, and keeping originators fired up to actually do there -- finance their loans.

And telling borrowers we can do a deal in three weeks if we have to, versus the drag on the earnings of REIT of having all that cash and the capacity. You know, we did sell a few bonds this quarter.

And we are going to take advantage of rallies and the credit markets to recycle cash. If the remaining yield on our equity is unattractive, meaning it's probably less than 8%, we will take it off if we have another use for the cash. 8% is pretty good if you are sitting on 10 basis points cash, but it's not good if you're going to need to play at 11% or 12%.

I missed that before. The gains on sales in this quarter were due to RMBS sales.

No, there was a sale of mortgage note on one of our hotel portfolio papers. There was a little RMBS.

Okay. Thank you. Can you guys also talk about just the transitional market, broadly? Are you seeing a lot more players coming into that? Are you seeing a lot more demand for just may be light transitional assets that are starting to get finance and a debt that may not have been available 12 -- 18 months ago, but now some of those projects are starting to come back in?

At this point, there definitely are more players in that space, but there are also more guys -- there's more activity in terms of people buying assets. That market, those kinds of transactions play perfectly to our strength.

Those are these large, complex transactions that, you know, banks shy away from time to time. If you look at all of our activity over the last six months, and Barry and Stew both talked about this sort of one stop shop for large deals.

When they are transitional that really takes a lot of players off the playing field, and allows us to make outside returns on those kinds of transactions. Yes, there is more competition all of the time.

It's interesting. The transitional might mean looking at a deal. It may be 50% lease with six cap -- six yield, (inaudible) yield.

We haven'tdone that but we're -- you know that's -- in a strong market where you think stabilizes it to nine debt yield, and the building will trade at six cap. That is the right pricing we would make. You know, I think you are seeing that there are holes for us. They are big enough.

We have a big pipeline. We have a lot of deals in the pipeline, and it is pretty good stuff, with good credit support and very good attachment points. We look very carefully at what we are lending per foot, what we're lending per room.

What we're lending per foot if it's a residential project, or what were lending per foot if it's an office project or a retail (inaudible). We are doing -- I am pretty pleased we reviewed our portfolio, and we have almost no issues anywhere in the portfolio. In fact, I would say we have no issues in the portfolio, at all.

And the fact,as I mentioned in my comments, things are, on the whole, much better than we underwrote across-the-board, which isn't surprising, really. The interest rate environment continued to melt down so it is good. Weare pleased, and we're feeling good about things.

Josh, other than the election. We recently did a press release on a transaction just like, you know, Blackstone, you know, the largest real estate player in the world -- or in the United States, acquired 100 Montgomery in San Francisco, and we were able to make a 65 LTB loan.

And they accepted our pricing. It works for them because itwas a speedy deal, and it works for us because we, obviously, like to sponsor and we understood the real estate. I do want to say one thing. I forgot what it was, though. Let's go to another question if there is one, then we'll --

Thank you. That really sums up a lot of our feelings today. But thanks.

Yes. One more?

(Operator Instructions). We will take the final question from Jade Rahmani with KBW.

Good morning and thanks for taking the question. I was wondering if you could share your thoughts on the quarterly dividend, since the midpoint of your core EPS guidance is above the 4Q dividend. Do you think that the 4Q dividend is including any of the extraordinary dividend you still expect to pay in the fourth quarter?

Hi, Jade. I am not sure I understand your question. We are paying the $1.76, which is the $0.44, and we said we were going to paya one time special to true up the dividend.

Essentially, we are going to pay something above $1.76 and probablybelow 100% of our earnings. There is a -- we have a, basically, kind of an NOL, or we have -- we don't have to pay 100 cents on the dollar, because we overpaid early in our life.

We will continue, if earnings continue at this pace next year or, hopefully, grow or whatever happens, we are going to continue -- we're going to have a problem. We're going to have to increase the dividend.

We told you we were going to increase the dividend with a true up, right now, in the fourth quarter, annually. We haven't determined the exact number. When we do we will announce it to you, and the rest of our shareholder base at the same time.

I guess, the core question is typically with other mortgage REITs, dividends do reprice for an asset yield and investment spreads decline, as they have recently.

My core question is whether you view the dividend in that way as likely to fluctuate based on rates, or if you look at it as more of a promise and signaling tool to investors, more which would be similar to equity REITs or non-REITs.

I am not sure I totally get the question. I think wefeel like our dividend is solid. I am aware of the challenges that our residential mortgage REITs are facing as the yield curves flatten.

And they are [caused] funds may not be falling as fast as the coupons they are reinvesting at. I think we are a different beast. We, obviously, don't have the leverage on our books that they do. In some cases six, seven to one. So we have pretty good visibility, as I mentioned.

What disrupts our dividend -- our ability to pay our dividend, our fast, large repayment. That is why I made the comment about our rollover schedule -- [fade] rollover schedule. It would be difficult if one credit with $300 million of equity, which I don't think we have, but if we had one, refinanced unexpectedly in a quarter and we were repaid.

But I don't think it wouldn't kill us. We'd just have to reinvest the capital and roll through that. It might -- we are feelingcomfortable with our dividend at the moment. If we actually feel like we cannot hit the kinds of spreads, overall, that we have earned in the past, you will hear us comment on it in a future earnings call.

I think we are -- as I mentioned, we have been through the cycle, already, I think three times as the credit markets went in and out, and we got nervous, and it loosened up, and there was a crisis.

You have a little fiscal cliff crisis, we'll put out $1 billion in a week. I mean, if there's a fiscal crisis and a bank stack up and everyone getsnervous and spreads back up, we will be back in business lending and a lot of money, quickly, to guys who have got to close.

I would expect the flurry of activity from sellers who want to get deals closed by the end of the year, including ourselves. I was going to mention one other thing about synergy between Star Capital and Star Property Trust.

Also for this conference, weadded up the amount of borrowing Star Capital has done away from the REIT, which is in $5 billion of investments in three years. It is $10.2 billion of financing and refinancing. We have a good view of what the pricing should be.

Oftentimes, when Boyd and Stew and Chris Tokarski, our Chief Credit Officer, or Wanda Hahn, our Origination Officer want to price a deal, we'll send it over the fence to our internal finance team at Star Capital Group and say, "What do you think?" How does that look as pricing?Is that market?

That is really, unusually, powerful. Most of the public competitors don't do this. They don't have the capacity to do that. We are a big borrower. We are top five borrowers of many of these commercial banks now. We get -- we kind of know where the pricing is, and we get to check it all of the time. So I think that is really, as I see what is going on, I think that is exceedingly valuable.

To be in the equity markets as an equity player in the debt markets financing the equity deals, and to be in the debt market as a lender, to have the cross pollination and deal flow is really good. I am pretty happy with how we are doing, and I hope you are, too.

Can I ask a final question?

You could.

I just wanted to ask the Starwood Capitol acquisition of LNR Property, does this present any potential sourcing or other financing opportunities for Star Property Trust? With respect to the -

Let's not comment on that, right now. I mean, I think you could assume that if the transaction goes forward, the REIT would benefit in some material manner. So -- but let's leave it at that, because we'll talk about it when we can talk about it.

Okay.

Thank you all. Thanks everyone have a great day, and good luck. Bye.

And that concludes today's teleconference. Thank you for your participation.