Starwood Property Trust Inc (STWD) 2013 Q3 法說會逐字稿

Good day, and welcome to the Starwood Property Trust third quarter 2013 earnings conference call.

(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 Sossen, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, operator. Good morning, everyone and welcome to Starwood Property Trust's earnings call. This morning we released our financial results for the quarter ended September 30, 2013. We filed our Form 10-Q with the Securities and Exchange Commission. In addition, we posted our supplement to our website. This document is available on 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 statements are based on management's current expectations and beliefs, and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the Company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The Company undertakes no duty to update any forward-looking statements that may be made 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 financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through 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; Boyd Fellows, the Company's President; and Cory Olson, the President of LNR.

With that, I'm 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 results for the third quarter of 2013 and the fourth quarter to date, including discussions of each of our three basic business segments -- our traditional lending business, LNR as a stand-alone unit, and the single-family residential property business, all of which we began providing segment-level financial results for last quarter. Following my comments, Barry will discuss current market conditions, the state of our business, and the opportunities we see looking forward for our newly expanded platform.

For the third quarter of 2013, we reported core earnings of $104.4 million, or $0.61 per fully diluted share. Both of these figures are substantially above our results for the prior quarter, where we reported core earnings of $86.1 million or $0.52 per fully diluted share, before one-time transaction and restructuring costs associated with the LNR acquisition.

The primary drivers behind this earnings growth is the deployment of over $1.4 billion in new loan investments during the past two quarters, as well as very strong results for LNR. I should note our third quarter results also benefited from the first full quarter of operations for LNR, which closed on April 19th, 2013.

GAAP net income for the third quarter totaled $89.7 million, or $0.52 per fully diluted share. These figures also compare very favorably with GAAP net income for the second quarter, which, exclusive of transaction costs associated with the LNR acquisition, stood at $79.4 million, or $0.48 per fully diluted share.

As of [June 30], 2013, GAAP book value per diluted share was $21.78, an increase of 2.7% over the level of $21.21 we reported as of June 30. Fair value per share stood $22.09, also above the level of $21.77 per diluted share reported at the end of the second quarter. Both increases are reflective of the $690 million capital raise we completed in mid-September.

It's also important to note that our fair value calculation does not take into account estimated appreciated in the value of our single-family portfolio, which, based upon third party valuations, is between 10% and 20%.

Now let me continue to outline the third quarter results for each of our three major business segments. Following on the heels of an extremely active second quarter where the lending division closed 10 transactions with total commitments of $838 million, this division closed an addition 12 transactions with total commitments of $1.1 billion in the third quarter. When combined with new originations to date for the fourth quarter of $877 million, new loan origination totaled $2.3 billion during the past 150 days, a pace nearly twice what we achieved over the same period last year.

Included in this quarter's lending activity was $105 million loan secured by an office property in Manhattan that represents our first material balance sheet origination both sourced and financed through the LNR platform. The loan is a refinancing of a loan that was specially serviced by LNR, and we also used the LNR conduit program as our securitization agent in selling the senior A note component of the loan as part of their normal conduit loan sales process.

The securitization sale of the senior $74 million A note component of the loan leaves us with a $31 million 10-year B note secured by a great piece of New York real estate, with loan-to-value attachment points of 53% to 76.5%, and an estimated yield to maturity of 10.75%.

Some of the impressive year-over-year increase in lending activity is reflective of continued improvements in the commercial real estate market, but to a greater degree, it's a testimony to the brand and presence we've built in the real estate debt capital markets, both here, and now in Europe. In fact, we've deployed over $5.1 billion since the beginning of 2013, including the recycling of $1.1 billion in capital associated with assets that have now run their full course.

We used to say our goal was to see every lending opportunity in the United States relevant to us and cherry pick the best loans. We now think we're well on our way to achieving that goal.

LNR continued its strong results during the third quarter. The LNR segment contributed GAAP and core net income of $44.5 million and $46.5 million, respectively, both inclusive of allocated shared costs of over $7 million. This reflects an increase of 29% and 30%, respectively, over the results of the second quarter.

The improved performance of this segment is principally due to, one, the inclusion of LNR as a segment in our results for the full quarter, as opposed to only 72 days in the second quarter, which began on the acquisition date of April 19th; second, higher net profits from their conduit business; and third, we had higher gains on advantageous sales of CMBS from LNR's CMBS book, which stood at over $400 million at quarter's end.

I'd like to note that LNR has continued to perform better than our pre-acquisition underwriting. We are particularly pleased with the performances of the special servicer and the conduit businesses. Servicing revenues were strong for the quarter, and, although you'll see in the financial statements a decline in the value of the servicing intangible for the quarter of $3.9 million, it's important to note that this decline is below what we expected, principally due to the attainment of new servicing contracts during the quarter, and an increase above expectations of the balance of loans in special servicing.

Also, outperforming our underwriting is the conduit business, whose profits and volumes are significantly higher than anticipated, with three securitizations completed in the second quarter, and another three during the third quarter, resulting in overall pretax profits in the taxable REIT subsidiary we operate this business in of more than $20 million in the quarter.

Lastly, I'd like to mention we continue to be pleased with the integration of our legacy Starwood Property Trust operations with our counterparts at LNR. We hope to continue to realize synergies throughout the organization. At this point, we're on schedule to complete the consolidation of all the Company's accounting and asset management operations in the LNR offices in Miami by January 1st.

As I'm sure you are all now aware, we announced last week our intention to spin off our single-family residential property and non-performing loan portfolios this coming February. Barry will be discussing the spinoff in greater detail in his remarks later in today's call, but I'd like to provide some detail on the performance of this segment for the third quarter.

Since the beginning of the third quarter, the number of properties owned has grown from 2,778 to 4,269 units, and our single-family non-performing loan portfolio stood at 1,549 units as of 9-30. Our total portfolio of property and loans now comprises over 5,800 units, with an aggregate investment basis, including capital expenditures and net of depreciation, of approximately $750 million.

While the business segment continued to operate below breakeven on a GAAP basis, the operating shortfall narrowed this quarter, and we've made material progress in leasing homes that are ready to rent. We also anticipate the financial performance for this segment will continue to improve as the occupancy rate of the portfolio increases and we realize gains associated with the sale of non-target assets acquired as part of pool purchases.

Let me finish my remarks with a discussion of our current investment capacity, our second quarter dividend, and provide an update to our 2013 earnings guidance.

As of Tuesday, November 5th, we had $268 million of available cash, $93 million of financing capacity approved but undrawn, and $138 million of net equity invested in liquid residential mortgage-backed securities. With this, we have the capacity to acquire an additional $400 million to $750 million in new investments.

Our Board has declared a $0.46 dividend for the fourth quarter of 2013, which will be paid on January 15th, 2014, to shareholders of record on December 31st, 2013. This represents a 7.06% annualized dividend yield on yesterday's closing share price of $26.06.

At this time, we are revising upward the lower end of our core earnings guidance range for the full year 2013 to $1.95 from $1.90 per fully diluted share. We've maintained the upper end of the range at $2.10 per diluted share. Excluding the LNR acquisition and restructuring costs mentioned earlier, this translates to a comparable range of $2.09 to $2.24 per diluted share.

(coughs and clears throat) Excuse me. Now, I'm done. I think I'll turn it over to you.

(laughter)

Before Stew passes away.

Exactly.

Good morning, everyone, it's Barry, here with Boyd and Andrew Sossen. I would just make -- that last comment that Stew made, it's not before the acquisition of LNR -- it's before the expenses associated, the one-time expenses associated with the acquisition and restructuring costs of roughly $0.14 per share.

So, actually, myself, I was quite astonished when I saw the stat that we deployed $5.1 billion of capital this year, including rolling over $1.1 billion of equity that was referred in the form of loan maturities or loan repayments.

So, we've had a pretty busy year, and I think it's been a great effort by a total of people this quarter. I'm particularly pleased, as Stew mentioned, with the work of LNR integrating into the San Francisco office of STWD, and the SCG guys across the world who have really stepped up the originations for the platform, particularly in Europe. I'll talk more about that in a second.

But from your perspective, and also mine, as a big shareholder, I think the LTV remains rock solid, below 65%, and we haven't had to climb much higher in the LTVs, though the markets remain competitive. I think we used our great financial strength and ability to source large loans and then chop them up later to work with our partners better, now many across the board, whether it's a life company or a commercial bank.

We've been able to maintain our disciplined underwriting standards. And we're very tough. I mean, we just killed a -- had a brouhaha here over a few hundred million dollar loan that the equity guys and the debt guys fought to the finish line, and, ultimately, when we have that much of a disagreement, we don't do it. So, probably a great deal, and probably see it in one of our competitors' books, but we couldn't get consensus, and it wasn't about the LTV, actually, it was about the floor plans of the real estate and whether they would work long-term or not, and what kind of credit tenants they would attract. It was actually a retail asset.

So, our book, not only is it rock solid from the LTV perspective, but we are very diversified, by property type, by region. If we have one focus regionally, it'd be New York City, although even in that city we're diversified by product type, and I think if you're gong to be long a market, be long New York City. Given the capital flows in the world today, it remains attractive to nearly every sovereign wealth fund in the world. You continue to see people like the Chinese buy the JPMorgan headquarters building that just happened a couple of weeks ago, which our equity group had bid on and got smoked.

The other thing I think is important from an entity level is the number of business lines that we've entered. And we started, really, as a single business, and that is our core business, which is large loan originations. It was purchasing. These days it's mostly originations.

We've added to that some of the businesses of LNR that have nothing to do with the servicing book, things like the conduit business, run by a very good team. They'll turn their book maybe 10 times this year. It's like a manufacturing business. They are very good at what they do.

The average loan balance is less than $20 million, and they participate in securitization with multiple banks who seek their product because of the quality of their underwriting, and also the knowledge of the group in terms of -- the Street is very comfortable with their origination. They've been doing this for a long time.

That business has turned out to be more profitable than we thought, and it's run very well by its leadership and the team in Florida. We also have been very active, probably top three in the [VP] (inaudible) business, and that's one of the reasons the servicer has not declined in value, as Stew said, and it recently won a couple of awards there. We use the 218 LNR professionals to underwrite these transactions, and, often, we're contributing loans to those securitizations through those conduits.

So, it's a very synergistic business, and it deploys capital. It will never deploy our entire book, but it's an interesting way, and we also get the servicing rights on the strip. So, it's good all the way across the board, and we continue to challenge the team in Florida on their [VPs]. Boyd and company go down and they scream at each other and it's a contest of ideas, and if we like it, we do it. So, it's working really well.

As far as the servicing business, I think it's been very successful. From our perspective, the book that we manage has been deteriorating much more slowly than we anticipated, which is also good, and we've both proactively and defensively traded paper to secure our rights and make sure that they didn't go away.

But we also have the CMBS trading business, and, as Stew mentioned, it's a $400 million book that we acquired when we bought LNR. Quite different than the other servicers is that LNR had this gigantic book. You saw a couple million bucks of gains in the quarter from the CMBS book. That is them trading that book. And that'll be a recurring, non-recurring, thing. It'll be -- as the CMBS come down, they'll be flipping out, trading into other positions. So, that is another business for us.

Recently, we've also looked at the CDO, CLO equity business, and we'll probably see a trade in that area, also in the real estate arena, which is something new for us that we're doing. We've always been, since the day we were formed, in the RMBS business, which is a business we've used to manage our cash and continue to use to manage our cash, I'd say, quite successfully. And a business we have not abandoned our hopes to be in, and we have something teed up in that area, will be the net lease business. And we looked at a deal like (inaudible), but that's a very -- that's really a band, and, at the pricing paid, you have a duration risk.

So, we've opted not to do that kind of net lease at those kinds of yields, figuring that over our next five years interest rates will surely rise. So, instead, we're looking at other ways to deploy capital in that business, and I should also point out, and it said in the press release, but you can't say it enough, almost all of our book is floating rate. And we actually are originating all floating rate loans, so, if, in fact, if you believe our LTVs, which we certainly do, and rates rise, we are a net beneficiary of that, a significant beneficiary of that, and every time the market sees rates going up, the mortgage REITs all trade down.

I try to kick and scream and say the commercial REITs are not the residential REITs. And, hopefully, at some point the shareholders or some new shareholders will realize that, that, actually our dividend yields and our earnings will go up if rates go up.

The other really notable point for us going forward is Europe. Europe has been slow developing, but Europe seems to be at a tipping point, and in terms of our ability to write loans and also find partners to take the A notes, because before you couldn't find anybody in Europe to take the A note, and now, again, the safe piece is being bid up by local banks in each market.

There are rumors or statements that Europe has $1.7 trillion of loans in trouble, so the pipeline there should last most of our respective lifetimes, and I think with the team that we've built there, we have almost, I think, 30 people now in the London office, and in Paris, and we've hired, recently made some great hires in the debt business. We have a real head start on many other competitors that are coming into the market.

And, reflective of those inroads are loans like the Heron Tower investment, which took my involvement and Jeff Dishner, who runs acquisitions for SCG in Europe, and relationships we had with the borrowers, which were very net worth in the US and two sovereign wealth funds, and it look like nine months to get this deal to sit still, but when we ultimately closed it, it's probably the highest, if not the highest quality -- certainly one of the most high -- highest quality buildings in central London, and we think we, partnering with a money center bank, created a tremendous piece of paper.

I'd say, when you're getting double-digit yields out of mezzanines like the 10.75 coupon in the mezz that we got in New York City, or the -- this loan we did in Heron Tower in the UK, [we got in CVD] London, that's 2X what you're getting as an equity investor. I mean, you're going to buy these buildings at 5%. Rents would have to double before you'd get a 10% yield. We're getting 10% out of the box in the mezz. I would say that's just incredibly compelling when you're at 65% LTV.

So, I really like what we're doing right now. I really like the way the teams are working together. The cross-pollination of ideas and underwriting talents from LNR, from SCG, from the Starwood dedicated executives, is really exciting and when we bid a deal at SCG and lose, we turn around and offer to finance it. We're actually competing right now on something we just sold, and we're begging the borrower to chose us to refinance this portfolio. And we're all over them. We're leaning on them, traffic every day.

And we haven't had to climb too high in the LTV. What we'd rather do, as we said, safe, secure loans that keep us -- let us sleep at night.

I also think the banks, now that we're in our almost fourth year of operation. We started late '09. Is that our fourth year, third year, something like that. The banks really come to rely on us. They know they'll get a bid and we'll close, and we won't re-trade. So, I think, also, our reputation is growing, and that's how you can deploy $5.1 billion in nine months.

If we were a bank, I bet we'd be in the top 20 banks in the United States in terms of loan originations. We actually started with capital up to bank investments, and we dwarf them. They originate 800, we originate billions. And they're big banks based in California at this point with billions in deposits.

So, we are really cooking well. My job, also, I think, right now, is to manage our balance sheet and manage the flow of capital. We have, as Boyd will talk about in a second, a pretty robust pipeline, and how do we manage our sources of funds to do so, and knowing there'll be repayments, maximizing the shareholder price, at the same time having the capital to continue to take advantage of what we think are asymmetric investments, more upside than downside, and, hopefully, will last a long time.

So, we're looking whether we should do our converts or our term loans or equity, or some other form of derivative, or whether we should just sell down interest in some of these transactions, which is something we've got some interest from, from capital partners that we might sell down a 50% interest in the loan just to diversify the book further, and allow us not to have to come back to the equity markets.

I want to say a word about our single-family business. We had great results this quarter, but, once again, we had a drag of, maybe, I think, $0.04 or so in the earnings from the resi book, which I believe fundamentally we've created shareholder value, and I'm really pleased we did it, and it's a good thing we did LNR, because it would have really hurt our results.

So, one business was accretive, and the other business was dilutive, and the business has grown bigger faster than we would have thought. And it continues to grow at a pace of $40 million, $50 million a month of homes that we're buying, using, now, the Waypoint platform, which you all know we bought and we'll merge into, commensurate with the spinoff of the business coming soon.

We announced the spinoff. I think the record date was January 26th --

24th.

24th, and so we'll start trading, we think, in February. And we're going to do a 5 for 1 reverse stock split. We anticipate that being around $1 billion book. That is a 5 for 1 reverse stock split, it's about $5 a share, $1 billion book, 200 million shares. When we spin that book off, if you follow the math, let's say we're at $26, it's $5 in book value -- I'll talk about that in a second -- that means the stock is $21. If you take our current dividend, which we're going to keep at $1.84 on the $21 stock, it's like an 8.9 dividend yield, which will be the highest dividend Starwood's ever traded at, if it trades at that level.

So, with a better book, more diversification to the book, multiple sources of business, multiple lines of business, we're a real company now. We're not just a pile of mortgages. We're certainly not a pile of CMBSs.

And we think it's a great opportunity for us, and we really think the single-family business will begin to trade very well. We believe have about a 16% gain in that book. $1 billion, that's $160 million. That's almost $1 a share. In our fair market value for the quarter, we're not including anything for the increase in value of the single-family home and NPL book.

I'll also point out a really interesting quirk, which is, as we take the NPLs and churn them, and get gains and sales of loans, that does not count under GAAP as earnings. So, although there are many millions of dollars of gains from churning the NPLs, it's not in our GAAP earnings, and that's odd, but it is GAAP. So, don't ask me, I didn't write GAAP.

The other thing I'd point out about our single-family book, which is very important to me, at least, and should be to our shareholders, long term, is this Company is sort of unique. With 5,000-odd homes, we have this big footprint in Florida. Half the homes are in Florida, and then about 25% of the assets are in Texas, primarily in Houston and Dallas.

And that's not an accident, and we've bought buckets of homes and sold them in markets we didn't want to be in to achieve that critical mass, but we believe it'll make an interesting play in the single-family business in the Florida market. And you can tell, those are states without income taxes, and being as close as we are to New York City and their new mayor, we think we'll benefit from that in the Florida markets, going forward.

It will support home prices, which I don't expect to get out of whack. And we have an extraordinarily good view of Florida, because we bought a homebuilder years ago, and all their lots and their land. They were in Tampa, and we own, probably, I don't know, 8,000 lots in Florida today in many of these markets. So, we have a bird's-eye view of what's happening in that market, and in real estate, you don't -- you can do that. You buy, look, and then make initial investments because you have information that's real time on the market and the moves in the market.

And places like Orlando and Tampa are really turning fast. And I expect, as you look at the national homebuilding market, where aren't we in the single-family market? We are not in Vegas, a market that is, I think, third worst in the nation in creating jobs from the trough of the recovery, yet the housing market exploded, propelled almost completely by speculators, and professional capital that just bought the houses, and maybe they'll be right, long term, but we really focused on markets where there was long-term job creation, and we thought favorably long term that that would lead to home-price appreciation over five to 10 years.

So, we have a very different book than the other guys who are public. And we hope the market recognizes that, plus the fact that it's a portfolio by the time we finish should be worth 20% more than book. We'll see how that goes. That company is being spun off unlevered. And we'll have between a $400 million and $500 million credit facility in place at the time of the spin. It will have nearly $1 billion of capacity to buy homes, before it ever comes back to the market to raise capital again, and, in our current thinking, that won't be 'til some time in the second quarter of next year, or third quarter of next year.

So, you all and we all will see how well we're doing before we come visit you, if we ever raise money in that vehicle, or just we'll see what happens.

Anyway, we're exciting. We spent a lot of merging -- cutting a deal to merge with Waypoint and getting a best-in-class operator that has national scope, with a brand. We had bought the homes, basically using a handful of executives from SCG, from Starwood Capital Group, but we really think that now we have to manage them under a single manager. We had multiple partners. And so we consolidate the book behind the Waypoint team, which is a best in class, and we look forward to introducing them to you.

And with that, I thought I might turn the -- I just want to make sure I covered everything I wanted to cover, but I think I did. With that, I'm going to turn it over to Boyd. He's going to say a few comments about the marketplace in general.

Barry, like always, you covered virtually everything, but I'll just say a couple of quick things about our business. The pipeline's as robust as it's ever been, which is really, really amazing considering there are so many other market players who now have discovered mezzanine as a really attractive investment.

We've -- it's obvious that our scale is probably our single largest competitive advantage, and it allows us to win transactions consistently when we really like that. Recently, we have been successful in a number of development deals in New York City with world-class sponsors at very low LTVs, which is really, really impressive in terms of what it's been able to do for our investment portfolio.

Another quick thing worth mentioning is what we refer to as our smaller loan program -- so our average loan in our pipeline these days is north of $100 million -- but through the acquisition of LNR, we began to pursue smaller loans, down to $20 million, and that business is finally getting traction. We've got a handful of deals that are now in the pipeline or signed up. There's an executive down there, [Matt Jewell], who's running that program for us, and that's really coming on. It's another example of the synergies with LNR working.

And the last quick point I'd make is that, as Barry alluded to -- or not alluded, not specifically about earlier -- the percentage of our pipeline made up of transactions generated out of Europe by Jeff Dishner and [Pete] or [Denton's] groups is now the most material it's ever been as a percentage of our pipeline, as a whole. And those transactions consistently have very, very attractive risk-adjusted returns.

I'll -- right now, that portfolio is around 10% of our book, but we'd expect it to grow significantly, perhaps, given the pace of and the scale of those markets. The one other thing I'd say is, if you don't look at our supplement, you should. We said when we went public we'd be state of the art in disclosure, and, frankly, I'm astonished at how much we give you.

But there's -- it's really good, and you can really see the breadth of our operations and where we operate, the number of people in the various offices. It's quite something, and it's a non-deal road show all in itself. So, I encourage you to look at that disclosure statement. A lot of people work hard to put it together for you, and we believe in no surprises. So, my team to me, me to you, we'll do the best we can in market conditions.

But, in general, I'd have to say one other thing. With Yellen's ascension to the throne, we'll be lower, longer. And that's good for our business, too, and good for real estate, and good for values.

So, with that, let's take some questions.

Thank you. (Operator Instructions). And we first go to Ken Bruce with Bank of America Merrill Lynch.

Can you hear me?

Yes.

Hi, good morning. Thank you for the disclosure. Barry, you pointed that out, it's very interesting to see the improvement, or I should say, maybe, the slower reduction in the special servicer business. Is there any way that you can frame what that opportunity is, just broadly?

I realize it's a little bit of a hard-to-define market, but there was a lot of concern about what the melting ice cube might look like. Obviously, that's melting slower. But just kind of understanding what the potential is for new deals and things of that nature would be very helpful.

I think, first -- let me take the front of this, and Cory Olson (inaudible) from our office in Miami.

Here's the shape of things in the servicer, right? The servicer was a bimodal camel. It had the five-year maturities of the '07 deck, the '06-'07 maturities, which were '12 and '13, and then it had the 10-year paper that was originated in those same years.

Those mature in '16 and '17, and I've seen a little bit in '18. And we have a significant market share of those loans that are maturing, both as mezzanine servicer, and then as what we expect to get fees from when they fall apart in '16 and '17.

The truth is, nobody can really know the magnitude of the fees we will get in '17. What made LNR kind of unique among the three major servicers was that we could see near-term, pretty well. We couldn't see '16 and '17 so well, and if you think rates are higher, they're going to make a lot of money, because more's going to default than we probably think. If rates are lower, then probably defaults are what we think about today.

But, for example, if you have to refinance with a 5-year Treasury -- 10-year Treasury at 5 instead of 2.6, there's going to be more distress and more fees and more happiness here in that group. I'm hoping the rest of us are happy.

So, we can't -- I would say we're doing a pretty good job of managing the trust and being aggressive to defend our strips, our servicing strips, and one of the three largest services, if you look at page 15 in the deck, you'll see that the three largest servicers -- this is Morningstar's ratings -- are CW, LNR, and C-III, and between the three of us, we have 85% of the market. We're three guys that, basically, are the market.

The top one, CW, seems to be liquidating now, and they're doing $3 billion-plus of bulk loans now that will be done in the fourth quarter. So, my guess is, they're sort of wrapping things up, and I think that will benefit the rest of us, going forward.

And we can't tell you. We have models and we're actually looking at our budgets for next year for LNR. And I'd point out that when we bought the company, the servicer got is something like 40% or was it less than 40%?

No.

Less than 40% of the allocated purchase price. So, while it's a tricky business, it certainly wasn't the majority of the value of the company. What distinguished these guys was three of their businesses -- I should have mentioned one of them, Hatfield Philips, the largest servicer in Europe, which I'm actually getting off this call and on a call for them to a conference they're hosting, which is a sleeping beauty. I mean, I think it's going to be quite valuable for us. There's 100-plus people over in Europe. It's in our deck.

And then you have the conduit business, which we value very -- we didn't value very much, but it's making a lot of money. And then the CMBS book, which is very valuable. And I'm forgetting -- oh, and the interest in Auction.com, which is a wild card, and that could be worth a lot of money. They're working on an investment with a household-name firm at a strike in excess, well in excess, of what we valued it at.

So, we are -- we're not attributing any real value to that position. It's sort of a hidden asset in the whole portfolio, and I remind you, we only own 7.5% of this in the REIT. We split it, 7.5% is owned by our fund. But Auction is a wild card in terms of value, and, hopefully, we'll get a windfall, and it'll be something great, create a lot of value. If they get a valuation like Twitter, we're really going to be happy.

Hey, Ken, just --

Can Twitter buy us? Can you guys arrange that on the phone?

(laughter)

They need some cash flow and earnings. How accretive would we be to them.

They're down the street. I'm sure you could make that happen.

Hey, Ken, it's Cory Olson. Also on the special servicer, a couple data points for you. We've been named special servicer on a dozen new deals this year. So, we're actively both participating from an investment perspective, we're joint venturing with other players and participants in the market. So, those are deals that will be adding to the book in years to come.

And then, if you look at the legacy portfolio, we picked up, net, 6 assignments this year. So, you're always going to have periods of time when you're, due to migration, perhaps, losing a trust here or there, and picking up some. On a year-to-date basis, we're up 6 trusts. So, we're both managing the legacy book very actively, and we're, of course, participating in the new issue market.

Right. And that's what's so encouraging, I guess, as we look at this business and, Barry, as you were discussing, some of the issues around valuation. I think this continues to be one of those areas where, if the investment community can get a better sense as to what the earnings power for this business is over a longer term, I think you'll get better realization of that in the multiple on the stock, or, expressed maybe differently, as a lower yield on the stock.

I think, also, the -- just because there is so many different businesses here, just having some sense as to how they -- how each of them might produce some growth for you would be important.

My last question is, I guess, as you think about capital formation, which you've been very successful with in the last couple of years, and you mentioned in your remarks that you're looking to be a little more efficient in terms of the way that you use the balance sheet to maybe allow for sale -- asset sales, or syndications, or something of that nature to allow you to invest without raising capital. Can you help to give us some sense as to what the capacity is, if you went that direction, and help us frame kind of -- I think you've pointed out, you've got something close to $500 million in capacity, but how that might be extended if you think about making your balance sheet -- optimizing your balance sheet as much as possible?

We have plenty of term capacity, term loan capacity, and, obviously the converts have been a successful way for us to raise long-term capital and not dilute our equity base, at least not day one.

And our book value continues to climb. I mean, we're at $22 now, without the gain from the resi, which would make it like $22 or almost $23. So, and I think you can see, you can run the math on our earnings. You know our payout requirements under REIT regulations.

(Technical difficulty) we have is TRS, and -- which is avoiding some -- which is paying taxes on some of the earnings. So, and we have been working on some -- I don't know if you can say anything. Want to say anything about the (inaudible), or not?

No, we've been having dialogue with the IRS around ways to potentially classify what's currently being pulling through our TRS and getting taxed at, effectively, a corporate tax rate, be able to move some of that income out of the TRS to the REIT level, and avoid the tax leakage that we have at the TRS. And we added some disclosure in our earnings release this quarter at the beginning of the discussion on the LNR segment to try to frame for you what percentage of our assets fit in TRS versus outside of a TRS, and, if we're able to effectively classify bad income as good income, you could see some pickup in earnings going forward.

But this isn't totally de novo. They allow some of the residential mortgage REITs to take their contractual servicing strip, and they have private letter rulings that would classify them as good REIT assets. And we think -- early indications are they will do the same for us, here.

But it's the IRS, who knows. After my comments with Obama on CNBC, I'm sure they're never going to talk to us again.

(laughter)

Okay. Well, thank you for those comments, and congratulations on a good quarter, and a lot of activity, as you can tell from this quarter's performance. So, thanks again.

Thank you.

(Operator Instructions). Next we go to Jade Rahmani with KBW. Please go ahead.

Great. Thank you for taking the question. On the recent pace of real estate originations, can you discuss the average LTVs and target spreads on first mortgages and mezzanine loans that you're originating?

So, I'll make a stab at this. If Boyd wants to add, he certainly can.

Our LTVs, as you can see, are staying around 65% on a blended average, and we climb higher or lower depending on the revenue. We think on Hudson Yards Tower, which is a construction loan, is a fantastic loan, and it's probably 50% LTV.

As you may recall, I think we originated a $400 million loan and the borrower, the developer, put in $100 million into our loan, because he liked the loan so much. So, he has a silent position in the deal.

And it was a great execution. It's a great -- the building is leased to credit tenants, and the banks couldn't figure out how to deal with Coach, which is a tenant, of buying their space, and so they claim pari passu to the banks, and the banks couldn't figure out how to do that. That's the perfect execution for STWD.

So, I don't think our LTVs are climbing up. We do higher LTVs in multi-family. Just closed a loan in San Francisco. It's probably an 80% LTV. On multi-family, if you don't go there, you're just not going to have any in your portfolio. It has a different risk profile than a hotel, for example.

So, it's by asset class. It's by security of the income stream. It's by the rollover schedule. We're using our real estate execution. We're happy to climb -- in fact, I'm working on a deal right now, a multi-family deal, it seems like I reached the borrower and begged for the loan, and I told our guys, I'm willing to go higher on those assets, with a higher LTV, because I know the assets intimately. We used to own them.

So, I'm totally comfortable. I was going to offer a bid to buy the assets.

So, if we know that, if there are 14 bids -- I'm making this up -- $500 million, and the loan is $350 million, I'll let our guys go to $380 million to win the loan, because I know I'm not getting it back. Plus, in this case, the borrower's never going to default and leave you with $100 million.

So, as far as spreads go, I think the mezzanines are bouncing. The lowest one I think we did was (inaudible).

(Inaudible), yes.

I think we had in the quarter, and then they go as high, as like low-single-digits to mid-double -- we even had something in the 13s, something like that. So, the weighted average is included in your deck. You can see them right there and wrap them up. It's specified loan by loan.

But, overall, frankly, as a shareholder, you should look at our decks, overall, and look at the fact that we're producing a 7 or 9 dividend, pre-or-post spin, with AAA-rated paper and tucked inside of us, we have some 0% loans. There's loans that go all the way down. We're not a book of just mezzanines.

We have, if you look at the chart on page seven of the deck, we own the first mortgage from the bottom to the top, and we finance those against our credit facility in the case of Hudson Yards at the moment, that's an unlevered first mortgage loan. It's a construction loan, but it's unlevered, and it's a pretty good coupon for us.

I would just add that it's actually quite rare that borrowers ask for anything north of 75 LTV. More often than not, they'd rather put in more equity. In fact, on the deal that Barry was just referring to, those large multi-family, another multi-family we're competing and trying to win, the borrower just told us yesterday they want to borrow less. They want to drop the LTV, and that's a far more common to see the LTVs at 60 -- I would say we see way more deals at 65 LTV than above 80. It's just rare.

We can't win those, by the way, because they'll fall into a life company bucket. If they're not going to stretch LTV, we're just not going to be able to -- not stretch LTV, but if they're going to push it down to the point where it brings in the traditional AAA in securitization, it's really hard for us to get that paper. It's been that way for four years. So, nothing's changed. It's the same way. It's simple and easy, and we're just not the guy.

And we've always said that rather than chase our yield by going up and taking a whole lot of risk, if it comes down to it, we're going to stay at the safer end of the spectrum. But --

We only have one -- one paper that has an equity kicker in it, which is 701 Broadway. So, at the moment, that's the only transaction where we thought we climbed high enough that we justified taking a piece of the equity, which we did. And we value that, by the way, I believe at zero. And I will tell you, we did our equity position, and it's not zero.

So, we didn't value it somewhere in our books, at $100.

And how about on the first mortgage or whole loan side, where spreads, just generally are?

I mean, spreads have been -- generally? I mean, that's a hard answer to be specific about. We do loans between LIBOR plus 3.5 and LIBOR plus 8. It's relative to the situation. So, we're able to be competitive in all of those spaces. There's no doubt that, as Barry said, rates are low. They don't look like they're going up any time soon, and there's a lot more capital chasing the mezz space, so, there's some pressure on that.

But, again, we run this, as Stew said in his discussion, we run a giant cherry picking machine where we try to see every transaction in the country and then find these particular large, complex transactions where we have less competition. It takes --

That is still the niche. The bigger deals are -- they still stress the banks' capability to hold the paper. If they're going to securitize it, they'll step up. You've seen step up (technical difficulty) that took a CMBS exit. When it's a loan, like something like the Hudson Yards, they're going to hold that paper, and they are limited by size.

And we see that in our equity book, and we see there's five guys sharing a loan, and they got to syndicate it to the hold book of a bank. And that's when we can be super competitive, because we don't have to syndicate, and our balance sheet, at the moment, allows us to take the whole loan on it, and then syndicate it later, when we think we'll get a superior execution.

When their Plan B on one of these very large, very complicated transactions is a syndicate of banks, just the process of trying to negotiate and close a large, complex transaction with five banks is a nightmare. It's enormously onerous on the borrowers, and so they much prefer -- we use the term all the time -- a one-stop shop. They can talk to us. It's one conversation, one negotiation. For real estate developers, that's very valuable.

And one other -- it's interesting. I'll say something else about (inaudible). Like, we just refinanced our loan, our original loan on the Hyatt in New Orleans, which we actually made the construction loan to turn on this beast that is next to the [Astrodome] which got shut after Hurricane, what is it, Katrina? And now, we're really proud of that loan. I mean, we did a great thing for the community, and it was a great deal for us, but because it's us, and because we have a relationship with the borrower, we were able to refinance the loan without competition. He liked us, he liked the way we stepped up the first time. We, obviously, had this loan for, I think, three years.

So, we have perfect underwriting. I visited the property recently, and it's spectacular. They did a great job. We were very comfortable in upsizing the loan and refinancing it without anybody -- no brokerage, just us. Those are great, and I think today it still resonates with some portion of the borrowers that they like having a guy they can go to. They can pick up the phone and call Boyd or [Warren] or any of us, and Stew and [Chris Catarski] or any of our originating guys, and they can get an answer. And they want to upsize the loan, they have a tenant they brought in that needs $18 a foot instead of $13 a foot, we look at it, we can change the loan.

So, we're really super-flexible, and we're like an old-line insurance company that way. We're not -- we eat what we kill, I guess is what it is. We're hold guys. We have to like what we originate. That's slightly different for the conduit business, by the way, but for our main business, our lending business, it's really good that way.

And on some of the recent European deals you've originated, how does the underwriting compare with the US? Is it similar returns for lower risk, or is it much higher expected returns?

I'd say it's pretty similar, probably slightly higher returns. But we've focused our European lending, focused on the UK. We have looked at transactions -- I think we financed a Finnish retailer recently. We're buying a retail in Sweden, so we've been up in those markets, and we've looked at some things in Spain, but we haven't closed a -- my partner (inaudible) that is (inaudible). He said you lend in the beer-drinking countries only. So Germany, the UK -- it's a great line. I never heard it before. And you don't want to lend in the wine-drinking countries of France, Spain, and Italy. It's too -- it's a very funny line.

Just -- it was the talk of (inaudible). I'll also point out that --

What did you want to point out there?

Oh, that we hedge the currency. So, we're at a little bit of a disadvantage to local lenders, because we will shave --

50?

50, exactly.

50 bps.

It depends on the --

On the currency, and the --

And the rate differential between the --

But it doesn't -- to a local lender, we can lose. But we're finding American banks, actually, are taking bigger and bigger positions over there, so we're not even partnering on the Heron Tower. It was published. I can say it. We partnered on the (inaudible), it was taken by JPMorgan.

So, you didn't see these guys over there a lot. Now you're beginning to see more of them as the French and German banks have stepped away from international loans. They've pulled back to their borders.

So, and they're stepping out a little bit. We recently saw a German bank in the UK, but, for the most part, you don't see them. And, obviously, many of those British banks are just -- are shrinking, not growing.

Great. A quick clarification on the single-family spinout. The $850 million of assets, including the cash that you're going to contribute, and the $1 billion in equity value by the spinoff date, is that the additional purchases that are taking place, just that $40 million to $50 million a month? I assume you're not going to stop buying.

Yep.

So, Jade, we announced that as of 9-30 we had approximately $750 million in the strategy, and if we're spinning out early February, it's three months at $50 million a month and $100 million of cash. So, that's how you back into the $1 billion.

Great. Thank you very much.

Thank you.

(Operator Instructions). And next, we will go to Dan Altscher with FBR.

Hey. Thanks. Good morning, everyone, for taking my call. Barry, I enjoyed watching you on CNBC the other day, hopefully, Stew, you caught your breath by now.

A question on the dividend. Barry I think you said that you're going to keep the dividend at $0.46 -- which is good. But thinking forward, it looks like, clearly, the core earnings power of the Company is going to be better than that. So, kind of a two-part question. One, is there room to maybe move the dividend up? But, if not, if -- am I right to assume that that is going to be retained earnings, and that's organic book value growth that offsets that way?

You'd be right. And you're right, if we don't pay it out, it goes into book value. So -- but we will -- frankly, we need to -- we're still doing the consolidation of -- or looking at the numbers from LNR for next year, and you can see, we're a lot of businesses now. We're more complicated than we were. And we run a lot of models to figure out like low-ends and high-ends of ranges, and we're guessing origination pace. And so, we try to do this with some margin of safety.

But I think you will -- you would expect that if our business continued at the pace it does, you eliminate the $0.14 hit from the one-time LNR acquisition, you're -- what do you say, $2.18 in this year, $2.20?

Got a range of $2 -- yes, we said, $2.09. Isn't it $2.20.

$2.20. So, I don't think we're going to get away with $1.84 on $2.20. I think we might be at the very low-end of our payout requirement as a REIT, so that would mean we would have to increase the dividend. Obviously, that's a board decision, not mine, and we haven't --

It requires a lot of tax analysis, too. It's complicated.

It's complicated. In Andrew's case, the servicing switch would change our earnings, also, and could be materially accretive to the Company. So, that would also change our feeling about the stability of our stream, and we're really happy to be paying what I hope will be close to an 8.5%, 9% dividend yield, unless the stock rises on the (inaudible), and that's ridiculous. So, personally, I own stock. I'd be happy to buy more.

And I think we'll take the same disclosure tactics to the single-family resi business as we've done to this business. And you should be able to make -- my feeling is, we disclose it to you, you make your education decision, ask us questions, and if you don't like what we're doing, you can always sell the stock. If you do like it, you can always buy more.

So, I think we're done, right? Thank you all for being here this morning with us, and have a great -- what's coming up? Thanksgiving. Have a great Thanksgiving. Take care.

And that does conclude today's conference. We do thank you for your participation. You may now disconnect.