Starwood Property Trust Inc (STWD) 2013 Q4 法說會逐字稿

Good day and welcome to the Starwood Property Trust's fourth-quarter 2013 earnings conference call. All lines are now in a listen only mode.

(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, and good morning and welcome everyone to Starwood Property Trust's earnings call. This morning the Company released its financial results for the quarter and year ended December 31, 2013; filed the form 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are all available in the Investor Relations section of the Company's website at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements 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.

Refer you to the Company's filings made with the SEC for 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 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; Cory Olson, the President of LNR; and Rita [Pinerri] the CFO of LNR.

But that I'm not 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'll be reviewing Starwood Property Trust results for 2013 fourth quarter and full year and our initial guidance for 2014. I will also discuss the performance of each of our three business segments: our traditional lending business, LNR, and the single-family residential business. Following my comments, Barry will discuss market conditions, the state of our business, and the opportunities we see looking forward.

For the fourth quarter we reported core earnings of $121.2 million or $0.62 per fully diluted share, an increase of 29% when compared to core earnings of $64.5 million or $0.48 per diluted share in the fourth quarter 2012. For 2013, core earnings per diluted share increased 12.6% to $2.24 before LNR acquisition cost of $0.13 per diluted share.

The primary drivers behind this earnings growth are the acquisition of LNR and the deployment of $3.8 billion in new investments during the year. These figures are also reflective of operating losses for the quarter and full year of $0.01 and $0.08 respectively per diluted share in our single-family residential business.

GAAP net income for the fourth quarter 2013 totaled $95 million or $0.48 per fully diluted share, which compares to GAAP net income of $56.3 million or $0.42 per diluted share in the fourth quarter of 2012.

In addition to our improved operating performance, we also committed over $2 billion in new investments in the fourth quarter. In the last 2 months we have also upsized, repriced, and extended both of our primary secured financing facilities, adding in aggregate $550 million in additional capacity at best-in-market terms.

Another item I wanted to point out was that in Q4 we completed a successful integration of the legacy STWD and LNR platforms. We have leveraged LNR significant investments in technology and finance infrastructure, which has enabled us to centralize the IT, accounting, planning, tax, and treasury functions. We have also reallocated resources and loan servicing to enable the primary and special servicing functions to be combined.

As of year end, GAAP book value per diluted share was $21.83, a slight increase over the level of $21.78 we reported as of September 30. Fair value per share stood at $22.17, also above the level of $22.09 per diluted share reported at the end of the third quarter.

Pro forma for the spinoff of our single-family residential business, which we completed on January 31, 2014, book value and fair value per share as of December 31, 2013 would have decreased by approximately 25% to $16.42 and $16.76 per diluted share respectively.

Now let me outline the fourth-quarter results for each of our three major business segments. Following on the heels of an extremely active third quarter, where the lending segment closed 12 transactions with total commitments of $1.1 billion, this segment closed an additional 12 transactions with total commitments of $1.7 billion in the fourth quarter. When combined with new originations to date of $1.2 billion in the first quarter of 2014, new loan originations totaled $2.9 billion during the past 150 days. This represents a significant increase in pace over past quarters.

Included in this quarter's lending activity were the $246 million origination of a preferred equity interest in a commercial asset REIT, and a GBP280 million or, on the equivalent basis, a $448 million loan collateralized by the iconic Heron Tower in the City of London.

Over 80% of our new originations in the quarter were floating rate, as are nearly all of our hold-to-maturity pipeline loans. Some of the impressive year over year increase in lending activity is reflective of continued improvements in the commercial real estate market. But as I have said in the past, to a greater degree, it is clear testimony to the brand and presence we've built in the real estate debt capital markets both domestically and in Europe.

Now let's turn our attention to LNR, which we acquired in April. LNR has been accretive to STWD since acquisition, and continued to strong results during the fourth quarter. The LNR segment contributed GAAP and core earnings of $35.7 million and $45 million respectively, inclusive of allocated shared costs.

LNR's total revenue has increased $12.3 million or 15% in the fourth quarter, compared to the third quarter; reflecting higher levels of both servicing fees and interest income on CMBS. However, GAAP and core earnings of this segment decreased $6.4 million and $1.2 million respectively, mainly due to the decrease in fair value of LNR's domestic servicing intangible. During the fourth quarter the decrease in the fair value of the intangible was $18 million on a GAAP basis and $15.8 million in a core basis.

The net decline is attributable to the expected amortization of this declining asset, net of increases in fair value due the attainment of new servicing contracts.

Because the intangible represents the net present value of future fees on existing servicing contracts, the asset burns off as those fees are earned. As a result, the remaining fair value of the domestic special servicing intangible, which stood at $230.7 million as of December 31, is expected to substantially decrease over the next 5 years as we recognize the revenues from our existing servicer contracts, the bulk of which are associated with CMBS transactions consummated between the years 2000 and 2007.

However, the servicing asset continues to perform well ahead of our underwriting expectations, and the current contract base is expected to continue to generate positive returns on our invested capital as these legacy CMBS transactions run their course. Additionally, our intent at this point is to remain a preeminent player in the CMBS special servicing business, investing substantial capital and new subordinate CMBS, and acting as special servicer for the CMBS trust involved in these new investments.

As we have said in the past, the LNR platform provides us with absolute best in class talent and system infrastructure to optimally exploit high yield opportunities in the CMBS business, the performance of which are naturally hedged by the earnings potential of our role as a special servicer in the same transaction. Interestingly, the CMBS special servicing business is the only credit hedge that I know of that is an inherently profitable transaction in its own right. As of year-end, LNR was named special servicer on $16.2 billion in loans and real estate owned, well ahead of our underwriting expectations at the time of acquisition.

As I mentioned earlier, we completed the spinoff of our single-family residential segment on January 31. Barry will be discussing the spinoff in greater detail in his remarks later in today's call. I would like to provide some financial details on the segment for the quarter.

During the fourth quarter, the number of properties and NPOs grew from 5,000 to 7,200 units. As of year-end, the net assets of this segment totaled approximately $1 billion, comprising 13% of our net assets. On the spinoff date, the asset base totaled approximately $1.1 billion, including $100 million in cash.

While this business segment continued to operate below break-even on a GAAP basis throughout 2013, we have made material progress in leasing homes that are ready to rent. We also anticipate the financial performance for this segment following the spinoff will improve, as portfolio occupancy continues to increase, and gains are realized from the sale of non-target assets. In accordance with GAAP, beginning in the first quarter of 2014 we will retrospectively reclassify the single-family residential segment as a discontinued operation.

Now, looking forward to 2014, let me turn our discussion to our current investment capacity, our first quarter dividend, and our 2014 earnings guidance. As of Friday, February 21, we had $293 million of available cash, $104 million of net equity invested in liquid residential mortgage-backed securities, and $68 million of financing capacity approved but undrawn.

With this, we have capacity to acquire an additional $300 million to $525 million in new investments. In addition, with the strong rally and credit spread seen in the CMBS markets in recent months, we are reviewing LNR's book of CMBS holdings, which now totals in excess of $550 million, looking to identify for potential sale certain securities that no longer meet our return targets.

This week our Board declared a $0.48 dividend for the first quarter of 2014, which is an increase of $0.02 from the prior quarter, reflecting the company's continued strong earnings. The dividend will be paid on April 15, 2014, to shareholders of record on March 31, 2014. This represents an 8.03% annualized dividend on yesterday's closing price of $23.89.

I'd like to finish my remarks with a discussion of our 2014 core earnings guidance, which we are providing during this call for the first time. Our initial guidance for 2014 is core earnings of $2.00 to $2.20 per fully diluted share. There are a variety of factors impacting the formulation of this guidance, and I want to take some time to walk you through them.

It is important to look at each of the primary asset categories and business lines independently, because each of them impacts our P&L and core earnings differently. When we build projections for our hold-to-maturity lending business, we think about it in the context of the runoff of our current portfolio, our existing pipeline and prospects for future originations, and, importantly, all of this is within the investment theme we have articulated since day one, which is to hold as wide a portion of the capital stack as possible in a safe lending transaction while achieving our target equity returns of 9.5% to 12%.

Historically, and still true today, this has generally represented the portion of the debt stack between approximately 45% loan-to-value and 65% loan-to-value. For the better part of the last 18 months, the majority of new lending transactions have involved our origination of the entire debt stack as a one-stop-shop financing solution for the borrower and the subsequent manufacture of the subsequent 45% to 65% portion of the debt stack targeted for long-term retention, utilizing either off-balance-sheet financing in the form of A-note sales and securitization, or on-balance-sheet financing provided through one of our many secured financing facilities or through attribution of a portion of the more than $1 billion in convertible debt we have issued since February, 2013.

Now with respect to LNR, our projections primarily focus on six key items. First, we utilized extremely sophisticated software and expertise to project future special servicing fees and expenses, for both the loans currently in special servicing, as well as potential new additions to the special servicing roster. Special servicing revenues are composed of a variety of fee types, with the majority of revenues coming from inventory fees, resolution fees, and default interest.

Inventory fees and resolution fees are a bit more predictable, in that they are a function of the volume and duration of loans that go through special servicing over time. Default interest is more difficult to predict, and as such, we generally take a more conservative approach to projecting future collections.

Secondly, and of equal importance, are the estimates of our likelihood to retain these existing servicing contracts and gain new contracts. All of these factors contribute to both our estimates of future special servicing revenues and expenses, as well as a speed and timing of the decline in the value of the servicing intangible.

The third important item in our forecast is the expected performance of LNR's $550 million-plus portfolio of high yield CMBS, and our expectations concerning future investments and sales activity, as well as market yield levels for the asset class. In the current environment, we expect loss-adjusted yields to maturity on new issue CMBS investments in the 13% to 15% range.

The fourth major element of the LNR business involves projecting origination volumes and net profits from our small loan balance conduit operations. As we have discussed in the past, the last 12-plus months have been an extremely strong period for the conduit business. Competition has increased in that business, and we would expect profit margins to revert over time to their historical averages of 2% to 3%.

The fifth key element for the LNR forecast involves projecting the taxation level of the various taxable REIT subsidiaries we utilize to operate the special servicing and conduit operations. While we seek to operate these businesses in the most efficient manner possible based on the current tax rules, these subsidiaries are expected to pay federal, state, and foreign taxes. In 2013, which was a partial year for LNR, these entities incurred tax expense of $25.5 million.

Lastly, we obviously spend a good deal of time estimating the future path for cost and expenses across all the elements of our platform. As we have talked about earlier, LNR's operations have now been integrated with those of the legacy Starwood operations, which will allow the combined entity to realize efficiencies across the business lines. It is important to point out that nearly 75% of LNR's cost structure is variable, which affords us enormous flexibility to respond to market conditions and changes to the business model overall.

With that, I would like to now turn the call over to Barry for his comments.

Thanks, Stew.

As you just heard, Stew's comments were long and detailed, so I hope they answer a lot of questions that you might have about the Company today. I think I will start off by saying it was a very good year and a really transformative year.

We did over $4.7 billion of loan originations and 42 transactions, averaging over $100 million a loan. There's no question the Company has become, behind a very dedicated team, a well known player in the commercial real estate finance markets in the United States, and more recently in Europe. It's also, I think, obviously was a transformative year because this was the year we converted from just being a mortgage book or a pool of mortgages to really being more of a finance company. And that was led, of course, with the acquisition and the integration of LNR into STWD.

I want to take a moment just to thank all people that worked together globally, collaboratively, with maximum productivity, utilizing all of our global banking relationships, sourcing, underwriting, and effectively [called debated] ideas, taking to task every investment we made; both in the LNR platform and then heritage Starwood book. Because I think it's really the cross-pollination and best practices with all these people that have led the Company to be a market leader and actually positioned it to do so in the future.

When you get a lot of experienced people here looking at sliding up and down the debt stack, looking at the proper pricing; debating, sizing, choosing between different borrowers, you don't see that in a coupon. But when you're lending to people like Mike Milk and a high network family, firms like Blackstone or Colony or any of the many people we lend money to, [related] -- you can't really see in an IRR or in an earnings number, but you have really credit-worthy people, assuming in the equity that we think will pay us back and honor their obligations.

And we utilize also the 65 banking relationships. We have a rough 102 lenders at Starwood Capital Group, but we have 65 existing lenders today. So we're in constant dialogue with -- I think the greater platform is very powerful, and I think we can use it better in the coming year. So I'll talk about that in a second.

I think we closed some marquee transactions during the year. 701 7th avenue is an investment source here in the Greenwich headquarter office; but the trophy office building will be converted to a retail building and an Edition Hotel. We have a great position including a 20% equity kicker, which we don't really value, but I'm sure will be worth a lot of money someday. I can almost guarantee that.

And then we closed an investment in Hudson Yard, working with related and a very creative structure; it worked for both of us, and we're proud to be part of that. The shareholders should be proud to be building what will be the anchor to what will be the new Rockefeller Center of Manhattan.

And then Stew mentioned Heron Tower, another marquee, maybe the best new office building the City of London, that we closed with some friends on the other side were refinancing a loan that was in trouble from a European bank. These are highly negotiated, very relationship-based; and really we're the best of our platform working with speed, execution, getting around some of the banking regs that bothered banks that they couldn't figure out how to structure. That is where we can really have sustainable competitive advantage in the marketplace.

What the shareholders got from us, then, were great real estate investments and a big fat wide piece of paper producing a double-digit rate of return. So I think, given the 2.74% 10-year and the 1-point something% 5-year, if you look at earnings 700, 800, 900 basis points wide of that, I'd say some really compelling real estate backs the bulk of our assets today and our loans.

I think it is a great risk-adjusted return. I noticed we're trading at an [8-dividend] yield, which remains a lot higher than the 5-year and certainly higher than 1-year pay [period].

But probably the most important transaction was the acquisition at LNR during the year; and I think with LNR we not only bought a great book, but we bought a great group of people. And maybe will spend a minute on that.

We have 50 people who do accounting now, and 41 people in IT. Our job, my job, Boyd's job, Cory's job is to take advantage of that extremely knowledgeable basis. Excellent assets to grow our businesses behind them, and that is where we -- for us we picked up many new lines the business. And you've heard about the conduit operations, which were quite profitable last year, remain profitable this year.

You heard about the into the CMBS book. I felt that we specifically gave you a number of how much LNR invested during the 9 months we owned them but, Cory -- over a couple hundred million dollars, is that right?

That is correct.

Behind the platform, buying additional servicing [strips], buying B pieces, investing in one-off pieces of paper -- with their inside knowledge of the markets and their activities that we continue to work with them on finding new ways to deploy capital and very advantaged ways -- ways Starwood Capital could never do, for example. We don't have the trading desks here to trade CMBS. We don't even know what they look like, and we don't get any phone calls either.

Then, I think Stew also mentioned the integration of LNR, which was led by teams from both Companies; from STWD some [SUG] help, and Cory and his team's help will work seamlessly. Today, I think we've got a streamlined asset management function -- accounting, reporting and that is going to make my life, Boyd's life, Stew's life, Cory's life, and Rita's life much easier. Maybe even Andrew's life too.

In the transformative way, I think we have like six new businesses -- we want to add more businesses, but one business we did separate was our residential business. And we completed that spinoff, as mentioned, at January 31. It was an excellent transaction for the STWD shareholders, whether they choose to stay in [the sway] stock or sell it and move on.

I believe we have created state-of-the-art Company; and hopefully, when the Company does its proper road show, when it's, in the future, going to raise capital, more shareholders will see the technology backbone that is unique to Starwood way point. The 550 and growing dedicated athletes they have to that business; and the opportunity, I think, which is long-term, for them to create real value for shareholders both in the fee business -- owning, buying houses, renovating them and renting them -- and in the MPL business, which is a big portion of what they do also, buying loans, distressed loans, and converting those to fee, and in some cases keeping them and renting them and adding them to the core base of the Company.

It was an interesting transaction from my perspective, because I wasn't sure what the reception would be to the stock, given that we had investors or shareholders in a yield vehicle and that Company has not paid a dividend to date.

But it was the right thing to get it out of here; it's totally different business, a different risk profile; and it, too, will hopefully pay a dividend in the near future and grow its business from there. But we spun it off unlevered and it has credit facilities of $500 million, on which you could buy probably over $1 billion of houses or loans before coming back [section out] a separate line of NPLs. But it can more than double in size, just about, before it has to access to the equity markets again. At that point, with a couple billion dollars of homes, we'll all know if they're doing great, which we think they are. Or you will be able to assess it on your own.

I am going to go back to the future for us for a second: what is ahead for the Company. I think it's continue to build new lines of business and find ways to deploy capital in advantaged ways. I would be disappointed if we didn't pick up on two or three new business lines types of financing that we should be doing whether we believe there are holes in the capital markets. I also look to grow our book in Europe and take full advantage of Hatfield Philips.

Hatfield Philips is our special servicing subsidiary based in London and Frankfort, which has something like 90-odd people in London and about 30, I think it is, in Frankfort. And more actively and in a much more proactive way, use that platform to force and drive growth in our European loan book where there's a need for lenders like us who understand property to help refinance the coming tidal wave of loans being sold by the banks, which are going to have to mark their assets to market when we're waiting as long as we've been -- well I, for the four years of STWD (inaudible). So even if we capture a small share, it will be an overwhelming share for the company. And we're pretty excited about that; I think it's a real imperative that we do that going forward.

I also think we need to take better advantage of some of the assets that we don't mention that are part of the company, like auction.com. Auction is a dominant player in the auctioning sale of both small commercial assets from us, in fact, and people like CW Capital. They sell -- we have an office building and we get it back; it's already owed $10 million we put on their platform and they auction it off.

As well as single family homes, which they auction off on behalf of the [wider] area banks and several federal government agencies. So it is a very exciting time for Auction. They're going to announce an important deal which I won't mention; I'll let them do that. And hopefully we'll be able to help them grow their business and that will become an important asset for [Star] REIT in the future, and an important advantaged way for us to deploy capital, helping them grow in the future. We are pretty excited about that.

Also, furthering our investments behind LNR in this business that we talked about, whether it's the CMBS B pieces, repositioning REO and selling them -- or buying, acquiring additional control strips and existing CMBS structures.

You have to remember that the special servicing business -- which you all think of LNR as a special servicer, but -- Stew mentioned that the baseline value of the service today is $235 million. So it's not -- what is that? Less than 5% of our asset base. I think if you look to talk more about what Stew said, we thought the book would deteriorate or decline faster than it did. And what we thought it was $17 billion, it will be much lower at the end of the year. And it turned out to be $16 billion or so.

So we are guessing at the pace at which that -- and to some extent you control it. But you have to remember that CMBSs were bi-modal; that the restructuring of these -- there was the five years and the ten year strips. The five years matured; they originated in 2006 and 2007, the peak of the real estate market; matured in 2012 and 2013 with extensions. Those are behind us. And there's another huge wave coming, which are the ten year maturities of those CMBS strips.

And frankly, we're all guessing, because, depending on what your view of interest rates is and views on values for real estate, we have a base case we know what we're going to do. But if interest rates are 10%, there's going to be massive destruction in those bonds, and they'll be field day for special servicers. If in fact interests rates are zero, they'll be less lucrative probably, because people will be able to refinance those loans.

But there will be -- when we say it's declining -- it is a high variability of standard deviation on what those fees could be in 2016 and 2017. And to some extent, though, as Stew mentioned, the CMBS book is a perfect hedge to that; because if, in fact, rates go to zero, the CMBS book will obviously appreciate and things we are taking today we think are worth nothing could be worth a lot of money. So it's nice position -- we are blessed to be in it, and we thank our teams for executing so well through the year.

Finally, I will just mention some trends in the business. I think what you see from us is that we have some sustainable competitive advantages. Our scale has never been more important.

We actually need to be bigger; we need to write whole loans in Europe. And we're probably not going to be able to compete unless we can do that. Well, that's going to get us and the shareholders the highest ROE, so scale is really important.

Also, we have chosen not to take up our leverage in our A-note sales. We can drive a higher ROE, and there are people in our business who are doing so, keeping a much smaller piece of the loan they originated, if you will. Let's say that we both make a loan at 65% or 70%; they take a leverage up -- they take a 10% swag of the holding peace, of the mezzanine, and it's 10% wide. 50% to 60% or 55% to 65% or 45% to 65% -- I mean, the market is going to have to figure out over time what about the leverage we deployed and the risks we are taking in our are ROEs.

Different firms are taking different approaches to this, and neither is right or wrong. It will depend on someday down the road -- obviously leverage is a double-edged sword; and we have chosen, if we have any new paper, to be wider on our retained pieces. And maybe some of our peers are doing --interesting, we are looking at it; we can do it; we have not chosen to do it. I do think you'll see us toggle up and down the Cap stack. I would expect in the US at least, you might start seeing more transactions like 701, where we took 20% of the equity. I don't know for sure; we get nervous a lot when we start climbing the LTV.

But other sustainable competitive advantages were obvious during the quarter; we can move fast and we understand risk and reward -- maybe better than a lot of banks, given that many of the assets we see, I have seen them in my 20-year career for sale five times.

Having all the experts and there isn't a situation where, whether it is a hotel and the team at STWD, San Francisco, is calling our hotel guys here to ask their opinion; or they call Chris Graham, our head acquisitions in Washington to ask him about a building that is being sold. And most of the time we can provide a lot of help and guidance -- and then, the expertise of the STWD team led by Boyd and Chris Tokarski and Lauren on sourcing pricing and structuring those investments is really a tremendous competitive advantage long-term.

I think that's it. I think that's -- I'll leave that -- cut it off there. I think I have covered everything I want to say, and we will take questions.

(Operator Instructions)

Dan Altscher, FBR.

I was wondering if you could help bridge the gap year on leverage. I think the philosophy has generally been not to be a overlevered vehicle, equity like returns with equity like financing in some cases or A-note sales and what have you. But at the same time, looks at you have taken up some leverage on the term loan and some other repurchase facilities.

Can you maybe help us get a sense there, is there a change in philosophy? Or is it just a function of where the business is going?

I think it is just leverage. I mean, we increased the lines capacity.

If you think about, as a mentioned in my script and Barry mentioned as well, in the lending segment our basic business plan is to hold a wide swath of the capital structure, first mortgage transaction. The leverage can be either on balance sheet or off balance sheet.

A-note sales would constitute off-balance sheet leverage; they would not show up on our balance sheet. Whereas if we replicated the exact same risk position, utilized the same leverage but with one of our warehouse facilities, on balance sheet leverage -- so leverage that it appeared in the financial statements -- would go up. We optimized the use of on- and off-balance sheet leverage, but within the context of that same basic message.

Now historically, we have been reasonably stable. But nonetheless, for example, in 2013, we took advantage of access to the convert market at very attractive prices to create a leverage bucket -- $1 billion worth of what is on-balance sheet leverage that we conceptually attribute to other loans.

In a lot of cases, we could have manufactured comparable leverage with A-note sales. But the execution in the converts was so strong, it gives us an on-balance version of the exact same thing.

But it's all within the theme of our basic business plan, which is to originate, call it a first mortgage at 70% LTV, and to lay off the 0% to 45% piece, either directly on balance sheet with a financing facility or with term debt or through an asset sale -- an A-note sale.

Okay, thanks for that.

Stew, in your guidance range, can you just help us all out a little bit? What type of capital needs are being considered there, if any? And then also is there any impact from the converts now being in the money?

Capital needs? I'm not sure I follow.

I guess what I mean, is there assumptions for more permanent capital that is baked within the guidance, i.e., another convert for instance or common equity or the like?

We balanced that in house for four years -- the balance between equity issuances, converts, sale of paper. We mentioned those at the CMBS. You will see a fall of the CMBS going forward. Some of these (inaudible) are yielding, let's say, now what was yielding 13% is yielding 6%. So, I will sell that -- and come back to the equity market. We try to balance all of that.

I think it is a long game. And as you know, we are aligned with everybody. We have a big holding ourselves in the company recently. So we recognize that. And you offset that against building our equity base, which allows us to do these big holdings I talked about in Europe, which we need to do. And the bigger we are, the more likely the Company can get better and better credit facilities. The converts could convert, obviously. They're in the money.

I think they are all in the money. So some have chosen to do so, not material announced, yet but perhaps they will. When everything goes up, they decide to take dividend from the common rise and convert. But usually that is involved in some arbitrage trade by some people; I don't understand what they do.

I can speak to them; you'll have to speak to them. I do not know.

It is lovely their converts are in the money. I am happy that it worked out for everybody. It was a great source of capital for us not to lose the shareholders in the slightest at the time and the cheap financing.

Converts in the money are a good problem to have, per se.

One there's one final one also. We have seen some other players maybe on the special servicing side and maybe the distressed assets side -- like a CW -- do large auctions of assets.

Do you get the sense that maybe they or others are starting to pull back maybe a little bit in the market and maybe there is an opportunity to pick up share for you guys? Or is it kind of at the quarterly rotations in terms of like market share that is going on?

There are three firms that basically dominate the space. I think they're using different strategies; and why they chose to do a bulk sale, we can speculate. They might have been losing control of those strips and decided to do it all at once.

I do think that we are running what we hope will be a long-term business. And I think for some of these guys, maybe it is more of a trade and has been a very successful trade.

I would bet that we are investing more capital in our business lines today than they are. I am really referring to CW.

Dan, I think LNR is the only major special servicer that is actively participating in the new-issue B-piece market. So to Barry's point and Stew's point in the script, we are playing for the cycle, if you will.

Kenneth Bruce, Bank of America Merrill Lynch.

Quick question for you just to follow up on Dan's, maybe just ask the question slightly differently. Does your guidance include the converts being converted, or does it not include those?

No.

Okay,

Barry, you mentioned in your prepared remarks essentially the dividend yield being around 8%; and that, on a relative basis, is very high. What do you think is required to get the market to re-rate Starwood Property Trust?

Do think it is something that, first of all, you all can do? You've been around the markets a lot -- Barry, in particular. What do you think is necessary to get this stock re-rated at this point?

A couple of things. And we're going to build up our IR effort, which we probably haven't done as much. We have been so busy. We're hiring dedicated athletes to do that and talk. We need more retail participants in the stock.

I think, surprisingly, we are still a pretty institutionally-held stock. I thought over time that would drift retail, mostly because when we have done secondaries or add-on offerings, they have gone to institutions who have stepped up and bought them in scale.

So the banks have not pushed them down the retail channel. And to some extent, that surprises the heck out of me. Whereas if you look at HPT, for example, has held almost all retail. And not very many institutions trade normally well inside of our dividend.

And the average read is what -- 3% dividend yield? It is funny, we look at this all the time because we're obviously buying equities. And there are institutions that are looking for AIIRs owning assets with for current or something like that. Well, our loans are better than that; and they're not the equity risk. They're 60%, 65%. So why wouldn't you just buy the debt?

But it's a funny thing, especially if you have unit inflation staying low, which is probably the case at the moment. Then the debt looks really compelling. And, frankly, real estate's correlation to inflation is probably overexaggerated. Certain (inaudible ) will be okay, but others won't.

I don't know the answer to that. With our floating rate base, we kind of would like interest rates to go up. But no sign of that anytime soon, it looks like.

I think LADR went public during the quarter. We look a lot like LADR. If we were asset light, we could look like LADR.

It's trading has a pretty good number, pretty good multiple of its business. You can be assured we are going to keep looking at ways to enhance shareholder value.

You have done a good job of creating shareholder value. You can look at the stock where it is trading today, and it is almost fitting essentially at the fair market value for your portfolio based on yields and where other things of similar risk or higher risk are trading in the market. So the LNR business seems to be almost coming a long for free.

Do you think it is just a matter of being able to demonstrate over time the performance of the different LNR businesses and possibly grow them? You talked about that without much detail. But is it just a matter of showing some persistency in the market?

I think that is correct. I think like any company, like any major company, if you can have 14 divisions all contributing earnings, some will be not that significant during periods of time. But then other times they will be the drivers of value.

I think for us, we have to continue to reassess risk and reward. We've got to find new ways to deploy capital which we're blessed to have access to.

The burden is on us to continue to show that we can built a diversified income stream. There will be times when -- we mentioned them -- you mentioned the default interest.

We don't model default interest, but we get it. It's sort of a recurring/nonrecurring thing. And it comes up with strips of the CMBS. It is hard to figure out. But then that is great earnings. But we want to find ways to use the 350 athletes of LNR to create sustainable competitive advantage for the company in the market.

I think we are doing great. You just can't rest on your laurels; you got to keep going.

Lastly, there's been a lot of debate in the market as to how competitive the commercial lending markets are becoming and whether they being gateway cities are non-gateway cities.

Is there anything from your vantage point that suggest that things are grinding meaningfully tighter-- meaning you can see that there are opportunities in Europe and you have begun to explore those more aggressively?

You have gotten into transactions that others can't. Is this just a matter of finding these pockets of values where others are chasing down yield? Any color on that site with the helpful.

Okay, I didn't talk about it. The credit markets are wide open. I said that in a speech the other day in the city. There's a lot of competition for credit today.

We can count how many condo lenders there are, but there are a lot of them. You won't win it. The markets are trillions of dollars, so you will not win every deal. We actually talk about it. Like Boyd says -- We have got to tighten 25 basis points to get this deal; or -- Let's pass on this one; we've got this other one.

We are large, but we are not that large. And in the scheme of things, we are nothing.

We pick and choose what we choose to chase. And sometimes we will partner with other people that we are bidding the same loans. We're going to do that in a deal that we are working on right now we hope to get closed with one of our -- you'd call them a competitor.

It has always been the case since we started. We told you four years ago that we can't win 50% LTV loan that a like company bids; it's true today too.

This is probably our third or fourth ebb and flow to capital markets since we IPO'd that the markets got really tight, then they GAAP'd out, then they got tight. At one point, if you remember, (inaudible) fired the whole conduit operation. That was like a year and a half ago because the [carat] markets blew up.

Right now, you're in a pretty aggressive period. I am worried about underwriting standards; that is for sure. We see it in our equity deals. We see the closer we get and we the spreads we 'reoffered. And you just worry; I always worry, so it's just part of my DNA.

I do think capital has come back to Europe at a ferocious pace. And like the US, the first capital to come back is the senior, the very tight senior, the 0% to 50%, which the British banks even if they're nationalized have to put money out. That spread has come in 200 basis points in12 months.

That is actually good because now I can layer in advantage from 50% to 70% or 75%, depending on the collateral type. And the overall cost of borrowing again is acceptable to the borrower.

The good thing is the markets are rapidly changing. There's a ton of capital. There's a ton of yield searching. You see it, obviously, in the equity markets overall.

We're doing okay. The pace of our originations is at record high; and we have never put out more capital, I don't think.

You made a comment worth pointing out to our shareholders, that on one hand, the conduit business has got over 30 players and those guys are beating with both -- by pushing leverage and also offering borrowers what I will call risk restructured loans. That kind of competition isn't really happening in our market at all.

The balance sheet lenders, like ourselves, that are doing large or mid-size transitional loans, have not loosened up on the structure, on the elements of the loans that we closed that we put in place to protect ourselves.

In a downside scenario, we're feeling very little or no real pressure on that side of it. So the credit underwriting part in our space -- balance sheet, the transitional stuff -- is stable and not getting overheated.

Okay, well thanks.

I'll tell you it's a funny thing. You have people like Wells that compete head-to-head with us and then finance us -- and Blackstone and probably Colony and Apollo. It's kind of a funny thing.

When we win a deal against the Wells, because we're cuter and better looking and we will take whatever -- we'll do whatever it takes legally -- they call us and then finance us.

Because they already underwrote the note and that happens all the time. It is a funny situation actually.

And also, we won't bid a deal; we will know that Wells is going to win it. They really want to buy it, and they're going to be really tight. We don't bother quoting it. It is kind of fascinating.

You have got a four-year history of picking your spots very well. Congratulations on a good quarter. Thank you for all your comments

Joel Houck, Wells Fargo.

Just wanted to echo my congratulations on a really good year. Obviously, it was a tough year for mortgage REIT; but you guys really stood out.

I guess the first question is, if you look back in 2013, and you see a full year, at least in your disclosures on page 21. It looks like the real estate investment lending was about two-thirds of net income, and LNR is about one-third.

In the guidance of 200 to 220, can you give us a sense to what you guys are thinking in terms of the relative contribution of the lending segment versus LNR? Because I think -- and I will just speak for myself -- we still, I think we have more certainty and more confidence forecasting in the lending segment and LNR is a little trickier to forecast.

Well, hard to forecast but pretty consistent I would expect. Maybe slightly more on the lending side. It really depends on the pace of originations in the back half of the year. It is hard to tell -- so it is not easy to know.

These loans that we are making today some of them are large, really large. And that number could tilt; it could be 80/20. We don't really know.

Especially if we start doing like selling the CMBS positions and redeploying the capital in other business.

We bid a lot of -- I don't know, Cory. How many did you pass on, how many did you bid, and how many did you win of B-pieces?

We bid on something like 25 transactions last year, which would be underwriting several thousand loans. And we participated in eight deals in one fashion or another, either as the sole B-piece buyer or partnering with someone else.

How many didn't you even bother --

It probably another 15 or 20 that we did not even bid on.

For various collateral concern reasons.

Again, we pick and choose. And we are not actually in charge of the pace of those deals -- issues. That is really the credit market. It is a best guess.

Okay, but certainly the fulcrum of leverage would seem to be on the real estate lending side based on market conditions and how aggressive or lack of aggressive you're going to be. Is that a fair way to look at it or think about it?

Yes, maybe. The sequence, we'll tell you. We don't at the moment expect 2015 from LNR to look much different than 2014. And we will tell you that 2014 we are projecting down from 2013, but you only saw 2013 for nine months.

But we could be wrong. It could be up, and we beat our budgets fairly handily last year with LNR. So we don't really know; but so far, positive surprises are good.

If I could have another one, did you disclose or talk about the gain on sale margins you saw within the conduit lending business and what is a reasonable run rate going forward?

He said 2% to 3% is more reasonable as a run rate.

I did not catch that. Maybe just --

Let's spend a minute on that. Cory, how many securitizations did our aim participate in? What did they do -- about 10 deals?

We got 10 done last year and should do a dozen this year.

We are not going hog wild by the way. We are at the level we are comfortable at. More accurately, the guy running this group works with Cory and Rina is comfortable doing -- we said -- Hey, this is so profitable, we will do more. And he is like -- No, you can't do more, got to do this size.

So you can add a little bit of scale, but he is not doubling and tripling in size. He's probably good to go up 30% or so. Because margins go down, it would probably be slightly -- well, we expect to earn less there this year.

Jade Rahmani, KBW.

On the Sri lending segment, most of the growth in the core portfolio was in the first mortgage segment, which at quarter end I think was one times levered.

Is that a function of the whole loan originations on development deals you are doing? And also can you talk to whether this category, if you expect to retain all of it or there is potential for the sale of A-notes within that category? And also if the first mortgage category includes a B-notes?

Yes, yes and yes. So, yes.

When we are originating a loan and it's, let's say a high (inaudible) loan, we anticipate as we fund -- we like our coupon on our first mortgage. There is no leverage against it as it is funded. We will go out and sell an A-note down the road and dramatically enhance the yield on the first, dramatically.

That is the strategy behind many of those loans. And it is made possible through uses of leverage, (inaudible) leverage. And also because of the way we structure the deals, we are able to get some pretty wide coupons on the first that are pretty good in and as of themselves.

Do you want to add anything to that?

That's why you see that leverage of one to one as opposed two to one. It is a business mix. It is a little tricky again because we do think about attributing the converts as leverage against certain investments that we have on the balance sheet.

We're going to have to rethink that.

Does the first course mortgage category include B-notes, or are those insubordinate mortgages?

Those are insubordinate mortgages.

The press release noted your thoughts on further diversifying the business, and I wanted to see if you could provide any additional color on that.

You had mentioned triple net lease in the past, which you have looked at. And I'm wondering which were thinking on that side.

We'll be silent on that. Triple net lease was a business we looked at. And I will reiterate, the reason we haven't done it is our conservative nature.

So triple net lease is a bond. If you do think interest rates are going up; you're going to be in trouble. Most of those -- let's say it's a ten-year lease. It might have a ten-year loan against it that is fully amortizing. So even though you have a decent cash on cash yield on the equity, you have no cash because all of your cash is going to pay down the seniors, and the building will be empty in ten years.

We have no cash to pay the dividend. We would be borrowing against this theoretical residual to pay you a dividend.

That is what I abhor about the single-family triple net lease business. If in fact you could have a corporate facility IO, no problem.

But most of these portfolios, like the LSC which we looked at --and we're not even going to talk about cap lease -- great credit stuff but the outstanding debt, I just don't want to do that. I don't want to pay a dividend out of air because all the cash is going to pay down the senior so it will amortize the debt which usually matches the lease term.

We have not done it ,and we have looked. And lord knows we've presented with a zillion different deals, some of which have gone public on their own. But we have chosen to be conservative in that manner at least.

Any other businesses or business types that you would look at? I assume that --

There are types of financing that we would like to be involved with. But Boyd and the team, we have to figure this year out how we're going to executing in these lines of businesses. But we don't want to talk about it.

Lastly, the comment in the press release that leveraging LNR's infrastructure to run Starwood's day-to-day operations I thought was interesting. Investors have periodically asked me about whether you might think of potential internalization of management. And I am curious if you could offer any comments on that.

That is something that we are thinking about at the moment.

I think what you are seeing us do is to more of back of the house than front of the house, obviously. We have a team, 40 people, quadruple our overhead in Europe and there's not a single employee of the REIT in Europe at the moment other than -- they're all OCG people.

All the stuff we originate in Europe is done for our management here -- essentially covers part of our overhead. We hired the head of debt from the MP power line I think it is. Peter Denton who -- I just got an e-mail this morning about four more hires they want to make into that group in Europe.

We are expanding the overhead, especially in places like Europe, where our focus, by the way, has mostly been in England, the UK.

You can see us broadened that out. But probably there are some countries in the Continent we will not lend in. It's not friendly to lenders, so we won't do that. You won't see us there. One of them has a prime minister who has five girlfriends, so you can figure out what country that is.

Just want to the White House recently, stag. This is what happens with the call goes over the allotted time. [ Laughter ]

Actually, I have two quick technical ones.

One is on the seven 701 Seventh Avenue. You said 20% of the equity. Is that relative to the refi recap you did or the original size of the loan or there's parameters you can provide?

It stayed in place. So what's part of the original loan was refied and stayed in place.

The reason the deal was refirf was to build the addition hotel, which Marriott has provided -- I don't know what has been said but that -- there is a guarantee in place that facilitates that construction of that hotel.

And here is a really interesting case in point. I built the W across the street. I know exactly, even today, what it makes. And I know what it made when we built it, and I know exactly what this hotel will make, more or less, barring a worldwide-something-bad happening.

And what it cost to build, I know it is literally not 1,000 feet from here. And frankly, this is going to be a damn good hotel for a W.

But it's really going to be much better. The W doesn't have any common area. This has a ton of common area.

If you look at the building today, the top of the building will be the lobby of the additional hotel, which will rise from the existing building. It's something like 40 floors or something.

It is going to be fantastic. And that is the best hotel market in Manhattan, Times Square, because on get full-on weekends, you get the foreign travelers and everybody wants to stay in Times Square.

Don Fandetti, Citi.

Just curious -- if you look at the special servicing business, would you ever make another acquisition there? Is that kind of a scaled business, or are we seeing kind of what you need in that business? ¶ And secondarily, if you could just talk a little bit more about the competitive landscape in your lending business.

In the lending business?

Yes, just your spread lending business -- so two separate questions.

I will take the first one. Obviously, everybody looks at everybody in our business. Taxable business, the LNR servicing. It's taxable to everyone who owns them.

LNR -- it is funny mentioned the $250 million or $230 million or something as the value of the servicer. I also mentioned they are hard to value. I am not sure everybody agrees on the valuations of these things.

As far as the competitive landscape, just name anyone and they probably are competing against us. Anyone you can think of -- whether it's the money center banks, the big banks or Deutsche Bank or your bank or Wells, who is on the call, or if you have a balance sheet at Goldman Sachs.

But it is the case where we partner and we compete and all of the above.

Then you have the public companies -- We don't see much of the two smaller guys in the lending business these days. Occasionally, we see Colony, don't really see much of Apollo, occasionally -- actually I shouldn't say that. They're quite active in Europe, but through their insurance company. I think it is.

As you look at guidance into 2014 on the lending business, do you assume any spread compression? And if you do, do you offset that with lower financing costs and more leverage to where the lever returns? Or ROEs are pretty static from today into 2014?

We're pretty comfortable -- ( multiple speakers)

What we think we can do.

We can't quote the number because we wobble based on the quality of what we are doing.

We are not cowboys. We're not doing 92% of LTVs and standing in front of the guy to take out. We're not doing dividend recaps. We're not letting the guy take out $100 million up front.

But it will change. An office building in Manhattan, that's where office building is going to get a different quote from us than an office building in Bismarck, North Dakota. It's probably booming in Bismarck, but--

In my remarks, I think I gave you a range. I said that given that our basic -- again, that business model, the 45% to 65% retention we're targeting to Barry's point a wide range, but in the low 9%s to 12%. After manufacturing and leveraging and all of that other stuff on what we target as the retention, as the portion that we are using -- the equity capital, the shareholders money to invest in.

And it is absolutely a function of the attributes of the transaction, the market, sponsors, all that stuff.

I would just mention that LIBOR base, 9% to 12%. So it is a floating rate.

Yes, in today's environment.

( multiple speakers )

I'm sure you will follow the XMT -- you have seen the book, 5.25%, 4.75%. LIBOR is 4.5%. You can see the same kind of flex.

We're competitive with those guys, and they're competitive with us. Sometimes we choose. We don't like something about the deal. They may like it and vice versa.

Thank you very much for being here today, and hope we're able to answer calls. Thank you for being with us today.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation.