Starwood Property Trust Inc (STWD) 2014 Q4 法說會逐字稿

Good days, and welcome to the Starwood Property Trust fourth-quarter 2014 earnings conference call. Today's conference is being recorded. At this time I would like to turn the call over to Zachary Tanenbaum, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and welcome to Starwood Property Trust's earnings call. This morning, the Company released its financial results for the quarter end December 31, 2014, filed its 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the Investor Relations section of the Company's website, at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements 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 the 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. Reconciliation of the these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the Company's CEO; Rina Paniry, the Company's CFO; Jeff DiModica, the Company's President; and Cory Olson, the President of LNR.

With that, I'm going to turn the call over to Rina.

Thank you, Zach. Good morning, everyone. I will begin this morning by reviewing the Company's fourth-quarter and annual 2014 results, both on a consolidated basis and for each of our two business segments, and then providing a brief discussion of our 2015 earnings guidance. Following my comments, I will turn the call over to Barry, who will discuss current market conditions, the state of our business and the opportunities we see looking forward.

Starwood Property Trust continued to deliver strong results for its shareholders in 2014. During the year, we deployed a record $7.4 billion of capital across a variety of assets including floating rate loans, fixed-rate conduit loans, CMBS, and equity investments. As is announced, $5.2 billion came from our lending segment, which represents an increase of 33% over the $3.9 billion deployed by the segment in 2013. For the year, we reported core earnings of $473.7 million, or $2.17 per diluted share, an increase over the $352.6 million of core earnings, or $2.11 per share, we reported in 2013.

Turning to the fourth quarter, we deployed $2 billion of capital and reported core earnings of $112.1 million, or $0.50 per diluted share. This is down slightly from the $0.55 we reported last quarter, principally as a result of the realized gains of $12.7 million, or $0.06 per share, that we reported in our third-quarter results. Excluding CMBS gains, core earnings were relatively flat reflecting the consistently strong performance across our platforms, and particularly our lending business.

As of December 31, book value per diluted share stood at $16.84, reflecting a 1% decline over the book value per share that we reported at the end of last quarter. This decline is principally due to the impact of the end-of-money portion of our converts. As we have discussed in the past, this portion is required to be included in our diluted share count under GAAP. Because it is largely a function of our stock price at the balance sheet date, it can vary significantly from period to period.

During the fourth quarter, due to increases in our stock price, 3.4 million shares related to our converts were included in the calculation of book value per share, compared to just 1 million shares in the prior quarter. Because of the unrealized nature of this volatility, you will notice disclosure in our 10-K indicating that we revised our methodology for computing core earnings per share.

For 2014, and going forward, we will now exclude the impact to our core shares coming from the end-of-money portion of converts. However, it is still included for GAAP purposes, and thus you will continue to see the effects on book value and fair value per share calculations depending on our share price. Fair value per share, which we compute as the fair value of our assets net of the par value of our debt, was $17.40 at the end of the year, also a decline of 1% over the prior quarter for the reasons I just mentioned.

Now turning to results of our segments, starting with our lending segment. During the quarter, this segment contributed core earnings of $75.6 million, or $0.34 per diluted share, reflecting an increase of 7% on a per share basis. Despite repayments of over $150 million this quarter, our loan book grew by 10% from a balance of $5.5 billion last quarter to $6.1 billion at December 31. The increase was driven by $1.2 billion of new investments that closed during the quarter, of which we funded $1 billion. These new loan commitments, which consisted principally of floating rate loans, include a diverse mix of property types and primary morning locations, all with first-rate institutional sponsors.

This quarter we again took advantage of international opportunities announcing the co-origination of $350 million, or GBP200 million, first mortgage with the European affiliate of Starwood Capital for Aldgate Tower, a 317,000 square foot office building in London. Of the total loan amount, we originated $220 million. As we typically do with our foreign denominated investments, we have hedged our exposure to foreign currencies related to this loan. At the end of the year, Europe represented 13% of our overall lending portfolio.

The fourth quarter also includes the $150 million equity investment we discussed with you during our last call. The asset is a 33% participation in a high-quality retail mall portfolio. In this the investment, we invested alongside three sovereign-wealth funds. You will see this investment included in the investments and unconsolidated entities line in our balance sheets, and its reported in earnings from unconsolidated entities in our income statement. We reported $2.2 million in earnings from this investment during the quarter. This amount is net of depreciation.

Despite the competition for yield that we are seeing in the marketplace, the returns on our lending segment's target investment portfolio remains strong at 8% on an unlevered basis, with optimal levered returns holding constant at almost 11%. In computing these returns, we are not including the allocation of any corporate level debt, including our term loan and convertible notes. If we were to attribute this debt, our target returns would be markedly higher. Our lending focus continues to be in major markets, including New York, California, and Europe. We have very limited exposure to the oil producing states, with less than 5% of our target portfolio secured by collateral located in Texas. Of this amount, we have only $5 million of loans with collateral located in Houston.

Looking forward, we continue to have a strong pipeline of high-quality transactions that meet our risk adjusted return criteria. The credit quality of our existing portfolio continues to be our utmost priority, as evidenced by an average LTV of under 62% and our continued track record of zero credit losses across the over $14 billion of loans that we have originated or acquired since our inception.

Turning to the topic of interest rates. As we have stated in the past, we are uniquely positioned to benefit from a rising rate environment. 77% of the lending segment's loan portfolio and nearly all of its pipeline is indexed to LIBOR. Of the floating rate portfolio, 87% benefits from having a LIBOR floor averaging 0.35%, which is higher than current LIBOR. As LIBOR rises, our interest income will increase as well.

We continue to finance our floating-rate investments with floating-rate debt and our fixed-rate investments with either fixed-rate debt or floating-rate debt hedged by interest rate swaps. While we would pay more in interest expense on our floating-rate debt if interest rates were to rise, this increase would be more than offset by a course funding increase and interest income from our floating-rate loans. Also, for the portion of our portfolio that is fixed, the weighted average interest rate is an impressive 8.2%.

We estimate that 100 basis point increase in LIBOR would result in an increased annual income of $18.3 million, or $0.08 per fully diluted share, while a 300 basis point increase in LIBOR would result in an increased income of almost $60.1 million, or $0.27 per share. This does not include any benefits that our special servicer would realize in a rising rate environment. If rates rise, the expected number of loans that would enter special servicing increases, and accordingly special servicing fees would also increase. Speaking of special servicing, I will turn to a discussion of our other segment.

You probably noticed that we have introduced a new segment name in our financials this quarter. The new investing and servicing segment, which was previously called the LNR segment, was renamed to more accurately reflect the multi-cylinder nature of this business. While the LNR name is practically synonymous with special servicing, this segment of our Company is much more than just a special servicer. In fact, in 2014, net servicing fees represented just 36% of this segment's gross income sources on a core basis. With a $750 million CMBS portfolio, which contributes 39% of gross income sources, and a conduit business, which securitized $1.6 billion in 2014, this multi-cylinder development platform does not really sole on one income stream to deliver its results.

So, we selected a name that would be more descriptive of the overall business initiative for this segment. The new name is also part of a slight reorganization of our segment reporting, which will be based on the nature of the investment going forward. For instance, all CMBS will be reported in our investing and servicing segment and all performing loans and preferred equity investments will be reported in our lending segment. While we currently have only minimal duplication between the two segments, as we continue to seek new investment opportunities, we believe this form of reporting will make it easier for investors to understand and analyze our operating results. Segment reporting aside, our special servicer will continue to operate under the LNR name.

As we said last quarter, while the investing and servicing segment may experience some earnings volatility on a quarter-to-quarter basis, cumulatively, we expect a relatively strong contribution from this segment. To this end, the investing and servicing segment contributed core earnings of $36.5 million for the quarter, or $0.16 per diluted share, down from the $53.9 million, or $0.24 diluted share, we reported last quarter. The decline is primarily attributable to the CMBS gains I mentioned earlier.

You may also recall that during our last quarter earnings call, we discussed a timing issue related to one large liquidation that was anticipated to close in the fourth quarter, but instead accelerated to the third quarter. These types of variations are to be expected on a quarter-to-quarter basis. If we look to the overall year's results for this segment, core earnings were $176.9 million, or $0.81 per diluted share, compared to $126.8 million, or $0.76 per share in 2013. Included in this segment results for the quarter is a reduction to a domestic servicing intangibles of $9.8 million, leaving the intangible with a remaining book and fair value of approximately $178 million at year end, representing only 2% of our gross assets.

Despite its continuing amortization, the servicing aspect continues to deliver stronger than expected performance and consistently positive returns on our invested capital. As of December 31, LNR was named special servicer on over 150 trusts with the collateral balance in excess of $130 billion. We expect the intangible to grow as the 2006 to 2008 CMBS maturity shift more of that $130 billion into special servicing in 2016 to 2018. At the end of the quarter, LNR was actively servicing $13.7 billion of loans and real estate owned, down just $1.3 billion from last quarter. LNR has maintained its foothold as one of the world's premier special servicers, retaining its one-third overall market share. Further evidencing its leadership in this space, LNR was ranked first in new servicer assignments for 2014.

These new servicer assignments are principally the results of our continued active participation in the CMBS B-piece space, where we continued to exploit high-yield opportunities. In 2014 alone, we invested almost $200 million in new issued B-pieces across 14 deals, all of which we partnered with other investment firms, and ultimately took approximately 37% of the B-piece investments on a weighted-average basis. In each of these deals, we were named special servicer for the related CMBS trusts. We also purchased B-pieces in two 2011 vintage CMBS deals on an opportunistic basis.

On the new issued B-pieces, it is important to point out that any benefit we would gain from serving as special server of these trusts likely won't be realize for many years and will therefore have little impact on our current financial statement. Because the performance of our CMBS is naturally hedged by the earnings potential of our role of special server in the same transaction, earnings resulting from servicing and investment income combined are expected to be relatively stable. Another potential feature benefit to our CMBS investment activity could come from the risk retention roles that we discussed last quarter. While the industry is still working to determine the exact impact that these roles will ultimately have, we believe these roles could provide us with a competitive advantage.

The roles require the sponsors of securitization transactions to retain for five years, 5% of the loans they originate. The five-year hold restriction would limit the B-piece playing field to only those investors with permanent capital, which many current market participants do not have access to. As one of the pioneers in the B-piece space coupled with our scale and our ability to hold risk capital long term, we are uniquely positioned to capitalize on these structural changes either by sponsoring our own transactions or partnering with financial institutions. We will continue to evaluate the impact of these roles and will update you as we work through the tier implementation period.

The third key contributor to the results of the investing and servicing segment is our conduit operations, Starwood Mortgage Capital. Despite tightening spreads and increased competition, this business continues to deliver superior performance. Our conduit securitized a record $1.6 billion in 2014, in a total of 11 securitizations. That is a remarkable turnover rate of almost one securitization per month, allowing this business to generate extremely attractive returns on our invested capital, while at the same time, reducing the credit risk of holding these assets for longer periods. As margins continue to come in, we expect to see a slight decrease in profits in 2015, but generally, this business should continue to be a strong contributor to the segment's results.

Now, turning to capital markets. Complementing the success on the origination and investing side of our business, our great results in our management of the right side of our balance sheet. As of December 31, our overall best equity ratio was 1.2 times. The increase from the prior quarter is attributable to our efforts to take advantage of attractive borrowing rates and borrow-friendly terms, which have become available to us at this point in the cycle. We created an additional credit capacity on our repo lines of over $500 million during the quarter, and selectively sold over $200 million of senior interest in our loans.

During the quarter, we also issued $431 million of 3.75% convertible notes, which mature in 2017. As of December 31, our total borrowing capacity was $5.8 billion under 13 financing facilities across 11 leading financial institutions and three convertible senior notes. We also amended our $250 million share repurchase program to allow for the buy back of our convertible notes in addition to our common stock. There was no activity in this program during the fourth quarter. As we evaluate sources of capital, we do so with an eye towards the overall leverage levels. While we plan to continue taking advantage of our opportunities that will make the right side of our balance sheet more efficient, we will stay true to our original commitment to our investors to retain appropriate leverage levels in the context of our overall balance sheet and our ultimate goal of achieving investment grades.

As we look ahead, I'd like to turn to a discussion of our current investment capacity, the fourth-quarter dividend and our 2015 earnings guidance. As of February 20, 2015, the Company had $287 million of available cash and cash equivalent, $84 million of net equity invested in RMBS, $94 million of approved but undrawn capacity under our financing facility, and $391 million of unallocated warehouse capacity. Together with the expected maturity, prepayments, sales, and participation over the next 90 days and net of working capital needs, we have the capacity to acquire or originate up to an additional $1.1 billion of new investments.

Now turning to our dividend, consistent with prior quarters, our Board has declared $0.48 dividend for the first quarter. The dividend will be paid on April 15 to shareholders of record on March 31. The $0.48 dividend represents a 7.9% annualized dividend yield on yesterday's closing share price of $24.28. We believe these returns continue to be compelling, given our high-quality loan portfolio with LTVs of less than 62%, no history of credit losses, a CMBS investment, servicing and conduit platform that continue to deliver consistent performance and modest leverage levels overall. We are proud to say that we have earned our dividend in every one of our 22 quarters since inception.

As we look ahead to 2015, we are providing 2015 core EPS guidance in the range of $2.05 to $2.25. There are a variety of factors impacting the formulation of this guidance, and I want to take a moment to walk you through some of the major assumptions, starting with our lending segment. In 2014 our lending segment contributed 63% of consolidated core earnings, and we expect its relative contribution to continue into 2015. To achieve our targeted earnings in 2015, we expect to deploy a similar amount of capital as we did in 2014. In addition to fundings on previously committed loans and originations of more traditional loans, you may also see us investing in assets that we have not traditionally invested it, such as the mall portfolio we talked about earlier. As for the sources of capital to make these new investments, we expect that payoffs will become an increasingly significant source of capital.

Though this is a number that is very difficult to estimate with certainty, we have a team of asset managers as part of our internal infrastructure which closely monitors the performance and expected repayment of every asset in our portfolio. This enables us to manage cash flow as efficiently as possible. We expect to be able to put these repayments back out to work, thus keeping the portfolio fully invested and avoiding any cash drag. This is a unique advantage of the scale and maturity of our business.

We also plan to utilize some of our more traditional sources of capital, including off-balance sheet financing in the form of [gain on] sales and securitization, or on-balance sheet financings in the form of secured asset-level debt or corporate-level debt. Given general margin compression, returns on new loan originations are expected to be slightly lower than historical levels, but it's still accretive to our dividend. With respect to the investing and servicing segment, as we said before, we expect quarterly volatility in this segment's earnings to continue. Overall, we expect a steady contribution from this segment over time.

Servicing fees are expected to trend downward in 2015 and part of 2016, as the nearly $14 billion in defaulted assets currently in servicing are gradually resolved. However, we expect to see a new wave of defaulted mortgages starting in 2016, as the 10-year loans from the 2006 and 2007 vintages reach maturity. We believe performance in other areas of this segment including our CMBS investment portfolio will largely compensate for the expected near-term decline in special servicing profits. Similar to 2014, we plan on deploying additional capital into the B-piece and legacy CMBS space and will continue seeking opportunistic sales for bonds in our portfolio based on market condition. In the current environment, we expect loss-adjusted yields to maturity on new issued CMBS investments to be in the low double digits.

With regards to our conduit lending operation, competition continues to increase in this space. Although we expect profit margins to decline slightly, we expect increases in securitization volumes to somewhat offset this decline. In addition, we will continue to pursue equity investment opportunities, sourced both my our manager as well as opportunities from our servicing book. We believe this segment is well positioned to source and underwrite highly accretive equity investments. As we look to deploy capital across all parts of our business, we will continue to in invest in those assets which will generate the most attractive, rick-adjusted returns for our shareholders, while still maintaining our disciplined approach to investing.

We will also continue to leverage our relationship were our manager, Starwood Capital Group. Together we are almost 1,000 people strong. We will mine the multitude of investment opportunities available to us via our lending, special servicing, B-piece, conduit, and equity platforms, all of which provide us with access to unparalleled expertise across the global real estate markets and uniquely positions us to take advantage of opportunities going forward.

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

Thank you, Rina. Good morning, everyone. First, I'd like to mention that Andrew Sossen is not with us because he had a baby boy -- or more accurately, his wife had a baby boy two days ago, so we told him he didn't have to come in for the earnings call. I know you'll join me in congratulating him on his second child.

Rina's presentation was quite long and exhaustive, so I'll have some fill-in comments. I think in summary, since it's the end of the year, we had a great year. It was an excellent year, we put out $7 billion all at attractive returns across multiple business lines, everybody rowing in the same direction, very attractive risk adjusted returns, I'd say, incredibly compelling for its shareholders in this low rate environment. Overall feeling is that rates will stay low longer, and we continue to operate with that viewpoint even though we have a free call option on higher rates, as Rina outlined in our earnings, given our floating rate asset base.

There were a lot of people worked really hard this year, and I want to thank them on the call. This is a big company now, with a big asset base, and we are paying out a lot of dividends. When we started this Company back in 2009, we said that from a pile of cash we said we would build a company that was consistent, predictable and safe, and believe that our yield plus growth. I think we've delivered that. If you added back the value of the spun company, SWAY, we are the best performing stock in the sector over the five years and returning over 100% to the shareholders either through dividends or stock price appreciation over the time period, so it's been a very good five or so years.

We're really looking forward with the organization we've built and with expansion of Starwood Capital Group, the manager, to continue to provide shortened opportunity to our shareholders going forward. The markets are competitive. It's not news to you that there are many conduits operating in the market. We've been through three or four of these cycles, even in our five years, where capital flows in and flows out, spreads GAAP in, GAAP out.

There are anomalies in the market that are taking place today. The large floating rate loan securitizations have not -- you're beginning to see, I think, the impact of recent regulations on buyers, banks and other institutions don't have a place for non-rated paper. It should create interesting opportunities for us, which we'll look at take advantage of. We've played it in a small way in the fourth quarter in two such positions where we felt that we could participate in some of the securitizations and find very attractive yields for our shareholders.

The markets are, clearly, competitive. I think we are relying on reputation, the ability to execute quickly, our ability to diagnose complex deals, and the ability to write large loans, our size. We think all of those reputation, speed of complexity and the ability to do scaled deals give us a sustainable competitive advantage in the marketplace. We are an important player, though small in the overall lending market, in what I'd call non-investment grade loans. Though, you'll look at our book and you will see that a 62% LTV this late in the cycle, that's an astonishing number.

We continue to look, though, because of those competitive worlds, at equity opportunities. These opportunities go through the same rigor that our debt opportunities do. We're looking to achieve a very attractive cash-on-cash yield from the mall portfolio. Our participation is greater than 10% cash yield, which are attractive and accretive to the dividend, and they don't get repaid. It will be years before we have to worry about getting the money back and redeploying it. So it increases our duration of our book by doing equity investments, and we obviously have a call option on appreciation, particularly if we can take advantage of the interest rate cycle and buy assets here.

You will see us probably do more in the core space -- core plus space, value-added space and the equity. It will grow as a percentage of our assets. It's in our pipeline of several transactions. Again, we're looking now globally at opportunities that we think will be very attractive to REIT, and our Board would agree us. They are in the same vein, consistent, predictable, safe, and attractive yields. We're also, -- I'm particularly looking forward to the maturity of the 2016, 2006, 2007 10-years legacy CMBS investments.

They should provide a fertile growth in opportunities for us, both the buyouts and set of trusts, and also to lend, then refinance and restructure the loans that are coming due. I think that's bodes quite well for us. A lot of loans, probably, will continue to perform in the sense that we will continue to see that [onto] 2018, as well as our -- as you know, a servicer can simply extend a loan. It can extend a loan for a month, a half a year, a year, two years, so those don't leave the system. We have a pretty good view.

I think one of the surprises of the heritage LNR acquisition is the pace at which the book has declined, which is quite a bit slower, as it should be -- that's a good management of our team, by the way -- than we might have predicted and did predict in the acquisition. But I would also point out, as Rina did, that the service took 2% of our assets, and not, the majority of our income in the heritage LNR segment coming from other businesses not from the servicing book. It's just -- it is a volatile interesting little feature and kind of unique to us. We continue to learn from them and them from us about how to now take advantage that have book.

I also think one of the things that is probably a highlight of the Company in the last 12 months is we've been really focused on increasing ROE. You know we haven't done an equity offering since last April. That's a long period of time, especially as loans come back. We've been working. We have 13 credit facilities. We're going to be adding billions of dollars, probably, of additional credit facilities, working with our banks and really working with our relationships that have become critical.

We're in the Top 5 borrowers from most money center banks across our $40 billion platform. So we are pushing on those relationships to get better credit facilities for our Company here, and also partnering with the lending institutions. We needed to bridge -- a loan that was getting repaid to us, and we wanted the cash so we wouldn't have to do a equity offering. We borrowed $100 million from the bank and two months later it was repaid, so we paid the bank back.

Having relationships like that allow us to manage our cash much better, which significantly decreases the drag on the Company of having an equity offering and having cash sitting around. Even if we're raising the capital, as we have historically, for additional investments, there always is a drag between when we expect the loan to close and when it does close, and it creates a little bit of a noise in our quarterly numbers. I think we're doing a really good job at that and managing our balance sheet, increasing ROE has been a focus.

To that vein, you know we have some construction loans, including Hudson Yards in New York City, which we expect will get repaid at its maturity and essential completion of the building, when they get the TCO and probably will refinance us. In assets like that, since we know it's going to be repaid and we have a first mortgage written at a very attractive rate, we can sell off -- it was always our goal to sell off seniors in these construction loans, which are all first-mortgage loans. As we sell the seniors off, that's in essence an equity raise. Jeff and the team are working on that and it's another source of capital for us, which does not require us to go back to the capital markets.

If we can avoid that, we will avoid it. As you know, we're partners with the shareholders. If we think it's an incredible opportunity to raise capital for some large transaction, you will see us come back and raise capital in this climate, if it's accretive to the enterprise as a whole and the Board agrees.

With that, I'll just stop and I'll say April 2, we're doing our Investor Day, it will be in New York. It will be webcast, also. Reach out to Zach Tanenbaum for more information if you need it. We're looking forward to that. You'll see the breadth of the team at that day. Hopefully, you'll learn something and we'll learn something from you about your concerns and issues.

Again, I think steady for the course. It isn't easy. This is not an easy business today. We continue to look at pockets or vacuums where we can lend money, if attractive, and move across the whole spectrum. You saw a very large loan in Europe. We just killed a large loan that we tied up in Europe. Another transaction we killed on credit quality that just came through. It was a very interesting deal that we were all gung ho about doing.

It was significant, but we're not going to do it unless the seller changes the credit covenants of the package of things they're selling us. We're going to continue to be picky as can be. You can't see the risk profile of what we're doing very well, but you can see that not a single loan in five years have defaulted in our portfolio. We're pretty proud of that track record. It's a tribute to our very robust underwriting and investment committee process, which really does blend the best of lender's lending discipline and as well as the equity discipline.

Oftentimes we're lending against assets we either bid on, like [McKinn] on the west coast, where we bid on a property, or the big land assemblage in southern California. We bid on the property, we lost, and we turned around and lending it instead. That's when you get tremendous synergy from the manager, because we know exactly what it's worth. We just bid on it and lost. We certainly wouldn't lend against it at $0.70 of what we were willing to bid against it on.

That is probably one of the most powerful things about having affiliation with the Capital Group for the Company, as well as their ability to source assets. We have as you know a 50-person team in the UK, all the which are always sourcing investments. We've restructured our group over there to look at -- to really add bodies to continue to source loans in Europe. It's pretty interesting in Europe, again. This spread on traditional properties, that we bought some office buildings in Poland and we've bought some office buildings in places like Dublin and London.

The spreads you're getting are pretty astonishing, 150 basis points over. There's plenty of capital, but there's never any interest in capital. The bread and butter businesses of banks, they're stretching for yield, but if there's any wrinkle whatsoever, it's the great stock place for us to take up to 300, 400 basis points of excess spread, which we would then sell off the A note and keep the difference and achieve these target returns.

We'll point that out, so that I think something Rina mentioned, I'm just going to highlight it because one of our peers mentioned it also. Again, if you attributed all of our corporate debt and converts to our loan book, you'd say our returns are probably in excess of 13% on our assets. We haven't done that. Historically, we've given you the number with the debt in place, not theoretical debt in place, just actual. In fact, the opposite takes place here.

If we can get $100 million loan, and we can retain $30 million and sell $70 million and earn a 14%, or we can retain $40 million and earn 11.5% we will take the 11.5%, because we think that's a tremendously attractive return in the no-interest rate environment. We'll increase the size of our equity investments. We're not -- to lower our returns, if we like the credit quality and don't meet every deal to be a 14%, that would be lovely. But, [clearly] is our goal is to continue to provide our shareholders with a very consistent and safe return. That's what I think we've done so far.

I will say that as the world gets more cautious -- we were asked at the IPO and I'll continue to say it, when there's nothing to do, we are not going to do it. We're going to shift investments to a different area, if there's nothing for us to do in lending. If it's all risk and no reward, and we do worry about loosening of credit standards, you're seeing more and more loans kicked out of conduit deals. People are -- well if the rating [institutes] doesn't like them, the buyers don't like them. It shows you that you're seeing deteriorating credit conditions or people stretching to make loans to compete. I think there's like 40 operating conduits again. I have to tell you, that they underwrite to a different standard than we do, as an owner of risk.

With that, I think we'll take questions. Jeff's here. Cory's on the phone -- the President of LNR, to onboard the investing -- what do you call it, the investing and servicing segment? (laughter) We're trying not to call it LNR anymore. Somewhere in the line, we could get you the Head of LNR, which is now just the servicer.

Anyway, thank you, everyone, for -- and we'll take your questions.

(Operator Instructions)

Dan Altscher with FBR.

Rina, you had mentioned that, I guess in the lending segment, the exposure to Texas and Houston is relatively small. Maybe this is actually for Corey, as you look forward the servicing book, is there maybe an opportunity there to see some defaults across some of those geographies, whether it's Texas or maybe in the Dakotas, that could present a bit of an opportunity?

It's a great question. Obviously, the CMBS space is constituted of assets and loans. It's stretched from coast to coast, so it's going to have more geographic diversification to it than would the large floating rate loan book. I would agree.

We'll see probably, ultimately, some more activity in special servicing coming out some of the Texas markets, in Bakken shale and some of the gas markets. We'll see what kind of opportunity that presents to us other than just, obviously, special servicing related activities. But we do expect to see modest uptick in loans coming into servicing over the next 18 months associated with those regions.

Okay.

It's early for you to see problems in the Texas markets. The oil just fell three months ago. The issue will probably be first felt in these office markets where it's the number one city for new construction in the United States. My guess a lot of those energy companies that are probably these space will be reluctant take as much space, and might try to weasel out of commitments to space.

Second place, what you seeing is -- you will see, and we expect -- when we did some work on this, we think you'll see it in multi-family rents, but that might not be 18 months before you see it. There's been a flat lining, not a collapse. There's been a flat lining in the single-family home business for home prices and demand. I think builders are wary that they might be over building the market.

I will point out, it's not the case in Texas. If you look at the absorption of multis, in Houston, it's gone flat into slightly negative, but Dallas is doing fine. There's another school of thought that will depend on what side of Houston you're on, because the chemical refinery and petrochemical industry is actually benefiting from widening spreads and boosting their returns. The port area of Houston is actually benefiting from the energy crash.

It's all -- Texas has been the number one source of jobs in the United States in the entire recovery. There is an amazing stat that I once put up the other morning in CNBC, that all the job growth in the United States, all of it, is from Texas, in the last -- since the crash. The rest of the states combined haven't gotten back to where they before the crisis. I think it's 1.3 million jobs have been built in Texas.

You actually looked at the jobs, they are not all in energy. They are in servicing and education and health and other sectors. As you know, they've seen a significant immigration of people, jobs. That's one of the things going for it besides relatively better weather than New England and no taxes, which is definitely better than New England.

Thanks, that's really good color.

Barry, just trying to read between some of the lines of your comments around maybe some of the financing flexibility and capital. I guess my take has been you've generally thought of the Company as being a relatively low levered vehicle. But it sounds like there might be some opportunity to maybe increase the leverage a little bit more modestly? Is that the right read, as we think about this year?

No, I don't think so. It's interesting, as we look at equity investments, they might be 60%, 65% levered to generate very high single digit, low double digit cash yield. We're not levering to 85%, which we could and in some opportunity, fun to do. We wouldn't do that here. That's not what we're about.

As far as increasing leverage on loans, again, it depends on what we're doing. Our A-notes, if you will, that's implied leverage. I wouldn't say we've changed our strategy there. It's not a topic of conversation here. Jeff is it?

No, I would agree. Listen, the markets have given us some fantastic financing opportunities. Where the markets stretch, as Barry said in the beginning of the life cycle of this Company, I think we will look to those opportunities to take advantage of them.

The lending markets are very frothy. There's plenty to borrow for us. There's an abundance of capital and at lower rates than we thought there would be at this point in the cycle. Opportunistically, we've taken advantage of that, but holistically, I don't think that's our strategy.

The markets seems to be doing what the fed is wanting them to do. The rated classes are getting -- they bobble, but the trend line is forever ever decreasing spreads. The rated B classes has been to turn to put out capital.

You saw this morning, JPMorgan said they're going to give back $100 billion in deposits. If you look at their deposits, they are soaring at record highs, but their lending is flat to where they've been since the beginning of the recession. So, they're just sitting on a mountain of cash, and they've got to invest it in something.

They'll go to rated securities, because that's where the fed regs are the most beneficials for them. They will not touch the unrated, so anything that has that unrated piece in it, is where we play. Then, the job is for us to then widen our capital sack, as fat a piece of the capital sack we can keep and still achieve our returns.

That's the gig. You can see what is evolving in the markets. It's probably -- it's retention, rich retention rules that Rina mentioned. It will be very interesting to see how that works. It's not going in to effect yet for maybe 12 months.

So, how will the banks change their origination processes, if they have to retain the 5% slugs? They make big loans -- I was with the head of the (inaudible) for dinner two nights ago, and we were talking about that, and them not playing like they used to play. That's good for us.

That combined with the maturities of the 2006 and 2007, we should have a couple good years of reasonably decent runway.

Okay, and maybe just one other one on Europe. Can you just compare and contrast the opportunity there, I guess between geographies and property types? Are some geographies lending themselves to more transitional lending opportunities, whereas some other geographies are better stabilized type of assets, but just maybe a lack of financing available?

Well, it depends on what you want to lend against. We did a big loan on an office building in London. That is just being completed. For lots of reasons, the guy held off leasing, and we made the loan even though the building is substantially unlet.

We like our basis. Since we lent the loan, he's going to be 50% leased, and that's probably in three months. It's really good real estate, so it was no problem.

The banks have a trouble with an empty building, so easy for us. He had an issue with one of his partners, so that created opportunity -- he wanted to, whatever, buy him out or whatever and replace the construction loan with more permanent debt.

England, Ireland, the Nordics, Germany are all green lights, if we can finds stuff to do, we do them. Our partner, Jeff Dishner in London is fine in saying, you lend in the beer countries, than we stay away from the wine countries. We'll probably say that's the truth.

We have a pretty much -- I have put a red line around France, and we don't really make loans in France. I suppose -- it would be never? No, but it's a very tough to be a foreign lender in France, and we'll leave that to the French banks, which are so nice.

In Spain and Italy, we had a large thing we were going to do in Spain. The markets there are more wobbly in both countries, not clear if they're going up or down. We haven't really found a need to lend there. There's less capital there.

What you are seeing in Europe is the in-country banks lend in country. So if we, the Capital Group, are doing a deal in Spain, which we're looking at right now in hotel space, all the lenders are the Spanish banks. There's no one else there.

Same is true in France. The only people lending in France are the French banks. They've pulled in all their US operations and they've probably been instructed by their governments to support their own markets, which frankly supports their own banks, if you limit such exposure to local markets.

So you're not seeing a lot of foreign banks -- UK is different. You see the US banks. You see the German banks.

But within continental Europe -- it's interesting, we bought some office buildings in Poland and then we levered them 75% at 190% over. I don't know where we would play in those markets. They're leased. I think it's like here, you're looking at transitional deals, the same thing.

We really like Ireland, it's done really well. It has a great tax benefit. The office market in Ireland, and Dublin particularly, is tight and it's gotten really tight really fast.

Rents are rising. Good opportunity for us there, both in the equity and in debt. We're doing what we always do, we move geographies and change positions in the capital stack and we change asset classes as we see rick and reward changing.

We are looking in Latin America, I should mention. But the hedging of the currencies in places like Brazil, which desperately needs capital, is impossible. Though it is -- and if you look at the forward curve on the Brazilian real, you're going to lose a third of your money if you don't do anything in five years, if you don't hedge. Hedging is 600 basis points or so in the IRR, so it's very tough.

Other markets might be more attractive, that we're looking at, but we have not been able to find anything compelling to do so far.

Charles Nabhan with Wells Fargo.

You've talked about some of the optionality within the LNR specialty servicing business during 2015 before the 2006/2007 maturities kick in the following year. I was wondering if you could give us some color on some of that the optionality, including repurchase of bonds at par or collateral at fair value and what that could mean to the financials this year? How we should think about that as a variable to your guidance for 2015?

We've talked about it as multiple lines of businesses. One of the businesses we decided to look at is whether we should buy assets from the servicer. It's all subject to fair value guidelines.

I think you're not going to see, probably, a lot of vol in our earnings. This year we expect it is an okay year, frankly, from the servicer. Next year, the year after, 2018, we would expect better years.

I'd like Cory to talk to this. Cory, do you have an answer, or do you want to comment?

Yes, I think, clearly, there's some interesting opportunities. Now, when you look at STWD and the size of its balance sheet and in P&L, it's all relative. We've closed three modest sized, fair value par purchase equity investments for just under $25 million in net equity deployed at very attractive returns. I think you'll continue to see us sourcing opportunities out of that book.

How much capital could we deploy in a given year? It would be terrific if we could put out net equity of $50 million to $75 million, maybe a little more, maybe a little less. We will continue to look at opportunities that come out of that book of business and keep you updated as the year goes by.

Again, it's not a major line of business for us. That's what Cory is saying, but it is -- we have 12 cylinders. It's a 12 cylinder, and we'll have 13 or 14 cylinders, because we are not force capital into any one business when there's nothing to do.

What you didn't ask directly is, what's going on in servicing book? As Rina alluded to in her script, for the next, 12 months, 16 months, 18 months there's, again, a gradual decline in assets that are in special servicing. That is totally expected.

I think what Rina was referencing in her comments was the returns that we're getting off of our CMBS book, both the new issue market and the legacy CMBS space, plus things like opportunistic equity investing, et cetera, make us fairly confident that the contribution from the segment, the investing and servicing segment, will continue to be pretty steady even though there will be a slight decline in the amount of assets, short term, that are in special servicing.

Jade Rahmani with KBW.

Thank you for taking my question. I wanted to see if you could discuss volatility in the CMBS market in the fourth quarter? What you think the drivers were and whether this has persisted since year end?

In addition to that, could you comment on whether you saw any diminution in competition in the BP space as one of your competitors recently mentioned in its earnings review?

Sure. Hey, Jade, it's Jeff. How are you? Cory, I'll start and then have you jump in.

As far as volatility goes, yes, as most of you know, I think there were six or so floating-rate deals that were trying to get priced in the end of November and beginning of December last year. Those are both single-borrower and multi-asset deals. We saw BBBs and BBs widen out from the low to high plus $300 million range into the mid to high $500 million range.

We bid on four of those six, we knew the assets very well. Through Starwood Capital we had bid on a few of them already. Again, back to the scale of our manager helping us when we look at the deals.

Over the course of those, we ended up winning and a couple of them. Put some money to work at very attractive mid-teens yields on a levered basis.

Since year end, we've seen things come back in. I think that deals have done better. I think there was a liquidity problem in December, where lot of hedge funds and others probably had mediocre years and where they typically play in the bottom of the stack, they had pulled back.

The Street lost a lot of money in December. AAAs got wider into the low $100 millions, but are back into the high $80 millions. The market has rebounded a decent bit.

I think the fall on for us will be that over the coming quarter or quarters, the Street will be a little more reluctant to take down large, single asset positions. You will see less of those single asset and multi borrower floating-rate deals come out of them.

That plays right in to us. We're the competition for that. We will be able to get a little bit of a pricing advantage, and hopefully pick up some spread based on their leaving some portion of the market.

As far as competition in the B-piece market, I think we're seeing a phenomenon that we saw at the end of 2013, and it continued now into 2015. That is that the B-piece buyer has more control over shaping of the pool. We're able to kick out more and price adjust more loans than we have in a long time.

A big part of that is that there are going to be less people playing in that, given the five-year hold, given the 5% need to hold. Even though it's not coming for most of the year from now, there are going to be less people playing in it. We are starting to see an advantage come to the people who are permanent capital and can play in it for a long period of time.

I think our ability to shape pools will continue to get better. I think people like buying deals where LNR is the B-piece buyer, because they know that we are very good and very conservative with kicking out deals.

I sat down for four and a half hours one day a month ago and saw them go through every single loan in an CMBS deal. I don't know who has the scale to do that as well, across all the asset managers in our 330-person platform. Going through every deal, running stress losses, and running deals across each one in making decision, is really powerful when you can put the scale of LNR behind it.

Cory, do you have anything to add to that?

Yes, just a little color. In the fourth quarter alone, we underwrote $8 billion in CMBS loans here at LNR. To Jeff's point, we've got a lot of touches and looks into the marketplace. We're encouraged by our ability to leverage that scale and scope.

One thing we haven't talked about, but we have in the past is, all of those activities create more and better information and an information advantage that we try to glean out of our system. We're a very large underwriting and information gathering machine, which I think assists us greatly as we look at newish transactions, legacy transactions, et cetera.

As Jeff said, the opportunity now is probably to shape the pools a little bit more. We GAAPed out in December to maybe mid 15%s, pre-loss yields, because of a lack of competition. A lot of shops were full up and we took advantage of that.

As we get towards the end of the first quarter here, I'd tell you, competition remains robust. There's probably eight players out there that are pretty active in the B-piece space, and pre-loss yields are maybe closer to 15% now, maybe a skosh under that. It remains a competitive marketplace.

Jade, we've talked in the past about not just the pre-loss yields being what we will eventually book, but owning that servicing 10 years out, depending on what discount rate you put on that cash flow. Future cash flow is also significant, so it makes our yield, if it's mid teens, mid teens plus. So, we do look at it that way.

Steve Laws with Deutsche Bank.

Barry, you covered a lot on the Europe side, both in your prepared remarks and some during the Q&A. Can you maybe just quickly touch on what you expect out of the mix of the portfolio? The last two quarters roughly 13% of assets, 10%, 11% of capital, is that a mix we should expect to continue, or is that something you think increases over 2015?

Maybe our reorganization will allow us to get that number up. I'd be happy with 25% of the book, or even a third. I think we should -- I think we'll wait and see. We're working hard on finding new lending opportunities.

I think, maybe also, you have a fear in continental Europe of demand destruction, so we're less -- it's hard to underwrite continental Europe. I'm talking about the developed economies in Germany, France, Italy and Spain.

Much like our equities strategy has been more in the periphery and the UK and Ireland, we're not -- the core malls we'll never lend against -- I don't think, but it follows the equities strategy that we have. In our H fund, we were only 5% in Europe. In the ninth fund, we're a third Europe. In the tenth fund, which is -- I think we announced we closed in the next week, this week probably. It's running about half and half.

I don't know when the lending book will follow that, but I don't have any particular fear of being there, as long as we pick our asset classes in geographies and leverage levels appropriately. I doubt that happens, just because of the girth of our organization isn't built that way. We are always going to say that, there's no place like home where the rule of law is fairly well known.

I'd be happy, if it climbed. I don't know if it will climb.

Douglas Harter with Credit Suisse.

(technical difficulties) challenges on asset yields, but also the better financing. When you put those two together, when you look out, the incremental deals, how do those levered returns compare to what's on the book today?

Shockingly, it's the same. Around -- Jeff, what was the number?

We've been 11% the last two quarters, which has kept our portfolio yield somewhere around 10.8%. That's not going to last forever, we know the environment is getting hard. As Barry said, we would rather put more money out in thicker slices. As we make those decisions it will certainly come in.

We do write some 8%s and 9%s. There are awesome opportunities in great real estate with borrowers that we want to do business with, where we will write a levered 8% or 9%. There are some opportunities, sometimes, to get a different yield --

I don't think we can do a levered 8%. Not in the loans, but we will look -- we have touched that level or close to it. It's funny the loans going to get repaid, it was on the 14 and tool lot. It was like a 9%; I think and 8.8%, but that's tight.

That's -- it's in our blended returns which are 10.8%. It's not going to crash. It's just going to drift. It's done it three times, and we had this situation three times already in five years, where the -- every time there's a hiccup, the conduit owners flea the market. They shut it down.

The guys who run the conduits -- you saw like Credit Suisse just dropped their whole boardage book last time the market tightened up. They just let all their, the whole lending segment go.

There's a big change in the market, which is going to be very interesting to see. Some of the most aggressive lenders have been the foreign banks, namely like Deutsche Bank. Because they are asking them to capitalize their US domestic subsidiaries, that could have impact, dramatically, competition in some of our -- I would say they are among the most aggressive lenders and they do what we do and a lot more of it.

If they change their stripes, and you haven't really seen in the US or -- you see Credit Suisse. They must have capitalized here, domestic subsidiaries differently. Deutsche Bank has not had a highly -- you saw bank incentive there.

They are irrelevant right now in our business, but Deutsche Bank is far from irrelevant. They have been very aggressive, and often, our competition in transactions.

If they pull their skirts in, which I'm guessing a 70/30 they will, that's good for us and good for our sector.

Our pipeline blend is still somewhere close to 11% today. Notably, in the last six months, we really haven't done construction loans, which were very yieldy previously. Not that we wouldn't look at construction loans, but we haven't done any and we've maintained the yields without that. So, I think we do see opportunities, and as you said, the financing side is certainly helping drive our ability to maintain our yield.

But the pipeline is at 11%, so pretty good. It's always, actually, surprising. As you know we have the Christian Dalzell is running that group now for us.

It's never been easy (inaudible) to pick 11% of the Street when the 10-year is 1.99% (laughter). But you book a lot of ugly girls, or ugly guys, just to keep it on the -- (laughter)

Keep it non-sexist there. (laughter)

I'm sure that will come out in some replay now. (laughter) (inaudible)

We will take our last question from Eric Beardsley with Goldman Sachs.

Just a follow up on the competitive environment, at least you were talking about the potential for yields to drift down a little bit. Have you seen any changes in the competitive environment over last three, four months?

You've seen the banks pull back a little bit. I think there are very few people who play in our space, who have this scale to be able to lend on the size that we lend. The conduit, 40 people that Barry talked about is true. That is a smaller fixed-rate universe.

Within the large complex floating-rate loans that take a lot of work to get over the finish line and take a lot of expertise, there's very few people. There's still very few people.

I think the competition will remain the same, has remained the same. And I think borrowers recognize the scale of a few people who they can come to, and those are the repeat borrowers we've been able to continually get business out of. We expect to be able to do in the near future.

I don't necessarily think that the competition is going to be what drives opportunities, although a pull back from the investment banks will create more opportunity.

That will conclude our question-and-answer session. I'd like to turn the call back over to Mr. Sternlicht for any additional or closing remarks.

The only thing I'd say, is come to the Investor Day on April 2 and meet the team. It's always good to see Management, and we have a great team. I look forward. A lot of you on the call, and listened to the call as you fielded the call.

Thank you all for your continued support, and we look forward to talking to you next quarter, or seeing you on April 2. Take care. Thank you.

This does conclude the conference. We thank you for your participation.