Starwood Property Trust Inc (STWD) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Starwood Property Trust first quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Zach Tanenbaum, Director 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 ended March 31, 2015, filed the Form 10-Q with the Securities & 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 2ww.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 number of trends and uncertainties that could cause actual results to differ 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 risk 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. The presentation of this information is not intended to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable prepared in accordance with GAAP can be accessed through our filings with the SEC at www.SEC.gov. Joining me are Barry Sternlicht, the Company's CEO, Rita Paniry, the Company's CFO, Jeff DiModica, the Company's President, and Andrew Sossen, the Company's COO. With that, I will now turn the call over to Rina.

Thank you Zach, and good morning everyone. I will begin this morning by reviewing the Company's first quarter results, both on a consolidated basis and for each of our segments. I will also provide some information regarding recent our recent equity offering, and the pending acquisition of a portfolio of commercial real estate assets in Europe. We began 2015 with a very strong start, recording core earnings $123.7 million, or $0.55 per diluted share in the first quarter. This is up 10% from the $112.1 million of core earnings, or $0.50 per diluted share we reported just last quarter. During the quarter we deployed $1.2 billion of capital across a variety of asset classes, including $721 million from our lending segment, and $487 million from our investing and servicing segment. I will discuss the composition of this capital deployment in greater detail when I walk through the results of each segment.

As of March 31st, book value per diluted share stood at $16.67, reflecting a 1% decline from the $16.84 that we reported at the end of the last quarter. This decline is principally due to the impact of the intermoney portion of our converts, which is included in our diluted share count under GAAP. After adjusting for our share issuance in April, our pro forma book value per share would have been $17.06, which would have been an increase of 1% over last quarter.

Before I turn to our segment results, you may have noticed that we incorporated a slightly different segment presentation this quarter. We established a separate column for corporate overhead, in an effort to identify those items that are not directly allocable to our business segments. Previously these costs have been included in either the lending or investing and servicing segments. The corporate column includes interest and other costs associated with our corporate level debt, consisting of our convertible notes and term loans, management fees, and miscellaneous corporate level G&A. We have retrospectively reclassified our prior periods to conform to this presentation. So my discussion of segment results will be comparative on this new basis. I will being with the results of our lending segment. During the quarter, this segment contributed core earnings of $109.9 million, or $0.49 per diluted share. Reflecting a 3% increase over last quarter. During the quarter we funded a total of $659 million in new investments, and $130 million under pre-existing loan commitments for a total funding of $789 million. Despite repayments of $278 million in the quarter, our lending segment's target portfolio grew by 6%, from a balance of $6.4 billion at December 31, to $6.8 billion at March 31st. Our activity for the second quarter is off to a strong start, with nearly $1 billion in loans that have either closed or are under signed term sheets. The organic growth in this portfolio reflects our continued focus on asset, credit, and earnings quality. We continue to be very selective in our choice of property types, market location, and sponsor, as evidenced by our average LTV, which remains at a conservative 62%, and our track record of zero realized credit losses across our nearly $15 billion of historical loan originations and acquisitions. The returns on our lending segment's target investment portfolio remains strong at nearly 8% on an unlevered basis, with optimal asset level returns at 10.6%. In computing these returns, we do not include the impact of the corporate level debt. If we were to allocate this debt to the asset level, our returns would be much higher. As we have discussed in the past, our book remains uniquely positioned to benefit from a rising rate environment. 80% of the lending segment's loan portfolio and all of its current pipeline is indexed to LIBOR. For the 20% of our portfolio that is fixed, the weighted average interest rate is 8.1%. We estimate that 100 basis point increase in LIBOR would result in an increased annual income of $19.7 million, or $0.09 per fully diluted share. This does not include any benefits that our special servicer would realize in a rising rate environment.

I will now turn to a discussion of our investing and servicing segment. During the quarter, this segment again demonstrated the power of its multi-cylinder platform, recording core earnings of $60.9 million, or $0.27 per diluted share. An increase of 28% over last quarter. On the servicing front, revenues remain strong, and we continue to be ranked first in special service or market share in the CMBS conduit universe. The domestic servicing intangible was reduced by $4.9 million this quarter, leaving it with a balance of just $173 million. Less than 2% of our gross assets. As of March 31st, we were named Special Servicer on 156 Trusts, with a collateral balance in excess of $130 billion. And we were actively servicing $13.7 billion of loans and real estate owned, which is flat to where we were last quarter.

Turning to the CMBS space, we continue to exploit high yield opportunities in this market. During the quarter we invested $48 million in three new issue B-pieces, all of which we partnered with other investors, and ultimately took just 44% of the B-Piece on a weighted average basis. In each of these deals, we remain special servicer for the related CMBS trust. So as we have discussed before, the value of these servicing contracts is currently a very small part of the intangible balance. We also sold certain of our CMBS assets on an opportunistic basis, realizing core gains of $11.2 million in the quarter. On a related topic of risk retention, we continued to engage in discussions with various market participants and industry organizations, regarding implementation of the new rules. Why we continue to believe that we will benefit from the rules, it is still too early to determine the exact impact that they will ultimately have. We will keep you apprised of any significant developments, as we proceed through the implementation period.

Moving onto another cylinder for this business, our conduit operations. Starwood Mortgage Capital reported yet another strong quarter of results continuing its remarkable average turnover rate of one securitization per month. During the quarter, our conduit participated in three securitizations, and sold $465 million of loans for a net securitization profit of $11.1 million on a core basis. And finally, another contributor to this segment strong results for the quarter is a relatively new cylinder, the acquisition of commercial real estate properties from the CMBS trust for which we serve as special servicer. This cylinder ties into our overall business strategy of expanding into the acquisition of commercial real estate equity. During the quarter we sold an operating property that we previously acquired from an CMBS trust. This transaction resulted in a $10.2 million core gain net of tax. We expect to see more of these acquisitions going forward. Tying in with our gradual diversification into real estate equity investing, we will be introducing a new segment to you in the second quarter, which will include these types of asset purchases, the mall portfolio we acquired last quarter, as well as our recently-announced acquisition of a 13 asset portfolio in Dublin, Ireland. On a pro forma basis, these would collectively comprise 7% of our gross assets, and 8% of our gross equity at March 31st. During the quarter we made a EUR17 million deposit on a portfolio of 12 office and one multifamily portfolio property in Dublin. The assets were sourced and will be managed by our managers, Starwood Capital Group, whose equity investment expertise and presence in the European market, allowed us to take advantage of this unique opportunity. The total purchase price is EUR452 million, approximately 70% of which is expected to be paid this month, as we close on 10 of the assets in the portfolio, while the remaining three assets are expected to close late in the second quarter. The assets are located in Dublin's central business distinct, span 630,000 square feet, are 99.9% leased to quality tenants, including multinational and government tenants, and carry a weighted average lease term of 6.2 years, adding significant duration to our current portfolio. The acquisition will be levered conservatively at a 65% LTV, and a 200 basis point spread. The portfolio is being acquired at a 5.5% cap rate, with an average cash on cash yield of approximately 10%, and a levered IRR of 12.5%. As we have done with all of our foreign currency based transactions, we intend to fully hedge our equity and cash flow exposure to foreign exchange risk resulting from this transaction.

Now turning to the newest column in our segment presentation, our corporate column. During the quarter unallocated corporate overhead totaled $47.2 million, or $0.21 per diluted share, compared to $41.8 million, or $0.18 per diluted share last quarter. The increase is primarily due to a $5.3 million loss on extinguishment of debt that resulted from the repurchase of $104.1 million par value of our 2019 convertible notes. The notes were repurchased at a premium to par for a total cash consideration of $119.9 million. GAAP requires us to allocate the repurchase price between its liability and equity components based on fair value.

The extinguishment loss is the difference between the book value of the liability component and the related allocable liability component of the repurchase price. Our book value was less than fair value, principally because we had not yet fully amortized our debt discount, and that difference is what resulted in the $5.3 million loss we reported this quarter. We believe that we repurchased these notes at an amount that would be less dilutive, than if we had converted them in the ordinary course. Although the notes are currently trading at a premium, that premium is less than the premium which was accumulated on our stock since the notes were issued. Allowing us to repurchase the notes below parity, and thus less expensively. The repurchase also enabled us to de-lever, allowing us to retire more expensive corporate level debt, and optimize less expensive asset specific debt, all while continuing to maintain our conservative leverage levels. Subsequent to quarter end, we issued 13.8 million shares of common stock for gross proceeds of $326 million. Our first equity issuance in 12 months. The proceeds from this offering will be used to fund our investment pipeline, including the aforementioned Dublin portfolio, and for other general corporate purposes.

Pro forma for the share issuance our overall debt to equity ratio was 1.2 times at the end of the quarter, consistent with where we were last quarter. We continue to take advantage of opportunities that will make the right-side of our balance sheet more efficient. Obtaining less expensive asset level debt, while retiring a portion of our corporate level debt in the form of our convert repurchase. As of March 31st, our total borrowing capacity was $5.8 billion, under 14 financing facilities, across 11 leading financial institutions, and 3 convertible senior notes. As we move forward, we will continue to stay with an appropriate leverage level in the context of our overall balance sheet, levels which are conservative compared to our peers, and levels which should allow us to obtain our ultimate goal of achieving investment grade.

I would now like to turn to a discussion of our current investment capacity, the second quarter dividend, and our 2015 earnings guidance update. As of April 30, the Company had $370 million of available cash and equivalents, $79 million of net equity invested in RMBS, $133 million of approved but undrawn capacity under our financing facilities, and $304 million of unallocated warehouse capacity. Together with expected maturities, prepayments, sales and participations over the next 90 days, and net of working capital needs, we have the capacity to acquire or originate up to an additional $1.5 billion of new investments. As we look to deploy this capital across our various business lines, we will continue to be selective and diversified, to ensure that we do not overstay our welcome in any single asset class.

Turning to our dividends, we have declared a $0.48 dividend for the second quarter. The dividends will be paid on July 15 to shareholders of record on June 30. The $0.48 dividend represents a 7.9% annualized dividend yield on yesterday's closing share price of $24.30. As we look to the remainder of the year, our business continues to perform in line with our expectations. Income resulting from our acquisitions and sales of commercial real estate assets was incorporated into the guidance numbers we previously provided you. We therefore reaffirm our 2015 core EPS guidance range $2.05 to $2.25. As a reminder, this range excludes any loss that we may realize from the repurchase of our convertible notes.

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

Thanks Rina. Last month, Barry and 16 members of our management team hosted our first Investor Day in New York, which I believe highlighted the great depth of our management team. I would like to share some of the main takeaways with you. We walked through the depth of our global organization, with over 1,400 people in the Starwood franchise, and nearly 500 of them in Starwood alone. We highlighted our credit first philosophy, and our goal to lend on and buy great properties in great locations globally with great sponsors. Credit is always more important to us than yield, and our scale allows us to sift through hundreds of loans and properties to allocate capital to investments with the best risk adjusted returns. We looked at nearly $100 billion in loans in 2014, and we chose only 5% of those to lend on, passing on hundreds of deals, and closing on approximately one deal a week, with an average size of $95 million. And a levered yield as Rina said of 10.6%, and that trend has continued in the first quarter of this year. We utilized our manager and all of its subsidiaries to sift new these new opportunities, and as Rina mentioned, are very proud to have never taken one dollar of realized loss in over five years. At 62 LTV our book is setup to continue that trend, and importantly, our scale allows us to analyze, underwrite and service all of our loans in-house, and we meet consistently and constantly to discuss every loan in our book. We talked in depth about our credit process, which is led today by 30-year veteran Carl Tash, who worked with Barry at JMB in the 1980s. And though we have a committee approach to investing, it is important to note that Barry looks at every potential new loan before we issue a term sheet. There are still great risk/reward loans to write and properties to buy. Including our pipeline under contract. Our origination team will have put out over $4 billion in loans and equity in the last eight months alone. We walked through the depth of our funding options in relationships, which Rina just mentioned, and said we plan to add our first managed CLO to that mix this year.

Our team are Best-in-Class at optimizing both sides of our balance sheet, and we are as focused on liquidity and the right side of the balance sheet as we are on the left. As our source of capital become more divers, our borrowing rates have continued to fall, allowing us to maintain a very constant levered yield on our lending portfolio, and to generate cash on cash yields on our equity portfolio in excess of our dividend pay rate. We talked the complexity of our business, and that we are meticulous and detailed, and spend countless hours calculating the timing of maturities and inflows versus expected outflows to manage our liquidity. We talked about the many engines of our business, we are diverse in geography, loan type, property type, and earnings drivers, and continue to look at new cylinders to add to our business. Less than two-thirds of our revenue today comes from our lending segment, and the remainder comes in almost equal parts in the servicing, mortgage conduit, and CMBS businesses, in our real estate investing and servicing segment, which highlights the diversity of the business we built. We were named Special Servicer on more deals than anyone in the last year, which will add revenue 10 years into the future, that you won't see in the earnings announced today, as well as being Special Servicer on over one-third of the coming CMBS maturities, which along with pending regulatory changes should create great opportunities for us, and provide us a hedge for interest rate and credit if cycles change.

Finally we want to thank those who have been with us for the last five-plus years. You have now earned over 130% on your investment to date, and you have earned it consistently with very little volatility. I'm equally excited about the next five years, and want to hand it over to Barry to talk about the markets.

Good morning everyone. Thanks Jeff, thanks Rina. Rina's comments get longer, and we added Jeff to talk, so my comments will get shorter. I am just really going to talk about the overall market for a second. It is a competitive world as you can imagine, with rates around the world hovering around zero. And when the German tenured at 7 basis points, and then to the complete meltdown to yield 34 basis points, it is really irrelevant to us, it is still a super competitive world. I think our team is doing a great job looking under lots of rocks to find the jewels that fit our risk profile. Everything in this market today, both on the equity and the debt side is about risk and reward. There we are not a bank. We can go up and down, sideways, around, we will structure ourselves, work quickly. Our greatest strength has always been and continues to be our speed and knowledge and experience. We have seen a lot of these rodeos.

For that reason, as you have seen, we are diversifying into the equity space. Rina mentioned the IRR, which I would say is a guess, I can tell you the cash on cash yield in excess of 10% is not a guess, with a duration of 6.2 years on leases, and 99% leased portfolio. When we can earn that kind of return, which is accretive to our dividend yield, and covers our overhead as a firm, our management fees, then we will probably do those investments if we think it is inconsistent with the key core theme of our Company, which was to produce an attractive dividend yield, to be predictable and transparent, and to search the globe for great opportunities that afford themselves on a risk/reward basis. These are great office buildings on the market, we actually bought the first deal from NAMA in Ireland, and partnered with RTC there, and we hope the IRRs are in excess of what we gave you, and obviously the IRR will depend on the hold, and I don't even actually know. My guess is that was a 7 to 10 year hold that we quoted you an IRR from.

But in general I wouldn't pay attention to that as much as I would to the cash on cash yields, which are consistent with the mall portfolio we did, by the way, and if you buy Battleship Mall and earned a better than 10% cash yield in a world with no yield, you ought to do it, and that is how we are deploying your capital, as if it was our own, because it is our own. We have well over $100 million invested alongside of you in the Company. As Jeff mentioned, this has led to a compound CAGR of over 15% annually, for those who have owned our stock since the beginning it is 15.3%, and if you might deploy modest leverage margin on our stock, you are earning probably 20% to 25% on your capital working with us, and I think that is completely beyond compelling, given the 61% LTV in this portfolio. So some day we will drive the stock and dividend down, but for now you can enjoy it. And one of the things that Rina also mentioned in her comments is duration. By doing equity deals, we are actually stretching the duration of the portfolio, which I think is important because of what I see, and I will talk about it now. What I see as a growing lack of discipline in the marketplace, as people, our conduits are being formed, people are entering the market, you are beginning to see some serious concerns in book to lending and the equity pricing. Real estate is definitely entering the danger zone. For me, where silly trades are being used as comps, and saying that they are off of the market, whether it is a whole different story, or at 33 times cash flow, or the Crown Building at a 1.9 per 10 dividend yield, that is not even a free cash flow yield, that is an NOI yield. After management fees, I think the holder has no free cash flow. This is a distorted market that is being driven by investors who are using this asset class as an alternative and proxy for the bonds. And I think that creates very strange behavior, and will create traps for unwary investors because these guys are here because of interest rates, not because they love real estate as much. I think it is really incumbent upon our underwriting teams, Carl Tash, and myself, to use our 30-plus years, 60 years between us, and the other team members, to make sure that we don't enter into transactions we can't get out of. We are not thinking about today, we are thinking about five years from now.

Nothing is going to happen in these investments over the next two years, but we have to be cognizant if somebody says its all about looking into the future. I think that was Stanley Druckenmiller's face he just made, where are things going to be three years from now, and position yourself for that. I think the warning signs also are about investments that are done above replacement cost, and replacements costs people were buying these assets well above replacement costs are driving new development, and you are seeing over development now in the United States in certain asset classes, and in certain markets. Not in general but in specific cases. For example, high end condos in New York City we think are in a crisis stage, or will be in three years out. There are just too many of them.

Too many products being built at too high price per foot, that I don't think the market can absorb especially with the strength of the dollar and the converse weakening of foreign currencies. Having said that, we are not black lining construction. We are looking at opportunities in other markets or maybe other asset classes in places like Manhattan, where we know investor demand is deep, but I am worried about the condo market, the high end of New York City. It is about risk and reward. It is about every individual investment, who the borrower is, what the track record is. How do we protect ourselves. Do they have gross maximum price contracts in place, creditworthy contractors. We haven't actually done many construction loans in the past year or 1.5 years, and one of the reasons we have shied away from that is frankly it is a different risk profile. But by definition you are going to go below replacement cost, which is nice. We just don't really want to get it back.

One of the other things we started the Company which we said we are not the a loan to own firm, and those of who were with us on the road show five years ago, we were doing that, not because it wasn't a good business, but because it is hard to predict. When an asset goes into bankruptcy, and cash flows can be interrupted, we could spend millions of dollars hitting earnings on a quarterly basis to litigate our way out of, or into a foreclosure, maybe to buy the asset. We haven't changed our stripes. We are still not a loan to own firm. I think some of our peers are beginning to make loans where they say, hey, if he fails I will get the asset back. We could change our strategy but you will hear about it on another earnings call. We are not planning on talking about that at the next earnings call. There if going to be a point here, where you are going to make a loan and say, well, if it fails we would love to own the asset, and if we actually go in that direction, we will let you know. Similarly a cousin of that is making a 90% or 95% loan, and taking half of the of the equity. A tool I would have expected us to be using at this point in the cycle, but we are not, and we haven't really tried to go there.

We are about margin of safety and predictability and we just decided taking equity risk in the debt envelope just by the equity, not finance it and lock it away, and get consistently high returns for your shareholders that are predictable. Another thing I would like to say again, which I read in my comments from the investor meeting which were shockingly long, are the scarcity of our raises. We haven't really done a raise in a year. We did a small raise for, primarily needed the money for the equity transaction. We have been really good about managing our cash balances. Really good about returning selling lowing yielding assets that we can get out of the premium and rolling the cash over, and we continue to so by continuing to raise the ROE of the Company, and not go back to the market unless there is something dramatic that we are trying to do that we need capital for. We continue to look at large opportunities in the market place. We continue to look at ways to diversify our Company, with the core strategy theme that the bigger we are, the more diverse the cash flow stream is, the more stable the dividend is, the repayment of any loan cannot interrupt our dividend, and also the ultimate goal of reaching potentially investment as a Company, which would lower our financing costs, and make it a virtual cycle for us, ourselves.

The other thing that we are focused on is what the banks can't do, and where we can partner with them in taking splitting opportunities to grow our book as their originator going forward. We are pretty excited about the current, and very excited about our future, as we continue to manage our way through this real estate cycle, and I wouldn't just say real estate, other asset classes that we can lend on that are readable. With that, I think I will take any questions and comments.

(Operator Instructions). And we will take the first question from Dan Altscher from FBR.

Thanks. Good morning everyone. And again, appreciate the Investor Day last month. Thought it was a good time. I was wondering on the Dublin portfolio, if you can just dive in a little deeper on that. I think it probably follows in the core-plus strategy that you are kind of exploring. Give us a sense of why, what makes it maybe a core plus, the underlying credit stats, whether its the lease duration or the occupancy on the whole looked pretty good?

Well, Dublin is an office market that is almost fully recovered. Enjoys a single digit vacancy rate and rents are rising, which is good, but not that relevant because we are leased. When we roll, we expect the rents will rise. We have already undergone an asset by asset review to see if we wanted to sell individual assets earlier. The IRR that Rina cited didn't have that. I actually got a memo yesterday about one building that we might want to sell. The credit quality is extraordinary, but I am going to ask Andrew to give you the stats, or Rina, after the call on an individual basis. We haven't gone into that level of detail. Very good quality tenants. I just don't have that at my finger tips.

Yes. Not a problem.

I would say it is core plus. I mean it is isn't an asset management intensive portfolio. And we actually bid on this portfolio. So I should also say that, that our opportunity fund bid and lost, so we knew these assets really well.

Good. That is perfect. I was wondering if we could take a little bit maybe about GE Capital, which one of our peers recently participated in a large transaction. Wondering if you guys took a look at that deal, whether it was on the SEG front or REIT front, or have any thoughts about it, or maybe just in general some more big portfolios to be coming from them, or maybe someone else in that world, that might have some regulatory relief issues or regulatory needs to shrink?

We didn't see the deal. I have subsequently interviewed friends and executives at GE that I know, including various senior executives. It was a book purchase. They played book, at book those assets were bought a long time ago, pre-crisis. It was a solid price meaning it was I would say fair. Full and fair. And levered nine to one in the mortgage REIT with some very aggressive debt by Wells at 186 over, I think was the spread if I recall correctly. And then a warehouse line on top of that. We have never done that. We have never used leverage like that. $9 billion of the $24.5 million went directly to Wells, and then there was an equity purchase where they put out another roughly $1 billion. There is several hundred billion dollars of assets left at GE, and you can be assured that they know we are going to look. There will be a business that will be sold. The bid will come in Thursday. We are not participating in that particular business that is being sold, but they have other, there are several hundred billion of assets, about 40% of it is in the US, and about 30% is in Europe, and the rest is scattered. So we would have an interest in the US and European stuff including entire businesses that might fit in somewhere in our portfolio. You do know we have a $5.5 billion, $5.6 billion opportunity fund. As we have done before on occasion the two entities can partner up, and Blackstone did split portfolios where the loans go with the loans that are loans, and the loans stay with us here, and other crap that doesn't fit a REIT might go in the opportunity fund, and/or in a core vehicle with one of our capital partners. I think that we represent more than a dozen sovereign loan funds ourselves. Some of which we don't share with Blackstone, so you can be assured that we certainly will look.

Okay. That sounds good. And then one other final one on the residential space there seems to be a lot more of the mortgage REITs that have gained access to the FHLB despite the moratorium being in place. I suspect you guys may have been in the early stages, or early process of that also before the moratorium came in. Any thoughts on that, if it is an option at this point, or something that you are still exploring?

The moratorium was lifted and it is something we are looking at. So we will let you know if we do something.

Thanks so much.

Sure.

The next question from Douglas Harter from Credit Suisse.

Thanks. Can you just talk about the on the specialty servicing side, the balances were flat, but can you talk about the pace of inflows and outflows that you saw in the first quarter, and kind of expectations for the rest of the year?

This is an amazing book. Just again the maturities are 2016 and 2017, and we expected a trough year this year. And business continues because of its balance from the various five businesses we operate continues to do okay. And deteriorates slower than we expected. Partly that is the way we manage the book, and partly that is the way borrowers are managing their own maturities. Do you want to add anything Rina?

I mean it has been a steady flow really of ins and outs. We thought it would be lower, but again we continue to purchase new deals, and get additional info because of that. We don't specifically attribute our kind of net transfers in to whether or not they came from purchases or a book that was existing, but it is kind of fairly equal pace I would say.

The one thing that we are doing I guess is that we are shaping the pools we buy. We are buying B-pieces, we are kicking out loans fairly regularly I would say, right?

If you look back to last year, I would say Christmas of 2013 or so, you were able to kick out a number of loans out of a pool. If it is a 100 loan pool, you could probably kick out 8 or 10, and as the year he heated up in 2014 you were unable to do that with a lot of hedge funds and others paying up for B-pieces, and then as the year ended last year into today you are getting more opportunities once again to shape the pool, and kick out loans, which is giving you a pool that you are more comfortable owning for as long as the investment and mid-teens deals.

I don't think, correct me if I am wrong, Rina, actually these show up as material on our balance sheet.

That's right.

Because they are all future cash flow streams. To your question of why the servicing balance looks so constant, or the loan book looks so continent, it is because the book isn't deteriorating at the pace that we have anticipated.

And in flows that are coming in really aren't off of the new purchases. You will not see the benefit of those inflows until a much later date. Really just in and out on the legacy book. On the 1.0 book.

Years. Right. Stuff coming in and stuff going out.

And then just shifting to the lending segment. You have been able to keep the sort of the optimal levered return fairly constant, and despite some asset yield compression, because of improvements on the financing side. Is there any more room for that to happen, or if we continue to see asset yield compression, will levered returns decline at this point?

Well, interesting question. We argue ourselves and talk to the Board, should we lower our targets, because just for safety. We are all about safety and yield, why are we doing some of these transitional deals for the high returns. Because this model will work differently, and probably going to be just as well. We won't be able to return 10.5%. That number, our peer, our largest peer that is about half our size, they actually report with the corporate leverage. So they give you like a high number, and Rina said it would be much higher, probably another couple of hundred basis points higher, 12.5%. We do that, we take our corporate debt and assign it to our unlevered loans, and we literally run a model for optimum leverage, how much capacity do we have, do we a first mortgage, let's say Hudson Yards, it is an epic office building, now fully leased, we have it unlevered. Right, there is no debt against it.

We can say, okay, we will take $200 million of our corporate spread or converts and assign it to that asset, and how much more leverage would we be comfortable with, assigning to that construction loan, and that gives us an idea of the overall leverage of the whole company that we would be comfortable with. So we gave you I would say a silly number, the 10.6, because that is not the way we think about the Company. I think about the Company as the right leverage on the asset base we have, and so that is more like 12.5% or 13%. I don't even know what the number is, but it is much higher. Borrowing at 4% on the converts, and some of them are even tighter than that. My mother is calling from the hospital. I apologize. One second. My dad is in the hospital. She gets a bye, but she is gone, so hopefully I will talk to her in a second.

I think that is the way that we, that I look at the Company, and Andrew and I have been looking at the Company for a long time like that, and running a model of basically allocating the debt to assets, and seeing where our leverage levels are. And in general we are keeping a very, we are not levering the book. We keep talking about this. If we can put out cash, let's say we are doing a loan at whatever, right, and LIBOR plus 5, and I am making this up. We have a choice every time we do one of these loans, how wide a strip are we going to keep. We can lever it up, today you can lever it up, and maybe we keep $10 million of a $15 million strip, and earn a 4.13, or should we keep $20 million of a $50 million strip and earn an 11. We will choose the later today. For many reasons, but putting out money at double digit yields in a world with no yields, we consider an incredible opportunity for this shareholder base. We are about core yield and some growth, and that is how we return 15.3%. By crossing an 8 current, and a little appreciation, you then you throw a little margin loan on that, you have a hedge fund that will be the top performing hedge fund in the United States. All you have to do is own is our stock. And you will be, because look at hedge funds are returning 2% this quarter. We did that in our dividend yield. And you don't pay 80/20 on 2% management fees, so you have liquidity instantly. Anyway, it is really we are working this book hard, and it is a lot more than a package of loans at this moment.

Great. I appreciate that insight.

And we will take our next question from Eric Beardsley from Goldman Sachs.

Thank you. Wondering if you could talk a little bit about the cash needs for the upcoming quarter, it looks like you have some more maturities and prepayments expected than you have had over the last few quarters, but you still did the equity raise. Outside of the Dublin portfolio that you are acquiring, is there anything else that is relatively large in the pipeline right now?

We have modeled a steady deployment of equity capital throughout the year quarter by quarter, and if we do that, we actually are pretty self-funding this year. If we were to do a large transaction of anything, we probably would have to come back to the market. So far everything that we have done has been accretive. I think that is correct. Is that fair, Andrew?

Yes. I think our philosophy on capital raising remained consistent since we went public 5.5 years ago, and we raised equity capital and we have a pipeline of new investments, whether equity or debt that need to close, we don't have the kind of self-funding sources to close, and some call it adjusted time capital model, there are other ways to describe it. But raising equity is just one way that we continue to grow. As we have talked about at the Investor Day, we are looking at the senior unsecured market as a way to grow the Company, with an overall goal of getting to investment grade. I think Eric, you will see in the supplement, I think we quoted a up to $1.5 billion, $1.540 billion of capacity as of April 30, 2015, so that gives us some significant runway to close the investments that are in the pipeline for the foreseeable future. As Barry mentioned, if anything really material comes in that might necessitate an additional need for capital, but that doesn't necessarily need to be equity.

Got it. If you just evaluate the opportunities Europe versus the US at this point, when you are looking at the core plus equity. How does it stack up with the returns and just the quantity of opportunities?

We are hamstrung so far by trying to cover our 8 pay rate on equity, without overleverring the assets that we are buying on the equity side. And we are trying to do deals I would say at the value add IRR range. IRR is for REIT investors having run several REITs in my career, they are not that relevant to you, because you don't know when I'm going sell asset, and you don't know if I am investing for a 20 or 25 or 14. You really don't know. I can tell you but how could you verify that. That was one of my great frustrations running Starwood Hotels, I could do 30 IRR deals but nobody cared. And if it didn't show up in current earnings, and that is what we are really about here, nobody cared. One of great frustrations at Starwood was pre-opening expenses from hotels hit earnings, were dilutive, they had great private company IRRs, but GAAP accounting was horrific, showing value creation and equity and Ecorps. So here, I would say that our discipline has been stability, quality of assets, ability to hold them for a longer period of time, maybe forever, using our sourcing ability, and we are one of the most active equity investors on the globe. We are agnostic to the US versus Europe. But I would say even Steven we would take the US any day. Just because it is here, tax codes, everything else, currency issues. By the way, we hedged all of our cash flow streams on the Irish deal, all of the cash flow streams.

And those were included in the cash on cash yield.

They were included in the cash on cash yield. We like Europe. We actually I would say from an equity shop, just to look at how Starwood Capital has evolved over the past five years, our Eighth fund was 93% of the US, and 7% other. Our Ninth fund which was $4.2 billion, was two-thirds one-third US/Europe, and our 10th Fund, I am skipping the small change stuff, there are other countries represented. Some others are running at about half and half. There is a lot for sale in Europe, as you know, and Europe there is a lot of debt in Europe, and that I think is the biggest surprise, is how hard it is and how competitive the lending market has become in Europe, with the banks staying inter border, and lending aggressively within their borders.

So English banks lending in England. The German banks in Germany. The French banks in France. Not that we would ever borrow there, and we have done deals on the equity funds in Poland and Czech Republic and Norway, Sweden, Ireland, UK, Spain, and lending is aggressive, and tight spreads. We continue to look for stuff to do. We made a large loan on a building in the city of London, Albany, which is a great loan. And it was a transitional loan. I won't go into the details. But it is a great brand new office building. We cherry-pick, and we are agnostic, as long as the returns meet our criteria, and the risk profile suits us.

Just jumping back to the financial capacity for one second. Andrew mentioned the $1.5 billion or so that we have remaining. You have to remember also that more than half of what we do today we finance in the A note market by selling off a senior mortgage, as opposed to putting it on a warehouse fund. So we have significantly higher capacity to the extent that we do sell off A notes, and create mezzanines versus some of our peers, who will look just the warehouse line capacity.

Great. Thank you.

In the exhibit there is a slide that shows what we expect the capacity originally required, it shows the outline of how we get to $1.5 billion.

We will take our next question from Jade Rahmani from KBW.

Thanks. Wondering if you could elaborate on how you are thinking about diversifying the business, you mentioned exploring large transactions. Can you give any sense for the kinds of things that could make sense? Is it geared towards lending, for example, spaces that you might not be active in, such as multifamily, healthcare, maybe international, or even residential, or is it focused on equity, or otherwise services, such as investment sales, or even investment management?

All of the above. Thanks for the question. No, seriously, we are looking at lending businesses that fit our criteria. Obviously I would rather not talk about it, because we do have competition, but we are not, we have always been transparent. We just won Best Disclosure again from NAREIT. We are telling you heads up, we have been looking for five years. We haven't done anything major. I mentioned on the earnings yesterday we looked at a company like Cap Lease, that had great credit, triple net, bond like equivalents, but had fully amortizing debt, which meant that all of the nice income we had wasn't actually cash, and we would have to pay out a dividend and borrow the money to pay you a dividend, and yes, it could work, but I didn't want to do it. I didn't want to borrow, we like to pay our dividend in cash we earn each quarter, and safety and security is a pretty constant theme. This is not a high wire act, and we won't lend into a high wire act. We won't do that. And the guys who asked me on the road show, how do I know that your mortgage REIT loan will act like other mortgage REITs and overstay its welcome, I said because we will not lend until you see us beginning to diversify into equity. And actually if you don't like it, you should sell the stock, because I'm not going to drive this Company into the ground, and run a high credit risk book. I just won't do it. I'm not interested in that. We are going to make money for you long term, and do our best trying to do so.

Okay. A related question --

That is an aggressive answer.

A related question.

When there is nothing to do, don't do it, is the moral of the story. (laughter)

A related question which I think was mentioned at the Investor Day, what can you say about whether the management or Board is looking at a cost benefit rationale to potential internalization transaction with the manager?

It hasn't really come up at the Board level. We haven't raised the discussion. I think even today our overheads are nine figures. More than nine figures. Of Starwood Enterprise, 1,500 executives, or people in our enterprise. It is interesting, we just have every Monday morning, we have our acquisition meetings with the equity teams and the debt guys come in and listen in, and we are getting very, we have spread our stock to the equity guys too, and sent them to bring us deals, and one of the things we are going to have to think about, is it all about yield? Is it just yield, a consistent and growing yield, agnostic to real estate asset class, or do we pick one asset class and we are doing X, I will pick triple net, because we talked about it. And loans. Or what are we going to do? And that is something we will discuss at our Board meeting, and probably make a decision. Are we going be a potpourri of very carefully curated assets across the globe, that produce the kinds of consistent pie cash. The equity REITs are yielding 3 to 3.5 I think. Some of them are yielding 2. We are yielding 8. If we can keep this up, and as you have seen companies like Colony, which have internalized, and NorthStar. NorthStar is a little bit of a hybrid, but Colony seems to have gotten credit in their yields from moving into the equities space recently, and they were always sort of a hybrid REIT. Very complicated and hard to understand. Not a bad thing, just different than us. And we are locking at that, because if we are going to be an equity REIT, does our dividend fall to 3.5%, 4%, 5%, then our stock goes to 35. Something that we are considering, we have to look at that, and I think that is something we are thinking about. We are not in this core business, core plus business at Starwood Capital Group. There is a bright line which is over fine years, and we have crossed it twice, or three times maybe, where the investment had a higher than 14 IRR, and we split it, the REIT got 75% and the fund gets 25%. It would happen at TALF, it happened in--

A small multideal. A small multideal. Like in the first year. And then LNR.

The LNR acquisition. Yes.

Lastly on risk retention. I wasn't sure if in Rina's comments there was a note on the cost, that it may benefit the Company. Can you just elaborate on your thoughts there?

As we had said previously Jade, that we thought it would benefit us. We continue to believe that, but then you should really use a two year implementation period, which is a fairly long period of time, and there is a lot of back and forth as to what exactly the rules mean, and how they are going to be implemented. We continue to believe that it will benefit us, for the reasons we mentioned before, that we are able to put out capital longer term and hold onto it, which may restrict others, and so we still think there is a benefit there, but we just don't know if the way this gets implemented, is how we think it is going to be, because two years is such a long period or time.

We had our best and brighter in Greenwich and Miami looking at it. Part of it is, it is a competitive world and to the extent we can find a better mousetrap, we want to keep the money for that, proprietary versus talk about it publicly.

And the regulators will have a difficult time holding up the spirit of what they originally proposed. There will be a number of lawyers and investment banks and others trying to figure out ways around it. The original spirit is of great benefit to us, and we will see what their ability is to maintain that original spirit, as we get closer to implementation.

Thanks for taking my questions.

Our next question from Charles [Nabin] from Wells Fargo.

Good morning. Thanks guys. Could you comment on the ramp up and profitability of the Ireland transaction, how we should think about that from a timing standpoint, and if we should expect any expenses to be incurred over the next couple of quarters?

It is cash flowing out of the box. There isn't a ramp up. I mean the cash flows do ramp. But they start out at consistent with what Rina said, at better than 10% cash return on our equity invested.

All of the deal level expenses, if that is the question, are all embedded in the cash on cash return. You are not going to see --

Okay.

There is no fee. There is no acquisition fees, or anything paid to Starwood Capital Group. We receive no compensation. That is we get paid for that out of our management fee. It is very straight up. It was a 100% purchase, and it was done for the benefit of the REIT.

It is 99% leased with not many leases rolling in the near term. So you don't have a lot of leasing upside, and no TI to bring you back down the other side. We expect this yield to--

There is leasing upside. It is the opposite of what you think. Some of the market is moving so fast, that we would like to buy it up ten and count. But that would just be pure upside if that would happen.

Okay. On the liquidity side could you comment on the $904 million in expected maturities, prepayments and sales?I believe that might include some construction loan sales, but could you give us some color on the composition of that $904 million? I

I know like this for example, one of our peers is selling a large company which we are actual bidding on, [Vulu]. And so we know that this will be repaid. And we would love to buy it, but I don't think we will be able to. So that is in there and as far as construction loans there are some, but I don't have any details in front of me. Do you?

I don't have them in front of me. I would say probably split evenly between sales participations and expected return.

And as far as mezz versus senior, could you comment on that?

You mean what is being repaid?

Yes.

Well, all-in0all, I mean there is, you are asking for a lot of detail that I'm not necessarily comfortable sharing. I would say that we gave you earnings guidance for the year, so we kind of know what is coming back, and we modeled it into there in the guidance we have.

Okay.

I don't know of anything. We are big enough now at $9.3 billion, or $9.4 billion asset base that it is really handle-able.

Yes. And I would say that the earnings guidance we gave you, and we go through a very rigorous asset management process on a quarterly basis, where the entire management team gets in a room and looks at every asset, obviously on a more granular basis. Whereas the managers are looking at our assets on a daily basis. Part of that quarterly review process, is we look at every asset, and come up with expected maturity date, and those expected maturity dates are actually what we use to come up with our forecast on the yearly basis. I would say the $904 million is coming back, the assets are coming in at their expected maturity dates. Those are actually in our numbers, getting the cash back.

Got it.

And in periods of some sales and construction loans.

And one last thing, where this is a 5.5 year mature REIT, you will see 4 year loans, 3 year loans, and 2 year loans rolling off. So when you compare that to other people who have ramped up a portfolio in the last year or two, and don't show much in terms of those prepayments, it is a function of the maturity of our business.

There was a comment I should have said about the purchase of the GE book by one of our competitors. It had a two year duration, and that was the stated duration in the portfolio. We tended not to try to do deals that are so short, because we have to redeploy the capital just 12 months later. One of the tricks in the business has been to get lock outs, and again that is one of the trickiest things about lending today, which we give preprepayments. The money could come back 45 minutes after we lent it, it is not even worth the legal fees to put the deal out. That is one of the challenges of staying in the lending business, is yes a guy borrows at our rates of return, which we can lever a 4.5% loan, or a 4 loan, LIBOR plus 4, and create a nice piece of paper today given our borrowings, L plus 200. But you still prepay once the asset has stabilized, and we need duration. We not roll $9 billion of loans every five minutes. That would be a really hard thing to do. So it is another reason to stretch our book into the equity side, or build such an amazing origination machine that we can make a billion $10 million loans. That is an alternative for us, it would require a new type of organization. Something we will have to consider. So it would look like an insurance company, or a bank, or something, but we don't look like the large loan lender that we have been, but we are creative.

All right. Thanks, guys.

Thanks everyone. Thank you.

And that does conclude today's question and answer session. I would like to turn the conference back over to Barry Sternlicht for any closing remarks.

Just want to thank everyone for being with us, and we appreciate your attention and partnership. Have a great day.

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.