Starwood Property Trust Inc (STWD) 2015 Q3 法說會逐字稿

Good day, and welcome to the Starwood Property Trust third-quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning the Company release its financial results for the quarter ended September 30h, 2015, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the Company's website at www.starwoodpropertytrust.com

Before the call begins, I would like remind everyone that certain statements made in the course of this call are not based on historical information, and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the Company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The Company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed in 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 these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Joining me on the call today at Barry Sternlicht, the Company's CEO, Rina Paniry, the Company's CFO, Jeff DiModica, the Company's President, and Andrew Sossen, the Company's COO. With that, I'm now going to turn the call over to Rina.

Thank you, Zach. And good morning, everyone. Our performance this quarter once again demonstrated the strength of our multi-cylinder platform with all components of our business contributing to core earnings of $135.4 million, or $0.56 per diluted share, in increase of 8% from the $125.9 million, or $0.53 per diluted share we reported just last quarter.

This quarter, we continued to build upon our increasingly diversified asset base, spending $1.2 billion of capital across our lending, investing and servicing, and property segments, while receiving $1.1 billion of capital back from these segments in the form of asset sales, maturities, and repayments.

For the left side of our balance sheet, we exercised patience under volatile market conditions and maintained our disciplined credit-first approach when deploying new capital. On the right side of our balance sheet, we continued to maintain a conservative approach to leverage with our debt-to-equity ratio remaining consistent at 1.2 times. On a consolidated basis, our annualized return on equity this quarter remains attractive at 13%.

I will begin the discussion of our third-quarter results with our lending segment. During the quarter, this segment contributed core earnings of $107.8 million, or $0.44 per diluted share. We originated $310 million of new loans of which we funded $283 million. We also funded an additional $133 million under pre-existing loan commitments. These fundings were made with recycled cash from the lending segment's investment portfolio, which returned $684 million of capital during the quarter.

Credit quality continues to be a priority for us, with the average LTV on our loan book at just under 62%, and our track record of zero realized credit losses continuing across almost $16 billion of inceptions to date, loan originations, and acquisitions.

You will notice that we reduced our allowance for loan losses this quarter by $2.7 million. This decline is principally due to the full payoff of loans which were previously risk rated a 4 or 5.

The returns on our lending segment's target investment portfolio remain strong at nearly 8% on an unlevered basis with optimal asset level returns of almost 11%. Keep in mind that these returns do not include the impact of corporate-level debt, but just our term loan and convertible notes, which if included, we estimate we result in the segment returns of approximately 13%.

Our loan book is designed to benefit from a rising rate environment with 82% of the portfolio consisting of floating rate loans. We estimate that 100 basis point increase in LIBOR would result in an increase to annual income of $16.1 million, or $0.07 per fully diluted share. This does not include any benefit that our Special Servicer would realize in a rising rate environment.

To give you a bit of color on this particular point, for the loans that are scheduled to mature in 2015 to 2017, in CMBS Trust where we are currently names Special Servicer, there are over $50 billion of performing loans in those trusts. In a rising rate environment, higher rates would make it more difficult for these loans to refinance, resulting in more loans entering special servicing and more servicing fees earned as we work to resolve these loans. This puts us at a very unique advantage to other REITs generally, and specifically to other mortgage REITs.

I will now turn to our investing and servicing segment, which returned another strong quarter of results, reporting core earnings of $64.7 million, or $0.27 per diluted share, a 6% increase over last quarter.

Our conduit operation, Starwood Mortgage Capital, participated in four securitizations this quarter, selling nearly $400 million of loans for a net securitization profit of $10.1 million on a core basis. The remarkably high turnover rate for this month, which totals 12 securitizations for the nine-month year-to-date period helps limit our exposure to some of the market volatility we have seen in this space.

Our servicer continues to maintain its dominant position in the market, again ranking first in name, special service, or market share. As of September 30th, we were named Special Servicer on 156 trusts with a collateral balance of approximately $118 billion, and we were actively servicing $12.2 billion of loans and real estate owned.

As we thought to take advantage of widening spread, we acquired $115 million in CBMS this quarter with our new issue B-Piece investments acquired at higher yields than prior purchases. We've talked previously about how the nature of our CMBS investments make them less vulnerable to spread movement, so you did not see much volatility in our P&L mark this quarter.

As with our loan portfolio, the credit quality of our CMBS portfolio also remains a high priority. Our team continues to underwrite every loan in the deals we invest in, and continues to kick out loans in the collateral pool which do not meet our standards of credit quality. Interestingly, with the widening spread and market volatility we saw this quarter, we also experienced an increased ability to shape the collateral pool for our B-Piece investments. Our CMBS pipeline looks strong with four B-Pieces and the related servicing already secured in the fourth quarter.

As we near the implementation of the Dodd-Frank risk retention rules, we continue to believe that we are uniquely positioned to benefit from increased opportunity in this space, and are actively seeking ways to take advantage of these opportunities when the rules take effect.

Now I'll turn to our property segment, which contributed core earnings of $6.2 million, or $0.03 per diluted share for the quarter. The quarter saw the normalization of last quarter's asset purchases in Dublin, and was impacted by the $122 million of purchases of the remaining asset in the portfolio in late July.

We are excited to announce our newest addition to this segment, which we expect to complete in the fourth quarter. We recently entered into agreements to acquire 30 multi-family affordable housing communities located in Florida for $553 million. This acquisition marks the third investment for this segment, and will be funded with a combination of existing cash on hand and agency debt as well as the assumption of pre-existing government sponsored financing.

The communities are 98% leased and comprised 8,320 units concentrated primarily in Tampa, Orlando, and West Palm. The transaction is expected to close in phases throughout the fourth quarter, the first of which closed on October 20th for a total acquisition price of $143 million.

The remaining properties are expect to close late in the quarter. The acquisition will be levered with sub-4% fixed-rate financing with an 18-year average term and an LTV of just under 70%. The portfolio is being acquired at a low 6% cap rate, with targeted levered cash yields in the low double-digits.

Moving to a discussion about our capitalization. We are excited to announce our membership into the Federal Home Loan Bank of Des Moines. Our admission to the FHLB system will provide us with an attractive low-cost funding source for a variety of [ROE] investments. Our admission into the FHLB along with amendments to our existing financing facilities increased our borrowing capacity to $7.7 billion this quarter, a 28% increase from last quarter. This excludes any capacity we could create from selling senior interest in our loan portfolio.

Also during the quarter, we repurchased 1.4 million shares of common stock at an average price of $20.86 for a total of $29.1 million. Inception-to-date REIT purchases under our existing repurchase program total $187.4 million, leaving us with $262.6 million of remaining capacity.

And finally, I'll add just a few brief comments about our current investment capacity, our 2015 earnings guidance update, and fourth-quarter dividend.

As of November 2nd, we have the capacity to originate or acquire up to an additional $2.7 billion of new investments driven by available cash, capacity in our existing financing facilities, and expected cash returning from our loan book. This number does not assume any incremental leverage that we could obtain and liquidity we could generate from additional senior notes or CMBS sales.

As the year comes to a close, we continue to be pleased with our financial results. Through September 30th, we have paid dividends totaling $1.44 per share compared to core earnings of $1.64. Based on current expectations for the fourth quarter, we are narrowing our core EPS guidance to a range of $2.13 to $2.17 for the year.

We have also declared a $0.48 dividend for the fourth quarter, which will be paid on January 15th to shareholders of record on December 31st. This represents a 9.4% annualized dividend yield on yesterday's closing share price of $20.32.

With that, I'll turn the call over to Jeff for his comments.

Thanks. As Rina mentioned, our seasoned investment book continues to provide capital that will allow us to take advantage of the best investment opportunities available to us going forward. As we look globally for opportunities to deploy capital, we expect our new investments to return levered yields that are higher than the yields that are rolling off in the coming year. In doing that, we will continue to employ the lowest leverage in our peer group to achieve these returns.

Rina also mentioned that our ROE on a consolidated basis stands at 13% this quarter, which is up versus the last two quarters, and in line with the highest ROE since inception as we continue to find cracks in capital real estate markets that are being created in this increasingly volatile environment.

We expect our opportunity set to continue to expand as our competition pulls back and we get closer to implementation of the Dodd-Frank risk retention rules in late 2016. Reduced competition and increased volatility are bringing us more attractive investment opportunities. For example, as Rina mentioned, we've been able to kick out more than twice the number of loans in the CMBS deals we invested in this year versus last year, allowing us to invest in better collateral pools and have better yield.

Additionally, we continued to partner on our B-Piece acquisition, which allows us to diversify our capital across more CBMS deals while securing servicing on the full investment. When we look at the return of our CMBS book including the accompanying servicing fees, we really like the risk reward profile available to us today.

Despite seeing more opportunities than we have in a long time, we were less aggressive in signing up new loans in the third quarter as we felt the opportunity would get better given the volatility we are seeing as both a borrower and a lender in the capital markets.

It has. The fourth quarter is off the a strong start with over $800 million of loans signed up today or closed in our lending segment and four B-Pieces signed up in our CMBS segment, and the over $500 million in equity purchases in our property segment and in equity opportunities sourced from our $12.5 billion special servicing book.

As Rina said, we continue to diversify our funding sources. We now have over $7.6 billion in borrowing capacity from eight different lending partners including the Federal Home Loan Bank. Our dedicated capital markets team have also been extremely active selling senior note syndications with 19 completed year to date for over $1.5 billion, by far the most prolific in our history.

We appreciate our bank partners, but can't run a business that is reliant solely on them, and we will continue to run a highly diversified liability and funding structure. We are excited about our new membership in the home loan bank system and hope to update you more in the coming quarters about how we will use that to the shareholder's benefit.

From the shareholder's perspective, it's been a challenging and disappointing 12 months in the REIT and mortgage REIT space, and we have not been isolated from this market volatility. When the Fed begins to raise rates, we will begin to see the benefit we have expected to materialize, and we also hope that our diversified business and the implicit credit hedge of our servicer will help differentiate us from other mortgage REITs going forward.

Cumulatively, management is the top 10 shareholder of the stock, and we'll be patient to continue to build shareholder value. We have the team business lines in place to continue to be the leader in the space, and we think our dividend yield and opportunity set are exceedingly compelling today.

Now I'll turn it over to Barry.

Thanks, Jeff. Thanks, Rina, Andrew, Zach. Good morning, everyone. I actually don't have that much to add. I think Jeff and Rina's comments were fairly comprehensive. I'm proud of the Company. I think we did a really good job in continued choppy waters.

We saw they were choppy. Obviously with our position as a $50 billion asset manager, we were in the markets as a borrower all the time. And it looks like the flood of high-yield offerings -- somebody quoted to me that there's $400 million of high-yield that have to get done by year end -- the gap in the high-yield market spilled into the CMBS market, widening spreads dramatically. DDDs went from 2.80% to 4,25%.

So in that market climate, when the conduits start seeing 1% margins -- one of the other finance companies reported this morning -- they get nervous. That means spreads widen for us. This is, I think, our fourth time this has happened since we were birthed in 2009. We like it. It's really good for us. We like being the guy -- we're the biggest guy in the land, and cherry-picking our loan opportunities.

So you step back, let the market settle in, and then you go forward. We also recognize that we have to be judicious on deploying the capital because we don't have access to capital at these levels. Why? I mean, we're still trading at what looks like a premium to book. But our book value is dramatically understated today, I'd say.

When we bought LNR back in 2010 -- 2013? Oh, just that long ago. We used a large 15% discount rate, and that was on the maturity streams of the maturing trusts that were the 2016 and 2017, which the 10-year anniversary of the 2006, 2007 maturities. And that is approaching. The 2016 is just around the corner, and 2017 is right around the corner. We have a lot more certainty and visibility into that income stream and opportunity today.

And you could argue we should lower our discount rate and raise the value of the servicer, which has been written down to $156 million, which is actually a silly number. So if you raise that to, let's say, $250 million by (inaudible) instead of the 15%, you'd see our book value jump $1.00, $1.50. We also have plenty of embedded gains in our collateral book, our billion dollar CMBS book.

And it really is a testimony to the team's ability to look at all this data that we have in the position of the largest servicer in the country to really navigate which they paper they buy, which paper they sell. And it makes the whole process better.

And then we have, obviously, there's a great capital markets team, that they're always in the market selling A notes and the loans we originate.

So we've said we would build a multi-cylinder finance company, and I think we've achieved that. We have lots of ways to deploy capital. It could raise the return in any one cylinder. Might not be profitable, or as profitable, or as competitive in any time period in quarters. But there will always be something we can do.

We continue to look at other investments. We were the backup bidder on the healthcare business sold by GE. That was a very big bid for us. Stock price was a little higher when we bid for that. But we were willing to take on a very big diversification into the healthcare space. Unfortunately, as levered as we are, 1.2 times, we can't compete with a bank that's going to be 9 to 1.

We were kind of hoping they didn't show up. But they did. And we had teamed with another company that was going to buy the cash flow loans, and we were going to buy the readable loans. So we were very aggressive. We spent a lot of time on that. We actually probably incurred a dead deal cost for that, and that probably hit our earnings. Rina's shaking her head yes. You can't see her head, but it's bobbing up and down.

I also think it's pretty interesting that we have 62% LTV at this point of the cycle, which is pretty consistent. It's probably lower than it was when we started. And paying a 9.4% dividend yield is just a conundrum.

I gave a talk yesterday in Chicago, and I said the market has thrown out the baby with the bath water. And we're really not -- I mean, [the world] with no yield, and I do think you're going to see a 10-year, whether it's [2.14] or [2], it's still [2]. And we're paying 9% and 52% LTV loan book, which is really -- I don't know where you want to draw your AAA credit, but it's 55%.

And that's if you bought those securities in the market, they trade today at [125] over. We're trading at [700] over, [720] over. It doesn't make a ton of sense. And so we've been buying back our stock, so we were blacked out for a considerable period of the quarter for buying stock back. And that's painful because we'd rather grow the enterprise. We've always said this business is much better bigger. It allows us to get our Holy Grail, which is investment grade for the Company.

And one of those things we've been doing to improve the focus moving into the equities markets. And so I love the multi-family deal we did. It's delightful. And it's got 18-year debt at 6%, and double-digit yields, and very attractive growth markets in Tampa, Orlando, and West Palm Beach. So that was a little bigger deal we (inaudible) at the last minute. But it's the kind of things we're doing in the REIT as we move our equity investments up.

That increases the duration of our book and takes care of some of this job that we have in redeploying a lot of the capital we're getting back because we've been [completed] $16 billion of deals with not a single loss, as Rina said. So I like that too. That's impressive.

I will point out, we have one loan (inaudible). It was a [five] hotel that we restructured it like three times. And it got paid off. That's why the loan loss (inaudible) went down because it got totally paid off, and we had a significant loan loss against that one loan. Which was done a long time ago, I might point out too.

So the other major coup for the quarter -- kudos to Andrew and the team who was getting the FHLD approval -- we've been after that for a year or so. And that's a new cylinder for us. And there are new things we can do with financing at the levels they'll provide. And we're figuring our exactly how to grow the firm with that new cylinder. And that's pretty exciting, because it allows us to be competitive in verticals we actually couldn't be competitive before.

The other thing I'd mention about the equity book is it does provide a depreciation shield for the Company. So despite the fact that our goal is always trying to raise the dividend, it'll give us a safety and cushion that allow us to lower our payout ratio and preserve cash so we can deploy it and grow the Company and grow the business.

So I think overall, it was a very solid quarter. I think the other thing I'll mention is that the servicers book has declined slower than we thought, materially slower. Like, many -- $5 billion slower than we originally underwrote. And we thought it'd be $7 billion in loans and servicing at this point. It's $12 billion in special servicing.

So that goes to, again, that we probably over-marked the servicer [down]. But just the financial gains that we marked it up. We'll tell you about it, but we won't make the change. And if we make the change, we'll tell you because we have to.

So I also -- last point -- we said all along, predictable, stable, consistent, secure, and transparent. And I think we continue to lead the market in transparency and telling you everything that's going on in the business.

And we have probably 400 people in all dedicated -- no, more because we have our business in Europe -- 500 people working for this beast today. So it's a collection of a lot of athletes doing good work. And making $16 billion of loans, I always like to look at the bank market and see how if we were a bank, they'd be the envy of the world. [Lever] this book 9 to 1, and you're going to have the best performing bank in the country. Maybe we should become a bank. Andrew's shaking his head and he's (inaudible) wants to kill me. (Laughter)

But I mean, it's quite a credit group that we've established. And you know, Mark Cagely, who's our new Chief Credit Officer, has done a wonderful job for us. And I'm surprised. I will tell you, the loan books we see today -- the loans we're seeing today are better than the loans we saw a year ago. And we haven't done a construction loan in a year.

So our exposure there has dropped over $1 billion. And will continue to drop as the deals we did are getting repaid like Hudson Yards, we think will be substantially complete mid-year, in seven, eight months, and we will be the first thing they repay. So we know that money's coming back. The net equity, not the total gross dollars in these positions. In that case, that was a first mortgage, so then we never levered it. And so it'll be cash to the Company.

So we prepare for these repayments. We see them coming. And pretty much, we're not that surprised. And we can deploy the capital across our various business, which makes us somewhat unique in the market today.

So with that -- which I said I wasn't going to say anything. I guess I lied. (Laughter) We'll take any questions.

(Operator instructions)

Charles Nabin, Wells Fargo.

Thanks, and good morning. Given your visibility into the maturing vintages over the next couple years, I was wondering if there's been any change in your expectations in terms of defaults as it pertains to the specialty servicing book over the next couple years?

Adam Behlman, do you want to talk to that?

Yes, it's really just starting --

Adam, introduce yourself.

Oh, I apologize. I'm Adam Behlman. I'm the President of the Real Estate Investing Servicing segment down here in Miami. Yes, we're seeing the beginnings of the loans that were expected to mature. Have some issues and come in -- I'd say we're low to middle of our expectation. Really things start heating up come into 2006.

So we're starting to see some people call in informing us that potentially that they may wind up in special servicing, which is typical signs of issues with getting refinances on their loan. So it's a little early to say at, above, or below expectation. We're starting to see that flow begin now.

Okay. Switching to the lending segment, you alluded to patience with respect to the origination pace in the third quarter. But there appears to be a fair amount of volume in the pipeline or the closing process right now.

So my question is, has anything changed in the environment in your view? Or are you simply seeing more -- just finding pockets of opportunity? And I think you alluded to those pockets of opportunity, so if you could specify maybe whether it's by geography or property type. And what's causing that dislocation that you've been able to capitalize on in the marketplace?

Well, I think we felt the market kind of (inaudible) here, so we can put out capital and not worry about having to -- to tell you how bad the market was or is or how transitional it was, we were actually doing an equity deal for the REIT. And the financing quote we got from a major investment bank was I think [280]? and it went to [400]. And that was the end of that deal.

So it was a dramatic widening of spread, probably in 30 days. So one might call that being re-traded. But in the lending business, if you're a bank, you just don't want to make loans you're going to lose money on. There's some high-yield deals that we're told -- like, Jeffries lost $60 million on the deal. So the banks got really nervous and really widened their gaps. And even those were best-effort quotes that weren't even give you firm commitments with flex.

So in that environment, we found ourselves looking at loans that we had -- or quotes we had outstanding that were not going to be good loans. And I think the spreads were appropriate given where the market improved.

So once now that you have this gapping out, I actually think that my mouse will pass through the snake's belly through maybe the first quarter of next year. There's this balloon of supply coming in the market. It's more supply led. And a thin market, because nobody wants to catch a falling (inaudible).

So -- but we think these trades work for us at these spreads with our financing lines. And we have the capital, so we do have to deploy it because it's just sitting cash otherwise. So we've been a little more aggressive. I would say it's not -- in general, I don't think it's property-type specific. And it's not geographic-specific. I think we're kind of all over the place.

And we're credit-quality specific. We're looking for the -- we're looking at debt yields today. We just did a loan at a 10. It's been a while since we saw 10 at that yield. That was in Atlanta. And we just did a deal out in Napa, and that was tighter -- actually that was actually also a 10 -- close to a 10, 9.

So it's a little better for us right now because people are scared. The lenders, the banks are scared. Nobody wants to go into year-end with a ton of loans on their books and having marked risk. So it's still competitive. It's not like people walked off the table. But the conduits have definitely gotten -- they're the first to widen their spreads out because they have to deal with the reality of the market every day.

And most of these guys, whether it's us in our business or (inaudible) in their business or CTRE in their business, you're trying to turn these things quickly. So if the market's [400] over, you're going to [400] over. That's your quote, and you'll move your whole quote. And when the CMBS market does that, then our whole loan business just [drafts] right behind that. And so if they're quoting [450], then we can do [425] because our credit facility is at [225] depending on the collateral. It could be [180]. It could be [200].

So we can manufacture -- that's why our ROE is the highest in history right now (inaudible), which is pretty amazing given -- and it's exactly what we told you, by the way. We told that spreads are coming in on loans. Our cost of financing was dropping. And so we could still maintain the ROE that we had.

And if we were running more like, let's say, BXMT, to be specific, on a loan, but we'd be running 15%, 16% ROEs. But we run a lot lower leverage overall. So we would be running a much higher ROE. It's safe and predictable and consistent. That's what we said we were going to do. Should it be 14%? 14s a good number. If you're 15%, you're like a world-class company period.

There are very few companies in the S&P 500 that have sustainable 15% ROEs. I think I went through that list, it was like two companies over 10 years. We're not 10 years old, but we're 5. Are we 5 yet?

We're six.

We're six? Oh my god.

Barry, you talked about spread widening in the CMBS, but you're also going to have significantly less volume be done. I think the Street is now thinking $95 billion or $96 billion this year versus $120 billion that people thought three or four months ago. And deals did not get done into volatility [of the] summer.

So less deals getting done, the banks pulling back. Certainly the banks pulling back on single-asset deals, which have really executed poorly over the last few months. And you've had an opportunity to pick up mezzanine securities there if want to. It's significantly higher spreads than we've seen. So the Street won't be doing much in single asset. And those are thin loans that would tend to fall to us.

So what we've seen is borrowers coming to us saying, if you can be here, we can do a deal as opposed to you're in competition with five other guys and put your best foot forward. We're really able to be price givers as opposed to price takers. So it's been a better quarter.

Well, and the other think that's coming down the [pipeway], the change in the risk retention rules. And that's going to be a free for all. Nobody really knows how it's all going to play out. But everyone's talking about it for the first time. Even though we've talked about it every call, now the banks are talking about it.

The one thing to know is debt's going to get more expensive. So spreads will widen. My guess is the whole stack [resets] 25 basis points. And if you know that's going to happen, maybe 35 basis points, at what point (multiple speakers) that into the market right now because why would you write a loan at [400] over that two days later is going to be [435] over.

So we're working on that. I'm sure everyone's working on where the opportunities are for us. But it's a non-regulated entity, and that's pretty exciting to me. We just have to figure out how to (inaudible) driver's seat at least participating in that structural change to the system, which has to be good for us.

Great. I appreciate the color, guys. Thank you.

Jade Rahmani, KBW.

Good morning. Thanks for taking my questions. On the lending business, can you talk to what drove the slower originations? Was it purely caution on market conditions? And based on where you sit today, is that business still attractive? Has anything changed, for example, on the personnel side to inhibit a re-acceleration in originations?

Hey, Jade. It's Jeff. So on the origination side, I think at one point in the middle of the China crisis late August, we walked in on a Monday morning and Chris Dalzell, our Head of Originations, got something like 18 new calls on loans. It's typical to have about 100 loans in our pipeline. We typically do about 4% of those. We had more calls into that volatility from people who were seeing their opportunities away from us go away, banks pulling back, and others. We probably increased that opportunity set to 120 rather than 100.

And again, we've historically done about 4% of it. I think we could have done $3 billion instead of $300 million. And we certainly could have done it at high leverage. And you guys would have applauded a significant volume increase. But we chose, at that time, to pull back and see where the world settled in.

And within the coming, ensuing month or so, it settled in a little bit better. And also we are a borrower on the (inaudible), and with our warehouse lines, we want to make sure that we have our financing set up. So we felt it was good to be patient, and we let a -- what was a larger pipeline than we've probably ever seen kind of go by the wayside a bit and wait. And we found some deals, as Barry said, that are really high cash flowing that we love the stories on in the fourth quarter. So we'll take that lead now. And probably take advantage of it a little bit more.

And just, as you sit here today, do you think the -- are the returns in that business still attractive? And you mentioned the GE Capital healthcare business. Are there other business lines, product lines you're looking to add to the segment that you feel could just bolster the offering? For example, GSE multi-family is one.

Yes. So on a return profile, I think we've run a little bit higher than 11% on our loan book levered since I came on in September of last year, which is higher than the book that we inherited. Over the next year or so, the roll-off in our book will be significantly lower than that. There's a decent number of construction loans, as Barry talked about earlier, that will be rolling off at lower yields. They're generally unlevered.

So I look at the next year and think that continuing to do 11% higher [Rs] should be something that is our goal, and will continue to be our target. And I think we'll see that opportunity set, and we'll be reinvesting against a roll-off that's significantly lower. And so I think it'll be a good year for us in terms of pick up in interest income for the same amount of dollars.

You asked a second question, and I forgot what it was.

Just about adding additional business lines or products to the lending segment.

(Multiple speakers) We're working on it. So I think we're in like seven businesses. One business we don't actually talk about is our Auction.com, which is another business that we have which we support by giving them assets to sell, and I think we've (inaudible) in the company too, like 97% of it, something like that.

So that [business has been doing] pretty good. And we've made attractive investments in Google. And we'll see what happens to them. Also, we have a kicker in Seven [over on] 7th Avenue, and we're hoping to have really good [news] in that. That's probably (inaudible) zero. That's a major project in Midtown, Manhattan where the [addition] is going up, and they broke ground Thursday, I think it was. It was last week. So that's an exciting development. But we own a 20% interest in the equity of the project.

But there are many lines of business we are thinking about. But we're (inaudible) until we've completed doing them. So we'll let you know.

We did hire a Head of New Business Development, a 25-year Wall Street veteran this quarter in Miami. So we're looking into a lot of new things.

And then just on the guidance for 4Q implying a sequential down tick in earnings, can you just give any further color, if that's conservative, if that's embedding a slowdown in LNR, servicing revenues, or maybe just a timing lag on capital re-deployments? Just how to characterize the fourth-Q earnings (inaudible)?

So they always true up the year-end bonuses, accruals and stuff won't get into play. So you're guessing more or less. We can have a pretty good runway. It's November, so we know what October looks like.

I'd say that loans close and repay, we get repayment penalties. And we didn't take any gains to speak of in the quarter we just passed. We have -- we always do. I mean, we always have gains in our CMBS book, in our RMBS book. And then we didn't need them, so we just put them away for a rainy day.

And we'll see -- it's the business. It's what we do. It's like a bank. And we're always going to -- [it's about to happen]. So we gave you a best guess. It could be higher. It's not likely to be lower. And it's a continuum. (Background noise) It isn't that. You can see the loan book has accelerated. The commitments have accelerated again. And we've signed up $800 million in the loans book alone in what is, I guess, (inaudible) or something like that. So not even five weeks.

And we're always looking at our dividend. And we sure would like to increase it. But I don't think it'd make a difference right now. I think the client base is such for the Company that we're waiting for this too will pass. I think, as I said, all the mortgage REITs got hit, all the REITs got hit. I was surprised when rates ticked down from 2.20% to 2% and then actually below 2%. And we're not -- that's the 10 years. The five year is, what? 1.50%, 1.60%.

I was surprised the stock didn't rebound, but it didn't. And I just don't think we seem to have as big an audience. We're working on that. There's a trip coming up to Asia for the team to go talk about us. And Zach and the team are doing a good job. But a good job would be a stock back at $25. That would be a good job.

And then our dividend yield commensurate with the risk in the Company. So the dividend's well covered, $2.15. We'll earn something like $2.14, $2.15. We gave a range. (Multiple speakers) To take a midpoint, $2.15 above [92], and so we have plenty of dividend coverage.

If I thought it would make a difference at all to the Company's trading position, we could raise the dividend a little bit. We have the room. But I really think at this moment, with our stock hit, we have to preserve capital. And it's a real tug of war. I mean, do you buy in your stock with the dividend where it is and shrink your enterprise knowing that you're taking -- it's a good short-term move?

But we need more investors. We need more people to take positions and buy this stock up. That's what we need. We need to get the stock dividend yield to -- at the appropriate yield for a company of this risk profile. And we are definitely hurt by the resi REITs. There is no doubt that in ETF trading, we are the most liquid, we're the biggest guy -- or the third biggest buy, but we are the biggest guy in commercial real estate. And we're getting swept out with the baby, or the bath water. Or whatever. Which one? One or the other. Whatever's bad, we're getting swept out.

Because they were adjusting their book values, they're having write-downs, they're lowering their dividends. They're paying a 13% dividend yield. Everybody looks at us and says, oh, they're 13%. Well, 9% seems appropriate because it's better than 13%. But we don't look like them. We're not even in that asset class. And we don't have a mismatched book. So we don't look like them. And if the market doesn't make any difference at the moment, okay, we're six years. We'll keep doing this for another 10 years. And then I'll be, I don't know, doing something else presumably. (Laughter) Maybe not.

Any other questions?

Dan Altscher, FBR.

Hey, thanks. And good morning, everyone. I wanted to just ask about access to the FHLB. You mentioned before it took a long time to get it and finally here. What type of collateral do you plan on pledging against that? Is it going to be some of the CMBS positions? Or maybe (inaudible)? Or is it maybe some actual multi-family loans? Or how do you plan on using that?

Yes, it's Andrew. I think to start out we're being fairly conservative. As you know, there's been a lot of dialog coming out of the FHSA around captive insurance companies and their ability to actually access the home loan banking system.

Actually, at the end of October, there was a bill introduced in the house, HR 3808, which was put forth by four representatives that actually should help the cause of all the captive insurance companies. It's effectively trying to block what the FHSA has been doing vis-a-vis captive insurers.

So until all that plays out, I think we're being conservative in terms of how much we're going to access via the FHLB. We do have a billion approved line going in. And they've told us that, I think, we have the ability to double that over time to the extent we remain consistent in our business plans.

But in terms of the type of collateral, it really runs the gamut. You've probably seen obviously some of our peers and some of the agency REITs use it for securities. I think we have the ability to finance kind of high-rated CMBS via the home loan banking system.

And we also have the ability to finance our whole loan business as well. So they'll take varied collateral into the system. And we think it's going to be a great source of low-cost, stable financing going forward once all the uncertainty settles in Washington.

Okay. No, that's a helpful update. And we'll keep a watch on that. And if I can sneak one more in, just broader, and I think some of the comments alluded to year-end books maybe getting a little backwards, maybe a little capacity coming out of the system.

I mean, are you seeing some of the more traditional players like the banks, like the insurance companies kind of really pulling back towards the year end? Kind of maybe reaching caps? Or maybe on the agency side, the [GOC] is kind of getting to their caps? Is there maybe kind of a supply/demand imbalance, if you will, as we approach the last two quarters of the year?

Well, there's clearly a supply/demand imbalance. At the last count, I was told $450 billion of high-yield paper that has to get done. And then there's -- that didn't include the Dell deal or the AmBev deal, which is another couple hundred billion. Obviously not all high-yield either.

But against that backdrop, don't forget the higher markets can be tremendously influenced by the paper in the oil and gas industry that's on its way to evisceration as the hedges wore off. And so the whole market, the whole -- these are the same guys, the guys who are buying some of this high-yield [5s are now 8s] are looking at CBMS, and they're saying, oh, I'm not going to buy that at [4]. I want [5].

It's not that thick a market. I was hearing some horror stories about people calling up to try to sell some AAAs to a major money center bank. And the bid was -- I'm making this up -- [72], [73], and they went to sell this $2 million position, and the bank quoted them [65]. And then they said, are you going to sell the rest of your AAAs? Because they were afraid this was like the beginning of a torrent of paper coming out. There's clearly odd things happening in the debt world right now beyond my expertise.

But in that environment, you're cautious and you're careful. And it's good for us. Yes, I would say, in general, the conduits, many of which are affiliated now -- (inaudible) something interesting. I think there were 40 conduits or so operating today. Maybe the number's a little higher. There were 250 of them in (inaudible), 2007.

I think it's a lot, but it's not a lot compared to what we used to be dealing with. And they're all looking at dramatically lower conduit margins. And that makes you very careful about -- probably if you're earning a point and a half, or a point, and we earned 2-something in the quarter, if you fully loaded the overhead of the business into that, I'm not sure you're making any money.

So that means non-diversified companies that are just doing that are really nervous. They have to get better spread. They have to widen their spreads on every quote because they're not able to make any money.

So we can limit (inaudible) the down period because we're making, oh, $500 million a year or something like that. $2.15 times 227 million shares, or some -- I can't multiply. But --

$500 million.

$500 million. So we can absorb a bad quarter in the conduit business. No problem. That is the design of the Company. That is what we have.

And we'll have over $500 billion of commercial real estate transactions in the US this year. First time since 2007. So you've had the insurance companies --

Total transaction?

Total transaction volume, correct. So you've had the insurance companies go up a little bit more than they normally would have. The multi-family sector has been on fire. As you know, the agencies pulled back for a while, went to wider spreads. The insurance companies and others filled in some of that gap.

But the agencies are coming up closer to their caps. I think the insurance companies have done probably more than they had anticipated this year. And you're looking at probably a wider fourth quarter across the board for our competition. So you might have an opportunity here to put more money to work into the end of the year.

Maybe just one simple yes or no question. But your multi-family deal that you're working on right now, is that totally just coincidental, kind of at the same time as the equity residential deal? Or are these related?

This one preceded those two and the equity residential deal. And this affordable, very high-quality newer buildings. But we thought with the 18-year fixed debt that's payable and growing double-digit yield. But we didn't think it was going to be a -- it was the kind of thing we decided -- And as shareholders, we own probably $150 million of stock -- we would like to own. We saw no downside relatively speaking and more upside.

We intend to hold this for a long time. EQR is more of a trade. This is probably -- well, we think it's a sub-14 IRR, but we think it's going to double-digit cash yield. But that's because we're not selling it either. We intend to hold on to this for a while. This is really good stuff. And it's well-financed, and it's, as you saw, 98% occupancy. This is not the kind of stuff that we bought in EQR portfolio.

That's great. Thank you so much.

You're welcome. Thanks, everyone. We really appreciate your time today. And the team's available to answer any of your questions as they always are. So have a great afternoon. And I hope you don't own Valeant. Bye.

That concludes today's conference. Thank you for your participation.