Starwood Property Trust Inc (STWD) 2016 Q1 法說會逐字稿

Good day, and welcome to the Starwood Property Trust first-quarter 2016 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's earnings call.

This morning, the Company released its financial results for the quarter ended March 31, 2016, filed its 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available in the Investor Relations section of the Company's website at www.StarwoodPropertyTrust.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs, and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the Company's filings made with the SEC for a more detailed discussion of the 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. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.SEC.gov.

Joining me on the call today are Barry Sternlicht, the Company's CEO; Rina Paniry, the Company's CFO; Jeff DiModica, the Company's President; Andrew Sossen, the Company's COO; and Adam Behlman, the President of our Real Estate Investing and Servicing segment.

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

Thank you, Zach, and good morning, everyone. Despite a volatile market backdrop, this quarter once again demonstrated the strength of our multi-cylinder platform, with core earnings of $0.50 per diluted share and an annualized return on equity of 11.6%.

I will begin our discussion this morning with the results of our Lending Segment. During the quarter, this segment contributed core earnings of $98.5 million, or $0.41 per share. We originated or acquired $437 million of investments, of which we funded $341 million. We also funded an additional $186 million under pre-existing loan commitments.

These amounts were funded mostly with recycled cash from the Lending Segment's seasoned investment portfolio, which returned $302 million during the quarter, in line with our expectations. We expect over $2 billion of additional repayments this year, $671 million of which we already received in April.

The credit quality of this portfolio remains exceptionally strong, with weighted average LTV declining to 61.2%, the lowest in our history. This improvement was due in part by the LTV of our new investments during the quarter, which averaged 54.6%.

I will now turn to our Investing and Servicing Segment, which contributed core earnings of $52.4 million, or $0.22 per share. Because of the $51.5 million unrealized decline in our CMBS portfolio, we reported a GAAP loss of $2.2 million. As we communicated during our last call, the marks in our CMBS portfolio were impacted by the significant spread-widening that occurred this quarter. While GAAP requires us to mark all of the CMBS in this segment to market, the portion that is most vulnerable to spread [division] are the double-Ds and triple-Bs, which are more liquid, and most clearly reflect market-based pricing. These bonds constitute approximately 25% of our portfolio, and represent 64% of the change in value reported this quarter.

There are a few important items to consider when looking at our CMBS book. First, ours is not a short-term business model. To the contrary, we intend to hold these investments long term, and unrealized spread marks are not an indicator of value recovery over time. Unfortunately, the GAAP consolidation model, which causes us to consolidate $85 billion of [DIEs] on our balance sheet also causes us to elect a fair value option on the bonds we own. If we were able to follow the health and maturity models for CMBS like we do in our Lending Segment, you would not see these marks in our P&L.

On this point, it is important to note that our core earnings recognition model for CMBS follows an amortized cost approach, in line with the long-term hold strategy for these bonds. Despite the decline in value we reported this quarter, if we were to liquidate our CMBS book at its March 31 fair value, we would not realize a single dollar of loss in core earnings.

The second item to consider is the noncredit-related nature of these marks. Over 90% of the change in value reported this quarter was noncredit, which means that the underlying cash flows of the bond did not decline. To give you some color on the cash flows of this portfolio, the bonds returned cash interest of $48 million and repayments of $20 million this quarter. These cash flows are what enable us to pay our dividends.

And finally, our CMBS book is incredibly diversified, with over 300 CCIPS and an average price as a percentage of face value of just $0.22. We chose to make $47 million in CMBS purchases during the quarter. These consisted almost entirely of senior-rated securities with strong credit metrics and attractive pricing levels. We chose not to invest in any new issue deals, simply due to the widespread market volatility and our cautious approach to investing this quarter.

Moving on to our servicer, as of March 31, we were named special servicer on 154 trusts, with a collateral balance of approximately $106 billion. And we were actively servicing $10.6 billion of loans and REO. You have heard us talk about the wall of maturity resulting from the 2006 and 2007 CMBS vintages. In the first quarter, we saw the beginnings of this wall, with $256 million entering special servicing. Since quarter-end, an additional $636 million entered special servicing, in line with our expectation that more defaults would occur as the year progressed.

And now turning to our conduit, as we mentioned during our last call, the extreme volatility in the credit markets impacted pricing on our securitizations this quarter, resulting in our conduit reporting its first-ever securitization loss of $1.4 million. However, as the markets continue to recover, we are pleased that the business has returned to profitability either at or above historical levels.

I will now turn to our Property Segment, which contributed core earnings of $9.8 million, or $0.04 per share this quarter. Unrealized changes in value led to a GAAP loss in this segment as well, with depreciation and amortization of $0.07, and a decline in value of our foreign currency hedges of $0.04. The economic reality is that these assets are not depreciating. Likewise, our foreign currency hedges are effective economic hedges. But there is a timing mismatch under GAAP which causes the value of the hedge to flow through earnings today, while the impact to the related asset will not flow through earnings until a future period. Core earnings does not contain these unrealized charges.

During the quarter we added another $203 million of assets to this segment, closing on 12 of our previously announced Woodstar multifamily affordable housing communities. As a reminder, these assets are levered with sub 4% fixed rate financing that has an 18-year average term.

Finally, I will add just a few brief comments about our capitalization, investment capacity and our forward outlook. Our debt-to-equity ratio was just 1.4 times at the end of the quarter. If we were to include off-balance-sheet leverage in the form of A-units sold, our debt-to-equity ratio would be 2.5 times, or 2.4 times excluding cash. We believe these levels are conservative when compared to others in our sector and when compared to the LTV of our loan portfolio.

Given our current investment capacity of $2.5 billion and expected loan repayments throughout the remainder of 2016, we continue to have adequate liquidity to execute on our core business strategy going forward. We have ample capacity on our existing lines, and are in regular communication with our lenders to expand these lines when and as needed.

Looking ahead, we reiterate what we said to you last quarter. We will commit to earning and continuing to pay our $0.48 quarterly dividend this year. To that end, for the second quarter of 2016, we have declared a $0.48 dividend, which will be paid on July 15 to shareholders of record on June 30. This represents a 9.8% annualized dividend yield on Friday's closing share price of $19.67.

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

Thanks, Rina.

Our last earnings call was on February 25, and we told you we were holding more cash than we ever have. Spreads had just hit their cycle wide, and we said we would remain patient in deploying capital.

Soon after, we saw normalization returning to the debt market, as both a lender and a borrower, and we began the process of putting that money back to work in our loan book. And we have done so at the highest risk-adjusted yields I have seen since I have been here. We will continue to be opportunistic, and expect to redeploy idle cash, mostly through our loan book, moving forward, and at likely higher blended yields.

The optimal leverage yield on new originations and loan purchases averaged over 14% this quarter at just 54% LTV, and shows that we were able to take advantage of the market dislocation in quarter-one. Although the first quarter may be an outlier, it feels like we can maintain the credit quality of our book and invest at higher yields today than we could in 2015. But the volatility that has allowed us to invest more accretively in our lending book has also had an effect on the CMBS market.

On that first-quarter call, I said that the widening in spreads would create more opportunities, and that lower volumes would lead to scarcities, which would lead to tighter spreads. We are seeing that now, and CMBS spreads have rallied back in, with little new issue in the market, and volume expectations continuing to drop in 2016. Buyers have less paper to choose from, and shorts have been reduced. I think hedge funds and others spent a lot of time looking under the hood at CMBS in quarter-one, and found what we have been saying, that today's CMBS is very different than pre-crisis originations in LTV, IO percentage, enhancement, and importantly, the ability of the BP buyer to shape a pool through kick-out.

We expect to ultimately to see significantly better performance from recent originations. The investing landscape will continue to improve for permanent capital vehicles like ours, who are positioned to take advantage of the implementation of the new risk-retention rules later this year. It will also create an opportunity for Starwood Mortgage Capital, which, after a slow first quarter, has recently earned gain on sale margins in-line with the best we've seen since buying the business.

We talk a lot about our credit-first philosophy at Starwood. In over seven years since our inception, we have yet to take $1 of loss on almost $18 billion of loan. Also, as Rina mentioned, our weighted-average LTV declined in this quarter to a record-low of 61.2%, with 95% below 70 LTV. The more interesting statistic to me is that not a single loan in our book is above 80% LTV today.

The risk in a book like ours is not in the averages, but in the tail. And simply said, we have no tail risk in the book today. We underwrite and asset-manage every loan in our book ourselves, and our Credit Committee consists of the most senior people at both Starwood and our manager at Starwood Capital Group. We share a tremendous amount of information and data across our platform of over 2,000 employees, and will not sacrifice credit to reach for yields.

I am now going to turn it over to Barry.

Thanks, Jeff, and thanks, Rina, and good morning, everyone. I'm glad you are with us this hour earlier than our usual call. We're all wondering why we did this.

I have to say, I'm really happy with the quarter. We didn't have a lot of -- some of our cylinders were off, our conduit business being negative for the quarter. It's a tribute actually, losing only $1 million in one of the most volatile credit markets we've seen since we started the Company five years ago. It achieved its actual model of turning their inventory 11 times in a year. And as you heard, since then, we've returned to profitability, and that is a business we count on to make a few shekels every quarter.

I'm delighted to see not only it survive, but thrive, because the structured environment continues to change, and some conduits were shut. And clearly, the Fed is telling banks to cool it on lending for property. And with the new risk-retention requirements coming at the end of the year, I probably have never been as excited about the prospects for our Company going forward. We really, as the largest player in the space, and with the coming liquidity we're anticipating in our book, and the quality, as Jeff said, of what we are lending against, and returns we are seeing, this is a full all pedal to the metal environment again for us.

And we find ourselves really cherry-picking loans again, and relying on our equity credit underwriting orientation to pick the best. And that really is our core business, the lending business. And I am happy to see that we can get back in that business, in a scale that is unique to us given the scale of our Company and the breadth of our organization.

That would include, by the way, picking up our lending in Europe, where we have been incredibly successful, too good, because many of our loans are being repaid. That's what you head from Rina. Those are (technical difficulties) a lot is our loans in Europe. So we charged our 50 or so direct employees in Europe to find new opportunities for us, and they are responding. And what you see here is being married in Europe, where banks are getting a little bit more shy, and that creates great opportunities for us as a creative lender.

And not only in transitional assets today. Some of them are just -- the banks weariness in the scale of their loans, and their inability to securitize, just backed them out of the market. And we're obviously a lender that holds.

I just want to point out and highlight again Rina's comment about our overall leverage at 2.5 to 1, when our nearest competitor is nearly 3.5 to 1. It's a totally different strategy obviously. And we have a multi-cylinder strategy; they are all credit-related. But we are trying to extend maturities, and that was our move into the equity book.

I'll make a comment about the equity book, because it is really exciting for the Company. There are two loans in the Company that we made, or two purchases -- one, a portfolio of assets in Ireland, and another one the loan at 701 Fifth Avenue -- Seventh Avenue in New York City. Which is a redevelopment where we hold the senior mortgage. And then there was an ED5 financing placed above us. And then we have an equity kicker, which we hold on our books for zero.

In the quarter, the Company or the developer executed a major lease with a credit institution for a considerable portion of the [tub as to lease] base of the property. But it is a very exciting tenant, so we've been able to backfill that now with added grade space, which is our premium space. And based on that, we think this equity paper is worth a lot of money, tens of millions of dollars.

And in aggregate, I can safely say that the gain in our equity portfolio is over $100 million, consisting from really three positions that we hold, and a conservative mark on a fourth. So our adjusted book value, our share market value is well-above the book value you see here. And as Rina pointed out, we're going to have fluctuations both in currencies and in CMB, that are going to affect our mark-to-market book value, which we hope will be conservative.

The other exercise we undertook in the quarter was to value our servicer. Just out of curiosity. [The agreement was] to lay out what we expect on the cash flow streams for the servicer going forward for the next four years. And we also think we have a carry a fairly conservative mark on our servicer, somewhere around -- $120 million?

$122 million would be (multiple speakers).

$122 million at the end of the quarter. So we think that is also a fairly -- very conservatively large, given the discount rates we're using on those cash flow streams, which are probably considerably in excess of what they ought to be, given the near-term nature of the cash flows coming in.

So I want to summarize by just saying that I think the environment is really good for us, and I think this is our fifth cycle in five years where things gapped out, things came in, things gapped out, things came in. We were very cautious, as we told you we would be. We wanted to get through that hurricane that hit the credit market.

And I ask myself every day, given what we do here, the equity book we have and our $70 billion in assets: is this the summer of 2008? Like we're all getting lulled into a storm, and the equity market is going to blow up? And the one big positive I see today versus that period of time -- there's two. There's $10 trillion of capital or bonds with negative yields in the world, and to produce a 10-dividend yield with a 61% LTV is absurd. I think the credit quality of our book obviously has never been better, but the markets don't seem to pay attention to that.

But what I really like about the market right now is that credit markets are rallying. They're not falling apart. They are actually -- triple-As have come in from 175-ish to 125 around securitization. So were you really in the summer of 2008, you probably would see the credit markets deteriorating, and they are not. Even the high-yield market has opened up again, and companies are issuing debt. So I think that bodes well.

But the structure of the market has probably never seen this much turmoil, with banks basically shutting down lending operations, and traditional lenders jockeying for a position, with the post-December risk-retention changes in rules. And I don't think any company in our sector is better-positioned than us to take advantage of those changes, both because of our underwriting capacity and our conduit business. And our issue shelf through Star Mortgage Capital, as well as our ability to write large loans and syndicate them if we choose to do so. So I'm looking forward to the next 12 months with the Firm, and hopefully, the next 10 years.

But it was a very good quarter. I am really happy with the performance of the Firm, especially when somebody -- that is why we have 10 cylinders. So if one shuts down, we can work on others, and we'll always have something to do and we will never push the credit curve and the credit cycle, and we will stay the course. And we sat on a lot of cash, we paid for it. But now we can deploy it, and we're really excited about the opportunities that are in front of the Company right now. So with that, we will take questions.

Oh, one more thing, before I take questions, Operator, if you're there. What you don't also see is that the credit quality of the book really has gotten better. Because we paid off -- or have been repaid on $1.5 billion in construction loans. So, if we had gone into construction a couple years ago -- in fact, I thought the book was too heavily laid in construction.

We actually avoided construction in New York City, in particular, beings there was too much exposure to the city. And that turned out to be an incredibly precious move. We will get repaid on Hudson Yards probably on the day it is open, for repayment. But actually that loan, which was a fabulous risk reward loan -- it was an 8% first mortgage -- it was only levered at the corporate level; we've never leveled at the asset level. So it actually was a drag on the ROE of the Company, despite the fact that an 8% first mortgage on a trophy office building, nearly fully let today, would be an amazing deal. And today, you could probably sell it in 250 or 200 million over.

It's not a net-accretive transaction to the Firm, even though it was a great way to deploy capital. So we are super-excited about reducing our construction exposure. And we're also excited about looking at new opportunities in construction -- which again, changes in regulations are allowing us to do. And we can go into that in detail offline if you would like to know how the change will offer -- people who own land for long periods of time, they are in a world of hurt right now, getting a construction loan.

So thank you very much, and we will take questions.

(Operator Instructions)

Steve DeLaney, JMP Securities.

I'm going to start with a small item. I noticed in the principal, the target portfolio, that you sold about $98 million of loans. And should we just assume that, that was a senior participation or an A note? That is the first part the question. And then secondly, when you take a whole-loan and you sell that interest, do you then reclassify your retained piece down to the subordinate loan bucket?

Let me do the first one, and then the second one -- did you hear the second one? What was that question, the second one?

Oh, okay, Barry. The first part was just that --

Okay, let me do the first one. We made a loan -- we got a little over our skis, I felt, when we made a loan on the market to sell in New York City. And we flipped it, we got out of the position. It was too equity-like, I thought. A lot of the cash, the assets come from the leases on mega condos at the top of the building, and they rent for like $70,000 a second. And it is hard to underwrite, and I was just not comfortable with the loan. So we made the loan, and then we sold the loan and basically broke even.

We earned a mid-teens return and had a slight profit on it.

Slight profit. But it was -- again, you do not see these things. But I just did not want to hold the [marko sell] loan. It looked like it was 13. But it was hard to sell. I mean it was hard to --

Yes, got it. Okay, so no retained exposure.

No, none, zero.

Okay, great.

It was hard to sell the A note, though, you are correct. We would have re-classed it. It just was just not the case.

We sold the whole loan. We originated the fee, and then syndicated the loan back out.

All right, that's very helpful, thanks. And as far as -- I think we're all amazed. I mean what was it -- Jeff said it was late February we were sitting around on your last call wondering about whether CMBS were going to go to 200 before they came back to 100. So thank goodness, the way that turned out.

But I am curious if -- you're back active, you are seeing some good results. Would you describe yourself and Larry's team as being fully engaged with the market now? And to that end, we saw a lot of layoffs of conduit lenders. Was he able to, through the shutdown period, was he able to maintain his staff?

Yes, we maintained staff. And if anything, I think we would go the other way, given the opportunity that we see. The reality over the last couple months is volumes do go down when spreads widen. The rate that is getting passed through to the borrower is significantly higher, and it becomes significantly higher than they can get in the bank or insurance market. And you will see loans that do not have to get done, not get done. And loans that have to get done, go to the bank and insurance market.

So if you saw CMBS volume come down, you certainly saw less production from people like us. Although we were pricing in wider spreads, both because of volatility and because spreads were wider. And ultimately, you will see us and people like us make significantly larger gain on sale margins on anything they were able to write in February, March or April. Unfortunately, the volumes won't be quite as big this time around, for these couple of months. But we are hoping to pick that back up into the quarter. We're hoping to continue and potentially grow our FMP business.

Great, all right, thanks, Jeff.

Larry asked me if I wanted him to make up for the volume that we didn't do in the first quarter, the rest of the year. And we said: just run your business the way you normally run your business. Take the risk you took before, and if it means you're reaching $500 million loans a quarter, that's totally fine. If you see opportunities, though, lay them out and go for them.

And I think with those, as you point out, and as I was referring to, the changes in the market with the conduit lay-offs. We have such a strong balance sheet and so much capacity, and we believe in Larry and his team so much that we will let him do what he needs to do. He has never suffered a loss, and if you know our reputation in the lending market, other securitizations want Larry and the Starwood Mortgage Capital loans in their securitizations, because they feel they are well structured and well-underwritten.

And also, we are the [beef he spires] today, as you know. We have [these due] in the first quarter. But we tailor these portfolios with the team there, to basically cherry-pick and create a great securitization because of the knowledge we have in the marketplace. So an unlevel playing field, and to some level, to our advantage, so we're happy with that.

Great. And Barry, let me close with one really big-picture item, if I could. There has been some M&A going on in the mortgage REIT space that obviously we hadn't seen in prior years. And I am curious if you and the team are looking out, there's been a lot to deal just with the market and your own portfolio. But if you are looking at that group of roughly 50 companies and seeing anything that, whether from a strategic perspective or just a cost-effective way of acquiring incremental capital, if you think there is anything out there that might make sense?

I know you took a run at something like that, I think, back in 2011. But I'm curious about your thoughts on the M&A going on in this space? Thanks.

Well, you know us, we are watching and looking, and if we see something that is accretive and good for our shareholders, and it is doable and fits the strategy, then we certainly would like to figure out if we can execute it. But our goal is it has to be accretive, both to earnings and to book. So those are our guidelines.

Got it. Thanks for the comments.

(Operator Instructions)

Eric Beardsley, Goldman Sachs.

Just wanted to get a little bit of color around the special servicing. You had talked about seeing some potential decline in the first half of this year. Given that you are now starting to see that wave come in, and you mentioned roughly $600 million entered special servicing after quarter-end, are we at trough-level now, in terms of the first-quarter revenues and servicing?

Let me say just one thing about the special. We always talk about this business being a hedge to the rest of our business, and I think the tightening of the lending environment is causing more loans to go into special. Some of these are refinance-able, but they, today, because we'll play in the equity and the debt, they present opportunities to us to either refinance the loan or restructure the loan. And even participate potentially with a kicker [in aqui-fi].

Most of this is, often the borrowers waited too long, they have fantasies about what they will do on the refi. But the one thing that is interesting about the book, first of all, the book -- Andrew corrected; we've been in business seven years. I thought it was five. Time flies when you're having fun. And we modeled this book probably to be $5 billion, $6 billion, at this point, in 10.5.

And as we look out, we thought the maturities in 2016 and 2017 would mean peak earnings in 2016 and 2017. And we actually don't think that is the case anymore. We see these workouts and cash flows extending out further through 2018, and even 2019. So it is a longer-lived cash flow stream than we probably thought. And hopefully, it will be even higher returns.

Some of this stuff is like -- it's hard to value, hard to anticipate. Because as you know, we get default interest, and it's hard to model. And sometimes we offer, this has been a historical case, it's not this year, where we offered a refinancing to a borrower, and he chose not to do it. And at the end of the day, he waited too long and had to pay up a bunch of default interest. So we try to do conservative cash flow projections and budgeting, and then if good things happen, they happen, and hopefully no bad things happen.

Got it. Just as a follow-up on that, are we near a trough now, or are you near the low-end of where those balances will be, you think? Or is there something where maybe you start to see more growth in 2017, and we're not quite troughed out yet?

I think it's probably further to fall in the balance of both earned and special servicing. I think you are going to see more transfers out than transfers in, say, in Q2 and Q3. And then, I think it will start to pick back up towards the latter part of the year. We've always thought that the majority of the maturity defaults would start hitting later this year. So until we get there, I do think that, that balance, that $10.6 billion balance, is going to go down. So I don't (multiple speakers) --

Let me give you a quick display of our loans. Some of these loans were written at 50 basis points over LIBOR at pre-ILTV. So if the property hasn't recovered, it's been starved for capital, it probably might not be cash flowing as optimal now, and they probably need some kind of increase in loans or their [GI], or a building improvement. So anything covers at 50 basis points over LIBOR, but [don't] and IO.

So it is going to be quite an interesting couple of years. And again, we want the credit markets to fall apart. You may not like them to fall apart, but we would be really happy. And then we would be earning adjusted 14s on our capital, which is ridiculous in a world like this. The IRR equity deals which were meant to be core deals are also quite high -- shockingly high. So we are pretty excited about the next -- and our job, my job, Jeff's job, is to position ourselves in a good manner for taking advantage of the changes in the marketplace, and making sure that we at least maintain our lead in the space.

Got it. And just as a quick follow up there, it sounds like the reinvesting environment is really strong right now. And given those returns you mentioned, what can you do to take advantage of that? Are there any opportunities to take up leverage? And also, with that, are we going to start to see that start to translate through to your loan yields in the coming quarters?

It takes a long time to change the overall loan yield. So certainly we will have some unlevered stuff rolling off, and as we replace it with levered higher-yield side, it can certainly make a difference. But I wouldn't expect a wholesale change in that, on an overall basis.

From a leverage perspective, we are credit-first. We look at every loan first from a credit perspective, and then figure how much leverage are we comfortable with to maintain our credit-first methodology and make sure that we don't take that first dollar of loss. As I mentioned, we don't have a single asset above 80 LTV today in the way we mark our book. And we are very happy with that and proud of that.

So we are unlikely to push our leverage to a point where we start to worry about that 80% threshold. And I think that the market today is a great opportunity to be reasonably levered, not overlevered, and take advantage of areas where some of the banks have pulled out, especially on the larger, more complex transactions. And as Barry said, there are more opportunities in construction as well, going forward, and we are going to measure those against cash flowing deals. And we think there may be an opportunity they can gain more yield there, as well.

We haven't lost sight of the fact that bigger is better. It's more diversified and it's more or less interruptions of cash flows. I just think it's an environment for us. We know the history of mortgage REITs. And the environment for us has to be one where we have to be cautious and not be a slave to any one business line necessarily.

So we continue to look at opportunities, and I think the opportunity for a non-bank lender today is really exceptional if you can get your word out. The number of relationships we have, the repeat business we have, the team we have, and the building coverage we have around the globe is really exciting for us. But I really -- every once in a while over the last seven years, we roll our eyes and say: what are we going to do now? This is not one of those moments.

Got it, great. Well, thanks so much.

Douglas Harter, Credit Suisse.

I was hoping you could talk about the relative returns of the new loans you are putting on, versus the loans you are getting repaid on right now?

Sure. I do not have the exact stats on the repays. I can talk a little bit about what we are putting on. In the first quarter, we actually -- we had a few distressed opportunities where some things came to us that couldn't fit -- that other lenders couldn't get comfortable with, couldn't turn on quickly. And through some relationships that we have, we were able to do some fairly large, accretive deals. And I think on average, we are seeing all of our loans over 12% or so, where we have historically been 11% in the first quarter, and some outliers that brought us up significantly over 14% in the first quarter. That's not going to last forever.

I don't think that is going to last. I mean, what we did was we add a thin funnel because we were conservative in the quarter, and if it was absolutely compelling, we did it. And that was the 14%. But that is not our target return on what we do; we would not be competitive today. 11%, 11.5% is perfect on the whole piece. And frankly, as you know, we would take a wider piece than at 11% than a skinner piece at 14%.

We manage our cash, and we're happy to earn -- if we can get double-digit yields with these kind of LTVs, it is compelling for our shareholders, for me personally, and the management team, with over $100 million of stock that we hold.

So we are right beside you, and we're taking what we think is prudent risk. And sizing the size of these investments, both for our own capacity, as well as to maximize duration and good opportunities in good assets.

And what rolled off, just to answer your question -- it was assets that we expected to earn somewhere around 10%, that actually earned somewhere around 12%.

Got it. And then, Rina, you were talking about in the next couple quarters having more resolutions, and especially servicing the inflows. Can you remind us where the bigger -- where you earn more of the fees, or more revenue gets recognized along that lifecycle?

Sure. The bulk of the fee is recognized at liquidation, because that is where you typically would earn your 100-basis point fee. As opposed to when they enter, you only earn your check-in fee, and you are waiting until the asset resolves.

Does that mean if you have more resolutions, that the revenue could be higher in the coming quarters?

It is dependent on a lot of factors. It could be. But keep in mind that we have been liquidating at this pace for the past several quarters. So, it is not that our liquidations will be higher than in the past. I think our liquidations will probably be similar to what they have been in the past. You are just going to start building up your inventory with transfers then. Does that make sense? Not necessarily an increased pace.

I got it. Thanks, Rina.

Jade Rahmani, KBW.

Wanted to find out if LNR has looked at credit performance of new-issue CMBS since 2009, versus legacy CMBS? And whether the rate of delinquency increase on new-issue has, in fact, been better than legacy, or in line with a pre-2005 vintage CMBS?

So looking at a -- there was nothing in 2009. The first deals got done at the end of 2011. So the new cycle is really 2012 vintages on. So if I'm comparing the 2012 vintage for the last four years versus a 2005 deal for the first four years, obviously it's going to be almost impossible to compare them. Because the 2005 deals hit the wall 2 1/2 years in. So they did not make it the four years that the new issues have made it.

So we have not done a study on it, but obviously at this point, four years into the new cycle, the old cycle had completely deteriorated by then, given what happened in 2008. So, it is a little bit hard. Our expectations are, you're going to have a significantly better performance. And that isn't just us; that is the world. IO percentages are only a little bit more than half of what they were at the highs. LTVs versus CMBS today are something like 64, versus 69 to 70 LTV back then.

One of the things I didn't mention is, back in 2006, 2007, you were underwriting CMBS off of pro forma cash flows that you expected to get. Today we underwrite off of cash flows you actually receive. Those are very big differences. You add those things up, and I think that you are looking at likely extremely better performance. You look at enhancement to BBB -- so the rating agencies are getting the joke, as well. Rating agencies are now putting 8.9% enhancement to BBB versus they were 3.3% in 2007. So they are getting it.

Throw on top of that, Jade, is, we talk a lot about our ability to shape the pool through kick-out. We talked about in the second half of last year kicking out 25% to 30% of collateral in different deals. I think we are more aggressive there than other people. I think you will see studies that show the market being lower, but we particularly push to shape our pools, or we won't play. You take a shaped pool, with all of those other characteristics, and undoubtedly you will end up with a significantly different vintage performance.

In terms of the CMBS fair value marks you incurred this quarter, can you quantify what percentage were due to changes in your underwriting of your B pieces in your discounted cash flow modeling, and what the main changes in those models were?

Adam is on the phone. Adam, do you want to --?

I think as Rina stated earlier, over 90% of the marks were due to really the liquid mark changes in spreads on the double-Bs and the triple-Bs that we have on the books. And no credit events for those double-Bs or triple-Bs we are seeing. Obviously each quarter we go through, we have different -- we review our entire portfolio in our CMBS book and find loans that change characteristics during that time, and they constantly are floating back and forth. So there's a proportion obviously each quarter that has a credit quality to it. But it's a really minor piece relative to the mark-to-market that happened in the first quarter.

You know, again, that is a 3/31 mark, don't forget May. So, we had to do what we had to do for the quarter.

And just on the loan repayments, you gave the April figure and what you expect for the full year. Was 1Q impacted by the -- I assume it was -- by the market volatility that slowed lending?

No. I mean, our loans -- when you have 61% LTVs, people can repay you. So I think Rina said something -- I'm going to double-check live with Rina, when she said had 400 or so repayments in (multiple speakers) --

300, and that was actually what we --

-- we expected. And then 600 have repaid since then, in April, a go rate, as expected. You said it's another $2 billion. I think it's another $1.3 billion.

Right. It's $2 billion, and of the $2 billion, $700 million were (multiple speakers) --

Right. So that was a misstatement. We have another $1.3 billion coming in, a large portion of which is actually Hudson Yard, the people at Hudson Yard. So, we know what we are getting back, and we planned our year accordingly. One nice thing about the construction loans is they actually draw from that capital. So to the extent we have other investments that are being built, they suck up liquidity. They are well-matched to each, though we have excess liquidity right now.

Thanks for taking my questions.

Charles Navin, Wells Fargo.

In terms of the loans you are kicking out of pools, or the loans you're seeing getting kicked out of pools, are you seeing any common themes in terms of property type, structure or geography? And have you seen any change in underwriting as a result of the increased number of loans getting kicked out of pools?

If Larry was here, I would kick it to him. But Adam is probably the next step for that. Adam, do you have any thoughts?

Adam, tell everyone who you are.

Oh, sure. I am Adam Behlman. I'm the President of the Real Estate Investing Servicing segments of Starwood, which was formerly known as LNR. So yes, we are seeing an increase in overall kick-outs. I think a couple of the issues are single-tenant types of stuff we're seeing more of, which we don't like, IOs versus non-IOs, different credit qualities. I wouldn't say there's a trend in anything.

We are not particularly disliking one thing. It's just, a lot of the times I think it is over-levered relative to where it should be. Obviously based upon our really incredible database of information we have from what happened during the downturn, we know a lot about the loan, the area where that loan is, the borrower themselves, to really have a real input on information that we get from the new loans that are coming out. So, it affords us the ability to really qualify what we don't like about a loan, and potentially those loans don't ever wind up in our pool.

You probably remember at Investor Day when we threw up our internal [Elcamp] model and showed you the geography map of the tens of thousands of loans that had been through servicing through FMC through our property trust business and through Starwood Capital Group where we have tremendous information on rent rules, etc, in any geography, that we think it is almost impossible to replicate. And, a lot of what we use to figure out our kick-outs is that proprietary data and more information on what is going on down the street helps you make a better decision on the loan you are looking at. Especially on the smaller conduit loans, where other people don't have the access to the type of information to make decisions on smaller loans like we do.

Great. And as a follow up, I wanted to switch back to loan yields. You talked about the opportunity in Europe, and I understand the deals are -- pricing on deals is very deal-specific. But could you talk about what you are seeing in terms of incremental yields in Europe relative to what you're seeing in the US, and relative to the existing book?

I would say the yields are consistent, maybe a little tighter in Europe. But there are entire gaps. The reason the overall yields are tighter is not proceeds. They are not lending aggressively in Europe. It is actually the opposite. But the most senior piece is being bid down to levels that are well-inside of the United States.

So we made a loan on what's in Heron Tower in the City of London, to Mike Milken in a sovereign wealth fund from the Middle East. And I think our loan was like -- I want to say 450 or 500 over. And they not only took it out, I think they took it out -- they had excess proceeds inside 200. It was like 120, I think. It was some ridiculous spread, with a European bank.

So they determined -- by the way, the building leased up, and it been a credit right now, but as [bills say guided], we were delighted to get the building back up in time today, which they really would just be happy if they dissolve. But we don't do that. With a 61% LTV, it would take a lot to press them to default. But we were taken out, and we were astonished at the spread. But if the guy wants to get these LTVs up to 75 or 80, then we can price a pretty good piece of paper on top of it, which meets our objective.

So it's about diversification for us. I don't think you can say the returns are significantly higher. And we always have red-lined a lot of Europe, and we don't do a lot of little loans in Spain or Italy on 200-year-old buildings that need $300 million to refurb, and they can -- we are pretty much sticking to modern buildings in well-located urban markets. To date, we haven't done much on the continent. We have done Ireland, we have done the UK, and we really haven't done that much outside of that.

We have looked, but we don't really -- we won't lend in France. It is not a really fun place to be a lender, especially a foreign lender, with the four banks on the market. And we would like to lend in Northern Europe, where we have done a lot of equity deals. But one of the biggest spires of assets is Sweden and Norway, in Poland, Czech Republic. Those would be fine too, and we see good opportunities there. Hungary, which is a big country, and the rule of law of the place and the economy is not too bad.

We are just being super-cautious, but there is enough to do just in England, we are finding, and in Ireland, which is really doing quite well. I think Dublin's vacancy rate is 3.7%, which may make it the lowest vacancy rate in the world right now, that I am aware of. The rents are really moving in Dublin.

Great, thank you.

Ken Bruce, Bank of America.

This is Mahijo for Ken. I just had a quick question on the share repurchases. I saw that you did some. I think you talked about it on the call last time, Barry, that you all had done some early in the quarter, and they seem to taper off to the stock price. Or it recovered a little bit, but it was still pretty -- lower than I'm sure what you would consider fair value. So wanted to see if you have any comments on that? Thanks.

Because we're so cautious around the world, it's seemed like we should just step back and -- we attracted a couple of big sellers in the quarter, and we wanted to flush them out of the market. We were just cashing their stock; it was [stupid]. And then we were working on a few transactions, and we had to stop buying. So we bought around $20 million of stock at about $18.71 a share, and we will remain opportunistic. But whenever we're working on a transaction, we cannot buy stock, and of course, the blackout period comes into play.

So we are there because we're acutely aware of our dividend yield, and if we can't -- it is like a lot of things, especially in the [folio], one -- our spun-off Company, our cousins colony Starwood Homes, which was spun-out from us, as you know, is beginning to see a rally. I mean, they have a similar issue of buyback stock. The Company is trading at $0.65 of fair value -- or grow, and build a better portfolio, or pay down debt in our case. So we have to balance the use of capital across all the corporate opportunities.

I would like to have been more aggressive on the share repurchase. It was a scary time. And again, if we had one large shareholder with a multi-million share position, there is no point in us standing in the way of that freight train, and making sure that someone else, if necessary -- they are out of the market now. They are done with their selling. So it's taken a lot of pressure off the top.

So thank you. Thank you all. We appreciate you being with us today. And as always, the team is available, myself included, to answer your questions going forward. And we look forward to hopefully an exciting quarter next quarter. Thank you very much.

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