Starwood Property Trust Inc (STWD) 2016 Q2 法說會逐字稿

Good day and welcome to the Starwood Property Trust Second Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and welcome to Starwood Property Trust earnings call. This morning the Company released its financial results for the quarter ended June 30, 2016, 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 to remind everyone that certain statements made in the course of this call are not based on historical information, and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs, and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

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

Additionally, certain non-GAAP financial measures will be discussed in this conference call. A 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. This quarter once again demonstrated the strength of our multi-cylinder platform with each component of our business delivering another consistent quarter of strong earnings performance. Collectively, we generated core earnings of $119.9 million or $0.50 per diluted share, which included $2.5 million of costs related to transactions that were either closed or under review during the quarter. Our annualized net return on equity this quarter was 11.8%.

I will begin our discussion this morning with the results of our Lending Segment. During the quarter, this segment contributed core earnings of $102.4 million or $0.43 per share. We originated or acquired $1.1 billion of investments this quarter, of which we funded $651 million. These investments consisted principally of loan originations or loan portfolio acquisitions with an average size of $178 million and a weighted average LTV of just under 62%, consistent with the LTV of our overall portfolio.

During the quarter, we also funded an additional $124 million under pre-existing loan commitments. Somewhere in the past quarters, these fundings were made with recycled cash from this segment's seasoned investment portfolio which returned $1 billion during the quarter, in line with our expectation.

The repayments included $576 million of loans in Europe, which paid off early in the quarter, decreasing our international exposure to 7% of carrying value from 12% last quarter. Subsequent to quarter end, another one of our European loan repaid taking our international exposure down further to 6%. Consistent with past practice, we continue to fully hedge all of our foreign currency exposure.

I will now turn to our Investing and Servicing segment which contributed core earnings of $49.9 million or $0.21 per share this quarter. On the CMBS front, spreads came in slightly, which led to the recognition of an unrealized gain of $7.5 million on our overall portfolio. This gain was driven by the mark on our BBB and BB bonds. As a reminder, GAAP requires us to mark all of the CMBS in this segment to market and the portion that is most vulnerable to spread movements are the triple-Bs and double-Bs. These bonds represent 27% of our CMBS portfolio and purely reflect market based pricing. During this quarter, we partnered on two new issue CMBS deals investing $59 for minority stake in these two deals and retaining the related servicing rights on $1.5 billion of collateral.

On the topic of servicing, as of June 30, we remained special servicer on 154 trusts with a collateral balance of approximately $101 billion and we were actively servicing $11 billion of loans in REO, an increase of $0.5 billion over last quarter. You've heard us talk about the wall of maturities resulting from the 2006 and 2007 CMBS vintages. During the second quarter, $1.5 billion of these bonds entered special servicing, up from $365 million last quarter.

And now turning to our conduit, Starwood Mortgage Capital. Last quarter (inaudible) extreme volatility in the credit market impacted pricing on our securitization with some participants in this space cutting their exposure and staff. Since then, we have seen the markets recover with our conduit participating in two deals and realizing $11.7 million of net securitization profits on a core basis. The effects of profitability of this business shall ultimately normalize by year end (inaudible) full year securitization profit will resemble that of prior year.

I will now turn to our property segment which contributed core earnings of $12.7 million or $0.05 per share. This quarter, we closed on the final two assets of our 32 asset Woodstar portfolio for a gross purchase price of $39 million. In connection with these last two acquisitions, we recognized an $8.4 million bargain purchase gain in GAAP earnings (inaudible) determined to be less than fair value. This gain is not included in core earnings.

The assets in this segment continue to perform in line with our expectations and have become a meaningful contributor to our results. More importantly, as Barry will discuss, we believe that several of our equity assets have appreciated in value, so this increase is not reflected in our financial statements.

And finally, I'll add just a few brief comments about our capitalization, investment capacity and third quarter dividend. We ended the quarter with $8.4 billion of debt capacity and a debt to equity ratio of just 1.4 times, consistent with last quarter. If we were to include off-balance sheet leverage in the form of A-Note sold, our debt to equity ratio would be 2.5 times or 2.4 times excluding cash.

Given our current investment capacity of $2.3 billion, of which $1.2 billion represents unallocated warehouse capacity, we continue to have adequate liquidity to execute on our core business strategy going forward. For the third quarter, we have declared a $0.48 dividend, which will be paid on October 17 to shareholders of record on September 30. This represents an 8.8% annualized dividend yield on yesterday's closing share price of $21.75.

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

Thanks, Rina. We're very proud of our second quarter results. We told you, we will be patient in turbulent times and aggressive when we see opportunities, and after an extremely slow January and February, we've decidedly moved to our front foot. As Rina said, we committed to $1.1 billion in growth commitments and acquisitions in Q2.

We've been adding to our originations, underwriting and asset management staffs to keep up with the robust pipeline of opportunities we see, and expect to see as traditional lenders pullback in increasing regulatory environment. We continue to increase our borrowing capacity, and continue to finance approximately half of our loan through the sale of senior participations, where we have a dedicated capital markets and syndication staff, and unlimited capacity.

Overall, US real estate transaction volumes fell 16% in the first half versus 2015, but we are seeing and executing more of the highly structured deals we specialize in without sacrificing our credit risk culture. With a 61.9% LTV, and zero losses since inception, we believe our credit first mentality has been proven in over $23 billion of investments over seven years. We have been less active lending in Europe the last 12 months to 24 months as European banks took back market share, offering financings at very low rate, and higher leverage point. As Rina said, because of this, our non-US portfolio going into Brexit have been paid down to just 6% of our portfolio, with just 3% in the UK versus 12% in Q1, and a high of 14% last year.

Over 95% of our remaining UK exposure is in two loans we originated in 2014. The first is a GBP101 million construction loan on a 46 storey residential project that is 98% sold with more than two times our loan basis, and will be completed in November. We expect it to pay off in Q1 2017.

The second is a GBP220 million retail and condo project expected to be complete in 2017. The retail is 89% leased, and the condo units have been selling at 100% higher than our loan basis. Our only other UK loan is freshly originated this quarter. Clearly, we feel very good about the quality of our exposure in the UK and in Europe. On the positive side, we've recently seen significantly more opportunities in both debt and equity across Europe, post Brexit, and we expect to be able to add solid risk reward assets there in the near future.

Rina mentioned the significant return on equity we've been experiencing in our book and fortunately, that means we have ample dry powder to redeploy it today. We have been telling you that our $350 million Hudson Yards loan would pay off this summer as soon as it was open for repayments and it did impact payoff this week. Last year, IRRs on newly originated loans were approximately 11%. This year, we have redeployed capital at well over 12% after purposely pulling back in the volatile credit markets in January and February. And as always, that is not (inaudible) if rates rise.

In our REIT segment, after pulling back in Q1, we took advantage of the spread widening and purchased minority interests in two B-pieces in the second quarter that yields well in excess of current market pricing. We continue to look forward to the implementation in December of the Dodd-Frank mandated risk retention rule and are uniquely suited as investor and services take advantage of them.

Although not a perfect parameter for our CMBS book, the new issued CMBS market and the CMBS BBB and BB indices are up over 5% since the quarter-end. CMBS spreads widened in the quarter-end following Brexit on June 26. And although legacy cash securities have not moved up at the same pace, we remain encouraged by the recovery of the CMBS markets, which you can also see in the performance of our conduit originations platform, Starwood Mortgage Capital.

S&P volume in Q2 appears smaller due to deal slipping into the first week of Q3, but will be more than made up for in Q3 where we have successfully priced two deals and expect three more to price before quarter end. We have an opportunity to take market share as competitors pull back and leave the market and we will continue our slow steady strategy of high velocity and a credit first orientation avoiding kick outs.

To conclude, we are also pleased with the upside in our equity portfolio, particularly with respect to two of the investments; our Dublin equity portfolio and our debt and equity interest in 701 Seventh Avenue which Barry will discuss.

And with that, I'll turn the call over to Barry.

Thanks, Jeff. Thanks, Rina. Good morning everyone. Like Jeff, I'm very happy with our quarter and very happy with our prospects looking out. I am really happy to sort of position of the Company and I think it is a company, it's not just the portfolio of loans. And you saw the strength of our platform, as Rina mentioned, with the performance of our multi-cylinders. We do that and we've driven the strategy in that direction so that we are never forced to do anything when there was nothing to do.

And as I mentioned in last call, we've slowed down given the volatility in the market, uncertainty and (inaudible) that period and now we accelerate. I'll take you through some of that. And we remain a largest player in the space with an over $5 billion market cap and that's 2x or nearest competitor. We've built this multi-cylinder model, which I think is incredible because of the synergies between our activities. We may be a bit more complicated, but it gives us a lot more ways to deploy capital at accretive returns. The conduit business led by a terrific team was able to dial down and then reaccelerate (inaudible) only tiny losses in the business when the markets imploded in the first quarter.

With that recovering, the CMBS markets recovering, I think we all agree there's going to be lower loan to yield in the world or no yield in the world, so we expect our CMBS book to be a continuous source of strength to the Company going forward.

One thing also Rina mentioned, which is, we've been waiting for, each of the services, we're the largest special servicer in the country. They each had books that were different from each other in a sense that some may have been distressed and what they control might have in the five-year maturities and they may have experienced the peak of their earnings back in 2013, 2014 which would have been the five years from the (inaudible). 10 years was [2016, 2017, 2018] and this is the first time since 2011 that our loans and servicing picked up.

We are $1.5 billion into servicing, up from $400 million in first quarter and we have a pretty good view of this and not only is what's really (technical difficulty) and that gives us a level playing field versus our peers because they have a look at what name servicing (inaudible) of assets. They also as you know have been exercising occasionally a fair value purchase option in building a small book of equity and looking at that portfolio and trying to find things to do, which is another interesting opportunity to deploy capital.

On the equity side, Jeff mentioned the two deals, and I'll add a third deal that have done super well since we made these investments and gave you the quality of what we bought for the REIT and why we bought it. I'll start with our Woodstar portfolio, which is almost (inaudible) multi-family units spread across Southeast United States. The cash and cash yield on that portfolio today is 12% and that is done with 18-year debt fixed. So it is affordable apartment. It's a great return for the Company and I'm sure there is a funny quirk in our financials that we bought last two closings, we closed, and then we were praised for what reason, Rina?

We were praised at a higher fair value than what we (multiple speakers).

(technical difficulty) So we have (inaudible) we closed more than we pay for them, but the portfolio is a tremendous investment that (inaudible) and I'm really excited about that and we intend to not to sell that but if we ever sold it, I'm sure we have a gain. Any of those gains are reflected in our book value -- as Rina said, our financial statements, more specifically, our book value.

The Dublin office portfolio, which some of you might have raised your eyebrows on, Dublin's been an amazing market. The vacancy rates since we bought the portfolio form to 3.5% and this is before Brexit and the impact of potential people in the UK moving to Dublin, which is a came to Boston to New York. Anyway, since the beginning of 2015, when we bought those building, rents have increased 26% and we think we have a significant gain if we would sell that portfolio and obviously return the business of trading (inaudible) investing, that portfolio today rents available to the market and continue to follow market is also returning cash-on-cash yield. So, we might do something with some portion of that portfolio and realize the gains and show the value of [properties], duration high yielding investments that we're looking for during the duration of the REIT.

The third one is 701 Seventh Avenue, as Jeff mentioned, for those of you who don't know where that is, that's here in Manhattan, it's in the bow-tie of Time Square, where half a million people walk by the front door. (inaudible) on this project and then the developer came in and threw in what's called (inaudible) on top of that, pushing us down on the capital stack, but we bought if you recall (technical difficulty) in the property.

And during the quarter, we announced the lease of the majority of the center of the properties in the NFL (inaudible) and with that, they are going to do like a holographic amazing exhibit in Time Square for the NFL. The remaining lead sale has become very valuable because everybody knows there'll be a lot of people going through this property as well, the signage around the property. So we expect there was at least another lease announcement underway and with leases in negotiation, there will be 100% leased in the retail on top of this hotel, retail block, there is a gigantic Marriott Edition Hotel also being built with great meeting space. So it'll be a terrific hotel (inaudible) almost 100 feet away from here (inaudible). So, I know how strong that particular market is in New York City and that hotel will be advantage.

So, we think our equity kicker here is, I would guess, worth a lot of money and anywhere from probably, I'm not going to tell you, a lot of money, but it's not (inaudible) and that's good to know (technical difficulty). There is a giant screen on Times Square which is one of a kind, the largest in Times Square, which is very valuable for advertising revenue. But the owner, the developer is far more bullish that we are in what he thinks he can sell it for, but the point is, these are the kinds of investments that Starwood Capital Group is able to do and with its expertise, working with Starwoor Property Trust management team to enhance the value for shareholders going forward.

I think it's really exciting that deals have done so well in such a short period of time, way outperforming all of our expectations frankly. The other thing, when you look at the strength of our model is LTV. I was looking back at LTVs and I am amazed that back in 2011, our [LTV portfolio] which at that time was much smaller, [65%] and now its 61.9%. Our LTVs have actually fallen. That would be counterintuitive, we would not have expected as the cycle moved on, that LTV (technical difficulty) have fallen to like 61.9%. They don't need to be that well (technical difficulty) the kinds of things we've been doing in the mix and the book that (technical difficulty).

The other thing about the strength of the platform, don't forget, (technical difficulty) diversification of book. And as you can see for whatever reason, we don't have much exposure if any really to the UK, and no exposure with the UK office market, which is really the important market I'm most worried about. And I would not be long due, UK office, right now.

Now, let's just turn to the climate out there. This is probably -- we went through, I think since 2009, which is our (inaudible) seven year anniversary in August, right now, of the birth of this company. This is probably the (inaudible) I've really been through and (inaudible) was not like the one you know, but the ones we know were money gets too cheap, the loans get real aggressive, lenders get little crazy (technical difficulty). We lose a lot of deals. I think the climate is changing now in our favor for foreseeable future.

On July 16, The Office of the Comptroller of the Currency came out and told banks stop making real estate (technical difficulty) conditions are getting too aggressive, get back. The OCC, the FDIC, and the Federal Reserve Board are all watching the banks, and the banks know they're being watched. So, the banks are not actually, does not have in the cycle, and as we look at our equity book, the banks are not lending 90% of cost or 85% of cost, or 80% of cost. Frankly, it's too prohibitive, the capital requirement on loans of that LTV. And frankly borrowers aren't trying to lever up that high.

So, this has been a much more disciplined lending cycle, but the banks are having trouble and they know that -- the governing bodies are saying, you cannot continue to increase your real estate exposure, and given where corporate America is not borrowing or having already borrowed, they're trying to, but the OCC is watching them, that plays really well to companies like ours, and certainly us, because we're the biggest in this space. And we want to grow, you might be happy $5 billion equity cap, and we are really not, and we should be a $20 billion vehicle. And the bigger we are, the better we are, because we have more diverse, more consistent, more reliable (inaudible) higher, better people build a better enterprise.

So, I think it's really great at the top, and then the next thing to happen will be the change in the risk rates, which is risk retention rules. Retention rate will change at Christmas, permanent, and they will change fundamentally that non-bank banks like us, should be more advantage in the marketplace, because banks cannot sell on loans in the securitization market once they retain that, what we have historically called the [BPs] and we think that will be a great opportunity for us, and certainly, it's not a negative.

And we look forward to the changed climate, once that's implemented, and I think players are beginning to think about, how they might position themselves for that world. It will be very difficult for many players to make loans that they want to sell off without retaining a piece and the retention piece has very high capital requirements, retention requirements for the bank that make it kind of silly that you don't even bother. So we hope our shareholders will give us the capital to continue to grow and become dominant player in the space.

Lastly, our stock price (inaudible) clearly close to all-time high, it's like $6 per share value and the original shareholders are affirmed, so you're like $20, $29 company and had our original IPO two decades ago at $20 a share (technical difficulty) So I think we are as a total term, the best performing company in this space and I hope we can continue that. I look forward to doing so.

I would say, what surprises me, and I don't think I got wrong -- I actually thought with interest rates where they are, that our dividend will the more valuable, particularly in the retail market and the stock will trade to more like a $60 and bigger we grew, people will feel more secure and (inaudible) last night. You think about it, I was looking back that the five year, when the IPO, it was [275] and we had no dividend (technical difficulty). The 10-year in 2010, was four, today it's 1.5. We had a dividend hasn't been able to pull the stock up and hopefully, I think it will change and I'll tell you when I think it might change, which is when LIBOR rises.

The revenue REITs are where retail go and many of them historically have been bigger than us, but they have this fundamental mismatch in maturities which they can and everybody knows is where it thrives, they get hurt, they get squeezed and the dividends come down, some of them have actually lowered their dividend, already lowering their dividend as repayments come in place and they (inaudible) yield curve flatten. So when rates rise and they will rise whether it's in December this year or first quarter next year (inaudible).

We have the opportunity to look forward to some of that retail money may be coming to the commercial mortgage REITs, which are offering silly yields, given the risk profile of the companies. There is a chart that we added back to your supplement this quarter, half of our, I think 75% of the loans (technical difficulty) 73% and again that if you look at the book, it's in page 7 on your supplement, all that stuff, it was gobbled together, quickly called back and securitized and that would trade in the less than 200 over and we traded the Company at yields, so doesn't make a lot of sense.

We're looking ourselves and trying to figure out how to take advantage of that opportunity, but we are pretty happy with our performance and the last thing I would say is the team. We've added (technical difficulty) hiring originators and building our squad. Our team in Miami, the 300 people that work in our searching business is doing a great job, and I couldn't be more pleased with the way the Company is running, and the way we can position ourselves for this new opportunities as they emerge and taking advantage of existing opportunities in our loan book and our servicing platform.

So overall, I can say that, I think the future will be better than the past and the past has been pretty good. So, we look forward to taking your questions now. Thank you.

(Operator Instructions) Douglas Harter, Credit Suisse.

This is actually Sam Cho, filling in. So, I noticed that, for a time, you guys thought that special servicing balances would fall, but are you guys experienced an uptick? I was wondering whether you guys are already starting to expect that to trend upward, and I guess, to follow on to that, how do you see the refinancing outlook and the impact on the servicing inflows?

Adam, why don't you take that, Adam Behlman is here who runs (multiple speakers).

(technical difficulty) suggested there would be an uptick, I think it's going to be choppy through this. If you look at what maturities are going to be coming due over the next two to three quarters, there is significant amount of maturities due that haven't gone through this special servicing process. We're having to free this out. So, there is volatility, as we said earlier, we had $1.5 billion coming this quarter versus a significantly less amount previous quarter. And that's based upon the beginning of the uptick of all these maturities. So, there is a trend that may happen, it's really hard to say. Interest rates are going to matter, the different (technical difficulty) pending changes in the governmental regulations are going to matter. So there's a whole bunch of things that are going to happen simultaneously that could affect our number.

We know how much is going to roll-off in the book. You never know what's going to roll in, unless you know where rates are going, and where credit spreads are going, but I think it'll be choppy around here, not significantly higher overall.

There is a $100 billion of these guys, right, and there because these loans were typically written in extraordinary LTVs, and at LIBOR plus 50, they stay on, these debt longer they can. And many of them wait too long to refinance or find it more difficult to refinance than they might have expected. So, it's impossible to predict, but it's only -- it is like 15% or less of our earnings in the special. So, its upside if it gets better. We expect it to get better. We expect it to make more money, and especially given that we've reached the 10-year maturity of legacy CMBS securities. I wanted to add one comment that I forgot, because some of the analysts have written this morning that we think guidance on our dividend, I can assure you that we'll earn the dividend and we'll want a few companies to give guidance and we just, our basic thought is that it sounds like (inaudible) dividend, it sounds like you're not going to give dividends in quarters, so I say that (inaudible) and we'll let you know if we're not going make the dividend but that's not something -- I don't think Company like General Electric think (inaudible) dividend this quarter. So my guidance maybe stupidity but I just said we should out, it's ridiculous and if we can make the dividend, we'll let you know but we expect to earn in excess of dividend this year.

Got it. So I know in the prepared remarks, you mentioned the slowdown in the conduit business and you expect that recovery in the third quarter, was wondering if you could provide more color on how the opportunity set has changed, given that some players have exited the market?

Yes, I guess I'll start. There are a number of things that are hard for some people. We are invited into a number of shelves, we do more securitizations than almost anybody, we did 19 last year, we had very high velocity. I think other people are struggling to get shelf space as investors want to see more of the bank issuer collateral running the deal at 50% or more. That's harder for some of the small guys. I also think guys are really suffering through kick out, we told you in the past that we kick out 25% to 30% of the loans that we see as a DTs buyer, don't make it into the deals that we brought (inaudible).

We have not had a kick out at third mortgage capital, it seems almost impossible but it's true we are a credit worth, we understand the rating agencies, we understand the DTs buying environment and we've never had a kick out to-date. I think that is something that's fairly costly for some people and you've seen that in the earnings of some other people. I also think that -- as spreads have also recovered here, you've seen a significantly better opportunity to write loans any time after middle of February of this year, anybody who did is very happy and you'll see above normal trend returns on any loans that were written between February and today.

And fortunately, we have a decent pipeline in the third quarter. We've already priced two deals, and we have three deals coming up. So, I think the trend is really our friend as it is to anybody with a credit-centric view and a place on popular balance sheets to go into their deal where dealers really want us in their deals and I think that's not a position enjoyed by everybody, and so you're seeing some smaller guys leave the market and you'll see the banks pull back in the market.

The volatility slide down in the second quarter and into the third quarter, which allowed for I think most of the shops to be able to go back and increase the amount of originations that they were doing for the volatility side.

But look at the climate again, before it goes too late, the amount this year was probably like down 40%, $65 billion versus $100 billion something. There's a lot of loans coming due, the CMBS market does not grow. How are these loans are going to get restarted, the banks are constraining their lending because the OCC is looking over their shoulder which they are, go look at July 16, just look at two weeks ago, (inaudible) bank and regulators said to the banks. So I'm smiling. From start of property insurance, we are sitting in a really nice position, we're seeing our competition is not like free fall out there, but at this late in the cycle (inaudible) and earn 12% ROEs on your loans is pretty remarkable. The 10 years, 150.

We don't know how long this will last, and we'll tell you when we can't do it anymore, but at the moment, again we are not [so wet] earning 12%, we'd be perfectly happy risk adjusted returns of 10%. But we are able to do this for one reason or another and we will continue to do if we can. We've turned down (technical difficulty) but we didn't like the risk. So we passed. Don't forget, also we think these returns are so compelling for investors that we widened these B-notes like our notes are 55% to 75% of the capital stack, they're not 73% to 75%.

That is a materially different risk profile than owning a plain little silver which you call mezzanine loan. These are not done that way. In fact, we widened the stack, put out more money at these double-digit yields in a world of no yield. So we could actually boost the ROEs by borrowing more senior or going higher. We don't do that and we're not trying to run, we should stay consistent predictable in 2009 with the same company, with a lot more exotic and lot more people but we are the same company today that we were -- strategically than we're back in 2009.

Jade Rahmani, KBW.

Can you talk about what percentage of the originations were directly originated versus acquired, and also maybe discuss the Lisbon origination and say what interests you in that market?

Dennis Schuh just joined us who is a 19-year vet at JPMorgan, ran originations over there. Do you have this number off the top of your head, you want to get back to us.

We'll get back to you, but probably it's about 60%, 40% direct versus broker.

I don't think that's what they are. Direct originations versus acquired loans. So we acquired the Lisbon assets. There were two assets identified by -- we have 50 people in London at SPG, at the parent company and they found this opportunity viable, we thought it was compelling, CMBS certificate, I think CMBS notes in Portugal. You want to talk briefly about that?

Yes, there are two individual loans, two retail assets that Deutsche Bank originated that we were able to purchase. They were intended for securitization. The securitization market became volatile over there, and we were able to put better than attractive returns with appropriate leverage from Deutsche Bank under that.

Mid-teens returns.

Yes.

Mid-teens IRRs on those loans.

And the breakdown was approximately two-thirds originated, one-third acquired. We took advantage of another.

It's very rare by the way, and we don't usually do that. In a cycle with the stress to buy loans of securitization, that's why that number -- normally, they're probably (multiple speakers) and as soon as we bought those two loans, we did the same thing way back from the same bank actually on our hotel in New York and what happens is, when the bank get into trouble in the quarter, they have somebody have to talk from creditors to sell everything. So, they go into their book, and sell stuff and that's our best time. So (technical difficulty) we're happy to buy the loans, but it's not our core business unit even though I love the business, it's lot easier, it's lot cheaper, the notes are already written. No legal work, other than reviewing the loan box.

And in the property segment, it seems like there's been very strong price appreciation on particularly Dublin assets, are you contemplating any asset sales within that segment?

Yes, not with our portfolio. We think that's bread and butter. We just love the deal. It's a $600 million of acquisition. It's interesting, you finance six with $200 million of equity, so two-thirds leverage from multi, which is like -- we might sell an interest in the Dublin assets, and we deploy, we were going to do something and redeployed them to a new loan in Ireland but that went away from us. So we are considering it, and it's a huge market, maybe people appreciate the value that we're adding on the equity side of our book. So, we might, it's not something REITs do a lot of, its trading assets, it's all sort of trade assets, and we have to watch our bad income, but I would say it's better than 50% likelihood, but just around there.

And on the serving side, apologize I jumped on late, do you give an update on the BPs opportunity, and how plans to raise the fund are going?

We are contemplating that, and I'd rather not talk about it. And on the BP side, the markets are active.

We purchased two minority interests in the second quarter. We had one sort of close in the third and then we're looking at other situations right now.

We're looking at the world, things have come back into mid 17%, zero loss yields from what touched close to 20% area. And so that market is definitely normalizing and we think we still have a great opportunity to structure deals and kick out loans in a way that we like. So, we're likely to continue the level.

And just, there are lot of constant players looking for yields but we don't provide yields. We get searching income on top of the income of (technical difficulty) $1.5 billion of servicing in the quarter. And so, we get a better yield than our partners. This is not ever going to be a giant business for us in the sense that -- now, these B-Notes are better than the B-Notes in CMBS loan because we are tailoring the book, our loan take outs and other stuff, but we're not going to be the dumbest money at the table.

So when somebody gets a bunch of captive collateral with no idea of what he is doing, he is just doing actuarial amount on the loans we still underwrite them. That's why we have people. So we have this amazing database, we can go through and look at, all we have is in similar neighborhood that we have serviced and with the rents, we can check loans. And we're just uniquely positioned to be very choosy.

So, us loosing or you don't see us in a lead table buying B-pieces is by choice. It's not because we didn't show up, either because the guys we're willing to take in the 12 IRR and we thought we got 15 or we don't like some of the collateral and originator of a pull wasn't willing to take it out. So, we are aggressive when we want to be aggressive in this space, and we have -- nobody I think in the country has a better platform to be buying B-pieces than us, nobody.

Charles Nabin, Wells Fargo.

Looking at slide 5 of the presentation, it looks like the ROAs on the first mortgage portfolio declined by about 20 basis points. So my question is, could you give us a sense for what type of yields you're putting on the books relative to what's been rolling off over the past couple of quarters?

Sure, that would seem confusing as a headline, so I'm glad you picked it up. The reality is, we are putting on north of 12% so far this year versus the book that was around 11% for all of 2015. That would argue that, that number would actually go up. There is a little anomaly this quarter that a number of high-yielding loans did actually pay off this quarter, some in Europe, some that were construction loans and some that came out with fairly significant fees.

And so, as the loan exit with fees, it takes off a decent amount of yields from that optimal IRR that you see in the book. We are certainly trending higher and we hope to be able to hold in similar originations in second half of the year to what we have in the first half. And over time, that will cause a pick back up, but in the first quarter the loans that rolled off after fees were fairly significantly high.

Okay, great. As a follow-up, within the Investing and Servicing segment, you disclosed that you purchased four properties during the quarter. Could you talk about your intentions for those properties, whether you intend to hold them or sell them at some point?

Yes, the overall intention is to hold them three to five years is the aim, and we're looking at opportunities through our special servicing rights to be able to purchase these and we've been very pleased with the full cash-on-cash and the IRR returns (technical difficulty).

This is the right that we have through the end of the CMBS 1.0 and we'll continue to make these types of purchases for the next 30 months or so. Probably, I think the book is around $250 million today and it probably gets to twice that. The cash-on-cash is similar to the cash-on-cash of the properties in our property segment and we never talk about or think about IRRs much here, but I can assure you, we think they're higher. We think these are really good investment.

Jessica Ribner, FBR & Company.

Just going back to your lending segment, I may have missed it, but what's the pipeline for originations in the third quarter?

I don't think we said it. It is looking to be close to in line with where we've historically been, which is where we were in this quarter. I don't think we've said it, but it will be robust, I think it will be above the trend of 2015 and similar to this quarter, if we close everything in the pipeline right now.

Okay. And how do you disclose the run-off you're expecting in the second half of the year, or maybe a better way to ask it is --

If you take a look at our liquidity slide that's in the supplement, we disclosed this is just under $1 billion of repayments that are expected.

We've run the year, it's interesting, we run the year with higher cash balances than we would like, partly by design because we were cautious early on in the year and the repayments are coming pretty much as we expect, while some of them have been slightly later but overall I would say that that is the primary reason we are building up our origination team is we want to grow -- we want to tell you we have more opportunities for double-digit returns than we have capital for that I hope can get on one of these calls and tell you that because is better. I think our goal would be investment grade at some point (inaudible) let's have diversity. And we have to have some other things that I won't mention. So, but anyway, that's our goal.

Okay. And just one more kind of piggybacking off of Jade's question. Do you see, given the environment for banks that you mentioned and just the volatility in the market, do you see more opportunities for acquiring loans? And I know that you, Barry, you talked a little bit about you like that business relative to the originations because it's easier and I get that. Is that something that you are kind of on the lookout for, is that opportunistic, are you being a little bit more aggressive in sourcing those loans given the environment?

It depends on the health of the bank. When banks are having a hard time and you're seeing some banks trying to pull back and get smarter, we get better opportunities to potentially buy things at a discount that are cheaper than where we would originate. Otherwise, we prefer to originate.

We've always been looking to buy things, and I think the supply of those things is prices we paid, there is a decline, particularly banks withdrawing from market, banks shrinking their balance sheet exposure, banks having earnings issues. So you see all the volatility, particularly the off-shore banks in United States. People are leaving in ports from any of these institutions, and when they leave, they have loans and they're like, okay, let's secure them. I have two senior (inaudible) just left when they both went to REITs. There is just going to -- there is a fundamental structural change going on in some of the -- in the lending climate.

Without the CMBS market, and then while it is already up to the (inaudible) is getting out of lending but there is just capacity issues and The Office of the Comptroller of the Currency is staring at you all the times. So we like him to keep staring, that's fine with us and we want to be a beneficiary of this climate. So, I will say (inaudible) leader of the team but there have been times (inaudible) this is getting hard.

This is not one of those times, there is a -- we are cherry picking deals and there's a lot of opportunities out there (inaudible) the deal that you guys are trying to convince me to agree to and (inaudible) at the corner of the table here. And it's like a 2014, but I'm not sure and we're the dad, we're 65% on that deal, and I'm like, I don't think the equity works. So I'm like screw that but they are good opportunities for us and they are seeing a lot of stuff and I think with Dennis in the Board, and his following, he has his own 19-year history of working with borrowers, and I think our team is good, and I hope it gets better. So, we're excited.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Sternlicht for any additional or closing remarks.

I hope, we have to bring you a good news next quarters forever, but thank you for your attention. And I want to thank our team, and our Board for their continued support also. Have a great holiday weekend, not a holiday, have a great weekend.

Ladies and gentlemen, this does conclude today's conference. Thank you everyone for your participation. You may now disconnect.