Starwood Property Trust Inc (STWD) 2017 Q1 法說會逐字稿

Good day, and welcome to the Starwood Properties Trust First Quarter 2017 Earnings Conference Call. As a reminder, 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, 2017, filed its 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 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 going to now turn the call over to Rina.

Thank you, Zach, and good morning, everyone. This quarter we reported core earnings of $132 million or $0.51 per share, up from the $0.50 we reported last quarter. We delivered these results despite slight drag earnings, resulting from our capital raises in December. We estimate that this excess capital cost us $0.02 per share of earnings in the quarter. As you may recall, we earmarked a portion of this excess capital to repay the balance of our 2017 converts that mature in October.

I will begin the discussion of our results with our Lending Segment. During the quarter, this segment contributed core earnings of $98 million or $0.38 per share. We've always told you that our book was positively correlated to rising rates. This quarter, the increase in LIBOR resulted in approximately $3 million of additional interest income. We estimate that a 100-basis-point increase in LIBOR would add another $0.11 of core earnings annually, not including the incremental benefit that could be realized by our servicer in a higher rate environment. This quarter, our target loan book grew by $326 million. We originated or acquired $934 million of loans, which averaged a 12.5% optimal IRR, a 62% LTV and an average loan size of $127 million. We funded $489 million of these new loans as well as $142 million under preexisting loan commitments. These fundings were offset by sales and repayments of $338 million.

Next, I will discuss our Investing and Servicing Segment, which, as a reminder, houses our conduit, CMBS book, servicing platform and asset purchased from CMBS trust. This segment contributed core earnings of $65 million or $0.25 per share. Starting with our CMBS book. Similar to last quarter, we took advantage of market conditions and sold certain of our securities for core gains of $14 million. We also invested in 1 new-issue B-piece for a purchase price of $57 million, marking the industry's first horizontal risk retention structure. Jeff will walk you through some of the details of this trade. On the servicing front, we obtained 2 new Servicing assignments on deals totaling $1.7 billion of collateral, including the horizontal deal I've just mentioned. As of March 31, we were named special servicer on a 154 trusts, with a collateral balance of approximately $80 billion. And we were actively servicing $10.5 billion of loans and REO. The balance and servicing is down from last quarter, principally due to 5 large loans totaling over $700 million that resolved during the quarter. As we have mentioned in the past, the specific loans that ultimately fall into servicing and their timing of resolution can be difficult to predict.

And finally, on our conduit. This quarter, we securitized $169 million of loans in 1 securitization transaction. As expected, volume was slower this quarter as the market gained comfort in the viability of risk retention structure. We expect volume to pick up next quarter.

I will now turn to our Property Segment, which benefited from a full quarter of results coming from the medical office portfolio that we purchased in late December. This segment contributed core earnings of $19 million or $0.07 per share, up from $0.05 last quarter. The wholly-owned assets in this segment continue to generate consistent returns with aggregate cash-on-cash yields of 11.2% and occupancy ranging between 95% and 100%.

I will conclude with a few brief comments about our capitalization and second quarter dividend. During the quarter, we extended the maturity of a portion of our 2018 convert by repurchasing $230 million of these notes and issuing $250 million of 2023 notes. The repurchase resulted in a GAAP P&L loss of $6 million. However, because this transaction was effectively an exchange, the loss was deferred for core earnings purposes and will be amortized over the term of the new debt. We ended the quarter with $10.4 billion of debt capacity and a debt-to-equity ratio of 1.4x. If we were to include off-balance sheet leverage in the form of A-Notes sold, our debt-to-equity ratio would be 2.2x or 2.1x, excluding cash. For the second quarter, we have declared a $0.48 dividend, which will be paid on July 14 to shareholders of record on June 30. This represents an 8.7% annualized dividend yield on yesterday's closing share price of $22.07.

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

Thanks, Rina, and good morning, everyone. As long-time shareholders know, we've always been at -- focused on optimizing the liability side of our balance sheet as the assets side. Our leverage profile remains conservative and best-in-class with 1.4x on balance sheet and just 2.2x, including off-balance sheet financing. We have built a multicylinder investment company with the belief that if we ran a consistent, transparent, low-leverage vehicle that the credit market and our lenders would ultimately allow us to borrow at the best rates in our industry. Our bank partners continue to offer us larger warehouse lines at tighter spreads. And our dedicated Capital Market team has sold A-Notes to finance approximately half of the loans that required third-party leverage since inception. Last quarter, we discussed the $700 million, 5%, 5-year debut unsecured debt offering that we completed in December. We're very pleased that those bonds have traded above par every day since issuance and now trade above 104 or at a 3.9% yield today. The 5-year treasury yield is unchanged over that period, so the outperformance in our bonds has been driven by our credit spread tightening. And we now have the ability to issue debt at much lower rates going forward.

We put great value in the diversity of our best-in-class funding model and the credit markets have validated our strategy as we look forward to finding ways to take advantage of our ability to borrow both secured and unsecured at the most attractive level since our inception in 2009. As the debt markets becomes more competitive, we believe we can and will outperform, given our cost of capital advantage, the scale of our global originations team and our proven credit first philosophy to investing.

We've recently won NAREIT'S Investor Care award for the fourth year in a row as judged by the analyst portfolio managers and academics that study our industry. The award honors members for their transparency in providing the most comprehensive, clearly articulated and useful information and in the most efficient manner. We greatly value our relationship with our shareholders. And we will continue to strive to provide best-in-class transparency to help you understand our business as well as we do.

As Rina said, we deployed $1.4 billion of capital this quarter. We continue to add to our loan origination staff; in this quarter, we hired a new head of West Coast originations, in addition to adding more support to our teams in New York and in Greenwich. We continue to focus our efforts on the subsegments of the lending market where increased competition is not as apparent, and where our deep credit expertise, global footprint, scale and borrowing advantage can differentiate us.

Brokered $50 million to $100 million cash-flowing loans are very well bid today, as banks creep higher in LTV and cash-flowing transactions that do not require excess regulatory capital in smaller players without our relationship for global scale often show up. We've seen this movie before. And, fortunately, those loans have never been our focus. We will continue to focus on larger, more complex transactions that our 2,200 person global organization has the expertise to underwrite and regulations have forced the bank to be less competitive in.

As a side note, post Brexit, we are also seeing more interesting opportunities in the U.K; we hope to convert on it in the coming quarters. We've held onto significant undrawn capacity today to allow us to invest in attractive opportunities and pay off our October 2017 convertible bond maturity. Although the equity and credit markets are wide open to us today, we've always run our business in a conservative manner, so we will not be forced to raise capital at an inopportune time to manage our debt repayments. Accordingly, excess cash has created some drag in our portfolio in the short run, as Rina said, but we expect to be back in line with our historical cash averages in the coming months.

This quarter, we paid a small premium to buy back $230 million of the $600 million of convertible notes set to mature in March of '18 and issued $250 million of new convertible notes that won't mature until '23. These new notes have a conversion premium that is 15% higher or 25% -- excuse me, 15% higher than the stock price at the time or $25.91 on our share price, which is 23% higher than the conversion price of the 2018 convertible notes we repurchased, which were “in the money” and, therefore, dilutive to earnings, with a convergence price of $21.04.

In our REIT segment, we are proud to have structured and purchased the first post risk retention horizontal B-piece deal. We were able to purchase this transaction only as a result of Starwood Mortgage Capital being deemed the retaining sponsor on the securitization. This symbiotic relationship between the sponsor and B-piece buyer allows us to deploy capital in areas where many of our competitors cannot invest.

Finally, in the Property Segment, we remain encouraged by the performance of our entire portfolio. We have talked about the significant improvement in the Dublin market in the past. And since Rina mentioned the MOB portfolio, I will add that we were very happy to see a large trade of similar assets and scale in April, at a significantly tighter cap rate than where we closed our transaction.

I'd like to now turn it over to Barry.

Thanks, Jeff. Thanks, Rina. Thanks, Zach. And thanks, everyone, for dialing in today. Just some overall comments on the environment that we are in. It was a fascinating quarter for real estate in general. Transaction volume dropped dramatically across the United States and particularly in Europe, almost, I think a 35%, 40% drop in transactions volume. In Europe, you know that was in front of the French elections and the potential for the explosion or implosion of the euro and also the ongoing uncertainty around negotiations for the Brexit and what that would mean for different asset classes in different countries. Domestically, we were quite active on the equity side. Transactions volume kind of slowed also fairly dramatically because of the delta, the difference between buyers and sellers; I think stemming from their different views of the pace and the rate of increase in interest rates. And, obviously, rates shocked most everybody. I think probably 100 out of 100 economists were wrong and rates went down instead of up. And it remained lower than anyone would have thought. And then I think most people, including ourselves, still have the baseline prediction or forecast that rates will rise and Trump will get at least 1, if not 3 of his 5 stimulative programs through, those being deregulation or increased -- less regulation on the financial sector as well as the general economy, corporate or private or both tax cuts. Something will get done. Infrastructure spending, which will be longer lived but stimulative to the economy and repatriation of foreign capital, which also probably will fund the infrastructure spending going forward.

I think what we wanted to see happen actually happened, which was fiscal conservatives stood up and said, You can't do all of this on a 4.5%, 4.4% unemployment base. We'll blow ourselves to smithereens. There'll be such rapid inflation interest rates will skyrocket, and we will cause a recession. And whether people didn't know how to price real estate and cap rates and yields, it was quite a tug-of-war between people wanting to deploy capital and people's fear that they might actually get the entry point wrong. So transactions, loan volume was down. If transaction volume is down, loan origination volume is down. And still, I think we had a super quarter in that light. And more importantly, the pipeline continues to be quite robust. Not exactly sure what's going on. Also, the conduit market kind of came to a screeching halt because of the uncertainty around vertical -- I mean, horizontal and what would happen in this Trump environment to the banks regarding risk retention is still unclear.

So in that vein, having the quarter we had with 3 big drags, I would say, one, the cash drag which is anywhere from $0.02 to $0.06. It depends how you count, because we raised the capital opportunistically. We financed unsecured at 3 point -- now 3.93%, something like that as, obviously, our costs were higher, but the bonds were valid and we were the first-time issuer in that space. And that's very gratifying long-term for the company. And then you saw the conduit business, which has been a pretty good, solid business for us, has been a very reliable player, [kind of] get one deal done. We didn't have the drivers. And that actually continues to be tested on each of our earnings model, which is diversified cylinders, that if one is not available, others do better.

The core strategy continues to be the build the loan book and play opportunistically in the CMBS, the conduit, the B-piece markets as well as other businesses. And also we would like to see our book in Europe grow significantly. It used to be, I think, 15% of our book, and now it's virtually 0 -- sub-5. So with the restructuring and the uncertainty in Europe, we do expect, as Jeff mentioned, those opportunities will open up for us.

There are other businesses that we are entering right now, and we'll talk about them if any of them become material to us. And we only look at businesses that we can deploy capital repeatedly over longer periods of time and in a meaningful way to a company of our scale and then meet our ROI targets as well as the complexity. Because I think one of the things we most value here is what Jeff mentioned: The transparency, the consistency of our earnings to you and, gratefully, many REITs recognize that.

So some of our business might be really great, but dissecting them for you it would be really hard for you to understand. And some of the things we've considered would really skew our leverage ratios, even though we have no issue with the leverage, whether it's unsecured or nonrecourse or not cross or whatever it might be. But it will fuddle up our financial. So we've avoided to date doing anything like that.

The banks are still fighting pretty aggressively for very low LTV loans. And we continue to execute on [any of those] strategies, use the warehouse lines. The business evolved, I would say, almost to a mature business now, that the banks are very comfortable with us. With our underwriting skills and continue to extend and increase and lower the cost of funds of our credit facility, they are going down, much as we told you they would, even when rates went up 3 years ago. Kind of what exactly we thought would happen happened. The markets again have been fluctuating. So I think, it's transactions. Now that you have the French elections behind you, I'm pretty sure Merkel will get -- or somebody like Merkel will get reelected in Germany. You've got wide-open markets, I think you will see transaction volumes pick up. And I'd be happy to deploy a lot of cash in accretive deals. 12.5% return on debt-to-capital was absurd in a 228, around 232 10-year market. And 62%, 63% LTV, which is where we have been from virtually the start of the firm is astonishing 9 years into a cycle. What's more astonishing is our stock continues to pay an 8.5% dividend yield, which I find inexplicable. But it is what it is, especially since we have no need to reenter the Capital Markets anytime soon. We are flush with capital and obviously, we have new -- the only REIT that I know, that is done -- in our space that is done on secured credit deals. So that's a unique funding source for us.

I think, overall, we're pretty pleased with our property portfolio. 11.5% cash-on-cash returns are really good. Obviously, the earnings numbers look funny because of depreciation and that gets involved and the EPS. So you've got to -- now we have to look through that to the core FFO of the company. They are not overlevered either. These portfolios were modestly levered. So this is an 11.5% cash yield which we expect to grow, strengthens -- lengthens the duration of the entire book. If you look at the pool of assets, that's why we've entered into that. And we told you we would choose assets and transactions. Now we are pretty steady in cash-flowing deals that will continue to pay our dividends. So we'd always have the cash to pay our dividends and hopefully grow it over time. And we've set our own goals of how much money we will be deploying to that sector. But it's just a -- we called it line in the sand. It's more like a scribble in a puddle. If we see something fantastic, we might do it. It's pretty hard to generate 11.5% cash-on-cash returns with modest leverage in the equity markets today. But occasionally we run into these transactions. And we are also -- and have done so and we've itched to do them when we could, like our medical office building portfolio, and nearly doing the REO. So I'm going to trade later in the quarter. We looked at hard -- we even thought about buying but the pricing was just too rich for us and didn't meet our return objectives.

So with that, I thank our team across the board. I mean, there's a lot of people working on behalf of the REIT, including the whole team in Miami. And [Belmont's]in the room. He heads that team. So I think that's what I'm going to say today.

And we'll take any questions. Thanks.

(Operator Instructions) And we'll go first to Ben Zucker with JMP Securities.

First is more of a high-level question. I wanted to ask about the pipeline. The press release described it as robust across all segments. And I heard you touch on the international opportunity opening up, which I think relates more to the principal lending. So I was hoping you could take a minute to talk about what's interesting as it relates to the recent Property Segments. And if there's anything in the pipeline that would be related to M&A activity or if this is organic focused?

We always looked at -- certainly, we did 25 deals in the public sector since we've been public. I can't rule it out, but I would say it's unlikely that it's a major acquisition or something like that at this point. The -- as far as the Property Segment, we're just quintessentially opportunistic. We deployed probably $2 billion or something like that, $1 billion to $2 billion in equity, which is what -- $6 billion to $8 billion of transactions a year. And if one comes in that looks like a steady earnings [grower] that's below where we would think will be a 15 or 16 IRR kind of thing, then we will probably try to do it here. We just recently killed a deal in Europe on the equity side. We really liked it, but it was in the retail class, which you guys don't really love these days. This was in...

In Nordic.

I know I wasn't going to say that. I was trying to figure out what to say. I know where it was. And I just think if it puts any kind of dent in our [patina] of the stock, it's really not worth doing, even if we loved the asset. So it's just not worth, because you don't -- I mean, having run like 6 public companies, it's very hard for investors to know IRRs. What you can see from us is cash flow. And so in this REIT, we're focused on paying a dividend and hopefully someday growing it again. Although -- what I rather see is the stock traded at 6 dividend yield, not has -- have to continue to grow the dividend. So I would say, at the moment -- I mean, we bought a portfolio of apartments. Really great stuff. And we -- our approach to this is that, do we want to own this stuff for 20 years, right? This stuff we want to own. And do we think like we'll have a major capital call and -- down the road that would screw us up. And -- so our apartment portfolio, I think, is running in the high 90s occupancy and is affordable housing, but it's really well built and it's in great shape and it's well maintained. The medical office building have built in rent growth into the REIT leases, I think 2.5%. So we're -- and we like that asset class. We like the locations of these buildings. They are near hospitals and schools. So they're dominating 60% of them or something like that as -- on the campus of a hospital. So we feel really comfortable with that stuff. We -- as you know, we own 4 good malls. We actually took the cash flows down because we put in a movie theater into Wellington Green in -- here in Wellington, Florida. And we took out a poorly producing furniture store and put in a brand new movie theater. I think -- I forget what it was called. But it's got the new seating and everything and that creates more traffic, and then we have to retenant some of the space. But these malls have been doing okay. And I would say one comment at the mall sector. Our sales are kind of flat. There is -- what's happening in the malls is more the churn, the churn of the tenant, which you're reading about. But in no cases have -- and we own 24 malls. There are 4 in the REIT. Have any of our anchors left. So -- and we have Macy's stores doing $50 million and Sears even doing $30 million. I kind of hope Sears goes bankrupt every day because we'd love to repurpose that wing of the mall. I don't think we have much exposure really to tenants. What we're seeing is the small guys, like you saw Bebe Stores and stuff go out. We got to replace them when we got [VTI]. So fortunately, they were tenants. And if you look at Taubman or -- (inaudible) the occupancies of these malls are actually near record highs. But the patina and Amazon clobbering the malls, the mall will probably survive much more easily, frankly, than the strip center, because you have parking, you got visibility, you got access. Everybody knows where it is and it's going to repurpose itself. And you're seeing a lot of restaurants and deals with more entertainment. We say it, but it happens to be true, is what -- we have a deal with (inaudible) in here. It's not in our portfolio. But in Texas, we're putting an equinox, a Crayola kids club, a new movie theater, 6 or 8 new restaurants and we chew up the GLA and we improve and make it a must-see destination for the local community. And it just raised the game for retailers. You just can't be a passive owner anymore. And that's our approach to the malls that we own and we take the long term view. So we don't think the mall is dying, and we just think it's under [CNBC] assault. So it's got a lot of -- it's fun to talk about, everybody shops somewhere. So we talk about -- you saw the list of stores that went bankrupt pre the existence of the internet before it ever existed. It's as long as the hairs I've lost on my head. So a lot. (inaudible) [Bradleys] in my neck of the woods where I grew up in New England, they all went bust. Alexander's, (inaudible) everybody went bust. So it's just a constant churn business. It's the way it is. And what's interesting about the mall is [nothing] interesting is happening about the mall. I just say last comment about it, [I'm] going to be defensive, but we signed, I think, 10 deals with H&M in our portfolio and I think 7 or 6 with ZARA. So you're taking little guys out and you're putting big guys in, and the credit quality of the big guys is better than the little guys and so the mall is actually changing and becoming, I think, in many cases, a better credit portfolio than it was in the old days. And it's just interesting because it's subtle. I mean, you had these other retailers and they've struggled, but I think the retailers were also -- I was quoted as retailer resize. You'll lose in Dallas -- North Dallas, Plano. You can't get a better market, 2 of the 6 malls will close. The other 4 will get stronger. So it's probably the evolution of retail -- and over retail, we have too many square feet.

I appreciate the commentary there. And if I could ask one more, since you kind of teed it up for me. In your loan portfolio, the retail exposure is only 7%, I think. So it's clearly not an asset class you guys have targeted per se. But I was just wondering if maybe the widespread fear around everything retail has the potential to open up maybe some more lending opportunities for you guys?

That's for sure. And it really is about the credit there, right? I mean, if you have -- 60% of your stuff is really good credit stuff, you'd make that loan. And you're absolutely right because it's -- where the fear is, is where you'll get the best returns. And on the other hand, we are -- perception can be reality, so we have to be careful. But clearly, that is an area where the markets are a little skittish, but it hasn't been an asset class. We could never get the returns we need, lending to that sector. So when we are looking, by the way I should say, in our portfolio, we are looking at, I would say, disguised credit deals. So you'll probably see us do something in the near future that looks retail-ish, but it's not retail in my view and -- because it's more of a credit play, mispriced corporate bond. So we think there is interesting place there where you dig a lot of level deeper and if we complete this transaction, we'll talk about it probably next quarter.

(Operator Instructions) We'll go next to Jade Rahmani with KBW.

What do you make of the current competitive environment? On the one hand, there seems to be a continued proliferation of debt funds and other vehicles. Additionally, the GSEs are quite aggressive and life insurance companies are also active. But lastly, the Federal Reserve, senior loan officer's survey in April did show a tightening in lending standards and some consternation from banks on [Seary] exposure. So just want to get your sense of the competitive environment.

Well, I'll let Jeff go first and then I'll see if I need to fill anything.

Yes. Thanks, Jade, and good morning. I would say that we are seeing more people show up on the cash-flowing deals. Deals with high cash flow that are easy to underwrite, generally that are brokered, and I made that statement in my remarks. There are more debt funds now who show up for those every day. I think if you can't differentiate yourself with a large global platform with repeat borrower relationships and create opportunities out of your own portfolio that aren't brokered, it's a more difficult sled. And so I think you're seeing people complain about the difficulty in the market for those. I also think that once you get above $100 million, and certainly above $200 million that there is only a few players who can really differentiate themselves in that space. Also, the more complexity you'll get. There's only a few players who can really understand the complexity and underwrite a business plan on a very complex asset. I think those are things where we differentiate ourselves. So we'll continue to look for the larger, more complex deals that get away from the $50 million cash-flowing deals that our brokered. We do a much smaller percentage as does our biggest competitor, a smaller percentage of brokered deals than a lot of the debt funds who are out there and rely on the brokerage community. We're not as reliant on them, and I think it speaks to the quality. And ultimately, I think it speaks to the performance and why we've been able to have a significantly better book. You get into these brokered deals with 20 debt funds and you will see 20 term sheets on some deals. You're unlikely to come out with a loan that you're really excited about having. You're going to have something where you got the worst in class execution and credit.

Just to interrupt. That's been the case since we started. Like if the Street originated a deal and they call 25 debt funds, we were really never often going to be there and be competitive. And that's -- this has been now 8 years, how long?

8.5 years.

8.5 years. I mean, that -- it ebbs and flows, right? The Street gets excited because the conduit markets open up again, they start to originate loans again, they try to sell the junior classes and even whole loans. This has been the way this business has evolved for 8 years. So 7 cycles in 8 years. The markets -- that a conduit deal blows up or if spreads wide and people get caught with the wrong price book and they stop originating again. So our business has been a different kind of business. Our business has been 11 [turns] a year of our book. We don't hold it. We don't aggregate it too much. So we sell it down very quickly on the conduit side. And on the loan side, we try to originate the whole loan and then we sell the A-note or we use our subline. So we don't -- the manufactured somewhere else business is brutally difficult for us to be competitive at the rates of return we're looking for. And our peers -- some of the guys who were teed up to go public, they play a lot more in that space than we do. It is lower even than -- I assume I think they're going to have a lower dividend yield. I don't know. I don't know what the market thinks, but I think -- I will say the market -- I don't totally agree with Jeff in one sense that I think the big guys are getting better looks at bigger deals. I mean, there's -- we're big. We can do a $500 million deal. We can do a $700 million deal. And there's not a lot of guys that can do that, and we -- I think our equity base is the largest by a factor of 2, against our nearest competitor. So we have the most -- I look at our book as tradeable like we could just sell our CMBS that we wanted to and raise another $1 billion. So if there was some unbelievable thing we wanted to do, we don't have to go to the equity markets to do it, we can just rejuggle our book and sell those. We could sell our loans to other guys in our space. So we look at that as we want to raise our ROE. We should -- we look at peeling off lower-yielding stuff. And I will say that one thing that is obvious, we didn't talk about, is the construction markets. It has been very hard to get construction loans. That has really gotten really hard. They are high frequency -- what are they called?

HVCRE, High Volatility Commercial Real Estate.

I could never remember that, actually. They are ugly loans to banks and the banks don't really want to make -- I mean...

50% more regulatory capital.

Right. So that market, and we are -- you saw some of our peers go into that business having not been in that business because it is a vast void. And there are really materially good projects getting built. By definition, you're lower than replacement cost because you're going to be at 60 cents on the dollar or even less. So -- but we can't do too much of that in our portfolio, and we -- again, we play -- as a real estate guy now that we have an equity book and if the guys defaults -- I was going to use a slang word or a bad word, but I'm not going to use it. We get the building at 60 cents on the dollar, and we know these property markets. We are the largest owner of apartments in the United States today, [starting] with Capital Group. So we have 100,000-plus units. And we have malls. We have -- I don't even know how many million square feet of office. We can underwrite pretty well and -- brand new building at $0.60 like you would not like it because we have a default, and I would love because we'll make a lot of money someday when these markets rebound. So -- and that's the way we're going to run this company as a way to make money for our shareholders, we hope for long periods of time. So the construction book, we do in moderation because the future funding needs have to balanced against repayments rolled in. So we've seen that movie before. So right now I think our -- if you had me guess, I'd say rates continue to rise slowly from here, and maybe you see it 2 and 3-quarter tenure at the end of the year. But this is all [of that] on what this tax reform bill looks like. And I'm assuming we're not going to run $1.5 trillion deficit next year, which would happen if everything took place per what was discussed with corporate cuts. So -- I don't know. We'll see what happens, but we're watching that. And -- again, rising rates is good for us, but -- for every reason, frankly. We'll make -- earn more money. There'll be more defaults in our servicing book, which is still $80 billion. On $10 billion of it, we actually are actively managing today. So we'd love a little -- I was kind of looking forward to 3% 10-year, what happened? So have we lowered leverage rates for property, but it was sort of an odd thing. I do worry that the economy is -- you saw a crazy bad first quarter number, but you can see a crazy good second quarter GDP number. Balanced together you're going to have the 2% growth we've had. It's like 3.5% and point -- above a 0.7%, 0.8%, like [2 2] growth and that seems odd -- The 10-year's lower than it was before Trump ever said he was going to run for office January 1 of 2016, the 10-year was higher than it is today, and Trump has been elected. And I will say one thing that Trump is good for business, and people -- the CEOs I talk to, I happen to be one of them, are fairly bullish on their prospects going forward. So business is not being nullified anymore, and consumer confidence and business confidence is up. So can't [beat] if this economy stays this weak. I think -- I do think his trade stuff is equivalent of Dodd-Frank for banks. And corporations are not exactly sure where to invest capital. So it's impeding the capital investments by businesses, which is a material portion of GDP growth. And until he clears that up, I think people will be confused and see -- you see companies buying back stock. Even M&A is down. Because nobody knows what the rules are. So they got to clear this up so you can go forward. And when they do, I think the economy will pick up.

Just on the retail exposure. I wanted to ask about the retail joint venture. If you could give any color on occupancy, leasing spreads, same-store NOI and just also the types of projects in the Lending Segment.

Okay, hold please.

Same-store sales have been relatively flat year over year over year. We'll get the exact number. I think at a rough quarter, we were up just over 1%, I believe. But it was basically flat and the sale per square foot I feel very similar, mid-500s.

Similar like at 540 a square foot, Jade, which is flat to last year. And I think on the occupancy, we were around 95%...

94.8% and lease rate is 96.2%.

Which is flat to last year.

And like I mentioned, it was a -- that's as of year end 12/31. So I don't know if you have the 3/31...

They haven't sent it.

They haven't sent it. so we have what we have.

Sorry, Jade, your other questions was (inaudible).

Just the -- on the lending -- in the lending book, the retail exposure on the lending book. Can you give any color on the types of projects and...

I think it shows in our supplemented, 7%. I think when we break out our mixed use and include our mixed use. It rises to as much as 9%. If we take the retail component of our mixed use and put it back into retail, it would bring us up to 9%. But still very small.

And 1/3 of that...

Are those urban retail projects?

Most of it actually is the deal we did in Portugal last year.

Oh, the mall. It's a really good deal.

But to -- of the exposure that we have, $200 million relates to the Portugal property.

I see the largest unpaid principal balance is $108 million.

And then the one underneath it is the same.

Are the same one in [Ricardo].

Yes.

We have Portugal $200 million, $180 million. LTV is 51% and 64%, and I don't have any more information on this particular sheet. Those are good loans.

Okay. And then just lastly, can you comment on the outlook for the CMBS special servicing portfolio? It seems like it's been lumpy. There's been an uptick in legacy delinquencies, but your portfolio of actively service is declining. So what do you expect for that?

Yes. Look, it's still a guessing game at this point. We're into the heavy edge of what's going to happen with the maturities. The second and third quarters were really the major origination times in 2007. It always -- as always, you know, there's no timing or direct knowledge of when a loan is going to be finished through its special servicing business. So it's difficult to say, and we're -- I don't think we're expecting significant upticks or significant downticks. It's kind of where it is -- is kind of where we are right now. This past quarter was, as Rina mentioned earlier, was heavily based on some large incoming loans and also some very large outgoing loans, which led to the slight decline.

Yes. I mean, it's unusual, Jade, to have a loan for, call it $150 million come in or out, and we had 5 of them go out. So that's what caused the decline. And again, you just don't know when those particular loans are going to come in or leave.

And we'll go next to Jessica Levi-Ribner with FR -- FBR Investment Bank.

Just one on the conduit. What you're seeing in the market now, and I think, Barry you've mentioned that transaction volume had come to kind of a screeching halt. Is it picking up now that the first horizontal deal is done? And how do we think about that, maybe, even through the year?

I was talking about equity transaction bonds. We got borrowers having to finance an acquisition. At the same time, the CMBS market -- the conduit market slowed. The CMBS market, the sale of new origination, CMBS. I think there are -- just a couple of deals done in the quarter. I think at the end of the day...

Those were a handful of...

There was a handful of transactions. Look, the market really went through a major change in the first quarter. It was the first quarter where all the risk retention rules went into play. So I think everybody had ideas of how much they wanted to get out. They were making sure they had partners to do all their deals. We were seeing deals being shown to B-piece buyers significantly earlier, because they were worried that they weren't going to be enough parties around. We're now into the second quarter. You're seeing that, I think, a lot of the fears that there weren't going to be enough B-piece buyers or that the risk-retention rules were going to stop the origination process have somewhat been alleviated, so that you'll see a pickup as time goes on. And it's just been the new news to have the market overreact to these new changes and keep moving accordingly.

And Jessica, this is Jeffrey. If you remember, in December, before the regulations went into effect, there was a significant amount of issuance. So everybody basically cleared the deck. So we expected a very slow first quarter, and so part of it's the digestion of the new regs, and part of it is just that the deck had been cleared. I would say that B-pieces have consistently, whether it's vertical or horizontal or else, have traded tighter as the quarter has gone on. That is good news for the future of the CMBS market, that is good news for volumes as you head into the second half of the year. The fact that the B-pieces continue to trade better and these senior bonds continue to trade very well. So I would expect to see a pretty good rebound after the books were depleted going into the beginning of the year.

Okay, great. And then just going back to your comments on construction lending. I know that you want to keep it kind of a smaller part of your portfolio. But are you seeing a lot of opportunities? Especially it sounds like a lot of the debt funds, certainly not the insurance companies, are competing for those loans. Are you seeing more opportunities?

Well. Yes, I mean, that we are seeing a lot them. You got to be big to make a construction loan. I mean, you're not going -- I don't think you're going to syndicate this to a -- there's one large hedge fund out of Europe that has made some massive construction loans in New York City, like billion dollar loans. But for the most part, you don't see a ton of players, and there's a bunch of us in the space. The banks are still doing construction loans. They're just -- they're often recourse, they're modest LTVs. We find the IRRs in these loans higher than the coupon because they're never often fully drawn, and you get your feeds in on a lesser balance or drawn capital than you actually ever deploy. So it depends on what it is. Whether it's a condo loan or an office building, for example. But it's really about balancing ins and outs for our portfolio of cash and repayments that we expect and we can count on. I think the good thing is, you saw repayments in the quarter were modest compared to prior quarters, and I think they look that way going forward for the year. They're not bad. We had high -- much higher repayments in prior years than we had this year. So that's good for us. I means as we can net originate net capital well above our deployed capital, we have all this cash to get rid of in a creative and a constructive way. But it is unusual for us to be running the company with as much cash as we have at the moment. It's a little over the top. We're reserving several hundred million dollars just for rainy days as we run our company with that baseline. Even that is deployable if we had to. But we don't generally run it that way. There are some restrictions on running a negative cash balance company, but we would never do that. So I think, we have -- we're not going to tell you what our targets are, because it's not really relevant -- because you can't see everything we can see about repayments and everything. But we -- the other thing about construction is, also like our other book, it's diversified by product type and by location. We're not going to be lending just in Manhattan condos. That's not what we're going to do. Even if they're good deals we won't do it, because we're not going to have that concentration risk just in case, god forbid, a bomb goes off or something. We're not -- those things you can't even, despite the VIX being 9.62, the world is a volatile place and we're going to run a diversified book, and we have. And I think that's one reason our bonds trade where they trade. When you look at -- I would say, the credit guys are smarter than the equity guys. If you look at our credit guys, they really like our story.

And without giving away any percentages, a part of what Barry talked about with the repayments was the lot of the construction loans that we did from 2012 to early 2014 paid off in the last year, and we stopped doing construction for a reasonable amount of time. We have a significantly smaller construction book today as a percentage than we've had in the past, so there's room if we see that as an opportunity.

I'd say that New York City got to be too big a concentration risk for us. They all paid off. Everything worked out fine. But frankly, we didn't want to have 20%, 30% of the book in New York City in the construction loans. I mean it's not prudent from a -- might work out, but it's not the way we run the company. So it's like sometimes the real detail's behind the number, right, not how you got the number. But it's how you got the number not the number.

To be technically correct, we have one more construction loan that'll pay off this year in New York City. It's significantly...

I didn't say they were all paid off. Some paid off, like Hudson Yard, for example. I didn't think everything paid off. We have that construction loan in part of building. We (inaudible) stops, right.

Okay, cool.

And we'll go next to Charles Nabhan with Wells Fargo.

I know you touched on the decline in the special servicing UPB. I was hoping to get some color around the decline in servicing fee revenue during the quarter. I know you had mentioned that there was some large loans that were resolved, and that typically results in higher fees on the back end. So I wanted to get a sense for the drivers behind the decline, and if there weren't any offsets to, what I would expect to be, large resolution fees on those loans?

So a part of the decline you're seeing quarter-over-quarter actually relates to Europe. So you need to back out $2 million of the servicing fees in Q4 related to Europe for the -- remember we didn't sell Europe until end of October. So the 1 month of the servicing fees were $2 million. You have to back that out. The other thing is on the resolutions I mentioned, on the $700 million, we actually did not earn a liquidation fee on all of those loans. Some of them were modified and returned to performing. So the fee will come at some point in the future. It'll not come today. So 2 of those loans were modified, were not actually liquidated. So they were resolved, they were treated as resolved, so they come out of the balance. But they weren't liquidated, so don't earn your point liquidation fee. The other thing, the other nuance is negotiated fees. We had higher negotiated fees in Q4 than we had in Q1 as being principally default interest, and when it comes to default interest, it's very loan by loan specific, and you just -- it's one of those things that you can have a large default interest balance on a loan that pays and you never get your full amount -- you rarely get your full amount, but it's just a -- it's a negotiated item. So negotiated with fees, we're down $4 million in the quarter.

Got it. And as a follow-up, you mentioned a transaction that priced in April that was tighter than one of your deals and that you viewed as a comp. And I was hoping to get some color around that to the extent that you can comment on where price, specifically, relative to where your deal was, and kind of how you view the market conditions in that Property Segment?

You're talking about the equity deal? The (inaudible)...

Yes.

It traded probably 50 basis points inside -- the deal we did. 40, 50 points. And that's a lot when you're talking around 6% to 5.5% or 5.8% or a 5.7% to a 5.3%, and those are big numbers. All right? Again, I think the world loves yields right now. And that's -- the comments about proliferation of private debt funds and others, that is -- the world's looking for anything above a 2.28%. And -- so this asset class is pretty secure, and viewed as a core portfolio. And so levered up, even 20%, 30%, when those spreads in the [annals] trading, I think -- what's AAA [paper note], 78?

Yes.

Something like that? In the high 70s, 80s. I mean you can lever these things pretty well, and get pretty nice cash yields. So I feel fairly secure, plus you have the inflation hedge in the equity book, which you don't have in the debt book. You have it because your LTVs will drop, but not in the same way you do as the upside in rents with the falling inflation. So you know, these are -- there are markets that -- good stuff is trading tight. I mean apartments -- we were selling apartment buildings we bought sub-5, and you could pay -- lever it up and pay in the 5s and 6s. I mean, you're making money. And in a one-off deal, there's great demand for most asset classes. But markets overall are very balanced. There are problems. There are problems in New York City rentals and there are problems in Miami hotels, but there are problems. There is just -- there is also lots of good stuff going on. The overall market, they're pretty balanced across the United States in almost every asset class. You have vacancy rates in industrial sub, like 2% in Los Angeles. So these markets are pretty decent. And you just got to be careful. So one interesting thing about the markets is -- it is interesting in our portfolio. When we started out, we thought we'd had all hotel loans, because we figured banks don't like hotels and neither do insurance companies, but it's not turning out to be the case. And something -- I have to comment about the GSEs. The GSEs really compete on multispace, and it's really hard for us to find multi-deals. You know, it's a -- you can't get them. You can't get the returns that you want. You can get them, but we can't produce 12.5% returns on equity which our book -- $1 billion of capital deployed will do in the quarter. That's just not going to happen. Unless we're levered at 90%, which you don't want us to do and we don't want to do. So we can't compete against the GSEs.

[We have] a lot of multi-construction, but we -- and we do very limited amounts of it, so we see almost nothing in cash flowing.

And we'll now take our last question from Douglas Harter with Crédit Suisse.

Can you just talk a little bit about the new originations and kind of the characteristics that we're able to get such a higher return on those versus the portfolio? How you view the risk on those versus the portfolio?

Can you -- I want to correct something I just said. I think that portfolio traded 75 basis points inside of ours, the medical office building just got (inaudible) 4.75%, something like 5.5%. So it was the Duke medical office building portfolio, if you're counting. So that's quite a spread. Turn that into multiples and you'll see the impact of that over the leverage. So, I'm sorry, can you repeat your question? We were talking about something here.

Yes. You know, so the new investments, you said you had a 12.5% return on that versus the portfolio of 11%. Can you just talk about kind of the characteristics that allowed you to get that higher return there? Whether there's sort of theoretically higher risk on that? Or again, what kind of led you to be able to get that higher return on those new investments?

Well, I think it's a blend. I mean, there is -- the first large deal of the new quarter is that number. So maybe higher. It's really -- it's just a blend of loans we originated (inaudible), loans in the quarter.

And I guess it was similar to what we originated last quarter, which had a blend of 12.6%. So we were sort of flat.

There's construction loans in there, that boost the returns a little bit. You know you can't -- and obviously, we look at our competitors and assume the public ones [who have reported], we look at their books and their spreads and their cost of funds, and we're quite similar to some of them. Not all of them. We pay more attention to some than others. But I'd personally be -- I look forward to the other companies just to see the benchmark our team, and see how we're doing. We're doing fine. We have split loans before with some of our peers, by the way, when -- on that large construction loan in San Francisco. We wound up just splitting it. It was enormous, and that loan is probably a year old now, a 1.5-year?

1.5 year. It should hay off by the end of this year.

Yes, it's a big loan.

Or probably next year.

It's on the -- we can tell them what it is. It's the loan on the...

181 Fremont.

181 Fremont. It's a giant project down in the (inaudible) Bay, is that why they call it.

Making sales at more than 2x our basis today in the conduit.

So you just mentioned that the first one you closed this quarter was a comparable yield. I mean, is that -- do you view that as sustainable? And then you can kind of drive the portfolio yield higher over time? Or is this kind of a nice pocket of opportunity?

I think what we try to do with the secure [one], it's an 11% or maybe even at 10%, and then we do a more exotic one and that might be a 14% blend to a 12%. So we're not seeing every loan at 12.5%. We just see them all over the place. And we're doing right now because we now have corporate debt that's unsecured. We're also thinking of -- in our mind, we ascribe value from our funding facilities to these loans, because we all talk about our stabilized yields from our portfolio, and the optimum leverage. You've seen us all talk about that. So that's how we kind of behave, too. We can lever it standalone. We can sell an A-note, and borrow on warehouse lenders to leverage standalone, [we sell the A-note], or we can just assign corporate debt in our minds and we kind of lever them correctly. And you've heard, no need to repeat them, our overall credit stats for the company which are better than our peers, I think. So overall...

We did talk about the larger loans being a sweet spot. 2 of the loans make up about half of what we did, and they were the highest-yielding loans. So some quarters, the large loans will have a high yield. Some quarters, that won't be the case. But I think that ultimately is what pushed the number to be a little higher this quarter.

Another thing that does the same, since we're chatting almost half an hour now, duration matters to us. So we can earn a 14% in 5 minutes, and you earn $0.33 and I can't pay our dividend. So we do need to try to keep the money outstanding. It's a pain in the a** to have to make a 6-month loan, and -- so we balance everything that way.

And that does conclude our question-and-answer session. I will now turn the call back to Mr. Sternlicht for any additional closing remarks.

Thanks, everyone. Thanks for your support, and we hope -- we'll take, as always, we're always available to answer questions after the call. And Rina, Andrew, Adam, Jeff, Zach and the whole team. So thanks you very much -- thanks you, that's a new English word, and we'll see you next quarter.

And that concludes our conference for today. Thank you for your participation.