Starwood Property Trust Inc (STWD) 2017 Q4 法說會逐字稿

Ladies and gentlemen, please stand by.

Good day, and welcome to the Starwood Property Trust Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's conference is being recorded.

And now at this time, I'll turn the call 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 December 31, 2017, filed its 10-K 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'll 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 Chief Executive Officer; Rina Paniry, the company's Chief Financial Officer; Jeff DiModica, the company's President; Andrew Sossen, the company's Chief Operating Officer; 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. Jeff will be covering our annual results in his remarks, so I will focus my discussion on the quarter.

Our core earnings this quarter totaled $145 million or $0.55 per share. This includes a negative impact of $0.04 from federal tax reform and a positive impact of $0.06 from the payoff of our October 2017 converts. I will discuss each of these shortly.

I will begin this morning with the results of our largest business, the Lending Segment. During the quarter, this segment contributed core earnings of $110 million or $0.42 per share. On the commercial lending side, we originated or acquired $1.4 billion of floating-rate loans with an average originated loan size of $166 million and an LTV of 61%. We funded $1.1 billion, of which $947 million related to new loans and $137 million related to preexisting loan commitments. These fundings slightly outpaced repayments of $914 million. Our commercial lending book ended the quarter at $7 billion and continues to be positively correlated to rising interest rates, with 93% of the portfolio being floating rate.

The credit quality of our book remained strong, with LTV improving to 62% this quarter. We also saw improvement in some of our 4-rated loans, with the loan loss reserve declining from $6.6 million to $4.3 million. This was mostly due to upgrades of 2 loans, both of which are expected to pay off in the near term.

On the residential lending side, we acquired $220 million of non-agency loans this quarter, bringing our total portfolio to $613 million and our net equity to $169 million. The current portfolio has an average 63% LTV, an average FICO of 723 and an optimal annual cash yield in the mid-teens.

I will now turn to our Property Segment. We are excited about our newest addition to this segment, a 27-property affordable housing portfolio in Florida, which we agreed to acquire for $595 million. This acquisition consists of 6,109 units that are 99% leased and concentrated primarily in Orlando. 3 days before year-end, we closed on 8 of these properties for $156 million. Subsequent to quarter-end, an additional 12 properties closed for a purchase price of $293 million. The remaining properties are expected to close next month.

Combined with our existing portfolio known as Woodstar, we will now have 59 affordable housing communities totaling over 15,000 units. The properties will be financed with a combination of sub-4%, fixed-rate agency debt as well as the assumption of preexisting government-sponsored financing. The debt has a weighted average term of just over 11 years.

The portfolio is being acquired at a high-5s cap rate with targeted cash-on-cash yields in the low double digits. The investment is being made via down [REIT] structure, whereby the properties are contributed into a newly formed subsidiary in exchange for equity units in that subsidiary. The units are redeemable into our common stock at the option of the holder. And prior to redemption, the units are entitled to dividends, which are indexed to our common stock. In our GAAP balance sheet, the subsidiary equity is reflected as noncontrolling interest. And in our GAAP P&L, any accrued dividends are reflected as noncontrolling interest expense. But for our purposes, we are treating this similar to an equity issuance. Any noncontrolling interest deducted from the P&L will be added back, and the redeemable units will be included in our equity and share count. There was little impact of this transaction during the quarter because the first phase closed just 3 days prior to year-end.

The remainder of our wholly owned assets in the Property Segment continued to perform well. Weighted average occupancy increased this quarter to 98%, up from last quarter's 94% due to a newly executed 55,000 square foot lease in Dublin. The lease carries a 20-year term and was signed in December, so we expect to realize the full P&L impact next quarter.

As our property portfolio continues to become a larger part of our book, so does depreciation. As of December 31, we had $174 million or $0.67 per share of accumulated depreciation. The economic reality is that these assets are appreciating in value, not depreciating. As a result, GAAP book value is becoming an increasingly less relevant metric for us.

I will turn to our Investing and Servicing Segment, which contributed core earnings of $42 million or $0.16 per share to the quarter. As I mentioned earlier, this segment was impacted by the fact of U.S. tax reform principally because it houses our 2 primary taxable REIT subsidiaries, our conduit and our servicer. While the decrease in our blended effective tax rate from 39% to 25% should benefit these entities going forward, it had a negative impact on their deferred tax assets during the quarter. Our DTAs result from temporary differences in certain of our intangible assets, namely the servicing intangible and goodwill. Remeasurement of the DTAs at the lower effective tax rate resulted in a onetime write-off of $10.4 million or $0.04 per share during the quarter.

Our CMBS portfolio continues to perform well, generating mid-teens core yield in the quarter. On the servicing front, revenues remain relatively flat to last quarter, as expected, with resolutions also flat. However, we did see a higher pace of transfers into servicing primarily for our 1.0 deals. Fourth quarter transfers outpaced third quarter by 2x, increasing our actively serviced portfolio from $9.6 billion to $9.9 billion.

This quarter, we obtained 8 new serving assignments on deals totaling $5.9 billion of collateral, bringing our named servicer portfolio to 160 trusts with a balance of $73 billion.

In 2018, though we expect a net contribution from our servicer to decline, we expect a compensating increase in the net contribution from the properties we acquire from CMBS Trust. In 2017, we recognized approximately $16 million of core gains from the sale of 5 assets in this portfolio. As the remaining 25 assets reach stabilization, we expect to see significantly higher gains going forward.

And before leaving this segment, I will say a few words about our conduit. This quarter, we securitized $578 million of loans in 3 securitization transactions and ended the year with total securitization volume of $1.5 billion in 8 deals.

Now shifting from the left side of our balance sheet to the right.

In the past 3 months, we completed 2 high-yield debt issuances totaling $1 billion. In December, we issued $500 million of 7 1/4-year notes at LIBOR plus 253. And in January, we issued another $500 million, this time with a 3-year term at L plus 128. We also repaid our October 2017 converts for their par amount of $412 million. The equity component of these notes, which had been accretive through interest expense over their term, expire worthless. This resulted in a gain of $15.2 million or $0.06 per share that we recognized for core earnings purposes in the quarter.

We ended the year with $3.9 billion of undrawn debt capacity, a weighted average debt term of 53 months and a modest net debt-to-undepreciated equity ratio of 1.6x. If we were to include off-balance-sheet leverage in the form of A notes sold, this ratio would be 2.1x.

I will conclude my comments today with our outlook on 2018 and our dividend.

Similar to what we told you last year, we expect to earn and continue to pay our $0.48 quarterly dividend this year. To that end, for the first quarter of 2018, we have declared a $0.48 dividend, which will be paid on April 13 to shareholders of record on March 30. This represents a 9.6% annualized dividend yield on yesterday's closing share price of $19.99. One item worth noting about this dividend yield is that under the new tax law, individual shareholders now receive a 20% deduction on REIT dividends. For those shareholders in the highest tax bracket, this adds another 110 basis points to their pretax yield, making REIT investments such as ours even more attractive.

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

Thanks, Rina.

We had an extremely successful fourth quarter, deploying over $2.3 billion across all of our investment cylinders and expect to beat that amount with a record Q1 investment pipeline of approximately $2.5 billion.

In our Lending Segment, we have always focused on the quality of the loans we put into our loan book and not the quantity. Facing large expected payoffs in our loan book in 2017 and early 2018, we doubled the size of our originations team in the last 2 years, leading to increased loan volume while maintaining loan quality and expected IRR. In the last 3 quarters plus the current quarter, we will have realized over $4.2 billion in loan repayments versus just $1.4 billion in the next 4 quarters ending in Q1 2019. Fortunately, our large loan origination business is hitting on all cylinders, and we expect it to continue to be the dominant user of our capital for the foreseeable future. In Q4, we originated $1.4 billion in large loans with an expected IRR of 13% and weighted average loan-to-value of 61%. Our volume and IRR were both the highest in years, and our loan book today is the largest it had been in our history. Our large loan originations were over $4.2 billion in 2017, up approximately 30% versus 2016. And we've seen the retail exposure in our loan book fall to below 5% by the end of this quarter.

The first quarter of 2018 is shaping up to be our largest lending quarter on record, with over $1.75 billion of loans in various stages of closing. We expect to originate over $5 billion in floating-rate balance sheet loans in 2018 while maintaining our credit-first culture, the lowest leverage in our peer group and IRRs commensurate with or above previous quarters as we continue to optimize the right side of our balance sheet to achieve the lowest possible cost of funds for our company.

Over the last 4 years, we've purposefully built a diversified book of unencumbered assets that allow us to do what others in our space cannot: issue unsecured bonds at spreads commensurate with investment-grade issuers. Since speaking with you in November, we've issued $1 billion of 7-year and 3-year unsecured bonds to go along with the $700 million of 5-year bonds we issued in December of 2016.

We built a business model that the bond markets think very highly of. At Treasury plus 143, the 3-year bond we issued last month was 2 basis points outside the median spread of the BBB bond index and the tightest spread for a Ba3, BB-rated or lower senior unsecured note since 1998 and the second tightest spread of any high-yield issuance since the financial crisis. We believe that borrowing spread is inside where any of our peers would issue unsecured bonds if they have the unencumbered collateral to do so. As a mature company, we've moved away from convertible notes and replaced them with longer duration, lower-coupon unsecured bonds with no equity conversion risk. At our issuing cost, unsecured bonds are cheaper, more flexible and more efficient than CLOs for large, floating-rate loans today.

Approximately 30% of our debt is now unsecured, decreasing our dependence on the secured debt markets. Also, our property book is over 25% of our assets, putting us in position for a ratings upgrade as we continue to execute on our business plan to have the lowest cost of funds in our peer set.

At 1.6x debt-to-equity, we continue to choose to run our business at significantly lower leverage than our peers. The credit of our loan book continues to perform exceptionally well, and, as Rina mentioned, our LTV fell again to 62%.

Unlike others in our space, who have chosen to report or move to reporting only origination LTVs, our Large Internal Asset Management Department updates our LTVs quarterly, and management spends significant time reviewing that work. We believe origination LTVs are significantly less useful in dynamic markets and think our shareholders deserve that transparency, which we will continue to provide. Importantly, we continue to have only 1 loan above 80% LTV and have seen significant progress achieving the business plan at that asset and expect full repayment.

Our other businesses are also performing very well. As we have talked about on prior calls, our property book has significant embedded capital gains, which are not valued in our book value. Our residential hold-on business has best-in-class warehouse financing, and we expect to issue our first securitization in the coming months that will benefit from securitization spreads that continue to improve, producing a low to mid-teens return on equity.

Additionally, this quarter, we made a small investment in our mortgage origination platform, giving us control over a growing portion of our deal flow. We also expect our CMBS conduit business, Starwood Mortgage Capital, to again be a steady contributor to earnings in 2018, and our platform has proven to be one of the few nonbank winners post risk retention.

We expect our servicing business to continue to be profitable on its own in the coming years while also continuing to support our preeminent CMBS and REO purchase investment cylinders. We cannot confidently make the high-yielding CMBS investments that we have since inception without the breadth of the 300-plus people in our REIS segment. We recently closed our second Freddie Mac small balance servicing assignment and hope to increase our agency servicing business in 2018 and beyond. We've begun to use resources in our REIS segment to build out a middle-market balance sheet lending presence to add incremental and accretive loans to our book.

Finally, our REO purchase cylinder has $350 million of assets with significant embedded gains that we will continue to harvest as recurring and nonrecurring gains in our book over the coming 3 to 4 years. In aggregate, these business lines continued to contribute significant revenue and ROE, offsetting the expected dip in the servicing revenue until 2.0 maturities lead to increasing servicing revenue once again.

In closing, we feel very good about the prospects for our company on both the left and right side of our balance sheet and have ample cash from this period of outsized loan maturities to continue to execute on our strategy. We have been in blackout during much of the recent dip in our stock price and view our common equity at 9.6% dividend yield as another attractive investment. We have historically bought back shares when we feel they are particularly undervalued, and I will remind listeners that we have $267 million of equity and debt buyback capacity remaining on our $450 million board-approved buyback.

With that, I will turn it to Barry.

Thanks, Rina. Thanks, Jeff, and good morning, everyone.

Not sure where to start. I mean, I guess you -- I should start as a frustrated CEO of a large enterprise because our stock obviously hasn't responded well, and I want to talk about 3 markets that are interacting here and what's going on.

The real estate markets, the fundamentals of real estate in the United States, which is primarily a focus or really excellent and probably among the most balanced real estate markets I've ever seen in almost 30 years of doing this, whether in the multi-sector, where we continue to see rental growth, the office sector, which is having rental growth, industrial sector, which is having rental growth, and medical office building sector, which is having rental growth, you're hard-pressed to really find tremendous weakness. There obviously is some uncertainty around retail, as Jeff pointed out, and we have very little exposure to the asset class. And where we do, I'll even argue it's not retail in one case, which we'll talk about. So the fundamentals of the property class are good.

And if you think as well as I do that the economy is going to accelerate with a $1.5 trillion tax cut and a $300 billion spending bill, it's -- you're just going to be good. And with that, it means commodity prices will probably rise, replacement cost goes up and our LTVs fall and values rise in properties. And you could probably even see our book falling to 50s a year from now, high 50s if, in fact, we see what I expect to see, which is inflation and rising rates.

So against that, money is pouring out of the REIT sector and the flow of funds against our company and all real estate REITs is tough. And it's hard just like City Hall. On the other hand, people aren't paying attention as they often do when you're traded around ETFs to individual names and how they react differently to different interest rate climates.

So recently -- earlier this week -- or last week, one of the banks, I'll point it out because it's so irresponsible, JPMorgan, report -- put a report out that basically had us as a sell because we're exposed to rising interest rates, which is actually completely untrue. It's factually inaccurate. The analyst has never actually been on a call with us that understand our book. 92% of our loan book is floating. We benefit from rising interest rates.

So maybe they're thinking about the property sector. Maybe they think our assets will go down in value with rising interest rates.

A point on how we finance our property sector in a REIT because we're long-term holders. We're not actually going to sell any of our assets anytime soon, except maybe some of our assets in Dublin, which have soared in value.

But looking at our apartments, for example, which are about 25% of our equity, both the deals we've closed and the deal that is pending, one of these deals is financed with 17-year paper at 3.38% fixed. The other deal is 10-year paper, which is the one we're closing right now, at 3.8% fixed. Our medical office building is financed with 6-year paper at 4.06% fixed. Our only floating exposure is the Dublin portfolio because we are -- we never intended to hold that portfolio forever. And so the market -- our Cabela's investment is 10-year fixed-rate CMBS at around 4.3%.

All these investments in the aggregate, including a 0 accretion on a small $100 million rough investment, which is less than 2% of our equity base in retail, so accruing the retail at 0, was 10.5% on -- cash-on-cash return out of the box, rising as the economy rises and stable as can be.

So when we started our business, we said we're going to be transparent, we're going to be consistent, we're going to be safe. And I think we built a book that's transparent, consistent and safe.

We're really nervous about complexity. I can see conglomerate discounts across the real estate space and that we might be overly complex for people to analyze. And you look at the way we're balancing our return on equity and having a quarter like this with some of the highest ROEs we've ever produced on the loan book and accelerating, as Jeff mentioned, the incredible first quarter we expect to have, I mean, had you told me 9 years into the cycle we could originate loans at 61% LTV at a 13% ROE on capital, I would have said you were nuts. And if you told me our stock was going to trade at a 10% dividend yield with 61% credit LTVs, I would have thought it'd be a 6%, not a 10%, or 9.6%. So I would have thought, hey, we're safe and we should be bought down because we're a mutual fund of real estate exposures. We're actually a whole bunch of AAA paper. And the shocking thing is the debt markets understand it. As we've gone to issue unsecured debt, we look like an investment-grade company in the debt market, so we look like a junk credit in the equity market. And the diversity of our book makes me -- as a major shareholder, lets me sleep at night, and yet the shareholder base seems to be lost and confused and caught up in ETFs. And trading as many other mortgage REITs have done over time -- they've exploded with a 61% LTV -- I don't think you're going to see us explode. Did you think -- what do you think? We'll probably dive -- fall 40% next year?

So -- by the way, we are happy these days to climb up in LTVs. We just haven't like we will do a loan to own. But the opportunities haven't arisen. Frankly, we would love to do them. People aren't borrowing like that today.

What is interesting, again, is the holes in the capital market, the ability of the team, our team, which has grown and is a great team in the origination business, to really drive and find great flow. We still get all the calls. We're back into Europe, making loans in Europe again, which is exciting. And we're not having to sacrifice return even though it is a competitive market. What you've seen in the credit markets, obviously, is spread tightening, dramatic spread tightening. So the overall cost of borrowing for equity investors is not -- probably gone up less than half of the rise in rates because credit spreads have come in as people search for yields. And they're looking at nominal yields.

So I do believe -- and one of the things we've -- we all talked about is that our book value is dropping, another place where sweeping computer programs generated -- looking at our company would misunderstand what's happening. What's happening is we're actually lowering our payout ratio. We're increasing our property book. It throws depreciation on to our balance sheet, the strategy to be able to conserve cash if we ever needed to because we won't have to pay it out.

We won't have -- when we start being 100% interest income, 95% of all taxable income has to be distributed. But now that we have this property book, we have a depreciation shield. But the negative impact is it's driving our book value down, which is different than our peers. But it's actually an asset because the assets are appreciating, not depreciating. But that takes more than a computer screen to figure out.

And so you have to dive down into the company. And as you know, our team is available and willing to talk to you about almost anything we do, unless it's completely proprietary. But I'm really proud of the team and the business strategy that we've executed.

Having said that, I'm not going to bang my head against the wall. And over a period of time, we're going to have to look at whether we are too complex and what are the things we can do to enhance shareholder value because paying out the dividend yield we have, the good news is we don't need any capital, external capital. The bad news is, we want to grow and it's hard to grow issuing stock at this kind of dividend yield.

So we have a competitive advantage. We've run this business with lower leverage also, which we get no credit for than almost any of our peers, maybe any of our peers. And yet, we continue. We've always gone for safety, not -- no, we haven't looked like a high-yield book. We haven't levered ourselves 80% or 90%.

So the margin -- thickness of our slices, as we said, the thickness of our B notes or our mezzanine paper has always been -- our goal is to put out much money as we could in these very high rates of return. Not to get a 14% on $5 million, make 11% on $30 million. And that's how we continue to run the company.

So I'm not sure I understand the disconnects in the equity markets other than the basic outflow of capital from all things real estate at the moment. And again, if you take the sum of our parts and you look at multiples on apartments, you look at multiples on office, on medical office, on Dublin office, and then you add back -- you take our peer's multiple on a mortgage book, you get a number much higher than we trade today.

And we -- as you know, we have harvested, and we will continue to harvest, as Jeff said, the embedded gains in our book over time, and we continue to create them. We continue to buy assets off of our books, and we continue to find attractive ways to deploy capital.

On the equity side, our equity book was meant to extend duration. Jeff mentioned $4-something billion dollars of repayments. That's capital we have to put out again at the same rates of return, and we're going to have a decreasing earnings stream. We haven't suffered from that, but it's scary. And you have to do that every quarter. You have to get your team -- so we went into equity. Long duration. Great, safe assets that are producing double-digit cash flows and very high ROEs. We can take the leverage up if we wanted to. But the strategy at the moment -- obviously, I feel good about the enterprise and so do the credit markets. But the equity markets are a little less excited at the moment and we're not sure we understand why.

It is a -- been a very good business, and the team, [CG] at Starwood Capital Group and the team at the REIS has really never worked more closely together to generate value for shareholders. We see a lot of deals. The -- one of our big apartment deals came from one of our lending guys and vice versa. So our deal that we just did in Europe came from one of the equity guys. So we're continuing to source as we can all over the world to continue to find attractive ways to deploy capital at rates commensurate with our historical returns.

And at this point in the cycle, I would have thought that would have been hard if you had asked me 9 years ago given you know what the world's like today. It's not a surprise. But Jeff mentioned the $1.75 billion book in the first quarter. And I think -- last time I looked at this, and I meant to do it right before the call, but I forgot, I think we're in the top 20, maybe 15 lenders, real estate lenders, in the United States at that size.

And so this is a broadly diversified company. We built it that way. We want to be able to deploy capital and to not force it into any [squeeze], and yet we are obviously dominated by our leading book, which is our basic backbone. So we're happy, really happy with our move in the residential markets. That's turned out to be a very good business with very, very attractive ROEs. And we'll continue to grow that, but it'll never be a dominant piece. It'll just be another place we can deploy capital. When commercial real estate somehow as a blip, we will be very capable in another sector.

So with that, I think I'll stop and thank my team for a great year, incredible year, and thank our board for their support in executing our strategy. And hopefully, we'll be talking to you about a $30 stock price someday.

I'll add to Barry's comment on Dublin, which was floating rate when we put it on, that we're now 3 years in. We're a quarter away from being able to refinance it, which we could do at either a tighter spread, floating rate, or a 2.1% fixed rate today is the quote we're getting. So very easy for us to lock in a very low attractive fixed rate there.

And let me go back on the equity markets. So I think we should just comment on this. The apartments we own, you can look at apartment multiples, they're probably 5% caps today, 5.40%, and there are 6%. That's 20x FFO. Medical office, 20x FFO. Dublin is a 4.5% cap market, and we would sell those assets at 22x to 23x, 24x EBITDA. We haven't told you what we've done with Cabela's, but we believe there's an arbitrage between what we paid for those assets and what they're available to be sold for. And I can talk about Cabela's credit if you'd like. At some point, I think that was quintessential of Starwood having conviction in a credit. And what our thoughts are, I'll be happy to talk about in the Q&A.

So these asset classes trade at much higher multiples than a debt -- than a mortgage book and should drag us north. And frankly, they're a multiple of book that is well beyond any of our peers', which are simply collections of paper and yet that hasn't succeeded yet.

So I sound frustrated. I probably am frustrated. But I'm comfortable. And as you know, I have never sold a share of stock. So thank you.

Operator, we'll take questions now.

(Operator Instructions) And we will hear first from Douglas Harter with Credit Suisse.

Can you talk about the -- your available liquidity and the ability to balance the strong pipeline you referenced and the opportunity to repurchase shares?

I'm sorry. There was noise in the hall. Can you get them to stop talking out there?

You asked about our ability -- we have like $1 billion of capacity, including $260 million of approved repurchase capability. Rina, you might know the cash drag we experienced through the quarter. It was -- we raised our debt when we could. And the thing we pay off are our credit facilities with the proceeds, but it does create an underlevered balance sheet. That is not insignificant. We know our pipeline, so we can see what we're holding cash for but using a lot of cash. And Rina, you have an estimate of what that might have cost us this quarter?

Probably about $0.03 -- $0.02 to $0.03 for the quarter because we had cash lying around to pay off the converts that we need to -- that are maturing tomorrow. That was $370 million that we sat on.

The converts.

So I would say about $0.02 to $0.03 of drag that we got in the -- yes, tomorrow.

Okay. Well, good-bye, converts. I hope you enjoyed owning us.

But Doug, it's Andrew. I mean, just in terms of capacity, to your question, I mean, where we sit today, we have plenty of capacity to execute on the business plan and, to the extent we wanted to, be out in the market repurchasing stock and not to have to access the incremental new capital.

Right. And both are capable. But not only cash but also our undrawn...

Approved and undrawn.

That's undrawn (inaudible).

That is right.

(inaudible)

Yes. Committed and undrawn capacity, which is probably well over $1 billion combined.

So I guess just to Rina's point that there was -- might have been a $0.03 drag from cash, I guess since the converts pay off tomorrow, I guess should the first quarter see a similar drag? And when might that drag be reduced?

We put out somewhere in the area of $150 million a month of equity. And if you use that number that Barry just said of around $1 billion and you're 5 or 6 months probably away from being to a more normal and if you increase the pipeline a bit, which we're hoping to do...

Is your number net? The $150 million, is that net?

That's net of repayments.

No, that number is just equity out.

Okay.

That's right. Okay.

So yes, I agree with Jeff's comment. I think you're going to see that drag for the next 6 months.

Reducing each month for the next 6 months.

It's in our...

That's right, that's right.

Our forecast. It's not -- again, it's not a surprise.

(Operator Instructions) Now we'll hear from Jade Rahmani with KBW.

I appreciate the frustration on the stock price, the dividend yield, and personally think management has been doing the prudent thing in terms of pivoting toward unsecured debt issuance as well as continuing to incubate new business lines. I just wanted to ask about unsecured debt. Is the motivation about having more flexibility in terms of the types of deals that you're able to pursue because warehouse financing can be somewhat constraining? Or is it a risk management tool in terms of diversification of the liability structure?

How about all of the above? And deep in the back of my mind, God forbid the world ever ended, you can buy back unsecured notes in the open market at discounts to par. That's very hard to do with a bank. So it is -- that is a proven methodology in terrible cycles to keep these companies afloat. And I'm not anticipating that happening, of course, but it is an asset to us. I will -- I'd say that it's cheap. It's very important to rating agencies that we issue unsecured debt and unencumber assets, and it gives us maximum flexibility. So what we do, as you probably know, is we attribute that in our minds to different assets that are unlevered, and we look at like our leverage strategy and see if we're underlevered or overlevered. And that might change in our view. It's our -- it's management's view. So we attribute -- even though it's unsecured, in our minds we're tagging it to a deal and saying we're levering it with unsecured debt.

Yes, I mean, Jade, at LIBOR plus 160 area for our recent financing, you guys have seen everybody that's causing a lot of CLOs to get down on the market. The CLOs have flashy headline numbers of what their financing is today. So these are floating-rate assets that can prepay tomorrow. And as they do prepay, which they do, you pay off sequentially your AAAs and your cost of funds goes up. We think that the CLOs that are getting down are well north of LIBOR plus 200 after all of that is factored in. And in addition, you have to show the world your hand. You have to give the documents on every loan that you have. Those are assets that we're going to go out and make the phone calls on and already have every time we see somebody's CLO out there. So we think it's significantly better. Then you throw in the flexibility that Barry talked about. From a flexibility perspective, we could assign unsecured to a single loan. But we could also say, well, the warehouse lines or A-notes are willing to lend us 70% of our loan balance at x and 60% at y, and Y is cheaper, but we could do at 60% at y and top it off with that 10% of our corporate debt. And every one of our loans can then be priced off a cheaper liability structure. And every 10 basis points is 30 basis points in yield or IRR, and we think we'll save 20, 30, 40 basis points of financing by optimizing the strategy that others don't have. So we think it's a -- it's net, a big win and it takes a lot of work in creating the unencumbered assets and having diligence to do that, and it's something we stuck to for 4 years to be able to reap the benefits today.

In terms of the 1Q investment activity of $2.5 billion, can you give some color how that splits by segment as well as the types of deals on the lending side that you're looking at?

It's all over the place. And that would be another -- I should have made that comment. If you told me we'd have a book that looks like we do, it's not dominated by hotels, I mean, I would have been really surprised, right. I think if you're asking by segment, it's pretty diversified. I haven't seen the stats, but I've seen we approved sequentially the deals. Do you have that?

Yes, we have.

Yes, I do. It's $1.9 billion in our Lending Segment and then $450 million in our Property Segment for the rest of the down rate portfolio. And then the rest is sort of split across.

In terms of the $1.9 billion in lending, just the level of transition, the types of deals you're doing. Are they construction loans? How much is whole loans versus mezzanine? And what's the level of credit risk, do you think?

Are you stealing our first quarter earnings call right now? What we're going to talk about?

Well, I think you're talking about the stock price and valuation, and there is a perception that you guys have more credit risk than, say, BXMT.

Yes, our construction book continued to fall, Jade. It stayed at a relatively low level as a percentage of assets over the last year. We're significantly lower as a percentage of our lending book than we were a year ago in our lending book. So despite this opportunity in construction lending, we have not jumped in with both feet and moved the book entirely in that direction. The first quarter pipeline is a mix of construction and nonconstruction, much -- it looks a lot like the existing book today. But I would say it's important to note that our construction book has not grown.

And I understand there is a development, and I'm the first one who -- but they're building. If you're building a high-quality sponsor and you're lending him money at 50%, 60% of what it's costing him to build a project, I go to bed every night hoping he defaults and we can buy that asset at 60% of the cost of construction. I know exactly what it's costing, right. So this isn't a guess on buying something and it's a 4.5% cap wherein I'm hoping it's holding at 4.5%. I know exactly what the cost of construction is in getting a brand-new asset. And we're smart enough, having now a $60 billion book and incredible data, to know where this asset -- what it's worth and what it will rent at and what the expenses are and what they trade for. So this is -- we're an equity book team looking at debt deals. And nearly every time we look at a deal in Investment Committee, I mean, today, what are the guys who buy assets in that sector in the firm think of it, right? At this moment there's an interesting deal right now in the hotel space. And it's a deal where we're not -- anyway, we look at these things very closely. And I would put our LTV up against any company in the business and argue with it. Frankly, I'd say it's safer. We've been taken out of positions we worried about by other public REITs, and we're delighted to get out of those deals. So I would say LTVs are -- sometimes, in the judgment of management, I would say ours are conservative.

And Jade, our book sets up very well, as we've spoken about before, for construction loans. The large, diversified nature of it and the amount of repayments that we have coming in from various places ensure that those -- that we always have cash coming in for those future fundings. Also, the fact that we have unsecured debt, which has ultimately significantly more flexibility, is -- makes it a lot easier for us to be competitive in construction, where there are less competitors. So we can be competitive because we can use high yields that they have none.

They're -- it's not a material portion of that, so.

In terms of the uptick in the special servicing balance this quarter, is that sort of a onetime thing and you expect further runoff this year? Or is there any inflection in the trend?

Rina?

I can answer that. We actually took in a transfer from another transaction that brought in a significant amount of new loans into special servicing from that. So I think the trend is stabilization of that number over time. I don't know if we'll see increases like that, but there have been a couple of more transfers than we've had in the past.

We would -- going out of topic...

We did see a...

It's always a little subtle, but we'd point out that if rates were to spike, our servicer would probably have -- be busier, our special servicer. So we had that -- we've always had that little guy, and that little guy is only worth $60 million or $59 million right now on our balance sheet. So it's like the servicers carried a virtually nothing. It's like what, 1% -- almost 1% of our assets. And oh, that's -- it's a nice little option to have in a business that -- and the rest of it -- the businesses of the REITs are operating great. That one's operating great, too. It's just the planned decrease in its book over time, right. And then their other business have to make up for it. We know it's coming.

The Freddie Mac agency servicing you cited, yes, how big an opportunity is that?

We're doing the small balance deals as a starter. Hopefully, we get involved in the larger case series soon and prove ourselves there. So I think when -- with our ultimate plan, it's the decent-size opportunity, but we're taking the baby steps you have to take to get involved in the program. And we're going to do a great job on the small balance and then see if we can get into the larger balance business.

And lastly, since you guys are pretty bullish on multifamily, what's your interest level in the GSE multifamily lending business? As I'm sure you know, the FHFA slightly reduced their lending caps but volumes are expected to remain pretty resilient. And that business line would seem somewhat complementary to your existing businesses as well as express the positive view of multifamily that you have.

It's something we look at. We leave it at that.

And we have time for one more question, and that will come from Fred Small with Compass Point.

Just leaving aside the depreciation shield and the potential ratings agency impacts. What's your level of frustration with the implied valuation for something like your multifamily property assets inside of Starwood compared with the public market valuations? And assuming this persists, what's the probability that you'll take some action to either separate these assets or monetize their valuation discrepancy over the next 12 to 24 months?

I'd call it increasing frustration. I would not say it's a panic. We're here for the long run. And I -- look, as the property book has grown, it's a more relevant discussion to have, and it's something we have to look at. I mean -- but is it in the long-term interest of the firm to spin out a property book? Again, it's served the purpose of extending durations and giving us, unlike a loan, hopefully increasing cash flows. We expect -- there are fixed bumps in our medical office building portfolio and for -- in the rents. So their cash flows are going up. And the same thing, I think, would be true over our multifamily assets over time. So I think we like them. I personally like -- I own a lot of stock. You can look it up. I mean, I like them in the book. I'm happy -- that was my -- that was our strategy: Buy assets we want to own for a long time. And that's how we chose the assets. And -- but, I mean, if we can't be competitive with a dividend yield like this, when we have to issue stock -- look, I don't want to issue stock at this kind of dividend yield. So it's too expensive to us, and we should be buying it in. And that is the -- obviously a very good place to deploy capital. So we are -- obviously, our stock is a little higher than it was at the height of the panic recently, and our thought was -- and my thought was that we're getting in the way of a freight train and nothing to do with us. And we are in a -- we would have had to, had we rushed in the market, issue stock to buy back stock. We would have had to accelerate our earnings release for you and it would have looked really silly. And we decided at the end of the day. Nobody knew how long about whether it was going to last and how much stock we were going to buy. So -- but it is something -- I mean, you can clearly see that we're -- we've done it before and we'll do it again. We'll buy our stock back. So it's hard to argue, But the best credit isn't the 9.6% dividend yield of our firm. So -- and we're partners with our shareholders. We don't want to see the stock at these levels. I -- the ETF flows will settle down. I mean, the withdrawal of funds from the REITs, they will find a level, and then I guess it will backfill. People will buy -- comb through the debris that they created by selling all of the REITs, and they'll find the companies that are going to perform better in higher rates environment like us, and they'll see it in our earnings. Others will be going down. Look at the resi REITs right now. They are having a bitch of a time, right, but they have mismatched books. We have perfectly matched books pretty much. And we never create an S&L crisis here. We never floated -- we never redeem capital. We never floated short and have long assets. We didn't borrow in repo paper and sh**. So our floating to floating, fixed to fixed and pretty much matched book. And so we don't have that kind of exposure. Now people have longer memories, I guess, and think people take crazy risks. We haven't. And again, that's why there are some companies in our sector that have gotten a lot of trouble being conglomerates and diversified. I think you make up for that with full disclosure. We tell you what we're doing, and you can model. I have trouble modeling some of these companies, so I won't mention them. But I'm lost. I can't figure out what's going on. And they don't provide enough information for me to figure it out. We will give you all the information you need, as long as it's not proprietary, to figure us out. And you take your own view of the risks we're taking in our enterprise. So we want you to partner in our success and benefit all the shareholders. So we are transparent. We've won the award 4 years in a row from NAREIT, the most transparent gold book. What you call it? The Gold key award?

Yes, Gold -- kind of gold medal.

And we're going to do more with Zach sitting here, and he'll tell you whatever you want to know, other than the -- who the borrower is necessarily and the day the maturity of loans, so we don't wind up having 4 other guys calling the borrower. So we are -- I'm really pleased with our -- you should be very pleased with our loan origination volumes. I mean, at this point, given what you know the world is like, I mean, they're not -- no other stressed bank in the world. But even increase in Greece, they're rallying. So I think we compete head-to-head in the marketplace every day. It's competitive, but we have a very good cost of funds, which Jeff and the team have built, and we continue to beat up our banks on our credit facilities and the spreads on those facilities. And we're not being impacted. It's not like we lend at 375 over or 295 over. Over is the over for everyone. We're not at a disadvantage with rates rising. They have to borrow from somewhere. So we have to have the most competitive spreads, the cheapest borrowing costs and produce the highest ROE. And then it's a virtuous cycle. And that's what we're trying to achieve. So I think the market is freaked out. But things like that JPMorgan report, and there was a whole list of 50 stocks you should sell in a rising rate environment. I wrote to Morgan, and I said, "The analysts should take their head out of their butt because that was really an awful and stupid report. It -- they should have looked at our company before they did a computer screen and looked." They said they own debt and that's all they did. So it was irresponsible, but I've lived through that before in my career. It's not a big problem. Just stupid. But know the difference between facts, fake -- what they call fake news. That was fake news. That was actually a fact. I think that's it, right? Or one...

One more.

One more? Okay?

And now we'll take a follow-up from Jade Rahmani with KBW.

Do you have the amount of prepayment income in the quarter?

Prepayment penalty?

Yes, Jade -- yes. Yes, we've got prepayment penalties and accelerated depreciation of $11 million in the quarter, which is flat to last quarter.

That's one that more or less every quarter, I mean, you're always going to get those, Jade, right? I mean, like, I don't think ask JPMorgan about prepayment penalties on their earnings. Now we're not JPMorgan, but it's kind of like we're in the business -- so we own, what, a $12 billion book? $11 billion?

$13 billion.

Yes, with $13 billion. I mean, we're bound to get some, especially if spreads came in, Jade, right. As spreads -- I mean, people are refinancing at lower spreads and trying to extend their maturities, so we're always going to have them.

Yes, we try to calculate what your underlying yields are, excluding those just to see the spread trends.

Yes. Well, the originations numbers we quote to are the spreads to maturity, right. So they -- the IRRs actually went up higher oftentimes because you get the fee in and sometimes the fee out. And the paper is shortened because they -- a lot of these assets are those in empty [10] and -- they get a 10%, they go refinance it as soon as they do. And so your IRRs go up, not down. But it's -- sort of it's -- the good news is you're getting a higher ROE on your paper. The bad news is you paid out for less period of time to redeploy it. So it's a good question, and it's a fascinating situation.

All right. Thank you, everyone. I hope I'm less frustrated next quarter. Appreciate you listening. Thanks for your time.

And with that, ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation. You may now disconnect.