Starwood Property Trust, Inc. (STWD) Q2 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Starwood Property Trust's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Sossen, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, operator. Good morning, everyone. I'd like to welcome you to Starwood Property Trust Earnings Call for the second quarter of 2012. With me this morning are Barry Sternlicht, the company's Chairman and Chief Executive Officer; Boyd Fellows, the company's President; and Stew Ward, the company's Chief Financial Officer. This morning, the company released its financial results for the quarter ended June 30, 2012, and filed its Form 10-Q with the Securities and Exchange Commission. In addition, the company has once again posted supplemental financial information to its website. These documents are available in the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I'd 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 these 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 in the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered an 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 the company's filings with the SEC at www.sec.gov. With that, I'm now going to turn the call over to Stew.

Thank you, Andrew, and good morning. This is Stew Ward, the Chief Financial Officer of Starwood Property Trust. This morning, I will be reviewing Starwood Property Trust's financial results for the second quarter of 2012. I'll also highlight several items pertinent to both the second and third quarters as well as our overall business. Following my comments, Barry will discuss current market conditions, the state of our business and the opportunities we see as we look forward. For the second quarter of 2012, we reported core earnings of $50 million or $0.45 per diluted share. On a per share basis, this is in line with the $0.58 per diluted share we reported for the first quarter when adjusted for the $0.13 per share onetime gain realized in the first quarter due to the early repayment of a large U.K.-based mezzanine loan. 2012 year-to-date, core earnings totaled $105 million or $1.02 per share. On a per share basis, this represents a 19% increase over the $0.86 per share recorded for the same period over the prior year. GAAP net income for the 3 months ending June 30 was $44.5 million or $0.40 per diluted share, slightly above the $0.39 per share recorded during the same period for the prior year. As of June 30, 2012, the fair value of our net assets was $19.65 per diluted share. For the same date, GAAP book value per diluted share was $19.13. Both of these figures are above the March 31 levels of $19.52 and $18.96, respectively. In fact, the fair value level of $19.52 per share is the highest since the IPO. The primary drivers in both cases were improvement in asset valuations associated with the continued improvement in credit markets and spreads and the positive impact of the accretive $457 million equity raise we completed in April. Now let me outline some of our significant activities for both the second quarter and third quarter today. During the second quarter, we closed $433.1 million of new investments. The most significant transaction of the quarter involved the origination of $170 million first mortgage loan on 2 class B office buildings in the SoHo District of New York City. The transaction had an initial funding of $135 million and provides the borrower future advances of $35 million to pay for redevelopment costs to pay tenant improvements and leasing customizations. We anticipate closing the sale of a senior component of a loan to a major money center bank within the next 30 days. This will leave us with a subordinate debt piece that yields approximately 11.7% and represents the slice of the capital stock between 45% and 54% loan-to-value. Other noteworthy transactions for the quarter include the origination of a $73 million mezzanine loan collateralized by a portfolio of 6 office buildings in the Washington, D.C. area, and the origination of a $30 million mezzanine loan collateralized by a prominent office building in Philadelphia. These 2 investments are expected to produce annualized returns of 12% and 10.5%, respectively. We've also been very active since the beginning of the third quarter, closing new investments totaling $249 million. These new transactions included the origination of a $51.5 million first mortgage secured by 3 hotels located in Charlotte, North Carolina and Princeton, New Jersey and Lynchburg, Virginia that we anticipate leveraging through the sale of an A-note to a banking institution. This transaction, as well as the previously discussed loan we closed in downtown New York City, highlights one of our core competitive advantages. We have the size, scale and dedicated staff necessary to offer one-stop financing solutions to our borrowers by originating a whole loan and then subsequently manufacturing and retaining a compellingly-priced subordinate component of the debt stack through the sale or syndication of a senior component of the loan through a bank or life company. With the addition of these investments, our target portfolio stands as of last Friday at $3 billion, with the current return on assets of 8.9%, a leverage return on equity using our current financing balances of 11.2% and a pro forma fully leveraged return on equity of 12.8%. We think this represents compelling risk-adjusted return to investors in a near 0 interest rate world, and in light of the portfolio of average last dollar loan-to-value ratio of approximately 65%. Our activities since the end of the first quarter have also included several interesting developments on the financing and capital fronts worth mentioning. In April, with the compelling near-term pipeline of potential investments, we sold 30 million shares of common stock at a net price of $19.88 per share, resulting in gross proceeds of $457.3 million. Importantly, pricing of this new capital was accretive to existing shareholders as the transaction was executed at a time when our stock was trading at a premium to book value. On June 22, we filed an ATM equity program, which allows us to sell shares from time to time with an aggregate sales proceeds of up to $250 million. We have not yet sold shares under this program, but consider this an important tool with which to efficiently size and time capital raises coincident with our capital needs. We've also recently expanded our financing options in 2 important ways: First in early July, we closed an $80 million repurchase facility with a new banking relationship. The closing of this facility allows us to transfer assets previously financed on our primary, Wells, and fee bank revolving facilities, essentially freeing up an additional $80 million of revolving capacity and diversifying our sources of financing liquidity. This facility has an initial 3-year term and can be extended for 2 additional 1-year periods. Of more significance, this past week, we closed a $250 million corporate star revolver. This facility is unique in a number of ways for us, but importantly, it now gives us the ability to finance our originations of first mortgage loans on the day they close, avoiding liquidity and earnings drag associated with the 45- to 90-day lag we normally experience, while we either seek financing approval from our conventional secured financing providers or negotiate with purchasers of A notes. This facility will keep us -- will allow us to operate the platform more efficiently from a liquidity perspective, which is something on which we relentlessly focus. Now let me bring you up-to-date on our current investment capacity. As of August 6, we have $63 million of available cash, $183.5 million of approved but undrawn financing capacity and $172.2 million of net equity invested in RMBS securities. With this, we have the capacity to acquire or originate an additional $300 million to $500 million in new investments. This capacity is expected to be augmented over the next 2 quarters with aggregate cash proceeds from loan and security repayments, net of any required debt repayments of approximately $60 million. Proceeds from A-note sales of approximately $130 million and additional financing facilities we're evaluating associated with certain potential pipeline investments. As announced in our press release, our board has declared a $0.44 dividend for the third quarter of 2012, which will be paid on October 12, 2012, to shareholders of record on September 28, 2012. This equals the dividend paid for the last 5 consecutive quarters and represents a 7.8% annualized dividend yield on yesterday's closing share price of $22.48. We're also raising guidance for the full year 2012 core earnings per share to a range of $1.80 to $1.95. I'll now turn the call over to Barry for his comments.

Thank you, Andrew. Thank you, Stew. Good morning, everyone. I have to say this is about a 3-year anniversary of our existence in the firm. And it's almost to the day actually. And I think it's really quite remarkable that we started with a $900 million pool of cash and we've originated or acquired over $5 billion of assets, some of which have been recycled over the last 3 years. And I think it's really the core strength of the company that with now a nearly 40-person dedicated team and augmented by the 160 people in Starwood Capital Group, we've been able to source, find, structure, sell down and create this extraordinary pool of loans in a market where there's no yield. And I said in the last call, when you look at a 65% LTV book has stabilized fully levered will yield over 12%, you know there are a few things. First, if you take the loans that are 0% to 50% LTV, those are AAA, and they should be yielding LIBOR plus 50 in this market today, so the excess yield that created also by the team is extraordinary. And really my congratulations to the entire team for this execution in this marketplace. And then this most noteworthy thing for the company or a major milestone was this first on secured credit facility for the company. It shows a shift of both the power of the scale of the enterprise, but also a shift in our lending relationships looking at our scale of saying, it really says no issues. Then we have never had an issue for the first 3 years of our existence on any of the loans we've originated. None of them have ever go into the monetary default. So I think our underwriting has proven to be a unique blend of both the equity teams and the debt teams getting together and scraping and arguing and fighting and clawing over structure and over LTVs has really paid off, so far for the shareholders, which is fantastic. When we went public, we told you we will be predictable, we'd be safe, we'd produce a compelling yield and we do it in an explainable manner with state-of-the-art transparency. As you can see from our massive supplement, which is unbelievable. We are doing all those things so I think it's great, and we think you ought to know what you own. We're a big shareholder along with you, and we're very comfortable of owning the stock in this rateless world. It's a really interesting market today. Rates have been all over the place. The 10-year was way below 1.34%, I think it hit, it's 1.60% today. Who would have thought it could easily be 3.25 in 12 months, which is where it was about 14 months ago. So we are originating loans in sort of the way we always did. Despite the rally in bonds, we've not -- our LIBOR spreads have been able to come in primarily because senior lending has been tightening. Spreads in the senior lending have gotten tighter and tighter towards -- by banking institutions have been removed because there's virtually ferocious demand to put out capital. And when one bank removed the floor on a LIBOR loan, all the banks followed, and that's allowed us to lower our spreads and still be competitive in the marketplace. But it's not perfect. I was talking to Boyd and Stew earlier today. And we said the most compelling thing and most important competitive advantage we have is when we can do the whole loan, we can originate a loan at LIBOR plus 5, which obviously is dilutive to our dividend yield, but we can lever that and create a double-digit yield and a junior note. I also want to distinguish what we're doing because I always challenge the team on why we didn't participate in this BPs acquisition or -- some of our competitors have done volume BPs and securitization. You have to look at again the width of our mezzanine. They are quite wide, they go from 45% to 65% or 50% to 70%. They are very wide swaps of paper. And essentially, when we're doing that, when we originate the asset, where we know the asset and we originate the loan, if there's a default, we actually would love to own our asset at the basis at which we wrote the loan. In these BP securitizations, you might find a piece of paper from 70% to 73% LTV, and it operates as a first loss position in these. And so any one loan underneath going bad and you are the first guy to absorb it. They may have the same coupon, but they have totally different risk reward profile. And the more sophisticated you are and the more you understand our story, the more I think you'll like what we do and you'll take some surety that we can keep doing it, which has been interesting. I think the pipeline looks pretty good, and we are looking all over the world at investments. I think one of our challenges going forward will be what to do about the growing pipeline of debt opportunities in Europe. It's probably the biggest hole there is in the mezzanine markets. It's something that the papers can be quite large and we are at a sort of a competitive disadvantage, slightly because we're hedging these assets back into dollars and that probably scrapes it hundred basis points off the IRR. There are other people who aren't doing that, so to the extent we have to compete with them, that's a disadvantage. So we're thinking about what, if anything, we're going to do if the pipeline in Europe continues to grow. And again the appetite for the size of the piece of paper are enormous, there is really no junior debt. And there's a lot of -- there is still appetite, you can still get loans at LIBOR plus 450 in a senior but we continue to be astonished at the spread differential between Europe and the United States right now, which shouldn't be surprising given the banking situation in Europe and the fact that most lenders in Europe are pulling back. The French shores and the Spanish are trying to shore up their own sovereign debt, and the British banks backing the British properties. So the German banks, some of them are completely gone from the market have been quasi-nationalized. We're also watching regulations in our industry. We're very involved and very anxious to see where the whole requirements wind up for originators. We are a huge proponent that people should hold or hold the junior note or BPs or the retention of what they originate. I can't imagine a better alignment of interest. There's a proven case of how this works in the DUS lending business. If you look at the DUS lenders, where they have a 5% guarantee essentially on the loan in top junior 5%, they basically guarantee the default rates on those loans is dramatically better than loans that are originated in the conduit market and collapse in the real estate correction. So you can see that when you are forced to have some hold or some skin in the game, it has been a healthier, better market for investors, and I can't see any reason the Treasury and the Fed wouldn't force banks to keep a piece. And by the way, it's obviously self-serving, we would love to originate those loans. And then they can take down any size they want of our loan and the A piece or incline the stack and then sell it on. But we're the originator and we are a holder. We eat what we originate. And we like that. And I think, also, one of the other things that's happened over the last 3 years is that we get phone calls now. I mean, people who were initially afraid of Starwood Capital that we are piranhas and we would make a loan and then try to pick your property back. But I think as we've done deals with people like Blackstone and others, people have gotten comfortable that we really are simply trying to originate performing loans, and that's been our business from the start and we don't want the keys, not in this vehicle. As you know, that creates lack of transparency, a lot of costs we can't predict and volatility in our earnings and it's been a business that we've decided to stay away from and we've done so to date. I also want to point out that even though we've originated $5.1 billion, I think the permanent book is $3 billion now after the -- so we have round-tripped over $2 billion of capital in our 3 years, which is quite efficient. And I think one of the things that we are trying to do is utilize. We have a lot of low-yielding first mortgages still on our portfolio. You can see it in the columns in the earnings release. There's a column that says ROA, the unlevered yield. The second column is return on assets in unlevered yield -- the leverage return as they are levered today. And the last column which reads optimal leveraged return. And if we drew the facilities that we have arranged on that capital, you can see the power of the leverage. But we don't need those leverage, so we're not borrowing it. And what we've been doing every time we raise money is we pay off these lines against these positions. And so the ROE, the ROI assets, ROE of the entity drops and then it rises and it's creating a -- it's not optimal. And again as we grow and as these any one loan maturing becomes less critical, we can more efficiently manage our balance sheet. I also think it's kind of cool that our book value is the highest it's ever been, hopefully at a current pace, we'll pass the IPO price as a book value, which is sweet. It's hard to do obviously when you have to pay out all your earnings. And that leads me to another point which Stew did not mention, is that we will have to examine whether we have to do a special fourth quarter dividend based on our earnings projections and what we see happening in the market and the pace of what we're doing. That's something the board will have to decide and it actually won't be -- it will be what it'll be. It will be whatever the REIT requirements are for us. So we decided we'd do so with special dividend and not a raise of the bar every quarter with moving the annual dividend. We also continue to look at other verticals. Stable businesses with our lines of business that we think there are holes in the capital markets to fill. We're exploring a number of industries to which first mortgage financing is not available today. There are other areas where banking laws changes. It will provide significant pipeline opportunities for us. So we're pretty pleased at where we sit today. There's a very large commercial money center bank that says they have a fortress balance sheet. And I think we have a pretty good fortress of book of loans. And we are seeing, as I said, a lot of transactions. And again, our biggest issue is maximizing, being able to take down large whole loans. We're $2.5 billion, and we're the biggest commercial mortgage REIT in the country but we're a teeny-weeny company. If you're going to do $150 million loan, it's hard to do and those are the loans we want. They're better properties. The SoHo loan, $170 million in Manhattan in a -- and those are some of the highest rents in Manhattan. That's the kind of deals we need to do. And to do that, we need to be -- have the capacity to write that whole loan and then sell off the junior note. So again, I'll also say, that this corporate facility is not to be undersold. This is a big deal and it will allow us, as Stew said, to manage our capital much better. We now can make that whole loan and at 5.25% and not be dilutive. It will be accretive to that financing facility. So there's about 5 banks that participated in that syndicate. And we want to thank all of them. We could not have done that 3 years ago. Actually, we wouldn't even come close. And I will say on the portfolio side, again, when we talked about going public and predictable and safe, we've really monitored the diversity of what we're doing by state, by product type and the pool of the -- while we still have some hotel concentration, that's an asset class we know pretty well. And we still remain very diversified. You can see it by the originations we've done some office deals in places like New York, who would have thought. And the LTVs have been exceptional. We have no commercial NPLs. And personally, we didn't expect to have any. So we think we're in a good place today. I think our dividend yield is quite compelling. I wish my hedge fund first portfolio was producing 7%, 8% unlevered. You can lever our stock and earn a 15 today if margin are on stock, that would make us the best performing large macro fund in the world. And I giggle. I asked our guys to produce the IRR on the paper that's round-tripped into our company because if we were a hedge fund, we would really be able to retire. We've done a really good job, I think, for shareholders and I'm slapping my team on the back because we don't often celebrate our successes, but we've done a really nice job. And I look at apartment REITs that are probably yielding unlevered 4% and we're producing twice of that, and that's the best asset class for NOI growth. So if you think cash flows are going to double for apartments, they won't. There'll be new construction and they will never get to the 7%, 8% unleveraged yield that our mortgage REIT is producing today and it gets worse from there. I mean, obviously yield is valuable but as long as we can continue to produce this kind of risk-adjusted returns, I think we have a great future in front of us. Thank you very much, and we'll take questions.

[Operator Instructions] We'll go first to Joshua Barber with Stifel, Nicolaus. Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Would you be able to talk a little bit more about your RMBS investment strategy? It looks like you're buying private label RMBS at pretty decent face discounts, but you're still counting them as available liquidity. So is it that the investments are attractive today but you'd sell out for the right price? Or is this actually part of the longer-term strategy here?

Yes and yes. And we've been doing that for 3 years. We're very comfortable with our sub manager on that. And yes, if we have to liquefy if, we could. It is a very good cash management strategy and we've -- for us. And it is -- the guys doing it are experts in the field and we've monitor what they do all the time. Stew can talk more about that, but we're very comfortable and obviously, I think our book value is higher than the fair market, but I don't think we've been aggressive in stating our fair market value. Obviously, rates have fallen and LTVs are probably lower than we've said they are. We only review that really once a year. So And I think in the RMBS book, I mean, we know that what's going on in residential real estate equity company owned nearly 20,000 lots, and we have a homebuilder in our portfolio. So when we saw that RMBS was underpriced and we were happy to continue to invest aggressively in this space, especially in this, you're right, the private label, non-agency paper, where we thought residual values were too low, that people were really taking a draconian case and pricing was bizarrely cheap. So while it is only $173 million or about, what, 8% of our equity, 7% of our equity, it's not that big. We have used it historically. We've been able to lever it or unlever it very easily. We can get very high leverage against the portfolio if we want.

Very low cost.

Very low cost. I mean, it's the lowest costs debt we can get. And how high can the leverage go?

The way that current facility works as much as 75% of the value of the collateral. We're well inside of that. We have -- we're in the $288 million to $290 million. I think we have $125 million drawn, but we've revolved the balance. We probably revolve the balance 5x or 6x a month depending upon what type to manage our cash.

As we get cash, one of the things we start out with was really focus on short paper with no -- what we decided there was no principal [ph]. We said keep it at 1-year, 2-year paper. And we've done that so -- and we've extended the maturity slightly. But again, we can use it as we can lever it up, as you heard, we have over $100 million of additional borrowing capacity against the RMBS book we have as stated and that creates a lot of liquidity for us. Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Okay. But it's still fair that you're seeing it as a cash management tool and not -- I mean, you're buying RMBS with a $60 million fixed discount. And I don't know if you get all that back, but if you think you can get some of that back in the next year, would you rather...

We like what we're doing. We like what we're doing. We consider and I'm not going to talk about how we're doing this, but we're very comfortable here. So yes, you're right, this is a cash management tool. Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Can you also remind us what your total built in exposure today and what the total, I guess, face value discount is after the second quarter acquisition?

We have $170 million of equity.

Okay. We have a total equity -- the equity is $170 million. Total asset investment basis of about $565 million, $566 million, with about $400 million of financing against it, so $170 million net. And I think the face on that is -- our average face is about $91 million. So call it up $650 million or some number about like that, $660 million in face.

And it's trading today around $97 million.

And if you look in our supplement, it's among the lowest last dollar LTVs of any asset we own.

But it's 6 points on $500 million, so it's $3 million again embedded that hasn't been realized, something like that. Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Right. Okay. And some of that might run through the third quarter? Unrealized mark-to-market?

Yes. I suppose that's true. Do we do that?

Well, we accrete, we do it on a level yield basis.

We're not straight lining with market prices. We're basically accreting the discount over.... Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Okay. You don't have to mark that to market even though it's a CMBS. Got it.

Well, it's marked on top of that, but what goes through, what we've described as core earnings is just the accrual.

[Operator Instructions] We'll go next to Stephen Laws with Deutsche Bank.

Can you talk a little bit about the financing market? Seems like you guys have done a good job getting new lines put in place, it's going to allow you to continue to grow the portfolio grow or the cash flow drag you mentioned on the A-note originations. Can you talk about what you're seeing out there? Is that something you guys have put in place with your scale and platform that you're benefiting more or lenders getting more open with financing lines, are counter-parties open with credit facilities?

Well, the one thing I'd say that's hidden and an issue for us is the original lines that we build the company originally. They're actually way over market today. The spreads will probably come in 100 basis points from what we originally did but we're stocked. And that's good news because eventually, if they roll off, which -- I mean, the good news was they got a 5-year facility when nobody could and that's funded all of our paper. But the bad news was had we taken a risky route and then a 1-year facility and rolling 1-year, we would've within the LIBOR curve down and spread market down because I think spread is tight. What do you guys want to say about the question about financing facilities, Stew?

And I think your comment's a good one. We could probably replicate, if we were able -- if we wanted to -- if it were financially reasonable to do, the secured facilities. I don't know if they're 100 tighter but they're tighter a bit. This corporate facility, the corporate-style facility, for a lack of a better description, I think is pretty unique to us. I'd be surprised if anybody else in our space could get something like this done. It's largely predicated on the transparency of the assets booked that were able to put so it is their look through to what effectively is there collateral and the diversity of our book and our sheer scale. And from a pricing perspective, it's a little expensive but again, we're only talking about utilizing it for 45- to 60-day period. So in the scheme in a 5-year investment, 4-year investment, it's insanely efficient relative to going on leverage for that 90-day period. Again, I'd be surprised if somebody else could get one.

I think one of the things we learned, which we didn't understand as well as we probably might have when we went public was this cash drag on our earnings. And having, because of the lumpiness of the origination market, having $100 million sitting around earning 10 basis points versus whatever it earned, was really a problem and shave cents off of earnings and so this is this a milestone. Hopefully, we can replicate it with another line as we grow and we won't have that cash drag. We've also decided to run the company with about what, $75 million...

$75 million to $100 million.

Of cash just for a rainy day and that also is something that's okay. Again, as we get bigger that number doesn't really have to change that's what we do to cover, we dividends and...

Margin exposures and stuff like that.

And hedges on the foreign currency we have and stuff. So those 2 things and things we didn't appreciate as much. Those former is going to be handled through tremendous extent by this corporate facility, which is really a -- we said we would put it in place last quarter and we intimated that we were close so we're happy to get it done.

It's exactly great to see those increased capacity there. And can you talk a little bit -- you commented on growth there. How do you look at growth with regards to raising more capital and things like you got some capacity left to originate new investments when you kind of look at how big you can get it. Is there a point where it's just hard to continue sourcing enough investment to match the payoff paydown rate of the portfolio or how do you look at those 2 metrics against each other?

Actually, the one really good thing we have is a fairly light repayment schedule now in front of us, which is really one of the lowest for the next 12 months. I think it's the lowest we've had since we went public. If you recall, the first major deal we did was a teacher transaction. It had a lot short-term loans in that portfolio. And they all have come and gone and reinvested. So yes, we don't -- we like the stock going up. We want to let the stock run as far as it can and we think -- we still think we should be in retail hands and they should buy this down to a lower dividend to reflect the risk profile of the coupon. So we're happy to use the ATM which is a dribble strategy. We're happy to use of secured facility. We're happy to step out of the market. If we go to market, it's because they have accretive stuff to do with the capital, and that could hopefully drive the earnings growth. And we don't want to step into the stock every time we trade the premium to book. That is not what we're trying to do. Where we are trying to grow our business and we recognize it so it's a risk reward, it's a balance between our desire to grow and get scale and get efficient and get more credit facilities and the shareholders needing a break from us continually to raise stock and disrupt the stock price. So we're, as you know, we are a material shareholder here so we are in the same -- and every single person at Starwood, including the secretaries, drivers, the assistance, the janitors they own stock in the REIT. So we are trying to drive this enterprise forward and I think it's nice when the stock responds positively to what we're doing.

[Operator Instructions] We'll go next to Jade Rahmani with KBW. Ryan O'Steen - Keefe, Bruyette, & Woods, Inc., Research Division: This is actually Ryan O'Steen on for Jade. Just to go back kind of into the pipeline, any changes or how would you characterize this kind of a pace over the loss of activity going forward in the back half of the year increasing, decreasing? And just secondly on the mix, I mean you talked a little bit about Europe. Any other changes in regards to asset class or size, geography, et cetera?

None on geography. I mean, it's still all over the place and not on size. I mean, things show up there's $100 million deal shows up we can close and shows up on a Monday and we close it and we can wrestle it to the ground. It would be fair to say that we are talking about, I mean, I think this is the third cycle since we've gone public where spread has been spread compression. And where are we on origination? Should we settle for a 10.5% instead of 11.8% to 12% in the junior note? Obviously, we can create that note but we want the width of the note. We can create the 12, but you might be writing the smaller chunk of the capital stack. So we have -- I think for security and safety so we would rather do the 10.5% wide than a 12% if you understand what I'm saying. And yet we've not done that today really. We've been able to hold our target. It does depend on what asset class we are underwriting so would we do a 10.5% or a 10% on an apartment deal. Absolutely, we could do that, that would be heroic because you just can't find the part that has any -- to really to speak of because debt yields are so tight and assets are trading at sub 5 caps. So why would anyone borrow at 10%? But there are exceptions to that transition, multis and stuff where but then they'll come back. Now it's also a question we have and we keep asking ourselves is the duration of what we do. We've been trying to get paper that has some now term to it. And it's is not easy to make a loan and have it come back in 18 months or 12 months. The only -- somebody mentioned the Hilton paper, that's probably the only place that we continue to think about when the sponsor might repay that or change its structure. There are reasons to believe it will still be years, but there's also reasons to believe that until the hotel stocks trade at huge premiums to their current trading value and there's more clarity in the outlook for the world, they're not going to try to do an IPO there. So the good news and the bad news is we'd earn a whopping IRR, probably 14%, 15% if it's paid off early. And that would be a home run although, the negative is, we'll have to reinvest the cash. But how are we doing? I think we're seeing a lot of deals and we were a network originators, and I think we are trying to figure out what exactly where we should be pricing as the capital markets really have ebb and flow. See us shuts done their conduit operation, 3 guys jump into the business. The conduits have not, if you see what's happening in the banking market and we have a number of private investments in banks at Starwood Capital there and having a bitch of a time originating mortgages. And we're originating more paper than those banks were involved with and were obviously, a minority shareholder in those banks, our $2.5 billion institutions, they can't originate loans. And what they're finding out is that the commercial banks, the bigger debt guys are stepping into what we used to be regional markets and writing a $25 million first mortgage on a small office building. So there is a scramble for real estate debt among the banks today. And if it's safe, you can bet we can't possibly do it. If it's really, really safe like a 45% LTV loan. A life co, you've seen a life co step up. It is competitive craziness out there. But so far, we're able to continue to operate and we get inbound calls from guys saying will you take the junior note of this origination, those are our happiest days. We like that. But we also want them to call us exclusively. We don't want to shop with 15 people and we won't win that. I will tell you right now there our guys on the street with private funds and they will be at 8% for these mezzanine. And so we can't compete with these guys and not only that they are raising billions and billions of dollars doing 8s in mezzanine, and making a fortune doing it. So whether we have to pull -- we're going to tell you when we're going to change our pricing strategy if ever because we've talked about it internally and should we -- are we better being a $5 billion, $10 billion enterprise with a portfolio yielding 10%, as opposed to a $3 billion enterprise with a portfolio yielding 11.8% or 12% or 12.5%. I don't know the answer to that. I actually tend to believe we're better off being bigger, it's just the more efficient vehicle that we can raise capital. And again, the repayment of anyone loan if you were bigger is no big deal as the size we are, which is really big, I think were 2.5x the next guy. And our space we still will have the drag of a major repayment.

[Operator Instructions] We'll go to our last question from Joel Houck with Wells Fargo.

My question has to do with kind of your outlook. Given we're in a low-rate environment, it's probably going to stay there for some time. Your end markets seem to be very strong. What's your view in terms of adding duration in the portfolio? It will obviously require you to move down a bit and capital structure but as you pointed out we're on a yield starved world. Seems like the risk reward profile, particularly for companies like Starwood that have proprietary origination are very favorable right now, just curious as to your viewpoint going forward.

We're probably reverse course on this. The thing that we've danced surround, which is when we started, we actually thought rates were going to go up. So we kept our duration shorter on purpose because we thought we could invested some capital of higher LIBOR and higher -- were the curves were back then. Now you're right. I mean if the Fed -- if the world's interest rates go up, countries go broke. And so I think we're kind of turning the Western world into Japan. And because of that, I think we would extend duration and lower coupons to do it and the curve is pretty flat. So you're right, I mean, again, we, Boyd and Stew and Chris Tokarski and Warren de Haan who formed the core of the origination group with Gerry Carpenter [ph]. And they haven't really said let's do something sub double digits. But you can see that at some point that is probably something we're going to have to look at. We're going to have to look at that. We don't feel like we have to go there today, but I think the shareholder money like it's our own. I think we all do. So we'd say with the 10 fantastic in a world where 10-year is 1.6%, a 10 on a 5-year piece of paper, the 5-year, I think, is 88 basis points or something. So by the way, the markets are telling us that. I know what's happening is the seniors, as you know, because you know for Wells, the seniors are getting tighter and tighter and tighter, and you're the largest real estate lender in the nation. So you can talk to your own desk and we can lower our spreads, we were commenting today we can do a loan of LIBOR plus 475, LIBOR plus 500, LIBOR plus 5.25 and create the paper we need, right? That would be in light of 650 3 years ago or even 675, 700. So because the seniors have come in so hard and we watch the pricing of the CMBS markets and where these loans are getting done, AAA is continuing to come in again and they are nowhere near where they used to be, but they continue to head in that direction, we will be able to keep our spreads. We just have to -- I think, there's a lag in the market frankly, but every time there's a scare, everybody backs out again and that's our finest moments because then borrowers have to refinance and we can go in the market, right the loan, and then take our time and get rid of the senior. So there's been like 4 -- there's 3 or 4 cycles already where the market blew up. Last year August, September there is a gapping out of spread all the banks halted their conduit origination, some of them went out of the conduit business altogether because they are faced with large losses. And Credit Suisse is one that comes to mind. There just hasn't been a ton of demand, I would say. Overall, demand for real estate debt has not been that high because of the nature of buyers today you've seen mostly core buyers buying buildings and they don't want 50%, 60%, 70% leverage, so until you've seen investor on the capital side -- and you've seen a few deals. You've seen Blackstone do a bunch of deals, bigger deals where they write -- The Street writes up for whole loan and chops out the mezzanine. So far we're all for 100. We have not bought a single one of these pieces of this paper. And they have been chopping these mezzanines at 80% LTVs. Just not -- we can't compete there, I mean, we won't be competitive. And we won't -- I don't expect we'll be going there. As you know our hurdle rates 8% on our incentive fees as an enterprise. And that's not the reason we hold the 8% as the Holy Grail, but you have to have a management fee and you can see that, that does guide us to what we're willing to do. As long as it's available and right now we're originating $0.5 billion a quarter, it's pretty good. As long it's available we will continue doing what we're doing.

Good. Appreciate the color. And lastly, do you guys have a weighted average diluted share count for the quarter?

Sure.

Weighted average that's like 112 -- the average is 112 million -- I know I got it right here. Here it is 112.184 million.

Bye-bye, everyone. Have a great summer. Speak to you soon.

That concludes our question-and-answer session. That concludes today's conference. Thank you.