Starwood Property Trust, Inc. (STWD) Q1 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Starwood Property Trust First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, I'd 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, and welcome to Starwood Property Trust earnings call. Earlier this morning, we released our financial results for the quarter ended March 31, 2013, and filed our Form 10-Q with the Securities and Exchange Commission. These documents are available in the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for 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 Chief Executive Officer; Stew Ward, the company's Chief Financial Officer; Boyd Fellows, the company's President; and Mike Berry, the company's Chief Accounting Officer. With that, I'm going to now 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'll be reviewing Starwood Property Trust's results for the first quarter of 2013, as well as discussing our activities since quarter end, including our recent acquisition of LNR Property Group. Following my comments, Barry will discuss current market conditions, the state of our business and the opportunity that we see looking forward for our newly-expanded platform. For the first quarter of 2013, we reported core earnings of $62.5 million before transactions expenses associated with our acquisition of LNR or $0.46 per fully diluted share. Net of these transactions expenses, which totaled $4.4 million and were comprised of legal and due diligence costs incurred prior to the close of the acquisition, core earnings stood at $58.1 million or $0.43 per fully diluted share. GAAP net income for the same period inclusive of these transactions expenses totaled $62.2 million or $0.46 per fully diluted share. Both core earnings and GAAP net income per share before the LNR-related transactions expenses were generally in line with the quarterly results exhibited over the past year and I think serve a strong testimony to the strength of the market-leading real estate finance platform we've built over the past 3.5 years that has continued to maintain an 8-plus percent annualized dividend yield on paid-in capital despite the strong resurgence in the lending markets and the systematic rally we've all seen in credit spreads over the past 18 months, all while maintaining an overall portfolio loan-to-value ratio of less than 65%. I should note that next quarter's earnings results will be reduced by the final $12.8 million in transactions expenses associated with the LNR acquisition. As of March 31, 2013, GAAP book value per diluted share was $20.08, an increase of $0.18 over the level of $19.90 we reported on December 31, 2012. At quarter's end, fair value per share stood at $20.48. On a pro forma basis, inclusive of the $822 million common equity raise we completed April 9 in anticipation of the close of the LNR acquisition, GAAP book value and fair value per diluted share increased substantially to $21.34 and $21.67, respectively, reflective of the accretive pricing of the raise. Now let me outline some of our significant activities for both the first quarter and second quarter to date. Commercial real estate debt investment activity for the first quarter was a bit lighter than in previous quarters, reflective of both the first quarter being a historically slow period for newer loan origination and the fact that we experienced timing delays with several large loan transactions that have now either closed or expected to close in the coming weeks. Originations and acquisitions for the quarter totaled $432 million. The highlight for the quarter was the acquisition of single-family residential properties and nonperforming loans totaling more than $200 million, representing 1,706 individual housing units. With these acquisitions and additional purchases of both homes and nonperforming loans since quarter's end, our single-family housing property and loan book now stands at $454 million, representing 3,653 units. Rounding out the first quarter -- first quarter's investment activities were the originations of 3 significant commercial real estate loan assets worthy of mention. In January, we closed an $86 million construction financing for the development of 30 residential condominium units and ground-floor retail on the Upper East Side of Manhattan. We're very pleased with the risk and return attributes of this loan, as it has an estimated last dollar loan to book sellout value ratio of approximately 60%, and an unleveraged investment return in excess of 11.25%. In March, we closed a $43.1 million first mortgage on a high-quality office building in San Francisco that was leveraged this past week through the sale of an A note to a regional bank. The retained subordinate debt investment is expected to produce equity returns of approximately 10%. Also in March, we closed a $37.6 million preferred equity investment in a residential site in lower Manhattan, with an extremely well-respected sponsor, a very attractive exposure basis and expected annualized equity returns in excess of 12%. With the addition of these commercial and residential investments, our total investment portfolio stood at $4.1 billion as of March 31, $1 billion larger than at the same time a year earlier. We expected this portfolio -- we expect this portfolio of commercial real estate debt assets to earn an annualized leverage return between 11.6% and 12.1%, and as I mentioned earlier, think the single-family residential strategy will generate similar returns when mature. The average last dollar loan-to-value ratio of our commercial real estate loan book remains virtually unchanged at approximately 64%, and we continue to have an absence of any material credit issues in the portfolio. Obviously, the close of the LNR acquisition in mid-April is our most significant transaction to date. But before I discuss details of that transaction, let me give you some highlights of our origination and acquisition activities since April 1. Originations and acquisitions of core assets have totaled $616.7 million to date for the second quarter. Dominating this second quarter activity was the close of a $475 million first mortgage and mezzanine loan for the construction of the Hudson Yard South Tower located in Manhattan's West side. We acted as the lead lender in a lending syndicate that included the Southwest Carpenters Union, funded approximately $100 million at the initial close and with future fundings totaling an additional $250 million scheduled over the next 15 months, which match well with repayment timings in the current loan book expected for next year. Also closed in April was the purchase of a discount -- at a discount of 2 B notes secured by 2 of the premier office buildings in Austin, Texas and the origination of a $47 million first mortgage loan secured by a large portfolio of specialty store locations in 7 states. We think this loan is attractive with a history of stable operations and estimated loan-to-value ratio of 68% and an unleveraged expected equity return of 10-plus percent before attributing any value to a 25% equity kicker we also received as part of the loan transaction. These originations and acquisitions, coupled with the acquisition of LNR and a current pipeline of potential new investments and future funding commitments totaling in excess of $1 billion, were the impetus behind the $600 million convertible debt offering we completed this past February and figured into the sizing of both the common equity raise and the term loan financing we completed this April. While we're likely to experience some attrition in the pipeline, we are confident we will close a number of very attractive new investments in the next 60 to 90 days that will further diversify our investment portfolio, as well as maintain an attractive risk and return profile of the loan book. Let me finish my discussions of recent activities with a few details concerning the LNR acquisition that, coupled with Barry's upcoming comments, should provide good insight into the acquisition, the current composition of the acquired assets and the funding sources we used to close the transaction. On April 19, Starwood Property Trust, in combination with Starwood Capital Group's newest investment fund, SOF IX, acquired the full assets and operations of LNR Property Group at a total cost of $1.06 billion. The SOF IX Investment Fund acquired all the hard real estate-related assets and investment funds of LNR, as well as 50% of LNR's ownership stake in the real estate-related auction platform, Auction.com, all for a total purchase cost of $194 million. Starwood Property Trust, the REIT, acquired for $862 million the remaining assets and operations of LNR, which included the entirety of LNR's domestic and European primary and special servicing assets and operations; 100% of their commercial mortgage-backed securities portfolio, many of which are key to controlling LNR's appointment as special servicer; their active and profitable commercial mortgage loan conduit lending operation; a small loan investment fund; and the other 50% of LNR's ownership stake in Auction.com. Included in the Starwood Property -- in Starwood Property Trust's purchase and extremely important to the strategic value of the company were the underwriting, credit evaluation, accounting and processing systems, people, historical loan performance data sets and other infrastructure LNR has built over the past 2 decades that were keys to them becoming the preeminent leader in the CMBS special servicing business. Coincident with the close of the acquisition, we also repaid the remaining balance of LNR's existing term loan of $270 million, which was required upon a change in control. Funding the acquisition was accomplished through a combination of existing cash resources at both companies, as well as portions of the proceeds from both the recent capital raise and a $300 million term loan that closed just prior to the acquisition. This term loan received a rating of BB+ by Standard & Poor's and Ba3 by Moody's. As part of the term loan ratings process, we also received first-time entity ratings of BB by Standard & Poor's and Ba3 by Moody's. Let me finish my remarks with a discussion of our current investment capacity and the second quarter dividend. As of yesterday, May 7, we had $241 million in available cash, $161 million of financing capacity approved but undrawn and $262 million of net equity invested in liquid residential mortgage-backed securities. With this, we have capacity to acquire an additional $500 million to $750 million in new investments. Our board has declared a $0.46 dividend for the second quarter of 2013, which will be paid on July 15, 2013 to shareholders of record on June 28, 2013. This is an increase of $0.02 per share over the $0.44 dividend paid the prior 8 consecutive quarters and represents a 6.65% annualized dividend yield on yesterday's closing share price of $27.65. With that, I'd like to turn the call over to Barry for his comments.

Thank you, Stew. Thank you, Andrew. Good morning, everyone. I think it's really important first 4 months of the year for Starwood Property Trust. Obviously, when we were born, we had to invest $900 million of cash, but we've done that actually in -- twice that in 4 months' time, investing $1.6 billion, including the transformative acquisition of LNR, which I think continues the profile of this company, which is providing, I'd say, asymmetric risk versus reward. I think -- I continue to marvel at the loan-to-value of the portfolio and the stability of our earnings stream, and it gave us and the board the confidence to increase the dividend. But I will say upfront that the next quarter, this quarter and the next quarter, will kind of be noisy. We've known that they would be noisy. There's a lot of accounting issues as you close the LNR transaction, including the transaction cost of the acquisition, and we'll talk more about that in a second. But I think also as you look at what we did in the quarter and the 4 months -- I'm going to include April for a second -- I mean it was really a momentous quarter for the firm. We did a term loan that was rated, the cost of financing for 5- to 7-year money that we can prepay basically at Coldwell at par was at 3%, and who would have dreamed that we could borrow money at the corporate level at 3%. We also went out to the market to do a convert. We upsized the convert, turned out to be a $600 million raise -- it could have been bigger -- the convert is trading at 1.10% and the implied coupon of our cost of capital is 3%, and that opens up a whole new -- a lot of interesting opportunities for us as we go forward. So I think it was very powerful for the firm to raise nearly $1 billion in the debt markets in that manner. The convert, I believe, is trading at 1.10%. So we're quite pleased that we were able to do that, and it's very accretive to our shareholders and they'll get the long-term benefit of what is a market-leading cost of financing. I think that is the benefit of being one of the biggest players, if not the biggest player, in the commercial mortgage industry at the moment. So one thing about the markets. I mean, the markets are super competitive. The CMBS markets are wide open, I don't need to tell you that. But we continue to find opportunities, given our unique skill sets, which is the speed at which we can move our knowledge of the markets, our ability to dial up and down the risk spectrum, the blend of our equity skills and our debt skills to close complex transactions, and borrowers who want to work with us know that we're a flexible capital, we're going to retain the B note, when down the road if something good or bad happens, they'll be able to come back to us. And one example of that is 701 Seventh Avenue, which was this giant loan we originated, I think, last quarter in New York City and really amazing things has happened at that property, which I'm not at liberty to say, but the transaction when it comes open for prepayment, which is in October, will probably be sized-up and the equity kicker in that transaction which I'll note is not in our fair market value estimate of our book or fair market value of our book, is worth significant money to the firm. So we're really excited about things like that where we can take advantage of our sort of unique skill sets in the marketplace. The CMBS market being open presents interesting opportunities and also allows for a lack of discipline today in the market so we're seeing an increase or decrease in underwriting skills. You actually are pretty much exactly where you were precrisis in the sense that the ratings agencies are still there, same guys that were rating the stuff they rated in '06 and '07 are still in their seats. And they have to be careful about what you're buying. We're still waiting for the government to come out with the retention requirements, the financial institutions. We hope they ask the banks to retain at least 5% of the paper they originate. We think that would be healthy. We'd look forward to that. We would be the originator and then sell down the notes to the banks and/or to insurance companies and/or to other senior providers that we're working with actually even today. In this world, we will continue to focus on safety versus chasing silly yield on crappy assets. So assets like Hudson Yards, which we worked with the related companies or investments we've made with other household name borrowers, that's really where we're going to focus. And we can be super competitive because our cost of funds is so inexpensive relative to where it was when we started out. Europe is also picking up for us. We're going to continue to see a lot of pipeline opportunities in Europe. They seem to squeeze from one quarter to the next and borrowers come and go, but we are thinking that there'll be an increased pace of investment in Europe, where spreads are a little wider than the U.S. and the markets are a little less perfect. But again, I think our pipeline -- we closed almost $700 million of loans in April, and we have a pretty good pipeline in the U.S. and I think LNR, the transition to LNR will provide its own unique pipeline. So let's talk about LNR of a second. We closed it 2 weeks ago, finally. As you know, their named service [ph] to run more than $120 billion of trust, and they have about $20 billion of assets in their special servicing book, about $6 billion in REO and $14 billion in loans. And all of that hopefully will provide a pipeline of unique opportunities for us, both in the actual special servicing book, the $20 billion, as well as what's named special, and we can anticipate perhaps loans going bad and/or getting into trouble and offering tailored refinancing solutions to borrowers. As you may know, we own this company from the announcement when we went hard, which is early January. And what you don't know, we didn't tell you, we're telling you right now, is the company made nearly $90 million year-to-date, and all of that cash did not go into earnings. That actually went to reduce the goodwill account that we'd set up, or preliminarily set up, or how we allocated the value when we bought the company. So the company has been wildly profitable since we acquired it. And the lowering of goodwill will help future earnings and provide a better balance sheet for the firm going forward. We're going to be evaluating integration and the future cash flow projections of the company, and we'll provide further earnings guidance at the end of the second quarter for you. We kind of left it where it was because, actually we'll have a management meeting all hands on deck later today as we continue to work to integrate the company and take advantage of their systems and our systems and hit the ground running. We're pretty excited about it. As I mentioned, the CMBS market being as open as it is, has led to their conduit business, Archetype, being exceedingly profitable, and we're comfortable that it will vastly outperform our expectations in the short run and hopefully in the longer run too, so they will benefit from that from the conduit business that their executive team runs. The servicer has had a good run of it too, and loans are resolving and we get default interest on loans and some of these payments are rather large. We are pretty excited about our little business in Europe called Hatfield Philips. It's not that little, it's the largest servicer in Germany and the U.K., and we're evaluating how we can take full advantage of that platform, which has recently turned quite profitable. On the CMBS book, which is material, I think it's nearly $275 million on our cost basis is also -- is inversely correlated to the servicer. If the world gets better, the CMBS book is likely doing more and the servicer might be worth less so you've a natural hedge in their book. But we're pretty excited about the transaction, very excited about the transaction. The transaction costs will run through this quarter and will run through next quarter, given that we closed the transaction April and just had to pay the lawyers most recently. There's one other business since we talk about the company, which haven't focused on and you're not seeing any benefit from but there's an interest in Auction.com, the nation's largest commercial online and residential online auction house. This is being accounted for, and I'm looking at Stew, under the equity accounting -- cost method of accounting and so when -- there's no income even though their company's significantly profitable, we're not taking into our income any earnings from that subsidiary. And there's a significant value accreted to that position. And when and if it does something like pay the dividend, distributes it or goes public or does whatever it's going to be in the future, you'll see basically a windfall in our book value per share because there's nothing in the book value for -- there's no earnings for this business that we attributed value to. And we will use the roughly 500-plus people that are -- we acquired with LNR and partners in the future to enter new businesses and we're really excited about the team and the future potential for our company. I think Boyd and Stew and Mike Berry and Andrew spent a lot of time with the gentlemen down there, and we're really excited about the future for our company with LNR. And the quality of the executives is really one of the great assets of the company. I want to spend a minute talking about our residential foray. As you probably didn't notice but we started to buy single-family homes in the REIT exclusively. We're not doing this in our fund. We just did this in the REIT -- we don't know how you can do this in multiple vehicles -- probably the middle of last year and now we're up to nearly 4,000 homes, about 3,665 homes. This business, which now employs -- deploys about $450 million is dilutive to the company at the moment. It produces -- actually loses money in the quarter, and that's because we have chosen to enter the business by doing both NPL acquisitions as well as REO acquisitions and it's upfront costs while the homes are being renovated to and then they're rented. So there's $450 million of capital not earning -- actually losing money in the quarter embedded in our numbers. What's really interesting about this as you consider our fair market book -- our market to fair market book, which is between $21.50 and $22 a share, again excluding the kickers in the Canadian stores [ph] alone or the 7017s and excluding what is -- kind of interesting -- our average price for these homes at the time of acquisition was around 80% of the broker's opinion of value. And what you're seeing in these auctions today in the resi space is guys paying 105% of broker's opinion of value -- they're legging into the trade, if you will, and we chose to enter the business in a slightly different way. And if you take that 80% on $454 million and you said that maybe it was worth par, that's a $90 million gain to the REIT. That's not in our numbers and not in our book value. If you actually said that the markets of single-family home markets, which they are, have rallied quite hard, which they have, and since we required some of these assets, and you're up another 10% let's say. I think last quarter there was an announcement or earlier this week or this month, 9% year-over-year gains in single-family homes -- obviously, stronger in some markets than other markets, the Northeast being weak -- we don't own broad share, but Florida being strong, we own a lot in Florida and a lot in some of these rallying markets. That's a 10% gain, it will be another $45 million gain, it's $135 million of nearly $1 a share in fair value to the company and we are anticipating thinking about spinning this business out. We've told you about that now multiple times, and we're -- expect that, that will happen in the coming months as we move to do that. We think it's a different business, it should have its own life. It doesn't really belong here long-term. We'll have different payout ratios and different implications for our current yield versus appreciation. Obviously, loans don't really appreciate unless they're locked out for 1 billion years and the interest rates continue to hold steady because actually, they probably have appreciated given where rates are at the moment. But we're going to earn a pretty good cash yield. The book is completely unlevered at the moment, though we are completing a financing line right now for the resi with one of the major banks, which will be accretive to the company as well and the future company that may get spun out of us. So my final comments, I'm really happy to see the book value climb close to $22 a share. It's probably north of that with this fair market value of much of the things that I've talked about. We IPO'd at $20 so we're pretty happy that the book has climbed where it is, especially since we are a REIT that pays out 95% of its taxable income. I continue to believe that we can find really interesting things to do in the marketplace. And again using our speed, our flexibility, our market analogy and our scale to create unusual and compelling returns for our shareholder base. So we're pretty happy at the moment, and we're feeling good about our business. We're feeling really good about the cross-pollination between the Starwood Capital equity guys and the Starwood Property Trust dedicated athletes as we use our relationships. I can't tell you how many times Boyd and Stew and Chris Sikorsky and Leo Huang [ph] say, "Can you call this dude?" Can you call him?" Or we find something and pass it over the fence, or they find something and throw it to us, and that's really been a nice benefit of symbiotic relationship for the last 3.5 years between the 2 organizations, as they each continue to build up their capability globally. So with that, I think we'll take any questions you have.

[Operator Instructions] And we'll take our first question from Joel Houck with Wells Fargo.

Question I guess is around just the single-family business. Obviously, it's ramping up, it's new. What do you think rough terms of size of this would have to be before you guys would consider spinning it out?

We're big enough. We're big enough now. I mean, we can spin it out now. So we're working through the mechanics of that and obviously are making sure our management team's in place. And it's interesting, there will be probably, who knows, half a dozen of these, I guess. And it will be -- they're interesting vehicles because you can always liquidate them, right? You can always sell the houses or you're going to hold on to them and it's really -- nobody really knows. I mean you can't -- nobody has had enough operating history to know how this is going to work. Because it's pretty competitive space, I'm not going to go into details about it. But we've tried to be very picky about what we're doing and how we're doing it and through how we're acquiring these houses. As you may know, as you saw Colony's earnings yesterday and there's a lot of transaction costs up front. So you got to find -- showing up at auctions where all the investors are driving prices is a really difficult way to do this. And I think as houses approach replacement cost, it gets far less interesting to acquire them. But right now, it certainly can achieve, I think, the kinds of returns we've seen in the debt book. Between current yield and appreciation, I think it's safe to assume that you can see leverage yields, levered IRRs north of 12%. We should feel again asymmetric, more upside than downside.

Okay, no, I agree. And just quickly on the LNR, you said they made $90 million year-to-date. I assume that's through Q1 or is that through April?

That was through closing. So what happened is that all the money they made, we were all excited about, we actually thought some of it might blend into earnings, but it all went again to reduce basis in the company. So we paid $860 million all-in with transaction cost, which I think $862 million, I think that probably $40 million of that was transaction cost, or $30 million or $20 million? It was prorated with the other real estate that was sold. So that you could have netted it against that but that wouldn't be proper accounting, unfortunately. So you could have said you paid 7-something but you didn't. And they made a lot of money in the conduit, which was unanticipated.

And a lot of money in the special services.

And a lot of money on the special service area. All of the businesses performed pretty well for the quarter. Everything. And one of the businesses they have, we're evaluating because it's not making any money, it's actually losing money. So if we got rid of that, we may be more profitable. It's one of the reasons we can't give you -- we didn't give you perfect guidance. We expect LNR to be accretive, more accretive than we probably have given you but we don't know yet. We're going -- we want to tick and tie the numbers and then come back to you.

That's exactly right.

No, that's fair enough. I mean, do you have some sense in terms -- so we can calibrate this in our models, what is a reasonable IRR over LNR versus kind of -- we'll call it legacy Starwood, for lack of a better term?

You can't really do it. They're there in operating businesses, and by the way, they're taxed, right? So some of -- some of the earnings flow through the TRS and it's taxed. So we're giving you an after-tax number. And even there, there's things going on in -- with the IRS about what is good income and bad income for the REIT and that might change too. So, as soon as we have more data, we'll provide full disclosure to you.

[Operator Instructions] We'll take our next question from Jade Rahmani with KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: You've shown an ability to win very large transactions, including the Hudson Yards deal. Can you characterize the competition on those types of large development transactions, and more broadly, who you view as your direct main competitors?

Let me start -- I'll start and then Boyd will finish. Well, you can imagine who we see. On a deal of that scale, that we're competing against the banks and the complexity of that loan given that Coach was a tenant in the building and funding construction simultaneous with the banks, was completely tripping up the banks. What we thought maybe they had the better credit because they were funding $300 million of the construction costs and they're basically condoing and owning their piece of the building. So that created all kinds of inner creditor issues to the bank, they were tripping over themselves. We got an inbound call from Related [ph] saying, "Can you do this?" And when they described it to me, I said "100% we can do this." It's great, I think we're in the building for like $500 a foot or something like that, less than $500 a foot and it's trophy real estate at least on top of Coach you have -- I've forgot, SIEMENS, you have SAP, is it? L'Oreal and it's great. So it's a great risk-reward, in fact, Related [ph] took $100 million of the facility themselves. So they liked it so much they co-invested with us and we took the balance. It was a monumentally complicated loan to close. On a transaction like that, I'd say given the scale of it, there probably weren't that many people to go to. Occasionally, we see hedge funds that have shown up in the debt world, anything in the debt wrapper today, it attracts a lot of capital. I think most of the investors who are coming into the hedge fund world don't really expect that they'd be making first mortgage loans in a hedge fund but they have no high watermarks, they get paid 2 and 20, if they can make a loan at 8%, they make a lot of money. And given they've had a rough go of it recently in not keeping up with the Joneses with the S&P and the Dow, I think where we've seen the hedge funds come into the market. Boyd, do you want to add anything?

You've covered it completely. On those transactions again, it's our belief, you act as a one-stop shop. In some of these large construction loans, we're competing strictly against basically a bank syndicate, which was the case in the Hudson Yards loan. In others, we compete against a combination that's even more complex and burdensome for the borrowers, which is a combination of a bank syndicate and a mezzanine lender. On a construction loan, when you get 6 first mortgage lenders and a mezz lender, that's an incredibly complex process for a borrower to deal with, and we can come in and literally give them a single point of contact and write a single loan. So we really don't have any...

We really like those deals, and we wish there's were more of them. There's a couple in the pipeline, frankly and I think it's part of lending, it's sort of new to me. I mean, these are relationships too. I mean, people just like our team and they're flexible and the more we do, the more references we have and we tell them check our references. And we got it done when we said we'd get it done and we haven't bothered them and we work with these guys. I think Blackstone, we've partnered with them on a few transactions, they've borrowed from us on a few transactions. I mean, so we see them as they try to, I guess, get in the business, I anticipate we'll see them doing what we're doing. And for the most part, Colony has drifted into more or less the resi business, as you know. Apollo is pretty quiet. I don't see them a lot. They don't have the balance sheet to do these gigantic deals. But we've split a deal with Apollo, too, in the past. It's really whether -- I think the real question for us will be the foreign banks, which have been very big competitors for us, I'd say our largest competitors. They're the more aggressive foreign banks, and whether or not given Basel III, they'll continue to compete with us at the pace they are or let us do the loan and then we'll sell them down the seniors and they can securitize to their heart's desire, and we'll keep a wide mezz loan. I think one of the businesses we didn't mention -- I should have -- was the B piece business, which we deploy capital. And even since we closed LNR, we just bought, I guess, a $44 million B note on a transaction. And that's another interesting place we can uniquely deploy capital. We're going to be pretty careful about that. It's a very different business than the core business we've been in. The core business has been as you look at our book, 45, 50 to 65, 15-point wide mezzanine loans. They're big wide swaths for the capital stack -- I can't overemphasize that. If you're earning 11 on 15 points in the capital stack, it's a lot different than earning 11 on 1 point in the capital stack -- from 73 to 74, which is what the B pieces just typically are. They're very narrow but higher yielding than 11, they're probably in the 20s. So you really have to use your underwriting skills and that's really where LNR comes in, and we're going to -- the business we actually talked about many times in the prior years. Stew and Boyd have a lot of experience there. And we're not sure, we're going to be very picky and play where we want to play and not participate in other areas. But it does -- it's another cylinder. If we have 12 cylinders to create value for our shareholders, we probably have 4, 5 filled out, we have another 5 to go. And we know what they are, we're just not going to tell you right now. But now that have all these great bodies down in LNR, I think we can execute against these business strategies. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Great. The press release cited a $28 million sale of a first mortgage. I would assume that type of activity is going to be increasing. And I was wondering if you could discuss what the margins are on those types of sales? And also what percentage of your existing first mortgage book could be financed through structural leverage like that?

We've talked about this a lot in the last, over the last 2 or 3 calls. And one of our competitive advantages is this, as Boyd mentioned, is this one-stop shop and key to this is staffing a sophisticated syndication staff and executing on that part of the business plan. That $28 million sale was the sale of an A note. Those are generally -- they're not profitable. I mean, we don't book -- we're not booking profits. It's really a financing. They're generally done. When we structured a transaction at the outset, we've already pre-marketed. We have a very good idea about where these A notes are going to trade. So for the most part, the P&L on those sales will be very minor. But again, they're, in our view they're -- they're spectacular when you compare them to the on-balance sheet comparable leverage, because these are match funded, they're nonrecourse, they're not cross-collateralized with our other assets. At the same cost of funds, they represent and produce help us to continue to produce a better sort of risk profile of the overall book. So as I've mentioned in the past, both on these calls as well as a lot of the one-on-ones and things, we relentlessly sell-down what we have online to A notes. We have sales of A notes. We're looking at securitizations for example, right now that will have loans -- of the financing component of loans that we have on some of our warehouse facilities. And so it's an ongoing full-time business practice and business line that we pursue. So to answer your question more directly, there are a number of positions on our book that are small, that are kind of impractical to sell A notes, and they may ultimately fit into a securitization in some form of another in a little bit more efficient manner. But all the large transactions for the most part, we'll look to finance with A note sales at some point in their lives.

And we'll take our next question from Dan Altscher with FBR. Daniel K. Altscher - FBR Capital Markets & Co., Research Division: Had a question about the NPL book. One, I guess are you guys finding competition increasing here from other folks like hedge funds or private equity to buy into these? Or is the market really pretty thin from a buyer perspective? And then also from a seller perspective, who really are the sellers? Is it the FDIC? Is it the banks themselves? Is it other hedge funds and private equity that own them right now?

So the sources of these deals are everyone. We've been more active with banks, I suppose. They are competitive as can be and you do see a lot of the hedge funds in the business. So we're focused on geography as we sort through the portfolios, where are the houses located and whether it's judicial or nonjudicial states and where they are in the foreclosure process. And what we think of the collateral and the quality of the homes. You can divide our investment by the number of homes we have. You look at $450 million and 3,600 and something, you can see it's like $120,000, $130,000 a house. It's -- some of the stuff we buy with, we're trading sardines -- we actually buy it and get rid of it and we booked small profits on that. I think we've booked a couple of million dollars of profits out of that stuff. And then another stuff we fix it up and fit into the core holdings of the entity. So it is a lot of work and it's a very, as you know, a hands-on business. But it is competitive. It's not, not competitive. It's just -- we like, we've been attracted to the fact that we could buy -- I mean if it was easy, everyone would be doing it. But I think our pricing, our entry points have been good. I think the tricky part about the market is the investors. While they're only 1/3 of the market -- that's the national statistic -- in some instances, they're much more than that. And like price leader in these open all type [ph] auctions where some guys are coming with bushel-fulls of cash. I mean, they are driving market value. If they pay 100 -- if they pay 100 cents on the dollar for the house is broker opinion of current value and they pay $1.05, the next auction next week, that's the $1.05 is now broker opinion of value. So then they pay $1.05, that's now the broker opinion of value. And I think the current yields are going to deteriorate because the rents are not keeping up with the price appreciation of the homes that they're buying. So our actual purchase price is more like $0.65 on the dollar, broker opinion of value. And I mean, that's just phenomenal. So I'd say $0.80 on the call but it's more like $0.60, less than $0.65.

If you add in the single-family, it gets closer to $0.80 with the NPLs broken out separately.

The NPLs are $0.65. Well, it's a different business and you got to know what you're doing and I think what we know what we're doing. So we don't get those homes immediately, right? They come over time so you have to impute their cost of carry or whatever your cost of capital is to that. So we're leveraging our relationships in the markets with institutions to try to grow a book. I think it's an interesting business. I don't know how big it will be. I mean, as a stand-alone company, I just don't know. I mean, it will be a company, will it be a size of EQR? I don't think so. Having said that, there are a lot of guys who have bought houses and won't have an opportunity to take them out through a public offering. We've already been contacted by several. I'm sure there are others. One of the companies that went public in this space was basically 3 or 4 portfolios glued together. So if you have a team and you have a story and you have competency and they want an exit, you can do it. You could probably scale up faster than even us just acquiring homes and notes. Daniel K. Altscher - FBR Capital Markets & Co., Research Division: That's great color. And then just one more, if I may. I'm trying to summarize your comments on the CMBS market. I'm a little mixed in terms of I can't tell if you're saying I think it may be a little frothy right now or at the same time LNR is bringing on a pretty nice portfolio that you're excited about. So maybe you can just summarize how you really or how you're seeing the market right now?

Sure. The split comments, right? The CMBS book of LNR is an historic book. It's what they owned. Nothing really to do with today's underwriting. It's really stuff that's pieces and strips of deals over the last 10 years, probably. And some of it's control pieces and some of it's not just -- one of the things we do with our money now is we buy pieces, we buy bonds. We have -- they have a database, we go out and see $7 million of bonds that you can earn at 13, we buy them. So we've been investing capital, we'll probably invest probably $100 million, $50 million to $100 million in the LNR platform this year in buying stuff.

Legacy secondary...

And legacy secondary trades of CMBS securities, that's a whole other line of business. And we do that if it's accretive to our earnings and accretive to very attractive to unrisk or basis. They have information on all these trusses [ph] -- a finite number of them. So if you underwrite them and you know the assets like you can't know and I can't know until we've acquired LNR. You have a competitive advantage playing in those marketplaces. Completely different point is that the CMBS market is pistol hot and frankly there hasn't been enough product for the pipeline but as investors stretch for yield, not surprising that underwriting standards are beginning to come looser and looser. And I think you're pretty much -- it's a little tricky out there. I mean, guys are pretty aggressive in the CMBS market. It's interesting -- we started capital, just did a loan with a bank, on a hotel -- small hotel, $9 million loan, it was a single asset we had. And -- we just checked with the conduit guys at LNR and this is yesterday so it's fresh data. And I think our loan is like $295 million over and the conduit could lend the money at $305 million over was his initial bid and I'm sure if I pressed -- [indiscernible] who runs that business for us, he'd probably go to $300 million over. So the conduit pricing is right on top of the banks and if the banks are making this spread or the conduit guys are making the spread. And the business has been pretty profitable for everybody and I think you've seen Lennar talk about going public now as a C-corp. We don't think these spreads are maintainable. I mean, we think that, the conduit business has been a 2, 3 point business and it's been more than that. So and that's really a function -- we have a unique way of -- the average loan that we originate is less than $25 million; it's just small loans that our team and LNR can do and frankly we couldn't do before. So we weren't going to do a $25 million loan, we'll had a $5 million mezzanine note. We'd be here for the next 350 years, putting out $1 billion. So and it's kind of like the equity markets today. You can buy individual assets at better cap rates than you can large portfolios because the nature of the money out there is that it wants to move big money. I was correct that the average size loan of the conduit business in LNR is $12 million. That's a big business and there's a lot of those. In the pyramid of demand there's only so many Hudson Yards loans.

And profit margins on $12 million can be double what they would be on $25 million and $50 million loans that are dramatically more sought after by the Street. It's a really great, sweet spot for LNR.

We're excited to have it. But I am worried about underwriting standards. That would be a general view that I think people are getting loose. And you have -- you have inverse -- you have versionary rents in office buildings. You have many buildings today with rents above market. You have some very soft office markets. When these leases roll, you may not see tenants in these buildings and they're being underwritten seems like without any understanding that the rent is 2x of market today or that this market is 22% vacant and you're building's 93% vacant but it could go to 80% or 0 when the rents roll. There's not a huge velocity of office lease in the United States. Some of these asset classes are doing better, retail is doing better, overall consumer spending is up, hotel markets are fine but the pace of growth is probably slowing. So we're seeing some incredibly aggressive loans in the hotel space and incredibly so. You could probably get anything financed today. In fact, it's almost back to the day when there's no cash flow, it's a better loan. You can fantasize about what the cash flow might be if it ever was leased or was profitable. So there's some really wacko things happening out there. It's not '06, '07 but it's '05.

And we'll go to our last question. It's from Steve Delaney with JMP Securities.

I really appreciate the candor on the residential strategy, sort of the end game there because we didn't get that from some of the other players early on as to whether it was viewed as core or opportunistic, so appreciate that. Barry, I was just wondering if Starwood Capital, as you approach this, both the SFR and the resi pools, I don't, of course, I don't profess to know Starwood Capital well other than by reputation, but have you identified a partner on the special servicing side that you've engaged to work with you on this at this time? And I guess the second part of that would be as you look to a spin-off of this business, is the management of that new-co something that Starwood Capital and/or a partner would look to retain?

So we're working on -- we work through multiple partners right now. And as most of us are doing in this space, we have guys who are exclusive to us that we've added in buying in markets that we've identified we thought would be attractive. I think I want to be clear, Starwood Capital is not playing in this space. We did not do this in our opportunity fund. And the reason, by the way is -- let me tell you why we did it that way because we know that a greater portion of the return would come from appreciation than it would from current yield ultimately. And that beauty would be in the eye of the fantasizer about the home price appreciation over the long run. So that, if you're going to try to get a 15 or 20 but you thought you're going to get a 5 current and 15 in appreciation, Starwood Capital would lose. So our opportunity fund would lose that bit. What you're seeing is current yields are getting compressed because not only are -- is there a ton of houses going into the marketplace but their rents are actually falling in a few markets because there's so much supply and there's just not that much -- it is impacting, you're beginning to see it in the multifamily rents that the single-family pressure in places like Atlanta. They're putting pressure on multifamily -- the rate of increase of rents in multifamily is slowing and it's not just because of over -- new building and overbuilding in the multi-space, it's also because of 12 million, 13 million homes that are going to be rented. The really good news is they're coming out of the stock, right? I mean, the good news is they are not for home prices and we have a homebuilder chart point so we see. This stuff is leaving the system. It's not like it's going to -- these houses are going to be rented and they're going to stay in the rental pool. So it's good for the single-family home market. It's just an interesting business that I think actually -- it's an asset class that, that I would play in if I was an equity investor. I think it's an interesting as some of their classes of REITs that are out there. But the answer is that will have a dedicated management team and that's one of the reasons we have not spun it out. We'll continue to work on our strategy there and that's coming together hopefully in the next 90 days or so and once that's complete, we will file and offer a memorandum, I suppose. Is that right?

Yes.

One just quick follow-up. It looks like -- one thing that appears to be unique to your strategy versus what's in the marketplace right now, if I've heard you correctly, you are looking at the SFRs and the NPL pools as a related business, and did I hear you say that when you do a spin out, it would include the NPLs as well as the SFR? Did I understand that?

Yes, you're correct.

Okay. The unique thing about that is ultimately the SFR is going to -- you're going to win or lose based on your cost of acquisition. And at the courthouse with 20 other people, you're going to have a high cost. Is this NPL pool, I mean assuming you can buy them right at the right discount to BPOs, et cetera. I mean, do you see that sort of a resi version of loans of -- a loan to own strategy in a way where I think -- Altisource just spun out an IPO called resi where they're actually taken their special servicer and they're going to kind of retain the REO for their own sister company. Is that -- am I thinking clearly on the way you see it?

I think you see us trying multiple ways to access the homes, right? And we're comfortable doing the workouts of the NPLs, and they're going to go together, right? They're going to go -- they're REO in the homes because it is a loan to own. I mean, we're buying the loan to own the house. But we don't own all the houses. Like I said we'll be trading out some of the stuff and we'll keep the stuff we want. It's kind of like you're doing a lot more work. It's kind of like buying the -- fishing in the ocean versus buying it at the shopping center, all cleaned and...

Filleted and ready to put on the grill.

Exactly. I mean, we're buying -- we're literally going to square one, the raw material, if you will. And it's more work but our basis we hope will be more attractive and we'll do both. And we are pretty busy. I mean, we bought -- we're buying a good number of homes and I think the complexion of what we're buying is a little different than what I've seen other guys in the market to -- we'll give you more disclosure in the next quarter but you'll see what they've done in terms of geographic. We have one state that's typically not in these deals that I've seen which I like and I think you'll like. We have a good team and they've done a nice job. I'm just coaching. They've doing a good job.

And that concludes our question-and-answer session. I'll turn it back over to our presenters for any closing remarks.

Thanks for being with us this morning, and Stew and Andrew and then Boyd and the rest of us are available to answer your questions. Thanks again. Take care.

That concludes today's conference call. We appreciate your participation.