Starwood Property Trust, Inc. (STWD) Q3 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the Starwood Property Trust's Third Quarter 2013 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, and welcome to Starwood Property Trust's earnings call. This morning, we released our financial results for the quarter ended September 30, 2013, and filed our Form 10-Q with the Securities and Exchange Commission. In addition, we posted our -- in addition, we posted our supplement to our website. This document is available in the Investor Relations section of our 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 the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the company's Chief Executive Officer; Stew Ward, the company's Chief Financial Officer; Boyd Fellows, the company's President; and Cory Olson, the President of LNR. 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 results for the third quarter of 2013 and the fourth quarter to date, including discussions of each of our 3 basic business segments, our traditional lending business, LNR as a stand-alone unit and the single-family residential property business, all of which we began providing segment level financial results for last quarter. Following my comments, Barry will discuss current market conditions, the state of our business and the opportunities we see looking forward for our newly expanded platform. For the third quarter of 2013, we reported core earnings of $104.4 million or $0.61 per fully diluted share. Both of these figures are substantially above our results for the prior quarter, where we've reported core earnings of $86.1 million or $0.52 per fully diluted share before one-time transaction and restructuring costs associated with the LNR acquisition. The primary drivers behind this earnings growth is the deployment over -- above our $1.4 billion in new loan investments during the past 2 quarters, as well as very strong results for LNR. I should note that our third quarter results also benefited from the first full quarter of operations for LNR, which closed on April 19, 2013. GAAP net income for the third quarter totaled $89.7 million or $0.52 per fully diluted share. These figures also compare very favorably with GAAP net income for the second quarter, which exclusive of transaction costs associated with the LNR acquisition stood at $79.4 million or $0.48 per fully diluted share. As of June 30, 2013, GAAP book value per diluted share was $21.78, an increase of 2.7% over the level of $21.21 we reported as of June 30. Fair value per share stood at $22.09, also above the level of $21.77 per diluted share reported at the end of second quarter. Both increases are reflective of the $690 million capital raise we completed in mid-September. It's also important to note that our fair value calculation did not take into account estimated appreciation in the value of our single-family portfolio, which based upon third-party valuations, is between 10% and 20%. Now let me continue to outline the third quarter results for each of our 3 major business segments. Following on the heels of an extremely active second quarter, where the lending division closed 10 transactions with total commitments of $838 million, this division closed an additional 12 transactions with total commitments of $1.1 billion in the third quarter. When combined with new originations to date for the fourth quarter of $877 million, new loan originations totaled $2.3 billion during the past 150 days, a pace nearly twice what we achieved over the same period last year. Included in this quarter's lending activity was $105 million loan secured by an office property in Manhattan that represents our first material balance sheet origination both sourced and financed through the LNR platform. The loan is a refinancing of a loan that was specially serviced by LNR, and we also used the LNR conduit program as our securitization agent in selling the senior A-note component of the loan as part of their normal conduit loan sales process. The securitization sale of the senior $74 million A-note component of the loan leaves us with a $31 million 10-year B-note secured by a great piece of New York real estate with loan-to-value attachment points of 53% to 76.5%, and an estimated yield to maturity of 10.75%. Some of the impressive year-over-year increase in lending activity is reflected -- is reflective of continued improvements in the commercial real estate markets. But to a greater degree, it's a testimony to the brand and presence we've built in the real estate debt capital markets, both here and now in Europe. In fact, we deployed over $5.1 billion since the beginning of 2013, including the recycling of $1.1 billion in capital associated with assets that have now run their full course. We used to say our goal was to see every lending opportunity in the United States relevant to us and cherry pick the best ones. We now think we're well on our way achieving that goal. LNR continued its strong results during the third quarter. The LNR segment contributed GAAP and core net income of $44.5 million and $46.5 million, respectively, both inclusive of allocated shared cost of over $7 million. This reflects an increase of 29% and 30%, respectively, over the results of the second quarter. The improved performance of the segment is principally due to: one, the inclusion of LNR as a segment and our results for the full quarter as opposed to only 72 days in the second quarter, which began on the acquisition date of April 19; second, higher net profits from their conduit business; and third, get higher gains on advantageous sales of CMBS from the LNR's CMBS book, which stood at over $400 million at quarter's end. I'd like to note that LNR has continued to perform better than our pre-acquisition underwriting. We are particularly pleased with the performance of the special services around the conduit businesses. Servicing revenues were strong for the quarter, and although you'll see in the financial statement the decline in the value of the servicing intangible for the quarter of $3.9 million, it's important to note that this decline is below what we expected, principally due to the attainment of new servicing contracts during the quarter and an increased above expectations of the balance of loans and special servicing. Also outperforming our underwriting is the conduit business, whose profits and volumes are significantly higher than anticipated, with 3 securitizations completed in the second quarter and another 3 during the third quarter, resulting in overall pretax profits in the taxable REIT subsidiary we operate this business in of more than $20 million in the quarter. Lastly, I'd like to mention we continue to be pleased with the integration of our legacy Starwood Property Trust operations with our counterparts at LNR, both to continue to realize synergies throughout the organization. At this point, we're on schedule to complete the consolidation of all the company's accounting and asset management operations in the LNR offices in Miami by January 1. As I'm sure you all now -- are all now aware, we announced last week our intention to spin off our single-family residential property and nonperforming loan portfolio this coming February. Barry will be discussing the spinoff in greater detail in his remarks later in today's call, but I'd like to provide some detail on the performance of this segment for the third quarter. Since the beginning of the third quarter, the number of properties owned has grown from 2,778 to 4,269 units, and our single-family nonperforming loan portfolio stood at 1,549 units as of 9/30. Our total portfolio of property and loans now comprises over 5,800 units, with an aggregate investment basis, including capital expenditures and net of depreciation, of approximately $750 million. While the business segment continue to operate below breakeven on a GAAP basis, the operating shortfall narrowed this quarter, and we've made material progress in leasing homes that are ready to rent. We also anticipate the financial performance for this segment will continue to improve as the occupancy rate of the portfolio increases, and we realize gains associated with the sale of nontarget assets acquired as a part of pool purchases. Let me finish my remarks with a discussion of our current investment capacity, our second quarter dividend and provide an update to our 2013 earnings guidance. As of Tuesday, November 5, we had $268 million of available cash, $93 million of financing capacity approved but undrawn and $138 million of net equity invested in liquid residential mortgage-backed security. With this, we have a capacity to acquire an additional $400 million to $750 million in new investments. Our board has declared a $0.46 dividend for the fourth quarter of 2013, which will be paid on January 15, 2014, to shareholders of record on December 31, 2013. This represents a 7.06% annualized dividend yield on yesterday's closing share price of $26.06. At this time, we are revising upward the lower end of our core earnings guidance range for the full year 2013 to $1.95 from $1.90 per fully diluted share. We've maintained the upper end of the range at $2.10 per diluted share. Excluding the LNR acquisition and restructuring costs mentioned earlier, translate to a comparable range of $2.09 to $2.24 per diluted share. Excuse me. Now I'm done. I think I'll turn it over to you [indiscernible].

Good morning, everyone. It's Barry, here with Boyd and Andrew Sossen. That last comment that Stew made, it's not before the acquisition of LNR is before the expenses associated, the onetime expenses associated with acquisition restructuring costs of roughly $0.14 a share. So actually myself was quite astonished when I saw the staff that we deployed $5.1 billion of capital this year, including rolling over $1.1 billion of equity that was returned in form of loans, maturities or loan repayments. So we've had a pretty busy year, and I think it's been a great effort by a ton of people this quarter. I'm particularly pleased, as Stew mentioned, with the work of LNR integrating into the San Francisco offices, STWD and SCG guys across the world who've really stepped up their originations for the platform, particularly in Europe. I'll talk more about that in a second. But from your perspective, and also mine as a big shareholder, I think the LTV remains rock solid below 65%, and we haven't had to climb much higher in the LTVs, those markets remain competitive. I think we used our great financial strength and ability to source large loans and then chop them up later, work with our partners that are now many across-the-board whether it's a life company or commercial bank. We've been able to maintain our disciplined underwriting standards, and we're very tough when we just killed -- had a brouhaha here over a $200 million loan that the equity guys and the debt guys fought for the finish line. And ultimately, we have that much of a disagreement we don't do it, so probably a great deal and probably see it in one of our competitor's books but we couldn't get consensus. And it wasn't about the LTV actually. It was about the floor plans of the real estate and whether they would work for long term or not and what kind of credit tenants they would attract as actually a retail asset. So our book, not only is it rock solid from the LTV perspective, but we are very diversified by property type, by region. Well, if we have one focus regionally, it'd be New York City or even in that city, we're diversified by product type. And I think if you're going to belong in a market, belong in New York City, given the capital flows in the world today, it remains attractive, nearly every solvent world fund in the world, but you continue to see people like the Chinese buy the JPMorgan headquarter building. It just happened a couple of weeks ago, which are equity group has stood on and got smoked. The other thing I think is important from entity level is the number of business lines that we've entered. And we started really as a single business and with that is our core business which is large loan originations. It was purchasing. These days, it's mostly origination. We've added to that some of the businesses of LNR that has nothing to do with the servicing books, things like the conduit business run by a very good team. And they'll turn their book maybe 10x this year. It's like a manufacturing business. They are very good at what they do with the average loan balances, less than $20 million, and they participate in securitizations with multiple banks. The secret product because of the quality of their underwriting and also as the knowledge of the group in terms of -- they was [ph] treated very comfortable with the originations they've been doing this for a long time. That business has turned out to be more profitable than we thought, and it's run very well by its leadership team in Florida. We also have been very active, probably top 3 in the BP sign business, and that's one of the reasons the service has not declined in value, as Stew said, and recently won a couple of more awards there. We used the 218 LNR professionals to underwrite these transactions in week. And often we are contributing loans to those securitizations through those conduits so it's a very synergistic business. And it deploys capital, we'll never deploy our entire books but it's an interesting way. We also get the servicing rights on the strips. So it's good all the way across the board, and we continue to challenge the team in Florida under VP board and company go down and thus giving each other the contest[ph] of ideas. And if we like it, we do it. So it's working really well. As far as the servicing business, I think it's been very successful. From our perspective, the book that we manage has been deteriorating much more slowly than we anticipated, which is also good, and we've proactively and defensively traded papers to ensure our rights to make sure that they didn't go away. We also have the CMBS trading business, and as Stew mentioned, it's a $400 million book that we acquired when we bought LNR, quite different than the other services is that LNR has this gigantic book. And you saw a couple of million dollars of gains in the quarter from the CMBS book. That is them trading that book, and that will be a recurring, nonrecurring thing. It will be as a CMBS come down, they'll be flipping assets to trading into other positions. That is another business for us. Recently, we've also looked at this CDO/CLO equity business and we'll probably see a trade in that area also in the real estate arena, which is something new for us that we're doing. We've always been -- since the day we performed in the RMBS business, which is a business we use to manage our cash and continue to use to manage our cash I'd say quite successfully. And the business we have not abandoned hopes to be in, and we have something teed up in that area, will be the net lease business and we look at a deal like Cole [ph], that's a very -- that's really a bond. And there's, at the pricing paid, you have a duration risk. So we've opted not to do that kind of net lease at those kinds of yields, fearing that over our next 5 years, interest rates will surely rise. So instead we're looking at other ways to deploy capital in that business. And I should also point out, it said in the press release that you can't say it enough, almost all of our book is floating rate. And we are actually originating all floating rate loans. So since that, we believe that our LTVs which we serve certainly do and rates rise, we are a net beneficiary of that, and a significant beneficiary of that. And every time the market sees these rates going up, the mortgage rates all trade down, I try to kick and scream and say the commercial rates are not the residential rates. And hopefully at some point, the shareholders -- new shareholders will realize that, that actually our dividend yields and our earnings will go up if rates go up. Another really notable point for us going forward is Europe. Europe has been slow developing but Europe seems to be at the tipping point and in terms of our ability to write loans. Also plain partnership take the A-note because the 40 couldn't find anybody in Europe to take an A-note. And now again, the safe piece is being bid up by local banks in each market. There are rumors or statements that Europe has $1.7 trillion of loans in trouble so the pipeline there should last most of our respective lifetimes. And I think with the team that we've built there, we have almost, I think, 30 people now in the London office and in Paris. And we've hired recently some -- made some great hires in our debt business. We have a real head start on many other competitors coming to the market. And reflective of those inroads are loans like the Heron Tower investment, which took my involvement and Jeff Dishner, who runs acquisitions for SCG in Europe, and relationships we have with the borrowers which were -- probably hang that western U.S. and 2,000 wealth funds. And when it took like 9 months to get the deal to sit still we also may close it's probably the highest loan, if not the highest quality, certainly one of the most highest quality buildings in central London. And we think we -- I was talking about the money center bank created a tremendous piece of paper. I'd say what you're getting a double-digit yield out of mezzanines like the 10.75 coupon in the mezz that we got in New York City for this loan we did on Heron Tower in the U.K. down in CVD London. That's true actually what you're getting as the equity investor. You're in a body building to 5% meant you'll have to double before you get to 10% and you're already getting 10% out of the box in the mezz. I'd say that's just incredibly compelling when it's 65% LTV. So I really like what we're doing right now. I really like the way the teams are working together. The cross-pollination of ideas and underwriting talents from LNR, from SCG, from the Starwood dedicated executives. It's really exciting when we do -- when we bid a deal at SCG, the minute we turn around and offer to finance it, we're actually trying competing right now on something we just sold, and we're complaining -- begging the borrower to choose us to refinance this portfolio, and we're well over them, we're leaving them e-mail traffic every day. And we haven't had to climb too high in the LTV. We'd rather do, as we said, safe secure loans that keep us -- let us sleep at night. I also think the banks, now that we're in almost fourth year of operation, we started late '09 is that our fourth year? Third year, something like that? The banks really comes to rely on us, we know they'll get a bid and we'll close and we won't retrade. So I think also our reputation is growing and that's how you can deploy $5.1 billion in 9 months. If we were a bank, I bet we'd be in the top 20 banks in the United States in terms of loan originations. We actually started capital to bank investments and we dwarf them. And they originate $800 million, we originate billions, and they're big banks based in California at this point with billions in deposits. So we are really cooking well. My job also, I think right now, is to manage our balance sheet and manage the flow of capital we have, as Boyd will talk about in a second, a pretty robust pipeline. And how do we manage our sources of funds to do so and knowing there will be repayments, maximizing the shareholder price at the same time, having the capital to take advantage of what we think are asymmetric investments more upside than downside and hopefully will last long time. So we're looking whether we should do our converts or our term loans or equity or some other form of derivatives, or whether we should just settle down. Interest in some of these transactions, which is something we've got some interest from, from capital partners that we might sell down a 50% interest in the loan just to diversity the book further and allow us not to have to come back to the equity markets. I want to say a word about our single-family business. We had a great result this quarter, but once again, we've had a drag of newly, I think, $0.04 or so in the earnings from the resi book, which I believe fundamentally we've created shareholder value, and I'm really pleased we did it. And it's a good thing we did LNR because it would have really hurt our results. The one business was accretive and the other business was dilutive. And the business has grown bigger, faster than we would have thought and continues to grow at a pace of $40 million, $50 million a month of homes that we're buying using now the Waypoint platform, which you all know we bought from a emergent too, a financer with the spinoff of the business coming soon. We announced the spinoff, I think, the record date was January 26...

24.

24. And so we'll start trading, we think in February. And we're going to do a 5-for-1 reverse stock split. We anticipate that being around a $1 billion book. That is a $5 -- 5-for-1 reverse stock split, it's about $5 a share, $1 billion book, 200 million shares. When we spin that book off, if you follow the math, let's say, at 26, it's $5, it's book value, I'll talk about that in a second. That means the stock is $21. If you take our current dividend, which we're going to keep at $1.84 on the $21 stock, it's like an 8 9 [ph] dividend yield which will be the highest dividend, I think, Starwood's ever traded at if it trades at that level. So with a better book, more diversification to the book, multiple sources of business, multiple lines of business, we're a real company now, we're not just a pile of mortgages. We're certainly not a pile of CMBSs. And we think it's a great opportunity for us, and we really think the single-family business will begin to trade very well. We believe we have about a 16% gain in that book, $1 billion, it's $160 million, it's almost $1 a share. And our fair market, the value for the quarter we're not including anything for the increase in value of the single-family home and NPL book. I'll also point out a really interesting quirk, which is as we take the NPLs and turn them and get gains in sales of loans, that does not count under GAAP as earnings. So those are many millions of dollars of gains from turning the NPLs. It's not in our GAAP earnings and that's odd but it is GAAP so [indiscernible] GAAP. The other thing I'd pointed about our single-family book, which is very important to me at least and should be to our shareholders long-term, is this company's really unique with 5,000 odd homes. We have this big footprint in Florida, half the homes in Florida. And then about 25% of the assets are in Texas, primarily in Houston and Dallas. And that's not an accident and we've bought buckets of homes and sold them in markets we didn't want to be in and couldn't get critical mass. But we believe that it will make an interesting play in the single-family business. In the Florida market, you can tell those are states without income taxes. And being as close as we are to New York City and our new mayor, we think we'll benefit from that in the Florida market going forward. It will support home prices which I don't expect to get out of whack. And we have an extraordinarily good view of Florida because we bought homebuilder years ago and all their loss in Orlando and Tampa and we own probably, I don't know, 8,000 loss in Florida today and many of these markets, so we have a bird's eye view of what's happening in that market and in real estate, you can do that. You can buy a book and then make additional investments because you have information that's real time on the market and then loosen the market. And places like Orlando and Tampa are really turning fast. And I expect as you look at the national homebuilding market, where aren't we in single-family market? We are not in Vegas. A market that is, I think, third worst in the nation in creating jobs from the trough of the recovery, yet the housing market exploded. Propelled almost completely by speculators and professional capital that just bought the houses and maybe they'll be right long term, but we really focus on markets where there was jobs -- long-term job creation, and we thought favorably long term that, that would lead to home price appreciation over 5 to 10 years. So we have a very different book than the other guys who are public. And we hope the market recognizes that, plus the fact that the portfolio by final extension worth 20% more than book. We'll see how that goes. That company's being spun off unlevered and we'll have upward of $300 million, $400 million, $500 million credit facility in place at the time of the spin. It will have nearly $1 billion capacity to buy homes before it ever comes back to the market to raise capital again. And our current thinking that won't be until sometime in the second quarter of next year or third quarter of next year. So we all will see how well we're doing before we come visit you if we ever raise money in a vehicle or just we'll see what happens. Anyway, we're excited to spend our time merging with -- cutting a deal and merging with Waypoint and getting the best-in-class operator that has national scope with the brand. We had bought the homes basically using a handful of executives from SCG, from Starwood Capital Group. But we really think that now, we have to manage them under single manager, we have multiple partners so we consolidate the book behind the Waypoint team which is best-in-class. And we look forward to introducing them to you. With that, I thought I might turn -- I just want to make sure I covered everything I wanted to cover. I think I did. With that, I'm going to turn it over to Boyd to say a few comments about the marketplace in general.

Barry, like always, you've covered virtually everything but I'll just say a couple of quick things about our business. The pipeline's as robust as it's ever been, which is really, really amazing, considering there are so many other market players who now have discovered mezzanine as a really attractive investment. It's obvious that our scale is probably our single largest competitive advantage, and it allows us to win transactions consistently when we really like them. Recently, we have been successful in a number of development deals in New York City with world-class sponsors at very low LTVs, which is really, really impressive in terms of what it's been able to do for our investment portfolio. Another quick thing worth mentioning is that our -- what we refer to as our smaller loan programs or average loan in our pipeline these days is north of $100 million. But through the acquisition of LNR, we began to pursue smaller loans down to $20 million. And that business is finally getting traction. We've got a handful of deals that are now in the pipeline or signed up. There's an executive down there, Matt Jewell [ph], who's running that program for us and that's really coming on. That's another example of the synergies with LNR working. And the last quick point I'd make is that, as Barry alluded to, or not alluded, spoke specifically about earlier, the percentage of our pipeline made up of transactions generated out of Europe by Jeff Dishner and Peter Denton's groups is now the most material it's ever been as a percentage of our pipeline, I hope. And those transactions consistently have very, very attractive risk-adjusted returns.

Right now, that portfolio's around 10% of our books but we'd expect it to grow significantly perhaps, given the pace of and the scale of those markets. The one other thing I'd say, if you don't look at our supplement, you should. We said when we went public we stated the art and disclosure, and frankly, I'm astonished at how much we give you. But it's really good and you can really see the breadth of our operations and where we operate a number of people in the various offices. It's quite something and it's a non-deal roadshow all in itself. So I encourage you to look at that disclosure statement. A lot of people work hard to put it together for you. And we believe in no surprises, so my team to me and me to you, we'll do the best we can in market conditions. But in general, I've to say one other thing. With Owen's ascension to the throne, we'll be lower longer and that's good for our business too and good for real estate and good for values. So with that, let's take some questions.

[Operator Instructions] And we first go to Ken Bruce with Bank of America Merrill Lynch.

You pointed out that's it's very interesting to see the improvement or I should say maybe the slower reduction in the special servicer business. Is there any way that you can frame what that opportunity is just broadly? I realize it's a little bit of a hard-to-find, hard to define market, but there was a lot of concern about what the melting ice cube might look like. Obviously, that's melting slower, but just kind of understanding what the potential is for new deals and things of that nature would be very helpful.

I think -- Cory.

Yes.

Let me take the front of this and Cory Olson [indiscernible] office in the Miami. Here's the shape of things in the servicer, right? The servicer was the bimodal camel. It had the 5-year maturity of the '07 deck, the '06 and '07 maturities, which were '12 and '13. And then add that 10-year paper that was originated in the same years. Those mature in '16 and '17 and see a little bit in '18. And we have a significant market share of those loans that are maturing both as main servicer. And then as what we expect to get [indiscernible] from may fall apart in '16 and '17. The truth is nobody can really know the magnitude of the fees we will get in '17. What made LNR kind of unique among the 3 major servicers was that we could see near term pretty well. We couldn't see '16 and '17 so well. And if you think rates are higher, they're going to make a lot of money because more is going to default than we probably think. As rates are lower, then probably defaults where we think about today. But it's been -- for example, if you'll have to refinance the 5-year or 10-year treasury at 5 instead of 2 6, does it give any mortgage stress and more fees and more happiness here. And mixing that group something of, I hope rest of those are happy. So we can't -- I would say we're doing a pretty good job of managing the trust and being aggressive to defend our strips or servicing strips. And one of the 3 largest servicers, if you look at Page 15 in the deck, you'll see that the 3 largest servicers, this is Morningstar's rating, are CW, LNR, and C3. And between the 3 of us, we have 70%, 85% of the market. We're 3 guys that basically are the market. The top one, CW, seems to be liquidating now, and they're having a -- they're doing a $3-plus billion float loan sale that will be done in the fourth quarter. So my guess is they're sort of wrapping things up. And I think that will benefit the rest of us going forward. And we can't tell you we have models and we're actually looking at our budgets for next year for LNR. And I'd point out that when we bought the company the servers that we've added something like 40% or less than 40%? No, it's less than 40% of the allocated purchase price. So well, it's a tricky business, it's certainly wasn't the majority of the value of the company that -- what distinguish these guys was 3 other businesses I should have mentioned one of them, Hatfield Philips, the largest servicer in Europe, which is -- I'm actually getting off this call on a call for them conference [indiscernible], which is a sleeping beauty. I mean, I think it's going to be quite valuable for us, that the 100-plus people over in Europe that sleep on [ph] deck. And then you have the conduit business, which is -- we didn't value very much but it's making a lot of money. And then the CMBS book, which is quite valuable for getting -- oh, and the interest in Auction.com, which is the wildcard and that could be worth a lot of money, they're working on an investment with a household name firm that will strike and in excess [indiscernible] we value to that -- but we're not exceeding any real value to that position. It's sort of a hidden asset in the whole portfolio and our logic is only [indiscernible] 7.5% in the REIT and when we split 7.5% is run by our funds. But Auction is a wildcard in terms of value and hopefully we'll get a windfall and that'll be something great and create a lot of value. They can get a valuation like Twitter, when it really can be happy.

Can Twitter buy us? Can you guys arrange that on the phone? We need some cash flow and earnings. How accretive would we be to them?

They're down the street. I'm sure they can make that happen.

Ken, it's Cory Olson. Also on the special servicer, a couple of data points for you. We've been named special servicer on a dozen new deals this year, so we're actively both participating from an investment perspective. We're joint venturing with other players and participants in the market, so those are deals that we'll be adding to the book in years to come. And then if you look at the legacy portfolio, we've picked up net 6 assignments this year. So you're always going to have periods of time when you're due to migration perhaps losing a trust here or there and picking up some. On a year-to-date basis, we're up 6 trusts. So we're both managing the legacy book very actively, and we're, of course, participating on a new-ish market.

Right. And that's what's so encouraging, I guess, as we look at this business. And Barry, as you were discussing some of the issues around valuation, I think this continue to be one of those areas where if the investment community can get a better sense as to what the earnings power for this business is over a long term, I think you'll get better realization of that in the multiples on the stock or expressed maybe different way as a lower yield on the stock. I think also just because there is so many different businesses here, just having some sense as to how they -- how each of them might produce some growth for you would be important. My last question is I guess as you think about capital formation, which you've been very successful with in the last couple of years, and you mentioned in your remarks that you're looking to be a little bit more efficient in terms of the way that you use the balance sheet to maybe allow for sale -- asset sales or syndications or something of that nature to allow you to invest without raising capital. Can you help to give us some sense as to what the capacity is if you went that direction and help us frame kind of -- I think you pointed out you've got something close to $500 million in capacity but how that might be extended if you think about making your balance sheet is -- optimizing your balance sheet as much as possible?

We have plenty of term capacity, term loan capacity and obviously, if we can convert this thing successfully close to a long-term capital, then that could help our equity base. And it's not day 1. And our book value continues to decline. I mean, it's $22 now without the game, the revenue which would make it like $22, almost $23. And I think you can see, you can do the math on our earnings and you know our payout requirements under REIT regulations, ultimately we have [indiscernible] and which is absorbing some -- which is paying taxes on some of the earnings of LNR, so -- and we have been working on some -- do we want to say anything on [indiscernible] or no?

No, we've been, I mean we've been having dialogue with the IRS around ways to potentially classify what's currently being pulling through our pirouettes [ph] and getting taxed at effectively a corporate tax rate be able to move some of that income out of the TRS to the REIT level and avoid the tax leakage that we have at the TRS. So when we added some disclosure in our earnings release this quarter at the beginning of the discussion on the LNR segment, we try to frame for you what percentage of our assets in TRS versus outside of the TRS. And if we're able to effectively classify bad income as good income, and you could see some pickup in earnings going forward.

But this isn't totally de novo. They allow some of the residential mortgage REITs to take a contractual servicing strip and they've tried a little and that will make classify into good REIT assets. And we think there are indications they will do the same for us here. But it's the IRS -- who knows? After my comments about Obama on CNBC, I'm sure they're never going to talk to us again.

[Operator Instructions] And next we go to Jade Rahmani with KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: On the recent pace of real estate originations, can you discuss the average LTVs and target spreads on first mortgages and mezzanine loans that you're originating?

So I'll make a stab at it. If anyone wants to act, then you certainly can. Our LTVs, as you can see, are staying around 65% on a blended average. And we climb higher or lower depending on the risk. We think our loan on Hudson Yards Tower, which is a construction loan, is a fantastic loan and it's probably 50% LTV. As you may recall, I think we originated a $400 million loan. And the borrower or the developer put in $100 million into our loan because he liked the loan so much. So he has a silent position in the deal. And it was a great execution, it's a great -- and the building is leased to credit tenants and the banks couldn't figure out how to deal with Coach, which is a tenant of buying their space and for that to claim [indiscernible] to the banks and the banks couldn't figure out how to do that. But the perfect execution for the rest of STWD. I don't think our LTVs are climbing up, we do higher LTVs in multifamily, just closed a loan in San Francisco, it probably was 80% LTV, a multifamily if you don't go there, and you're just not going to have it in the portfolio. It has a different risk profile than a hotel, for example. So it's by asset class, it's by securities income stream by the roll over schedule, they are using our real estate execution. We're happy to climb -- in fact, I've working on this deal right now on multifamily [indiscernible] if I could reach the borrower and beg for the loan. And I'm told I'll only go higher on those assets and the higher LTV because I know the assets into the lease own them. So I'm totally comfortable [indiscernible] by asset. So if we know that, if there are 14 bids on making this $500 million on the loan, $350 million -- a lot of our guys go to $380 million doing the loan because I know I'm not getting it back plus in this case, the borrower's never going to default and leave you with $100 million. So as far as spreads go, I think the mezzanines are bouncing below. I think we did with [indiscernible]. It was like 9.25 and we go inside like can go single-digits to mid-double digits -- we haven't something since '13, something like that. So the weighted average have included in your deck. You can see it right there [indiscernible] loan by loan but overall, frankly as shareholders should look at our decks overall and look at the fact that we're producing 7 or 9 dividend yields pre- or post-spin, with AAA-rated paper and talk inside of us. We have 0% loans. These loans will go all way down. We're not a book of just mezzanines. We have, if you look at the chart on Page 7 on the deck, we own first mortgage from bonds at top and when we finance those against our credit facilities or [indiscernible] in the case of Hudson Yards at the moment, it's an unloaded first mortgage loan, a construction loan but it's unrivaled and it's pretty coupon for us.

I would just add it's actually quite rare that borrowers ask for anything north of 75 LTV. More often than not, they'd rather put in more equity. In fact, on the deal that Barry was just referring to, those large multifamily -- another multifamily we're competing and trying to win, the borrower just told us yesterday they want to borrow less. They want to drop the LTV. And that's a far more common to see the LTVs at 60 -- I would say, we're seeing way more deals at 65 LTV than above 80. It's rare.

And we can't win them, by the way. They will fall into a life company, they're not going to stretch out, really we're just not going to able to -- not stretch out, but they're going to push it down to the point where it brings the institution into AAA in securitization. It's really hard for us to get that paper. It's been that way for 40 years, though. Nothing's changed, it's the same way. If it's simple and easy, we're just not the guy.

And we've always said that rather than chase our yield by going up and taking a whole lot of risk, if it comes down to it, we're going to stay at the safer end of the spectrum.

But we only have one paper that has an equity figure in it, which is 701 Broadway. And so at the moment, that's the only transaction when we thought we climbed high enough that we justify taking a piece of the equity, which we did. And we value that, by the way, I believe it's 0 and I will tell you that [indiscernible] our equity position, it's not 0. So we have hidden value somewhere in our book. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: And how about on the first mortgage or whole loan side where spreads just generally are?

I mean, spreads have been -- generally? I mean, that's a hard an answer to be specific about. We do loans between LIBOR plus 3.5 and LIBOR plus 8. It's relative to the situation. So we're able to be competitive in all of those spaces. There's no doubt that, as Barry said, rates are low, they don't look like they're going up anytime soon, and there's just a lot more capital chasing the mezz space, so there's some pressure on that. But again, we run this, as Stew said in his discussion, we run a giant cherry picking machine, where we try to see every transaction in the country and then find these particularly large complex transactions where we have less competition. It takes scale to win those.

That is still the niche. The bigger deals are -- they still stress the bank's capabilities to hold the paper. If they're going to securitize it, they'll step up, you have seen them step up [indiscernible] that CMBS exits. When it's a loan like something like a Hudson Yards, they're going to hold that paper and they're limited by size. And we see that in our equity book and we see there's 5 guys sharing a loan and they've got it syndicated to the whole book of the banks. And that's when we can be super competitive. Because we don't have to syndicate and our balance sheet at the moment allows us to take the whole loan on and then syndicate it later when we think we're getting superior execution.

With a plan B on one of these very large, very complicated transactions as a syndicate of banks, just the process of trying to negotiate and close a large complex transaction with 5 banks is a nightmare. It's enormously onerous on the borrowers. And so they much prefer -- we used the term all the time a one-stop shop, they can talk to us, it's one conversation, one negotiation for real estate developers that tend to be valuable.

One of the -- introducing the face something else about that because like we just refinanced our loan -- our regional loan on the Hyatt at New Orleans which we actually made the construction loans to turn on the piece next to the Astrodome which have shot after Hurricane Katrina. And we're really proud of that loan. I mean, we did a great thing for the community and it was a great deal for us. But because it's us and because we have relationship with a borrower, we were able to refinance the loan without competition. He liked us, he liked the way we stepped up the first time. We have, obviously have this loan for I think 3 years. So we have perfect underwriting, I visited the property recently and it's spectacular. They did a great job. We're very comfortable in upsizing a loan and refinancing it without anybody, no brokerage, just us. Those are great. And I think today it still resonates with some portion of the borrowers that they like having a guy they can go to. They can pick up the phone and call Boyd or Warren or any of us and Stew and Chris Tokarski or any of our originating guys and they can get an answer, anything they want outside the loan, they have a tenant they brought in that needs $18 a foot instead of $13 a foot, we look at it, we can change the loan. So we're really super flexible and we are like an old insurance company that way. We're not -- we're -- we eat what we kill. I guess is we're whole guys. We have to like what we originate. That's slightly different for the conduit business, by the way, but further our main business or any business, it's really good that way. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: And on some of the recent European deals you've originated, how does the underwriting compare with the U.S.? Is it similar returns for lower risk or is it much higher expected returns?

I'd say it's pretty similar. Probably slightly higher returns. But we've focused our European lending -- focused on the U.K. We have a look at transaction, but I think we financed a Finnish retailer recently. We're buying some retail in Sweden. So we've been up in those markets and we've looked at some things in Spain, but we haven't closed [indiscernible] partner business that appeared last week. You land in the beer drinking countries only. So Germany is a great winery before and you don't want to land in the wine drinking countries of France and Italy. It's too -- it's very fine line.

A talk of [indiscernible] I'll also point out that...

What do you want to point out here?

That we hedge the currency. So we're a little bit disadvantaged. So local lenders, because we will shape...

50.

50 exactly. 50 bps off of the...

The way depends on them.

Depends on the currency and the duration and the rate differential, but it doesn't for local lender, we can lose. But we're finding American banks actually are taking bigger and bigger positions over there. So we're not even partnering on the Heron Tower. It was published, I can say it. We partnered on the senior that was taken by JPMorgan. So you didn't see these guys over there a lot, now you're beginning to see more of them. As the French and German banks have stepped away from international zones, they pulled back to their borders. So -- and they're stepping out a little bit, which recently closed a German bank in the UK. But for the most part you don't see them and obviously, many of those British banks are just are shrinking, not growing. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Great. A quick clarification on the single-family residential spinoff. The $850 million of assets, including the cash that you're going to contribute and the $1 billion in equity value by the spinoff date, is that the additional purchases that are taking place, you said $40 million to $50 million a month? I assume you're not going to stop buying?

Yes, yes.

So Jade, we announced as of 9/30, we had approximately $715 million in the strategy and of course, spinning out early February at 3 months at $50 million a month and $100 million of cash. So that's probably back into $1 billion.

[Operator Instructions] And next we will go to Dan Altscher with FBR. Daniel K. Altscher - FBR Capital Markets & Co., Research Division: Question on the dividend. Barry, I think you said that you're going to keep the dividend at $0.46, which is good. But thinking forward, it looks like clearly, the core earnings power of the company is going to be better than that. So kind of 2-part question. One, is there room to maybe move the dividend up? But if not, if -- am I right to assume that, that is going to be retained earnings and that's organic book value growth that, well, sets that way?

You'd be right and you're right and if we don't pay it out it goes into book value. So -- But we will -- frankly, we need to -- we're still doing a consolidation of -- we're looking at the numbers from LNR next year and you can see, we're lot of businesses now. We're more complicated than we were and we run a lot of models to figure out like low ends and high ends of ranges and we're guessing origination pace. And so we try to do this is as some margin of safety. And -- but I think you would expect that if our business continue the pace it does, you will eliminate a $0.14 hit from the one-time LNR acquisition. You're -- what did you say, $2.18 in this year or something like that? $2.20.

We had a range of -- we've said $2.09 to mid-$2.20s.

$2.20s. So I don't think we're going to get away with $1.84 and $2.20. I think, we might be a very low end of our payout requirement as a REIT. So that would mean we would have to increase the dividend, obviously that's a board decision, not mine, and we have...

It requires a lot of tax analysis too.

Yes, complicated and in Andrew's case, the servicing switch would change our earnings also and could be materially accretive to the company. So that would also change our feeling about the stability of our stream, and we're really happy to be paying what I hope will be close to our 8.5%, 9% dividend yield, unless the stock rises on the stealth and that's ridiculous. So personally, I own stock and I'd be happy to buy more. I think we'll take the same disclosure tactics to the single-family resi business as we've done to this business. And we should be able to make -- my feeling is we disclose it to you, you make your educated decision, ask us questions. And if you don't like what we are doing, you don't sell the stock and if you do like it, you're going to buy more. I think we're done, right? Thank you all for being here this morning with us, and have a great -- what's coming up, Thanksgiving. Have a great Thanksgiving. Take care.

And that does conclude today's conference. We do thank you for your participation. You may now disconnect.