Starwood Property Trust, Inc. (STWD) Q1 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the Starwood Property Trust First Quarter 2014 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, and good morning, everybody. Welcome to Starwood Property Trust's Earnings Call. This morning, the company released its financial results for the quarter ended March 31, 2014, filed its 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available in the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the company's CEO; Stew Ward, the company's current CFO; Boyd Fellows, the company's President; Rina Paniry, the company's new CFO; Cory Olson, the President of LNR; and Zach Tanenbaum, our recently named Director of Investor Relations With that, I'm now going to turn the call over to Stew.

Thank you, Andrew, and good morning. This is Stew Ward, Chief Financial Officer of Starwood Property Trust. This morning, I'll be reviewing Starwood Property Trust's results for the first quarter of 2014. I'll also provide details of the performance of our investment lending business, LNR, and briefly comment on the impact the Single-Family Residential property business had on the quarter prior to its January 31 spinoff. Following my comments, Barry will discuss current market conditions, the state of our business and the opportunities we see looking forward. For the first quarter, we reported core earnings of $121.5 million or $0.60 per fully diluted share, which is more than double the $58.1 million of core earnings we recorded in the first quarter of last year. The primary drivers behind our earnings growth were obviously the acquisition of LNR, which accounted for 78% of the growth, as well as the deployment of $4.7 billion in new loan and securities investments during the past 12 months, which accounted for the remaining 22%. GAAP net income for the first quarter of 2014 totaled $120.6 million or $0.60 per fully diluted share, which compares to GAAP net income of $95 million or $0.48 per diluted share in the fourth quarter of 2013 and $62.2 million or $0.46 per diluted share in the first quarter of 2013. As of March 31, 2014, GAAP book value per diluted share was $15.85, a decrease over the pro forma level of $16.42 we reported at year end after adjusting for the spin-off of SWAY. The decline was primarily driven by the dilutive impact of an incremental 6 million shares included in our share count at quarter end. Of this amount, 3.2 million shares related to the in-the-money conversion value of our convertible debt instrument, and the remainder related to the issuance of stock compensation awards in the first quarter. Also contributing to the decline was the greater-than-expected asset distribution to SWAY due to the pace of our asset acquisitions in the segment in the first month of the year. There were no credit losses or impairments during the quarter. After adjusting for our accretive share issuance in April 2014, our pro forma book value per share was $16.57, and pro forma fair value per share stood at $17.05. Now let me outline the first quarter results for our major business segments. During the quarter, the lending segment closed 10 transactions with total commitments of $1.7 billion, of which $700 million was funded at closing. 98% of these new investments are LIBOR-based flowing-rate loans. As is approximately 94% of the Lending segment's pipeline. These transactions included a good mix of property types, primary market locations and first-rate institutional sponsors. The last dollar loan-to-value exposure for these transactions range from 55% to 80%, and as a group, we expect to earn an average leveraged returns of 11.3%. Included in this transaction set are several large construction loans we've been working on for the better part of the past 6 months. In aggregate, we now have 8 construction loans with an aggregate funded balance of $500 million and future funding commitments of $1.1 billion in our target portfolio. I want to make a couple of important points about our construction exposure. Commercial construction activity fell dramatically during the recession, and the traditional lending sources for large commercial construction projects have been largely absent as the commercial real estate market have rebounded to the point that significant new construction is warranted. During the past year, we've been able to step into this financing void and originate what we think are some of the most attractive loan investments we've ever done. We expect these loans to yield risk-adjusted returns in excess of 11% on a stabilized LTV below 60% and an average loan-to-cost of less -- of approximately 72%. Over 95% of these loans are in New York City with well-capitalized, world-class sponsorship, and the property types that comprise the portfolio are well diversified, with the majority representing mixed-use developments. Additionally, we've been extremely thoughtful in analyzing the impact that future funding commitments associated with these transactions have on our future liquidity picture and at this point feel that these commitments fit in extremely well with anticipated repayments and asset sales of our -- in our existing portfolio. LNR continues to be accretive to STWD, and it delivered another strong quarter of operating results. In the first quarter, the LNR segment contributed GAAP and core earnings of $62.8 million and $49.3 million, respectively, inclusive of allocated shared costs. When compared to the fourth quarter of 2013, GAAP and core earnings of this segment increase by $27.1 million and $4.3 million or 76% and 10%, respectively. This strong performance is principally due to the rally in the CMBS markets during the quarter. LNR was able to harvest realized gains from its investment securities portfolio of $17.3 million, resulting from the sale of approximately $64 million in CMBS. Also related to this portfolio were $19.7 million of unrealized gains and $23 million of interest income. As we discussed last quarter, the servicing intangible is an economically deteriorating asset, which continues to amortize. During the quarter, the intangible associated with this asset declined by $12.2 million, which was in line with our expectations. The remaining fair valuable (sic) [value] of the intangible at March 31 was approximately $222 million. Despite its continuing amortization, the servicing asset continues to perform well ahead of our underwriting expectations, and the current contract base is expected to continue to generate positive returns on our invested capital as these legacy CMBS transactions run their course. We continue to be a preeminent player in the CMBS special servicing business, investing substantial capital into new subordinate CMBS and acting as special servicer for the CMBS trust involved with these new investments. As I've said in the past, the LNR platform provides us with absolute best-in-class talent and systems infrastructure to optimally exploit high-yield opportunities in the CMBS business, the performance of which is naturally hedged by the earnings potential of our role as a special servicer in the same transactions. As of March 31, LNR was named special servicer on $15.7 billion of loans and real estate owned, which continues to exceed our underwriting expectations at the time of acquisition. On the financing and capital fronts, we've had a very busy last 4 months. In January, we upsized our largest and most active financing facility from $550 million to $1 billion, extended the maturity of this facility to a new 5-year term, revised the pricing and sizing of new assets to significantly more competitive levels and negotiated a new term-out option for assets remaining at the facility's maturity to mitigate overhang risk. Additionally, in early April, we sold 25.3 million shares of common stock for gross proceeds of $564.7 million for the purposes of funding a pipeline of identified transactions. As I'm sure you're aware, we completed the successful spin-off of our Single-Family Residential segment on January 31, which now trades on the New York Stock Exchange under the ticker SWAY. On the spin-off date, the asset base totaled approximately $1.1 billion, including approximately $100 million in cash. For the month prior to the spin date, this business segment contributed modest GAAP and core earnings losses of $3.4 million and $1.9 million, respectively, primarily reflective of allocated management fees and overhead charges. In accordance with GAAP, the Single-Family Residential segment has been presented as a discontinued operation. Let me turn the discussion to our current investment capacity, second quarter dividend and 2014 earnings guidance. As of Friday, May 2, we had $277 million of available cash, $123 million of net equity invested in liquid residential mortgage-backed securities and $225 million of financing capacity approved but undrawn. Accordingly, we have the capacity to originate or acquire an additional $450 million to $725 million in new investments. This investment capacity is anticipated to be further expanded by several significant A-note and loan participation sales we expect to close in the coming months. This week, our board has declared a $0.48 dividend for the second quarter of 2014, consistent with the prior quarter, reflecting the company's continued strong earnings. The dividend will be paid on July 15, 2014, to shareholders of record on June 30, 2014. This represents a 7.9% annualized dividend yield on yesterday's closing share price of $24.18. In addition, at this time, we are reaffirming our 2014 core earnings per share guidance range of $2 to $2.20. On a final note, as Andrew mentioned, this will be my last earnings call as the CFO of Starwood Property Trust. When we initially evaluated the possibility of acquiring LNR in late 2012, one of the many synergies we identified was the potential to consolidate all accounting, treasury and asset management functions with LNR in Miami to take advantage of the substantial infrastructure in those areas they have developed over the years. To that end, we've spent the past year orchestrating that transition, which is now complete. As such, Rina Paniry, who has served as the Chief Financial Officer of LNR, will be assuming that responsibility for the overall company. She is a stupendously smart and capable person. I don't use that term stupendous lightly. And you'll find her a delight to deal with as well. I couldn't have had a better partner over the past year. In her, the firm's in excellent hands. With that, I'd like to turn the call over to Barry.

Thank you, Stew. I think I should start my comments by thanking you for your amazing work these past years and since you had to print yourself out of a job by transitioning all of your reports to Miami when you're based in San Francisco, as I think our shareholder base knows. So you've been a pleasure to deal with, and the whole team and the shareholder base and the Board of Directors thank you for all your efforts these past years. And as I've told you privately and I'll say publicly, you should go into a business that we could possibly fund. We'd be delighted to be your partner going forward. So, I think we had a pretty good quarter this year -- this past quarter. I want to start by talking about the economy a little because I think, as you know, from the start, we have an overall macro view, which informs the investments we make and where we deploy shareholder capital. So our feeling of the economy is what you'll see it is to be. It's not that strong, and even though the weather impacted the quarter, for sure, I don't expect GDP growth to accelerate dramatically in the U.S., primarily because the rest of the world is not pulling its weight any longer at rapid growth. So I'd see the number between 1% and 2% GDP growth in United States, lower than that in Europe, and nobody believes the numbers coming out of China. So -- and obviously, South America, led by Brazil, is functioning at a dysfunctional rate of growth. It's not really absorbing the cost increases inherent in their labor structure. So I think we're going to see lower, longer, globally. And I think most of you and I and most every economist have been surprised that the 10-year is below 2.60% at the moment. That has to be good news for the REIT and good news for our shareholders, as our dividend and our yield globally become super valuable and super attractive. High yield continues to trade around 5%, and I'd argue that our dividend of 7.9% with secured mortgages, whether they're first or we call A2 notes because, they're first sliced in half, match funded are just far superior risk-adjusted returns for shareholders than you could find in high yield and certainly in corporate. I do think what this means, though, is with the flood of liquidity in the world, especially attracted to real estate, we see a lot of crossover capital are coming out of corporate bonds into real estate, mortgage bonds, again, and that's propelling the rise in growth in the CMBS market once again, is that spreads will continue to come in, which will absorb some increase in rates going forward if it, in fact, it happens. But I think you'll see short rates go up. We plead God they go up. It's good for us because we have LIBOR-based loans. But I don't think the curve is going to steepen, or it's going to flatten. I think the -- without growth, I don't see the 10-year racing away from you. Anything that goes to 3%, if the short end goes to 2%, you're going to see huge compression in rates or a flattening of the curve. Good for banks, good for LIBOR-based lenders, and keep that in mind as we continue to generate LIBOR-based loans and focus only on LIBOR-based loans going forward. So I really like our book. I think it's amazing, as we've said. If you've been with us, and some of our shareholders have been with us since the IPO, we said we'd build a diverse book, which we have, by asset class and by geography, which we have. We said we would focus on safety, which we have. It's pretty interesting to see the LTV of our book hovering around 66% and pretty consistent quarter-to-quarter. We've moved into Europe, as you know, and done some amazing deals. The cover of the annual report, if you haven't seen it, is Heron Tower, which is one of the finest buildings in London, and we featured it on the cover of the annual report for that reason. We have a great book. It's quite valuable. I think, if we sold it in bulk, a life company would take it down to a very attractive price compared to where we're marketing it at book or fair market value. We have, as you know, also focused on the major assets -- the major markets and the major assets. New York City is well represented in our portfolio, and that's because it is, by far, the best market in the U.S., with deep investor interest. And we see that from our equity positions at our client base, which includes -- almost 10 of the world's sovereign wealth funds are very focused on that city and will keep values high for a very long time. We're also watching, as it relates to loan-to-value, Fruchter [ph] reforms that are making their way through Congress. The biggest beneficiary of Fruchter [ph] reforms would clearly be New York City. So all the property markets in United States are pretty stable, and they are slowly improving. Even the once-dead suburban office markets are getting better, and certain markets are actually doing quite well in suburbia. You just need to pick your spots. You saw us do a deal in Minneapolis after the quarter end, which is a pretty good suburban market. Even multis, which we feared were going to be overbuilt, are still seeing rents rise, and I think -- there's a great debate about the housing market. I actually think the housing market is fine. I think the issue is more the subs, that there aren't trained subs and there isn't demand. But that doesn't mean, in certain markets, housing prices didn't run further than they should have based on galloping investor interest, which propelled these markets, like Vegas and Phoenix, far beyond where they should have been pushed. And so they're correcting. But for the balance of the company -- for the country, as you saw this morning with Tripoint's earnings, the housing market is quite good, particularly in Southern California, though they are limited to their ability to add product, nobody's going to want to spec housing there because of subs, which means that you might see some tick-up in inflation in the construction trade. And maybe some of those people will reenter the workforce, and that's good because that will propel the GDP growth higher. The lending markets, on the other hand, are super competitive. I think our -- we continue to rely on our speed, our knowledge, our relationships, the fully fixed acquisition guys we have in Starwood Capital Group, to amend the [indiscernible] are dedicated to the REIT, as well as the 74 asset management people in the various functions of the firm also can look for opportunities for us. I would have liked to have seen more loans from Europe in the quarter, and we continue to press our European team. There, too, spreads have come in dramatically over the last 12 months. And even on the equity side, we're able to refinance loans that were LIBOR plus 450 or LIBOR plus 275, and those spreads will continue to come in as Europe recovers. Probably the most important statistic I look at when I look at what's happening in the world, I know how sanguine investors are becoming, is the 10-year in Spain and Italy, which has hovered for years above 4%, 5.5% and 6% and 7%, and then crashed this year, falling from 4% to like 3.18% and actually getting very close to U.S. 10-year treasury rates, which is quite something, given the moribund economies of both countries, though they're both mending. So we are looking at other geographies today and other product lines to add to our business lines. We have many business lines. We don't have the one. And the special service is interesting. At $222 million, that's less than 5%, I think it's 4%, of our book, but a very small part of our overall business. And in fact, our small loan conduit business; the CMBS investment and trading business; the B-piece business; the servicer, Hatfield Philips, which is our servicing business run by the REIT in Europe; all those are contributing meaningful to our growth and take us away from being a book value company and towards a global finance company, which is what my goal is for our firm. We also made a key hire to run Hatfield Philips in Blair Lewis, and he joined us in January. I'm really excited about the future growth and potential of that business. Also, I'll point out in the quarter or prior -- early in the quarter, it was announced that Google took an interest -- put $50 million investment into Auction.com at a $1.2 billion strike price. I'll point out, in our book, in our earnings, that is a 0 value. It clearly has value, and Google wouldn't invest and Google Capital in something they thought couldn't be the leader in its field. So that's a free option for shareholders on something that could have significant value down the road. Also, I'll point out the assets like 701 Seventh Avenue in New York City, which was a retail base deal where we financed the project for developer, Steve Witkoff, in partnership with Vornado, who we sold a piece to, to secure our -- to make sure our position was safe, then signed a deal with -- to put a Marriott on top of the box, and Marriott provided a put on the hotel, which gave us the ability to significantly increase the construction loan, and then we split it in half and sold it to another investor. So we wouldn't assume this exposure to that, but we do have a 10% equity kicker in the transaction, which we believe is worth tens of millions of dollars, and that's 0 in our book. And also, we did not accept an offer to sell it. And I'll also point out that we believe our CMBS book is quite valuable, and though it's marked at fair value, we would suggest it might be worth more than that. And the sales that we made in the quarter, you should expect us to continue to look at individual securities, some of which they recently bought or are just trading around, very high IRRs, but we think that's an interesting business. We have an unlevel playing field because we have very good information on all the CMBS legacy securities. We'll continue to mine those opportunities going forward, and every day, I seem to get a wire transfer of $22 million or $5 million or $8 million as they buy and sell these positions. We sold the ones we sold because the yields to maturities fell below 5%. And there are others that, when we see stuff like that, we must take advantage of the marketplace and sell these positions. So we'll continue to do that. It should be viewed as a recurring, nonrecurring because they will recur overall going forward. I also will reiterate how Stew's comments about the accomplishments of Rina and Stew and Cory and the teams in integrating the Starwood systems in with the LNR platform. We had -- I don’t know how many people we have in accounting before, half a dozen, and now we have 60. We had an IT platform of, I don't know, none, and today, we have like 40 people doing IT. So one of the other projects we have here is working on our database and making it usable across the company and across all our entities so that we have unbelievable information on loans and on assets and on our performance, which will help us underwrite. And Stew raised that in the year-end discussion with me that we're not taking full advantage of the extraordinary skill of our enterprise, which, today, I think, is a $38 billion asset manager. So I think we'll keep working on the market opportunities that are afforded to us. We want to drive the earnings growth to create a full-fledged finance company, and that will create continued growth in our dividend. The key for me has always been the diversity of our book and the ability to not face rollover risk. The construction loans we made will fully -- pretty much fully match the expected maturity to prepayments and repayments of our loan book in the near couple of years, which means the cash that we get back that we couldn't deploy, and don't forget, it's earning close to between 7% and 11%, then goes to 10 basis points. That's a problem for us, so if we can fund these construction loans, they will absorb those repayments. And because of the nature of borrowers and the quality of the projects, we're very comfortable that these are really good assets. And for example, we have a construction loan on an apartment deal in the Upper East Side where our basis is -- our breakeven is $850 a foot. If you know anything about Manhattan real estate, that's about 1/3 of what it's probably selling for. In fact, I think that project is sold out or close to being sold out.

90%.

90% sold out. It's...

More than 2x the debt.

More than 2x our -- so it's construction exposure, but it's not really construction exposure. Included in that book is also Hudson Yards, which you should be fond of making construction loans as good as this. It's above an 8 coupon. It's the first mortgage, and as the project's completed, we will lever it. And I think our basis is something like $500 a foot, which no office building is traded at $500 a foot. And it's -- I think it's like 70% leased now. So very exciting stuff. You saw Tishman Speyer pay $438 million for a piece of dirt next door. And our construction loan is, I forgot how big, but it's about that big.

Total loan's $475 million.

$475 million for a first mortgage on a million-square-foot office tower. So it's super safe and producing a great yield for you, and better when we lever it. It's still unlevered. One of the other things that Stew mentioned, briefly, was that we have decided, with some of our clients, to lay off some of the construction exposure. And we have a deal cooking to sell down a $150 million position in one of our New York City loans, one of the newer ones, which we will do. And it's in process, we believe, and we will earn a profit on that sell-down and then recycle the cash, which is a significant trade for us. It's a $150 million layoff to a foreign insurance company. We would like to do more of that. The only issue is that capital is typically much slower than we are, which gives us the opportunity to make the loans in the first place, but we'll have to warehouse them and then sell them down, and we have a significant interest from clients looking to participate. And then we're really going to be a bank-only purchase without our loans. So in summary, our outlook and the pipeline is quite strong for the company. I expect we will tighten our spreads to lend against ever-better real estate, but I also think our new credit facility, which Stew and Cary Carpenter helped negotiate, are going to allow us to lever them a bit more and still achieve a reasonably good and better-than-good yields with a LIBOR base, again, going forward. We think this is better than stretching too far with worse collateral, but I would like to take advantage of our 90-odd, 100 people at SCG to do more loans that have kickers in them and participate in the recovery of the real estate market. So hopefully, you'll see us climb a little bit in LTV and take something with kickers that may be available in the marketplace today. Not everybody wants to borrow 80% and give you 20% of the project, but some people might, especially if they believe we're going to add expertise into their capital stack. And in all circumstances, these kickers will give us free upside, and hopefully we won't have any incremental downside if we get our real estate calls right. We can only achieve -- do this strategy because of the breadth of the total organization, and we're very excited about the future of the company. And we welcome Rina Paniry as our new CFO. And I want to thank all the people in the company for a really broad-based giant effort. It's a big company today. We product $120 million of profit in the quarter, so almost $500 million a year in profits if we annualize that. This is a big company and it's one of the largest banks, except it's not a bank, in United States. We're doing almost $5 billion of new lending in a year. It makes us, I would think, in the top 10 financial institutions in the country, my guess is. So with that, I think we'll take questions.

[Operator Instructions] We'll first go first to Jade Rahmani with KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask about the real estate lending portfolio and what you think an appropriate leverage target would be. If you assume 50% to 60% of your lending portfolio is mezzanine or subordinate mortgage debt, how much on-balance sheet leverage do you view as what you're comfortable running with?

Well, we're running lower than our -- I guess, our major competitor would be Blackstone at the moment. We're not running as levered a book. We look a little differently, partly because of the nature of our -- we're it doing first mortgage loans, which absorb cash, but they're high enough coupons that they're slightly dilutive to the enterprise while they're unlevered and then wildly accretive when we lever them down the road. We could lever some of them today, but we might as well wait until we can get sizable first at a very attractive [indiscernible] spread rate. so I would guess, what you think 3? 2.5?

Well, we've talked about it, Jade, I think, in the past a number of times. I mean, we have, really, 3 ways to finance ourselves, right? We use -- historically, prior to February of 2013, when we did our first convert, we really only had access -- we financed ourselves either with secured warehouse lines, on-balance-sheet warehouse lines, or we manufactured the same kind of leverage with A-note sales, so it would be an off-balance-sheet equivalent. With 2013, we matured to the spot of the company that we issued over $1 billion in convertible debt at really attractive pricing, and we also now have a rated term loan of almost $700 million. So we have a -- we now have a fairly substantial access to a corporate-style debt; we have $3.3 billion in on-balance sheet, secured warehouse capacity; and then we have a very -- as Barry mentioned earlier, I think we have one of the premier syndications in A-note sales desks on the street, let alone for a company that looks like us. So to some extent -- and we talked about it -- again, I know I've covered this concept on these types of calls in the past. Our business MO is to make safe, call it, 70% first mortgages and retain the 45%, 50% to 70% slice of those mortgages. And we can -- we manufacture that retention with both -- in those methods I just talked about, either with on-balance-sheet leverage or off-balance-sheet leverage. So to some extent, historically, we've been running at about 1:1 in leverage. It's an absolute artifact of just the optimization of what's the right financing source. If the A-note market, if -- as Barry mentioned, if we start doing -- if, in the next 6 months to 12 months, we do a wide -- a large -- we originate a lot of high-quality, very attractive bank-like loans, we'll probably sell the bulk of those in A-note form. If we do a securitization, if CDO market is returning in a fairly substantial way, we -- that's a market that we watch constantly. That will represent -- in most structures, that would be an off-balance-sheet-style transaction. We have -- like I said, we have access to corporate debt. To the extent to which we utilize that, that will represent on-balance-sheet. To some -- so to some extent, the business MO will -- at least, unless we decide to change it, won't change, but the actual on-balance-sheet leverage will be a function of the combination of on-balance-sheet alternatives and off-balance-sheet alternatives that we utilize. So we don't have a firm target. That said, I'd be surprised if we ever got above -- really, much above 1:1. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Well, I think that's very helpful. In the past, I think you've mentioned further diversifying the business. I wanted to ask if, at this juncture, you're comfortable discussing, as you survey the real estate spectrum, what other markets could be of interest? One example that comes to mind is for -- is lending to small to middle-market, single-family rental operators, which some have started conduit operations for with plans to securitize. Is that market attractive, or are there any other ancillary markets you're considering?

Why don’t we tell you after we do it? We have been booking at a number of businesses, and it's one of our key objectives in the next 12 months is to start 3 or 4 of these lines of business, so hopefully, that -- we'll get them done. And we think there's opportunities in not only lines of business. But also in geographies, different geographies with capital like ours. So we just built the organization to do so, find the right people.

We'll go next to Joel Houck with Wells Fargo.

The -- if you look at LNR, the conduit business gain on sale was over 5%. The EPP base is increasing. Is this -- the platform more stable than you'd previously anticipated, and how -- relative to your initial expectations going in when you first closed the deal, can you give us a sense for how much more accretive it's turning out to be? I mean is it 10%, 20% or -- if you could kind of put a range on it, that would be helpful.

So yes, I mean, both the fees and the liquidation of the book is slower we thought. Part of this you manage yourself as you work with borrowers and work the book. Some of it, you're a victim of the markets taking longer. Don't forget, I mean, the key year -- there are 2 key years for us. By the way, LNR is now the largest servicer, again, in the United States. And there are -- these '16 or '17 years will represent the 10-year maturities of the '06 and '07 legacy CMBS, so those are really critically interesting years for us. And we kind of expected almost a 2-hump camel with a good earning short-term flow down and then good earnings in '16 and '17. I think across the board, these businesses are performing better than we underwrote. Some of it, you just can't easily underwrite. And I think you're wrong about the CMBS trading operations. Don't forget, we have a TRS and -- where a lot of the trading is housed, and that's taxed, so we do pay taxes. And we should mention, I don't think we did mention, that the unrealized gains in the book is not part of Core Earnings. It's really important. I should've said that multiple times. So that's just in GAAP but not in Core. And you could expect that, if we harvest those gains, then they will fall into Core. But I would say that some of our securities, honest to God, are not -- there's some judgment in marking them, and we've hopefully erred on the conservative side so we don’t have any issues going forward. It is performing far better than we thought. I would say that, in it's entirety, that would be true, every part of the business, actually. Cory, you want add anything? You're the expert.

Yes. No, I think that's a fair statement. We've got more, as we call it, cars on the lot. The amount of loans and REO that are sitting in special servicing is higher than we anticipated it would be at this point in time, just under $16 billion. The conduit, the smaller balance loan origination platform is doing extremely well in a very competitive market. We did 3 deals and in Q1, we think we'll do another 9 the balance of the year. So -- and all of the cylinders at LNR are performing, I think, at or above expectations at this time.

We're thinking that the only business we're going to call a special service of LNR is the special servicer, and the rest of the businesses, our conduit business, now carries next to our mortgage capital. So we're going to -- hopefully, over time this won't be its own -- it will be integrated into the whole company, which it is, but when we can continue to do a better job of that -- having Rina there will help to carry the Starwood futures now, rather than just insurance. So I think, Cory, if I would guess, we might have underwritten the book to be 12 now, as opposed to just under 16. Is that about that?

That's about right. I think we're almost 20% higher at this point than we anticipated we would be as part of the underwriting.

That's very helpful. And just to clarify, in your reconciliation, net income to Core, your core EPS is $0.60. That does back out $22.5 million of securities gains for the quarter, does it not?

Right.

Backed out the...

Unrealized gains...

The unrealized gains are in...

They're in GAAP, but they're not in Core.

In GAAP but not in Core.

Not GAAP.

Correct. They're in GAAP, right.

[Operator Instructions]

All right, well thanks, everyone, for being with us today, and as usual -- whoa, whoa, whoa, there's one more question I'm being pointed to.

We'll take our final question from Arren Cyganovich with Evercore.

The -- I had a question on the liquidity position relative to your unfunded commitments. You talked about it a little bit, I guess, with the maturities expected. How easily are those matched relative to the unfunded commitments? And what other areas can you use to help fund those unfunded as they come due over the next couple of years?

Well, the construction jobs are fairly predictable from our clients at this point. So we know what they look like. And we have the stated maturities. Those are very predictable. And then we have prepayments, which we'll mainly get -- if they're faster, we get more capital earlier than we've modeled, but we've modeled what we think will be when loans are open to prepayments. And I think -- and they're very well matched right now. I mean, that's one of the reasons we've kind of put brakes on some of our construction opportunities. Even though they're really interesting opportunities, we just don’t want to do the entire book that way. So we're going to balance this business part of our overall business. But, if we needed to, we have an RMBS book we could flip, we have a CMBS book we could sell, and we have undrawn credit facilities we could call on, and we could sell individual loans that we own. So we don't really worry about our liquidity, although we watch it, obviously, as anyone would. And if it's one our key things that we look at. I think it's also interesting that we had no impairments in the quarter, and the book is pretty damn good, and it's producing an 8%, 7.9% yield on 24 books, which it may not after this morning, but it's pretty impressive. That's really impressing, given where the world is today. So -- and that's really a combination of lots of things. But we see -- we don't see a lot of issues at the moment, other than just it's competitive out there. Don't kid yourself. This is a -- U.S. lending market, you got to have people wanting to do business with you today because there's -- they like our -- the best thing that happens to us are references from borrowers, when people say, "Your team was fantastic," and I do hear that a lot. So that means that -- and they come back to do additional deals with us. Working on a deal -- a big deal right now in -- on the West Coast with a repeat borrower, and he's going to probably give us a deal because we did a really good job on the last deal we did for them. So that means you kind of get a last look and you kind of decide if you want to take the exposure or not. That's happening a lot, actually, for us. We'll say, "You know what? We're going to pass." And occasionally, we see guys now wandering in from offshore. We see hedge funds that are making construction loans, believe it or not. And we also see life companies coming into the business, which is relatively new. Because the banks really can't do these big construction loans when Basel III kicks in. The capital regs for them are brutal. So you're going to see a complete makeover of construction lending in the United States. And given the nature of the capital that might make them, whether it's life or us, some portion of them, I expect the markets will be much more, what's the word, balanced and less prone to getting overbuilt because, I think, we approach it with a much more skeptical eye. So we have one more question, and we'll take that.

That's helpful. Just as a follow-up, the -- Stew made some comments about potential A-loans in securitization. What form would the securitization likely come in? And do you have any idea of what exactly you'd be looking to put into that as to specific property types, geography or capital stack? I guess, probably senior loans, I'm assuming?

Yes, I mean, if you look at the recent CMBS activity, CMBS, CLO-type, CDO activity. There have been a number of whole loan, floating rate -- sorry, securitizations of small loan count, large average balance, floating-rate loans that look similar to types of loans that we make. And for a variety of reasons, I mean, we -- I think we're -- it's fair to say we are absolute experts on this space. For the most part, the economics of those transactions haven't -- it hasn't competed well with our alternative financing sources, with our direct sales of senior components of loans to other senior lenders or the credit facilities that we have and the corporate debt alternatives that we have. But of late, there have been, with continued rallies in the CMBS markets and some structural nuances that are now becoming more prevalent in the marketplace, a whole loan style small securitization of -- call it, a dozen to 2 dozen loans now have economics that look like they're -- it likely could complete reasonably well with some of our other alternatives. And so I think the type of thing that we would look to do would be to take 10 or 20 loans, let's say. They would be unlikely to have, like, construction exposures. They'd unlikely have large unfunded balances. But they'd be funded loans, transitional in nature, transitional and stabilized in nature, very much like the rest of the book that we do, and we would -- if you think about that comment I made earlier where our goal is to hold sort of a very wide slice of a safe lending transaction, let's call it a 70 LTV overall mortgage whole loan where our goal is to retain that 45%, 50% to 70% slice, if we pooled 20 of those loans together, let's say we put $500 million of those loans in a pool, we could sell $300 million to $350 million of investment-grade debt at expense -- at sort of an all-in cost, including issuance expenses and things, probably compete pretty well with our warehouse lines or where we're selling A-notes, and that might be the type of transaction that we'd do. It would be just another substitute. It would be similar in every respect, from our perspective, to the other financing alternatives that we'd do.

But just as a layman in that space, I've always challenged the team to look at that, whether we should just do our own securitizations of our A-notes, if you will. And I'm always astonished at the coupons that our guys, when you look at the duration and the fees and the costs -- not the coupons, the costs that the rating agency process and they underwrite a whole thing, it felt -- the fees are much higher than the coupon. So the all-in cost to the firm has been not attractive. As the CMBS market continues to tighten, and lets assume we can tighten our lines, credit lines, which we have been able to do, lower the spreads on the credit facilities. Then if it is a more attractive execution, we will do it. And we might -- while it's too soon to do a construction loan, we'd certainly do a loan when the building's open and to be utilized.

Exactly.

So we'll have to -- when we're earning an 8 on a first mortgage, we might wait. I mean, having the Hudson Yards project in a securitization would be the great anchor to our own deal. We'll have to wait and see and see where the world winds up. But it's interesting. The markets are bouncing around a little bit lately. And if you've been following the CMBS market, it's widening, it's tightening, it's widening, it's tightening. It's kind of a weird market, although the payoffs that people are seeing in these AJs and AMs and -- are really often far greater than people thought they would be today with the property values soaring. So you're seeing some windfalls in some of these securities from the astonishing prices people are paying for some real estate across the U.S.

And now the final question will come from Dan Altscher with FBR. Daniel K. Altscher - FBR Capital Markets & Co., Research Division: I was wondering if you can maybe just give us a sense for some of the legacy portfolio loans that have now paid down, maybe what those overall yields were, whether it's ROA or unlevered or levered and maybe how that's -- or what that's being replaced with?

I don’t know the answer to that. It's -- I've never really looked at that. I think -- it's interesting, we looked at -- I asked our guys. 75% of -- 98% of our pipeline of what was done this quarter was -- 96%, whatever it was, was LIBOR based. 98% of the pipeline was LIBOR based. 75% of the existing book is LIBOR based. That's relatively new because we did -- and then, of this 25% that's not LIBOR based, about 2/3 is mez and 1/3 is first mortgages. And the first mortgage coupons are close to 7 that are fixed, and the mezs are close to 10. So we don't think there's any real risk in that book from a rise in rates, because obviously, their LTVs might be improving, not from where we originated them, given the rise in property value. So they probably are gains in the whole book across the board. The -- so I think that you have this call on rates in the book, which is a free option for us. And if do get rates in October to rise, we're going to have a big party. Short rates, that is. And I think that's probably the biggest difference in the book. The LTVs have been fairly constant for our entire life as a public company, I think. And the mix of properties, pretty the same, I think. And we did a Walgreen's loan in the beginning and...

It was in the -- held early on, and now that's dissipated, it's really much more balanced.

Yes, it's interesting to me that the book is not hotels, and we've -- by the way, if we want to do construction loan in hotels, we can put out $25 billion in a quarter, but we won't see us do to that. But there's -- it's interesting. I mean, I don't know. We'd have to go look. My guess is we're down 100, 150 basis points on stuff that's maturing.

If you look at the migration of the -- in the release, we always provide that table of the leverage returns. And if you just think back...

It's still 11.48%, isn't it?

Think back, we're 11.5%. And I think the biggest number was probably 12.6% or 12.7% or something like that a couple of years ago.

That was like in 2009 when we had a...

By the way, it's worth pointing out that the unlevered IRRs on almost all the construction loans are north of 9%, unlevered; and their levered IRRs are well north of 11%. So that migration from the old really high-yielding paper into easily leveraged construction loans to surpass those rates is a big reason why we put them on.

And the reason it's 11% is they actually are 9%, and then they're 9% for 1 year or 2, and then they're 14%, and that gets you to 11%. So -- because they get levered, obviously, they're credit's in place, it's an office building or whatever it is, a multifamily rental property. So we have lost the 2 large deals to hedge funds in the lending space. And one of them was an overseas hedge fund. So we see all kinds of players in the market today, not necessary the traditional guys you would have expected. But -- and I think the banks like us. They like sitting -- seeing us on top of them, although sometimes they like to take a whole loan themselves. But we're easier to deal with than most of the banks. Daniel K. Altscher - FBR Capital Markets & Co., Research Division: And maybe just a follow-up also. I think generally, you've been fairly agnostic in terms of property types. It's generally all been about finding the best risk-adjusted returns. But is there anything that you see coming up these days that you continually are passing on, whether it's property types or geographies, because you think the risk-adjusted returns are just so poor?

Interestingly, we've built a retail platform at Starwood, so we've got 180 in Chicago in Star Retail Properties. And we're finding retail tough to do at the levels people are willing to do it. So we've enormous expertise -- in fact, I was with the team yesterday, the retail team, and they were telling me about a deal that they worked with the team in San Francisco and killed because they knew everything about the center. So the board whispered, "retail", and I think that's true. I think you're not seeing us make a lot of retail. Its only 8% of our book by net, whereas office is 29% and multi is 29% and hospitality is 29%, mixed-use is 10%, multis is 7%. It's surprising to see that, but I think it's -- I think, really good retail is probably in Core, and they're borrowing 45% against it, and that's it. So we're not playing there. So that's -- it's both. When we see it, it's probably screwed up, and if we don't think it's a value-add re-tenanting situation, we're just going to pass. That's -- it's interesting. I think the other thing we're seeing is -- we still see deals, we have one deal in shop where the borrower has more than $200 million invested in a hotel property, and they're looking for $8 million first, but the asset only makes $3 million or $4 million. It's a 5 yield [ph]. It actually covers debt service on an $80 million mortgage, but I'm not sure why, when we lend against it, it's going to perform any better tomorrow than it did yesterday. It's the same management company, same owners, same -- the asset's in great shape. There's nothing you can do to it. Tough deals. I mean, it's interesting. You've seen this equity value appraisal there, I think, of $120-odd million, but this appraisal's forecasting a turnaround. We just don't think that -- I don't think that market's going to perform much better than it is right now. There's a lot of supply coming in that town. So there's lots of things out there. We just cherrypick them. Thank you. Thanks, everyone. Have a great day, and we appreciate you being on the call with us. And Stew and Rina, Boyd, Andrew, Zach, everyone's here to answer your questions today if you -- or tomorrow. Or come visit both here in San Francisco. We're happy to spend time. Thank you very much. Go visit them in Miami, too. You'll be impressed. Goodbye. Thanks, Cory, remotely. Have a good day.

See you.

This concludes today's conference. We thank you for your participation.