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…

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…

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…

[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…

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…

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.