Zachary Tanenbaum - Director of Investor Relations Rina Paniry - Chief Financial Officer Barry S. Sternlicht - Chairman, Chief Executive Officer and Chairman of Investment Committee Jeffrey F. Dimodica - President Cory Olson - President and Chief Financial Officer Andrew J.

Sossen - Chief Operating Officer, Chief Compliance Officer, Executive Vice President, General Counsel and Secretary.

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division Daniel K.

Altscher - FBR Capital Markets & Co., Research Division Eric Jansen Beardsley - Goldman Sachs Group Inc., Research Division Donald Fandetti - Citigroup Inc, Research Division Charles Nabhan - Wells Fargo Securities, LLC, Research Division Kenneth Bruce - BofA Merrill Lynch, Research Division.

Good day, everyone. Welcome to the Starwood Property Trust Third Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir..

Thank you, operator. Good morning, and welcome to Starwood Property Trust Earnings Call. This morning the company released its financial results for the quarter ended September 30, 2014, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website.

These documents are available on 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.

And 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; Rina Paniry, the company's CFO; Jeff Dimodica, the company's President; Andrew Sossen, the company's COO; and Cory Olson, the President of LNR. With that, I'm now going to turn the call over to Rina..

Thank you, Zach, and good morning. I will begin this morning by reviewing the company's third quarter results, first on a consolidated basis and for each of our 2 business segments.

Following my comments, I will turn the call over to Barry, who will discuss current market conditions, the state of our business and the opportunities we see looking forward.

Starwood Property Trust continues to deliver strong results for its shareholders this quarter, deploying over $2.3 billion of capital and declaring another $0.48 per share dividend.

During the third quarter, we reported Core Earnings of $124.8 million or $0.55 per diluted share, which is up 8% over the $115.2 million of Core Earnings and $0.51 per diluted share that we reported just last quarter.

The primary drivers behind our earnings growth were continued strong performance from both our lending business and our securities portfolio. The rally in the CMBS markets drove our GAAP earnings with $52 million of realized and unrealized gains. Our loan book continues to grow as evidenced by our significant capital deployment during the quarter.

Net of repayments, our loan book grew by $300 million this quarter. Overall, the unlevered return on our target investment portfolio remained constant at 8.2% with our levered returns remaining at just over 10%.

As our business has evolved, we continue to deploy capital in those assets which will generate the most attractive risk-adjusted returns for our shareholders, while still maintaining our disciplined approach to investing.

As we've stated in our recent public filing, at this point in the cycle, we believe it is prudent to take advantage of some of the opportunities we are seeing in the real estate equity market, specifically, Core plus equity investments.

We consider these investments to be high-quality, stable real estate assets, which contain a value-added element that would allow us to generate a levered yield of 10% to 14%.

In October, we committed $150 million to our first Core plus equity investment, a 33% participation and a high-quality regional mall portfolio that is managed by an affiliate of Starwood Capital Group.

Our relationship with Starwood Capital, along with a team of real estate professionals employed by our special servicer, provides us with access to unparalleled expertise across the global real estate markets and uniquely positions us to take advantage of these types of equity investment opportunities going forward.

As of September 30, book value per share was $17.06, a $0.47 or 3% increase over the book value per share we reported at the end of last quarter. Fair value per share, which we compute as the fair value of our assets, that is the par value of our debt, stood at $17.65, also an increase of 3% over prior quarter.

This increase was realized despite the fact that we did not issue any new debt or equity during the quarter. Just over half of the book value increase resulted from strong earnings while the remainder resulted from lower share dilution from our convertible notes.

As we've previously disclosed, the in-the-money portion of our converts is included in the determination of our diluted share count under GAAP. The mathematical calculation of the in-the-money portion is largely a function of our stock price at the end of the quarter.

Our lower stock price at September 30 versus June 30 resulted in 3 million fewer shares being included in our diluted share count this quarter. Now turning to the results of our segments. Starting with the Lending segment. During the quarter, this segment contributed GAAP and Core Earnings of $69.2 million and $71 million.

GAAP earnings are flat to last quarter while Core Earnings were down $6.2 million due to the nonrecurring RMBS gains of $10.1 million that we took advantage of in the second quarter. Core interest income from our loan portfolio increased 5% from last quarter, consistent with the net growth in the loan book.

The Lending segment closed approximately $1.7 billion of new investments during the quarter, consisting principally of floating rate loan originations. These new loan commitments include a diverse mix of property types and primary market locations, all with first-rate institutional sponsors.

During the quarter, we also took advantage of international opportunities, announcing 2 co-originations with the European affiliate of Starwood Capital. These loan commitments totaled just over $200 million. Looking forward, we have a strong pipeline of high-quality transactions that continue to meet our risk-adjusted return criteria.

The credit quality of our existing portfolio continues to be our utmost priority as evidenced by an average LTV of just under 65% and our track record of 0 credit losses. I would like to spend just a few minutes on the topic of interest rates and their impact to our financial results.

We have constructed our loan portfolio so that it would actually benefit from a rising rate environment. The majority of our existing loan book and nearly all of the Lending segment's pipeline consists of floating rate loans. So as LIBOR rises, our interest income increases as well.

We continue to finance our floating rate investments with floating rate debt and our fixed-rate investments with either fixed-rate debt or floating rate debt hedged by interest rate swaps.

So while we would pay more interest expense on our floating rate debt if interest rates were to rise, this increase would be offset by a corresponding increase in interest income from our floating rate loans.

For the first time this quarter, we included in our press release a table, which demonstrates how we expect variability in LIBOR to impact our financial results.

As you will see in this table, a 100 basis point increase in LIBOR would result in an increase to income of $17.5 million or $0.08 per fully diluted share, while a 300 basis point increase in LIBOR would result in an increase to income of almost $60 million or $0.27 per share.

This does not include any benefit that our special servicer would realize in a rising rate environment. If rates rise, the expected number of loans that would enter special servicing increases. And accordingly, special servicing fees would increase as well.

Speaking of servicing fees, I'd now like turn to a discussion of the LNR segment's operating results for the quarter. This business delivered its sixth consecutive quarter of strong earnings since its acquisition in April of 2013.

During the quarter, the LNR segment contributed GAAP and Core Earnings of $95.8 million and $53.9 million and comprised $0.24 of our $0.55 Core Earnings per share. Driving the current quarter growth in both GAAP and Core was a continued rally in the CMBS market, which led to both higher realized and unrealized gains as well as higher interest income.

Also contributing to the segment's strong results were unexpectedly high servicing revenue, due in part to the timing of 1 large liquidation, which was originally anticipated to close in the fourth quarter.

Included in LNR's results for the quarter is a reduction to the domestic servicing intangible of $18.3 million, leaving the intangible with the remaining book and fair value of approximately $188 million at the end of the quarter. The increase in the amortization of this asset from last quarter is principally due to changes in debt yields.

As credit spreads continue to tighten, we are seeing secured type loans being originated at lower debt yields. For purposes of valuing the intangible, the debt yield at which loans are expected to default is a key variable in determining the number of loans expected to enter special servicing.

As debt yields decline, fewer loans are expected to default. Despite its continuing amortization, the servicing asset continues to deliver stronger-than-expected performance and consistently positive returns on our invested capital. LNR has maintained its foothold as one of the world's premier special servicers, retaining its 1/3 overall market share.

Further evidencing its leadership in this space, LNR was ranked first in new servicer assignments for the 9 months ended September 30. At the end of the quarter, LNR was actively servicing $15 billion of loans and real estate owned for 146 trusts with a collateral balance in excess of $130 billion.

This balance is fairly consistent with where we were at the end of last quarter. In addition to the strong performance of the servicer, LNR has continued to exploit high-yield opportunities in its core competency of investing insubordinate securities.

As a preeminent player in the CMBS BP space, LNR continues to invest capital in both new and legacy subordinate CMBS while being named special servicer for the related CMBS trust.

Because the performance of these securities is naturally hedged by the earnings potential of our role as special servicer in the same transaction, the earnings resulting from servicing and investment income combined are expected to be relatively stable.

While we're on the topic of B-Pieces, I would like take a moment to talk about the risk retention roles that were recently issued. These roles require sponsors of securitization transactions to retain a certain level of risk in those transaction. And that risk must be retained for a period of 5 years.

The 5-year hold restriction would limit the BP's playing field for only those investors with permanent capital. However, many current market participants do not have access to permanent capital, and those who do tend to have a much higher cost of capital than ours.

In addition, risk retention will be based upon the fair market value rather than the par value of the securities issued in the transaction. This will -- actually I said that backwards. It will be based on the par value rather than the fair value.

This will translate into larger B-Pieces that could reach higher into the structure, possibly into the BBB- tranche. This is the added benefit of forcing more subordination to cover potential losses for the B-Piece buyer at a potentially wider spread.

While we are still evaluating the impact these roles will ultimately have on us, we believe they could provide us with significant competitive advantage, particularly when considering our scale and our ability to hold risk capital long term.

As one of the pioneers in the BP space, we are uniquely positioned to capitalize on these structural changes, either by sponsoring our own transactions or partnering with financial institutions.

We will continue to evaluate the impacts of these roles and will update you as we work through to your implementation period Continuing with our discussion of the LNR segment results for the quarter, we have so far discussed servicing income and income from securities.

The third key contributor to the segment's results is our conduit operations, Starwood Mortgage Capital. This business continues to deliver strong performance, generating net securitization profits during the quarter of $17 million and $16.3 million on a GAAP and core basis.

For the quarter, our conduit originated $586 million of loans and completed 3 securitizations for a total of 8 securitizations during the 9-month year-to-date period. That is a remarkable turnover rate of almost 1 securitization per month allowing this business to generate extremely attractive returns on our invested capital.

While there is certainly volatility in the various line items of the LNR segment's income statement, it has consistently delivered Core Earnings in excess of our underwriting business acquisition in April of '13.

We have talked previously about the expected downward trend in the servicers' revenues until 2016 and 2017 when 10-year CMBS maturities will more than double.

While this decline will certainly be a factor in the LNR segment's results in the coming 12 to 18 months, we expect strong performance in other areas of the segment to help offset the decline, including performance of the expanding securities portfolio, which stands at almost $700 million at the end of the quarter; our conduit business, which continues to deliver superior results; and the mining of new investment opportunities, including the real estate investment opportunities we discussed earlier.

As demonstrated by the past 6 quarters of operating performance, the LNR segment itself is a multi-cylinder investment platform that does not fully rely on 1 income stream to deliver strong results. While we may experience some volatility on a quarter-to-quarter basis, cumulatively, we expect a relatively strong contribution from this segment.

Now turning to capital markets. During the final week of the quarter, we established a share repurchase program, which provides us with a flexible mechanism to purchase up to $250 million of common stock.

During the quarter, we repurchased 588,000 shares pursuant to the program at a weighted average dollar price of $22.10 for a total purchase price of $13 million. On the financing front, we continued our efforts to make the right side of our balance sheet as efficient as possible.

During the quarter, we entered into a new 3-year $250 million warehouse facility and increased the borrowing capacity on an existing facility by $100 million. After the quarter, we issued $431 million of 3.75 convertible notes, which mature in 2017, and increased available borrowings under our largest repo facility from $1 billion to $1.25 billion.

This brings our total borrowing capacity to approximately $5.4 billion under 12 financing facilities across 8 leading financial institutions and 3 convertible senior notes. As we evaluate our sources of capital, we continue to take a very conservative approach to our overall leverage.

Inclusive of corporate level debt, which is our convertible notes and term loans, our debt-to-equity ratio continues to be just under 1x. As we look ahead, I'd like to turn to a discussion of our current investment capacity, the fourth quarter dividend and our 2014 earnings guidance.

As of Friday, October 31, we had $281 million of available cash; $749 million of unallocated warehouse capacity; $84 million of approved, but undrawn financing capacity; and $88 million of net equity invested in liquid RMBS.

In addition to this, we expect to receive approximately $417 million during the fourth quarter in new financings, loan maturities, prepayments, sales and participation. With these various funding sources, we have the capacity to originate or acquire up to $1.4 billion in additional new investments.

Our continued level of capital deployment and ability to generate consistent returns has allowed us to maintain our existing dividend to our shareholders. To that end and consistent with prior quarters, our board has declared a $0.48 dividend for the fourth quarter. The dividend will be paid on January 15 to shareholders of record on December 31.

The $0.48 dividend represents an 8.5% annualized dividend yield on yesterday's closing share price of $22.58.

We believe these returns are extremely compelling, given our high-quality loan portfolio with LTVs of less than 65%, no history of credit losses, a CMBS investment servicing and conduit platform that continues to deliver consistent performance and a modest overall debt-to-equity ratio of less than 1x.

As the year comes to a close, we continue to be pleased with our financial results. Through September 30, we have paid dividends totaling $1.44 per share compared to Core Earnings of $1.67 per share. Based on our current expectations for the fourth quarter, we are narrowing our Core EPS guidance to a range of $2.12 to $2.16 for the year.

With that, I'd now like to turn the call over to Barry for his comments..

Thank you, Rina. That was quite comprehensive and more thorough than we've probably done in the past. So I'd just make some comments -- and good morning, everyone.

When we started this company more than 4 years ago, we were asked a question about the fate of mortgage REITs and that they hadn't performed well and they always overstayed their welcome in the cycle. We kind of promised you that we wouldn't do that.

By turning to a fairly significant -- although not in the scale of our company equity investment this quarter. We are demonstrating our ability to pivot as we see credit conditions get too tight and find new ways to deploy our capital with longer duration in our typical loan portfolio.

What was unique about this regional mall portfolio was the high cash on cash yield we were able to deliver, well in excess of 8%, and the overall stability and excellence of the portfolio. We participated along with 3 sovereign wealth funds that co-invested in this -- with the mortgage trust.

And we'll look to do similar investments that support a high cash on cash yield with reasonable and appropriate leverage globally going forward, if there's opportunities and as they arise.

So we said we wouldn't overstay our welcome, and I think that reflects some of the -- what we saw going on in the credit markets being in the business for now 4 years at Starwood Property Trust and watching these credit cycles.

I think this is the fourth time spreads really tightened, and we saw underwriting standards loosen to the point where we were getting nervous. But then we have this little shock wave go through the markets, the credit markets, and a more -- financing opportunities once again opened up. So by no means are we exiting the Lending segment.

In fact, our pipeline, and now with our new team in place, is bigger than it's ever been. And just yesterday, we got a commitment for an enormous transaction in Europe at a very attractive double-digit cash-on-cash yield to us going forward. And sometimes we may do a transaction that's a 12 or 13 on a retained piece and blend that with an 8.5.

So the overall return is in the 10s range for the portfolio, and we do look at that. And we are actively continuing working on improving, increasing the credit quality of our portfolio.

In the Lending segment, in particular, we're looking at concentration risk, which is a little subtlety by geography because we are nervous, even though we love the major markets like New York City, and perhaps San Francisco, we don't want to our entire book to be in New York City.

That would be imprudent of a global player in the credit market to have that kind of exposure even though it is the #1 city in the country, generating the lowest cap rates in the United States. But we will not have the book entirely in New York City. That would be imprudent.

Because from the start, we talked about delivering a safe, consistent and predictable return to the shareholders, and we've done that for 4 years. And we tend to do that going forward. We'll also point out that we entered in a big way the RMBS market in the cycle. That book grew to maybe $500 million at one point, and today stands at $88 millions.

So we dialed it down, its returns have dissipated. We also entered the single-family home market, if you recall, and successfully spun out Starwood Waypoint to the shareholders, which continues to be the best performing stock -- or operating performance in its sector. Those earnings will be released on Wednesday -- on Friday, sorry.

And so also beyond what we're doing directly in equity and potentially using Starwood Capital's global acquisition platform to source opportunities in what we're calling the Core plus space with IRRs -- expected IRRs slightly less than 14% and high current cash dividends.

We're also mining the equity book or the book of LNR more actively and taking advantage of transactions where we see we can buy an asset off of the LNR platform and potentially hold it for a short period of time and then sell it hopefully at a profit. So we're continuing to be creative and to deploy capital on many cylinders.

It's not new to you that we talk about diversification. We've been talking about the triple net lease business, but we were worried about that's a bond with enormous convexity risks. As rates go up, you get smooshed.

One of the other very important differentiating features of our company when I see what else is going on in the sector today or related companies, is that we've always earned our dividend.

We've never ever used realized or unrealized gains in securities books to pay a dividend because that could reverse and all of a sudden you've got leverage and no income to support it. So when we make a loan, we almost never do an accrual loan that doesn't have a high-cash pay, and we never pay you a dividend out of paper earnings.

It's always cash we have in the bank to pay you dividends. And that is probably not differentiated between companies and by shareholders and by analysts. So we're pretty excited about that, and our ability to continue to do that.

As Rina mentioned, actually, the best for LNR is ahead of it because of its '16 and '17 maturities, which are the 10-year maturities of the '06 and '07 CMBS certificates. And that will bleed into '18 and '19 and we're not exactly sure what that's going to look like.

But in the margin, the book, as Rina mentioned, our performance had been better than underwriting, notably, we expected the special servicing book in its entirety that we're named servicer now on the $130 billion and 15th in the tranche. We thought that would be billions less. So this business has held up very well.

But I also point out that we're carrying the servicer now, the intangible at $188 million. It's virtually irrelevant in the scheme of our company at the moment.

And the Conduit business and the CMBS book and the CMBS trading book and the information we have off that desk has really led us to have consistent and repeatable earnings much like our business. That big part of our business represents like a ladder.

It looks a lot like a ladder company which trades, obviously, the big premiums to what we trade out, so it isn't lost unless that we have ladder inside of us. And that's something we'll be looking at down the road, how to best monetize the value of that company because if we're not getting -- it's not being reflected in the stock price.

And obviously, we are able to continue to support a very attractive dividend higher than our Concepts, which is too bad. We'd like it to be lower, frankly, because it would be better for us. And I want to add now -- and Jeff Dimodica will speak in a couple of seconds about the team.

We seamlessly transition to Jeff and Christian on the origination side, Andrew Sossen, sitting beside me, so he hasn't -- nothing's changed for him. And it's really been a very good transition. We've not lost a single body actually, other than the ones we told you about.

And I'm actually encouraged that the origination -- actually, they're so active that we're actually killing more deals probably than ever before, but they're higher-quality deals. And it really is a question of where we want to set our mezzanine, our retained piece.

Don't forget there's traditionally the business has been -- we make a loan at 65, 75, we keep 15% to 20% of the stack, a very wide mezzanine, or I call it the 8 2 note because it's the first cut in half. And usually -- our mezzanine used to be in the old days, 72% to 78%, 8 -- 75% to 80%.

And those are in '14, but we're earning 11 or so on a much wider piece of the capital sec. We can always slice our wide mezzanines into a senior mezz and a junior mezz and get a 14. We choose not to do that, we choose to basically put out more capital at 800 basis points over the 10-year or close to 900 basis points over the 5-year.

Because we think that's an amazing attractively risk award for the shareholder base and for our capital, we're big shareholders alongside of you. So we can always narrow the mezz, if we want to.

We've chosen not to, so the question is where do we write that overall mezzanine? If we were to write mezzanines now and unlevered, let's say, inside of that, we could put out $10 billion in a quarter. We have the capacity to do that, we're seeing that many transactions, we're just not going to do that right now.

We continue to look at our access to capital to do so. And obviously, balancing our desire to grow and improve our book, and ultimately one day reach investment grade against our -- we want to protect the shareholders, and not issue willy-nilly equity and dilute our book.

And we have some -- as you noticed, our net increase in our loan book was $300 million. We have maturities coming down the pike. And we continue to examine them all the time and make sure that we can actively redeploy capital so we don't have a drain on our earnings. And we continue to earn good returns on shareholder capital.

Our ROE is actually best in class. And we're monitoring that too, hopefully, that should drive shareholder performance. But it is -- continues to be true as we've said the last couple of years. Bigger is better, it drives down our cost of capital. It creates more diversity. Any one loan paying off doesn't impact our earnings for the quarter.

So bigger is better. And I'm really looking forward to the outcome of the risk retention rules. Because that could be just a major opportunity for us. And we will take our place alongside many of the financial institutions, probably, as the guy to originate loans and then use them to sell them off but they won't retain the piece.

We are the natural owner of that risk period -- risk piece. We do it today in B-pieces, on securitizations that are done by other people. In this case, we would be the originator, and we use The Street distribution system to sell down the securities from there.

So where that legislation -- it's a 2-year implementation, but as we look at how we deploy capital going forward, I mean we were very much aware that, that could be a fantastic opportunity for us and quite different than taking equity risk in which traditionally has been a debt book. So we'll be agile and flexible and creative.

I think that's what you were counting on us to do. We have probably over $100 million of ownership of a REIT vehicle directly, more than any of our peers by far in any of their businesses. And we'll continue to look at ways to increase shareholder value over the long term. With that, I'm going to pass it to our President, Jeff DiModica..

our COO, Andrew Sossen; Chief Originations Officer, Christian Dalzell; Chief Credit Officer, Carl Tash and I all have [indiscernible] and the communications from the top down is not only seamless but instantaneous. In the last 7 weeks, our team has put under contract a full quarter's worth of loans by count and by volume in both the U.S.

and Europe and IRRs above our average for this year. This will not always be the case. And as Barry mentioned, markets are getting harder and harder. But there are still good risk adjusted returns in the market for organizations capable of underwriting large very complex deals. And we are finding them.

We have already added to our originations team, and we'll continue to grow the organization as the opportunities persist and continue to invest in our LNR franchise as well. The scale and information flow that business brings us is difficult to duplicate and continuing to harness it will be the key to continuing to grow this business..

Thanks, Jeff. I should also mention that we're going out on the road. I'll be joining Andrew and Jeff. And I don't know if Rina will be coming or Cory. But we'll be going to be New York and also to Boston in the coming weeks, and we look forward to -- I look forward to telling our story in more depth at the shareholder base.

So it's been a while since I've been out. And the more you look at us, led by our best-in-class disclosure, we're grateful that NAREIT gave us a gold award for disclosure. Recognizing -- I think we're the only mortgage trust that got that award.

But I think as a shareholder, it's my -- and the same way I run our company, it's no surprise that we tell you what we're doing and you can follow along, and hopefully we can continue to grow the vehicle in a very profitable manner for everyone. So with that, we're going to take questions.

And for myself, for Jeff, for Andrew or Rina or Cory Olsen and the President of LNR is also on the phone..

[Operator Instructions] We'll take your first question from Jade Rahmani with Keefe, Bruyette & Woods Investments..

Can you discuss trends and investment trends across the product types you're targeting? I think it would be helpful if you could provide some comments on where you are signing the most attractive risk adjusted returns? Whether it's by loan type or investment size, geography and then also on the equity investments that you're looking to make..

On the debt side, it's -- I think the larger loans continue to be the best place for us to shop. And assets that may have a transition in place, clearly, there's a tenant turnover issue. And we can lend some of the TI, which is only drawn when the tenant moves in, obviously.

But if a bank won't get to the proceeds at levels they want and it's not ready for securitization immediately -- don't forget, just like in bonds and currencies the bank's aren't holding inventory. So they want to hold the real estate loan for a short period of time and then flip it out.

So if there's any instance of transitioning and emptiness, associated with any kind of income asset, whether it's a distribution center or an office building or even a retail part, those are prime candidates for us to make a large loan, because they can't -- the borrower typically can't get the proceeds he wants.

And we were very competitive and we can take our -- because of the cost of our lines now, we continue to look at -- to drive.

It's almost a joke over here, because every time I see anyone else's credit, I say, "Are we as good as that?" So we go back and adjust our lending partnerships to make sure we have the tightest spreads available in the marketplace so we can make loans at 3 Hanover and still generate 8.5, 9 mezzanine yields.

And as I mentioned, we'll find the outliers to blend our book higher. So you've seen the 8.25 roughly unleveraged yields. Lever that, however you want, but you can see here close to double digits or above double-digit yields, especially when you apply 3.75 converts -- coupons to that.

Interestingly, we issued a shorter-term convert, because we were spreading out the maturities of our existing converts. There are 3. And just spread them out. So that was actually tactical that we wanted to -- we didn't want to glomp them all on top of each other. So that was strategic in deployment.

And then in the equity side, I'd say it's quintessentially opportunistic. But we think of it as real estate we want to own for 20 years. Stuff, we think, is great and will be great for long term, so it's higher quality assets. It's not quite core. Although I think you could think they're somewhat core.

But we're going to run them with what I call the appropriate leverage. And we'll do it across the asset classes. There's no one specific asset class we're thinking of, focused on. Probably you'll see the 3 major food groups being retail office. And probably maybe industrial. You're not going to see -- or multi, sorry.

You're not going to see us do hotels, most likely. I would think that would be hard on the equity side. I don't think that would be appropriate in this vehicle. So there's higher vol there. That doesn't work with our team or for the company. So that's what you'll see us do. And we already do this.

So what's interesting is we have opportunity funds that focus on 15 to 20 plus IRRs. And we have -- we're exclusive to those funds for those IRRs. And we have a 14-year low, we can do whatever we want and we intend to -- we expect we will pursue some of those opportunities here.

And -- but we'll -- our core business is still lending, and that's globally. We've talked about expanding our geographies. We're in Europe. We're looking at other geographies if it makes sense. One of the key job task for Jeff Dimodica is actually to look at whether we can set up lending operations in other places.

Again, we're going to have to be able to hedge the currencies if we go off into other places that may not have access to capital the way that U.S. and European property markets do today. All right, say the markets are pretty competitive, very competitive and a global search for yield, there are some crazy things being done.

And [indiscernible] take advantage of them and not fall into that same trap. But we are airing on quality. We are not going to 90% LTV. I was with the lender the other day. They mentioned they were very excited about lending 100% construction costs and taking half the asset. And that's not something we've chosen to do.

And that tells you you're getting toppy in the market, frankly. So that's why, at Starwood Capital Group, we started Energy business when the real estate market got too crazy in '07, late '06, '07, early '08. And I couldn't see anything to do in real estate. We're not there yet in property.

And property probably is actually in a sweet spot, because if the economy stays weak or slow growth, which is our baseline scenario, interest rates don't go anywhere. Property produces exceptional yields. Cap rates probably continue to slide down, not up.

And it doesn't induce new supply across most of the asset classes, because there's only slow growth and modest employment growth and so that's basically nirvana for a lender. It's also nirvana for an equity player. SaaS growth, which you might want, 4% GDP growth, is actually not great.

It'll induce higher interest rates and probably induce new supply because builders and construction, loans will become more prevalent. And people will say, "All right, I got to have new everything." So this is actually the best period for real estate relative to the other asset classes.

And so I'd argue in the lending segment, which I think people are -- we're seeing deals where the loans again are higher than the equity bids by us. And that worries me. And there's a lot of nutty -- as I've said before, not to be critical, the guys who drove us off the cliff, the rating agencies, are still there.

And they didn't change the drivers of the bus. They just yelled at them and they're still there. If these guys will rate it and the Street can sell it, you've seen this movie before. So we're not going to participate in that movie..

I just wanted to ask the loan improved -- the land improvement loan originated in the quarter, can you comment on the end use for that, the development pipeline type of sponsorship? And then secondly, also the loan-loss provision that you took in the quarter..

Yes, the land is a fantastic piece of property based in California. And I would say A+ dirt. When it comes to residential, we have an unbelievable seat at the table, because we obviously sponsored a homebuilder that operates in Orange County and this is near Orange County in Tripoint. We also have SWAY's book which we can see how this rents for.

And we have perfect knowledge. So we're very excited. And we also have Starwood Land Ventures, which is a proprietary group of former homebuilder executives who work for Starwood Capital Group and are active in California. So we have a great loan, it's home building -- land improvement and home building. It's at a very modest LTV.

And I think it's 50% to 55% or something like that in the 50s. And it is Cadillac dirt and we bid on it. So we knew exactly what it was worth, we lost the bid, the 2 very well-funded, I guess you call them, equity real estate managers. And we turned around. Obviously, easy for us to finance a deal like that. And when it came available, I said go get it.

We would buy it 100 times at our loan balance, 2x, roughly 2x, our loan -- our bid was almost 2x what we lent. So they're very good deals and a very attractive return on our capital. And they were really happy too..

And also just lastly, the loan loss provision?.

Sure. Our loan loss reserve is, as we've disclosed in our Q and our K is based on how we rank our -- each of our loans based on certain criteria. So none of our loans are impaired, as we've disclosed, but we do provide a provision based on how we rate the loan.

So any loans that are rated a 4 that has certain impairment indicators, we apply a 1.5% reserve to. Any loans that are rated a 5, we apply a 5% reserve to. So it's simply a function of certain loans having more or less impairment indicators in a given period.

But again, there's no impairment, it's just -- it's kind of a general provision that we take on our loan book..

It's automatic based on the rating. And the rating is done by our asset management team. And as a group, they get together and review every loan in the book accordingly. But it is somewhat subjective. What we think is a 4 or 5, to somebody else, might be a 2 or a 1.

And so we were actually talking about it earlier when we were reviewing our quarter that -- how we never get anybody to use it. So it's a general slush fund, I guess you'd call it..

We'll hear next from Dan Altscher from FBR..

I was wondering if you could talk a little bit about the share buyback authorization. I think it's admirable to have it out there. I think just the way you all think that the stock is relatively undervalued or it's an attractively valued instrument right now.

But how do you weigh -- I think you got your stock buyback versus some of the other things that we've been talking about earlier, the lending side or equity investments were redeploying in some maybe LNR businesses..

Yes. It's a long road, right, and it partners with our shareholders to support our stock. Because sometimes, it looked like our stock weakened in the transition, and 8.5% dividend yield, it's pretty attractive to us. So it always has to be use of funds in buying back your stock, if that's the best investment you can make.

And we just issued the convert and we had some excess cash laying around. It's really, as you know -- I mean, we're telling people our stock, we think is undervalued. And we do think it's undervalued. So we weigh that against everything else we're doing at the time, and I think that's it.

I mean, it's very attractive buying in a dividend yield of whatever. I think that, that level is like 8%, 7% or something. So we're looking at our own cash flow projections not just this quarter, but next year, in determining what we think is a right use of incremental cash. And it's not what we want to do.

We'd rather have the stock at 28 and not buy stock. But we have to prove -- I don't know, we have to prove that in 4 years, we should be -- have a track record by now. Anyway, that's why we continue. It's not the first time we've stepped in and bought stock in our life cycle, so. And I think, obviously, it reduces the management fee.

But that's fine, we're fine with that. I mean, it's a long game and we're there to support our shareholders and support our stock..

That's helpful. On the equity investments, it sounds very interesting.

But is it maybe the first transaction you looked at? Or has it been one of many and this is the first one that really met the threshold of yield and attractiveness and what fits within the REIT versus maybe an opportunity fund?.

We looked at many, as you mentioned, and the credit net lease business, it was a company called CapLease, which I can talk about now, which is high-quality triple net leased buildings but fully amortizing debt. So we would have a taxable income but we'd have no cash to pay the dividend, because all the cash would be going into amortize the debt.

And then in 10 years, you'd have these assets more or less unlevered and you couldn't defease the debt. So there's an example of why we have the company, actually own the stock in the company. We were going to make a tender offer. But when we examine the -- I just don't do that, I don't believe in drinking your own blood.

So I'm hoping that down the road, you can pay a dividend, you'll re-lever in uncertain environment 10 years from now. So we didn't do that transaction. We've looked at probably every triple net lease deal that's been out there, including some that have opted to go public instead of accepting our bid. We've looked at other equity investments.

But this is really, I think, the first time that we stepped up in the scale. And frankly, it was because of the cash on cash yields here were so good out of the box. And it was such a stable asset class and the kind of assets that you want to own long term. And I'm happy.

When we look at ourselves and Jeff Dishner, my partner in London, and the other members of the Investment Committee and said, "Wow. We should own this. This is great stuff to own. Would you like to own it at this level, at this yield and this IRR?" And we said, "For sure." So we'll do that.

When we're opening the deck and we're going to continue to look with our equity guys at opportunities that might fit the REIT and we recognize that we don't have infinite capital to deploy, but also recognizing that there are loans coming back to us and cash coming back with those loans.

And it's kind of easier to quickly buy an asset than maybe make a loan which you don't control the borrower. He gets to choose when he borrows your money.

And as you know, historically, we've had some trouble when you think a loan's going to close this quarter and drift into next quarter and we wind up having too much cash on our balance sheet because we've made the commitment but it hasn't closed. And so the nice thing about equity is it's usually faster.

I'd also point out that we are much more active now mining LNR's book. Those opportunities tend to be smaller, significantly smaller. But the nature of the $15 billion of assets in their book are $30 million office buildings, $12 million multifamily assets.

But if you have 1,000 of them, maybe deploy some capital behind that, and that's an advantage the way to deploy capital of high rates of return. So that's also something that we're doing in greater volume, and we'll talk more about it if we actually get anything done in scale..

And I just wanted to dive a little bit into the new risk retention, and maybe it's a more appropriate question for Cory. But as we think about the new procurement capital, and you all referenced, I think that's a paramount aspect of needing -- owning B-pieces going forward.

Do you think there's going to be maybe actually like B-piece-dedicated private funds that are created just to exploit that market. And also, going into risk retention, I know it's still a couple of years away.

Do you think that there might be a rush of CMBS issuance ahead of that, so that those cannot be subject to risk retention, essentially get grandfathered in..

Cory, you want to try that?.

Sure. As it relates to people rushing to the marketplace, there is a significant amount of maturities the next couple of years. So regardless of risk retention, we see a considerable flow coming into the conduit markets, and we intend to take advantage of that, both at our Starwood Mortgage Capital conduit origination business as well as B-pieces.

As it relates to how capital forms around the opportunities that are created around risk retention, hard to say, at the end of the day, it's a 2-year implementation period. I think it's just safe to say that our historical approach to the marketplace, which is a very long-range approach. We look at these investments over a decade.

We intend, generally speaking, to hold those assets and to retain them on our balance sheet. So what has come down is very consistent with the long-term approach of Starwood Property Trust and of LNR. And we think we will be in an advantaged position as those new rules do get rolled out..

We'll hear next from Eric Beardsley from Goldman Sachs..

As we think about the moving parts in LNR, just curious as to what percentage of Core Earnings that might be in between now and the period it transitioned to, an increase in the special servicing?.

Yes. Let's break up LNR. LNR has a conduit which has been -- and I was going to mention this in my comments. It's taxed, right? That all goes into the TRS. So their impact is smaller than you might think, because they're taxed.

CMBS, which is now up significantly from where we acquired the company, both because we bought and deployed capital behind the database that they have and the knowledge of the trust. And also because the book, it appreciated in value with rates coming in.

That part -- portion of the business we've talked about it, that can just move over theoretically into the core book of Starwood, because its long-term holding paper. But it's still, from an accounting standpoint, has to stay in this "LNR segment." But those are readable securities and they're in the REIT.

And those are not taxed, the income on that goes -- flows through directly to our income. And then Hatfield Philips is a small servicing business, they're as small as its contribution to the company. It's not that small based in Europe, it's a hidden asset of the company, it's done much better than we thought.

We're working on how to deploy capital behind that platform. And then also, we didn't talk about it. You do know we own an asset called Auction.com, an interest in this asset and Google has taken an interest in the company, which is trying to transform the auction marketplace for residential houses.

It's kind of a free option and obviously, value in our stock that probably nobody attributes to the stock. So someday, we'll monetize that stake, I hope, for a lot of money and make our shareholders super happy.

But we don't -- we've actually taken write-downs against it, instead of write-ups, even though some of the chatter about subsequent rounds with these be massive gains for our current holding price for the position. The core servicing book, in its totality, LNR is contributing roughly 1/3 of our earnings.

That's taxed, I believe, right, Rina?.

Most of it is. So the CMBS -- the servicing was at 100%..

But as we reported, it's roughly 1/3. And that's taxed and untaxed. So obviously, the CMBS stuff is untaxed. But that is roughly 1/3. And we don't really look at it like that, but you can, it's the way it's reported in our financials..

So how does that progress, I guess, with the amortization? Do you have offsets in those other areas to make up for that? Or you're looking at this, the core lending segment, offsetting any decline in the earnings that you would have from LNR over the next 12, 18 months?.

Let's talk about what -- just the servicing portion which has that $188 million book value today. '15 is going to be our next year in servicing and '16 and '17 will be considerably the biggest years probably LNR's likely to have ever had, but a lot will depend on where our interest rates are. And offsetting that will be the CMBS securities.

So just to go over this, because it's a little -- a lot less obvious than you think. If rates come down, right, or spreads stay in and things don't default, some of the things we wrote off in the CMBS book, even the way the world's going, may have huge value. You could see massive gains in the CMBS book.

If rates go up and there's more defaults, the CMBS is going to be worth less, right, because we're not going to get any excess cash flow payments in the CMBS tranches. And instead, we're going to get servicing fees and extension fees and refinancing fees and all the fees that a servicer normally gets. So we have an interesting natural hedge in place.

And it's -- and for us, I mean, I don't know which one we'd rather have. I like chaos, I like higher rates. I would help our Core Earnings of the lending book, as Rina pointed out, 300 basis points would be a bonanza for us, we'd make a ton of money.

By the way, rates going down doesn't impact us, because most of our loans have a LIBOR floor or, I already said LIBOR plus 25 basis points. So how much lower can they go? So it's aced, it's a free option, right? The shareholders are getting a free option on higher rates.

And the natural hedge business, chaos would also allow the loan company, the loan business, to help refinance all these loans, right? So we -- that's great for us. It falls into servicing and we approach every borrower and say, "Hey, we are a one-stop solution.

We know the asset because we've been servicing it, and we even commit to making you a loan in 10 seconds because we have all the data." I guess if I had to choose, I'd probably take higher rates. I guess -- my guess is we're in through what we got for a while, on low rates for longer.

And Jeff DiModica was the first call that and then later, the desk of RBS. But lower longer, and it's probably the world. Because our view of the world is Europe and Brazil and China are not strong enough to pull the global economy higher right now, and the U.S. is a bright spot. But we have issues. So maybe the Republican victory last night might help.

I couldn't help myself, I had to say that. But I was told to stay away from politics. But I'm smiling for a second, okay? Now we're moving on. Sorry..

We'll hear next from Don Fandetti from Citi..

Barry, I think you may have made some comments about monetizing the Conduit business. I was wondering if you could talk a little bit about the gain on sale margin trends that you've seen over the last few quarters and where you think that might go as you look out over the next year, and then the competitive landscape in that business..

So it's an interesting business because of the velocity of the turns that the group does.

I think we'll probably -- I'm sorry, your query was to 10 securitizations this year, 11?.

Yes, we're going to do 11. So not quite one a month..

And I'll point out that our -- the way that business works in our firm is we can give them controls. And meaning that Larry and his team have never had a loan rejected out of securitization. So they're really good at what they do. And we actually don't want to disclose the margins, but I would tell you that they've come in but the ROE is fantastic.

So we allocate a small portion of our balance sheet to him for warehousing loans, and they -- you saw at the end of the quarter, I think we had $254 million of loans on the books or something like that. They just did a securitization of $181 million of them, but he's already filled up the buck with a whole other group of loans.

So I mean, it just turns really fast and he's -- there, the team's quite efficient at it. And also our management is sharing in the success of the business. So the net profitability of that business to us is not what you might think. It's less than you think even though it's very valuable business for us.

I mean, management has very incented, both up and down, and aligned interest with them because it actually acts the way we've chosen the structure of the business..

And in terms of your outlook on where you think margins could go, is it pretty constructive outlook or it just depends?.

I mean, we're -- I would guess and Corey could comment on this, I think. But we're among the more profitable operations out there. I think it goes to reputation of the team and the comfort of the agencies with the quality of their underwriting. And so they're able to get lower subordination levels than the other guys.

And the velocity that they have, I think it's really -- actually they have an office in Manhattan and I dripped into that office occasionally and there's 50 people sitting at their desks -- okay, maybe 25, all the time and just minding their business and doing their business. So very impressive business.

And by the way, I mean, we will look at stuff like NorthStar, okay, their split or -- and we -- it's not lost on us that we have this servicing business. And it's not just the conduit, it's other parts of the operation. And is there a way to increase shareholder value? So our job to study all these things all the time and look at the market.

We'd say, "Hey, that's a Service business. That's accorded a much higher multiple than our mortgage book might be." And we play a very important role in securitizations because we originate small deals. These guys typically do loans less than $25 million. Occasionally, they break out and do a $45 million loan.

And their, actually, Starwood Property Trust Core lending business helps them sometimes. Like in one case, we wrote the mezz and they securitized on a $50 million-plus loan. We -- I think we kept the $12 million mezz and they've securitized the rest of it. That actually got us a win, the deal, because we were happy with the multifamily asset, I think.

And I was very happy with the way the teams worked together to execute to be a win-win across the platform is fantastic. Makes me smile when the team works well like that..

We'll hear next from Charles Nabhan from Wells Fargo..

I wanted to get your commentary on some of the volatility and spread widening we saw subsequent to the quarter, specifically if the impact that may have had on demand and if you were able to capitalize on some of the spread widening within your CMBS book?.

It's Jeff. The volatility and spread widening was relatively short-lived, which created an opportunity during it, I think, during that volatility as things blew out. Corey and his team were able to get more actives on the CMBS side. We became a more active bidder and I think we did a decent job of taking advantage of that volatility.

Our convert came out at the same time while the market was very volatile. I think the market showed that being willing to have over $500 million in orders on a convert on one of the worst days in the middle of that volatility was a testament to what we were doing.

But at the same time, we were investing on the other side of that and taking pretty decent advantage of it, I think, that those are the opportunities that we look for. Certainly, on the conduit side, we were forced to probably widen things out a little bit. But as we were making our loans, they were wider also.

And I think we took pretty good advantage of that volatility. It's hard. It makes the day to day here hard on both sides. I don't think any of us thinks that we want that kind of volatility all year long. But it is an opportunity, and we look at it as that..

So -- and to be specific, I mean, if you were shopping for a loan during that crazy period and even today, I don't think we've gone full circle on some of these spreads. All the lenders are gapping up. They're saying, "Okay, I need 10 basis points and then we'll close." And there's no way left for them to go.

But there are, on last count, I heard 38 conduits operating in the U.S. now. So it's not like it's....

Over 40..

Over 40. Well, you have a better count. So look, they have a big team. They're good at what they do. It's not a major contributor of earnings to defer on a net basis after tax. But it's good, it's another cylinder. It's just another way to grow. We've talked about once upon a time, we were doing larger loans for this business.

We got out of that business because of our inability to hedge ourselves on larger loans that we're going to aim towards securitization. We've talked about whether we should go back into that business. We have to really -- that's Jeff's expertise. I can't -- I don't know anything about hedging our exposures and that stuff, but he's a master at that.

So I know that we got whipsawed on the hedges we put in place on the large loan securitization business. We could do it. It's not a cylinder today, but something we'd certainly should consider. We have all the athletes to do it and then you're neck and neck with the Street.

And we -- I think we've been in the business long enough now that we only -- not only do we get every call in every broker transaction of every large loan in the country, but we also work now hard, and harder probably than we have in the past, combining the relationships that started capital on the equity side.

So we have partners in the hotel space that we've done, let's say, 14 individual transactions with. Our debt guy should be calling on that guy to not only finance -- finance is everything he does. And he'll be the guy of choice and we have enough room in our quotes that we can win stuff if we want to win it.

And we measure that against the [indiscernible] capital with $1.4 billion of capacity, we know that. But we want to grow and we want to deploy capital and we're excited about what we're seeing. I'm actually very pleased. I got a little more nervous about 8 weeks ago, 12 weeks ago.

And right now, with the energy of the new team and their aggressiveness, we're killing more deals than I thought -- they're actually okay, they're just a little too tight. But they are of high quality, and that's a conversation we're going to have with the board and with the shareholder base over time.

How long can you earn 10s in a world of a 5-year at 160? I don't even know -- I know the 10 year's 232 or something, 165. So -- and don't forget, we're earning 11s, but the 10 year was 3 1/4, it's 100 basis points inside of that, so now we're earning 10s.

And tell me where you can get those returns in the capital markets today? Tell me about high yields that are 4 3/4, right, with no covenant protection? You're floating out in space. They can finance trucks in front of you, and we have first mortgages on that cast with cash flows.

There is just no relevance in the capital markets the way these companies are trading. I understand the markets, but I don't understand that dividend yield.

I don't understand why secured mortgages that if we floated them in the CMBS markets, we traded -- 100 portions of our loans have traded at 120 over, right? So if you look at the -- because we have a lot of first mortgages. If you look at our book, I mean, it's kind of wacko.

It's an arbitrage also for our lenders, they're getting better returns here than they get -- if they bought the same tranche off the CMBS' desk. So it's kind of nuts, but it will evolve. It just takes time. The markets are evolving..

Great.

And keeping with the topic of selectivity, are you seeing any themes in terms of the deals you're turning down in terms of property-type geography, loan size?.

We just lost a big industrial quote. Really good stuff, there's huge demand for it, if it's really tight, if it's fully leased. We've never in 4 years have been able to compete there. The life company used to take those loans. So I think -- and we don't want to do a ton of construction loans. We've done some. Some have already been harvested.

I consider the construction loan on Hudson Yards, one of our best loans. I think we're in that brand-new building of like $500 a foot. It's super complicated, that's how we got it.

In fact, they -- the borrower called us and said, "Can you help us? Because the 5 banks are tripping over each other." We'll do some, but we're trying to move ourselves away from that. Also, the AAA Internet company that wants to build a headquarters.

But the construction, they're doing in a series of buildings that would have to commit today to fund some construction that would be out many years, like 3 years out.

We just don't want to do -- we could do it, but why do it? I mean, why take that risk when we have other opportunities to deploy capital? So I can't point to any trends right now, other than the same trends that have been in the business since the day we started, really, which is -- I would say one thing that's good for us.

I think more people are willing to lever a little higher. Before, when the world -- everyone was nuts, scared and conservative. You'd see a guy buy a property and he might borrow 40% of the property. And so there was no play for us, because that went to a life co.

I think the same guys and the kinds of guys buying stuff today, I'll say is from the equity side, were our own clients. We see it the same way. We bring them a deal and say we're going to put 45% leverage.

And they say put 65%, 70% leverage on it, because they want to gauge their ROE that everyone's chasing yield, and they are pretty comfortable with the cash flow streams and the stability of the streams so they want to lever it up. I think that's changing.

That's creating, on the margin, more opportunities for the guys like us, where the life company might not want to go up that extra 5. They're more formulaic, where we're more entrepreneurial, I'd say, in our lending. That's the other substantial competitive advantage.

For us, the guys know we'll close, right? And they're used to saying, no, we're flexible. And they know if they get into trouble, they can come talk to us. That is our biggest calling card. Now they want to add 2 floors to the building or add 50 rooms to a hotel or -- and so we have the capability of flexing what we do for them.

We're such traditional lenders, specialty securitization does not let them do. So there will always be a place for us, and the question is how big are the returns here? So that's kind of where we are. We've looked at many with -- there are so many construction loans in New York City now on residential.

We're nervous, very nervous about the high-rise, high-end residential business in New York City. So you won't see us doing anything there unless our attachment point is like $1,200 a foot, which is 1/3 of what people expect to get on every property in New York City.

Not -- we've lost construction loans in New York to both the life companies and to offshore hedge funds, giant ones. That just -- don't forget, the hedge funds are making mezzanines now at 7, and they're incented, they get a 20% of 7. 80-20, right? They get their 20% of 7 with no floor. Our incented fee is over 8.

So we just really can't even compete with them. When they come in and do 7 -- and they're doing these loans, the hedge funds, by the way, because it's been a tough year in the equity book and the 7 -- 20% of 7 it's almost, for sure, you get your 1 1/4 -- you get 1.4% participation in that. So they're real players in the marketplace.

The hedge funds, especially on these -- and they're usually inside of us. Well, not all of them, but a significant number that we feel their presence in the market. And that probably would go away if they started doing better on their equity books..

And your last question today will come from Ken Bruce from Bank of America..

First, thank you for the updated guidance. I guess looking at that, what does that say about the fourth quarter? It seems that, that would be quite a feat for you to come in at something like $0.47 in the fourth quarter..

We gave guidance that we thought we could achieve..

You've probably already achieved it..

No. Well, I can't say that. I have these forward-looking statements and I get text by Chief Counsel and everyone else in the room. Zach was trying to get on me. But no, we gave you a narrow range, a little narrower than we have before. We've pretty good visibility, I think, into the book and to our perspective. The needs are not for additional capital.

So yes, I think your conclusion is correct..

Okay.

And just as we think about the move into the equity space, is that, you think, just a natural extension of the diversification that you've been thinking about over time? Or is it more a reflection of just the -- maybe the tight markets that you find from time to time? I guess I'm trying to maybe catch a little bit of a nuance between kind of what is driving you into the equity side at this point?.

I worry about the credit markets getting way too tight and losing the discipline completely. When the lending side starts making quotes higher than the equity bids, it's time to exit lending. And we're not going to do that. I mean, that's not what we were created for.

We have a broad mandate in our origination agreement and we're going to try to find the best routes to congested returns across the spectrum for shareholders.

And that business is a really good business if you play it correctly in my 28 years of experience in the equity markets and 500 people at Starwood Capital Group today, and we can do this business easily. So we want to have -- we are not going to force feed, as we mentioned, right off the bat.

We're not going to force feed and overstay ourselves in the cycle. Every mortgage REIT in history has got in trouble, getting further and further out on the risk spectrum, making sloppier and sloppier loans. We don't intend to be one of those guys. And there's 2 ways to go, right? We can say we're going to do it for mezzanines at 7.

Obviously, that would impact the dividend over time. Are we better off doing that? Are we better off buying equity deals and getting better than 8 cash on cash yields with no refinancing risks or anything for the shareholders? We'll tell you when we've made that call. But we're not making that call. Our current pipeline is really good.

And I look at the average of the return on equity, that the stabilized return on equity is consistent with prior experiences, not slightly better. So we'll see how this goes. We'll tell you as it progresses. But we have a global acquisition team. We have 50 people in London. We have people in São Paulo.

We have people across the United States in, I think, 12 offices. We see equity opportunities, historically, we have not played in. But really good real estate, the kind of real estate people -- our shareholders should want to own. So we can do better. These IRRs are our best guesses. Also REITs don't really sell assets.

So we're looking for assets that we say in 10 years, we know it'll be worth more than we've paid for them today and significantly more. And we'll do that whether it's an office building in London or a multi in the Bay Area.

We're going to probably look and we're actively considering transactions, because we see a lot of them and even with the multi deal that we just were looking at. That was really beautiful stuff. Part of the discussion there also is how levered will we take those equity back. So that's....

Right. You mentioned that you'd look at all the different opportunities to enhance shareholder value. And at least there's one example of a mortgage REIT that is considering an internalization and essentially wrapping up its private equity real estate business within the public REIT.

Is that something that you -- and the market seems to perceive it fairly well? Is that something that you all would contemplate? Or is there any natural differences between what you're doing at Starwood Capital and what you view as the real mandate that Starwood Property Trust would just -- would prevent that from ever being a reality?.

Well, it hasn't been lost on us. There's a small bio firm in KKR that went public merging with a vehicle, which was a European-listed company. I can't understate the liquidity in our book. We have -- every loan we own we probably sell and probably above the fair market value mark. So we could trade $3 billion of cash tomorrow if we wanted to.

Fundamentally, some we'd have to consider over time. It's not something that's on the drawing board right now. We'd bust the REIT status because we'd have that income, a lot of it. So -- but it is something we've talked about and have considered and of course, some of the Wall Street firms have come to us, and suggest we do.

We'll see how this all works. And if it really -- what the market thinks of these things and decide if it's something to do or not do. You would -- it's complicated, right, because you have a lot of funds that have interest in real estate.

Does the real estate go in, go out? Every investor have [indiscernible] going in, the investors have to approve it from many different funds, there's relative valuations between funds. If the real estate stays out, it's just a C corp, that's going to bust REIT status, so if we got a group -- it's complicated, but we'll see.

I'm watching what the market thinks of one of the companies that's announced last night so....

Right. And the last question, I'm sorry, I'll cut it off after this. But you mentioned that you, you're a little perplexed about the devaluation on the stock. I think many of us might agree with that. You've done what you said you were going to do from the outset of Starwood Property Trust.

The returns are quite attractive, all the things you kind of laid out.

What is it that you think that the market is either discounting, or is -- what -- maybe said differently, what do you think the market needs to kind of focus on to begin to give Starwood Property Trust the proper valuation?.

I think that's what our job will be on this road show coming up. I mean, I think the market is confused by LNR. It has to be that, right? Because -- and so you segment. You broke our business into 2 pieces and did a DCF on the LNR cash flow streams. And then we take our -- the market multiple on the book.

We think you get to a significantly higher stock price in excess of $25. So we're going to try to outline that. And for the shareholder base, and some people will say we get it and some people will disagree.

Also, we charged our team with finding ways to deploy capital at attractive rates of return on a sustainable basis for the -- forever, right, for the foreseeable future. We have a long view of the window in 2018 when some of the servicing fees roll off. They're not that huge in the scheme of things, so it's not like we can't replace them.

And Corey keeps telling me they never -- we always -- we're always doing things. We're always finding ways to deploy capital, and they've proven that.

And we didn't underwrite -- Cory how much capital have you put out since we acquired you? What would you guess?.

Over $0.25 billion..

Right.

And that doesn't include conduit originations?.

No. That capital, as we've talked about, is cycling every 34 days..

Right. So we will look in -- we have technology, we have all kinds of stuff that we can monetize and we're looking at doing. And that's what we're focused on. Thanks, everyone. It's been a long call, but we appreciate your time. And have a great day and may all your stock markets just go up. Okay. Bye-bye..

That does conclude our question-and-answer session. Everyone, have a great day..