Zachary Tanenbaum - Director, Investor Relations Barry Sternlicht - Chairman and Chief Executive Officer Rina Paniry - Chief Financial Officer Jeffrey DiModica - President Cory Olson - President, LNR Property LLC.

Dan Altscher - FBR Charles Nabhan - Wells Fargo Jade Rahmani - KBW Steve Laws - Deutsche Bank Douglas Harter - Credit Suisse Eric Beardsley - Goldman Sachs.

Good day and welcome to the Starwood Property Trust fourth quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Zachary Tanenbaum, Head 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 December 31, 2014, filed its 10-K 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.

The company undertakes no duty to update any forward-looking statements that may be made during the course of the 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. Reconciliation 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; and Cory Olson, the President of LNR. With that, I'm going to turn the call over to Rina..

Thank you, Zach, and good morning, everyone. I will begin this morning by reviewing the company's fourth quarter and annual 2014 results, first on a consolidated basis and for each of our two business segments, and then providing a brief discussion of our 2015 earnings guidance.

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 continued to deliver strong results for its shareholders in 2014.

During the year, we deployed a record $7.4 billion of capital across a variety of assets, including floating rate loans, fixed rate conduit loans, CMBS and equity investments. Of this amount $5.2 billion came from our Lending segment, which represents an increase of 33% over the $3.9 billion deployed by this segment in 2014.

For the year, we reported core earnings of $473.7 million or $2.17 per diluted share, an increase over the $352.6 million of core earnings or $2.11 per share we reported in 2013. Turning to the fourth quarter, we deployed $2 billion of capital and reported core earnings of $112.1 million or $0.50 per diluted share.

This is down slightly from the $0.55 we reported last quarter, principally as a result of the realized gains of $12.7 million or $0.06 per share that we reported in our third quarter results.

Excluding CMBS gains, core earnings were relatively flat, reflecting the consistently strong performance across our platform and particularly our Lending business. As of December 31, book value per diluted share stood at $16.84, reflecting a 1% decline over the book value per share that we reported at the end of last quarter.

This decline is principally due to the impact of the in-the-money portion of our converts. As we have discussed in the past, this portion is required to be included in our diluted share count under GAAP, and because it is largely a function of our stock price at the balance sheet date, it can vary significantly from periods-to-periods.

During the fourth quarter, due to increases in our stock price, 3.4 million shares related to our converts were included in the calculation of book value per share compared to just 1 million shares in the prior quarter.

Because of the unrealized nature of this volatility, you will notice disclosure in our 10-K indicating that we revised our methodology for computing core earnings per share. For 2014 and going forward, we will now exclude the impact to our core shares coming from the in-the-money portion of our converts.

However, it is still included for GAAP purposes, and thus you will continue to see the effects on our book value and fair value per share calculation, depending on our share price. Fair value per share, which we compute as the fair value of our assets net of the par value of our debt, was $17.40 at the end of the year.

Also a decline of 1% over the prior quarter for the reasons I just mentioned. Now, turning to the results of our segments. Starting with our Lending segment. During the quarter, this segment contributed core earnings of $75.6 million or $0.34 per diluted share, reflecting an increase of 7% on a per share basis.

Despite repayments of over $150 million in this quarter, our loan book grew by 10% from our balance of $5.5 billion last quarter to $6.1 billon at December 31. The increase was driven by $1.2 billion of new investments that closed during the quarter, of which we funded $1 billion.

These new loan commitments, which consisted principally of floating rate loans, included diverse mix of property types and primary market locations, all with first-rate institutional sponsors.

This quarter we again took advantage of international opportunities, announcing the co-origination of a $350 million or GBP200 million first mortgage with the European affiliate of Starwood Capital for Aldgate Tower, a 317,000 square foot office building in London. Of the total loan amount we originated $229 million.

As we typically do with our foreign denominated investments, we have hedged our exposure to foreign currencies related to this loan. At the end of the year, Europe represented 13% of our overall earnings portfolio. The fourth quarter also includes a $150 million equity investment, we discussed with you during our last call.

The asset is a 33% participation and high-quality regional mall portfolio. In this investment, we invested alongside three sovereign-wealth funds. You will see this investment included in the investments and non-consolidated entities lying in our balance sheets, and its results reported in earning from unconsolidated entities in our income statement.

We reported $2.2 million in earnings from this investment during the quarter. This amount is net of depreciation.

Despite the competition for yields that we are seeing in the marketplace, the return on our Lending segment's target investment portfolio remained strong at 8% on an unlevered basis, with optimal leverage returns holding constant at almost 11%.

In computing these returns, we are not including the allocation of any corporate level debt, including our term loan and our convertible notes. If we were to attribute this debt, our target returns would be markedly higher. Our lending focus continues to be in major markets, including New York, California and Europe.

We have very limited exposure to new oil producing states, with less than 5% of our target portfolio secured by collateral located in Texas. Of this amount, we have only $5 million of loans with collateral located in Houston.

Looking forward, we continue to have a strong pipeline of high-quality transactions that 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 under 62%, and our continued track record of zero credit losses across the over $14 billion of loans that we have originated or acquired since our inception. Turning to the topic of interest rates.

As we have stated in the past, we are uniquely positioned to benefit from the rising rate environment. 77% of the Lending segment's loan portfolio and nearly all of its pipeline is indexed to LIBOR. Of the floating rate portfolio, 87% benefits from having a LIBOR floor averaging 0.35%, which is higher than current LIBOR.

As LIBOR rises, our interest income will increase 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.

While we would pay more in interest expense on our floating rate debt, if interest rates were to rise, this increase would be more than offset by a corresponding increase in interest income from our floating rate loans. Also, for the portion of our portfolio that is fixed, the weighted average interest rate is an impressive 8.2%.

We estimate that a 100 basis point increase in LIBOR would result in an increased annual income of $18.3 million or $0.8 per fully diluted share or a 300 basis point increase in LIBOR would result in an increased income of almost $60.1 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 also increase. Speaking of special servicing, I will now turn to a discussion of our other segments.

You probably noticed that we have introduced a new segment name in our financial this quarter. The new Investing and Servicing segment, which was previously called the LNR segment, was renamed to more accurately reflect the multi-cylinder nature of this business.

While the LNR name is practically synonymous with special servicing, this segment of our company is much more than just a special servicer. In fact in 2014, net servicing fees represented 36% of the segment's gross income sources a core basis.

With a $750 million CMBS portfolio, which contributes 39% of gross income sources, and a conduit business, which securitize $1.6 billion in 2014, this multi-cylinder investment platform does not realize solely on one income stream to deliver its results.

So we selected a name that would be more descriptive of the overall business initiatives for this segment. The new name is also part of slight reorganization of our segment reporting, which will be based on the nature of the investment going forward.

For instance, all CMBS will be reported in our Investing and Servicing segments and all performing loans and preferred equity investments will be reported in our Lending segments. While we currently have only minimal duplication between the two segments, as we continue to seek new investment opportunities.

We believe this form of reporting will make it easier for investors to understand and analyze our operating results. Segment reporting aside, our special servicer will continue to operate under the LNR name.

As we said last quarter, while the Investing and Servicing segment may experience some earnings volatility on a quarter-to-quarter basis, cumulatively we expect a relatively strong contribution from this segment.

To this end, the Investing and Servicing segment contributed core earnings of $36.5 million for the quarter or $0.16 per diluted share, down from the $53.9 million or $0.24 per diluted share we reported last quarter. The decline is primarily attributable to the CMBS gains I mentioned earlier.

You may also recall that during our last quarter earnings call, we discussed the timing issue related to one-large liquidations that was anticipated to close in the fourth quarter, but instead accelerated to the third quarter. These types of variations are to be expected on a quarter-to-quarter basis.

If we look to the overall year's results for this segment, core earnings were $176.9 million or $0.81 per diluted share compared to $126.8 million or $0.76 per share in 2013.

Included in this segment results for the quarter is a reduction to the domestic servicing intangible of $9.8 million, leaving the intangible with a remaining book and fair value of approximately $178 million at yearned, representing only 2% of our gross assets.

Despite its continuing amortization, the servicing aspect continues to deliver stronger than expected performance and consistently positive returns on our invested capital. As of December 31, LNR was named special servicer on over a 150 trusts, with the collateral balance in excess of $130 billion.

We expect the intangible to grow, as the 2006 to 2008 CMBS maturities shift more of that $130 billion into special servicing in 2016 to 2018. At the end of the quarter, LNR was actively servicing $13.7 billion of loans and real estate owned, down just $1.3 billion from last quarter.

LNR has maintained its foothold as one of the world's premier special servicers, retaining its one-third overall market shares. Further evidencing its leadership in this space, LNR was ranked first in new servicer assignments for 2014.

These new servicer assignments are principally the result of our continued active participation in the CMBS BP space, where we continue to exploit high-yield opportunities.

In 2014 alone, we invested almost $200 million in new issued B-pieces across 14 deals, all of which we've partnered with other investment firms, and ultimately took approximately 37% of the BP's investment on a weighted average basis. In each of these deals, we were named special servicer for the related CMBS trusts.

We also purchased B-pieces in two 2011 vintage CMBS deals on an opportunistic basis. On the new issued B-pieces, it is important to point out that any benefit we would gain from serving a special servicer of these trusts, likely won't be realized for many years, and will therefore have little impact on our current financial statements.

Because the performance of our CMBS is naturally hedged by the earnings potentials of our role of special servicer in the same transaction, earnings resulting from Servicing and Investing income combined are expected to be relatively stable.

Another potential feature benefit to our CMBS investing activity could come from the risk retention roles that we discussed last quarter. While the industry is till working to determine the exact impact that these roles will ultimately have, we believe these roles could provide us with a competitive advantage.

The roles require the sponsors of securitization transactions to retain for five years, 5% of the loans they originate. The five-year hold restriction would limit the BP's playing field to only those investors with permanent capital, which many current market participants do not have access to.

As one of the pioneers in the BP space coupled with our scale and ability to hold risk capital long-term, 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 impact of these roles and we'll update you, as we work through the tier implementation period. The third key contributor to the results of the investing and servicing segment is our conduit operation, Starwood Mortgage Capital.

Despite tightening spreads and increased competition, this business continues to deliver superior performance. Our conduit securitized a record $1.6 billion in 2014 in a total of 11 securitizations.

That is a remarkable turnover rate of almost one securitization per month, allowing this business to generate extremely attractive returns on our invested capital, while at the same time reducing the credit risk of holding these assets for longer period.

As margins continue to commence, we expect to see a slight decrease in profits in 2015, but generally this business should continued to be a strong contributor to the segment's results. Now, turning to capital market.

Complementing to the success on the origination and investing side of our business, our great results and our management at the right side of our balance sheet. As of December 31, our overall debt to equity ratio was 1.2x.

The increase from the prior quarter is attributable to our efforts to take advantage of attractive borrowing rates and borrower-friendly terms, which have become available to us at this point in the cycle.

We created additional credit capacity on our repo lines of over $500 million during the quarter, and selectively sold over $200 million of senior interest in our loans. During the quarter, we also issued $431 million of 3.75% convertible notes, which mature in 2017.

As of December 31, our total borrowing capacity was $5.8 million, under 13 financing facilities across 11 leading financial institutions and three convertible senior notes. We also amended our $250 million share repurchase program to allow for the buyback of our convertible notes in addition to our common stock.

There was no activity in this program during the fourth quarter. As we evaluate sources of capital, we do so with an eye towards the overall leverage levels.

While we plan to continue taking advantage of opportunities that will make the right side of our balance sheet more efficient, we will stay true to our original commitment to our investors to retain appropriate leverage levels in the context of our overall balance sheet and our ultimate goal of achieving investment grade.

As we look ahead, I'd like to turn to a discussion of our current investment capacity, the fourth quarter dividend and our 2015 earnings guidance.

As of February 20, 2015, the company had $287 million of available cash and cash equivalents; $84 million of net equity invested in RMBS; $94 million of approved, but undrawn capacity under our financing facilities; and $391 million of unallocated warehouse capacity.

Together with expected maturities, prepayments, sales and participations over the next 90 days and net of working capital needs, we have the capacity to acquire or originate up to an additional $1.1 billion of new investments. Now turning to our dividend. Consistent with prior quarters, our Board has declared a $0.48 dividend for the first quarter.

The dividend will be paid on April 15 to shareholders of record on March 31. The $0.48 dividend represents a 7.9% annualized dividend yields on yesterday's closing share price of $24.28.

We believe these returns continue to be compelling, given our high-quality loan portfolio with LTVs of less than 62%, no history of credit losses, a CMBS investment, servicing and conduit platforms that continue to deliver consistent performance and modest leverage levels overall.

We are proud to say that we have earned our dividend in every one of our 22 quarters since inception. As we look ahead to 2015, we are providing 2015 core EPS guidance in the range of $2.05 to $2.25. There are a variety of factors impacting the formulation of this guidance, and I want to take a moment to walk you through some of the major assumptions.

Starting with our Lending segment. In 2014, our Lending segment contributed 63% of consolidated core earnings and we expect its relative contribution to continue into 2015. To achieve our targeted earnings in 2015, we expect to deploy a similar amount of capital, as we did in 2014.

In addition to funding on previously committed loans and originations of more traditional loans, you may also see us investing in assets that we have not traditionally invested in, such as the mall portfolio we talked about earlier.

As per the sources of capital to make these new investments, we expect that pay off will become an increasingly significant source of capital.

Though, this is a number that is very difficult to estimate with certainty, we have a team of asset managers, as part of our internal infrastructure, which closely monitors the performance and expected repayment of every asset in our portfolio. This enables us to manage our cash flow as efficiently as possible.

We expect to be able to put these repayments back out to work, thus keeping the portfolio fully invested and avoiding any cash drag. This is a unique advantage as a scale and maturity of our business.

We also plan to utilize some of our more traditional sources of capital, including off-balance sheet financing in the form of gain on sales and securitization or on-balance sheet financing in the form of secured asset level debt or corporate level debt.

Given general margin compression, returns on new loan originations are expected to be slightly lower than historical level, but is still accretive to our dividend.

With respect to the investing and servicing segment, as we've said before, we expect quarterly volatility in this segment's earnings to continue, but overall we expect a steady contribution from this segment overtime.

Servicing fees are expected to trend downward in 2015 and part of 2016, as the nearly $14 billion in defaulted assets currently in servicing are gradually resolved. However, we expect to see a new wave of defaulted mortgages starting in 2016, as the 10-year loans from the 2006 and 2007 vintages reach maturity.

We believe performance in other areas of this segment's, including our CMBS investment portfolio will largely compensate for the expected near-term decline in special servicing process.

Similar to 2014, we plan on deploying additional capital into the B-piece and legacy CMBS space, and will continue seeking opportunistic sales for bonds in our portfolio based on market conditions. In the current environment, we expect loss adjusted yields to maturity on new issued CMBS investments to be in the low-double digits.

With regards to our conduit lending operations, competition continues to increase in this space and although we expect profit margins to decline slightly, we expect increases in securitization volumes to somewhat offset this decline.

In addition, we will continue to pursue equity investment opportunities sourced both by our manager as well as opportunities from our servicing book. We believe this segment is well-positioned to source and underwrite highly accretive equity investments.

As we look to deploy capital across all parts of our business, we will continue to invest in those assets, which will generate the most attractive risk-adjusted returns for our shareholders, while still maintaining our disciplined approach to investing. We will also continue to leverage our relationship with our manager Starwood Capital Group.

Together we are almost 1,000 people strong.

We will mine the multitude of investment opportunities available to us via our lending, special servicing, B-piece, conduit, and equity platforms, all of which provide us with access to unparalleled expertise across the global real estate markets and uniquely positions us to take advantage of opportunities going forward.

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

Thank you, Rina. Good morning, everyone. First, I'd like to mention that Andrew Sossen is not with us, because he had a baby boy or more accurately his wife had a baby boy two days ago. So he told me not to come in for the earnings call. But I know you'll join me in congratulating him on his second child.

Rina's presentation was quite long and exhaustive itself. So I'll add some fill-in comments. I think, in summary, since end of the year, we had a great year. It was an excellent year.

We put out $7 billion all at attractive returns across multiple business lines, everybody rowing in the same direction, very attractive risk adjusted returns, I'd say, incredibly compelling for its shareholders in this low rate environment.

Our overall feeling is that rates will stay low longer and we continue operate with that viewpoint, even though we have a free call option on higher rates, as Rina outlined in her earnings, given our floating rate asset base. There are a lot of people who worked really hard this year and I want to thank them on the call.

This is a big company now with a big asset base and we are paying out a lot of dividends. When we started this company back in '09, we said that from the pile of cash, we said, we'd build a company that was consistent, predictable, safe, and believe that our yield plus growth.

And I think we've delivered that, if you added back the value of the spun company, SWAY, we are the best performing stock in the sector, only the five years and returning over 100% to our shareholders either through dividends or stock price appreciation over the time period.

So it's been a very good five or so years, and we're looking forward with the organization we've built and with expansion of Starwood Capital Group, the manager, to continue to provide shortened opportunity to our shareholders going forward. The markets are competitive. It's not news to hear that there are many conduits operating in the market.

We've been through three or four of these cycles, even in our five years where capital flows in and flows out, spread cap-in and cap-out. There are anomalies in the market that are taking place today.

The large floating rate loan securitizations have not -- you're beginning to see I think the impact of recent regulations on buyers, banks, and other institutions. We don't have a place for non-rated paper. It should create interesting opportunities for us, which we'll look at and take advantage of.

We've played it in a small way in the fourth quarter in two such positions, where we felt that we can participate in some of the securitization and find very attractive yield to our shareholders. But the markets are clearly competitive.

I think we're relying on our reputation, the ability to execute quickly, our ability to diagnose complex deals and the ability to write large loans of our size. We think that all of those reputations, speeding complexity and the ability to do scale deals, give us a sustainable competitive advantage in the marketplace.

And we are an important player, though small in the overall lending markets in what I'd call, non-investment grade loans. Though you'll look at our book and you'll that is 62% LTV this late in the cycle, that's kind of an astonishing number.

We continue to look, though, because of those competitive world and equity opportunities and these opportunities go through the same kind of rigor that our debt opportunities do. We are looking to achieve a very attractive cash-on-cash yield from the mall portfolio.

Our participation is greater than 10% cash yield, which are attractive and accretive to the dividend, and they don't get repaid. It will be years before, we have to worry about getting the money back and redeploying it. So it increases our duration of our book by doing equity investments.

And we obviously have a call option on appreciation, particularly we take advantage of the interest rate cycle and buy assets here. So you will see us probably do more in the core space, core-plus space, value-added space and the equity and will grow as a percentage of our assets. It's in our pipeline in several transactions.

And again, we're looking on globally at opportunities that we think will be very attractive to the REIT and our Board would agree with us. And they are in the same vein, consistent, predictable, safe, and attractive yields. Well, also I'm particularly looking forward to the maturity of the 2016 and 2006 and 2007, 10 years legacy CMBS investments.

They should provide further growth and opportunities for us both to buy assets out of trust and also to lend, then refinance and restructure the loans that are coming due. And I think that bodes quite well for that.

A lot of those loans probably will continue to perform in the sense that we will continue to see that on 2018, as well as our -- as you know, a service that can simply extend a loan, it can extend a loan for a month, half-a-year, a-year, two years, so those don't leave the system, and we have a pretty good deal.

I think one of the surprises of the heritage LNR acquisition is the pace at which the bookings decline, which is quite a bit slower and that's a good management of our team by the way. Then we might have predicted and did predict in the acquisition. But I'd also point out as Rina did, that the service took 2% of our assets.

And that the majority of our income in the heritage LNR segment coming from other businesses are not from the servicing book, it is a volatile interesting little feature and kind of unique to us, and we continue to learn from them and them from us about how to take advantage of that book.

I also think one of things that's probably a highlight of the company in the last 12 months is we've been really focused on increasing ROE, and we haven't done an equity offering since last April. That's a long period of time, especially as loans come back.

We've been working, we are searching credit facilities, are going to be adding billions of dollars probably of additional credit facilities, working with our banks really working with our relationship that have become critical. We're in the top five borrowers from most money center banks across our $40 billion platform.

So we are pushing on those relationships to get better credit facilities for our company here. And also partner with the lending institutions we needed a bridge -- a loan that was getting repaid to us and we wanted the cash, so we would have to an equity offering.

We borrowed $100 million from the bank and two months later it was repaid, so we paid the bank back. But having relationship like that allow us to manage our cash much better, which significantly decrease the drag on the company of having an equity offering and having cash sitting around.

Even if we were raising the capitals we have historically for additional investments, there always is a drag between when we expect the loan to close and when it does close, and it creates a little bit of a noise in our quarterly numbers. I think we're doing a really good job at that, and managing our balance sheet, increasing ROE has been a focus.

Into that vein, we have some construction loans, including Hudson Yards in New York City, which we expect will get repaid at its maturity and essential completion of the building, when they get the TCO and probably will refinance us.

But in assets like that since we know it's going to be get repaid, and we have a first mortgage written at very attractive rates. We can sell-off, it's always our goal to sell-off seniors in these construction loans, which are all first mortgage loans, and we sell the seniors off in essence in equity raise.

So Jeff and the team are working on that, and this is another choice of capital for us, which does not require us to go back to capital markets. And if we can avoid that, we will avoid it.

As you know, we're partners with the shareholders, and if we think it's an incredible opportunity to raise capital for some large transaction, you will see us come back and raise capital on this climate, if it's accretive to the enterprise as a whole and the Board agrees.

So with that, I'll just stop and I'll say, April 2, we're doing our Investor Day. It will be in New York. It will be webcast also and reach out to Zach Tanenbaum for more information, if you need it. We're looking forward to that.

You'll see the breadth of the team at that day, and hopefully you'll learn something as we learn something from you about your concerns and issues. Again, I think, steady for the course, it isn't easy. This is not an easy business today. We continue to look at pockets or vacuums, where we can lend money.

It's attractive and move across the whole spectrum. And we saw a very large loan in Europe. We just killed the large loan that we tied up in Europe. Another transaction we killed on credit quality that just came through.

It was a very interesting deal that we were all gung-ho about doing a significant, but we're not going to do it unless the seller changes the credit covenants of the package and things they are selling us.

So we're going to continue to be picky, as can be, and you can't see the risk profile of what we're doing very well, but you can see that not a single loan in five years have defaulted in our portfolio. And we're pretty proud of that track record.

And it's a tribute to our very robust underwriting and investment committee process, which really does a blend the best of lender's lending discipline as well as the equity discipline.

And often times we're lending against assets, we either bid on like we [ph] McCann on the West Coast, where we bid on a property or the big land assemblage in southern California. We bid on the property, we lost and turned around lending instead. And that's when you get tremendous synergy from the manager, because we know exactly what its worth.

And we just bid on it and lost, and we certainly wouldn't lend against it at $0.70 and what we were willing to bid against it on. So that is probably one of the most powerful things without having the affiliation with the capital group for the company as well as their ability to sources assets.

We have, as you know, 50% team in the U.K., all of which are always sourcing investments and we've restructured our group over there to really add bodies to continue to source loans in Europe.

It's pretty interesting in Europe, again, the spread on traditional properties that we bought some office buildings in Poland and we've bought some office buildings in places like Dublin and London. The spreads are getting pretty astonishing, 150 basis points over. There is funded capital, but there is never any interesting capital.

The bread and butter businesses of banks are stretching for yield, but if there's any kind of wrinkle whatsoever, it's the great stock place for us to take up to 200 basis points, 300 basis points, 400 basis points of excess spread, which we then sell off the A note and keep the difference and achieve these target returns.

We'll point out also that I think something Rina mentioned, I'm just going to highlight it, because one of our peers mentioned it also that if you -- again if you attributed all of our corporate debt and convert to our loan book, you'd say, our returns are probably in excess of 13% on our asset. So we haven't done that historically.

We've given you the number with the debt in place not theoretical debt in place, just actual, but we in fact the opposite takes place here. So if we can get the $100 million loan, and we can retain $30 million and sell $70 million and earn 14% or we can retain $40 million and earn 11.5%.

We will take the 11.5%, because we think that's a tremendously attractive return in the no interest environment. We'll increase the size of our equity investments.

To lower our returns, if we like the credit quality, and don't need every deals to be a 14% that would be lovely, but clearly our goal is to continue to provide a shareholders with a very consistent safe return. So that's what I think we've done so far.

But I will say that as the world gets more cautious, we were asked at the IPO and I'll continue to say, when there is nothing to do, we're not going to do it. So we're going to shift investments to a different area, if there is nothing for us to do in lending.

If it's all risk and no reward, and we do worry about loosening the credit standards, you see more and more loans kicked out of conduit deals. So people are operating this is no item to buy, I don't like them.

And it shows you that you're seeing deteriorating credit conditions or people stretching to make loans to compete, I think this was like 40 operating conduits against. And I have to tell you is that they underwrite through a different standard than we do as our [indiscernible]. So with that, I think we'll take questions.

Jeff is here; Cory is on the phone, the President of LNR, to our board of investing. Would you call it the Investing in Servicing segments. We're trying not to call it LNR anymore. And somewhere in the line, we could get you ahead of LNR, which is not just a servicer. Anyways, thank you, everyone for -- and we'll take your questions..

[Operator Instructions] We'll go first to Dan Altscher with FBR..

Rina, you had mentioned that, I guess in the Lending segment, the exposure to Texas and Houston is relatively small.

Maybe this is actually for Corey, as you look through the servicing book, is there maybe an opportunity there to see some defaults across some of those geographies, whether it's Texas or maybe in the Dakotas, that could present a bit of an opportunity?.

Yes, it's a great question. Obviously, the CMBS space is constituted of assets and loans that stretch from coast to coast, so it's going to have more geographic diversification to it than would the large floating rate loan book. So I would agree.

We'll see probably ultimately some more activity in special servicing coming out of some of the Texas markets and Bakken shale, and in some of the gas markets.

We'll see what kind of opportunity that presents to us other than just obviously special servicing related activities, but we do expect to see some modest uptick in loans coming into servicing over the next 18 months associated with those regions..

It's early for you to see problems in the Texas markets. The oil just fell three months ago. So the issue will probably be first felt in these office markets, where it's the number one city for new construction in United States.

And my guess is that a lot of those energy companies that are probably taking the space will be reluctant to take as much space, and might try to work a lot of commitments to space.

Second place you're seeing is, you will see, and we expect when we did some work on this, we think we have seen in multi-family rents, that might not be 18 months before you see it. And there's been a flat lining, not a collapse. There's been a flat lining in the single-family home business for home prices and demand.

I think builders are weary that they might be overbuilding the market. I will point out that's not the case in Texas. If you look at the absorption of multis in Houston, it's gone flat to slightly negative, but Dallas is doing fine.

And there is another school of thought that will depend on what side of Houston you're on, because the chemical refinery and petrochemical industry is actually benefiting from widening spreads and boosting their returns. And so the port area of Houston is actually benefiting from the energy crash.

Texas have been the number one source of jobs in United States in the entire recovery. There's an amazing stat I had once put up the other morning on CNBC, that all the job growth in United States, all of it, it was from Texas, since the fiscal crash. And the rest of the states combined haven't gotten back to where they were before the crisis.

I think its 1.3 million jobs something built in Texas there. And you actually look at those job, they are not all in energy. They are like in servicing, and education, and health and other sectors and as you know they've seen a significant immigration of people jobs.

And that's one of the thing going forward, besides relatively better weather than New England and no taxes, which is definitely better than New England..

Barry, just trying to I guess maybe read between some of the lines of your comments around maybe some of the financing flexibility and capital.

I mean I guess my take has been you've generally thought of the company as being a relatively low levered vehicle, but it sounds like there might be some opportunity to maybe increase the leverage a little bit more modestly? Is that kind of the right read, as we think about this year?.

No. I don't think so. It's interesting as we look at equity investments, there might be 60%, 65% levered to generate very high single-digit, low double-digit cash yields. We're not levering the 85%, which we could and in some opportunity fund to do. We wouldn't do that here at this level we're about.

As far as increasing leverage on loans, again it depends on what we're doing. I mean, our A-notes, if you will, that's implied leverage, I wouldn't say we're really changing our strategy there. It's not a topic of conversation here.

Jeff, do you agree?.

I would agree. Yes, indeed. The markets have given some fantastic financing opportunities, and where the markets stretch, as Barry said in the beginning of the lifecycle of this company. I think we will look to those opportunities to take advantage of them. And the lending markets are very frothy. There is plenty to borrow for us.

There is an abundance of capital, and at lower rate spend we thought there would be at this point in the cycle. So opportunistically we've taken advantage of that, but holistically I don't think that's our strategy..

The market seems to be doing what the Fed is wanting them to do, right. The rated classes are getting -- they bobble, but the trend line is for ever decreasing spreads in the rated classes, as banks to turn to put out capital. You saw this morning JPMorgan, I think they gave back a $100 billion in deposits.

If you look at their deposits, they are soaring at record high, because their lending is flat, where they have been since beginning of the recession. So they're just sitting on the mountain of cash. And they've got to invest in something. They'll go rated securities, because that's where the Fed regs are, the most beneficials for them.

They will not touch the unrated. So anything that has unrated piece in it is where we play, right. And then the job is for us to then widen our capital sack, as fat a piece of the capital sack we can keep and still achieve our returns.

And sort of the gig, you can see what's evolving in the markets and it's probably -- and with retention rules as Rina mentioned, it will be very interesting to see how that works out. It's not going to effect, I guess maybe 12 months.

So how will the banks change their origination processes, if they have to retain these 5% slugs? I mean, they make big loans -- I was with the head of the [ph] debt for dinner two nights ago, and when we were talking about that, and things are not playing like they used to play, that's good for us.

And that's combined with the maturity of this, of the '06 and '07, and we should have a couple of good years of reasonably decent runway..

And maybe just one other one on Europe.

Can you maybe just compare and contrast the opportunity there, I guess between geographies and property types? I mean, are some geographies lending themselves to more transitional lending opportunities, whereas maybe some other geographies are better stabilized type of assets, but just maybe sort of lack of financing available?.

Well, depends which we're lending against, right. So we did a big loan in an office building in London. That is just being completed. And for lots of reasons, the guy held off leasing and we made the loan, even though the building is substantially unlet. We like our basis.

And since we lent in the loan, it's going to be 50% leased and that's probably in three months. So it's really good real estate. So it was no problem. The bank had a trouble with an empty building, so easy for us, and he had an issue with one of his partners, so that created opportunity.

He wanted to, whatever, buy him out or whatever and replace the construction loan with more permanent debt. I think so England, Dublin, Ireland, the Nordics, Germany are all green lights. If we can find stuff to do, we do them.

Our partner, Jeff Dishner in London is fine, and saying, you lend in the beer countries, and we stay away from the wine countries. So we'll probably say that's the truth. We have been pretty much -- I have put a red line around France. I mean, we don't really make loans in France, I suppose -- it would be. We never know.

But it is very tough to be a foreign lender in France, and we'll leave that to the French banks, which are so nice. In Spain and Italy, we had a large thing we were going to do in Spain. The markets there are more wobbly in both countries, not clear if they're going up or down. We haven't really found a need to lend there. There is less capital there.

But what we're seeing in Europe is the in-country banks lend in-country. So if we, the capital group are doing a deal in Spain, which we're looking at right now in hotel space, all the lenders are the Spanish banks. There is no one else there. Same is true in France, the only people lending in France are the French banks. So they pulled in all the U.S.

operations, and they've probably been instructed by their governments to support their own markets, which frankly supports their own banks, if you limit such exposure in local markets. So you're not seeing a lot of foreign banks. U.K. is different, you see U.S.

banks, you see the German banks, but within continental Europe -- it's interesting we bought some office building in Poland and we've levered them 75% and 190% over, so I don't know where we would play in those markets. They're leased though. I think it's like here, you're looking at transitional deals, the same thing.

We really like Ireland, it's done really well. It has a great tax benefit. The office market in Ireland, and Dublin, particularly is tight, and it's gotten really tight really fast. Rents are rising. Good opportunity for us there both in maybe equity and in debt. We're doing what we always do.

We move geographies and change positions on the capital stack and we change asset classes, until we see risk and reward changing. We are looking in Latin America, as we mentioned. But the hedging of the currencies in places like Brazil, which desperately needs capital, is impossible.

And if you look at the forward curve on the Brazilian Real, you're going to lose a third of your money if you don't do anything in five years, if you don't hedge in 600 basis points or so in that IRR. So it's very tough, other markets might be more attractive that we're looking at, but we've not been able to find anything compelling to do so far..

We'll go next to Charles Nabhan with Wells Fargo..

You've talked about some of the optionality within the LNR specialty servicing business during 2015 before the 2006, 2007 maturities kick-in in the following year.

And I was wondering if you could give us some color on some of that the optionality, including the repurchase of bonds at par or collateral at fair value? And what that could mean to the financials this year? And how we should think about that as a variable to your guidance for 2015?.

We talked about it as multiples lines of business. It's one of the businesses we decided to look at is whether we should buy assets from the servicer. It's all subject to the fair value guidelines. But I think you're not going to see probably a lot of fall in our earnings. This year we expected, it's okay year, frankly, from the servicer.

And next year to the year after an '18, we would expect better years. But I'd let Cory talk to this.

Cory, you have any answer, so do you want to comment?.

Yes. I think clearly there are some interesting opportunities. Now, when you look at STWD and the size of its balance sheet and P&L, it's all relevant. We've closed three modest sized fair value purchase equity investments for just under $25 million. And net equity deployed in very attractive returns.

And I think you'll continue to see us sourcing opportunities out of that book. How much capital could we deploy in a given year, it'd be terrific if we could put out net equity of $50 million to $75 million, maybe a little more, maybe a little less.

So we will continue to look at opportunities that come out of that book of business and keep you updated as the year goes by..

Yes. Again, it's not a major line of business for us. So that's what Cory is saying. We have 12 cylinders, it's a 12 cylinder, and we'll have 13 or 14 cylinders, because we're not going to force capital into any one business when there is nothing to do..

What you didn't ask directly is kind of what's going on the servicing book. As Rina alluded to in her script, for the next 12, 16, 18 months, there is again a gradual decline in assets that are in special servicing that's totally expected.

I think what Rina was referencing in her comments was the returns that we're getting off of our CMBS book, both the new issue market and legacy CMBS space, plus things like opportunistic equity investing, et cetera, make us fairly confident that the contribution from the segment, the Investing and Servicing segment, will continue to be pretty steady, even though there will be a slight decline in the amount of assets short-term that are in special servicing..

We'll go next to Jade Rahmani with KBW..

I wanted to see if you could discuss volatility in the CMBS market in the fourth quarter? What you think the drivers were and whether this has persisted since yearend? In addition to that, could you comment on whether you saw any diminution in competition in the B-piece space as one of your competitors recently mentioned in its earnings review?.

So Cory, I'll start and then have you jump in. As far as volatility goes, as most of you know, I think there are six or so floating rate deals that we're trying to get priced in the end of November and beginning of December last year.

Those are both single borrower and multi-asset deals and saw BBB's and BB's widened out from the low-to-high plus-300 range into the mid-to-high 500 range. We bid on four of those six. We knew the assets very well.

Through Starwood Capital we had bid on a few of them already, again, back to the scale of our manager helping us, when we look at these deals. Over the course of those, we ended up winning and a couple of them. Put some money to work at very attractive mid-teens yields on a levered basis. Since yearend, we've seen things come back.

I think that deals have done better, I think there was a liquidity problem in December, where a lot of hedge funds and others probably had mediocre years, and where they typically play in the bottom of the sack, they had pull back. The Street lost a lot of money in December. AAAs got wider into the low 100s, but are back into the high 80s.

So the market has rebounded a decent bit. I think the fall on for us will be that over the coming quarter or quarters, the Street will be a little more reluctant to take down large, single asset positions. And you'll see less of those single asset and multi-borrower floating rate deals come out of them.

And that plays right in to us, we're the competition for that and we'll be able to get a little bit of a pricing advantage and hopefully pick up some spread based on they are leaving some portion of the markets.

As far as competition in the B-piece market, I think we're seeing a phenomenon that we saw at the end of '13 and then continuing now into the beginning of '15, and that is that the B-piece buyer has more control over shaping up the pool, where we're able to kick out more and price adjust more loans than we have in a long time.

And a big part of that is that there are going to be less people playing in that, given the five-year hold, given the 5% need to hold, even though it's not coming for most of the year from now.

There are going to be less people playing in it, and we're starting to see an advantage come to the people who are permanent capital and can play in it for a long period of time. So I think our ability to shape pools will continue to get better.

And I think people like buying deals, where LNR is the B-piece buyer, because they know that we are very good and very conservative with kicking our deals. I sat down there for four-and-a-half hours, one day a month ago, and saw them go through every single loan in CMBS deal.

I don't know who has the scale to do that as well across all the asset managers in our 330% platform. They're going through every deal, running stress losses and running yields across each one and making decisions is really powerful, when you can put the scale of LNR behind it.

Cory, do you have anything to add to that?.

Yes, just to add a little color. In the fourth quarter alone, we underwrote $8 billion in CMBS loans here at LNR. So to Jeff's point, we've got a lot of touches and looks into the marketplace. We're encouraged by our ability to leverage that scale and scope.

And one thing we haven't talked about, but we have in the past is, all of these activities create more and better information and an information advantage that we try to glean out of our system.

So we are very large underwriting and information gathering machine, which I think assist us greatly as we look at new issue transactions, legacy transactions, et cetera.

And as Jeff said, the opportunity now is probably to shape the pools a little bit more, we gapped out in December to maybe mid-15s pre-loss yields, because of a lack of competition and a lot of shops were full up and we took advantage of that, as we kind of get towards the end of the first quarter here. I'd tell you, competition remains robust.

There's probably eight players out there. They're pretty active in the BP space and pre-loss yields are maybe closer to 15, now maybe a skosh under that. So it remains a competitive marketplace..

And Jade, we've talked in the past about not just, but pre-loss yields being what we will eventually book, but owning that servicing 10-year though, depending on what discount rate you put on that cash flow. Future cash flow is also significant. So it makes our yield, if it's mid-teens, mid-teens plus. So we do look at it that way..

We'll go next to Steve Laws with Deutsche Bank..

Barry, you covered a lot on the Europe side, both in your prepared remarks and some during the Q&A. But can you maybe just quickly touch on what you expect out of the mix of the portfolio? The last two quarters, roughly 13% of assets; 10%, 11% of capital.

Is that a mix we should expect to continue or is that something you think increases over 2015?.

Maybe our reorganization will allow us to get that number up. I'd be happy with 25% of the book or even a-third. But I think we'll wait and see. We're working hard on finding new lending opportunities. I think maybe also -- you have a fear in continental Europe of demand disruptions, and so we are less hard to underwrite continental Europe.

I'm talking about the developed economies of Germany, France, Italy and Spain, much like our equity strategy has been more in the periphery and U.K. and Ireland. I mean we're not the core malls, we'll never lend against anything, I don't think If it follows the equities strategy that we have, in our eighth fund we were only 5% in Europe.

In the ninth fund we're a-third in Europe. And in the tenth fund, which is announced to close in the next week, this week probably, it's running on half-and-half.

I don't know whether the lending book will follow that, but I don't have any particular fear of being there, as long as we pick our asset classes and geographies and leverage levels appropriately. I doubt that happens, just because of the girth of organization isn't built that way.

And we are always going to say that there's no place like home, where the rule of law is fairly well known. So I'd be happy if it climbed, I don't know if it will climb..

We'll go next to Douglas Harter with Credit Suisse..

[technical difficulty] the challenges on asset yields, but also the better financing.

When you put those two together, when you look out, the incremental deals, how do those levered returns compared to kind of what's on the book today?.

Shockingly, it's the same around.

And Jeff, what was the number?.

We've been 11% the last two quarters, which has kept our portfolio yield somewhere around 10.8%. That's not going to last forever. We know the environment is getting harder. As Barry said, we'd rather put more money out in thicker slices. Then as we make those decisions, it will certainly come in. We do write some 8s and 9s.

There are awesome opportunities in great real estate with borrowers that we want to do business with, where we will write a levered 8% or 9%. And then there are opportunities sometimes to get a different yield..

I don't think we can do a levered 8%, not in the loan, but we have touched that level or close to it. But it's funny the loan is going to get repaid, it was on a [ph] 4th of July, maybe like a 9%, I think. That's tight. And that it's in our blended returns, which are 10.8%. It's not going to crash, it's just going to drift.

And it's done it three times, and we've had the situation three times already in five years. Every time there is a hiccup, the conduit owners flee the market, and they shut it down. And the guys who run the conduit -- and you saw like Credit Suisse just dropped their whole boardage book last time the market tightened.

They just let all their whole lending segment go. There is a big change in the market, which is going to be very interesting to see. Some of the most aggressive lenders have been the foreign banks name like Deutsche Bank, and because they're asking them to capitalize the U.S.

domestic subsidiaries that could have impact, dramatically, competition in some of our -- I would say they are among the most aggressive lenders and they do what we do, and a lot more of it. So if they change stripes -- and you haven't really seen in the UBS or you see Credit Suisse, they must have capitalized the U.S.

domestic subsidiaries differently. But Deutsche Bank has not had a highly, you saw bank's incentive, they're irrelevant right now in our business. But Deutsche Bank is far from irrelevant.

They have been very aggressive, and often our competition in transaction, so if they pulled their strips, and which I'm guessing 70-30 they will, that's good for us and good for our sector..

And our pipeline blend is still somewhere close to 11% today and notably in the last six months we really haven't done construction loans, which were very yieldy previously. Not that we wouldn't look at construction loans, but we haven't done any and we've maintained the yield without that. So I think we do see opportunities.

And as you said, the financing side is certainly helping drive our ability to maintain our yield..

The pipeline is at 11%, so pretty good. It's always, actually surprising -- as you know we have the Christian Dalzell is running that group now for us. And it's never been easy, though I can pick up [indiscernible] of the street when the 10-year is 199. But you book a lot of ugly girls, or ugly guys, just to keep it ugly.

I'm sure that will come out in some replay now..

We will take our last question from Eric Beardsley with Goldman Sachs..

Just a follow-up on the competitive environment, as you were talking about the potential for yields to drift down a little bit.

But have you seen any changes in the competitive environment over the last three, four months?.

You've seen the banks kind of pull back a little bit. I think there are very few people who play in our space. Who have this scale to be able to land on a size that we lend. So the conduit, 40 people that Barry talked about is true, that is a smaller fixed rate universe.

Within the large complex floating rate loans that that take a lot of work to get over the finish line and take a lot of expertise, there's very few people, there's still very few people. So I think the competition will remain the same has remained the same.

And I think borrowers recognized the scale of a few people who they can come to, and those are the repeat borrowers who we've been able to continually get business out of. And we expect to be able to do in the near future. So I don't necessarily think that the competition is going to be what drives opportunities.

Although, a pullback from the investment banks will certainly create more opportunities..

That will conclude our question-and-answer session. I'd like to turn the call back to Mr. Sternlicht for any additional or closing remarks. End of Q&A.

The only thing I'd say is come to the Investor Day on April 2 and meet the team. It's always good to see management, and we have a great team, so I look forward. I'm glad that you called and listened to the call [indiscernible] the call.

But thank you all for your continued support and we look forward to talking to you next quarter, or seeing you on April 2. Take care. Thank you..

This does conclude the conference. We thank you for your participation..