Zach Tanenbaum - Director OF Investor Relations Barry Sternlicht - Chief Executive Officer Rina Paniry - Chief Financial Officer and Chief Accounting Officer Jeff DiModica - President Andrew Sossen - Executive Vice President and Chief Operating Officer.

Doug Harter - Credit Suisse Group Charles J. Nabhan - Wells Fargo Securities, LLC Jade J. Rahmani - Keefe, Bruyette & Woods, Inc. Daniel Altscher - FBR Capital Markets & Co., Eric Beardsley - Goldman Sachs Kenneth Bruce - Bank of America Merrill Lynch..

Good day, and welcome to the Starwood Property Trust’s Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to 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 June 30, 2015, filed its 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 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 maybe made during the course of the call. Additionally, certain non-GAAP financial measures will be discussed on this conference call.

A presentation of this information is not intended to be considered in isolation or as a substitute for 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 Andrew Sossen, the Company’s COO. With that I’m now going to turn the call over to Rina..

Thank you, Zach and good morning everyone. This quarter once again demonstrated the strength of our multi-cylinder platform with all components of our business contributing to core earnings of $125.9 million or $0.53 per diluted share.

Excluding certain one-time costs related to the acquisition and pursuit of properties related investments, which I will touch on shortly, this core, was $130.8 million or $0.55 per share.

During the quarter, we deployed $1.9 billion of capital across a variety of asset classes including $810 million in our Lending segment, $552 million in our Investing and Servicing segment and $503 million in our New Property segment. I will discuss each of these segments individually, but I will start with our newer segment, the Property segment.

We established this segment to house oour stabilized operating properties, assets which carry high occupancy levels and stabilized cash-on-cash yields such as the Dublin portfolio we spoke about in our last call. During the quarter, we closed 12 of the assets in this portfolio for a gross purchase price of $383 million.

We closed the final asset in the portfolio on July 24 for $122 million. Also included in this segment is our 33% equity investment in the Mall portfolio we acquired in the fourth quarter of last year. We have reclassified our prior period segment financials to reflect this investment in the Property segment.

Excluding the impact of one-time acquisition and pursuit cost, primarily relating to the Dublin portfolio the Property segment contributed core earnings of $4.6 million in the quarter. Keep in mind that most of the Dublin assets were acquired mid quarter and therefore did not have a full quarter of contribution to our results.

We have a robust pipeline of over $1 billion in assets for this segment, all consisting of stabilized assets across the variety of property types. We hope to tell you more about these assets during our next call.

Now turning to the results of our Lending segment, during the quarter this segment contributed core earnings of $108.1 million or $0.46 per diluted share, a slight increase over last quarter’s core earnings of $107.3 million.

We originated or acquired $810 million of new investments of which we funded $560 million; we also funded $132 million under pre-existing loan commitments for total fundings of $692 million.

These new assets are funded almost exclusively with recycled cash from the Lending segment’s target portfolio which in line with our expectations received $928 million during the quarter from repayments, partial paydowns, refinancing and sale. The new investments made by this segment during the quarter were accretive to the loans that were repaid.

Credit quality continues to be a priority for us with the average LTV loan book declined to 61.3% and our track record of zero credit losses continuing across over $15 billion of historical loan originations and acquisitions.

The returns on our Lending segment’s target investment portfolio remains strong at nearly 8% on an unlevered basis with optimal asset level returns increasing to 11% this quarter due primarily to new investments being made at higher returns than those that repaid.

Keep in mind that these returns do not include the impact of corporate level debt such as our term loan and convertible notes. If we were to allocate this debt to the asset level we estimate that our optimal returns would be over 14%.

Our loan book continues to remain positively correlated to a rising rate environment with 82% of the portfolio consisting of floating rate loans. We estimate that 100 basis point increase in LIBOR would result in an increase to annual income of $19.5 million or $0.08 per fully diluted share.

This does not include any benefit that our special servicer would realize in a rising rate environment. To give you a better color on this particular point, for the loans that are scheduled to mature in 2015 to 2017 and CMBS Trust where we are currently named special servicer; there are approximately $60 billion of performing loans in this trust.

In a rising rate environment higher rates would make it more difficult for these loans to refinance, resulting in more loans entering special servicing and more fee income to the bottom line. This puts us at a very unique advantage to other REITs generally and specifically to other mortgage REITs.

Speaking on special servicing, I will now turn to our Investing and Servicing segments which returned another strong quarter of results reporting core earnings $61.1 million or $0.25 per diluted share a slight increase over last quarter’s core earnings of $ 60.9 million and an increase of more than 28% over the earnings we reported in the same quarter last year.

All cylinders of this segment contributed to the improved performance, our conduit operations Starwood Mortgage Capital participated in a record five securitizations this quarter fiilling $533 million of loan for net securitization profits of $17.3 million on a core basis.

The remarkably high turnover rate for this buck up to limit our exposure to some of the market volatility we have seen recently. Our servicer continues to maintain its dominant position in the market again ranking first in named special servicer market share.

As of June 30, we were named special servicer on 153 trusts with a collateral balance of approximately $125 billion and we were actively servicing $12.6 billion of loans and real estate owned. Our CMBS portfolio remains relatively flat this quarter increasing to $830 million from $807 million last quarter.

While CMBS spreads widened this quarter it is important to recognize that our CMBS do not trade in the same way as other CMBS bonds, and thus our marks are less vulnerable to spread movement.

First, the majority of our bond portfolio is marked to a loss-adjusted yield, which means we assess credit quality of every loan in each CMBS scale we invest in and mark down the bonds when we believe credit deterioration has occurred.

Although our pricing yield is impacted by market spread movements, those spreads are often muted by treasuries who’syields typically move in the opposite direction. The other factor to keep in mind is that we have planned a whole much of our CMBS to maturity.

Our CMBS pipeline looks strong with 3 BPs and the related servicing already secure thus far in the third quarter. Once the Dodd-Frank Risk Retention Rules are implemented in 2016 we expect the playing field to shrink considerably which will uniquely position us to benefit from increased opportunity in this space.

Turning briefly to our corporate segments, unallocated corporate overhead on a core basis totaled $43.6 million or $0.18 per diluted share, a decline of 8% from the $47.2 million we reported last quarter. The decline resulted from fewer convertible net repurchases this quarter.

Moving to our discussion about our capitalization, early in the quarter we issued 13.8 million shares of common stock primarily to help fund our acquisition of the double in portfolio. On June 22, our board authorizes a $200 million increase to our repurchase program.

We repurchased 400,000 shares pursuant to this program during the last week of the quarter, before we entered the blackout period.

Our total borrowing capacity excluding capacity which we could create from selling senior interest in our loan portfolio stood at $6 billion at the end of the quarter and has an increased to $6.5 billion subsequent to quarter end.

We continue to stay within our historical leverage levels with our debt to equity ratio following to 1.2 times at the end of the quarter; a level which we believe is extremely conservative compared to our peers.

And finally I'll add just a few brief comments about our current investments capacity, our 2015 earnings guidance update and the third quarter dividend.

As of July 30, we have the capacity to originate or acquire up to an additional $1.5 billion of new investments driven by available cash, capacity under our financing facilities and expected cash returning from our loan book. This number did not assume any incremental leverage that we could obtain on new investments.

As we look to the remainder of the year, our business continues to perform inline with our expectations and we therefore reaffirm our 2015 core EPS guidance in the range of $2.5 to $2.25. consistent with that we have declared a $0.48 dividend for the third quarter.

The dividend will be paid on October 15, to shareholders of record on September 30, and represents an 8.8% annualize dividends yield on the yesterday’s closing share price of $21.78. With that I'll turn the call over to Jeff for his comments..

Thanks Rina. We run a complex at a complementary business this year. We believe that complexity is also a competitive advantage giving us the ability to see the entire playing field from many angles. Lever our expertise and scale across the real estate capital markets and invest across many platforms in the highest risk adjusted returns available.

We believe the more engines we have the more opportunities we will find and that we will never be in a position to meet the reach in a specific sector to invest capital. Our multiple platforms give us the ability to be flexible and very selective in the assets we acquire.

We continue to venture to overcome the complexity by telling our story to investors and value that opportunity and we will host meetings in Chicago, San Francisco and the Mid Atlantic in the coming months.

We allocated nearly half of our subscribed equity offering in April to retail investors and we continue to think there is upside in our equity story with retail investors, who have historically owned lots of our stocks than our peers. At an 8.8% dividend yield, we feel the better they understand our story, the more our stock price will benefit.

We continue to think book value is not the appropriate valuation that’s it for large part of our operating platforms.

We are finally at the beginning of the 30 month wall of CMBS maturity we’ve been waiting for and getting closer to the December 2016 implementation of Dodd-Frank Risk Retention Rules [indiscernible] very opportunistic for us as investors in CMBS BPs.

We worked very hard in some large portfolios this quarter, Dublin may work for us and few bets did not. We utilized the scale of nearly 500 people in Starwood Property Trust and another 1,000 across our manager to underwrite large portfolios of assets that we simply could not underwrite any sufficient detail without our scale.

We underwrite in asset manager entire book ourselves staying close to every detail of the credit quality of our assets. As Rina just mentioned, our LTB fell again and we continue to have zero dollars in realized loan losses.

Importantly in our mature low LTV book our internal asset management process and interactive borrower feedback helps us hone in on the timing of our expected maturities.

Managing our liquidity is among our most important job and we had over $900 million in loan payoffs, refinancing and maturities this quarter, but none of them were a surprise for us and we have been able to or will reinvest that money in a timely fashion.

We have many places to use cash, we deployed nearly $2 billion during the second quarter across the many investment engines available to us and the third quarter is starting of strong across all our investment platforms. We added seven new borrower partners this quarter and have lent to over 100 distinct borrowers over the last six years.

We constantly mine our portfolio for refinancing and repeat borrower opportunities and did so effectively this quarter as well. It will be very difficult to stay invested with out repeat borrowers and the relationships over 1500 person organization.

I always talk about our credit first philosophy and our goal to lend on great properties in great locations globally with great sponsors. This quarter we made eight loans for $810 million at a 12.9% levered IRR in our lending book, which is well above the yield of our legacy portfolio.

That credit first philosophy now extends into our equity purchases. As Rina mentioned, highlights this quarter includes the Dublin portfolio purchase and the turnover end volume of our conduit operation, which was the large contributor to five distinct CMBS conduit deals, quite a feast.

Our borrowing rates continue to fall this quarter and we added a tremendous amount of new capacity. We closed, modified or amended a handful of loans this quarter and are working on eight new lines of modification.

In addition to the 23 loan totaling over $1.5 billion we put on warehouse lines this quarter we also sold or syndicated 17 loans for almost $1.2 billion and believe that mix is both prudent for the long run growth of our business and allows us to optimize multiple sources of available financing.

I would consider our dedicated sales and syndication expery is another engine in our diversified platform. As a side note, we announced the new Chief Credit Officer this quarter, Mark Cagley, who we hired after 30 years of Bank of America in Wachovia.

And we also announced co-President of the resegment Adam Behlman and Isaac Pesin and look forward to introducing them to you all in the future. I’ll now turn it over to Barry..

Thank you, Jeff. Thanks and good morning everyone. Interesting quarter, I mean the world was volatile and we were not. We talk about being stable, transparent, predictable, and I think we delivered all three as we have from the start of the firm to our shareholders.

The market was a little volatile every time in interest rate because they are ticking up our stock tickets down, I’ll point out that the $0.08 from the increase in LIBOR 1% is nearly twice our second largest competitors gains and the increase in earnings per share will be almost twice what they achieve if in fact rates do [pop-up] (Ph).

I would also point out there was a sloppy quarter and we actually beat the street estimates because we didn’t realize that we would be taking the up-front hits from the equity deals we did in our earnings. So we did $0.55, your estimate was $0.53, but it was a really sloppy quarter while Jeff said we anticipated $900 million of cash coming back.

We sat around with a lot of cash during the quarter. To know if we would be able to put that out quickly in the third quarter and we anticipate being - I can’t remember the last time we ended the quarter with $1.5 billion of capacity.

So it’s we are not operating on all cylinders, the good news we got a lot of dry powder and the really good news is we we’re finding opportunities to deploy it, which even surprises me.

And the two highlights of that which I will say again be duplicative with Rina and Jeff’s comments are the LTV dropping which is shocking at this point in the cycle and also the yields on our target assets that is going up not down.

We actually told you this, we told you that we would be able to finance cheaper as these credit lines came in cost we could lower our cost of borrowers, but at the same time, our cost of financing would drop and we can - expect that to continue to see that happen.

The other thing you are looking at very different strategies in the space, looking at company that is 1.2 times levered it is really not very leverage and we highlight it for you that if you attribute on balance sheet leverage across the company we are earning a 14% return on capital, which is best in class and we expect that will get better not worse as we continue to deploy capital and grow the enterprise.

Really excited about the pipeline both on the team and the origination side, we are not looking for mass, we are looking for quality and finally we are very picky, I’m really excited, I wouldn’t say a side note Mark Cagley, we are really excited to have him on-board as the Chief Credit Officer of the REIT.

He has done a really a nice job of integrating the team really well and the coordination between [indiscernible] our Regional Officers, our European Officers and the team at Miami which is 350 people strong has never been better, as well as Rina’s efforts to consolidate and drive quality of our earnings information in our back offices I think you will continue to see those scale synergies as we continue to grow and get better coordination - increasing coordination between the parts of the firm.

We also brough a little stock and we have been involved in some transactions and we are involved in large transaction, we actually can’t buy our stock in. So we will be active repurchases, the board approved a repurchase program and we've recognized where our dividend is on the stock right now.

And I think overall we’re pretty happy, I’m pretty happy with the quarter given how much cash we loaned up with an average balance, which was excessive and unusual for us. We had some timing delays as we've have always talked about when the loan is invested or we close.

The Dublin deal had a split closing maybe closed one piece and second piece and we have some really interesting deals under contract which we are not going to talk about, our strategy as you know on the equity side is stretch duration, invest in very safety yields where very high cash on cash returns so we can pay the dividend right off the bad, sustain our dividend or grow it overtime if its possible.

And when we don’t do that we will let you know when we change strategies. Right now the strategy is available to us and we are executing it literally on a global basis.

And monitoring our cash position, [indiscernible] stock price to know that we have to be careful about raising additional capital at these levels, so with that I want to thank the whole team Zach and Andrew and Jeff and Rina and Adam and everyone for all their effort, the continued hardwork at the company and we are pretty excited about our market leadership position in the space, but we do think we have to continue to introduce the company at different audiences, Jeff mentioned retail probably in Asia something we should go do, where a yield like this 61% LTV emains a bit of a joke.

I own a lot of stocks so it’s hard for me to buy more but I guess I could. Thank you very much. We’lI will take questions..

[Operator Instructions] we will go first to Doug Harter with Credit Suisse..

Thanks.

Can you talk about sort of as the portfolio is seasoning and as you get more sort of repayments on our quarterly basis, how you plan to sort of manage those cash balances down to kind of a more normalized level?.

One of the things that we have which we are benefiting from is the very good construction book and it has draws, like Hudson Yards as you have seen te tower going up, it has draws so we actually know cash is going out and cash is coming back and its going out. We actually projected this out probably two years.

So net cash that we have and expect to have for investments is not nearly - we are counting on these repayments and we know they are going to be repaid. Things like Hudson Yards I can guarantee you today that loan is an 8% first mortgage on atrophy office building in New York that will go away near place with far lower concept financing.

So I know its coming back and we can anticipate that coming back. We have about $1.5 billion thats left to go out on those just on those existing high quality loans, which are very low LTVs, they are actually helping our LTV calculation.

I should have mentioned, I didn’t mentioned Jeff mentioned briefly and I’ll do it in your question, not in my comment, but the changes are going on in with the banking system with Dodd-Frank and Basel III really should be a very good thing for us.

And across our platform we can take advantage of that at every part of our business, whether it’s buying BPs, originating for paper, for conduit business and Starwood Mortgage Capital, for our large loan business, for construction lending that could be just the greatest thing that’s happened to us since 2009.

So we just have to make sure and we will look and we did, we have worked on some larger things that we didn’t win, but [indiscernible] assets too, it’s another low yielding assets, which is fairly clean quarter with not a lot in the way of assets sales, and was nothing, but that we have in the past looked to take an advantage of the markets and sold stuff and that’s another source of capital.

We have a very liquid balance sheet, I’m not sure of people but we sell anything, pretty much anything on the book and then we have stuff on the book like auction.com which actually doing pretty well, kickers in some our deals that we don’t value at all. So they are virtually not in the book.

So the company is unusual, its built differently it’s a pretty interesting Ferrari, maybe we weren’t quite a Ferrari this quarter, we were kind of Lexus [indiscernible] Lexus but we are going to be a Ferrari we are going to continue to better what we do and I think we have a great opportunity in the space..

Right, thank you..

[Operator Instructions]. Our next question comes from the line of Charles Nabhan with Wells Fargo..

Thanks and good morning. One of the themes you have touched on, is the opportunity in the B note space, so I was helping you to comment on the incremental returns you’ve seen over the past couple of months with the recent spread widening and also if you have seen any change in competitor behavior..

You want to say take Jeff, I mean the BPs market isd inacttive as you know, there were the [indiscernible] more than we have seen before we were like a position, spreads pop in and out. When they pop in where you walk when they pop out we should come back.

We have been very tough in our BPs buying, we have been kicking deals out of securitizations and that doesn’t always make us the guy of choice, but for one reason or another it’s actually working okay for us, it’s not like we feel like we are not. Don’t forget we also as a servicer we get high ROE point by BP and many peoples then hire a servicer.

So we can bid a penny more and we win and get a higher return than they were bidding a penny less. So that’s a competitive image of the integrated platform.

Do you want to add anything into that?.

No. I think the BP deals backed out into those sort of high 14% or they are about probably 100 basis points wider than where they were, not that long ago, but it’s really a combination as Barry said of what we are able to kick out and how we are able to shape the pool and the yield.

A wide yield of loan won’t get us in, we need to shape the pools to something that make sense for us, there was only one of those last quarter, we have three already this quarter..

Again we like this environment, we like the volatility in the credit markets in a sense that - I mean that’s hurts us maybe in one securitization out of 11 or so we will probably do this year, but it also widen spreads and makes all the conduit lenders get more nervous and they don’t keep tightening, tightening and thinghs are going to always go in one diretcuion.

So the backing up of AAA is good for us, we really like that frankly, we want more of that give us more volatility, the traditional lenders walk away, they freeze and we wonder in and these are real estate underwriting to say this is final take us down we’re a holder anyway.

The vol is good for us, higher interest rates are good for us, you know I keep mentioning that every time rates go up we get sold.

Since we are the largest of those with $5 something billion dollar equity market cap, we are the fun guy to sell with ETF, they buy us and sells us and we go down every time, there is liquidation in yielding ETFs and they assume the REIt is going to do down they sell us, they sell for resi REITs.

And that’s just shareholders have look though that noise and the long-term value of that and the franchise in enterprise and use those opportunities to buy the stock, because the ETFs are really [indiscernible] pointed out what was pointed [indiscernible] ETFs are creating interesting opportunity for smart investors to take advantage of that because they are just pushing bucks and selling stocks and for us we just have to dance around that situation..

Okay, just a quick follow up to that. You had disclosed $33.4 million in properties acquired through the trust in investing at servicing segment. I was wondering are those - is the intention to hold those properties for investment or tell those properties..

Both. Mostly to hold, we’re modeling five year holds, but those are off deal in our book. That’s what those are..

Okay. Great. I appreciate the color, guys. Thank you..

[Operator Instructions] We will go next to Jade Rahmani from KBW..

Thank you for taking my questions. At this point, the number one question I get asked by investors about stared property trust concerns the external manager.

Can you comment on whether the board has discussed extential internalization transaction, a couple of it appears are internally managed and one has merged with its private equity depend as you’ve previously noted.

How realistic do you this extential transaction might be?.

Let’s see. We’re in the structure we have well in worth of a $100 million plus overheaded FCG, the parent company that’s deployed in behalf of the reason. So all the equity deals we’re doing are done by the manager. And they are growing in number and they will grow in number in the company.

So I don’t think at the moment, I think we’re securing this company which we saw in colonies internalization was a company with a different potential future. It was a very different looking; it was already an equity book.

It was more of a diversified almost opportunity fund, strategy as appose to BXMT which is obviously externally advised and we don’t expect to them internalize anytime in my life time. So this is a debt book and a high yielding book and it’s managed like a fund and I think that’s the strategy we’re going to keep in place for the time being..

Okay. Just turning to the lending business, can you discuss what’s over the increase in optimal levered returns, was that mainly due to leverage on the first mortgage position or something else..

Better originations. It’s interesting; obviously we changed our organization team for those we’ve been following our firm over the years. We haven’t made a construction loan in like a year, may be more. And we were getting full up.

We like the opportunity in something black line and get a red line, which something we’re going to do and we’ll be selective but we kind of afford looking at the enterprise risks of the company decided we pull back and we did and what’s interesting is without even though the [indiscernible] but without having to do those I think just a better originations and better credit review and better deals we got us better yield.

So a combination of the fact that our spreads are little tighter on our lines, which we continue to work to drive down and it’s not really because of more leverage because the front’s overall leverage fell quarter-to-quarter.

So kind of a shockingly interesting, I actually scratching myself, I pointed out to the board our recent board meeting that the quality of our book, now we are not doing probably we are not doing $2 billion of loan origination of the quarter. And that is we’ve always done, we’ve always focused on the capital of filling out.

So the equity retention piece or the A note that we like call that a beat, the A2 note because the mortgage that we slice and sell off to senior to match funding the risk.

That’s something else that I think is lost sometimes on some of the analysts is - the match funded nature of the books, its really important because you can repull this stock and we could drive earnings through the ceiling.

If we chose to just do it overnight financing and you wouldn’t see the risk until we had our own S&O prices when we couldn’t roll the repost but very effective way to answer itself.

Its just effective when we are all trying to, there is no credit for any standing where does it show our not basically as you know one of the reasons, straight away they do is, they worry their impact or both are declining book when rates go up, the value of their book and the fact that reaccerlates their short term and there is longer term investment against it.

So we have the S&L risk and then which we don’t. So but again, you wouldn’t know it from the stock price, it’s not exactly where we want it to be..

Can you also touch what drove the loan loss provision in the quarter?.

Well we added one loan. I think that was one of our worst loans, was just taken out, so worst loan I was worried about, I love to handle, I don’t have loss in six years or five years whatever it is. But they repaid us and sold and we’re done. So we added something else to the watch list..

That loan was for the third quarter, so it is actually just a couple of loans that added to it this quarter and again it’s not that we don’t expect to be fully repaid on those loans, we just have with all impairment indicators related to debt yields that we think ultimately will be overcome..

The auditors like us to keep the reserve, so we have instituted one taking into size of the book but the actual - I would just remind you to what loan that is, there is no chance that is going to be an issue. That is I hate to say things like that but demand in dollars in California valuable really ton of money with the deal.

So they lost a tenant and so we moved our new [indiscernible] is running that risk retention, okay let us put in the buckets that we did. Automatically increased the reserve when that happens and….

And then finally on the servicing intangible in the 2015 through 2018 time period if there are additional servicing transfers that increased the amount of special servicing would the intangible on the balance sheet increase?.

Yes it would and as we get closer in time because we discount those cash flows at 15% as we get closer in time, it will increase to [indiscernible]..

That is an interesting point, we talked about also in our meetings which are we get - we have been discounting those streams at very high discount rates probably inappropriate and the book value as the service would go up as we got more visibility on exactly, they have done some pretty good analysis now of what is coming down that and we really would like to reiterate [indiscernible] higher interest rates because they will stress everyone of those loans just very some people are don’t even remember that period but those loans are return at 90% plus LTVs very high of these and most of them written like 30, 40 basis points over LIBOR, so we have absolutely no risk of defaulting until maturity and no borrower would refinance that other.

So when they go to refinances some subset of those should be opportunities that will fall into special and we will earn good in working them out, so we would really like rates to be up, I think maybe 2016 or certainly I do think we will see our rate increases here maybe a 25 perhaps 60 different LIBOR, but I think it will be we look forward to it or stock will probably fall but we will make more money until we realize that..

Andrew just finally if I could in terms of capital I think at the Investor Day you commented on potential plans for CLO, is that still something you anticipate during this year?.

Yes I would say it is something that we will like more likely been not do by the end of this year, its lined up against everything else that we have, the reality is our borrowing lines continue to get cheaper and it is a function of where [indiscernible] vis-à-vis our borrowing lines and where the capital market execution is on the given day with more volatility in the market it is a little harder to get a deal done and if the market gets less volatile and see all those get tighten in to make it more competitive than we are ready to pull the trigger on..

[indiscernible] is the total cost of the financing I already said with these guys why we are doing these and respect we very pace have still there are fairly, there is accordion features of it but based on credit quality on the spreads and the overall cost and the duration sequential how it pays off speculators use this the value of some of the leverage to the firm.

So I have been bonded with this that is something now we have looked at it in terms of some of the finance deals we have been doing.

We are looking at it, whether we would take some of the assets that we are buying and pulling it together, we are doing a CLO and there of course it is not incremental to anything if not we don’t actually have the capacity in some of this to put it on our line. So that might work but we would love to be there.

We also know we didn’t bring it up, when we should bring it up that we have some margin orders on investment grade and it is something that we would like to do although it may take longer of course than we would like, but we know where we have to go across different parts of the firm and you will see us do move if that will move us in that direction and so we are Andrew and Rina and team have done a really nice job of lying out road map working rating agencies of and what we need to in order to achieve what we talked would be just and we could get investment grade and the banks can’t make loans anymore in real-estate that would be a good thing.

So, we’ll see..

Let’s some other interesting news you will talked to you about in the quarters is coming up that we we’re working, but just easy right now its like a feature film [indiscernible]..

Thank you very much for taking the questions..

We’ll next to Dan Altscher with FBR..

Thanks and good morning everyone. Actually I want to talk a little bit about the buyback; I’ll see the percentage are very much it little bit towards end of the quarter.

Just curious why up the buyback authorization if it seems like they are still, adding some quick capacity on going into that into late June, in preparation of some increased activity going forward giving where the stock is..

We often we issued that the buyback authorization but as I mentioned in the my comment every time we involving something that’s scale we are not allowed to buyback stock that’s we are obviously insiders and then we have the natural of time through earning to lot to buyback too.

So you saw I was wondering and buy some stock but again if we have something large that we’re looking at which we were and do and or then we’ll stop because we think we can deploy, we can use the cash or something else, but yes it was like I said from a balance sheet perspective actually it may have been one of the sloppiest quarter we have ever had with a lot of cash slashing and it’s wasn’t actually slashing around, it was pay down credit facility so we are unlevered for a portion of the quarter or more so then I think we typically would be, do you agree it..

Yes, Sorry I’m little sick, but if you look at our share price over the course of the quarter I mean as of June of 11 or 12 we still note that $22 a share so we start stepping into the market kind of subsequent to that and as Barry mentioned, as you head June 30 you go into your blackout window from a buyback perspective so we are of course still legally have to step out of the market.

And remember that our share our buyback authorization also covers our converts and we disclosed, we bought some converge back this quarter and bought a greater quantum back last quarter or so although we had capacity it’s covering a wider spectrum of securities today then it has historically..

Yes, I know its definitely so it converts also I mean that’s going to will become lead to my next question and some was answering already is how do you think about the mix versus convert versus comment I mean just, the simple math kind of think just $22 or so price where you sort of like the comment as well.

So how we weighted what both of those options versus the big things that’s sound like there are maybe in process I mean kind of fields like the buyback there is supplement but it’s not may be going to use in a super big way at the end of the day..

The converter obviously attractive financing for us, but when we have an opportunity and when we had an opportunity to buy them back at a discount to priority which the function of both we convert price and the equity price and we’ve stepped in and done that.

I think that’s the strategy we will continued to do today converted traded better vis-a-vis the equity and there are not at the discount parity that they were when we were repurchasing them, we think it makes economic sense to do so when they get down there, they are not there today, so we have pulled back on purchasing the coverts..

Well we don’t love them [indiscernible] do a lot of that, because of the vol trade facility use to cash with the effective cost of funds [indiscernible] we have to buy them in.

So it’s they are fine but we rather find other ways to grow probably at this point, the one of it’s unusual things about those converts also spend so the shareholders that are here we did spin out our away point which is roughly $5 a share so our stock is really because of five points split as a 26 something the company that’s probably paid out I don’t know $13 in dividend since its start so it was $40 stock if you will since we started.

So I think that makes best in class which I actually know we are so we got it look at everything and find the vol and that convert creating our earnings is kind of upsetting and it’s not exactly like what we pay us do is manage that [indiscernible] our balance sheet is a head ache..

And then you Barry’s I just want to talk on a point or question or comments, that you have made earlier in the prepared remarks and I think it was that you recognized where the dividend is, maybe what do you mean by that recognizing that it’s lastly very generous of the current rate or that there is potential hopes to step it up overtime like you have in the past of that, just really comfortable with where it is, what do you mean by that exactly..

I think it’s too harsh, do you have any stock, stock fell in the date and the rate is too high and look at my peers do it and is too high given what we have and they have relative basis and that I started to pay dividend, pays at 1.3 times book.

So there is an example or I think our second largest tier the moment is more lever than we are at three to one leverage and they have a lot of dividend yield than I think.

What obviously is a case and what Jeff and Andrew, Rina, and the team are working on is that is educating people on the servicer because the only possible explaining I can have for where our dividend is that people to understand the recurring nature of the servicing income in the company and the business that with a substantial portion of profits of company come even from the conduit business which has nothing to do and hopefully we’ll be here forever and remain best in classes as it’s been for a long time.

So there in the CNBS grows up fairly predictable value for us, that’s the bulk of the and the servicer only value $175 million or something like that. 165 at the end of the quarter. So what is that like, 2% of assets.

And, yes, there are also some good income and there is opportunities there but we hope as you know as our deployment is the equity space and this is kind of in par to cushion what we would expect might be reduction of income from that area of 2018, 2019, 2020, where it can do it in 2020, we got to do it now.

So we know, just like we know the repayments, we know we’re looking at. And I think I just don’t understand the yield on our stock and I do blame it on the ETFs side, I blame it on the fact that the ETFs.

There been accounts that, that’s like I highlighted the quality of the book originating today because you might say the credit cycle is getting along and the two is I myself say it’s really to, it’s not like it’s easy to find good loans that we can make it spread the work for us.

But there are opportunities and some of its just had repeat borrowers guys coming back and I think one of our dealer refinancing four times, fourth refinance.

So we’re easy to deal with and we’re flexible that’s what we’ve told everybody we’re fast, flexible, we know real estate, or hold the loan, they want to upsize it, they want to expand their asset, we are great lenders for that.

An office building in Manhattan leveraged 35%, we’re not worthy of a phone call there is just time where we won’t be competitive..

With our mature loan book, two of the loans this quarter were refinancing, as Barry just mentioned and they were attractive yields to us, we control those, we’re the only person who can rewrite those loans, they have prepayment penalties that borrower can’t go out to another person in the market without significant penalties and while we control that we look for opportunities to extend it and refinance and with a six year old mature book that is an opportunity that we’ll continue to take advantage of..

We’ll go next to Eric Beardsley with Goldman Sachs..

Hi, thanks. On the dividend I guess, how should we think about the potential for dividend growth from here, is it going to be a function of more leverage over time, growth in the fee income, or just better reinvestment yields..

I think all the above. I think as the book growths are cost of finance will continue to drop and then with the obvious gold making investment grade and then the ROE of the business goes up and you can pay a bigger dividend. It’s the yield startup the world, it will be less yield start but rates go up but so I think there is pressure on yields.

And [indiscernible] and we look at a lot of equity deals to try to find deals that have cash pay rates and we can do equity deals all day along that pay 6% current but that’s not going to work in our model.

So we are looking for kind of equities that it look like us, payable long term really no risk we believe to the corpse of our capital and things we would like to own forever, so the deal you will see is announced are kind of like one of them is very long financing in place, fixed financing for ever.

So hopefully you will see the kinds of stuff and we think of it is like we want to drive first and we want to own it for twenty years and later feel comfortable with it.

That’s how we screen this stuff and then we say okay, can we get cash and cash yield frankly next to the 10%which we achieved in the first two investments we mainly expect we can achieve on further ones but that is a subset, small subset of what you can actually buy, you are not going to see us buy likely, I mean we will tell you we can do it, but a $2 billion office building in New York is a two capped that would interrupt our dividends.

So that would be a change in strategy which we have not yet decided to do. So we find need to do..

Got it.

And on the equity investments are you primarily targeting fixed rate funding to keep that asset sensitivity?.

Hence what it is, but I think that is what we have done, yes it depends what it is, we have also done in a private book we have done deals with floating with cap and so it depends what it is and we don’t these are not trading, we are not thinking we are going to be buying a stuff and selling it.

So having said that we have invested in a Mall portfolio which could go public at some point, our form of ownership will change into stock I guess.

We also if we look around [indiscernible] next earnings call through the IRR on these deals you want an interesting thing about these loan repaying the way they are is the IRRs are through the book, I mean we are achieving 16, 17, 18 IRRs on invested capital because of prepayment penalties or other stuff or duration is shorter, so the fee upfront is more important than it was when we underwrote the deal, so we are telling what we think IRRs but one of these things pay off early turn it partially to big investments that loans are example we mark that deal I think it like I don’t remember probably 65% LTV where the company sold that loan is a 40% LTV loan.

You might think 61% you guys are crazy, I will tell you they are considering they are probably lower.

They are probably 50%, I don’t know it has new trade for but it will trade for that loan is probably 35% what I think we will sell for it, so it is not markdown because we mark just percent of cost not a percent of fully leased our value and now the tower is leased.

So you kind of [indiscernible] credit book like this, it is ridiculous but it is what it is, our job is to kind of worth off more. And we have good retail, we don’t have retail much to get it..

Great, thank you..

Sure..

We will now take our final question from Ken Bruce with Bank of America..

Thanks good morning everyone.

I guess I have been following the stocks since the IPO and Barry you have been talking about this is being a stable transparent and predictable business really from the outset, you delivered on that everything that you are talking about in terms of the quarter reflects the positive fundamentals and things that you can do to enhance the returns in the portfolio but you point out that your stock is more or less being treated more like an asset class versus a standalone stock with a very good investment thesis behind it and I wonder as you kind of look back and as you think forward excuse me and try to I guess kind of deal with the conundrum of stock that seem to be perpetually undervalued, what you are willing to do strategically that might if you will create shareholder value over period of time, you say tell us little bit in terms of what you may do from a kind of a operating perspective and I guess thinking about it more strategically over a longer window if you can’t get the market to rationally price your stock or what might you be willing to do?.

No probably we should [indiscernible] REIT conferences shared we don’t because we are mortgage REIT and people don’t attend that, but if you think about looking through the multiples of REIT and the equity REITs the other day the cost factors and then I was looking at their dividend yields which are like depending on what they are as well as 3%, 4.5% we are paying an 8.8%, so there is a lot of stuff that can go wrong before and we are going to revert to cash at some point.

So I don’t you can get a lot of return promoting us and I think your principles risk higher rates, right I think we are running a deal up with higher rates most REITs will go down with higher rates and there is stocks will fall with higher rates which you are seeing every time there is a tickle up in the 10 year equity REITs fall and those multiples are stretched, they made correct input, they are still high, I mean you got plenty of companies with 25, 20, 25 EBITDA multiples, FFO multiples which lever the yield at 20 times.

So as a value player in the REIT space playing real estate and now we are cherry picking equity deals with great high cash on cash returns and you total IRR today with the equity investors are lower than our dividend. The total IRRs people are aiming for 6, and 7, and 8 IRRs on their target investments.

We are paying a current so much you think the principles that risk, if it seen the stupid thing to do frankly, so and we are now searching duration with the equity book so, we think in the universe of investments charters go margin or stock in our [indiscernible] yourself routine.

If you do that with your hedge fund you are the best performing hedge fund United States this year because where if you are guys earning that kind of return in this market with the down of 1.6% and S&P flat or whatever is so I mean we are nice coholding and now the stock where it is it shouldn’t be here I do know why we are here, but you are right I mean the we will have to work on the way if you get the stock up and I have some ideas but won’t tell you that we are imitators so we’ll do them and then you can apply I hope..

Well you know I guess you know there is the unfortunate reality that we may have to wait for rates to moved actually have the asset sensitivity work through the P&L and ultimately you know I think the market will kind of get it when it’s see it not one that’s wants to I guess give a lot of credit for theoretical asset sensitivity, but ….

It is in the aggregate well is, well over 100 million stock we are very interested in supporting this stock, I am very patent it’s a long story its now - and if you want to pump or new term earnings we can do that I am not sure that’s going to help the stock.

I think we just got to keep telling the story a different and every wider circles of investors to bring this thing into the position where these to go and team spend a lot of time doing during the quarter and do more different audiences and did our first trip to Europe.

I think frankly you just got to be, it’s helps us to get bigger we get more attention and people think they giving out of stock [indiscernible] big factors for us, they would go the other way, in more sectors the bigger you are or low your dividend yield in our cases we are not there, so the yield is what’s surprising for me is that giving the credit quality and returning nature of the cash flow exchange or what are we doing here, but anyway it is what it is..

Right well, I guess for you know my advantage point you know the investment return that you are able to deliver are very attractive, they are compelling we would like to see it get bigger not smaller I know that buyback always seems like, it’s a good way to support the stock, but I don’t prefer that you get that it’s all I would like you get bigger or so..

You are right, I mean that’s just [indiscernible] levering the enterprise about that stock are using capacity End of Q&A.

Thanks everyone we hope you do have any questions you call over, people and we will welcome any all of your questions. Thanks a lot. Have a great day..

This concludes today’s conference call. Thank you for your participation. You may now disconnect..