Good day, and welcome to the Starwood Property Trust Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir..

Thank you, Operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended September 30, 2015, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website.

These documents are available on the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.

These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed in this conference call.

A 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 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.

Our performance this quarter once again demonstrated the strength of our multi-cylinder platform with all components of our business contributing to core earnings of $135.4 million, or $0.56 per diluted share, an increase of 8% from the $125.9 million or $0.53 per diluted share we reported just last quarter.

This quarter, we continued to build upon our increasingly diversified asset base, funding $1.2 billion of capital across our lending, investing and servicing and property segments, while receiving $1.1 billion of capital back from these segments in the form of asset sales, maturities and repayments.

For the left side of our balance sheet, we exercised patience under volatile market conditions and maintained our discipline credit-first approach when deploying new capital. On the right side of our balance sheet, we continued to maintain a conservative approach to leverage with our debt-to-equity ratio remaining consistent at 1.2 times.

On a consolidated basis, our annualized return on equity this quarter remained attractive at 13%. I will begin the discussion of our third quarter results with our lending segment. During the quarter, this segment contributed core earnings of $107.8 million, or $0.44 per diluted share.

We originated $310 million of new loans, of which we funded $283 million. We also funded an additional 133 million under pre-existing loan commitments. These fundings were made with recycled cash from the lending segment investment portfolio, which returned $684 million of capital during the quarter.

Credit quality continues to be a priority for us, with the average LTV on our loan book at just under 62% and our track record of zero realized credit losses continuing across almost $16 billion of inceptions to date, loan origination and acquisitions. You will notice that we reduced our allowance for loan losses this quarter by $2.7 million.

This decline is principally due to the full payoff of loans which were previously risk-rated a four or five. The returns on our lending segment’s targeted investment portfolio remains strong at nearly 8% on an unlevered basis with optimal asset level returns of almost 11%.

Keep in mind that these returns did not include the impact of corporate level debt, such as our term loan and convertible note, which if included, we estimate would result in segment returns of approximately 13%. Our loan book is designed to benefit from a rising rate environment with 82% of the portfolio consisting of floating-rate bonds.

We estimate that 100 basis point increase in LIBOR would result in an increased annual income of $16.1 million, or $0.07 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 bit of 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 over $50 billion of performing loans in those trusts.

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 servicing fees earned as we work to resolve these loans. This puts us at a very unique advantage to other REITs generally and specifically to other mortgages REITs.

I will now turn to our investing and servicing segment, which returned another strong quarter of results, reporting core earnings of $64.7 million or $0.27 per diluted share, a 6% increase over last quarter.

Our conduit operations Starwood Mortgage Capital participated in four securitizations this quarter, selling nearly $400 million of loans for a net securitization profit of $10.1 million on a core basis.

The remarkably high turnover rate for this book, which totals 12 securitization for the nine month year-to-date period helps limit our exposure to some of the market volatility we have seen in this space. Our servicer continues to maintain its dominant position in the market, again, ranking first and named special servicer market share.

As of September 30, we were named special servicer on 156 trusts with a collateral balance of approximately 118 billion and we were actively servicing 12.2 billion of loans and real estate owned.

As we start to take advantage of widening spreads, we acquired $115 million in CMBS this quarter, with our new issue B-piece investments acquired at higher yields than prior purchases. We talked previously about how the nature of our CMBS investments make them less vulnerable to spread movement.

So you did not see much volatility in our P&L mark this quarter. As with our loan portfolio, the credit quality of our CMBS portfolio also remains a high priority. Our team continues to underwrite every loan in the deals we invest in and continues to kick out loans in the collateral pool, which do not meet our standards of credit quality.

Interestingly, with the widening spreads and market volatility we saw this quarter, we also experienced an increased ability to shape the collateral for our B-piece investment. Our CMBS pipeline looks strong with four B-pieces and the related servicing already secured in the fourth quarter.

As we near the implementation of the Dodd Frank risk retention rules, we continued to believe that we are uniquely positioned to benefit from increased opportunity in this space and are actively seeking ways to take advantage of these opportunities when the rules take effect.

Now, I'll turn to our property segment, which contributed core earnings of $6.2 million or $0.03 per diluted share for the quarter. This quarter saw the normalization of last quarter's asset purchases in Dublin and was impacted by the $122 million of purchases of the remaining assets in the portfolio in late July.

We are excited to announce our newest additions to this segment, which we expect to complete in the fourth quarter. We recently entered into agreements to acquire 30 multi-family affordable housing communities located in Florida for $553 million.

This acquisition marks the third investment for this segment and will be funded with a combination of existing cash on hand and agency debt, as well as the assumption of pre-existing government sponsored financing. The communities are 98% leased and comprises 8,320 units concentrated primarily in Tampa, Orlando and West Palm.

The transaction is expected to close in phases throughout the fourth quarter, the first of which closed on October 20 for a total acquisition price of $143 million. The remaining properties are expected to close late in the quarter.

The acquisition will be levered with [indiscernible] fixed rate financing with an 18-year average term and an LTV NTP of just under 70%. The portfolio is being acquired at a low-6% cap rate with targeted leverage cash yields in the low-double digits.

Moving to a discussion about our capitalization, we are excited to announce our membership into the Federal Home Loan Bank of Des Moines. Our admission to the FHLB system will provide us with an attractive low-cost funding source for a variety of yearly investments.

Our admission into the FHLB along with amendments to our existing financing facility increased our borrowing capacity to $7.7 billion this quarter, a 28% increase from last quarter. This excludes any capacity we could create from selling senior interest in our loan portfolio.

Also during the quarter, we repurchased 1.4 million shares of common stock at an average price of $20.86 for a total of $29.1 million. Inceptions to these repurchases under our existing repurchase program total $187.4 million, leaving us with $262.6 million of remaining capacity.

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

As of November 2, we have the capacity to originate or acquire up to an additional $2.7 billion of new investments, driven by available cash, capacity and/or existing financing capabilities and expected cash returning from our loan book.

This number does not assume any incremental leverage that we could obtain and liquidity we could generate from additional senior notes or CMBS. As the year comes to a close, we continue to be pleased with our financial results. Through September 30, we have paid dividends, totaling $1.44 per share compared to core earnings of $1.64.

Based on current expectations for the fourth quarter, we are narrowing our core EPS guidance to a range of $2.13 to $2.17 for the year. We have also declared a $0.48 dividend for the fourth quarter which will be paid on January 15 for shareholders of record on December 31.

This represents a 9.4% annualized dividend yield on yesterday's closing share price of $20.32. With that, I'll turn the call over to Jeff for his comments..

Thanks. As Rina mentioned, our seasoned investment book continues to provide capital that will allow us to take advantage of the best investment opportunities available to us going forward.

As we look globally for opportunities to deploy capital, we expect our new investments to return leverage yields that are higher than the yields that are rolling off in the coming year. In doing that, we will continue to employ the lowest leverage in our peer group to achieve these returns.

Rina also mentioned that our ROE on a consolidated basis stands at 13% this quarter, which is up versus the last two quarters, and in line with the highest ROE since inception, as we continue to find the cracks in the real estate capital markets that are being created in its increasingly dull environment.

We expect our opportunity set to continue to expand as our competition pulls back and we get closer to implementation of the Dodd Frank risk retention rules in late 2016. Reduced competition and increased volatility are bringing us more attractive investment opportunities.

For example, as Rina mentioned, we've been able to kick out more than twice the number of loans in the CMBS that we invested in this year versus last year allowing us to invest in better product pools [ph] and at better yields.

Additionally, we continue to partner on our BPs acquisition which allows us to diversify our capital across more CMBS deals while securing servicing on the full investment. When we look at the return of our CMBS book including the accompanying servicing fees, we really like the risk-reward profile available to us today.

Despite seeing more opportunities than we have in a long time, we were less aggressive in signing up new loans in the third quarter as a result of the opportunity we get better given the volatility we are seeing as both the borrower and the lender in the capital markets, it has.

The fourth quarter is off to a strong start with over $800 million of loans signed up today or closed in our lending segment and four BPs signed up in our CMBS segment and the over $500 million in equity posted to property segment and in equity opportunities those from our $12.5 billion special servicing book.

As Rina said, we continue to diversify our funding process and we now have over $7.6 billion in borrowing capacity from eight different lending partners including the Federal Home Loan Bank.

Our dedicated capital markets team have also been extremely active selling senior note syndications with 19 completed year-to-date for over $1.5 billion, by far the most prolific in our history.

We appreciate our bank partners, but can’t run a business that is relied solely on them and we will continue to run a highly diversified liability and funding structure. We are excited about our new membership in the home loan bank system and hope to update you more in the coming quarters on how we will use that to the shareholders benefit.

From the shareholders’ perspective, it’s been a challenging and disappointing 12 months in the REIT and mortgage REIT space and we have not been isolated from this market volatility.

When the Fed begins to raise rates, we will begin to see the benefit we have expected to materialize and we also hope that our diversified business and the implicit credit hedge of our services will help differentiate us from other mortgage REITs going forward.

Cumulatively, management is the top 10 shareholder of the stock and we will be patient to continue to build the shareholder value. We have the team and business lines in place to continue to be the leader in the space and we think our dividend yields and opportunity sets are exceedingly compelling today. Now, I will turn it over to Barry..

Thanks, Jeff. Thanks, Rina and Zach. Good morning, everyone. Actually I don't have that much to add. I think Jeff’s comment is fairly comprehensive. I am proud of the company, I think we did really good job in continued choppy waters.

We saw they were choppy obviously with our position as a $50 billion asset manager, we are in the market as a borrower all the time and it looks like the sweat of high yield is offering, somebody quoted to me that it’s $400 million of high yield that have to get down by year end.

The gap in the high yield market is spilled into the CMBS market widening it spreads dramatically. DDDs went from like 2.80 to 4.25. So in that market climate when the conduits start seeing 1% margins, one of the other finance companies reported this morning, they get nervous. That means the spread has widened for us.

This is I think our fourth time this has happened and simply reversed in ‘09. We like it, it’s really good for us. We like being the guy with the biggest guy in the land and started taking our loan opportunities. So you step back and let the markets follow in and then you go forward.

We also recognized that we have to be disciplined deploying the capital because we don’t have access to capital at these levels. Why? I mean, we are still trading at what looks like a premium to book, but our book value is dramatically understated today.

When we bought LNR back in 2010 - ‘13, that long ago, we used a large 15% discount rate and that was on the maturity change of the maturing trust that was the 17, 16 and 17, which is the 10-year anniversary of the maturities. And that is approaching, right, the 16 is just around the corner and 17 is right around the corner.

We have lot more certainty and visibility into that income stream and opportunity today and you could argue we should lower our discount rate and raise the value of the service which has been written down to $156 million, which is actually a silly number.

So if you raise that to let’s say $250 million by using 8 [ph] instead 15, you see our book value jump to $1, $1.5.

We also have plenty of gains in our collateral book or $1 billion CMBS book and it really is a testimony to the team’s ability to look at all this data that we have in the position of providing services around the country to really navigate which paper they buy, which paper they sell and it makes the whole process better and then we have obviously they great capital markets team that’s always in the market [indiscernible] in the loans we originate.

So, we said we would build a multi-cylinder finance company and I think we’ve achieved that. They have lots of ways to deploy capital, it could raise the return in any one cylinder. It might not be profitable or as profitable or competitive in any time period, any quarter, but it will always be something else we can do.

We continue to look at other investments. We were the backup bidder on the healthcare business sold by GE. That was a very big bid process, stock prices were a little higher when we bid for that. But we are willing to take on our third big diversification into the healthcare space.

Unfortunately it’s levered is the 1.2 times, you can’t compete with the bank that’s going to be 9 to 1. We are kind of hoping they didn’t show up, but they did and we had teamed with another company that was going to buy that cash flow that we were going buy [indiscernible] loans. So were very aggressively spending a lot of time on that.

We actually probably incurred a debt deal cost for that and then probably get our earnings. We are initiating our heavy assets, your can’t do if your head is bobbing up and down. I also think it’s pretty interesting that we have 62% LTV at this point of the cycle which is pretty consistent.

It’s already lower than it was pre-target and paying a nine point dividend yield, it’s just a conundrum. We have a target today in Chicago and I said the market is throwing the baby with the bathwater.

And we are really not - I mean we are with no yields and I do think you are seeing a 10-year with 2.14 or 2, it’s still 2 and we are paying 9 on 52% LTV loan book which is really I don’t know what you want on AAA credit, but maybe it’s 55% and that’s if you bought those securities in the market they trade today at 125 over, we are trading at 700 over, 720 over, it doesn’t make it kind of sense.

So we’ve been buying back our stock, so we blacked out for a considerable period of the quarter for buying stock back and that’s painful because we would rather go to enterprise, we’ve already said this business is much better, bigger and allows us to get our Holy Grail which is the best and great for the company.

And one of those things we’ve been doing to do improve the book is moving into the equities markets. And so I love the multifamily deal we did. It’s delightful and it’s got 18 year debt that’s fixed and double digit yields and very attractive gross markets in Tampa, Orlando and West Palm Beach.

So that was a little bigger deal and we also [indiscernible] but it’s kind of things we are doing in the REIT as we move our equity investments up.

They increase the duration of our book and takes care some of this job we have in redeploying all the capital and getting back, because we’ve been doing the $15 billion of deals with not a single loss, as Rina said, so I like that too, that’s impressive.

I will point out we have one loan and we have got five on a hotel that we restructured like three times and we got paid off and that’s why the margins went down, because we got full - fully paid off and we got significant loan loss against that one loan which has been long time to go and I would point that those too.

So the other major coup for the quarter, kudos to Andrew and the team getting the FHLB approval, we’ve been after that for a year or so and that’s a new cylinder for us and I think we can deal with financing at the levels that will provide and we are figuring out exactly how to grow the firm with that new cylinder and that’s pretty exciting because they are largely competitive in verticals we actually couldn’t be competitive before.

The other thing I would mention about the equity book is it does provide a depreciation shield for the company, so despite the fact that our goal is always trying to raise the dividend, it will give us the safety and cushion that allow us to keep our payout ratio or lower our payout ratio and preserve cash, so we can deploy it and grow the company and grow the business.

So I think overall it’s a very solid quarter. I think the other thing I would mention is the services book has declined slower than we thought, materially slower like many $5 billion slower than we originally underwrote and we thought it would be$7 billion in loans and servicing at this point 12, in special servicing.

So that goes to again, it was quite over-marked that services are down, but just the financial gains that we’ve marked it up. We will tell you about it, but we don’t make the change and if we make the change we will tell you, because we have to.

So as a last point, we said all along we are stable, consistent and secure and transparent and I think we continue to beat the market in transparency and kind of give everything that’s going on in the business and we have probably 400 people all dedicated, no more - we have our business in Europe, 500 people working for today, so it’s a collection of a lot of assets and good work and making $15 billion loans, I would like to look at the banking market and see how if we were a bank it would be end of your world, lever this book 9 to 1 and you are going to have the best bank in the country.

Andrew is shaking the head and he is like, don’t’ need to kill me. But it is quite a credit group that we established and we have Mark Cagley, who is our new Chief Credit Officer.

He has done a wonderful for us and we are just being I am surprised that the loan book we see today, the loans we are seeing today are better than loans we a year ago and we haven’t done a construction loan in a year.

So and our exposure there has dropped over $1 billion dollars and we will continue drop as the deals we did are getting repaid like up to March we think we will be substantially complete midyear in seven, eight months and we will be first thing they repay.

So we know that money is coming back in that equity, total gross dollars in this division and that case that was a first mortgage, so we never levered it and it will be cash to company.

So we prepare for these repayments, we see them coming and pretty much we are not that surprised and begin to deploy the capital across our various business which makes us somewhat unique in the market today. So with that, we will take any questions..

Thank you. [Operator Instructions] And we will take our first question from Charles Nabhan with Wells Fargo..

Thanks, and good morning. Given your visibility into the maturing vintages over the next couple of years, I was wondering if there has been any change in your expectations in terms of defaults as it pertains to the specialty servicing book over the next couple of years..

Adam Behlman, do you want to talk to that?.

I apologize, I am Adam Behlman, I’m the President of the real estate investing servicing segment down here in Miami. Yeah. We are seeing the beginnings of the loans that were expected to mature - have some issues and come in. I’d say we’re low to middle of our expectation, really things start heating up coming to 2006.

So we're starting to see some people call in, informing us that potentially they may wind up in special servicing, which is typical signs of issues with getting refinances on their loan. So it's a little early to say at, above or below expectation. We’re starting to see that flow begin now..

Okay. Switching to the leading segment, you alluded to patience with respect to the origination pace in the third quarter, but there appears to be a fair amount of volume in the pipeline or the closing process right now.

So my question is, has anything changed in the environment in your view or are you simply seeing just finding pockets of opportunity and I think you alluded to those pockets of opportunity.

So if you could specify maybe whether it's by geography or property type and what's causing that dislocation that you've been able to capitalize on in the marketplace?.

Well, I think we felt that the market kind of bottoms here. So we can put our capital and worry about having to. It’s sad how bad the market was or is or how transitional. We were actually doing an equity deal for the REIT and financing while we got from a major investment bank, it was I think 280 and it went to 400 and that was the end of that deal.

So it was a dramatic widening of spreads, probably in 30 days. So one of my call that’s being retraded, but in the lending business in your bank, you just don’t want to make loans you’re going to lose the money on, there are some high yield deals that were told to Jeff, the last $60 million on the deal.

So the bank has got really nervous and really widened their gaps. And even those were like best effort quotes, they weren’t even giving you firm commitments.

So in that environment, we found ourselves looking at loans and we had of course, we had outstanding that were not going to be good loans and I think that we’re appropriate, given where the market has moved.

So once now that you have this gaping out, I actually think the mouse will pass through the snake fairly through, maybe the first quarter of the next year and the balloon of supply coming in the market. It’s supply led and a thin market because nobody wants to catch a falling knife.

So but we think these trades work for us at these spreads with our financing lines and we have the capital. So we do have to deploy it in cash otherwise. So we’ve been a little more aggressive. I would say it is not, Andrew, I don’t think it’s property type specific and it’s not geographic specific. I think we’re kind of all over the place.

And we’re credit quality specific, we’re looking for - we’re looking at debt yields today, we just did alone the 10. It’s been a while that yield. That was in Atlanta. And we’ve done - we just did a deal out in APA and that was higher, close to a 10, 9. So it’s a little better for us right now because people are scared, the lenders the banks are scared.

Nobody wants to go into year-end with a turnaround on their books and having marked risks.

So it’s still competitive, it’s unlike people walked off the table, but the conduits have definitely gotten, did first to widen their spreads out, because they have to deal with the reality of the market every day and most of these guys who are in our business, later in their business [indiscernible] you’re trying to turn these things quickly.

So if the market is 400, oh, you’re going to 400 over, that’s your quote and you’ll move your whole quote and when the CMBS market does that, then our whole loan business just drops right behind that.

And so, they’re quoting for 50, then we can do 400 a quarter, because that’s credibility is two in a quarter depending on the collateral of the 180, maybe 200. So we can manufacture, that’s why our ROE is the highest in history, right next to it, it’s just pretty amazing and it’s exactly what we told you by the way.

We told you that spreads are coming in on loans, our cost of financing was dropping. So we could still maintain the ROE that we had and if were running more like, let’s say, BXMT, to be specific on loans that we do earning 15, 16 ROE, but we've run a lot lower leverage overall. So, we would be earning a much higher ROE.

I’d say it’s been predictable and consistent, that's what we've said we were going to do, should it be 14, 14 is a good number, if you're 15, you're like a world-class company, period. There are very few companies in the S&P 500 that are sustainable 15% ROE, like two companies over ten year, we are not ten years old, but we’re five, are we five yet..

Barry, you talked about spread widening in CMBS, but you're also going to have significantly less volume be down I think the street is now thinking 95 billion or 96 billion this year versus 120 billion that people thought three or four months ago, deals did not get done in to the volatility of the summer.

So that deal is getting done and the bank is pulling back, certainly, the bank is pulling back on single asset deals, which have really executed poorly over the few months and you have had an opportunity to pick out mezzanine security there if you want to at significantly higher spreads than we've seen, so we won't be doing much in single assets and those are debt allowances that we tend to fall through.

What we’ve seen is borrowers coming to us, saying, if you can be here, we can do a deal as opposed to you're in competition with five other guys and put your best foot forward, we're really able to be price givers as opposed to price takers, so then a better -.

And the other thing that’s probably down the pipe will be the change in the risk retention rules. Now, it's going to be free frail. Nobody is going to know how it’s all going to play out, but everyone is talking about it for the first time, even though we talked about it every call, now the banks are talking about it.

The one thing you know is debt is going to get more expensive, so spreads will wide, I guess, the whole stack reached that 25 basis points. And if you know that's going to happen, maybe 35 basis points. At what point, we even had booked that into the market right now, right, why would you write a loan [indiscernible] 435 over.

So, we're working on that and I'm sure everyone is working on where the opportunities are for us, because the non-regulated entity, that seems pretty exciting to me, [Technical Difficulty] participating in that structural change, which has to be good for us..

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

[Operator Instructions] We'll take our next question from Jade Rahmani from KBW..

Good morning. Thanks for taking my questions.

On the lending business, can you talk to what drove the slower originations, was it purely caution on market conditions? And based on where you sit today, that business is still attractive, has anything changed for example on the personnel side to inhibit a re-acceleration in originations?.

Hey, Jade. This is Jeff.

On the originations side, I think at one point in the middle of the China crisis late August, we walked down on a Monday morning and Christian Dalzell, our Head of Originations got something like 18 new calls on launch, it’s difficult to have about 100 loans in our pipeline, we typically do about 4% of those, we had more calls into that volatility from people who were seeing their opportunities away from us, go away, bank pulling back and others, we probably increased that opportunity set to 120 rather than 100.

And again, we've historically done about 4% of it.

I think we could have done 3 billion instead of 300 million and we certainly could have done it at high leverage and you guys would have afforded significant volume increase, but we chose at that time to pull back and see where the world settled in and within the coming ensuing month or so, it settled in a little bit better and also we are a borrower on that side and with our warehouse lines, we want to make sure that we have our financing set up.

So we felt it was good to be patient and we led a - what was a larger pipeline than we probably ever seen, kind of go by the way side of it and we found some deals as Barry said, that was really high cash flowing that we loved the stories on in the fourth quarter. So we'll take that lease and probably take advantage of it a little more..

And today, do you think they are the returns in that business still attractive and you mentioned the GE Capital Healthcare business, are there other business lines, product lines you're looking to add to the segments that you feel could just bolster the offering for example GSC multi-family as one..

So on a return profile, I think we've run a little bit higher than 11% on our loan book levered since I came on in September of last year, which is higher than the book that we inherited.

Over the next year or so, the roll off in our book will be significantly lower than that, as a decent number of constructions loans that Barry talked about earlier that will be rolling off at lower yields that are generally unlevered.

So I look at the next year and think that continuing to do 11% IRRs should be something that is our goal and we'll continue to be our target and I think we'll see that opportunity set and we'll be reinvesting against a roll off that's significantly lower and so I think it will be a good year for us in terms of pick up in interest income for the same amount of dollars.

You asked a second question and I forgot what it was..

Just about adding additional business lines or products to the lending segment?.

I think we think we’re in like seven businesses, one business we don't actually talk about is our auction.com, which is another business that we have, which we support by giving their asset to sell and we've learned a lot [Technical Difficulty].

So, but this isn't pretty good, they have made attractive investments in Google and I will see what happens to them, also we have a kicker in [Technical Difficulty] So that's an exciting development, but we own 20% interest in the equity of the project. So, but there are many lines of business we’re thinking about, but [Technical Difficulty]..

We did hire a Head of new business development, a 25-year Wall Street veteran this quarter in Miami, so we're looking at doing a lot of new things..

And then just on the guidance for 4Q, implying a sequential downtick in earnings, can you just give any further color, is that conservative, is that embedding a slowdown in LNR, special servicing revenues or maybe just timing lag on capital redeployments, how to characterize the 4Q earnings?.

No, it’s the yearend bonuses and accruals and stuff all getting into play, so you’re guessing more or less, we can have a pretty good runway, it’s November, so we like to overlook quite..

I’d say that loans close and repay, because of repayment penalties and we didn’t take any gains specifically in the quarter we just passed.

We have - we always do, I mean, we always have gains in our CMBS book and RMBS book and then we didn’t need them, so we just put them away for maybe a day, and we will see - it’s the business, it’s what we do, it’s like our bank, and then always going to stuff happen, so we gave you our best guess, it could be higher.

It’s not like they will be lower and we just continue them. It is since that, I mean, we can see the loan book accelerated again and we signed $800 million in the loan book alone and what is I guess - something like that. So not even five weeks. And we are always looking at our dividend.

We sure like to increase the balance, I think it doesn’t make a difference right now, I think the climate is such for the company that we are waiting for the two of that. I think as I said, all the mortgage rates got hit, all the REITs got hit, I was surprised when rates tick down from 2.20 to 2.00 and then actually below 2.

We are not - that’s a 10-years and 5-years 1.50, 1.60. I was surprised it would rebound, but it didn’t, and I just don’t think we seem to have big an audience working on that or the trip coming out to Asia for the team, talk about us, and back in the team, we are doing a good job. But the good job would be back in 25, that would be a good job.

And then dividend yields commensurate with the risk in the company, so the dividend well covered 2.15, something like 2.14, 2.15 [indiscernible].

So I thought it would make a difference at all, so the company is waiting for this and we have raised the dividend a little bit, we have the room, but I really think it’s - stock here we have to preserve capital. And it’s the real tug of war.

I mean, did you buy in your stock with the dividend where it is and shrink your enterprise knowing that you’re taking good short-term route. But we need more investors, we need more people to take position and then buy the stock up. That’s what we need. We need to get the stock dividend yield to them.

The appropriate yield for a company is its risk profile and we are definitely hurt by the growth rate.

There is no doubt in ETF trading, we are the most liquid, we are the biggest guys, third biggest guy, but we are the biggest guy in commercial real estate and we get flushed out with baby and that’s about - whatever, which one - which one of the other bank.

So whatever is bad we are getting flushed out, because they are adjusting their book value, they are having write-downs, they are lowering their dividends, they are paying a 13% dividend yields, everybody looks at us says, they are 13, we are 19, so the growth rate is 10 and 13.

[ph] So we don’t look like them, we are not even I that asset class and we don’t have a mismatch book. So we don’t look like them and the market doesn’t get any different at the moment. Okay, this year we will keep doing [indiscernible].

Any other questions?.

Our final question will come from Dan Altscher with FBR..

Hey, thanks and good morning everyone. I wanted to just ask about access to the FHLB, you mentioned before it took a long time to get in finally here.

What type of collateral do you plan on pledging against that? Is it going to be some of the CMBS positions or maybe an account or is there may be some actual multifamily loans or how do you plan on using that?.

Hey, Dan, it’s Andrew. I mean, I think, to start out, we are being fairly conservative. As you know, there has been a lot of dialog coming out of FHSA around captive insurance companies and their ability to actually access banking system.

Actually at the end of October, there was a bill introduced in the House, HR 3808, which has put forth by four representatives that actually should help because of lot of captive insurance companies that’s effectively trying to put a - trying to block what the FHSA has been doing vis-à-vis captive insurers.

So in total, kind of all that plays out, I think we are being conservative in terms of how much we are going to access via the FHLB, we do have a $1 billion approved line going in and they’ve told us that I think we have the ability probably to double that over time to the extent we may be consistent in our business plans.

But in terms of the type of the collateral, kind of really runs the gamut, probably seeing obviously some of our peers and some of the agency REITs as opposed to [ph] securities. I think we have the ability to finance kind of high-rated CMBS via the home loan banking system.

We also have the ability to access our - to finance our whole loan business as well. So there is very - they will take very collateral into the system. I think it can be a great source of being a low-cost stable financing going forward once all the uncertainties settles in Washington..

Okay. That’s a helpful update, well, people watch on that.

And if I can sneak on more in, just broader I think some of the comments alluded to year-end, folks getting all backwards, maybe little capacity coming out of the system, I mean, are you seeing some of the more traditional players like the banks, like the insurance companies and kind of really pulling back towards year-end, kind of maybe reaching caps or maybe on the agency side, the GSEs kind of getting to their caps, is there may be kind of supply demand imbalance if you will kind of as you approach the last two quarters of the year?.

Really there is clear supply/demand imbalance. At the last count, I was told $450 million of high yield paper that has to get done and that didn’t include the [indiscernible] But against that backdrop, don’t forget the highest market is going to be tremendously influenced by the paper in the oil and gas industry.

That’s going to - on its way to the duration as the hedges will - and so the whole market, the whole - these are the same guys, the guys who are buying some of the high yields 5s and our 8s, are looking at CMBS and they are saying, I am not going to buy that at 4, I want 5. It’s not that stable market.

I was hearing some horror stories about people calling up to try to sell some AAAs to a major money center bank and the bid was making this up, 72, 73, and they went to sell this 2 million position and the bank quoted 65. And then they said, are you going to sell the rest of your AAAs.

So they were like, they were afraid it was like beginning of our torrent of paper coming out. There is clearly odd things happening in the debt world right beyond my expertise, but in that environment you’re cautious and you are careful and it’s good for us.

Yes, I would say in general, the conduits, many of which are fully [indiscernible] interesting. I think there are 40 conduits that are operating today, maybe the number is little higher.

There were 250 of them back into - so I think it’s a lot, but it’s not lot compared to what we used to be dealing with and they are all looking at dramatically lower conduit margins and that makes you very careful about probably earning a 1.5 or above 1 and we are 2 something in the quarter.

If you fully loaded the overhead of the business into that I am not sure you’re making any money. So that means non-diversified companies that are just doing that are really nervous and they have to get better spreads, they have to widen their spreads on every quote because they are not able to make any money.

So we - whether it’s a down period because we are making $500 million a year something like that, [indiscernible].

$500 million..

$500 million, so we can observe that quarter in the conduit business, no problem. That is the design of the company, that is what we have..

And we’ll have over $500 million of commercial real estate transactions this year, first time since ‘07 that you have the insurance companies, total transaction bunker. So you have the insurance companies still up a little bit more than they normally would or the multifamily sector has been on fire as you know.

The agencies going back for a while, went to wider spreads, the insurance companies and others build in some of that gap, the agencies are coming up closer to their cap, so I think the insurance companies have done probably more than they anticipated this year and you are looking at probably a lighter fourth quarter across the board for a lot of our competition.

So you might have an opportunity here to put more money to work at the end of the year..

Maybe just one simple yes or no question, your multifamily deal that you are working on right now, is that totally just coincidental time at the same time as the equity residential deal or are these related?.

This one preceded those two and the equity residential deal and this is affordable, very high quality newer buildings but we thought with the 18-year fixed debt stable and growing double-digit yield, but we didn’t think it was going to be - so it was kind of thing we decided and shareholders and we own probably $150 million of stock we would like to own and we thought no downside growth [indiscernible] This is probably what we think is a sub-14 IRR but we think it’s going to double-digit cash yield, but that’s of course we are not selling it either.

We intend to hold on to this for a while, this is really good stuff and it’s well-financed and it’s just 98% occupancy. This is not kind of stuff [indiscernible] portfolio..

That’s great. Thank you so much..

You’re welcome..

Thanks everyone. We really appreciate your time today and the team is available to answer any of your questions as they always are. So have a great afternoon and [indiscernible]..

That concludes today's conference. Thank you for your participation today..