Good day and welcome to the Starwood Property Trust fourth quarter 2016 earnings 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's earnings call. This morning, the company released its financial results for the quarter ended December 31, 2016, filed its 10-K with the Securities and Exchange Commission and posted its earnings supplement to its website.

Starting this quarter, all the quarterly disclosure by business segment that was previously contained in the company's earnings press release can be found in the company's earnings supplemental. 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 on 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Joining me on the call today are Barry Sternlicht, the company's CEO, Rina Paniry, the company's CFO, Jeff DiModica, the company's President, Andrew Sossen, the company's COO and Adam Behlman, the President of our Real Estate Investing and Servicing Segment. With that, I am now going to turn the call over to Rina..

Thank you Zach and good morning everyone. 2016 proved to be another great year for us. We saw strong performance from each component of our business and we continued to lengthen the duration of our portfolio by adding just over $1 billion of stabilized properties to our property segment.

We ended the year with core earnings of $2.09 per share after $0.50 fourth quarter. If we exclude the loss resulting from the early repayment of our term loan, core earnings would be $0.53 for the quarter and $2.12 for the year.

Despite a cautious start to the year amidst volatile market conditions, we believe these results speak to the strength of our diversified model which delivered a return on equity of 12.3% this year. I will begin our quarterly discussion this morning with the results of our lending segment.

During the quarter, this segment contributed core earnings of $91 million or $0.38 per share. We originated or acquired $1.2 billion of loans with an average loan size of $167 million and a weighted average LTV of just under 64%. More than half of these loans closed in the last two weeks of the year.

During the quarter, we funded $1.1 billion of these new loans in addition to $146 million under pre-existing loan commitment. As expected, our loan portfolio returned $473 million during the quarter, down from $1.1 billion last quarter, which impacted the contribution of prepayment fees and accelerated accretion to interest income.

The loans we funded this quarter were all floating rate, taking the composition of floating rate loans to our overall loan portfolio to 91%, which places us in a great position to benefit from rising rate.

A 100 basis point increase in LIBOR would add $0.10 of core earnings annually, not including the incremental benefit that could be realized by our servicer in a higher rate environment. That brings me to our investing and servicing segment which contributed core earnings of $69 million or $0.28 per diluted share this quarter.

Our CMBS book continues to perform well. While our mark-to-market remained flat in the quarter, we have seen spreads tighten since year-end, which could lead to a meaningful increase to our mark next quarter if current market conditions remain or improve further.

We continue to be opportunistic in our sales of securities and in doing so, sold a small number of securities during the quarter for core gains of $14 million. Our CMBS book generated cash this quarter of $113 million from sales, principle repayments and cash interest.

We invested $41 million in two new issue B‑Pieces and obtained three new Rina servicing assignments on deals totaling $2.7 billion of collateral.

As of ended December 31, we were named special servicer on 153 trusts with a collateral balance of approximately $88 billion and we were actively servicing $11.2 billion of loans and OREO, up from the $11 billion we reported last quarter. This amount is the result of $1.3 billion of transfers in during the period and $1.1 billion of transfers out.

Subsequent to quarter-end, we began to witness the early effects of the maturity law with over $1 billion of assets transferring into servicing January 1. Although these transits can be lumpy, we are optimistic about the trend. Also a significant contributor to this segment's results is our conduit, Starwood Mortgage Capital.

During the quarter, we securitized $514 million in loans in four securitizations, generating core securitization profits of $17 million. SMC ended the year with total securitization volume of $1.8 billion in 14 deals with an average hold period through the pricing date of just 43 days.

Despite some of the volatility we saw from this business earlier in the year, the results for the full-year normalized as expected. Before I leave our discussion on the investing and servicing segment, we spoke last quarter about the contribution of our European subsidiary to Situs effective October 31.

Our financial statements this quarter reflect the exchange as its wholly-owned business for a noncontrolling interest in Situs.

As we have said before, we do not expect an impact to core earnings overall from this transaction, but you will notice declines in both the servicing fees and G&A lines in our P&L resulting from the removal of our European servicing operations, I will now turn to our property segment which contributed core earnings of $12 million or $0.05 per share this quarter, driven by the two primary asset portfolios in this segment.

On December 29, we completed the acquisition of our newest addition to this segment, our medical office portfolio. We acquired 34 of the 38 assets we told you about last quarter with four of the assets being removed during our final diligence phase.

This business contributed only three days of operations to the quarter and thus had a limited impact on core earnings. One item I wanted to point out this quarter is that we reported GAAP gains of $78 million from the change in fair value of our derivative.

$30 million of these gains relate to the foreign currency hedges on our lending and property book, as we have discussed in the past. We do not recognize these gains to core until the related asset is realized, in other words, when the loan is repaid or the property is sold.

At that time, we would expect to see an offsetting loss from the asset for a net zero impact on core. Also during the quarter, we reported a GAAP gain of $26 million related to the interest rate hedge on our medical office portfolio.

Because the debt on this portfolio is floating, we entered into a floating to fixed interest rate swap when we signed a firm commitment to acquire the portfolio. Upon closing of the portfolio, that derivative settled for a gain of $26 million.

However, we used the settlement proceeds to buy down the rate of our new debt on the portfolio to a fixed rate of 3.7%. As a result, this gain was not recognized for core. The debt on our medical office portfolio carries a five-year term and two one-year extension options. That brings me to a discussion about our overall capitalization.

In December, as most of you know, we completed 3T capitalization transactions totaling over $1.5 billion. First was our debut high yield debt offering, where we issued $700 million of five-year senior unsecured notes at 5%. Second, we raised net proceeds of $448 million through the issuance of 20.5 million shares of common equity.

And third, we obtained a new $300 million term loan and a $100 million revolver, each of which carries a four-year term with two six-month extension options. These transactions allowed us to repay our $653 million term loan B which in turn unencumbered $2.1 billion of collateral and ultimately led to our ratings upgrade.

We also recognized a loss of $8.8 million through both core and GAAP for the write-off of unamortized debt issue costs related to this loan. We ended the quarter with $10.3 billion of debt capacity and a debt-to-equity ratio of 1.4 times.

If we were to include off-balance sheet leverage in the form of A-Notes sold, our debt-to-equity ratio would be 2.1 times or two times excluding cash. I will conclude my comments today with our outlook on 2017. As we said last year, we expect to earn and continue to pay our $0.48 quarterly dividend this year.

To that end, for the first quarter of 2017, we have declared a $0.48 dividend which will be paid on April 14 to shareholders of record on March 31. This represents an 8.4% annualized dividend yield on yesterday's closing share price of $22.87. With that, I will turn the call over to Jeff for his comments..

Thanks Rina. Credit spreads in lending markets have normalized since the year ago this week when spreads tipped their post recovery wides in February 2016. After pausing on investments in the first quarter of 2016, we were very active investors the last ten months taking advantage of wider spreads and the pull back we have seen from the bank.

Today, we are seeing outsized opportunities in the larger and more complicated assets that our deep credit platform was built to understand and execute. Since our inception, we have always focused on lending to partners we believe in, on business plans that take deep credit expertise to understand and in locations and MSAs we have an opinion on.

We utilize the information and expertise in our 2,200 person real estate centric organization to have a view on most markets, asset types and borrowers allowing us to make outsized returns and we believe that will continue in 2017.

Increased capital requirements as a result of HVCRE rules implemented in 2016 continue to play out in our favor on assets that require higher benched capital prices and more future funding. Only 5% of the nearly $1.2 billion in Q4 originations were construction loans and that one loan will receive PCO this month.

But with the banks continuing to pull back, we have seen a number of exciting construction loans at a very low loan to cost in our pipeline with what we feel are compelling risk-adjusted returns. Of note, our funded construction book today is just 9% of our total assets, leaving us room to take advantage of this opportunity.

With the closing of the medical office building portfolio in the quarter, our property segment now represents 19% of our asset base. We have stated before that we would target around 25% of our assets in equity of long duration high cash flowing properties.

Thus we have room to add today as our manager, Starwood Capital Group, continues to look more of these opportunities. These purchases provide diversity, duration, depreciation and potential performance upside to our portfolio.

Although our four large portfolio purchases in the property segment end are fair and par purchase option purchases on our REIT segment are not intended to be short-term hold. They have performed very well to-date.

We estimate that the appreciation in our property portfolio gives us well north of $100 million of gain to potentially harvest in coming quarters or years. Additionally, we have talked before about additional upside in the equity kickers in several of our loan investments and our CMBS and RMBS book.

We believe the multiple investment cylinders and diversity of our platform has created significant shareholder value and we will continue to look for accretive ways to diversify and deploy capital in 2017 and beyond. In our REIT segment, Rina discussed the positive momentum in our servicing book so far in 2017.

The long-awaited CMBS risk retention rules are finally here, which we believe will benefit permanent capital vehicles like STWD.

In addition to the two B-Pieces we acquired in Q4, we expect to close on our first post retention B-Piece in the coming weeks and are excited to be able to deploy capital at accretive yields and in thicker portions of the capital stack.

Finally, Rina spoke earlier about our inaugural high-yield bond issuance and I would add that along with the other upsizes in new credit lines we closed this quarter that the availability of credit to us and the spreads we borrow at have never been better.

On the back of Moody's upgrade of our corporate rating from Ba3 to Ba2 on December 5, our five-year senior unsecured high-yield bond offering priced 50 basis points inside of the original price stock at 5% and was five times oversubscribed.

We used that demand to upside our offering from $500 million to $700 million providing us ample cash to invest today or payoff our other upcoming debt maturities, notably the deal with the tightest place debut high yield deal ever for a company in the financial sector on both yield and spread.

It was the tightest priced Ba3 BB-minus rated debut high yield deals in 2013 and it was the largest debut high yield deals ever for a mortgage REIT more than twice the size of the next largest deal.

Our high-yield bonds trade at approximately 103 today implying we can go back to market and raise five-year money at approximately 4.25% which is cheaper all-in than any of our outstanding convertible bonds that we issued as a less mature company With that debt deal, our new term loan A, which replaced our term loan B and our $450 million equity raise in December, we created ample liquidity to continue to execute our business plan and we simultaneously unencumbered over $2 billion of capital and executed a $100 million revolver, which will help reduce drag on our cash management strategy going forward.

Now I will turn the call over to Barry..

Thanks Jeff. Thanks Rina. Good morning everyone. I am actually out on the West Coast and the team is actually in Miami and also in Connecticut. So we are a little all over the country, kind of like our portfolio, very diversified this morning.

I think this years has been a great year for the company and I think the high yield offering was, as Jeff mentioned, not only significant to the firm's balance sheet, but incredibly great third-party endorsement for the strategy of the company making record spreads, having the bonds trade up, the biggest and tightest spreads of non-bank first time financial issuer and a mortgage trust, a truly extraordinary comment on the depth of the team, the quality of the book, something that actually the equity markets don't seem to appreciate.

When I look at it, I continue to marvel at a bloke with almost all of its assets in 60% LTV, now he is seven years after we started the company and that securitized most of that would be investment grade and traded hundred over, which are AAAs.

As it continues, we suddenly had the ratings of these companies that I think are the legacy of a decade ago when lending practices weren't a theme. Today, when the markets remain very disciplined in their underwriting, there is no issue in the banking market. So we ended the year like time for this year. We have the best balance sheet we have ever had.

We are swimming in cash. We have too much cash that we want to deploy it and we have a good momentum as the biggest quarter of lending we have had in the fourth quarter for the year. You might recall, first quarter, we kind of sat it out. The markets were super volatile. We couldn't really see what's happening. The election noise was at its peak.

And we aim for caution and we never thought actually we could build the book this fast again when we sort of had stopped. And with $1.2 billion of originations and well on its way to a similar quarter this quarter.

I am showing really good about the prospects for the company and the equity book that we have diversified to increase duration for the company is performing really well and medical office building portfolio that we bought, we know we had three days of it in the quarter. So it will start contributing to earnings right out of the box going forward.

So we are really happy. One of the other things that, a nuance which was mentioned by Rina, is rising rates are really good for us. A two point increase in LIBOR is $0.20 to earnings and we can't wait for the Trump economy to actually show up. Right now, I would expect you still will have an economy where rates will move higher and faster.

And for last seven years, I have been saying lower and longer. So I think with the multiple stimuli in the hopper and the animal spirits of CEOs and small businesses that are no longer showing vilified by the administration, I do think this economy is going to get pretty strong, particularly the only weak past of the U.S.

economy was the oil economy and even oil is doing well. So I am still concerned about long-term implications of oil prices. So again, I will say, this is the best quarter of the year for loan volume which is our core business. We are excited about the $1 billion of transfers into the special servicer and what that bodes.

If the rates rose further, I didn't tell you about the benefits of additional servicing fees off that book, impossible to model. So we don't really talk about it. The cash on the balance sheet, we have modeled it showing a modest deployment of that cash.

We took advantage of the strength of the market, as Jeff said, to upsize our offering and a company with an equity offering and we do have lots of opportunities and we are building, our staff behind that adding more originators, particularly on the West Coast where, in the past, you probably haven't gotten our share of market share.

And then on the lending side, as Jeff mentioned, construction. And we are really coming at this with an equity view point, because there is one market in the country which is quite weak, but where the weakest market is where there is almost no loans at all. So we are looking at places like Manhattan.

The condo market at the high-end, you know, is a catastrophe or will get worse. The hotel market is weak, not terrible, still profitable, but you are not seeing RevPAR increases year-over-year, in part because of the dollar and also because of supply. New York City rental market is going to be weak. It is weak. It is going to continue to be weak.

You saw that in our earnings statement. Similarly, parts of South Florida, particularly only really our focus on Miami has a similar situation with a lot of condos coming online with a much different structure than any market we have seen before, because in most cases the individuals have up to half of the cost of the apartment paid for as a deposit.

So we are actually looking at this as interesting because we can get great loans at very interesting attachment points versus what is a replacement cost and it is something that we are needling, doing.

If we really like the real estate and we think about long-term, long-term New York is going to turnaround because there will be deregulation of the banks and the banks would probably go back to feeling their oats, raising, hiring people, paying them more and that usually trickles down into the residential markets of New York City.

So we are not really worried about New York long-term. It's still going to be the destination for more than half of foreign tourists and there will be more and more for foreign tourist.

The last thing I would say and the cup that's between these schemes we have on our equity investments, particularly our Dublin office portfolio 701 Seventh Avenue have an equity kicker or the multifamily assets that we bought really well are performing perfectly or the embedded gains in our CMBS book and our RMBS book and there was a huge rally, as Rina mentioned, in the CMBS markets that really drove our book into a very nice position which you didn't see us take into earnings.

I also point out, there was almost a $30 million gain in the hedge we had for the Dublin office portfolio, I mean the medical office building which we just used to roll down the spread and the cost of dent instead of taking it to earnings which we could have done. And we have a lot of juice in the company earnings power.

So we are probably never this bullish but I feel pretty confident about the future of our enterprise and the talent that we have in-house and the commitment of our team to remain the premier commercial finance company in the space.

So with that, I will thank our, because it's our end of year report, I thank all of our dedicated people and also Jeff, Rina, Andrew, Zach, Adam and the rest of the team for their work this year and also to our Board of Directors for their contribution and hard work. They work hard.

They get lots of calls, look at lots of deals and they make lots of calls on our behalf too. So with that, I think we will take any questions..

[Operator Instructions]. We will take our first question from Doug Harter with Credit Suisse..

Thanks.

Can you help us think about the excess liquidity position as of year-end and how that can translate into growth with the existing capital base?.

Well, yes. I mean, it's all what the other guys -- I will go first. We have worked in despair locations I mentioned, but we model a steady deployment of our -- we don't need equity for, unless something gigantic comes along, for quite some time, not for the foreseeable future.

And as Jeff and Rina both mentioned, our credit facilities are better than they have been ever been too. So whether we want to dial up our leverage and approach Blackstone's leverage which is 2X ours, I mean that -- and the market doesn't seem to care, we can take our leverage up. They are at 3.5. That's an equity rate of 2.2 or something like that.

So we have the capability of juicing our IRRs. We have chosen the more diversified, different. They are both great companies. They are just deploying a slightly different strategy.

And I think one of the keys of the business today is the duration of our loans and that's why we moved a portion of our assets into high cash flowing equity properties that have steady growing cash flows because -- Rina, what was the repayments, $1.4 billion? What was the repayment last quarter?.

Last quarter was $1.1 billion..

$1.1 billion and we just took all that money and redeploy it, right. And the equity hasn't still come back. So I think the key would be and we are going to talk about some opportunities right after our call today that have come in. If we deploy the cash faster, we are going to earn more.

Do you have anything else to say about that, Jeff or Rina?.

Yes. I would say that the pipeline looks really strong right now. We are seeing a ton of deals which is what I spoke about, but the one of the things that's really important is when we sit on cash what might look like cash is really we are using to pay down our most expensive warehouse line, that LIBOR plus 300, LIBOR plus 275.

So we are not earnings zero. We are earning way above our money market rate by paying down our line significantly less destructive or it creates a lot less drag than it would appear if it were cash..

Well, to be fair, LIBOR plus three not LIBOR plus 11 or 11% return that we earn on our equity. So while it's not bad, it's just not full earnings power for the company. So yes, we get some return for it but it's nothing like four times three or four times less than we get if we deployed it into something.

And you take $500 million, take 9% or 8%, the difference between 11% and three and you are talking a lot of money on a he company like this. So we also, I should have mentioned that we crossed the numbers in the fourth quarter. We didn't model the $0.03 reduction to our earnings from the prepayment of our debt. We were just opportunistic.

So we did $0.53 really, not $0.50 or whatever. And as Rina mentioned and that's without the medical office building portfolio closing and with all this cash now sitting on our balance sheet, it's a good thing. You have been listening to me for seven years, I rarely am this excited about the prospects for the company.

So I think we are really that high yield deal, getting unsecured debt, getting investment-grade and upgrade from the credit rating agencies, unencumbering $2 billion of collateral that is important, was very important to, that was one of the reasons our upgrade went into place, the bonds have traded really well. It's really good stuff..

And then just one. It looks like the asset yield on the lending portfolio came down.

Can you just talk about what were the factors there?.

The optimal yield, Doug, I think remained constant.

Are you referencing interest income?.

I guess I was talking at the return on assets. The asset side of it, Rina..

The optimal of 11%? I am sorry, Doug..

So if the return on assets going from 7.4% to 7.1%?.

Got it..

And t obviously the optimal staying flat.

So just the components that drove those two pieces?.

Yes. I think that's really the sub-function of the assets that are coming online and the ones that are going off. I am not sure there is any large driver of that, to be perfectly honest..

Okay. Thank you..

We will take our next question from Steve Delaney with JMP Securities..

Good morning everyone. Thanks for taking the question. So I would like to start with a big picture item. So I think we get to hear a lot about tax reform over the next few months and I was curious just maybe looking at the house proposal is just a blueprint of what we might get, if we get anything.

Curious whether you view that type of reform as a net positive or a net negative for the real estate market generally? Thanks..

Barry, you are going to take that one?.

I am sorry. I missed the question. Somebody walked into the conference room..

Yes. No problem, Barry. This is Steve Delaney. I was just asking, I was in Boston yesterday with [indiscernible] people and a lot of questions about tax reform and potential impact on real estate.

I was just asking if we took the house plan as sort of a blueprint of what might come down the road, have you guys given any thoughts to on the equity or debt side of your businesses, what the implications are for the real estate market broadly from tax reform?.

You are listening to me, I know. I am laughing because I don't really think anyone actually knows what they are doing. One day the border tax is certain, next day there's no chance for having a border tax. Actually what's happening in Washington is actually what I want to happen.

There is dialogue and discussion and they are concerned about the rise in the deficit, which really could on the backs of trade wars, rates could rise too fast if you over stimulate the economy by doing everything at once.

And so a slow pace, since the economy is really doing fairly well into his election, a slower pace and a more measured approach, thoughtful approach to simplifying the code, impossible to know.

I don't think anybody knows, obviously Donald is a real estate guy and on his bunch of panel are Steve Roth and Richard LeFrak who are two of the largest real estate owners in the United States and real estate guys are well represented in the cabinet and the presidency and Wilbur Ross is good friends, but Richard and he is the new partner, [indiscernible] who owns a huge property portfolio.

So I think and frankly I mean, everyone in the United States don't have a home. As you start getting into interest deductibility and this is going to be complicated and they have got to hustle because they have got to get it done by August which is scary.

But actually I have no crystal ball because I really don't know what on earth they are going to do and since it is going to be pluses and minuses, I think the equity markets have completely adjusted for a lower corporate tax rate. And then I think there is a big --.

No question..

They have taken and as you say that is in the market, that is in the market. That's the one thing the market said, we are going to get a corporate tax cut because both the democrats and the republicans want them. So that will happen. And what happens to individual and where that falls out with interest deductibility is a whole another cup of tea.

If he comes out with this program where you can expense all capital investments certainly within one year, you could really talk about the real estate market. People could start talking. They will build stuff you don't need. The other interesting question is EB-5 financing also, because some of these cities are overbuilt like New York.

It's EB-5 financing that has, in my mind, distorted the market. It's money that doesn't care about the economics of a property and so it should go away. It's really a program that is not needed in this economy with 4.5% unemployment with job creation in real estate. We can't find construction workers. We don't need any EB-5 financing. So we have it.

We use it because it is a gift. But we don't think it should exist. So it should just go away. And one market we are very nervous about though as long as you talk about impact is the DC area. We don't really have much of anything at the DC district on the loan book.

But if he does any kind of reshuffling and reorganization in downsizing the federal government, a market that has been fairly steady and an institutional darling could be in a world of hurt for a while, kind of like Northern Virginia was after the sequestration when the defense contractors stop being able to grow.

So we think North Virginia is a slightly different market, more tech based but CBD or DC, if they cut agencies and I don't know anything about anything but 17 intelligence agencies might be one too many. I don't know if it happens. All right, that was a long answer..

Listen, it was kind of a very much open ended question obviously, given the uncertainty about what comes down the road, but there was some very good comments in there that gave us some insight. So thank you for that. Jeff, I guess this one is for you.

We have been seeing more construction lending by the mortgage REITs and you have highlighted that in your comments.

Just curious if you could, as you look at those loans versus the more traditional bridge loans, can you compare or contrast the risk return profile? And are you seeing an incremental return for the effort you are having to make to do construction loans versus bridge loans? Thank you..

Sure. I will start and then Barry, I will let you follow-up. And I will jump back to Doug's question, because it feeds into this a bit. Doug had asked about the return assets jumping down from 7.4% to 7.1%. What happened last quarter. if you look at that chart on page 17 of the supplemental is that our optimal asset level returns stayed flat at 11%.

That's our levered number. That includes our lending book where the optimal is up to 12.6%, as we continued to see good opportunities in the lending book. But Doug's question was about the unlevered return asset and we had a very large unlevered construction loan roll out of the book and so we moved down from 7.4% to 7.1%.

In this quarter, we didn't really add any construction which is where we tend to see the increase in the unlevered return on assets. So in quarters where we do do construction, the return on asset will jump up on an unlevered basis.

So to answer your question, what do we like about construction loans? We did the loan for Eliot Spitzer's company in April and that was 52% of cost. We like having great sponsors with a tremendous amount of equity behind us.

In the 50 to low 60s percent of cost, we think they are great opportunities on the right project versus slugging it out at 70% or above LTV in the regular lending book.

We also get on unlevered basis, we get spreads in the LIBOR plus 600 to 900 range when we work in construction and our typical loan on the whole loan side today is anywhere from LIBOR plus 300 to 425 quarter.

So we are picking up a significantly higher unlevered return at a much lower loan to cost and as you know that's even a lower loan to value, if you ultimately believe you are creating value in the project.

So we like the risk return metrics and we think it fits a book like ours very well and we will continue to look and we are certainly seeing more of them. And as we said in the note, we built this company to take advantages of cracks and fissures in the capital markets and today there is a gaping wide crack where the banks are not competing here.

So we are able to get a much better risk return today than we have in my tenure here.

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

We are such a big owner of property today, $50 billion, $5 billion book. We have pretty good data on what's soft and what's strong and we know the borrowers. So I think the construction loans, the only issue to me, is that with construction, it's the on call capital, right. So $100 million loan, he draws it.

Usually it is never fully outstanding, by the way, which is where the ROE, especially if there is some scale component to it. When he makes his project he pays off, as we have with the deals that we have built. We borrow some $270 million to $280 million when we built the Baccarat Hotel & Residences in New York.

I think the peak equity on that loan is $220 million, but we fees on like $280 million. The ROEs get really high but it's a little messy for us in the sense that to be drawn. On the other hand, we know when loans come back and are getting repaid, we know the cash is going out the door.

So we don't really get ahead of skis which has caused problems for other people in prior cycles and we have to lock the cushion, I think Jeff's number was, what was it, like nine to one or something like that? Three to one? Money coming back in versus money going out that's dedicated.

We watch that metric very closely as well of course our match funding. So at the moment, it's a green business for us and it is something we have done before and one of our peers is going to get into now because it is a whole and we would be delighted to take it back at half the cost. We want to make money. That would be a big money opportunity for us.

So unfortunately we are not so lucky to get these assets back so far..

Great. Those comments were helpful. Thanks guys..

We will take our next question from Jade Rahmani with KBW..

Thanks for taking my question. Just given all the optimism, what are the constraints in the 2017 outlook you provided? A couple of years back you did give core EPS guidance.

So just wondering if that relates to timing of special servicing transfers in and out as well as CMBS securitization instruments?.

We don't think our conduit will be as profitable this year as it was last year. It's funny because it was unprofitable the first quarter of last year breakeven but then rallied hard as the markets rallied.

Servicing businesses is going to -- and our model will tell off that we are ramping up lending to begin to absorb some of the decreases in our servicing revenue and -- it is my daughter's phone. Just hold on. And we just want to be as conservative as we could be.

The timing of loans, you know, is always a fascinating exercise when a loan we were just talking about something in the first quarter might roll into the second quarter. Never in our control exactly when the guy closes a loan. So I think that's about it.

I really hope we have more upside in the sense that we were able to put the capital to work much faster.

One of the interesting questions we have and it's pretty obvious, but not subtle, is that we have a convert that's coming due later in the year and we can either sit on cash, which we have, to pay it off or we could put the cash out if we are lucky to have some of incredible investment opportunities and then just either do another high-yield deal or another convert or equity deal is not likely to replace it.

So that's the deal. Our base model is, pay it off in cash right now. I hope that's fine. That's what we are modeling. But that means we suit around with some money. So October, I think it is. So if we get lucky and we find a really good place to deploy capital faster, well you can be sure we will put the capital out.

We don't think we have any interest in raising capital in the debt or equity markets or borrowing and levering some of our unleverd assets if we had to. So I think we are just being conservative because I don't think we are getting any help for being more aggressive frankly.

Nothing we are doing is talking our dividend down, even though I have tried for five years..

In terms of credit quality, can you just discuss the credit migration in the quarter, which the statistics around risk ratings were actually positive, but you did have the loan default on the condo conversions? So just overall credit quality? And then can you touch on the condo conversion? What you anticipate happening? If you expect to foreclose on the asset? Or if the borrower will refinance or sell the property?.

I am going to pas this over to Rina and Jeff. But that one loan, there is a loan and it was one of three loans, that are prior originations bought in New York City and the other two are gone. This is the one that's left. So this goes back several years now and prior to Jeff DiMo's administration, I will point out.

Now, Rina and Jeff, why don't you take it from here..

Sure. I guess I will start by saying, that loan you are talking about is our only loan today above 80% LTV. I think there's 124 loans in the book. So we were very comfortable with the credit quality of the book, 63 LTV on the overall book and one loan above 80 out of that many, I think, is extraordinary.

That said, we did put that loan on nonaccrual in Q4.

I guess before I go on, Rina, do you want to describe what it means to go on nonaccrual?.

Sure. So Jade, this quarter, we disclosed for the first time our policy on nonaccrual which is when a loan is significantly past due. If it is greater than 90 days past due during the quarter which is why, to say as a matter of policy, we put it on nonaccrual. So we did run an impairment test on the loan and it passed. So the loan is not impaired..

So we intend to modify the loan in Q1. We do expect to receive full repayment of principal and interest, Jade. We spent a lot of time with the borrower. We believe that the business plan works..

All of the time with borrower..

Yes. And we had other opportunities to go different avenues but we honestly believed this works and we will get out and our Board and Barry and all of us are on board and we are pretty comfortable that this will ultimately resolve itself in a positive way.

But as we always do, we are brutal on ourselves in terms of our risk ratings and some of them were higher. I think our average risk rating is something like seven-tenth of a point or eight-tenth of a point higher than our biggest peer. It's not because we have worse loans.

We have the same 60 odd LTV and we have a more mature book, which I would argue is going to lead to even better loans in a market that's performed well. So we are hard on our ourselves. We are our hardest graders..

In terms of the servicing book, you mentioned the positive transfers post quarter end seems very strong as a start to the year.

Are you still anticipating transfers out of the book to exceed transfers in for 2017?.

I think right now we still expect we will have a little bit more in servicing at the end of the year than we do today and we will continue to increase modestly as we are certainly optimistic about what we are seeing in the first couple of weeks of the year.

And my guess is that we are up a little bit but it's not going to be a large magnitude up and it shouldn't be a large magnitude down if we are wrong on that. But the expectation is a little higher balance at the end of the year..

Thanks for taking the questions..

Thank you Jade..

[Operator Instructions]. We will take our next question from Joel Houck with Wells Fargo..

Good morning. Thanks. So a question on the conduit business. How do you assess or see the opportunity to pick up market share? We see some of smaller lenders close shop and go away..

That's certainly the case. There is going to be less players. We have been invited into, as you know, three large shelves over the years. I think Starwood Mortgage Capital's performance on our conduit loans stands for itself.

Our relationship with the banks and the number of deals that we are in which is significantly more than anyone shows that our deals and the collateral and the help that that they give to diversification that they give to the CMBS deals is well thought out.

We have we have a number of different partner opportunities this year and we think that we will take some from the smaller guys or certainly banks that want to have a bigger share and they have capital today to put behind a vertical scenario.

And we believe they will spend that money this year and probably see a little bit more vertical this year than other structures and the large banks may try to pickup market share as well. But I think the large banks and a couple of nonbanks like us will benefit and the smaller guys, they are certainly going to have a harder time of it..

All right. Thank you..

We will take our next question from Jessica Levi-Ribner with FBR..

Hi. Thanks for taking my questions. Most have been asked and answered, but one question around the construction lending.

What does funding look like on those loans from the banks? And do they take participation?.

Sure. Well, the great news is, we don't need the funding. We can do most of them on an unlevered basis and historically we have done more of them unlevered than with financing. There is financing available in the zero to 35 or 40 LTV, leaving us a slice above that, if that's the route we want to go and lever them.

But depending on the coupon, we haven't always done that. And the couple that we are looking at today, probably three of them that we are looking at today would be unlevered opportunities. Barry, I heard your voice just as I started to talk. Turning it back to you..

Yes. I think because the bank doesn't want to make a loan on a construction loan typically it really has to be done unlevered and when it's more seasoned, I think Hudson Yards as an example which is complete and paid off.

Way down the road, we can probably lever when it's got it's [indiscernible] or just about, just almost complete, we could lever anything in a bank. It won't be a normal loan though. They are not going to lend at 200 over or 250. They are going to charge 350 or 400 and it's a very short duration. So sort of not really worth doing.

We know we are going to get repaid in almost all cases when the property opens. So it's just that historically, we have made these loans unlevered and in our minds and when we look at our -- we attribute corporate leverage to these assets, okay, they are levered but not directly.

And that's how we monitor our debt-to-equity as the company and a whole..

And how big would you get in construction? Like today it's 9% on assets.

Would it be 15%?.

Yes. Probably something like that. I don't think it would be higher. I almost think -- so we have had all kinds of discussions about it. Our equity book were 19%, we would go to 25%, the construction book is 9%, we would go to 15% or maybe 17%. I am not sure. But we would like to pickup our lending in Europe. It's been slow and I expect we will pick it up.

We have done a reorganization over there and we would like to have more of our loans in Europe.

I think they have all been paid off, Jeff, right?.

We have one large one coming back in the next few months and then we will be down to about 4% of our assets. We are at 7% today. It would be done about 4% international which was as high as 14$ or 15% five quarters ago, I would say. So certainly going the wrong direction..

Yes..

Okay. Well, thanks very much..

And that does conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Sternlicht for any additional or closing remarks..

So we thank everyone for their support this past year and look forward to a good year ahead of us. Everyday you wake up and it's never dull. So I hope it all settles down and clarity comes out of Washington. It will be its own break on the economy if they don't get some of these tax forecast or tax position finished and trade wrapped out.

So you can't grow a economy at 3% and 4% if you don't clarify the rules of engagement and the tariff stuff and tax treaty, import barriers will act much like Dodd–Frank did to the banking sector, if not clarified. So I hope they resolve this quickly. Thanks everybody. Have a great year..

This does conclude today's conference. Thank you all for your participation and you may now disconnect..