Good day and welcome to the Starwood Property Trust second quarter 2017 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's earnings call. This morning, the company released its financial results for the quarter ended June 30, 2017, 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 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 maybe made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call.

Our presentation of this information is not intended to be considered in isolation or as a substitute for 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 going to now turn the call over to Rina..

Thank you Zach and good morning everyone. This quarter, we reported core earnings of $137 million or $0.52 per share, up from the $0.51 we reported last quarter. We continue to a strong contribution from each of our business evidencing the power of our diversified multi-cylinder platform.

I will begin our discussion this morning with the results of our lending segment. During the quarter this segment contributed core earnings of $99 million or $0.38 per share. We originated or acquired $871 million of loans with an average size of $218 million and 11.5% optimal IRR to spot LIBOR and a 53% LTV.

We funded $615 million, of which $423 million related to new loans and $192 million related to pre-existing loan commitments. Repayments totaled $656 million for the quarter, in line with our expectation. The credit quality of our book remains strong with the LTV of our large loan portfolio remaining steady at 63%.

In addition, we saw improvement in some our 4-rated loans this quarter with the loan loss reserve deploying from $9.5 million to $6.88 million. This was mostly due to a $170 million loan that prepaid in full shortly after quarter end.

Our book continues to be positively correlated to rising interest rate with just over 92% of our portfolio being floating rate. We estimate that a 100 basis point increase in LIBOR would add $0.09 of core earnings annually not including the incremental benefit that could be realized by our servicer in a higher rate environment.

Next I will discuss our investing and servicing segment which contributed core earnings of $71 million or $0.27 per share. As a reminder, this segment houses our CMBS conduit origination business, CMBS book, servicing platforms and property purchased on CMBS trust.

It also houses our investment in Ten-X, the former auction.com which we acquired in 2013 as part of the LNR purchase. GAAP earnings exceeded core earnings for this segment, principally because of a mark-to-market adjustment related to our investment in Ten-X.

Last week, Ten-X issued a press release stating that they have entered into a strategic transaction with an investor to acquire a controlling stake in the company. Through a 50/50 JV, we own two types of financial instruments in Ten-X, warrant which we report on a mark-to-market basis and common stock which we report as historical cost.

Combined, our investment in Ten-X had a GAAP carrying value of $21.6 million last quarter. As a result of the recent announcement, during the second quarter the warrants were mark-to-market based on the implied value of the transaction.

This resulted in a GAAP gain of $26 million, which you will see reflected as an increase to our GAAP carrying value and as earnings from unconsolidated entities in our P&L. Because we hold our JV investment in a taxable REIT subsidiary, we also reported a corresponding tax provision of $10 million. Both of these are excluded from core earnings.

We will report core gains for this transaction when it closes, which we expect will be next quarter. If we were to sell 100% of our equity positions, the pretax core gain would be approximately $60 million. Moving on the other cylinders in this segment.

We continue to capitalize on opportunities to harvest gains in our CMBS portfolio and in the properties that we acquire from CMBS trusts. During the quarter, we sold CMBS for core gains of $6 million and properties for core gains of $8 million.

On the servicing front, resolutions once again outpaced transfers in, mainly due to the liquidation of five large loans totaling over $650 million. These resolutions drove the $4 million increase in servicing revenues from last quarter. We also obtained one new servicing assignments this quarter on a deal totaling $1.1 billion of collateral.

This brings our named servicer portfolio to 153 trusts with a balance of $72 billion. But before leaving this segment, I will say a few words about our conduit performance. We securitized $272 million of loans in two securitization transactions this quarter and expect volumes during the last half a year to be significantly higher than the first.

I will now turn to our property segment. This segment contributed core earnings of $18 million or $0.07 per share. The wholly-owned assets in this segment continued to generate consistent returns with a blended aggregate cash-on-cash yield of 10.5% and a weighted average occupancy of 94%.

These statistics are down slightly from last quarter due to the planned departure of a below market tenant that occupied roughly 9% of the space at one of our Dublin property. We are in the process of renovating the space and have agreed terms with a prospective tenant for a 20-year lease commencing in December.

The new lease is at a blended rate of just over €55 per square which is a nearly 50% increase from the €37 per square foot of the vacated leases. I will conclude with a few brief comments about our capitalization and third quarter dividend. We ended the quarter with $3.8 billion of undrawn debt capacity and a debt-to-equity ratio of 1.5 times.

If we were to include off-balance sheet leverage in the form of A-notes sold, our debt-to-equity ratio would be 2.2 times or 2.1 times excluding cash. For the third quarter, we have declared a $0.48 dividend which will be paid on October 13 to shareholders of record on September 29.

This represents an 8.8% annualized dividend yield on yesterday's closing share price of $21.78. With that, I will turn the call over to Jeff for his comments..

Thanks Rina. There is so much written about the number of new public and private entrance in the debt space, but we believe this story is one of haves and have-nots.

We will significantly increase loan production this year while at the same time taking advantage of the lowest borrowing spreads since our inception continuing to originate double-digit IRRs while maintaining the same credit first discipline we built the company with eight years ago.

We will continue to do this by using the breadth of our multi-cylinder platform to go where the capital markets offer us the best returns for the lowest risk.

We will continue to focus on large complex transactions where our credit first platform cost of capital that gave us experience in equity real estate and access information provide us with the greatest competitive advantage.

In anticipation of more competition, we have doubled our origination staff in the past 12 months as an investment in our future which has enabled us to continue to produce high-quality transactions and a very robust pipeline.

We closed $871 million of loans this quarter and our lending segment have over $1 billion of transactions already in process of closing in Q3 and have as robust a forward pipeline as we have seen.

We have achieved double-digit optimal IRRs in our lending book every quarter for the last three years and an 11.5% optimal IRR this quarter conservatively assuming flat LIBOR curve. Importantly, approximately one-third of our second quarter originations were unencumbered by asset level debt.

Our IRR would have been higher had we take asset level debt on all originations, but by continuing to create unencumbered assets, we have the unique ability amongst our peers to issue unsecured bonds at extremely attractive rates.

We have approximately $3.5 billion in unsecured assets on our balance sheet today that service collateral for our unsecured borrowings, a significant multiple over our peer group. We have approximately $2 billion of unsecured debt today between convertible bonds and our $700 million five-year unsecured bond deal we issued in December 2016.

Those bonds trade at 104.25 today, implying a 3.9% borrowing cost for 4.5 year unsecured debt. That is a lower rate than where others in our sector issued convertible bonds this week, giving us a significant funding advantage without risking equity dilution.

With over 100 institutional owners of those bonds, the debt market has shown great support for our business model and are trading our bonds in line with higher rated companies giving us the opportunity to utilize corporate debt in a manner and pricing that our peers simply cannot match.

Despite this access to capital at best-in-class rates, we continue to run the business very conservatively and our debt-to-equity ratio stands at just 1.5 times today, as Rina said, or 2.2 times when we add back the A-note, significantly lower than our mortgage REIT or finance company peer group.

Our credit profile continues to be exceptionally strong with our LTV falling slightly this quarter to 62.9%. We continue to be our own harshest critics as two of our largest loans that were risk rated a four in 2017 paid off after being refinanced at higher proceeds than we were willing to consider.

Like our competitors, the full impact of our closings has not been reflected in the second quarter due to the delayed nature of capital deployment on deals with future funding, but that is routinely the case as we make new loans.

In REIT, we continue to reinvest run-offs in our CMBS book, which has seen spreads continue to tighten in each of the last five quarters and as we frequently do, we sold CMBS for a core gain of $6 million in the quarter. Rina also told you that we sold two properties this quarter that we acquired from CMBS trusts recognizing $8 million of core gains.

We have many similar assets left in the book and expect to continue to buy and sell going forward. In addition to gains in this book, we have spoken before about our significant unrealized gains in our property segment and equity kickers in our loan book and you will see us realizing some of those gains from our Ten-X investment next quarter.

We are excited to announce that subsequent to quarter-end, we became members of the Federal Home Loan Bank of Chicago, giving us access to an extremely attractive capital source for present and future business lines at STWD.

In 2012, we created a single-family residential rental portfolio that was later spun out of STWD and has been renamed Starwood Waypoint Homes or SFR. We have also owned RBS securities almost since inception that have performed extremely well.

We have continuously looked at the residential mortgage business as an opportunity given our expertise, the health of the residential market, the dislocated nature of the lending market and our borrowing costs in the space.

This year, the dedicated team of residential mortgage professionals at our manager Starwood Capital Group has helped us take advantage of an attractive opportunity in the residential housing market for nonagency mortgages.

Since the great financial crisis, residential borrowers who don't fit squarely within the agency Fannie and Freddie's credit box have found it very difficult to get a loan to buy a house, even if they have a very good credit profile. The quality of the nonagency borrower and lower LTV makes this segment the antithesis of subprime lending.

Discovering an area underserved by more traditional forms of capital, we have developed flow relationship with top-tier originators to begin buying nonagency loans that fall just outside the agency credit box, with a borrower having nearly 40% equity in a property and a prime credit score.

In addition, the securitization market and funding markets have reopened as well and we are in the process of evaluating securitization exit versus the extremely accretive return profile we achieve by funding our nonagency portfolio through our Federal Home Loan Bank membership.

Securitizations for prime low LTV pools like ours are consistent with our investment objective today. We have aggregated a portfolio of nonagency loans that are carried as loans held for sale on our lending segment balance sheet. These loans have FICO scores over 700 and LTVs, consistent with our lending book.

We will continue to look for other ways to use this line and further diversify our business while using conservative leverage best-in-class financing techniques across all of our business lines to produce outsized risk-adjusted returns for our shareholders. With that, I will turn the call over to Barry..

Thanks Jeff. Thanks Rina. I want to wish Rina happy birthday which was Sunday and she hasn't been feeling well. So thanks for putting in time and effort.

One other thing I would say again, I just got the trophy from NAREIT for disclosure and when we went public in 2009, we said we would be best-in-class in transparency to our LTs, our shareholders and that I will treat like partners.

And it's nice to see for the third year in a row we were recognized with the Gold Award from NAREIT and our disclosure package sets the standard for our space and I think most people feel that mortgage REITs have already got in trouble and what we promise you, for those of you who have been with us for the entire ride, since we began our company, was that we never pushed the envelope and we would be careful and we would also diversify ourselves.

So that if there were trouble or we couldn't meet the returns we thought were attractive for our shareholders, we would open up other cylinders of business that potentially could capture some of the capital freed up from our loan book, if in fact it became difficult to produce the returns we were used to.

And so I am really excited that we consider ourselves more of a real estate finance company than just a large loan lender.

And as you know, with our conduit business and our servicing businesses, including our continued strength in the B-piece market going forward and CMBS 2.0, we have now added two other interesting really exciting new businesses for us.

So Home Loan Bank purchase and license agreement which allows us to borrow at truly extraordinary rates and we can grow some of the lending business with Freddie and Fannie who have been great partners and will be great partners we anticipate and as we work to help correct some of the loans that have too tight credit cycle in the resi markets as well as the move into, well I consider them two different things.

FHL, Federal Home Loan Bank purchase as well as the move into non-QM lending which is a new cylinder for the company.

There are several others we are evaluating which would increase our ROE and reduced the drag which has been incredibly significant, I mean I could tell you, but I am guessing $0.05 to $0.10 year-to-date from the excess cash we have from the spectacular raise and debt offering we did earlier in the year.

So we have been sitting on a lot of cash, which is a drag, significant drag on our earnings and we are doing it, in part to retire, we have the option to retire for cash the October maturity of the convert and Jeff mentioned that one of our peers issued a convert this week and we have [indiscernible] that trade inside of the convert mostly created unusual volatility on our earnings as you have to mark them in and out as they are going out of the market.

And so we have avoided that particular tier even though we could do it tighter than our bonds. And our bonds of trading as if they were investment grade. And as you know, we are DD, straight to positive outlook from the rating agencies. So the markets are competitive. The debt market has been coming off of lows in the markets.

We have had a tightening of the market as a lot of hunch was yield across some asset classes and others are wider. We are trying to be super careful. I think this is the fourth or fifth cycle of tightening since we started the business.

I am very reassured that the 11.5% optimize debt yields, which isn't even optimized, as Jeff pointed out, for our portfolio. And then looking at the book for the third quarter, we are pretty optimistic. We expect the originations to be larger in the third quarter than the second quarter, as Rina pointed out in our pipeline, as Jeff point out.

And all of these mortgage REITs have LIBOR at their back. So it's in fact, the Fed continues to raise rates, unlike our resi peers and we get swapped up in ETF because we are set in the same ETF, our earnings will go up and theirs might go down. So it's been interesting, the world stretches for yield again at 10 year.

As you know, this morning, it is back below 2.2%, 8.8% dividend yields of last night was 63% LTV book is just compelling for shareholders and I point out to my hedge fund friends if they use modest leverage on the stock purchase of us, they will be the best performing hedge fund in the United States practically.

The other thing I think is relevant as we move on in the long cycle here is the asset classes in the United States, in particular, are still pretty much balance. There isn't a ton of growth in the hotel address, the RevPAR is 1% to 2%. The office markets are actually improving, almost across the board, in the United States.

Hotel markets have a few pockets of weakness, New York City, to some extent Miami. But also those weaknesses also present opportunities to us as a lender. And since we are now in the equity business, if we were wrong and we took back to the asset we wouldn't be complaining too much.

It's a business we have long done at Starwood Capital Group and while we don't intend to do loan-to-own, it isn't the worst outcome now that we are in the equity business, as you know. Trump has five stimulus packages, none of which, as you know, have passed, any one of which will accelerate the U.S.

economy, we believe from it's lagged pace now that we are lagging both Asia and Europe in growth.

So if he gets repatriation completed, his infrastructure spending comes online, any kind of tax cuts for either these are businesses or personal taxes, he continues to actually execute the deregulatory policy which really hasn't taken place on the banks, at least.

There has been talk but not a lot of change or makes any changes eventually to the healthcare practice that will lower healthcare costs, all this would be good for the U.S. economy.

And what's good for the economy is good for wages, it creates inflation, increased replacement cost for real estate assets and I think our LTV at 63% would drop to 58% 55% and it will be more compelling for the shareholders as the risk-reward basis. And we would love to see that because LIBOR would go up and our earnings would go up with LIBOR.

And we need that, the wage growth, which has been sorely lacking in this recovery and it continues to surprise me that it has such weak wage growth when we all see significant employment issues or lack of available people to hire in markets and categories today.

I want to take one side besides the FHLB purchase and the non-QM lending and talk quickly about Ten-X in the context of our non-core businesses. Ten-X was something we picked up in the LNR transition transaction and we own a piece of the company. In total, the gain we think is around $60 million, plus or minus.

There maybe an opportunity to rollover some of our gain and continue to invest with the private equity firm that is buying them with a consortium of investors. It's an interesting company. It was always in our taxable sub given it's an auction business and has only nonqualified REIT income in it.

But the $60 million, that is sound money for our shareholders and we are excited about that. It points to the fact that we did have our carrying value as less than a third of that or about a third. So point of the fact, we do have these embedded assets in our portfolio, which we think are significant.

Now let me talk about quickly through the couple of the larger investments. We have about $2 billion of growth asset cost in the equity book, which is around 20% of our gross assets. The equity attributed to those investments because they carry asset specific debt is around $700 million.

That's 15% of our book equity and significantly less on their market cap. And if you take one of the largest investment in the group, which is the medical office portfolio we bought last year for about $800 million,.$838 million. The recent trade by, I guess it was Healthcare Realty Trust, at a 5% cap.

And we bought our portfolio which we think is better at 5.6% in place. And interest rate at the time were 80 to 90 basis points lower. So they paid about $470 a foot, we paid about $394 a foot. The occupancies were about similar 96% and 95%. Their average age of the buildings was slightly better than us.

But we have 65% of our tenants are credit, theirs is about 60%. So we are excited about that market. It happened, I think just last week and you can see on a leverage basis. So that's a significant increase, over 10%, which on the gross cost would be almost $75 million, if you use that cap rate on our book.

Similarly, our apartments are performing magically. They are 98.5% occupied which is high. We own 107,000 apartments. We own a large part in the Northern United States. This is the highest occupancy portfolio we have because it caters to the residential market, the affordable housing market and they are really nice assets.

So these are good-looking assets. They were newer in quality and continue to perform at or above our forecast. And I will mention the Dublin office portfolio because that is the third biggest equity investments at the time right now.

And we were offered an opportunity to sell a significant chunk of that equity, all of it or part of it at a significant premium to the carrying cost. We decided not to do it because we have enough cash right now. And probably I am more bullish on Dublin's office prospects than even our European office, given the Brexit opportunity and it's asymmetric.

They are either going to tighten the market, even though there is construction. The construction is good because it allows the banks a place to leave and go to. And as you can see, with the lease renewal on the one asset which was up 50% year-over-year or over in place rents, the market is really on fire and has enjoyed the sub-5% vacancy rate.

On the other hand, I will mention the asset, the investment in the retail portfolio which is a mall, four malls and that is just 5% of our equity book, 2.8% of our book equity and 2.2% of our market directly. The mall business is under attack, more because of the media and the hype and the reality of the business.

Having said that, it is impacting, panicking, many of them have tremendous turnover in the malls. So while we think these are great to purchase real estate, the capital cost are probably higher as you re-tenant the spaces, the occupants remains okay. You recently Simon's earnings report last week and their malls continue to function well.

The reality is they are functioning quite well, but there is higher capital cost and I think you would see some weakness, which should be immaterial to the company in that category potentially going forward and more than offset by the investments that are materially larger for our company. You can find the data for that on page 21 in the supplement.

So with that, I really the team is gelling, doing great. I am excited about growing our origination team, trying to open up new markets for us and new lending relationships. I can't overestimate or overemphasize how important it is to have experience in these markets.

From the equity perspective, it's quite wonderful to have a team of 50 acquisition people that are active in all these markets and can help underwrite and check the credit memos that the team puts together on the debt side and the collaboration is probably as good as it's ever been.

The markets are wide open We enjoyed a significant competitive energy in the funding market. We would like to see us move more to the unsecured debt market because we have this collateral we can use. And business is okay. It's pretty good.

So we are looking forward to continue to innovate and continue to find new ways to deploy capital and meet our objectives over time. So as we have always said and we will finish the call with, we are going to be consistent, transparent and do what we say we are gong to do.

So Jeff and Andrew and Rina and the team out at Belmont and the REIS, which is the real estate investment and servicing operations down at Miami, everyone. I want to thank all of them for their hard work on behalf of the shareholders and the Board. So with that, we will take question..

[Operator Instructions]. Our first question comes from Steve DeLaney with JMP Securities. Your line is open..

Good morning everyone and thank you for taking the questions. I would like to start with one of the headlines on your press release, the access to the Federal Home Loan Bank system.

I wondered if you could provide some color as to how were able to navigate that given, I guess, the ban, if you will, that the FHFA put on captive affiliates of mortgage REITs back in January 2015? And I realize some of that, you may not be able to say too much there, but is that also strategically, is that in some way tied to your interest in the residential mortgage space? Thanks..

Thanks Steve. It's Jeff. Good morning..

Hi Jeff. Good morning..

It is obviously tied. There are other bucket like multi-family and places where the Home Loan Bank could potentially be helpful, but given what we are doing in looking at in the residential space, it certainly makes sense. Shortly after quarter-end, we acquired a captive entity with an existing five-year charter with the Home Loan Bank Chicago.

We have executed that out to the end of the five-year sunset period which is currently about 3.5 years. But we are not disclosing at this time any additional information about the transaction itself or our capacity for borrowing on that line, but we are excited to be part of Home Loan Bank..

So assuming let's say it is a 3.5 years barrier current policy, it could change just like this opened up for us. So it might be 10-years. You have no idea what they will decide. So it's all political, I would say..

Sure. And Barry, I understand there is a bill in the house that actually would expand membership and we know the myth that Federal Home Loan Banks themselves want the mortgage REITs in the system. So hopefully this could always be resolved through some sort of a regulation that would be tied into --.

It will be one of our, I think Rina has a number of a $10.6 billion of debt capacity. This is one additional lever we have. And yes, it is really where we use debt financing, which is significantly inside the cost of any of our credit line. It is somewhat strained by what they want to see us borrow for.

So it's very attractive for us and one of our peers, it's more of trading house, it's not -- they actually have this -- and we were going to do it and they shut it down and we got the guys found one and bought it. So they did a nice thing and I think it's going to be exciting for our shareholders..

And Steve, as you know, that I said in my script, we do run a fairly large book of unencumbered assets. We go out of our way to create unencumbered assets at the expense of IRR at the time and those unencumbered assets will help us be able to borrow on lines like this.

So it's not just owning the license, it's really having the balance sheet that allows you take advantage of it and we have set ourselves up well for that..

Understood. Thanks. And one for Rina, if I may. Just looking at conduit sale activity in the quarter. I guess, just roughly looking at the gain on sale margin that would be in excess of 5%.

Does that tie into your view of your results?.

Steve, I would say it was relatively small from an originations amount. And as you know better than anybody and you know the sector very well, spreads will continue to tighten. When spreads are tight, that business looks a really good business. When spreads are widening, it's a little more difficult.

We had a tailwind for the last five quarters of spread tightening. If you remember, in the first quarter of 2016, we spent a lot of time talking about our book and spreads have widened significantly in that quarter. We stayed the course, added to it.

We have been rewarded on our CMBS holdings and we have been rewarded for staying in the CMBS conduit origination business that probably 10 or 12 people have walked away from in the last year and we are picking up market share versus other nonbanks.

Obviously the large banks have picked up market share in total, but we picked up market share versus the nonbanks and we are excited about it and we will continue to grow modestly and slowly. But it's hard to look at gain on sale margin absent looking at spreads. And spreads have tightened and that's a good thing for our business.

So we try not focus on those margins. We try to focus on making good loan..

Yes. Understood. Certainly a business that's in much better shape than any of us expected it might be a year ago today when we were staring risk retention in the face. One final thing and this is --.

Than any of you expected..

Yes. Okay. Any of us, that's right, the outsiders. I hear you. One just to close, one big picture question. CBRE has been reporting about $900 billion of private equity capital commitments that are sitting there available for the U.S. commercial real estate market.

Barry, I am just wondering if you think that entire amount is actually going to be called and invested and some idea of over what period of time? So just a view on like where we on the cycle and the amount of money? This seems to be the fuel behind the market. And I would appreciate your views on that. Thanks..

You know, in the cycle, you are betting two things when you are make an equity investment today. What's going to happen to the U.S. economy over the five-year period? Will Trump get infrastructure spending done that might help suburban hotel portfolio. Any growth in GDP will help RevPAR growth. Are we going to rollover? I don't think so.

I think the fact that we had such a week nine-year recovery means we have more capacity. There is no bubbles that I can really point to in the market. On the other hand, I think investors are nervous. I think as you have seen or maybe haven't seen, year-over-year the property sales have declined.

And there have been bid/ask spreads that have opened up in some asset classes, because even though there is money, people were assuming rates would rise in and they were more worried about their exit cap rates. So I think that's the question. Like we all expect in the underwrites for the exit yields to be wider.

Some of us say they will be constant and then if you think they are going to hold flat and you will probably win an auction, if you think they are going to gap out, you are not going to win the auction. And whether they gap out or not will really depend on what happens to rental growth.

And if rents continue to rise, rental growth maybe more important than movement in interest rates as it's modest and I don't think anyone expects it to be crazy. Actually I am concerned about a different thing. I think the flow of the all the markets price off the top bid and the top bid has been an Asian bid.

In the sub-market, you have seen whether it was the sale of Waldorf or the bailouts of a strategic hotel deal, Anbang was on the edge or top of the heap in what they were willing to pay for assets.

And I think a lot of -- and I have been through this cycle for 30 years, everybody thinks they are rich when the guy pays the 2% cap for an asset or 1% cap. So I think it's good that the Chinese have stepped on some of the crazier things that happened in the market. It is one purchase.

If there are six bids at $1 billion and one guy is at $1.5 billion, I would ask you to tell me where the LTV is of the loan, right, against $1.5 billion, right. So this is easier for us in some ways. We know where the markets are. It looks like cap rates for apartments have stayed fairly stable, I would say.

I think cap rates for offices, nothing is drifting down. I don't think this weight of money is affecting the property market that values are screaming ahead. So I don't think that's the case at all. I would say that those outlier bids, the guys who are looking at real estate as alternative for bonds, those are primarily foreign sovereigns.

Those have left the market right now. And the market has absorbed the most foreign capital in New York City, maybe DC, maybe San Francisco. And those markets have their own issues. And I think some of the Middle Eastern investors where the Saudis are successful getting Aramco public has affected their flow of funds.

I think as politics raise their head above, if you are having a fight with our administration, you are just not going to invest here and there you have the Qatar issue for the Saudis and our response to it and they are very quick to shut down the capital flows. Or they need liquidity and sell assets, right.

So there is nothing to do with the asset class. It has to do with politics. So I think I am not worried at all about that. I wouldn't say the markets are easy. But I think there is certain and there are other markets that are doing much better because they have tightened and there really isn't a ton of speculative construction in the office markets.

But I think the industrial markets are just ridiculously tight. So you have seen their cap rates are 5%, sub-5% for industrial. It's been a darling of the sovereign wealth, the foreign investors and it may not stay that way, if in fact they curtail their investment, you could see cap rates gap out fairly significantly. These are not a domestic bid.

I forgot the number, but something like 70% or 80% of the industrial deals done was foreign capital. So these big purchases are basically bond equivalent credit yields. They are not really real estate players. They are just buying the yield.

So far, I mean I think we get to pick and choose on equity side where you think you can get, I am laughing, we had an investment committee meeting on Monday and we were talking about one of the foreign country in Asia and their office markets are 5%.

And I asked our guy over there, he is based in Hong Kong, where he felt rents will grow and he was using 3%, they are at like 4.5% vacancy rate. And then we were working on a deal here in one of our cities where we own assets and what do you think, rents are growing at 3%. So that's like a 9% vacancy. You have to call the rent growth now.

Like you have to step up to the plate and leg into the trade because you are later in the cycle and there is not much in the way of distress in the United States. So there probably is distress coming and obviously we are beginning to see the cracks of the high-end residential market in Manhattan. It's going to be a debacle.

The building on 57th Street just went through it's B-lender. Those deals, the building going up next to nothing, those deals are going to be a disaster. But we knew that. We told you that three years ago, two years ago. So high-end resi in New York really in trouble.

All the new construction, the construction lenders typically are not, we don't have exposure to that market. Those are typically, there's a hedge fund that made $1 billion mortgages against some of these properties out of Europe and we will see how that fairs.

But you can see the headlines and the issues coming in that market and we don't really have exposure set to $6,000, $7,000, $8,000 a foot pro forma in residential in Manhattan. That is not going to end well. But it's also not a bank issue. As I said, the loans are not being made by the commercial banks. These were made by hedge funds.

And so there's $3 billion in New York. They have $1 billion mortgages provided by hedge funds. So maybe they like the return, but they will lose capital and can't get paid off when they find out their basis is accreting because they are not getting paid currently obviously. If they are getting paid currently, it's their own money paying themselves.

So it doesn't mean anything. I think we kind of want a train wreck. We like those markets. We like capital getting scarce, but I don't see that coming right now other than some crazy stuff coming out of DC, which is possible..

Steve, for clarity, Barry is talking about Central Park South when he talks about 57th Street. As you know, we have a large asset on East 57th Street with our residential that's doing great and will pay off in the very near future. I just wanted to clear that..

Yes. I am talking about a condo in Philly. Our price attachment points are $1,500 a foot, not $6,000 a foot..

Steve, I would add that regardless of prices up or down, the pent-up capital should be good for transaction volume staying somewhere near here which is good for us as a lender..

It's down. I mean in the first quarter, transaction volume was down like 30%. That's now down I think 20% or 18%. But one of the reasons I think that people don't talk about it, not only bid outspreads widening but, is tax reform.

I mean if you thought your capital gains tax rate was going to drop dramatically, as the Trump proposal has talked about, you would wait. And you are getting paid. You have got great positive leverage on your real estate. You just wait. So private owners are saying, well let's just see what comes out of this.

And I think it has affected the real estate markets from a transaction volume standpoint which indirectly affects us and also tightens spreads because there's just fewer assets to lend against with fewer transactions..

Our next question comes from Jade Rahmani with KBW. Your line is open..

Thanks very much.

When you talk about growing the platform, I wanted to see if you could provide your thoughts on whether there's any interest in the healthcare lending space such as the recent RX Lancaster deal or in the GSE multi-family lending space?.

We look at everything. That's all I am going to say. We don't have any particular reason not to do healthcare lending. We have been looking at the assisted living space. We think the train wreck that we anticipated is not going to abate for a while. Senior housing is overbuilt and rents are falling. That is a very tough segment to lend into.

So we knew that. We could see the construction. I can't believe the numbers. We just talked about it in the investment committee and 8% increase in supply and rents are falling in many markets. So that is an area of assisted independent living we are kind of staying away from. We are staying away from it.

We don't have a single loan that's exposed to that business. But the healthcare facilities, hospitals, things like that, we would do that. As you know, we are like credit first, as Jeff says. And we are underwriting these risks. And we are going to close a loan in the third quarter that might raise eyebrows.

And we will tell you why we did it after we do it. But the returns are terrific and we think it's an exciting opportunity for us..

And then just on acquiring any --.

Sorry, on the assisted living side, I think I read recently the average age of occupants is 82. But Baby Boomers are still in their mid-60s. So all the supply came in early. And you are going to have a decent amount of time before you can sop it all up in addition to Barry's point..

And how about acquiring a license in the GSE multi-family landing space?.

Not a bad idea. I mean it's something obviously. It's a business we look at..

The residential mortgage business, what are the target ROEs? And do you expect it to take up the leverage on the balance sheet through the FHLB?.

Yes. Potentially with commensurate returns, it will exceed to book the returns that we have achieved in our lending business. I will say that..

If we achieve securitization, Jade, which is our goal over a long of period of time, our on balance sheet leverage won't actually go up. The securitization will give us term financing off balance sheet..

And it won't be targeted basically, is what Jeff is saying. So that is our intention is to exit the securitization although they won't be as attractive financing as FHLB credit facilities..

In the core lending business, can you talk to the relative attractiveness of structured investments like subordinate debt, mezzanine loans, preferred equity versus originating whole loans or first mortgages and levering those? Which are risk reductions?.

This question has been going on for seven years. We are so much better off making the loan ourselves, right. And the mezzanine in certain asset classes, right now the mezzanine bids are mind boggling. If it's manufactured on the Street and you want to sell a mez, you can find sub-7% guys out there right now and 6.5%.

It's a feeding frenzy again for Street originated debt. But it's okay. We are going to always continue to find the kinds of loans that we need to make. And I guess you call them transitional and we look very hard at the attachment point. Where are we creating the asset if we are wrong? And so far we haven't been wrong. We haven't had a loan go bad.

But yes, I mean the market right now for mezzanines is as tight as we have seen it and there's a lot of offshore money, particularly from Asia, that is buying this paper. And there are managers that are doing this. If it disappears, the gap out on those mezes could be 200 basis point.

If that market may again, if the money is from places like Korea and there's an issue in Korea that could stop instantly. So we are just going to do what we do all the time.

We originate the loan, the whole loan, partner with other guys if we can, sell the A-note, put it on a credit facility and now we have other ways to finance it too, use corporate debt if we have to and just own the whole loan on our balance sheet..

Jade, we talked about this but as you know, we do 60 to 80 page credit memos as if we were underwriting equity. We really prefer to eat our own cooking from a credit perspective regardless of the fact that we are getting significantly more yield and the mez market is a funny one.

I think every year for the last five years post-crisis at some point in the year the spreads widen, the banks lose some money on a trade or two and they stop doing it. And that's an opportunity for us to come back in and then a couple quarters later they jump back in. So they are cyclical. That will always be the case.

We are here for long term and we will do the work for a longer term holder..

I just want to ask about the dividend yield versus peers.

If I assume special servicing is around a third of the LNR segment, do you think it's fair to assume it contributes around 10% or so of total earnings?.

Rina?.

On a net basis? Jade, I am not sure if that's a fair statement..

Let's get back to you on that..

Yes..

Yes..

I think the core question is, if any of the dividend is supported by special servicing revenues? That may speak to why there is a bit of a higher dividend yield for Starwood versus peers..

Well, that's clearly the case and we do make money in the business. And unlike our peers, we are covering our dividend handsomely, I might add. So it goes away. We can not cover our dividend too. That would be fine. They still trade at a lower dividend yield than we do. And they trade with a one turn more leverage than we do. So explain that to me.

And we have other ways to make money if the lending business gets really tough and they don't. So just straight up, it's sort of ridiculous. The way you cover these companies, is insane. But on the other hand, we do know what it does. It creates nice ROE for us. It's a high ROE business. We are working to replace it with other business lines.

As you can see, we are not sitting still. The FHLB thing, we didn't think we would have last year and now we have it. So when we have new businesses. We have another new business that Jeff's trying to convince me to go into and the Board which we will decide if we are going to play in and probably will take our ROE up again.

And it might come with higher leverage though. And we might begin to look a little more like they do. I think they are three or 3.1 times and we are like 2.1, 2.2. So just to give a heads up, yes, you can't explain our dividend yield based on our book and being higher than theirs given the diversity of our businesses.

We are twice the size that they are by market value. They have a bigger loan book. We have other stuff. And we know we are a complicated story. I mean there is a simplicity to that model. But I think we have been doing this for what, seven, eight years and we have embedded gains in our book that they don't have, as we showed you with Ten-X.

I mean to find $60 million you didn't know you had, that's a gain. I guess the investment was something beyond that because there's more cash coming out from that investment. But yes, we scratch our head and we understand the complexity and the fact that servicing book will go down and is declining.

Our tangible right now, Rina, is around $60 million?.

Yes. $66 million at the end of the quarter..

So the intangible has been dropped from the original.

It was probably what, $500 million?.

No. The original was up to $240, $250..

$240? Yes. So we have taken it down fairly aggressively and the size of the intangible and servicing now is the same size as the gain on Ten-X. How's that for maybe a giggle? So even if it was zero, it would be fine. So we think it will go back up as stuff gets transferred into servicing.

But I would say that the frothiness of the lending market has not lead to the kind of fees we might have expected from the rest of the 2007 maturities. But it's fine. I mean it's one of many businesses that we are in..

Thanks. I appreciate it..

Our next question comes from Doug Harter with Credit Suisse. Your line is open..

Thanks.

With the monetization of Ten-X coming up, can you talk about the potential for other monetizations, equity kickers on loans in particular?.

Like I said, we passed on an opportunity really in our Dublin portfolio. I mean we really didn't make these investments to trade them. We made these investments that we decided what we would like to own for 10 years. And by the investment we basically increased the duration of our book.

And also in meeting with the credit agencies, they were supportive of that. And so we have moved into that business. And finally, we have another investment we are looking at right now for the book on the equity side.

But finding deals that meet our criteria, which I think Rina, the book is what, 10.5% billion cash-on-cash yield, is that right?.

That's correct. Yes..

So finding investments like that with that cash yield are not easy to find today given the markets. But we always find something and we have. We found another investment that we are working on. Actually two, one will close in the third quarter and the other one we are still working on.

But I guess the biggest asset on the equity kicker side would be 701 Seventh Avenue which is nearing completion. It's the EDITION Hotel on top and I guess they have retail at the base which is led by --.

NFL Cirque Du Soleil..

NFL is doing NFL experience in the heart of the building which can generate north of five million visitors a year. So the retail is two-thirds leased. There's one remaining space which is the best space, the corner space. I think they did it with Hershey's. They are moving across the street. So this is the corner of --.

47th and 7th..

47th and 7th and it's catty-corner to the tickets booth and half a million people walk by there every day. So I am highly confident he will lease the corner retail and we and the developer don't agree on how valuable this building is. And we have almost no value for this. He thinks it will be worth nine figures to us.

We own close to 20% of the property after the payment of debt. So we will see. I mean if that sells as a trophy property, we will see. But we have been pretty conservative. But we are optimistic he's right. And he swears he's right. So we will see if he's right. So anyway, that's a big number given our share count and we will see.

That one because we are not controlling the sale. He is going to sell it when he wants to sell it and we are not looking to market to our position. We are just going to hold it and we have no value from it, there is no cash flow from it right now. I don't know, the building must be a couple million feet. It's a giant building.

And we have no debt exposure to that asset, by the way. He brought in EB-5 financing and JPMorgan took the senior and we are out of the deal. So the only thing we have left is the equity kicker which is 20% unsubordinate, straight up. It's actually ahead of the other equity players. So it's a pretty valuable position.

And then, as you know, we have been buying assets from the trust and using the fair value purchase option. And so that business has been a good business for us and we continue to mine that base. And there's a lot of assets in it and there are some bigger assets now in it and we will continue to do that. We sold two of them.

There's a bunch more that we have on our books that we think are in the money quite a bit. And so we are just finding new ways to make money for the shareholders..

And then on the Dublin office, you had the nice lease renewal.

What does the lease renewal schedule look like? And is there any other sort of big step-ups that you can expect there?.

That is a really good question that I don't have in front of me..

I don't think there are any other tenants that occupy that much space. That was our largest tenant. There are other tenants that are rolling at higher rents but not that would really move the needle in terms of a cash-on-cash yield and occupancy.

But you are not going to see the uptick on that until probably first quarter of next year because the rent commitment date on the new lease isn't in until December. So you are going to see the current step kind of stay about the same for the next six months..

Right. So you will see a lower cash yield right now and then a much higher cash yield next year. And we should get to you because I don't have it at my fingertips and Rina will get it for you, the lease rollover schedule if you want to see it. I don't actually know what it is..

Thank you..

Our next question comes from Jessica Levi-Ribner with FBR. Your line is open..

Hi guys. This is Tim for Jessica. Thanks for taking my questions. You had touched briefly on the lending pipeline and cited it was robust.

And just wondering if you could potentially size that for us? And given your expectations for increased conduit activity in the back half of the year and other investment, just any directionally how you expect the second half of the year to stack up to the first half of the year in terms of lending?.

I will say one thing, when we deployed the book that we think will deploy in the third quarter, our cash balances will go down. And so it's accretive to put the money out, right? And I don't know the net of the repayments, Jeff and the money going out. I don't know how accretive it is.

But Jeff was just telling me that he thinks the fourth quarter might be bigger than the third quarter. So we have a long line of deals as you know. We don't get to choose when the bar wants to close..

I would say the third quarter paydown to be about the same as the second quarter. And we expect a little pickup in the fourth quarter and then back to around here for the first quarter of next year.

So the pay downs that were elevated as a result of a lot of the 2013 and 2014 construction loans that we successfully made and they are now paying off and we will complete that cycle in the next few months will play out. I will tell you that our normally two page small font pipeline sheet is now over three pages.

Doubling the size of our origination team has meant a lot of stress on the team and long hours but good stress. And if we can bring them in, I am as optimistic about the third and fourth quarter as I have been any time since I have been here in the three years that I have been in this seat.

So we think we built a really great pipeline and we are excited about it. But as always, we will see how many of those fish we can get in the boat. But it feels really good right now..

Great. Thanks. And think I think --.

I would just add one thing. I mean we talk about this all the time, the higher we go, the more risky the asset the more likely we can make a loan and clear the market. On the other hand, as soon as the borrowers fixes the asset, he pays us off. And the duration on those loans is not great. The IRRs are great, but all our profits aren't great.

So we would like to move and our credit facilities reflect this. If it's a transitional asset, we might borrow at 250 over on our credit facility. A more stabilized asset or very stabilized asset, we might borrow at 180 over.

And if we can meet and work towards lowering our funding costs, which we should at our scale, we would be okay if our 11.5% optimal yields drifted to 10%, even to 9.5% if we got three-year duration out of the paper instead of 12 months or 18 months.

So we are really focused on credit quality of the assets and we have lines of scale based on the credit quality of the asset. So I am pushing the team to be more competitive on higher quality assets and take advantage our cheaper funding lines.

And also may possibly take advantage of the unsecured debt markets which are attractive to us and a good way for the company to finance itself, particularly if we want to achieve an investment grade rating someday.

So it's all, everything is tied to everything, but we are not, we size, sometimes as you probably know but it's worth saying because probably I haven't said it in years. We want to write as wide a piece of paper as we can so that, let's say, we are making a loan that's 65% LTV.

If we can write 45 to 65 at 11 or we can write 55 to 65 at 14, we are going to write the wider piece of paper at 11.5. So these are not B-notes. These are not B-pieces. These are not 5% of the capital stack. These are much wider pieces of paper and the market has never given us credit for that, but we don't care. Because I am a shareholder.

I have a lot of money in this company and I want to earn a great return on my capital and reflecting risk and there's no free lunches. So for which we are getting a 14 and we might be doing it on 2% of the capital stack. I mean some of these B-notes are double digit. They are like 17% but it's on your insurance for a stack of paper below you.

And if you are not in the servicing business, you have no offsetting credits for the servicing fees that you are taking of the trust. If there's one loan in that portfolio that goes bust, you are gone depending on which loan and the size of it. But I am talking about in a major securitization of ten assets, one big hiccup and the B-note is now toast.

So that's a nuance that seems to be lost on many people in the market, but we try to write these wide pieces of paper as we can and target the double digit yield on our remaining equity investment in the assets. And we cited to that. We do not try to optimize and lever the piece of paper, which we could do. We could borrow 80%, but we don't do that..

Barry mentioned unsecured. Today we could issue five-year unsecured in the 4% to 4.125% range and eight-year unsecured inside 4.5%. So the market is very open and it will be very accretive to us when we have the right use..

We move towards investment grade, right? And that would be [indiscernible], right? Because then that paper is wide and it keeps coming in and that's the Holy Grail. We win because we have the cheapest cost of funds..

Yes. It's great. Thanks for all that. And then I guess just piggybacking off the last part of that just on the unsecured debt comments. I believe you have a convert that matures in the fourth quarter.

Are you looking to potentially pay that down with additional unsecured debt? Or as of now are you planning to just use liquidity on hand to pay that off?.

Right now liquidity on hand. It could change. It depends on our deployment of capital, right? I mean it can be paid off. As you can see where our bonds are trading, we could pay it off with an unsecured bond issue or we can pay it off with cash.

Correct, Andrew?.

Yes. Correct. I mean obviously, as Jeff said, we are reissuing unsecured today or we could assure unsecured today it would be accretive to the extent we replaced our convertible debt with straight unsecured..

Okay. Great. That's all I got. Thanks guys..

Thanks..

Our final question comes from question Kenneth Bruce of Bank of America. Your line is open..

Thanks. Good morning. You guys know I have been following this company for a long time and I have learned to expect the unexpected, but I am not sure that I was quite thinking non-QM loans.

So I am hoping maybe you could just give us a little sense as to what's so attractive about that market? And why now?.

Yes. Sure. You know, part of it's the funding advantage which makes it uber-attractive for us versus anyone else, but when Starbucks had it, it's a credit play for us..

He's talking about the FHLB loan..

Yes. It's really a credit play. We have a lot of people here, myself included, who have a lot of experience going back through the crisis. These are the type of loans, these 700 plus FICO, 60 LTV loans that did perform extremely well through the crisis. We believe will perform extremely well going forward.

They give us the opportunity to create cash-on-cash return. That's in excess of what we are able to make in any of our commercial books today and certainly with upside to that on the financing side. We have the expertise in-house. This is not our first rodeo in residential. We have looked at all sectors of residential mortgage finance for a long time.

It wasn't until we were able to develop some flow relationships with the best premiere guys that are originating this stuff, people who have been around since before crisis, not new guys in the space by any means, that we feel really confident that we are going to be able to originate really strong loans with extremely low to zero losses and zero losses are a viable scenario for us to think about in that space and at financing levels that are great.

You know, at the end of the day, our goal is to find areas that are underserved by private capital. We think that market still is today. The securitization exit has come back. If the securitization exit goes away, I don't think you will see us balance sheet with warehouse financing or home loan bank financing a massive portfolio of that stuff.

And I don't think this is a greater than 10% equity position in our book over time. It's just something that we are able to take advantage of the opportunity today where other people don't have our funding and maybe don't recognize the ability to leverage as many of these originator relationships as we have..

Right.

So this would be an originate to distribute, the gain on sale model?.

That would be right. We would do gain on sale. I apologize, that is incorrect. What we would be doing is doing financing and keeping the bottom of the financing, not gain on sale. We want to be --.

Just by way of background, obviously we started a homebuilder in the country and I don't know, 30,000 lots or something like that. We were once the largest owner of lots that wasn't tied to a homebuilder. This is the parent Star Capital. And we created Starwood Way Point which is 37,000 houses.

And so I am not sure if anybody has a better view of the residential market than we do. But we still do land deals in California and other places. So we are comfortable with our exposure in the 60s on LTVs on these homes and these markets. And it's again, as Jeff said, it's 10% maybe target and we might adjust that but --.

It might be 2% to 4% this year..

Of our equity. So we are not turning ourselves into a resi REIT, Ken. It's just another way to deploy capital at what, we think are, attractive rates. And as you guys have pointed out and the market obviously is pricing in, we need to find ways to replace the income from the servicer, so it's one of those, right..

Yes. Well I mean from my point of view it's been an area where there's been a lot of inefficiency. There is great return opportunity. I guess I hadn't realized that the securitization market has opened up in a way that kind of makes it maybe something a bit more mainstream than it's been in the past. So that's encouraging to hear.

I guess as you think about it and you are probably quite aware that the residential mortgage finance can kind of tighten things up very quickly if it makes its way into some of the bigger lenders.

And I don't know if you think that that's kind of off the purview of the big banks who really want to be involved in that business which will give you kind of a statutory mandate over and above what they are willing to do in that business..

Steven Ujvary who's running the business for us is sitting here and I think he's probably best equipped to talk about it..

I think that point is kind of spot on.

To sum up Barry and Jeff's comments, it's an opportunity for private capital that are outside of the bank construct and to take advantage of an opportunity where banks haven't really piled in and attracted some of these really high-quality borrowers that since the financial crisis can't qualify for an agency mortgage.

So what you have seen over the past few years is the private mortgage finance, residential mortgage finance contracts fell away after the crisis and it hasn't really been replaced yet outside of borrowers being able to sell loans into Fannie and Freddie. So that's what we are targeting is high-quality borrowers right outside of the agency credit box.

And we have been following the market closely over the past four years. And as Jeff mentioned we are working with the highest quality mortgage originators.

And we think that at 60 LTV in mid-700 FICO scores and we stress the borrowers through the financial crisis we are projecting kind of zero losses and the ability to take advantage of that market where the banks are lending is very attractive..

Right.

Will you have servicers? I assume that you won't pick up servicing in this case or you will have it subserviced?.

That's right. We will have it subserviced..

Okay. And last question, you put a lot of emphasis on the competitive advantage that you have in financing markets which certainly in the primary businesses that you are in has a huge impact on your ability to compete.

Is this an area that, one I guess, what do you think gives you that cost advantage? And secondarily, do you think that there's some natural barriers that will prevent others from replicating your cost structure?.

We are an extremely large counter party to the Street. So across the board, our financing lines, if we need to use Wall Street, are as good as anybody in the space and a lot of people who play in the space simply don't have the gravitas of the 2,200 person organization that our manager employees.

And so that importance and the gravitas of the size of being the largest commercial mortgage REIT, we just tend to get better rates and that is a great thing. We have the Home Loan Bank on top of that and we have expertise in securitization finance here..

But if we can borrow 50 basis points in size of unsecured versus a competitor and we translate it into a 3:1 or 2:1 leverage, you can originate lower and achieve the same returns, right, if that's how you are choosing to finance your paper or your investments. And we kind of target that leverage.

We kind of assign the corporate debt to unencumbered assets and we, in our minds, lever those assets. We are not trying to over lever the book. And I would say that it's fascinating to me and it should be to you, that the equity markets trade at a higher dividend yield than our peers. Our debt is inside of our peers.

So if you think the credit markets are the best analyst of risk and return, they have voted aggressively for the business model we have. And the shareholders have not, right. We have a wider dividend yield than our nearest largest competitor. That's kind of fascinating to me.

So the credit markets are quite happy and the debt and the equity markets are less convinced. And our stock trade is fine. We trade at a reasonable premium to book value, less to fully adjusted book value for the equity investments we have and the embedded gains in our books and probably close to parity, I would say when you take those into account.

And yet we have, I think, a more sustainable business model in the sense that we have more ways to deploy capital to achieve our targeted returns..

Yes. Well, I tend to agree with your assessment of it and can appreciate your frustration. It feels that equity --.

Often times it is frustrating..

Well, it feels like equity markets sometime ignore some of the risk aspects of one business versus the next and focus on other aspects, but that's probably for research report. Thank you for your time this morning. I appreciate it..

Thank you. Do we have one call or are we done? Thanks everyone for your time today. And sorry, Operator. You can go ahead..

I will turn the call back to management for closing remarks. End of Q&A.

Well, again we are going to thank everyone for being with us today and this team stands ready to answer your questions as we always do after the call. Thank you..