Good day, everyone, and welcome to the Starwood Property Trust Third Quarter 2017 Earnings Call. Today’s conference is being recorded. For opening remarks, I will now 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 September 30, 2017, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website.

These documents are available on the Investor Relations section of the company 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 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 Chief Executive Officer; Rina Paniry, the company’s Chief Financial Officer; Jeff DiModica, the company’s President; Andrew Sossen, the company’s Chief Operating Officer; and Adam Behlman, the President of our Real Estate Investing and Servicing segment.

With that, I’m now going to turn the call over to Rina..

Thank you, Zach, and good morning, everyone. This quarter, we reported core earnings of $171 million, or $0.65 per share. This amount includes $35 million, or $0.13 per share from the previously announced sale of a portion of our Ten-X investment, which I will discuss shortly.

We delivered these results despite a slight drag on earning from excess cash that we held to repay our October 2017 converts. We estimate that the impact was just over $0.02 in the quarter. I will begin my discussion this morning with the results of our Lending Segment.

During this quarter, this segment contributed core earnings of $112 million, or $0.43 per share. On the commercial lending side of this segment, we originated $937 million of loans with an 11.3% optimal IRR to spot LIBOR and a 65% LTV.

We funded $1 billion, of which $787 million related to new loans and $187 million related to preexisting loan commitments. Our commercial lending book ended the quarter at $6.8 billion with an LTV of less than 63%. Repayments totaled $951 million for the quarter in line with our expectations.

On the residential side of this segment, we acquired $128 million of non-agency loans this quarter, bringing our total portfolio to $419 million and our net equity to $169 million. The current portfolio has an average 62% LTV and unlevered yields of 5.9%.

Our loan book continues to be positively correlated to rising interest rates with 93% of our commercial portfolio being floating rate. We estimate that a 100 basis point increase in LIBOR would add $0.08 of core earnings annually. Next I will discuss our Property segment.

On September 25, we added a new portfolio to this segment, bringing its total assets to $2.6 billion. The acquisition was part of a sale leaseback transaction, where we acquired $425 million of retail assets and $128 million of distribution centers from the recently merged Bass Pro Cabela’s entity.

The properties were concurrently leased back to Bass Pro and Cabela’s tenants under triple net master leases that carry 25-year terms and built-in rent escalations. The assets were levered with 10-year debt at a blended fixed rate of 4.37%. Because the acquisition closed five days before quarter-end, it has little impact on core earnings.

Jeff and Barry will discuss this portfolio in more detail during their remarks. Overall, the Property segment contributed core earnings of $16 million, or $0.06 per share. This is down $0.01 from last quarter, principally as a result of our 33% interest in a regional mall portfolio, for which we did not recognize core earnings in the quarter.

In our GAAP results, we recorded a $34 million unrealized loss related to this investment. This relates to a reduction in fair value recorded by the fund vehicle that holds the underlying property.

Because the fund is an investment company under GAAP, the asset it holds must follow a mark-to-market accounting model versus the more traditional historical cost model that you typically state when accounting for properties held by REIT and other non-investment companies.

As a result, market movements are reflected in the fund’s P&L and our GAAP earnings reflect our 33% share of that P&L. The markdown recorded by the fund was based on lender appraisal that assumed an as is liquidation of the property. As with our other unrealized mark-to-market adjustment, the markdown was added back to core earnings.

Despite the markdown, these properties continue to generate positive NOI are 91% occupied and have sales per square foot $558. However, the free cash flow is expected to be utilized for CapEx and for principal amortization on their newly extended debt.

We will not be recognizing core earnings related to this investment until operating distributions to the LTVs are resumed. Our GAAP investment, inclusive of the unrealized loss and $16 million of funded capital commitments this quarter is now $110 million, which represents 1% of our total assets and 2% of our equity.

The remainder of the assets in this segment, including our Dublin, Woodstar and medical office portfolios continue to perform very well, generating consistent returns with a blended aggregate cash-on-cash yield of 10.5% and a weighted average occupancy of 94%.

I will now turn to our Investing and Servicing Segment, which contributed core earnings of $94 million, or $0.36 per share. The $0.09 increase from last quarter is primarily due to the sale of 88% of our investment in Ten-X. As you may recall, last quarter, we recorded a $26 million GAAP gain related to the warrants we hold in Ten-X.

This quarter, we recorded a $28 million GAAP gain for the common stock portion of our investment. For core purposes, the entirety of the realized gain, which excludes a 12% equity interest that we retained in the acquiring entity is reflected in the current quarter. The core gain totals $52 million and was offset by income taxes of $18 million.

We also capitalized on opportunities to harvest gains in our CMBS portfolio and in the properties that we acquire from CMBS Trust. During the quarter, we recognized net core gains of $8 million related to these assets.

We also recognized a $14 million positive mark-to-market adjustment in our GAAP P&L related to our CMBS, principally as a result of tightening spreads on our BBs. On the servicing front, we saw lower transfers in the servicing than we saw in each of the last two quarters.

We also saw fewer resolution, which drove this quarter’s decline in servicing fees. During the quarter, we obtained two new servicing assignments on deals totaling $2.1 billion of collateral, bringing our name servicer portfolio to 153 trusts with a balance of $69 billion.

And before leaving this segment, I will say a few words about our conduit, which continues to perform well. This quarter, we securitized $498 million of loans into securitization transactions. We expect to see similar volumes in the fourth quarter. I will conclude with a few brief comments about our recapitalization and fourth quarter dividend.

We ended the quarter with $3.8 billion of undrawn debt capacity, a weighted average debt term of 54 months and a modest debt to undepreciated equity ratio of 1.6 times. If we were to include off balance sheet leverage in the form of A-notes sold, our debt to undepreciated equity ratio would be 2.2 times or 2.1 times, excluding cash.

As our property portfolio continues to become a larger part of our book, we believe that metrics based on undepreciated equity are more meaningful than depreciated GAAP equity and we’ll therefore present them to you on this basis going forward. Our historical called debt-to-equity metric would not have changed using this new approach.

For the fourth quarter, we have declared a $0.48 dividend, which will be paid on January 15 to shareholders of record on December 29. This represents an 8.9% annualized dividend yield on yesterday’s closing share price of $21.46. With that, I’ll turn the call over to Jeff for his comments..

Thanks, Rina. We’ve always ran this company with as much focus on the right-side of our balance sheet as the left, and the capital markets continue to treat us well. We’ve increased our borrowing capacity significantly in 2017 and at lower rates.

We have been able to offset loan spread tightening with cheaper secured and unsecured debt while maintaining on and off balance sheet leverage ratio significantly below our peer group. The five-year unsecured bonds we issued last December traded 3.65 today at 3.65% in line with where many investment-grade companies trade.

Being able to issue unsecured debt inside where others in our space issued convertible bond is a great advantage, and we will continue that rotation of our capital structure towards unsecured debt. As Rina said, we recently paid off our October 2017 convertible bonds of cash.

We expect to continue to term out our liabilities by issuing unsecured fixed rate debt, which is very powerful and would allow us to both unencumber our higher cost asset accretively and bid more competitively on a variety of new debt and equity investments.

Our Lending segment had another strong quarter and our lending book today at $6.8 billion is the largest it has been in our history, up 32%, or $1.7 billion since the first quarter of 2014. Rina mentioned, we had significant loan payments in this quarter. 2014 was our highest volume origination year.

And as those loans payoff, we expect elevated repayments to continue through the first quarter of 2018, giving us ample near-term dry powder to invest. We are confident in our ability to recycle these assets accretively and expect to continue to do so at equal or higher returns.

We will continue to add origination staff to increase lending volumes and take advantage of the opportunity to recycle that capital fully and accretively as we did this quarter. Q4 is shaping up to be our largest loan origination quarter in my three-plus years here with $700 million closed to date and an optimal IRR about 12%.

While base lending spreads have undoubtedly tightened, we have maintained discipline in our lending book. Our loan book today is 82% first mortgages and 42% office, which is up 36% versus 12 months ago.

No MSA in our lending book is over 15%, and less than 1% of our loan book is over 80% LTV, which we believe is more important than the 62.8% LTV of our portfolio overall. Construction lending continues to offer an outsized opportunity for our expertise, our scale, and our capital. We made one construction loan in the quarter for $72 million.

We are extremely discriminating in every loan we make, writing less than 5% of the loans we look at and more so in construction loans.

So despite the opportunity created by HVCRE and the pullback of the traditional lenders, our funded balance of construction loans today as a percentage of our entire loan portfolio is the lowest it’s been since we started the strategy four years ago.

This provides us ample room to grow that book as opportunities present themselves in the coming months and quarters. Switching gears to our residential lending platform, we expect our balance in non-agency loans to be over $500 million by year-end. We plan to securitize the majority of these loans in Q1 of 2018.

Fortunately, non-agency securitization spreads continue to tighten across the debt stack. Based on the strong credit performance of our loans and where deals are getting done today, we expect to earn higher full-term IRRs on these than our pro forma underwriting. We’ve talked before about our preference for experiential retail.

As Rina said, commensurate with Bass Pro’s acquisition of Cabela’s since September, we acquired three industrial and 20 retail locations that will be triple net master leased for 25 years with inflation protected, rent escalation, and a corporate guarantee from Bass Pro.

The combined company produced a stable cash flow through cycles and it’s now more diversified across segments with Bass Pro being bigger in boating and fishing and Cabela’s in hunting and shooting.

Cabela’s also has an exceptionally durable credit card program that accounted for 73% of its operating income in 2016 and will continue to help drive performance of the combined company. We believe the merger makes great strategic sense and expect there to be substantial synergies realized in the combined company.

We are able to purchase these properties at a price we believe is materially lower than where the properties would sell on a one-off basis. And we expect to earn an accretive cash on cash return from day one of this investment that will increase over time.

We financed our investment with 10-year CMBS debt at 48% of costs and expect to earn an accretive cash and cash return of over 11% during that 10-year period. Some of you have never entered the Bass Pro or Cabela’s and it would be surprised to learn that the average customer spends almost three hours in the store from the time they enter.

This is the definition of experiential retail complete with active exhibits, restaurants and an extremely loyal patronage that puts great value on the credit card loyalty program. With this purchase, our own real estate across our property and REIT segment is now over $3 billion.

Additionally, we are in process of closing an accretive multifamily portfolio that will further increase our Property segment in the coming months. Rina just described, the Q3 write-down to our retail JV, an investment that I would note accounts for less than 1% of our assets.

The rest of our property portfolio, which is much more significant in size and contribution has performed extraordinarily well with a cash on cash return of over 10.5% and significant unrealized upside across each property type.

If marked – if we mark those to market today, we conservatively believe that our Dublin office portfolio woodstar multifamily portfolio, medical office portfolio and REIT property portfolio, each have gained similar to or greater than the appraisal driven GAAP write-down we are taking this quarter.

En masse, the Property segment has done exactly what we hoped when we began that diversification process, providing current income, duration, depreciation, and significant portfolio level appreciation.

In addition to the Ten-X gain we took this quarter, we also have two significant equity kickers on our loan book that are carried at zero basis on our financial statements.

I would be remiss not to mention Starwood Mortgage Capital, our CMBS conduit origination business that continues to perform well in an increasingly competitive lending environment. Many of you have noticed a significant CMBS spread tightening we’ve witnessed in the past few weeks and months.

The world is starved for yield and CMBS incorporate credit continue to perform very well. We think we have a pretty good yield story, too. Barry mentioned on this call, years ago, that the Holy Grail for us was to someday become investment grade.

We set a long-term goal to run a diversified real estate finance business of complimentary businesses that outperforms group cycles and seek value across the spectrum of possible investments.

We believe by continuing to add stable equity investments, increasing our unsecured versus secured debt, keeping our leverage significantly lower than our peers and maintaining laser-focus on our liabilities and the credit of our portfolio that we will continue to lower our borrowing costs, which over time will grow our earnings and our company.

We believe we’re well on our way. With that, I’ll turn it over to Barry..

Thank you, Zach. Thank you, Rina. Thank you, Jeff. I think, we had a really solid quarter and obviously, I was fairly bullish last quarter. So you can see the results and you can see just optimism – the team’s optimism on the pipeline going forward.

I was struck as we reviewed the company’s evolution by two really fascinating facts on the loan book, which reached its highest size in the history of the firm this quarter. The LTV of the portfolio was actually fallen over the last three years in 2013, it was 65%, 65.5%, and today it’s 62.8%.

And it’s kind of remarkable, because the dividend yield obviously doesn’t reflect the credit of the portfolio, that’s the loan book. And then you add in the equity book, and if we are an equity REIT, obviously, our dividend would be probably on those assets in the five maybe in sub-5, 4.5. So the stock continues to order extraordinary value.

And I think we’ve successfully diversified into these new business lines to fill the gaps that will evolve over time as the servicing book declines, especially kudos again to Larry Brown’s team in the conduit business. We had an exceptional quarter and continues to – it’s a manufacturing business, they turn their book 11 times a year.

So we have never had experienced the loss in that business and now going on 90 shares. And our resi businesses outperform even our expectation and it’s growing nicely, very nicely. And we said, we’ll need to exceed its return expectations, those were also double-digit on equity. So we expect to grow that business and continue to grow our equity book.

And all rates kind of similar to the rates we were doing three, four, five years ago. We told everybody that, as spreads tightened, our cost of funds borrowings would tighten and we would be able to preserve our yield and it’s nice to do exactly that, 11.4 target yield on the portfolio originated last quarter.

But in the 60s on an LTV basis, it’s just the tax they’re investing. Just to go over how we select assets, you may not know, but we’re the, I think, the largest or second largest market rate apartment owner in the United States.

And we look in the REIT for stable assets with double-digit cash on cash yields, and there are very few real estate assets that can perform like that. And multi-family is the ones we bought the affordable housing portfolio, we call the Wilson portfolio.

But we didn’t expect rapid growth, because the affordable housing that we sold is incredibly stable. And if you recall, we financed it with, I think, at the time 2017 year debt, fixed debt. So and we – the partners here say, we really like to own this forever and we say yes, and so we put it in the REIT.

And we expect since we own it for a long time that the IRR will be low double-digits and attractive for our core investing and our goal of having consistent dividend yields. Also say that our move into Cabela’s into this credit was controversial. But it’s actually, when you think – I didn’t think it was a retail deal.

I thought it was the credit deal and then distressed credit side, because the market has so kicked retail in the face that this investment actually looks totally compelling.

And I don’t really care about the stores or where they are located because we have the full credit support of the parent and Bass Pro as you know was private, Cabela’s was public and Jeff mentioned it’s credit card receivable. Actually they had a bank and the bank was three quarters of their income, and so we lent against the bank.

The bank is now owned basically by Capital One, but they pay hundreds and hundreds and hundreds of millions of dollars to this combined entity in the form of EBITDA receipts or which actually it’s a bigger portion of their EBITDA than they make in their stores. So we lent against the bank, not against the retailer in my view.

And there will be hundreds of millions of dollars of synergy, I won’t even tell you what this companies thought, but the Bass Pro shops which was a successful enterprise bet the ranch on doing this investment and so at our OTC of 40% something, we were super happy and with their credit guarantee.

That bank by the way or they rely as well – it is a private label credit card and Cabela’s issues only 5% of the transactions on that card actually take place in the Cabela’s store.

And the company has an already successfully migrated online, so it’s all those stores would go dark for bid, we still have their corporate guarantee and the credit card business as long as they have an online business would stay intact.

So we actually think now that they can redeem those points and the asset that is we’re growing scale and so does the company. So we thought it was a mispriced credit and we reached up and took advantage of it and I’m really excited about that investment opportunity for our as long live deal that was kicking around for a long time.

And we are not – we don’t really care what happened to same-store sales I might add again, especially with migrating online for them because that’s higher margin business than moving in the stores.

One other thing about hunting is you can’t rifles online, so that part – portion of their business and everything to do with hunting most likely stays in a physical retail store for a long time, as Jeff mentioned, is our three hour visit, so we’re pretty excited about that.

And we’re also excited about our – all of our new businesses and we’re looking at several others in this portfolio that Jeff mentioned another multifamily portfolio that you’ll see announced in the coming weeks.

They are – and then multifamily portfolio, they are all in Florida and concentrated in Orlando, a market we know really, really well and we’ll finance it with a long-term debt and we’ll have a double digit cash and cash yield out of the box, so there will be no need to pro forma diluted yield as we’ll provide that right out of the box with fixed rate debt.

So the other thing is, as Rina mentioned at the top of her comments is that, we didn’t run a very efficient book and we haven’t really for most of the year. We’ve been sitting on a lot of cash and to be benched with the credit markets and we did a big loan refinancing early in the year.

We sat on a ton of cash to payout the convert in October and we hope to run a more optimal book going forward and to continue to look to delever our assets or unencumbered assets and issue unsecured debt which will keep us marching towards an investment grade credit.

What’s fascinating about it is that the debt markets think where it start and the equity market treat us like we’re a junk-bond, so it’s a fascinating situation because our debt has traded great and continues to tighten and tighten and our stock continues to sort of be a puts [ph].

So, trading at almost a 9% dividend yield, so I think it’s a ridiculously compelling investment. If it was – I’ve never understood why the stock didn’t trade at 6% dividend yield given the diversity and where rates are and the amount of money in the market and the lack of yield.

And we’re seeing mezzanines now at 7%, 6.5%, 6%, just pointing down, the yields are going down. So we have a 62% LTV book and we traded at 9%, we figured that out.

The mezzanines are trading frontward, they go from 60% to 70%, 75% LTV and there is 7, because it’s a diversified book with amount of equity investments in the company and we traded at 9 is sort of the preposterous, but anyway it’s a – and then we have the embedded gains in the book which are substantial and we think our management would estimate over $1 a share of gains net of the small unrealized loss we took this quarter in the Tallman portfolio.

So, we’re pretty excited about the coming months.

The team is jazzed up and we’re cooking on cylinders, we continue to be a major force in the market being two times the size of our nearest competitor and we’re ramping up and continue looking aggressively at loans in Europe, much more really trying to build that book up, it basically doesn’t exist today and we’re looking at some investments across that sector.

It’s probably what, 5% of our assets?.

Yes, basically 7%..

7%, so that shaking is heavy, I think it’s 7%. So 7.

But we’d like to get that back up to like 20% and what we’d like to see is that loan book which is 6, 9 or so grow to $10 billion, right and that’s – if we can find these investments, we just got to keep adding people and continue to gain market share and work with the banks which are our friend and partners and competitors in a very competitive market, it’s not exactly a lab out there.

One other thing as we always say, the equity book stretch the duration of our investments and you can see with $900 million of payoffs, it’s awfully nice to have a 30-year book now not rolling over and earning double-digit yield, it’s adds great stability to our income stream. So super happy and with that we’ll take any questions..

[Operator Instructions]. We’ll take our first question from Jade Rahmani with KBW..

Thanks very much.

In terms of risks on the horizon, I wanted to find out if you could share your thoughts on the things you worry about and how you expect the commercial real-estate performance to perform in 2018?.

Yes, so I think I worry about what everybody worries about that the unwind of the stimulus gets a little out of hand when the government starts selling bonds it will raise rates in December. We just worry the economy getting too hot and the rates move too fast to, that’s actually good for us, but I just – it’s not good for general economic activity.

So it will be good for our earnings, we hardly refinance our debt, so we’ll have less payoff which is great. But I think since we’re floating rate, I mean most of our book, people can if spreads come in because barriers are going up because inflations returned and replacement cost arising.

On the margin I guess we’d like to see economic activity and you’re seeing in the country, but so risks on disciplined lending, this foreign capital that showed up as it’s powering most of these mezzanine players to buy debt that are typically Asian sources of capital.

The Chinese are probably backing off a little bit, certainly from the equity markets are backing off completely, but from the debt market, so they’re really committed to a fund, they are in the fund and the sovereigns haven’t shut down there.

Investing you saw recently that think it was CIC, so they are going to put $5 billion into property in the U.S. So, but all of the life companies and they have probably closed their business in the states for a while.

So maybe you’re seeing the tail end of some of that wave of money that blew into the country and started to buy these mezzanines and get spreads we haven’t seen before.

So, lack of discipline, right now you are seeing the market remain fairly disciplined, the government, the federal government continues to look at the banks and look at their books and look at their real-estate loans and outstanding and then those held.

We have seen a few investment banks do equity deals again on their balance sheet and that was a horrible thing last cycle, Morgan Stanley I’ll name bought a casino, fairly a charted bank shouldn’t be buying a casino, they bought a development piece of land – a piece of land in Jersey City, sine that CEO is no longer there I can say that, Atlantic City, sorry.

And that’s to allude to investment bank doing on their balance sheet and borrowing money from the government is zero was pathetic. And we’ve recently seen a few other investment banks get back into the equity business just because they are fairly chartered banks and they are looking for spread.

We don’t want to see that, don’t want to see anything like that and that’s a winning bid, we can’t compete with that, all right? They borrow at the window at nothing and we can’t, so we’d like to see the banks stay banks and not put big real-estate deals on their balance sheets to get the earnings and yields of the trading operations aren’t going so well.

So, I would say that’s a warning, that’s a warning sign, it hasn’t been a flood, it’s been more of a natural trickle, something north of a trickle and that’s been a flood.

And I think that’s a – we’re watching the retail complex, we are – sales, you’ve seen recently, yesterday there was a rumor that General Grocers is going to be bought by Brookfield.

There are – the retail complex is kind of like a bid-ask place today, right? I mean, the people feel the assets, they own assets really affiliated, they’re stable, there’s turnover in tenants.

But the patina of the sector is tough and that we’re grateful that our investment represents 1% of our assets and we’re not accruing any income from the investment right now and won’t for the foreseeable future as we continue to invest in those properties.

But – so it’s not our earnings estimate, it’s not an issue, but it will be like to perform better? Absolutely. Maybe that up 1000%? No that we and net gains in the equity book overall for sure. So I think, the retail space, I mean, nobody knows where equilibrium is.

But there is, I think, it was one of the company, I think, it was GDP that they signed more leases last year than they’ve ever signed last 12 months. So there are tenants. It’s just – there are different tenants and you’ve got the wrong tenant in the mall. It’s not the tenant millennials want.

And so when you put Warby Parker and Bonobos and Box and these other guys in your mall and the kids go and you put unfortunately for them. You put the gap and Millennium Express and those are yesterday’s brand, it’s kind of like post serial. Nobody is buying Special K painting [ph] shopping in the mall.

Our job again is the malls are going to experience and drive traffic. In the old days, the mall owner did not think. He just made it clean and turn the lights on the AC. Now I got to program the mall like you would a concert hall. You’ve got to bring in events and really pull people off of their couches for the experience.

And all the tenants are doing it together. I’d say, that the industries understand that pressure it’s under. And so we’re cognizant of – we’re wondering this is a great opportunity for lending, right? We’re not sure in our cases, so we’re going to be super picky and find our where we think the right risk award places.

We’ve made a management change at our own management company and Bird and Michael Lynch sort of run our retail assets. And he’s managing those assets, and he’s fairly optimistic. But everyone’s under pressure in that space, so there are a few in department stores. The good news is many of our malls we want the department stores to go out.

They pay us nothing. Typically, sometimes we don’t even own the store. Now we do own the store if I pay two or three bucks. So essentially, the land value would be higher as apartments or hotel or an office building and we’re looking at all those JVs for all of our retail assets..

On the retail JV, is there any conservatism baked into the write-down you talked? And what would be the timeframe for the JV to start providing, generating operating earnings again?.

If you ask me, first of all, conservatives, you’re taking no income. So that’s conservative and the appraisal is the appraisal, and I think it’s fine I know, it was done for the recent re-extension of the debt, which I believe is a two-year extension. Honestly, we lost on those investments.

It will be a disaster for me eagle eyes, but nothing for the company. So is that going to happen, you tell me. I mean, I think, these are great assets in great markets. I happen to think the malls are – is a – like a patients that’s at the doctor getting resuscitated, he needs a new – who needs a few new organs.

And – but it’s a healthy body, and it will recover. So they’re well located. They’ve got great parking. Everybody knows where they are. They’ve got great access. There’s going to have to evolve and it’s a cliche doing more of a entertainment environment. So bring people there. But the whole sector, well, Amazon be the only retail up in the United States.

I have a feeling that municipalities will be very bumbling their main streets are completely empty. And they don’t know what to do with all the retail stores in Madison Avenue and Soho and Michigan Avenue.

So if you think people got upset about the Bookstore closing and then did movies about that wait till they take down every single company in America affect them all, don’t worry about them. Think about Main Streets all across the United States, or if you say Wal-Mart, it’s not Wal-Mart. It’s different. This is predatory pricing.

Their ability to use prime, the prime card, and deliver basically below cost wouldn’t be legal in other industries. So, in the old days, if you price aluminum below cost, you got a federal – you have a federal government at your front door. So those companies trades on 100 times EBITDA.

I mean, it’s game over, right? There’s nobody trades on 100 time EBITDA. Though their profits in their AUS business, their cloud business kind of supportive of aggressive move against everybody. On CBS, they delivered subscriptions to your house, you tell me when it ends, I’m not smart enough.

But I have a feeling of somebody’s going to annoyed here at some point. So it has nothing to do with us, I’m way off topic, but you asked, so I answered..

On the special servicing side, can you touch on the outlook for 2018 for special servicing? And also on the surveillance in CMBS 2.0 side, given the retail lows.

Are there any uptick in CMBS 2.0 delinquencies that could potentially provide some – somewhat of an offset to the special servicing run-off?.

I did want to answer, say, one thing I forgot in my comment. We kind of made a decision to keep our CMBS book at roughly $1 billion, or 10% of our overall asset for about four or five years probably. And so we haven’t been – we’ve been cherry picking BPs deals. But I was surprised when I looked at our book today.

I think, it looks like 85% of our book of that is 2.0 today, and it’s not 1.0. So we’re no longer, that business is kind of already done potentially and coming off. And those were good high income paper. We’ve navigated that transition beautifully.

I would say that our – as we look at our budgets for 2018, at this moment in time, we’re in better shape than we were going into 2017.

So we budget what we can and with – and so we are feeling pretty good about 2018 and we’re not – we’re managing the decline in the revenues of the special servicing book if not, we know what we’re going to see pretty much. There’s a lot less vol in the numbers.

And so we have to manage the decline of that business and we’re 100% aware of it and replace it with other things, which is why we start our resi business and doing some other stuff so..

And the 2.0 delinquency is still very, very small, Jade, but that’s not going to be a big revenue driver yet on 2.0 book, get those in the next few years we hope. But I think, it’s too early to be counting our losses at 2.0..

And then on the non-agency residential mortgage originations.

It was this quarter sort of a run rate pace, or you expect that to meaningfully to ramp? And did you say that you’re going to do a CLO in the first quarter of those deals or CMB.S?.

No, what I was mentioning in terms of securitization was the residential business, where we’ve built the portfolio a little over 500 million, so we were doing non-agency residential securitization in the first quarter to turn that out take it off with the warehouse lines.

In terms of the CLO market, which you asked about on the CRE side, you’ve seen a lot of deals get done for people that don’t have our cost of capital, the CLO market is absolutely a place to look at. We finance inside of our competitors on our – on a swap basis or high yield trades in the low LIBOR 200.

And we can’t compete with that on a – in a CLO that’s significantly better than where a lot of our peers are able to borrow in the secured and unsecured market. So I think you’ll see our peers continue to go there. We have been pushing towards doing some more smaller balance loans and ultimately that may be a good exit for that.

So you could see us in the CLO market later in 2018, or early 2019 at some point. But that’s not something that we need to lean on because of our capital both unsecured and secured. So I think you’ll see us stay the course in unencumbered assets..

Thanks for taking the questions..

Thanks, Jade..

[Operator Instructions] We’ll go next to Doug Harter with Credit Suisse..

Thanks.

Can you talk about what the – where your debt is trading where it is? What else you can do to the capital structure? What we should – what the capital structure might look like a year from now?.

Yes.

Listen, we – our warehouse lines in general are LIBOR of 175 to 225, let’s just say, and there’s a few items like?.

There’s not a lot of 175, what would you say to blended spread it on a warehouse find on drawn capital?.

Yes, about 210 – 205, 210 somewhere around there..

So given that on the warehouse lines side, one of the phenomenons we’ve seen is, warehouse lines have come in a lot. Obviously, the banks from a regulatory capital perspective like this business. They get cross lines of multiple assets, and they get a guarantee of some portion of that back from the parent, and these are good lines for the banks.

And from a regulatory capital perspective, they are a strong ROE. So they push the warehouse line business pretty hard, and we’re getting better levels today than we’ve got historically. That said, I think, that’s still a great business for the banks and that we expect them to continue to bring those levels down.

I look at it versus other floating rate assets like cards and auto even on the AA side, and it’s still significantly wide at over 200 basis points for cross with recourse. I think about it versus where I can finance BB CMBS at LIBOR plus 160 for the 60 to 63 size of the capital structure.

These borrowings at LIBOR plus 205 or so are significantly better investments for the bank. So I think, the banks will continue to move those spreads lower, but A-notes haven’t really followed.

So our ability to sell A-notes and get them off balance sheet, it’s still there, and we’re doing it on some portion of our portfolio, but not the majority of our portfolio, which is how we started this business, and that is because the banks are really pushing on the warehouse side as opposed to the A-notes side.

So I don’t know that we will replace the entirety of our warehouse lines of unsecured debt. But I think ultimately, as opposed to going to the A-note market, you’d more likely see us use unsecured. For the higher price lines that we have on warehouse, you’ll likely see us rotate from warehouse into unsecured.

I think, there’s the ability to put $1 billion plus taking that off and accretively or flat move them from secured to unsecured borrowing, and the rating agencies will like that. I think you guys should like that as investors, and that’s something that we will endeavor to do in the short period from now given how well our bonds are trading..

Great. Thank you..

[Operator Instructions] We’ll go next to Jessica Levi-Ribner with B.Riley FBR..

Good morning, guys. Thanks for taking my questions..

Good morning..

Could you talk maybe a little bit about, I know, you’ve touched on the non-agency resi that you’re doing, but what kind of competition you’re seeing there? And maybe if you have market share targets, what you’re thinking for that business in the long-term?.

It’s really good right now for us. And it’s an area that we’re kind of – we’re going to experience team, but for me, it’s a bit of a learning curve, I have to say. So we – I would say, we towed in, and the net equity after the securitization only be like a $150 million probably or even less, it’s becoming unleverage we want to deploy.

We’re going to like we have done in our loan book, real estate loan book, we’re going to make five. We could borrow probably $0.87 on the dollar on those loans, but we’re not going to do that, and that would be like a 17 that you go would look like some of our peers in leverage if we did that.

We’re probably thinking it’s going to be 70% or something like that we took rate at lower, but a very attractive low teens double-digit yield. So I think, we could get to $1 billion of equity in the business. That would be a target maybe 10% of our assets. And hopefully, our assets will be 15 and then it would float up from there.

One of the things that we decided recently as we take our CMBS book up a little from here because of the – we’ve grown and our asset base is bigger, and the $1 billion was at 10% of assets. And we will be okay at something a little north of that. So we’ll take that business up a little bit, be a little more aggressive in the BPs market.

We think actually the BPs is being originated today are pretty high quality. And to Jade Rahmani’s pointed earlier in the call, I mean, a lot of retail is going to kick out of these securitizations, and whether they’re right or wrong, they will be the one to take the risk.

So you’re seeing low LTVs, but very aggressive pricing and very bespoke pool of paper being originated. So we’ll go back in that business, and I think there was a lot of dancing in Miami when we said we were going to increase our investment in the space. But overall, on the resi side, we don’t have a market share target, frankly.

It’s more of the sizing in our own book and not 7.24 on the – 7.42, 7.24,, I’m dyslexic..

7.24 FICO..

FICO Scores. These are good loans, and we are peeling our way. We’re going to do something. We’re going to buy an entity into the REITs, and we’re going to grow these – our origination business ourselves. So that yield is under contract, and we’re going to – so we’re going to take that engine and put it in the REIT.

And we’re going to take advantage of the opportunities as long as it meets our ROE targets. And we don’t think we’re taking too much or even any real credit spread risk..

And we think we finance ourselves better than anybody in that market and financing obviously matters. And so it’s an advantage to us and ultimately, the securitizations business coming back helps a lot. The handful of private equity competitors in that space, it’s not a massive market today.

We think a couple couple of hundred million dollars a month would be an optimistic goal in today’s market absent on your own originator, but it’s a business we look to grow profitably..

Okay, thanks. And then just piggybacking off your comments in terms of BP spine, what kind of yields are you seeing today? And Barry, you said you would be wanting to take it up.

Do you have a percentage of equity like 15%, something like that?.

Something between 10% and 15%. I wonder that Adam talk about the targets..

Okay..

Yes. Yes, spreads, as they are in the top of those stack are tightening. So we are seeing 15-ish shields on the unencumbered, 13s on the verticals and probably the 17, 16 – high 16s, low 17s on the bottom of our securities. So they are in probably about 50 to 100 basis points depending upon which of the originators are having a collateral on the deal..

Okay..

One thing is the risk retention rules haven’t been one of the things that Trump has deregulated. And there’s no sign of him doing that right now, and it has changed the market a lot. They are – smaller conduits are having trouble competing, and the banks are tough.

So it’s a challenging environment today more so than it’s been, but because of the way our business has been structured, the conduit business, they’ve been able to dance around the changes in the market very adeptly. So I wouldn’t expect that would change going forward. So they’re working with these banks, and we can participate in the vertical.

We can do our own horizontal. So mostly those markets move to vertical deals..

Jess, I would also say that deals today have a much lower LTV than certainly pre-crisis are then 2.0, And as LTVs have come down into the high 50s and low 60s, you’ve seen a much better collaterals, which leads to that Adam gives you numbers of 15 – spread between a pre-loss and post-loss expectation and yield is tighter today than it’s ever been historically.

You have more investment-grade loans. So as you expect to lose much, we’re also going to be kick 25% plus out of these deals still that we’re shaping the pool in a way that we want to.

Our post-loss is not far from what it’s always been even though pre-loss deals have tightened in, because we moved to this higher investment-grade collateral with significantly lower LTV. And the CMBS market is – that market is responding to it. AAAs aren’t trading mid-70s for no reason.

They see that as better collateral and it’s bank-dominated collateral, investment-grade dominated collateral and it’s trading very well and bond buyers see that as well..

Okay, great. That’s really helpful color.

One last question for me would be just, I know, that there’s – you’ve had kind of longstanding frustration with how the stock trades on a dividend yield basis, what are you seeing kind of the equity markets don’t get that the debt markets do? Do you think maybe the property portfolios lost in translation? Is it the conduit? How do you guys think about that?.

I’m sorry.

Can you say that again? What was the question?.

The dichotomy between the debt markets and the equity markets? What are the equity markets missing?.

So we’re an ETF, and as most liquid name in our sector, we kind of as a – in our mortgage or yield ETFs, we’re one of the largest players now. We’re number three. So we get whips a lot with people’s expectation where rates are going and when the resi REITs, which don’t have positive converts to the rising interest rates get crushed.

We get sold off with them and it’s a blind trade. It’s just programmatic and it’s has nothing to do with our underlying assets. It was amusing as people thought rates were going up sort of amusing that we were going down with the residential REITs and most of our peers earnings were lot not down with rising rates, the ETFs don’t care.

They just – we’re all on the same bucket, and they just sell us based on our market caps. That’s one issue. I would say, the second issue is, people worried about the servicer that must be in our yield. That is a declining asset base. And we’re well aware of it.

It’s not a secret that the ROE from that business will go away over time and be slightly reduced, but and maybe that explains it. But you can’t account for the differential between us and our nearest competitor Even if the servicer had zero, I guess, we adjusted our divided to not – to that level. We trade where our peer trade.

So they trade it like seven, nine, or something like that, and we trade it eight, night. So take out the earnings and you get the same dividend yield as they do, assuming we have, but we have all this equity assets and we have a totally different book. I mean, we’re appreciating equity assets. We don’t have loans paying off at par.

We have equity assets that are rising in value on the whole fairly significantly producing double-digit cash yield everyday.

I mean, we were talking about the other day, there’s – there are things we can do with our equity purchase as we spun out our single-family forward rate point, I mean, there are ways to recognize value if we have to down the road if we- what we’re doing is, because we want to stretch the ratio to the books.

So the debt markets really value the diversity of our income streams, and they value the quality of – they are looking at the LTVs. They are looking at the scale of the enterprise, the size of the company. And our ability is sort of to produce earnings for multiple cylinders.

We never said that every cylinder was going to be operating firing at the same time, and that’s why you have 12 different businesses, right? You may recall, we were out of the conduit business almost shut in the first quarter of this year, I think, it was, and we did nothing.

And then the team said to me, he wants to make it up the rest of the year the earnings that we had in our budgets. I said you just do with the right pace, do whatever pace you’re comfortable with, but don’t press it, don’t force it. So, we know that these businesses all won’t work perfectly every moment, but the credit markets love that.

Somehow that hasn’t translated into a fixed dividend yield for the stock when – and it’s kind of odd. I mean, you don’t really see this very often in the capital markets, you see the opposite. The debt markets are freaking out. The equity markets think there’s nothing going on, they are just fine. So you see the opposite here.

You see the credit markets loving the story, loving the diversity of the asset base, enjoying the equities, the ability of multis and awfully these office buildings and the equity markets don’t seem to care. So I don’t know, Maybe Zach needs to get better at what he does. He’s sitting in front of me. So I’m smiling as I say that..

[indiscernible] okay..

I don’t know. The asset is nine years, and the company is bigger, better more diversified, and we continue to – so it has to be the income from the servicer. There’s no – I don’t want to go away and sell it and move on and stabilize the company, because we don’t consider that. But we love the business. It gives us optionality. It gives us deal flow.

And we thought rates would rise rapidly. We’d have more bad loans to service. So it hasn’t quite, but that didn’t happen, we are fine. So the Ten-X investment turned out to be something nobody obviously valued, and we made, I think, it’s going to go close to $100 million in proceeds, $60 million, $70 million in proceeds in cash for the company.

So we’re – it’s a long road, we’re okay..

All right. Well, thanks for that..

Ladies and gentlemen, now we’ll conclude our question-and-answer session. I’ll turn the call back to Barry Sternlicht for closing remarks..

Well, everyone, thank you for dialing in and listening to our story, and the team is around to answer any questions. And as you know, our transparency and our desire to partner with you has been the way we’ve started this company from the beginning.

No surprises, and we’re delighted with the team’s performance and look forward to another great quarter. Thank you very much..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect..