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Edited Transcript of STWD earnings conference call or presentation 9-Nov-18 3:00pm GMT

Q3 2018 Starwood Property Trust Inc Earnings Call

GREENWICH Jan 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Starwood Property Trust Inc earnings conference call or presentation Friday, November 9, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Behlman

Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing

* Barry Stuart Sternlicht

Starwood Property Trust, Inc. - Chairman & CEO

* Jeffrey F. DiModica

Starwood Property Trust, Inc. - President & MD

* Rina Paniry

Starwood Property Trust, Inc. - CFO, Treasurer & CAO

* Zachary Tanenbaum

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Conference Call Participants

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* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

* Timothy Paul Hayes

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Starwood Property Trust Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Zach Tanenbaum, Head of Investor Strategy.

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Zachary Tanenbaum, [2]

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Thank you, operator. Good morning, and welcome to Starwood Property Trust Earnings Call. This morning, the company released its financial results for the quarter ended September 30, 2018, 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 they 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 risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. 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 and Chairman; 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.

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [3]

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Thank you, Zach, and good morning, everyone. Our core earnings for the third quarter totaled $148 million or $0.53 per share. This is after a $0.01 loss on extinguishment of debt and $0.01 of GE transaction-related expenses. I will discuss both of these a little later.

I will begin this morning with our largest business, which we have renamed the Commercial and Residential Lending segment.

During the quarter, this segment contributed core earnings of $111 million or $0.40 per share.

On the commercial lending side, we originated $1.1 billion of loans with an average loan size of $138 million. We funded $1.2 billion, of which $1 billion related to new loans and $156 million related to preexisting loan commitments. We received $393 million of repayments and $321 million from the securitization of senior loan interests, which allowed us to optimize yields on certain of our loans.

Our commercial lending book ended the quarter at a record $7.5 billion with an LTV of 62.5%.

Also, in this segment is our nonqualified mortgage, or Non-QM business. As a reminder, these loans are high FICO, low LTV loans that do not qualify for agency financing and therefore carry higher coupons. Our Non-QM loans have an average 64% LTV, 724 FICO and a weighted average coupon of 6.3%.

During the quarter, we completed our first securitization, selling $384 million of these loans, retaining $45 million of subordinate securities and recognizing a core gain of $4 million.

While the transaction qualified as a sale for GAAP purposes, we consolidated the related trust on our balance sheet under the VIE rule.

After the sale and new purchases of $241 million, our Non-QM loan book was $627 million with net equity outstanding of $194 million.

I will now turn to our new segment. As we previously announced, during the quarter, we closed on the acquisition of GE Capital's project finance debt business. This business will be reported in a new segment, which we refer to as the infrastructure lending segment. The $2 billion purchase price included $1.6 billion of loans and investment securities, which we intend to hold to maturity and $320 million that we have current bid for and expect to sell in the near future. 97% of these assets are floating rate and are financed with 4-year floating rate debt, totaling $1.5 billion as of September 30.

Subsequent to quarter-end, we acquired $147 million of additional loans from GE, which was subject to a delayed closing.

Because the transaction closed on September 19, our P&L for the quarter reflects only 12 days of operations. The $6 million GAAP loss that we recognized this quarter was primarily driven by $6.9 million of transaction expenses. $3 million of these expenses related to an unused bridge commitment fee that we expensed for core earnings.

I will now turn to our property segment, which contributed core earnings of $32 million or $0.12 per share.

During the quarter, we acquired the last property in our second affordable housing portfolio in Florida for $33 million.

In connection with the closing, we issued 425,000 OP units. There an additional 1.9 million OP units that we expect to issue in the fourth quarter. These relate to contingent purchase price consideration for certain property tax abatements that have now been realized.

With this last purchase, we now own 59 affordable housing communities, totaling over 15,000 units.

All of the wholly owned assets in the segment continue to perform well, with blended cash on cash yields increasing to 11.4% and weighted average occupancy remaining steady at 98%. The increase in yields from last quarter's 10.9% was mostly driven by changes in Florida property tax law, which provides tax abatements for our affordable housing properties.

As a result of this new legislation, we expect to see an ongoing $6.9 million annual reduction to property taxes in our Woodstar Portfolio.

As a reminder, this portfolio is financed with debt containing an average remaining duration of 12 years at a weighted average fixed rate of 3.8%.

Also contributing to the increase in cash yields this quarter is the renewal of a 50,000 square foot lease in Dublin. This renewal reflects a 37% rent increase and a 14-year remaining term. Occupancy for our Dublin portfolio remains high at 99.7%.

Collectively, the properties in this segment and in our Investing and Servicing Segment totaled $3.5 billion on an undepreciated basis, representing 22% of our total undepreciated assets of $16.2 billion. These assets carry $270 million or $0.98 per share of accumulated depreciation. As we have proven in the past, we are able to sell properties in excess of our purchase price, and we believe there is continued appreciation in our property book. As a result, GAAP book value is not a relevant metric for us.

At a minimum, adding back $270 million to our GAAP book value arrives at purchase price. Any gains on these assets would suggest an add back in excess of this amount.

I will now turn to our Investing and Servicing Segment, which contributed core earnings of $60 million or $0.21 per share to the quarter. We saw higher income levels over last quarter in both our servicer and CMBS portfolio, which was offset by lower income on our conduit. The lower income from our conduit was simply a function of timing as we had one securitization for $224 million slip into October.

During the quarter, we securitized $172 million of loans in 1 transaction.

I will conclude my remarks with a few comments about our capitalization and dividend. We extended our credit capacity during the quarter by $3.2 billion.

For our infrastructure loans, we entered into a new $2.1 billion facility to finance both the funded and unfunded portions of the acquired portfolio. For our commercial loans, we upsized 2 of our lines and added 2 new lines for a total of $1.1 billion.

We ended the quarter with $4.7 billion of undrawn debt capacity and a net debt to undepreciated equity ratio of 2x.

As we discussed with you last quarter, our 2019 convertible notes entered their open redemption period on July 15. During the quarter, we settled $236 million principle of notes with the combination of cash and stock. Total consideration paid to redeem the notes was $266 million, consisting of $21 million in cash and the issuance of 11.2 million shares.

In connection with these redemptions, we recognized a core loss of $2.5 million, representing the proportionate share of the settlement premium paid in cash.

Subsequent to quarter-end, we settled another $28 million principal amount of notes with $5 million cash and the issuance of 1.2 million shares.

For the third quarter, we have declared a $0.48 dividend, which will be paid on January 15 to shareholders of record on December 31. This represents an 8.8% annualized dividend yield on yesterday's closing share price of $21.73.

With that, I'll turn the call over to Jeff for his comments.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [4]

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Thanks, Rina. We're excited about both our financial achievements this quarter and the closing of the GE Energy infrastructure finance business. The infrastructure finance business further diversifies our company giving us another attractive risk-reward cylinder in which to invest our equity capital and following in the footprints of the successful launch of our Residential Lending platform a year ago.

The integration of the infrastructure lending business is going well, and our new team is building a robust pipeline that we expect will deliver low double-digit leverage yields going forward. This new lending vertical is uncorrelated to our other core businesses and gives us even more flexibility to invest our equity into the best available investment across the commercial, residential and now, infrastructure businesses.

As most of you know, the bond markets have apparently put substantially more value on our multicylinder business model than the equity markets have, as reflected in our outside dividend yields. Moody's placed us on watch for upgrade in the quarter, which would provide the potential to lower our borrowing cost through an improved credit rating.

Our last unsecured debt issuance came right on top of investment-grade pricing, but our equity yield simply does not reflect the diversity of our platform. That said, we will continue to strive to build a generational enterprise able to prosper in any market environment.

You will note that our leverage ratios are higher this quarter as a result of the purchase of the energy infrastructure portfolio and the continued growth in our high FICO, low loan-to-value residential book. Our leverage, especially our on-plus-off balance sheet, which adds back structural leverage created by senior mortgage sales is still significantly below our peer group. We intend to continue to run our entity level -- entity leverage below that of our peers despite adding high-quality, higher leverage verticals. We will do this by continuing to take less asset level debt in both our loan book and our equity book.

After settling the bulk of January '19 maturity convertible bonds with shares in the open window this quarter, we have capacity to execute our business plans.

We also have ample unencumbered assets, allowing us the ability to opportunistically create cash, either by issuing more debt or by selling equity assets and thereby, taking some of our large embedded gains and increasing our book value and earnings power going forward.

In our Commercial Lending segment, through 3 quarters, our core bridge funding business has already originated more loans than we did in all of 2017 with similar optimal IRRs and LTVs. We had a few loans we expected to close in Q3 slip into Q4. And we expect to announce a robust Q4 well in excess of this quarter's closing.

We expect to have originated over $6 billion worth of bridge loans by the end of the year, which will be up 50% versus 2017 and almost 100% versus 2016.

Our ability to finance ourselves at the best rates in the market has allowed us to earn the same IRRs we have always earned on similar low risk, low leverage deals, as we have since inception.

We have built a large team in London and have seen an expanded pipeline of opportunities in beer drink in Europe and are adding staff to explore other international opportunities. In many circumstances this year, we have filled mezzanine tranches that are junior to us on larger originations, giving us spread, but keeping us lower in origination LTV and improving the safety of our portfolio.

We have also done a good job this year refinancing deals on our book as spreads have tightened and given our improved borrowing spreads, we've been able to do so without giving up total return.

As for credit, the LTV of our book remained consistent at 62.5% this quarter. Please note that the retail exposure in our loan book is only 2% of our portfolio and will be less than 1% in 2019 when we expect our pari passu 40% loan-to-cost senior loan on the very successful American dream project to pay off.

We continue to make positive progress on our upper West side, New York City condo loan that we discussed last quarter. As part of our recent modification to extend the loan, we were able to negotiate a recourse agreement with the borrower, which should ensure we are fully sold out in 2019. Since the modification, 6 units have already closed or are under contract.

We have focused our financing strategy on lowering our warehouse line costs, issuing unsecured debt well inside our peers and scouring the market for A note partners.

As Rina said, we now have more capacity with more lenders at tighter spreads than ever before. We were prepared to issue a single-asset, single-borrower floater to replace existing warehouse financing on 8 loans in our book, but got an overwhelmingly better financing quote to leave those assets on our warehouse line, so we did. As we have been consistently saying, we expect line pricing to continue to improve significantly from here.

We also executed 2 single-assets, single-borrower deals. One on the hotel portfolio that increased our IRR by 360 basis points to 14.9% and increased our equity out from $75 million to $100 million. And a second deal that allowed us to sell a subordinate mezzanine tranche significantly reducing our LTV without sacrificing yield on our equity. We will continue to look for opportunities in the large season book to do similar financings going forward.

We reengineer every CLO that has been done and may look to execute a transaction in the coming quarter, though we will not report to you like others that our financing cost is the day 1 cost of funds because that would be untrue. As floating rate loans pay off, your borrowing costs inevitably increase, as your cheapest AAA bonds were paid down first. But if timed right, we could possibly print a nonrecourse financing at similar lifetime pricing to our lines today.

As we told you was our plan, our Residential Lending business had its first successful securitization in the quarter, and we intend to continue to securitize our originations consistently in the coming quarters, locking in matched term financing and mid-teens returns on a high FICO, low LTV paper.

S&P gave our Residential platform a higher rating than any nonbank in the country in our inaugural operational assessment this year. We have added multiple counterparties to directly originate more volume at better pricing levels and IRRs. We remain optimistic that we will be able to accretively grow this vertical in the coming quarters and years, which along with our property sales, has combined to offset the historical contributions of our 1.0 special servicer.

Our property portfolio continue to perform exceedingly well. As we told you was our plan, we have sold 3 of the 23 assets in our Bass Pro portfolio at significant gains and expect to sell 4 more assets accretively in the very near future, leaving us with 16 retail assets and an equity investment of approximately $130 million versus the peak equity investment of $294 million and a mid-teens IRR over 300 basis points in excess of our original target.

Rina mentioned the tax abatements that have added significant revenue and equity value to our stable Florida multifamily portfolios, which now account for over half of the very substantial gains in our Property Segment.

We realized $3.5 million annual tax savings on our first multifamily holder loan, which at a 5.25% cap rate results in incremental value of $63 million to this portfolio alone.

Subsequent to quarter-end, we also refinanced our Dublin portfolio at an amazingly low 1.9% fixed rate for 7 years, significantly increasing our cash return.

In REITs, we are proud to have added 11 new servicing assignments in the quarter, which we expect will add significant revenues to our servicer in the years to come. Subsequent to quarter-end, we took advantage of the tighter spreads we've seen postcrisis to tactically trim our CMBS book, leaving it 10% smaller than it has been in years. We think there will be a great opportunity to reinvest in new securities, with the lowest LTVs and the best collateral we've seen since well before the downturn.

In closing, we look forward to seeing many of you at our New York City Investor Day, which is scheduled for December 14.

In addition to keynotes from Jim Grant of Grant's Interest Rate Observer and from Barry, we look forward to the opportunity to walk you through each of our business lines in great detail, and for the first time, give you asset-level valuations on our property book, which continues to perform tremendously well. Please reach out to Zach for more information or to register.

With that, I'll turn the call to Barry.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [5]

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Thank you, Rina. Thank you, Jeff. Good morning, everyone. I want to take a step back and talk about our company in its eighth year, I guess, of its life, maybe ninth. This has become a very big company and I'm really proud of what we've built. I'm excited about the business and I think one of the things that I -- it continues to strike me as odd is, I think shareholders should want to diversify business. And so that's what we've set out to build, a company that can deploy capital in many different businesses successfully. So they never have to force feed capital into one and at lower returns and in my experience, which is now nearly 30 years investing in the property markets, we've always changed geographies, asset classes, positions in the capital stack. As we saw risk and reward changing and that led to a better than 20% return on what's now more than $30 billion of invested capital over Starwood capital's life.

So we're in many businesses. We're in the large loan business, which is our core business and this would be our best year ever. We've, as Jeff said, produced more than -- originated more than $6 billion in loans, and I'm guessing that in investment community, we killed another $3 billion of loans. So we're very picky and we'd rather give away the upside to preserve what we've always said we'd be, which is stable, consistent and predictable.

We have a really fine conduit business, that's mid-market and makes money and consistently made money. It's lost money I think in one quarter, I think it was $0.01, through already 4 credit cycles since we've been public. They had an off quarter and will have a good quarter this quarter. We have a CMBS trading book, which is backed by unparalleled information from our servicer, which allows us to cherry pick buying securities and know when to sell securities, has been a consistent performer for us.

We, obviously, have our special servicer, which has become a bit of a -- I guess, an anathema to the market, but it is a really valuable source of information. And 1.0 is in its tail end, but 2.0 is built and we continue to participate buying additional strips. We started what's become a pretty successful Residential Lending business, knowing that special servicing 1.0 freeze will be tailing away. We completed the securitization we promised we would and our ROEs are higher than our large loan book, credit rating on this loans -- underlying loans was terrific, and we'll continue to build that business and it will contribute, we hope, tens of millions of dollars to our profits.

One thing we have done is take advantage of our special servicing platform and exercise our sale value purchase options, I will get to that in a second. The equity book, our Property Segment is nothing short of spectacular. And we'll talk about it on our Investor Day. The extraordinary embedded gains in our portfolio, and we're trying to figure out, we debate every day, whether we should realize them.

But one thing you can know for sure, we have an 11.4% cash yield -- cash-on-cash yield on our equity deployment, which is nearly 1/4 of the company and in most multifamily we've traded 20x EBITDA and we have an unbelievable portfolio of multi-families with fixed-rate debt at low coupons for more than a decade.

And now we've added the GE infrastructure lending business, which we're really excited to grow, which will be uncorrelated to everything else we do, which is the reason we did it. And while it complicates us, it builds us into a company, you should think of us as nonbank bank, not as a real estate lender per se and we'll continue to do stuff. We bid on and lost the GE health care lending business, that turned out to be a mistake as bank one (sic) [Capital One] bought it. And the volumes originations have doubled what we underwrote.

So we are excited to get into this business and we think it will produce returns consistent with other business lines we have with a totally different correlation.

So I'm super excited about our businesses. I'm super excited about our team. I think we have the best team we've ever fielded across multiple product lines. We've incredible talent in the company, incredibly stable. And Jeff, Andrew, Adam, Zach are best-in-class in their jobs as our originators and our conduit leaders.

I'm super excited about the data we have and the impressing access to that data and the ability to use it to invest capital wisely. I'm really excited that our cost of capital in the debt market, I mean, our capital is approaching investment grade. I'm excited about the global platform that originates deals for us. We originated loans and have a robust pipeline in the U.K. and other markets in Europe. We're going to expand to other regions of the world.

I remain startled by our LTV. I can't believe in year 9 -- 8, 9 whatever this is of our company, we're still in the 60% LTVs on a loan book as large as ours.

And on the underlying risk profile, those loans were selected in our LTV. I'm pretty excited about our ROE as a firm. I'm excited about our risk model. We've never deviated from match funding our deals. We have basically financed -- match financing, and we could find other ways to do this. When you're selling an A note, you never have to worry about getting back the line, the note, you are just exposed for the retain paper. If you use warehouse facility, which many of our peers do, if something goes wrong, you're going to paying off the warehouse line, that is -- you don't see that risk but we do.

I'm really excited about rising rates, which actually help our earnings per share and they create this optionality in our servicer. So as rates go up, they skyrocket, there can be a lot of distress, we're going to make a lot of money and that's unique to our company.

So what am I not excited about? I'm really not excited about our stock price. What I thought would be good for our business is our scale. We still remain I think 1.5x the size by market capital of our nearest competitor. But scale in this business should help your credit statistics, it will help our credit ratings and if we can become investment grade, we have a virtuous cycle to originate paper, tighter spreads, finance cheaper than anyone else and continuing dramatic ROEs, which are tremendously high given the risk we're taking.

And I also feel like, when I look at our stock price, you might look at the uninformed or financially illiterate -- might look at our book value. Our book value is declining. Let's say the books are, but you take the undepreciated book value, that would be significantly higher. I think it is in the financial statement. And then if you do your job, you should look at the value of our equity assets, because you add that, the stock is -- book value is north of $20 a share.

So all of your models, which show embarrassing lack of sophistication do not take into account the fair value or the liquidation of our company. So don't run your models. Look at the business we've created and figure out what we might be worth because this is a business that can take money and generate superior returns on capital and superior risk-adjusted returns on shareholder value.

So I look forward to our Investor Day. Probably like I haven't looked forward to anything in a while. On December 14, we hope you will all join us and bring your friends and retail investors, who'll love our absolutely outrageous dividend. It is hard to grow this enterprise and want to sell stock. And the underlying book value or share value of our asset is as high as it is and the dividend yield is where it is.

The risk profile of this company -- would warrant us 6 dividend yields, not at a 9 or 8, 9 whatever it is.

And we're going to have to figure over time how to position ourselves to capture the online value of the enterprise because if you can give us $1, we'll continue to earn 11%, 12% on that dollar with this risk profile. We outperformed every hedge fund in the United States with our team, more or less, given the risk that we're taking.

So it's an incredible company that we've built, and I'm super proud of our board and our team.

And with that, I'm going to knock it off and go take a drink. Thank you.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [6]

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Operator, we'll turn it to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Doug Harter, Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2]

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I'm trying to tie together, Barry, your comments about the cost of equity capital and the strong origination growth you've seen across your segments. I guess, how do you view your ability to sort of maintain that? And how much liquidity do you have for growth from here? Or at what point would you kind of want to or need to slow down that pace, I don't know, with the current cost of equity capital?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [3]

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Let me -- we have like $4.7 billion of debt capacity. I guess, one of the things that, I think Jeff mentioned, is that we can only sell stuff to generate more additional cash, and you look at our asset base, we got stuff everywhere, in every business, so we can sell a loan. And what you're seeing us do, I think, perhaps I should have mentioned this that it's not -- we're doing the opposite of adverse selection. We're selling our worse assets first and keeping the best assets that we want -- and that was our business plan. And we'll generate mid-teens, probably IRRs overall in that portfolio. As you know, we mentioned last earnings call, the bonds have traded up and they're trading -- it's doing fairly well.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [4]

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The term on it is still at par today. And it was at 91 when we underwrote the project.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [5]

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So it's our job to find anomalies in credit markets. We have one retail exposure to those energy projects, now they're called American Dream. And I think our loan is 40% OTC, and I think we were getting L800 on it?

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [6]

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Little less.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [7]

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Little less. Unlevered, and then we apply corporate debt, we're earning 12, on a 40% LTV. That's our job. We're supposed to find holes in the credit markets to deploy capital with stupid risk-adjusted returns. And we've consistently done that for 9 years. This isn't a rookie outfit. So I'm really happy with our loan book, and I'm really happy with the pipeline and years ago, we made a switch in management, our origination team and we were doing a lot of construction loans, a lot of really large construction loans centered in New York City, and I was having a heartburn. So our quality of book, while we still like that business and think we generate really good -- by definition, we're getting -- if we get the asset back, you're getting at a discount replacement cost. We're cognizant not to overload our book with construction loans, and we're avoiding markets that we consider overbuilt or at risk. And there's a lot of good ones out there, there are a lot of interesting deals to be done. We have to knock more of them down than we do because our construction financing remains difficult to get at this moment in time. Jamie Dimon recently said that, while they talk about deregulation that hasn't yet really impacted the commercial bank. The tone has changed, but the actual regulations haven't and the implications and application, they still have the high-value real estate -- whatever that was called. What was it called?

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [8]

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HVCRE, high volatility commercial real estate.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [9]

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HVCRE, and they still have restrictions. There are other changes coming with Basel IV that will open new opportunities for us as a nonbank lender, where capital requirements are going up for banks, lending in sectors that are requalified globally, and we're super excited about entering some of those businesses, which heretofore, we haven't been able to be competitive in. So I'm super happy about what we're doing right now and I'm just -- it's fun to be the CEO of this group. I mean, we got a good team, and they're rolling in the same direction, and we have stamina. We'll be here. We own a lot of stock, much more than any of our peers, the management team. So I mean, I'm going to do what I think is right for our shareholders, which happens to be for myself. So we are very plugged in here. And as you know, I think unique in our concept, we have bought back stock. As the stock has gotten weaker, we have stepped up and brought in the company and now is the -- this change in the real estate taxes for the multifamily assets or affordable housing, created probably north of $100 million of free value for the shareholders, maybe $150 million. If you don't know what I'm talking about, they have the real estate taxes on affordable housing. We have over 15,000, 18,000?

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [10]

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15,000 units.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [11]

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15,000 units. So around -- that's not me guessing what it's worth. You can take any cap rate you want and 99% fold apartments and that was a gift from one of our shareholders. Does the stock go up? No, it goes down. So it's kind of interesting. We're more complicated but it's worth it. We once bought a bank called Corus in liquidation. They had 111 construction loans. We're not interested in being Corus. I promised one of our shareholders at the beginning of the company when we IPO-ed that we wouldn't overstay our welcome in the sector. We wouldn't compete -- repeat history and wind up being a mortgage lender that went bust. We're not going to do that as long as I can help it and the move into GE lending business is part -- consistent with that, it's not easy, it's not simple, but we're not going out -- way out of market. We're not embarking on some radical new strategy that you can't possibly understand. We'll work with you to educate you on what we're doing and why we're doing it, and then you can decide whether you like it or not, you think the dividend is safe. Our goal would be to grow the dividend someday. But we have a high dividend yield and we would like to grow it. It's possible to do, but we have to really increase our loan volumes. We need capital as we get much over at some point, and that's a little bit of a trick because we really can't do it very easily. We'll have to shut down or sell other securities. We are beginning to sell assets and we're looking at other ways to trim some of our exposure in lines, just to recycle capital now at higher ROEs. So we don't want to talk about it until it's done, but hopefully, we'll get something done in that area in the next couple of months.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [12]

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So, Barry, in addition to selling -- potentially selling equity assets with gains if you wanted to as a CDO equity ratio...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [13]

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Or loans.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [14]

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Or loans, we also have created a tremendous amount of unencumbered assets that support a lot of unsecured debt. We could issue more unsecured debt today to position that. We don't need it for asset-level financing. We can add it on top of the company. And I don't think everybody has that ability. So we have a number of ways to raise capital that aren't going into the equity market. So it's just dividend yield. We could also add leverage to our portfolio, which has been significantly under-levered.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [15]

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And then, on the New York apartment loan, where you took the reserve last quarter. It sounds like there were positive steps there in terms of sales and getting a guarantee. Can you just talk about what it might take to have -- to revisit kind of the reserve or provision you took against that loan?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [16]

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It's Barry. Our breakeven now is the new sales -- excuse me, hold on, my mother is calling. She must know that I'm on this call. So our breakeven on our loan is significantly below what they're selling, even more than 50% -- 40% below what they're selling the units at right now. So we feel we're very comfortable to recover all our capital on that deal plus. So -- oh my gosh, mom.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [17]

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She must be listening.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [18]

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No, she's not listening. My mom's 84. Maybe she has a comment, I should let her on the call.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [19]

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Sorry, Doug. So we do have a recourse agreement. We're excited about that. We will be paid down in a more quick time frame than what we had thought the last 6 months ago, and we have some cushion there, as Barry said. So we hope to not be able to talk -- not to have to talk about that one in the coming quarters.

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Operator [20]

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Our next question comes from Steve Delaney, JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [21]

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A common theme that we saw this quarter for the first time, probably well over year, among the larger U.S. commercial mortgage REITs was a focus on global markets, especially Europe and the U.K. I'm just curious that on some other calls, when questions about that, what we heard was just loan spreads are better there. I'd like to hear your opinion. Is it just a question of loan pricing or your collateral value in terms of higher debt yields lower, current LTVs? Is there also a quality issue at work there that you're seeing in those markets?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [22]

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We're picking up in Europe, several hundred basis points and a swap back to the U.S., which is the first time in a long time that's been the case. And so that's dramatic, right? And your lenders -- local lenders doesn't have that. So we get that plus. So we -- as you know, we hedge everything, so every coupon, every payment. So it's a windfall for U.S. lenders in Europe at the moment, given the shape of the curve. And interesting in other places of the world, it's gone the other way. Asia, for example, but not Australia, which you've seen some of our peers look at. And we're active in -- and the team just got back from -- we've been spending a lot of time in that country. So it's a relatively small market, but a very good one. And I think, our -- we have 55 people in London, and we have a fairly large dedicated lending team in the U.K. We support another small company called Starwood Finance...

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Zachary Tanenbaum, [23]

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European Real Estate Finance.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [24]

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European Real Estate Fund.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [25]

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The listed trust on the British Stock Exchange, and they tend to do -- it's interesting, they do seniors, lower coupons. And it's a small vehicle. I think, it's like a GBP 300 or GBP 400 million, I guess, company. We've shared deals together and we originate loans for both companies. But we have ROEs targets than they do. So it's a -- I do think there are pockets. I mean, if we could -- if you could tolerate and figure out your hedging strategies in Latin America, there's an incredible lending opportunity. But there's too much risk around...

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [26]

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Too much currency.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [27]

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Yes. Well, you can hedge the currency, it's just 600 basis points off the return, or it was, I haven't checked it lately, for Brazil. But in Europe, you have the unique moment in time with the swap.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [28]

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Okay. And we noted the Moody's took your outlook up from stable to positive. Remind me, are you simply -- are you just one notch below BBB- at this time?

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [29]

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So we're hoping to make the move to BB+ in the near future and then the journey begins for getting up to the next grade. But it's more important to us that the bond market participants, the buyers of bonds, trade us like we're an investment-grade than the rating agencies call us investment-grade. And we believe the former has come close to happening and that the latter will happen in time, and they may be dragged along with price. It's going to be hard for them to...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [30]

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It's funny, when I ran Starwood Hotels, we weren't investment-grade and Hilton was, and our bonds traded through Hilton. So -- I mean, the credit markets do a really job of crediting it down. One thing, for example, the rating agencies really like is our equity book. They really like the stability and duration and the cash yields of our portfolio. I mean, this is not exotic stuff. We own multi-families in Orlando, 99% leased. And they'll be 99% leased, barring them falling down forever. They're affordable housing but they're nice. They're newer stuff. And frankly, the deal's so good, which we've done in our equity book.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [31]

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They also like our low leverage, they like our significantly low leverage, they like the diversity of our book. There's a lot that the rating agencies...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [32]

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And we have secured assets. That was key to them. We'd like to move the company more, and we'll look at that more into unsecured debt and away from moving to direct property mortgages, if we can. We'd even give up 8 basis points to do it.

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Operator [33]

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Our next question comes from Rick Shane, JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [34]

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I just wanted to talk a little bit about the infrastructure of the project finance business. On a pro forma basis, what do you think the contribution would have been in the third quarter? And more importantly, as we look at this business, it's got -- you make the point from a fundamental perspective, it's uncorrelated and that makes sense. From a finance -- from a balance sheet perspective, it's a little bit different, it's a little bit lower-yielding, more leveraged. Do you think that the ROEs on this business will be consistent with your core businesses?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [35]

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So the equity check carries like 8% of our market value or something like that. So we think it's all about the future. And I think you may know this, but we're on a third energy infrastructure fund that we do on the equity side of Starwood, on our capital. And it's led by a very smart guy, who helped us underwrite the book. And he's routinely financing these deals and at rates that would more than work for us, and results at producing 30, 40 and 50 IRRs on his infrastructure, especially on the second fund. So we felt very comfortable. There's about, I think, 18 people in that team in our house, and the team we brought from GE is 16 people, I believe?

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [36]

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22.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [37]

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22, there you go. So we've got 6 for free. And anyway, the -- so we combine it, and we can underwrite any energy credit. And we -- the spreads are better -- there's less participants, more idiosyncratic. You're -- actually, they look like real estate deals. Often, those leases in place, they take some or all the power being generated. So that's how we actually got into the energy infrastructure business. It's kind of funny. We did exactly in the mortgage REIT what I did with Starwood Capital Group. Back in '07, '08, when we were losing every deal by a million miles on the equity side on real estate and our funds couldn't compete with out-of-control lenders. We started energy lending business and started to buy to invest in because they looked like real estate deals. We built a cable that connected -- that brought power from Southern New Jersey to Long Island. It was nearly a $1 billion project, while making 7 to 1 on our equity. And then, we laid a cable that connects Manhattan to New Jersey. It's like an extension cord. That was a $1 billion project. One was called Neptune, that won deal of the year, one was called Hudson. So if you look at the deal in Long Island, Long Island tower took all the power for 20 years. The construction loan was investment-grade because it was so little risk. It was 20 years of upwards-only rent reviews basically in the lease payments. And if you finance that at 3 75, oh, you're getting a gift of manna from God. So these loans also have a lot more amortization in them than typically commercial real estate loans. So on the whole, I'd say they're safer and their spreads are wider, and that's why we chose to go into the business. But it is about -- for us, we lagged into the chase. We paid quite a bit for the book, which we're selling down, so reducing our equity in that book because some of these loans are so good, they're like 1 50, 1 75 of our loan, they don't belong in our company right now. So we're selling those loans, we've sold $300 million...

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [38]

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About $350 million...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [39]

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$350 million of loans, and we'll continue to put all the pedal to the metal in the portfolio. And it really is about the future and what we can and we'll start off -- we're feeling pretty good about our pipeline and we'll have the infrastructure team in front of you for the December 14 Investor Day, and you can meet them firsthand.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [40]

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So if I go back to my original question, is the way to think of this a lower ROA, higher leverage in-line ROE business?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [41]

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Yes. Yes, that would be fair. We'll see. I mean, like all cycles, I'm sure that paper gaps out and gaps in. And it might be not lower ROA. It might be similar weighted. The attachment points are similar. We're lower, we're LTV, LTC, if you can interpolate one. And we can lever because the banks, particularly Starwood, what they lend to and with their new facilities, 80% or a little slightly north of that percent of costs because the banks are super comfortable in this space, and they are actually preferred, I guess, or some do, to what they're doing in CRE, or the debt wouldn't be available. So that shows you that it's a good business, and the question really is making sure we can earn returns that are consistent with what we need produce to grow our company.

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Operator [42]

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Our next question comes from Jade Rahmani, KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [43]

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The special servicing rights, I think, are carried at about $40 million at this point, so almost immaterial per share, yet Rialto was sold for $340 million, currently has very minimal special servicing balance, but you could do their funds that they manage as a melting ice cube. So how do you look at the value of the servicer, I guess, relative to the Rialto trade?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [44]

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Funny you asked. We obviously -- you know we have an interest in Situs as well from Tencent...

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [45]

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Ten-X.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [46]

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Actually, we have gains coming in both of those deals and they're not even in the equity book. I always think there was more than significantly more time. But we have been approached to sell bridges in our servicer, and I am the one who's blocked that. Jeff and Rina probably would say, let's sell half or something like that. It turned out it's kind of like this gift that keeps on giving. You continue to find stuff -- it's not my mother calling this time. I'll turn my phone off. You find -- you always find things that you couldn't really predict. And I think it's probably loan litigation on something, maybe you have to really look hard on something. It'd be great. So I just found about it yesterday, actually, I didn't know that. So there's a lot of optionality in these things. And LNR was kind like Rialto, was able to survive and prosper before the financial crisis and then just made a lot more money. And these are clever people. I'm actually in Miami with them, and there are, what, 300 people in this building? And they're here at 8:00 at night doing their jobs. And so there's a lot to do. I can stream Adam Behlman, they kind of won't let him. He could probably make more money for us, but we don't want the CMBS book to be bigger than x percent of our assets. That's probably juggling bananas, but it's about diversification for us. And we don't want to get caught. And so far, if you remember, 3 years ago probably, took a mark-to-market loss on CMBS.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [47]

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Third quarter of '16.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [48]

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'16 when the debt markets capped, we recovered all that and more when they rallied, but it's kind of hard to do, at least not with half of our assets. There's other companies, ladders and super successful and smart guy that do this more regularly than we do. So these are all things we're going to have to figure out, but we only have so much equity capital to deploy, and our job is predictability and consistency.

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Zachary Tanenbaum, [49]

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And Jade, if you think about what both Barry and Jeff said in terms of our credit rating and the focus on trying to get a higher credit rating and potentially to investment-grade over time, I mean, continued ownership of the servicer has been viewed as kind of a very important piece of the puzzle by the rating agencies, kind of having that credit hedge in our business that has ownership of a business that will outperform over the course of the down cycles has been viewed as very important in terms of diversification of cash flows. That's just another reason to keep that business within Starwood Property Trust today.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [50]

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And it's really an investment business. We're really glad that you pointed out, the relative value potentially of that versus others and where we market.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [51]

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Definitely worth more than $40 million, if that was the question.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [52]

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It will make less...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [53]

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He's tough. Sees market as being down. It's going down. I'd say it's going up and that it's gone down.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [54]

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We'll make less for a few years, but we're excited that we'll make more over time, and it's really an investment company for us, and there's so much that we can do with that, with the information that we get out of it. But we're glad there's -- at least the data point now where people can realize just how much more that servicer is worth to us than where we're holding it.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [55]

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Yes. For what it's worth, we ran an NPV analysis and we end up with north of about $200 million of future value.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [56]

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That would be correct, probably, and maybe even more. It's funny. If we were successful, this planned move would be more than the book -- one plan would be more than the book -- the carrying value of the whole enterprise. So I mean, it's kind of nuts out there. And by the way, if you asked me 2 years ago, I didn't know that the thing has existed. Actually, I didn't know it existed a week ago. They don't tell me everything. They like to surprise me. But -- and honestly, I mean, I have no idea what will happen, but it's worth more than $40 million. I wasn't actually including any of that or the interest in Ten-X, Situs, or even our CMBS book. I mean, we think we have latent gains in so many parts of our company. That's why it's kind of fun. But selling stock anywhere here is destroying shareholder value. So we have to figure out how to raise money that we need to operate our business and grow our franchise, which drives our ability to get investment-grade and diversifies our book, while -- you're not going to see us do billion share offerings for this set of businesses now because we're actually diluting your shareholder value. So we know we're not going to do it.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [57]

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The BPs portfolio of $1 billion, is there a significant opportunity to monetize some of those positions and retain the special servicing? I know on some of the new deals you've done, you figured out ways to participate, maybe 25%, but organized to have the special servicing rights. Is that a source of potential liquidity?

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [58]

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Yes, I mean, we've been doing...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [59]

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That's Adam Behlman speaking.

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [60]

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So we've been looking at our book. We've been scaling back on things that -- we were reducing risk in the future. And as we do new deals, we -- if we're putting money into it, we're making sure that we try to lock down servicing in the future as part of the deal. So when we're working with partners or other third parties in this thing, we make a statement that we can control the deals in the future. In addition, we've dramatically picked up our third-party servicing capabilities and have grown our book substantially. If you look at it, it's had a very nice upswing over the past 4 quarters. And it's important to us to expand out beyond just what our original platform looked like.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [61]

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Jade, pre-crisis, as you know, the majority owner of the lowest rated outstanding bond tranche named special service around 1.0. In 3.0, we have the ability to put in the paperwork, the ability to keep ourselves as the special servicer. So we won't be playing chess to try to buy a majority of what is the future control class in a bond. We can focus on doing what we do well, which is bringing in partnerships, analyzing more deals than anybody, doing loan level analysis on every loan and leveraging our servicing by getting as many partnerships as we can and as much third-party servicing as we can. That will pay off in 2021, '22, '23 and beyond. You'll just see a little dip while we're building business for the future.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [62]

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What is the total value of our REO in the book today?

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [63]

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We're down to about $6.5 billion.

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [64]

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$6.5 billion.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [65]

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So I'm just pointing out $40 million valuations. We're servicing, or in REO, announced $6.5 billion, and we're still main servicer on...

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [66]

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Like another $72 billion.

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [67]

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$72 billion.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [68]

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$72 billion. I mean, we're 9 years past as an enterprise. I think, when we started, we would've had that business at zero today, by now. So $72 billion, and we're servicer, this is 1.0.

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [69]

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To the total. We've been bringing the book back up.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [70]

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$6.5 billion of...

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [71]

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Facility REO.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [72]

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So you can imply any fee structure you want. Now we get paid on the resolving...

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [73]

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If you just get a point, which is the minimum we get without taking fees, that's $60 million, and we're carrying it at $40 million. And you have everything in 2.0 and 3.0 and our investment engine and our ability to do partnerships and anything else.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [74]

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We're cheap. I keep telling the same, are you getting the picture?

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [75]

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The active balance declined by about $2 billion in the third quarter, and I think, at a conference recently, C-III said there's just a robust amount of activity. Is there anything outsized in the third quarter to take note of? Or do you expect that pace of runoff to continue?

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [76]

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No, I think it starts and fits and things like that, and you'll see some quarters ought to be bigger than others. I mean, it did -- it's working itself out. There's some bigger deals that got done in the third quarter. I don't think you'll see as much nearly in the fourth quarter. And it'll work itself out over time. There are still a lot of stuff that came in at the maturity, at the end of the maturity wall in 2007. It takes a while for it to get the system. We're...

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [77]

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2017.

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [78]

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Loans that mature in 2017, yes. So there's stuff that's still to be had, and we're going to work it out, and the optimal way to make sure that both our own book and the third-parties that we work with at this point maximize value.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [79]

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But the value really is in the timing of the resolution to the $6 billion. It's going to happen over the next few years. The value is in what falls in out of what we're creating on the back end and how much we can leverage with these smaller purchases that we can make, how much can we leverage the servicing that we can get for future revenue.

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Adam Behlman, Starwood Property Trust, Inc. - President of Real Estate Investing & Servicing [80]

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And you also have to remember that there's a business to be had for actual non -- loans that are not in default there. We have to approve new leases, sales, a whole bunch of other things that get worked through the special services. There's a portion of business that will always have some income based on that.

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [81]

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So Jade, just to point out, we had $2.5 billion of resolution that happened in the quarter, and that's part of why you see the servicing fees tick up this quarter.

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Operator [82]

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Our next question comes from Stephen Laws, Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [83]

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I guess, to follow-up a little bit, Barry, and you provided a good bit of comments on this, I think, already, but how do you think about the mix shifting as we go forward? Obviously, you've got 2 new business lines, I guess, relatively new, or new with the infrastructure, relatively new with the non-QM residential. As you're thinking about capital allocation and even reallocating capital, as you mentioned, about potentially harvesting some embedded value gains, how do you think about the mix shifting over the next 12 months or so? Or which lines do you think provide the most growth opportunity here as you look forward?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [84]

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I'd love to double our residential lending business. It's really high-quality and low risk. Obviously, it's millions of loans, there's plenty of little stuff. And the ROEs are better than the lending book. Our large loan real -- commercial real estate lending book. So considerably better. So if we could, doubling that, that would be awesome. I think, also, the -- we're still on a hunt for equity deals, but it's hard to find. When we buy assets, we pretty much take the view, do I want to own -- do I personally want to own it for 20 years? And to find assets like that, that have double-digit cash yields with fixed debt, they're not float -- they're not GIPS by floating rate debt, which is 99.9% of opportunities for what including ours did. These are fixed rate debt in place, 17, now 14 years on the first portfolio at 3.7% or something like that, right?

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [85]

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3.8%, yes.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [86]

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Really, I mean, I've been telling Rina is the debt an asset. And the other one is even lower than coupon, 3.5% or something.

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Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer & CAO [87]

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Yes. The big ones.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [88]

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Big ones. So anyway, the -- so we'd like to do it. It's hard to do. I mean, how do you that? So they were -- one of those loans came from one of the deals. The one we issued stock for came from an issuer, head of originations of the mortgage book. So it was off market and they came to us for a loan, and we wound up buying the thing. So I don't -- I think -- we'd love to double our loan book, our large loan -- we keep adding originators, probably have to add half a dozen more, but we will be at a point where we would need more money because there are ways -- when we can see them. Optimal yields are probably 11.5%, 12%, something like that. So that's good. And rates go up, we -- it gets -- it all gets better. We made our targeted returns more easily. So -- and we're one of the few people cheering for 3.5% 10-year and at least 2 more fed raises. So go, Powell.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [89]

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As you think of what it takes to recreate a portfolio like we have, which is the unicorn today, you need to buy -- what we did buy was 6 to 8 cap assets that were good long-term hold assets and be able to finance them. Between 1.9 is our lowest fixed rate for 7 years going forward on Dublin, and probably close to 4% on the worst. To finance a 6 to 8 cap at 3 or -- or in the 3s gets you a 10-plus cash return. It's very difficult to get that financing today given the curve flattening and the increase in rates, and cap rates haven't really moved up that much. So it would be great to add to it. It's just a difficult thing to add, unless you're willing to live off of your IRR rather than your cash return, which is something we've always said we're not going to do, we're not going to drink our blood by paying other dividends that we haven't yet earned.

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Operator [90]

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Our final question comes from Tim Hayes, B. Riley FBR.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [91]

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I'll just leave it at one. And just curious, how much of your current real estate portfolio you believe falls within designated opportunity zones? And how you intend to approach that opportunity?

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [92]

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Probably not much. And we haven't -- I don't know the answer to that because in order to get value from opportunities, then you have to build, you have to add significant improvements. Our -- obviously, our Dublin portfolio isn't qualified. And the multis, some of them may be there, but we couldn't put in capital that makes it worthwhile for -- unless you tore it down. There is like -- we have odds and subs though that might be in zones. We'll have to check. It's going to be an interesting business. As a lender, it's going to be particularly tricky because anytime you change tax codes, you create massive distortions in markets. And the capital going into opportunities could overwhelm both the demand. And you won't know because everyone's building the department right next to each other in the entire zone and all open the same time and all being done for tax deferral, not for the economics of the deal. So it's going to be fascinating, right? I mean, it's going to be interesting to see how this plays out. And to some extent, land values will quickly rise, so basically taking into account the deferral you're going to get, and then you have the economics. I'm just worried that everybody thinks they're going to get a fixed return on cost on new multi deals and it's going to be a 4 because there's just going to be too many of them. Everyone racing to -- do the same thing. You must build and you have to do it in a certain time, and money has to be committed. The gain has to be realized and committed and in place. And you have to go, go, go. So go, go, gadget. You could see some of this stuff like, really, they build, without demand in place or a balanced community. So I don't even know -- I don't know anything about the infrastructure of these -- what are supposedly blighted, and many are not. As you may know, all of downtown Portland's within an opportunity zone. That is not a blighted district. So there was a lot of political giftsmanship that went around designation, and only in Washington would they say that this helped the poor. It didn't really in many instances.

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Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [93]

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Operator, I think that's the end.

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Operator [94]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Barry Sternlicht for closing remarks.

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Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [95]

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Well, thank God the call is over because I'm exhausted, and I hope I wasn't too difficult on my friends in the analyst community, but I really would love you to dig under the table and look at this company in detail and compare it to its peers in the comp set because it's not a mono-line company, but that's our strength, not our weakness. And I'm aware of things like Vornado going into cold storage and Toys "R" Us and JCPenney. It's not what we're doing here. We're actually just building other product lines where we can deploy capital in the most lowest -- highest returns for the lowest amount of risk. So thank you, and I hope you all have a great weekend. Thank you.

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Operator [96]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.