Good day and welcome to the Starwood Property Trust fourth quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Zachary Tanenbaum, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning the company released its financial results for the quarter ended December 31, 2014, filed its 10-K with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of the 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. Reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the company's CEO; Rina Paniry, the company's CFO; Jeff DiModica, the company's President; and Cory Olson, the President of LNR. With that, I'm going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. I will begin this morning by reviewing the company's fourth quarter and annual 2014 results, first on a consolidated basis and for each of our two business segments, and then providing a brief discussion of our 2015 earnings guidance. Following my comments, I will turn the call over to Barry, who will discuss current market conditions, the state of our business and the opportunities we see looking forward. Starwood Property Trust continued to deliver strong results for its shareholders in 2014. During the year, we deployed a record $7.4 billion of capital across a variety of assets, including floating rate loans, fixed rate conduit loans, CMBS and equity investments. Of this amount $5.2 billion came from our Lending segment, which represents an increase of 33% over the $3.9 billion deployed by this segment in 2014. For the year, we reported core earnings of $473.7 million or $2.17 per diluted share, an increase over the $352.6 million of core earnings or $2.11 per share we reported in 2013. Turning to the fourth quarter, we deployed $2 billion of capital and reported core earnings of $112.1 million or $0.50 per diluted share. This is down slightly from the $0.55 we reported last quarter, principally as a result of the realized gains of $12.7 million or $0.06 per share that we reported in our third quarter results. Excluding CMBS gains, core earnings were relatively flat, reflecting the consistently strong performance across our platform and particularly our Lending business. As of December 31, book value per diluted share stood at $16.84, reflecting a 1% decline over the book value per share that we reported at the end of last quarter. This decline is principally due to the impact of the in-the-money portion of our converts. As we…

Thank you, Rina. Good morning, everyone. First, I'd like to mention that Andrew Sossen is not with us, because he had a baby boy or more accurately his wife had a baby boy two days ago. So he told me not to come in for the earnings call. But I know you'll join me in congratulating him on his second child. Rina's presentation was quite long and exhaustive itself. So I'll add some fill-in comments. I think, in summary, since end of the year, we had a great year. It was an excellent year. We put out $7 billion all at attractive returns across multiple business lines, everybody rowing in the same direction, very attractive risk adjusted returns, I'd say, incredibly compelling for its shareholders in this low rate environment. Our overall feeling is that rates will stay low longer and we continue operate with that viewpoint, even though we have a free call option on higher rates, as Rina outlined in her earnings, given our floating rate asset base. There are a lot of people who worked really hard this year and I want to thank them on the call. This is a big company now with a big asset base and we are paying out a lot of dividends. When we started this company back in '09, we said that from the pile of cash, we said, we'd build a company that was consistent, predictable, safe, and believe that our yield plus growth. And I think we've delivered that, if you added back the value of the spun company, SWAY, we are the best performing stock in the sector, only the five years and returning over 100% to our shareholders either through dividends or stock price appreciation over the time period. So it's been a very good five…

[Operator Instructions] We'll go first to Dan Altscher with FBR.

Rina, you had mentioned that, I guess in the Lending segment, the exposure to Texas and Houston is relatively small. Maybe this is actually for Corey, as you look through the servicing book, is there maybe an opportunity there to see some defaults across some of those geographies, whether it's Texas or maybe in the Dakotas, that could present a bit of an opportunity?

Yes, it's a great question. Obviously, the CMBS space is constituted of assets and loans that stretch from coast to coast, so it's going to have more geographic diversification to it than would the large floating rate loan book. So I would agree. We'll see probably ultimately some more activity in special servicing coming out of some of the Texas markets and Bakken shale, and in some of the gas markets. We'll see what kind of opportunity that presents to us other than just obviously special servicing related activities, but we do expect to see some modest uptick in loans coming into servicing over the next 18 months associated with those regions.

It's early for you to see problems in the Texas markets. The oil just fell three months ago. So the issue will probably be first felt in these office markets, where it's the number one city for new construction in United States. And my guess is that a lot of those energy companies that are probably taking the space will be reluctant to take as much space, and might try to work a lot of commitments to space. Second place you're seeing is, you will see, and we expect when we did some work on this, we think we have seen in multi-family rents, that might not be 18 months before you see it. And there's been a flat lining, not a collapse. There's been a flat lining in the single-family home business for home prices and demand. I think builders are weary that they might be overbuilding the market. I will point out that's not the case in Texas. If you look at the absorption of multis in Houston, it's gone flat to slightly negative, but Dallas is doing fine. And there is another school of thought that will depend on what side of Houston you're on, because the chemical refinery and petrochemical industry is actually benefiting from widening spreads and boosting their returns. And so the port area of Houston is actually benefiting from the energy crash. Texas have been the number one source of jobs in United States in the entire recovery. There's an amazing stat I had once put up the other morning on CNBC, that all the job growth in United States, all of it, it was from Texas, since the fiscal crash. And the rest of the states combined haven't gotten back to where they were before the crisis. I think its 1.3 million jobs something built in Texas there. And you actually look at those job, they are not all in energy. They are like in servicing, and education, and health and other sectors and as you know they've seen a significant immigration of people jobs. And that's one of the thing going forward, besides relatively better weather than New England and no taxes, which is definitely better than New England.

Barry, just trying to I guess maybe read between some of the lines of your comments around maybe some of the financing flexibility and capital. I mean I guess my take has been you've generally thought of the company as being a relatively low levered vehicle, but it sounds like there might be some opportunity to maybe increase the leverage a little bit more modestly? Is that kind of the right read, as we think about this year?

No. I don't think so. It's interesting as we look at equity investments, there might be 60%, 65% levered to generate very high single-digit, low double-digit cash yields. We're not levering the 85%, which we could and in some opportunity fund to do. We wouldn't do that here at this level we're about. As far as increasing leverage on loans, again it depends on what we're doing. I mean, our A-notes, if you will, that's implied leverage, I wouldn't say we're really changing our strategy there. It's not a topic of conversation here. Jeff, do you agree?

I would agree. Yes, indeed. The markets have given some fantastic financing opportunities, and where the markets stretch, as Barry said in the beginning of the lifecycle of this company. I think we will look to those opportunities to take advantage of them. And the lending markets are very frothy. There is plenty to borrow for us. There is an abundance of capital, and at lower rate spend we thought there would be at this point in the cycle. So opportunistically we've taken advantage of that, but holistically I don't think that's our strategy.

The market seems to be doing what the Fed is wanting them to do, right. The rated classes are getting -- they bobble, but the trend line is for ever decreasing spreads in the rated classes, as banks to turn to put out capital. You saw this morning JPMorgan, I think they gave back a $100 billion in deposits. If you look at their deposits, they are soaring at record high, because their lending is flat, where they have been since beginning of the recession. So they're just sitting on the mountain of cash. And they've got to invest in something. They'll go rated securities, because that's where the Fed regs are, the most beneficials for them. They will not touch the unrated. So anything that has unrated piece in it is where we play, right. And then the job is for us to then widen our capital sack, as fat a piece of the capital sack we can keep and still achieve our returns. And sort of the gig, you can see what's evolving in the markets and it's probably -- and with retention rules as Rina mentioned, it will be very interesting to see how that works out. It's not going to effect, I guess maybe 12 months. So how will the banks change their origination processes, if they have to retain these 5% slugs? I mean, they make big loans -- I was with the head of the [ph] debt for dinner two nights ago, and when we were talking about that, and things are not playing like they used to play, that's good for us. And that's combined with the maturity of this, of the '06 and '07, and we should have a couple of good years of reasonably decent runway.

And maybe just one other one on Europe. Can you maybe just compare and contrast the opportunity there, I guess between geographies and property types? I mean, are some geographies lending themselves to more transitional lending opportunities, whereas maybe some other geographies are better stabilized type of assets, but just maybe sort of lack of financing available?

Well, depends which we're lending against, right. So we did a big loan in an office building in London. That is just being completed. And for lots of reasons, the guy held off leasing and we made the loan, even though the building is substantially unlet. We like our basis. And since we lent in the loan, it's going to be 50% leased and that's probably in three months. So it's really good real estate. So it was no problem. The bank had a trouble with an empty building, so easy for us, and he had an issue with one of his partners, so that created opportunity. He wanted to, whatever, buy him out or whatever and replace the construction loan with more permanent debt. I think so England, Dublin, Ireland, the Nordics, Germany are all green lights. If we can find stuff to do, we do them. Our partner, Jeff Dishner in London is fine, and saying, you lend in the beer countries, and we stay away from the wine countries. So we'll probably say that's the truth. We have been pretty much -- I have put a red line around France. I mean, we don't really make loans in France, I suppose -- it would be. We never know. But it is very tough to be a foreign lender in France, and we'll leave that to the French banks, which are so nice. In Spain and Italy, we had a large thing we were going to do in Spain. The markets there are more wobbly in both countries, not clear if they're going up or down. We haven't really found a need to lend there. There is less capital there. But what we're seeing in Europe is the in-country banks lend in-country. So if we, the capital group…

We'll go next to Charles Nabhan with Wells Fargo.

You've talked about some of the optionality within the LNR specialty servicing business during 2015 before the 2006, 2007 maturities kick-in in the following year. And I was wondering if you could give us some color on some of that the optionality, including the repurchase of bonds at par or collateral at fair value? And what that could mean to the financials this year? And how we should think about that as a variable to your guidance for 2015?

We talked about it as multiples lines of business. It's one of the businesses we decided to look at is whether we should buy assets from the servicer. It's all subject to the fair value guidelines. But I think you're not going to see probably a lot of fall in our earnings. This year we expected, it's okay year, frankly, from the servicer. And next year to the year after an '18, we would expect better years. But I'd let Cory talk to this. Cory, you have any answer, so do you want to comment?

Yes. I think clearly there are some interesting opportunities. Now, when you look at STWD and the size of its balance sheet and P&L, it's all relevant. We've closed three modest sized fair value purchase equity investments for just under $25 million. And net equity deployed in very attractive returns. And I think you'll continue to see us sourcing opportunities out of that book. How much capital could we deploy in a given year, it'd be terrific if we could put out net equity of $50 million to $75 million, maybe a little more, maybe a little less. So we will continue to look at opportunities that come out of that book of business and keep you updated as the year goes by.

Yes. Again, it's not a major line of business for us. So that's what Cory is saying. We have 12 cylinders, it's a 12 cylinder, and we'll have 13 or 14 cylinders, because we're not going to force capital into any one business when there is nothing to do.

What you didn't ask directly is kind of what's going on the servicing book. As Rina alluded to in her script, for the next 12, 16, 18 months, there is again a gradual decline in assets that are in special servicing that's totally expected. I think what Rina was referencing in her comments was the returns that we're getting off of our CMBS book, both the new issue market and legacy CMBS space, plus things like opportunistic equity investing, et cetera, make us fairly confident that the contribution from the segment, the Investing and Servicing segment, will continue to be pretty steady, even though there will be a slight decline in the amount of assets short-term that are in special servicing.

We'll go next to Jade Rahmani with KBW.

I wanted to see if you could discuss volatility in the CMBS market in the fourth quarter? What you think the drivers were and whether this has persisted since yearend? In addition to that, could you comment on whether you saw any diminution in competition in the B-piece space as one of your competitors recently mentioned in its earnings review?

So Cory, I'll start and then have you jump in. As far as volatility goes, as most of you know, I think there are six or so floating rate deals that we're trying to get priced in the end of November and beginning of December last year. Those are both single borrower and multi-asset deals and saw BBB's and BB's widened out from the low-to-high plus-300 range into the mid-to-high 500 range. We bid on four of those six. We knew the assets very well. Through Starwood Capital we had bid on a few of them already, again, back to the scale of our manager helping us, when we look at these deals. Over the course of those, we ended up winning and a couple of them. Put some money to work at very attractive mid-teens yields on a levered basis. Since yearend, we've seen things come back. I think that deals have done better, I think there was a liquidity problem in December, where a lot of hedge funds and others probably had mediocre years, and where they typically play in the bottom of the sack, they had pull back. The Street lost a lot of money in December. AAAs got wider into the low 100s, but are back into the high 80s. So the market has rebounded a decent bit. I think the fall on for us will be that over the coming quarter or quarters, the Street will be a little more reluctant to take down large, single asset positions. And you'll see less of those single asset and multi-borrower floating rate deals come out of them. And that plays right in to us, we're the competition for that and we'll be able to get a little bit of a pricing advantage and hopefully pick up some…

Yes, just to add a little color. In the fourth quarter alone, we underwrote $8 billion in CMBS loans here at LNR. So to Jeff's point, we've got a lot of touches and looks into the marketplace. We're encouraged by our ability to leverage that scale and scope. And one thing we haven't talked about, but we have in the past is, all of these activities create more and better information and an information advantage that we try to glean out of our system. So we are very large underwriting and information gathering machine, which I think assist us greatly as we look at new issue transactions, legacy transactions, et cetera. And as Jeff said, the opportunity now is probably to shape the pools a little bit more, we gapped out in December to maybe mid-15s pre-loss yields, because of a lack of competition and a lot of shops were full up and we took advantage of that, as we kind of get towards the end of the first quarter here. I'd tell you, competition remains robust. There's probably eight players out there. They're pretty active in the BP space and pre-loss yields are maybe closer to 15, now maybe a skosh under that. So it remains a competitive marketplace.

And Jade, we've talked in the past about not just, but pre-loss yields being what we will eventually book, but owning that servicing 10-year though, depending on what discount rate you put on that cash flow. Future cash flow is also significant. So it makes our yield, if it's mid-teens, mid-teens plus. So we do look at it that way.

We'll go next to Steve Laws with Deutsche Bank.

Barry, you covered a lot on the Europe side, both in your prepared remarks and some during the Q&A. But can you maybe just quickly touch on what you expect out of the mix of the portfolio? The last two quarters, roughly 13% of assets; 10%, 11% of capital. Is that a mix we should expect to continue or is that something you think increases over 2015?

Maybe our reorganization will allow us to get that number up. I'd be happy with 25% of the book or even a-third. But I think we'll wait and see. We're working hard on finding new lending opportunities. I think maybe also -- you have a fear in continental Europe of demand disruptions, and so we are less hard to underwrite continental Europe. I'm talking about the developed economies of Germany, France, Italy and Spain, much like our equity strategy has been more in the periphery and U.K. and Ireland. I mean we're not the core malls, we'll never lend against anything, I don't think If it follows the equities strategy that we have, in our eighth fund we were only 5% in Europe. In the ninth fund we're a-third in Europe. And in the tenth fund, which is announced to close in the next week, this week probably, it's running on half-and-half. I don't know whether the lending book will follow that, but I don't have any particular fear of being there, as long as we pick our asset classes and geographies and leverage levels appropriately. I doubt that happens, just because of the girth of organization isn't built that way. And we are always going to say that there's no place like home, where the rule of law is fairly well known. So I'd be happy if it climbed, I don't know if it will climb.

We'll go next to Douglas Harter with Credit Suisse.

[technical difficulty] the challenges on asset yields, but also the better financing. When you put those two together, when you look out, the incremental deals, how do those levered returns compared to kind of what's on the book today?

Shockingly, it's the same around. And Jeff, what was the number?

We've been 11% the last two quarters, which has kept our portfolio yield somewhere around 10.8%. That's not going to last forever. We know the environment is getting harder. As Barry said, we'd rather put more money out in thicker slices. Then as we make those decisions, it will certainly come in. We do write some 8s and 9s. There are awesome opportunities in great real estate with borrowers that we want to do business with, where we will write a levered 8% or 9%. And then there are opportunities sometimes to get a different yield.

I don't think we can do a levered 8%, not in the loan, but we have touched that level or close to it. But it's funny the loan is going to get repaid, it was on a [ph] 4th of July, maybe like a 9%, I think. That's tight. And that it's in our blended returns, which are 10.8%. It's not going to crash, it's just going to drift. And it's done it three times, and we've had the situation three times already in five years. Every time there is a hiccup, the conduit owners flee the market, and they shut it down. And the guys who run the conduit -- and you saw like Credit Suisse just dropped their whole boardage book last time the market tightened. They just let all their whole lending segment go. There is a big change in the market, which is going to be very interesting to see. Some of the most aggressive lenders have been the foreign banks name like Deutsche Bank, and because they're asking them to capitalize the U.S. domestic subsidiaries that could have impact, dramatically, competition in some of our -- I would say they are among the most aggressive lenders and they do what we do, and a lot more of it. So if they change stripes -- and you haven't really seen in the UBS or you see Credit Suisse, they must have capitalized the U.S. domestic subsidiaries differently. But Deutsche Bank has not had a highly, you saw bank's incentive, they're irrelevant right now in our business. But Deutsche Bank is far from irrelevant. They have been very aggressive, and often our competition in transaction, so if they pulled their strips, and which I'm guessing 70-30 they will, that's good for us and good for our sector.

And our pipeline blend is still somewhere close to 11% today and notably in the last six months we really haven't done construction loans, which were very yieldy previously. Not that we wouldn't look at construction loans, but we haven't done any and we've maintained the yield without that. So I think we do see opportunities. And as you said, the financing side is certainly helping drive our ability to maintain our yield.

The pipeline is at 11%, so pretty good. It's always, actually surprising -- as you know we have the Christian Dalzell is running that group now for us. And it's never been easy, though I can pick up [indiscernible] of the street when the 10-year is 199. But you book a lot of ugly girls, or ugly guys, just to keep it ugly. I'm sure that will come out in some replay now.

We will take our last question from Eric Beardsley with Goldman Sachs.

Just a follow-up on the competitive environment, as you were talking about the potential for yields to drift down a little bit. But have you seen any changes in the competitive environment over the last three, four months?

You've seen the banks kind of pull back a little bit. I think there are very few people who play in our space. Who have this scale to be able to land on a size that we lend. So the conduit, 40 people that Barry talked about is true, that is a smaller fixed rate universe. Within the large complex floating rate loans that that take a lot of work to get over the finish line and take a lot of expertise, there's very few people, there's still very few people. So I think the competition will remain the same has remained the same. And I think borrowers recognized the scale of a few people who they can come to, and those are the repeat borrowers who we've been able to continually get business out of. And we expect to be able to do in the near future. So I don't necessarily think that the competition is going to be what drives opportunities. Although, a pullback from the investment banks will certainly create more opportunities.

That will conclude our question-and-answer session. I'd like to turn the call back to Mr. Sternlicht for any additional or closing remarks. End of Q&A

The only thing I'd say is come to the Investor Day on April 2 and meet the team. It's always good to see management, and we have a great team, so I look forward. I'm glad that you called and listened to the call [indiscernible] the call. But thank you all for your continued support and we look forward to talking to you next quarter, or seeing you on April 2. Take care. Thank you.

This does conclude the conference. We thank you for your participation.