Q3 2019 Earnings Call
Greetings and welcome to the Starwood property Trust third quarter 2019 earnings call.
This time all participants are in listen only mode. A question and answer session. Most all of the formal presentation.
Sure and you want to require greater assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Zach Tanenbaum director of Investor Relations you may begin.
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 Thirtyth 2019.
<unk> Form 10-Q with Securities and Exchange Commission and posted its or any supplemented with website. These documents are available in the Investor Relations section of the company's website at Www Dot Starwood property Trust Dot com before the call begins I would like to remind everyone that certain statements made in the course of this call or not based on historical information and may constitute forward <unk>.
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 could differ materially from those described in the forward looking statements.
I refer you to the company's filings made with the FCC for a more detailed discussion of the written factors that could cause <unk> actual results could differ materially from those expressed or implied and any forward looking statements made today.
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 I presentation. As 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 measure.
For his prepared in accordance with gap can be accessed through our filings with the FCC at Www Dot FTC dotcom.
Joining me on the call today are Barry Sternlicht, the company's chairman and Chief Executive Officer, Jeff Demotic other companies President Rina Paniry, the company's Chief Financial Officer, and Andrew Sossen, The company's Chief operating officer with that I'm now going to turn the call over to arena.
Thank you back and good morning, everyone. This quarter once again demonstrated the strength of our multi cylinder platform with each component of our business working together to deliver strong earnings performance.
Collectively we generated core earnings of 153 million or 52 cents per share.
Our performance was led by our largest segment the commercial and residential lending segment, which contributed core earnings of $109 million to the quarter.
On the commercial lending side, we originated 1.2 billion along with an average loan size of 138 million all of which were first mortgages.
During the quarter, we received 745 million from loan repayments.
These repayments carried fewer prepayment penalties that last quarter, which accounted for much of the decline in interest income this quarter.
Cash inflows were offset by fundings of 351 million on new long and 276 million I pre existing loan commitment.
Our commercial loan portfolio ended the quarter at $7.9 billion with a weighted average LTV I've just under 65%.
We continue to finance this portfolio with both on and off balance sheet leverage as a reminder, off balance sheet leverage Atlanta form of and outsold is nonrecourse not funded and is not cross collateralized against our retained bone interest.
Our commercial lending docket off balance sheet leverage a $3.1 billion at quarter end.
If you assumed refinanced all of this on balance sheet, the aggregate balance of our loan portfolio would be $11 billion.
On the residential lending side, we continued our expansion of this doesn't that by purchasing $618 million of non QM loans, and completing our fourth and larger certain securitization for 546 million.
This brought our residential loan portfolio to 1.2 billion at the end of the corridor.
In order to optimize current returns on this business and better utilize our low financing costs, we decided to hold a portion of these long to maturity.
In doing so we classified $479 million as long as held for investment this quarter.
The remaining balance continues to be held for sale and intended for future securitization.
I will now turn to our infrastructure lending segment, which contributed core earnings of $3 million to the quarter.
This includes a 2 million dollar loss on extinguishment of debt, resulting from the sale and repayment of loans that we acquired from GE.
As you know our strategy of bend to sell the lower margin loans in this buck and redeploy the capital into higher yielding loans.
As we execute on this strategy, we sold 47 million of the GE losses, this quarter and have $164 million left to sell.
We also received repayments of 237 million, bringing the balance of the acquired portfolio to $1.1 billion from $2 billion.
The remaining 446 million of infrastructure loans on our balance sheet were acquired post acquisition.
As we work to deploy capital into this segment, we have increased our borrowing capacity into longer term facilities with lower borrowing costs.
In July we closed the new 500 million dollar facility with a coupon of L 200.
A five year revolving term and a term out that extends to the eight your life of the facility.
Subsequent to quarter end, we completed another 500 million dollar five your debt facility at our lowest coupon to date of L 175.
Next I will discuss our property segment, which contributed core earnings of 29 million to the quarter.
All of the wholly owned assets in that segment continue to perform well with blended cash yield up 13% this quarter and weighted average occupancy remained steady at 97%.
We expect our yields to increase next quarter as a result of accreted financings that we completed after quarter end.
In October we refinanced our medical office portfolio with five year floating rate that.
Using proceeds from the unwind of our head on the existing debt, we swapped the interest to a fixed rate of 3.3%.
We also plan to close today 60 or supplemental financing for one of our multifamily portfolio. In total we took out 180 million and gross debt proceeds.
Pro forma for these financings the wholly owned assets in this segment are financed with debt campaigning in average remaining duration of eight years at a weighted average fixed rate of 3.4%.
As of quarter end these properties along with those in our investing in servicing segment carried accumulated depreciation of $366 million or $1.30 per share.
As we've said in the path. We believe these assets have appreciated meaningfully since we acquired them and the appreciation is not reflected in our GAAP book value.
At a minimum adding back 366 million to our GAAP book value what arrive at her purchase price for these assets.
The gains that we believe existing this portfolio would be an incremental increase to undepreciated book value.
I will now turn to our investing in servicing segment, which contributed core earnings of $64 million to the quarter.
This business continues to use its various cylinder to produce and attractive return.
And our conduit, we securitized or priced 479 million of loans in three transactions this quarter and our servicer. We continued to add CMBS 2.0, and 3.0 deals tour named portfolio.
Quarter end, we were named service or on 180 trust with an unpaid principal balance of $89 billion of which 95% now represents 2.0 and 3.0 deal.
And finally on the segments property portfolio, we continue to harvest gains as these assets reached stabilization.
During the quarter, we sold one property with the cost basis of $38 million for core gain of $9 million, which is net of a $4 million non controlling interest as a reminder, our GAAP gain on these assets differs from our core gain primarily due to accumulated depreciation which we include in our GAAP the core reconciliation.
This portfolio ended the quarter with an underappreciated balance of 337 million across 20 investment.
And now turning to our capitalization and dividend.
During the quarter, we made significant enhancements to the right side of our balance sheet further reducing our reliance on repo lines and exposure to margin call Braskem in August we issued our first theory, CLL, which provided 936 million of non recourse term matched financing for 21 of our existing loans totaling 1.1 billion dollar.
Yes.
The structure has a day one spread of 134 basis points over LIBOR, they want to advance rate of 85.1% and a reinvestment feature which allows us to maintain this advance rate for at least two years.
In July we completed our 400 million dollar seven year term loan b, which priced at all to 50, that's been replaced our 300 million term on ebay, which we repaid this quarter.
The transaction increased our liquidity extended the tenor of or financing, an unencumbered $486 million of our assets.
Concurrent with the term loan we entered into a 100 million dollar five year revolving credit facility to replace our current revolver.
We ended the quarter with a record $8.5 billion of Undrawn debt capacity and an adjusted debt to Undepreciated equity ratio of 1.9 time.
As for our dividend for the fourth quarter of 2019, we have declared a 48 cents per share dividend, which will be paid on January 15th to shareholders of record on December 30, Onest. This represents a 7.9% annualized dividend yield on yesterdays closing share price of $24.21.
And finally I would like to conclude my remarks with a few comments about the new accounting standard on current expected credit losses are Cecil as you've probably heard silver places todays incurred loss model with an expected loss model for determining the allowance for loan loss under GAAP.
The standards effective for us on January 1st and applies to both our theory long as well as our infrastructure along it does not apply to any other loans or securities that we report at fair value.
For our theory and infrastructure loans, we will not only have to record and allowance on the current funded balance of these bonds, but we will also have to record a reserve against our unfunded commitment the adjustment will go against equity at the date of implementation and we'll thereafter be reflected in GAAP earnings.
Consistent with our current policy core earnings will not include the allowance we will provide you with a more detailed update on the status of our implementation efforts next quarter.
With that I'll turn the call over to Jeff for his comments.
Thanks Rina.
Very fundamentals in loan demand remained strong Morgan Stanley wrote last week that private real estate funds have $334 billion of dry powder compared to 205 billion in 2014.
Institutional allocations to real estate continue to rise.
Transaction volumes have remained elevated the last five years and after a strong September United States. The only gten country, where volumes are up, albeit slightly year over year led by major markets, which is where the bulk of our loan portfolio has always been located.
Dry powder and transaction volume combined with lower interest rates led to significant loan origination activity.
And with improved cap rate and property prices, increasing 6.7% year over year or existing property in loan portfolios continue to perform very well.
With that robust backdrop as rina alluded to our internal valuation of our own property portfolio was up over $120 million from last quarter and now has a fair value in excess of $800 million over our underappreciated carrying value more than half of which is in our 15000 unit, Florida multifamily portfolio, which has performed.
Far in excess of our underwriting assumptions.
Strengthening theory markets have made it difficult add core stabilized properties with double digit Kashi up to our property segment.
Our $3 billion of wholly owned properties are earning a current yield of 13% today and as Rina mentioned this will increase significantly as a result with the successful refinancing of our medical office portfolio last week, and the pending upside or debt on our high performing Florida multifamily today.
We will continue to model the earning power holding these gains across our property portfolio versus realizing them and reinvesting incremental proceeds.
Keep you up to date on any changes in our plan going forward.
We deployed $2.5 billion in capital this quarter led by another strong performance in our core see our lending business, which deployed $1.2 billion and we expect a significantly stronger fourth quarter.
We continue to see great opportunity internationally, where we wrote three new loans for $554 million in the quarter with a 7% Unlevered return and a levered return inline with our current yield targets.
Our portfolio continues to benefit from LIBOR floors.
On loans originated when LIBOR was well above 2%.
84% of our loans of LIBOR floors, our weighted average for its 136 basis points and 25% of our floors are in the money today.
You'll see in the supplemental deck that has posted to our web site. The counterintuitive result of our existing LIBOR floors is that our earnings will increase in our primary primarily floating rate loan book with either increase or a decrease in LIBOR and we will actually earn more in a decrease in LIBOR that an increase.
Our commercial lending portfolio continues to perform very well also with no downgrades in the quarter and a slight improvement in our overall portfolio risk rating to 2.62 on a five point scale.
With all that we work headlines the last few months I want to take a moment to talk about the loan. We made on 424 fifth Avenue, the old Lord and Taylor site, which comprises 95% of that we work exposure in our lending portfolio.
We own a $229 million above 500 million dollar first mortgage loan and we own the entire 150 million senior mezzanine loan.
There is a $250 million junior mezzanine loan subordinated to us as well as $387 million of equity.
We're very comfortable with our last dollar fully funded loan basis of 51% loan to cost on what will be a finished trophy Midtown building with a 15 year corporate guarantee from we work.
As Rina said, our non QM residential lending business acquired $618 million of loans during the quarter and completed its fourth largest securitization today locking in the lowest cost of funds we realize today.
This high quality portfolio as an average FICO was 720 and 65% LTV.
We expect to continue to increase the scale of this business in the coming quarters.
Finally, only 3.1% of our loan portfolio is dead dedicated retail assets and our portion of the senior loan on the American Dream represents more than half of its exposure.
Most of you have read that the theme park opened in October and the retail, which is which has exceeded our underwritten leasing estimates is scheduled to open in March based on our conservative leverage position on the capital stack that 36% loan to cost the continued leasing momentum at the project and the pledge of interest and other assets of the borrower.
Sure we can do to feel very comfortable with this loan.
[noise], our energy infrastructure lending business Theyve started the year slowly and cautiously following the equity selloff in spread widening in December .
The bulk of the first half of the year focused on selling down that lower yielding assets, we acquired in the GE purchase and setting up financing on as Rina mentioned, we've closed to new 500 million dollar five year financing facilities at sequentially tighter spreads, giving us ample financing to execute our business plan into 2020.
With these financings in place we have a robust pipeline of well over $500 million in loans for Q4 at a blended iron ore that it's very accretive to our overall return threshold.
As a result of the 1.1 billion dollar theory, CLL, we talked about last quarter, which price at the tightest financing levels and best structure of any deal done post crisis as well as a note sales. We have made this year almost 60% of the financing for our commercial real estate lending segment is now off balance sheet.
Our on balance sheet leverage drops during the quarter as a result of those back to just 1.9 times and our leverage including off balance sheet is still a modest 2.9 times today, despite having high quality higher leverage businesses like non QM and energy infrastructure lending on our balance sheet.
We will continue to conservatively lever our business looking for lending and equity investments that do not require outside financial leverage to meet our return threshold.
Reducing our on balance sheet that leaves us today with a record $8.3 billion of financing line capacity across our businesses and the ability to scour the market for the most optimal form of financing for every asset without pushing on leverage or structure.
Finally, we've looked at investing in investment grade Sotheby's CMBS single borrower CMBS and in CLL, but have chosen not to allocate capital up. This strategy rates are low spreads are very tight this.
Spreads are at very tight historic level bid offer spreads can vacillate and it requires multiple turns of spread mark repo leverage to achieve returns significantly above what we get by risk grossly paying down our bank lines, we instead benefit from having multiple businesses, allowing us to invest our available capital into loans in assets we source.
And underwrite ourselves.
That I will turn to bear thanks, Jeff. Thanks, Rina good morning, everyone.
I can make my comments short.
I say that and always thought too long.
But.
This morning, I'm going to do that.
The overall environment is is interesting.
Out there the property markets continue to have great strength, both in the United States and in Europe , particularly the office industrial and multifamily markets, where we've seen accelerating rent growth across our own portfolio. It in our equity books outside of the reef.
The two asset classes, there remain somewhat challenged or retail and the hotel stays.
Hotels.
Primarily because of over building more than.
A lack of demand.
And.
Supply in multifamily actually remains fairly.
Handle mobile or benign I wouldn't say, it's totally benign, but there's more net absorption in every market.
And then there is construction saved in northeast there are pockets of problems New York City high in retail residential as you know.
The West Coast, San Francisco, and we are worried increasingly nervous about the impact of.
A democratic victory and raising rates on.
Tax rates on the wealthy in cities like San Francisco, and like New York, which would cause an exodus of wealth and the relying.
Ultimately the burden of carrying the social services of these blue States will fall in ever shrinking population it will be a negative cycle reinforcing cycle, it's beginning to impact our lending thoughts because we you really want to be longer.
Extensive building at a low cap rate in New York City of.
Tenants like JP Morgan decide to.
Top.
Uptown and you're seeing that reflected in the lack of.
Strength of their housing markets in and around New York City in particular, and then all the Blue states with the removal of the deductions of taxes, but I think we can all assume that the with the Democratic victory. There is no chance taxes aren't going up on the rich.
Some capacity.
So what you're seeing also is tremendous volatility in interest rates much more civilized couple of years two days ago. The tenure was 160 something in this morning is close to closing on too.
It doesn't really impact us at all but it is interesting to see the uncertainty in the markets.
The melt up of the stock market I would just concluding our.
The conference is on our equity funds Tonight.
Referenced the beyond Me chart, where segment earned 20% off its IPO and now it's down by two thirds from its IPO just because the market is rising don't mean, they have to stay in that position clearly equity markets are ignoring the prospects over.
Our left victory.
At the moment and at some point in the next 12 months they may reassess that depending on what happens in political arena.
So staying closer to us I mean, we're very comfortable that our loans are ltvs will probably drop on assets that were lending to because of the rising rents across pretty much the country in most major office markets.
Also.
If the economy weakens rates will say low and I think there driven right now more off of European condition than they are up to us condition and in Europe .
Germany is probably focused on some fiscal stimulus to raise their.
Pull them out of a manufacturing slowdown and they've been quite the laggards. When you look at the competitive landscape of what governments have done across the country with the Japanese have done with the Chinese have done with the Americans have done.
Clearly the the German.
Blend or the CB has has done far less in fiscal stimulus in the rest of the world.
And their economy is kind of showing the impact of that double wall of that and also the.
Chinese trade negotiations and their dependence of on foreign trade, which is so much different than our economy here.
I think that means that if Germany were to.
Get going it probably pulls us rates higher even if the U.S. economy slows.
Since I believe we're funding, our where pricing off of the the bones.
So coming back to us we've never been stronger we have as Jeff mentioned, it and have billion of undrawn facilities ample cash on our balance sheet. Our our multiple credit line business lines are functioning really well really excited about the growth in the resi book and the quality of what we're doing the returns that were getting.
And we're moving to hold more of that paper than we had in the past from an increase our on balance sheet rather than to a securitizing all of it because the yields are in excess of what we can return and.
Our commercial lending segment and the risk we believe is at least.
As good or may be better.
The energy infrastructure business is actually cost us.
Probably in excess of 10 cents and growing this year.
In year over year earnings, primarily because as Jeff mentioned, we shutdown originations we had a facility for a two year facility. When we bought the company from GE, but the loans are five year loans, and we don't mismatched maturities. So we basically said we're going to wait so the team put together. These two financing lines are longer duration now we can comfortably.
Make these loans and we're off to the races. The books never been bigger.
We'll hit or exceed I expect our origination goals in that business and will add accretive lead or earnings next year.
And going forward, so pretty excited about having a.
A broken wing business.
Contribute and start lapping at swing in helping us going right correction.
The property book is beyond belief, good, particularly our multifamily assets there.
We we don't want to do with them I mean, there's that we have this more than 500 million to our gain.
And.
Cash and cash yields that are 14, 15% and only going up so.
We could harvest, we don't know how to replace them and.
Require.
There was let's say $800 million of embedded gain or capital and gain coming back to us.
From the sale of those assets.
At our leverage ratio thats, another four or $5 billion of that loans, we have to make and the average duration of our loans is short these assets will live forever.
So we'd have to put $4 billion at every two years three years, it's it's a high burden on top of the six or so five or six will originate this year and we did notice by the way as Jeff mentioned Rina mentioned that and it's something actually just caught arent too is that our largest competitor does everything on balance sheet and we do these notes.
And so our volumes are understated because if we actually did financed the company the way they finance their company our loan book would look at 11 billion not this seven nine that that you see so.
And then number originations what might look different too so.
It's really it's just the way, we presented ourselves and we're going to correct that going forward.
Because really in $11 billion book.
We also don't do in scale, we don't finance ourselves and there's no material portion of our competitors book is loans to themselves, even though they're quite large it's not a bad thing I'm not saying, it's about things just a different philosophy and weve on occasion done it and very small numbers way back when probably seven years ago.
And there was a 13% mezz on I think was a 250 million to our position fit the 200 250 of the on premise mountain, which we owned we sold our pieces it off to Apollo into the 49% loan.
Assets sold for $810 million, our last dollar exposure was $250 million. So whenever there is just stupid paper available we have occasionally done it but in various on small scale certainly.
One hundreds of the size of what our competitors.
Yeah.
And I think the other interesting thing in the book is $90 billion servicing portfolio, all new and I will mention b pieces, because some of our peers.
We are the biggest player in servicing so we should be the biggest player in.
Pieces right and we're not we don't really think it's a tremendous business. Its insurance that's mispriced not bad works in a bull market, but it's not going to be a core evercore business for us and so I will participate I think were fifth or sixth and B piece purchases Jeff.
Mainly done we cherry pick the ones, we want to buy particularly the ones where original where we're contributor to the pool.
And pretty much move on from that so.
I don't have any other comments I think the companies doing quite well we have completed a three year plan were quite sanguine on our on our future.
We are looking at things to buy.
And have tried and failed but perseverance is genius in disguise. So there'll be other things, we'll be looking at in the future. So thats going to stop thank you.
At this time, we will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad a confirmation John will indicate your line is in the question Q you May Press Star too if you would like to remove your questions from the Q for participants.
Thanks, Speaker equipment and may be necessary to pick up your handset for pressing the star Q.
One moment, please dolly pose your question.
Just first question is some jade rahmani as KBW. Please go ahead.
Good morning. This is Ryan Thomas Hell on for Jay Thanks for taking the questions.
Jeff We appreciate the comments in your prepared remarks on for 24 fifth Avenue.
Was wondering if you can say what you think ultimately plays out with that asset with we work walking away from the lease and some individuals believing.
Got the sponsor group overpaid for the asset by several hundred million the the 51% loan to cost metric. You cited can you say what value that's based on and if it includes.
He works purchase price plus any anticipated rent of renovations for that asset.
Before you one thing that they can't walk away from the asset is a 15 year corporate guarantee at this point other sponsors long I think we'll be long something like $19 billion invested in this company. So it is the single largest credit liability as a single liability now on their balance sheets.
But it can't walk away from it and they can sublet it or sell the building obviously, they don't own the building there's a different group that owns the building so.
And that has got institutional capital.
To the tune of what $380 million or something.
They have spoken to us and they believe that Theres equity like Dave I don't believe it actually lost money and.
Moving this tremendous demand for the space, So and we've been approached by our note.
And you know were new drilling on whether we want to do that it's actually a pretty good haute so.
Jeff can give you the stats sure.
I laid out part of the cap that earlier, where isn't that 500 million dollar first mortgage we are the $150 million senior Matt is that the $650 million.
Last dollar the total cap that concludes as I said before 250 million of shoot junior Mezz and 387 million of equity for cap stack of 1 billion to 87, and Thats, where I get the 51% of cost using 650 out of two out of 1 billion to 87.
Okay.
Okay. Thanks, Thanks for all that conduct color.
And I guess, just moving on to the lending markets overall.
What's your current view.
The levels of competition and underwriting standards.
Do you think that non bank lenders are increasingly getting more aggressive.
And then regarding Fourq here, you mentioned, you're expecting a strong investment quarter.
Can you provide us with any parameters around what you're expecting for origination volume as well as repayments in the fourth quarter.
Sure I would say first of all we havent changed our standards in the in the 10 years. Since we started the company in the five and a half that I've been here, we have a very thorough and difficult investment committee process through two investment committees. We use tremendous amounts of 30 years of data and information from Starwood Capital Group is our property Trust and our standards are what they are the good news is.
The volumes are fairly high and we're seeing a decent amount of loan activity for everybody to choose from and we're all going to pick and choose where where we want to be within that.
The non banks people think that they're being more aggressive I do think we're getting pushed to tighter spreads today. Fortunately, we have tightened liabilities. So we're able to earn similar spreads but one of the things you have to realize is not everybody has the same cost of capital. The non there are a number of non banks with separate accounts with a lower return hurdle than we have and they're going to look at slightly.
Tighter deals than we will look out in those are deals that may crossover into our space. So there are times, where we will feel like spreads are little bit tighter than they would have been but often times, it's not because I don't believe it's because people with the same cost of capital as us are loosening their standards to go to tighter spreads I believe that it's because there is simply not a number.
Of different cost of capital from banks at the at the lowest cost of capital to some separate accounts that a more moderate cost of capital and then our cost of capital being a little bit higher so.
It's hard to say that standards are getting worse than that loans are deteriorating when everybody in our space seems to write more every year, we will be within 10% of what we wrote last year last year every one of our competitors that the most amount of loans that theyve ever done loan volume as high will be over 500 billion of transactions again this year for the fifth straight year only time since 2000.
Even though theres plenty to go around everybody is going to choose their buckets, we are going to focus on credit more than not more than spread and we're going to find the credits that make the most sense for us and our cost of capital of the fourth quarter.
We never give an exact number I would say, we think that will do at least those up somewhere in the neighborhood of 50% more than what we did this quarter fourth quarter has always been seasonally a stronger quarter for us and we believe we without moving our standards that that will be the case.
Europe picked up in the third quarter fairly significantly it'll be a little bit smaller next quarter, but we were opening in the first quarter that we'll pick back up we have people in Australia as we've talked about before now and we're hoping to continue to grow the international books. So the number of things that we have to look at is still robust. We hired more originated this year to be able to get through it and I think that somewhere in.
Sort of five to 7 billion dollar annual run rate is what I would expect us to be able to continue to achieve without lowering our standards.
And then just one last one if I could vary you mentioned that you are you looking on things to buy I think you specifically said.
What what types of things are you are you looking at.
We expect it's more infill to the con business focus.
Hi.
Furniture for my new apartment.
[laughter].
I think the GE deal I mean, the infrastructure deal from GE was interesting as it is it stuff like that where you're expanding the actualized line faster and more infill.
I would say more infill.
Or or ratable business lines, not everything we look at middle market lending some of these other stuff, we can't actually fit in our structure, we can fit it in our structure would have to go in the Trs.
But we may not be the best buyer for it because of our tax that we pay.
So requires some significant restructuring.
It's interesting.
There are lot of players in our space and and.
I'm not sure we're all needed.
So.
We also.
The restructuring of the federal agencies might present interesting opportunities to us.
We are I think that's known that we are.
Looking at the purchasing an originator in there in the resi space.
So we can be a fully integrated company in that space and we're just.
Something is under contract and we have waiting for regulatory approval. So.
Building out these businesses, so that potentially we could do another.
Starwood waypoint homes invitation homes spin from ourselves is something we would look at.
With our resi book of the grew large enough to be a standalone company that that's the reason is only one reason the spin it says it runs at higher leverage levels in our business and the the screens of our company make us look odd.
Even though I don't believe we're taking on any excess leverage being on the board of invitation homes since we spun it out of us.
Hi that company, which is in quite well had had never thought it could trade, where it's trading because they thought.
The market with few can leverage levels of the company.
And we had big fights that the board meeting about should they use the money to grow the any free cash flows should they use the money to pay down debt should they use the might increase the dividends, which is de minimis and well below the yield on other equity rates and I argued that you can't possibly make attend the leverage levels and it's really the or we have the businesses.
Super attractive in there's no excess risk being taken by having the leverage levels and so the company stock is perform great. This year as the company now passed that then easy.
And so the point is that the market said, we understand the high leverage structure, when you're not taking a lot of risk and drove the market value of the equity up so the average fair value of the debt versus equity market value of the equity is lower so I'm, saying that may be the market would would allow us to have a.
Giant resi book inside of ourselves don't know me and but we want to keep the opportunity of maybe spinning it out that would require us to be as I mentioned, a fully integrated group, which would require us to be in origination business as well. So we're working on that and we've got great team that running a great business is adding it's adding.
It's accretive to our platform and the hours are higher than GAAP allows us to tell you. They are so.
We are funny because.
They really are very interesting IR ours, and GAAP doesn't allow you to forecast refinancings and other things you anticipate doing as the corpus of the bomb the bond portfolios that paid off so.
It's a very good our OE business for US, Iran. I wanted to revisit your supposition on the equity paid too much for for 24 Fifth Avenue, where we're talking about we work before if the if the tenant.
We're no longer a going concern and we had to re let the office if we realized at $30 lower on our blended rents, we would still be south of 70% loan to value in north of a 7% debt yield on that building. So we have the free and confidence that our loan is.
Better than money, good and by the way, we have a LIBOR floor that 70 basis points in the money on that loan as well. So once again, we're not the owners. So we don't get that that we work rent, but again, they lowered that rent area. We were assume they're going to occupy most of that space and then do enterprise deals in the balance of it.
So the enterprise tenant wouldn't be take $30 less than we were with thing they probably paying $50 more than than the space was going to be built out for the money going into the that were funding that was enjoying it at closing was done for the fit out of the building, which was the do enterprise for the non we worked headquarters space. So.
You got a very nice building and Thats probably.
Jeff, saying is probably a 50% drop of what they expected to rent those spaces forward to the Amazon's and other people that were interested in being in that space with them.
So.
We feel very comfortable.
Next question please.
The next question is from Steve Delaney of JMP Securities. Please go ahead, thanks for taking the question.
Regarding your comments about the reinvestment challenge on real estate gain realizations.
I guess you guys. It's been there has been doing so long long time and you can either you can either by it or build it and there had been some recent news articles about a property you own called the mall at Wellington Green about potential for a major redevelopment I wondered if it's possible you could comment about that particular.
Property, but just kind of in general.
The returns that you might see yawns, especially urban infill and redevelopment.
As a.
Deployment of capital and with those returns might might look like thank you very much.
Okay.
Thanks for your question, we're not in the development business.
We're lender we happen to have.
And asset there in Wilmington that that the Nordstrom store left and allowed us to.
Ah.
Mission the mall potentially position the mall in that case, we proposed.
Although goon, a crystal lagoon and building beach around that as an amenity to drive traffic through the mall. This town is very excited about the mayor, but we have to look at incremental capital on the and how much is going to.
The cost us to do and what we think the investment returns might look like and what the shape of the probably the outcomes might be in retail today.
It's complicated there are so few.
Comparable for sales of malls.
If you think you're going to sell this property when stabilized at a seven or six or 10, 11 12, you need to go forward or not go forward and there's just not a lot of clarity about.
That situation. So we're certainly we are evaluating.
In the context of.
All of our assets, we look at our redevelopment potential, but mostly with this entity doesn't do that I mean this is not what what we anticipated doing in this vehicle. That's more development deals are really done in our equity funds. So sure enough to interact on here.
Okay. Thank you for that Barry.
Jeff switching over switching over to the resi side, obviously, great progress there on Bloomberg had an article on Monday about said, we're pushing up to 20 billion year to date.
Adding or we yeah, and I guess into specifically it in Q. When do you have a sense for what that annual origination securitization market.
Could be at.
Yes, I think it's a fraction of what it could be.
You have.
Non QM patch happening at the agencies that if I'm right. It's it's a multiple of almost 10 x. that of potential available capital at come back I think yes, exactly what 18 to 20 billion up from $12 billion, though last year year to date, there's a handful of large private equity type sponsors like us who were investing in this space.
Ultimately I think it's potentially a couple of hundred billion dollars business I am I think the business could certainly grow at a lot of it depends on what the agencies decide to do in terms of how large of a portion they want to be one of the things that pushes people to non QM is that if they fail the 43% debt to income test and typically with.
So a lot of self employed people in an economy, you're going to have a lot of people who don't state. The full income because they have expenses that they run through their business or whatever else that is that were where a good borrowers and can put down significantly more money will be borrowers are pretty down 35% on their houses versus agency borrowers are putting down 10 to 20. These these borrowers have higher FICO scores generally.
But they fail some portion of the tests that we put them into the agency buckets of.
Assuming that we will still have a lot of self employed people in this country and demand for for real estate loans with a slightly higher coupon in the agency side than we could grow a little bit, but what's really going to drive volume for someone like us is where the agencies decide to play how much they opened their box or close their box and what that leaves for the for the rest of also to play at the is its a.
Kind of cute business will do to an activity in our so a year and and would love to do double that but its hand to hand combat every day trying to get close to a bunch of originators to be able to do that smartly.
Yes, so shifting from the consumer side, well, we're obviously the regulatory and GRC issues.
Have you guys looked at these the SFR product the rental to single family rental product and.
Any ideas, whether that's an opportunity and how those returns might compare to in QM, which is obviously more competitive right now.
You know very knows that's better than anybody who we obviously spun out starwood waypoint exactly.
Invitation homes and they do a great job of that in the mountains did extremely well yeah.
Thinking about the debt I'm thinking about debt not not owning hopes by the way just yes.
First mortgages.
I've got it we have not spent a lot of time there a lot of our competitors looking at things like that and fixed and flip and some other businesses.
We've sort of stuck to our knitting today, we really like the demographic of a 720, FICO 65, LTV rather than the professional home homebuyer enough. If there's anything bought about that we are extremely comfortable with the credit and we know what these borrowers did in the last cycle when things went south and these borrowers tend to perform.
Very well best in class in terms of in terms of how they got through the crisis and we're sort of leaning on that if we ever had it back into a crisis, we want to make sure that were in what we believe is the highest credit quality part of the residential lending business and Barry.
Barry mentioned that you.
And renewed it to you put some loans on the as held for investments held to maturity.
Just to close out the FHLB I mean, theres, obviously been some positive.
Suggestions in the treasuries report and everything else I mean.
Seems to be that that access going forward long term is huge for your ability to put whole loans on your books and with that I'll I'll drop off but just wondering what your final thoughts.
I would say that it's beneficial.
But not required and we've lined up another facility to replace them potentially.
If that does go away I would say the odds of it going away or less than they were before.
But the obviously this is somewhat political though this does this can be done with them.
And what they call. It administratively is not a has nothing to do with doesn't go to Congress. It can be just done by the administration if though.
And we obviously it's never.
It's unprecedented it's actually eliminate business unit that.
That's not costing the government anything in there is no defaults so.
It would be a first they turn turn them off but regardless, we've modeled the going away and and were model even the loans held to maturity in the sizing of that book based on them going away. So we think it's the wrong move for the government, we think they shouldn't do it but they do it you know it will.
Survive and the IR always will be a little lower so you know wont be tragic probably will not grow to be the business. We expected to be on at least on balance sheet. The securitization business will stay around you just have a different are we.
It's good to keep private capital extremely involve they've done a great job on the bottom of agency mortgage securitization by selling off the private capital and keeping private capital involved in sort of first Boston and the agency business I think it would make a heck of a lot of since the key private capital involved in competing on the non agency business as well and.
If you start ticking away things like that it makes it more difficult, but we can.
The securitization market, we have multiple lines, let Barry said, where we can finance. These on the phone. So we're very comfortable with the decision.
Okay.
The next question is from Stephen Laws Raymond James. Please go ahead.
Hi, good morning.
Couple of things been touched on and apologize if I missed this but I noticed you refinance some of the real estate assets.
More optimized or capital and you're going to redeploy that can you talk about how much more opportunity there has to do that given the appreciation in the real estate book in how we should think about.
That capital being deployed is taking place over the next 12 to 24 months.
The good news is we have long term fixed rate debt on a number of these properties and until that roles at the little bit more difficult to do that the medical office portfolio were able to do a CMBS financing and upsize that and take out a significant amount of money, we were able to to add onto our first multifamily portfolio. We believe at some point in the future.
Not too long, we'll be able to add onto the second multifamily, but the master lease portfolio has long term debt.
And we just refinanced our Irish portfolio last year at 1.9%, which was an incredible incredible achievement.
For a fixed rate of seven years to get back kind of that kind of rate. So when when the root when the debt is rolling we'll be able to take a little bit of cash out and redeploy that when we redeploy that obviously, it's it's sort of three equity as we as we put it back out and then it will be accretive to earnings, but it's probably not a lot on that front burner in terms of refinance potential in the portfolio.
Okay. Appreciate the commentary there and a follow up I know you provided a number of details and energy infrastructure earlier, but I saw you sold one one asset or some sales in the quarter can you talk about where you are in kind of.
Better positioning the original portfolio and cycling out at some of the lower yielding assets that came in.
What you have left to accomplish on that front.
Yes, sure you know we have got rid of the bulk of the lower yielding assets is there's very little that we would want to sell if the if it was there and as Barry said getting the two lines that we got Israeli open the gates for us to start to add Accretable yield. This portfolio I have a seat in front of me that is well over $500 million in loans that we expect to close in the fourth quarter and.
And we ran at a rate like that we underwrote. This thinking it was a 1 billion in a quarter to going to half a year. So 500 plus million in the quarter would show you that we think there's a pretty good opportunity here and the Levered IR ours are above what we originally underwrote. So we're optimistic things can change quickly, but right now the what's in front of us feels really good in that in that business today.
Great appreciate the comments a good day.
Thank you.
Your next question is from Rick Shane as JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning.
Look at year end 2019 were at arguably a little bit of across roads.
In terms of outlook in economy as you guys are planning youre.
2020, and I suspect your deep in the middle of that right. Now curious how you think about the different scenarios and the different paths you could take.
Actually from a lending perspective, our businesses I mean, I'm fairly sanguine I think I think it's much more concerning on the equity investment side than it is on the debt side.
I think low rates have actually the first half of the year or transaction volumes were down like 10%.
I think around the world.
Capital flows have been adjusted or or reach read jiggled.
Because things like the Chinese aren't here.
The Aramco IPO, probably even takes place in any scale will mean that there will be greater participation in the U.S. markets by middle Eastern investors than we've seen.
But I think we take the general view that that the economy is going to slow.
And.
Fairly significantly next year.
Now I go negative just slow slow because of the election, primarily in the difficulty in determining what's going to happen and its atossa. We we.
We don't even though the candidate.
I will say candidates on either side are going to be given the impeachment process. So.
I think that Specter means you see this unbelievable thing going on all over the world actually but it's worse in the us the consumer confidence remains relatively high.
CEO confidence has been not as low since 2009.
And so they're looking at a world with all of these problems and all the the rance of the left in them.
Far left and they're worried and and so worried means you wait and the portion of the GDP, that's not healthcare investment spending will slow.
It was we'll wait they'll say, okay, let's just wait and we'll see what happens with the election and then we'll plan for the next four years. So I don't see any way the economy won't slow it's not an historical data I mean people look at these you know the pundits come up with Rosen remote ridiculous I mean, there's never been an election is formalizing that since I've been analyzers decide to lot too.
Ideologies are going head to head in a in a two extremes and people keep forgetting 43% of the country's independent it's the largest party and there is no party for the middle of the country and the timing Bloomberg. He has to run as a Democrat right well Ross Perot Junior was a billionaire and probably not the greatest candidate in his.
Street, and you've got 19 presented the electorate right and that ended independents at that time, where about half the size. The are today, so I mean the country needs.
Somebody in the middle in my view, sorry, I'm being political on an earnings call but.
The country is fiscally conservative and socially liberal the vast majority of people or in that bucket, especially kids kids may not be social fiscally conservative.
But.
You know that I think from our perspective. It is not an issue from the reads perspective, and we continue I don't see any of our business lines.
Being impacted by the craziness all we have to do in lending is get our money back we don't have to make money and and think about increasing and so having our biggest equity assets being affordable housing space.
Where we're rents can only go up based on incomes of.
In our in our average incomes in towns like Orlando and Tampa.
And that we're just doing really good about that so we don't really have anything else to that we feel like we're exposed with moving we feel.
The team has done an unbelievable job on the balance sheet of the company and it's the best in the in the industry by far So we're positioned for safety. We've always been there and you may give up slightly excess returns that 10 year track record of this company is 12.6 or 8% compounded per annum for 10 years total return.
That concludes our spin off by the way, 240% total return.
It's admirable and few levered that you'd be at the divested hedge fund the United States you'd have a 20 plus.
Return for 10 years, running and you'd be running $60 billion. So I wish I done that trade myself, so I have been long the stock.
But we're happy we're concerned about lack of lending discipline.
It's not so bad I've been through a lot of these I mean, that's not crazy. There's a few outliers here and there are people just some money stuff.
You may lend to.
We sometimes we had the lender people the banks won't lend to but we'll do it based on our understanding of the asset values. So.
We lend to.
Can't Street right. So in New York, we'll leave it at that Jeff shaking his head of me so.
But a bank will make alone we made we got paid off.
I guess I would answer a different scenarios has a lot of thoughts on where the world is going to go and it is usually a is usually pretty spot on but I think our job as management here is to make sure that we performed well in any environment. We now will perform well if interest rates decline or fall and where we make the lease money is if they stay here if credit spreads widened like they did in December of last year.
It's a great opportunity for us to add to our book. We noted earlier, we have $8.3 billion of capacity to add today and that the that gives us significant firepower would love to add more property pour more into our property portfolio. If cap rates were to widen that would be a wonderful opportunity for us.
If and when spreads tighten we will probably take some gains like we have in the past and try to figure out how to how to redeploy them. So I think as we look to 2020, we've significantly reduced our exposure to credit marks by the moves we've made of the COO and the sales et cetera, and we're really positioned extremely well for either rise and fall in rates or regard.
It is what happens in credit spread so we're pretty excited about the positioning of the company going to you.
Our final question is from Ken Hayes is B. Riley FBR. Please go ahead.
Hey, guys. Thanks for taking my question.
As a DC resident big stand that cover of the supplement and.
Your largest loan this quarter was at 300 million dollar construction loans for the Wars project.
And your second largest loan was also a construction loan can you just touch on how you think about construction lending at this point in the cycle what percentage of your book consists of construction loans and what the LTV is our here in any other color on structure.
Sure. There's a lot of the schools of thought on lending and when we're in construction loans. We are typically on a much lower loan to cost than we are a loan to value on a regular alone. So if the risk is completion when we come out on the back end, we certainly feel very comfortable with it that said our board of directors is always been very concerned about future funding risk.
One of the things that we have going for us having this very large diversified book is we have money coming in from lots of different segments of our business. So we like to think that we don't want to ever have more money going out in any quarter in future funding than we have twice as much money expected to come in FX at that time as a percentage of our.
Overall loan book and as a percentage of our assets, we have a significantly smaller construction book than what we had back in 2013 in 2014.
We never give the exact number but I would say, we're we're sort of right in the middle.
Slightly above the middle of of our historic average in terms of construction exposure our future funding is relatively small versus the amount of the amount of money, we are coming back and our $17 billion balance sheet.
So we feel we feel very comfortable that we have a band from the from from our board and were 25% below the top about band and we've benefited physician or very close to this position for for most of last couple of years. So I don't think it's changed much at all our book has got bigger, obviously, which which which allows us to do a little bit more construction our overall gone.
She is now close to $17 billion. So.
We think about a lot we're very comfortable with the with the risk in terms of the LTC versus the ltvs on on other opportunities and we're extremely comfortable with the future funding exposure today.
One of our directors.
He was hoping these guys with the fall.
Get the by brand new buildings that two thirds or will they cost to build.
But that's not going to happen we.
We are very much as you know we found if I start with changes named too or is it was actually start financial became I start and then they bought a bank called.
Right.
What was the call.
Anyway.
And they blew that deal because what happened was while they got a discount on the $3 billion of funded loans they had to phenolic.
All that draws at par and that wouldn't have been a problem, except a fremont is called freemont.
The when the World ended they didnt have the sources to fund those make those commitments to the to the on the construction loans. So repayments stopped we know the drill we saw a go bad and so we're pretty careful about our our our exposure to the construction markets. Despite the fact that we like our.
Project and we like our task when you mentioned the war firming wouldn't you like to by the two thirds of where the cost to build so absolutely not going to happen button.
Okay with it.
We typically do 10 or 12 loans in the quarter and looking back in the last year a year ago. This quarter, we didn't do any construction loans in the first COVID-19. It was about 10% of our book next quarter will be a lot smaller percentage than it was this quarter. So one or two construction loans can make the number look like if they look like it's a bigger quarter, but it's not a significant trent.
Got it that job really helpful color. Thanks, There and then just one quick.
Follow on just the Dublin portfolio sale, just curious if you still intend to sell that portfolio before year end and theres any changes and expectations around the K began you might receive there.
Yes.
The actually topic for Monday, we've bid and we're going to sided what enough for us like Okay. What do we do with the money so.
We are flushed with cash and capacity and I wish we could double our pace of originations that met our criteria and we're going to try but.
We have enough we have to cover and in terms of an hourly and and we don't want to.
Less than our credit underwriting standards so.
We're going to try and one place, we'll look to pick a volumes and the team is pretty bullish on is offshore and we've stopped and office in Australia. We have a team I think eight people or something like that now in London.
Looking for a lot lending opportunities so when they have to change our geography, a bit to get our volumes up and if it would be I would tell you that if I feel confident we can originate $15 billion and loans up from six wheat harvest all our gains in our equity books and put the assets out.
The gains take the and then because you that's equity that isn't returning a return that isn't earning a return right is the gain not in our GAAP financials. When you do a screen on US you see a 16 something book value.
We know the drill right, but nobody can say the services a big problem today, I mean, Rina mentioned to you that 90 something percent of our our 95 isn't is is 2.0. So the service or is a 42 odd million dollars book value now and the company, it's worth probably doubled that or triple that I don't even.
Okay. So you.
No. It's that's not where complex we talk about at every board meeting why we traded the dividend yield we trade for a while there seem to be moving ahead, but.
We're going to stay the course, it's working for our shareholders reasonably well, it's not a huge issue for us as the stock were 28, our dividend yield will be five or six weeks that would be a really nice for us we could issue equity accretive Lee and go do.
Great things right now, we don't have any need to do so.
Europe looks like it's going to continue to be a good opportunity for us for a little while and you're seeing some or other competitors go there as well the with rates higher in the US. The dollar is weaker on a forward basis, though given we hedge out the foreign exchange when we invest in Europe , you're picking up 200, 230 basis points or so in the cross currency swap today by invest.
Thing in Europe , which makes dollar denominated loans over there back brought back to dollars in the future look very attractive versus where they historically looked so I would expect to see us continue to try to add in Europe . I think we brought the book back from it was 17 or zero percent of our book It went down to 9% they get back to 16 or so present today and we.
I would hope we can get it back to 20% or even above that over over the coming over coming quarters in years.
We have reached the end of the question and answer session and I will now turn the call over to Mr., starring Nick Chairman and Chief Executive Officer for closing remarks.
Well, we wish everyone a happy holiday season, coming up will speak to you again after the holiday so.
Have a great Thanksgiving with your families and the Mary New year, and let's hope for stability in piece of the world. Thanks, everyone.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
[noise] [noise].
[noise] <unk>.
[noise] [noise].
[noise], who.
Mike.
Mm.
[noise].