Q4 2019 Earnings Call
Greetings welcome to Starwood property Trust fourth quarter 2019 earnings call.
At this time all participants are they listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistant store. The conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now I'll turn the conference over to your host Zach Tanenbaum.
Head of Investor Relations. Please go ahead.
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 31st 2019 filed its form 10-K with the Securities and Exchange Commission and posted its earnings supplement you with website. These documents are available on the Investor Relations section of the company's website at Www Dot started probably.
30 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 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 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 risk.
Factors that could cause actual results could 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 be made that maybe made during the course of this call. Additionally, certain non-GAAP financial measures will be discussing this conference call.
Indentations information is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with gap can be accessed through our filings with the FCC at Www Dot FTC dako.
Joining me on the call today are Barry Sternlicht, the company's Chief Executive Officer, Jeff Demotic other companies President Rina Paniry, the company's Chief Financial Officer, and Andrew Sossen, the cheap the company's Chief operating officer with that I'm now going to turn the call overt arena.
Thank you that's and good morning, everyone in the fourth quarter capped off another strong year for core earnings in Q4 totaled $139 million or 47 cents per share.
After adjusting for certain items impacting our property segment core with 53 cents per share this quarter and $2.10 for the full year I will discuss each of these items and detail a little later.
Our performance this quarter was led by our largest segment commercial and residential lending, which contributed core earnings of 109 million to the quarter on the commercial lending side, we originated 16 loans totaling a record $2.2 billion, bringing our 2019 volume to 5.5 billion with an average loan size of 104.
87 million.
In the quarter, we funded 1.4 billion on new long and 536 million on pre existing long commitment.
These findings were offset by 551 million and loan repayments, bringing our commercial lending portfolio to a record 9.1 billion at a weighted average LTV of 64%.
As a reminder, we update the LTV is on our long, but at least once a year or more frequently if circumstances warrant.
The values are typically based on internal duck underwriting, which tends to be more conservative than the third party valuations we received.
With our implementation of the no current expected credit loss or Cecil accounting standard we will be revising our policy to utilize third party instead of internal valuation with this change we expect our weighted average LTV to drop below 60%.
On the residential lending side, we continued our expansion I said that I part to think 541 million of non QM long and completing our fits securitizations totaling $370 million.
It's brought her residential loan portfolio to 1.3 billion and our retained RMBS portfolio to 147 million at yearend.
The lungs carried an average LTV, 69% and average FICO Accseven 32, with 672 million of these long classified as held for investment.
Irritate RMBS portfolio produces a double digit yield and unlike our securitization gains is not taxable.
I will now turn to our infrastructure lending segment, which contributed core earnings of $7 million to the quarter.
We acquired a record 640 million of long of which 424 million was funded.
The funding for Backended with 85% occurring in the second half of the corridor.
This brings our post acquisition portfolio, representing the non G.E. long to 843 million at yearend.
After the long we acquired from D. These lower margin loans continue to roll off with 336 million of repayments in the quarter.
Between sales and repayments. This portfolio has decreased by 63% since acquisition, bringing the balance to 751 million at yearend and bringing the total infrastructure Lombok to 1.6 billion.
[laughter].
As we work to deploy capital into this segment, we continue to increase our borrowing capacity in October we close to 500 million five your financing facility at our lowest spread to date about 175.
This brings our total financing capacity in this segment to 2.3 billion of which 1.2 billion withdrawn.
Next I will turn to our investing in servicing segment, which contributed core earnings of $63 million to the quarter.
As we've said in the past the various cylinder. The this segment worked together to produce a consistent and strong return.
Our CMBS portfolio continues to perform very well in late December we entered into our eight and larger strategic CMBS joint venture.
In doing so we sold CMBS totaling 333 million to the JV with a third party obtaining a 49% interest for cash consideration of 163 million.
For GAAP purposes, we consolidate the JV, which is why are financial statements do not reflect the sale instead of 49% third party interest is reflected within the non controlling interest line on our balance sheet.
And our conduit, we securitize 794 million alone and four transactions this quarter, bringing our total securitization volume for the year to 1.8 billion and 11 transaction.
And finally on the segments property portfolio.
We continue to harvest gains as these assets reached stabilization at yearend, we had 17 assets remaining with an underappreciated balance of $278 million.
And finally, I will discuss our property segment.
Or several significant items affected core earnings.
First we completed the sale of our doubling portfolio on December 20, Threerd, which generated a core gain $60 million or 20 cents per share and that cash proceeds of $214 million.
The transaction, we are going away or we did not directly pay tax in Ireland. Instead, there was a tax withholding adjustment, which was treated as a reduction of the game.
Without this tax adjustment our gain on the transaction was $83 million.
The second item impacting the property segment core earnings this quarter was a 72 million dollar or 24th that impairment relating to two our interests on a regional mall portfolio.
During the quarter, we commissioned independent appraisal for each of the off that's what that's portfolio, which resulted in a reduction of our investment to zero.
The last item I wanted to mention what the refinancings of two of our property portfolio this quarter, which enabled us to take out 190 million a debt proceeds and increase our cash on cash yield.
Our medical office portfolio, we refinanced 495 million a debt.
With 600 million.
A five year financing this took our cash yield from 10% to just under 13%.
We also entered into an 85 million dollar six year supplemental financing for our first multifamily portfolio, which took our cash yield from 16% to just over 19%.
In connection with these refinancings, we recognized a 5 million dollar or two fad per share loss on extinguishment of debt.
Following these events, we expect the blended cash yield related to the assets in this segment to be 15% with weighted average occupancy remaining study at 97%.
These assets are financed with that containing an average remaining duration of seven years at a weighted average fixed rate of 3.7%.
As of quarter end lease properties, along with the in our investing in servicing segment carried accumulated depreciation of 311 million or $1.10 for share.
As we've said in the past 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 311 million to our GAAP book value what arrive at her purchase price for these assets.
The games that we believe exists in this portfolio would be an incremental increase to undepreciated book value.
And now turning to our capitalization and dividend we continue to have ample credit capacity across our business line during the quarter, we entered into new or expanded facilities totaling $1.8 billion, bringing our undrawn capacity to 9 billion.
We ended the year with an adjusted debt to Undepreciated equity ratio of 1.9 times.
As for our dividend for the first quarter of 2020, we have declared a 48 cents per share dividend, which will be paid on April 15th to shareholders of record on March 31st.
This represents a 7.5% annualized dividend yield on yesterdays closing share price of $25.60.
Before I conclude I wanted to say a few words about Cecil which took effect on January 1st and will be more fully disclosed in our first quarter 10-Q.
Because we have no history of realized losses, we have subscribed to third party database services to provide us with industry losses for both theory and infrastructure long using these losses at the benchmark for our alone we estimate that the total change to our allowance from the implementation of Cecil Provine between 30 and $49.
[noise] approximately half of this change relates to infrastructure, which currently has no reserve and the other half relates to our theory Buck, which currently has a 3.6 million dollar General reserve along with specific reserved for certain long.
This adjustment will go against equity at the date of implementation.
Afterwards, any changes to the reserve will flow through GAAP earnings.
Consistent with our current policy core earnings will not include the allowance.
With that I'll turn the call over to Jeff for his comments.
Thanks Rina.
The strong fourth quarter capped off a banner year for shareholders of Starwood property Trust, our stock price was up 26% for a 37% total return with dividends the highest return on our 11 years since inception.
Our dividend yield today is over five and a half times the over the 10 year U.S. Treasury and we believe the proven consistent performance of our multi cylinder business our best in class leverage the low loan to value ratios of our loans, which are going lower our diversified liability structure and embedded gains of over $800 million or.
Over $202, an 83 cents per share justifies continued outperformance both versus rate and versus our peers in the years to come.
Before commenting on our segment highlights I'd like to discuss our work on E. G initiatives in 2019.
We're proud to report that M.F.C.I. this quarter upgraded our yes, GE rating to triple B, making us a leader in our peer group.
I will I would direct shareholders to the corporate responsibility tab on our website, where we talk about our positive social and environmental impact and quickly highlight our large affordable housing portfolio actions, we've taken in our own portfolios to reduce environmental impact our very strong diversity hiring statistics.
The involvement initiative.
As Rina said, we originated 16 theory loans in our property segment for a record $2.2 billion in the quarter expected I are ours and these originations were aligned with the first three quarters of 2019 and its similar leverage levels.
60% of our Q4 loans closed in the final two weeks of the quarter. That's had a small impact on Q4 performance, but we'll have a greater impact on twentytwenty and beyond.
After starting 2019 cautiously following the credit widening in December 2018, we're happy to report that are you every loan book is that a record size of $9.1 billion today and over $12 billion. If we included senior financing. So that's part of our originations.
Q1 is off to a strong start as well and we expect the first seven months of the year to be busy as we head into the summer holidays and then the elections in November.
We care about volume of origination, but care more about credit quality and the quality and pricing of our liabilities.
Our debt to equity ratios, both on and off balance sheet of 1.9 times and 2.9 times are significantly below our peer group only 40% of our 9.1 billion dollar loan book is financed using bank warehouse lines today, which is also significantly below our peer group and keeps us and better position should credit market deteriorate in the future.
With $9 billion of warehouse line capacity available today and $3.2 billion. The unencumbered assets on balance sheet, we have tremendous secured and unsecured debt capacity.
At the accretive and be accretive sales.
Hello, and term loan restructuring, we executed in 2019 to the mix and the diversity of the right side of our balance sheet allows us to borrow extremely efficiently and therefore invest in higher quality assets at the lowest possible leverage to achieve our return threshold.
As a final point on credit our theory lending books loan to value fell to 64.1% in the quarter and as Rina said, we expected the fall below 60% the lowest in our history with the implementation of fees on Q1.
29 team with the first year in our 11 years, the company, where LIBOR fell bringing into focus the value of the LIBOR floors, we negotiate for in our loan book.
We have LIBOR floors on all our domestic loan.
32% of our floors or in the money today, and our 2019 originations had a weighted average four of 190 basis point, putting them $17 million in the money to our expected maturity today.
Due to these four hour LIBOR sensitivity shows our floating rate loan book Counterintuitively performed even better when LIBOR fault than what it rises and our worst case scenario is our underwritten case static LIBOR.
Our non U.S. loan book with just 11% diversity every loan portfolio at the beginning of 2019 and is 19% today and we expect going higher.
We have hired talent to our loan originations team based in London, and expect to continue to grow our international exposure.
We take advantage of larger net interest margins and a positive basis swap when hedging expected cash flows back to dollars.
Finally, only 3% of our lending portfolio within retail today half of that is in the American Dream, all which we've spoken about a lot recently and its opening in full soon.
In property as Rina mentioned, we Opportunistically sold off.
Filled our Dublin office portfolio in the quarter at a significant gain as our internal model expect moderating rent growth in that market going forward.
Our property portfolio gives us significant asset duration and once again performed very well in 2019 with income up cap rates tightening and our cash yields improving due to the accretive refinancing we executed in the quarter.
We refinanced our Moby portfolio, and our first Florida multifamily portfolio, bringing the cash yield of our property portfolio up to 15% not inclusive of the over 700 million and gains in our property book alone, which come predominantly from our Florida multifamily portfolio, where rents can go up based on median and I'd say income growth, but rents cannot go down.
In Reais as Rina said, we formed a $333 million CMBS b piece joint venture in the quarter of which we hold a 51% majority.
STW D receive asset management fees and to promote on the JV, which will increase the return on our retained investment well, allowing us to keep the vast majority of that feature servicing revenue.
In the last nine quarters, we've increased our named special servicing by 34% to $93 billion across 185 truck, while simultaneously taking advantage of tighter spreads and lower interest rates to tactic, we reduced our own CMBS book by 26% from a tie to just 4.4% of our assets.
First is 10.4% of our assets five years ago.
Being named special servicer on more loans, while decreasing our own book will ensure this book outperformance at an unexpected downturn hit the property or credit markets.
Our equity investments in rates continue to perform very well.
I mentioned, we harvested some gains in the quarter and expect to continue to harvest significant gains for the next two years until the time when our special servicing revenue is expected to pick backup.
Rina also mentioned the performance of our conduit origination business Starwood mortgage capital, which securitized 1.8 billion of loans in 11 transactions and 29 game.
We continue to be among the largest best performing non bank loan originators with the lowest historic delinquency rate of the top non bank originators producing very consistent earnings at a very hard hi, Aro easy, which expands our multiple the book value and creates long term shareholder value.
Turning to our non QM book as we underwrote the credit performance in this sector has been stellar and we continued to add acquisition channels in 2019, allowing us to acquire over $2 billion of high quality loan.
We expect to continue to grow this book in 2020 and beyond.
Subsequent to quarter end, we priced or six securitization and our deals continue to price of the tightest liability spreads in the market a testament to the quality of the platform we have built.
There is tremendous capacity of warehouse lines for this product and we expect adds significantly more warehouse capacity in 2020, as we get closer to the February 2021 maturity of our FHLB line.
Finally in infrastructure, we're pleased to report at our energy infrastructure business is now running at full capacity with refinancing facilities in place for $1.5 billion into more in process.
We took advantage of wider lending spreads the put out $640 million in the quarter, which is well above our underwritten annual run rate at spreads above our original underwriting.
We still own some lower yielding assets from our acquisition portfolio, but are happy to report that the $1 billion in loan volume in 2019 had an optimal IR are well in excess of 13% and we believe the outlook for 2020 is good and hope to execute our first the yellow in this sector to further diversify our financing options for this business.
Before turning it to Bury I'd like to add something on the dividend on an adjusted earnings basis, We again covered our dividend handily in 2019, we're confident in our ability to continue to earn our dividend in the coming years and are in the unique position of having over $800 million in unrealized gains to harvest, if we choose leaving us in the enviable position.
Never have to take outsize risks in our core business.
We began this new decade with the same investment philosophy in which we began the last.
Slow steady and thoughtful.
With that I'll turn the call the Barry. Thank you readiness. Thanks, Jeff Good morning, everyone. Thank you Jack.
Hi, guys can talk about too.
Comments were fairly extensive let's start with the world, though because it's a fascinating world today I think one thing is the Soc sells off a little bit on on on the.
Contagion from Krona virus.
We have no impact from Corona virus, I mean that is not a risk for our firm.
In any way shape or form.
So it's just market sentiment fell off and one thing that's fascinating, though is the what the bond market is telling you. The bond market is telling you the economy is.
For the global economy slowing.
Clearly, we will slow from Corona virus again, I actually think it makes property more valuable and I expect cap rates to drift down a cap rates in property you probably haven't adjusted to a 130 year Treasury and not only are the base rates coming down LIBOR will now fall this year, which will.
Hi, Jeff LIBOR floors, even more valuable, but my guess is that spreads will come in as lenders are searching world for yield so our enterprise in the mark to market of our loan book is becoming more and more valuable sort of every day and.
We had three in a quarter 10 year in the stock was 24 or whatever and now we have a 138 tenure the stock is totally miss values. The market is getting the quarter all wrong.
We you should have known that the Taleban transaction wasn't trouble, we told you that.
And we had offset that with a gain from Dublin's approved you. The games, we talked about the $800 million was real we debated whether we should sell it or not ultimately decided that we thought the rent profile in Dublin, and new construction was going to slow the run rate run of growth rate of growth and we totally offset the loss from the taleban write off with the gain from Dublin, and we thought.
You might like that wasn't imperative that we do that but with an $84 million gain a 70 laid our write off it looks funny in your GAAP accounting. So you can find it correctly, because there's all kinds of issues with taxes and hedges.
But it wasn't 84 million dollar total gain on Dublin, which made it a terrific investment for us and the only asset that we own that we actually thought we might want to sell.
Everything else I want to own for 150 years.
Although at some point, we probably will harvest some of those gains.
As Jeff mentioned, it as Rina mentioned I mean, when your property, earning 15% annually cash on cash on invested capital and it's growing every year Oh My God. It's that's as good as you can get and that was the purpose of buying those assets was to create duration or book loss.
There's no issue repayment, we control the sale and it's almost a third of our asset so.
That was really exciting for us I think actually the companies in a better position probably than it's ever been overall.
We had a transitional year in the energy business, we started out very slow selling assets and we did not have matched duration financing for the loans, we were originating so rather than put on five year paper with to your debt. We just didn't do it and we waited until we got the facilities in place to have duration, you don't see that in or in our earnings but it speaks to how we run the company.
Which is as Jeff said safe unpredictable.
And transparent, which as you know we've won every year award you can win from they read on disclosure.
And we want you understand everything we're doing because all of our business lines are performing well and getting better. So as we enter 2020, we actually are more bullish than we've ever been I suppose.
One thing I think you'll see US do is do more loans in Europe.
There are a better spreads in Europe right now the banks are sitting back I think you've seen some of our peers increase or exposure to Europe.
We hope that will come to fruition those markets are very sound actually despite the slowing it.
[noise] economies.
The markets like places like the German property emerges seeing substantial rent increases.
In the office markets as well as places like Spain.
And even the London market is really recovered in both residential and in office.
Another thing, it's kind of fastening this will be our lowest LTV ever.
When the Cecil.
Numbers come in and below 60% on TV on a book, earning what do we earning like 11 for something like that on the asset level. It's just ridiculous frankly.
When Marina told me, we'd have to revalue the assets.
To go with outside appraisals, which is a requirement of seasonal I kind of grip the table ones fearful that she can tell me, where 70% LTV and we're actually shows you. The conservancy conservative nature of our marks we were 64 were dropping below 60, most of our peers are already using that methodology. So we haven't really been apples to apples to our comp set and our LTV marks.
One thing also that maybe not that obviously as we are growing already book on the held to sale.
One reason, we do that which we've kind of never talked about is that the GAAP accounting for the resi book.
Substantially lower than what we actually think we're going to earn on those assets. We you know when you buy these are originating these loans.
You basically can't assume for gap the refinancing of the remaining trust and if in reality you will do that you will pop again, we'll take the IR ours that we have in our financials higher so also they're not taxable when we put them in in the right.
And hold them to maturity. So you will see is continue to deploy capital behind that business not taking any excess credit risk.
But that is relatively new thing that the board is approved and we really like because it's a double digit yield on capital.
And it's been a very good business for us and we'll continue to do that as well as continue to securitize.
Some of the loans that that we acquire so the other a couple other things the book at 9 billion as high as it's ever been.
Our loan book and that's good we continue to look at.
Yields versus duration and no we still have a significant number of what we'd call transitional loans large loans and we'd like to originate slightly lower yields have keep these assets around longer someone we keep talking about some of our peers are probably doing a little bit more of that than we are and it's something we can do and expand our loan.
Books.
Going forward.
Lastly, I think on the CMBS, we didn't have to execute this trade that we didn't lower CMBS exposure.
But there's been some volatility in the CMBS markets historically right now it's really good time to have them, we'll continue to grow.
That base restocking the pool, if you will with new credits, which are have less risk and then obviously retail.
As all over the CMBS books of different lenders and and retail we reset it will have a value.
Even if it's an alternative value and you have a chance to do that a new deal that you didn't have an old deal. So it's one of the reasons Weve lightened up a little bit on.
Our CMBS book in a in a JV with a partner, which will as Jeff said or promote to the firm partly we'll go to the somebody employees.
As a retention vehicles. So overall I'm very confident in the in our business in 2020, probably entering next year this year.
As good a position as we have ever have a year and the team is focused and weve a diverse business all of which cylinders are doing just fine.
We're excited so with that.
I'm going to stop and we're going to take questions.
Oh, I will say one more thing operated before you go.
The we work headquarter in loan Lord and Taylor deal.
Some of you are aware we have.
A piece of the first mortgage Anna senior Mezz and that transaction. You May also know that there are rumors that Amazon is going to take the building down.
It's been published and we have call protection in that loan obviously, they want to stay some of your really good loan that they want to keep us into the test will be really happy, but I think you're going to see a good outcome. There it's not an exposure for the firm at all as is the American Dream, all known you shouldn't even think of that as a as a retail them.
We're under wrote that as never opening a retail store and we are operated we underwrote. It is a theme park, which it is it has indoor ski season.
Whatever Ferris wheels.
And we also have the mall of America as collateral. So I mean, there's no chance that will ever see a problem and that loan. So just it was an unbelievable arbitrage of.
A moment in time, when when people needed to Athens, like less than 50% LTV, if I if I recall.
So well less especially if you take the additional collateral the company gave us so.
Those are not issues and with that I'll take questions or we'll take questions. Thank you.
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Our first question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks can you talk about the environment you know as we look into 2024, the return environment for commercial mortgage loans and kind of what your expectation is for for net growth for the year.
Yes, Thanks, Doug.
I would say that were earning very similar to what we've historically around we're probably 50 basis points lower on a levered IR are today than we were a year to half ago or something like that but it stayed fairly consistent through 19.
Our borrowing better we continue to borrow better as I think I told you a year ago, when we when our best warehouse facilities, where LIBOR plus 150, I said for cash flow, we're going to be seeing facilities at LIBOR plus 125 on our bank warehouses, that's come to fruition.
So as you are seeing spreads tighten you know you have to off a measure. The fact that liability spreads are tightening we did our COO. This year at a mid one thirtys I think but a tremendously tight.
Brett other people are doing the same across all parts of our financing capital structure. If we went into the high yield market, we get asked ourselves better today, the term loan b market, which we use this year is it's very efficient in the low LIBOR plus two hundreds and we can sort of do whatever you want to there. So we're borrowing better we are lending tighter spreads lending a tighter spread.
It does give you more duration people are less motivated to prepay those loans, we like duration it gets us off the treadmill.
I would expect that last year after five and a half billion. When if you remember very well Doug that in the first quarter without together and we told you we were being extremely conservative in doing that stress testing coming out of the December widening. So we started the year. We started the year slow if we hadnt would be right around the same 6 billion as we were last year and we expect this year will do and others.
<unk> billion somewhere right around these returns so we're seeing a tremendous amount I think with our $109 billion of loans last year that we looked at versus maybe 100 and for the year before is that we're looking at more loans, we have a larger team to do that and and I'm optimistic that 2020 will look very similar to 2019 in the lending book with a little bit more of a bent towards Europe.
We're seeing some incremental return opportunities.
And just like the comment on kind of added duration is that any difference loan products, you're offering to kind of got that duration or it's just that the loans windup staying a outstanding longer because.
Yes, the lower spread you just have less rationale for refinancing it you'll still sell it at the same time, arguably but essentially with the debt, but you have less less rationale for refinancing a lower coupon that you do for refinancing a higher coupon. So they tend to stay on our books, a little bit longer I'd guess closer to three years on the lower coupon stuff as opposed to 20 to 30 months on the stuff where you get a.
Higher coupon, it's more transitional and people are more motivated.
Great and run it looked like there was a gap provision against the infrastructure.
What was what was that for.
So that was a along that we had acquired from GE. We had marked it below par at the time, we acquired in purchase accounting, we had mark that to 80 cents on the dollar.
On the project that was underline that long went into bankruptcy and 2019. It emerged from bankruptcy in November so that would be praised valuation coming out of bankruptcy related to that loan we held at 10% participating interest. So it's a it's a much larger loan, but overall and whatsoever.
Total so our our our total basis is now about $25 million. After a 3 million write down it's kind of irrelevant.
But I guess, how does a 3 million compared or kind of where you had it more or is that below kind of the 80% me Mark $2 million are okay got it.
On the dollar Mark to 69 cents.
Got it okay. Thank you.
Next question comes from Steve Delaney with JMP Securities. Please go ahead.
Thanks, and good morning, everyone.
Your total investment portfolio 17 billion and Barry highlighted the 9 billion dollar loan book when you look at those numbers kind of macro do you see yourself is roughly fully invested at December 31, and if not how much.
How much growth do you think you could have been in in your investment portfolio with the existing capital base. Thanks.
Oh, we're never [laughter], Yeah, I mean.
We have probably three or $4 billion. So I would I would throw out a away from just the capacity would you can see in the supplemental in the $3 million to $400 million of cash that we normally fit on we have tremendous amount of unencumbered assets you could go out and raise more debt on if we wanted to we are under levered versus our peers, we could take more asset level that every to ever.
One of those could add fourth dollars' worth of assets for every dollar we brought in if we were if we're putting them out and levering them. So there is clearly the potential to bring that 17 up to 20, plus if we wanted to run the business hotter, but we've decided to run a more low leverage conservative business. Your Stephen we like having cash on the balance sheet. If it does create a little bit of dry bulk.
Leaves us opportunities.
Money for opportunities when they come in if we were trying to be more perfect. We would we would run our cash balances the little tighter and reduce drag in the business.
Conservatism that comes with holding cash is it good for us and it gives us opportunities when when things one.
Great and you know I had a second part to that question, but you've kind of already answered it but I'll go ahead and throw it out there I mean, you guys had been very respectful of your shareholders over the years stock is up 30% since the end to 2018 into dividend yield down to seven and a half I'm pretty quick.
It would be if the right opportunity presented itself and you needed more than 3 billion at what point and what would the return profile have to look like for you guys to consider issuing common equity because you certainly I think.
Have earned the right to do that if you saw the opportunity.
We're always in the market looking at ways to grow the enterprise.
It have to be accretive.
So.
Earning returns can at least is consistent with what we earn on our book strategic fits our our overall plan and you know.
When you Stewarding capital like this.
It is about reward versus the risk and again, if you take the long term view and this is our 11th year or something like an enterprise.
You never want to put the enterprise at risk right. So we can produce higher returns, but but I was planning on sticking around and not having used than me bombs in the mail. So we don't you know we're going to be careful and how we deploy capital what we do with that and this is really as opposed to be a an incredible risk reward with a seven after that.
Then yields in a world where the 138 treasury. So that's that's the play we've always into play you've seen. We then we have not entered the equity market every time the stock moves up a we've been very disciplined on issuing equity obviously like to grow the enterprise not for the reason you might think it's not about management fees or anything like that.
I think bigger is better in the states will drive our cost of funds down it will help us achieve investment grade and some of the assets that were buying like our resi is higher leverage loan a higher leverage business. So as we entered businesses our leverage levels as a firm are creeping up the risk isn't changing in my view because the resi book is sold.
Diversified and such good credits.
No one house is going to hurt us not even 10 houses in the Securitizations that doesn't matter and we were were optimizing our OE for the asset classes and it gets blended sadly by the street into and out even though our overall debt remains below our peers, even bringing back the off balance sheet leverage.
We don't traded the best in class and we used to think it was a servicer maybe that was the issue of the services not making much money anymore. It's just an option on the future. So it's not the service or maybe it's the resi book, maybe just too complicated, but you should want us to be complicated because we won't forced feed the commercial lending book, if we don't have to we can grow the resi book would grow the key.
Conduit business has been a steady performer now for as long as we've owned Eleanor and we had one quarter, where we didn't make money we've never lost money in the in the conduit business with 11, Securitizations warehousing company, we just manufactured paper and sell it and not only that the under the big banks want our paper because we're going to top rated a conduit provider in the country.
So all these businesses sort of sit nicely with each other there all related to each other the one we you know I have to say we were disappointed. It's early performance was the energy infrastructure business, but we slowed it down we didn't want to take that Mismatching maturities you would never know until there was a problem and we don't run the company that way. So we we like to enough to match funded.
We did our siloed because they're match funded and.
Dessert off you can't see that from our quarterly earnings, but it's the way we're running the company Jeff highlights. The fact that the company has the best is the right or left side I never right number right [laughter] both size, yeah, [laughter] left or right, Brian I don't know so the you know I think it looks it's just that.
Solid solid.
Solid company 17 billion well, how many leave it that we've done I think it's 60 billion, but on a 60 billion total and full investment since we have $60 billion I mean, it puts us in the top 10 as a bank in the United States.
Steve you're one of the analyst who does a great job and we appreciate the flattering version of the question does a great job of pointing out our adjusted book value, but looking today and it in these numbers are couple of days old were 1.54 times book that doesn't include depreciation and taking out our fair market value gains that we've told you about ensuring that we're around 1.2.
[music] times in our peer averages above that in our largest peer it's well above that we feel like we've created a low leverage diverse amazing business at various there with a great right side of the balance sheet that that can compete with any of them and we're really low.
Price to book value not high on a price to book value basis. When you consider taking out depreciation is that is a you know gator again on the on us issuing equity right because we look at our acquired.
Of our company as opposed to the books of our company in.
We we own 15000 to affordable housing units running like 97% occupancy with upwards only rettinger [laughter] and two of the fastest growing income towns in the United States. I mean, this is the gift that keeps on giving frankly, we blew it I mean these assets would be among the greatest equity assets.
We've ever seen so there is fantastic there in the read they determine that would provide.
Earnings literally forever for the company. So we talk about realizing those gains and we have to figure out how we deploy all that excess cash and and we'll do it at the point we were confident we can put out.
All that capital so.
You know the there's only there's only one way apartment cap rates are going it's not up.
Thank you. Our next question comes from Dod Fan Daddy with Wells Fargo. Please go ahead.
Oh, Yes. My first question is for Barry Barry.
I tend to agree with you the low rates and lower cap rates are probably going to be considered to be good for companies such as yourself. One thing that does crossed my mind in this environment with the kroner viruses.
Could you have some type of capital markets.
And wanted to see if you could talk about how you're positioned and what your play book would be if you did get into some type of situation where.
It is Asian markets got wobbly.
And you know if you can address that.
Don It's Jeff I'll start and let them.
Very clean up as you know, we do a lot of things everyday to prepare ourselves for what happens at the capital market event happened, we've taken our CMBS book down from 10% to 45%. That's the one place where when the credit markets of Wobbled, where people have said, while they own a lot of CMBS, we should though we should sell STWB that book it performed tremendous.
The well with a high teens return over the 11 year life than we expected to have a similar high teens return over the next 11 years, but as we head into a credit downturn that certainly helps having its the CMBS special servicer will help us significantly outperform our peers will make more money in credit distress.
On the theory lending book side, we wouldn't make more money. If we financed everything we do want to warehouse line many of our competitors lean towards doing almost that 40% of our book is on warehouse lines. We can borrow at L. 125 on warehouse lines on cash flowing assets today, we can make tremendously higher returns that we leaned in there we have 40% of our book there today.
It's not the best earning place to be but it's the safest place to be having diversity on the Reits out of our balance sheet, which includes our term loan. It includes our high yield assets. It includes the COO that we've done in importantly includes all the note sales that we have a separate group of professionals, who does that help us sell a notes and do the yellow securitization. So we're excited.
Beamly cautious when it comes to I'm managing the right out of the balance sheet and left out of the balance sheet for a potential credit event. If we were to get ones that we think we will outperform in that environment, we get frustrated and you probably heard me talking about being below the peer average price to book, which makes no sense to me, but we always say that we will outperform if and when the.
Credit markets do deteriorates, which drives up the company up to be ready for that very I don't know if you have other though.
Oh I don't see that is a big issue for the company really.
Fed look into the double edged sword at lover loans.
Sure.
Of the Mets financings, though like yeah, I mean people getting there as the minute refinance.
And I no I don't see.
I don't see I don't see I.
I don't know I mean, it's hard to figure out what you might do.
If the credit markets just roads.
Bank markets I think I think this cycle again youve to remember where we are property is not a problem for any bank in the United States.
These banks have been very [laughter] very disciplined shockingly.
The excesses in the market don't come from the banks.
From our peers, a shadow shadow banks, and and the one thing that streets into the market and it is happening now is you see these sort of outlier bid and I remind our guys as we go through our loan.
Our loan review when we're looking at the investment Committee for these loans you know just because somebody paid it doesn't mean, it's worth that and when you get times like this where somebody saying I own enough for your treasury isn't going to buy a building into two cap. It doesn't mean, it's where the two job and and so in the equity book, where we're selling assets all the time and you might see one guy.
20% higher than the pack.
Who is right on the LTV and I think this is where our experience doing this for 30 years is super helpful. I mean, I I see all kinds of things and.
We've been to these movies through multiple crises. So you know as stewards of capital.
We have experience when we're not going to get.
There's a bunch of stuff out there today that is really that we just debate and have argued this three loans on the table that it probably a $1 billion kind of looking at Jefferies shaking his head because we're just.
Arguments are very complete do this loan [laughter] well I mean is always going to another alone and you know there's issues like unions in and all kinds of stuff. The one thing I should say as construction costs are rising as people think inflation is 1%, they're certainly not in the real estate markets and we're seeing.
Almost double digit cost inflation on the west coast.
Labor is just scarce is one benefit of a 3.5% unemployment rate. So you are the contracts are telling you. What your buildings are going to cost and then they just say what we can't do that for you. So we were building a hotel in the West coast.
In the Bay area and through 80% drawing the quote was 170 million and then when we went to complete the.
[music].
The budgets to 50 like how is that even possible, but it's sort of that you know what do you do you don't build and and and that's good for existing loans and property prices are increasing even because construction costs are rising.
Now there are markets in cities, where you shouldn't investing is we have an interesting portfolio because we don't have a lot of exposure that we work to New York City for example, and we're not particularly bullish on the New York City Office market, we think expenses might rise faster than.
The rents and whether it be super careful there are cap rates are obviously low but they may change of people get the view that net rents are going to fall and what's driving all these major markets is the same thing thats driving the stock market five companies they are expanding into Berlin into New York into Toronto.
It's an even Nashville Amazon.
Your well they call it the fangs and you can add three or four other names Salesforce. These are driving these these commercial property markets and if they get in trouble in the stock market. They will get in trouble in the real estate market. The markets have never been more intertwined and it's a very that you don't care about banks expanding anymore universities to be up banks not about banks anymore TMT.
And I'm thinking through in London, like all the incremental space is being driven by the Google wants with Amazon once that Facebook wasn't Netflix when Netflix ones are terrible Twitter wants.
And then a dozen other unicorn so for them the cost of spaces minuscule under piano tiles, and they don't really care, where they pay kind of like the hedge funds of old and we've just be careful about the exposure to those markets because I actually have the thing that will stop these companies regulation. That's the hardest thing to underwrite right is somebody decides that Amazon destroying the world.
As we know it and Congress decides to change things.
It will change things so.
With an interesting world that it is very.
But in other asset classes that that the I mean, the office markets United States are fairly sound across the board and other than San Francisco in New York I can't really think of something that I think isn't it you know Chicago for always more bonds, but let's find its stable is just but other markets are rents are rising smartly ahead of expenses.
Don back here as a result proposition of credit markets widen we have the most cash we had the most availability of on our facilities. We have the most unencumbered assets and we have the most the only equity assets that we can so we're in a tremendously better positioned than others I hope you're going to ask a question about if credit market deteriorate to two others are reporting its like looks I think.
We've set ourselves up for 10 years that will perform in exactly about scenario.
Our next question comes from Stephen Laws with Raymond James Please limit yourself to one question. Thank you.
Okay. Good morning.
I guess the follow up then on the regulatory comment a bit switching gears, a maybe thoughts on how.
QM patch exploration plays out Additionally, Jesse reform that might open back up that's HLB I think Barry you mentioned in the your prepared remarks that your facility there expires I think 2021.
But but those two issues and I'll leave it at that please thanks.
And it's only upside on the path we have no idea, it's going to play out as 180 billion that get done at the agencies of non QM to the extent.
At the Q on patch goes away, that's 180 billion that floods, a $50 billion market and we're a part of that $50 billion market and it gets a lot bigger in our footprint can get bigger I'm, assuming that we can finance ourselves as well as we do today that would be that would be wonderful. My guess is that along the way. Some portion of the pads comes off at a 180 billion of non John.
Definitely be agencies the flood the non agencies.
I don't think the market a quick for and I don't think Thats, what the government really want so theres upside to us there's no real downside if they don't we're back to where we are today. So we're excited about that and as far as GFC reform, yes, there'll be a lot written most important thing. We can do is get ourselves set up as well as we can that at February 21 comes and we don't have home loan bank that we have tremendous amount of capacity elsewhere. We.
I have an RFP out for four quotes on warehouse lines I think we add 11 or 12 different banks, who want to provide us warehouse lines in that space and I think they'll trip over each other to finance them at the cheapest levels that.
They can find and ultimately we will end up in a very similar play kind of every laughing because you think our businesses to up the a bank today I mean is the chasing ever lighters spreads and benefiting us too so.
It's.
Again, I mean, I wouldn't have thought when we started the mark.
This way, but to produce the same return on equity today that we did in 2008.
Or 10 that gives me launch until nine.
A remarkable but it is because the banks have lowered their spreads to us and weve been able to lower spreads to borrowers and it's been a.
Nice sink goodnight evolution of cheaper and more available financing and we use our underwriting skills to pick our pick our spots and you know, we it's and the way I feel bad for our actually do feel that for origination team because it's minimal market in real estate, probably killed three or $4 billion of loans that were judges.
Fine.
Somehow they don't complain all the time to me that probably complaints.
[laughter], but.
That's the way it's going to go right I mean, we're not going to prove every loan that comes in a bull market all bodes for us to rising tide, all although thrive, but we're trying to keep afloat when the tide goes out so.
And there have crazy people in the world doing crazy things and are they crazy I mean property, we're seeing yields in Europe and building, a 2.5% necessarily seen right, but the that every current every treasury every duration treasury in Germany is negative.
You are picking up 250 basis points to take that United States 138, plus 250 is like close to four on apartment right. That's the same arbitrage. If you will so you have to end the borrowing spreads but still it's some people are issued a 25 year paper in Germany at like 1%, it's bananas, but that's.
There's an opportunity there for us.
One and a half the green is looking like that's not worry about possible. It's true I just [laughter]. The Guy issued I was talking with those should at 100 your bonds in Austria at 1.8%.
And on an office building, so I mean, there's an opportunity to make real money today, it's a little uncomfortable frankly for guys use divide sixs Cincinnati.
But I don't think we're getting back there I don't see I don't see any pressure upwards pressure on rates in Europe.
And I know, you'll have tomorrow I went to HBS.
Which is known to the school in Boston, I mean, I never learned that you could run a trillion dollars plus deficit on its way to two trillion dollars deficit. The three and have presented unemployment rate economy growing at 2% negative real rates.
And the 10 years at the lowest lowest pointing US history. This is not a class I attended so every economists got it wrong in 19 out of my Big worries there all getting along this year, though expecting rates would be low forever that that worries me [laughter]. They were the entire consensus is 100 out of 100 economists were wrong on 12 31.
18 that were rates would wind up and at the end of I guess 31.
18.
At the end of nine.
Yes, that's right as last year, so and we're all talking about some some money managers I'm at 6% tenures you remember Jeffrey good luck.
And even Stanley Druckenmiller, not exactly dumb people.
And rates went the other way so conventional economics would have said then it's really I think at the end of the Davis the slowdown that came from the trade.
Uncertainties.
One of the key reasons that global rates felt particularly in Europe, and they pulled us rates dealt with it so I.
I don't see a changing anytime soon and there's just too much money that printed searching for yield 28 banks easing at the same time or something [laughter]. I mean is like the earth of fuel pumps and everyone thinks there's no piper to pay so far they've been right somehow it doesn't feel like it will be right long term.
Our next question comes from Jade Rahmani with KBW. Please go ahead.
Thanks, very much as you look at the portfolio. The is the loan books about 19% hospitality, how do you feel about.
The hotel loans and any potential impact from Corona virus.
Good question I think everything we have us we don't have any tailwinds offshore right.
We have one of their construction stand, but no the that.
Nothing else nothing operate nothing yet so so far obviously the use.
Vince fared Corona Vars I'd have to get back to you guys look at individual loan exposures.
Familiar with a dentists are you on the phone.
Hi America.
Do we have much exposure to various anywhere I don't think so.
In New York City hotels, Apportion, Dennis which is which is very helpful. The obviously out you'd have a lot more you'd have a lot more there are our portfolio is much more national not really in much for tourists cities not in Miami not in New York I doubt that it's going to have as big of an impact on us but go ahead done.
Yes.
Yeah, I think Jamie we should probably follow up with you and get granular sort of asset by asset, but none of the markets that have had a ton of exposure to krona virus, we don't have any exposure there.
But obviously, it's an evolving evolving there are no markets in the U.S. that have had exposure to current affairs that I'm aware of other than something in California right.
A couple of things.
We'll we'll come back to you on that.
Thank you.
Next question comes from Rick Shane with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning.
Yes, and Barry you both mentioned the conduit business I'm, just curious how much capital you allocate to that how much you think you can allocate it realizing that it's a capital light business and what types of returns.
Sort of on an annual basis, because I realize there's going to be some volatility there.
You really on the conduit business, it's difficult to grow using more capital. It's a relationship business, we could write larger loans, we could write tighter spread loans that have a little bit less PNM and that creates a little bit of volatility for us and takes more balance sheet, but our balance sheet.
Light strategy here is is going to continue its 100 million plus of a balance sheet and it across three or four different warehouse lines and we write eight to 12 million our loans occasionally a 20, we don't try to take out we don't try to take on really big investment grade physicians were good at what were good out and we sort of stay in our sandbox.
We push the team to do a little bit more were up a little bit we did a billion fixed up to 1 billion eight that's good.
The larger the loans get below where the profitability got them and we picked a sweet spot for us than in our relationships and I think it works well, so I don't foresee us going putting more balance sheet behind that business not that we wouldn't but just because we're going to stick to what we're good at.
Got it in the second part of the question was sort of what is your return target there overtime.
It's not really return businesses the get its the gain on sale business. So I don't even though they are are we is tremendously high in very accretive to our book to our price to book ratios and other.
Don't really think about it that way you know we try to write smartphones that we are confident we'll get into a securitization. Some of those securitizations will end up on into bps on maybe a quarter of them or so so we have to care an awful lot of both the credit on those but we care about the credit of the of what we right because ultimately we will be more successful in that space, we will get better.
It has not levels when our loans performed better and I think I just looked at something we have 1.1% lifetime delinquencies when I look that when I looked at Morgan Stanley end of year data and that was the best of the non banks and it's not that far from the very best of the banks and it's better than a lot of the banks and they're writing.
It is investment grade loans. So our credit performance has been stellar you don't see that on our balance sheet or in our performance, but it's important that that business rights really good loans, because that's going to allow them to get into more deals that a better enhancement levels. We're proud of what those guys have achieved and what's been a a volatile market. The consistency has been amaze.
Thing or is it other than one quarter, we've made a lot of money.
You lose money, we used to make any.
Okay.
I think thats. The end. Thank you. Our final question comes from Tim Hayes with B. Riley. Please go ahead.
Hey, good morning, guys. Thanks for taking my question just a quick one for me on the JV write down.
Just wondering if there's a past a partial recovery there and if it there are any actions being taken by you or the other sponsors to improve those assets.
Well our basis is now approximately zero I mean are held so yes, I mean were.
We're we're not giving up where we're going to look at restructuring the the deal with the Servicers. The first step was the appraisal is it marks the where the where the that it is now in servicing special servicing and now if you should look at as a pure option and we can create value great. We can't.
We won't and.
The.
Just talk about retail in general today, the retail assets need capital to be fixed there's no way to transition like the bankruptcies of forever 21, and the dozens of other retailers have gone bankrupt without replacing them with other tenants. There are tremendous we had a record leasing year.
In our retail assets, but rents are lower tenants have all the leverage and I would say the tenants themselves are doing an incredibly should the job running their stores.
If you walk into.
Some stores.
Even brand new stores here in in Miami Lincoln Road, a brand new Nike stores, the walk in and want to medium short there out of it it'd be out of shorts.
So they're sending you to the online and why because wall Street wants to hear about their online sales. So it's kind of.
The big mess.
It will stabilize there really good malls are still busy of other tenants are there are fewer tenants out there interestingly I wonder how this is going to translate into logistics, which has been an incredibly hot.
Industry in United States, and something we don't have much exposure to actually almost nothing in the retail I can think of.
Because of the credits go bankrupt in the multi go grand groups bankrupt in their distribution centers.
And.
So I mean, you haven't seen that happened, but Oh my God. It has to happen I. Almost every single decisions that are going to occupy by Amazon, which I highly doubt so.
It's an interesting business today.
And they're just fewer tenants the malls have to be smaller they were built too big for the environment. There is today, but every one of those properties as an alternative use everyone. You can chopped down I was looking at our property at similar showing that there were doing within the northeastern city and we're taking down three prism on building apartments on it it's a well located it's obviously great access got great parking.
There is a value for these properties somebody bold not us we're not in that business here is going to makes a lot of money buying a distress retail. It's certainly plays with the most distressing I'd say today, so and it is hard to figure out where the bottom might be JC Penney stock I think is 70 cents in the bond yield 40%.
You will to maturity, so I think they must junior bonds. So.
It's not over yet and so we have to be Super cautious in Britain planning cap that business in any respect.
Thank you I would now I'll turn the call over to Mr. Sternlicht startling for closing comments. Please go ahead.
I, just say that we had it really interesting in a good year solid year, but we really feel better about next year. This year 2020 than we did about 2019.
We just had our three year budget planning, our three year business plenty.
Meetings, and we looked at each other and said this looks pretty good [laughter], where we're happy with where we are the teams never been more cohesive other board is supportive and and [noise].
And adds tremendous value to our enterprise and we want to thank you because the.
First quarter call and for all your support over the years and we look forward to continuing what we're doing and doing it even better going forward. Thank you very much.
This concludes today's conference you may disconnect your lines at this time and thank you for your participation.