Q2 2020 Starwood Property Trust Inc Earnings Call
[music].
Greetings and welcome to the Starwood property Trust's second quarter 2020 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this.
The conference is being recorded I'd now like to turn the conference over to your host Mr., Zach Tanenbaum director of Investor Relations for Starwood property Trust.
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 June Thirtyth 2020, <unk> form 10-Q, with the Securities Exchange Commission and close its earnings supplement to its website. These documents are available in the Investor Relations section of the company's website at Www Dot Starwood property Trust Dot com.
The call begins I would like to remind everyone that certain statements made in the course of this call not based on historical information and May constitute forward looking statements.
Statements are based on management's current expectations and beliefs and are subject to a number of trends what 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 more detailed discussion of the risks and 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 may be made during the course of this call.
Additionally, certain non-GAAP financial measures will be discussed on this conference call.
Our presentation at this information is not intended to be considered in isolation gradually substitute for the financial information presented in accordance with gap.
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 FTC at Www Dot FCC talk up.
Joining me on the call today are Barry Sternlicht, the company's chairman and Chief Executive Officer, Jeff Demotic other companies President.
Up an area of 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 Reno.
Thank you that and good morning, everyone.
For the second quarter, we reported core earnings of $126 million or 43 cents per share.
As we proactively manage the initial market impact through covert 19, we quickly moved our balance sheet into a more defensive position.
When we last spoke in early May we had already de Levered, our balance sheet and increased our cash position significantly.
Although prudent in the face of unprecedented market volatility that's strategy created over $1 billion, a balance sheet and efficiency, which came at a cost earnings in the corner and continues to have an impact today.
GAAP earnings for the quarter was $140 million or 49 cents per share.
<unk> was 23 cents increase in our GAAP book value per share to $15 me 79 cents.
And a nine cents increase in Undepreciated book value per share to $17 and threed that.
Our book value per share includes year to date decline.
32 cents related to diesel and 38 that related to mark to market adjustments on our asset base.
These amounts do not reflect the fair value of the assets and our property portfolio, which we continue to believe have appreciated meaningfully since we acquired them.
This is demonstrated by our continued refinancings of these assets, which I will touch on later.
Okay.
Despite the macroeconomic headwinds we faced this quarter the power of our diverse platform was evident with each of our business line contributing to earnings and liquidity.
I will begin with our largest segment commercial and residential lending, which contributed core earnings of $112 million kind of quarter.
On the commercial lending side, we selectively originated $198 million along with a weighted average LTV, 44% 156 million of which was funded.
We also funded 220 million under pre existing loan commitment.
These cash outflows of $376 million were more than offset by $566 million of cash inflows, resulting from failed and repayment.
During the quarter, we sold three long at par to I know for 225 million dollar and one whole loan for $172 million.
We also received $169 million in laundry payment, which brought our commercial lending portfolio to 9.4 billion dollar.
The I know and how long fell two of which were construction loan contributed to a 26% reduction in our future funding exposure this quarter.
Our quarterly interest collections were strong at 98%, 6% of which were deferred or pending deferral as part of coping related loan modification.
We have modified 11 month to date, representing $6 million of deferred interest in the quarter and we're working to modify one additional loan.
Made modifications for short term generally permitted only the personal deferral of interest and were often coupled with additional equity commitments from our hopper.
With respect to our seasonal reserve, we had no long, which warranted a won't specific reserve or change to nonaccrual status, the slight increase of $11 million and our general reserve was primarily the result of macroeconomic conditions in our Cecil forecast model as well as changes in estimated repayment timing.
The credit quality of our portfolio remained strong with a weighted average LTV 61%.
As a reminder, our business continues to be positively correlated to changes in interest rate with 93% of our commercial portfolio being floating rate.
As of quarter end $6.2 billion of our long benefited from having a weighted average LIBOR floor of 157 basis point.
Turning to the residential lending side of this segment, we completed our seven and largest nonqm securitization today total totaling 584 million dollar in connection with this transaction, we retained hundred $85 million of RMBS, bringing the balance of our RMBS portfolio to $328 million.
At quarter end.
Although we recognize the $5 million securitization, while we were able to read de risk our balance sheet and improve our liquidity position by selling these long into an off balance sheet structure with no recourse and no spread Barbara.
As we continue to expand this business we entered into an agreement early in the quarter to acquire up to $558 million of non QM loans at a discount.
Although not had been purchased by quarter end, we intend to simultaneously acquire and fell approximately $470 million have evolved into our eight securitization in the coming weeks.
Separate from this agreement, we acquired $135 million, a non QM loans during the quarter and $245 million subsequent to quarter end all at discounts to par.
Our residential loan portfolio ended the quarter with a balance of 700 million dollar a weighted average coupon of 6.2% an average LTV of 67% and an average FICO 730.
Last quarter, we spoke about the significant spread widening that these long experience in late March.
Since then they have mostly were covered with 33 million of last quarter is 35 million mark to market decreased being river through a GAAP mark to market increased this quarter.
Next I will discuss our property segment, which contributed $18 million of core earnings for the quarter.
The portfolio continues to perform very well with blended cash on cash yield increasing to 15.7% this quarter.
Right collections were strong at 97% and weighted average occupancy remained steady at 97%.
Core earnings included a 2 million dollar loss on extinguishment of debt related to the refinancing of 12 assets and Woodstar won our first affordable housing portfolio and Florida.
We obtain debt of $217 million with a 10 year term at a spread of 271 basis points over LIBOR, which we capped at 1%.
This allowed us to return $100 million, then proceed and reduce our basis in this portfolio to just $30 million from $169 million at acquisition.
In connection with the refinancing we obtained appraisal devalued the asset at a 4.64% cap rate.
The fair values in our supplemental reporting package reflect this portfolio at a 4.75% cap rate our acquisition cap rate was 6.16%.
Next I will discuss our investing in servicing segment, which contributed core earnings of $37 million to the quarter.
This amount includes $10 million related to the partial sale of our minority stake and cited the real estate Advisory company that we acquired and interest then during 2016, when we disposed of our European service there.
During the quarter, we received cash of $10 million related to the partial sale, which resulted in a realized GAAP and core gain.
We also recognized an unrealized GAAP gain of $18 million to increase our remaining in back then to its imply fair value.
And our special servicing business $2.8 billion of long transferred into special servicing during the quarter, bringing our active servicing portfolio to 8 billion dollar at June Thirtyth.
These transfers contributed to the 5 million dollar increase in the servicing intangible that we recognized this quarter.
Despite the large volume of transfers into service thing, we did not receive any significant covert related fees.
Given the current environment, we expect to see longer resolution time for these assets, which will result in the lead fee recognition.
In our conduit, we waited for the securitization markets to recover before attempting to securitize are pretty cobot portfolio.
Although we had no securitization during the quarter last week, we securitized hundred $51 million along for a slight loss of 0.6%.
We also collected 100% of interest due in the quarter.
And finally regarding our properties in this segment in April we sold an office property in North Carolina for gross proceeds of 24 million dollar, resulting in a GAAP gain of $7 million and a core gain of $2 million.
Concluding my business segment discussion it or infrastructure lending segment, which contributed core earnings of $5 million for the quarter.
The portfolio was relatively flat over last quarter at $1.6 billion with $51 million a funding under pre existing loan commitment slightly outpacing repayments at $36 million.
The lower coupon alone we acquired from GE represent 726 million of this amount is 64% decrease since acquisition.
We continue to be pleased with the credit performance of this portfolio, which had no margin call and 100% interest collections in the quarter.
In addition, subsequent to quarter end, we extended a 500 million dollar financing facility by 12 month to February 2022.
I will conclude this morning with a few comments about our liquidity and capitalization.
We continue to have ample credit capacity across our business line. We ended the quarter with an undrawn debt capacity of $9.5 billion and in adjusted debt to underappreciated equity ratio of two time.
We also had $2.9 billion of unencumbered assets.
As of Friday, we at $821 million of cash unapproved Undrawn debt capacity. This amount is after payment of our second quarter dividend and after $347 million of de leveraging across our facilities.
The de leveraging include voluntary paydown of $173 million on seven of our warehouse line, where we have obtained margin call moratorium on certain assets.
With that I'll turn the call over to Jeff first comment.
Thanks, Rena and good morning, everyone.
I'd like to start by congratulating Reena back in the rest of our team for being awarded the Navy Investor Care Award for the seventh straight year.
The award of given to only one company in our space each year for excellence and reporting and shareholder communications and we're proud to have been voted by our shareholders and analysts for seven straight years.
Although some of our company has been working remotely I've been back in the office along with the senior management team since our last call. It have to say, it's been nice that some part of life feel normal again.
Since covert began we worked hard to strengthen our balance sheet by both de leveraging our business and significantly reducing or for future obligations.
Inclusive of our de leveraging we have been sitting on over 700 million of cash on most days since covert began in over 800 million today as Rina said.
This liquidity has given us the ability to go cautiously on often purchasing or agreeing to purchase approximately $700 million worth of low loan to value residential mortgage loans.
Made to high quality borrowers have large discount to par near the bottom of the cobot pricing dip.
We can securitize those loans today, well above par, reducing the net permanent required equity on these purchases to less than $50 million.
We've also selectively written CR rebound and have an actionable pipeline of accretive large loans, we plan to execute on in the second half of Twentytwenty.
We are investing today, but we'll maintain a balance of caution and maintain ample liquidity to weather any future tremors, if that's recovery stalled.
With both $500 million of senior secured notes maturing at our federal home loan Bank membership set to expire in February we are preparing our balance sheet today for both events.
With our recent Securitizations, we have reduced our FHLB borrowings by two thirds, leaving only 342 million currently drawn and we will have the ability to move any remaining balances to over $1 billion of new bank lines that are expected to close in the coming weeks or two securitization financing over the coming month, leaving us with Trump.
This capacity to continue to grow our residential lending business.
As to the senior unsecured notes they could not be prepaid until November onest.
We plan to hold ample cash to be able to pay them off should the capital markets not be open or efficient, but our plan today with credit spreads improving dramatically to read that capital in the fall through either a term loan b upside new senior unsecured notes or some combination of both.
Now I'd like to discuss our performance an opportunity set by segment. That's we expect to deploy capital in each segment this quarter.
And our large loan lending book, we're rebuilding our loan pipeline going forward, we expect to continue financing more than half of our see every loan portfolio off balance sheet.
We did pre cobot.
Our post cobot playbook also includes prioritizing more stabilized assets with smaller future funding components that are in the more resilient sectors of our rebounding, but we think we'll outperform during and after koby 19.
As Rina said during the quarter, we both de leveraged our borrowing and continued to self senior mortgages to obtain efficient off balance sheet financing with no mark to market features.
For liquidity planning purposes, we conservatively extended management's expected loan repayment date and are now modeling that less than 4% of our loan book repaid in the second half of Twentytwenty as well as significantly less in 2021 than we previously forecasted.
You have been less loans could pay off in the coming 18 month, we actively reduced our future funding requirements in the quarter to be sure. We can easily cover those fundings in cash if no loans repaid which is a very draconian assumption that I'm sure we will be wrong on.
You know jails and power loan sales executed in the quarter helped reduce future funding in our theory portfolio by over $700 million in the quarter.
Our gross funding obligations are down 35% today versus where they work just last quarter and net of bank financing.
Our future funding is below a very manageable $1 billion and spread out over the coming three plus years.
Historically, approximately two thirds of our future funding requirements around construction loans and one third is what we call good news money or the future funding of new lease tenant improvement and leasing commissions on cash flowing properties.
Providing that's good news money generally de risks your alone as the sponsored executed on your underwritten business plan.
By the end of this quarter, assuming no new construction loans were made we expect to have managed our construction exposure as a percentage of lending segment assets down 32% versus the first quarter to just mid to low teens percent of lending segment assets.
Of note, 30% of our construction loans are fully leased to investment grade tenants, Facebook Amerisourcebergen and British telecom.
We are happy during this unprecedented period to have been able to proactively reduced our future funding requirements, so significantly and without selling any loans securities or other assets below par nor did we need to raise expenses were dilutive capital.
The two thirds of our loan book that have LIBOR floors above zero have an average floor of 1.57% approximately 140 basis points above like work today, giving them a value of over $150 million today.
Floors could be sold to create incremental cash should we ever choose to.
Given our liquidity position, we were early an aggressive in de leveraging warehouse lines in exchange for emerging called holidays on 94% of our hotels and a few other assets, allowing us flexibility to modify the majority of our corporate affected hotel loan which include new sponsor equity ability to use reserves and as Rina mentioned.
Some short term interest deferrals where appropriate.
Our best in class sponsors that contributed over $150 million a fresh equity since cope it began and are projected to contribute another 150 million a fresh equity in the second half of Twentytwenty for over $300 million of current and future equity contributions in total.
Fortunately, 20% of our hotel exposure is in extended stay hotels, which have significantly outperformed other hotel segment and averaged over 80% occupancy during cobot.
Finally in lending, we're pleased that Amazon signed a lease for 100% about 1 million square foot Orlando distribution Center, formerly leased by Winn Dixie and is moving equipment as we speak.
We took an $8 million reserve won't be foreclosed on the other former Winn Dixie out that we own in Montgomery, Alabama, and it's been leased the entirety about 1 million square feet facility to dollar general.
We're pleased that due to our leasing efforts within a year of taking over both empty properties. We went from taking to reserve to creating tens of millions and gain that we will realize in future quarters.
Moving to I read the non QM business since covert began we purchased or agreed to purchase approximately $700 million and loan significantly below par.
Prices on these fixed rate loans, the recovery to above par today and are projected to generate large taxable gain in our portfolio in the coming quarters.
We priced our eight securitization this week, our second securitization since cobot began.
Transactions raised over $1 billion of nonrecourse fixed rate financing and continue to show the resiliency of our star securitization platform access to financing even in difficult markets for our target high FICO low LTV. So.
Our unsecuritized whole loan balances down to $700 million today versus $1.2 billion last quarter, and we expect that to fall to less than $300 million. After our next securitization, which is planned in Q3.
Coming weeks, we will have executed three new bank warehouse lines with nearly two times the capacity of our existing FHLB borrowings with pricing and structural turns that give us significant capacity to continue to grow this business at attractive return profile.
Although we expect the pace of originations to slow in the second half of 2020, we believe a residential platform is well positioned to grow market share in the coming quarters.
And our energy infrastructure business stuff. We've told you that we invest away from the commodity wellhead and are therefore, not highly correlated to commodity prices.
By significant commodity price volatility in early cobot as Rina said, our 1.85 billion dollar loan book that very strong credit performance has not had any voluntary or involuntary deleveraging to date and had 100% interest collections today.
Unlike our yeah rebound these loans don't have embedded interest rate floors. So lower LIBOR has reduced our interest income, but we see good opportunities on the horizon two of dust accretive Lee with attractive postcode spreads on new issue loan.
In order to continue to invest we continue to add too and extend our financing availability in the quarter and continue to look at COO execution economics that will allow us to move more financing off balance sheet in the coming year.
We have talked about our research segment and I will add that in addition to re purposing employees to help manage the onslaught of new special servicing opportunities that will create revenues for the next 10 years.
We have also seen attractive yields on new B piece investments today on very high quality post cobot origination.
Finally in our property book after remarketing are but we believe we still have to over $700 million of gain over 85% of those gain or in our very stable 15000 unit, Florida multifamily portfolio.
With that I will turn the call to Barry.
Thank you Jeff. Thank you Randy Thank you Andrew and thanks, everyone for dialing in this morning.
It's hard to add a lots of what a arena, Jeff and said I think like my quote in the earnings release reflects my view that we're kind of it that was a speedway and the could target they called it out and we're lapping around the truck.
All of the mortgage rates roll the lenders are sort of on the trucking do you have done I'm proud to pull into the pits and having the tires changed and getting new bodies are they had a crashing this crisis and we've never experienced that.
As you remember you're seeing we've.
Significant cash resources almost five.
Never having any kind of issues with the a recap necessary for the company.
And does it look out for the years ahead.
It really interesting company, which as Jeff said, we have older games that are in the investments we've made and you'll soon.
Other games.
The opportunistic.
You know and a.
So a lot in the middle of the crisis with though.
Sure.
Jeff referenced that securitization will take place this quarter. So we have a funny company, which resilient, but diversification of the business lines is proven to be.
A significant the damage.
And I think also that several of our business lines are still not performing at the.
The appropriate stabilized earnings power, specifically, our energy infrastructure business.
Which has kept a significant overhead what we pulled back from investing in that that continues to decrease it oh its contribution to earnings.
Given the scale that we hope to be out at this time, but obviously causes the energy markets went into a free fall.
I mentioned that Jeff mentioned, the arenas mentioned the book has held up extremely well with no margin calls no deterioration in credit quality.
In the entire appeared to the crisis.
The thing that's not obvious to shareholders is we don't given the strength of our balance sheet, we never have to panic.
And we held off selling loans and securities.
Including the ER loans that we held in our call do it as well as RMBS Oh, we knew that they were mispriced and the crisis and there are good credits and so being able to hold onto that doesn't sell them now let's gains are tiny losses have been a great strength of the company.
And we are.
Cautiously going on office as Jeff said, and I'd say that we're trying to cherry pick.
Opportunities around the world of the recently committed to a deal in Europe.
And we're looking at deals in United States, but we do have to be careful we're obviously in this period before the vaccine.
We all hope the vaccine is successful we also hope that people use it.
We're realistic that they may not actually.
All uses and so some of the sectors of the property markets, which had been injured the most family retail hotels.
We have to be very careful with.
But again I think if you told me 10 years ago.
We started developing 2009 I guess, it's 11 years ago that we'd be running a book 11 years into the process with the 61% LTV.
I would be astonished frankly, and the ability to continue during these times the returns.
In that position in the capital structure or even the quality the RMBS securities were buying.
Is truly something surprising I suppose.
It's been helped obviously, but continued easily.
They will get credit for our business, whether it's a COO war warehouse lines or you know so.
Which match fund the maturity of our assets. So we're quite last I assume with our scale and with a really supernatural channel. That's on a great job all hands on Dec. Even this remote everybody's been pitching in as we work through situations with borrowers.
Try to be creative and work through their issues. They face. It is it is.
The interesting time.
But I'm really grateful for the enterprise so weve built in for the team that's been managing the company just quickly on the asset classes, obviously industrials and find the housing markets.
On fire in some places are up dramatically multifamily is holding its own with small to choose deterioration.
Submarkets in in a lie one of the things we were looking at as real estate taxes as municipalities try to balance your budget still the pressure on real estate taxes, and we have to watch out for that or.
The office markets are relatively stable.
I recently is what those field one of the major check something else, but their employees working from home.
And he said well not really I mean, we just want people know that have to come back to the office, but we prefer to come back to the opposite so the media, it's kind of overdramatic. Thanks.
And people like us we've broken down your cost as we open the Grand it's off to seal family office are allowing people to come back to work in a lot of them are choosing to do so.
And then the hotel markets you know as Jeff mentioned extended stay is one thing, which we have a chain of extended stay hotels that we own or equity book, which is running at 85% occupancy, which is up 200 basis points from FICO. Good but also hotels like a hotel, we owned or actually we don't know with the lender on first mortgage lender.
In Beverly Hills, where the owner has put in several hundred million dollars of equity into asset when we've seen that was around $200 million is that.
And we never expected to walk away from that property. So not all not also tell loans are created equal and that's our job is to come through the debris and find the deals we really think or.
Great risk reward for our shareholders.
Retail is asset by asset as you know we own a portfolio of net lease cabello stores.
There are quoted the guaranteed because those is benefiting from a coded obviously gun sales are up [laughter] and ER and the kind of the credit quality is terrific and I think around like a 13 passion cash return on those assets.
So with that I'm going to stop all with and take questions. I think one one thing we're very much loved the maturity of our bonds in Mexico, but they can't DT pay as Jeff said till November. So it's nothing we can do right now except a few cash on hand, if we have to that to a small offering or find a different what I just finance.
Rollover, we can do the.
So now it's not a question about it will be a question what the coupon.
So we want to take a long road here.
Long ball and not sell assets that we think we have huge gains and just to sell them and create games. We that's why we're holding onto our.
Multifamily book, because where else can we get 15% cash on cash yields that are increasing.
Every quarter, frankly, so we could sell them and though but we would pay taxes and we couldn't replacing duration of the cash flows.
So with that I'll take so well take questions. Thank you.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one under telephone keypad.
A confirmation total indicate your line is in the question.
You mean prestart you if you'd like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
First question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
You know I guess first looks like you've made new investments, obviously see ari as well as the purchase of the non agency loans that are that you covered it hasn't closed.
Curious on the energy infrastructure lending you know how do you feel about that portfolio and segment I think a few weeks ago you saw log.
And talk Whitney sell some.
Energy loans was that something you guys looked at a you know was or read through on that sale that makes you more positive or or less or more negative on on that asset class maybe talk about the outlook for the energy portfolio and any growth there.
Hey, Steven Great question. Thank you for a thank you for right.
New investments and on the energy side, you know we were quiet this quarter spreads it certainly widened out the banks have pulled back a bit.
We think we can generate levered yields that are in excess of what we're generating before coated we actually approved the deal I'm. Just just a couple of weeks ago that we didn't end up buying we thought we could potentially probably a little bit cheaper secondary and that didn't quite work out I have Sean Murdoch and Denise or two on the line with me and regarding your question.
On the portfolio and what they're seeing specifically there when I turn it to Sean and Denise.
Quickly give you an update.
Sure I think we're seeing the markets in energy stabilized that sort of signs of putting after coded and our portfolio.
That's an opportunities.
Our growing and as Jeff said, there that you know attractive returns versus the returns were generating critical that I'd add that Jeff mentioned, we're working hard on doing this yellow, which we think.
You know sort of proves out the business model in terms of generating term nonrecourse financing.
For our loan activities.
Okay, great answer listening.
Sorry, Sidney just to add on the Hancock.
Those were all boy, that's really deal and service deals. So we're not investing and close to the wellhead, which is what those deals are so they have a lot of commodity risk associated with those deals so not really a good for our Bob.
Okay. That's helpful. Thank you.
Steven finally, we probably need 15, or so new investments to complete a portfolio for the C. Although its young I have no both talked about so our goal over the next six to nine months, we'll begin to get to the point, where we can agree to become with the with yellow to move this debt off balance sheet.
And then Barry.
Question on the election, if the date hold your next conference call will take place the morning. After the presidential election, and I guess, depending on mailing boats in different states, we may or may not happen and answer or through the next president [laughter].
Can you.
Talk a little bit about I know you got the new investments you're doing you've got a very strong balance sheet, you mentioned, maybe raising some debt around some maturities later this year, let's go in November election, as well you know the risk it biden selected regarding the real estate taxes. These proposed eliminating like kind exchange how does that it you know the different things I'm sure you're aware.
How does that impact how you think about starwood the mortgage rate and the bigger just how you think about real estate investing in general if that were to come to fruition.
Yeah, I think you know the most important thing we we look at as rates and there's no yield to the world and underpinning real estate, there's tremendous rates are too wide.
I I think I was reading something where we mentioned that Amazon lease credit will trade into five cap rate, you know and their bonds traded like 40 basis points or something like that if there's a huge premium on real estate yields because people perceive.
Weakness in the income streams, which is not only you can't you can't really invest macro your option does micro and you have to go block by block and you look at the credit quality of the cash the straight.
So I think if you think that Biden selection will decelerate the economy, what I've heard that beams get really other than minus 32% LNG [laughter].
Yeah, I think there'll be no issue rates will stay low.
And I don't think the like for example, like kind exchange is relevant to the kinds of apps, we finance I think that's mostly used by individuals buying strip centers and.
Franchise net leased assets and again, because there is no alternative will they sell it seven cafs instead of six perhaps because their tax.
Like kind exchange. Thank you should go away it isn't required it doesn't isn't helpful and its unique to real estate. So I, that's an easy when coal for them to fill I've never used in my life by the way so I've never been affected [laughter], but I think I think other situations other issues like municipalities toxin real.
<unk> is is a double edge sword, reducing the volume of the value of buildings in cities because they are doubling property taxes.
Means the capital won't flow into those either by build the Newbuilding order by a building interesting values are going down.
So while it seems to be popular thing to tax buildings assuming that.
Wealthy people own them truth is obviously shareholders on them in the public market I assume some of those are pension plans and individuals.
And the truth is they're not they're not going to create and there are certain families I don't buildings, but they're the minority of the U.S. property market. So it's there's certainly more welcome Tac go go talks to actually [laughter] and taught me later.
So yeah, the real estate markets I think.
Oh, so pardon, they're not pricing in inflation, it's interesting to me with gold past 2000, bitcoin rallying that hard assets haven't really gotten the bid.
Globally, I think that will change I think people will begin once you feel like there's I. Just tried this climate is walking in quick sand and and we think the ground is stable, but it shifts we don't know still vaccine around the election January will work will there be somebody that comes out of the vaccine that doesn't work and people get pissed off long.
Novartis and that's been the Astra zeneca producer of actions later.
<unk>, presumably will be no more institutional if you will so it's it's a choppy road and we have to be careful we're here for the long haul we're not here to have.
A one quarter I I didn't mention I Should've mentioned, having my notes that you sitting on $800 million of Kashi and $600 million is excess cash is a 10% deal, which we've obviously got better all business lines on that $60 million, It's 20 cents a share in earnings.
So you know you can add 20 cents to our earnings for normal period for [laughter]. Once we put the capital work, but we can't do that however, we can cover the dividend because we have all these gains on our books and and so that kind of interesting time, it's it's a scratch your head a little bit, but but be careful and I think the election.
And but over yet and I.
I don't think.
I don't think generically I think the move to increase all toxins corporate income taxes capital gains tax.
As well as tax on the wealthy.
We'll see it's a complicated puzzle will they change depreciation schedules for real estate I don't know usually hard assets are held for long periods of time and people like to use them as inflation hedges.
I can't really.
I do think capital gains tax changes will will mean people will hold assets longer so we'll be less for sale, most likely especially from taxable institutions are individuals not necessarily pension plan.
So the long answer that I have no idea [laughter] because I can argue both cases.
Thanks.
Next question comes from line every machine with JP Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my questions. This morning, I'm, Jeff you'd spoken about the purchase of the low loan to value resi portfolio.
And the possibility of securitizing that above our how should we think of that from an economic contribution than it do the securitization is that a gain that you recognized or would that discount since you need to be accreted into income going forward.
Yeah. Thanks, Rick. Good question you know these purchases we were fortunate during covert deal with the buy them at a discounted as you just said to the Securitizations today are above par I think single abuse or trading on it in a yield better about equivalent to the gross wax the coupon of the underlying pools. So these are obviously very occur.
You have one weekend, so triple A.'s, it 120 over or whatever that is so the other financing markets have come Roaring back and I think one of the reasons is there's going to be a lot less supply in the coming months. The non QM originators, we'll be doing less volume people live clean note most of the loans that they have so given there are a lot of bond buyers, who really like this sector and they like it because.
As a bit strong credit characteristics that we like it for you know the reality is that securitization pricing should continue to be pretty strong going forward and will increase the hold on bids to significantly above where we purchase though as far as the gain goes you know these gains our taxable I'm. So we will have some tax issues. They are also they're hedges in news and given what.
Rates have done the other probably be some small hedge losses, but net of all about the there should be very large gains that that we will likely take 'em along with the at the times of the securitization. So as we as we head into the next couple of Securitizations I think you'll likely see some fairly large gains along with that as opposed to just running at all through all through coupon.
Did you have anything different you would say there.
No I would just say that it's consistent with how we treated the past securitizations in this business as well as our conduit asked Ardmore mortgage capital. So we recognize the gain at carry with it.
Great perfect. Thanks, guys.
Thank you. Our next question. Thank you Tim.
Right.
Please proceed with your question.
Hey, Good morning, guys Hope are all doing well my first question just on the CRT pipeline can you maybe size that for us today, and just give us a little bit more color on the characteristics. You know it seems like your migrating towards higher quality more stabilized assets. So are you seeing yields come in a bit there were spreads coming out of it there.
And LTV Ltvs move up or just curious.
You can talk about the assets all said that are asset types, you're focusing on.
Yes, sure, it's Jeff I'll start and I'm sure Barry might jump in and Dennis you are had originations is a is on the line.
I would say immediately post over the handful of opportunities that we saw were significantly wider you've seen some spread tightening here as people are coming back into the market. There are a lot of our competitors are not looking to invest today. So there is a little bit better opportunity set for us to to get into some things that we couldn't necessarily get to our rates of return on pre told it.
I think we're seeing a decent amount of multifamily that we really like we're seeing it does feel that we really like we're seeing sectors that that we want to be and with the ability to potentially so a notes or use them as COO collateral as opposed to continuing to add to warehouse lines, which as you know are less than half of our financing of our multi every both in the lowest I think.
Among our peers I'm. So we will continue to sort of look to keep less students to bring on assets with less future funding I think given the uncertainty around repayments and we've pushed out cautiously and push so repayments significantly into the future right now we would like to have less future funding than more future funding obligations until we have a little bit more clever.
The about how we get repaid so I think you'll see us stick to our new thing with with some fairly conservative prototypes and probably not doing much if anything in retail, which we haven't done in the last few years or other sectors, but could be a that could be considered a little bit more volatile.
Barry do you have any thoughts or dentists are different.
Well well anything else I'll say is our loans are chunky [noise].
Right I mean, we wanted you are doing bigger loans, obviously than maybe some of our smaller peers.
And well these patients in the deck, we invest a $40 million in the back half of the year, it's like four or five cents earnings, it's not going to make or break a year. So.
All we if we can get a 15 points to put out a third less to get to attack running our model on even or loans or are doing better than that and the energy book as well north of.
The returns.
In real estate right now so the one problem that I see for lenders is the volume of deals.
Until sort of the dam breaks here, where people really run out of extensions and.
And collaboration.
Banks are doing they don't really have to sell and they don't want to sell nobody wants to sell predictions of Cove. It. So transaction volumes globally are down I mean financing opportunities are down.
And and yes, I think people perceive that there will be light at the end of the tunnel. So as Jeff mentioned, yes spreads have come in there've been a few.
So called the <unk> financings for a few people appears and even though the spreads have come in they are still being bid heavily dramatically it's interesting because.
Obviously, we did one of them.
The trial I want to be like well.
It's good to see where the pricing as you're seeing a lot of hedge funds for just picked up market.
There I.
I would call, let's go down a little less you, though [laughter]. So done this for so long that sometimes it would seem death is trade three times by 30 years. So [laughter] I mean, it really we know these assets than Weve somebody's business would have a perspective and why that acid, even though it looks like it's not good locations never worked.
So we just try to avoid landline and and there were opportunities construction itself is going to drop dramatically. It's already dropping I think multifamily down 100000 units from peak.
And I don't see a lot of people starting anything spec in office.
Oh held will finish their construction pipeline that that's actually two large and.
And then I think you'll see a tremendous [laughter] reduction in supply.
I think you know two areas were demand isn't going to return to the levels. It was.
Any time pre koby will be hotels and.
And retail those are the two asset classes that it's tough to you could gets extraordinary deals I'm sorry spreads.
And those asset classes, but you're gonna have to predict the future that's not going to look like 20 line teed up for a while yeah. There's no question business travel will be injured for some period of time until their traffics restored and international travel comes back. So no. It's their underwriting is gonna be different than the underwriting we had before and you know I'm working.
Got it as heck so.
There's going to do you like doesn't go buy through the shop L.C., we see that [laughter], what do we think.
I think Jeff and Dennis can [laughter] can support that but you know there's a lot of stuff will pass on right now just risk reward like why why take the risks and we do.
We can survive just said we have a really strong was probably survive as well as anyone can in this space, having said that you know if it's the cold. It went on for years, that's going to be tough.
So no I think it's tough for equity markets, who by the way.
I personally would have then we'll all a buried subscriptions to do all the new services that show him every deal that gets done because we do get aggressive at all of them to finish the job I would say are [laughter] our pipeline today, it's about two pages long ago, almost two full days, which is almost similar to where we were pretty cobot, yeah. It started out very small.
We have eight loans or so in the Red zone that would use a decent chunk of our budget returns that are above what we've seen in and I would say also you know when the street originates alone and they try to sell a mezzanine something that we do very little of we seem to deals that we actually like the credit on but they thought they could sell the mezzanine 300 basis points are so inside of.
Where we would bid which is why we like to create our own cooking and and underwrite originate our own loans and then sell off our seniors ourselves that the bid from hedge funds and others, who don't have the origination capability is back and its voracious and it's been it's causing those mezzanines that originated by the street to trade multiple hundreds of basis points inside of where we would begin to care.
Sorry long answer them.
Jeff incentive that out as a <unk> I'd say generically returns are up about 200 basis points versus pre coded levels and I'd say generically leverage on the asset classes that we ought to be land. There are probably down about five points on average that's just generic but as Barry said, it's still ideal asset by asset Street by Street. So.
Yeah, I didn't know I appreciate the the detailed response there that was lot of get information. So I appreciate that and then just on the margin call holidays, you haven't placed on the hotel loan portfolio can you just remind me when knows were put in place in the duration of those agreements and just curious if you know it.
If you if it's too early to begin having conversations about extending knows in one it would take whether it's just additional de leveraging or other kind of give ups that would be needed to if you wanted to extend those agreements.
Yeah. Thanks for the question you know I would say in general they expire around year end. This year, we're certainly hoping that hotels start to see a little bit better performance come year end in general the de leveraging was somewhere in the 10% area up My guess is if yearend comes and things are still not great.
Ah you potentially have another small de leveraging but a fraction of the 10% that we paid down previously which was only $100 million in total look across those so I'm not a huge liquidity scare for us, but you know sort of hoping that hutto numbers come back a little bit into Q4 and that we're able to hold the line you know the bank.
Lines General generically, if we're writing a 65 LTV loan or something like that the banks are listening to us at 45 LTV on his assets. So if we've already paid them down by 10% at some point it becomes a sort of ridiculously low leverage level from the senior so <unk> <unk>. The next round will be very small is my as my hope.
<unk>.
Got it Okay and then just my last one here you know circling back on the dividend.
I know it sounds like investment activity should pick up a little bit on your guys ended the second happened here a lot of good opportunities a capital work, but also sound like that.
Elevated cash levels aren't going anywhere so just wanted to circle back and see how I know, it's a board decision, but how you're thinking about continuing to under earn the dividend for the foreseeable future. You know just knowing that you could earn and if you want anybody.
Yes that that might not be the near term pipeline.
And we say no comment [laughter]. They they you know again its a.
I'm, a big shareholder myself I'd love to maintain the dividend and the market doesn't think we're going to maintain the dividends I think the street has us paying a dollarssixty unfold so in the stock trades or the ridiculous yields so given the what's going on just count to our peers.
So it's really.
Well, there's plenty of a competitors that are actually aren't paying a dividend their stocks are holding up.
So you know we don't we're going to just look at a month by month.
And at the moment you know, we obviously all the dividend and but I think my comments would infer to use we can't cover the dividends. We just want to also be normal and or [laughter] looks like you can get to normal.
Sometime soon so.
I think we'll leave it at that [noise].
Thank you.
<unk> line of George.
Thank you. Please proceed with your question.
Hi, Good morning, you cited in a roughly 11 loans at quantified at during the quarter.
Imagine some jodys loans were hotel or retail one I'm gonna confirmed that was accurate and and secondly, if.
It may be there were some of the ones that were not will tell retail I'm, just kind of getting some more context around the mix there.
Yeah, but the vast majority was hotel as your do supposed that that's absolutely correct.
The others are.
Or some very small its a very small mostly technical modifications that have been done today, but the majority of the of them odds had been on hotels.
Great and my second question Miss this detail you talked about good news money for unfunded commitments can you just.
Revisit those comments on.
Much of that the 2 billion is callable or maybe it's gonna be dependent on sort of performance milestones.
How much of the 2 billion is callable I'm not sure I understand exactly if you can or you even a good news right. So it's gonna be dependent on some sort of Elisa back to be fine, yeah, right or just kind of any sort of performance milestones just wondering how much of the 2 billion is maybe tied to that.
Yeah, I I said in my comments I believe about a third of it typically is good news money in about two thirds his future drawers on construction, so and the 2 billion is gross I would assume that none of our banks fund alongside of US and we always assume that are banks will fund alongside of us and leaves us less than $1 billion of net future fundings from us so using.
Lets say mouse you know 333, if it were exactly 1 billion of good news money and and 666 or so of construction growers are coming out over the next three and half years extremely manageable numbers given the size of our booking and the amount that we expect to come back into the book on on repayments.
Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.
No I'm very theres some.
Bearish views on New York Office.
You had commented a little bit about the tech CEO that you spoke to maybe applying it was somewhat over dawn.
I was like your thoughts on New York Office and.
Kind of where you think will be a year to <unk>.
Yeah.
[noise].
I do think the the big boost to these are facing some troubles and the pressures on real estate taxes office properties will be tremendous because they're they're big you can still packs them.
You can tack street level retail and hotels, a close so [noise].
Oh, it's going to I think it's not even so much of rental so much as expenses going up lets object go up to some need to increase expenses for awhile as you know the way leases are structured the tenants will pay those increases.
[noise].
So when the lease rolls it will be Oh, and sometimes the the leases written so that the the landlord house increase the absorbed increasing taxes I think you're seeing you're seeing interesting issues immersion some office markets, namely San Francisco, and New York San Francisco.
10% or the stays in downtown is no up for sublet.
So I think going to see a significant decrease in rents in San Francisco being the heart of Tech land on the fact that downtown San Francisco as.
Yes, clean and that the has issues right now I think people are thinking they can go somewhere else and work in the suburbs and so the CBD is has some issues I think in New York City.
Oh, Yeah, that's funny I think.
I got a lot of criticism for saying guys would be down does it will be down New York, they've already got a newborn and.
But I do think people want to work from the offices and what I was really referring to wasn't actually coupled with it or even.
Or even the protests some of which turns into riots Oh I think there's a general perception that the sees aren't safe.
And nothing will clean other downtown faster than a better returns they have in urban markets and whether its downtown Atlanta or downtown Washington, or downtown New York or.
Chicago I think the city layers are gonna have to pay attention to the one thing about safety and safety you can't price into real estate. So it's really important that these cities get control of Oh, the safety issues and.
People said their children unsafe or they're going to move and across the country. This most flights a suburbia, taking place which is kinda fascinating like exactly what you might expect on other hand, that's not going to disappear or doing to talk about on the margin pressure on ramps up or down and in the middle co visit point out Facebook I know just announced it took.
730000 square foot leasing and and probably building, so and I'm aware of a Facebook take space in that building and.
In Portugal, another another and a 400000 Scotia deals just signed in Boston. So deals are getting signed it's pretty hard to sign a lease when you can visit the property and most yields are sort of taking your time out and trying to figure out what the future looks like.
Tax mall Tech firms they were always distributor in the where they they ran these companies. So you know program considering the and the caving in Alaska and do his work most companies don't look like that and I think as I talked to that techs, you're asking about loyalty and then how do you build a corporate culture and then how do you feel with people, who don't have Wi Fi at home and.
There you know we don't have the kinds of connectivity that that wealthier people have so it is.
That's a mall can said recently its little discriminatory for several of the work from home. So obviously service industries, you can't do but anyway. So I don't think I think youre in a in trouble.
I blame it on the administration of the city right now and the city council much more than two workers are hardly resilience and tough and but I think a safety new people don't want go back to your markets and that's something that the city's chapter is not yet on.
I think I think other cities will benefit from this and whether its Nashville, or Austin, Texas or.
Alice Houston, the Florida capitals in Tampa, Orlando and me Jacksonville.
Georgia, you know there there are places benefiting from this.
Kind of cloud coming over these large cities boss is probably fine.
Right, but but the other issues and other cities and it will affect property that is that something we'd watch out for <unk>.
And dawn I will say in various push that this way for a long time, but less than 3% of our loan portfolio is Manhattan office, that's three loans to them or small unexpected anyone in one is on a diversified portfolio, including a large investment grade tenant taking the bulk of it we feel really good about those ah, but those three loans, but again very small percentage of our portfolio in Manhattan office.
Our.
Thank you.
Our last questions today will come from the line of Jade Rahmani with KBW. Please proceed with <unk>.
Thank you very much I get a lot of questions on styrene, It's a new York City exposure and I was wondering if you could quantify that and also provide some commentary as to the a few specific loans that are in the New York market and how they might be positioned in terms of buck future credit performance.
Great. Thanks for the question in total, including all New York City area. Our exposure is about 14% of the loan book today about 37% of that is office. There are condos in there in these condos up significantly low bases, we have to you and I've talked about a few of them in the past and.
We feel that we feel very good about the condos I would say as I as I look at across our portfolio. You know we do have the one condo or that we have spoken about before that we have taken a reserve on so away from that the rest of it but condo book feels pretty good we still have a recourse guarantee on that and it is still in the process of selling.
Selling units. So we believe will be done in the next 12 to 15 months without loan again with with full recourse and Jeff. It's Barry just I'm just interrupting you can you reconcile the 3% instead it was in the working your first comment last question. The 14%. He said it was in New York and I'll be Ronson Sanchez question.
Absolutely so what about 5% of our book in total is office.
60% or 3% about or so is in Manhattan, and the rest is and as I look your Brooklyn, and long Island I'm, So about 5% of our portfolios office out of and then 14% of our portfolio includes all New York City Office Condo Hotel and multifamily Barry.
Or what else I want hotel don't is only $36 million in the <unk> de I'm, just so no acid basis, North of 17 billion or loan book is 9.4, you said you've done in mine too.
[noise] [noise] [noise] [noise], great. Thanks for taking the questions.
And then just in terms of the overall loan portfolio.
Given the recent a note sales what percentage of the loan portfolio is being outs at this point.
I don't have that exact number I want to make sure. We can give you an exact number I think were about 45% today on bank lines and we obviously have alerts the yellow and the rest would effectively be notes, but I don't have it on the tip of my tongue reenter unless you have.
Jade, we can come back to with the exact number for because of its b note.
I do not.
I I just point out again that that you have a warehouse line on this on the RMBS. The FHLB line and you have a different set of lines on the energy book. So it's not just talking about real estate anymore.
Or key real estate.
Hey, Hey, Jay Sandra out of the out of the around 9.4 billion and a commercial lending book, there's about a 600 emas at about 150 160 preferred equity so call. It around 750 million ATA nine point.
9.4 billion of and that's that's carrying value of the assets Andrew I think he's also considering things where we sold in a note. So I think we should get back to them with the exact number.
Thank you very much I'll follow up on that later.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Sterling for any final comments.
Thanks, operator, and thanks for your questions and for joining US today, but one thing I'd say as you know I'm very proud of the fact, Oh, we want This award maybe go care award for seven years in a row at <unk> at long went public we said, we treat our shareholders I got partners and we do so were available to answer your questions image and there's always been available to do so so.
So without giving away things, we consider proprietary were at once you understand what we're doing and the risks in the book and we appreciate your spending time with us and supporting US. Thanks have a great holidays or whatever that is summer [laughter] August take care.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.