Q3 2020 Starwood Property Trust Inc Earnings Call
The 10 quarters.
In summary, our liquidity position remains strong.
In our residential lending business, we created opportunities to lean in on offence during cobot when loan prices were the most distress. This spring.
In addition to the $50 million gain Rina mentioned on our $479 million securitization in the quarter. We purchased another 336 million of loans at a discount to par that will go into future securitization.
We continue to optimize our liabilities in the segment away from securitization and Rina mentioned 600 million in new repo facilities this quarter.
I will add that this includes our first non mark to market non recourse warehouse line, which goes along with the strategy. We've employed in our theory lending business, which is to diversify our funding sources with a focus on non mark to market non recourse.
That goes for our energy infrastructure segment as well are we added loans in the quarter and are working to add the final loan that we expect to comprise our first energy infrastructure CLL that we hope to price in the first half of 2021.
This will be the combination of the business plan, we set up with two years ago, allowing us to accretively grow the book with non recourse non mark to market from financing.
They've had no pause or interest the world's first three quarters of 2020, and our portfolio has withstood the lowest natural gas prices since 2005 and negative oil prices in April further proving the book insulation to commodity prices.
In our property segment Rina mentioned, we had a 54% cash return on our quality bond like portfolio.
Based on similar low income housing tax credit properties that we thought trade in the quarter at lower cap rate, we tightened the cap rate on our internal marks to 4.5 on our 15000 unit, Florida portfolio, which increased our fair value marked by almost $100 million.
The embedded gains in this portfolio now make up $2.25 of the $3 per share fair value upside across our owned asset portfolios.
These marks on a GAAP basis would be almost 1.25 billion today versus 1.1 billion last quarter.
Adjusted for depreciation and fair market value marks our book value is back over $20 by making our stock price very attractive it on 75% of that adjusted book value.
And in over 13% dividend yield.
In our CMBS book remains near its lowest balancing years with just over $700 million balance. Thanks.
Subsequent to quarter end, we took advantage of recent dislocation to add a majority interest in a pool with significantly better credit collateral and higher yield and pre covert deals. We continue to increase their names special servicing to take advantage of coated related dislocations in the years to come.
Our service or is very busy and we expect it to be for the foreseeable future.
During coded while many pulled back we chose to increase our pace of CMBS conduit originations, allowing us to make tremendously accretive gain on sale margins in Q4 Securitizations on loans, we wrote in Q2 and Q3.
Finally, we mentioned last quarter that Amazon signed a lease for the 1 million square foot Orlando distribution facility. We foreclosed on in Q2, 2019, and we expect to sell that asset along with a 1 million square foot distribution facility, we foreclosed on simultaneously in Montgomery, Alabama, and subs subsequently leased to dollar general.
The Montgomery asset is under contract and we expect to end market the Orlando asset for sale in 2021.
In sum using the sale at our contract Montgomery in the appraisal we got on Orlando, We will have created approximately $90 million of investable equity.
These sales will reverse the previous $8 million impairment and create over $50 million for the company due to the unique ability of our manager to maximize value on the only two assets, we have ever foreclosed on and our 11 year history.
Importantly, we were able to accomplish this outcome in less than 18 months.
It's been a hectic here and the management team has never worked harder or been more aligned and we have never benefited more from our ability to choose the most attractive sectors in our multi cylinder platform nor from the diversification of liabilities on our balance sheet.
We run a uniquely diversified low leverage business that we set up long ago to outperform periods of dislocation and we appreciate your trust in us.
With that I will turn the call to Barry.
Thank you Zach Rena, Jeff and good morning, everyone. Thanks for joining us.
I have to say I'm pretty happy with the quarter Im pretty happy with our outlook.
Which I think was reflected in light my quote in the earnings release.
We did build a differentiated platform, we're not just the commercial mortgage riet rely on one business and we are we have platform value.
Which is expressed in seen in our earnings for the quarter and what you'll see from us going forward. Some of our credit our businesses are extremely high early like our our conduit facility, which completely completed a securitization after quarter end.
It will be the second most profitable securitization or 11 year history.
And other companies over the year compared to don't have those cylinders. They don't aren't in those businesses Thats force capital into and maybe at a time when they shouldn't into one line of business and Thats why we created this multi cylinder platform and that is why I think we can continue to perform at the levels. We have in the past we've always created nonrecurring recurring earn.
And we always will probably create them and the comfort you should take is the fact that we have.
$5 of value on our from above book gap.
And that represents huge earnings power, which we can harvest at times, we might need to.
While other businesses might be having a low so let me back up and talk about the real estate markets, because I think thats really important as we look at what we're going to be doing going forward.
I'll just walk through the five major asset categories and give us give you our view on them.
The.
Yes, Mike I mean, so let's start with the two most impaired asset classes and talk about our exposure to them the probably the most difficult asset class and real estate at the moment is.
Retail retail is difficult to underwrite.
Because of the credit quality of the tenant is on.
Certain and because the tenant has all the leverage and many retailers are deciding what footprint there.
In this brave new world.
Do they want to open stores that they want to work on their E commerce platforms. When they want to invest whatever capital you may have in their distribution centers in last mile.
So retail is really hard to underwrite and hard for lenders to underwrite our exposure to retail is about 1.5% of our total assets.
And the biggest component of that is alone on the American Dream, all in New Jersey will repaired pursue first mortgage.
We have about a $1 billion at the top end of our stack about a billion 2 billion won 95 of exposure to the asset. It's a first mortgage there's almost a billion dollars of debt junior to us.
And the loan is collateralized with.
Second is on the mall of America and the other assets of bigger Museum brothers. We're kind of proceed with JP Morgan Bank. They have not taken any write downs.
It's about a 170 million our position in total for our company.
Inconceivable that the mall is worth nothing because you're the first mortgage. So the question is if you have any do we have any doubt you'll collect this.
This first mortgage I don't really have a doubt.
Roles reopened and we underwrote it as the entertainment venue it has ride fares.
In parks and frankly, we underwrote it with our team I, So, let's let's write underwrite the retailers in Europe, let's assume they never leases a store what do we think the mall will make from its entertainment venues and we still feel comfortable that we'll be fine.
At that asset and so that is not really a risk for us the second major asset class that talk about his hotels, obviously hotels are different than retail because they will come back they'll come back at different points in time and looking back differently, depending on what markets. They serve since were large players in the hotel market when I'm guessing we know what's going on.
Finally at the firm in the equity side, we probably have interest in over 600 hotels all over the world.
Our drive to assets in places like in Suburbia that are not dependent on international travel or even domestic travel as you can see the staff. The running 50, 60% occupancy was our courtyard scattered around the country. We have low end hotels are actually running.
In the eighties.
Occupancy or we own a chain of 200 hotels called Intown suites that actually is up year over year in EBITDA. So it's very different to what you own hotels will come back. So it will be a vaccine at some point there will be international domestic travel at some point and we have a very good crew of borrowers we only have four.
Assets in our hotel book that we think will require additional restructuring at the moment and deferrals.
But we're really comfortable with our our basis in these loan and feel fine offices yellow that offices, and so yellow for lender because often our offices that have tenants in there and whether they are physically there or not they have to pay us rent and the credit quality tenants and so you see our collections that office book are fine and much of our office yields are totally fine you seen no deterioration leasing.
Duration, our credit book.
Slightly better than than we have in our risk ratings improved slightly.
And I'm not really worried about any impact of the current spike in Corona virus, because I do think you are going to have testing.
Better testing.
Celsion incredible testing.
Devices coming out in the coming in the near future, which will help mobility and help all of our assets to help people get back to the office. Then you have to other asset classes really that are that are large one is a multi and the other is industrial both of which are our green and maybe bright green in the industrial space and Thats that was.
Heart of one of the deals we did in the quarter in the UK, which is multi and industrial so I just want to take you through a quick comment on valuation of our company I want to say how ridiculous is actually so the GAAP book value of the company's 15 86 a share.
The Undepreciated book value is more like 17 so.
10, something like that if you actually take the GAAP book value of 56, and you believe us and I think you would you we can't we continue to believe our our valuation of our affordable housing book is conservative and we are the nation's third largest owner.
Okay affordable housing in the country, we have assets in the in the space outside of the mortgage trust. So we know what we just bought a portfolio with foreign accordingly. So.
14, other guys behind us and we're still buying this portfolio to four and a half cap.
So if you believe are $3 of of of fair value that is not in the Undepreciated book value, bringing our fair, though above 20 Bucks a share let's take the 15 86, let's take the $3 out of it. That's 12 those six that's a $3 of equity assets that are largely fully leased industrial buildings or affordable housing assets that.
In sum the best markets in the country and stay completely fold because rents are 30% below fair value of garden apartments of market rate apartments, and then take out the accumulated depreciation of $1.30 you're buying our stock at 10 76 against the GAAP book value of 15, 86 that 66% of the value of the gap.
Two of our of our company our average loan is 61% LTV. So you're buying these assets and loans at 41% 41 cents a part of the fair value the assets. So enter that you're getting a 13 dividend yield seems.
Seems a little ridiculous. So there is no way property values and what we have lent against are down 60%. So I don't think anyone even considered that as a possibility. So we are if she has always been the same issue we could pay our dividend forever.
Forever is a long time, but in the foreseeable future. We can pay our dividend should we pay our dividend is another story because nobody believes it's going to stay here and payment recently talked about it on a.
Program.
But we have been swept under the rug of all the other commercial mortgage Reits I myself, given my history in this space with the Starwood financial which became I start I'm painfully aware of whats happened to mortgage rates in the past and those of you who are with us and somebody who have been with US since we created this company 2009, I said to you we would not we would not stay past our time.
And we would not.
Go the way of many other mortgage Reits and we're sitting with $880 million available liquidity today and with a really good book in a really good team 300 people here, there's no value for the platform the stock price either and we have a huge team I'm actually sitting in our offices in Miami with 300 people who are doing the work they've been doing since for 11 years originally in originating really.
$50 billion alone.
And it's really I really feel really good about our position in the market So culture.
Hopefully the market will recognize that im sorry, we are not.
Like in trading at 176 times revenues.
So we're sort of boring, we just pay cash and would continue to earn our dividend and Thats. Our motto is we want to make sure that as long as we can earn the dividend, we'll pay the dividend and we're pretty comfortable looking out into 2021.
And what we see in front of US we had modest.
Very modest paybacks.
In our worst case scenario in a 21 forecast stretching what we expected what used to be expected maturities and people that pay us off we put them to 2200 based models and shockingly the money to be named come back with some of you have mentioned to Zack.
Our European exposure going up which was really one loan but two of the loans are going to get repaid that we werent. We didn't think we are going to get repaid for now.
Net exposure Europe's going to go down and probably hold constant after those two repayments, which will come shortly so rates are low people would like to refinance that like to get rid of our our debt and as soon as the credit markets allow them to I assume they will again and it will be back aggressively looking for deals. So it's kind of fun I wish I were still running.
I say, we turn to become more aggressive we're not Cowboys, we're not doing anything that isn't like we think really good risk reward in this environment, we do think things could go wrong.
And we are going to keep around $400 million of liquidity when in the old days, we used to keep to 50 and over 400, we'd like to invest our capital and we'd like to do it in any of our businesses, you'll see us take up our energy book.
As you book, our energy business has been rock solid with no impairments at all as you know these are conch typically contracted.
Properties that we and we'd like to increase that exposure, we expect to do a different kind of financing coming forward.
Similar to what Weve used in the CLL books in our in our in our real estate book and I think with that asset business that asset is underperforming because of its scale, we expected to originate a 1 billion three along the year, we weren't able to do that now because we couldn't do it we just didn't want to do it because it couldn't get match debt facilities for it and that without the without taking a.
Liability like a savings alone with a short term loan a long term asset we held off poring capital into that business until we got eight.
A new.
A new facility, which we just got which will allow us to have terms match financing and take the risk out of any mismatching maturities between energy paper, So and if we can open up the CLL market for that business you can see us.
Make that a significant contribution to our our business a business. The book is running around on the old book around seven and a half and on the new book greater than 14.
The problem for US is that the scale. It is the overhead is bringing the darling of the business below what it needs to be kind of mid single digits.
Right.
And it will it will ride.
It should rise to.
Double digits as we grow the book and we're pretty excited about that because we have a really good team that does that and again there is platform value in our company. Because these people are the people, earning that need all this money for us in these other business lines that are away from our commercial mortgage book. So we like the markets to think of us as a company.
As a finance company and not just the commercial real estate lender and we favor the real estate all areas that real estate, but we have a lot of opportunity another interesting about.
As of course, the servicing book is growing again I think it was down at six six.
60 billion and now it's $80 million.
So weve turned the corner on that and getting bigger and bigger.
You know a lot of loans are getting restructured.
A lot of them are guests are coming in and then leaving more quickly, but we thought that would be a hedge we thought we see opportunities to make new loans in that book and of course, all that's actually going to happen and so we'll provide a proprietary platform of opportunities for us going forward. So I think we're uniquely positioned against the competitive set.
Continue to perform at an exceptional level for our shareholders. I think we were the best performing mortgage rate in the United States for the past 10 years.
Including our dividends and our spin of sway now invitation homes.
And we'll continue to hopefully.
Hopefully achieve that in the next 10 years. So thank you for everything I want to thank our team because we're working remotely. This is a big company and we have a significant asset base and everyone is rowing in the same direction dedicated to the task of being the best at what we do and we appreciate your support.
So with that I think we'll take questions.
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One moment, please while we pull for questions.
And our first question is from Steve Delaney with JMP Securities. Please proceed with your question.
Good morning, everyone and thanks for taking the question.
Jeff You mentioned and a number of comments, but you mentioned your conduit lending business. I think you were in one deal in July with Morgan Stanley in the third quarter.
It was a piece and CMS back Capex late October talking about conduit profit margins in the third quarter in excess of 500 basis points.
Just curious as you see the business now do you see it stepping up in the next few quarters going forward to maybe where youd be involved in multiple new issues and what are your thoughts about the sustainability of those profit margins. Thank you.
Yes, Thanks, Steve I really appreciate it we have a great team at Starwood mortgage capital, we service that quiet in the second quarter.
We came into the summer and decided to hold on to some loans and wait for a better opportunity to securitize, rather than do a private COO get out of risk sell loans at a discount and ultimately we were rewarded with our patients we make more money in conduit originations, obviously when the markets are a little bit volatile like they've been we can price and a little bit more spread out.
Somebody who needs to take a loan is going to be willing to pay that in times of in times of volatility, but most importantly, we as an industry make more money when spread tightened you've seen AAA slight tightening back back to and through the tight.
We hedge our interest rate duration on our loans when we when we write the loans and we only hedge a portion of the credit duration effectively whatever we priced in as an industry. We we assume that we can take a decent sized credit widening and still do okay. So we don't pay a lot of money shorting CMBX is very expensive short again, you have the full color.
Lateral but the amount that the dollar price is below par. So it costs you a lot in sort of in sort of negative drag to be short. So were generally short about 30% of the credit so when spreads tighten as an industry, we make more money in that business. We had two things happen a more volatile market people pulled back we were able to write some some some higher coupon loans.
And at the same time spreads tightened. So this this time period about writing loans in Q2, and Q3 and securitizing in Q4, which we did already Barry mentioned and we will do another one in December.
I'd be really surprised if anybody who is in this business Didnt didnt do very well, we Fortunately stepped on the gas a bit when we saw an opportunity. So we're glad we were able to do it.
So looking forward next year, what would you just for modeling purposes rates are low I think CMBS issuance volume would be strong what would you recommend as sort of an average gain on sale margin on your CMBS participation.
Yes, we don't we don't we tend to price loans to two to three points. Then then when spread tightened right a little bit more and when spreads widen we make a little bit less on that so that's pretty much the whole market does that leave you know we do focus on slightly smaller barron balance loans, which are more profitable than the large loans large investment guidelines that get done by many of the bank.
So we tend to be able to have a little bit more cushion I think we'll be back to a billion and a half to $2 billion of originations in 2021, okay.
Turnover in the book I think we've lost a penny one I think we lost money in one quarter.
Seven years, and I think it was a panel.
Yes, yes.
It is like.
We did this team is exceptional and and they we turned the book. So we're not we're not whole giant loans for four months or six months and lining up and we were 11 securitization of the year and this thing and were filler for other People's securitization, where diversification, we just type of loans.
And the team has got relationships I will tell you that this is the team.
I, probably want us to have another couple of decisions here, but this one.
Is it really is self sufficient they run on the amazing business and.
We had a we had people who know me think kind of the.
It involves maybe two can involved in certain things in controlling so.
So we set up a book a job here with the if loans were kicked out of Securitizations, we become we would.
Down and get involved and it's never happened [laughter], they've they've they've never needed more more credit than weve allocated to them and.
They run a nice business for us and that we supply them with information and cross fertilization and the balance sheet and they provide us with information to Steve and we don't want to spend.
Too much time on the sector, but but we're really for this business and and I believe that it will help us be a better CMBS investor. It does help us be a better CMBS investor we often.
By the B pieces of loans that we are in and most importantly, as a massive b piece buyer, we know what loans there originating are likely to get through the system and so the kick outs, which caused other people losses in times of distress. We've just never had kick outs because we're so close with the rating agencies, we understand the process and when the B piece market. So thats really helped.
Our profitability over those 11 years too.
Thanks for the comments.
And our next question is from currently rescue with JP Morgan. Please proceed with your question.
Hey, good morning, everybody. Thanks for taking the questions.
Given all the avenues to deploy capital versus your peers I am not surprised to see.
You got the among the first to kind of go back on offense as opportunities arise and as you know, particularly outside of the traditional CRD balance sheet lending market do.
Do you think that coming out of this starwood will look pretty similar to pretty good start from a capital allocation standpoint, or do you think there's going to be more kind of fundamental changes to the earnings makeup of the company.
Hi.
If you ask me I mean, I'd love to be a.
A little more balanced so so our resi business, so our energy business.
We have some other.
Assets that we were not going to talk about that I'd like to turn into a bit.
And I think we'll always be at least half I with the large loan business, but.
It would be it would be lovely if we somehow be.
33.
Or maybe its 2020 42008 from our servicing business I mean, the more diversified the better off I think our shareholders are and we just need stability. Our earnings stream. We went public for those of you who were at our initial road show when we raised our initial $900 million is safe and predictable and.
Dependable, we weren't we were a company that said everything we earn so we have no shelter other than depreciation book, which would allow us to pay down our.
Our payout ratio lower than any other commercial mortgage rate frankly.
It's why we bought the originally about the equity book to shelter that.
The period tax shelter for us that we didn't have to distribute 100.
Our earnings, which we did for our first.
Six years of our lives whatever it was so that would allow us to get the flexibility in it and if we needed. It we now have the flexibility we don't need it at the moment, but.
The more diversified we are like it's complicated for you I realize that for the analyst community, but.
Probably more stock in this company than any sponsored does have their commercial mortgage riet and I'm going to run it like it was my money and that's what I'm doing like we're running a diversified company with my position you can look at how much it's worth and.
I don't want to force feed at capital into the business. When there is nothing to do and I think our greatest problems right now keeping everyone motivated because we have been less capital out with this is not a flood where cherry picking deals. We're looking at opportunities as we lay out and by the way the overview as commercial mortgage and commercial real estate transact.
Wins are down like 60% across the world. So there is there aren't as many loan opportunities frankly at the moment for.
For for lenders because transaction volumes are down and they are down because.
Banks are extending loans and allowing.
The corporate tenant extend but it's not really pretending I mean, they're they're just allowing hotels to use FF in your reserves, which is perfectly fine because you don't either is or doesn't mean hotel. So.
And they are extending the loans because they know that if they take the loan back they're going to have to carry asset until it becomes cash flow positive.
But.
So I think I think I think I don't mind us being bigger and other sleeves.
And one of the reasons is that the loan book has a short short duration.
Right and.
I'd like to extend our duration that makes our earnings and our dividends more predictable for us So and one of the questions. We've had since we started and we're talking about for the last six years.
If we lowered our ROI targets for our loans.
Now with those durations be longer and how would that translate into our book would be grow bigger faster.
But and also then could we pay the dividend. So there's that's sort of a strategic question that we have not.
At the moment, we don't have to address but we continue to look at it so I think.
We we we have these businesses they allow us to produce double digit our OE and because some of them like the conduit business is pretty much in the capital.
Turns and the resi trading days in the quarter.
We will we closed and sold the bonds that same day I think so.
So when you put out $400 million room in it [laughter] came right back and we had a large gain from that trade. It was an incredible execution at toll.
Home run for the company and.
And then you look at what happened with these two Amazon Amazon and the dollar general distribution centers, I mean, Holy Moly, and we took a 8 million our laws and we'll make that $65 million that on a green River.
Reversing a lot for me in like Wow, I would like to do that every day.
That is by the way what's going to happen for some of these commercial loan we will take assets back if we have to.
We'll reposition them with the strength of our balance sheet, and we will sell them whenever it's time to sell them. So I mean that was heroic execution by our team here and leasing asset to Amazon is like when I said, when we sell the asset and we're going to have a large gain and thats, how I can be comfortable on our dividend at the moment, we can pay it.
Surely pad I mean in the market thinks we're cutting the dividend.
We're going to pay the dividend right now so we'll just we'll just if there is a big second crash in real estate prices.
Don't count on it but right now I think we're on a course to recovery you're going to see a stimulus package coming out of the government doesn't matter, who wins, you're going to get a stimulus package that will bridge us to the actual new normal and the new normal I believe people will go back to offices. There. They are not going to work from the houses forever, especially our.
Tenants.
They are not going to do it and.
In our.
When people talk about this I kind of good old because in the middle of pandemic when everybody knew what was going on in this April Facebook took 750000 square feet at the Farley building. We as you may know how to questionable loans. Some of you on the Lord and Taylor building Amazon bought the building for more than a billion dollars and we got paid off right. So.
Hi Tech is going to go back to work to kids want to be with kids and don't confuse pandemic behavior with the long term.
Social.
Patterns of human beings and I see it I'm in Florida now shifted Mike.
My office back down here for the for the for the Winter season I was in New York, our offices totally fall everyone was in the office in New York City.
And.
We just want to go back they want to get other apartments I want to go back to the office or go back to the lives. They had before so I am near cities in the World hurt I mean, I'm really glad we don't have exposure there.
So the material exposure, we have restructured alone were pushed ourselves down $50 million in the capital stack.
And Jeff just handed me a note that Amazon bought for 10, Hence capacitance Avenue last week. The company earned $4 billion. So I guess I think they're going back to work.
And it's true the patents drool over here if you look at Europe.
Talked about as someone like equity calls Paris was 83% occupied Menger Madrid, and Berlin were in the sixties physical occupancy.
The United States was led by Dallas at 40% physical occupancy and the New York to that 12, because you have a mayor there is bordering on insanity. So any of the city with I think the third lowest incidence of coated in the country and they wont let people in restaurants. So I mean, it's a whole nother capacity right. So.
But I think New York and San Francisco are two markets that if you have exposure to them in your in your commercial mortgage portfolio you could see considerable issues arising and we don't have any exposure to either city, so and Thats actually also our equity book, we don't own any buildings in New York City or apartments are sitting in our equity book, we stayed away from those markets.
Primarily because.
The pressure on costs not revenue you thought rents would be okay, but the the increases in real estate taxes are.
We are too great to underwrite the value of property. So we're not there and the company has no exposure in those markets really so some.
We are grateful and thanks for the question.
And our next question is from non Vendetti with Wells Fargo. Please proceed with your question.
Hi, good morning.
It's really interesting to see how quickly these.
Debt markets have come back and.
Taking a lot of the financing risk off the table.
Yes, as you look at some of your businesses like the non QM.
Where returns today.
Relative to like pre Colgate and.
Do you see a lot of opportunity in that business still.
Yes, it's interesting you're seeing loans trade back up in the 103 $104 price securitization is probably 105, plus theres still profitability in that the bonds that we retain we believe are still low double digit returns. Obviously there was a moment in time, where there was no liquidity in the loan business. There was no liquidity in the property.
Business that was very little liquidity in broadly syndicated energy loans, but it was great liquidity in in loans on residential securities and on residential securities.
Parse part of the reason why we why we jumped in there that was great liquidity and an opportunity to take advantage part of it was we were able to to get certain non mark to market.
Guaranteed debt, if we weren't able to securitize and we were able to securitize. So you have to break it down into gain on sale I think the gain on sales will be will be smaller and more in line with what the securitization will be so you'll go back to securitization yield.
We own the aisle, we own the bottom of the capital stack in into the to the extent that we are correct and that Seventhirty ficos with new money put down at 65% of the value of the house, putting down 35% that they will defend their mortgages like they did in the great financial crisis, I think we'll be right in that our yield which are low double digit can be high double digits as we get the ability to.
How these deals and refinancing in the future. So we're excited about that business, but it was a moment in time that played out and we took advantage of well two things I'd add and one thing, Jeff and and as you talk to even more quickly than I do sometimes.
Reena and GAAP accounting for non QM does not allow you to assume refinance of the trust in three years, which is your underwriting. So what we think our 16 17 18, IR ours were really accounting for more like 11, and Thats, we follow gap and Thats, because and we're going to refinance.
Right now the first of our Securitizations and we're going to lower the debt the debt costs from three and a half the one and a half and the IR is going to zoom up on the trust that we and what little equity we have left in the trade. If you will so it's a very funny business, because it's almost better done in private and public because we what we think is a 17 or.
And our team by the way argue about this all the time, but Reno wins, and we follow GAAP and we have to basically model. What we're allowed to model. So they are ours in the business are better than you see you will see the gains I guess later when the when the recent cure disease patient shows up so as these things.
And then they pay down you now have no leverage against your your book and so you have to re refinance take your equity out and you get a much higher Roe and.
And that's not a small thing because the businesses. We have 1 billion three of exposure there right now or loans on the books. So.
And we've done nine Securitizations nice ones.
Going to happen in the cases, an aide and not in the near term will be this quarter. So the other thing that strategically is is we don't want to buy these loans at these levels. We would the trade we made that we made a small fortune on we bought 94 in the middle of the crisis.
But we don't want to pay one on too so we've been working on ways to to.
When we have under contract an originator basically that will allow us to buy the the part driving the yield on the portfolio way higher so we were working on.
We've been stuck.
That was a some agency.
Waiting for an approval for quite some time it.
There's nothing to do with US it has to do with them. So we will someday, we may actually closes deal as long as light deal maybe in Starwood history.
But it is an originator and it would help us lower the raw product from raw material for the securitization. So I think those are two critical elements for us to increase the book would require us probably to.
To add that element to our platform essentially it is under contract it just hasn't closed.
Yes, thanks for the detail.
And our next question is from Doug Harter with Credit Suisse. Please proceed with your question.
Thanks.
Barry If you think the market continues to kind of undervalue your collection of assets.
How do you weigh the potential for for maybe selling some of the assets are recognized that spending them off or the continued benefit you get from diversity and stability and return goals.
I am glad you think it's a benefit at the moment I think anyone [laughter], so I care.
And you're in so we we've now.
What we think matters to the machine that follow us is booked value and there's lot of commercial mortgage Reits trading at 50 cents a book value of 60 cents of book value terms that we are trading at 61% booked up.
Depresses the Hell out of me, so I've actually we've charged very guidance for thinking about how the how to take out some of the gain and actually keeping it in book value because we just sell the.
The assets here, we'd have to pay out a substantial amount of cash which will help book value. We have that make it either put the money to work or extraordinary extraordinary dividends. So.
But we could do a JV on affordable housing portfolio for example, and take some of the gain crystallize that prove to the market that the values that asset, even though I swear to God.
Since I'm buying that stuff every day, we probably bought four new portfolio is affordable housing the last year and a half we closed we actually won his closing right. Now. So why is here its duration. It gives us dependable cash flows I don't need to worry about the bar paying the off suddenly and the money comes back into the bucket.
This was a way of increasing duration of our book and asset when we bought these assets I said I never want to sell them. This is what I want to put my money and I would give you seemed like it it will be in a trust funds for thousands of years, and then great markets Orlando and Tampa, It's really good stuff in growing the rents are set off of.
The income levels of these communities and.
They never go down they're not they're not allowed to go down. So you have a one way option on rents and your rents are 70 cents of of of market. So your full time, you're over 98% occupancy and were 97% paying I think it is so.
It's it's gold and I don't really want to sell it but I'm disturbs that we get no credit for and so yes, and we could if we sell it to a buyer who is divided in eight IR, we redeploy the capital into 12 13 14.
We can do that we won't have the duration on what we are doing a lot of what we do is not doesn't have.
I love those I got to pay that I love the cash flow of these multizone, our credit leased assets and so thats the trade off it's like I.
I know, it's there I know the gain is there is there any time, we want to take it we can peel off in the first portfolio can peel the assets of one at a time, we wanted to add that Weve quick little gains for the next 230 years and.
Thats, one way or we could do a JV on the whole portfolio. We have some tax considerations in the second portfolio the Wilson portfolio would it.
So.
The debit backwards as often portfolio is also helpful.
Well Theres two Wilson is off and I forgot the orders of go but it's.
It's certainly something Jeff Demotic because in my office like every week talking [laughter] I know I, just don't want to do it because I can depend on those assets and there are really no exposure to covance in there. The other ones are the cabelas dealers like US 13 cash yield now and boy did their sales take off and co.
We're not big gun sales are like skyrocket.
So I think we and that's a 25 year lease. So we're we're sitting really good with that book. It is a material amount of our of original equity now it's been like I think we have like $15 million left in the 18 18 in a multi booking we refinance it like three times.
So.
And I, just I don't know exactly but I do realize that we should probably think about.
If we take that gain maybe the shareholders would give us some respect and they move US away from then we can be like everyone else, we'd looked like commercial mortgage lender, but.
We obviously are getting no credit for when could we spin it out it's very complicated with a corporate debt right, we have corporate debt and.
And spinning it out and its own vehicle, we'd have to sort of figure that out with the with the corporate bonds.
And if we were to spin it out the name Dolphin like Snowflake and others is probably our best Mineable name Barry So you get data at a premium to the name it all that platform multiple but the last thing I'd say is the longer we hold onto these units do and we'll roll to market rate and you will have significant pickup in rents in that the cap rates. We're talking about that's a significant advantage to us to the longer we can hold.
Don and enroll more of that portfolio to market rates. So there's a lot of push and pull that.
But we'll continue to take cash out revised and refinance that portfolio as time goes on if we if we end up holding it.
And our next question is from.
Stephen laws with Raymond James. Please proceed with your question.
Hi, good morning.
Appreciate everything covered so far can you maybe talk a little bit about rent collection I know in the around the debt offering. It cited a 96% collection in July and August and that it was 92 in September as of March 30.
Can you maybe provide some update there on where you're seeing it I may have mentioned something around the call. It in the low ninetys, but wanted to get an updated and kind of how you see how that's trended in October and the outlook there. Thank you.
Sorry, just given that that's a function of the timing September Brent.
The time you get to the end of September you Havent fully collected everything it typically take three week three to four week. After the end of the month in which the rent would do it fully collected a 93 were simply a function of the timing that we released that number which is why we've closed July and August.
If you look at collection through the end of October well back at 97% for the month of September if that makes sense. If the rent was due in September and you look at cash that came in through the end of October related to September we're back at 97%. So.
Thank you Jason to the second quarter numbers, we've disclosed.
And it recently, but the month was simply timing there.
We have not seen a deterioration in recollections at all.
Setting.
Great. Thanks clarify we'd appreciate that.
And our next question is from Jade Rahmani with KBW. Please proceed with your question.
Thanks, very much hi, it's interesting you mentioned I start, which together with their ground lease week called Sage has a market cap of $4.3 billion, which is higher than where you.
He is trading yes, they generate very little and operating cash flow I think I'd argue there sockets and 50% of where they claim fair value is you will set up a company like ladder capital sitting on $900 million in cash, which is about 57% of their book value and 100% of their market cap trading at.
50% book value. So my question is given the valuation discrepancy that Youve annunciated.
And the current dividend yield that you mentioned.
For many in the past quarters, what do you think the keys are to getting full recognition and how do you compare allocating capital to new investments.
Backstop, what some of your peers like air I have started to do or perhaps a firing some of those shares that are trading at a lower valuation.
So of course, I know about both those companies.
And.
No.
Visibly will permit.
It is especially when some of the ground leases are on hotels at levels. What you are evaluating our loans [laughter] and we have we have dividends coming off of those and they have a water, 1% yield or something for their stock at these levels. It's an anomaly the ground lease since it was arbitrage.
And it's sort of.
[laughter], so they'll have to every I guess everybody probably.
They could they could write alone our rallies at levels that would take out our our our debt and and you value. The one cap. So he should do that.
It's completely absurd frankly.
To that I, just think its a joke.
The way the markets value into value is a good company.
He is going to kill me, but it's not valued appropriately certainly relative to us that creates discounting in the parent company.
Outage for doing it and the market fell in love with it mostly hedge funds.
So and people have considered safe and secure you go figure that out I mean, we pay dividends for 11 years 44 quarters in a row.
At least.
And I don't know we have 350 people working here something like that so this is a big enterprise and we have a $100 million of corporate overhead and we have a lot of Barclays.
And it's not it's not like every time I look at our earnings I look at the drag that corporate overhead is just is what it is like we that's why we have these people. So we can make money on these trades and everything else. They do otherwise we wouldn't need them. So.
But we like I like it I mean, these are talented people, having amazing seat at the table and the real estate sector. So as far as ladder goes I mean, they do a lot of menu Brian's genius and they do incredibly creative things that they do have much more trading and we do and.
I can't speak to the devaluation of those enterprises.
Some.
Basically you know real estate as a four letter word and the capital markets right now, but it's interesting the reads are down and take office re is down 50%.
I think we are raising our largest opportunity fund ever.
And.
We think the best opportunities for us will be the public markets, we don't think private market valuations.
Assets in Yieldstar of World are correct.
And so.
So I think I think you'll see us.
Soon as the pace car leaves that track and they tell us we can place which is the elimination of coated.
I think you'll see us I think you'll see you'll see firms like us and others to take advantage of these discounts in the public market and just some extent people look at real estate is a dead money and they are perfectly happy buying wait there at 35 times revenue or whatever it is up 300%. This year the company in its between $500 million EBITDA.
What was I don't know what the current earnings are so it is not there is no it's not the real estate.
The next time in the marketplace, but look at yield yield from properties can be very valuable in the Yieldstar World. It's everyone is basically saying is around.
And and we will have our day, we will snap back as an asset class and so will the stock, but it's going to take you got to take the black cloud over the sector. I mean, it's it's a weekly people look at these companies. They don't take the time to understand as they they look at us as a bucket they trade off book value. This one's a business ones at that.
Somewhat encouraged by a couple of the companies in the sector that that have done well.
And again, we we never needed.
Rescue financing, we had plenty of liquidity and Jeff has a list of wasting thanks, Chris.
Maybe every year, we can take off our LIBOR hedges and produce a $170 million of earnings we didn't take off our our California change.
We had a whole bunch of ways to create cash should we need to think we never even come close to meeting at so.
But we had like we obviously get to our property book at any time and didn't want to and don't want to we don't have to you, but I am concerned about this persistent.
Valuation and the dividend. So we have stepped up and started a stock buyback at the parent company.
And started in this quarter.
And we'll continue to look at that and other ways to deploy capital I'd I'd really rather grow our enterprise.
And look there is there are there are commercial mortgage rates not paying a dividend and they're trading at decent.
Sure.
[laughter].
I feel like a full [laughter].
But.
You know I don't like Jack can we get hit nice dividends I'm, a big shareholder so.
You know and I am not saying you money I'm not earning so I mean, I'm, giving you what we got and we didn't know what are going to make $50 million on on this yesterday.
Oops, sorry about that good rewind and race so.
I think those things that's why we have 350 people to be able to execute opportunistic trades like that so.
That was not that's growth net it was only $28 million.
So.
Okay.
Thanks can I ask another question.
Maybe go ahead.
Well ask anyway.
Yeah, the slide 14 disclose it for commercial portfolio snapshot and in March.
Marshall lending commitments can you give an update on the American dream projects, which I think was about 175 million.
Exposure.
I did mention it in my in my comments, but we'll go back and talk about what would you like to know the assets open now and the end use in park is kind of open the stores or by half lease or something like that we underwrote. It's due in part to assets and obviously you called in the past for this team bar to get to where it needs to get maybe the jets. The win a game in the parking lot pretty full and such.
Today.
Theres not with the jets performing the way they are and the Giants. The Sunday traffic is down [laughter]. There's good news is lots of parking spots. So.
I think as you know that we own the first and pipe ASU at one of the major money center banks and a few others and our exposures of billion with accruals now $1 billion plus billion too.
Our exposure or something.
Total debt total debt at our level is 1195 of which we have 175. The there is almost a billion dollars of debt junior to us and then.
Our loan is cross collateralized with.
The two other Grammys in malls mall of America, and let's say the one cost plus Edmonton mall. So we feel very comfortable where we are and.
And Thats, all we can really say about it.
Okay. Thank you.
And we have reached the end of the question and answer session I will now turn the call over to managed currently for closing remarks.
We just want to thank you for giving us your time everyone's busy and.
[laughter] your seasonally me the right candidate that your favorite candidate when but I don't really.
Anyway. Thank you and of course, we're all here to answer any questions and thank you again for your support.
Have a good.
Election [laughter].
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.