Q2 2021 Starwood Property Trust Inc Earnings Call
Greetings and welcome to the Starwood property Trust second quarter 2021 earnings call. At this time all participants are in a listen only mode of 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 conference is being recorded I would now like to turn the conference over to your host Zach Tanenbaum director of Investor Relations for Starwood property Trust. Thank you you may begin.
Thank you operator, good morning, and welcome to Starwood property Trust earnings call.
This morning of the company released its financial results for the quarter ended June 30 of 2021.
Filed its form 10-Q, with the Securities and Exchange Commission and posted 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 dotcom.
But for 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.
These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed.
The implied in any forward looking statements made today.
The company undertakes no duty to update any forward looking statements that we made maybe made during the course of this call. Additionally, certain non-GAAP financial measures will be discussing the conference call. Our presentation of this information is not intended to be considered in the isolation or as a substitute for the financial information presented in accordance with GAAP Rec.
The reconciliation of these non-GAAP financial measures for the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot S U P dot Gov.
Joining me on the call today are Barry certainly the company's chairman and Chief Executive Officer, Jeff The moniker of the company's President Rina pin area of the company's Chief Financial Officer, and Andrew sauce, and the company's Chief operating officer with that I am now going to turn the call over to arena.
Thank you Zach and good morning, everyone. This quarter once again demonstrated the strength of our diversified platform with distributable earnings or D E of $153 million or 51 cents per share.
We were active on both the left and right hand sides of our balance sheet deploying $3.1 billion of capital and completing securitization within our commercial residential and infrastructure of lending businesses.
I'll start this morning, with commercial and residential lending, which contributed D E of 127 million for the quarter.
In commercial lending, we originated $1.7 billion across well, while $1.4 billion of which was funded we also funded 149 million of preexisting loan commitments free.
Payments were $1.1 billion with a known and my phone sales totaling 231 million.
This brought our commercial lending portfolio to a record $11.5 billion at quarter end.
Despite $3.6 billion of loan repayments and sales post COVID-19, our portfolio has grown nearly 25% over the past year.
Also in the quarter, we completed our second CRE, CLO, which totaled $1.3 billion. The CLO of actively managed with the weighted average coupon of LIBOR, plus 150, and an advance rate of 85 per cent, allowing us to move a significant amount of our existing repo financing to a term matched non recourse.
The non mark to market structure.
We continue to see strong credit performance in our loan portfolio with the weighted average LTV of 61 per cent.
Over 80 per cent of the repayments this quarter were in the office and hotel and our retail exposure remains low at 3% with nearly all of this exposure and a single loan which has a significant entertainment component.
We continue to have 100 per cent interest collections and less than 2 per cent of our loans on non accrual.
On the Cecil front, our general reserve declined by $12 million in the quarter to 48 million due to improved macroeconomic forecast.
To conclude my comments on the commercial lending we have discussed with you previously certain loans related to our residential project in New York City the.
The foreclosure of the condo units, representing our collateral and those loans with formerly completed the quarter you will now find the entirety of the project reflected as property on our balance sheet.
In connection with the foreclosure, we incurred transfer taxes, which reduced the distributable EPS in the quarter by 2 cents.
Our residential lending business was also active in our loan portfolio acquisitions totaled $663 million and we completed our 11th and 12 securitization totaling 564 million.
Of the loans, we acquired this quarter 172 million resulted from unwinding 1 of our 2019 securitization.
This will allow us to significantly reduce the financing cost of these loans upon re securitization.
Our loan portfolio ended the quarter with the balance of 637 million a weighted average coupon of 5.2% average LTV of 68 per cent and average FICO of 739.
Our retained our MBS portfolio ended the quarter at 232 million.
After retaining bonds and our Q2 securitization.
<unk> previously retained bonds and accounting for the impact of elevated prepayment.
Next I will discuss our property segment, which contributed $20 million of distributable earnings to the quarter.
The credit performance of this portfolio remains very strong with rent collections at 98% weighted average occupancy steady at 97 per cent and blended cash on cash yields increasing to $18.5 per cent this quarter.
Next I'll turn to investing and servicing which reported D E of $48 million.
Our conduit was very active with $542 million of loans securitized or priced in 3 transactions 2 of which settled subsequent to quarter end.
Consistent with past practice, the 2 transactions, which priced in June but settled in July are treated as realized for de purposes. Our next securitization is not expected to price until September the we expect a lower contribution from this business in Q3.
In special servicing fees increased by 31% this quarter to $16 million due primarily to COVID-19 related modification and liquidation fees, while the timing of such fees cannot be predicted with certainty we expect to see at least some portion of COVID-19 related fees and earnings going forward.
We also continue to focus on obtaining new servicing assignments.
The quarter end, we were named special Servicer on 12 P. M. B S trusts with a balance of $12.2 billion, bringing our pro forma named servicing portfolio to $91.3 billion and our pro forma active servicing portfolio to $8.7 billion.
And finally on the segments property portfolio during the quarter, we sold an asset with the cost basis of $25 million for $30 million, resulting in a net D E gain of 5 million and of GAAP gain of $10 million.
At quarter end, the underappreciated balance of this portfolio with $250 million across 14 investments.
Concluding my business segment discussion today's infrastructure lending, which contributed D E of $8 million to the quarter.
We acquired $168 million of new loans, and funded 23 million under preexisting loan commitments.
The repayments were 85 million, which increased the portfolio to $1.8 billion.
On the right hand side of the balance sheet, we completed our inaugural of 500 million infrastructure of CLO, which provides a significant expansion of our credit capacity along with a term matched nonrecourse non mark to market structure. The.
The L O of actively managed with a weighted average coupon of LIBOR, plus 181 basis points and an 82% advance rate.
I will conclude this morning with a few comments about our liquidity and capitalization.
In addition to the securitization we completed in Q2.
For the clinic of quarter end, we securitized a $230 million extended stay hotel loans in our commercial lending portfolio at a 91% advance rate.
It's allowed us to generate excess liquidity, while lowering our exposure to recourse debt.
Also subsequent to quarter end, we issued a 400 million dollar unsecured sustainability bond with a 5 year term and of fixed coupon of 3 and 5 eighths.
The proceeds will be used to retire a portion of our December $700 million, 5% unsecured notes when they open for prepayment at par in September.
In addition to the financing capacity available to us via the securitization market. We continue to have ample credit capacity across our businesses ending the quarter with $8.3 billion of availability under our existing financing lines unencumbered assets of $2.8 billion and an adjusted debt to underappreciated equity ratio of.
The 2.2 times.
This credit capacity. In addition to our current liquidity of $1.3 billion provides us with ample dry powder to repay our December unsecured note maturity and execute on our pipeline.
With that I'll turn the call over to Jeff for his comments.
Thanks Rina.
The comments this quarter will be relatively brief highlighting another strong quarter of activity on both sides of our balance sheet.
I'll start by discussing our capital markets activity during the quarter.
As Rina said, we issued $400 million of unsecured sustainability bonds out of 3 and 5 eights coupon in July.
It was the tightest price 5 year unsecured bond offering on record for a mortgage REIT.
Our operating with over 4 times oversubscribed with $2.2 billion in orders.
Today, our outstanding unsecured bonds trade in the secondary market the yields between $2.75, and $3.2 5 per cent, which gives us the option to issue very accretive capital to grow the business or pay off the remainder of our 5% coupon bonds that mature in Q4.
For the first time, we chose to engage fits to rate the transaction and received the double b plus corporate and bond rating from them.
And rating us double B plus.
Fitch cited the diversity of Starwood business model strong asset quality consistent operating performance relatively low leverage appropriate interest coverage of diverse and well lathered funding profile install of liquidity.
Given where our bonds trade, we believe the bond market concurrence with this view.
During the quarter. We also closed on our second CRE CLO of $1.3 billion dollar transaction and our $500 million inaugural energy infrastructure of CLO and subsequent to quarter end completed the $230 million of SaaS B securitization on a well performing limited service hotel portfolio in our CRE loan book.
Along with selling a notes senior mortgages. These securitizations importantly, reduce our percentage of secured debt subject to credit marks and recourse, which has continued to be well below 50% of our CRE refinancing and contributed significantly to our best in class liquidity in the depths of Covid.
The transactions also significantly increase our returns on the equity in the transaction.
Our theory lending business continued to take advantage of the momentum we built over the last 17 months investing in every segment and every quarter since Covid began.
Rina mentioned, we originated $1.7 billion of CRE loans in our commercial lending segment in Q2, and we are on pace to have a record origination year in 2021 and expect to do so by the fall.
Commercial and residential real estate fundamentals continue to improve asset prices continued to increase and we believe our credit first culture and let the credit outperformance in excess of for the markets rebound.
As we said on our Q1 earnings call. Our base case modeling today suggests we will have little to no losses on our loan book as a result of Covid.
Statement, none of our peers have made to date.
We use our best in class financing for more than double our multifamily loan exposure over the past year.
At that time, our office of loan exposure at the percentage of our loan book is down 24%. Our hotel exposure is down 11% and our exposure to construction loans was down 61 per cent.
As our book has become less transitional we've also cut our future funding exposure in half over the last 18 months.
We've used the scale and footprint of Starwood capital to consciously increased our international exposure by 42% since the start of Covid and that book is now a record 27 per cent of our lending portfolio.
We expect the continued to increase our exposure to highly accretive international loan opportunities in the coming year.
We're finding higher returns internationally versus the U S where lending markets rebounded more quickly after COVID-19 and where we often see more competition of alone.
Our own property portfolio has benefited from lower cap rates and the significant liquidity in the real estate capital markets today.
The unrealized gain on our property portfolio rose again, this quarter to over $1.3 billion or approximately $4.50 per share.
Florida multifamily has been 1 of the biggest beneficiaries of our country southern migration lower taxes and growth.
As a result of another cash out refinancing we will execute imminently, we will have a negative basis in our Florida multifamily portfolio, which is conservatively worth well in excess of $2 billion today and accounts for over 80% of our.
James.
I will remind you that rents cannot go down in the 99% leased portfolio and we will continue to rise with median income in their specific msas, which are centered around Orlando and Tampa 2 of the fastest growing msas in the country.
These gains put us in the enviable position of being able to choose whether it's the harvest them to reinvest and grow earnings or retain them at a very accretive yield and ensure our unparalleled dividend coverage.
I will finish by saying management and our board of proud of the way, we set up of our company to outperform in volatile markets and we will use our credit first lens. The continue to work diligently to find opportunities to continue to diversify our business.
We have been in business for over 12 years and invested over $70 billion with only 1 basis point of realized the every loan losses to date, which has helped lead and lead to an industry best 13, plus percent annual return to shareholders since inception.
With that I'll turn the call it the Barry.
Good morning, everyone.
This is Barry Sterling, it's fun to follow the Jeff and Rina when the firm's nearly 350 professionals of all rowing in the same direction.
That's in addition to achieve more than twice that size of the parents Starwood capital.
The overall real estate markets remain extremely healthy abundant liquidity is powering of the values of everything stocks bonds D C private and public debt. The real estate is after all of proxy for yield and people worldwide and worldwide are in search of yield.
Rates are cooperating and spreads have continued to come in real estate AAA has still remained at spreads wide of corporate triple as capital is flowing to the arbitrage of these returns away capital is also flowing to the best and most safe asset classes like multifamily in industrials, causing pricing to.
Become extremely stretched pricing remains not so attractive for hotels because of the markets are assuming they were well covered it for 2019 levels.
That may be true in some cities and some assets in the other aspects of it could exceed in 2019 levels, but certainly not true overall for some period of time the market seems to be a little ahead of itself in the hotel space and then as the office markets, where vacancy rates in the cities like New York and San Francisco are approaching 20%, including pressure on.
The costs, including real estate taxes, and it's very hard to underwrite the cities at the time.
I'm pleased to say, we have very little almost no exposure to either city.
And that has made us smile through the pandemic.
It is tricky the underwrite real estate right now with cap rates moving down so for us and some of these asset classes.
But we remain happy 12 years into our creation that our loan to value of our portfolio is still 60 per cent.
The rental markets the single family and apartments are the best they've been in the years period people are seriously wealthy but the retail spending in leisure travel home prices and everywhere you see people are spending money on most everything and now you have the Washington, putting terrorists and open the fire.
Lending to large spending spree bills that will continue the power of this economy forward, but in the very unbalanced and in my opinion on the healthy way there are $9.5 million job openings in the United States and the government really should figure out of the help people will get these jobs and take these jobs or other obtained of just sit on the sidelines Barry.
Video games, iphones, Netflix subscriptions and all of their goods made in China.
Turning to US we've worked hard for many years on something people give us a little credit for 1 of the key issues with mortgage rates. Historically has been mismatch term that as loans that may refinance of B P paid after or before the underlying desert that financing of those securities are moves to cielo and the securitization financings of change.
This and build the fortress balance sheet for Starwood property Trust.
We've always done this and our condo, what but it's now part of our regular business center of large loan book and resi lending book and for the first time ever in our infrastructure lending business, which was critical for our willingness to grow that book.
Another item you may have noticed in our financials is that almost 30% of our book is now of international and we're leaning hard of our store capital's operations internationally with more than 60 people in London recently hired a new head of lending in Australia, and we continue the focus on these opportunities because they are frankly better spreads less competition more relationship.
Based and we are 1 of the few doing this in the mortgage business in United States. So there's another major differentiator of our firm and together with our European Group. We're looking at some very large opportunities that really only come to us because of our scale in any 1 of them, where the accelerate our growth and continue to increase our balance sheet. So.
We are quite excited about those opportunities that are unique to us because of our scale.
1 other item sometimes of issues become opportunities as many of you will recall, we were the first mortgage lender alongside some of the nation's largest money center banks and the American Dream Mall.
Is dominated by entertainment and amusement rides in the mall itself has now reached 82% of occupancy and I'm certain that our investment of sound as it represents roughly 1 third of the construction costs.
No mistake. The competition today is fierce we are grateful that our company's scale, our funding costs and a global reach continue to provide great opportunities for our company. We are on the offense in every market and our last board meeting of considered more of the dozen additional verticals that could add to our platform will be working to size and focus on.
These opportunities and see where we can accelerate our growth improve our ROE and continue to deliver on our goal out of our IPO 12 years ago, which is to provide safe consistent reliable dividends with best in class transparency. So our shareholders can see.
What we own and how it is performing and asking for any questions anyhow.
You today for your time in 2 of our team which is world class.
Thanks, Barry and with that we'll open it up for questions.
Thank you if you'd like to ask the question. Please press star 1 on your telephone keypad of confirmation tone will indicate your line is in the question. Kim You May press star 2 if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys our.
Our first question comes from the line of Rick Shane with J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my questions. This morning, just a quick question.
When I look at slide 27, which shows your financial capacity gets it's a very helpful. A walk of the big change quarter over quarter, and almost $600 million increase in approved and Undrawn credit capacity I, just would like to understand what drives that change.
Was there something contractual or does that have to do with repayments that.
That have not been.
Drawn again.
The records, it's Ryan I'll take that the big driver of that increase is going to be the 400 million dollar unsecured sustainability bond. So when we get cash and like that we'll take that cash and pay down our lines, which drive that approved but undrawn capacity. So you are paying down repo with the unsecured until you get to September.
When we'll pay down our December of maturity earlier of portion of our December maturity early and then Youll have the dropped back up your repo lines for that number will come down. So it is the timing issue caused by the unsecured issuance.
Got it.
Quite on it to to help you sort of understand the value and power of the <unk>.
The 2 accordion those lines.
We have repo lines that are anywhere from LIBOR plus 125 on the bulk of our newer assets in our multi families lately all the way out to may be LIBOR, plus 275, even 300, John some older more transitional loans.
When we get a dollar of cash in the first of all of our pages out of LIBOR plus 300 loan in the next dollar might pay down of LIBOR plus 275, and then maybe even of LIBOR plus 250, so on our cash we earn mid to high 2% on cash and most corporates don't have the ability to do that.
It's pretty good in a world, where we're raising debt at LIBOR plus 250 at $2.70 in the bond market to know that we could raise debt and sit on it and really not have any negative drag because we get such a high return on our cash by what's effectively you see us increasing our approved but undrawn.
Got it okay very helpful guys. Thank you very much.
Thank you. Our next question comes from the line of Tim Hayes with B T. I G. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions and just I guess sticking on the theme of the kind of liquidity here.
You are of very strong liquidity position. Despite the very strong growth you've had over the past year and I'm. Just curious you know as you look back to kind of pre pandemic levels. How does your liquidity compared today do you find that there is a bit of a drag on earnings from from having such an outsized liquidity position and I'm just curious.
Also it was kind of like part of that is what portfolio of size can your current capital base support.
Yeah, It's a great question.
Few pieces to that I would say that we have of December maturity coming up we raised 400 million of about $700 million, we'd probably thought that we would pay off the remaining 300 with cash on our balance sheet. We've had a decent amount of repayments coming back as of the market has come back a performing assets of and certainly paid off a little more quickly in 2021, which is.
Create the cash so.
We are sitting marginally higher and cash and where we would be optimally last year, we probably sat on an average of $400 million plus minus the cash more than normal.
Worried about a second dip in the market, we probably cut that in half, but I think we're still being conservative COVID-19 is not over we want to make sure. We have access to the tremendous liquidity, which we do with $2.8 billion of unencumbered assets as I said before we can we can raise capital in the high yield market very well and the equity market is sort of certainly cooperating so.
And we have a $3 billion.
Property book that obviously, we've talked a lot about so we have a lot of ways that the raise cash, but we still think it's prudent to hold a little bit higher cash balances in this uncertain recovery than we did pre pandemic. So we're getting a little bit of a drag.
Maybe it's too early.
So, but it's not the 4 of 5 that it was a year ago.
Mhm.
No that's helpful. Jeff and just part B that was just kind of the obviously I am sure your liquidity position can support some nice growth here, but what portfolio of size can your current capital base support.
It depends on leverage right. If we wanted to run our business is highly levered to some of our peers. We can have a much bigger portfolio, we've never chosen that path to date.
Obviously with the equity market, where it is we can grow the equity base and grow the bigger portfolio as well.
The wonderful thing for US is having 7 investment cylinders I'm looking at a number more we have the ability to really continue to grow.
I guess infinitely I would say if we were a 1 trick pony and all we did was wake up every day and make loans and it's the only thing that we could do.
The start to be uncomfortable if that loan book got over $20 billion or so because.
These loans average 2 and a half years and at $20 billion, you would need the right $8 billion of year, just to stay invested and coming out of the GSE. We went from 500 billion of loans a year before the GSV 275 billion then of 100 billion of $150 billion. In 2020, we were well below that 500 billion and if you need the right 8 billion.
And of transitional loans, just to stay invested and its the only thing that you do and you have another year like 2020, it's going to be difficult to put that money out unless you are willing to be a higher percentage of the market's loans and that means.
By definition that Youre, reaching for credit that you wouldn't have done in the more normal market. So I think the I think the size of the CRE lending business alone is 20 to 25 billion is the most of that I would think you would want to be but again, we have the ability of crowd and it's 1 of the reasons why our cylinders of we've continued to add and we continue to look we have the ability to be a lot bigger than that.
The only because Gary Kelly can you hear me okay.
Can you hear me yes.
Yeah, the only thing for that day is it you know.
We'd like to be bigger.
And it will at some point you know.
We'd be healthy the raise of capital but.
We don't need it any time soon sadly, we'd love to have the opportunity to do something whether it's the acquisition or what kind of business as I talked about but.
Some of them are actually more focused on generating Roe.
And won't deploy tons of capital, but what sort of work off of our knowledge base of information.
Great.
Yes.
So we have we have something for working on them.
Can execute some of the goals the balance of those high ROE businesses against the low ROE businesses of our largest our largest lending and even our infrastructure kind of things.
Okay.
Yes, it's bit of it.
Interesting how the whole.
Okay.
Got it.
It's Raj.
Differently when rates fall so.
It's been a it's it's.
It's been a pretty balanced growth story for us at least for at least earnings sort of outside.
Yeah.
No absolutely.
And that's good day now.
On the capital side.
Just kind of shifting gears I guess, Jeff because you mentioned and highlighted all of the gains again in the property book and how that could be a source of liquidity for you and enacted many capital raises the harvest gains there but.
It's been a goal of yours for for quite a while to harvest those gains in kantar.
Continue to see those apps depreciate, but still feel like kind of nothing to write home about there in terms of.
Crystallizing those gains so just curious if maybe you feel you're getting closer to Jim coming in terms of some kind of agreement there and selling a stake in any of these portfolios or is there anything to report along that initiative.
Yeah.
I think it's a lot more powerful than many capital raise of many capital raise comes with the cost of the equity dividend. In this case, we're just freeing up cash that we could reinvest so it's much more powerful and accretive to earnings any dollars that we take out of gains in property because they are just sitting as the game and there is no direct cost to us as there is on the equity side. So it is more powerful.
We've been working for for a good chunk of this year to get to get the right timing and timing means a lot. There were some tax changes that were happening in Florida, we wanted to let them settle in and and they came out favorably for us and now with those having come in I think that Thats something we will continue to work on as much to sort of prove to the market that our gains.
Of what we say they are as it is to get that excess capital, but as <unk> mentioned previously we don't really need today, but we think we have plenty of places to be able to deploy accretively. So we'll continue to work through the year on it these things take a little time, and we really slowed down a bit just to make sure that we.
We weighted out the the tax changes that happened in Florida over the last month.
Gotcha Okay.
Got it well thanks for the the color. This morning I appreciate it.
Thank you.
Thank you. Our next question comes from the line of Johnson Dirty with Wells Fargo. Please proceed with your question.
I was curious in your hotel portfolio.
You are hearing from owners in terms of the.
The delta there in any travel behavior changes bookings cancellations just checking in on that.
I'll, let Barry start there nobody nobody is closer to the Sim Barry Barry you want to start and then I'll give some numbers.
Yeah, I don't think our hotel portfolio at the most.
And that represents any exposure to the company.
I'll tell you that we haven't had any losses on our hotel book.
You know the.
Market.
Calculation of these assets has been astonishing I mentioned in my comments for you know you're seeing hotels treated for jobs and 5 caps.
And I, just don't think of the big urban boxes are going to get back to.
2019 levels for quite some time and.
And at the same time, while your revenues or not.
Not there your your property taxes of ryzen your costs are going up labor costs are going up if you can find labor so.
Where we're being very cautious on how we underwrite.
For the sector right now and more importantly, like what's the evaluation because people are paying.
Paying big Big prices for hotels, and and you know I.
I don't think.
We can lend against some of these prices people are paying so we have to be super careful I just think there's so much capital inflating values everywhere at least in the multi unit dose you have rising rents, which are real and and actually rising at an ever faster pace and and of course rents or are much more determinant in value and more.
Portland, and true small moves in interest rates. So the the the explosion of rents in single family and then.
Most of these and in the industrial.
You can't really see that in hotels, although this isn't really a rate issue today, it's really an issue of occupancy at the staff I mean, even if you have demand you can't run some of your hotels full because you can't get people to work in the hotel and that's across the whole country I've talked to every CEO in the hotel industry, and we're seeing it ourselves and our thousand or so hotels, we own and the equity side. So.
It's a it's quite interesting situation, but I don't think of the firm and Jeff will give you the numbers, but I don't think property trust is really any material exposure that I'm aware of really of note tells sector right now.
Yes, Barry I'll throw some numbers at it.
We've talked a lot about and you mentioned, we havent had any losses, our extended stay portfolio. It's about a quarter of the 8% of assets that are in hotel the 8% of our company's assets are in loans on hotels about a quarter of that is an extended stay which has performed tremendously well from the get go right right out of the right of the gates in Covid that stayed highly occupied and ADR is never.
The move down very much limited service has come back very strong that's another quarter or so.
Destination is about a quarter or 3 largest loans in the hotel business or destination and that's what we're seeing come back the fastest post COVID-19 and trading very well and as Barry said, the urban sort of travel boxes is something that we have historically avoided we have 1 loan in all of Manhattan and at the senior mortgage where we moved out of them as the last year. So we're very comfortable with that we're also very good.
Well that of the $800 million that are world class sponsors have committed to their projects since the beginning of Covid $620 million of that is on the hotel side. So when we lend in hotels, we tend to Linda very well capitalized sponsors.
The central tenant for us and it's something that Barry insist on and we've seen them prove their liquidity and their desire to hold onto the that total amount of these assets with the massive equity injection. So I can't as I look down our list of hotels. There is nothing in our hotel list that I'm worried about from a payoff perspective with what we know today. So we're super comfortable with it but as Barry said.
We're being cautious going forward.
Yes, I mean, certainly you know you guys are in great shape I was just more curious if you're sort of hearing any changes in trends at the property level and maybe some destination areas.
If there was any impact on the ground for him and occupancy standpoint.
Okay.
You mean, you mean.
Mean from the Covid variance emerging yes, yes exactly.
I would say no I'm not really not yet.
And I'm really talking about our equity book here and I don't have the daily financials of Oh.
All of the hotels, we lend to but we have a pretty good template of of and.
And I, you know New York Brooklyn.
Actually shocking how good the occupancies are.
Brooklyn is running 85% of New York for Barbie.
The West Hollywood and the lights.
These numbers kind of kicking off they're not they're not going the other direction. So.
You would expect some actually in Europe, you're seeing the opposite of what Youre seeing of hotels cancellations of people are worried about the variant of its interesting because Europe is now horvac alright.
Thanks.
I think some of the Astrazeneca.
Excellent.
They are in Pennsylvania.
Zero.
Our job is busy day.
Were in July.
And then I guess.
I know in the past.
On the call it sounds like valuations are very high because of liquidity.
So I wonder if some newer areas like mortgage origination that I think you've talked about in the past.
Even become more interesting, particularly given where valuations have gone in that business.
Are you still looking at those types of acquisitions.
Or are they good day maybe.
Maybe not be available by.
By mortgage originations I guess, we'd do that in all of our businesses can you be more specific are you talking about agency mortgage lender sure.
Yes, exactly Jeff residential mortgage origination I know in the past you've expressed some interest in that business just given the returns are pretty hot.
Yeah listen we do originate.
Mortgage loans on the residential side already mostly in the non QM space. When you talk about agency I think you might be talking about agency multifamily, which is the business that the number of our peers are in that's something that we still would love to be and we think it is.
The area of expertise for our firm there's on the low twenty's licenses from Fannie and Freddie they're mostly very well used and well continue to look at opportunities to get involved in that space. I think if we had 1 thing that we could pull the magic lever and create a license for ourselves we would love to be involved in that business.
I think it's a great hedge integrate offset for other things in our portfolio and the servicing is obviously is all.
Obviously, you're going to be worth of decent amount of rates ever backup so.
The business, we continue to look at we just have to find the right way at the right cost to our shareholders to be involved in it.
Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
Jeff you mentioned the 7 cylinders.
A few minutes ago, and I realize you mentioned theres sort of maybe a cap on how big the.
Once the loan portfolio to get but you know when you think about the next dollar out the door, which of those cylinders is currently providing the best returns and you know maybe as we look out 12 to 18 months, which of those cylinders due to see growing the most of the mix of the business.
Barry do you want to stay or do you want me to.
Why don't I why don't I, Yeah, why don't I give it a start last year.
I'll follow up yeah.
I would say last year I think on multiple calls Barry and I, both said that the residential business, where we're buying loans of discounts and ultimately securitizing them to a very strong securitization bid looked super attractive the NR.
The infrastructure business, where we've done our first CLO now and Thats a key component for us continue to grow that business. The levered yields there are of mid teens to us and we think that's the super attractive business there arent a lot of people.
Writing loans at slightly higher spreads in the banks and below the private equity guys, who don't have the ability to finance the same way. So we think we of a sweet spot there.
I will tell you that in the last couple of quarters, there's been nothing better than our commercial lending business.
We're seeing tremendous opportunities I mentioned of the call will have a record year by the.
The fall.
On the loan origination side of the transition of Lisa I think that's been of great business. The conduit business. It obviously with spreads grinding tighter we tend to make more money.
We are the number 1 originator of the non bank originator of the MBS now we've done that since Covid started as we stayed in that business for other people pull the way, we'd love to do more of the air but our business model isn't really set up to grow dramatically beyond a couple of billion dollars of year, we tend to do smaller loans high touch that we can do.
We can be a little bit more nimble unprofitable alondra and leave the bigger loans for for market share reasons to the banks, who want to have that market share. So I think those of businesses that we will lean in on but today. It feels to me like the CRE lending business our core business.
As a fantastic opportunity to keep putting money out we'd still like Rajeev, we would love to do more on the energy side. There's obviously been the less deals as <unk> seen coming out of the capacity auctions and other theres less of less need in we'll probably see some decommissioning there, but we think there's some great opportunities in midstream in general I would call the CRE lending business the best opportunity.
Over the last 6 months of being probably the next right Barry.
The only thing I'd add is obviously, our servicers the highest ROE either is and.
Looking at ways to make more money in fees and what we do.
Is an interesting thing for us to be focused on.
Because.
That is unique to us and the whole competitive set.
And there is other other asset classes that perhaps of the REIT compliant and we still have as the largest mortgage REIT we have the large.
That bucket, but we still get taxed in that bucket. So the.
Hurdles have to be higher in order to use that the bucket for non renewables lending.
But there are there of stuff, we're looking at so stay tuned we'll.
Where we are.
Some of them a lot of rock, we've completed a 3 year plan and now we're going to Polish it up and then hopefully executed.
Great and 1 follow up on the the Europe Europe opportunities have been mentioned, Barry and Jeff both kind of throughout the call can you talk about what type where in the capital stack and maybe what property type and.
You mean, the regions you expect to get the activity and has the the COVID-19 or delta varian or have any.
Restrictions in Europe made certain countries less attractive than maybe you would've been attractive before COVID-19.
I'll I'll take it definitely could have if you want I mean.
Or are most of our lending business has been in the Ireland and the U K.
Spain.
Gotcha.
Yeah.
Banks are pretty aggressive very low loan to values.
The interesting position for us if somebody wants to take more debt.
Well look we will look at any asset class.
Some of them on the equity side, so the investor in the equity side of the data center in London. So we.
All of the data center business of the lender.
Science has all of the.
What you've heard from other companies what people are lending on I. Just think we have to be we have to watch for supply.
So it isn't really the good news about the cycle for real estate in Peru lenders as construction cost.
Our going forward across the globe.
Sure.
Our loan to value I bet, if we actually looked at replacement cost is probably jobs for 10%. It just you can't replace these buildings anymore for what you see.
All of them for what are the loan exposure.
As you know the rents have to rise theoretically.
Construction of the warehouse.
People are willing to accept the 3% yield on cost of construction deals so far of the market hasn't gotten that bad.
It's dangerous when rents are rising, but developers do as the trend of the reps.
Basically stable against the.
8% for 3 years.
The rents will be 24 per bit higher.
But the other developers at the same thing and then of course it doesn't happen because everybody had the same model of then you wind up with the rebuild on com.
You know the good news as rates continue to stay low and low grade will stay low for Barry.
For reasons that I think for those of US who went to economics class you know, it's really the sheer weight of <unk>.
12, 13, 16 trillion dollars of money.
Just sitting on rates globally looking for yield and it's just there's so much money out the areas everyone.
Looking for anything that has the yield in it and it's obviously an interesting market and that should be careful but I'd like for certainly relative to the other.
All of the asset classes, even the bdcs the lending against companies at multiples that are historically quite hot.
We'll see how this all plays out.
What we're doing.
Uh huh.
Yes, I don't have a lot to add to that Barry.
You know the thoughts I would say multi office industrial is starting to look at data centers in Europe, certainly less competition. There. You know you don't have debt funds that can write loans with 2 guys in the Bloomberg and the broker relationship of <unk> into the European market. So certainly having less competition there in the larger deals by nature.
Helpful for us as well.
Yeah.
Thank you. Our next question comes from the line of Jade Rahmani with <unk>. Please proceed with your question.
Good morning. This is Brian Thomas Hello on for Jade, Thanks for taking the questions.
The M&A front I was wondering if you believe there are any acquisition opportunities.
That you'd potentially explore that could be beneficial to the company's cost of capital and goal of reaching an investment grade rating at some point.
Okay.
Yeah, I mean the start.
Go ahead, Barry I'll start and then you can pick up.
My feeling is that.
We'd love to get investment grade you know I think I think our farmers.
All of the bigger.
And so I think of the rating agencies look at us and say what can we what is our coverage for our debt and how diversified is our cash flow stream.
How insulated from economic cycles.
Just the sheer scale helps you there and and I you know we will be growing the balance sheet, which is great and we have almost 3 billion of unencumbered assets great. There.
The age.
Yeah.
I think we may of last Barry a bit.
Why don't I take up for a second is the we're starting to talk about rating agencies I would say that we built a purposefully unique company.
Unfortunately, the company doesn't fit into a box, it's much easier when the company fits into a box and you're going into a rating agencies model.
I look at the rating agency models.
1 of them doesn't add back depreciation on our portfolio. So as we fully depreciated it would assume that the property is worth zero. They do the exact opposite on property rights. They do add it back and for some reason, even though we're the hybrid between the property REIT and a mortgage REIT. They don't add it back for us though.
Some calculations that $420 million of equity that is lost on our balance sheet makes us look more levered than we actually are in that than any property REIT would be.
On the MBS side, they don't kind of below investment grade the MBS and our equity calculation again, making us look significantly more of Levered I argued on 10 year newly originated newly appraised fixed rate loans with 3 times debt service coverage you are effectively telling me I'm not going to get the odd.
Payment of interest by giving me no credit you could give us zero credit at the end. If you assume every the MBS bone is gonna be bad in 10 years, but by that point of recaptured my full investment which of the discount the investment and so to give us the euro credit on our equity makes no sense, we of billions of dollars today in CLO liabilities and we.
Despite them being non recourse with no margin calls they are treated the same way as repo in the rating agency models. So we have a lot of work to do to get to investment grade we have a lot of explaining to do with the rating agencies why they need to look at us outside of the box and take metrics that come from a bunch of places, we're happy ish with with Fitch coming in of double B plus.
The bond market, certainly trade desk as a close to closer to investment grade company than others, who are weighted similarly to us, but we think when the when the rating agencies come around the sort of understanding our business better that we have a much better shot of getting really close to investment grade, which would be wonderful for our financing costs and wood as Barry said allow us to really help.
It helped growing the business.
You had also asked about cylinders I believe about M&A stuff and Barry took on a lot of that but I would say coming out of our 3 year plan.
We probably have 8 or 10 related businesses to what we do.
Could go through some of them but.
Sort of add ons to our existing businesses net than a few potentially slightly new businesses, but our our cash from our board over the next 12 to 18 months is to show some progress on the so hopefully we'll be able to show you all some progress on those as well.
For reasons that we don't do we look at every business.
We put a list together and I think we've looked at 30 or 40 different companies and looked at the multiple times and the reasons that some of them won't sell and the reasons that we're not going to put our shareholders in them because we don't like some characteristics of the business.
So depends on how how the markets sort of open up to us at what price.
Premium of willing to pay to get into some of these newer businesses, but I can assure you that we have a whole team of people looking at the mall anything that we get out of that would be accretive and smart and a good credit play every day.
Great. Thanks, Thanks for that and.
I appreciate your comments around the <unk> business with the expected pricing of.
Of your next.
For September but can you talk more broadly about your outlook for the back half of the year in terms of current conduit volumes.
I guess do you expect volumes to be consistent or grow in the back half versus.
The first half of the year.
You know markets are cyclical.
People the other people, making money in the I'll jump in and they all jumped in at the same time and people like US who stayed in every quarter and wrote loans and became the largest non bank originator of other people will will draft off of that success and we will have more competition going forward.
This year for the first timing of the SaaS b market will be significantly bigger than the the MBS conduit market, which is really interesting. We don't tend to play much on the on the SaaS side, though but we just did our south be securitization of some kind of select service hotels in our portfolio that was priced a month or so ago and came up very well, but it sounds to me.
Actually the biggest CLO or are significantly bigger today, I think than the conduit market as well. So if we want to do more CLO, there's sort of 2 ways to do it right. We can continue to do what we've always done which is write loans for our balance sheet that fit our cost of capital with our available sources of financing a notes, which are a perfect match.
More expensive, but more safe no margin calls no recourse no credit marks.
No no cross on the assets will continue to sell a notes we sold more than all of our peers combined will continue to use the the.
The repo market, which is the the bank warehouse financing market, which is grinding and dramatically and giving us. The reason 1 of the reasons I like this part of our business is probably better than others as the banks are all flushed with cash as everybody is now trying to do CLO. The banks have less assets on their warehouse line of businesses and they want to grow them, so, they're giving us better cost of funds and better advanced rates there.
So we will continue to use those and we will write loans, hoping that ultimately we can look at our portfolio and do another CLO, but we won't do what so many people in our space too, which is write loans 2 of CLO exit the CLO exited the higher advance rate and a lower cost of funds, but the CLO market goes away for 6 months out of every 18 months it hasn't gone away and the last.
And the last couple of bits and how everybody is writing loans for their if you get hung with those loans and you don't get the CLO exit your expected 12, IRR might be an 8 or 9 and you're exposing yourself to the credit marks and recourse and things like that that you don't really want to do so I think of the 21, new businesses that we showed to our board.
The 1 got an X through it and that was what the originate loans 2 of CLO exit.
Just too risky it's not of smart business plan at the trade in and if we proven anything over 12 years, we're in the for the long run it not for of trade. So we'll do a CLO when it makes sense with things on our balance sheet, and we can finance them better and unless we unless we have those assets, we're never going to write loans 2 of CLO exit assuming that the capital markets will be there that's just.
The trade.
Thanks for taking the questions.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star 1 on your telephone keypad. Our next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Now on the 1 hand, you said theres a lot of kind of capital chasing real estate and you know just to kind of.
Now of kind of some of what.
CRE lending is kind of the most attractive opportunity.
<unk>.
And you could kind of square of those square those 2 comments.
So Doug you were cutting out you might not be aware of and maybe it was just for me I don't know if he was cutting out for others, but what I think I heard in the couple of pieces of it where there's a lot of capital chasing CRE the capital markets of very liquid and that we are also the thing that the CRE lending is super attractive and that maybe youre, making this up of.
<unk> that maybe those don't go together.
Is that fair.
Yeah.
I'm sorry, Mr harder has disconnected.
There are no other questions at this time I'll turn the floor back to management for any final comments.
Well the terrific. Thank you everybody for your time.
We are were looking forward to talking to you again in 3 months and and.
Thank you very much.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.