Q3 2021 Starwood Property Trust Inc Earnings Call

Greetings and welcome to Starwood property Trust's third quarter 2021 earnings call.

At this time all participants are in a listen only mode.

Brief 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.

Please note the conference is being recorded.

At this time I will now turn the conference over to Zach Tanenbaum head of Investor Relations.

You may now begin.

Thank you operator, good morning, and welcome to Starwood property Trust's earnings call.

This morning, the company released its financial results for the quarter ended September 32021.

<unk> Form 10-K, with the Securities and Exchange Commission and posted its earnings supplement to its website.

These documents are available on the Investor Relations section of the company's website at Www Dot Starwood property Trust Dot com.

Before the call begins I would like to remind everybody that certain statements made in the course of this call are 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 or implied in any forward looking statements made today.

The company undertakes no duty to update any forward looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call.

Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot SEC Gov.

Joining me on the call today are Barry <unk>, the company's chairman and Chief Executive Officer, Jeff <unk>, the company's president.

<unk>, the company's Chief Financial Officer.

And Andrew Softens, the company's Chief operating officer with that I am now going to turn the call over to Jeff.

Thanks, Zach we had a very strong quarter and we have a record pipeline of opportunities across CRE lending residential lending and energy infrastructure, we expect.

To continue to issue CLO securitizations and each of those businesses in the coming months.

Significantly more of our liabilities to matched term nonrecourse non mark to market facilities.

We have the most unencumbered noncash assets the largest owned property book, providing reliable and long term cash flow to shareholders. The most unrealized gains and the most diverse set of complementary business lines in our sector, which allowed us to invest accretively in the first year after COVID-19.

We believe that consistency has been a driver of our success and we are positioned well to do the same in the future.

In our CRE lending business, we have already closed over $1 billion of loans in Q4 and expect to close a multiple of that by year end, what will likely be our biggest quarter to date.

We also are borrowing at lower spreads, which is more than offset post COVID-19 asset spread tightening.

Our global loan acquisitions team has done a terrific job producing optimal levered returns on our CRE loans for the last four quarters of 12, 6% and our pipeline is also about 12% that compares to 11, 2% for the four quarters before COVID-19.

We were busy in capital markets this quarter as well.

Rina will speak in detail about our high yield and term loan b issuances and our Upsized revolver.

Led by the Covenant change and our term loan structure, which allows us to now borrow an incremental $1 billion against the same collateral package. We today for the first time have the unique ability to borrow a record $2 billion of new highly accretive incremental corporate debt.

We intend to continue to run this highly diversified company with low leverage but should the need arise we have more accretive firepower than we have ever had.

And read our team has significantly increased our named special servicing while reducing our C. MBS portfolio over the last four years Rina will tell you. We added 17, new servicing assignments with a $14 9 billion balance in the quarter.

That is more named special servicing than we've ever added in a quarter increases are named special servicing portfolio by 33% over those four years to over $90 billion today, giving us incremental revenue potential.

Now I want to talk about our affordable housing portfolio.

Barry has said before on this call that our purchase of <unk> 15057, affordable units in Florida, which we call would start wanted to was it.

One of the best purchases in the 30 year history of Starwood capital not just our property Trust.

We paid $1 two $5 billion in total for the two portfolios or $83000 per door.

With the completion of another $163 million cash out refinancing post quarter end, we now have a negative basis in this portfolio, meaning we have no equity left in the transaction and making our future returns infinite.

After quarter end, we established a new fund to hold this portfolio.

Last week, we signed a binding subscription agreement and other related agreements with major global third party institutional investors to sell an aggregate 26% interest in the fund for a total subscription price of $216 million.

We marketed the fund earlier this year and weighted to close the fund until two things happened.

First we realized a 100% reduction in real estate taxes on these assets that was signed into law. This summer by the state of Florida, boosting our net income.

Second we received sign off from the Florida housing authority in October, which allowed us to execute another cash out refinancing as well as our stake in the fund.

Rina will tell you more about the refinancing and the accounting treatment of the fund.

Yeah.

We sold an interest in the fund as a way to broaden our third party capital management footprint and because as evidenced by the growth we've seen in these assets since our acquisition. We believe there is still considerable growth in the cash flow and capital appreciation to be realized from these assets.

We continue to believe the Orlando and Tampa markets will see above trend income growth in the coming years and that institutional demand for these assets will keep cap rates in check.

As to continue to benefit from our majority ownership management fees.

And an incentive fee on the third party investments.

As we have told you in the past the actual NOI growth and cap rate compression has led to a gain of well over $1 billion incremental to the high teens annual return, we have realized and distributed to date.

We've always had asset light fee, earning businesses with high Roes.

Our special servicer or see MBS originations business and in our <unk> B piece investing business, where we receive management fees and outside portion of potential special servicing fees in later years or both.

This new investment funds at TWD to earn cash management fees annually of third party capital and an incentive fee, which we expect to be valuable.

After taking this gain the remaining gains in our property book across all owned assets still represents nearly $4 per share of distributable earnings, giving us confidence in our unique ability to earn and pay our significant dividend.

We may choose to sell more of this fund in future years and given the funds eight year life, we will determine the ideal exit strategy for those assets by the end of 2029.

As for the valuation in our sale cap rates on Florida multifamily have tightened significantly to the low to mid 3% range.

Rents, which cannot go down in the affordable segment, but go up along with median MSA income.

Risen over 20% since acquisition and.

And driven a nearly 40% increase in after tax NOI since our purchases.

Given the minority investors in this portfolio did not have control that the portfolio was not optimally levered to today's interest rate environment and that we are receiving management and incentive fees on their investment. We settled earlier this year on evaluation cap rate of 375% or a value just over $2 3 billion.

Or $153000 per door.

The accounting for the fund resulted an increase to our unappreciated book value to approximately $21 per share.

If we added nearly $1 per share gains available to us at our marks on the remainder of our owned real estate or fair value per share of our enterprise has nearly $22 today.

At a $26 stock price, we were at 1.18 times price to fair value book, which is below that appears who don't benefit from our diversification our.

Our unrealized gains the scale of our unencumbered assets or our third party fee streams.

I wanted to spend a few minutes today on the valuation of S. TWD.

We believe with almost $4 per share left in the cash from harvesting our unrealized gains that our ability to pay our dividend through cycles has never been greater and we have created a security question for our bond like dividend.

Yes, TWD trades at a seven 4% dividend yield today or almost 600 basis points above the 10 year U S treasury or.

Our company has significantly outperformed since our inception in 2009 earnings 13% annual total return for shareholders.

Our core business has continued to improve and we are earning our dividend and our core businesses. Despite a significantly lower LIBOR today.

Beyond continued outperformance in our core businesses there are ways, we could increase earnings and thus the dividend.

We could increase leverage or we could realize embedded gains and redeploy that capital creating excess earnings.

We sleep, well, knowing how well how well our lower leverage predominantly off balance sheet match funded financing model performed in Covid and have no plans to alter the strategy.

If we were to realize part or all of the $1 $1 billion of unrealized gains remaining after the minority fund interest sale I just spoke about each $100 million, we chose to sell if reinvested at the 12% ROE. We have historically earned would add $12 million to earnings and <unk> per year.

<unk> to our dividend.

If we sold $1 billion of our gains and reinvested the capital at 12%, we would add $120 million to earnings and <unk> 40 per year to our dividend.

Adding $42 92 dividend would be a dividend of $2 32 per year, which implies our dividend yield is actually almost 9% at $26 stock price at our marks.

Which over 80% of have now been justified by third party global investors.

To do that and not the other way if we paid a $2 32 dividend and the market's still believed our diversified model was at least as good as our peers today and held us at a seven 4% dividend yield.

Our stock would be over $31 per share today.

By monetizing $1 billion worth of our embedded gains and redeploying the equity at a seven 4% dividend yield our stock would be over $5 per share or 22% higher than it is today.

The option to sell a property book at a large gain is available to US we have opted to continue to stay diversified keep the above market return and long duration nature of these assets and save these gains to create the most stable earnings power in our sector.

I will finish with the things we can control.

We have access to more accretive capital than we ever have.

We are trending towards record origination levels. The credits in our portfolio continue to perform very well we are executing on it on the significant opportunity set in front of us and we believe our company has never had more distinct ways to outperform regardless of market cycle.

We are very excited about the prospects for our company and the potential value in our stock price.

With that I will turn the call at arena.

Thanks, Jeff and good morning, everyone.

This quarter, we reported distributable earnings or D E F $155 million or <unk> 52 cents per share.

We were again active on both the left and right hand sides of our balance sheet deploying $3 $8 billion of capital across our diversified platform and completing $580 million of corporate debt issuances, which I will touch on later.

I will start this morning, with commercial and residential lending, which contributed <unk> of $142 million for the quarter.

In commercial lending, we originated $1 $7 billion across 14 month, nearly half of which were multifamily and industrial.

We funded $1 4 billion of these new loans and $172 million of preexisting loan commitments.

We continue to see increasing lending opportunities across Europe, and Australia with international alone, representing 21% of our third quarter originations and 26% of our commercial loan book.

After $872 million of repayments, our commercial lending portfolio ended the quarter at a record $12 1 billion.

On the right hand side of the balance sheet, we completed a single asset single borrower securitization for a previously originated $230 million long.

Portfolio of 41 extended stay hotel.

This transaction allowed us to increase the advance rate and return on this long while moving the existing repo financing to a term matched nonrecourse non mark to market structure.

We continue to see strong credit performance in our loan portfolio and post Covid originations now represents 43% of our quarter end loan balance.

Our portfolio has a weighted average LTV of 60% and a weighted average risk rating of 2.7, both in line with last quarter and reflective of no downgrades.

With this performance our general seasonal reserve remained flat at $48 million.

Moving to our residential lending business, we saw record volume this quarter as we completed $1 8 billion of loan acquisition.

This amount $262 million resulted from unwinding, one of our 2019 securitization, which will allow us to significantly reduce the financing cost of the bonds upon re securitization.

We also completed our 13th securitization for a bond with a <unk> of $470 million.

Our on balance sheet residential loan portfolio ended the quarter with a weighted average coupon of four 4% average LTV of 67% and average FICO of 746.

Next I will discuss our property segment, which contributed $20 million of distributable earnings for the quarter.

Average occupancy remained steady at 97% and blended cash on cash yield increased to 18, 9% this quarter.

Subsequent to quarter end, we upsized the debt of what star one or first affordable housing portfolio in Florida by $163 million at a lower cost of funds in doing so we replaced $217 million of debt at LIBOR, plus 271 with $380 million.

Debt at LIBOR plus 211.

The refinancing returned 100% of our equity basis, and this investment and provided an incremental $140 million.

As Jeff mentioned, we established a wet start fund subsequent to quarter end.

You will see the accounting impacts I'm about to describe and our year end 10-K filing.

The new fund will be accounted for under ASC 946 financial services investment companies.

This investment reported on its balance sheet at fair value and changes in value recognized through GAAP earnings each quarter.

As managing member of the fund we will consolidate the accounts of the fund into our consolidated financial statements and thereby retaining the fair value basis of accounting for this investment.

We expect the related distributable earnings gain which will be recorded in the fourth quarter to be approximately $200 million. This amount reflects the difference between the subscription price of $216 million and 26% of our cost basis.

We do not expect a special tax distributions to result from either the third party investments in the fund or the refinancing.

Based on our current estimates of taxable income for 2021, including the taxable income, resulting from Westar, we will meet nearly 100% of our distribution requirement via our carryover dividend from the fourth quarter of last year and a full four quarters of dividend this year.

Said differently, our carryforward dividend, which represents the Q4 dividend that was declared last year and paid in January of this year plus four quarters of consistent declared dividends in 2021 would provide us with 100% dividend coverage.

Next I will turn to our investing and servicing segment, which reported D E F $34 million and our conduit Starwood mortgage capital. We completed our first single asset single borrower securitization for a $113 million alone.

We also priced one conduit securitization transaction totaling 239 million of loans, which settled after quarter end.

With past practice this transaction is treated as realized for de purposes.

And special servicing Jeff mentioned, the significant expansion in our named servicing portfolio this quarter, which increased by $12 $3 billion to $91 4 billion due to the assignment of 17 see MBS trusts with a <unk> of $14 9 billion.

And our active portfolio, we resolved $1 5 billion of loans this quarter, bringing this portfolio to a balance of $7 3 billion.

Concluding my business segment discussion today as infrastructure lending, which contributed <unk> of $11 million for the quarter.

We acquired $90 million of new loans, and funded $16 million under preexisting loan commitments.

<unk> were $113 million, which kept the portfolio at $1 8 billion.

On the right hand side of the balance sheet. We successfully replaced the acquisition facility that we entered into in 2018, when we initially acquired the portfolio.

Loans that were still on this line were transferred to one of our existing repo lines, which was temporarily upsized from $500 million to $650 million to accommodate the transfer.

I will conclude this morning with a few comments about our liquidity and capitalization.

During the quarter, we issued a $400 million unsecured sustainability bond with a five year term and a fixed coupon of three and five eights with no O I D.

We are able to issue these green bonds, given our unique platform, which has investments across the sustainability spectrum, including loans on green buildings and commercial lending.

Wants to homebuyers within residential lending affordable housing within our property segment and renewable energy within our infrastructure segment.

The proceeds from the bond issuance were used to retire $400 million of our December $700 million, 5% unsecured notes when they opened for prepayment at par in September.

We also upsized, our term loan by $150 million to $790 million and our corporate revolver by $30 million to $150 million.

In connection with these advisors, we amended our asset coverage covenant from five times to two and a half times, allowing for approximately $1 billion of incremental borrowing capacity.

In addition to financing capacity available to us via the securitization markets. We continue to have ample credit capacity across our business days ending the quarter with $8 1 billion of availability under our existing financing lines unencumbered assets of $2 5 billion and an adjusted debt to unappreciated equity ratio of two and a half.

Hi.

With that I'll turn the call over to Barry.

Hey, good morning, everyone. Thank you Zack Thank you Irina Thank you.

Jeff Jeff went before arena.

Diversity for us at the moment.

I think as he was really excited about talking about star.

Structuring.

Let's back up and talk about the markets for a second you know the most important thing in real estate right. Now is we're playing catch up to the rest of the world's asset classes.

And.

What is shocking is yield is still incredibly valuable.

Properties now that the worst is behind us clearly around the world proper.

Property values, not only stabilizing but they're moving higher rapidly.

The one area, probably the strongest market at the moment and all of real estate and besides the single family homes for rent.

Is multifamily.

Since we own nearly 100000 units as an equity player.

And control of those units, we can tell you with a strong comes markets are with daily.

Rollovers of leases and it's unprecedented.

I've been doing real estate for 35 years, and I've never seen rent increases not only that are high double digits, but across the entire country.

And that goes to kind of the valuation of the Winstar trade.

<unk> investment we created this investment fund.

Earlier in the year to prove to the market that the substantial unrealized gains that we had in our book real. So we found two very large offshore investors after a broad marketing effort.

To come invest in that portfolio, they bought 20% of the equity and I will tell you that we severely under those assets between the time of the investment.

Investment they made and what we're seeing in the marketplace. Today is in active equity investor probably cap rates have fallen more than 50 basis points.

And we just sold the large portfolio and our equity funds in the twos. So affordable housing you could argue is actually better than market rate housing in the sense that given the incomes are rising rapidly at the lower end of the income streams, 38%.

The increases in total.

Income for those age groups.

That demographic sorry.

The rents in multifamily are set by the median income.

And the areas that you are so whether you want assets in Orlando and wages are rising rapidly.

Just an anecdote I was talking to an operator in South Florida hotel they've taken their the ADR there average.

Labor costs from $14 to $22. So as those numbers filter through the economy and the income numbers of these towns and I'm sure. It's true everywhere as a service workers have been the last to come back to work and those are probably typically.

Our tenants, we're going to see pretty rapid growth in income in the affordable housing. So we love the portfolio. We would have sold that's why we didn't sell more.

On the other hand.

We wanted to Mark make some make sure that everybody realized that among all of the mortgage Reits were the only one with a $3 billion plus property book the cost on those multi use was $1 1 billion. In this trade was $2 3 billion. So valuations so.

I'm confident that we still marketing that portfolio significantly below its fair value and that is true across the board of the other multi that werent included in the fund so.

We think it's unique to Starwood gives us long duration.

One of the reasons that cap rate was a little higher was there was some debt on the portfolio by the way that was will obviously go away that was more expensive than it would be if we were able to refinance today.

We didn't.

We didn't maximize leverage the two clients weren't that interested in levering it through the moon and beyond so.

But that provides a baseline of dependable cash flow, one, which we believe support our dividend and also as we continue if we continue to harvest the gains in that portfolio, we can redeploy that trapped equity at higher returns.

And I think the other fast anything about the quarter as the 12, 6% Roe.

Our investment loan book put out.

That's as high as we've had in probably years.

And it's pretty surprising given everyone's come back to Linda.

And people are.

This comp competitive because there's a lot of projects aren't penciling out right now.

On the construction side, so an LTV of 60 11 years. After we started in business I would've definitely not believed that for a 12% Roe.

The chalk.

And what's so interesting is that replacement cost obviously inflation is hit the country and inflation in construction prices is giant.

Seeing 2% increases in cost monthly.

With labor and materials and some of the materials have softened, but I don't think thats going to last because of the transportation Bill.

Impact steel concrete piping and all the materials that go into construction constructing anything and then add that the fact that country seems to have lost 1 million construction workers and Theres a vast labor.

Shortages in construction and now youre going to try to fix bridges roads and tunnels all over the country. Good luck finding people could do it funny thing is we probably have to import all of these workers from some offshore country because they don't exist in the United States today, So small wrinkle on on how we're going to actually execute the <unk>.

600, $700 billion of physical infrastructure Thats planned.

To be it will continue to put pressure on pricing, which means existing ltvs will fall I'd give you a a 63 LTV is going to go to 55, just because the cost to replace a competitive building is going to rise and it will mean that there'll be less construction or rents have to rise in order to justify new construction, which will also provide a.

Lower LTV on the existing book.

So the fact that we have a business that produces seven whatever three dividend yields in a world with no yield at 60% LTV and a whole slew of hot high ROE businesses attached to that which no. Other mortgage company has and now we're trading at one two times book.

And that highlights what we probably been saying for five to seven years that we have.

GAAP book of now $20 $21.

Fair value book.

I would appreciate it and appreciate it and then 'twenty two box. If you take if you mark to market I think conservative estimate of the fair value of the firm probably closer to 23 I'm guessing. So you have a very cheap company youre getting all of these businesses basically for free because we put re trade right on top of our nearest competitor, but have all these high Roe businesses.

Alongside the lending book, which is having a record year.

Businesses.

<unk>.

Really good our global footprint is helping us Europeans are coming through with.

Increasing volumes and we have a backlog that's significant so.

In a world, where the 10 years back at 145.

Can't understand how we stood at 600 basis points higher spread with a 60% LTV again at 60, LTV. If you actually gobble theyre, all our loans together and put them in a trust youll probably be rated investment grade through most of the portfolio that would be just.

You would get like I don't know, maybe two 5% for that coupon on the debt. If we aggregated. This stuff. So it's it continues to amaze me and we thought one of the impediments to a higher stock price was a premium to book that perhaps some people just for running screens are not really paying attention to our calls in the detail of what.

And say, hey, I'm not paying one four times book and we've been arguing for five years not paying one four times one five times book because the book isn't real obviously with only investment the only mortgage company that has this massive depreciation coming through while assets are obviously appreciating in the case of would start $1 billion.

We just thought we should highlight it with actual facts and you can see we're freeing up a couple of hundred million dollars. We can invested high high returns was accretive move for the firm long term so that was.

I think the highlights of the quarter, we continue though to work on the balance sheet arena. The team Andrew have done an amazing job working with Jeff on on term financing our debt we have the least exposure to repos and bank lines I think any of our peers that I'm aware of with some of our major peers.

So it's not only a stable dividend, but it's fairly safe because you really can't be impacted and that's why.

When the when the stock fell out so that we can pay the dividend we can always houses the gains in the equity book and pay the dividend for the foreseeable future.

Just something no one else can say in the sector frankly so.

Now we did think the world is going and should we harvest some cash and we will take advantage of amazing opportunities, but it really never was a question we couldn't pay the dividend was a question of whether we wanted to.

And that would are dependent on the trajectory of the worlds if we'd gone into a massive depression, we would've.

Thought about what was the best use of our cash so regardless I think.

Firm has established itself as the Premier player in this space.

Hopefully would start trade, we've alleviated one impediment to a further increase in our stock price and we're pretty excited about some new opportunities we're looking at.

Hopefully you will see us do a couple of really interesting innovative things in the <unk>.

Near future. So thank you for everything and thanks, I want to thank the team because the.

300, and almost 400 people started property trust are working really hard across all our verticals to be best in class. There was a question that I'm preempting about.

Infrastructure lending just haven't been that many loans to do coming out and now the pace is picking up so.

Some of that stuff just froze in place and there was not a lot of volume. So we're picking that up but all of these businesses are producing target or better than target Roe.

And we.

We're pretty pleased about everything you can see our volumes in the non QM lending book were very large in the quarter continued to be large.

The conduit business continues to function perfectly frankly.

Our <unk> book has been lightened.

Tremendously, but we're also picking up servicing so.

It's really.

Kudos to the team they've done a great job so with that I think we'll take questions.

Thank you.

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One moment, please we poll for questions.

Thank you. Our first question is coming from the line of Tim Hayes with BTG. Please proceed with your questions.

Hey, good morning, guys.

First question just on the on the <unk> portfolio sale.

You mentioned some of this in your prepared remarks, but I wanted to maybe just dive a little bit deeper.

Can you give us a little bit of information on the profile of the buyers and what your appetite is like to sell more in the new fund structure and if you've had other conversations with other third parties and that seems to be something we can expect to see it in the next few quarters or.

Or if you are kind of set.

The amount of ownership you have in the portfolio now and then.

A couple of follow ups. Thanks.

What we can say about the investors is a giant offshore sovereign wealth funds that have an appetite to increase their positions in these portfolios in the future. If we decided to do it so they did not limited by capital.

But we're not at Liberty to tell you who they are.

<unk>.

And I think I think as to harvesting the future gains just in that book or the medical office portfolio are way above market Triple net leases to Dick's I guess bass pro shops.

Optics.

Yeah.

All depending on what how to put money out in the other businesses right.

If we're if we can.

These are what do we can do this year in originations you think Jeff.

We will be.

And James 1 billion, and then you add in <unk> and we're closer to 11, but in the large loan lending book 8 billion could we get those volumes to 14 or $15 billion. We would we could we could be $10 billion. This year.

We would we would we would take more gains to invested 12 roe's.

The one thing about the book as it gives us is stability.

The return on equity isn't nearly infinite and I don't have to worry about early repayments.

But as the book gets bigger and now I think it's the largest balance sheet, we've probably ever had for sure $21 billion right.

We can suffer those repayments without worrying about.

Any disruptions to our to our EBITDA or earnings potential so the bigger the book to better the business. It always was the case because then it's just a question of can we find enough attractive deals with enough duration. The business is not easy the duration of our wariness almost necessity necessity.

Necessarily thats a hardware to say and this is really in the morning necessarily.

In addition loans.

It was like the faster the borrowers fix their properties.

It was back it actually the lines of having to get a higher ROE because you've got a prepayment penalty and we get whatever fees. We took upfront are actually over a smaller timeframe. So we might think alone is a 12 and it's actually a 16 and I think if you go back and look at history, that's actually the case.

That people always kind of.

Pay us off a little faster when things go well.

The higher than your IP MMO is because you have upside to prepayment penalties and Youre only downside is credit where we haven't really taken any meaningful impairment ever. So so so so the thing is it's just a lot of work on it for the team.

I think broadening our ability with additional product lines to put out that capital.

When we cross that Rubicon, Youll see us probably take more gains off the table and redeploy with today is probably a sub par ROE I mean on.

We'd be better off taking the gain and reinvesting it which <unk> wants me to do every two days so.

I'm, just I want to make sure.

Eric we've been sitting on so much excess cash for so long, we don't know what to do with ourselves, but thats actually the good news is it.

Wendling and we do have access to the <unk>.

Given the Woods Star trade, we have we'll have.

Unprecedented access to.

The unencumbered assets to supply the company with additional corporate debt and still maintain lower leverage levels on our peers. So.

We could boost the row here as Jeff pointed out we could raise the dividend will be levered. The company just doesn't feel like what we told people we were going to do in the beginning of time, which is safe consistent and predictable and that we thought the market with value and the stocks rallied but.

703 dividend 12 years into your existence with a 60% LTV and proven.

Capabilities across multiple business lines.

Seems like a good deal in the market.

Where you see stuff going on.

We trended a little higher for a minute Barry, but we're trending back towards 2.0 times.

Times book on our leverage which should be at the very low end of anyone in our space.

So again, we will take other questions. If you had a follow up.

No Joe.

Two follow ups around that and you kind of answered one of them is just about where you redeploy that capital and it sounds to me and correct me if I'm wrong, if the best.

Risk adjusted return right now is still in the large loans CRE book. So I'm just curious if that's where you redeployed the $200 million youre getting back or if it's used to pay down. The notes you have coming due in about a month or so or if there's anywhere else that you might look to allocate that.

And then.

Part of that question Jeff is.

The comments around.

Around the earnings accretion right, because you might look at dividend coverage right here and you're.

Pretty well covered 52 versus <unk> 48, and Youre getting about eight back from this portfolio sale right and then that doesn't even include the management and incentive fees youre getting on that capital as well so that's going to be pretty noticeable when we see it flow through earnings next year. So I'm just curious if that.

That is enough to get you to think about maybe bumping the dividend or.

If it just provides nice coverage for you and give shareholders more confidence in your ability to pay it.

Thank you.

Okay. So so on the on the redeployment, we got the advantaged Tim of waking up every day, when we get a dollar into our ecosystem and deciding among seven different things what do we want to do I think running this business at this scale would be tremendously hard and often awkward. If you had to wake up every morning, and make only real estate loans.

Every morning with every dollar that came back into the system because there are times when you've seen us pivot. We built this book in 2015, and 16, because we didn't like where lending standards, where we decided it was better to be a borrower. We built this entire entire book and that pivot in the middle of Covid, we pivoted in and built a massive position in non QM residential mortgages, because there was something we could trade.

We're going to wake up everyday and decide where the best place to put our capital across the seven I would say you're right today based on what Barry just said that our fourth quarter will probably be one of our best quarters ever that we're trending in the mid 12% after trending mid 11% ROE Levered pre COVID-19.

The environment is very good for our large lending book and that's our core business I think if we had if we could grow one business that people understand that's for that and it's easier and we would continue to grow there, but I would say the energy infrastructure business, which really attractive in the fourth quarter. Non QM continues to look attractive the whole loan coupons are coming down but the financing is coming down also and there are some.

Pretty good opportunities in the MBS and other.

<unk> is a place for us to add today would probably be in the property segment, given what's happened to cap rates on core cash flow type of type of properties. So we feel really good about the fact that we can wake up and look at seven different businesses to put money out. It is a great time today, probably the best we've seen in a long time.

<unk> executed their business plans during COVID-19, but didnt refinance during Covid. We're now seeing the execution of the business plans are seeing a tremendous amount of volume potential coming out the other side and with LIBOR at a lot lower there is a lot of people, who just want to get out of a high floor and so that's adding a lot of volume. So we and our peers will have a big fourth quarter, we and our peers will probably have a big first quarter.

And the Levered yields are pretty good because of where financing markets are as far as growth of earnings relating to that cash coming back in and the desire to build the dividend I think that's a longer term question as we see how we come out of this over the next year or two but we certainly are in great position, earning earning our core dividend.

A lot of people are going to suffer with distributable earnings.

Given the lower LIBOR and the fact that we're earning our dividend in this lower LIBOR environment.

It's pretty good and if we can continue to do that coming out on the other side I think one thing about our business. We are still some large lending side as we are tried tied to global transaction volumes and the moves in.

<unk> cap rates.

And the fact that I think people are didn't sell during the pandemic as people why would you sell unless you had to sell during the pandemic or this backlog of deals that are trading now and Theres a lot of capital we ourselves.

We will have I think well by $30 billion of real estate. This year I was told so that is a record for our firm and in multiple vehicles. So we have very good view of what's going on that's producing a lot of lending opportunities and.

Well, it's going to continue for a while here as people re juggle their.

The portfolio there may be a slowdown actually in transaction volumes in the United States.

Some people tried to get ahead of the capital gains tax increases, particularly families.

And if they could sell they sold so you may see a slowdown I think you'll see a lot of corporate M&A.

In the next 12 months.

In the REIT sector more than we've probably seen in years.

So I think there'll be opportunities in that sector for us too and the Mezz is oftentimes in these giant deals we work with another one of our peers in one case and a duly approved just yesterday, we were working with a money center bank and splitting the deal. We competed with them. So just doing straight up with them.

It is an interesting time.

We have the ability to do very large transactions and small deals and we're doing both and we'll look at whether we should be bigger in middle market lending.

And looking at opportunities to be in that space, because really small investments go into conduit large loans go into the.

Into the book that held booked in the middle we don't play that much and that's something we could probably expand some of our smaller peers that have to be in that space because they can't do the giant deals. So we could we can organize ourselves and maybe start to go after some of that that those smaller investments. It's not just the churn is a lot of work and you make <unk>.

Million dollar loans and hold the $10 million or $15 million you know you've got to do a lot of them to make a difference, but every one of our business lines operated that way.

<unk>.

We want to provide them with capital to earn really good rates of return and a world without yield.

Where we.

We're.

We're pretty pleased I mean, it's pretty nice that the whole mortgage sector came through as a whole the the financial whatever you call that the pandemic crisis unscathed, I think mortgage Reits have old might've blown up.

And these these mortgage rates for the most part a few of them.

But most of them came through this a few of them were put out of their misery.

Some of the small guys, who got the gobbled up but.

Obviously, the major players, we're able to come through pretty well Barry to your first comment the transaction volume looks like it's going to be over $550 billion. This year and over 200 of it for the first time will be multifamily. So we're seeing a lot more multifamily opportunities. The market is seeing a lot more multifamily opportunities and that is helping drive it normal markets over the last 15 years pre COVID-19 pre <unk>.

The post GST after four or five years, everything, but 2020 since 2016 to between $500 billion of transactions. So we're trending to the high end of what we've seen and a big part of that being being multifamily. What's interesting is a huge part of the lending today is in floating and if you go back to the GSC year before there was a lot more fixed rate lending whats happened is private equity.

The Blackstone Starwood to the world funds who've got much bigger there's a tremendous amount of that money on the sideline and they will more often take floating rate than long term fixed rates. So the percentage of that 500 plus billion of transactions is more slanted towards floating which is a great opportunity for our large loan floating book.

One other comment I will circle back on the dividend.

Probably in the best position, we've been in five to seven years to actually look at increasing the dividend.

So.

That's a board discussion and we haven't made it but.

As you pointed out.

Probably one of the best coverage is I think in the mortgage business and obviously we have.

Billions and embedded gains so could.

Could we do it sure should we do it where it really help us.

We don't know so that's kind of what we're thinking about I mean.

But we are in a position to feel comfortable doing that if we wanted to do it. So we will probably bring it up we'll see.

Yes.

Thank you.

Our next question is from the line of Jade Rahmani with <unk>. Please proceed with your question.

Thank you very much first question is on prop Tech side I know Starwood capital group has invested in that are there any product attributes at LNR any proprietary technology their proprietary technology or is there too much of a dependence on third party data feeds.

That would create a hidden source of value.

Well, it's funny you mentioned that.

Actually it is.

I think a bigger group of technology or people with.

I know it is TWD then there is T J the parent.

It's five times the size.

One of the reasons they do that they have we have this database called L. P M.

Which is.

A database of all of the investments that we service and sell and monitor with the service loan book. That's what is it like 70 to 80 billion $90 billion named servicing right. We have to be careful about what data we use and for what purpose, but there is a business for us that we will.

We talked about getting organized which is to manage.

For small institutions to be their workout Department and then basically we are a workout department, we just do it for <unk> Securities.

And much like Guggenheim grew to be the investment shop for small insurance companies, we could be the workout department of small banks and we have that's why we have all these people that most of these people work in those businesses.

So it's something we've talked about and obviously, it's a very high ROE business and probably something we should try to execute in the future, but at the moment, It's nation I'm aware that Blackrock build a technology called Blackrock solutions for themselves to help them manage their.

Their assets and then founded so compelling that they went out and created <unk> solutions, which today I think classified checkmate $500 million for Blackrock. So.

Could we have in LNR solutions, or what we call ourselves.

One of their subsidiary called <unk> solutions.

That's something I'd love to see us execute it's obviously all option value, which doesn't exist today.

Thank you very much and just on the M&A side are you more focused on pursuing such asset light high re bid high ROE businesses or on the other hand do you see a consolidation opportunity within the mortgage REIT sector, you could bifurcate the mortgage rates the larger cap names trade fairly well.

The mid to smaller cap names or sort of loved so there could be potentially an opportunity there.

It's almost like a like a cliche to say, we look at everything but when we look at everything right.

Where they are trading isn't that relevant it's really a question of where they would do deals. So.

And.

It's very hard to do a hostile on a REIT.

And what gives you might've seen we we tried to buy an industrial REIT and.

Management, just said no and.

So it's just very hard to do that.

The funds the index funds won't vote and they're typically the top 12345 shareholders of the REIT. So.

It's very hard shockingly difficult and kind of sucks.

But it is the way it is I, even called Blackrock, specifically to say in one situation not the one I was mentioning.

Management has done a terrible job outlined all the.

Shareholder disasters that they presided over.

And they just don't want to vote, they don't want or they want to stay path. So they don't want to get involved in a takeover of <unk>.

It has compelling business in an ethical and more.

So.

It's kind of complicated I wish it was easier than it is.

Because it's like it's kind of it's that it's actually the REIT regs that allow that to happen you can't go over 10% ownership so and in some cases, if you do the draconian protections come into place and.

And you can basically say no <unk>.

Say now so we'll see I mean, we'll see what happens in our sector. I think there were a lot of consolidation talks during the pandemic, but not many of them took place so.

Actually happened anyway, thanks for the question.

Thank you. Our next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your questions.

Thanks can you talk about.

How the sale.

Good.

The property assets inflow impacts your problem journey to a higher credit rating.

We're continuing to lower the cost of debt.

Difficult to say that there is a tremendous amount of it.

If I were thinking about our ability to repay debt I certainly love. The fact that we have these large gains I think the agencies like we look at these gains and say when I need them they won't be there.

There's probably a misunderstanding of that and we think that these are durable and that they will last in a recession. The cap the interest rates go lower we've seen cap rates go lower on this stuff in COVID-19 on the largest portion of it. So I think we think there'll be durable.

Think any logical person would think you would be higher rated if you have this massive war chest behind you I think the agencies think that it's not durable and you don't have much of a war chest. So I don't think it matters that much to them. Unfortunately.

I don't think anything we're doing here is sort of ratings driven.

Got it and then can you just talk about the increased opportunity you saw on the residential loan acquisition.

This quarter and kind of you know.

Kind of how you think about the pace of deployment going forward.

We collapsed the trust with part of it and we will always do that to try to move it into better financing.

We own a.

The preferred equity investment I guess in an originator that we expect to become hours in 2022, and we've been really working hard to grow that and then a significant part of that origination come through that pipeline.

I also think that you're seeing.

You're seeing a decent amount of agency investor loans come through the pipeline and that's something where the agencies pulled back and non agency originators like us, we're able to step in and probably flip those back to the agencies at some point in that 500 million plus of that number. So that helped the number look a lot bigger.

But we continue to look at more sectors. We continue to stay the course, we love this sort of low sixties LTV high mid high 700, FICO credit profile with the HBA, we've seen around the country. There is no credit risk in these bonds, it's all about duration and prepay speeds right. So as long as we hedge these too fast.

The prepay speed than we think is likely and we can still earn a double digit return, we're sort of super happy to lean in I'll say the gross whack the coupons are coming down a bit that's expected as you move later into later into a cycle as the originators pivot away from doing just agency loans and then try to try to find non agency borrowers that they cannot.

For a lower rate. So we are seeing gross WAC has come down and speeds around a little bit higher than we thought but we've been fairly conservative on where we are in our speeds.

The last bunch of months and we'll continue to do that and hope that coupon stay around here if they collapsed a lot more we probably won't be a big investor here, but today, it's still very attractive for us.

Thank you.

Question comes from the line of Stephen Laws with Raymond James. Please proceed with your questions.

Hi, good morning.

It looks like from early last year International was a little less than 20% of the loan portfolio now.

Above 25 sounds like may be headed to closer to 30 here.

What are the opportunities you are seeing internationally that make that more attractive to deploy capital then the domestic.

And.

As a follow up to that it looks like you've got a higher mix of CBD office exposure with the international office assets than maybe what you've taken here in the states. So is that is that coincidental or is that part of part of the differences you see internationally versus domestically.

Yes.

I'll go and then you go I mean, the European markets and Australia markets are a little.

It is competitive and the banks are.

Less competitive for I'd say, there are more strict on kind of by the book lending on an LTV less inclined to do transitional deals.

Totally not inclined to do them.

And there's a very wide gap between where banks will lend cheaply and there'll be really cheap cheaper than U S banks, and where we would land.

To fill a gap in the capital structure based on our underwriting skills.

So I think we could be bigger in Europe than we are.

We're asset class agnostic, we really don't care.

<unk>.

And we try to we have.

Tried to avoid hotels.

Just because of the.

Not because were not comfortable lending against hotels, but I think it just puts a little alarm bells into our.

You know people don't like that as much so it's for subs perceived to be less resilient.

And you are coming out of the pandemic globally. So hotels will stabilize obviously, we own over 1000 of them. So I can tell you what they are doing.

And where theyre doing it since we own them all over the world.

We're looking at other asset classes to like data centers and any place. We can we can find opportunities to earn our returns they're all open open game and in some cases, maybe it's office building that's fully leased and we are.

Making a construction loan and we've done that before in a fully leased office building with long duration and credit tenant.

We will do that too so.

Yes.

Most of our peers in this space in the U S don't do European loans. So they don't have the infrastructure I think.

I can't tell you we have too many people are doing well.

I always think we have too much overhead, but I think it was probably 20 people now.

London.

And servicing and.

And the huge part of what you're investing on the equity side in Europe. So we know the market our London offices 70 people. So that's the benefit of having the parent that we do so for the REIT.

I'd throw on top of that the U S. You tend to see more brokered deals the stills and <unk> and whatever bringing deals and then on a broker deal three guys in a Bloomberg who call themselves. The debt fund can write alone because somebody brought it and they were the guy left standing with the highest proceeds or the lowest price and they are in business and you'll see a lot of that here I think it's harder to be a boy.

In Europe, it's much less in terms of broker deals I would say more than 80% of our loans have been direct in Europe, which is a significantly higher percentage.

One of the reasons on the office presented you do see less institutional multifamily in Europe.

You have a buy to let market that is well financed in the securitization world, but it's not really an institutional multifamily market. Historically, we are doing some due to the multifamily deals going forward, but that's a new sector. So your percentage office look higher there if youre doing large loans, just because you're sort of missing that whole multifamily segment.

Europe, we go onto has gone to buy to let.

Yeah.

Great. Thanks for the comments this morning.

Our next question is from the line of Rick Shane with Jpmorgan. Please proceed with your questions.

Hey, guys. Thanks for taking my question you really answered just answered my primary question.

So one quick thing do you have a couple of large.

Maturities coming up in 'twenty two.

I'm curious just your comfort level in terms of how those projects.

Moving through the path and your comfort in terms of them being able to.

Refinance or payoff.

Yeah, Thanks, Rick sorry to answer your question before.

I have a knock for doing that to you so I apologize.

A big loans are one in an office in DC and a mixed use in London.

Those are absolute smokers and theyre going to be really easy pay offs. Some of the easiest that we will probably see is my is my guess in terms of institutional quality.

That's in great shape and comes out so there are some bigger ones and I will tell you that specifically, we're not worried about anything that I can look at right now in the 2022 maturity bucket. So the credit has continued to perform pretty well we've been we've been super Lucky that Covid turned as quickly as it did but it was work that we did going in and we were.

Probably the first one to come out.

Almost a year ago now until you guys that we think it will be okay. In our portfolio will hold in and to date, we feel really good about that.

As I look at the fully extended payoffs for next year, not really worried about anything.

Alright, Hey, Jeff. Thank you for the specificity on those two loans those were the ones I was looking at.

I tried to buzz in as early as I can but apparently my peers or even faster than I am. So we're going to we're going to reverse next quarter, Rick I feel like all of you that.

Okay. Thanks, Scott Thank you.

The next question comes from the line of Don <unk> with Wells Fargo. Please proceed with your questions.

Jeff could you talk a little bit.

Where yields are for non QM I know, there's some noise with some agency acquisitions and.

Where do you think that market can go can it.

Can it get much larger.

As you look forward.

Yeah listen there is a lot of room for it to get bigger part of it getting bigger is going to be it's movement to a lower average growth average WAF gross WAC and our wax when we started doing this business. We're in the mid sixes and today they are in the low fours.

Youre getting to 150 basis points off of agency coupons, and so you'll start to feel some turbulence. If you try to tightened and from there on that spread. So my guess is that you hold in somewhere somewhere between 100 150 basis points wide of agency and that at that spread.

You potentially bring in a decent amount of people, who are able to refi, but don't fit the traditional bank origination statement, 43% DTI et cetera, and so so the market can probably continue to grow at one one of the things is what's the government going to do with the agencies and are they going to allow via the patch them to write more non QM or do they want them.

To be doing more mission specific stuff low income affordable et cetera, and depending where where they come out on that that will tell you whats leftover for us, but certainly a lower coupons there'll be more volume.

And one of the things one of the things driving the lower coupons I'm, giving you a blended coupon the agency coupons, where we did I told you over $500 million of Investor Agency loans, those were sub 4% coupon and our non QM loans are still mid and sometimes mid to high 4% coupons. So im giving you a blend between when we do both but reality is the non.

Jerome coupons are still in mid 4% today.

Okay, and the leverage and the leverage is fantastic right. We can get 11 turns of leverage if we wanted in the securitization market.

Spreads that are almost as tight as where we were at the very types and it is incredibly accretive and that's why you're seeing a lot of hedge funds come in and be willing to pay 104 105 for pools of these proposals of these loans to securitize them and we've been able to produce them at cheaper owning our own originator.

We're happy with them.

Okay.

Thank you.

And our final question comes from the line of Jade Rahmani with VW. Please proceed with your questions.

Thank you very much for taking the follow up just on the infrastructure side is there anything in the infrastructure Bill that you believe could be a boon for that business and secondly would you look at digital infrastructure credit fund, which another REIT and asset manager I believe you're familiar with is also looking at.

Right.

What was the first part of the question.

And for Bill anything in the infrastructure Bill that was just passed.

That could be a boon to that business.

A lot of those projects won't start till middle of next year some of them in 'twenty three like for example, the the ones that were familiar with the tunnel in New York or the investments in Amtrak so.

The government will do what it always does which is take some time.

To run them.

Foolish process and take a wrong bid and do something twice the cost of what it would cost private enterprise, but I look forward to that.

The.

But I think in general.

There'll be opportunities for us to lend money, particularly if there.

They are funded it depends what's what's happening.

Whats the project and who is leading it north to how theyre going to do a financing obviously the government will financings they own I would imagine so they won't be looking for third party capital, but if they partner with privates and and as opportunities would be great for us.

And to the extent.

There are other opportunities in the power grid in the green.

Areas, we are really well positioned we have a business that does equity investing in energy infrastructure and and so.

Led by a really talented fellow.

He works with.

The rest of our team to knees and Sean sitting in front of me.

So we can cover equity too that when you have the whole spectrum in house. So that they are supposed to do which there should be.

Can really be a boondoggle will hopefully that will be.

Yes.

We're trending to a really good place for the fourth quarter in that business, it's always fourth quarter centric, but we felt pretty good about where that is and where the business is heading as we as we come further and further out of Covid I think theres a lot to do there.

Okay.

Thank you.

At this time, we've reached the end of our question and answer session I will now turn the call over to Mr. Gary Stern Lynch for closing remarks.

Nothing to add thank you all for your time today and listening to us and asking your terrific questions and we look forward to the next quarter hopefully more.

More exciting things to talk about.

Take care have a great holiday season.

This will conclude today's conference you may disconnect. Your lines at this time, we thank you for your participation.

Yes.