Q2 2022 Starwood Property Trust Inc Earnings Call
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Greetings, welcome to the Starwood property trust. Second quarter 2022 earnings call.
At this time all participants aren'in a listen only.
A question and answer session will follow the formal presentation.
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I will now turn the conference over to your host, Zack pan am bom, Director of Investor Relations.
Thank you sir, you may begin.
Thank you, operator. Good morning and welcome to startarwood property. Trust earnings call.
This morning, the company released its financial results for the quarter ended June tieth 2022, filed its Form 10-K EY with the Securities and Exchange Commission and posted its earnings supplement to its website.
These documents are available in the Investor relation section of the company's website at W Star propertrust com.
Before the call begins, I would like to remind everyone 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. Implied any forward-looking statements made today.
The company undertakes no duty to update any forward-looking statement 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 to our filings with the SEC. The W SEC ducko.
Joining me on the today are very stn, like the any's Chairman and ief Executive Officer, Jeff de monico, the company's President, reina PEN area of the company's Chief Financial Officer and Andrew sauce, the company's chie Chief operatingive Officer. With that, i'am now going to turn the call over to arena.
Thank you Zack, and good morning everyone. This quarter we reported distributable earnings, or de, of $162 million, or 51 cents per share.
Gaap net income was $212 million, or 67 cents per share.
Our GAAP book value grew by 22 cents in the quarter to $20 and 68 cents, with undepreciated book value increasing 25 cents to $21 and 51 cents, an increase of 26% from a year ago.
We had an active quarter with $3.8 billion of new investments across our businesses and fundings of the same amount.
The investments were funded by available cash and loan repayments, as well as existing and expanded asset-pcific debt capacity, which I will discuss later.
Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of 153 million to the quarter, or 48 cents per share.
In commercial lending, we originated two point two billion across 15 new senior loans, all of which were floating rate.
We funded two billion of these loans, as well as 239 million of preexisting loan commitments, with most of our funding back ended to the last month of the quarter.
Given decreased and delayed market transaction volume, repayments were lower than our typical run rate at $319 million this quarter.
While leveled will still likely be lower than normal for the remainder of the year, we expect them to exceed what we had in the second quarter. To that end, for the month of July , we have received $283 million in repayments.
Our loan portfolio ended the quarter at a record 16.5 billion of 43% year-over-year. Of this amount, 92% represents senior secured first mortgage loans and 99% is floating rate.
Although we did not see a meaningful impact this quarter from rising interest rates due in part to some of our higher LIBOR floors, we expect to benefit more going forward.
Company-wide inclusive of floating rate assets and liabilities in all of our businesses. A 100 basis point increase in base rates would increase annual earnings by $33 million.
With our continued investing outside of the? U's, particularly in Europe and Australia. International loans represented 58% of our second quarter originations and 28% of our loan portfolio at quarter-end.
We hedge 100% of our expected foreign currency cash flow exposure on these loans, including both principal and interest.
As a result, despite significant volatility in currencies this quarter, the impact of book value was an increase of just six cents.
The credit performance of our portfolio continues to be strong, with the second quarter origination LTV of 60%, a weighted average LTV of our overall portfolio of 61%, a weighted average risk rating improving to two point five from last quarter's two point six one hundred percent of loans current as a quarter end.
On the ceil front, our general reserve increased by $8 million from last quarter to a balance of $59 million, reflecting market uncertainty and the impact of rising rates.
During the quarter we foreclosed on a FI brated $5 million first mortgage and medloan related to a 41 story office building located in the galleria office district of Houston.
The net assets of the property, including the assumption of an $88 million third party first mortgage, were recognized at the carryover basis of our loan, because the appraised value of the property exceed the debt.
Our last dollar basis in the property is $102 per square foot.
Next I will walk through our residential business, where $1 billion of purchases were offset by sales and securitizations of the same amount.
Despite repricing in the securitization markets and significant spread widening in the residential loans space. We securitized 828 million of loans in our eighteenth and 19 securitizations and sold 22 million of loans, all at breakeven, as a result of related interest rate hedge onwines.
For the loans remaining on the balance sheet. At quarter end we recorded a $108 million unrealized negative mark-to-market adjustment for GAAP purposes, along with an offsetting $22 million unrealized positive mark-to-market on the related interest rate hedges. We continue to believe in the credit quality of these low LTV highfico loans and, as a result, have not recognized any de losses for the loans remaining on balance sheet.
Our loan portfolio ended the quarter at a balance of two point two billion, including four million of agency loans. Average lpv of 68%, aweighted average coupon of 5%, an average FICO of seven and forty five.
Our retained MBS portfolio ended the quarter at 416 million, after retaining 142 million of bomb in our Q2 securitizations.
Next I will discuss our property segment, which contributed $21 million of de, or seven cents per share, to the quarter.
Our Florida affordable housing portfolio continues to perform exceedingly well for GAAP purposes. We recorded an unrealized fair value increase in the Woodstar fund this quarter of 292 million, or 232 million net of noncontrolling interest. The vast majority of the increase was driven by the fair value of the property, which increased by two hundred and sixty-three million.
In place. Noi increased this quarter due to the impact of huuds recently released maximum rent levels, which were 10% higher than last year.
The majority of these new rents were implemented in June , So you will see just a partial impact to earnings this quarter.
Our valuation only factored in these increases to NOI. We did not assume any change for the cap rate, which continues to be based on the third-party transaction price established at inception of the fund in November of last year.
We also recorded a $24 million increase related to the favorable debt on the portfolio, due to market interest rates exceeding the 4% blended fixed floating rate debt we currently have in place.
Next I will discuss our investing in servicing segment, which contributed DE of $34 million, or 11 cents per share, to the quarter.
In our conduit, starard mortgage capital. We completed two securitizations and price an additional securitization totaling 372 million in the quarter, all at profits consistent with historic level.
Consistent with past practice, the transaction which priced in June but settled in July is treated as realized for de purposes. As of quarter-end, all securitizable loans have been priced or securitized, leaving no mark-to-market exposure on balance sheet.
And in our special servicer, we obtained nine new special servicing assignments totaling nine billion dollars during the quarter, bring our named servicing portfolio to 105 billion, its highest level since two thousand and sixteen.
Including my business segment discussion is our infrastructure lending segment, which contributed DE of $13 million, or four cents per share, to the quarter. We funded 191 million of our 196 million in new loan commitments, along with 14 million under preexisting loan commitments.
These fundings outpac repayments of 58 million, increasing the portfolio to two point four billion from two point two billion last quarter.
We also entered into a new five million credit facility which carries a three -year revolving period and two one -year extension options.
This is a nonmark-to-market facility where the margin call provisions do not permit valuation adjustments based on capital market events.
I will conclude this morning with a few comments about our liquidity and capitalization.
In addition to the new infrastructure financing facility, we entered into new facilities and commercial lending totaling $92 million and completed $3 million in upsizes.
As a reminder, 90% of our outstanding on and off-balance sheet debt is nonmarked-to-market.
We also entered into an ATM agreement with a syndicate of financial institutions to sell up to five million of common stock through an at-the-market equity offering programwe issued one point four million shares this quarter, for gross proceeds of $33 million, at an average share price of $23 and 54 cents.
In addition to financing capacity available to us via the corporate debt and equity and securitization markets, we continue to have ample credit capacity across our business lines and ING the quarter with $9.3 billion of availability under our existing financing lines.
Unencumbered assets of $4 billion and an adjusted debt to undepreciated equity ratio of two point three X.
With that, I'll turn the call over to Jeff.
Thanks rena. As renna said, we once again used market volatility to our advantage. Adding nearly $4 billion of investments in the quarter bring our portfolio to a record $27 billion. Today, we have already closed $1 billion of CRE loans in Q3, which will bring our total for 2022 floating rate CREE lending to over $5 billion a year-to-date.
That said, we reduced our investment pace in recent months, recognizing that there would be great opportunity to invest at higher returns later in the year.
In early COVID-19. We have the unique ability to create significant liquidity from our unencumbered assets and own CRE portfolio, and we have the option to do that again today, should loan repayments decline.
Reduced investment pace does not mean reduced distributable earnings.
In lower volume period. We have a sharpshoo of mentality to laser focus on only the most accretive deals, and that is our second half plan.
Executing our plan is less depent on volume of investments and is more dependent on timing, sector rotation, the performance of our credit and staying optimally invested, therefore not sitting on too much or too little capital.
Finally interest rate sensitivity continue to move in our favor. rerena mentioned our interest rate floors, and sofur is now over 150 basis points above our average floor, So we will continue to make more money as rate drives and importantly, our new loans will have floors of today's sofur levels, which will have a big benefit should So for decline in the future faster than the fourkcurve.
Our $3 billion owned property portfolio continues to be our best performing investment and, as REA mentioned, we wrote up our Florida multifamily valuation not on cap rate But based on experienced rent growth, which we expect to continue to rise as mediian income growth in the future.
We still believe the cap rate on our minority sale last year is significantly higher than where a similar portfolio would trade today and are optimistic we will recognize more embedded value in this portfolio in the coming years.
Our net lease and medical office assets also continue to perform exceptionally well and have significant gains.
At our marks. We have nearly $5 per share our gains in our owned property portfolio today that can be harvested reinvested, distributed or we can continue to create long-term shareholder value by holding them.
Today's higher borrowing costs will not hurt our own real estate portfolio in the coming years.
We have significant remaining term on our debt across this portfolio and don't need to refinance any debt until November 2024 for our medical office portfolio, August 2000, and y-six for our woodstoar portfolio in October 2000 and twenty-seven for our triple net portfolio.
Our below market debt on this portfolio is a valuable asset as long-term holders.
Our CRE lending business had not a great quarter, with $2.2 billion of new originations at just 60% loan to value.
Inclusive of anote sales we have made. Our CRE loan book is now $2 billion for the first time, with two-thirds of those originations coming post-COVID.
Although CRE transaction volume is expected to slow in the second half. Lending competition is thinner, as the single assets, the MBS market, less well capitalized debt funds and many banks are on the sidelines.
We therefore expect to get better structure and pricing on what we do in the second half of the year than at almost any time in our history.
The $3 billion of CLOs we issued in prior years at very low borrowing rates are actively managed, giving us the ability to replace assets that pay off in them with other assets that would otherwise be financed at today's higher spread.
Reinvesting allows us to finance higher coupon loans originated in 2022 and 2023 at two point zero two two million and 21 financing spreads, which are 100 to 100 and fifty basis points lower than today and among the lowest in history.
100 basis points of tighter financing increases the return on these new investments by almost 500 basis points.
We have replaced over $6 million of maturing loans in our CLOs over the last 12 months and have projected reinvestment requirements of $1.5 billion through 2020. -three.
Said simply, in the next year we expect to be able to lever $1.5 billion of higher coupon new originations at financing spreads well below current market rate and earn and outsized leverage return.
You will see in our supplemental that we have completely repositioned our loan books in COVID-19, focusing on the most defensive sectors: multifamily and industrial.
As the agencies and CMBS market were forced to pull back. Post COVID-19, we filled the void.
More than half of the loans we wrote since covert multifamily, which is now by far our largest assetquac, represent the one third of our portfolio, versus just 13% precovid and 11% in Q1 2020.
We have significantly decreased our exposure to office, hotel and mixed-use investments in that time as well.
With the payoff and a loan sale at par on a previously disclosed four rated loan subsequent to quarter end. We now have zero loan exposure in the difficult San Francisco market in less than 3% of our assets are on loans in Manhattan.
Making our 61% loan-to-value portfolio the most diversified recession proved portfolio in our history.
International lending continues to be a growing and important part of our CRE origination.
We have had large teams in these markets for decades and this exposure provides diversification in our lending segment: collateral types at attractive levered and unlevered returns that continue to increase as rates move higher.
As a reminder, we fully hedgge foreign exchange risk for interest and principal payments through our expected matjurity.
Given dollar strength this year, those hedges have a very significant $118 million gain that will protect us show the dollar weaken in the future.
Nonagency credit spreads have widened significantly since the Fed stopped buying mortgage-backed securities in February as a pullback in senior bondbuyers was concerned about fixed income outflows has kept spread wider than expected.
In our residential lending portfolio. We always hedge interest rate risk, but the spread widing has made financing our loan book more expenses.
We were able to execute two securitizations in the quarter at breakeven. After unwinding hedges over the past couple of weeks, liquidity is returning to a non-QM securitization market as five to six deals priceed this past week alone and spreads are moving in. At the same time, we are buying significantly higher coupon loans that we expect to be accretive in the future.
As the market repair we will look to securitize the balance of our loans, which will remain on our financing facilities until securitization is more economically viable. Right in our CMBS, CRE and energy infrastructure lending businesses, we have the balance sheet to be long-term holders who will securitize when accretive.
Our 59% LTV energy infrastructure portfolio increased to $2.4 billion and we were on pace for a record originations year in very accretive return environment.
Our lvs have fallen this year as power plants became more profitable.
There is significantly less competition lending in this sphas. We like the credits and expect to earn mid-teens returns on current origination.
We recently add an experienced houston-based originator with over two decades of lending in the energy markets, to take advantage of these opportunities.
As rerenna mentioned, we added another term financing facility in this sector as well and hope to execute our third CLO later in the year.
Finally in rease, our CMBS conduit originations business continues to outperform in a volatile environment.
As rena mentioned, our named special servicing portfolio is now back over $1 billion.
This is important as the servicer has a long-term positive carry credit hedge that will make more money for shareholders should markets rollover in the future.
With that, I will turn the call to Barry.
Thank you Zack, REA and Jeff, and thank you for joining us again this morning. I thought I'd start my comments in the big picture, which is probably the most important thing: our strategy to navigate the turbulence we see in front of us.
First I think you'll all agree that the Fed was way behind.
Raising rates and let the casino society moved too far too fast and induced really unusual consumer behavior, reflected in the stock Mark and the tech sector, and then disciplined investing. Having said that, they're now trying to make up for being so far behind by using a fllededge hammer, increasing interest rates at a pace we've hardly ever seen.
To try to get in the way of inflation, which is really being driven by the commodity complex, particularly oil and gas, and it affects everything, oil and gas. It affects transportation costs, which affect food costs.
It effects what oil price this is affect airline wage and air air affairs, switching sky high.
And they tax the consumer significantly and obviously using a tool like interest rates. So gamp in oil demand is really the ING. Where that happens is if they really crush the economy.
So I'd be very surprised if the Fed didn't go forward and just kept rates here. The economy didn't soften materially coming out of the summer months, which are somewhat of a party from.
The extended period that people found themselvessay in COVID-19. There's no question in. Europe is going to have a very tough winter and there is already in recessions. German industrial production has to be cut back. China's slow growing very slowly, So we no way to pull the global economy forward and, as you know, global growth grids have been reduced, all the estimates to been reduced, So I wouldn't be surprised if the third quarter and fourth quar G P numbers were bad. The question really will be how bad.
The consumer, which is the backbone of the U's economy. Well, he may still be spending, but his confidenceces and boest points have been in decades. And it's even worse in Europe . So there's no question, the consumer will stop spending the way he has spend my mind.
And you CAn't look backwards, you have to look forward at what he's facing. And he's facing dwindling savings rates because he's spending his money on Das, on food, on rent and housing prices and interest expense.
I don't see the offset when we see obviously, the significant decline in both the stock market and the crypto markets.
Which have taken something in excess of 12, sixeteen trillion dollars out of global wealth.
Just in the equity markets. That's not including what's happened in private markets, in PE and tech. We have seen such dramatic increases in cause against this, but the real estate markets have held up very well.
And the.
Oil and gas increase, which is a really temporary. There it's easy or easy may take 18 months througheither German to terturn their nuclear plants, for us to come up ways to get increased gas reduction out of the Wells, the shuttered, or get oil out of the ground. And the managing curve, the oil price curve, shows that in addition, you're announcing a parabolic, a negative yield curve. You see the.
The markets are expecting that rates will fall sometime in the middle of next year and I agree with that. I think the economy over the Fed fo'll have to come off of the gas pedtal of rising rates and we all settle into this period of time will. We will be sort of in a slow stock negative cycle but it'will be easy to build off. That ll move forward, I think expeditiously. We'll have the elections in November , we'll get through that period and posos and capital PLS will adjust to the new cycle and their forecast. I couldn't really just agree more with and about the fedbeing having increase rates. I think it must be short the stock market.
Because the economies can roll over in its own and you're seeing that the housing marke is always leading sector. Obviously people won't be buying cars if they feel they not only can they not afford them when they CAn't get them but they CAn't be financed. Do presentcented in where there's no easy way to push car sales. So getting back to real estate, in the fundamentals real estate remain excellence. Apartment rents continue to rise, with the nation's largest ER, our apartments at the moment. So we have a pretty good view from 13 thousand apartment. Hotels are having a wonderful season. Marriage just recorded. You've seen their numbers. We're a little concern that that's sort of the super bowl effects extended- some super bowl people traveling.
Team friend going to Europe with the dollar. Where it is, industrial markets remain very strongestjust by themazon fighting back on some of the growth. The markets continue to have single digit BAs. concy ates. The only real cause concern from 800 feet to the office markets and there you have to actually separate market by market and good buildings from bad to buildings. There are leases to be had in Class a buildings, buildings that are fun for people to go back to work and and most management teams want people back in the office. And then there are all commodity buildings that are dark in jury and have no weak, doesn't have no light or full of cubicles. People Don' want to go back to work in those buildings and there's no bit. So you're seeing a bifurcation in the office markets. We just have to be careful what thelend againstts.
On the good note Andin the real estate marketts there's a benefit to rise in rates and increasing the cost of capital and that is construction. We would expect construction to drop significantly and many of the permits that have pulled. Many of those projects will never get built and that will help things like the apartment market and obviously the ll market, as many in these projects are shelved may be never get built because not only is it mar defensive tretriisure- construction only you can get one is more deoffensive- but also labor cost of continue to rise and the value of your buildingyou' probablydont think you're going to sell it at the capratethat you expected when you announce you are building that bill things. So if I were thinking I would sell my apartments that a three and a half yields or maybe the markets moving a three 7, five or four or maybe four and a quarter- not clear. You thought you're building us to a five and half on leverage and now you're building it to a four and three quarters because it's costing more, taking longer and material prices. Obviously component prices have gone up dramatically. Toi think you'll see a drop in construction. Structure, by the way, falls into the category of a selling economy. Construction and capital spending is a big part of G DP.
So with that, we are running our company cautiously from the perspective of retaining liquidity and keeping access to liquidity and running multiple scenarios. If, in fact, the markets get weaker, and what they might Dow in response to, wherewe can U us economy?
Our business has been performing very well in the quarter.
Other than the reme markets where we think our bones have great credit quality. But we have somecontemporary marks on the book and we'll navigate our way out of that position is we have other marks that we've taken in the cmdss book at moment in time and other other areas where we have mark-to-market losses. The credit quality of our loans are is exceptional FICO scores of our borers of grade.
And the loan to values are, or then, adequate and protected. So the book is good. As the question of liquidity for us in the securitization markets shut down and we didn't want to force selling into those markets and we don't have to force selling, So there was no reason to do that. It was amazing that our conduit business was profitable and this incredibly volatile market.
And our energy lending business is having a field day relative to when we started with loans. Tremendous ROEs to us and we would like to continue to increase that business. Obviously, the energy complexts is having a bit of a boom dogggle, So there's lots to do and we're trying to organize ourselves to take advantage of those opportunities from here on out for the rest of the yearand I think that is our biggest chp on today is how to position ourselves to take advantage of the great lending opportunities that we see, which ISAs good as we've seen in a long time. Most commercial banks have stepped back from the market. That creates incredible opportunes for alternative lendens like ourselves, with the footprint that we have both domestically internationally, and should pave the way for exceeding and good investments going forward.
one other hidden jewel for us is Re, the former L andr. We call start real ested services. As Jeff mentioned, the book will soon across one hundred billion dollars and first of name services that for larg, as the book have been since, basically be start in the business and will, sumely think, become the largest service here in the country. There will be a lot of workouts people. There will be a lot of LO that will need to be extended. A lot of people will find a covering two and a half percent interest is kind of different than covering six and a half percent interest charges if they byy caffe that they did. When a LO matures they're going need from help there an oortunity to pay down alone between our capital on the equity side and start probabty trust in the debt side're going to have our first or see that this' restructuring it should lead to exceed in a exciting O opportunities for our firm across the breath of what we do.
I'd say that we've also run our firm with very light leverage versus our per set 2.3. So times in our competitors of 3, six and three agg we have margins of err that maybe our per seset doesn't have. Including to, we choose to selling some of our real estate assets, which are quite liquid and we have significant games, and so we can always peel them off in the right time, and it provide an additional source of liquidity besides the bundraon lines and cash we have on hand. I think that's really going to position us well in the turbulent market. So we are all hands on deck. I think JAM IE diamond said this is a hurrica, ne feels to me like the moment we're in the eye, the hurricane. We don't know the worse behind us? I tend think not, but it may be shallow if the bed causes and the pet goes. Pe goes too far too fast in our was encouraged by take Pell' comments about their signs of softening should look little closer to, because he would have seen signs of the access and he would to raise rates. But there', S there's a lot of softening in the economy and I don't know about you, but whether pottery barn Dot com or zilllow, I see price reductions in certainly and secondary markets for homes and I see lots of sales of pottery barn West ellment.
Living dales and other company trying to clearinat y obvious. Wal ort, you want to? take. Look the conomy, look atwal art last time, this cerning like that. So America consumers are in a pinch, I think we kinds of assets in a loones, kind of assets that will perform seeing well in this climate and again we thank you for your support and I think my team for doing extraordinary job through a complex time and working hard and staying in their seatpts were all in inter seatpts. Thank you very much. Thank Barry, operated with that. Let's turn it over to questions.
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Our first question comes from the line of Stephen Laws with Raymond James. Please proceed with your questionions.
Good morningjeff. Want to start with Woodstar and the positive evaluation gains there- much, much larger than I think I expected. Can you talk about?
A little more detail. The assumptions and think arena provided up 10% on the NOI. It is all of that factored to this new valuation estimate or only the rents that rolled up in June ? And how do we think about how the rent increases over the balance of the year may impact the fair value estimate woodstoar?
Well thanks. So even it's an annual readach that, as we talked to about before. rena, do you want to? You want to take it onor, you want me sure, or I'll take it. Even the 10% is just the rent increase and the value adjustment B business in the entire amount, So it the NOI effectively, that's in place at June thirtieth capped, So it it's fully affected in the, in the fair value that you see. The other thing I would mention though, is NOI is not 10. no, I is actually higher, about 12%, and that's because your cost didn't go up by 10%, right? So you your, your overall NOI goes up by more than your, your gross rate.
Appreciate the color on that RA looking at the loans hope for they. Let us very on, it's very. one other thing is the debt is fixedand it's 3, 60 years, something like that, So there's no impact to rising rates on the portfolio. And one other comment, of course, is the rents can only go up there and affordable housing to cannot go down. So and we we think we're using a cap R that is wide of the market as well. We're being conservative and we know where the market is, because the equity group isn't selling moultiis and almost all the market rate sales that been actually inside of the cap rate materially in affordable factors caught of fancy because of the sent.
obviouslyand steeven, as I said in my prepared remarks. They are driven by median income and inflation in the median income numbers. We have most of the inputs for the next couple of years, the three -year look back and we do expect a couple more years of pretty significant increases.
Fantastic appreciate details from everyone. As a follow-up may be touching on relative attractiveness of kind of new CRE loans in the U's versus Europe and's. I think it's really toimmentioned almost a third of your portfolio, but what's the relative from a new dollar standpoint, kind of how do they compare today?
Where do you want to start?
terom.
We're know the kid just happened as better returns to a large deal in Australia. So that kind of tilt, the book, that a little more European than it normally would be historically, would kind of prefer, red even spread me, probably wind up in Europe because of the lack of pressure on rte.
You know, I don't think iz anywhere near other RA ther breadizing in the? U's and the difficulty there generally add ply I markets, like the office marketts, are returning to office in euro pretty much. Pretty much conification in the? U's to little bit the class shift in the? U's as well. Fact in both places. And we would know our poison. What do we want to? one exactly? Do we want to L and there on the Co when other really very costs that were being careful? I will add. We didn't give much detail on the Australia asset but Barry brought it up and you may have heard about it on the black Stone call. It is the crown casinos. This three and a half billion dollars of new cash equity in front of us. We believe it's about fifty 1% L T V and 44% of replacement cost. It's probably the the highest quality casinos in Australia and we we feel super comfortable with that outset. But that definitely drove the international number of this quarter's even.
Great appreciate the time this morning. Thank you, Thank.
Thank you. Our next question comes in the line of Rick Shane with JP Morgan. Please proceed with your question.
Thanks everybody for taking that question this morning. Look, for a really long time- and I don't think this has changed a big part of you herear heard- it is the disconnect between value and stock price. For a long time this was actually reflected in you guys not issuing levels that your peers, or multiples that your peers, certainly would have taken advantage of.
If we think about what's evolved you guys GI an equity issuance. At the end of last year you have an ATM program at ATM program in the market. Today. i'msure.
What changed? Is it just that you see the marginal opportunity in terms of deploying capital to be so attractive, or is it a relative value versus your peers that sort of driven the shift?
If you don't mind, I'll start in decem. When we issued equity I think, the stock was at 25- 75 and we issued debt multiple time previous to our last regular low way equity transaction and December 20- 16. it's super important to us that our bond rating makes its towards investment grade at some point. That's been our holy ail. We've spoken about that. To do that, one of the most important inputs is that our debt to equity ratio stays low. We were two point one time last quarter and with two point three times this quarter. Without reciting all of our peers, we are significantly lower than our peers as bar talked about. The only way if you're going to continue to grow the book with good opportunity to make loans to keep it down is to have some amount of equity go along with debt. So for every Bill dollars of debt you would need $4 million of equity plus minus and we had had gone a few billion dollars of debt without any E equity. So December was really more about balancing our debt to equity ratio as we hope to improve our credit rating across the Board to double plus for others, to for others to join our one double plus rating and then hopefully eventually get to to trily minus. So I think we looked at equity, not equity, with cheie, that llar price, we looked atequity as a way to balance our debt eity ratio in our goal to get to investmentgrade. This quarter was interesting. This quarter we saw high yield bond markets and credit markets widen much more significantly than the stock market. Early on in the quarter and early on in the quarter before our stock ended up getting down to, I think thousandnineteen, 70 at low in the high 20, we decided that high yield bond issuance would be very expensive in in the run that we had had in the second quar and we decided that it made sense if we were going to choose to have a little bit more of liquity if loan repayments slowed that. Raising $33 million all we raised in the a? T M felt like a decent spot of the. Our Deb, our debt had moved to being sort of within a hundred basis points or so of our dividend yield and historically that's been closer to 400. we thought that that raising debt with to expensive and so we took a bitofequity time we thought might need a little bit of capital later in the year. The yield markets have repaired massively and we are probably 200 basis points inside where we were at the worst. We came with a high y bond deal now, So we feel a lot better about the about, about that nextix, but there are different reasons of different times, So I would chose equity.
Okay Jeff, that's a really interesting answer. So to some extent it is relative value, but I wasn't thinated about it in the context of the relative value across your balance sheet.
Just it kind of feels like it is going to be A- and I guess this is the name- ATM programs and on demand source of capital, as you needed. If you continue to deploy a little bit regyou are.
Yes I think that's right. I don't think we look at 25- 75 is the price that we wanted to necessarily sell stock, but we think if we get to investment grade it's the 30 -plus dollar stock and we have to balance that and we have to have some equity to go along with debt in order to get to that investment grade goal.
Got it. Thank you very much, Gu.
Thank you, and our next question comes in the line of Doug harder with credit sues. Please proceed with your question.
Thanks.
You mentioned the significant percentage of your portfolio. That is kind of a post-covidt vintage. You know, I guess how are you thinking about the, the ultimate maturity of those loans, given that rates are higher and you know some of your other commentary around, kind of the?
The cash flows of higher coupon debt and kind of how that ultimately play out when those loans preach maturity.
Yes veryry whe, I should go where you guys. I think our six persal is our V protection from risk in roll up risk with any loans. I think to probably stay how longer we model the company, the manage expectation of tainay to said no.
Scheduled pay this quarter when we a do pay early. So it was kind of an an abverration. Then we had a quarter when we had no actual muries of loans because and looking at our expectations that and whether asset most our asse transition, So if they kind of the tenendor, they can take construction, they F out and we're we're doing to work to figure out when they F out and obviously the leg will stay out there. Track of arewe but it doesn't lot less cast's the new opportunity. So I think people comfort that to take our bor. We're not, we're not a.
peular lender we're not trying to get have pect right we Re buy or a kind of multiyear. They going to have kind it our loan leverage or something like that we really make money out as I think we have about every AC we've ever foreclosed on. So we don't look forward to that but for us doing you know we run the nation vol. The service or special service. Almost 300 people involve that busn't and.
Number the number of the BAB older P more about further we do with the lot when we have one I'll just that that we run a ton of debt yield sensitivities. When we write a new loan and given rents are up over this period over the last two years. Significantly more than we under O we underwrite these loanss to maybe 1% rent growth to offset expense growth. But we don't expect rent growth. We've had massive rent growth. So our debt yields are up significantly higher than what we thought they would be on our post cot originations today. So those higher debt yields will support a takeout at a higher interest rate level and I think our L T B is actually gone down in this period and not up and so as Barry said the 60 L T V is super important. But given business plans are executing at a faster pace than we would have expected. I think that more than offsets the higher rate environment for the takeouts and I would expect these ones to repay at a similar timeline. Because of these rent increases and.
peoplewanting to take some of that cash out on their executed business plans.
All right, and if you could, just a little more detail on the newly foreclosed Houston office. Just what type of timeline should we expect a resolution and kind of Ferry thinking about the options there?
Yeah I went down and toward our whole teams toward a number of times. It's a fantastic building in the gallery. A district. There's some Houston is definitely starting to benefit a bit from some of the change in in the energy policies that people are looking forward to and certainly commodity prices have changed. So the outlook is better today for Houston than than it was a year ago. This is a fantastic building. There's a lot of tenants circling we.
We feel really strong bet that this is a building that we're going to have. A much like what we've done when we've taken back assets is very set, whether it's in Orlando or Montgomery, Alabama. The assets that've taken back- we've made more money on the assets we've taken back then not in putting Starwood in front- is what created that leasing momentum at the other assets. We believe that our expertise in in office markets is something that that's going to play out that we'll be able to execute significantly leasing. We we're a little over $100 a foot on this assets, So it's something that I think we owned a really good basis to be able to bring in large tenants.
Bur the evidence that come my. It's commodity prices know ated. We can sell the steel for all move on will take it down and build a build a camp. It's it's a it's a iconic asset. It's the tallest outset and it's neighborhood by some way. It's in it. You know it. I I we go to Houston for longer than I want to say. So everyone knows it thatth that we still in the ocean gallery of hotels. Western oakan westtern galleria hotels have the gallery of mall. It's right next to that and.
And we're trying to figure out what we ought to do with that. Should we MEM see offbing reber?
Very ent sorryi think I think you createded a bit there but Yeah think ry said probably have reved in the next sixmons well be able to part back thenextthree to six months but.
Thank you, goodbye.
Thank you, and the next question comes from the line of Eric Hagan.
With B tig G. Please proceed with your question.
Hey thanks, good morning and thanks for taking my question. Just a quick follow-up on the Woodstar asset: are you able to borrow against the appreciated value in the asset? In other words, can you, is it a source of fungibility or liquidity on the balance sheet having appreciated? Thanks yes, we should take going bur.
I M going to say we can do that or we can sell additional interest in it. Those are two options. Yes, there is availability to increase the leverage on the portfolio.
We can probably CRE leverage by a couple hundred million dollars today if we chose to, So that's something that we look at.
Got you. That's really helpful. And then just looking at the market, what do you want?
I was going to say one nuance of that is the two agencies are wide open for business and.
So they will face a favor for allowousing. So this is not getting a caught in CLO execution of multifamily that somebody bought it. twent half percent forecasting after that gut is it ll make 6%. This is a stable asset. Some of that, the financing, temend to be more attractive than it's available.
Right a helpouple Thank you. And then, just looking at the market overall, you know there's this smallall of mataturity that are coming up in the C M B's market at a pointing the cycle where obiously could be tough to those sponsors to REF the capital markets. Can you talk about the relative attractiveness you think there might be to reffind some of those loans and just what it could mean for the market overall of those folks are having trouble rolling over. We CAn't what we CAn't. Be happihere you should have good cycle for lending, as you have and you know, no know can probably at yet here, you know, I think, and particularly because once again the field, the competitors, is narrow dramatically and the banks are are definhly query the senior officers of some of the lending banks scale start capital, just domestically I think, bar $34 billion last year. So you know these are here and the relationships and obviouslywe' in the act ING markets all the time and I guess they're all pointingg to regulatory issues that the regulators are on them and that's why the banksare pulling back. So for some situations, these alternative lenders in which you know, with the largest you should have a pretty good opportunity and we, we're know, checking our spread, we're doing apparting trust again we're getting, and buyers at that the other. So you know, I probablyve never had such coordination between our are borrowing group.
That the capital of group and the lending group that are barby truust, because we, you know, the markets are fluid and spreads are and now the markets are capping out and capping in. It is that, as all of the treasury is, that seems to be where for spreads are. And the number of participants, it's interesting: there are a lot of things that are looking, but not a lot of thingsks that are doing deals and and sometimes now they're offering spreads, they're more quient what we would would see thought. So you know they're Re 300, over 400, over and over over a real number. Now it's not over over zero. So it's going to be. It's going to set up for interesting cycle. That's for surearch, you not well capitalized.
Until the opportunity to deploy more capital, certainly on both the equity in V side, as people go to refinance these assets.
S helpful thanks the perspective.
Thank you at this time, we have reached the end of the question-and-answer session and I want now turn the call back over to management for any closing remarks.
Barry any closing remarks.
No but thanks JAM, and thank you today and enjoy your the rest of the job date in August .
Thank you BS, BS operator.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
And have a great day.