Q2 2019 Earnings Call
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Starwood property Trust.
Greetings and welcome to the Starwood property Trust second quarter 2019 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr., Zach Tanenbaum director of Investor Relations for Starwood property Trust.
Thank you you may begin.
Thank you operator, good morning, and welcome to Starwood property Trust's earnings call.
This morning, the company released its financial results for the quarter ended June 32019 filed its Form 10-Q , 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 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 FCC 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 we made during the day 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 FCC docket, joining me on the call today are Barry Sternlicht, the company's Chief Executive Officer, Jeff Dimodica, The company's President Rina Paniry, the company's Chief Financial Officer, and Andrew Sossen, The company's Chief operating officer with that I'm now going to turn the call over to Reno.
Thank you Zach and good morning, everyone. We reported core earnings of $154 million or 52 cents per share for the second quarter.
Our performance was led by our largest segment the commercial and residential lending segment, which contributed core earnings of $125 million to the quarter.
On the commercial lending side, we originated $1.1 billion of bonds with an average loan size of 109 million.
As we continue to expand our international footprint, 19% of these originations or outside the U.S., including our first Taiwan and Australia for 153 million.
During the quarter and consistent with our expectations, we received $763 million from repayments and $103 million from an outside sales.
These inflows slightly outpaced fundings of $496 million on new loans, and 216 million on pre existing loan commitments.
Our commercial loan portfolio ended the quarter at $8.1 billion with a weighted average LTV of just under 65%.
As a reminder, we update the ltvs on our loan book at least once a year or more frequently if information becomes available.
Our loan book continues to be positively correlated to both rising and falling interest rates with 94% of our commercial portfolio being floating rate.
We estimate that a 200 basis point increase in LIBOR would add 11 cents of core earnings annually, while I 200 basis point decrease would add 12 cents.
We are positively correlated to declining rates because of LIBOR floors, which we have on most of our commercial loans.
On the residential lending side, we continued our expansion of this business by purchasing $501 million of non QM loans during the quarter at quarter end. This loan book totaled $1.2 billion with a weighted average coupon of 6.1% and average LTV of 66% and an average FICO of 730.
Including retained securities of $63 million, the net equity of this business totaled $536 million.
Just after quarter end, we contributed loans with an unpaid principal balance of $546 million into our fourth successful securitization.
I will now turn to our infrastructure lending segment, which contributed core earnings of $2 million to the quarter.
This includes a $3 million loss on extinguishment of debt, resulting from the sale and repayment of loans that we acquired from GE.
As you know our strategy has been to solve a lower margin loans in this book and redeploy the capital into higher yielding loans.
As we execute on this strategy, we sold $171 million of the GE loans this quarter.
We also received repayments of $77 million, bringing the balance of the acquired portfolio to $1.3 billion.
The remaining $350 million of infrastructure loans on our balance sheet or acquired post acquisition.
Our purchases were lower during the quarter, while we work to complete a $500 million debt facility with which has better matched term financing than our existing lines.
The facility closed in July and we expect production to increase to a more normalized level in the second half of Q3.
I will now turn to our property segment, which contributed core earnings of $30 million to the quarter.
The performance of our Florida Affordable housing portfolio continues to vastly exceeded our expectations area median income levels, which govern rents for the over 15000 units and as portfolio were recently released higher median income for northern and Central Florida, where this portfolio is concentrated resulted in a blended rent increase of just over 6%.
These rents create a new floor, which cannot decrease going forward.
The increase that became effective on June Onest. So you will see the full effect on earnings in Q3.
All of the wholly owned assets in this segment continued to perform well with blended cash on cash yields increasing to 13.2% this quarter and weighted average occupancy remaining steady at 97%.
As a reminder, these assets are financed with debt containing an average remaining duration of eight and a half years at a weighted average fixed rate of 3.8%.
As of quarter end these properties along with those in our investing and servicing segment carried accumulated depreciation of $348 million or $1.24 per share.
Well, we've said it before we think it bears repeating the appreciation of these assets is not reflected in our GAAP book value.
At a minimum adding back 348 million to our GAAP book value would arrive at our purchase price for these assets the gains that we believe exist in this portfolio would be an incremental add back to book value.
I will now turn to our investing and servicing segment, which contributed core earnings of $48 million to the quarter.
This business continues to utilize its various cylinders to produce a stable return in our conduit, we securitized $345 million of loans and three transactions this quarter.
And our servicer, we saw lower income levels than last quarter due to the continued runoff of CMBS 1.0 loans as these legacy 1.0 deals resolve we continue adding new CMBS 2.0 servicing assignments.
Over the last 12 months, we have added 28, CMBS 2.0 deals to our name service or portfolio with a principal balance of $18 billion, including over $4 billion just this quarter.
I will conclude my remarks, with a few comments about our capitalization and dividend.
During the quarter, we expanded two of our existing repo lines by a total of $950 million.
These amendments provided an additional $700 million of financing for our commercial lending business as well as $250 million of short term financing for any loans targeted for securitization.
After quarter end, we continued to optimize our capital structure and expand our financing options in July we completed a $400 million seven year term loan b, which priced at LIBOR, plus 250 basis points and 25 basis points of original issue discount. The proceeds were used in part to repay our $300 million term loan.
We also entered into a $100 million revolving credit facility to replace our current revolver.
And finally, we priced our inaugural theory Hello.
Which Jeff will discuss with you in more detail.
These financing alternatives, along with the $767 million in loan commitments that we sold in the first six months of the year continued to strengthen our balance sheet and reduce our reliance on bank lines.
We ended the quarter with an ample $6.5 billion of Undrawn debt capacity and an adjusted debt to depreciated equity Undepreciated equity ratio of 2.1 times, which was flat to last quarter.
And finally for the third quarter of 2019, we have declared a 48 cents per share dividend, which will be paid on October 15th to shareholders of record on September Thirtyth. This represents an 8.3% annualized dividend yield on yesterday's closing share price of $23 and once that.
With that I will turn the call over to Jeff for his comments.
Thanks Rina.
Our company is 10 years old this week and although many things have changed we have done what we set out to do create a generational vehicle by taking advantage of mispriced sectors to create business lines that finance and own the most stable assets financed with the most diverse and save liability structures available to us.
We spoke on earlier calls about the stress test we ran on our business following the 15% stock market sell off in December 2018.
Although we have ample liquidity to withstand the large moves we tested core 20% lower on all real estate values and 250 basis points wider on all securities growth, we decided that the time to redouble our efforts to create the most diverse and stable right side of the balance sheet in our industry in 2019.
Given the market volatility of the last week, we're happy to say that we have made tremendous progress diversifying and de risking the right side of our balance sheet. This year.
We have never originated loans, assuming a CR Reid CEO exit.
Securitization markets can be fickle spreads can move quickly and it's yellow exit is not always accretive.
For the same reason and despite our financing advantage, we've not chosen to invest in seat COO senior bonds, which require tremendous leverage with repo spread marks to earn a modest return.
How significant spread volatility and can often be illiquid the sell in the secondary market.
That said, our repo financing level, two followed credit in corporate Siloed spreads tighter this year.
And more importantly, there are structures have improved dramatically in the issuers favor.
On July 26, we price the largest post crisis CRB COO to date $1.1 billion, which will settle on August 15th.
We price the largest most issuer friendly structure at the lowest cost of funds and highest advance rate to date.
Our CLL also produce incremental unencumbered assets for us and eliminated the recourse and credit Mark They had on bank warehouse lines.
While increasing our returns by over 300 basis points on the underlying loans.
I'd like to thank our incredible staff for completing what is normally a 12 to 14 week process for a first time celo issuer to get to market and price and just over seven weeks in order to avoid the potential credit spread and rate volatility that is so common for August and we are seeing this week.
Our dedicated capital markets team has always been the most active seller notes in our industry completing over $8 billion in sales since our inception.
And note sales are perfectly matched term financing and are more expensive than bank warehouse facilities, but have the advantage of being off balance sheet term financing without the recourse credit marks or across against other assets that make bank warehouse lines, the cheapest, but least structurally efficient means of borrowing for us.
In Q1, we replaced $654 million the committed warehouse borrowings with sales and expect to close this month on an additional $674 million that we will move off warehouse lines as we did the collateral in the COO.
These they note sales on season loans, where borrowers executing their business plans are at levels similar to our bank warehouse lines, and therefore do not materially affect our returns.
Our industry has relied primarily on warehouse line financing to hit their return targets.
Well, we issued unsecured debt at LIBOR, plus 128 and 20000.
2018, many of our peers use the Crs yellow market to other diversified to diversify away from the reliance on bank warehouse lines or to create room on their warehouse line.
None of our peers as aggressively sold to date and only one other has created an unsecured debt ladder.
I will leave it to the analysts on this call to give you more exact numbers, but our peers generally have two thirds or more of their secured borrowings on warehouse lines today.
Upon closing of our COO and ourselves we have signed up we expect to be a significant outlier to the positive side with just 36% of our large loan theory lending book financed via warehouse lines and over $5 billion in warehouse line capacity available to us today.
Rina spoke about a seven year term loan b, we pray subsequent to quarter end at LIBOR, plus 250, which was not only accretive long term financing, but also created unencumbered assets.
As a result of the actions we've taken this year and expect to close in the upcoming weeks, we expect to have $3.4 billion of unencumbered assets on our balance sheet to support the $2.15 billion of unsecured bonds, we have outstanding today, giving us tremendous flexibility to issue more unsecured debt in the future.
We set out five years ago on our goal to eventually become an investment grade rated unsecured bond issuer, allowing us to borrow at lower rates and earn higher returns.
To that extent, we have diversified our investment cylinder added over $3.5 billion and real property created unencumbered assets to support issuing unsecured bonds and kept our leverage significantly lower than our peers. All things. We believe will lead rating agencies to look at it differently than monoamine mortgage Reits.
We are delighted to have made so much progress this year in strengthening the right side of our balance sheet.
Increasing our returns.
And significantly reducing potential liabilities.
These actions required tremendous effort and dedication to a long term business plan and we believe the results will be apparent to the credit markets fall during the future.
In our CRB lending book spreads are certainly tighter than a year ago, but spread tightening is moderated in the recent rate rally and our cost of funds has continually improved allowing us to continue to earn similar risk adjusted returns.
Continuing our credit first mentality and very steady run rate, we again closed over $1 billion of loans in the quarter and have a similar pipeline signed up for Q3 at similar optimal level Levered returns.
We continue to see some of our best lending opportunities internationally and after dipping to just 8% of our lending book in 2018, our book is 16% international today and given our pipeline, we expect that number to continue to grow.
Our manager Starwood Capital Group has added employees in both Europe , and Australia, where we closed our first loan last quarter to take advantage of what we think is a terrific opportunity today.
Rina mentioned that our company will for the first time make more in a 200 basis point decline in rate than in the 200 basis point increase.
Our focus on structuring loans, including LIBOR floors that are at or near current rate is a big driver and as expected our performance and will create excess earnings regardless of whether LIBOR rises or falls.
Our price to book ratio today of 1.4 times is near its highs and we continue to urge analysts and shareholders to net out depreciation and game when computing hours.
Our Q2 book value of $16.48 per share is understated by a $1.24 per share due to depreciation net of which our book value would be $17.73 per share.
Our property portfolio is performing exceedingly well due mostly to the massive outperformance of our 99% occupied Florida multifamily portfolios in the past year that Rina mentioned.
We believe we have over $700 million in game or $2.50 per share not currently reflected on the balance sheet.
Depreciation and property gains significantly under estimate understate our book value.
Which net of these items will be over $20 per share.
At $20 per share adjusted book value, our stock is trading well below our historic average despite being the best performer in our sector. This year.
We have spoken about taking gains in a portion of our property book and expect to later this year.
We also have the opportunity to refinance properties that have performed exceptionally well and expect to lower our cost of funds increase our cash returns and take out an additional $180 million of cash in revise scheduled for later this year.
Deployment of gain and cash out re Fi proceeds will add to earnings as we reinvest them into new assets in the coming quarters and years.
We believe that our consistency multi cylinder investment engine.
Large property gain and differentiated balance sheet put us in position to continue to outperform for the remainder of the year and beyond regardless of market cycle or direction of rates.
I've gone on for longer than usual today, and can dream discuss non QM Reese and stuff I will leave the follow up I'll leave that to follow up in the queue and with that I will turn the call to Barry.
Thanks, Jeff and June .
Rena and good morning, everyone I'm sure you're looking at your quote machine.
And wondering what's going on in this chaotic world.
It is.
Troubling time and.
For real estate, we have to make calls on the direction of property values as we learned across the sectors across the world.
Well interestingly I mean real estate is a yield vehicle happens to be I can't buy anything and an eight cap other than our own stock.
But.
The drift of lower rates is obviously good for property and as the world is starved for yield.
And it looks like particularly in Europe , you're not going to see any turnaround in cap rates anytime soon and you probably will see cap rates continue to drift down.
Lenders like us.
Are likely to see our ltvs move down as property those increase.
And further.
Emphasizing the quality of the book of the security of our lending practices, it's tricky to lend in these markets because the cap rates feel little artificial.
But sodas printing enlist paper by western governments that the country has any hope of ever repaying.
So.
I do think the property sectors and often good place to hang your hat right now.
And if you are in the lending side, you obviously on taking the.
The equity risk, you're just hoping that.
They'll pay you the capital you have it at 64%.
Ltvs.
10 years. This is our 10th year anniversary August plans will be our 10th year anniversary as a public company I mean, if you told me because it's under 10 years into our lives I would.
Never thought possible.
And I think in general that's because of the relative disciplined on the lending markets, even the non bank.
For the.
And what you call it but there is other words to one of my peers like did better alternative lending sources or something like that.
And I think we all remain disciplined in many of the larger players also have equity shops, which help us underwrite assets because we own assets like these will be limited in similar markets.
So in general I would just touching on the markets and many of the apartment markets have strengthened as not weekends is millennials have turned back to renting.
Construction more or less is in check the office markets are very healthy we own tens of millions of square feet.
We don't actually own a lot of loans against office buildings in places like Manhattan, where we probably have more concerned about taxes and directional property values.
We're also little smoothed out above.
San Francisco.
And potential exposure to the biggest.
Correction if this happens we'll be in tech valuations.
That could impact as it always has the San Francisco office markets.
And then and industrial as you know has been the strongest sector in property hotels.
You've seen the earnings reports modest revpar growth in city by city asset by asset.
Don't expect anything to fall off the Cliff, where there is a lot of.
Construction led by the majors, who are keep adding.
Flags to already saturated market. So we have to be rubric careful and lend against specific assets we like.
And I don't again my base case with the economy was slowing next year.
Significantly and for no other reason not to do in Germany in essence throw in for Jim Jim China another throw in.
Accelerated down actually.
But just because of the.
Polarization of the electorate's the challenge of the elections.
The strain on executives as they listened to socialist adding great week extremists.
And there is nobody representing the 43% of America that is independent and it's scary to watches extremes go at each other and try to hone the farthest reaches of the political spectrum between the parties I think it erodes confidence obviously the trade wars fought it for OEM with tweets.
Erode confidence businesses get nervous all they have to do is slowdown investments and you have a recession or at least a significant slowdown.
So we can't pine on what's happening in the credit markets, but I will say that we feel pretty good and if anything this quarter was about strengthening our firm for the long term that's actually been this theme of the year. We've done incredible work not me the team.
On strengthening our balance sheet, Jamie Diamond talks about JP Morgan is having a fortress balance sheet with a fortress balance sheet of the mortgage industry, where the commercial lending segment, having over almost $6 billion pro forma undrawn credit facilities from our bank $6 billion.
And $3.4 billion of unencumbered assets.
And our $3.5 billion rock solid property book earned 13.2% cash returns, we're setting ourselves up as you know we've been working on this since our inception to achieve investment grade and because we are multi cylinder in these businesses are complementary.
We really think it's achievable and whatever it happens, Iran sold hotels as all of you know in our bonds traded through investment grade, even though we weren't investment grade. So the credit markets will decide the risk profile of our company even at the agencies are reluctant to get there.
Which happened to Starwood hotels, we traded through Hilton sponsor, even though they were investment grade and we weren't.
So I'm really happy with what we've done I mean, our focus was the downside what happens in a in a downturn in the economy and we would much rather be on financings lexia loes that are non recourse with no credit marks.
And to the team's credit they didnt want to do a COO last year, we obviously noticed some of our peers doing them.
The team convince me the effective cost of funds over the life of the instrument was higher than the stated rates I learned a little bit finance.
And this time.
We actually executed a very favorable and best in class both financing at a scale. That's the biggest one ever done since the financial crisis in the real estate area and then a notes are perfect you must realize that all of us take.
Term risks like we might have a financing facility. That's five years you might have a loan that's five years, we might have an investment that.
Two years.
Orders for five years, and we don't want to finance that with two year paper, even repo paper, if we can because banks have a nasty habit of calling them. When this <expletive> hits the fan as a technical term.
So we are match funded they are they are you still senior you have no recourse something goes bad you don't have to pay off the you just lose your investment, but there is no recourse to the company. So we've moved the company aggressively away from bank lines, even though we have best in class Bank lines, we still prefer not to be on them.
Learning the lessons of prior crises. So it's been a really amazing execution, you won't really see it in the dividend yields you won't see in our earnings, but how we get there and.
It is really important how we sustain a downturn Jeff talks about the LIBOR floors in our loans.
We actually make more money in how is life portfolio to tell you about how much money, we may when LIBOR rose now when it falls will make more money than it maybe if I think almost all of our peers.
Slate versus 12 cents Folsom start to wonder down 200, we earned 12 cents more because of the.
The flow the floors, we insisted on putting in the loans as we made them I want to point out one other thing the special servicer, which many of you think complicates our story and explains the discount to some of our peers or one particular appear.
That we trade that was about 75 basis points of the earnings this quarter. So it's almost immaterial it's counted as nothing on our.
On our asset base is like $40 million out of a $16 billion.
Asset base.
And the special Servicers really counter cyclical like again, we we talk about whether we should move it out key bit set up the little business.
But as the World goes bad our little Gem will be a very valuable again and the way the market is going it could happen sooner than we [laughter].
One other comment energy infrastructure, our newest cylinder, we didnt do a lot in the quarter and we put the brakes on and again why did we do that it wasn't because there were an opportunities to lend we didnt have the right financing facility for the business. We had a two year facility at loans or the App that actually would last three to five years, and we and the board didn't want to make loans without match financing. So the team worked really hard created a 500 million our facility, which is now in place to find the second one coming we hope behind it.
And now we will put the engine back to or the pedal back to the floor and hopefully grow that business and has meaningfully contributed to.
Our earnings next year, which is it has been a.
Drag on earnings, but where you don't care really quarter to quarter, we really want to build a great company long term that we all want to own and it can be proud to own so.
We held back I think we did $50 million in the quarter is like in significant.
And we're going to go back and we think the returns look to be similar or better than what we've been generating in our large loan book business. Just one more thing on competition. The it is competitive obviously and we're going to move.
To protect our the quality of what we do.
There is a lot of people have noticed the mortgage markets are a good place to park capital given the yields of everyones everything else in the world. So there is pressure obviously spreads are going to widen out and institutions will do what they did when rates were last year that will widen spreads. So they won't take 400 over it might go to 150 over so they are in the nominal three of the nominal for that the market will settle into whatever number that is so for us.
It is competitive.
We're going to.
Take care of our credit.
We don't have to land and we have enough engines of growth.
You cannot lens in the quarter or pullback on our earnings.
You heard about $1 billion plus pipelines the third quarters.
Hopefully this for third quarter is not done.
And we are expanding our lending internationally. There are very good opportunities offshore we are thinking of six or seven people now.
Focused on that in the UK and mean and the continent.
And we are trying to continue to fund holes. All we can achieve outsized returns through less risk. So I have to say I'm very pleased with.
Company and the balance of our business lines I know it.
It isn't lost on us that we've lost.
Relative multiple of book value.
But.
We think it's the right thing to do we have plenty of cash.
We don't need to.
Enter come back to the equity markets for the foreseeable future of save buying something gigantic or something like that which.
A moment is not in the cards.
The other thing is the residential business, which I should mention is the is a hidden hero for us we've done I think three securitizations four door and each one has gotten better we've perfected the machine, we expect that business to grow dramatically within us and we want to increase both the hold of those mortgages on our balance sheets as well as the.
Scale of the business.
And working hard by the end of the year, you'll hear something from us in that space.
And it could and should contribute meaningfully.
And become a major product line for us.
If the agencies, having the same direction and they get rid of the non QM touch of $180 billion of production that's four times.
We are what we as an industry of non bank lenders are doing and it's a massive opportunity I think leases is something like the fourth or fifth largest in the space now, but I expect we will get bigger.
And one other thing I would say that.
Two other comments to close.
We are the biggest market cap and so the timing of loans funding in the quarter effects us less though is the beauty of scale and for that reason alone.
Ladies and gentlemen, please hold our program will begin momentarily.
So where does anyone have any idea.
Enacted.
Reno can you tell us what the line went dead because we were talking.
I would say about two minutes ago.
How many.
About two minutes over the last subject Barry spoke about.
With the growth of the non QM platform and that we were yea ended the year entity or non QM.
Yeah, We expect I think were third fourth fifth largest in the space and we expect to build that business. Both on balance sheet and continue our securitizations achieve pretty high are always and Barry and I mentioned that the non QM patches Calabria pushes this through and get them out of the business is $180 billion of potential loans that could leave the agencies and go to the non banks.
We would expect to hopefully take advantage of that gain market share and grow the business.
Two other things about our scale and one final comment I mean being as big as we are means the timing of a loan funding affects us less than maybe smaller peers. It's one of the joys of being big I wish we were bigger still.
We also have consider more cash in modern much on it because it will affect us less than what our scale.
And I also think that being like we could as you asked if I waved my magic wand in one year's time, we would have.
10, 12 13 billion our loan book.
But it's going to require that we continue to drive our cost of funds down. So how this works is instead of lending at L. 300, we can lend it fell to 60 I'm, making this up but I'm just giving you. An example, and if we can lower our cost of funding from L. One email 150.
We preserve our return on equity on the mezzanine.
Well, what happens is the ability or desire of borrowers to refinance us is less because the coupons lowered to have so it's really important we follow this virtuous curve, which is what we've been setting ourselves up to do that we can lend ever more competitively.
Increasing duration of our book decreasing repayments and silver to maintaining our returns on equity.
And the last thing I'll say is as you know I think we have the largest insider owned.
Commercial mortgage rate.
Myself and the team alone.
Hundreds of millions of dollars of stock and cumulatively I mean, we do treat your capital that gets our own.
Because it is our [laughter] and we're doing what we think maybe the market doesn't appreciate and we are frustrated with our stock price and a three dividend yield in a world, it's yielding zero is ridiculous.
But if you look at the quality of our assets that you take out so.
Equity below can apply market multiples that side of our company.
We have business lines here that are quite are valued and other companies actually can take us apart even take our resi book Apart you can take car.
Our CMBS book, Apart and look at a company like ladder.
So it is what it is but we remain a bar doing in a world of uncertainty.
So.
Thank you very much.
Turn it for questions. Please operator.
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Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Oh. Thanks, you know I guess, if we look back to the December bout of volatility you know you guys pull pulled back you know kind of as that was happening you know kind of the volatility we're going through today, you know you kind of view that as an opportunity for for and blend at wider spreads or or kind of are you looking to kind of pull back into this bout of volatility.
I, I'd say, where all pedal to the floor for the right opportunity, we're not constrained by size, obviously with billion dollars undrawn capacity plenty of cash, which we didn't have as much cash back in December . We just bought I think the business that we actually were trying to make sure. We didn't have to come back to the market to finance that so as you know we've been selling off the.
Lower yielding loans out of the Oh, yes, and I think half the size of what we bought it bought it yeah. I mean, there's then between between sales and repayments its been about between eight and 900 million of sales and repayments right into our lives, but that's okay. Because of those those you know while they were accretive to our cost of debt. It was not it created this wasn't the highest yielding stuff we had and so.
We're we're this is sort of a transition year. If you will if we get all our cylinder built next year with the resi business hopefully a larger large loan book he'd be the special servicer finds itself in a healthy position obviously, our CMBS book is worth more not less and this kind of environment. So I think and then the <unk> business the infrastructure business a full full steam ahead, putting out loans and you will see us probably securitize those loans much like we have in the non QM business and.
And obviously, what our conduit business does which also had a good quarter. So all in all.
I'm pretty I think we're set up really well continue to drive the enterprise and if you can create these kinds of earnings in this interest rate environment, a repeated basis, they're doing a really good job in though.
And Doug I would say that our our pipeline report that are now showing a berry and others is up to three pages today. It hasn't been three pages in well over a year, we're seeing a lot more opportunities there is stuff trading.
We have more cash as Barry said due to some early prepayments students insist sales our term loan B, we took out an incremental $100 million versus our term loan a and we have pro forma Ed you know an equity sale in some cash out refinance though it's a great time for us if there's an opportunity to actually fill being an asset out of assets.
Exactly yeah.
The he Jeff also mentioned the cash out refi size I mean, we're so flush with cash and this is on two of our equity assets and we don't like I'm like that we need this money, but we're paying off bank line right. So with mortgage debt at cheaper spreads not much cheaper, but if it pays off bank lines. So we can pay positive carry to hold more cash effect right.
So I mean look we'll we'll take advantage of the market is probably even better than it was when we price it a little while ago. So it's really it's really a bizarre type, but no we're not going to step back where we were very confident in where we think values on the property markets and the only thing we worry about obviously is a calamitous recession led.
In part due to the trade trade war and the volatility in a couple of global economies.
I mean.
Hasn't gotten little Lucky does the decline in.
In European in the European economies is pulled forward and obviously negative pulled the U.S. rates down in a time when 100 out of 100 economists would have expected the 10 year to be three and a half not one six.
And and really you have to attribute it with a trillion dollar deficit as far as I can see and.
Until last month, we were selling or the fed was reducing its balance sheet. I mean, this is truly an astonishing outcome little scary actually but.
Honestly.
And then just Jeff just to be clear on that pipeline report is that mostly in a commercial lending or youre getting a world that okay. That's right Doug that the commercial lending reports, it's just more activity right now than we've seen in a while.
Great. Thank you.
Yes, there is there's a there's a backlog of loans on oneof two on the energy infrastructure side.
Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thanks, very much I appreciate the multi cylinder platform and the long term value of the special servicer and the steps you've taken on the balance sheet to reduce dependence on warehouse facilities.
If you optimize the balance sheet for reinvestment of gains on the property side as well as the refinancings that you talked about undertaking how much incremental earnings power or do you think that could create is it possible to put any parameters around that.
Well you must have been talking to Jeff awful [laughter]. He wants me to sell the real estate assets. So you can take that $700 million of gains and redeployed into.
And for <unk> I'm, a toxic kid with a 13 year old that actually deploying direction unless unless incomes fall in Orlando and Tampa were trying hard to imagine.
And I read it doubling down as to whether and how our floors that that cash on cash yields will continue to rise so I can't I can't replace.
I mean, when we bought that stuff that was my intention to hold these assets forever because I said this I'd like to own these forever and they're producing a double digit cash on cash yield and I believe.
One of them has 17 your dad or 13, you're dead right next they're both fixed so we have no exposure to rates. It's the safest thing I mean, you put this in all your kids Trust funds and you get to bide through our stock at an age which is ridiculous.
So hi, I'm reluctant to sell those they're they're they're affordable housing they will run 99% occupancy in almost any scenario because of cheaper than market rate, obviously, even though we're getting these rent increases and it's unimaginable to me that that Florida given.
The economy of those two markets is going to suffer any kinda income downturn over the next foreseeable future, let's say five years, because that's as far as the Crystal ball goes.
As you will continue to grow and then our medical office is pretty much.
Two plus percent growth built in maybe higher but the floor will be two or 3%, which in this kind of rate environment looks pretty good.
And then Cabelas visits were down to a relatively small amount of assets, earning 13 or something also kashi over 30. So you know and there is no issues. There. So I, we will do the analysis because Jeff is all over me all the time to look at this.
But.
I don't want to replace it the reason that booking just in here is the duration of our lending business I mean, the loans or 2.6.
Duration average term.
Nothing like that some others are three but there are still three not not forever and so it gives us a base of assets, earning a double digit cash on cash yield actually they're hurting our book value. Obviously, we're depreciating them every day.
But I I I tend to think these are great assets to own if we we stop buying them. We said to ourselves we would do like 25% to 30% of our cap in in equity assets that was led in part by guidance from the rating agencies.
And if other opportunities arise and as our balance sheet growth, we could add an incremental to the portfolio. It's just hard to find 10 cash on cash yield in equity rather than replacing Jay we are refinancing them and we'll take cash out and when we get to do part of what I want to do which is eventually reinvest that capital at 10, 12, 13% whatever a safe return incrementally that will add a tremendous amount. So the revise I mentioned earlier will add about $180 million and if we make up a property sale with a a with a gain that will add some more and multiply that by whatever you think a safe returning a significant portion of that back towards that's good point. So you are seeing the gains in that where you're able to take out a 180, well north of you.
More important it will be over $300 million.
If and when we sell those.
We're marketing.
It is the Dublin.
The Dublin portfolio a candidate for asset sales I believe there has been some reports to that effect.
That's that's the portfolio were looking to sell correct.
And that's okay number.
The press on saying it officially that that's correct and.
So again, it's a it's had a great run great assets.
Oh, we expect it will be a profitable sale and.
We thought Jay it might help that we demonstrated in the factually if you.
Gains we talk about actually do exist and then I'll I'll will provide all the information.
He wants to go value or multi looking for where valuations of those.
So you can see that there's about 400 plus million dollars of games to multifamily portfolio.
Okay.
Lastly, the company that are used to be involved with called I star has solely a pivoted at strategic focus the ground leases is do you have any views on the merits of out of the investment as an investor or whether as a financing tool that can be a way to unlock value within the property segment, they're offering 99 year ground leases with initial cap rates in the 3% range or in some cases below that.
Oh look.
I've been doing this 30 plus years.
It's always the.
Ground leased assets like encumbered hotels have fewer buyers.
Some buyers want to see so is the sum of the parts greater than the whole.
At the moment, there distortions enough in the market and it's possible that's the case.
I.
So we look at it and we did it ourselves on a portfolio of assets in the UK bunch of hotels, we own and we did some of the ground leases than we sold outright.
I'd say, it's a viable business is a good business, it's not done a lot because people don't.
It's another way of financing obviously.
In this environment I suppose it's something we could look at especially on maybe our multi.
Because we're going to hold the upside.
But it's.
The competitor that does it they have a 186 yield and.
Oh, that's that's fascinating so we've been eight three yield.
They were written too so.
It's interesting I mean, I I would not have expected a ton of volume in this but if you're going on an acid forever like we might with our multi is.
That's an interesting suggestion and we should look at that.
And never some there for that it's.
We'd have to look at how it works with the financing in place too I think we have existing debt so pretty sure would be complicated.
Until recently I would have thought that debt was way in the money. So I'm not sure. It is anymore, given where rates have moved I think it was like 173 to 73.
The debt on the on the on the on the Wilson portfolio.
It was really cheap.
Got it okay. Thanks.
Thank you.
Thanks for the thoughts.
Thank you. Our next question comes from the line of Rick Shane with Jpmorgan. Please proceed with your question.
Hey, guys. Thanks for taking my questions. This morning.
Jeff back at Investor Day, you outlined a strategy fault focusing in part on states that you felt would benefit from the salt distortion.
I'm curious if you.
No that is continuing to manifest and if you're seeing any price dislocations in those markets as peers or competitors.
Pursue that same strategy.
Yeah, I think it's the same as what we do here as we follow our manager Starwood Capital Group, which has a strong opinion tremendous amounts of bodies in the ground and data our manager Starwood capital group has been leaning into the low tax states migration states and we've done the same our lending book It certainly I moved more into a into Texas, and Houston, and Dallas and Austin in areas, there and and some great areas and.
In Northern Florida, and I've been looking at Nashville, and others without with others. So we but we still believe in population demographics, and where people are moving in low tax dates as the other really important to trend I think it's you know, it's helping our Orlando and and North Central Northern Florida multifamily owned portfolio outperformed by as much as it is I think a big part of that is what we are seeing down there for growth in those economies I think Orlando was the number one or number two growth and let's say in the country. This year are we just sort of Universal studios is going to add another.
Massive theme park, there that was announced late last week and that will be another 14000 jobs to that market. So yes. We are we continue to follow our manager into those markets and thinking about the really smart right I'd say that.
You know the.
We're kind of we're looking at our attachment points very closely in these markets and what is.
Business I should say I mean, the markets are losing a little bit of discipline.
When you consider the Ansys higher proceeds than you could sell an asset for and then you hear that that 60% a value.
You're kidding yourself.
Oh, there's some really aggressive loans being done in the hotel space like end of cycle kind of loans.
Luxury hotels, and four cap I mean hotels shouldn't be a forecast.
So interestingly I you know with the trade wars. The the biggest source of capital for some of these deals has been offshore, particularly southeast Asia than in Korea.
Obviously Chinese is out.
So there aren't that many people looking to buy some of these and you're seeing some incredible deals done.
In the hotel space, where.
I think the cap rates are seriously clicking question and the coverage ratios are questionable.
And I've seen this movie before so [laughter] twice I've seen the world and for these assets.
So I mean, we're being pretty careful about what we lend against and we'll let the other firms make those loans and so we'll just step aside.
And we also as a matter of course, you know, we we've not chosen so.
Do much with our funds right. We don't we don't we don't lend to ourselves typically.
And again, that's never a problem until it's a problem so.
I think it's a it's a very.
You have to look below the hood and our dividend yields just doesn't make any sense given the scale of the company and our competitors are the competitive universe of companies that trade in line with us on a dividend it's impossible to see that's the case, they're all mortgage rates. They have nothing in that makes up a bunch of loans they revert to cash to par to book we don't.
We don't we have a.
Property book, we have all these other assets they don't they don't revert to that so.
You know, we say it every quarter.
Maybe someday we'll be right.
Great. Thank you guys.
Thank you. Our final question comes from the line of Tim Hayes with B. Riley FBR. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking my questions. My first one I just wanted to thank you for the comments on the QM patch and non QM and all that and.
Just just a follow up there I know you mentioned.
Market share, but just wondering what expected annual volumes for Ambac is this year and next year.
Yeah, we listen we don't own impact were one buyer and we've done some straight impact Securitizations. We obviously have a have a preferred equity investment that will turn to equity on an originator of our own we have a handful of other originators that we've been working with.
No one relationship that will significantly dominate where we're getting our production from and we think it's important to have multiple sources and when you produce these loans by yourself and you save a point and a half a that point and a half is does the heck of a lot to your IR, our and our goal is to to originate as many as we can and grow smartly in that space rather than just be the highest bid for for premium bonds. These people on the loan prices have gone up relatively significantly as rates have come down, but we don't want to be just buying one a four and a half dollar price pools from the from the most prestigious originators.
We continue to diversify us to.
Translate for the Lehman.
So it was like a.
Matt it's like a like a super scientist.
Like a bad side of the.
You.
This business will be almost a couple of million Bucks this year originations and maybe higher we're driving it higher is one of the quality stays in the pricing works for us.
The key here is the originator, which as Jeff mentioned that will close and we have a government approvals, yes, I just had to get fingerprinted.
And that will close probably.
Year and that will drive.
That will allow us to accelerate and get better outcomes and better returns and should Billy integrated business for the benefit of the re inside of us.
Hi, one one.
The business runs and higher leverage levels. So you know, it's going to it's going to slightly skew our.
Our financial results.
Well, we still won't get close to the largest here, but we will drift that way.
But again, we're going to we're going to split the book and on some of those assets on our books.
And.
And create a business.
Whole platform, that's higher integrated company so.
Got it that businesses is running quite well and we were like our team they're doing a great job.
And I hope, we'll be able to report great things from that business as it grows and it should could be material.
And I hope it is.
Okay. Thanks, Thanks for the comments there and then just switching gears to infrastructure I think you mentioned 800 to 900 million of an aggregate repayments in sales in the portfolio. So far since acquiring that from GE just how much rotation that we have left there and then I think you noted a growing backlog, but at what point should we think about the portfolio growing I'm, especially now that you have that new facility in place.
Yes, Hey, Tim It's Andrew So we you know as I said, we've had about close to 250 million of sales.
Around 540 550 million of repayments since we acquired the business back in back in September So weve rotated through a majority of the lower yielding assets. There's a couple of hundred million last call less than 200 million of loans that we would look to opportunistically sell at the right at the right dollar price, but we don't have a gun to our head to force them out into the market. So they said, we'll remain opportunistic in terms of trying to find the right buyers at the right time.
Yeah, we were a little bit on our back but right in the quarter as Barry mentioned before we've been working on putting our second financing line in place and it's a significantly longer than than any of us expect it and they were really creating a new a new industry right. If you think about kind of where the financing of this asset classes. Its very reminiscent of where were backend Oh nine and 2010, we took starwood property Trust public we're trying to restart their commercial real estate warehouse business right. I mean at the time, we paid $250 million line in place with our friends at Wells Fargo and has grown to 2 billion right over time. So you know where you know, we're making really good progress on on finding financing the new facility. We put in place is up to kind of nine years of available financing on it. So it's really attractive in terms of kind of matching duration.
We have another $500 million line that that we're in the process of negotiating in you know.
$500 million Plaza, a term sheet, so well yeah risk aversion right. We could have made those loans in the quarter right. We could have put them on the existing facility that we got one put in place when we did the transaction with GE and we opted not to do that because we didn't really get hung on to to your facility with five three to five year loans. So good on it could have taken them off that facility down to the new facility, but we just said, let's just we don't need to do that why should we take that kind of risk yeah, we probably passed on $4 million to $500 million of production no. Nothing we would have done it all but things that didn't screen because we didn't have available financing and one other important thing to note you know Barry referenced you know we could be a CLO issuers securitization issuer in the space. There is a burgeoning market ripe for CLL was for energy infrastructure finance assets.
CLL got done in July .
In that asset class around half a billion dollar facility with pretty attractive pretty attractive terms. So you know the teams now that we've we've closed our highly successful series C. Allow the team is turning his full attention to it looking at energy infrastructure Siloed and again, that's something you could see US do in Q4 Q1, and if it the resi books are going to do 234 billion.
Origination, which is feasible this business should be over 1 billion, maybe a billion and a half.
Be a reasonable target and the returns are are actually the shape of the returns is different than most of the resin book.
The accounting GAAP accounting for the Resi book is in our view dramatically understate the returns available to us and we've been having a quite a bit of grew a hard internally trying to figure out that we follow gap obviously in the convention to the public market, but we do think that returns are actually higher than.
We're telling you there is some assumptions about what happens to these loans as they mature before they get there was like mortgages or replace some pay downs and you can't book any of that even though you think its going to workout certain ways. So.
We think the hours are quite attractive on the retained earnings.
And I will say with gas prices, having come down a bit I asked the team to run some back of the envelope numbers and if gas have from here and it dropped from in the threes doing the low twos now you could have from here our LTB would only go up by 4% I'm on our on our loan portfolio is that is there vollmer ballpark, yes, but were not exposed to the price of the underlying commodity what we really need to go energy book.
In the energy book with that I'm, sorry, I was like to fill in the whole company [laughter] really does it get any exposure to the energy markets like that how big is the book now like you had about like one about 1 billion billing and so you know happens that's on what 5% of our assets a six seven so 4% on five presenter is nothing.
Right.
Beauty of diversification.
Okay. That's really helpful. Thanks for all the commentary there guys are we appreciate you being with US today and have a great August and the rest of the summer thanks, and let's hope the world holds together.
[laughter].
Thank you. This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation.