Starwood Property Trust Inc (STWD) 2018 Q1 法說會逐字稿

Good day, and welcome to the Starwood Property Trust First Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended March 31, 2018, filed its 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.starwoodpropertytrust.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'll refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause the actual results to differ materially from those expressed or implied in any forward-looking statements made today.

The company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

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

Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer; Rina Paniry, the company's Chief Financial Officer; Jeff DiModica, the company's President; Andrew Sossen, the company's Chief Operating Officer; and Adam Behlman, the President of our Real Estate Investing and Servicing Segment.

With that, I will now turn the call over to Rina.

Thank you, Zach, and good morning, everyone. Our core earnings this quarter totaled $156 million or $0.58 per share. This includes a positive impact of $0.04 from the payoff of our March 2018 converts, which I will discuss shortly.

I will begin this morning with the results of our largest business, the Lending Segment. During the quarter, this segment contributed core earnings of $113 million or $0.42 per share. On the commercial lending side, we originated or acquired $1.2 billion of floating-rate loans in 12 separate transactions. The loans carried a blended LTV of 63%, consistent with our overall portfolio LTV of 62%. We funded $912 million, of which $743 million related to new loans and $169 million related to preexisting loan commitments.

Consistent with our projections, we had gross repayments this quarter of $1.5 billion. As we have said in the past, the timing of repayments in any given quarter can be lumpy, but they tend to normalize over the full year period.

Over the past 2 years, we have averaged $3 billion of gross loan repayments per year and expect a similar level this year.

Our commercial loan book continues to be positively correlated to rising interest rates, with 93% being floating rate.

On the residential lending side, we acquired $92 million of nonagency loans and received repayments of $30 million, bringing the total portfolio to $663 million and our net equity to $218 million. The current portfolio has an average 63% LTV and 723 FICO.

I will now turn to our Property Segment, which contributed core earnings of $27 million or $0.10 per share to the quarter. We previously announced the phased acquisition of a 27-property affordable housing portfolio in Florida, which we refer to as Woodstar 2. We closed on 8 of these properties in late December and an additional 18 properties in Q1.

The purchases in the first quarter totaled $405 million, including $27 million of contingent consideration, which is payable upon the achievement of certain real estate tax abatement. We levered this portfolio with fixed-rate debt containing an 11-year average term.

On a weighted average basis, our cumulative purchases contributed 46 days of earnings to the quarter. As we mentioned last quarter, we utilized the down rate structure for the first time in executing this transaction. In connection with the closings this quarter, we issued 7 million OP units with an obligation to issue an additional 1.3 million units upon resolution of the contingency. To date, we have issued 9.8 million OP units in connection with the acquisition of this portfolio. These units represent equity in a subsidiary, which are exchangeable into STWD common stock at the option of the holder.

As we discussed with you last quarter, we treat these units similar to an equity issuance for core purposes while GAAP treats them as noncontrolling interest. With regards to share count, these units were determined to be antidilutive under GAAP, so they were excluded from our GAAP share count. However, they are included in our share count for core EPS purposes.

In Q1, we added back 5.1 million shares to arrive at our core diluted weighted average share count of 268 million. With regards to income, the units are entitled to distribution, which are indexed to the dividend paid on our common stock. During the quarter, we paid $2.5 million in distributions on the outstanding units. These amounts are included in noncontrolling interest expense in our GAAP P&L and then added back to arrive at core earnings. The remainder of our wholly owned assets in this segment continue to perform well, generating consistent returns with a blended aggregate cash-on-cash yield for the trailing 12-month period of 10.9% and a weighted average occupancy of 98%. We expect this cash-on-cash yield to increase in the near term as we realize the impact of a significant lease-up in our Dublin portfolio that we mentioned last quarter.

This quarter, we also sold 2 retail assets from our master lease portfolio. The assets had a cost basis of $33 million and generated a core gain of $4 million.

I will now turn to our Investing and Servicing Segment, which contributed core earnings of $57 million or $0.21 per share to the quarter. Our CMBS portfolio continues to perform well. Core yields on our 2.0 book, which now represents 86% of our overall CMBS portfolio, continue to be in the mid-teens. We also recognized a positive mark-to-market adjustment of $14 million in our GAAP P&L related to tightening spreads on our 2.0 bonds.

On the servicing front, revenues increased to $33 million, up from our third and fourth quarter run rate of $23 million. These were driven by better-than-expected outcomes on $1 billion of resolutions that occurred during the quarter. We expect to return to our prior quarter run rate in Q2.

We also continued adding to our named portfolio, obtaining 3 new servicing assignments on deals totaling $2 billion of collateral. At the end of the quarter, our named servicer portfolio totaled 160 trusts with a balance of $73 billion and our actively serviced portfolios stood at $9.2 billion.

Moving to our conduit, we securitized $257 million of loans this quarter in one transaction. And finally, on this segment's property portfolio, we continue to harvest gains as these assets reach stabilization.

During the quarter, we sold assets with a cost basis of $19 million for a core gain of $3 million. We also acquired $28 million of properties, bringing the undepreciated balance of this portfolio to $354 million across 24 investments.

While we're on the topic of properties, I wanted to make a comment about our overall property portfolio and its impact to our book value metric. Collectively, the properties in our REITs and Property segments totaled $3.5 billion on an undepreciated basis, representing 27% of our total undepreciated assets of $13.2 billion. These assets carry $205 million or $0.78 per share of accumulated depreciation.

As we continue to realize gains in excess of our purchase price for these assets, we believe that GAAP book value is becoming an increasingly less relevant metric for us. At a minimum, adding back $205 million to our GAAP book value would arrive at purchase price. Any gains on this asset would suggest an add-back in excess of $205 million.

I will conclude with a few comments about our capitalization and dividend. This quarter, we were able to replace our convertible notes with more cost-effective senior unsecured debt. In January, we issued $500 million of high-yield debt at a fixed coupon of 3 5/8%, which we swapped to floating. We utilized those funds, in part, to repay the $370 million of our March 2018 converts, which carried a 4.55% fixed coupon and an all-in cost of funds of 5.7%.

The equity component of our converts, which had been accreted through interest expense over their term, expired worthless. This resulted in a gain of $10 million or $0.04 per share that we recognized in core earnings.

We ended the quarter with $4.2 billion of undrawn debt capacity, a weighted average debt term of 58 months and a modest net debt-to-undepreciated equity ratio of 1.5x. If we were to include off-balance-sheet leverage in the form of A notes sold, this ratio would be 2x. The decline of 0.1x from last quarter's ratios is due to a $143 million increase in noncontrolling interest associated with Woodstar II, which resides within GAAP equity.

For the second quarter, we have declared a $0.48 dividend, which will be paid on July 13 to shareholders of record on June 29. This represents a 9.2% annualized dividend yield on yesterday's closing share price of $20.96.

With that, I'll turn the call over to Jeff for his comments.

Thanks, Rina. On our last earnings call, we articulated our strategy to diversify and lower our borrowing costs to allow us to continue to grow our loan portfolio notwithstanding the tighter spread environment we see today.

We issued $500 million of unsecured notes in Q1 with a 3 5/8% coupon swap to LIBOR plus 128 bps, the tightest spread for a high-yield bond issuance since the financial crisis and more in line with where investment-grade names trade. Our diversified model has created a funding advantage that enabled us to, once again, more than offset loan spread tightening and still achieve an optimal 12.3% IRR and $1.2 billion in loan originations on 12 assets this quarter.

In the aggregate, we deployed $2 billion this quarter across our multicylinder platform despite having one $375 million loan we expected to close in Q1 slip into very early Q2. We expect a higher origination volume in Q2, with the majority coming from our loan portfolio.

Our average loan size was just over $100 million in Q1, and we conservatively locked in financing on each asset at origination as we always do. We have not taken market risk on financings to improve our IRRs or originated extremely large loans that ultimately could create significantly -- significant cash drag at maturity. We continue to think construction lending to great sponsors with conservative business plan is attractive, but I will note that construction loans are less than 15% of the assets in our lending segment today.

As Rina mentioned, we had large repayments in our loan book in Q1, with $967 million of equity returned, more than any prior quarter and approximately the same as what we expect in the next 3 quarters combined. We expected that amount. We have been patient with the deployment of this excess cash on our balance sheet, leaving us ample liquidity to execute our business plan in the coming quarters.

Surprisingly, at this point in the cycle, our loan portfolio is rolling off at the lower yields than we are replacing it with. Despite tighter loan spreads and without increasing leverage or expanding our credit criteria, our optimal origination IRR this quarter was 12.3%, consistent with our historical averages and 90 basis points above the optimal IRR on the loans that we paid in the quarter. In addition to tighter lending spreads, this increase has been partially driven by higher LIBOR. Additionally, tighter lending spreads have the benefit of increasing the duration of our loans by providing borrowers with lower coupons they are less likely to be refinance.

In Q1, our Lending Segment created an additional $300 million in unencumbered assets, which will help us continue on the path of issuing unsecured debt and unencumbering our balance sheet at the best rates in our peer group. We have $3.6 billion of unencumbered assets on our book today, with $2.3 billion of unsecured debt, a ratio of 1.6x, leaving us ample room to issue more unsecured debt as we continue to grow our core lending book.

Unsecured issuance decreases the cost of our liabilities, allowing us to grow our loan book without straying from our low-leverage strategy and credit-first culture and ultimately should improve our credit rating, which will drive our borrowing spreads even lower.

The credit of our portfolio continues its strong performance since inception almost 9 years ago, and we expect our 100% performing 62% LTV portfolio to perform very well. Our high FICO, low LTV residential loan portfolio continues to produce a very attractive levered IRR, and we expect to term out a large portion of the existing financing for this portfolio in our first securitization, which we anticipate closing later this quarter, achieving a rate of return at least as great as our loan book.

Financed conservatively with long-term fixed-rate debt, our diversified Property Segment provides us with double-digit cash returns. We retain the potential equity upside, extend our duration and benefit from the depreciation shield, which lowers our required payout ratios. This portfolio continues to perform extremely well. As we have previously mentioned, we believe that in the aggregate, our investment portfolio has over $1 per share in unrealized gains that are available for us to harvest in the future, though we view the bulk of this book as long-term core hold that we will continue to add to earnings for years to come.

With the bulk of the Woodstar II multifamily assets now closed, we are buoyed by continued strong performance in this 99-plus percent leased portfolio. The portfolio was all based in strong markets in Florida, with growth in medium -- growth in median income levels that will allow us to increase rents faster than we originally modeled.

Our Dublin office portfolio is virtually 100% leased and our medical office portfolio is 93% leased and both are performing very well. Rina mentioned we filled 3 small equity assets out of our REIT segment this quarter and 2 of our Bass Pro net lease assets from our Property Segment. We plan to sell approximately 1/3 of our total Bass Pro investment in the coming months at tighter cap rates than our purchase, proving the mispriced credit and our wholesale to retail thesis as we mentioned at acquisition, creating gains, lowering our bases and significantly improving the cash return of our remaining portfolio by several hundred basis points to over 13%.

In our real estate Investing and Servicing Segment, special servicing fees were up this quarter, our CMBS portfolio grew slightly, we added 3 new special servicing assignment, and our best-in-class conduit origination business continues to be a steady contributor to our earnings. I will note that in Morgan Stanley's year-end conduit scorecard, Starwood Mortgage Capital has the lowest percentage of loans in special servicing, only 3 out of 675 loans or 1/4 of 1% of loans originated, by far the best of the top 25 CMBS 2.0 lenders.

This exemplary credit performance along with our funding advantage, relationships with borrowers and banks, our position as a top special servicer and our balance sheet ensure Starwood Mortgage Capital will continue to be a winner in the postrisk retention CMBS conduit origination business. We are extremely happy to report that in Q2, through purchases, partnerships and assignments, we expect to add 9 special servicing assignments or over $9 billion in notional value to our special servicing book, the most we have added in any one quarter since our acquisition of LNR in 2013.

Our reputation, scale and ability to underwrite every loan in every securitization allowed us to acquire servicing on those 9 trusts while investing just $30 million to $45 million of our own capital, giving us significant leverage per dollar we invest and significantly more future servicing revenue for our company.

Finally, as we've done opportunistically in the past, we bought back $12 million of stock in the quarter, when our shares dipped in February, and have $250 million left in our board-approved buyback. This is our ninth year and our board and management team are top 10 shareholders, and we will continue to act like your partners and purchase stock when appropriate.

With that, I will turn the call to Barry.

Thanks, Jeff. Thanks, Rina and team. Good morning, everyone. There's -- whenever I do these calls, I think about what I'm going to say and how optimistic I'm going to be. And as you know, those of you who listened to me on my last quarter call, I was pretty optimistic, and I think our quarter proves that despite having some loans move to the second quarter in the origination side. The business is working well and I'm fairly confident that we will meet or exceed our projections and your estimates for the year. We have a pretty good view of what's going on, and we really like our positioning. The ability to drive our cost of financing down to better cost than anyone can in our sector is a permanent or sustainable competitive advantage. So our goal is to grow, and I'm hoping that we can continue to grow, and if we can do that, we can increase our dividend. But it's been a tumultuous time as credit spreads have come in and lenders have gotten more aggressive. You can see the velocity of the repayments of our loan book was the highest in history, but completely anticipated. And as Rina said, the next 3 quarters will be about what we had in the first quarter. So we actually...

In total.

In total we knew about it, and we prepared -- we're prepared for it. So we talk about every -- I can say it, all the time because it's true -- conservative. We run a conservative book. We can increase our earnings by levering up our book, we choose not to. We want to be stable and consistent, and I think you can see we're pretty stable and fairly consistent.

We're building businesses now that will replace lost earnings from the special servicer. I don't think Rina mentioned it, but the current value of the servicer is $50 million, which is less than half the value of the untaken gains in our equity book. So it's -- you have it for negative $50 million as a free option for the shareholders. And I would like to also mention again this comment that Rina made about undepreciated book value. It's been bothering me a bunch that I see our GAAP book, I guess it is, declining slightly. And you may say, oh, we're eating into our business. We're not. I mean, we're just -- if you go to the undepreciated book value, you'll see that, that is the multiple that the analysts should use to determine the multiple to book. Because if you use the other one, we look like we're trading to premium to some of our peers, which in my view we're really not at the moment, because you're using the wrong metric. And a lot of investors look at multiple to book, but they're looking at the wrong book because of our equity book. And as Rina pointed out, if you actually added the fair value of those assets, and I will tell you I think they're considerably marked, then you're even more understating our multiple of book. And it is -- while we did do our first ever issuance of stock to buy the Woodstar Portfolio in a down REIT structure and we'd love to do more of that, we don't really love selling stock where our stock is. And especially if you take my view of what the book value is of our stock, our multiple, our earnings, the safety of our business and, of course, our dividend yield. So it was a good, solid transaction. Our stock is incredibly attractive to people. We pay a very steady dividend that you can't find anywhere in the world with a 62% LTV. But I'm most optimistic that these other businesses will be able to replace, which I think has been somewhat of a cloud over the company's performance, as people thinking that the special servicing cycle is over and maybe we won't have an engine. And I think the team is pivoting and focused on that and you've seen us get into a few other businesses.

One other comment about recurring gains and nonrecurring gains. We were kind of like a trading house. If you look at a company like Ladder, which I'll mention, also, they buy securities, they sell securities. We buy little properties and sell little properties and we're probably always going to do that. And so our nonrecurring earnings gains are actually recurring, nonrecurring earnings gains. They'll be there all the time, and they have been the last several years, they'll be going forward. And I just was -- somebody sent me an article, congratulations on selling a retail center that I didn't even know we owned. It's a small center. I think we bought it for $5 million and sold it for $13 million or something like that. It was a [50] IRR]. And we can do that because the information in our book and the data we have and not to do so would be foolish and not enhancement of the shareholder value. So we'll continue to do that, continue to look for opportunities in our book and elsewhere, use our data and knowledge and our scale across the globe to find opportunities to deploy shareholder capital at attractive rates of return.

I think -- I was going to say one more thing, because it was announced and it's not in the paper. You may recall, long ago, we made a construction loan on 701 Seventh Avenue and the developer brought in EB-5 financing to pay this down. We only had our kicker left in the transaction, so the IRR on this deal is going to be in the 20s, I presume. But that you'll see something we were hoping would happen and it did happen subsequent to quarter end and we've even talked about. You can see an estimate of the fair value that gain in the supplement of your financials, I believe. Oh, it's not there. I didn't see it.

Not yet.

Not yet.

You just be surprised. So anyway, I was looking at a page at one of our board books. So I'm pretty pleased about things. I think we're cooking with gas. The origination team is good. We're adding businesses and volume and people. Some of our competitors are actually exiting the business, which is good. It is fiercely competitive out there. Don't get me wrong. These are hard loans to win. Our scale, and we can write a big check, if we have to, and we're happy to do it. And also our ability to underwrite these markets globally. I'd like to see us build a bigger book in Europe again, which we're trying to do, and their spreads are even tighter, but mezzanine loans can be written at attractive enough price points that we've -- and again, the strategy of selling off the seniors is open to us and we've charged our team and incented our team to sort of get going and build that book. We do expect, if I gave the wrong impression, that the servicer will remain profitable. And we would actually expect it to reaccelerate its growth going forward. So we're pretty excited about -- things are good at the moment, although -- believe me, it's because we have a great team and we're able to execute in this marketplace, because it is -- it's tough out there, but what business isn't tough? At least we don't make electric cars. All right, thanks, everyone. I've said enough.

I'm going to add one point of clarity to what Barry said when he talked about the servicer at $50 million. He said it's at less than 50% of the gains in our equity book. I know he meant the equity book that's within our servicer, not our overall property portfolio as he was thinking about that larger number.

Yes, there's -- yes -- thank you for the clarification. We'll take questions.

(Operator Instructions) And we take our first question from Doug Harter with Credit Suisse.

This is actually Josh on for Doug. First, Jeff, you talked about the drivers behind higher optimal asset yield on the lending book. Is that sustainable on a go-forward basis?

Well, listen, LIBOR is up. We all have disclosures. It's pretty easy to figure out that, that we're going to do better on a LIBOR basis. If we averaged 3 turns of leverage and probably our competitors are closer to 4 turns of leverage, we do run less debt-to-equity ratio, so we'll have less leverage in the improved financing. But for every basis point of loan tightening, if we get 1/3 of a basis point of financing tightening, yes, we will ultimately make more money at the same LTV with the same thickness of tranche. There are ways to make it appear like you have a higher IRR, thinner tranches, different credits. We don't do that. Higher leverage, we don't do that. We continue to run extremely conservatively there, but we're all being helped out a little bit by higher LIBOR. Our business isn't set up to be quite as much growth in our earnings based on LIBOR as some of our competitors who don't have the ancillary businesses and are only in the lending business. So I would say that our outperformance on the loan book is really actual outperformance of loans versus their -- where we're funding them more so than our competitors who are probably have more of a benefit from LIBOR.

Great, makes sense. And then second, in terms of competition, we've heard recently the bank bid for loans hasn't been as strong and that nonbanks have gained market share. I'm curious if you guys have seen a similar dynamic. And if so, any thoughts on the drivers behind this shift?

I'll start, and I'm sure Barry will have some comments, but in the end of the day, banks are financing us significantly better than they ever have. We are now able to compete with banks on the more transitional cash flowing properties that historically were properties that they might have competed on, but we're financing so much better. There are people doing CLOs, we haven't chosen that path. We're borrowing unsecured debt extremely cheap. Our warehouse lines continue to come in, and we can compete with the banks on transitional assets. They still will -- they will still dominate on the LIBOR plus low 200s or in assets that are high cash flow and great sponsor assets. So we're not going to compete there. It's not part of our business plan.

Never have.

Yes, it's construction. It's something that we continue to have an opportunity in, although this quarter we did less than 25% of our book. And as I said before, our book is only 15% or less than 15% construction...

Just stop. 15% of our book being construction is probably something like 7% of our overall asset base?

Yes.

So it's not like -- it's just a nice place. It's a cash management tool for us. And of course, because we're equity players from the start, not lenders, we rarely get this beautiful property at $0.60, $0.50 on the dollar. We'll be delighted. So if they fail, we win. They pay us back, we also win. So it's okay. I mean, at this point of the cycle, we're very picky about what we do and where we do it. And sometimes we pass. We think the -- we've seen some crazy deals, by the way. I would say there are pockets of stupidity emerging in the real estate lending market again. And they're coming from nontraditional players, often hedge funds wandering into the space looking for stable yields in a world where they don't have much and the returns have been suboptimal. So as a class, I do think that those are fewer and far between. You are seeing continued construction that shouldn't be built using actually the EB-5 financing program, which should be terminated. There is absolutely no reason for EB-5 financing to be in the marketplace today. All it does is induce supply that doesn't stand on its own merits, and we're not trying to bring in green cards or increase employment presumably at 3.9% unemployment rate. So why exactly does this program exist? I have no idea, but what a waste of money.

We'll now take our next question from Jade Rahmani with KBW.

In terms of the plethora of debt funds, are you seeing a bifurcation between firms such as Starwood Property Trust with multiple means of access, financing and smaller debt funds that need to sell A notes and so we don't have a competitive cost of capital? So are you seeing, sort of, a carved-out area of deals in which you guys have a competitive advantage and competition is not as great as in other sectors of the market?

Yes, thanks, Jade. I would say that where I think smaller debt funds who don't have our cost of capital, what they're doing to compete is they're simply taking more leverage. They're doing things 4 or 5x levered to achieve the same IRR. And if you don't have the cost of capital advantage, you'll ultimately going to run up leverage. And leverage, if the market turns, it ultimately what might bite you. I think we and Blackstone share best-in-class financing with the banks. We have multi...

They run higher LTVs than we do, routinely borrowing 80% against their positions, and we don't typically. So I think let's just talk about that for a second, because it's really important. If you borrow 80%, and property value dipped 25%, you lost half -- a significant portion of your equity, right? I think all of it.

All of it.

A 5% drop would be 25%. So if you borrow 60% or 70% or something like that, you're obviously not going to see the dimunitions to the equity book. Like all things, there is no reward without commensurate risk. And they look the same, but they're not the same. And yet, we trade at a higher dividend yield. So go figure. It's completely "bass-ackwards". But the market will eventually figure it out. Plus our equity book is rock solid, and we owned some salivating properties, our medical office and our multis there, low-income housing. Rina mentioned, and I think the first deal we did in the multi space had a 17-year fixed debt in place. This one has 11 years fixed debt. We could float it, increase our earnings. Stupid move, obviously, as you expect rates to drift higher. So we've taken the long-term approach, consistent with stable and consistent growing revenue streams. And we have gotten a couple of windfalls in the multi space. Jeff mentioned this. But we underwrote like 2% growth in rents, because that's what we figured inflation cost of living would be in the city of Orlando submarket, and they just increased rents 4%. Cost of living in the town went up 4%, so -- which is better than actually market rate apartment growth at the moment. And we remain totally full. And there's no issue of affordability since we're affordable housing. So we're really excited about that. I mean, we bought those assets. As Jeff mentioned, the board and management owns a fortune of shares here. We bought them thinking we'd like to own them ourselves forever. And we could sell them, but why would we do it? Why? To go into a short-duration loan is -- doesn't seem like a smart move for shareholders, so. We're frustrated by that. We don't want to increase the equity book of the company beyond maybe 30% of our asset base. That's kind of a guideline we've given ourselves. We could take it up a little higher, but we really don't, on an equity basis, feel like we should do that much beyond that.

And Jade, I'll add that smaller funds can't do the larger loans. And really, the larger, more complex loans are where we differentiate ourselves, and we add value, and we're able to earn a more accretive IRR for ourselves. And the other thing that I think smaller funds are doing, you're seeing a lot more of it happen, it's like they're reverting to a CLO market. And today, CMBS spreads are tight, and CLO spreads are tight. And you can get AAAs off pretty good. And you can fool yourself into thinking that you can get a LIBOR plus 150, LIBOR plus 160 base rate on your overall financing with seniors inside of LIBOR plus 100. The problem in -- we underwrite floating rate transitional assets. We don't know exactly the day where we're getting them back, but more importantly, over a year, if you build up a book of 3-year assets that may pay you back in 2, you can very quickly, by the time you securitize, be getting some loans that repay you. And when they repay you, the sequential nature of paydowns hits the AAAs first. And that financing spread that you fool yourself into thinking you're borrowing at 160, you're all of a sudden borrowing at LIBOR plus 220 in a year. And the IRR that you thought you were earning at 12 is a 7 or an 8. So in addition to having to show the world the assets, the loans that we have when we do a CLO, you're giving the world a lift, you're giving them basically the phone numbers of the borrowers and who to call to refinance you out of your loans. We don't think that's really smart. And we don't think that they'll ultimately achieve the financing levels that they will achieve. So we'll see over time how it works out, but we have term financing that we're pretty happy with.

No, I think the unsecured debt issuance strategy has been very smart on your part. Can you give any color on the large loan that slipped in the quarter, $375 million? And then also, the power deal you did, which sounded pretty interesting to me and something I haven't seen you do before.

Yes. Sure. I'll start. The first was a $375 million across a large portfolio that just took -- we probably had that in-house for 9 months. It's a great portfolio. We're very happy with it, but ultimately, we thought it would close before the end of March, and it slipped to the first week in April. That happens. We're giving you a number that we very conservatively know we can make this quarter, and...

You didn't give them the number, did you, for the quarter?

No, we just said we beat last quarter, which is why...

Yes...

And what kind of loan was that? What kind of portfolio was that?

It was across hotel portfolio.

Okay, and the power deal?

The power deal's an interesting story, because the power deal, just like Cabela's, which I think I was asked about at a conference, Cabela's may seem like a retailer to you. But to me, it seemed like a bank since 80% of their earnings came from a bank. And we got these 25-year leases, and we thought we were writing the credit too wide. So Jeff and the team suggested to me they go out and flip a couple of the buildings to prove to the market that we bought this really well. And that's exactly what they've executed, and you'll see the strategy continue to be executed in the second quarter. I don't think they're going to the third. Is it second...

Second and third.

Second and third. So we're just increasing our ROE on that book and very happy with it. And if people don't -- this is a merger of Cabela's and Bass Pro shop. And they modeled like $300 million of EBITDA and some in savings, merging the 2 business together. We don't actually care if that business actually takes place in our stores. We just need Cabela's and Bass Pro shops to stay alive. And so as they shift to online, which they're dominant in and they're the player in the country -- I don't think it's going to happen, by the way. I believe physical retail will be fine. Considering they sell things like -- or they did sell things like guns and things like -- they don't travel well across straight lines and don't work on online. But anyway -- I think we thought that was a great credit. So to answer your question on power, similar story, mispriced credit. There was a -- it was actually originated by our energy team that was looking to buy these power plants, and the financing that they told me they were getting was so stupid, I said "we ought to be involved in that." And there was a take contract, a power contract in place for the life of the loan that gave us, from a credit that's buying all the power from the plant. So it's a fully amortizing loan, I believe.

Fully amortizing over 7 years. There's 5 different BBB-rated credits who are guaranteed -- who are on the hook to make the payments. So it's basically a BBB credit loan and it's giving us double digits.

Double-digit return. It was -- we do a lot more like that, and we always are looking for other business lines to lend against as long as it's REIT qualified other assets in the power sector.

But if we didn't have an energy group, it's not something we would have seen or been able to see?

You're right, right.

We'll take our next question from Stephen Laws with Raymond James.

To follow up a little bit on the competition side, can you talk about what you're seeing with regards to competition on senior loans, which more public players, more public competitors there versus the mezzanine opportunities? As well as is there a point -- I think you guys have a lower cost of capital than most. But is there some point where spread compression stops because people just aren't able to reach kind of their targeted required return on capital? And how close are we to that point?

I think we feel -- a couple of things that are interesting about the market. One, it's kind of interesting. We're the largest owner of apartments in the United States. I can tell you that the entire movement in short LIBOR, which is significant off the floor, has not been reflected in cap rates at the moment. It's sort of shocking. And the same is probably true -- if you've been following the property markets in the United States, volume is down. People aren't selling. And so there's fewer transactions, and people are like dogs in heat trying to find properties to buy. So cap rates are very sticky at the moment, probably in all the asset classes, with the weakest, obviously, being retail and hotels. Hotels has had a kind of anemic performance here, which is kind of interesting. I'm not sure, having had spent my youth in the hotel business, not sure exactly what it's telling you about the U.S. economy. But I would say that we are a whole loan lender. So we will write the whole loan and then we will sell off the A-note or put it in one of our -- or chop it up and stick the senior on one of our lines. And I think you've seen about half of the increase in LIBOR absorbed by spread compression. We think it's kind of over. It looks like most lenders were targeting nominal rates. They want to earn a 4, they want to earn 4.5. So as base rates went up, as LIBOR went up and spreads came down because they were all happy at the 4, 4.5 number, whatever they needed, 5. So we think -- I mean, the markets have been rallying. It's been amazing. And credit spreads in like CMBS are still way wider where they were in '06, '07, '08 and the AAAs returning.

4x.

4x. So maybe, maybe real estate credits continue to come in, I don't know. But it's all good for us, and we'll benefit from that as -- because we are, I mean, among many other banks, we're either the first or second largest borrower in real estate. Don't forget we have the $60 billion asset base borrowing from these people. So we're not concerned about -- it's actually, if we didn't have the unsecured paper, and we didn't have the scale of the company. I would be more worried. But the access to capital that we have, both secured and unsecured, makes us incredibly competitive in the marketplace. And we are -- we keep asking ourselves whether we should either get more aggressive and get more yield, which will be widening your LTVs. This is the same LTV we had 9 years ago. We're not at the same point in the cycle if anyone didn't notice. And the 12 optimized return at this point in the cycle just seems outrageous. We could lower that. We could go to a 10, right, or 9.5. And what we'd be doing is providing a less transitional loan at a lower spread. But we would be hard-pressed to sustain the dividend at this level if we did that. And it wouldn't turnover. You wouldn't see $1.6 billion of debt repaid because they're not transitional assets. We'd have to probably lever the book more, significantly more, to achieve decent yields. But it is a strategy, easier, by the way, than what we do, which really is, as Jeff keeps saying here, credit first. I mean, we underwrite these assets. And -- but right now, we're content because it's working.

Yes, I guess, I'd add to that. I think there's significant room for our warehouse lines to come in. If I look at where we tap out and where banks come in, in the low 200s, where the banks will write a whole loan on their own, and that historically hasn't fit us so well, I would compare that at 65 LTV where a bank might write that loan. Versus leading to us at 50% LTV at LIBOR plus 175, which is about the average of our warehouse lines today. The ROE for the banks, after regulatory capital charges, is significantly better, lending to us on the cross portfolio with recourse back to us at LIBOR plus 175, than it is making a whole loan at 65% LTV at 2.25. So I think there's room for the banks to move, not only from LIBOR plus 175 to LIBOR plus 150, but I think LIBOR plus 100. I look at that asset at 50 LTV with recourse to us, which makes it feel like 40 LTV on a cross portfolio of assets that they had their choice and can -- if there's a credit event, can make a credit call on the warehouse borrower. This is AAAA asset, and I would compare it for bank balance sheets to credit cards, autos, student loans, things that trade LIBOR plus 10 to 50. And the fact that we're still paying LIBOR plus 160, 170 is too high in my mind. So I think there's significant room for the banks to lower the cost of their warehouse lines to us, and that will allow us to absorb spread tightening in a pretty significant way.

Great. And to touch base on the international bit for a second, it looks like sequentially, the loan portfolio at international moved from 12% to 9%. I think originations for the quarter were 5. We've seen a couple of competitors actually increase their activity, mainly in Europe. Is there something specific that has caused you guys to pull back there? Or is it just a coincidental function of what came through and what prepaid here lately? Or maybe any comments on what you're seeing in Europe.

Yes. A couple of big loans repaid. Centre Point and our shopping center, I guess, in Portugal.

Portugal.

Portugal. So there, you don't have to worry about it anymore, questions about our retail exposure. It's repaid, and I think they pulled money out of the deal. The markets, again, most of those -- our European assets, that is -- I mean, places like Germany, it's free. You can write 20-year paper at 80% LTVs at 2.5%. So there's no opportunity for us really in Germany maybe on a construction deal, which we haven't looked at. And the same I would say is the Nordics. So you try to just find your spot, like we do here. We've -- we have a team of people, I think we have 8 or 9 people in London, looking for opportunities. They say they went over a big book, it just hasn't solidified into...

We have one in the pipeline for the coming quarter, and we think probably one in the following quarter, decent-sized loans, and we'll continue to take what the market gives us.

Yes, we're willing to grow it. We're willing to grow it, for sure, and they know that, so.

Okay. So it's just a pipeline versus repayment situation. There's nothing specific that's caused you pull back over there.

Yes, 100%. Yes, yes.

We'll take our next question from Ken Bruce with Bank of America Lynch.

Gosh, where do I want to go? The frustration you have with the valuation of your stock is quite palpable. And I'm interested in kind of your thoughts as to what the market needs to see in order to re-rate the stock higher. I don't know if you pay attention to any of the transcripts from other calls. I've been asking everybody this to try to get a sense as to what the operators think needs to occur in the markets for the stocks to be looked at more either on an intrinsic value basis or maybe even relative. In your case, you've got a pretty significant discount to what we think it's worth. And I'm interested in, Barry, your thoughts in particular, just because you've been operating in these markets in various forms for a long time.

I'm almost speechless because it's never the case. Just because I really don't. I never would have thought at this point, with the scale of the company, the biggest in the sector, the diversity, safety, the 62% LTVs, that we wouldn't be trading at a 6 dividend yield, not a 9. We all know money managers hedge funds with a 2 and 20 structure that would be delighted to have earned a 6 the last 5 years. And I don't -- we've talked about things like spinning off the equity book, for example, and the resulting -- because if you think, I don't know, you probably know, the equity REIT dividend yield today are probably 4.5 maybe, 4.75. So take that dividend yield on this asset base. And one thing we get from that is you wouldn't look at the book anymore. I think one of the problems of mortgage REIT space is investors looking to see multiple of the book, multiple of the book, because it is true at least on that portion of our business. If we never make another loan, that's the number -- that, plus the undepreciated plus the fair market value of our equity assets, would be the liquidation value of the company. But there are ongoing concerns. And I think if we can drop the collar of being a 1.2x book, whatever we trade at, and that comes from building a machine, building a company that's diversified, that you give us $1 and we turn it into $1.20 repeatedly in every market. And that's what we're trying to do. That's why we're not trying to build just a mortgage book, we're trying to build a company in different verticals and different -- and we talk about different cylinders. Actually, if we can build any of these businesses to the scale of our loan book, we'd be happy as long as it's a smart deployment of shareholder capital and we can tolerate the risk. We've looked at a lot of different things. We just -- it's hard because, for example, the resi space, the analease space and some of the companies in that space, we'd be taking on massive leverage on to our balance sheets, and we'd freak everyone out. We got a call -- we had a shareholder meeting, and one of the people got it all confused about our [DIEs], right? I mean, that's where the -- where, basically, the service or the trust so we can consolidate their debt. It freaks people out. And for the average person who's not that sophisticated, I mean, we really need to get 30%, 40%, 50% of our stock held by retail accounts. Morgan Stanley, Dean Witter's, Smith Barney, we've got to move it out of institutions, and people have to just use it. By the way, I told you that there'd be no change in our stock price after they took the tax rate of our dividend from 37, whatever, to 37...

38%...

38% to 29%.

25%.

25%, I mean, that's unbelievable. But obviously most people don't seem to care. But I actually got a question from my mother yesterday. She goes, "Do I qualify for the lower tax rate?" So I said, "Yes, mom." She was, "Oh, good." So I wish there were more moms, right? I mean, I don't understand it. Our yields just went up 30% for an investor, our after-tax yield?

Yes.

And we got $0.30 in our stock for that. And nobody could have known it because none of us knew it. None of you knew it. We didn't know that was going to happen and apply to dividends. So it's -- we're patient. We're not going anywhere. So we're okay. I mean, it's just a shame that we can't issue equity to grow our company at the pace I think would improve our business. I think we'd be a better company. If we were a $20 billion company equity base than a $5.5 billion equity base, we'd just be better. We'd be more competitive. We'd be investment grade. We'd have a real machine. But this dividend is a bit of a -- it's definitely a problem around our neck. It's like issuing equity, you're paying 9., it's not very exciting. So we can always -- it's funny, because I think for a while, a lot of these stocks had the problem that we were just issuing equity to grow and be like, oh, I'll just wait for the next equity offering. We haven't issued equity in a long time other than this down REIT deal we just did. And we'd like to have a reason to borrow, but we have to make sure it's accretive to the enterprise and to borrow -- I meant to grow, to issue equity. But it's not -- and we can create liquidity. So when we give you our cash reserves, it's kind of meaningless to me because we could sell 3 loans and create equity. Everything in our company is basically liquid, including our equity assets. We could flip our apartments in about 3 seconds in this climate. So we just got to keep moving around. Our ROE is pretty good. It's better than most banks and with much less leverage. So -- but they don't have to pay out a 9. So it's interesting. Take someone like IStar. IStar pays no dividend at all and trades a little discount right now to book. But it's interesting. I mean, we just -- the sector hasn't really found the proper rating probably. The larger companies in the sector, I would say. But maybe that'll happen. I'll have to grow hair first.

Okay. Well, we've been waiting for a long time. So I'm not sure...

I've been waiting to grow that for a long time.

You and I both. But we won't get into that conversation. The -- I guess, you're talking about the dividend. And obviously, it's high on an absolute basis. There was a comment made, and maybe you can just kind of help me think through this in terms of shielding more of the taxable earnings in order to be able to, in a sense, reduce the dividend. I'm not sure if there's an active kind of thought process around literally taking the dividend yield down via a smaller payout. Or if you're just talking about retaining more capital as you grow earnings over time by being able to shield it. But can you just help us think through that?

Yes. I mean, that is a precautionary move on our part, right? Because these companies get into trouble when they have no shelter at all. They have to pay out every dollar, and they may need the money for in a downturn, right? So this allows us to -- another way, we're protecting ourselves in a downturn. If we had to, we could hold some cash, right, if we had to in a down market. And let's talk about what we might do, because it's happened in another company in the cycle, last cycle. You might pay that less cash and buy back your bonds, which will probably be trading poorly. So it's all about -- it doesn't matter on the surface, not affecting us at all. We're not having to touch our dividends. But it is a way of thinking about, okay, there's a recession, (expletive) hits the fan, nobody can expect it, we go to war somewhere, and we need to be able to have access to cash. We'll probably find great opportunities. We can't do it if we have to pay out every dollar or every cent of income we have. So it's really for a rainy day, and it's not raining right now. So -- in our business. That's the way I look at it.

Okay, I understand. Last question for me is there's been a significant amount of activity across the mortgage REIT universe in terms of consolidation. I don't know if you all are in a position to talk about how you kind of view the overall landscape, if there's options or opportunities that you might think are interesting to take advantage of, in a sense, some of the even more cheaply valued stocks that are in and around the sector to beef up your own capabilities whether that be on residential or otherwise?

So of course, we look at everything, and of course, we looked at some of these companies that have gone private. And one of them went private 105% of book, which is crazy. We mentioned already that they have significant leverage, which is going to confuse everybody. Typically, they have this -- they may have a mismatched book borrowing short, lending in longer durations, which is something I hate. It's -- we've even used -- thought about -- we have looked hard. And since these things on -- before they get involved in a deal, they're trading at $0.80 on the dollar, we worry that it would hurt us, like we paid -- they're not going to sell the company $0.90 on the dollar. We already tried that. They wouldn't do it. They just liquidate themselves. So if we bought them at par, and then we reverted back to where they were trading before, it would pull our stock down. Don't forget we issued 9% stock to get there. So we like -- we think it's interesting. It's another business, obviously, totally related to us, but we haven't yet figured a way to do it in that space. On the commercial side, we'd love to put our brethren out of business. Anybody wants to merge with us, just give one of the banks on the phone a call, and we'll talk to them. That's a smart move, consolidating the other commercial mortgage REITs. But for the most part, you've seen a couple will be born, not go away, the relatively small entities. And the other thing I'd say, which -- we do our lending here, and we don't have 7 other buckets to fill. So this is where we're focused, and I hope we can grow the book and grow the company.

Yes. When you think about the agency model, and I agree with Barry's comments wholeheartedly. The only reason -- the biggest reason why we thought that, that could be interesting was, one, if you could do a capital raise below book, and subsequently, market's shown that you can't. But more importantly, the cash management strategy, we run this large real estate mortgage finance company, and you would think that interest rates and credit would keep us up at night. Well, interest rates were mostly floating, and on the credit side, we do enough work on the front end in 62% LTV that it doesn't really keep us awake at night. What keeps me awake at night and most of the management team is when we get cash back in, how quickly can we redeploy it? Are we making sure that we're not having any negative drag on the company? And that's difficult, and it's one of the reasons we avoid these super large loans that some of our peers will do. One of the ways to offset that would be to have a small bucket of something like agency mortgage securities, which would allow you to have a very liquid asset that when you get a dollar in, you can put it out in the most liquid market in the world, the $6 trillion agency mortgage market. And when you need a dollar, you can sell a dollar worth of assets in a $6 trillion, very liquid, market. So as a cash management strategy, it's cute. It's probably not a business that we would scale, as Barry said for multiple reasons, including leverage, and making a yield curve that I don't think is what our shareholders want us to do.

(Operator Instructions) And we'll now take our next question from Tim Hayes with B. Riley FBR.

Can you just give us a sense of the timing of when repayments were collected in the quarter? And if that had a material impact on the earnings in the quarter?

Yes, Tim. The repayments were actually back-ended in the quarter. So if you looked at the interest income, it was sort of flat to last quarter despite the $577 million decline in the balance. The repayments came in, in the last 30 days of the quarter.

Yes, you might be surprised about it, and we talked about it with the board at great length. We spend a whole day every quarter going over our entire book because we have our own internal asset management. Not something we sub out like some people do. And one of the big focuses that we have when we do that is to make sure that we are -- that the most senior executives of the firm are looking at every loan and deciding when do we think, if we were an owner, which we are, in many cases, when would we refinance this? What's the market for refinancing it? And try to get in front of when we think the refinancings will happen, in addition to being in constant contact with our borrowers, having repeat borrowers. We actually have a very good handle on, and historically, we've been almost spot on every quarter what we're going to get back. We don't tend to get surprised very often, and that's an expensive part of what we do, both in time and bodies, but it's an important part of what we do.

So Tim, I guess, just one other data point. If you look at the weighted average balance of a loan book, even though the balance sheet showed a $577 million decline on a weighted average basis, it was only about $140 million, if that helps.

And we'll now take our next question from Ben Zucker with BTIG.

Building off the question on consolidation in the space, I had a little bit more specific of a focus. How do you guys feel about the GSE origination and servicing business, just because when I think about your platform, it really seems like the only hole right now, and I don't need to tell you how hot that market's been lately. So is there a specific reason you guys maybe haven't stepped in there, or something you don't like? Or is it just hard to find someone?

You're on a really sore topic. We...

Can I start? And then you...

Yes, but still.

It does feel a little bit late cycle. Obviously, it's $45 billion agency caps that may or may not go up, but I would bet that they don't, and you have some risk around that. And the cost of getting the brokers who get -- who have the relationships to bring these deals in, it's really expensive. You have to sign fairly long contracts with guys and lock yourselves into a very high-cost business model that you hope the government doesn't change their mind and turn things around. You're also heading into a slightly higher interest rate environment. So volumes will be a little bit lower. Purchase volumes are probably going to value out a bit. But it's got very expensive. The brokers in this business make more money than almost anything else that we see in real estate finance, and that can't continue forever. It doesn't tend to continue forever. And buying a whole bunch of them late cycle doesn't seem to me to be as smart as it would be. It'll be great business to be in if you could do it in the right way, but jumping in late cycle might be...

We've been dead wrong. We thought -- we worried that agencies are to be restructured. And instead, they've been getting more capacity. So obviously, there are companies that were $14 a share that are $40 or $50 right now. The issue is, again, they're not cheap now, and there is various (inaudible) talking about restructuring the GSEs, and they keep talking about it. So you're taking a lot. That could be sort of a fatal flaw, stupid deal if the scale on some of these companies, are we paid too much to enter the business and bought -- we're working on -- we're looking at the sector, but we haven't executed there. I'll give us a D on that. Give us an A on a lot of things, and not a high mark on that. We should probably over -- we thought it was too risky and it turned out to be not. And there was a moment in time we could have entered that business in hindsight. But again, you have to look forward now, and you tell me. I mean, in a predictable, safe and conservative, that wouldn't -- those are big bets right now if you bought a big player in this space. So it just makes me nervous. I kind of like our business right now.

There are no further questions at this time. And that concludes today's question-and-answer session. Mr. Sternlicht, at this time, I will turn the conference back to you for any additional or closing remarks.

No. Thank you, everyone. Have a warm spring. And we'll speak to you in the hot summer. Thank you.

That concludes today's presentation. Thank you for your participation. You may now disconnect.