Starwood Property Trust Inc

NYSE:STWD

Earnings Call Transcript 2019-Q2

[Operator]

Greetings, and welcome to 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. [Operator Instructions]. Please note, this conference is being recorded.

I would now just turn the conference over to host, Mr. Zach Tanenbaum, Director of Investor Relations for Starwood Property Trust. Thank you. You may begin.

[Zachary Tanenbaum, Head of Investor Strategy]

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 June 30, 2019, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its Web site. These documents are available in the Investor Relations section of the company's Web site 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 refer you to the company's filings made with the SEC for a more thorough discussion of risks and the factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. A 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 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 am now going to turn the call over to Rina.

[Rina Paniry, CFO]

Thank you, Zach, and good morning everyone. We reported core earnings of $154 million or $0.52 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 loans with an average loan size of $109 million. As we continue to expand our international footprint, 19% of these originations were outside the U.S., including our first loan in Australia for $153 million.

During the quarter and consistent with our expectations, we received $763 million from repayments and $103 million from A Note sales. These inflows slightly outpaced findings 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 with at $0.11 of floor earnings annually, while a 200-basis point decrease would add $0.12. 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 DE. As you know, our strategy has been to sell the lower margin loans in this book and redeploy the capital into higher yielding loans. As we execute on a strategy, we sold $171 million of the GE loans this quarter. We also receive 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 match term financing than our existing lines. That 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 at $30 million to the quarter. The performance of our Florida affordable housing portfolio continues to vastly exceed our expectations. Area median income levels, which govern rents for the over 15,000 units in this 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 increases became effective on June 1, so you will see the full effect on earnings in Q3. All the wholly-owned assets in this segment continue 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 8.5 years at a weighted average fixed rate of 3.8%.

As a 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 gap of value at a minimum adding back $348 million gap of value would arrive at our purchase price for these assets. The gains that we believe exists in this portfolio would be an incremental add back to book value.

I will now turn to our investing and servicing segment, which contributed quarter earnings of $48 million to the quarter. This business continues to utilize its various cylinders to produce a stable return. In our conduit, we securitize $345 million of loans in three transactions this quarter. And our servicer, we saw lower income levels in last quarter due to the continued run off of CMBS 1.0 loans. as we'd like to see one-point deals resolved. 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, servicer 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 continue to optimize our capital structure and expand our financing options. In July, we completed a $400 million 7-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 A. We also entered into a $100 million revolving credit facility to replace our current revolver and finally we priced our inaugural CRE CLO which Jeff will discuss with you in more detail.

These financing alternative along with the $767 million in loan commitments that we sold in the first 6 months of the year, continue 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 depreciated equity to 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 $0.48 per share dividend, which will be paid on October 15 to shareholders of record on September 30. This represents an 8.3% annualized dividend yield on yesterday's closing share price of $23.01.

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

[Jeff DiModica, President]

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 mid-price sectors to create business line that finance and own the most stable assets finance with the most diverse in state liability structure available to us.

We spoke on earlier calls about the stress test, we ran on our business. Following the present stock market fell off in December 2018. Although we had ample liquidity to withstand the large moves we tested for 20% lower on all real estate values in 250 basis points wider on all security spread we decided at 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 in 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 CRE CLO exit securitization market can be fickle spreads can move quickly and CLO exit is not always accretive for the same reason and despite our financing advantage we have not chosen to invest in CLOs senior bonds which require tremendous leverage with repo spread marks the earn a modest return have significant spread volatility and can often be illiquid to sell in the secondary market.

That said, CRE CLO financing level to followed credit in corporate CLO spreads tighter this year and more importantly their structures have improved dramatically in the issuers favor. On July 26, we priced the largest post-crisis CRE CLO to date $1.1 billion, which settle on August 15, we priced the largest most issuer friendly structure at the lowest cost of funds and highest advance rate to date, our CFO also produce incremental unencumbered out that for us, and eliminated the recourse and credit marks they had on bank warehouse line while increasing our returns by over 300 basis point on the underlying loan.

I'd like to thank our incredible staff for completing what is normally a 12 to 14-week process for the first time to CLO issuer to get to market and price and just over 7 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 dollar in our industry completing over $8 billion in sales. Since our inception.

A 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 of the cheapest but least structurally efficient means of borrowing for us. In Q1, we replaced $654 million the committed warehouse borrowings with A Note 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 CLOs.

These A Note sales on seasoned loans were a borrowers executing their business plan are at levels similar to our bank warehouse lines and therefore do not materially affect our return our industry has relied primarily on warehouse line financing to hit their return targets, while we issued unsecured debt at LIBOR plus 128 in 2018, many of our peers use the CRE CLO market through other diversify away from their reliance on bank warehouse line or to create room on their warehouse line. None of our peers have aggressively build a note 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 CLO and the A Note sales we have signed up, we expect it to be a significant outlier to the positive side, we've just 36% of our large loan CRE lending book financed via warehouse line and over $5 billion in warehouse line capacity available to us today.

Rina spoke about the seven-year term loan B we priced subsequent to quarter end at LIBOR plus 250, which was not only accretive long-term financing but also created unencumbered out that as a result of the actions we have 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 cylinders added over $3.5 billion in 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, then mono line mortgage REIT.

We are delighted to have made so much progress this year and strengthening the right side of our balance sheet. Increasing our returns and significantly reducing potential liabilities. These actions require tremendous effort and dedication to a long-term business plan and we believe the results will be apparent to the credit markets falter in the future.

In our CRE 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 managers 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 200 basis point decline in rates. Then 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 in expected outperformance and will create excess earnings regardless of whether LIBOR rises or falls.

Our price to book ratio today at 1.4 times is near highs and we continue to urge analysts and shareholder to net out depreciation and gain 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 performance of our 99% occupied Florida multifamily portfolios in the past year that Rina mentioned. We believe we have over $700 million in gain 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 return and take out an additional $180 million of cash in scheduled for later this year.

Deployment of gain and cash out refi proceeds will add to earnings as we reinvest them into new assets in the coming quarters and years. We believe that our consistency MultiStem under investment engine large property gains 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 rate.

I've gone on for longer than usual today, and since Rina discuss non-QM, REIT and SIF, I will leave that to follow-up in the Q&A.

With that I will turn the call to Barry.

[Barry Sternlicht, CEO]

Thanks, Jeff and Rina, and good morning everyone. I'm sure you're looking at your growth machines. I'm wondering what's going on in these chaotic world it is troubling times and for real estate, we have to make calls on the direction of property values as we learned across the sectors across the world what interestingly I mean real estate is a yield vehicle happens to be I can't buy anything and an capital of than our own stock.

But the drift of lower rates is obviously good for property as the world has started 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, are -- likely to see our LTVs down as Property those increase, and further emphasizing the quality of the book in the security of our lending practices is tricky to lend in these markets because the cap rates feel a little artificial, but so does printing and paper by Western governments that no country has any hope of ever repaying.

So I do think the property sectors and also a good place to hang your have right now and if you're in the lending side, you obviously taking the equity risk you're just hoping that will pay you the capital you have but at 64% LTVs 10 years this is our 10th year anniversary August 9 will be our 10th year anniversary as a public company, I mean you told me we could have done the 10 years into our life. I would have never thought possible.

And I think in general, that's because of the relative disciplined on the lending markets even non-bank or the -- and what you call us there is other words one of my peers you. I'd like to better alternative lending sources or something like that. And I think we all remain discipline in many of the larger players also have equity shops, which helped us underwrite assets, because we own the assets like these that we lend against similar markets.

So in general, I just touching on the market to be able to apartment markets have strengthened is not weak in this millennials of turn back to renting construction more or less in check the office markets are very healthy we own 10s 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 direction of property values. We're also a little spooked out about San Francisco and potential exposure to the biggest for correction if this happens will be in the tech valuations that could impact it always has the San Francisco office markets.

And then industrial, as you know, has been the strongest sector in Property hotels, you've seen the earnings reports modest RevPAR growth it's city by city asset by asset. Don't expect anything to fall off the cliff. But there is a lot of construction led by the majors, who are keep adding flag to -- already saturated market. So, we have to be 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 with Germany and throw in or China another throw and accelerated to down actually, but just because of the polarization of the challenge of the elections, the strain on executive as they move into a socialist batting right we've extremist and there is nobody representing the 43% of America, that is independent and it's scary to watch is extreme to go out each other and own the farthest reaches of the political spectrum between the parties.

I think it erodes confidence obviously, the trade wars fought it for with tweets - the road confidence businesses get nervous all they have to do is slow down investment and you have a recession is at least a significant slowdown. So, I can't opine 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. This actually been this theme of the year. We've done incredible work not need the team on strengthening our balance sheet. JPMorgan is having a fortress balance sheet, where the fortress balance sheet of the mortgage industry or the commercial lending segment.

Having over almost $6 billion pro forma undrawn credit facilities from our banks $6 billion and $3.4 billion of unencumbered assets and our $3.5 billion rock solid property book in 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 happens, I ran Starwood 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 response, 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 downturn in the economy and we would much rather be on financing like close that are non-recourse with no credit marks and to the team is credit, they didn't want to do a CLO last year, we obviously noticed some of our peers doing them. The team convinced mean the effective cost of funds over the life of the instrument was higher than the stated rates I learned a little bit Finance. At this time, we actually executed a very favorable and best-in-class financing of the 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 risk like we might have a financing facility that's five years, we might have a loan, it's five years, but we might have an investment that's two years or five years and we don't want to finance it with two-year paper or even repo paper. If we can, because banks have a nasty habit of calling them when they should into the technical term.

So we know our match funded, they are you still a Senior you have no recourse something goes bad to pay off the A note. If you just lose your investment. But there's 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 with so prefer not to be on them learning the lessons of prior crisis.

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 is really important how we sustain a downturn, Jeff, talks about the LIBOR floors in our loans, we actually make more money and how is LIBOR fall to tell you about how much money we made when LIBOR rose announcement it falls will make more money than it. I mean if I think almost all of our peers.

It's like $0.12 -- down 200 we earned $0.12 more because of the floor, as we insist, and I'm putting in the loans as we made them. I want to point out one of the thing. The special servicer, which many of you think complicates our story and explain to discount to some of our peers or one particular peer that we trade at was about 75 basis points of the earnings this quarter. So it's almost immaterial it's counted Is nothing on our, asset base, it's like $40 million out of $16 plus billion asset base and the special servicer is really counter cyclical. Again, we talk about whether we should move it out. He bid set up a little business. But if the world goes bad our little Jim will be very valuable again and the way the market is going.

It could happen sooner than we think one other comment energy infrastructure our newest cylinder. We didn't do a lot in the quarter and we put the brakes on. And again, why do we do that it wasn't because they were an opportunity to lend. We didn't have the right financing facility for the business. We had a two-year facility are loans that that actually with last three to five years and we have the Board didn't want to make loans without match financing. So the team worked really hard created a $500 million facility, which is now in place sign. The second one coming. We hope behind it and now we will put the engine back to the pedal back to the floor.

And hopefully, grow that business and have a meaningfully contribute to our earnings next year which it has been drag on our 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 can be proud to own so we held back, I think we did $50 million in the quarters like insignificant. And we're going to be 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 -- it is competitive obviously and we're going to move to protect our -- the quality of what we do. There's a lot of people who noticed the mortgage markets are a good place to park capital given the yields of everything else in the world, so there is pressure. Obviously spreads are going to widen out and the institutions will do what they did when rates were last year. They will widen spreads, so they won't take 100 over, it might go to 150 over, so they are in the nominal 3, the nominal 4 that the market will settle into whatever number that is.

So for us it is competitive. We're going to be very careful of our credit. We don't have to lend. I mean we have enough engines of growth that we cannot lend in the quarter or pull back on our earnings. You heard about a $1 billion plus pipeline for third quarters is hopefully a third quarter is not done. And we are expanding our lending internationally.

There are very good opportunities offshore where I think we have six or seven people now focused on that in the U.K. and the continent. And we are trying to continue to find holes. Are we going to achieve outsized returns through less risk. I have to say I'm very pleased with the company and the balance of our business lines. I know it isn't lost but I will not say 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 or come back to the equity markets for the foreseeable future say buying something gigantic or something like that which I should say at the moment is not in the cards.

The other thing is that the residential business which I should mention is a hidden hero for us. We've done I think three securities, four 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 good from us in that space and it could and should contribute meaningfully and become a major product line for us. If the agency is 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.

[Jeff DiModica, President]

I think we see it as something like the fourth or fifth largest in the States now. But I expect we will get bigger. And one other thing, I would say that two others comments to close, we are the biggest market cap and so the timing of loans funding in a quarter affects us less. That was the beauty of scale and so for that reason alone.

[Operator]

Ladies gentlemen please hold, our program will begin momentarily.

[Jeff DiModica, President]

Does anyone have any idea?

[Operator]

We are now reconnected.

[Jeff DiModica, President]

Rina, can you tell us was the line went dead, because we were talking.

[Rina Paniry, CFO]

I would say about two minutes ago.

[Jeff DiModica, President]

How many?

[Rina Paniry, CFO]

About two minutes.

[Jeff DiModica, President]

What is the last I think Gary spoke about?

[Rina Paniry, CFO]

It was the growth of the non-QM platform and that we were…

[Jeff DiModica, President]

At the end of the year.

[Rina Paniry, CFO]

End of the year of non-QM.

[Barry Sternlicht, CEO]

We expect, I think we're third, fourth, fifth largest in the space and we expect to build that business. Look on balance sheet and continuous securitizations achieve pretty higher ROEs.

[Jeff DiModica, President]

And Barry, I mentioned that the non-QM patch if Calabria pushes this through and gets them out of the business is $180 billion of potential loans that could leave the agencies and go to the non-banks.

[Barry Sternlicht, CEO]

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 to me being as big as we are means the timing of the loan funding affects us less than maybe smaller peers. It's one of the joys of being big. I wish we were bigger, we also consider more cash and not earn much on it because it will affect us less than our scale. And I also think that being if we could and you asked me if I wave my magic wand in one year's time, we would have a $10 billion, $12 billion, $13 billion 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 it all 300 we can lend it out 260. I'm making this up and I'm just giving you an example. And if we can lower our cost of funding from L180 to L150 we preserve our return on equity on the mezzanine. But what happens is the ability or desire of the borrower to refinance us is less because the coupon slower to him. 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 the ratio of our book, decreasing repayments and still maintaining our returns on equity. And the last thing, I'll say is as you know I think we are the largest insider owned commercial mortgage rate myself and the team owns hundreds of millions of dollars of stock intuitively. I mean we do treat your capital like it's our own because it is our house and we're doing what we think maybe the market doesn't appreciate and we are frustrated with our stock price an 8.3 dividend yield in the world that's yielding zero is ridiculous.

But if you look at the quality of our assets you take out of the equity book and apply market multiples. That side of our company, we have business lines here that are quite our values in other companies actually can take us apart. It can take our resi book apart, you can take our CMBS book apart and look at a company like ladder. So it is what it is but we remain at bar goon in a world of uncertainty.

So thank you very much. Start with questions please, Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.

[Doug Harter, Credit Suisse]

Thanks. I guess if we look back to the December bout of volatility, you guys pulled back kind of as that was happening, kind of the volatility we're going through today, do you kind of view that as an opportunity for and to lend at wider spreads or you're kind of are you looking to kind of pull back into this bout of volatility?

[Barry Sternlicht, CEO]

I'd say we're all pedal to the floor for the right opportunities. We're not constrained by size obviously $1 billion on capacity, plenty of cash which we didn't have as much cash back in December. We just thought I think the business and 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 EIF which was I think half the size what we bought it.

[Doug Harter, Credit Suisse]

And is that between sales and repayment has been about between $800 million and $900 million of sales in repayments?

[Barry Sternlicht, CEO]

It is okay because while they were accretive to our cost of that, it was not accretive, it wasn't the highest yielding stuff we had and so we're this is sort of a transition year if you will as we get all our cylinders built next year with the resi business, hopefully a larger loan book maybe this doesn't service finds itself in a happy position. Obviously our CMBS book is worth more not less in this kind of environment. So I think in the ISF business the infrastructure business for 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 obviously what a 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 basis you're doing a really good job.

[Jeff DiModica, President]

And so, Doug, I would say that our pipeline report that I'm showing Barry 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 due to sys sales, our term loan B, we took out an incremental $100 million worth of term loan A and we have pro forma as you know an equity sale and some cash out refi. So it's a great time for us if it's an opportunity.

[Barry Sternlicht, CEO]

And equity sale being an asset out of their assets not and Jeff also mentioned the cash out refis, I mean we're so flush with cash. This is on two of our equity assets and we have gotten like do we need this money that we're paying off bank loans. So with mortgage debt at cheaper spreads not much cheaper but if it pays off bank loans. So we're going to pay positive carry to hold more cash effective right. So I mean we'll take advantage of the markets is probably even better than it was when we priced it a little while ago. So it's really a bizarre time. But no we're not going to step back, we are very confident and where we think values are in the property markets. And the only thing we worry about obviously is a calamitous recession led in part due to the trade war and the volatility in the global economies. I mean the President got a little lucky. The decline in European, in the European economies have pulled this obviously negative, pulled the U.S. rates down in a time when 100 out of 100 economists would have expected a 10 year to be 3.5 not 1.6. And really you have to attribute that a $1 trillion deficits as far as I can see until last month we were selling. The Fed was reducing its balance sheet. I mean this is truly an astonishing outcome a little scary actually but astonishing.

[Doug Harter, Credit Suisse]

And then just to be clear on that pipeline report is that mostly in commercial lending or a world. Okay.

[Jeff DiModica, President]

That's right. I have got the commercial lending report there's just more activity right now than we've seen in the while.

[Doug Harter, Credit Suisse]

Great, thank you.

[Jeff DiModica, President]

And there is a backlog of loans on EIFs to on the energy infrastructure side.

[Operator]

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

[Jade Rahmani, KBW]

Thanks very much. I appreciate the multi-cylinder platform. 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 do you think that could create. Is it possible to put any parameters around that.

[Barry Sternlicht, CEO]

You must have been talking to Jeff online. He want me to sell the real estate assets so he can take that $700 million of gains and redeploy it into center intoxicated with a 13-year that actually needs some correction unless incomes fall in Orlando and Tampa which are hard to imagine. That cash on that will continue to rise, so I can't we I can't replace I mean when we bought that stuff. That was my intention to hold these assets forever because I said this is I'd like to own these forever and they're producing a double-digit cash on cash yields and I believe one of them has 17-year debt or 13-year debt, it's fixed.

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 buy to our stock at an age which is ridiculous. So I'm reluctant to sell those, there are affordable housing, they will run 99% occupancy and with any scenario because they're cheaper than market rate obviously even though we're getting these rent increases and it's unimaginable to me that Florida given the economy of those two markets is going to suffer any kind of income downturn over the next foreseeable future let's say five years and that's as far as the crystal ball goes. Those cash will continue to grow and then our medical office that's pretty much 2 plus percent growth built in may be higher but the floor will be 2% or 3% which in this kind of rate environment looks pretty good.

And then Cabela's is we're down to a relatively small amount of assets earning us 13 or something. Also cash yield over 13. So and there's no issue there. So 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 the book exists in here is the duration of our lending business. I mean the loans are 2.6 duration average term, something like that. Some others are three but there's still three 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 tend to think, these are great assets to own, if we stopped buying them, we said to ourselves we would do like 25% to 30% of our cap in equity assets. That was led in part by guidance from the rating agencies. And if other opportunities arise and as our balance sheet grows, we could add as incremental to the portfolio. It's just hard to find 10 cash on cash yield in equity.

[Jeff DiModica, President]

So rather than replacing Jade, if we are refinancing them, we'll take cash out and then 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, and incrementally that will add a tremendous amount. So the refis I mentioned earlier will add about $180 million. And if we make up a property sale with a gain that will add some more, and multiply that by whatever you think a safe return we can return it.

[Barry Sternlicht, CEO]

That should take a significant portion of that back to work. That's a good point. So you're seeing the gains in that where you're able to take out $180 million and well north of $200 million. It'll be over $300 million if and when we sell the flyover marketing for the [indiscernible] to market.

[Jade Rahmani, KBW]

Is the Dublin portfolio a candidate for asset sales? I believe there's been some reports to that effect?

[Barry Sternlicht, CEO]

That's the portfolio we're looking to sell, correct, and that's the rumored and perhaps saying it officially, that sounds correct. And again, they've had a great run, great assets, we expect it will be a profitable sale, and we thought, Jade, it might help if we demonstrated it factually these gains we talk about actually do exist. And then we'll provide all the information [indiscernible]. So you can see that there's about $400 million plus of gains in the multifamily portfolio.

[Jade Rahmani, KBW]

Okay. Lastly, a company that used to be involved with, called iStar has solely pivoted its strategic focus to ground leases. Do you have any views on the merits of either 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.

[Barry Sternlicht, CEO]

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 fee, so is the sum of the parts greater than the whole. At the moment there are distortions in the market, and it's possible that's the case. We look at it, and we did ourselves on a portfolio of assets in the U.K., a bunch of hotels we own. So we did some as ground leases, some we sold outright. It's a viable business, 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 that's fascinating. We have an 8-3 yield, they're a REIT too. So, it's interesting. I mean I would not have expected a ton of volume in this, but if you're going on own an asset forever, like we might with our multis, that's an interesting suggestion. And we should look at that. It never -- I'm there for the -- we'd have to look at how it works with the financing in place too. I think we could have existing debt, so pretty sure it would be complicated. And until recently, I would have thought that debt was weighing the money, so I'm not sure it is anymore given the rates have moved. I think it was 173-273 the debt on the Wilson portfolio. It was really cheap.

[Jeff DiModica, President]

We get it.

[Barry Sternlicht, CEO]

Okay, thanks.

[Jeff DiModica, President]

Thanks, Jade.

[Jade Rahmani, KBW]

Thanks for the thoughts.

[Operator]

Thank you. Our next question comes from the line of Rick Shane with JPMorgan. Please proceed with your question.

[Rick Shane, JPMorgan]

Hey, guys. Thanks for taking my questions this morning. Jeff, back at investor day you had outlined a strategy focusing in part on states that you felt would benefit from Salt [ph] distortion. I'm curious if you -- that is continuing to manifest, and if you're seeing any price dislocations in those markets as peers or competitors pursue that same strategy?

[Jeff DiModica, President]

Yes, I think it's the same. Listen, what we do here is we follow our managers, Starwood Capital Group, which has a strong opinion, tremendous amounts of bodies on 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 has certainly moved more into Texas, and Houston, and Dallas, and Austin, and in areas there, and some great areas in Northern Florida. And we've been looking at Nashville and others with others. So we still believe in population demographics and where people are moving in low tax states as a really important trend. And I think it's helping our Orlando and north -- Central Northern Florida multifamily owned portfolio outperform by as much as it is.

I think a big part of that is what we're seeing down there for growth in those economies. I think Orlando was the number one or number two growth MSA in the country this year. We just heard Universal Studios is going to add another massive theme park there that was announced late last week, and that'll be another 14,000 jobs for that market. So yes, we continue to follow our manager into those markets, and think that that's a really smart…

[Barry Sternlicht, CEO]

Yes, I'd say that the -- we're looking at our attachment points very closely in these markets and what is -- I should say I mean the market are moving a little bit disciplined. When you can finance a higher purchase than you can sell an asset for, and then you're at the 60% of value you're kidding yourself. There's some really aggressive loans being under the hotel space, like end-of-cycle kind of loan, luxury hotels with for cap. I mean hotels shouldn't be in for caps. So interestingly with the trade war, the biggest source of capital for somebody who deals within offshore, particularly Southeast Asia, then Korea, we've seen China is out.

So there aren't that many people looking to buy some of these, but you're seeing some incredible deals done, particularly in the hotel space, where I think the caps rates is seriously a cooking question. And the coverage ratios are questionable. And I've seen this movie before, so -- twice I've seen the world end for these assets. So we're being pretty careful about what we lend against, and we'll let the other firms make those loans, and we'll just step aside. And we also, as a matter of course, we've not chosen to do much with our funds, right. 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 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 the competitive universe of companies that trade in like with us on a dividend, it's impossible to see that's the case. They're all mortgage REITs, they have nothing in the mix 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 revert to that. So, look, we say it every quarter, maybe some day we'll be right.

[Rick Shane, JPMorgan]

Great. Thank you, guys.

[Operator]

Thank you. Our final question comes from the line of Tim Hayes with B. Riley FBR. Please proceed with your question.

[Tim Hayes, B. Riley FBR]

Hey, good afternoon, guys. Thanks for taking my questions. My first one, I just wanted to thank you on the comments on the QM patch and non-QM, and all that. And just a follow-up there, I know you mentioned market share, but just wondering what expected annual volumes for Impac is this year, and next year?

[Jeff DiModica, President]

Yes, listen, we don't own Impac. We're one buyer, and we've done some straight Impac securitizations. We obviously 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. There's 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, that point-and-a-half does a heck of a lot to your IRR. And our goal is to originate as many as we can, and then grow smartly in that space rather than just be the highest bid for premium bonds. These loans, the loan prices have gone up relatively significantly as rates have come down, but we don't want to be just buying one or $4.5 price pools from the most prestigious originators. So we'll continue to diversity.

[Barry Sternlicht, CEO]

So, just to translate for the layman, Jeff is like a mad -- he's like a super scientist, like a mad scientist. This business will be almost a couple of billion bucks this year, originations. And maybe higher, we're driving it higher as long as the quality stays and the pricing works for us. The key here is the originator, which Jeff mentioned, that we'll close when we have the government approvals, I just have to get fingerprinted. And that will close probably at the end of the year. And that will drive -- it will allow us to accelerate and get better outcomes and better returns, and should build a integrated business for the benefit of the REIT inside of us, one, the business runs on higher leverage level. So it's going slightly skew our financials and might look -- we still won't get close to our largest peer, but we will drift that way. But again we are going to split the book and own of that on our book and create a whole platform of integrated company. So, that business is running quite well. And our team has done a great job. And I hope we will be able to report great things from that business as it grows. And it should/could be material and I hope it is.

[Tim Hayes, B. Riley FBR]

Okay. Thanks for the comments there. And then just switching gears to infrastructure. I think you mentioned $800 million to $900 million of aggregate repayments in sales in the portfolio so far since acquiring that from GE. Just how much rotation do we have left there? And then I think you noted a growing backlog. But at what point should we think about the portfolio growing especially now that you have that new facility in place?

[Andrew Sossen, COO]

Yes. So, hey, Tim, it's Andrew. So I as I said, we had about close to $350 million of sales and around $540 million - $550 million of repayment since we acquired the business back in September. So we have rotated through a majority of the low yielding assets. There is a couple of hundred million left. Call it less than $200 million of loans that we look to opportunistically sell at the right dollar price. But we don't have a gun to our head to force to them into the market. So as I said, we will remain opportunistic in terms of trying to find the right buyers at the right time. We were a little bit on our back foot in the quarter. As Barry mentioned before, we have been working on put our second financing line in place. And it took significantly longer than it was expected. We are really creating a new industry, right?

To think about kind of where the financing of this asset class is, it's very reminiscent of where we were back in '09. In 2010, we took Starwood Property Trust public. We are trying to restart their commercial real estate warehouse business. At the time, we put $250 million line [indiscernible] Wells Fargo and that's grown to $2 billion over time. So, we are making really good progress on finding financing. The new facility we put in place has 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 we are in the process of negotiating, and $500 million plus of term key, so we are…

[Barry Sternlicht, CEO]

Risk aversion? Like we could have made those loans on the quarter, right? We could have put them on 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 want to get hung on the two-year facility with five, three loans. So, we would have done it. We could have taken them off that facility down to the new facility. But, what we just said we don't need to do that. Why should we take that kind of risk?

[Jeff DiModica, President]

Yes. We probably passed on $400 million to $500 million of production and 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 as Barry referenced we could be a CLO assured, securitization assured in this space. There is an emerging market for CLO, for energy, infrastructure finance asset. CLO got done in July in the asset class around $0.5 billion facility with pretty attractive term. So the team now we that we've closed our highly successful CRE CLO, the team is turning its full attention to looking at energy infrastructure CRE CLOs. And again, that's something you could see us do in Q4 - Q1.

[Barry Sternlicht, CEO]

Again, so resi book is going to do $2 billion, $3 billion, $4 billion origination which if feasible. This business should be over a billion maybe $1.5 billion would be a reasonable target. And the returns are -- actually the shape of the returns is different than those from the resi book. The accounting -- the GAAP accounting for the resi book is in our view dramatically understates the returns available to us. And we have been having a quite a [indiscernible] internally trying to figure out. We follow GAAP obviously and the conventions of the public market. But, we do think returns are actually higher than what we are telling you. There are some assumptions about what happens to these loans if they mature or they get the underlying mortgages pay down. And you can't book any of that even though you think it's going to work out in certain way. So, we think it's quite attractive on the…

[Jeff DiModica, President]

And I would say with GAAP, prices having come down a bit I ask the team to run some back of the envelope numbers. And if GAAP halved from here and it drops from the 3s to low 2s, now if it halves from here, our LTV would only go up by 4% on our loan portfolio -- it's our ballpark, yes. So we are not exposed to the price of the underlying commodity.

[Tim Hayes, B. Riley FBR]

Oh, you mean in the energy book?

[Jeff DiModica, President]

In the energy book.

[Barry Sternlicht, CEO]

The whole company? Really? I think the exposure to the energy markets like that? How big is the book now?

[Jeff DiModica, President]

It's about a billion - $1.5 billion.

[Barry Sternlicht, CEO]

That's what? Five percent of our asset, 8,6,7 so 4% and 5% is nothing.

[Tim Hayes, B. Riley FBR]

Great.

[Barry Sternlicht, CEO]

Beauty of diversification.

[Tim Hayes, B. Riley FBR]

All right. That's really helpful. Thanks for all the commentary there guys.

[Barry Sternlicht, CEO]

We appreciate you being with us today and have a great August and the rest of the summer. Thanks and let's hope together. Bye-bye.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.