Starwood Property Trust Inc

NYSE:STWD

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, welcome to the Starwood Property Trust Second Quarter 2022 Earnings Call. [Operator Instructions].

And please note that this conference is being recorded. I will now turn the conference over to your host, Zach Tanenbaum, Director of Investor Relations. Thank you, sir. You may begin.

[Zachary Tanenbaum, MD & Head, 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, 2022, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company's website at www.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 detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied 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; Jeff DiModica, the company's President; Rina Paniry, the company's Chief Financial Officer; and Andrew Sossen, the company's Chief Operating Officer.

With that, I'm now going to turn the call over to Rina.

[Rina Paniry, CFO]

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $162 million or $0.51 per share. GAAP net income was $212 million or $0.67 per share. Our GAAP book value grew by $0.22 in the quarter to $20.68 with undepreciated book value increasing $0.25 to $21.51, an increase of 26% from a year ago. We had an active quarter with $3.8 billion of new investments across our businesses and funding of the same amount. The investments were funded by available cash and loan repayments as well as existing and expanded asset-specific debt capacity, which I will discuss later.

Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $153 million to the quarter or $0.48 per share. In Commercial Lending, we originated $2.2 billion across 15 new senior loans, all of which were floating rate. We funded $2 billion of these loans as well as $239 million of pre-existing loan commitments with most of our funding back ended to the last month of the quarter. Given decreased and delayed market transaction volume, repayments were lower than our typical run rate at $319 million this quarter. While levels will still likely be lower than normal for the remainder of the year, we expect them to exceed what we had in the second quarter. To that end, for the month of July, we have received $283 million in repayments. Our loan portfolio ended the quarter at a record $16.5 billion, up 43% year-over-year.

Of this amount, 92% represents senior secured first mortgage loans and 99% is floating rate. Although we did not see a meaningful impact this quarter from rising interest rates due in part to some of our higher LIBOR floors, we expect to benefit more going forward. Company-wide inclusive of floating rate assets and liabilities in all of our businesses, a 100 basis point increase in base rates would increase annual earnings by $33 million. With our continued investing outside of the U.S., particularly in Europe and Australia, international loans represented 58% of our second quarter originations and 28% of our loan portfolio at quarter end.

We hedge 100% of our expected foreign currency cash flow exposure on these loans, including both principal and interest. As a result, despite significant volatility in currencies this quarter, the impact to book value was an increase of just $0.06. The credit performance of our portfolio continues to be strong with the second quarter origination LTV of 60%, a weighted average LTV of our overall portfolio of 61%, a weighted average risk rating improving to 2.5 from last quarter's 2.6 and 100% of loans current as of quarter end.

On the CECL front, our general reserve increased by $8 million from last quarter to a balance of $59 million, reflecting market uncertainty and the impact of rising rates. During the quarter, we foreclosed on a five rated $50 million first mortgage and med loans related to a 41-story office building located in the Galleria Office District of Houston. The net assets of the property, including the assumption of an $88 million third-party first mortgage, were recognized at the carryover basis of our loan because the appraised value of the property exceeded the debt. Our last dollar basis in the property is $102 per square foot.

Next, I will walk through our residential business, where $1 billion of purchases were offset by sales and securitizations of the same amount. Despite repricing in the securitization market and significant spread widening in the residential loan space, we securitized $828 million of loans in our 18th and 19th securitization and sold $220 million of loans, all at breakeven as a result of related interest rate hedge online. With the loans remaining on the balance sheet at quarter end, we recorded a $108 million unrealized negative mark-to-market adjustment for GAAP purposes, along with an offsetting $22 million unrealized positive mark-to-market on the related interest rate hedges. We continue to believe in the credit quality of these low LTV, high FICO loan, and as a result, have not recognized any DE losses for the loans remaining on balance sheet. Our loan portfolio ended the quarter at a balance of $2.2 billion, including $400 million of agency loans, average LTV of 68%, a weighted average coupon of 4.6% and average FICO of 7 45. Our retained RMBS portfolio ended the quarter at $416 million after retaining $142 million of bonds in our Q2 securitization.

Next, I will discuss our Property segment, which contributed $21 million of DE or $0.07 per share to the quarter. Our Florida affordable housing portfolio continues to perform exceedingly well. For GAAP purposes, we recorded an unrealized fair value increase in the Woodstar fund this quarter of $292 million or $232 million net of noncontrolling interests. The vast majority of the increase was driven by the fair value of the property, which increased by $263 million. In-place NOI increased this quarter due to the impact of HUDs recently released maximum rent levels, which were 9.7% higher than last year. The majority of these new rents were implemented in June so you will see just a partial impact to earnings this quarter. Our valuation only factored in these increases to NOI. We did not assume any change to the cap rate, which continues to be based on the third-party transaction price established at inception of the fund in November of last year. We also recorded a $24 million increase related to the favorable debt on the portfolio due to market interest rates exceeding the 3.7% blended fixed and floating rate debt we currently have in place.

Next, I will discuss our Investing and Servicing segment, which contributed DE of $34 million or $0.11 per share to the quarter. In our conduit, Starwood Mortgage Capital, we completed 2 securitizations and priced an additional securitization totaling $372 million in the quarter, all at profits consistent with historic levels. Consistent with past practice, the transaction which priced in June, but settled in July, is treated as realized for DE purposes. As of quarter end, all securitizable loans have been priced or securitized, leaving no mark-to-market exposure on balance sheet. And in our special servicer, we obtained 9 new special servicing assignments totaling $9 billion during the quarter, bringing our named servicing portfolio to $105 billion, its highest level since 2016. Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $13 million or $0.04 per share to the quarter. We funded $191 million of our $196 million in new loan commitments along with $14 million under preexisting loan commitments. These fundings outpaced repayments of $58 million, increasing the portfolio to $2.4 billion from $2.2 billion last quarter. We also entered into a new $500 million credit facility, which carries a 3-year revolving period and 2 1-year extension options. This is a non mark-to-market facility where the margin call provisions do not permit valuation adjustments based on capital market events.

I will conclude this morning with a few comments about our liquidity and capitalization. In addition to the new infrastructure financing facility, we entered into new facilities and Commercial Lending totaling $920 million and completed $300 million in upsizes. As a reminder, 90% of our outstanding on- and off-balance sheet debt is non-mark-to-market. We also entered into an ATM agreement with a syndicate of financial institutions to sell up to $500 million of common stock through an at-the-market equity offering program. We issued 1.4 million shares this quarter for gross proceeds of $33 million at an average share price of $23.54. In addition to financing capacity available to us via the corporate debt and equity and securitization market, we continue to have ample credit capacity across our business lines, ending the quarter with $9.3 billion of availability under our existing financing lines, unencumbered assets of $4 billion and an adjusted debt to undepreciated equity ratio of 2.3x.

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

[Jeffrey DiModica, President & MD]

Thanks, Rina. As Rina said, we once again used market volatility to our advantage, adding nearly $4 billion of investments in the quarter, bringing our portfolio to a record $27 billion today. We have already closed $1 billion of CRE loans in Q3, which will bring our total for 2022 floating rate CRE lending to over $5 billion year-to-date. That said, we reduced our investment pace in recent months, recognizing that there would be a great opportunity to invest at higher returns later in the year. In early COVID, we have the unique ability to create significant liquidity from our unencumbered assets and own CRE portfolio, and we have the option to do that again today should loan repayments decline. Reduced investment pace does not mean reduced distributable earnings and lower volume period, we have a sharp shoot of mentality to laser focused on only the most accretive deals and that is our second half plan.

Executing our plan is less dependent on volume of investments and is more dependent on timing sector rotation, the performance of our credit and staying optimally invested, therefore, not sitting on too much or too little capital. Finally, interest rate sensitivities continue to move in our favor. Rina mentioned our interest rate floors and SOFR is now over 150 basis points above our average floor so we will continue to make more money as rates drive.

And importantly, our new loans will have floors at today's SOFR levels, which will have a big benefit should SOFR decline in the future faster than the forward curve. Our $3 billion owned property portfolio continues to be our best performing investment, and as Rina mentioned, we wrote up our Florida multifamily valuation, not on cap rate, but based on experienced rent growth, which we expect to continue to rise with median income growth in the future. We still believe the cap rate on our minority sale last year is significantly higher than where a similar portfolio would trade today and are optimistic we will recognize more embedded value in this portfolio in the coming years. Our net lease and medical office assets also continue to perform exceptionally well and have significant gains.

At our marks, we have nearly $5 per share of gains in our owned property portfolio today that can be harvested, reinvested, distributed or we can continue to create long-term shareholder value by holding them. Today's higher borrowing costs will not hurt our own real estate portfolio in the coming years. We have significant remaining term on our debt across this portfolio and don't need to refinance any debt until November 2024 for our medical office portfolio, August 2026 for our Woodstar portfolio, and October 2027 for our triple-net portfolio. Our below-market debt on this portfolio is a valuable asset as long-term holders.

Our CRE lending business had another great quarter with $2.2 billion of new originations at just 60% loan to value. Inclusive of sales we have made, our CRE loan book is now $20 billion for the first time, with 2/3 of those originations coming post COVID. Although CRE transaction volume is expected to slow in the second half, lending competition is thinner as the single-asset CMBS market, less well-capitalized debt funds and many banks are on the sidelines. We, therefore, expect to get better structure and pricing on what we do in the second half of the year than at almost any time in our history.

The $3 billion of CLOs we issued in prior years at very low borrowing rates are actively managed, giving us the ability to replace assets that pay off in them with other assets that would otherwise be financed at today's higher spreads. Reinvesting allows us to finance higher coupon loans originated in 2022 and 2023 at 2020 and 2021 financing spreads, which are 100 to 150 basis points lower than today and among the lowest in history. 100 basis points of tighter financing increases the return on these new investments by almost 500 basis points.

We have replaced over $600 million of maturing loans in our CLOs over the last 12 months and have projected reinvestment requirements of $1.5 billion through 2023. Said simply, in the next year, we expect to be able to lever $1.5 billion of higher coupon new originations as financing spreads well below current market rates and earn an outsized levered return. You will see in our supplemental that we have completely repositioned our loan book since COVID, focusing on the most defensive sectors, multifamily and industrial. As the agencies and CMBS market were forced to pull back post-COVID, we filled the void.

More than half of the loans we wrote since COVID are multifamily, which is now by far our largest asset class, representing 1/3 of our portfolio versus just 13% pre-COVID and 11% in Q1 2020. We have significantly decreased our exposure to office, hotel and mixed-use investments in that time as well. With the payoffs and a loan sale at par on a previously disclosed 4-rated loans subsequent to quarter end, we now have zero loan exposure in the difficult San Francisco market and less than 3% of our assets are on loans in Manhattan, making our 61% loan-to-value portfolio the most diversified, recess improved portfolio in our history. Infrastructure Lending continues to be a growing and important part of our CRE origination. We have had large teams in these markets for decades, and this exposure provides diversification in our lending segment collateral types at attractive levered and unlevered returns that continue to increase as rates move higher.

As a reminder, we fully hedge foreign exchange risk for interest and principal payments through our expected maturity. Given dollar strength this year, those hedges have a very significant $118 million gain that will protect us should the dollar weaken in the future. Non-agency credit spreads have widened significantly since the Fed stopped buying mortgage-backed securities in February as a pullback in senior bond buyers with concern about fixed income outflows has kept spreads wider than expected. In our residential lending portfolio, we always hedge interest rate risk, but the spread widening has made financing our loan book more expensive.

We were able to execute two securitizations in the quarter at breakeven after unwinding hedges. Over the past couple of weeks, liquidity is returning to the non-QM securitization market as 5 to 6 deals priced this past week alone and spreads are moving in. At the same time, we are buying significantly higher coupon loans that we expect to be accretive in the future. As the markets repair, we will look to securitize the balance of our loans, which will remain on our financing facilities until securitization is more economically viable. Like in our CMBS, CRE and energy Infrastructure Lending businesses, we have the balance sheet to be long-term holders who will securitize when accretive.

Our 59% LTV energy infrastructure portfolio increased to $2.4 billion, and we were on pace for a record origination year in very accretive return environment. Our LTVs have fallen this year as power plants became more profitable. There is significantly less competition lending in this space. We like the credit and expect to earn mid-teens returns on current originations. We recently added an experienced Houston-based originator with over 2 decades of lending in the energy market to take advantage of these opportunities. As Rina mentioned, we added another term financing facility in this sector as well and hope to execute our third CLO later in the year.

Finally, in REIT. Our CMBS conduit originations business continues to outperform in a volatile environment. As Rina mentioned, our special servicing portfolio is now back over $100 billion. This is important as the servicer is a long-term positive carry credit hedge that will make more money for shareholders should markets roll over in the future.

With that, I will turn the call to Barry.

[Barry Sternlicht, CEO]

Thank you, Zach, Rina and Jeff, and thank you for joining us again this morning. I thought I'd start my comments in the big picture, which is probably the most important thing, our strategy to navigate the turbulence we see in front of us. First, I think you all agree that the Fed was way behind raising rates and let the society move too far too fast and induce really unusual consumer behavior reflecting the stock market and the tech sector and on disciplined investing. Having said that, they're now trying to make up for being so far behind by using a sledgehammer, increasing interest rates at a pace we've hardly ever seen to try to get in the way of inflation, which is really being driven by the commodity complex, particularly in oil and gas, and it affects everything oil and gas.

It affects transportation costs, which affects food costs. It effect oil prices, it effects airline wage and air fares, which are sky high. And in fact, the consumer significantly -- and obviously, using a tool like interest rates to dampen oil demand is really really crush the economy. So I'd be very surprised if the Fed didn't go forward and just kept rates here, the economy didn't soften materially coming out of the summer months, which are somewhat of a party from the extended period that people found this in COVID. There's no question that Europe is going to have a very tough winter and it's already in recession. German industrial production has to be cut back. China is growing very slowly. So there will be no way to pull the global economy forward, and as you know, global growth rates have been reduced -- all the estimates have been reduced. So I wouldn't be surprised if the third quarter and fourth quarter GDP numbers were bad.

And the question will be, how bad? The consumer, which is the backbone of the U.S. economy, well, he may still be spending but this confidence is the lowest point it's been in decades and it's even worse in Europe. So there's no question that the consumer will stop spending the way he has spent in my mind. And you can't look backwards, you have to look forward at what you're facing and he's facing dwindling savings rates because he's spending his money on gas, on food, on rents and housing prices and interest expense. I don't see the offset. We see obviously the significant decline in both the stock market and the crypto markets, which have taken something in excess of $12 trillion to $15 trillion out of global wealth just in the equity markets, but not including what's happened in private markets, in PE and tech, which have seen such dramatic increases in cost against this. Back to the real estate markets, who held up very well.

And the -- our oil and gas increase is really temporary. There -- it's easy or may take 18 months through their German turn their nuclear plants for us to come up ways to get increased gas production out of the wells that have shuttered or get oil out of the ground. And the energy curve, the oil price curve shows out. In addition, you're now seeing a parabolic negative yield curve, but you see the -- the markets are expecting that rates will fall sometime in the middle of next year, and I agree with that. I think the economy will little over defend, foot will have to come off of the gas pedal of rising rates. And we all settle into this period of time where we'll be sort of in a slow stock negative cycle, but it will be easy to build off of that.

We'll move forward, I think, expeditiously. We'll have the elections in November. We go through that period, and POs and capital plans will adjust to the new cycle and their forecast. I couldn't really just agree more with the active about the to increase rates. So I think you must be sure that stock market because the economy is going to roll over on its own. And you're seeing that the housing market, which is always a leading factor. Obviously, people won't be buying cars, if they feel they not only can they not afford them when they can't get them, but they can't be financed at 0% anymore. There's no easy way to push car sales.

So getting back to real estate and the fundamentals of real estate remain excellent. Apartment rents continue to rise. largest owner or partners at the moment. So we have a pretty good view from 130,000 apartments. Hotels are having a wonderful season there. It just reported, you've seen their numbers. We're a little concerned that, that sort of the Super Bowl effects -- extended summer Super Bowl. People traveling Europe, but the dollar where it is. Industrial markets remain very strong despite underlying cutting back on some of its growth. The markets continue to have single-digit vacancy rates. The only real cause to concern from 800 office markets, and there you have to actually separate market by market and good buildings from boiling. There are leases to be had in Class A buildings, buildings that are fun for people to go back to work and most management teams want people back in the office. And then there are commodity buildings that are dark and have no windows and have to live and cubicles.

People don't want to go back to work in those buildings, and there's no bid. So you're seeing a bifurcation in the office markets, and we just have to be careful what we lend against. On the good note in the real estate markets, there's a benefit to rising rates and increasing the cost of capital and that is construction. We would expect construction to drop significantly, and many of the permits that have pulled many of those projects will never get built and that will help things like the apartment market. Obviously, the hotel market as many of these projects are shelved may never get built because not only is it more expensive because your construction loan is, you can get one is more expensive, but also labor costs have continued to rise.

And the value of your bill and you probably don't think you're going to sell it at the cap rate that you expected when you announced you were building that building. So if I were thinking I would sell my apartment for the 3.5 years, maybe the market's moving to 3.75 or 4 or maybe 4.25, it's not clear. But you thought you were building this to a 5.5 unlevered and now you're building it to 4.75 because it's costing more taking longer and material prices, obviously, component prices have gone up dramatically, too. So I think you'll see a drop in construction structure, which, by the way, falls into the category of a slowing economy. Construction and capital spending is a big part of GDP.

So with that, we are running our company cautiously from the perspective of retaining liquidity and keeping access to liquidity and running multiple scenarios, if in fact, the markets get weaker and what they might do in response to weak in the U.S. economy. Our business has been performing very well in the quarter other than the resi markets where we think our loans have great credit quality, but we have some temporary marks on the book. And we'll navigate our way out of that position as we have other marks that we've taken in the CMBS book at moments in time and other areas where we had mark-to-market losses, the credit quality of the loans are exceptional and FICO scores of our borrowers rate, and the loan to values are more than adequate and protected.

So we look as good as the question of liquidity for us and the securitization market shutdown, and we didn't want to force selling into those markets, and we don't have to force selling. So there's no reason to do that. There's amazing that our conduit business is profitable and is incredibly volatile market and our energy lending business is having a field day relative to when we started with loans and tremendous ROEs to us, and we would like to continue to increase that business.

Obviously, the energy complex is sounding a bit of a boom . So there's lots to do, and we're trying to organize ourselves to take advantage of those opportunities from here on after the rest of the year. And I think that is our biggest chunk today is how to position ourselves to take advantage of the great lending opportunities that we see, which is as good as we've seen in a long time. Most commercial banks have stepped back from the market. That creates incredible opportunities for alternative lenders like ourselves with the footprint that we have both domestically and nationally and should pave the way for exceedingly good investment going forward.

One other hidden jewel for us is , the former LNR, we . As Jeff mentioned, the book will soon cross $100 billion in our main service. That's as large as the book has been since basically we start in the business and will soon think become the largest service here in the country. There will be a lot of workout people. There will be a lot of loans that will need to be extended. A lot of people will find the covering 2.5% interest is carved different than covering 6.5% interest charges. If they didn't buy , if they did when the loan matures, they're going to need some help and the building an opportunity to pay down the loan between started capital and the equity side and start property trust on the debt side.

We're going to have a first restructuring, which should lead to exceedingly exciting opportunities for our firm across the breadth of what we do. I'd say that we've also run our firm with very light leverage versus our peer set at 2.3 so times and our competitors at 3.6 and 3.8. We have margins other that maybe our peer set doesn't have, including should we choose to selling some of our real estate assets which are quite liquid, and we have significant gains in. So we can always peel them off at the right time and we provide an additional source of liquidity besides the undrawn lines and cash we have on hand. I think that's really going to position us well in a turbulent market. So we are all hands on deck.

I think Jamie Dimon said, this is a hurricane. It feels to me like at the moment, we're in the eye of the hurricane. We don't know if the worst is behind us, I tend to think not, but it may be shallow if the . And the Fed goes too far too fast, and I was encouraged by comments about their signs of softening. You should look a little closer because you would have seen the signs of excess, and we would to raise rates, but there's a lot of softening in the economy. And I don't know about you, but whether I'm on potterybarn.com or Zillow, see price reductions and certainly in our secondary markets for homes, and I see lots of sales at other companies trying to clear inventory and you obviously sell Walmart's report. If you want to take a look at the economy, look at Walmart. When was last time on a journey like that. So a matter of consumers are in a pinch. I think we on the current assets and the loans in kind of assets that will perform seeing well in this climate.

And again, we thank you for your support, and I thank my team for doing an extraordinary job through a complex time and working hard in staying in their seats for all . Thank you very much.

[Jeffrey DiModica, President & MD]

Thanks, Barry. Operator, with that, let's turn it over to questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Stephen Laws with Raymond James.

[Stephen Laws, Raymond James & Associates]

Jeff, I wanted to start with Woodstar and the positive valuation gains there, much larger than I think I expected. Can you talk about a little more detail in the assumptions? I know, I think Rina provided up 9 -- I think it was 7% on the NOI. Is all of that factored into this new valuation estimate or only the rents that rolled up in June? How do we think about how the rent increases over the balance of the year may impact the fair value estimate would store?

[Jeffrey DiModica, President & MD]

Thanks, Stephen. It's an annual reset, as we talked about before. Rina, do you want to take it on or do you want me to?

[Rina Paniry, CFO]

Sure. Sure. I'll take it. So Stephen, the 9.7% is just the rent increase and the valuation adjustment faces in the entire amount. So it's the NOI effectively that's in place at June 30, cap. So it's fully affected in the fair value that you see. The other thing I would mention though is NOI is not 9.7%, NOI is actually higher. It's about 12%, and that's because your cost didn't go up by 9.7%, right? So your overall NOI goes up by more than your growth rate.

[Stephen Laws, Raymond James & Associates]

I appreciate the color on that, Rina. Looking at the loans held for...

[Barry Sternlicht, CEO]

Hold on. It's Barry. One other thing is, the debt is fixed, and it's 3, 6-year something like that. So there's no impact to rising rates on the portfolio. And one other comment, of course, is the rents can only go up in affordable housing that cannot go down. So -- and we think we're using a cap rate that is wide on the market as well. So we're being conservative, and we know where the market is because the equity group has been selling some multi and almost all the market rate sales have been actually inside of the cap rate materially and the affordable effect just caught us because of defensiveness, obviously.

[Jeffrey DiModica, President & MD]

And Stephen, as I said in my prepared remarks, they are driven by median income and inflation in the median income numbers. We have most of the inputs for the next couple of years, the 3-year look back, and we do expect a couple more years of pretty significant increases.

[Stephen Laws, Raymond James & Associates]

Fantastic. I appreciate the details from everyone. As a follow-up, maybe touching on relative attractiveness of kind of new CRE loans in the U.S. versus Europe. I know that's -- I think as Rina mentioned, almost 1/3 of your portfolio. But what's the relative -- from a new dollar standpoint, kind of how do they compare today?

[Jeffrey DiModica, President & MD]

Barry, do you want to start?

[Barry Sternlicht, CEO]

Sure. happened a better return to a large deal in Australia. So that kind of tilted the book that a little more normally would be. Historically, we kind of preferred in spread to be probably wind up in Europe because of the lack of price on rates. I don't think rate will rise anywhere on the treasure in the U.S., but -- and the difficulty to early supply. At the moment, I said that markets like the office market, people are turning to office in Europe pretty much prepandemic. It's not the case in U.S. So it's a little bit asset class shift in the U.S. as well, but spreads are effective in both places, and we're now pumping our what do we want to -- what exactly you would want to lend to get and that were being careful.

[Jeffrey DiModica, President & MD]

I will add. We didn't give much detail on the Australia asset, but Barry brought it up, and you may have heard about it on the Blackstone call. It is the Crown casinos. There's $3.5 billion of new cash equity in front of us. We believe it's about 51% LTV and 44% of replacement cost. It's probably the highest quality casinos in Australia, and we feel super comfortable with that asset, but that definitely drove the international number this quarter, Stephen.

[Operator]

Our next question comes from the line of Rick Shane with JPMorgan.

[Richard Shane, JPMorgan Chase & Co.]

Look, for a really long time -- and I don't think this has changed, a big part of your is the disconnect between value and stock price. For a long time, this was actually reflected in you guys not issuing acquire levels that your peers or multiples that your peers certainly would have taken advantage of. If we think about what's evolved, you guys did an equity issuance at the end of last year. You have an ATM program program in the market today. I'm curious what's changed? Is it just that you see the marginal opportunity in terms of deploying capital to be so attractive? Or is it relative value versus your peers that sort of driven the shift?

[Jeffrey DiModica, President & MD]

Barry, if you don't mind, I'll start. In December, when we issued equity, I think the stock was at 25 75, and we issued debt multiple times previous to our last regular way equity transaction in December 2016. Makes its way towards investment grade at some point. That's been our holy grail. We've spoken about that. To do that, one of the most important inputs is that our debt-to-equity ratio stays low. We were 2.1x last quarter and we're 2.3x this quarter without reciting all of our peers. We are significantly lower than our peers, as Barry talked about. The only way if you're going to continue to grow the book with good opportunities to make loans to keep it down is to have some amount of equity go along with that.

So for every billion dollars of debt, you would need $400 million of equity plus/minus, and we had gone with a few billion dollars of debt without any equity. So December was really more about balancing our debt-to-equity ratio as we hope to improve our credit rating across the board to BB+ for others to join our one BB+ rating, and then hopefully, eventually get to BBB-. So I think we looked at equity not as equity was cheap at that dollar price, but we looked at equity as a way to balance our debt-to-equity ratio and our goal to get to investment grade.

This quarter was interesting. This quarter, we saw high-yield bond markets and credit markets widen much more significantly than the stock market early on in the quarter. And early on in the quarter before our stock ended up getting down to, I think, 1970 at a low in the high 23s, we decided that high-yield bond issuance would be very expensive in the run that we had had in the second quarter. And we decided that it made sense if we were going to choose to have a little bit more liquidity.

If loan repayments slowed, raising million we raised in the ATM, I felt like a decent spot vis-a-vis our debt. Our debt had moved into being sort of within 100 basis points or so of our dividend yield. And historically, that's been closer to 400. We thought that, that raising debt was too expensive. So we took a little bit of equity at a time we thought we might need a little bit of capital later in the year. The high-yield markets have repaired massively, and we are probably 200 basis points inside where we were at the worst if we came with a high-yield bond deal now. So we feel a lot better about that mix, but there are different reasons at different times where I was chosen equity.

[Richard Shane, JPMorgan Chase & Co.]

Okay. Jeff, that's a really interesting answer. So to some extent, it is relative value, but I wasn't thinking about it in the context of the relative value across your balance sheet. Just it kind of feels like it is going to be a -- and I guess this is programs, an on-demand source of capital as you said you need it, if you continue to deploy at the rate you are?

[Jeffrey DiModica, President & MD]

Yes, I think that's right. I don't think we looked at 25 75 as the price that we wanted to necessarily sell stock, but we think if we get to investment grade, it's a $30-plus stock. And we have to balance that, and we have to have some equity to go along with debt in order to get to that investment-grade goal.

[Operator]

And our next question comes from the line of Doug Harter with Crédit Suisse.

[Douglas Harter, Crédit Suisse]

You mentioned the significant percentage of your portfolio that is kind of a post-COVID vintage. I guess how are you thinking about the ultimate maturity of those loans given that rates are higher and some of your other commentary around kind of the the cash flows of higher coupon debt and kind of how that ultimately play out when those loans reach maturity?

[Jeffrey DiModica, President & MD]

Yes. Barry, why don't I -- go ahead, Barry. You go ahead.

[Barry Sternlicht, CEO]

[Indiscernible] protection from risk rollover risk in any loan. I think they probably will stay out longer. expect repayment in this quarter and when we had early. So it was kind of around the second quarter where we had no actual maturities of loans to speak of. And don't make it hard looking at our expectations of the repayment whether as most of our assets are traditional. So if they have a tender that can be , and we're doing the work and figure out and obviously, the an attractive ROE, but it has been a lot less cash investment new opportunities. So I think people comfort lender. We're not finding multiyear of 6.5x is where loan leverage or something like that. We will make more every asset we've ever foreclosed on. So we don't look forward to that, but for us, given that they run the national service users with almost 300 people involved in that business, and the number that probably in doing more outside of [indiscernible]. We're happy to win the lot happen in our you want to add.

[Jeffrey DiModica, President & MD]

Yes. I'll just add that we run a ton of debt yield sensitivities when we write a new loan. And given rents are up over this period over the last 2 years, significantly more than we underwrote, we underwrite these loans to maybe 1% rent growth to offset expense growth, but we don't expect rent growth. We've had massive rent growth. So our debt yields are up significantly higher than what we thought they would be on our post-COVID originations today. So those higher debt yields will support a takeout at a higher interest rate level, and

I think our LTV has actually gone down in this period and not up. And so as Barry said, the 60 LTV is super important, but given business plans are executing at a faster pace than we would have expected, I think that more than offsets the higher rate environment for the takeouts. And I would expect these loans to repay at a similar time line because of these rent increases and people wanting to take some of that cash out on their executed business plans.

[Douglas Harter, Crédit Suisse]

Great. And if you could just a little more detail on the newly foreclosed Houston office. Just what type of timeline should we expect a resolution? And kind of how are you thinking about the options there?

[Jeffrey DiModica, President & MD]

Yes. I went down and toured it. Our whole team toured it a number of times. It's a fantastic building in the Galleria District. There's some -- Houston is definitely starting to benefit a bit from some of the change in the energy policies that people are looking forward to, and certainly, commodity prices have changed. So the outlook is better today for Houston than it was a year ago. This is a fantastic building. There's a lot of tenants circling.

We feel really strong that this is a building that we're going to have a much like what we've done when we've taken back assets, as Barry said, whether it's in Orlando or Montgomery, Alabama, the assets that we've taken back, we've made more money on the assets we've taken back than not putting Starwood in front is what created that leasing momentum at the other assets. We believe that our expertise in office market is something that's going to play out and some of that we'll be able to execute significant leasing. We're a little over $100 a foot on this asset. So it's something that I think we owned a really good basis to be able to bring in large tenants.

Barry, do you have any...

[Barry Sternlicht, CEO]

Commodity prices rising the way they are . We'll take it down and build a camp. It's an iconic asset in its neighborhood by some way. And I go to Houston for longer than I want to say. So everyone knows the Galleria hotels -- Western Galeria Hotels at the Galeria Malls right next to that. And we're trying to figure out what we ought to do with that .

[Jeffrey DiModica, President & MD]

Barry, I'm sorry. I think he a bit there, but -- yes, I think Barry said, we'll probably have resolved in the next 6 months. We'll be able to report back to you in the next 3 to 6 months.

[Operator]

And the next question comes from the line of Eric Hagen with BTIG.

[Eric Hagen, BTIG]

Just a quick follow-up on the Woodstar asset. Are you able to borrow against the appreciated value in the asset? In other words, can you -- is it a source of fungibility or liquidity on the balance sheet having appreciated?

[Jeffrey DiModica, President & MD]

Yes, we can take -- go ahead, Barry.

[Barry Sternlicht, CEO]

Consumer can do that or we can sell additional interest in it. Those are 2 options. Yes, there is availability to increase the leverage on the portfolio.

[Jeffrey DiModica, President & MD]

Yes, we can probably increase the leverage by a couple of hundred million dollars today if we chose to. So that's something that we look at.

[Eric Hagen, BTIG]

Got you. That's really helpful. And then just looking at the market...

[Barry Sternlicht, CEO]

One nuance -- I was just going to say, one nuance of that is the 2 agencies are wide open for business, and so they will save affordable housing. So this is not -- you're not getting caught in CLO execution on multifamily that somebody bought it. after they got, it will make 6%. This is a sustainable asset so that the financing tends to be more attractive and it's available.

[Eric Hagen, BTIG]

Right. That's helpful. And then just looking at the market overall, there's this wall of maturities that are coming up in the CMBS market at a point in a cycle where obviously it could be tough for those sponsors to refi in the capital markets. Can you talk about the relative attractiveness you think they might be able to refi some of those loans? And just what it could mean for the market overall if those folks are having trouble rolling over?

[Barry Sternlicht, CEO]

We can -- we can't be happier. You should have good cycle for lending as you had probably at the end here. I think -- and particularly because once again, we feel the competitors has narrowed dramatically. And the banks are definitely clear the senior officers as some of the lending banks and , Starwood Capital just domestically, I think, borrowed $34 billion last year. So these are year end-to-year relationships, and obviously, we're in the market all the time. And I guess they're all pointing to regulatory is that the regulators are on them, and that's why the banks are pulling back. So for some situations based alternative lenders, which we're the largest, you should have a pretty good opportunity.

And we're always now expecting our spread, we're doing in the property trust against what we're getting and buyers on assets on the other side. So I probably never had such coordination between our borrowing group that the capital group and the lending group start property trust because the markets are fluid and the spreads are in and out. The markets are capping out capping in. As the treasury is, that seems to be where spreads are in the number of participants. It's interesting. There are a lot of banks that are looking, but not a lot of banks that are doing deals. And sometimes now they're offering spreads that are more to what we would tower. There are 300 over 400 over and over some of a real number now, it's not over 0. So it's going to be incentive for an interesting cycle. That's not well capitalized and build the opportunities to deploy more capital, certainly on both the equity and debt side as people going to refinance these assets.

[Operator]

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to management for any closing remarks.

[Jeffrey DiModica, President & MD]

Barry, any closing remarks?

[Barry Sternlicht, CEO]

No, but thanks, team and thank you for listening today. Enjoy the rest of the date of August. Thank you.

[Jeffrey DiModica, President & MD]

Thanks. Thanks, operator.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.