Starwood Property Trust Inc

NYSE:STWD

Earnings Call Transcript 2021-Q3

[Operator]

Greetings. Welcome to Starwood Property Trust, Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Zach Tanenbaum, Head of Investor Relations. Zach, you may now begin.

[Zach Tanenbaum, Head of Investor Relations]

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 September 30th, 2021, 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 everybody, 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 in any forward-looking statements made today. The Company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the Company's Chairman and Chief Executive Officer. 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 Jeff.

[Jeff Dimodica, Company President]

Thanks Zach. We had a very strong quarter, and we have a record pipeline of opportunities across CREE lending, residential lending and energy infrastructure. We expect to continue to issue CLO and securitizations in each of those businesses in the coming months moving significantly more of our liabilities, some matched term, non-recourse, non-mark-to-market facilities. We have the most unencumbered non-cash assets, the largest owned property book providing reliable and long-term cash flow to shareholders, the most unrealized gains, and the most diverse set of complementary business lines in our sector, which allowed us to invest acceptably in the first year after COVID.

We believe that consistency has been a driver of our success, and we are positioned well to do the same in the future. In our theory lending business, we have already closed over $1 billion of loans in Q4 and expect to close a multiple of that by year-end what will likely be our biggest quarter-to-date. We're also borrowing at lower spread, which has more than offset post-COVID asset spread tightening. Our global loan acquisitions team has done a terrific job producing optimal levered returns on our CRE loans for the last four quarters of 12.6%, and our pipeline is also about 12%. That compares to 11.2% for the 4 quarters before COVID. We were busy in capital markets this quarter as well.

Rina will speak in detail about our high yield and term loan issuances and our upsized revolver. Led by the covenant change in our term loan structure which allows us to now borrow an incremental $1 billion against the same collateral package, we today for the first time have the unique ability to borrow a record $2 billion of new highly accretive, incremental corporate debt. We intend to continue to run this highly diversified Company with low leverage but should the need arise, we have more accretive firepower than we have ever had. In RIS, our team has significantly increased our named special servicing while reducing our CMBS portfolio over the last 4 years.

Rina will tell you we added 17 new servicing assignments with a $14.9 billion balance in the quarter. That is more name special servicing than we have ever had in a quarter and increases our name's special servicing portfolio by 33% over those 4 years to over $90 billion today, giving us incremental revenue potential. Now I want to talk about our affordable housing portfolio. Barry said before on this call that our purchase of 15,057 affordable units in Florida, which we call with Star 1 and 2, was one of the best purchases in the 30-year history of Starwood Capital, not just Starwood Property Trust.

We paid $1.25 billion in total for the 2 portfolios or $83,000 per door. With the completion of another $163 million cash-out refinancing, post-quarter-end, we now have a negative basis in this portfolio. Meaning we have no equity left in the transaction and making our future returns infinite. After quarter-end, we established a new fund to hold this portfolio. Last week, we signed a binding subscription agreement and other related agreements with major global third-party institutional investors to sell an aggregate 20.6% interest in the fund for a total subscription price of $216 million. We marketed the fund earlier this year and waited to close the fund until two things happened.

First, we realized the 100% reduction in relative taxes on these assets that were signed into law this summer by the State of Florida boosting our net income. Second, we received sign-off from the Florida Housing Authority in October, which allowed us to execute another cash-out refinancing as well as sell a stake in the fund. Rina will tell you more about the refinancing and the accounting treatment of the fund. We felt an interest in the fund as a way to broaden our third-party capital management footprint. And because as evidenced by the growth we have seen in these assets since our acquisition, we believe there's still considerable growth from the cash flow and capital appreciation to be realized from these assets.

We continue to believe the Orlando and Tampa markets will see above-trend income growth in the coming years and that institutional demand for these assets will keep cap rates in check, allowing us to continue to benefit from our majority ownership, management fees, and an incentive fee on the third-party investments. As we've told you in the past, the actual NOI growth and cap rate compression has led to a gain of well over $1 billion incremental to the high teens annual return we have realized and distributed to date. We have always had asset late fee earning businesses with high ROEs; our special servicer, our CMBS originations business, and in our CMBS B-piece investing business, where we received management fees and upside portion of potential special servicing fees in later years or both.

This new investment funds will allow at TWD to earn cash management fees annually off third-party capital, and an incentive fee, which we expect to be valuable. After taking this game, the remaining gains on our property book, across all owned assets, still represent nearly $4 per share of distributable earnings, giving us confidence in our unique ability to earn and pay our significant dividend. We may choose to sell more of this fund in future years, and given the funds 8-year life, we will determine the ideal exit strategy for those assets by the end of 2029. As for the valuation in our sale, cap rates on Florida multi-family have tightened significantly to the low-to-mid 3% range.

Rents, which cannot go down in the affordable segment, but go up along with median MSA income have risen over 20% since acquisition, and driven a nearly 40% increase in after-tax NOI since our purchases. Given the minority investors in this portfolio did not have control, that the portfolio is not optimally levered to today's interest rate environment, and that we are receiving management and incentive fees on their investments. We settled earlier this year on evaluation cap rate of 3.75% or a value just over $2.3 billion or $153,000 per door. The accounting for the fund resulted an increase to our underappreciated book value to approximately $21 per share.

If we added nearly $1 per share of gains available to us at our marks on the remainder of our owned real estate, our fair value per share of our enterprise is nearly $22 today. At a $26 stock price, we were at 1.18 times price to fair value book, which is below that appears who don't benefit from our diversification -- our unrealized gains, the scale of our unencumbered assets, or our third-party fee streams. I want to spend a few minutes today on the valuation of STWD. We believe with almost $4 per share left in the cash from harvesting our unrealized gains, that our ability to pay our dividend through cycles has never been greater, and we have created a security question for our bond-like dividend.

STWD trades at a 7.4% dividend yield today or almost 600 basis points above the 10-year U.S. Treasury. Our Company has significantly outperformed since our inception in 2009, earning a 13% annual total return for shareholders. Our core businesses continue to improve and we're earning our dividend in our core businesses, despite a significantly lower LIBOR today. Beyond continued out performance in our core businesses, there are ways we could increase earnings and thus the dividend. We could increase leverage or we can realize embedded gains and redeploy that capital creating excess earnings.

We sleep well knowing how well our lower leverage predominantly off-balance sheet match funded financing model performed in COVID and have no any plans to alter the strategy. If we were to realize part or all of the $1.1 billion of unrealized gains remaining after the minority fund interest sale I just spoke about, each $100 million we chose to sell if reinvested at the 12% ROE we have historically earned would add $12 million to earnings and $0.04 per year to our dividend. If we filled $1 billion of our gains and reinvested the capital at 12%, we would add $120 million to earnings and $0.40 per year to our dividend.

Adding $0.40 to our $1.92 dividend would be a dividend of $2.32 per year, which implies our dividend yield is actually almost 9% at a $26 stock price at our marks, which over 80% of have now been justified by third-party Global Investors. To do that math the other way, if we paid a $2.32 dividend and the market still believed our diversified model was at least as good as our peers today and held us at a 7.4% dividend yield, our stock would be over $31 per share today. By monetizing $1 billion worth of our embedded gains, and redeploying the equity at a 7.4% dividend yield, our stock will be over $5 per share or 22% higher than it is today.

The option to sell our property book at a large gain is available to us, yet we have opted to continue to stay diversified, keep the above-market return and long duration nature of these assets, and save these games to create the most stable earnings power in our sector. I will finish with the things we can control. We have access to more accretive capital than we ever have. We're trending towards record origination levels. The credits in our portfolio continue to perform very well. We are executing on the significant opportunity set in front of us and we believe our Company has never had more distinct ways to outperform regardless of market cycle. We're very excited about the prospects for our Company and the potential value in our stock price. With that, I will turn the call to Rina.

[Rina Paniry, Chief Financial Officer]

Thanks, Jeff, and good morning, everyone. This quarter we reported distributable earnings, or DE, of $155 million or $0.52 per share. We were again active on both the left and right-hand side of our balance sheet, deploying $3.8 billion of capital across our diversified platform and completing $580 million of corporate debt issuances, which I will touch on later. I will start this morning with commercial and residential lending, which contributed DE of $142 million to the quarter. In Commercial Lending, we originated $1.7 billion across 14 loans, nearly half of which were multifamily and industrial.

We funded $1.4 billion of these new loans and $172 million of pre -existing loan commitments. We continue to see increasing lending opportunities across Europe and Australia with international loans representing 21% of our third quarter originations and 26% of our commercial loan book. After $872 million of repayments, our commercial lending portfolio ended the quarter at a record 12.1 billion. On the right-hand side of the balance sheet, we completed a single asset, single borrower securitization for a previously originated $230 million loan on a portfolio of 41 extended stay hotels.

This transaction allowed us to increase the advance rate and return on this loan while moving the existing ribor financing to a term matched non-recourse, non-mark-to-market structure. We continue to see strong credit performance in our loan portfolio, and post-COVID originations now represent 43% of our quarter-end loan balance. Our portfolio has a weighted average LTV of 60% and a weighted average risk rating of $2.7 both in line with last quarter and reflective of no downgrades. Consistent with this performance, our general CLO reserve remained flat at $48 million. Moving to our residential lending business, we saw record volume this quarter, as we completed $1.8 billion of loan acquisitions.

Of this amount, $262 million resulted from unwinding one of our 2019 securitizations, which will allow us to significantly reduce the financing cost of these loans upon re - securitization. We also completed our 13th securitization, for loans with a UPB of $470 million. Our on-balance sheet residential loan portfolio ended the quarter, with a weighted average coupon of 4.4%, average LTV of 67%, and average FICO of 746. Next I will discuss our property segment, which contributed $20 million of distributable earnings for the quarter. Weighted average occupancy remained steady at 97%, and blended cash-on-cash yield increased to 18.9% this quarter.

Subsequent to quarter-end, we upsized the debt of Wood star 1, our first affordable housing portfolio in Florida by $163 million at a lower cost of funds. In doing so, we replaced $217 million of debt at LIBOR plus 271 with $380 million of debt at LIBOR plus 211. The refinancing returned 100% of our equity basis in this investment and provided an incremental $140 million. As Jeff mentioned, we established the Wood star Fund subsequent to quarter-end. So, you will see the accounting impacts I'm about to describe in our year-end 10-K filing. The new fund will be accounted for under ASC 946 financial services investment companies with these investments reported on its Balance Sheet at fair value and changes in value recognized through GAAP earnings each quarter.

As managing member of the fund, we will consolidate the accounts of the fund into our consolidated financial statements thereby retaining the fair value basis of accounting for this investment. We expect the related distributable earnings gain, which will be reported in the fourth quarter, to be approximately $200 million. This amount reflects the difference between the subscription price of $216 million and 20.6% of our cost basis. We do not expect a special tax distribution to result from either the third-party investments in the fund or the refinancing.

Based on our current estimates of taxable income for 2021, including the taxable income resulting from Wood star, we will meet nearly 100% of our distribution requirement via our carryover dividend from the fourth quarter of last year and a full four quarters of dividends this year. Said differently, our carry forward dividend, which represents the Q4 dividend that was declared last year and paid in January of this year, plus 4 quarters of consistent declared dividends in 2021 would provide us with 100% dividend coverage. Next, I will turn to our investing and servicing segment, which reported DE of $34 million. In our conduit, Starwood Mortgage Capital, we completed our first single asset, single borrower securitization for a $113 million loan.

We also priced 1 conduit securitization transaction totaling $239 million of loans which settled after quarter-end. Consistent with past practice, this transaction is treated as realized for DE purposes. In special servicing, Jeff mentioned the significant expansion in our named servicing portfolio this quarter, which increased by $12.3 billion to $91.4 billion due to the assignment of 17 CMBS trust with a UPB of $14.9 billion. In our active portfolio, we resolved 1.5 billion of loans this quarter bringing this portfolio to a balance of 7.3 billion. Concluding my business segments' discussion today is infrastructure lending, which contributed DE of $11 million in the quarter.

We acquired $90 million of new loans and funded $16 million under pre -existing loan commitments. Repayments were $113 million, which kept the portfolio at $1.8 billion. On the right-hand side of the balance sheet, we successfully replaced the acquisition facility that we entered into in 2018 when we initially acquired this portfolio. The loans that were still on this line were transferred to one of our existing ribor lines, which was temporarily up-sized from $500 million to $650 million to accommodate the transfer. I will conclude this morning with a few comments about our liquidity and capitalization. During the quarter, we issued a $400 million unsecured sustainability bond with a 5-year term and a fixed coupon of 3 and 5/8 with no OID.

We are able to issue these green bonds given our unique platform which has investments across the sustainability spectrum, including loans on green buildings in commercial lending, loans to home buyers within residential lending, affordable housing within our property segment, and renewable energy within our infrastructure segment. The proceeds from the bond issuance were used to retire $400 million of our December, $700 million, 5% unsecured notes, when they open for prepayment at par in September. We also upsized our term loan by $150 million to $790 million and our corporate revolver by $30 million to $150 million.

In connection with these upsizes, we amended our asset coverage covenant from 5 times to 2 and 1/2 times, allowing for approximately $1 billion of incremental borrowing capacity. In addition to financing capacity available to us via the securitization markets, we continue to have ample credit capacity across our businesses, ending the quarter with $8.1 billion of availability under our existing financing lines, unencumbered assets of $2.5 billion, and an adjusted debt -to - undepreciated equity ratio of 2 and 1/2 times. With that, I will turn the call over to Barry.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Good morning, everyone. Thank you Zach, thank you Rina, thank you Jeff. Jeff was before Rina, which is diversity for us at the moment because he was really excited about talking about Wood star restructuring. So, let's back up and talk about the markets for a second. The most important thing in real estate right now is we're playing catch-up to the rest of the world's asset classes. And what's shocking is yield is still incredibly valuable.

So, properties now that the worst is behind us, clearly around the world, property values, not only are stabilizing but they are moving higher rapidly. The one area, probably the strongest market at the moment in all of real estate besides single-family homes for rent is multifamily. And since we own nearly 100,000 units as an equity player, and control those units. We can tell you how strong those market is with daily rollovers of leases and it's an unprecedented strength. I've been doing real estate for 35 years and I have never seen rent increases, not only that are high double-digits, but across the entire country.

And that goes to evaluation of the Wood star Trade Investment. We created this investment fund earlier in the year to prove to the market that the substantial unrealized gains that we had in our book are real. And so, we found 2 very large offshore investors after a broad marketing effort, to come invest in our portfolio. They bought 20% of the equity, and I will tell you that we severely underestimated those assets between the time of the investment they made and what we're seeing in the marketplace today is an active equity investor, probably cap rates have fallen more than 50 basis points. And we just sold large portfolio in our equity funds in the 2's.

So affordable housing, you could argue is actually better than market rate housing in the sense that given incomes are rising rapidly at the lower end of the income streams, 38% increases in total income for those age groups on that demographic. The rents in multi-family are set by the median income in the areas that you are. So, with these assets in Orlando, and wages are rising rapidly just an anecdote, I was talking to an operator in South Florida hotel. They've taken their average labor costs from $14 to $22. So as those numbers filters through the economy and the income numbers of these towns and I'm sure it's true everywhere as a service worker have been the last to come back to work and those are probably typically our tenants.

We're going to see pretty rapid growth and income in the affordable housing. So, we love the portfolio we would've sold -- we wouldn't -- that's why we didn't sell more. On the other hand, we wanted to mark -- make sure that everybody realized that among all of the mortgage rates were the only one with a $3 billion plus property book. The cost on those multis was $1.1 billion. This trade was $2.3 billion. So, valuation, and I'm confident that we're still marketing that portfolio significantly below its fair value. And that's true across the board of the other multis that weren't included in the fund. So, we think it's unique to Starwood, gives us long duration. One of the reasons the cap rate was a little higher with there is some debt on the portfolio, by the way, that was will obviously go away.

That was more expensive than it would be if we were able to refinance today, and we didn't maximize leverage to clients, weren't that interested in levering it through the moon and beyond. But that provides a baseline of dependable cash flow on which we believe support our dividend. And also, as we continue -- if we continue to harvest the gains in that portfolio, we can redeploy that trapped equity at higher returns. And I think the other fascinating thing about the quarter is the 12.6% ROE that our investment loan book put out. That's as high as we've had in probably years. And it's pretty surprising given everyone's come back to lend, and people are competitive because there are a lot of projects that are on penciling out right now, particularly on the construction side.

So, an LTV of 60, 11 years after we started in business, I would've definitely not believed that for a 12th ROE. I would've been shocked. And what's so interesting is that replacement cuts or obviously inflation has hit the country and inflation in construction prices is giant. You're seeing 2% increases in cost monthly as both labor and materials. And some of the materials have softened, but I don't think that's going to last because of the transportation bill impacted steel, concrete, piping, and all the materials that go into constructing anything, and then add that the fact that countries seems to have lost a million construction workers, and there's vast labor shortages in construction and now you're going to try to fix bridges, roads and tunnels all over the country.

Good luck finding people to do it. Funny thing is we're probably going to import all these workers from some offshore country because they don't exist in the U.S today. So, a small wrinkle on how we're going to actually execute the $600, $700 billion of physical infrastructure that's planned to be. It will continue to put pressure on pricing, which means existing LTVs will fall. Like if you have a 63 LTV, it's going to go to 55 just because the cost to replace the competitive building is going to rise. And it will mean that there'll be less construction or rents have to rise in order to justify new construction, which will also provide a lower LTV on the existing book.

So, the fact that we have a business that produces 7, whatever, 3 dividend yields in a world with no yield at 60% LTV, and a whole slew high ROE business attached to that, which no other mortgage Company has. And now we're trading at 1.2 times book, and that highlights what we probably been saying for 5 to 7 years, that we have a GAAP book of now $20 -- $21 fair value book with underappreciated. And then $22, If you take -- if you mark-to-market, I think conservative estimate of the fair value of the firm, probably closer to $23, I'm guessing. So, you have a very cheap Company. You're getting all these businesses basically for free, because we put -- we trade right on top of our nearest competitor. But put -- have all these high ROE businesses, alongside the lending book, which is having a record year.

So, businesses are really good, our global footprint is helping us, Europeans are coming through with increasing volumes and we have a backlog that's significant. So, in a world where the tenures back at 145. I just can't understand how we sit at 600 basis points higher than spread with a 60% LTV. Again, at 60 LTV, if you actually gobbled all our loans together and put them in a trust, you probably be rated investment grade through most of the portfolio and that would be just as -- you would get like, I don't know, maybe 2.5% for that coupon on the data we aggregated this stuff. So, it continues to amaze me and we thought one of the impediments to our higher stock price was our premium to book.

That perhaps some people just are running screens and not really paying attention to our calls and the detail of what -- and say, hey, I'm not paying 1.4 times book and we've been arguing for five-years, if you're not paying 1.4 times, 1.5 times book, the book isn't real. Obviously, the only investment -- the only mortgage Company that has this massive depreciation coming through, while assets are obviously appreciating in the case of Wood star, a billion-dollars, we just thought we should highlight it with actual facts, and you can see we're freeing up a couple $100 million we can invest in high returns was a creative move for the firm long term. So that was I think the highlights of the quarter. We continue through to work on the balance sheet.

Rina, the team, Andrew have done an amazing job working with Jeff on term financing our debt. We have the least exposure repos and bank lines. I think any of our fears that, I'm aware of are similar major peers. And so, it's not only a stable dividend, but it's fairly safe because it really can't be impacted. And that's why, when the stock fell I say, we can pay the dividend. We can always, however, is the gains in the equity book and pay the dividend for the foreseeable future, which is something no one else can say in the sector frankly. So, now we did think if the world was going to end, should we harvest some cash and go take advantage of amazing opportunities. But it really -- it never was a question we couldn't pay the dividend, it was a question of whether we wanted to.

And that would've dependent on the trajectory of the world's -- if we'd gone into a massive depression, we would've thought about what was the best use of our cash. So regardless, I think the firm has established itself as the premium player on the space. And hopefully with Wood star trade, we've alleviated one impediment to a further increase in our stock pricing, and we're pretty excited about some new opportunities we're looking at. And hopefully, you'll see us do a couple of really interesting innovative things and then -- in the near future. So, thank you for everything and thanks. I want to thank the team because the 300, and almost 400, people at Starwood Property Trust are working really hard across all our verticals to be best-in-class. There is a question that I'm preempting about infrastructure lending.

There just haven't been that many loans to do coming out, and now the pace is picking up. So, some of that stuff just froze in place and there was not a lot of volume. So, we're picking that up. But all these businesses are producing target or better than target ROEs. And we're pretty pleased about everything, you can see our volumes in the non-QM lending book were very large in the quarter, continue to be large. The conduit business continues to function perfectly frankly, and our CMBS book has been lightened tremendously, but we're also picking up servicing, so it's really kudos to the team they've done a great job. So, with that, I think we'll take questions.

[Andrew Sossen, Chief Operating Officer]

Thank you. We'll now be conducting a question and answer session. [Operator Instructions] One moment please so we poll for questions. Thank you. Our first question is coming from the line of Tim Hayes with BTIG. Please proceed with your questions.

[Tim Hayes, BTIG]

Hey, good morning, guys. First question just on the Wood star portfolio sale. You mentioned some of this in your prepared remarks, but I want to maybe just dive a little bit deeper. Can you give us a little bit information on the profile of the buyers and what your appetite is like, to sell more in the new fund structure? And if you've had other conversations, with other third-parties that, seems to be something we could expect to see in the next few quarters or if you're set with the amount of ownership you have in the portfolio now. Then I have a couple of follow-ups. Thanks.

[Barry Sternlicht, Chairman and Chief Executive Officer]

What we can say about the investors is their giant offshore sovereign wealth funds that have an appetite to increase their positions in these portfolios in the future if we decide to do it. So, they're not limited but [Indiscernible]. But we're not at liberty to tell you who they are. The -- and I think as to harvesting the future gains just in that book or the medical office portfolio or way above market triple-net leases to Dick's, I guess Bass Pro Shops, not Dick's, it's all depending on what -- how to put money out in the other businesses. And if is -- if we can raise our -- what are we going to do this year in originations, you think Jeff?

[Jeff Dimodica, Company President]

I think that we will be $8 and change billion and then you add in CMBS and we're closer to $11.

[Barry Sternlicht, Chairman and Chief Executive Officer]

But in the large loan lending book, $8 billion. Could we get those volumes to $14 or $15 billion?

[Jeff Dimodica, Company President]

We could be $10 billion this year.

[Barry Sternlicht, Chairman and Chief Executive Officer]

We would take more gains invested 12 ROE's. The one thing about the book is it gives us the stability, the return on equity is really Internet. And I don't have to worry about early repayments. But as the book gets bigger, and now I think it's the largest balance sheet we've probably ever had.

[Jeff Dimodica, Company President]

For sure.

[Barry Sternlicht, Chairman and Chief Executive Officer]

$21 billion, right? We can suffer those repayments without worrying about any disruptions to our short EBITDA, so our earnings potential. So, in the bigger the book to better the business is always the case because then it's just a question of can we find enough attractive deals? With enough duration? The businesses are not easy, the duration of our almost necessity -- necessarily that a hard word to say in this early morning. Necessarily transition loans, is like the faster the borrowers fix their properties, it's really wanted to pay this back. It actually the ones have happy to get a higher ROE, because you get a prepayment penalty and we get whatever fees we took upfront are actually over smaller timeframe.

So, we might think alone as a 12 and it's actually a 16. And I think if you go back and look at history, that's actually the case, that people always pay us off a little faster when things go well. You're obviously higher than your [Indiscernible], because you have upside the prepayment penalties and your only downside is credit, where we haven't really taken any meaningful impairment ever. The thing is, it's just a lot of work on for the team and I think broadening our abilities with additional product lines to put out that capital is when we crossed that Rubicon, you'll see us probably take more gains off the table, and redeploy what today is probably a subpar ROE. I mean, on the -- we'd be better off taking the gain and reinvesting it, which [Indiscernible] to Monica wants me to do every 2 days. If we -- I'm just -- I want to make sure.

[Jeff Dimodica, Company President]

It's a question for you, Barry.

[Barry Sternlicht, Chairman and Chief Executive Officer]

We've been sitting on so much excess cash for so long we don't know what to do with ourselves, but that's actually the good news as it's dwindling. And we do have access to the -- given the Wood star trade, we have -- we'll have unprecedent access to -- on one unencumbered asset to supply the Company with additional corporate debt and still maintain lower leverage levels than our peers.

So, we could boost the ROE here. As Jeff pointed out, we could raise the dividend and we lever the Company. Just doesn't feel like what if we told people we're going to do in the beginning of time, which was safe, consistent, and predictable. And that we thought the market would value and stocks rallied, but 73 dividend 12 years into your existence with a 60% LTV and proven capabilities across multiple business lines seems to like a good deal in the market full of crazy stuff going on.

[Jeff Dimodica, Company President]

We trended a little higher for a minute, Barry, but we're trending back towards 2.0 times book on our leverage, which should be at the very low-end anywhere in space. Tim, will take other questions if you had a follow-up.

[Tim Hayes, BTIG]

Yes, no. 2 follow-ups around and you answered one of them. It's just about, where you re-deploy that capital, and it sounds to me, and correct me if I'm wrong, it's the best risk-adjusted return right now is still in the large loans CRE book. So just curious if that's where you re-deploy the $200 million you're getting back, or if it's used to pay down the notes you have coming due in about a month or so. Or if there's anywhere else that, you might look to allocate that.

And then just part of that question Jeff is, just the comments around the earnings accretion, right? Because you might -- I looked at the dividend coverage right here, and you're pretty well covered, $0.52 versus $0.48, and you're getting about $0.08 back from this portfolio sale. And then that doesn't even include the management and incentive fees you are getting on that capital as well. So that's going to be pretty noticeable when we see flow through earnings next year. So, I'm just curious if that is enough to get you to think about maybe a bump in the dividend or if it just provides nice coverage for you and gives shareholders more confidence in your ability to pay it.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Okay. So, on the redeployment, we got the advantage Tim of waking up every day when we get a dollar into our ecosystem and deciding among seven different things, what do we want to do? I think running this business at this scale would be tremendously hard and often awkward if you had to wake up every morning and make only real estate loans every morning with every dollar that came back into the system because there are times, and you've seen us pivot, we built this book in 2015 and 2016 because we didn't like where lending standards where. We decided it was better to be a borrower. We built this entire book, in that pivot. In the middle of COVID, we pivoted and built a massive position in non-QM residential mortgages because it was something we could trade. We're going to wake up every day and decide where the best place to put our capital is across the seven, I would say you're right.

Today based on what Barry just said, that our fourth quarter will probably be one of our best quarters ever that were trending in the mid 12% after trending mid 11% ROE levered pre COVID. That the environment is very good for our large lending book, and that's our core business. I think if we had -- if we could grow one business, that people understand us for that, and it's easier, and we would continue to grow there. But, I would say the energy infrastructure business looks really attractive in the fourth-quarter. Non-QM continues to look attractive, the whole on coupons that coming down, but the financing is coming down also.

And there are some pretty good opportunities in CMBS and other. The hardest up place for us to add today would probably be in the Property segment, given what's happened to cap rates on core cash flow type of properties. So, we feel really good about the fact that we can wake up and look at 7 different businesses to pull money out. It is a great time today, probably the best we've seen in a long time as people executed their business plans during COVID, but didn't refinance during COVID. We're now seeing the execution of business plans, so we're seeing a tremendous amount of volume potential coming on the other side with LIBOR a lot lower, there's a lot of people who just want to get out of a high floor. And so that's adding a lot of volume.

So, we and our peers will have a big fourth quarter. We and our peers will probably have a big first quarter. And unlevered yields are pretty good because of where our financing markets are. As far as growth of earnings relating to that cash coming back in and the desire to build the dividend. I think that's a longer-term question as we see how we come out of this over the next year or 2, but we certainly are in great position earning our core dividend. A lot of people are going to suffer with distributable earnings given the lower libor and the fact that we're earning our dividend in this lower libor environment is pretty good.

And if we can continue to do that, coming out on the other side, I think -- One thing about our business, we are special large lending side as we are tied to global transaction volumes and the moves in yields, cap rates and the fact that I think people are -- didn't sell during the pandemic is people are why would you sell unless you had to sell during the pandemic [Indiscernible] backlog of deals that are trading now and, there's a lot of capital we ourselves -- will have -- I think will bite $30 billion of real estate this year, I was told. So, that is a record for our firm and -- in multiple vehicles. So, we have a very good view of what's going on. That's producing a lot of lending opportunities. And that was going to continue for a while.

There’re people we juggle their portfolios, or maybe a slowdown actually in transaction volumes. In U.S, I think some people tried to get ahead of the capital gains tax increases, particularly families. And if they could sell, they sold. So, you may see slowdown. I think you'll see a lot of corporate M&A in the next 12 months in the REIT sector, more than we've probably seen in years. So, I think there will be opportunities in that sector for us too, in the Mezz's, and often times in these giant deals will work with another one of our peers, and in one case, and do we approved just yesterday, we were working with a money center bank and splitting the deal.

We competed with them. So, we're just doing straight up with them. It's interesting time of -- we have the ability to do very large transactions and small deals and we're doing both. And we look at whether we should be bigger in middle market lending. And looking at opportunities to be in that space because really small investments going the conduit, large loans going into the book -- the held book. But in the middle, we don't play that much and that's something we could probably expand. Some of our smaller peers have to be in that space, because they can't do the giant deals. So, we could organize ourselves and maybe start to go after some of that -- those smaller investments. Just to turn, it's a lot of work.

You make $50 million loans and hold the $10 million piece or $15 million, you got to do a lot of them to make a difference. But every one of our business lines operates that way. They all -- we want to provide them with capital turn really good rates of return in our world without yield. So, we're pretty pleased. It's pretty nice that the whole mortgage sector came through as a whole, the financial, whatever you call that, the pandemic crisis, unscath. I think mortgage rates of old might have blown up. And these mortgage rates for the most part, a few of them are on life support.

But most of them came through, just a few of them were put out over their misery. Some of the small guys got gobbled up but obviously, the major players were able to come through pretty well. Barry, to your first comment, the transaction volume looks like it's going to be over $550 billion this year and over 200 of it for the first time will be multi-family. That we're seeing a lot of more multi-family opportunities, the market's seeing a lot of more multi-family opportunities. And that's helping drive it, normal markets over the last 15 years, pre - GFC, post - GFC after 4 or 5 years, everything, but 2020. Since 2016, we've seen $500 billion of transactions.

So, we're trending to the high end of what we've seen, and a big part of that being Multi-Family. What's interesting is, a huge part of the lending today is in floating. And if you go back to the GFC year before, there was a lot more fixed rate lending. What's happened is, private equity, the Blackstone’s and Starwood to the world funds have got much bigger, there's a tremendous amount of that money on the sideline, and they will more often take floating rate than long-term fixed rate. So, the percentage of that $500+ billion in transactions is, more slanted towards floating, which is a great opportunity for our large loan floating book.

One of the comments, I will circle back on the dividend. We are probably in the best position we've been in 5, 7 years, to actually look at increasing the dividend. So that's a board discussion and we haven't needed. But as you pointed out, we're probably one of the best coverages, I think, in the mortgage business. Obviously, we have billions in embedded gains. So, could we do it? Sure. Should we do it? Will it really help us? We don't know. So that's what we're thinking about. But we are in a position to feel comfortable doing that if we wanted to do it, so we'll probably bring it up and we'll see.

[Andrew Sossen, Chief Operating Officer]

Thank you. Our next question is from the line of Jade Rahmani with KBW, please proceed with your questions.

[Jade Rahmani, KBW]

Thank you very much. First question is on PropTech side. I know Starwood Capital group has Invested in that. Are there any p PropTech attributes that LNR, any proprietary technology, their proprietary technology or is there too much of a dependence on third-party data feeds that would create a hidden source of value?

[Barry Sternlicht, Chairman and Chief Executive Officer]

Well, it's funny you mentioned that. Actually, there's I think a bigger group of technology or IT people I know at STWD and there is at CJ, the parent. I think it's 5 times the size. One of the reasons they do those they have -- we have this database called LPM, which is a database of all of the investments that we service, and sell and monitor with a service loan book that's what is it, like $70, $80 billion,

[Rina Paniry, Chief Financial Officer]

[Indiscernible] $90 billion named servicing [Indiscernible]

[Barry Sternlicht, Chairman and Chief Executive Officer]

Right. We have to be careful about what data we use and for what purpose, but there is a business for us that we talked about getting organized, which is to manage for small institutions and to be their workout department. I mean, basically, we are workout department, we just do it for CMBS securities. And much like Guggenheim group to be the investment shop for small insurance companies. We could be the workout department of small banks. We have -- that's why we have all these people, that most of these people working those businesses.

So, it's something we've talked about. And obviously, it's a very high ROE business, and probably something we should try to execute in the future. But at the moment, it's [Indiscernible]. I'm aware that BlackRock build the technology called BlackRock Solutions for themselves to help them manage their assets. And then, found it so compelling that they went out and created BlackRock Solutions, which today I think last I checked made $500 million for BlackRock. So, could we have an LNR solutions or we call ourselves -- what's our subsidiary called [Indiscernible] That's something that, I'd love to see us execute. It's obviously, all option value doesn't exist today.

[Jade Rahmani, KBW]

Thank you very much. And just on the M&A side, are you more focused on pursuing such asset-light ROE -- high ROE businesses? Or on the other hand, do you see a consolidation opportunity within the mortgage rate sector? You could bifurcate the mortgage rates, the larger cap names trade fairly well, the mid smaller cap names are unloved so, there could be potentially an opportunity there.

[Barry Sternlicht, Chairman and Chief Executive Officer]

It's almost like a cliche to say we look at everything, but we look at everything right and where they're trading isn't that relevant, it's really a question of where they would do deals. And it's very hard to do a hostile on REIT it's some -- I wish you might have seen we tried to buy an industrial REIT and management just said no. And so, it's just very hard to do the funds -- the index funds won't vote, and activity that top 1,3,4,5 shareholders of the REIT. It's very hard, shockingly difficult, and sucks. But it is the way it is like I even called BlackRock specifically to say on one situation, not the one I was mentioning. Management is not terrible job, I outlined all the shareholder disasters that they have presided over.

And they just like, don't want to vote. They don't want to, they want to stay passive. They don't want to get involved and takeover. You're going to -- if it has compelling business and ethical and more on packing, it's complicated. I wish it was easier than it is. Because it's like -- it's bad. It's actually the rags that allow that to happen, you can't go over 10% ownership. So, and in some cases, if you do the draconian protections come into place. And you can basically say, no. Just say, no. So, we'll see. I mean, we'll see what happens in our sector. I think there were a lot of consolidation talks during the pandemic, but not many of them took place. So, actually it happened. Anyway, thanks for the question.

[Operator]

Thank you. Our next question comes from the line of Doug Harter with Credit Suisse. Please proceed with your questions.

[Doug Harter, Credit Suisse]

Thanks. Can you talk about how the sale of the property assets impacts your journey to a higher credit rating and continuing to lower the cost of debt?

[Barry Sternlicht, Chairman and Chief Executive Officer]

Difficult to say that there is a tremendous amount. Listen if I were thinking about our ability to repay debt, I certainly love the fact that we have these large gains. I think the agencies likely look at these gains and say when I need them, they won't be there. I think there's probably a misunderstanding of that. And we think that these are durable and that they will last in a recession, the cap -- the interest rates go lower.

We've seen cap rates go lower on this stuff in COVID on the largest portion of it. So, I think -- we think they'll be durable. I think any logical person would think you would be higher rated if you have this massive war chest behind you. I think the agencies think that, it's not durable and you don't have much of a war chest, so I don't think it matters that much to them, unfortunately. So, I don't think anything we're doing here is ratings driven.

[Doug Harter, Credit Suisse]

And then, can you just talk about the increased opportunity you saw on the residential loan acquisition this quarter, and how you think about the pace of deployment going forward.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Yes, we collapse the trust with part of it, and we will always do that to try to move it into better financing. We own a preferred equity investment, I guess, in an originator that, we expect to become ours in 2022. And we've been really working hard to grow that, and a significant part of that origination comes through that pipeline. I also think that, you are seeing a decent amount of agency investor loans come through the pipeline and that's something where the agencies pulled back and non-agency originators like us. We're able to step in and probably flip those back to the agencies at some point. And that's $500+ million of that number.

So that helps the number look a lot bigger. We continue to look at more sectors. We continue to stay the course. We love this low 60 LTV, high -- mid high 700 [Indiscernible] credit profile. With the HPA we've seen around the country, there's no credit risk in these bonds. It's all about duration and prepaid speed. As long as we head to these -- to a faster prepaid speed, then we think it’s likely and we can still earn a double-digit return.

We're so happy to lean in. I'll say the gross [Indiscernible] the coupons are coming down a bit. That's expected as you move later into a cycle, as the originators pivot away from doing just the agency loans and then try to find non-agency borrower so they can offer a lower rate to. So, we are seeing gross [Indiscernible] come down and speeds run a little bit higher than we thought, but we've been fairly conservative on where we are in our speed. So last bunch of months and we'll continue to do that and hope that coupons stay around here. If they collapsed a lot more, we probably won't be a big investor here. But today, it's still really attractive for us.

[Andrew Sossen, Chief Operating Officer]

Thank you. Our next question comes from the line of Steven Laws with Raymond James. Please proceed with your question.

[Steven Laws, Raymond James]

Hi. Good morning. Looks like from early last year international is little less than 20% of the loan portfolio now of above $0.25 and they may be headed to closer to 30 here. What are the opportunities you're seeing internationally that make more attractive to deploy capital than the domestic and as a follow-up to that, it looks like you've got a higher mix of CBD office exposure with the international office assets than maybe what you've taken here in the States? Is that coincidental or is that part of the differences you see internationally versus domestically?

[Barry Sternlicht, Chairman and Chief Executive Officer]

Yes. I'll go and then you go. The European markets are -- and Australian market are a little less competitive. And the banks are less competitive for I'd say they are stricter on by the book lending on an LTV, less inclined to do transitional deals totally not inclined to do them. And there's a very wide gap between where banks will lend cheaply, and they'll be really cheap, cheaper than U.S. banks, and where we would lend to fill a gap in the capital structure based on our underwriting skills. So, I think we could be bigger in Europe than we are. We're asset class agnostic. We really don't care much. And we try to -- we have tried to avoid hotels just because -- not because we're not comfortable lending hotels but I think it just puts a little alarm bells into our -- people don't like that as much, so it's perceived to be less resilient. And you are coming out of the pandemic globally, so hotels will stabilize.

Obviously, we own over a thousand of them, so I can tell you what they're doing. And where they're doing it since we own them all over the world. We're looking at other asset classes to like data centers and any place we can find opportunities to earn our returns. They are all open game. And in some cases, maybe it's an office building that's fully leased, and we're making a construction loan. We've done that before on a fully leased office building with long duration and accredited tenant. We'll do that too. I -- most of our peers in the space in the U.S., don't do European loans, so they don't have the infrastructure. I can't tell you, we've too many people doing loans.

I think we have too much overhead, but I think it's probably 20 people now in London, looking at and servicing and a huge part of what you invest in on the equity side in Europe. So, we know the market. Our London office is 70 people so, that's the benefit of having the parent that we do. So, all for the [Indiscernible] I'd throw on top of that, the U.S. you tend to see more brokerage deals, [Indiscernible]and JLL's and whatever bringing deals. And then on a broker deal, 3 guys and a Bloomberg who call themselves the debt fund can write a loan because somebody brought it to them and they were the guy left standing with the highest proceeds or the lowest price and they are in business and you see a lot of that here. I think it's harder to be [Indiscernible]. In Europe, it's much less in terms of broker deals.

I would say more than 80% of our loans have been direct in Europe, which is a significantly higher percentage. One of the reasons on the office percentage you do see less institutional multi-family in Europe, you have a buy-to-let market that is well-financed in the securitization world. But it's not really an institutional multifamily market. Historically, we are doing some [Indiscernible] similar deals going forward, but that's a new sector. Your percentage office will look higher there. If you're doing larger loans, it's because you missing this whole multi-family segment that is historically going to -- it's [Indiscernible].

Great. Thanks for the comments this morning.

[Andrew Sossen, Chief Operating Officer]

Our next question is from the line of Rick Shane with JPMorgan. Please proceed with your questions.

[Rick Shane, JPMorgan]

Hey, guys, thanks for taking my question. You really answered -- just answered my primary question. So, one quick thing, you have a couple of large maturities coming up in '22. I'm curious, just your comfort level in terms of how those projects are moving through the path and your comfort in terms of them being able to refinance or pay off?

[Barry Sternlicht, Chairman and Chief Executive Officer]

Yeah. Thanks, Rick. Sorry to answer your question before I have a knack for doing that to you so I apologize. There's a couple of big loans or one in an office in DC and a mixed-use in London. There's our absolute smokers and they are going to be really easy pay offs. Some of the easiest that we will probably see is my guess in terms of institutional quality stock that's in great shape

[Jeff Dimodica, Company President]

and comes out. So, there are some bigger ones and I will tell you that specifically, we're not worried about anything that I can look at right now in the 2022 maturity buckets. The credit has continued to perform pretty well. We've been super lucky that COVID turned as quickly as it did, but it was work that we did going in, and we were probably the first one to come out almost a year ago now, until you guys think it will be okay. And, our portfolio will hold then in and to-date, we feel really good about that. So, they look at the fully extended payoff next year, not really worried about anything.

[Rick Shane, JPMorgan]

Hey, Jeff. Thank you for the specificity on those two loans. Those were the ones I was looking at and I try to buzz in as early as I can, but apparently my peers are even faster than I am.

[Jeff Dimodica, Company President]

We're going to be your first next quarter, Rick, I feel like I owe you that.

[Rick Shane, JPMorgan]

Okay. Thanks, guys.

[Jeff Dimodica, Company President]

Take care.

[Andrew Sossen, Chief Operating Officer]

The next question comes from the line of Don Fandetti with Wells Fargo, please proceed with your question.

[Don Fandetti, Wells Fargo]

Jeff, could you talk a little bit on where yields are for non-QM. I know there's some noise with some agency acquisitions, and where do you think that market can go? Can it get much larger, as you look forward?

[Jeff Dimodica, Company President]

Yeah. Listen, there is a lot of room for it to get bigger. The part of it getting bigger is going to be its movement to a lower average growth -- average whack -- growth whack. And our whack and we started doing this business. We're in the mid-60s and today they are in the low 4s. You're getting 250 basis points off of agency coupons. And so, you'll start to feel some turbulence that you try to tighten in from there on that spreads. My guess is that you hold in somewhere between this 100 and 150 basis points wide of agency. And that -- at that spread, you potentially bring in a decent amount of people who are able to refer but don't fit the traditional bank origination statement, 43% DTI, etc. And so, the market can probably continue to grow.

One of the things is what's the government going to do with the agencies, and are they going to allow via the past stem to write more non-QM, or do they want them to be doing more missions specific stuff, low income affordable, etc. and depending where they come out on that, that will tell you what's left over for us, but certainly a lower coupon will be more volume. And one of the things driving the lower coupons, I'm giving you a blended coupon, the agency coupons where we did, I told you were $500 million of investor agency loans. Those were sub-4% coupon and our non-QM loans are still mid, in sometimes mid to high 4% coupons. I'm giving you a blend between when we do both, but reality is the non-QM coupons are still in mid-4s percent today.

[Rick Shane, JPMorgan]

Okay.

[Jeff Dimodica, Company President]

And the leverage is fantastic. Right. We can get 11 turns of leverage if we want it in the securitization market, that spreads that are almost as tight as where we were at the very tights. And it's incredibly accretive. And that's why you're seeing a lot of hedge funds come in and be willing to pay 104105 [Indiscernible] with these loans to secure ties with them. And we've been able to produce them a lot cheaper, owning our own originator. We're happy with that.

[Andrew Sossen, Chief Operating Officer]

Thank you. Our final question comes from the line of Q - Jade Rahmani with KBW. Please proceed with your questions.

[Jade Rahmani, KBW]

Thank you very much for taking the follow-up. Just on the infrastructure side, is there anything in the infrastructure bill that you believe could be a boon for that business? And secondly, would you look at a digital infrastructure credit funds, which another REIT, and asset manager, I believe you're familiar with, is also looking at.

[Barry Sternlicht, Chairman and Chief Executive Officer]

I put it on a mute. What was the first part of the question? Info bill.

[Jade Rahmani, KBW]

Anything in the infrastructure bill that was just passed that could be a boon to that business.

[Barry Sternlicht, Chairman and Chief Executive Officer]

A lot of those projects won't start till middle of next year, some of them in '23. Like for example, the ones that I'm familiar with, the tunnel in New York or the investments in Amtrak's. The government will do what it always does, which is take our time to run a foolish process and take the wrong bid, and do something at twice the cost of what it would cost private enterprise, and I look forward to that. But, I think in general, there'll be opportunities for us to lend money, particularly if they are funded. Depends what's happening, or what's the project and who's leading it and how they're going to do the financing.

Obviously, the government will finance things they own, so they won't be looking for third-party capital. But if they partner with privates and those opportunities would be great for us. And to the extent there are other opportunities in power grid and the green areas we're really well-positioned. We have a business that does equity investing in energy infrastructure. And so, led by a really talented foe, and he works with the rest of our team and Janice and Sean, sitting in front of me. So, we can cover equity to debt, we have the whole spectrum in house so that there is up to do which there should be and then it could really be a [Indiscernible] we're hopefully it will be.

[Jade Rahmani, KBW]

Thank you.

[Barry Sternlicht, Chairman and Chief Executive Officer]

We're trending to a really good place for the fourth quarter in that business. It's always fourth quarter centric. But we felt pretty good about where that is and where the business is heading as we come further and further out of COVID. I think there's a lot to do there.

[Andrew Sossen, Chief Operating Officer]

Thank you. At this time, we've reached the end of our question-and-answer session. I will now turn the call over to Mr. Barry Sternlicht for closing remarks.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Nothing to add. Thank you all for your time today and listening to us and asking your terrific questions and we look forward to next quarter hopefully, more exciting things to talk about. Take care, have a great holiday season.

[Andrew Sossen, Chief Operating Officer]

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.