Starwood Property Trust, Inc. (STWD) CEO Barry Sternlicht On Q2 2016 Results - Earnings Call Transcript

| About: Starwood Property (STWD)
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Starwood Property Trust, Inc. (NYSE:STWD) Q2 2016 Earnings Conference Call August 4, 2016 10:00 AM ET

Executives

Zach Tanenbaum - Director of Investor Relations

Barry Sternlicht - Chief Executive Officer

Rina Paniry - Chief Financial Officer

Jeff DiModica – President

Andrew Sossen - Chief Operating Officer

Adam Behlman - President of our Real Estate Investing and Servicing Segment

Analysts

Sam Cho - Credit Suisse

Jade Rahmani - KBW

Charles Nabhan - Wells Fargo

Jessica Ribner - FBR & company

Operator

Good day and welcome to the Starwood Property Trust Second Quarter 2016 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the call over to Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir.

Zach Tanenbaum

Thank you, Operator. Good morning, and welcome to Starwood Property Trust's earnings call. This morning, the company released its financial results for the quarter ended June 30, 2016, filed its 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the Company's website at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I 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 in this conference call. A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Joining me on the call today are Barry Sternlicht, the Company's CEO, Rina Paniry, the Company's CFO, Jeff DiModica, the Company's President; Andrew Sossen, the Company's COO; and Adam Behlman, the President of our Real Estate Investing and Servicing Segment.

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

Rina Paniry

Thank you, Zach, and good morning everyone. This quarter once again demonstrated the strength of our multi-cylinder platform with these components of our business delivering another consistent quarter of strong earnings performance. Proactively we generated core earnings of $119.9 million or $0.50 per diluted share which includes $2.5 million of costs related to transactions that were either closed or under review during the quarter. Our annualized net return on equity this quarter was a 11.8%. I’ll begin our discussion this morning with the results of our lending segment.

During the quarter this segment contributed core earnings of $102.4 million, or $0.43 per share. We originated or acquired $1.1 billion of investments this quarter, of which we funded $650.1 million. These investments consisted principally of loan originations or loan portfolio of acquisition, with an average size of $178 million and a weighted average LTV of just under 62%, consistent with the LTV of our overall portfolio.

During the quarter, we also funded an additional $124 million under preexisting loan commitment. Similar to past quarters, these fundings were made with recycled cash from this segment seasoned investment portfolio, which returned $1 billion during the quarter in line with our expectation.

The repayments include $576 million of loans in Europe which paid early in the quarter, decreasing our international exposure to 7% of carrying value from 12% last quarter. Subsequent to quarter end, another one of our European repaid taking our international exposure down further to 6%, consistent with past practice, we continue to fully hedge all of our foreign currency exposure.

I will now turn to our investing and servicing segment, which contributed core earnings of $49.9 million or $0.21 per share the quarter. On the CMBS side, spreads came in slightly which led to the recognition of an unrealized gain of $7.5 million on our overall portfolio. This gain is driven by the mark on our BBB and BB bond. As a reminder, GAAP requires us to mark all of the CMBS in this segment to market and the portion that is not vulnerable to spread movements are the BBBs and BBs. These bonds represent 27% of our CMBS portfolio and purely reflect market based pricing.

During the quarter we partnered on two new issue CMBS deals investing $15 million for minority stack in these two deals and retaining the related serving rates on $1.5 billion of collateral.

On the topic of servicing, as of June 30, we remained special servicer on 154 trusts with the collateral balance of approximately $101 billion and we were actively servicing $11 billion of loans in REO, an increase of $0.5 billion over the last quarter.

You’ve heard us talk about the wall of maturities resulting from the 2006 and 2007 CMBS vintages. During the second quarter $1.5 billion of these loans entered special servicing, up from $365 million last quarter.

And now turning to our conduit, start with mortgage capital. Last quarter you saw the extreme volatility in the credit market impacted pricing on our securitizations with some participants in this phase cutting their exposure and fast. Since then we’ve seen the markets recover with our conduit participating in two deals and realizing $11.7 million of net securitization profits on a core basis. We expect the profitability of this business to ultimately normalize by year-end, such that a full year securitization profit will resemble that of prior years.

I will now turn to our property segment which contributed core earnings of $12.7 million or $0.5 per share. This quarter we closed on the final two assets of our 32 asset Woodstar Portfolio for the gross purchase price of $39 million. In connection with these last two acquisitions, we’ve recognized an $8.4 million bargain purchase gain in GAAP earnings we have our purchase price that determine to be less than fair value. This gain is not included in core earnings.

The assets in this segment continue to perform in line with our expectations and have become a meaningful contributor to our results. More important, as Barry will discuss, we believe that several of our equity assets have appreciated in value that this increase is not reflected in our financial statements.

And finally, I’ll add just a few brief comments about our capital allocations, investment capacity and third quarter dividend. We ended the quarter with $8.4 billion of debt capacity and the debt equity ratio of just 1.4 times consistent with last quarter. If we were to include off-balance sheet leverage in the form of A-Note fold, our debt-to-equity ratio would be 2.5 times or 2.4 times excluding cash.

Given our current investment capacity of $2.3 billion, of which $1.2 billion represents unallocated warehouse capacity. We continue to have adequate liquidity to execute on our core business strategy going forward. For the third quarter we have declared a $0.48 dividend which will be paid on October 17 to shareholders of record on September 30. This represents an 8.8% annualized dividend yield on yesterday’s closing share price of $21.45.

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

Jeff DiModica

Thanks, Rina. We’re very proud of our second quarter results. We told you we [indiscernible] in turbulent times and aggressive when we see opportunities, and after an extremely slow January and February we’ve decided we move to our front foot.

As Rina said, we committed to $1.1 billion in growth commitments in acquisition in Q2. We’ve been adding to our originations, underwriting and asset management staff to keep up with the robust pipeline of opportunities we see and expect to see as traditional lenders pull back in an increasing regulatory environment.

We continue to increase our borrowing capacity and continue to finance approximately half of our loans through the sale of senior participations, where we have a dedicated capital market since inception and unlimited capacity.

Overall, U.S. real estate transaction volume sell 16% in the first half versus 2015, but we are seeing and executing more of the heavy structure deals we specialize in without sacrificing our credit first culture. With the 61.9% LTV and zero losses since inception we believe our credit first mentally improve in over $23 billion investment for seven years.

We’ve been less active lending in Europe the last 12 to 24 months, it’s European bank to that market share offering financing at very low rate and higher leverage point. As Rina said, because of this our non-U.S. portfolio going into Brexit has been paid down to just 6% of our portfolio with just 3% in the UK versus 12% in Q1 and higher 14% last year. Over 95% of our remaining UK exposure is in two loans we originated in 2014.

The first is a $101 million time construction loan on a 46-story residential project that is 98% sold in more than two time of their loan basis and will be completed in November. We expected to payoff in Q1 2017. The second is a $220 million retain and conduit project expected to be complete in 2017. The retail was 89% leased in the conduit units then selling at 100% higher than our loan basis. Our only other UK loan was especially originated this quarter. Clearly we feel very good about the quality of our exposure in the UK and in Europe.

On the positive side, we’ve recently seen significantly more opportunities in both debt and equity across Europe post Brexit and we expect to be able to add solid [indiscernible] assets there in the near future.

Rina mentioned the significant return on equity we’ve experiencing our growth unfortunately, that means we have ample dry powder to deploy today. We’ve been telling you that our $350 million Hudson Yards would pay off this summer as soon as it was opened for prepayment, and it did in fact payoff this week. Last year [indiscernible] newly originated loans were approximately 11%, this year we have redeployed capital and well over 12% and purposely pulling back in the volatile capital – after purposefully pulling back in the volatile credit market in January and February, and as always that is not run to the forward curve leading us upside if rates rise.

In our REIT segment after pulling back in Q1 we took advantage of this bread wining and purchase minority interest in two BPs in the second quarter, as yield well in excess of current market pricing. We continue to look forward the implementation in December of the [indiscernible] risk retention rules and are uniquely suited as an industry and services take advantage of them.

Although they’re not a perfect parameter for our CMBS book, the new issued CMBS market and the CMBS BBB and BB industries are up over 5% since quarter end. CMBS spreads widened in the quarter end following rest on June 26, and although legacy cash securities have not moved up at the same pace remain encouraged by the recovery of a CMBS market which you can also see in the performance of our conduit originations platform for our mortgage capital. [indiscernible] volume in Q2 appears smaller due to deals flipping into the first week of Q3 but will be more made up for in Q3 where we have successfully price the deals and expect three more to price before quarter end.

We have an opportunity to take market shares competitors pull back and leave the market and we will continue our slow, steady, strategy of high velocity and a credit first orientation that we’re going to take care of.

To conclude, we are also pleased with the upside in our equity portfolio, particularly with respect to two of these investments our Dublin equity portfolio and our debt and equity interest in 701 Seventh Avenue which Barry will discuss.

And with that, I’ll turn the call over to Barry.

Barry Sternlicht

Thanks, Jeff, thanks Rina. Good morning, everyone. Like Jeff, I’m very happy with our quarter and very happy with our prospects looking out. I’m really happy just with the position of the company and I think it is a company it’s not just a portfolio of loans, and you saw the strength of our platform continuing dimension with the performance of our multi-cylinders. We do that and we’ve driven the strategy in that direction so that we were never forced to do anything when it was nothing to do. And as I mentioned in the last call we slowed down given the volatility in the market and uncertainty and we would breach through that period and now we accelerate, I’ll take you through some of that.

And we are – we remain the largest player in this space within over $5 billion market cap that to as our nearest competitor. We’ve built this multi-cylinder model which I think is incredible because of the synergies between our activities. We maybe a little more complicated but it gives us a lot more ways to deploy capital at the accretive return.

The conduit business led by a terrific team who was able to dial down and then maybe accelerate with only tiny losses in the business when the markets imported in the first quarter. With that recovering, CMBS recovering I think we can all agree that is going to be lower longer yield in the world and no yield in the world, so we expect our CMBS to be continuing source of strength for the company going forward.

One thing also Rina mentioned which is we’ve been waiting for, each of the services was with the largest special service during the country. So each had books that were different from each other, in a sense that some may have been – the stress in there, and what they control might have been in five year maturities and then they’ve experienced the peak of the learnings back in 2013 and 2014 which have been the size of the year from the 2006, 2007 series in the asset loans. Ten years was in 2016, 2017, 2018 and this is the first time since 2011 that our loans in servicing picked up. A $1.5 billion in servicing up from $400 million in the first quarter and we have a pretty good view of this and not only is what’s really super interesting would be the opportunity [indiscernible] and that gives us a level of playing field versus our peers because we have a look at what name servicing will be on our $1 billion of assets.

We also as you know have been exercising occasionally a fair value purchase option and building a small book of equity and looking at that portfolio and trying to find things to do which is another interesting opportunity to deploy capital.

On the equity side, Jeff mentioned the two deals in light of third deal that is done super well since we made these investments. And to give you the quality of what we bought for the REIT and why we bought it, I’ll start with the Woodstar Portfolio which is almost 9,000 multifamily units spread across Southeastern United States. The cash-and-cash yield on that portfolio today is 12% and that is done with 18 year debt fixed, it is affordable apartments, it’s a great return for the company and I’m sure business [indiscernible] in our financials that we bought the last two closings we closed and then we’re praised for what reason Rina?

Rina Paniry

We priced at a higher per value than what we think.

Barry Sternlicht

[Indiscernible] right as we close it more than we paid for them. But the portfolio is tremendous investment at conduit [indiscernible] and I’m really excited about that, and we intended not to ever sell that but if we sold it I’m sure we have a gain. Any of those gains aren’t reflecting on the book value, [indiscernible] our financial statements, more specifically our book value.

The Dublin office portfolio which some of you might have reach your eyebrows on, Dublin has been an amazing market, the agency rate since we bought the portfolio of forms was 3.5% and this is before Brexit and the impact of potential people in the UK moving to Dublin which is a Kent Boston, New York.

Anyway, since the beginning of 2015 when we bought those building the rents have increased 26% and we think we have a significant gain if we would sell the portfolio, and obviously retail and the business of training is sort of adapting. That portfolio today with rents way below market and continuing to follow-up market is also returning cash-on-cash yield. So we might do something with some portion of that portfolio and we realized the gains just showed the value of some of these duration high yielding essence that we’re looking forward [indiscernible].

The third one is 701 Seventh Avenue as Jeff mentioned, for those of you who don’t know where that is, that’s here in Manhattan that’s in [indiscernible] of Times Square where half a million people walk by the front door. We made a giant loan on the project and then the developer came in and [indiscernible] on top of that, pushing that on the capital stack. But we bought, if you recall [indiscernible] in the property and during the quarter the lease of the majority of the center of the property have some sort of delay. And with that whole they’re going to do like a holographic evening exhibit in Times Square for the NFL. The remaining retailers become very valuable because everybody knows that there will be a lot of people going to this property and as well as the sides around the property.

So we expect there was a lease – another lease announced in underway and with leases and negotiation there will be a 100% leased in the retail. On top of this hotel there is a retail block, there is a gigantic [indiscernible] hotel also being built with great meeting space, it’ll be a terrific hotel. I doubt the view almost a 100 feet away from here [indiscernible] so I know how strong that particular market in the New York City and that hotel will be an advantage.

So, we think our equity kicker here is I would guess with a lot of money and anywhere from probably – I’m not going to tell you, a lot of money but it’s not a book value and that’s good to know.

Jeff DiModica

Six story, 194 foot screen as well.

Barry Sternlicht

Yeah, there is a giant screen on Times Square which is one of a kind and that large in Times Square which is very valuable for advertising revenue. But the owner, the developer probably bullish [indiscernible] he thinks he can sell it for, but the point is, these are the kinds of investments that start [indiscernible] and what’s it’s expertise working with the Starwood probably just management team are to enhance the value per shareholder is going forward. I think it’s really exciting deals we’ve done so well, in such a short period of time, way outperforming all of our expectations frankly.

The other thing when you look the strength of our model with LTV, I was looking back at LTVs and I’m amazed that back in 2011 [indiscernible] portfolio which is at that it’s much smaller only 65% and now it’s 61.9%, I know LTVs is actually falling that will be counter intuitive right, we would not have expected the cycle moved out [indiscernible] 61.9%, we don’t need to be that well, we’re happy with 70% in the real estate just the coincidence of the kinds of things that we’re doing in the mix and the book but this has remained as well.

The other thing about in terms of the platform [indiscernible] of book. And as you can see for whatever reason we don’t have much exposure any really to the UK and no exposure with the UK office market which is really the falling market the most worried about. And I would not be along UK office right now.

Now let’s just turn to the climate out there. This is probably, we went through – I think 2009 which is on October, actually it was our seventh year anniversary in August right now of the birth of this company. This is probably the biggest credit cycle we’ve been through and credit cycle is not like the ones you know, but the ones we know where money gets too cheap, the loans get little aggressive, lenders get little crazy, we should step back with [indiscernible], we lose a lot of deals. I think the climate is changing now in our favor for a foreseeable future, on July 16 the office that controlled the currency came out and told banks stop making real estate loans. So they told there were a lot of conditions we’re being too aggressive, step back. The OCC, FDIC and all the federals they were all watching the banks and the banks know they’re being watched, but the banks just not actually [indiscernible] if you look at our equity book.

The banks are not lending 90% of cost or 85% of cost or 80% of cost, frankly there is two prohibitive the capital requirements on loans with that LTV. In fact the borrowers aren’t trying to level up that high. So this has been a much more discipline lending cycle, but the banks are having trouble and they not – the government banks are saying you cannot continue to increase your real estate exposure and given where corporate Americas are not borrowing or having already borrowed, they’re trying to, but the OCC is watching them. That plays really well to the companies like ours and [indiscernible] and we want to grow, we might be happy $5 billion capital whether or not we should be a $20 billion vehicle, the bigger we are the better we are because we have more diverse, more consist, more reliable, higher better people built with that enterprise.

So, I think it’s really great that that’s happened and then the next thing to happen will be the change in the risk retention rules, retention regularly changes [indiscernible]. And they will change fundamentally that non-banks like us should be more advantage in the marketplace because banks cannot sell on loans in securitization markets once they retain the – well we have historically the VPs, and we think that’ll be a great opportunity for us. It certainly is not negative and we look forward to the change of climate once that’s implemented, and I think players are beginning to think about how they might position themselves for that world, it’ll be very difficult from the new players to make loans if they want to sell [indiscernible]. And the retention piece is now very high capital requirements, retention requirements for the banks and they could kind of still lease it to people. So, we hope our shareholders will give us the capital continue to grow and become a dominant player in the space.

Lastly our stock price, I mean if you glue us back together [indiscernible] all-time high, it’s like stick a dollar per share value and the original shareholders are affirmed, so it’s like $20, $29 company [indiscernible] decades ago it’s $0.20 a share. [indiscernible] So I think we are as the total term the best performing company in the space and I hope we can continue that, I look forward to doing so. I would say what surprises me and I don’t know if you got wrong, I actually thought was interest rates where there are that our dividend will be more valuable particularly in the retail markets and the stock would trade to more like a six dividends, the bigger we grew if you [indiscernible] and not sit here in eight over last night. If you think about it as looking back, the five year when the IPOs was 2.75 and we had no dividend, the IPOs is the only cash and today it’s 1.03. For ten year in 2010 it was four and today it was 1.5 [indiscernible] pull the stock up. And hopefully I think this will change and I’ll tell you when they think it might change which is when LIBOR rises.

The resi-REITs are where retail go and many of them historically have been bigger than us but they have this small amount mismatching maturities which they can – and everybody knows if rates rise they get hurt, they get squeezed and they’re going to come down. Some of them are actually lower than dividend [indiscernible] dividends as repayments come in place and they can’t [indiscernible] yield curve flattened.

So when rates rise and they will rise whether it’s in December of this year or first quarter next year [indiscernible], we have the opportunity to look forward to some of that retail money may be coming to the commercial mortgage rates which are often still a yield given the risk profile of the company. There is a chart that we added back to your supplement this quarter, half of our – I think 75% of our loans are [indiscernible].

Andrew Sossen

73%.

Barry Sternlicht

73%. And again if you look at the book it’s in page seven of your supplement, all that stuff that was goggled together quickly fall back and securitize and that would trade in less than 200 over and we traded the company at 88 yield. So it doesn’t make a lot of sense when looking at ourselves and trying to figure out how to take advantage of the opportunity. But we’re pretty happy that our performance with the firm and the last thing I would play as a team, we’ve added some [indiscernible] some mortgages, we’re hiring originators that are building our squad, our team in Miami that’s [indiscernible] doing a great job and I couldn’t be more pleased with the way the company is running. And the way we can position ourselves for this new opportunities as we emerged and taking advantages with existing opportunities in our loan book and our servicing platforms. So, overall I can say that I think the future will be better and that [indiscernible] pretty good.

So we look forward to taking your questions now. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Douglas Harter of Credit Suisse.

Sam Cho

This is actually Sam Cho filling in. So, I noticed that I mean for a time you guys thought about special servicing balances would fall but you guys experience a uptick? I was wondering whether you guys are starting to expect that to trend upwards and I just, to follow-on to that like, how do you see the refinancing outlook and the impact on the servicing inflows?

Barry Sternlicht

All right, Adam why don’t you take that, Adam Behlman here who runs the servicing segment.

Adam Behlman

[indiscernible] we suggest that there will be an uptick, I think it’s going to be choppy through this if you look at what maturities are going to be coming due over the next two to three quarters, there is significant amount of maturities due that haven’t had – haven’t gone through this special servicing process that we’re having to feed it out. So there is a volatility as we said earlier, we had $1.5 billion coming in this quarter versus a significantly less amount the previous quarter and that’s based upon the beginning of the uptick of all these maturities, so there is – that trend that may happen, it’s really hard to say. Interest rates are going to matter, the pending changes in the governmental regulations are going to matter, so there is a whole bunch of things that are going to happen simultaneously that could affect that number.

Jeff DiModica

We know how much it’s going to roll off into book, you never know what’s going to roll in unless you know where rates are going or where credit spreads are going, but I think it’ll be choppy around here, not significantly higher or lower.

Barry Sternlicht

There is a $100 billion of these guys right, and there – because these loans were typically written an extraordinary LTVs and at LIBOR plus 50, they stay on these debt long as it can, and many of them way too long to refinance or find it more difficult to refinance than what is expected. So it’s impossible to predict but it’s only – it’s like 15% less with our earnings in the special, so it’s upside that gets better. We expected to get better, we expected to make more money on the special given that may have reached the ten year maturity of the legacy CMBS securities.

I want to add one comment and I forgot, because some of the analysts have written this morning that we didn’t give guidance on our dividends. I can assure that we [indiscernible] the dividend and we were one of the few companies to give guidance and we used to get – obviously we thought it sounded like [indiscernible] dividend and it depends like you’re not going to do dividends some quarters. So actually that’s what’s up to that is weird and we’ll let you know [indiscernible] do then but something that you - I don’t see company like General Electric saying, hey we may not able [indiscernible] the dividend this quarter. So it was my guidance and maybe stupidity but I just thought we should take out its’ ridiculous. And if we can’t make the dividends we’ll let you know but we expect earning excessive of dividend of this year.

Sam Cho

Got it. So, I know in the prepared remarks you mentioned these flow down in the conduit business and you expect that recovery in the third quarter. I was wondering if you could provide more color on how the opportunity set has changed given that some players kind of exited the market?

Barry Sternlicht

Yeah, I guess I’ll start. There are a number of things that are hard for some people. We are inviting to a number of shells, we do more securitization than almost anybody, we did 19 last year, we have very high velocity. I think other people are struggling to get shell space as industries want to see more of the bank issuer collateral running the deal 50% or more. So it’s harder for some of the small guys. I also think guys are really sufferings through kick out, we told you in the past that we kick out 25% to 30% of the loans that we see a [indiscernible] we don’t make it into the deals that we bought [indiscernible] on it. And we have not had a kick out on third mortgage capital, it seems almost impossible but it’s true we are credit fast, we understand the rating agencies, we understand the [indiscernible] environment and we’ve never had a kick out to date.

They’ve got something that’s really costly for some people and you’ve seen it in the earnings of some other people. I also think that as spreads have also recovered here, you’ve seen a significantly better opportunity to write loans any time after middle of February of this year and anybody who did is very happy and you’ll see above normal trend returns on any loans that were written between February and today. And fortunately we have a decent pipeline in the third quarter, we’ve already priced two deals and we have three deals coming up. So I think the trend is really our friend as it is to anybody with a credit centric view and a place on top filled balance sheets to go into their deals where dealers really want us in their deals, and I think that’s not a position enjoyed by everybody and see [indiscernible] smaller guys leave the market and you’ll see the banks pull back in the market.

Sam Cho

Got it, all right.

Jeff DiModica

The volatility [indiscernible] down in the second quarter and into the third quarter which allowed for I think most of the shops to be able to go back and increase the amount of originations that they were doing pre the volatility side.

Barry Sternlicht

But look at the climate again, you asked about – this all goes to like the amount of CMBS issued this year will probably write down 40%, right, $65 billion versus a $100 billion something. There is a lot of loans coming to it, the CMBS market does not grow, how are these loans are going to get [indiscernible] the banks are constraining their lending because the OCC is looking over their shoulder which they are. Go look at July 16, just look at that, that was two weeks ago, go look what the banking regulators said to the banks. So I’m smiling, [indiscernible] we’re sitting in a really nice position, we’re seeing our competition is not like it’s a free fall out there but at this late in the cycle as your quarter and earn 12% ROEs on your loans is pretty remarkable, I mean the ten year is 150, but we don’t know how long its allowed so we’ll tell you when we can’t do it anymore, but at the moment – again we’re not [indiscernible] earning a 12%, we would be perfectly happy in risk adjusted returns at 10%. But we’re able to do this for one reason and [indiscernible] continue to do as we can.

We’ve turned on lots of deals, lot of the stuff like at 2017 but we didn’t like the risk, so we passed. Don’t forget, our – also we think these returns are so compelling for investors that we widen these B-nodes, like our nodes are 55% to 75% of the capital stack. They’re not 73% to 75%, that is materially different risk profile and [indiscernible], these are not done that way. And in fact, we widen the stacks without more money with these double digit yields in the world with no yield.

So we could actually boost the ROEs by borrowing more senior or going higher, we don’t do that. I mean we’re not trying to run, we stayed consistent predictable in 2009 we’re the same company with a lot more exotic level of more people but we’re the same company today that we were – strategically than we were back in 2009.

Sam Cho

That’s it from me. Thank you.

Operator

And we will take our next question from Jade Rahmani of KBW.

Jade Rahmani

Thank you for taking my questions. Can you talk about what percentage of the originations were directly originated versus acquired and also maybe discuss the Lisbon origination and say what interests you in that market?

Barry Sternlicht

Dennis Schuh just joined us, he was 19 year [indiscernible] JPMorgan and had originations over there. So we have this number of the topic, Andy we want to get back to them.

Andrew Sossen

We’ll get back to you, but it’s probably about 60-40 direct [indiscernible].

Barry Sternlicht

I don’t think that’s what he asked. He asked direct…

Andrew Sossen

Originations.

Barry Sternlicht

Originations versus acquired loans. So we acquired the Lisbon assets, there were two assets identified but we’ve 50 people in London at [indiscernible] at the parent company and they found this opportunity so I always thought it was compelling CMBS [indiscernible] I think it was CMBS nodes in Portugal. You want to talk brief about that?

Andrew Sossen

Yeah, there were two individual loans, two retail assets that Deutsche bank originated that we were able to purchase. They were intended for our securitization – the securitization market became vital over there and we were able to put other than attractive returns with appropriate leverage from Deutsche bank under that.

Barry Sternlicht

Mid-teen returns I believe.

Andrew Sossen

Yes.

Barry Sternlicht

Mid-teens IRRs on those loans.

Jeff DiModica

And then breakdown was approximately two-thirds originated, one-third acquired, we took advantage for another…

Barry Sternlicht

It’s very rate by the way, and we don’t usually do that. In a cycle with the stress to buy loans of [indiscernible] securitization that’s why that number, normally they’ll be probably 80-20 or 85 to 90.

Jeff DiModica

90 plus.

Barry Sternlicht

It’s just we bought those two loans, we did the same thing way back then from the same bank actually on the call at a hotel in New York. And what happens is when the bank gets into trouble in a quarter they have to [indiscernible] from credit to sell everything, so they go into their book and they sell stuff and I mean that’s our best times. So, [indiscernible] we’re happy by the loan but it’s very – it’s not our core business even though, I love the business, it’s not easier, it’s not cheaper [indiscernible] already written, they are legal work.

Jade Rahmani

And in the property segment it seems like there has been very strong price appreciation on particularly Dublin assets. Are you contemplating any asset sales within that segment?

Barry Sternlicht

Yeah, not with our portfolio, we think that’s bread and butter, we just love the deal. It’s a $600 million acquisition. It’s interesting [indiscernible] with $200 million of equity, so it’s about two-thirds leverage [indiscernible]. We might sell an interest in Dublin assets when we deploy, we were going to do something and redeploy it into a new loan in Ireland but that went away from us. So we’re considering it and it’s not a huge market, maybe if people appreciate the value that we’re adding on the equity side of the book too. So we might, it’s not something we need to do a lot of its trading assets [indiscernible] trade assets and we need to watch up that income but I would say it’s better than 50% likelihood but just around there.

Jade Rahmani

And on the servicing side, I apologize I had jumped on late. Did you give an update on the BPs opportunity and how plans to raise the fund are going?

Barry Sternlicht

We’re contemplating that and I’d rather not talk about it. And on the BP side I mean the markets are active.

Andrew Sossen

We purchased two minority interest in the second quarter, we had one that sort of closed in the third and then we’re looking other situations right now. We’re looking at the world things that come back into sort of mid 17% yields and will touch close to 20 area and so that market is definitely normalizing, and we think this will be a great opportunity to structure deals and kick out loans in a way that we like. So we likely to continue to nibble.

Barry Sternlicht

Just so a lot of capital players looking out for yields, we know to provide yields. We get servicing income on top of the income of the [indiscernible] we’re basically taking our servicing like a $1.5 billion of servicing for the quarter.

Andrew Sossen

That’s right.

Barry Sternlicht

And so we get a better yields than our partners, this is not ever going to be a giant business for us in a sense that they are not – these B-nodes are better than the B-nodes than CMBS 1 because we are tailoring the book, right, loan kick outs and other stuff but we’re not going to be the dumbest money at the table. So when somebody gets a bunch of passive collateral with no idea what he is doing, he is just doing [indiscernible] on the loan, we still underwrite them, and probably [indiscernible] people. We have this amazing data base we can go through and look at all similar neighborhood that we’ve serviced and what the rents are, we can check loans. And we’re just uniquely positioned, we’re about to be very choosy, so what’s loosing [indiscernible] is by choice, it’s not because we didn’t show up. It’s either because the guys were willing to taking the 12% IRR and we thought we should get 15%, or like some of the collateral and originator of the pool wasn’t willing to take it out.

So, I mean we are aggressive when we want to be aggressive in the space and we have nobody I think in the country have the better platform to be down [indiscernible], nobody.

Jade Rahmani

Thanks very much for taking my questions.

Operator

And we will move next to Charles Nabhan of Wells Fargo.

Charles Nabhan

Hi, good morning guys. Looking at a slight five of the investment – of the presentation, it looks like the ROAs on the first mortgage portfolio declined by about 20 basis points. So my question is, could you give us a sense for what type of yields you’re putting on the books relative to what’s been rolling off over the past couple of quarters?

Jeff DiModica

Sure, that would seem confusing as a headline so I’m glad you picked it up. The reality is we are putting on north of 12% so far this year versus the book that was around a 11% for all of 2015, that would argue that that number would actually go up. There is a little anomaly this quarter that a number of high yielding loans did actually payoff this quarter, some in Europe, some that were construction loans and some that came out with fairly significant fees. And so as a loan exits with fees it takes off a decent amount of yield from that [indiscernible] IRR that you see in the book. We are certainly trending higher and we hope to be able to hold in similar originations in second half of the year to what we have in the first half. And overtime that will cause a tick back up but in the first quarter as the loans that rolled out after fees were fairly significantly high.

Charles Nabhan

Okay, great. And as a follow-up, within the investing servicing segment you disclosed that you purchased four properties during the quarter. Could you talk about your intensions for those properties, whether you intend to hold them or sell them at some point?

Barry Sternlicht

Yeah I mean the overall intension is to hold them three to five years is the aim and we’re looking at opportunities through our special servicing rights to be able to purchase these and we’ve been very pleased with the full cash-on-cash on the IRR terms we think [indiscernible].

Jeff DiModica

This is the right that we have through the end of CMBS 1.0 and we’ll continue to make these type of purchases for the next 30 months or so probably. I think the book is around $250 million today and it probably gets to twice that, the cash-on-cash is similar to the cash-on-cash of the properties in our property segment. And we never talk about or think about IRRs much here but I can assure you we think they’re higher, we think these are really good investment.

Charles Nabhan

Okay, thank you.

Operator

And we will take a final question from Jessica Ribner of FBR & company.

Jessica Ribner

Good morning, thanks for taking my question. Just going back to your lending segment, I might have missed it but what’s the pipeline of originations in the third quarter?

Barry Sternlicht

Well it’s good.

Jeff DiModica

Yeah, I don’t think we said it. Rina, did we say that?

Rina Paniry

We did not say that.

Jeff DiModica

We did not said, it’s looking to be closely in line with where we’ve historically been which is where we were this quarter. I don’t think we said it but it will be robust and I think it’ll be above the trend of 2015 and some of this quarter is that we – if we closed everything in the pipeline right now.

Jessica Ribner

Okay. And have you disclosed the run off you’re expecting in the second half of the year? Or maybe a better way to ask it is…

Rina Paniry

No, if you look at our liquidity slide that’s in the supplement, we disclosed [indiscernible] $1 billion of repayments are expected in the year.

Barry Sternlicht

We’ve run the year, it’s interesting probably in terms of the firm, we run the year with higher cash balances than we would have liked, partly by design because we were cautious early on in the year. And the repayments are coming pretty much as we expect and some of them will be slightly later but overall I’d say that [indiscernible] reasons we’re building up origination team. We want to grow and we want to put out, we want to tell you we have more opportunities for double digit returns and we have comfortable for. But I hope I can get on one of these calls and tell you that, and we have to – because I think growing this business is better. I think our goal with the investment grade at some point [indiscernible] bigger that to have diversity. And we have to have some of the things that I won’t mention. So, but anyway that’s our goal.

Jessica Ribner

Okay. And just one more kind of piggybacking off of Jade’s question. Do you see given the environment for banks that you mentioned and just the volatility in the market, do you see more opportunities for acquiring loans? And I know that you Barry talked a little bit about you like that business relative to the origination just because it’s easier, and I get that. Is that something that you’re kind of on the lookout for, is that opportunistic, are you being a little bit more aggressive in sourcing of response given the environment?

Barry Sternlicht

The perfect sense is it depends on the health of the bank, when banks are having a hard time and you’re seeing some banks trying to pull back and get smaller. We get better opportunities to potentially buy things at a discount that are cheaper where it would originate. Otherwise we prefer to originate…

Jeff DiModica

Yeah we’ve always been looking to buy things and I think the supply of those things is prices we pay, there is a decline in the climate, particularly banks withdrawn from market, banks checking their balance sheet exposure, banks having earnings issues. So you see all the volatility, particularly the offshore banking [indiscernible] institutions. And when they leave they have loans, and then like, okay let’s get rid of them. Our two senior part MDs at a bank just went out when they both went to [indiscernible]. There is just going to be, there is a fundamental structural change going on in some of these lending climate. Without the CMBS market, and then [indiscernible] getting out lending but I mean there is just capacity issues when your offices or controller of currency is staring at you the whole time. So we like them to keep staring, that’s fine with us and we want to be a beneficiary of this climate.

So, I will say I mean I – I’m trying to get to the spot of leader of the team but there has been times when I’m like, oh my god, this is getting hard. This is not one of those times, we are cherry picking deals and there is a lot of opportunities out there [indiscernible]. I’m looking at the – that’s the one deal that the guy was trying to convince me they’re agreed to and potentially staring at corner of the table here. And it’s like a 2014 but I’m not sure, and we’re the dad 65% in that deal and I’m like, I don’t think the equity works. So, I’m like screw the dad, but there are good opportunities for us. I mean we’re seeing a lot of stuff and I think with Dennis at board and his following, he and his own 19 year history of working at borrowers and I think our team is good and I hope it gets better. So we’re excited.

Jessica Ribner

All right, thank you.

Operator

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Sternlicht for any additional or closing remarks.

Barry Sternlicht

Well, I hope we have given you good news in the quarters forever but thank you for your attention and I want to thank our team and our board for the continued support also. So have a great holiday weekend or a holiday, and have a very great weekend.

Operator

Ladies and gentlemen, this does conclude today’s conference. Thank you everyone for your participation. You may now disconnect.

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