Earnings Labs

Starwood Property Trust, Inc. (STWD)

Q4 2019 Earnings Call· Tue, Feb 25, 2020

$18.35

+0.11%

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Transcript

Operator

Operator

Greetings. Welcome to Starwood Property Trust fourth quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded.I will now turn the conference over to your host, Zach Tanenbaum, Head of Investor Relations. Please go ahead.

Zach Tanenbaum

Analyst

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 December 31, 2019, filed its Form 10-K with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on 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 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 Chief Executive Officer, Jeff DiModica, the company's President, Rina Paniry, the company's Chief Financial Officer and Andrew Sossen, the company's Chief Operating Officer.With that, I am now going to turn the call over to Rina.

Rina Paniry

Analyst

Thank you Zack and good morning everyone. The fourth quarter capped off another strong year for us. Core earnings in Q4 totaled $139 million or $0.47 per share. After adjusting for certain items impacting our property segment, core was $0.53 per share this quarter and $2.10 for the full year. I will discuss each of these items in detail a little later.Our performance this quarter was led by our largest segment, commercial and residential lending, which contributed core earnings of $109 million to the quarter. On the commercial lending side, we originated 16 loans totaling a record $2.2 billion, bringing our 2019 volume to $5.5 billion with an average loan size of $147 million. In the quarter, we funded $1.4 billion on new loans and $536 million on pre-existing loan commitments. These fundings were offset by $551 million in loan repayments, bringing our commercial lending portfolio to a record $9.1 billion at a weighted average LTV of 64%.As a reminder, we update the LTVs on our loan book at least once a year or more frequently if circumstances warrant. The values are typically based on internal based underwriting, which tends to be more conservative than the third party valuations we receive. With our implementation of the new Current Expected Credit Loss or CECL accounting standard, we will be revising our policy to utilize third-party instead of internal valuation. With this change, we expect our weighted average LTV to drop below 60%.On the residential lending side, we continued our expansion of this business by purchasing $521 million of non-QM loans and completing our fifth securitization totaling $370 million. This brought our residential loan portfolio to $1.3 billion and our retained RMBS portfolio to $147 million at year-end. The loans carried an average LTV of 69% and an average FICO of 732…

Jeff DiModica

Analyst

Thanks Rina. A strong fourth quarter capped off a banner year for shareholders of Starwood Property Trust. Our stock price was up 26% for a 37% total return with dividend, the highest return in our 11 years since inception. Our dividend yield today is over 5.5 times the yield of the 10-year U.S. Treasury and we believe the proven consistent performance of our multi-cylinder business, our best-in-class leverage, the low loan to value ratios of our loans which are going lower, our diversified liability structure and embedded gains of over $800 million or over $202.83 per share justifies continued outperformance both versus rate and versus our peers in the years to come.Before commenting on our segment highlights, I would like to discuss our work on ESG initiative in 2019. We are proud to report that MSCI this quarter upgraded our ESG rating to BBB making us the leader in our peer group. I will address shareholders to the corporate responsibility tab in our website where we talk about our positive social and environmental impact and quickly highlight our large affordable housing portfolio actions we have taken in our own portfolio to reduce environmental impact, our very strong diversity hiring statistics and our community involvement initiatives.As Rina said, we originated 16 CRE loans in our property segment for a record $2.2 billion in the quarter. The expected IRRs in these originations were in line with the first three quarters of 2019 and at similar leverage levels. 60% of our Q4 loans closed in the final two weeks of the quarter thus had a small investment on Q4 performance but will have a greater impact on 2020 and beyond. After starting 2019 cautiously following the credit widening in December 2018, we are happy to report that our CRE loan book is at…

Barry Sternlicht

Analyst

Thank you Rina and thank you Jeff. Good morning everyone. Thank you Zach. I wonder what I can talk about today. These comments were fairly extensive. Let's start with the world because it's a fascinating world today. I think one thing is, the stocks fell off a little bit on the contagion from Coronavirus. We have no impact from Coronavirus. I mean that is not a risk for our firm in any way, shape or form. So it's just market sentiment that it fell off.And one thing that's fascinating though is what the bond market is telling you. The bond market is telling you the economy is, well, the global economy is slowing. It clearly will slow from Coronavirus. Again, I actually think it makes property more valuable and I expect cap rates to drift down. Cap rates and property probably haven't adjusted to 1.38 treasury and not only are the base rates coming down, LIBOR will now fall this year which will make Jeff's LIBOR floors even more valuable. But my guess is that, spreads will come in as lenders are searching the world for yield.So our enterprise and the mark-to-market of our loan book is becoming more and more valuable sort of every day and that we had a 3.25 10-year and the stock was $24 or whatever and now we have a 1.38 10-year. The stock is totally misvalued. The market is getting the quarter all wrong. You should have known that the Taubman transaction was in trouble. We told you that and we offset that with a gain from Dublin to prove to you the gains we talked about, the $800 million, was real.We debated whether we should sell it or not. Ultimately we decided that we thought the rent profile in Dublin and new construction…

Operator

Operator

[Operator Instructions]. Our first question is from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter

Analyst

Thanks. Can you talk about the environment as we look into 2020 for the return environment for commercial mortgage loans and what your expectation is for net growth for the year?

Jeff DiModica

Analyst

Yes. Thanks. I would say that we are earning very similar to what we have historically earned. We are will probably 50 basis points lower on levered IRR today than we were a year-and-a-half ago or something like that. But it stayed fairly consistent through 2019. We are borrowing better. We continue to borrow better. As I think I told you a year ago when we did our best warehouse facilities for LIBOR plus 150, I said for cash flow we are going to be seeing facilities at LIBOR plus 125 on our bank warehouses. That's come to fruition.So as you are seeing spreads tighten, you have to also measure the fact that liability spreads are tightening. We did our CLO this year at a mid-130, I think, but at tremendously tight financing spread. Other people are doing the same across all parts of our financing capital structure. If we go into the high-yield market, we can finance ourselves better today. The Term Loan B market which we used this year is very efficient in the low LIBOR plus 200 and we can do whatever we want to there.So we are borrowing better. We are lending at tighter spreads. Lending at tighter spread does give you more duration. People are less motivated to prepay those loans. We like duration to get those off the treadmill. I would expect that last year after $5.5 billion when you remember very well, Doug, that in the first quarter, we got together and we told you we were being extremely conservative and doing some stress testing coming out of the December widening.So we started the year slow. If we hadn't, we would be right around the same $6 billion as we were last year. And we expect this year, we will do another $6 billion, somewhere right around these returns. So we are seeing a tremendous amount I think with our $109 billion of loans last year that we looked at versus maybe $104 billion the year before. So we are looking at more loans. We have a larger team to do that. And I am optimistic that 2020 will look very similar to 2019 in the lending book with a little bit more of a bent towards Europe where we are seeing some incremental return opportunities.

Doug Harter

Analyst

And just a comment on kind of added duration. Is that any different loan products you are offering to get that duration? Or it's just that the loans wind up staying outstanding longer because --?

Jeff DiModica

Analyst

Yes. The lower spreads, you would have left rationale for refinancing it. You will still sell it at the same time, arguably and potentially with the debt but you would have less rationale for refinancing at lower coupon than you do for refinancing a higher coupon. So they tend to say on our books a little bit longer. I would guess closer to three years on the lower coupon stuff as opposed to 28 to 30 months on the stuff where you get a higher coupon is more transitional and people are more motivated.

Doug Harter

Analyst

Great. And Rina, it looked like there was a GAAP provision against the infrastructure. Just I guess what was that for?

Rina Paniry

Analyst

So that was a loan that we had acquired from GE. We had marked it below par at the time we acquired in purchase accounting, we had marked that to $0.80 on the dollar. The project that was underlying that loan went into bankruptcy in 2019. It emerged from bankruptcy in November. So that was the price evaluation coming out of bankruptcy related to that loan. We hold a 10% participating interest. So it's a much larger loan overall.

Jeff DiModica

Analyst

With our total.

Rina Paniry

Analyst

So our total basis is now about $25 million after the $3 million write-down.

Jeff DiModica

Analyst

It's kind of irrelevant, just pointing that out.

Doug Harter

Analyst

But I guess how does that $3 million compare to where you had it more? Is that below kind of the 80% when you marked it?

Jeff DiModica

Analyst

No. It was never marked.

Doug Harter

Analyst

Okay. Got it.

Rina Paniry

Analyst

So we took the $0.80 on the dollar and marked to $0.69.

Doug Harter

Analyst

Got it. Okay. Thank you.

Operator

Operator

Next question comes from Steven DeLaney with JMP Securities. Please go ahead.

Steven DeLaney

Analyst · JMP Securities. Please go ahead.

Thanks and good morning everyone. Your total investment portfolio is $17 billion and Barry highlighted the $9 billion loan book. When you look at those numbers macro, do you see yourself as roughly fully invested at December 31? And if not, how much growth do you think you could have in your investment portfolio with the existing capital base? Thanks.

Barry Sternlicht

Analyst · JMP Securities. Please go ahead.

We will never fully invest it.

Steven DeLaney

Analyst · JMP Securities. Please go ahead.

Yes. That would seem so.

Jeff DiModica

Analyst · JMP Securities. Please go ahead.

We have probably $3 billion or $4 billion. I would throw out, away from just the capacity which you can see in the supplemental in the $300 million to $400 million of cash that we normally sit on. We have tremendous amount of unencumbered assets. We could go out and raise more debt on if we wanted to. We are under levered versus our peers. We could take more asset level debt. Every one of those could add $4 worth of assets for every dollar we brought in if we were putting them out and levering them.So there is clearly the potential to bring that $17 billion up to $20 billion-plus if we wanted to run the business hotter. But we have decided to run a more low leverage conservative business here, Steve. And we like having cash on the balance sheet. It does create a little bit of a drag but it leaves us opportunities, money for opportunities when they come in. If we were trying to be more perfect, we would run our cash balances a little tighter and reduce drag in the business. The conservatism that comes with holding cash is good for us and it gives us opportunities when things widen.

Steven DeLaney

Analyst · JMP Securities. Please go ahead.

Great. And I had a second part to that question, but you have kind of already answered it. But I will go ahead and throw it out there. You guys have been very respectful of your shareholders over the years. Stock is up 30% since the end of 2018 and the dividend yield down to 7.5%. So the question would be, if the right opportunity presented itself and you needed more than $3 billion, at what point and what would the return profile have to look like for you guys to consider issuing common equity because you certainly I think would have earned the right to do that if you saw the opportunity?

Barry Sternlicht

Analyst · JMP Securities. Please go ahead.

We are always in the market looking at ways to grow the enterprise. It would have to be accretive earning returns at least as consistent with what we earn on our book, strategic fits our overall plan and when you are stewarding capital like this, it is about reward versus the risk. And again, if you take the long term view and this is our 11th year or something as an enterprise, you never want to put the enterprise at risk, right. So we can produce higher returns but I was planning on sticking around and not having used to getting bombs in the mail.So we are going to be careful on how we deploy capital and what we do with it. And this is really as supposed to be an incredible risk/reward with a 7.5% dividend yield in a world with 1.38 treasury. So that's the play. We are always in the play. You have seen, we have not entered the equity market every time the stock moves up. We have been very disciplined on issuing equity. Obviously, we like to grow the enterprise but not for the reason you might think. It's not about management thesis or anything like that. I think bigger is better is this space. It will drive our cost of funds down. It will help us achieve investment grade. And some of the assets that we are buying like our resi is higher leverage business.So as we enter the businesses, our leverage levels as a firm are creeping up. The risk isn't changing, in my view, because the resi book is so diversified and such good credit, no one house is going to hurt us, not even penthouses and the securitizations. So it doesn't matter and we are optimizing our ROE for the asset…

Jeff DiModica

Analyst · JMP Securities. Please go ahead.

Right. Both sides, both sides.

Barry Sternlicht

Analyst · JMP Securities. Please go ahead.

Left brain or right brain, I don't know. So I think it looks, it's just a solid company with $17 billion. Well, how many loans have we done? I think it's $60 billion? Almost $60 billion.

Jeff DiModica

Analyst · JMP Securities. Please go ahead.

Total investments.

Barry Sternlicht

Analyst · JMP Securities. Please go ahead.

Total investments, $60 billion. It puts us in the top 10 as a bank in the United States by the way.

Jeff DiModica

Analyst · JMP Securities. Please go ahead.

Steve, you are one of the analysts who does a great job and we appreciate the flattering version of the question. It does a great job of pointing out our adjusted book value but looking today and these numbers are a couple days old, we are 1.54 times book. That doesn't include depreciation and taking out our fair market value gains that we have told you about. If you do that, we are around 1.2 times and our peer average is above that. And our largest peer is well above that. We feel like we have created a low leverage diverse amazing business. As Barry said, with a great right side of the balance sheet that can compete with any of them and we are really low on a price to book value, not high on a price to book value basis when you consider taking out depreciation.That is a gate on us issuing equity, right, because we look at our fair value of our company as opposed to the book value of our company. And we own 15,000 affordable housing units, running like 97% occupancy with upwards only rent adjustments in two of the fastest-growing income towns in the United States. This is the gift that keeps on giving. Frankly, we blew it. I mean these assets would be among the greatest equity assets we have ever seen. So they are fantastic. They are in the REIT. They determined that would provide earnings literally forever for the company.So we talked about realizing those gains and we have to figure out how we deploy all that excess cash. And we will do it at the point we are confident we can put out all that capital. So there is only one way apartment our cap rates are going. It's not up.

Operator

Operator

Thank you. Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti

Analyst · Wells Fargo. Please go ahead.

Yes. My first question is for Barry. Barry, I tend to agree with you that low rates and lower cap rates are probably going to continue to be good for company such as yourself. One thing that does cross my mind in this environment with Coronavirus, as you know, could you have some type of capital markets event and wanted to see if you can talk about how your positioned and what your playbook would be if you did get into some type of situation where securitization markets got wobbly, if you can address that?

Jeff DiModica

Analyst · Wells Fargo. Please go ahead.

Hi Don. It's Jeff. I will start and then let Barry cleanup. As you know, we do a lot of things every day to prepare ourselves for what happens if a capital markets event happens. We have taken our CMBS book down from 10.5% to 4.5%. That's the one place where when the credit markets have wobbled, where people have said, while they own a lot of CMBS, so we should sell STWD. That book has performed tremendously well with a high teens return over the 11 year life. And we expect it to have a similar high teens return over the next 11 years. But if you head into a credit downturn, that certainly helps. Having a CMBS special servicer will help us significantly outperform our peers. We will make more money in credit distress.On the CRE lending book side, we would make more money if we financed everything we do on a warehouse line. Many of our competitors lean towards doing almost that. 40% of our book is on warehouse lines. We can borrow at L125 on warehouse lines on cash flowing assets today. We can make tremendously higher returns if we leaned in there. We have 40% of our book there today. It's not the best earning place to be but it's the safest place to be having diversity on the right side of our balance sheet which includes our Term Loan, it includes our high-yield assets, it includes the CLO that we have done and then importantly it includes all the A Note sales that we have a separate group of professionals who help us sell A Notes and do CLO securitization.So we are extremely cautious when it comes to managing the right side of the balance sheet and the left side of the balance sheet for a potential credit event, if we were to get one. So we think we will outperform in that environment. We get frustrated and you probably heard me talking about being below the peer average on a price to book which makes no sense to me. But we always say that we will outperform, if and when the credit markets do deteriorate. So we have tried to set the company up to be ready for that.Barry, I don't know if you have other thoughts?

Barry Sternlicht

Analyst · Wells Fargo. Please go ahead.

I don't see that as a big issue for the company, really. I mean if I look at it as a double-edged sword. I love our loans this year because we have the match financing. So it's like, yes, people get nervous they may not refinance. And I don't see, I don't know, I mean it's hard to figure out what you might do if the credit markets just froze the bank markets. I think this cycle again, you have to remember where we are.Property is not a problem for any bank in the United States. These banks have been very, very, very disciplined shockingly. The excesses in the market don't come from the banks. They come from our peers, shadow banks. And the one thing that's creeped into the market and it is happening now is you see these sort of outlier bids. And I remind our guys as we go through our loan review when we are looking at investment committee for these loans.Just because somebody pays, it doesn't mean it's worth that. And when you get times like this where somebody is saying I own enough of the treasury, so I am going to buy a building at two cap. It doesn't mean it's worth a two cap. And so, in the equity book, we are selling assets all the time and you might see one guy 20% higher than the pack who is right on the LTV. And I think this is where our experience doing this for 30 years is super helpful.I mean I see all kinds of things and we have been to these moves through multiple crisis. So as the stewards of capital, at least we have experience. We are not going to get -- there is a bunch of stuff out there that is really that we just debate and have arguments, there's three loans on the table that are probably $1 billion. And I am looking at Jeff, he is shaking his head, because we are just --

Jeff DiModica

Analyst · Wells Fargo. Please go ahead.

The argument are, Barry, can we please do this loan? He says, no.

Barry Sternlicht

Analyst · Wells Fargo. Please go ahead.

Well, I mean, there's always going to be another loan. And there's issues like unions and all kinds of stuff. The one thing I should say is construction costs are rising. As people think inflation is 1%, they are certainly not in the real estate market. We are seeing almost double digit cost inflation on the West Coast. Labor is just scarce. It is one benefit of a 3.5% unemployment rate. So the contractors are telling you what you are building is going to cost and then they just say well, we can't do that for you.So we are building a hotel on the West Coast in the Bay Area and through 80% drawn, the quote was $170 million and when we went to complete, the budget is $250 million. Like how is that even possible. But it's sort of, what do you do? You don't build. And that's good for existing loans. And property prices are increasing even because construction costs are rising. There are markets and cities where you shouldn't invest. We have an interesting portfolio because we don't have a lot of exposure other WeWork in New York City, for example. And we are not particularly bullish on the New York City office market.We think expenses might rise faster than the rents and you need to be super careful there. Cap rates are obviously low, but they may change if people get the view that net rents are going to fall. And what's driving all these major markets is the same thing that's driving the stock market, five companies. They are expanding into Berlin, into New York, into Toronto and even Nashville. Amazon or what they call you the fangs and you can add three or four other names, Salesforce, these are driving these commercial property markets.And…

Operator

Operator

Our next question from Steven Laws with Raymond James. Please limit yourself to one question. Thank you.

Steven Laws

Analyst · Raymond James. Please limit yourself to one question. Thank you.

Okay. Good morning. I guess to follow-up then on the regulatory comment, switching gears. Maybe thoughts on how QM patch expiration plays out additionally GSE reform that might open back up FHLB? I think Barry, you mentioned in your prepared remarks that your facility there expires, I think, 2021. But those two issues and I will leave it at that. Thanks.

Jeff DiModica

Analyst · Raymond James. Please limit yourself to one question. Thank you.

Yes. Listen, it's only upside on the QM patch. We have no idea how it's going to play out. There is $180 billion that get done at the agencies of non-QM to the extent that the QM patch goes away. That's $180 billion that floods a $50 billion market and we are part of that $50 billion market and it gets a lot bigger and our footprint can get bigger, assuming that we can finance ourselves as well as we do today that would be wonderful. My best guess is that along the way, some portion of the patch comes off, but $180 billion of non-QM doesn't leave the agencies to flood the non-agency. I don't think the market equipped for it and I don't think that's what the government really wants. So there is upside to it. There is no real downside, if they don't. We are back to where we are today. So we are excited about that.And as far as GSE reform, there will be a lot written. And the most important thing we can do is get ourselves set up as well as we can that if February 21 comes and we don't Home Loan bank, then we have tremendous amount of capacity elsewhere. We have an RFP out for quotes on warehouse lines. I think we had 11 or 12 different banks who want to provide us warehouse lines in that space. And I think they will trip over each other to finance them at the cheapest levels that they can find. And ultimately, we will end up in a very similar place on a level return.

Barry Sternlicht

Analyst · Raymond James. Please limit yourself to one question. Thank you.

Because you think your business is tough to a bank today. I mean, they are chasing ever wider spreads and benefiting us too. So you know, again, I wouldn't have thought when we started that this market will evolve this way. But it's produced the same internal equity today that we did in 2008 and 2009 or 2010. I guess we launched in 2009. It is kind of remarkable, but it is because the banks have lowered their spreads to us and we have been able to lower our spreads to borrowers. And it's been a nice synchronized evolution of cheaper and more available financing. And we use our underwriting skills to pick our spots.In a way, I feel bad for our -- I actually do feel bad for our origination team because it's been a bull market in real estate. And we probably killed $3 billion or $4 billion of loans that worked out just fine and somehow they don't complain all the time to me. They probably complain to Jeff. But that's the way it's going to go, right. I mean we are not going to approve loan that comes in a bull market. In a rising tide, all boats rise, but we try and keep afloat when the tide goes out. And there are crazy people in the world doing crazy things. And are they crazy?I mean property, we are seeing yields in Europe and building a 2.5%. And that sounds insane, right. But every treasury, every duration treasury in Germany is negative. So you are picking up 250 basis points. So take that to the United States, 138 plus 250, it's like close to floor on our apartment, right. That's the same arbitrage, if you will. So you have to add in the borrowing spreads, but…

Operator

Operator

Our next question comes from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani

Analyst · KBW. Please go ahead.

Thanks very much. As you look at the portfolio, the loan book is asked about 19% hospitality. How do you feel about the hotel loans and any potential impact from Coronavirus?

Barry Sternlicht

Analyst · KBW. Please go ahead.

Good question. I think everything we have is U.S. We don't have any hotels in offshore, right?

Jeff DiModica

Analyst · KBW. Please go ahead.

We have one other construction in Spain. But no, nothing else.

Barry Sternlicht

Analyst · KBW. Please go ahead.

So far, obviously, the U.S. has been spared Coronavirus. I would have to get back to you because I would have to look at the individual loan exposures and I am not familiar with it. Dennis, are you on the phone?

Dennis Schuh

Analyst · KBW. Please go ahead.

I am there.

Barry Sternlicht

Analyst · KBW. Please go ahead.

Do we have much exposure to Coronavirus anywhere? I don't think so.

Jeff DiModica

Analyst · KBW. Please go ahead.

In New York City hotel, I will push in, Dennis, which is very helpful. Obviously, you would have a lot more there. Our portfolio is much more national, not really in much for tourist cities, not in Miami, not in New York. I doubt that it's going to have as big of an impact on us.But go ahead, Dennis.

Dennis Schuh

Analyst · KBW. Please go ahead.

Yes. I think, Jade, we should probably follow-up with you and get granular asset-by-asset. But none of the markets that have had a ton of exposure to Coronavirus, we don't have any exposure there. But obviously, it's an evolving issue.

Barry Sternlicht

Analyst · KBW. Please go ahead.

Currently, there are no markets in the U.S. that have had exposure to Coronavirus that I aware of, other than something in California, right. A couple of things. We will come back to you on that.

Jade Rahmani

Analyst · KBW. Please go ahead.

Thank you.

Operator

Operator

Next question comes from Rich Shane with JPMorgan. Please go ahead.

Rich Shane

Analyst · JPMorgan. Please go ahead.

Hi guys. Thanks for taking my questions this morning. Jeff and Barry, you both mentioned the conduit business. I am just curious, how much capital you allocate to that? How much you think you can allocate, realizing that it's a capital light business? And what types of returns sort of an annual basis because I realize there is going to be some volatility there?

Jeff DiModica

Analyst · JPMorgan. Please go ahead.

On the conduit business, it's difficult to grow using more capital. It's a relationship business. We could write larger loans. We could write tighter spread loans that have a little bit less P&L and that creates a little bit of volatility for us and takes more balance sheet but our balance sheet light strategy here is going to continue. It's $100 million-plus of balance sheet and it's across three or four different warehouse lines and we write $8 million to $12 million loans, occasionally a $20 million.We don't try to take on really big investment grade positions. We are good at what we are good that and we sort of stay in our sandbox. We push the team to a little bit more. We are up a little bit. We did $1.6 billion. We are up to $1.8 billion. That's good. The larger the loans get, the lower the profitability it gets. And we picked a sweet spot for us in our relationships. And I think it works well. So I don't foresee us going and putting more balance sheet behind that business, not that we wouldn't but just because we are going to stick to what we are good at.

Rich Shane

Analyst · JPMorgan. Please go ahead.

Got it. And the second part of the question was, what is your return target there over time?

Jeff DiModica

Analyst · JPMorgan. Please go ahead.

Yes. It's not really a returns business. It's a gain on sale business. So even though the ROE is tremendously high and very accretive to our price to book ratios and other, I don't really think about it that way. We try to write smart loans that we are confident will get into securitization. Some of those securitizations we will end up owning the BPs on, maybe a quarter of them or so. So we have secure on awful lot of the credit on those. We care about the credit of what we write, because ultimately we will be more successful in that space. We will get better enhancement levels when our loans perform better. And I think I just looked at something, we have 1.1% lifetime delinquencies when I looked at some Morgan Stanley end of year data and that was the best of the non-banks.And it's not that far from the very best of the banks and it's better than a lot of the banks and they are writing large investment-grade loans. So our credit performance has been stellar. You know you don't see that on our balance sheet or on our performance, but it's important that that business writes really good loans because that's going to allow them to get into more deals at better enhancement levels. So we are proud of what those guys have achieved in what's been a volatile market. The consistency been amazing. And as Barry said, that was the one quarter we made a lot of money.

Barry Sternlicht

Analyst · JPMorgan. Please go ahead.

And we didn't lose money, we just didn't make any. I think that's the end.

Operator

Operator

Thank you. Our final question comes from Tim Hayes with B Riley. Please go ahead.

Tim Hayes

Analyst

Hi. Good morning guys. Thanks for taking my question. Just a quick one for me. On the JV write-down, I am just wondering if there's a path to partial recovery there? And if there are any actions being taken by you or the other sponsors to improve those assets?

Barry Sternlicht

Analyst

Well, our basis is now approximately zero, I mean, our held, so yes. We are not giving up. We are going to look at restructuring the deal with the servicers. The first step was the appraisal because it marks where it is now in servicing, special servicing. And now you should look at it as a pure option. If we can create value, great. And if we can't, we won't.And I will just talk about retail in general today. The retail assets need capital to be fixed. There is no way to transition like the bankruptcies of Forever 21 and the dozens of other retailers that have gone bankrupt without replacing it with other tenants. We had a record leasing year in our retail assets, but rents are lower, tenants have all the leverage. And I would say, the tenants themselves are an incredibly shitty job running their stores.If you walk into some stores, even brand new stores here in Miami, on Lincoln Road, a brand new Nike store, you walk in and want a medium short, they are out. How could they be out of shorts? And so they are sending you to online. And why? Because the Wall Street want to hear about their online sales. So it's kind of a big mess. It will stabilize. The really good malls are still busy but the tenants, there are fewer tenants out there.Interestingly, I wonder how this is going to translate into logistics, which is an incredibly hot industry in the United States and something we don't have much exposure to or actually almost nothing in the REITs that I can think of, because if the credits go bankrupt in the mall, they go bankrupt in the distribution centers. And so I mean you haven't seen that happen, but…

Operator

Operator

Thank you. I would now turn the call over to Mr. Sternlicht for closing comments. Please go ahead.

Barry Sternlicht

Analyst

I just say that we had a really interesting and a good year, solid year, but we really feel better about next year, this year 2020 than we did about 2019. We just had our three-year business planning meetings and we all looked at each other and said this looks pretty good. So we are happy with where we are. The teams never been more cohesive. The board is supportive and adds tremendous value to our enterprise and we want to thank you because it's the first quarter call and for all your support over the years and we look forward to continuing what we are doing and doing it even better going forward. Thank you very much.

Operator

Operator

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