Q4 2022 Starwood Property Trust Inc Earnings Call

Speaker 1: Greetings and welcome to the Starward Property Trust 4th Quarter and full year 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Speaker 1: If anyone's your required operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Zach Tannenbaum, head investor relations for Starward Property Trust. Thank you. You may begin.

Speaker 2: Thank you, operator. Good morning and welcome to Starward Property Trust Learning's call. This morning the company released its financial results for the quarter ended. December 31, 2022 filed its form 10K with the Security and Exchange Commission and posted its earning supplement to its website.

Speaker 2: These documents are available in the Investor Relations section of the company's website at www.starwarepropertytrust.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.

Speaker 2: These statements are based on management current expectations and beliefs and are subject to a number of trans and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

Speaker 2: I refer you to the company's file made with the SEC for more detailed discussion of the risk and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Speaker 2: The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-get financial measures will be discussed on this conference call.

Speaker 2: Our presentation of this information is not intended to be considered an isolation, whereas a substitute for the financial information presented in accordance with GAP.

Speaker 2: Reconciliation of these non- GAAP financial measures to the most comparable measures prepared in accordance with GAP can be accessed through our filings with the SEC at www.scc.gov.

Speaker 2: Joining me on the call today are Barry Stern, like the company's chairman and chief executive officer, Jeff D'Modica, the company's president, Rina Penaire, the company's chief financial officer, and Andrew Sassen, the company's chief operating officer. With that, I'm now going to turn the call over to Rina.

Speaker 3: Thank you, Zach, and good morning, everyone. Our unique multi-cylinder platform once again demonstrated consistent performance with distributable earnings or DE of 161 million or 50 cents per share for the quarter and 726 million or $2.28 for the year. Underappreciated book value ended the year at $21.70. Up 26.

Speaker 3: 9.3 billion and follow-on fundings of 1.1 billion. Against that, we have repayments and sales of 3.7 billion, including 1.9 billion from commercial lending, securitization proceeds of 3 billion, and newly issued corporates of 1.1 billion. 2.3 billion.

Speaker 3: We continue to have significant liquidity with 1.1 billion of cash today, 250 million of which we will use to repay our convertible notes maturing on April 1st.

Speaker 3: We also benefit from excess unencumbered assets and gains within our property portfolio, both of which can be utilized to create additional liquidity.

Speaker 3: I will start my segment discussion this morning with commercial and residential lending, which contributed DE of 172 million to the quarter. In commercial lending, we originated 266 million of loans, including a 112 million loan on an industrial-built-to-suit that is pre-leased to an investment grade tenant.

Speaker 3: This brings our full-year originations to 5.3 billion of which 56% with multi-family and industrial. At quarter-end, our aggregate multi-family and industrial exposure is 39%, which is nearly three times the pre-COVID level.

Speaker 3: Our predominantly class A office exposure continues to be just 23% of our commercial loan book, which is down from 29% a year ago and 38% pre-COVID.

Speaker 3: In 2022, we received 362 million of office repayments and subsequent to quarter end a $92 million office loan in Canary Warp, London, repaid early, further reducing our office exposure today.

Speaker 3: During the quarter, we funded 84 million of new loans and 395 million of pre-existing loan commitments, which were partially off-fett by 301 million of loan repayment.

Speaker 3: This brought our loan portfolio to a record $16.8 billion up 18% year over year with 99% positively correlated to rising interest rates.

Speaker 3: Company-wide, inclusive of floating rate assets and liabilities in all of our business lines, a further 50 basis point increase in base rates would increase annual earnings by $19 million or six cents per share.

Speaker 3: On the seafull front, we increase our general reserve by 27 million in the quarter to a balance of 94 million, or just over half a percent of our commercial lending portfolio.

Speaker 3: In looking at credit performance and the adequacy of our Cecil Reserve, one of the key indicators of future loss is historical experience.

Speaker 3: Unlike our peers, our model focuses more on this actual historical loss experience, as well as property type and LTV, while placing no emphasis on the more subjective internal risk ratings.

Speaker 3: To that end, we had no new specific reserves in the quarter.

Speaker 3: However, we downgraded four office loans totaling 724 million from a 3 to a 4 in the quarter which Jeff will discuss and $142 million retail loan from a 4 to a 5 bringing our total 4 rated loans to $872 million and 5 rated loans to $287 million. We are confident in the underlying real estate and ultimately believe these assets are fully recovering.

Speaker 3: During the quarter, we foreclosed on a 5 rated $245 million first mortgage loan related to an office building in LA, which Jeff will discuss in more detail. The property was recognized at the carryover basis of our loans, and we have in place financing on the asset, totaling $117 million. In our residential business,

Speaker 3: We acquired 745 million of loans, including 713 million of agency investor loans that we discussed last quarter, bringing our on-balance portfolio to 2.8 billion. As prepayments have flowed, we recognized the $17 million gap market increase in our retained R&BF portfolio this quarter, bringing the balance to 423 million.

Speaker 3: We've previously discussed our equity interest in a residential mortgage originator. During the quarter, we exited this investment, resulting in an $11 million gap and DE law.

Speaker 3: Next, I will discuss our property segment, which contributed $17 million of DE to the quarter. Of this amount, $9 million came from our Florida Affordable Housing portfolio. For GAT purposes, we recorded an unrealized fair value increase related to this portfolio of $68 million in the quarter.

Speaker 3: or $455 million for the year net of non-controlling interest. The value was determined by an independent appraisal, which we are required to obtain annually. The implied cap rate is consistent with our prior valuation.

Speaker 3: In our master lease portfolio, we recognize a 10.6% increase in rents effective October 1st as part of the five year contractual rent bumps in this portfolio.

Speaker 3: This will result in $2.8 million a higher rental income annually. Next I will discuss our investing and servicing segment, which contributed DE of $31 million to the quarter. Our conduit, start with mortgage capital, completed one securitization, totaling $93 million in the quarter, bringing our total volume for the year to $1.2 billion across nine securitizations.

Speaker 3: In our Special Service, we have paid four new Special Servicing Assignments, totaling $4 billion during the quarter and $27 assignments, totaling $24 billion during the year. Bringing our name, servicing portfolio to $109 billion, the highest level since 2017.

Speaker 3: Our active servicing portfolio declined slightly to 5.4 billion as 700 million of resolutions were offset by transfers into servicing of 300 million.

Speaker 3: And on this segment's property portfolio, this quarter we sold one asset for proceeds of $37 million, resulting in a net gap gain of $25 million and a net DE gain of $23 million. Once again, demonstrating the embedded value of this portfolio, which has been a source of consistent and recurring gains across cycles.

Speaker 3: Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of 18 million to the quarter. We acquired 76 million of loans in the quarter, bringing our total volume for the year to 700 and 26 million. Funding totaled 68 million with repayments and sales totaling 75 million, keeping the balance of the portfolio consistent with last quarter at 2.4 billion.

Speaker 3: which was 97% floating rate. I will conclude this morning with a few comments of our capital markets activity and capitalization. We continue to focus on non-recourse and non-marked to market financing with 88% of our outstanding financing not containing spread marks, which are solely based on market events. During the quarter, we issued a five-year 600 million sustainability term loan B as for plus 325.

Speaker 3: This is an addition to our ATM capital raises early in the quarter where we issued 750,000 shares of common stock for growth proceeds of 16 million at an average share price of $21.17. Bringing our full-year ATM issuance to 2.2 million shares for $49 million at an average share price of $22.72.

Speaker 3: We continue to have ample credit capacity across our businesses, ending the year with $8 billion of availability under our existing financing lines, unencumbered assets of $3.9 billion, and an adjusted debt to underappreciated equity ratio of 2.5 times. With that, I will turn the call over to Jeff.

Speaker 4: Thanks, Rina. We strategically built our business over the last 14 years to perform well in normal markets and outperform in volatile ones. Higher leverage would have created higher earnings in normal markets, but our focus has always been on tail risk and dividend sustainability. We've held the line on very low leverage.

Speaker 4: diversified both sides of our balance sheet and added a special servicer that makes more money in time to distress. This model is proven itself through cycle and with $1.5 billion or $5 per share in harvestable gains in our own property portfolio, we have significantly grown book value, yet our stock is lagged with our sector.

Speaker 4: On average, our stock is traded at 123 percent of book value since inception, and today we trade below 90 percent of book values. Given the significant rise in base rates this year, the market's focus is clearly on credit, and specifically on office credit. Rena said we have reduced our exposure to office loans from 38 percent to 23 percent.

Speaker 4: lower office exposure to require lower reserves in the current environment, and that is the case again this quarter. Other than our previously disclosed $4.9 million reserve on the entire balance of a retail loan in Chicago, we have no assets specific, Cecil reserves today. With $1.5 billion and harvest the bull property gain.

Speaker 4: Over 15 times, our cumulative model driven fuselage reserve. We are the only mortgage rate with multiples of cushion to cover potential losses should see our remark its weakened from here.

Speaker 4: We have re-underwritten our portfolio multiple times in the past few months to ensure we maintain significant liquidity to both run our business and to be able to go on offense as market stabilized.

Speaker 4: We aren't dependent on raising incremental capital in the next year, even after the cash repayment of a maturing $250 million convertible bond in April and a maturing $300 million and a unsecured bond in November .

Speaker 4: Our ability to earn our dividend also doesn't depend on raising incremental capital. As spreads and rates normalize, we will continue to monitor the capital markets for capital raising opportunities to execute on the very accretive investment opportunities we see today. We will continue to optimize our existing investments by rotating credit and sectors as we always

Speaker 4: In the fourth quarter, we invested $1.2 billion, which is a fraction of our multi-year run rate, and we expect to maintain this defensive posture in the coming months. Credits breads have begun to stabilize since peaking in early Q4, and once longer-term credits breads stabilize, we expect to resume our run rate investment date. We have produced significant gains on assets we have taken into AREO since inception.

Speaker 4: proof that scale and experience matter in volatile markets. We will again use the experience of our manager, the RECAPLA Group, and our 350-person dedicated team to execute on our liquidity enhancement strategies this year. Resolving our ARIO in non-approal loans and re-investing that equity into new current pay assets is management's greatest focus. And doing so successfully, as we have in the past, will increase earnings by over 20 cents per share annually.

Speaker 4: Without the benefit of any reduction in drag or realizing any recurring, non-recurring gain, we project we will continue to earn our dividend each quarter this year in our core businesses alone.

Speaker 4: I want to spend a minute on our ARIO in newly downgraded position. As Reena said, we added an ARIO asset in the quarter, having taken title to a vacant office building in downtown Los Angeles during the quarter. We are working through several non-office redevelopment scenarios and are in discussion with a number of interested parties to redevelop with us or sell the property to. We talked previously about an office asset we foreclosed on in the gallery.

Speaker 4: and call the chat for it, which shows, directly

Speaker 4: We have put two units under contract since quarter-end at pricing in line with our expectations, and we expect that exposure to shrink this year.

Speaker 4: be fully collectible. The assets are in Brooklyn, Washington, DC, Orange County, and Houston. All of these borrowers are large institutional real estate investors and we are working with them to find the best solution on each. In all four cases.

Speaker 4: They're a sponsor fund related reasons. They may be unwilling to support the assets if they can't stabilize them this year.

Speaker 4: Against that, we feel secure at our basis in Brooklyn due to having significant excess loan collateral. DC is a great candidate for Reddy conversion and we are already in discussions with third parties at our loan basis should we get control of the assets.

Speaker 4: And in Orange County and Houston, the assets are being marketed and the sponsor is received or we expect them to receive bid at or above our basis. In residential lending, we have stopped buying loans. We exited our small preferred equity investment in a mortgage originator. And we sought securitization spreads, began to normalize in January . Loyal Aggregates are currently on sale in college commitments. They have lots of taxes. Why would we not want to expect students from everyone?

Speaker 4: Banks have become very competitive funding unsacuritized residential loans, and we expect to close on new financing facilities at materially better financing terms in the coming months.

Speaker 4: As Rina said, our securities book has performed well as prepayment speeds have slowed, helping to offset below target returns on our unsecuritized loan portfolio.

Speaker 4: We continue to add to our energy infrastructure lending portfolio in Q4 and in Q1 at above trend risk adjusted returns. When we go back on offense, I would expect we will invest more heavily in this attractive lending segment.

Speaker 4: Finally, we have talked about the earning power of our special servicer in times of distress. As Reena said, today we are named special servicer on $109 billion worth of CNBS up from $68 billion just four years ago. Maturities will start picking up this year and going forward as we are now past the 10-year anniversary of CNBS 2.0.

Speaker 4: or post GFC loan. And if markets continue to be volatile, this could produce significant earnings for our company in 2024 and beyond. With that, I will turn the call to Barry. Thank you, Zach. Thank you, Arena. Thank you, Jeff. Good morning, everyone. Welcome to our earnings call. Thanks for being with us.

Speaker 4: I usually start with the economy and those of you who have seen me on TV, I've been fairly aggressively trying to get the fed to stop raising rates and let the impact of what they've done, the largest increase in rates, the fastest increase in rates in the history of the country.

Speaker 4: coupled with the balance sheet reduction, coupled with the OCC telling most of the banks to cut back lending and shrink their balance sheets. It's created incredibly tight conditions. And I saw report this morning that construction in the US has dropped 27 percent. That's commercial construction. Obviously, single-family homes have fallen off a cliff. And when we complete this wave of construction, I would expect many projects to get tables. When we look back at the great financial crisis and where job losses were, they were really in two categories. Manufacturing.

Speaker 4: wages and real job across the service economy during 0708.09 actually education and healthcare went up.

Speaker 4: So you can't change that with interest rates. So the only place you really heard the economies in the service sector, which would be retail, travel, airlines, and things like that, such. Business services have already let go of 400,000 people, but you see the first and the largest dichotomy between unemployment claims and job layoffs.

Speaker 4: And it's never happened before, but this has been a white collar recession. All these people are getting unemployment benefits and you'll see these numbers show up when they unemployment benefits, which could last for longer, six months from tech companies actually come off. I think the economy, you're seeing the numbers from Target, the loans and grown from retailers, and yet you see these retail prints. I think that was clearing of inventory in January because obviously everybody wants to restock for the summer. And people forget that because of inflation when you're getting a retail number up three, it's actually...

Speaker 4: It wasn't in the Fed CPI numbers.

Speaker 4: because of the delay in their reporting. And now that rents are falling, they're still having them rising. And it's black and white, it's not, it's a fact. I don't know why they choose to do that one category with such a lag, but eventually we expect, I've said inflation could actually go negative. It will depend on other categories right now, I think, given the world complex. And the reopening of China, and the reopening of China,

Speaker 4: It's great. I don't expect it to be super inflationary. Basically, it'll help the supply chain finish the, and when you're building a building and you can't get the dish wash, or you need all the components of the building there, if 80% of the supply chain is fixed, you need 100% of the supply chain to be fixed, to actually get things done on time and on budget. So I wouldn't call that an in and of itself, necessarily a inflationary, but actually, you can argue with the deep-flationary. If the man comes down and supply increases, prices will fall. And that really goes to the structure and the company, and that's why I set it up that way. Let's talk about the real estate landscape for a second. It is a bit of a minefield. You can't really tell, looking at companies in private or public today, what's going on exactly in these companies, because many of us have floating rates.

Speaker 4: in 2009. We've never seen spreads like this. Construction loans, I was in Washington the other day and I was driving near a site and the driver told me that they made a loan on a hotel.

Speaker 4: So for plus $9.50, a new construction loan at 60% of cost, it's 14% for a new loan. I'd love to own a hotel at 60 cents of construction cost. I'd back up the truck, empty the kids' trust and make that loan today. Many of the companies are not in a position to do that right now. We're mostly paying defense. So you can go to the Leo

Speaker 4: And picking and choosing where to employ the capital, but we can't wait to go back on offense. And we will as soon as we see the landscape clear and the Fed basically says they're done. And what we expect to be a recession comes into place, forcing the Fed to probably lower rates. I saw a report yesterday that once they've done this, they've reached a fall 200 basis points. It's probably been pushed off a quarter or two because there's some remnants of rolling strength in the economy, but I still expect it to happen in the fourth quarter. So let's talk about the asset classes for a second. A multi-family, which has become a bigger and bigger focus of our firm and our lending book.

Speaker 4: It's going to go through a little spate of supply right here, but then it's going to end. The most projects in the multifamily will be halted until not only your cap rates up because of financing is way up. The ability to get financing construction loans is gone. And you already have a 1.7 million housing shortage. So short and long term, you're going to see rents. There are actually headline rents are going down, but in place rents are going up because it's big gap in these buildings. And in our portfolio alone on the loan book, Jeff tells me our rents have increased more than 20% since we started making those loans so that they will hit their stabilized yields. We think fairly quickly. And I would be delighted and sad, but the last.

Speaker 4: really understand or underwrite or they can't get loans for. Multi-family sector of course is supported by Fannie and Freddie where...

Speaker 4: Spreads today are available like 200 over. Fix rate debt is pretty cheap, 130 to 150 over, and that actually total cost of funds for fixed rate debt is lower than floating cost debt today. So if you want to park up some money away, if you're high net worth or in family, it's an interesting place to invest even into the softness of the market at the moment.

Speaker 4: Make no no doubt about it the Wall Street Journal of course writing six months after we talked about it the supplies been evident It's coming through it's a class stuff. They're charging a fortune We're trying to get a fortune in the B class assets. We'll have a longer runway than the a class which will fight against each other and compete and probably

Speaker 4: But we'll lease up because of the shortage of supply. Industrial has been a great market going to a good market. The market is bifurcated again. The market's main occupancies across the country remain solid. Big boxes are bonds. And so if you have an Amazon 15 year lease and you don't have steps.

Speaker 4: your bond has negative convexity and the debt on the industrial is not supported by a government agency.

Speaker 4: So it's under more pressure from a capric perspective, but having the most solid and strongest income growth of any athlete class at the moment. You do wonder how that slows down, which inevitably should, and pricing has been under some strain.

Speaker 4: The office markets you have a tale of two worlds which is everything but the United States and the United States Everywhere but the United States offices releasing. I just we have some investments in Europe particularly in Germany They can see right in Berlin is 4% and Munich is less than that Renser up in Munich 12% if you look at Asia the Middle East Korea Japan Australia people have gone back to the office It is a US phenomenon probably led by the tech sector

Speaker 4: which has created this unusual situation in US office. And in the US you have a tale of two cities. You have newer buildings and A buildings leasing and everything else emptying. And it's almost a one for one switch. So if you are in the A sector, you're doing okay. You're probably, we were just renewing a lease in probably the worst office market in the United States. Just started a capital group lease. We had 10 buildings to choose from with A quality in San Francisco and they're not lowering their rents. I was incredulous.

Speaker 4: I mean, I can't believe it. It's like a 40% vacant market. And we had to pay much more than we were paying today to be in the best buildings. There's very good demand for high quality assets. And there's no demand at all for other assets. And over time, these buildings will be converted to other uses. They'll become green silos in cities or...

Speaker 4: waste lands, indoor parks. I don't know what will happen to them, but they will be removed from the stock unless people really go back to the office in a big way. I personally like being in the office. I don't like working from home, but most of the younger generation actually likes working from Jackson Hole and Montauk. So I think that's gonna change in a recession. It has been easier for people to fire people that are not.

Speaker 4: in their offices, you obviously don't see them, you're not attached to them, and they aren't exactly raising the banner for the company and making it a big, great place to work. So I do think that will change. Having said that, the office markets are the toughest. It's only 13% of our overall asset book, a little over 13%, as Jeff mentioned.

Speaker 4: which I think might be the lowest of any commercial mortgage out there today. And we made that switch long ago and as you know we have almost no exposure to New York or San Francisco to speak of in that portfolio, which has been two of the toughest markets. And interestingly the red states, the Austin's, the Nashville's.

Speaker 4: That's not a state, but Texas, Tennessee, and Florida, Research Triangle Park, those markets have performed pretty well and continue to not only hold their occupancies better, there's fewer subletting. And

Speaker 4: They continue to attract space and there is a net positive absorption in these cities so you're going to city by city as you'd expect and There is a still a migration of people out of the blue states to the red states where there are no trade unions and the rights work and Obviously there's no income taxes and that will continue for the office markets Hotels have been incredibly strong one of the things you all know how much you're paying for your hotel rooms, but you don't

Speaker 4: the jobs added were in the hospitality industry, it was 250,000 jobs in the hospitality industry, which went a long way back to hiring the people that they couldn't hire. But the debt markets are a mess, nobody wants to land against hotels, which we would be delighted to step into that vacuum in the domestic class. We obviously know very well, not sure anyone.

Speaker 4: lending environment we've seen since 2009. We used to three or four times during the last 12 years of our existence, like are we 13 yet or so? 13 and a half. 13 and a half. We've moaned and groaned about too much competition or this is not an issue of that today because the lenders, the banks are on the sidelines, insurance companies are actually filling the void but...

Speaker 4: playing it in low leverage. Given our background and credit, our knowledge of the markets are real time data from 120 billion dollar asset base. We feel we could deploy capital extremely well and a credible spread in this market. But we've always...

Speaker 4: not issued equity below book value. And if we were above book value, we would love, we think we could make extraordinary loans today with incredible risk-reward characteristics, but at the moment we're going to play defense and make sure we have liquidity to handle anything that comes our way.

Speaker 4: as we navigate through this unusual situation at the world climate development. What we're doing here is really running multiple scenarios, which is we do nothing. And virtually nothing, we can earn our dividend earning doing almost nothing, which is phenomenal, and probably shocking to we're surprised with nearly.

Speaker 4: But it's probably because the floating rate book is carrying the firm and the loans. We always got repaid. And not getting repaid is actually a good thing. So we don't have the down time. The money doesn't go into cash and we're earning the coupon and we get paid currently. The other thing we're doing is how do we get, focus on turning the asset base over faster. So look at things that are not earning their keep and we're earning, let's say, a seven on a situation, but we can redeploy to 14. Maybe we sell to seven.

Speaker 4: take whatever small locks or might be to redeploy that capital into a 14. The last thing of course is to get the, as Jeff mentioned, the unproductive assets from our book out, whether it's the buildings in Houston or the museum tower in Los Angeles or the chats with the apartment. They're not contributing anything. They fight a capital in them.

Speaker 4: and their source of equity for us. And of course, we could sell additional liquidity, we could create additional liquidity by selling additional interest. And the Woodstart portfolio are multi-family assets that we wanted to. We would not really want to do that. We have lots of ways to create liquidity for the firm on top of the 1.1 billion of liquidity we sit on today. So.

Speaker 4: I think we're excited about the opportunities, we're cautious about the environment. It's nice to have a special service, they're the largest in the country that will continue to perform and is a hell of a hedge against everything else going on in the world. They have unparalleled knowledge, both in the C&DS markets.

Speaker 4: And of the loan book, we employ something inside the firm, something like 16 people in IT who run the databases that power the LNR service business. We have information that is mind-boggling and it's been accumulated over 30 years. Actually, the head of service thing has been here 30 years. Joe Forsha and he's one of the original employees of our company.

Speaker 4: They do an amazing job and I think it will be an amazing opportunity for him to grow and add additional earnings to the company in the foreseeable future. The worse he gets, the better their life will be and the more they'll earn. And today we earned roughly I think a third of what we earned in the peak in 07-08, something like that. Thanks a lot.

Speaker 4: There's good upside, hopefully, for that business, which is not, is a pure ROE business. It doesn't deploy any capital. It raises the ROE of the firm. And hopefully you will see positive things. So that we don't want to get too good because obviously it's probably a bad for the loan book and we're too good. So I think we're positioned to take advantage. And what we're looking for is a signal from the Fed that they're done. And I think the first thing that happens is that the threads come in.

Speaker 4: AAA is a 200 plus over is an anomaly. It should not be that way. That's fear in the market. There's tons of capital out there. You see it's run to the equity markets. I do think the equity markets are a bit ahead of themselves. You can see the speculation creep back in with AMC and Bed Bath and beyond and all these companies.

Speaker 4: They get raided by the guys that thought were dead, the meme stocks show up again. That is not healthy. We want these markets to settle down and be driven on fundamentals and a growth potential and really a fundamental analysis of the future and the cost of capital of equity and debt normalizing. I do think we can get back to 3% inflation. I'm not sure we can get to 2%.

Speaker 4: I don't know how he could actually try to hold a number like that and was really going to just crush the economy and then try to balance it at 2% inflation. That would be the Wizard of Oz couldn't do that. I'm not even sure the Lord himself could actually make that happen. So Jerome Powell better be the Lord because we're going to need him and his team to actually do something that I think is virtually impossible. We have a great balance sheet today. A great fortress balance sheet.

Speaker 4: board and a great share of repatement. Thank you.

Speaker 5: Okay, question.

Speaker 5: We'll take questions. Thank you.

Speaker 1: If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands up before pressing the star keys.

Speaker 2: Our first question comes from the line of Doug Harder with Credit Trees. Please proceed with your question. Thanks. I'm hoping you could touch on, you know, you talked about not being interested in selling down with Star, but, you know, I guess just curious, given your comments that this is as good as a lending opportunity if you've seen.

Speaker 2: kind of your appetite or willingness to sell down wood star to raise additional funds for capital for lending opportunities. Yeah, we can do it. We were actually talking about it yesterday and it's a different situation. One of our.

Speaker 4: clients have come to us for a separate account to buy affordable housing. And of course, we want to go to the two institutions that took the interest first. It hasn't been, we don't need a ton of excess liquidity, but we'd love to have it to deploy. I think...

Speaker 4: My number one source would be taking the condos and Chatsworth, forgetting about the book value. We probably are right around, we're realizing prices and consistent with where our marks are. But there are other assets that we'd like to move on and just redeploy the capital first. Woodstar is like selling gold.

Speaker 4: Don't forget, in affordable housing, rents can't go down. In all this building, none of it's affordable. So there's no risk of not being 100% full or virtually full. And the only question is what rents are going to be, and they can't go down. And we have attracted debt in place. So

Speaker 4: It's always something you can sell, but when we bought those, I literally said, this is what I want to own with my kids' trust accounts. As you know, I've never sold a share of stock in 13 years to start a property trust. I love to own that stuff. Should we sell another 20% or raise a couple hundred million bucks? Maybe we'll do that. We can move some of our resi.

Speaker 4: assets that are yielding that double digit return of everything else. We are hedged on interest rates, but the market's gotten a little better in the non-QM book. It's too big at the moment. We know it's too big. So that would be a place that has less.

Speaker 4: It would be a shame. I mean the markets will rally when the world gets better.

Speaker 4: If you can earn 14s and you're selling sevens and you get a couple years, you can quickly make up for any deterioration in book with great earnings power. It'd be nice to... Now, don't forget, some of the stuff, if you go to a 14 or a 13, as soon as the rule gets better, they're going to try to re-cinance you. So that's also kind of a trick. We have to be careful. Musk is Z9, youTaylor colorado. halfway things stop dropping on November 17th 201517 hours

Speaker 4: Because we'll get the book back, learn 14 for a year and then everything will be liquid again which is not great. So it's a balance and the good news is we have so many ways we can deploy capital. I didn't say it but the energy infrastructure, the energy lending is extraordinary. It's probably the highest return on equity we can get today.

Speaker 4: and I keep killing deals, transactions and investments just because I wanna maintain our liquidity right now. But it's probably, maybe it's an overabundance of caution, but I am very worried about Powell and them doing the exact reverse of what they did during the pandemic, which is keeping,

Speaker 4: fiscal policy to stimulative or their policy to stimulative.

Speaker 4: Over analog with the opposite, they'll tighten too long and when it's evident it'll be too late. They won't be able to correct it. They'll cause real pain. Of course, I go back to wage growth. It's good inflation. We should applaud wage growth. And they should applaud wage growth. Everything else is bad inflation. So we want wage growth. It isn't about killing wage growth. It is about...

Speaker 4: killing commodity price inflation, which really came from dislocations in the supply chain, and then throwing trillions of dollars at consumers that went out and spent it because they had nothing else to do. So they sat home, bought everything they could buy. We all know it. We all tried to buy a couch. We tried to buy a chair. We tried to buy a desk. If you wanted to buy a golf cart, a golf bag, you couldn't get anything. Watches, used cars, everything went insane. And now they've reversed. So I just think we have to be careful. We've chosen really to our dividends. I get letters from shareholders.

Speaker 4: They count on us in their retirement accounts and Woodstar provides a great amount of safety and a very consistent and growing cash flow stream to help us support the dividends. Not like, it doesn't come without a cost because we marked up the book with the sale and of course it actually went up. The third party appraisal took it up based on NOI increases which were substantial.

Speaker 4: we could sell it and probably have a little gain, I would think. I realize the gain again. A big gain. Almost all gains. Almost all gains. We'll look at it. We're turning over. Nothing's not available to be sold.

Speaker 2: Great, thanks. Our next class in comes from live. Steven Laws with Raymond James. Please proceed with your question. Hi, good morning. It cannot follow up on the Woodstar and Rina, you touched on this a little bit. But can you talk about, I think you mentioned the rent increases. I'm not sure if that was true.

Speaker 4: Thanks for the question. They'll come out again in April . As usual, they will have a three-year look on CPI and on median income. We know those inputs for the next couple of years look really good. So for the next few years, we feel really comfortable that we're going to continue to see rent increases. But the new data will come actually in April .

Speaker 4: We actually expect that number to be north of 10% in the government change their their calculativeness and they have noticed that the number to be 10% which is unbelievable. So it will be the strongest sector in Northern Miami, obviously, affordable, that's true.

Speaker 4: I think it could be higher depending on the portion that's coming from the local income growth. So, it's like I said, it's the give that keeps on giving.

Speaker 2: Yeah, it says strong market there. One quick follow up. Yes, could you talk a little bit about the Washington DC office? That looks like a maturity in early Q4. I know you guys. I think it's possible for rated. But right now if I'm wrong there, we can give us a little more detail and update on that. It's conversations and I expect the resolution or payoff to go there.

Speaker 4: Yeah, so there was one that I spoke about earlier, which is not the other asset that we talked about. So there's one that you see in our depth that say 2023 maturity we're working with the sponsor right now to potentially extend that asset into late 23 early 24 and get a paydown. There's another asset that I spoke today about that as a forrated loan, if that was your question. Yeah.

Speaker 4: And that's a downtown asset. How did GSA Tenants, it's 370,000 square feet office asset. The good news is it's completely vacant with that GSA Tenants leaving. And we think it's a really good candidate for residential conversion. We haven't taken the asset back yet. The sponsor is still touring some potential GSA Tenants. But if they strike out and we take it back, we think there'll be a lot of interest to convert this asset to Rezzi. And we have, we're in significant discussions already at our basis to do exactly that. You know, one of the difficult things sometimes is emptying these buildings out for Rezzi. You obviously have to have the right floor plan. You have to have the right.

Speaker 4: center core, you have to have the right size floor plate, you have to be in an area that's desirable for REZE that this one sort of checks all of those boxes and along with our Houston asset that we're working on a REZE conversion. We think these are two really prime examples of what can happen in the office space when the office market pulls back and REZE is a better place. So we're optimistic that there's a

Speaker 2: So there's a better play on that one to move forward if they don't equip a GSA tenant before the maturity this year. Appreciate the color there, Jeff. Our next question comes from LINE of Jade Romani with KBW. Please proceed with your question. Thank you.

Speaker 6: Thank you very much. Just in terms of the outlook on commercial real estate credit overall, trying to understand how nervous or worried you are about the environment and also the Starwood portfolio and hoping you can comment on each separately. You know, Aaron heaven, what is your question came to us.

Speaker 4: level on a different amount.

Speaker 4: And a lot of good, as you may know, there's a lot of stuff isn't being sold because people expect if they don't have to sell, they won't sell.

Speaker 4: It's a little like even though it's not the GFC. It mirrors that in the sense that there's a big bit of aspirin between buyers and sellers.

Speaker 4: And everybody doesn't want to have to sell today, isn't going to sell. And if there's a sale, it's pretty much a distress sale. A loan's coming due. You're going to give the building back to the lender. And you're going to have to sell today.

Speaker 4: Everybody doesn't want to have to sell today, isn't going to sell. And if there's a sale, it's pretty much a distress sale. A loan's coming due. You're going to give the building back to the lender, which in this case is to us.

Speaker 4: To see an institution, a household name institution hand this back a building in D.C. that had a third of it was equity, you know, is kind of shocking actually. But I think in the office sector it is really tricky. Mountains are almost 10%.

Speaker 4: Today, probably so far plus four to five to six hundred depends on what the building is. If you have a cash line hotel, you can get alone. Maybe it's 400 over, which is eight and a half percent. It could be pretty soon to be close tonight. But if you don't have a cash line hotel, you're going to see, you know, what you think you're going to turn around. And you're going to be.

Speaker 4: borrow, many banks are shutting down credits at smaller players. The Fed has no idea it seems that what's going on in the commercial real estate markets. And it's not Yau-Yauk. I mean, these buildings are basically the backbone of tax receipts for the subparities around the world country.

Speaker 4: and we'll exacerbate the problems in the blue states, which are already reporting multi-billion dollar deficits. So if they intend to write themselves by raising taxes, they'll only drive these cities further and their people into the ground. So it's not a tricky environment. There's no doubt. And we're all...

Speaker 4: Doing the best we can long term we're going to make more money in this environment That's the funniest thing and we're going to make more money because our new loans will be better But if we get these buildings any of these buildings back getting back that building in Washington it two thirds of the

Speaker 4: We lent like 60% or 62% of cost. I mean our basis is fantastic, right? So we're the Saudis in that market. We should be able to convert that building to a resident attractive basis. But we'll pick and choose how we deploy Cap. And ultimately, I think we'll make more money on these investments as we have. For the last 13 years, as Jeff is proud of saying all the time, all of our proposed rules, we've sold NIAG, we get it a profit, significant profit, to the value of the loans that we...

Speaker 4: put in place because we are an equity shop too. We're used to taking assets back, fixing them up and selling them. And the read is done an amazing job with that. Even buying assets from the trust and from the loan book. It's been a incredible source of earnings for us for 13 years. So I expect that would continue. And you get it significantly cheaper than the last guy who essentially was a smart person who bought that building or built it.

Speaker 4: expecting a different outcome, of course. We'll see how it plays out. Hey, Jade, I want to jump back to Stephen's question for a second because now I'm realizing what you guys are seeing on page 13 of the sub that on page 13, the first asset, the largest asset in our office, the exposure, which is what I think you were talking about, that's a tremendously well-leased, 93% leased, 10-year weighted average of a lead term, excuse me.

Speaker 4: 313 million are alone and that will pay off in October of this year. That is a very strong asset I think probably risk-rated too for us. The ones I spoke about were the 8th one, McLean Virginia, where we think that there will be a material paid-on or potentially a short extension. And again, I talked about the forrated zone when I was talking about the conversion to Reddy.

Speaker 7: But I don't want anyone to think that largest loan in that bucket is in anything but really good shape.

Speaker 6: Okay, thanks for that clarification and it's good to know that because I did get some questions on it. On the L&R side, I wanted to ask about if there's an opportunity to broaden the scope of business to do special servicing loan workouts, portfolio consultations to others away from the CNBS market because...

Speaker 6: The fixed rate nature of that business means you probably won't see an uptick in special servicing fees until probably 2024 and beyond. So in the meantime, there's all these capabilities. Why not put them to work?

Speaker 7: I thought I saw something in the bushes outside our board meeting two weeks ago, Jade, it must have been you. It's something Barry has been pushing us on for a significant amount of time. We actually have an active search out there for the right person to lead that. We have a deck all put together on all the different services that we can do out at LNR. And as you said, we have tremendous capabilities there from valuation on.

Speaker 4: We've been talking about this three years, so maybe longer. But there's no reason we can't be a scientist in the service to people. I'm not sure anyone in the largest in the nation. I don't know if anyone has a cred that we do in this space. And where are the highest rated servicer? My multiple agencies. My multiple agencies. So if you're picking the best and an experienced group.

Speaker 4: We're really a company in the form of a reef. We're a lender. We could be a bank................

Speaker 4: So, you know, it's really an interesting thing. We're different than everyone else in the sector on the purpose. And we can deploy capital to any one of these releases, you know. So the idea was not to have to force speed one, and there was nothing to do. It is interesting and overriding that we'll learn to do it, and we think.

Speaker 4: We're confident we can probably earn a dividend and we make you know new investment virtually no new investment which is

Speaker 4: something that I find surprising and good news. So we have to work the balance sheet. We're good to do that. So we're going to do that. That's really the right side of the balance sheet. That's the side where the assets are.

Speaker 4: Which is the death of a guy with a side with the death of a was it very good at accounting? But I can't add.

Speaker 2: Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question. Can you talk a little bit about how you're balancing a willingness to work with a borrower as their rate cap expires or whatever the other event is versus just kind of playing heartball and singing?

Speaker 7: partner, whether it's a bank or a CLO, what they want us to do or require us to do, whether they're forcing us to have a new rate cap bought in at what strike that new rate cap has to be bought in. They're very expensive, as you know, or whether they'll allow us to take interest reserves or other guarantees towards that. So with our premier borrowers, we're certainly open to talking about the different potential solutions in a very difficult rate cap. Use of some inquragen, ????n prickle, Munning Point

Speaker 4: the interest rate cap similar, you know, where almost all the loans have them and they're protected. Can you talk a little bit about that relative to CRE loans? Yeah, these are broadly syndicated loans that do and don't, but for the most part, they do have very similar, I'll get you the exact numbers on, after this, on exactly what percentage do have them.

Speaker 7: But it broadly speaking, it is more protected than not. I'll come back with the exact numbers on rate cap. Ladies and gentlemen, as a reminder, if you'd like to join the question, please press.

Speaker 2: Our next question comes from Rick Shane with JP Morgan. Please proceed with your question. This is AJ on for Rick Shane. Just on the loans that were downgraded, I know there are no specific reserves on those assets today, but if any of those loans don't work out, would we see additional reserve billed or is that already included in your December 31st?

Speaker 2: Okay, great. That's helpful. Thank you. And then you said there were sponsor fund related reasons for the office down grades. I mean, is there anything you can share with us? What are the reasons sponsors want to want to support the assets?

Speaker 7: You know, it's a fully invested fund in a few cases. In a case, there is a large fund that is leaving commercial real estate and they are not putting more money in. So, it's different in each one. But, you know, I think you're seeing a similar trend.

Speaker 7: We're a lot of people.

Speaker 7: Either don't have the cash available today or unwilling to. These are more scenarios where they don't have the cash available in the specific fund that the assets are owned in to be able to continue to support the project. So those are the opportunities where if we do step in, tend to be more creative to us where we do have the capital to be able to continue.

Speaker 2: Great, thank you. Thank you. Ladies and gentlemen, this concludes our question and answer session. Mr. Sternlick, I'll turn the floor back to you for any final comments. Thank you, operator. Thank you, everyone. Thanks for your questions, and we obviously are here to be transparent and welcome your questions and the team is available. So...

Speaker 2: Thank you and have a great first quarter. Stay warm. Thank you. This concludes today's conference. You may disconnect your line at this time.