Q2 2023 Starwood Property Trust Inc Earnings Call
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Ladies and gentlemen, good morning, and welcome to the Starwood property Trust second quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star and Seattle on your telephone keypad.
As a reminder, this conference is being recorded.
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 30th 2023 filed its Form 10-Q, with the Securities and Exchange Commission and posted its earnings supplement to its website.
These documents are available on the Investor Relations section of the company's website at Www Dot Starwood property Trust Dot 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.
The company undertakes no duty to update any forward looking statements may be made during the course of this call. Additionally.
Additionally, certain non-GAAP financial measures will be discussed in this conference call.
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 Dot FCC Dot Gov.
Joining me on the call today are Barry Sterne <unk>, the Companys, Chairman and Chief Executive Officer.
GAAP net income was 169 million or 54 cents per share.
Book value per share increased 7% to $20.51 with unappreciated book value, increasing nine cents to $21 and 46 that these book value metrics include an accumulated seafood reserve balance of 260 million or 83 cents per share.
Since our last earnings call, we significantly enhanced our liquidity position with the July issuance of $381 million of convertible note and commercial and infrastructure loan repayments of 1.3 billion during the quarter and 472 million subsequent to quarter end net.
Net of $787 million in fundings across businesses, our current liquidity increased to 1.2 billion.
Beginning my segment discussion. This morning is commercial and residential lending, which contributed D. E of 182 million for the quarter or 56 cents per share.
In commercial lending our pace of repayments picked up with 1 billion during the quarter and another $386 million in July alone well in excess of last quarters $257 million more.
More than half of these repayments were on mixed use and hotel loans.
These were offset by fundings of 272 million on a refinance loan and another $235 million of preexisting loan commitments, our portfolio, 93% of which represents a senior secured first mortgage loans ended the quarter at $16 4 billion with a weighted average risk rating of 2.9.
On the seasonal front, we increased our general reserve by 104 million due to our third party model, indicating a worsened macroeconomic outlook. We also applied more negative macroeconomic assumptions to our office phone. In addition to alone with four or five risk rating. This brought our general seafood.
Reserve to 228 million.
Of this amount $136 million or 60% relates to office.
As a reminder, seafood reduces our book value and GAAP, earning but does not impact D E.
In addition to our General Reserve, we recorded a specific reserve of 15 million related to a five rated mixed use flown in Phoenix, which was originated in 2015.
The original loan was $115 million and was recently paid down to 40 million.
The reserve was driven by the current quarter re trade of previously executed purchase and sale agreement relating to the remaining underlying collateral of which has been sold and half remains under contract.
For GAAP purposes, we charged off the portion of the loan above the current negotiated price of the remaining collateral which resulted in a corresponding D E lock.
Our only specific reserve at quarter end continues to be $5 million related to the entire balance of our retail asset in Chicago.
As discussed in our remarks last quarter in May we foreclosed on a five rated $42 million first mortgage loan related to a two storey retail and downtown Chicago, we obtained an appraisal in connection with the foreclosure, which values the asset at $42 million as a result, the property was recognized at the carryover basis.
Of our loan with no resulting impairment as.
As we have successfully done in the past our intent is to lease up the space stabilize the asset and ultimately sell it we expect to fully recover our basis.
For our remaining Oreo assets, we continue to actively work towards the path of full repayment.
We began evaluating alternate paths for this asset during the quarter, some of which were at or basis, and others, which were not.
Given the range of potential outcomes, we determine that a reserve was appropriate the reserve was determined by reference to an appraisal we obtained in connection with the foreclosure.
Next I will discuss our residential lending business.
Our on balance sheet loan portfolio ended the quarter at 2.6 billion, including $1 6 billion of non QM and $994 million of agency eligible loan we fully hedge the fixed rate interest rate exposure in this portfolio with our hedges, having a positive mark of 170 million at quarter end.
After $21 million of cash receipts in the quarter.
Lower projected prepayment speeds continue to benefit our retained our MBS portfolio, which increased in fair value by 26 million ending the quarter at $443 million.
Next I will discuss our property segment, which contributed 21 million of D E or seven cents per share to the quarter.
Of this amount 12 million came from our Florida Affordable housing fund, which continues to perform exceedingly well for GAAP purposes, We recorded an unrealized fair value increase in the fund this quarter up 209 million or 166 million net of Noncontrolling interests.
The increase resulted from the impact of HUD recently released maximum rent levels, which were seven 5% higher than last year.
Our valuation only factored in these rent increases.
Because the new rents will be rolled out beginning in July there is no positive impact to earnings this quarter.
One unique aspect of this year's maximum rent level is that certain properties or in geographies, where the rents were capped by hot this cap resulted in 3.5% of incremental rent growth being deferred to next year.
This would be in addition to any increase determined by the HUD Formula next year and will be included in our valuation at that time.
Turning to investing and servicing this segment contributed D E F 22 million or seven cents per share to the quarter.
In our special servicer are active servicing portfolio increased from $5 2 billion to $5 7 billion. This is the result of 738 million of loans transferring into servicing during the quarter nearly 70% of which were office.
Our named servicing portfolio declined to $102 billion in the quarter driven by 4 billion of maturities as maturities continue through the rest of this year and into next year, we expect to see a continuation of this trend with active servicing increasing and named servicing decreasing.
In our conduit starwood mortgage capital despite lower market volumes through this rate cycle, our securitization profit are similar to historic level.
During the quarter, we completed three securitization and priced an additional securitization totaling $218 million.
And on this segment's property portfolio, we sold two assets in the quarter, one classified as property on our balance sheet and the other is a 50% equity method investment our share of the proceeds totaled 32 million, resulting in a net GAAP gain of 11 million and a net D E gain of $5 million.
Concluding my business segment discussion is our infrastructure lending segment, which contributed D E of $20 million or six cents per share to the quarter.
Repayments of 254 million outpaced fundings of $78 million on new loans, and 11 million on preexisting loan commitments, bringing the portfolio down slightly from last quarter to $2 3 billion.
On the CFO front, we took an incremental $4 million specific reserve on a small legacy G investment that we discussed last quarter.
I will conclude this morning with a few comments about our liquidity and capitalization during.
During the quarter, we repaid the entirety of our April $250 million convert at maturity with cash on hand.
Our next corporate debt maturity is in November , which we likewise intend to settle with cash on hand, including the net proceeds from our four year $381 million six and three quarters percent convert issuance in July .
After that we have no corporate debt maturities until December 31st 2024.
Earlier in my remarks, I mentioned, our current liquidity of 1.2 billion. This does not include $1 5 billion of liquidity that could be generated through sales of assets in our property segment. It also does not include over $2 billion of debt capacity that we have the our unencumbered assets and term.
B.
Our leverage remains low with an adjusted debt to underappreciated equity ratio of just 2.4 times down from 2.5 times last quarter.
And finally I wanted to mention that this quarter, our credit ratings were affirmed by all three rating agencies.
With that I'll turn the call over to Jeff.
Thanks Rina.
We run our business conservatively since inception, 14 years ago, we've uniquely diversified into multiple cylinders, including commercial and residential lending energy infrastructure lending the MBS loan origination and investing and our 102 billion dollar named special services that produces counter cyclical income in time credit distress.
We've also built a large owned property portfolio that accounts for a record 29% of our company's underappreciated book value predominantly in the highly resilient low income housing multifamily sector.
This segment has produced high cash return and additionally over $1 $5 billion of harvestable gains contributing to liquidity Rina just mentioned.
We're property trust.
Diversified low leverage hybrid.
Set out to build with no true direct peers.
As a result of this diversification we have managed our exposure to U S office assets down from a peak of 26%.
At that time, we significantly increase their allocation to more defensive multifamily and industrial loans and to the owned low income multifamily investments I just mentioned all of which set an all time high as a percentage of our balance sheet and continued to perform exceptionally well today.
Our company's leverage improved again in the quarter to two four turns which is about a full turn of leverage lower than our peer group average.
If our asset mix looked more like our lending peers or if we increase leverage by over one full turn to look more like them. Our company would significantly out earn its dividend in this higher rate environment, but that is not how we chose to run the company at this time.
We built a diversified company with a conservative balance sheet that would best enable it to pay a stable and perhaps at times a growing dividend.
We have not and will not change our conservative credit first business model to Chase outsized earnings and we will continue to choose conservatism and consistency as we cautiously look for the right time to increase the deployment pace of our near record liquidity.
We have seen markets begin to normalize with transaction volumes slowly creeping back up in lending market starting to thaw.
We're seeing more lending opportunities and more lenders quoting loans, allowing asset and liability spreads to begin coming in you.
You can see this shift in sentiment in our loan book, where we have received $175 billion of repayments since March 31.
That is more than the previous three quarters combined and we are seeing investors, who have executed their business plans extend their maturities lowered their coupons and or increase their proceeds. We expect this trend to continue creating significant reinvestment opportunities at a time when we can redeploy capital at above trend returns and lower loan to values, which are <unk>.
We added a new lower values in most loan categories.
We have $25 billion of bank financing lines across 25 banks 8 billion of which is undrawn and $4 $4 billion of unencumbered assets, giving us unparalleled access to the corporate unsecured term loan asset specific financing and convertible bond markets.
In June and a much more difficult capital markets environment that exists today, we were two times over subscribed for our $381 million convertible bond issuance.
In commercial lending, 91% of our CRE lending portfolio have embedded interest rate protection with 80% of our loans having caps in place and then an additional 11% have interest reserves or guarantees.
Rina mentioned, we use third party macroeconomic forecast in calculating our seasonal reserves their economic outlook is more bearish than markets in forward curves imply resulting in a higher general seasonal reserves, which again reduced the increase in our company's book value This quarter.
On July 13th Bloomberg News referenced the Mckinsey Global Institute study.
That said that office values with declined 26% from 2019 through 2030, and the nine largest global office markets and with declined 42% from their peak and there are severe scenario.
Our model driven see some reserves for our office loans are pricing in an even more severe outcome than mckinsey severe scenario and our stock still trades below our GAAP are underappreciated and our fair value book values.
I will now discuss our four and five rated loans, which are 5% of our assets in total.
Rina mentioned, our five rated mixed use bone in Phoenix I want to add that we earned $24 million net loans since origination.
Fight our first do you off on over $75 billion of Starwood originated loans, we still made $9 million or a 4% positive IRR on that loan.
In addition to Phoenix, we downgraded two other loans from a four to five risk rating in the quarter.
The largest is a $252 million office loan in Houston that is 67% leased with a seven year <unk>.
Average remaining lease term.
Although the sponsor invested $259 million of equity in front of us the loan matures in September .
<unk> is working on a recapitalization, but if theyre unable to put it together, we will be prepared to take title that maturity.
With a six 4% current debt yield this well located trophy asset wont need significant incremental leasing or reduction in borrowing costs for us to recover our basis.
The second loan is a $130 million alone on a 381000 square foot office building in Arlington, Virginia that is currently 65% occupied.
With the government even slower to return to the office than the rest of our country Greater D. C. It's been a difficult submarket since COVID-19.
We will need more incremental leasing here then in the Houston loan, but it is a smaller building and that's a positive NOI and the borrower is negotiating a lease that would bring the property to 80%.
We have two other loans that are still five rated in the quarter.
On our $120 million of downtown D. C loan I spoke about last quarter, we're running parallel path to resolution, including a sale to a multifamily conversion developer at our basis. We told you about last quarter and we've been touring and active tenant interested in leasing the entirety of this building.
We expect to resolve this loan in 2023.
On our $230 million loan on a retail entertainment asset in New Jersey. The asset is now 80% leased and operationally cash flow positive after year over year increases in sales revenues and attendance.
We received our first operating distribution on the excess collateral underlying this one this quarter and management expect that our GAAP basis, we'll be below 70% of our legal basis on this asset this year due to it being on non accrual.
Having this loan on non accrual means we have had $230 million of equity, earning nothing thus, reducing our distributable earnings by <unk> 11 per share per year.
Once resolved this asset and the others on non accrual will create positive earnings power in the future as we redeploy that equity into income producing assets, while significantly reducing the likelihood and scale with future impairment.
We have five loans risk weighted for the first three were all upgraded in the quarter from five due to positive developments.
The $156 million Brooklyn alone that we classify as office and we have said is likely transform to a non office use given the low per square foot basis, which is primarily covered by the excess value of its cross collateralization with four large multifamily assets.
During the quarter, our borrower executed a lease with the city of New York to occupy half the building with an option for the remainder which along with an expected <unk> equity investment in one of the multifamily assets create sufficient cash flow in this loan to cure the past due interest.
Our $37 million remaining balance on our Napa Valley land zone had a favorable ruling in their insurance litigation in the quarter, which would result in a full return of our GAAP basis, and some or all of our non accrued interest.
On our 68% leased $197 million office loan in Irvine, California that had bids at our basis in the last year, we intend to close on a $30 million press equity investment, giving this asset two years of runway to increase NOI or wait for a better refinancing environment.
The other two four rated loans are $60 million multifamily loan that remained a four in the quarter due to slow lease up and a previously three rated $250 million loan in Brooklyn, where college has a 30 year lease on the lower 41% of the building and the sponsors have several executed LOI to take the building to 100%.
Leased on long term leases.
Our downgrade is precautionary until the leases signed.
Our four and five rated loans comprise only 5% of our company's assets or seven 7% of our commercial lending segment assets, which account for just over half of our company's diversified assets and earnings.
In our residential lending business, we have seen liquidity returned to these financing markets, we have $170 million in hedge gains in this portfolio and have newly closed and in process financing lines that will extend our maturities and reduce borrowing spreads by over 25 basis points across our loan portfolio, creating significant interest saved.
Things in the future.
Our own property assets benefit from fixed rate debt at an averaged 365% fixed coupon with a weighted average remaining term of three three years.
There are less lenders in the space, allowing us to earn more spread at lower ltvs with tighter structures on new deals.
Our borrowing spreads have stayed steady in this cycle, allowing us to earn high teens returns on credits that are deleveraging due to increased profitability, making this sector very attractive to our diversified strategy looking forward.
In summary, we are seeing more loans pay off and we will continue to manage our very low leverage business conservatively with near record amounts of cash and unmatched liquidity available to us.
We are also willing to sit back and wait for better entry points and although we have invested opportunistically every quarter, we have defensively sat on near record cash for most of this recent interest rate cycle.
With that I will turn the call to Barry.
Thanks, and good morning, everyone. Thanks for joining us.
We started this business now almost 13 years ago, we talked about being transparent and predictable running a conservative.
So you could depend on our dividend.
I think we've proved our trains.
Okay.
That's a lot of detail I'm going to go all the way to the top and talk about what I think is going on and how we're going to.
Address it.
As you know many of you know I've been critical of the fed I wasn't really critical of the need to raise interest rates, obviously initiative in rate as well before the fed raised them.
It was more of the pacing of the increases and how quickly they did it.
Sort of a U turn it was more of a V. A U turn even <unk>.
Straight up and then we have the highest interest rates, we've seen in 22 years.
And when you do something like this my other overarching theme is that the economy was going to slow anyway, you could see that savings were anticipating.
That consumer spending was slowing confidence were falling.
And as inflation took hold people were using less of their wallets.
What I didn't really anticipate and what Youre seeing now is the scale of the government programs under the <unk>.
Legislation about the infrastructure build.
Inflation reduction Ax, which is really a stimulus package centered around climate chips Act.
All of that spending is creating a lot of public spending.
It is offsetting the slowdown in private construction and private setting of course private construction slows only as property is complete you don't stop a project in the middle of construction when the fed is raising interest rates. So you sort of have a tug of war with one of the most restrictive monetary policies, we've ever seen but a completely on disciplined fiscal government spending.
Money with a regular spending build a trillion seven which has more money in the government spent in 2021 and 'twenty two the pandemic years. So one might have thought those were excess spending years, but in terms of the fact that you turned out to be the base our future spending in our very disciplined parties in Washington approved one seven trillion spending bill.
Which was the highest on record and the bipartisan manner trying to appeal to their home affiliates anyway see the fed with their foot to the floor on the brake and the government politicians with there.
That we're going to avoid a recession and so we've chosen to be fairly conservative here I kind of feel like we're battling with one arm and three fingers behind our back as we are exceedingly cautious because we know what you see on the surface as a lake that's solid but there are features and those are the loans that are maturing both in private equity.
Technology, where people have made loans to tech companies that don't have cash flows and also to real estate, so real estate and the real estate Empire.
Complex is really the collateral damage of the fed's policies and what you've seen now in this area and the fear in the market is two fold not only have rate's gone up but spreads have widened.
And what you will see on the other side is the double whammy of spread rates coming down and spreads coming down this year dissipates and that's beginning to happen. So the only good news about what the fed is dominantly moving so fast.
The sunlight.
We'll show up faster you are seeing the dramatic decline in inflation, we were all over that and the contribution of <unk>.
Brent to the inflation the CPI being a third we knew it was lagging it was lagging we said it was lagging and inflation falling 3% and probably continues to trend down.
And including are you seeing a shift in the labor market to lower wage workers were feeling if you saw recently reports recently, we're feeling the unfilled leisure and hospitality jobs several hundred thousand according to ADP Youre done in another month time youll have filled up youll filled all the missing jobs agenda return off of the pandemic and that's just.
I actually think we're beginning to see the listen through the clouds I would expect that that is done or maybe it has one quarter point hike.
In addition to what it's done.
And then I think youll see short rates begin to have to come down because inflation is two two and a half and five and a half short rates doesn't.
It doesn't make a lot of sense, especially as the curve against.
Bend or straighten out and Thats. The result of the real victim of the fed rate increases while we're in collateral damage. The number one victim of the fed raises as the federal government with 32 trillion of debt and having to pay these interest rates on that debt becomes a vicious cycle you have to keep refinancing at ever higher Ray.
It's putting more and more pressure on rates and so youll see the 10 year today at 4% to close to four two.
Who actually what worries me more than anything else.
And hopefully the other corporate by the way the other victim as the regional banks.
Which have a significant portion of their book value a non mark to market fixed securities.
They cannot sell them they can't move them and obviously that led to two banks defaults and could lead to others. If people want to turn their attention to raising those banks, but right now we have quiet on the set top.
Happy about that what this means though is created a climate in real estate that nobody really wants to sell anything if they don't have to.
The Big Hope is they can just refinance and has a path to refinance given the movement in constant with higher.
Interest rates, and so and wider spreads they typically need to inject equity or preferred or a mezzanine into their cap stack in order to roll the existing debt.
This issue and that's what I call. The category five Hurricane is really an interest rate hurricane it is not about the product.
Asset classes every asset class underlying fundamentals in the asset class in the United States are pretty good.
<unk> industrial logistics life Sciences student housing data centers.
Hotels, the cash flows are pretty robust, but the movement in interest rates has created a balance sheet issue for a lot of really good assets.
We're less willing to lend the money center banks for the most part we're trying to keep their balance sheets flat.
And those that are willing to make loans are kind of like us their predictions.
Selling or people will have to sell and then they are looking for that and then they.
Look at the deck quotes and they're like well I don't know if I want a bias with that quote. So the market has kind of stalled and thats kind of okay, but it creates a great landscape for us going forward I don't think youll see the regional banks or even the money center banks come back to the table as fast and so we will and many of the alternative lenders like US are also sitting on the sidelines.
Nursing their own refinancing issues.
We prepared for this by raising a record amount of cash and I'm also very.
And as Jeff mentioned.
Deploying the capital in today's in today's environment, the Safeway and the other thing I think you may not intuitive that was running a lower leverage business that we are a turn lower than our peers. So comp sets when when the short end goes up in all of our loans are floating.
We have less leverage so it doesn't it doesn't amplify it right. We don't we don't get to your numbers because we don't we're less leverage in the other hand, we're taking reserves and doing other things.
Earnings numbers than maybe you're seeing some of our peer set.
I did want to make a point and then making us light commercial.
That I made this comment about the category five hurricane, which got amplified across the media in many many places.
We also have a non traded REIT and that non traded REIT has 1% of its debt rolling over this year, 1% of its debt rolling over 24, 9% of its debt rolling over in 25. So the non traded REIT is in really good shape. The people who are in the midst of the hurricane and other people will have to do something right now and we don't have to do anything.
It's kind of shocking.
And can take us through this I think our fifth or sixth storm since we actually started the business for 13 years ago.
We continue to build even a bigger book, it's coming it's not not comment you can see the fissures in the lake they're lakes going to crack.
Unless he lowers rates fairly dramatically in the short and youre going to see a lot of.
Problems in all asset classes, even the good ones because people are a little upside down on the capital stacks.
So again I think we are playing the market with one arm behind our back, but we're really anxious to step out and continuing to deploy our capital and we will start doing that I think after we see the next September move, we'll see what happens with that.
Third we will have Jackson hole coming up and then won't hear their comments in September but unless I'm.
Really wrong I don't think the private sector is weakening manufacturers weakening we know construction private construction, where we can.
We can see the beginnings of the rollover domestically in the hotel market as apartment rents was slowing all positive by the way we'd be delighted to have 4% rental growth in apartments, thats a normal growth rate.
But it is down from 21 and Thats why we knew inflation will fall.
With that I think it's a very positive we're poised to do well the guys are all ready to go.
And we have the balance sheet, and obviously the reputation and the willingness to deploy our capital and hopefully get to even a much higher earnings basis than we've had in the past, which would be super exciting for us so with that we're going to we're going to be careful when we are going to be smart historically, we've made money on assets we've taken back.
At the end of the day, an equity shop, and we can manage these teams our teams have been really good at that so.
Thanks for your time today, and I'll pass it back to Jeff and Arena you all for questions.
Thank you.
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Ladies and gentlemen.
One moment, please while we poll for questions.
Our first question comes from the line of Stephen laws with Raymond.
Raymond James Please go ahead.
Hi, good morning.
Another nice quarter and congratulations on that I guess for my question I'd really like to hit on Wood Star can.
Can you talk about the strength, there pretty material fair value increase but looks like rental income was relatively flat versus Q1. So can you talk about the rent rolls that hit in Q2, when we should see those come through.
And what assumptions went into the fair value Mark for June 30th Thank you.
Rina do you want to start.
But let me add one thing.
The actual increase was 10, 11, 11 and HUD restricted it to seven five and we can take that leftover increase and apply to next year's increase so we didn't lose it we just deferred it and they'll also be whatever the increases next year and the rent for the affordable portfolio is determined by two factors in <unk>.
<unk> also.
The median income.
One thing about affordable housing business listen, it's obvious, but I should say, maybe it's not that obvious to everyone. It stays fault, it's always fall because it's 30% to 40% lesson really market rents. So my question is rents.
And what they are set up by the government so it.
I think it might have been unprecedented for the government to step in.
And.
Not give you the full amount of their count it's a calculation.
Howard.
Very transparent calculation.
They just decided I think politically it was possible increase affordable rents at that pace in those markets. It was not applied across the country. It was just certain markets, we happen to be in those markets and Stephen you know, we have a pretty low fixed rate debt on that but it doesn't start rolling until 'twenty six and then there's a series of roles. After that so we have plenty of room on our debt to continue to.
Get similar cash returns and not have to worry about refinancing that portfolio.
Thank you.
Take our next question from the line of Doug Guarino with credit.
Thanks can you talk about the potential size of the new lending opportunity.
Whether you would you know.
Well I think I think you know about one of our biggest non accruing assets is paired with two in the first mortgage of a giant property over in New Jersey here and.
70, or so a little below a little below and so.
This is the first mortgage by the way is this cross collateralization and all kinds of Goodies.
I think we challenge ourselves everyday to say, even though the properties performance is getting better and better and better. So what's the right time to sell it but it is and we can sell for 70, <unk> and I will take a loss pretty sure we can sell it for that.
People's expectations, and I think whether they price that mortgage basis do they price it to a 10 to 11 to nine that all depends on what they think the future of interest rates will look like.
If you think rates are going up you're going to be in.
68, and if you think rates are going down you get pay 75.
Because it is a first mortgage so yes, I mean, we are we are very much paying attention to that.
I'll just point out with all of this non income producing assets, we're still earning our dividend right. So.
It is it is actually shocking I think I've said this like three quarters ago, we didn't have to make any loans at all to make our dividend. So and that is so funny thing, it's counterintuitive, but they used to pay us back when we deploy the capital out now the duration of the loans is getting stretched a little bit. Although we did have almost a $1 billion.
At 1 billion to repayments in the quarter.
So we've put that money out that's why you saw us put out 500 something million and.
516, new investments so we're not sure we're just measured.
If there is something really tantalizing and good.
So good we will we will go after and borrowers are reluctant to borrow from USD 500 over five 600 over five you can make any construction loan you want in United States right now is like 550 over its 11% first money in mortgage.
And we tend not to do little deals, but there are a lot of little deals getting done at those levels lots and we ourselves on the equity side.
We're looking to borrow but we're getting close to $505 50 over partial recourse.
Lenders market you are one of the happy little Chiquita fewer lender today and you have capital.
Based in terms of opportunities, where we've been and we will probably pick up our pace.
Stopped or slowed down to about 1 billion and a half of the year I think youll see us starting to trend back up.
What's the amount of unused repo lines eight point something below $8 billion of unused lines, so plenty of capacity.
Because of the <unk> feel comfortable.
We can look out in the landscape and we really go loan by loan and see like who do we think can take us out where they are likely to take us out where.
It is an interesting situation because you've seen it in the media from Starwood I mean, there are some office buildings that you're just walking away from why are you walking away from the buildings.
Many of them are fairly lease, but the alone what's the cap rate on an office building today Odyssey will tell you. It's a four four I will tell you it's double that.
Because if you want to get financing to buy an office building today.
Seven to eight 9% and 10% so nobody's going to buy an office building and a four four nobody's a big word very few people maybe it is a sovereign wealth somewhere that decides they want a trophy and some city for their brochure and we will take a 20 years ago, but we're not able to do that so when you have building, even if its 70% leased and you have.
To get at 90% lease.
You have to put in more capital for tenant improvements and between the pay down the debt that's required by the bank and the capital improvements that you have to put in to stabilize the asset and in this cycle. So far the bank doesn't want to give you a five year extension for the world to reset itself you just can't do it.
The fiduciary that's not a great move so youre seeing frankly, Blackstone Brookfield Starwood all.
Walkaway from properties on occasion and in markets that we thought were injured I do think the office markets are better than people than people think.
And it's funny I Vornado reported yesterday you can go find their earnings reported they were running at 90% lease book in a really tough market.
And the office markets are seeing absorptions, you just have to have the right building.
And it's funny because in this market with a record profit of companies, they're not really pressuring you on rents it's not a renter.
Our rent.
And I'm, saying I'll take it at $70 and you want 90.
Taken as a question of them understanding their own expansion needs and.
But in Miami, and New York, even in L. A the right buildings are leased and they're full and they're getting the same rents and concessions they had before.
As you know it's a it's just like the mall business, it's evolve like the mall business. The excellent balls people tenants fight to get in there and they're raising rents climate and reported and the crappy malls, you will find becomes something else. So.
It doesn't one it's great for the media and the press to say offices and this again I believe that people are going to come back to the office.
Especially as management's if we have the recession.
It's going to be shallow I hope.
But we haven't I think management's most Ceos I know are back in their offices and they just arent, forcing the young people to get in but in a downturn.
Mentioned I think maybe not on this call as CEO of a major bank said to me. The first person on we had a fire in a downturn is the one working from home. So maybe these people think.
Job market has been so robust historically that even care.
And then in a downturn they will care.
Probably we'll do what we all did when we were we were kids will go back into the office and wave to our bosses and charter impressive that where they're working hard so we don't get let go.
So we'll see.
The chapter is not over this is not.
Again, I mentioned before I got chewed up on tick tock.
But across the world workers are back in office. It has to become an American thing and it's really only in some cities and it's different in different parts and I was really encouraged to see Amazon say they wanted people in their headquarters in Virginia, four days, a week and hopefully they'll convinced the federal government.
People come back to work in the federal government, which has been the last of the major employer groups not to come to work.
So that would be helpful. We have a couple of assets in D C.
Fortunately, they're going be ready soon.
Yeah.
Next question.
Thank you. Our next question comes from the line of Rick Shane with JP Morgan. Please go ahead.
Thanks, guys for taking my questions. This morning, I'd like to talk a little bit about the.
Special servicing at LNR.
It looks like the active special servicing went up about 10%.
Quarter over quarter.
But the named special servicing declined about 5%.
Just like to talk about sort of the movements there and also how we should expect that to play through the P&L over the next six months to 12 months.
Thanks, Rick Yes, youre right the active.
We will move around.
As you start to see roll off so one to get to the other so you had about $5 billion or so of maturities and we'll start to see maturities pickups are named special servicing absent us continuing to buy new deals and we have recently been investing in new B pieces. So we will add to that at the same time it gets subtracted, but for a long time deals werent maturing.
So our balance only went up with named special servicing now youre getting into those at the end of the 2013 maturities. So youre seeing maturity. So we had about $4 5 billion or so roll off and mature I think we'll have another $3 5 billion or so for the rest of this year some percentage of that four 5 billion roles in right and if 10% of that rolled in and Thats the 500 million.
Increase in active so one one creates the other and I think that this cycle will continue now for the next few years as you had more originations in 2014 and into 2015, you'll start to see the runoff pick up a little bit and you should see the active pick up a little bit and obviously, if we get paid on the active.
So we didn't think of the last few quarters that we expect the revenues to really be a 2025 phenomenon as the 2013 and 2000 fourteens mature and run through the special So we're expecting the increase on the revenue side to sort of be later later next year. So we always say its sort of 18 to 24 months of lag. So it's more of a <unk>.
25 revenue thing, but it is playing out just as we expected it.
Percentage of that runoff that rolls into active is what will be interesting more office, we see the more you'll probably see roll in and that was the bulk of what we did see come in this period, but we will pay attention to those maturities.
Most of our company is hoping that you don't have a lot of distress. This is the one part where we are hoping that there is distressed and we will make money off of that the threats, which make us great Gary hedge for us. So we're staying fully staff is getting ready for the opportunity, but it will really pick up over the next 12 to 18 months.
Thank you.
Our next question comes from the line of Don Vendetti with Pago. Please go ahead.
Yes can you talk a little bit about multifamily in terms of the outlook at your largest exposure in CRE lending I know, there's a couple of factors like higher cap rates and also just higher.
Let's start with the basics the fed's actions.
In a strange way will hurt inflation longer term, because they're creating a bigger dearth of housing stock.
And the lack of.
Single family of existing single family home sales has created a really odd outcome with the.
New new construction being not only robust, but but at good prices and I think everyone's been surprised at the strength of the new homebuilding.
The higher than they were but.
The backlogs are growing people are still moving they want to buy a new house.
Nobody's selling their old house, so they have to buy a new house.
And that's relevant to multis multis, we stress the book.
Personally sat down with the team I think we're selling today multi as if theres no attractive debt and the four and three quarter range four and a half because there's really good long term do you see that you can get low fours.
And why are people buying it they do think youre going to see rents accelerating again, they are slowing down nationally rents are almost flat.
And that came from Fannie Mae, which obviously as loans on pretty much every asset in the country.
And they vary from down in California to up in Florida up in New York up in Boston You saw that reason that recent report I think it came out last week on the housing market.
They are softening, but there is still as I mentioned positive and we have a 100.
I think 20000 apartments, some of which is.
Significant chunk of it is affordable, but our market rates stuff, where we're at we're around four.
Four and a half and some markets are accelerating in some markets are decelerating.
The cap rate when we will have issues, we'll be north of six and a half.
So we think our breakeven to our book is like six and a half and if if our asset Scott there will turn ourselves into ISR will gobble up every single multi and own them for you forever Couldnt wait best thing that ever happened to us.
Because they are brand new projects and we're getting them at $65.
<unk> I think the odds of that happening are less than 5%. There's one problem. We mentioned it in our earnings we have one asset in Portland, I think it is that is not renting at the pace and the rents we would've hoped obviously important as well.
One of the two cities that was most affected by.
The ratios George Floyd incidents.
That's the only issue we have and again our basis is talking about brand new fractions replacement costs, usually is an attractive place to enter a market nothing else can get built.
Until rents move to a place to make your new basis attractive so.
So you have to rents would have to increase that there'll be no new supply in the Portland market and.
And there are still people there. So it is it's funny as I travel the country and go to these cities you would think that San Francisco's a bowling alley. There is no one there there is still.
I don't know I don't know what nobody.
Cities are still thriving there's still active.
And I think you have to be careful because the media just wants to create news as they do in the political environment. They brought hysteria of craziness and everyone. There is a funny thing that people want to pick on New York or they want to pick on San Francisco, because they had a big run.
I'm in New York right now.
And the restaurants, they're busy.
That's amazing I mean is it is.
It is the only useful city, which where the kids want to go and all the problems in California are helping New York So.
Would you see you see the stores re tenant thing I can't tell you the rents they are having.
So.
And the offices and in building where offices in New York, a 100% leased leased in the pandemic and one floor came up for sublet.
Re leased in two days.
So it's actually like you call it like a stock pickers market. This with this isn't real estate now and you have to.
Have the right building with a variety of <unk> footprint and the right location with the right floor plates and you can lease it.
And if you have the wrong building.
You should not think that you have no hope.
I'll throw on looking at our portfolio right.
We probably both up the portfolio was 2021 and that was the lowest cap rate. So you were taking four cap asset.
We thought had five nine or 6% exit that yields you pushed rents in 'twenty, one and in early 'twenty, two by 10% or so in the last 12 months, our portfolio has been seven 8% rent growth.
So by pushing those rents your exit cap rates have now gone into the mid or mid to high sixes. So for a moment in time on a roll on that loan in 2024 or 2025, if the <unk> stays right here for a moment in time it would be negative carry for a couple of months, but it before it got resolved at all right you'll be positive carry and over the life of it.
Will be significant positive carry so we have great escape velocity at today's forward curve, even against those sort of four cap assets that were at the highest because we pushed rents and expenses haven't gone up nearly as much. So exited debt yields are higher and we think right now we have.
Plenty of escape velocity to get out of all of those loans as they start rolling in 'twenty four 'twenty five.
Thank you.
Our next question comes from the line of Jade Rahmani with <unk>. Please go ahead.
Thank you very much when you look back to you know early March and the theory I'm storms was really taking hold.
Then we had the bank distress.
Fast forward to today, and we've gone through second quarter results and it seems no huge shoes to drop a couple of big credit losses in the mortgage REIT space.
You all took up the seasonal reserve on macro nothing really new.
That large on specific loans. So let me question would be given the category five hurricane as you put it are you surprised that there have not been huge new shoes to drop of late and do you think it's just a timing issue or do you think this represents kind of a green shoot in your view.
Sorry, it's a timing issue.
Again, if you have caps in your loan is not maturing, it's not blowing up until it matures.
But it could be offset by what I'd expect to see a lowering of short rates maybe early next year.
But I know you're not going to see.
Unless we.
If we have a complete crack every time that's happened the fed has gone to zero on short rates that'd be good news bad news I suppose.
That would be the opposite of collateral damage, that's a windfall for the for the property sector.
What if he is measuring and success by rising unemployment and I. Just think that is really hard that is a very.
I guess the adjuvant.
Blunt tool, it's more like a sledgehammer because the euro can only get the unemployment in certain industries the service industries manufacturing industry.
It's not going to come from government spending everything a trillion seven <unk>.
Imagine an.
Apple spending a trillion seven trillion seven has a lot of spending that's just the fiscal budget before you get to the three stimulus programs that are still coursing through the through the economy.
I think.
I think it's like I said, I think it's a minefield and thats one of the reasons, we're not we're not deploying all this $1 billion today, because we have to be careful of every single loan in every single borrower in each borrowers in a different position than when I was thinking about starboard Blackstone and Brookfield, our think big borrowers and small borrowers are being judicious as.
Fiduciary for their capital in this climate and it's not like we've seen a deal like the deal in D. C that we took back.
It was a household name.
Moreover, one of.
One of the top five players in the space.
Oxygen, we got a loan back so.
People are willing to use.
We'll never walk well I don't think Thats the case right now I think the.
It's case by case asset by asset and you have to be.
Being.
As a jigsaw puzzle so.
Don.
Don't think that.
This is past and this is not this is not passed.
These are just a function of every borrower waiting till the last minute to try to figure out how to fix as capital stack.
And if you just run the math not has nothing to do with us as to its full market youre on a coupon that was two and a half or three now it's not.
Nine you can't borrow in the same amount of money. If you wanted to add debt service coverage test. So so lenders like us I mean, some people just.
Chopping their coupons, you past six and accrue three or something we haven't done a lot of that but other people are.
And just to just to bridge people too.
Two a brighter sky down the road I also think Youre seeing the government has now told the banks to work with our borrowers don't know what that meant means but backend.
You'll probably see some may be notes, you'll see mortgages chopped in half to induce.
On these lower coupons and remember these loans were written 234 years ago. So there's a lot of HPA built into those housing values. So I don't expect to see credit distress. There. The book doesn't kept the loan book doesn't carry quite as well as we would hope, but it carries positively and it get bailed out by the hedges and the and the legacy book that we own as well.
As we own some legacy securities from pre GSE that have been in our book to $250 million or so that have performed very well as well. So all in all of that book is not performing quite as well as our other cylinders, but it's a lot better than it was a year ago. We have a long term strategy and importantly, we have the liquidity to hold on not forced ourselves to.
Walk in bad financing cost in a securitization today, because we have access to so much liquidity.
Sure. So we continue to monitor it but this will be a long list to be something we're going to talk about for a long time, we're in it for the long run and in.
The book's performing fine.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. I would now have the conference over to Mr. Bobby <unk>.
Chairman and Chief Executive Officer for closing comments.
Thanks for being with us today and as always we're here to answer any questions and thank our board of directors and our great team and started property chose to who.
Put us in this position that we are.
And have a great August everyone.
Sure.
We will have the whole political year ahead of us to be entertained.
Yes.
Thank you the.
The conference of Starwood property Trust has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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