Q1 2024 Starwood Property Trust Inc Earnings Call

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Operator: Greetings. Welcome to Starwood Property Trust's first quarter 2024 earnings 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 zero on your telephone keypad. Please note this conference is being recorded. At this time, I'll hand the conference over to Zach Tanenbaum, Head of Investor Relations. Zach, you may now begin.

Greetings and welcome to Starwood property Trust's fourth first quarter 2024 earnings 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 zero on your telephone keypad.

Please note. This conference is being recorded at this time I'll hand, the conference over to Dr. Tanenbaum head of Investor Relations Zac you may now begin.

Zachary Tanenbaum: Thank you, operator. Good morning, and welcome to Starwood Property Trust's earnings call. This morning, the company released its financial results for the quarter ended March 31st, 2024, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the investor relations section of the company's website at www.starwoodpropertytrust.com.

Zac: Thank you operator, good morning, and welcome to Starwood property Trust's earnings call.

Zachary Tanenbaum: This morning, the company released its financial results for the quarter ended March 31 2024.

Zachary Tanenbaum: Filed its Form 10-Q, with the Securities and Exchange Commission and posted its earnings supplement to its website.

Zachary Tanenbaum: These documents are available on the Investor Relations section of the company's website at Www Dot Starwood property Trust's Dot com.

Zachary Tanenbaum: 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 statement. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Zachary Tanenbaum: 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.

Zac: 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.

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

Zachary Tanenbaum: The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed during this conference call. A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Zac: The company undertakes no duty to update any forward looking statements that may be made during the course of this call.

Zac: Additionally, certain non-GAAP financial measures will be discussed on this conference call.

Zac: The 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.

Zac: Reconciliations of these non-GAAP financial measures the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot FCC duck up.

Zachary Tanenbaum: Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer, Jeff DiModica, the company's President, and Rina Paniry, the company's Chief Financial Officer. With that, I'm now going to turn the call over to Rina.

Speaker Change: Joining me on the call today are Barry storm like the company's chairman and Chief Executive Officer, Jeff The moniker of the Companys President and ran up in the area of the company's Chief Financial Officer with that I'm now going to turn the call over to arena.

Rina Paniry: Thank you, Zach, and good morning, everyone. We reported a strong quarter with distributable earnings, or DE, of $191.6 million, or $0.59 per share. Our results were highlighted by contributions across all of our businesses, with outsized performance in property from the sale of our master lease portfolio and in commercial lending from prepayment fees, which was partially offset by underperformance in our CNBS book. In all, DE includes an 8 cent net gain from these items.

Arena: Thank you Zach and good morning, everyone. We reported a strong quarter with distributable earnings or D. E F $191 6 million or 59 cents per share.

Arena: Our results were highlighted by contributions across all of our businesses with outsized performance in property from the sale of our master lease portfolio and in commercial lending from prepayment fees, which was partially offset by underperformance in our C and B S. Buck.

Arena: In all they include an 8% net gain from these items.

Rina Paniry: They also contributed to Higher Gap Net Income, which was $154 million, or $0.48 per share. Undepreciated book value ended the quarter at $20.69, with gap book value at $19.85. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $205 million to the quarter, or $0.63 per share. Commercial Lending, repayments of $909 million, outpaced fundings of $128 million on pre-existing loan commitments. Our portfolio of predominantly senior secured first mortgage loans ended the quarter with a funded balance of $15.1 billion and a weighted average risk rating of 2.9. Jeff will cover our risk rating changes in greater detail.

Zac: They also contributed to higher GAAP net income, which was 154 million or 48 cents per share.

Zac: On depreciated book value ended the quarter at $20.69 with GAAP book value at $19 and 85000.

Rina Paniry: Turning to CECL, we had no new specific reserves in the quarter and no new loan or REO impairments. Our General Cecil Reserve increased by $35 million to a balance of $342 million, of which 70% relates to office. This increase was driven by our selecting the most pessimistic economic outlook of seven scenarios available to us in our third-party model for our office loan. Together with our previously taken REO impairments of $172 million, these reserves represent 3.4% of our lending and REO portfolios and translate to $1.64 per share of book value. Next, I will discuss our residential lending business.

Zac: Beginning my segment discussion this morning, if commercial and residential lending, which contributed D E F $205 million to the quarter or 63 cents per share.

Zac: In commercial lending repayments of 909 million outpaced fundings of 128 million on preexisting loan commitments.

Zac: Our portfolio of predominantly senior secured first mortgage bonds ended the quarter with a funded balance of $15 1 billion and a weighted average risk rating of 2.9.

Zac: Jeff will cover our risk rating changes in greater detail.

Zac: Turning to see fall, we had no new specific reserves in the quarter and no new loan or Oreo impairment.

Zac: Our general seafood reserve increased by $35 million to a balance of $342 million of which 70% relates to office.

Zac: This increase was driven by our selecting the most pessimistic economic outlook of seven scenarios available to us and our third party model for office loan.

Zac: Together with our previously taken Oreo impairments of 172 million. These reserves represent three 4% of our lending in Oreo portfolio and translate to $1.64 per share of book value.

Rina Paniry: Our on-balance sheet loan portfolio ended the quarter at $2.5 billion, including $880 million of agency loans. We had $45 million of par repayments during the quarter and recorded a $2 million net negative mark-to-market adjustment for gap purposes. This mark includes a $38 million negative mark on our loans, offset by a $36 million positive mark on our hedges, which provided $25 million of cash during the quarter. In our $435 million retained RMBS portfolio, a change in market call price assumptions contributed to a $7 million negative mark in the quarter.

Zac: Next I will discuss our residential lending business our on balance sheet loan portfolio ended the quarter at $2 5 billion, including $880 million of agency loans.

Zac: We had $45 million of par repayments during the quarter and recorded a $2 million net negative mark to market adjustment for GAAP purposes. This mark include a $38 million negative mark on our loan offset by a $36 million positive mark on our hedges, which provided $25 million of cash.

Zac: During the quarter.

Zac: And our $435 million retained our MBS portfolio, a change in market called price assumptions contributed to a $7 million negative mark in the quarter.

Rina Paniry: Next, I will discuss our property segment, which contributed $59 million of DE, or $0.18 per share, to the quarter. During the quarter, we sold our master lease portfolio for $387 million. The transaction resulted in net proceeds of $188 million, a net DE gain of $37 million, and a net GAAP gain of $91 million. Because the sale was completed in late February, our Q1 results include 2 months of income or $0.01 of DE from these assets.

Zac: Next I will discuss our property segment, which contributed $59 million of D. E. R 18 cents per share to the quarter.

Zac: During the quarter, we sold our master lease portfolio for $387 million.

Zac: The transaction resulted in net proceeds of 188 million and net D E gain of 37 million and a net GAAP gain of 91 million.

Zac: Because the sale was completed in late February. Our Q1 results include two months of income or one cent of D. E from these assets.

Rina Paniry: Our Florida Affordable Housing Fund generated $14 million of DE in the quarter. Subsequent to quarter end, HUD released the new maximum rent levels, which were set 7.9% higher than last year. Certain properties were in geographies where the rent increases were capped by HUD, which resulted in 3.8% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula in 2025.

Zac: Our Florida Affordable housing fund generated 14 million FTE in the quarter.

Zac: Subsequent to quarter end HUD released the new maximum rack level, which works at seven 9% higher than last year.

Zac: Certain properties, where in geographies, where the rent increases were capped by HUD, which resulted in three 8% of incremental rent growth being deferred to next year. This.

Zac: This would be in addition to any increase determined by the HUD formula in 2020 five.

Rina Paniry: And finally, in our medical office portfolio, subsequent to quarter end, we refinanced the $600 million of outstanding debt on these assets, which was scheduled to mature in November. We entered into new CMBS debt of $450 million and a mezzanine loan of $40 million, both with a five-year term at a blended coupon of SOFR plus 252 basis points. Turning to Investing in Servicing, this segment produced break-even results in the quarter, with the positive contributions from our conduit and special servicing businesses offset by a negative contribution in CMBS.

Zac: And finally in our medical office portfolio subsequent to quarter end, we refinanced $600 million of outstanding debt on these off that which was scheduled to mature in November.

Zac: We entered into new C. N B S debt of 450 million and a mezzanine loan of 40 million both with a five year term at a blended coupon of sofa, plus 252 basis points.

Zac: Yeah.

Zac: Turning to investing and servicing segment produced breakeven results in the quarter with the positive contributions from our conduit and special servicing businesses offset by a negative contribution in Zambia.

Rina Paniry: In our conduit, Starwood Mortgage Capital, we completed four securitizations totaling $212 million at profits consistent with historic levels, and our special servicer, L&R, our active servicing portfolio increased from $6.6 billion to $7.2 billion, primarily due to $1.1 billion of transfers in, more than half of which were office or contained an office component. Our named servicing portfolio ended the quarter at $96.1 billion, driven by $3.7 billion in maturities, offset by new assignments of $1.1 billion.

Zac: In our conduit Starwood mortgage capital, we completed four securitization totaling $212 million at profit consistent with historic levels.

Zac: And our special Servicer LNR are active servicing portfolio increased from $6 6 billion to $7 2 billion, primarily due to a $1 1 billion of transfer then more than half of which were office or contained an office component.

Zac: Our named servicing portfolio ended the quarter at $96 1 billion driven by $3 7 billion in maturities offset by new assignments of $1 1 billion.

Rina Paniry: Finally, in our CMBS portfolio, as is typical for the first quarter, we receive annual financial statement reporting on the assets underlying our bondholding. One securitization in particular had three non-performing assets out of the remaining 73 in the pool. Due to lower than anticipated NOI and a lower than anticipated appraisal for these assets, we recorded a $17 million DE impairment on the bond. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $20 million or six cents per share to the quarter.

Zac: Finally in our C. MBS portfolio as is typical for the first quarter, we receive annual financial statement reporting on the assets underlying our bond holding.

Zac: One securitization in particular had three nonperforming assets out of the remaining 73 in the pool.

Zac: Due to lower than anticipated NOI and a lower than anticipated appraisal for these out that we recorded a 17 million dollar D E impairment on the bond.

Zac: Okay.

Zac: Concluding my business segment discussion is our infrastructure lending segment, which contributed D E F $20 million or six cents per share to the quarter.

Rina Paniry: We committed to $120 million of new loans, of which we funded $96 million and an additional $42 million on pre-existing loan commitments. Repayments total $210 million, bringing the portfolio to a balance of $2.5 billion at quarter end. Subsequent to Quarter End, we completed our third infrastructure CLO for $400 million at a weighted average coupon of SOFR plus 218, which Jeff will discuss. And finally, this morning, I will address our liquidity and capitalization.

Zac: We committed to $120 million of new loans of which we funded 96 million and an additional 42 million on preexisting loan commitments.

Zac: Repayments totaled $210 million, bringing the portfolio to a balance of $2 5 billion at quarter end.

Zac: Subsequent to quarter end, we completed our third infrastructure CLO for $400 million at a weighted average coupon of sofa, plus 218, which Jeff will discuss.

Speaker Change: And finally, this morning, I will address our liquidity and capitalization.

Rina Paniry: We continue to have ample credit capacity across our business lines, ending the quarter with $9.7 billion of availability under our existing financing lines and unencumbered assets of $4.6 billion. Our adjusted debt-to-unappreciated equity ratio ended the quarter at 2.3 times, a decrease from 2.5 times last quarter. In addition to low leverage, our current liquidity position has increased to a record $1.5 billion. This does not include liquidity that could be generated through sales of assets in our property segment or debt capacity that we have via the unsecured and term loan fee market.

Speaker Change: We continue to have ample credit capacity across our business line ending the quarter with $9 $7 billion of availability under our existing financing lines and unencumbered assets of $4 6 billion.

Speaker Change: Our adjusted debt to unappreciated equity ratio ended the quarter at 2.3 times, a decrease from two five times last quarter.

Speaker Change: In addition to low leverage our current liquidity position has increased to a record $1.5 billion. This does not include liquidity that could be generated through sales of assets in our property segment, our debt capacity that we have there the unsecured and term loan b market.

Rina Paniry: With that, I'll turn the call over to Jeff.

Speaker Change: With that I'll turn the call over to Jeff.

Jeffrey F. DiModica: Thanks, Rina. Good morning, everyone.

Jeff: Thanks, Rina and good morning, everyone.

Jeffrey F. DiModica: We accessed the debt capital markets in the quarter, issuing $600 million of senior unsecured sustainability notes, leaving us with record liquidity today. This issuance was the first in our industry in over two years, and it was seven times oversubscribed with orders from 156 institutional investors, both records for our company. Record demand allowed us to tighten pricing by 75 basis points, and after swapping this fixed-rate issuance for floating, we borrowed at a repo equivalent of SOFR plus 312 basis points, in line with pricing we achieved throughout our history, despite today's high rate and spread environment.

Jeff: We accessed the debt capital markets in the quarter issuing $600 million of senior unsecured sustainability notes, leaving us with record liquidity today.

Jeff: This issuance was the first in our industry in over two years and it was seven times oversubscribed with orders from 156 institutional investors both records for our company.

Jeff: Record demand allowed us to tighten pricing by 75 basis points and after swapping this fixed rate issuance to floating we borrowed at a repo equivalent of sopra plus 312 basis points in line with pricing, we achieved throughout our history, Despite today's high rate and spread environment.

Jeffrey F. DiModica: After paying down bank warehouse lines, this issuance was leverage-neutral, allowing us to maintain just 2.3 turns of leverage, a two-year low for our company, and it will not affect our dividend-paying ability. Creating excess liquidity in a leveraged neutral fashion will allow us to again ramp up our investment pace at the appropriate time, when market transaction volumes are picking up, and our pipeline of actionable deals is as strong today as it has been in over two years.

Jeff: After paying down bank warehouse lines. This issuance was leveraged neutral, allowing us to maintain just to three turns of leverage a two year low for our company and it will not affect our dividend paying ability.

Jeff: Creating excess liquidity and a leverage neutral fashion will allow us to again ramp up our investment pace at the appropriate time.

Jeff: Market transaction volumes are picking up and our pipeline of actionable deals is as strong today as it has been in over two years.

Jeffrey F. DiModica: As for the macro environment, commercial real estate continues to face headwinds created by higher interest rates that have driven cap rates higher, thus causing the reserve increases you have seen in our sector over the last year. Partially offsetting that, three quarters of our CRE loans have interest rate caps in place, and 85% of our portfolio has embedded interest rate protection. Rates rose in the quarter since we last spoke and have now begun falling again after last week's weaker-than-expected employment number and the Fed's decision to slow the pace of quantitative tapering from $60 billion per month to $25 billion per month, which in turn will reduce Treasury bond issuance by $420 billion per year.

Jeff: As to the macro environment commercial real estate continues to face headwinds created by higher interest rates that have driven cap rates higher that's causing the reserve increases you are seeing in our sector for the last year.

Jeff: Partially offsetting that three quarters of our CRE loans have interest rate caps in place and 85% of our portfolio has embedded interest rate protection.

Jeff: Rates rose in the quarter since we last spoke and have now begun falling again after last week's weaker than expected employment number and the fed's decision to slow the pace of quantitative tapering from $60 billion per month to $25 billion per month, which in turn will reduce treasury bond issuance by $420 billion per year at the same time.

Jeffrey F. DiModica: At the same time, we are seeing tailwinds in increased transaction volume and credit spread tightening, which will help our borrowers as they seek accretive refinancing alternatives. Recent issue BBB-CMBS credit spreads, which are a good proxy for mezzanine CRE lending, have increased by over 300 basis points in the last six months and are back to second half of 2022 levels today. Spread tightening has allowed us to issue unsecured notes, refinance our MOB portfolio in the CMBS market, and issue our third energy infrastructure CLO, all inside market expectations at much tighter spreads.

Jeff: We are seeing tailwind and increased transaction volume and credit spread tightening, which will help our borrowers as they seek accretive refinancing alternatives.

Jeff: Recent issue Triple B minus the MBS credit spreads, which are a good proxy for mezzanine CRE lending have tightened by over 300 basis points in the last six months and are back to the second half of 2022 levels today.

Jeff: Spread tightening has allowed us to issue unsecured notes refinance our M O b portfolio in the MBS market and issue our third energy infrastructure CLO, all inside market expectation at much tighter spreads.

Jeffrey F. DiModica: We built a low-leverage, diversified business to withstand choppy conditions like these and to be in position to go on offense when they create outsized opportunities, which, as I said, we expect to do in the coming quarters. With regard to our commercial lending credits, like most banks, we use a third-party model called macroeconomic advisors in computing our general CECL reserves, which we again increased in the quarter.

Jeff: We built our low leverage diversified business to withstand choppy conditions like these.

Jeff: And to be in position to go on offense when they create outsized opportunity.

Jeff: As I said, we expect to do in the coming quarters.

Jeff: With regards to our commercial lending credits like most banks, we use a third party model called macroeconomic advisers in computing, our general reserve, which we again increased in the quarter.

Jeffrey F. DiModica: Our equity market cap of $6 billion is nearly two times the second largest participant in our sector, but since we have seven other businesses, we do not have the largest CRE loan book in our sector. We run a very low leverage business model, and only 11% of our assets are on loans on U.S. offices. The asset class most disrupted since COVID due to work from home, higher rates, and the tightening of real estate credit conditions.

Jeff: Our equity market cap of $6 billion is nearly two times the second largest participant in our sector, but since we have seven other businesses. We did not have the largest CRE loan book in our sector.

Jeff: We run a very low leverage business model and only 11% of our assets are on loans on U S offices, the asset classes, most disrupted since COVID-19 due to work from home higher rates and the tightening of real estate credit conditions.

Jeffrey F. DiModica: That is half of what our holdings were before COVID began and a fraction of our peer set average. Despite that, we have reduced book value with the largest general fees of reserve in our sector by dollar value and the second highest by percentage, giving us a cushion for potential losses that could come on assets we have not taken a specific reserve for.

Jeff: That is half of what our holdings were before Covid began in a fraction of our peer set average.

Jeff: Despite that we have reduced book value with the largest general sees a reserve in our sector by dollar value and the second highest percentage, giving us cushion for potential losses that could come on assets, we have not taken a specific reserve for.

Jeffrey F. DiModica: Our sponsors continue to support their assets en masse, and after receiving $1.3 billion of new sponsor equity commitments in 2023, we have already received an additional $483 million in 2024. Looking at our property types, our largest property type, multifamily, which is 21% of our company's assets, has an average remaining term of 2.7 years and continues to experience year-over-year rent growth with same store rents up 3.4% in 2023. The sponsors for 60 of our 72 multifamily loans have committed fresh equity to their assets, including all of our four and five-rated loans, and we don't foresee any issues getting paid off on the 12 that have not had to inject additional equity to date. I just mentioned office loans, our second largest property type, which comprises 11% of our company's assets. 87% of these are class A, and 77% of them do not mature until 2025 or beyond.

Jeff: Our sponsors continue to support their assets en masse and after receiving $1 $3 billion of new sponsor equity commitments. In 2023, we have already received an additional $483 million in 2024.

Jeff: Looking at our property types, our largest property type multifamily, which is 21% of our company's assets has an average remaining term of two seven years and continues to experience year over year rent growth with same store rents up three 4% in 2023.

Jeff: The sponsors for 60 or 72 multifamily loans have committed fresh equity to their assets, including all of our four and five rated loans and we don't foresee any issues getting paid off on the 12 that have not had to inject additional equity to date.

Jeff: I just mentioned office won our second largest property types, which comprised 11% of our company's assets.

Jeff: 87% of these are class, a and 77% of them do not mature until 2025 or beyond.

Jeffrey F. DiModica: Our third largest property type, hotels, is 8% of our assets today, and this portfolio has an average in-place debt yield of over 11%. As we have been saying since the beginning of COVID, we do not foresee refinancing issues with these hotel assets. As for risk rating changes in the quarter, while our four-rated bucket increased with three new additions, the dollar value of our five-rated bucket was lower this quarter, following the upgrade of a $252 million office loan in Houston.

Jeff: Our third largest property type hotels, it's 8% of our assets today and this portfolio has an average in place debt yield of over 11%.

Jeff: As we have been saying since the beginning of Covid, we do not foresee refinancing issues with these hotel assets.

Jeff: As for risk rating changes in the quarter, while our four rated bucket increased with three New addition, the dollar value of our five rated bucket was lower this quarter. Following the upgrade of a $252 million office in Houston.

Jeffrey F. DiModica: This Houston asset has seen incremental leasing activity, including the anchor tenant taking more space by extending the lease term to 2036, and is sufficiently capitalized with runway to complete important CapEx projects and secure accretive new leasing. We downgraded two smaller loans to five in the quarter, an $82 million mezzanine loan on an office building in Los Angeles where the borrower has remained current and we are working to extend the term, allowing time to complete accretive leasing, and a $52 million multifamily loan in Nashville that is in payment default and we expect to foreclose on.

Jeff: The Houston asset has seen incremental leasing activity, including the anchor tenant taking more space and extending lease term to 2036 and its sufficiently capitalized with runway to complete important capex projects and secure accretive new leasing.

Jeff: We downgraded to smaller alone to five in the quarter and $82 million mezzanine loan on an office building in Los Angeles, where the borrower has remained current and we are working to extend term, allowing time to complete accretive leasing and.

Jeff: And a $52 million multifamily loan in Nashville that is in payment default and we expect to foreclose on.

Jeffrey F. DiModica: We will decide in the coming quarters whether to maximize value by holding and stabilizing this asset as we have in the past or sell it at or near our basis, depending on the short-term direction of cap rates. We also downgraded three loans in the quarter from a three to a four risk rating.

Jeff: We will decide in the coming quarters, whether to maximize value by holding and stabilizing this asset as we have in the past or sell it at or near our basis, depending on the short term direction of cap rates.

Jeff: We also downgraded three loans in the quarter from a three to four risk rating.

Jeffrey F. DiModica: The first two are office buildings, a $99 million loan in Atlanta and a $92 million loan outside Minneapolis. We are working to close preferred equity investments on both that will carry the assets for two years, giving our borrowers time to find accretive leasing that would create escape velocity should rates continue to be lower and markets continue to repair. The final downgrade to four is a $45 million multifamily loan in Phoenix that is in payment default.

Jeff: The first two are office and $99 million alone in Atlanta, and a $92 million loan outside Minneapolis.

Jeff: We are working to close preferred equity investments on both that will carry the assets for two years, giving our borrowers time to find accretive leasing that would create escape velocity should rates continue lower end markets continued to read there.

Jeff: The final downgrade before its a $45 million multifamily loan in Phoenix that is in payment default.

Jeffrey F. DiModica: This asset has been poorly managed, allowing occupancy to drop into the 70s percent. Should we take the asset back, our manager, Starwood Capital Group, is one of the nation's largest owners of multifamily assets, and we hope bringing in new management and our expertise will allow us to bring this asset back to market occupancy of 90%, after which we will decide whether to hold or sell the asset. In our property segment, Rina mentioned our affordable housing and medical office portfolios and that we sold our master lease portfolio in the quarter.

Jeff: This asset has been poorly managed allowing occupancy to drop into the 70%.

Jeff: Should we take the asset back our manager Starwood capital group as one of the nation's largest owners of multifamily assets and we hope, bringing in new management and our expertise will allow us to bring this asset back to market occupancy of 90% after which we will decide whether to hold or sell the asset.

Jeff: In our property segment Rina mentioned, our affordable housing and medical office portfolios in that we sold our master lease portfolio in the quarter.

Jeffrey F. DiModica: We originally purchased the 23-asset master lease portfolio in 2017 for $556 million. We sold seven of the 23 assets in 2018 for $235 million and a DE gain of $23 million. This quarter, we sold the 16 remaining assets for $387 million and a DE gain of $37 million. We successfully doubled our equity investment on this sale over seven years, producing an IRR of 15.7% per shareholder. These assets had 25-year leases at origination, and the lease term had fallen to 18 years.

Jeff: We originally purchased the twenty-three asset master lease portfolio in 2017 for $556 million.

Jeff: We sold seven of the 23 assets in 2018 for $235 million and a D E gain of $23 million.

Jeff: This quarter, we felt the 16 remaining assets for $387 million and a D gain of $37 million.

Jeff: We successfully doubled our equity investment on the sale over seven years, producing an IRR of 15, 7% for shareholders.

Jeff: These athletes had 25 year leases that origination and the lease term had fallen to 18 years.

Jeffrey F. DiModica: Our plan was to sell these with more than 10 years of lease term remaining, and given retail sales have slowed since their early COVID increase, we thought this was an opportune time to take our gains and further reduce our company's leverage while looking for opportunities to reinvest elsewhere. In energy infrastructure lending, Rina mentioned we completed our third CLO. We now have 56% of our debt in this segment on term, non-recourse, non-mark-to-market financing, which further insulates our company's cash position.

Jeff: Our plan was to sell these with more than 10 years of lease term remaining and given retail sales have slowed since their early Covid increase we thought this was an opportune time to take our gains and further reduce our company's leverage while looking for opportunities to reinvest elsewhere.

Jeff: In energy infrastructure lending Rina mentioned, we completed our third CLO.

Jeff: We now have 56% of our debt in this segment on term nonrecourse non mark to market financing, which further insulates, our company's cash position.

Jeffrey F. DiModica: This business continues to benefit from lower lending competition and higher energy needs driven by AI and EVs. A significant portion of our holdings are on loans that have actively quoted trading markets, and prices on those loans are up almost four points in the last 12 months alone. LPVs in these assets continue to fall due to increased asset profitability and structural deleveraging over the life of these loans.

Jeff: This business continues to benefit from lower lending competition, and higher energy need driven by AI and Evs.

Jeff: A significant portion of our holdings are on loans that are actively quoted trading markets and prices on those loans are up almost four points in the last 12 months alone.

Jeff: L. P vs. In these assets continued to fall due to increased asset profitability and structural deleveraging over the life of these loans.

Jeffrey F. DiModica: In the quarter, we committed to $120 million of new loans at an IRR of approximately 20%, and our post-2018 acquisition portfolio now makes up over 90% of our portfolio with expected leveraged returns in the high teens. We expect to continue to take advantage of these tailwinds by making outsized investments in this highly return-accretive segment going forward. With that, I will turn the call to Barry. Thanks, Jeff. Thanks, Rina and Zach. Good morning, everyone.

Jeff: In the quarter, we committed to $120 million of new loans at an IRR of approximately 20% and our post 2018 acquisition portfolio now makes up over 90% of our portfolio with expected Levered return in the high teens.

Barry: We expect to continue to take advantage of these tailwind by making outsized investment in this highly return accretive segment going forward.

Jeffrey F. DiModica: With that I will turn the call to Barry.

Barry Stuart Sternlicht: I'm on the West Coast, so... dialing in remotely to the team's call. I'm out at the Milton Conference. I will say that the question on everyone's mind is, where are we in the cycle? Are we bottoming out? [inaudible] working to fix their capital stacks, buying caps, trying to push their loans into coverage ratios. I think there's a lot of dry powder on the sidelines, and you've recently seen Blackstone Large. Take the private part of a multifamily, two of them, in fact, one in Canada, one in the U.S.

Barry Storm: Thanks, Jeff One thing Serena Jackson, good morning, everyone I'm on the West Coast.

Barry Storm: Dialing in remotely.

Barry Storm: Seems call.

Barry Storm:

Barry Storm: Now to the Milken conference I will say that the question on everyone's mind is where are we in the cycle are we bottoming.

Jeff:

Jeff: He's going to get better.

Jeff: Will they get better.

Jeff: I think it's pretty clear that most every property type things are okay at the property level.

Jeff: So it's really a question of how do you finance yourself. This is a balance sheet crisis in United States, not a property level crisis.

Jeff: Most of the asset classes, where there are some decelerating rents in multifamily most.

Jeff: Most everyone's sophisticated real estate knows that the supply of new APA.

Barry Stuart Sternlicht: Apartments is going to fall precipitously.

Barry Stuart Sternlicht: Our weighted completes more or less middle of 'twenty slot and then rents should reaccelerate. So you are seeing buyers come out of the woods.

Jeff: Particularly since the credit markets that seem to be us markets are wide open.

Jeff: Even diversified portfolios are getting done in the seamless market spreads are in.

Jeff: So the markets are repairing themselves.

Barry Stuart Sternlicht: And even the tone of the banks are at least the large banks is getting slightly better as they grasp on to get their arms around what they happen who's going to walk with what it is remarkable how many sponsors are coming in and working.

Barry Stuart Sternlicht: Working to fix their capital stacks by caps trying to push their loans into.

Barry Stuart Sternlicht: Coverage ratios I think theres, a lot of dry powder on the sidelines.

Barry Stuart Sternlicht: And <unk> recently seen a blackstone's.

Jeff: Blackstone's large take private about multifamily two of them in fact, one channel or one in the U S. There are transactions taking place in the private sector.

Barry Stuart Sternlicht: There are transactions taking place in the private sector, and we're kind of—it's definitely the yellow flag. We're doing—there's caution rates, you're out, you're going around the track, peek your head into the pit, and do I have to come in, and then repair the car and go back out on the track. We are in an enviable position, I think, both with our footprint, both here in Europe where there's more activity, but also with liquidity; going into this with this much dry powder gives us the opportunity to restructure, modify, take back, and basically do the thing that will maximize value for our shareholders.

Barry Stuart Sternlicht: Hum.

Barry Stuart Sternlicht: It's definitely the yellow flag, we're doing quite well, it's caution rates you're out you're going around the track pick your head into that.

Barry Stuart Sternlicht: And do I have to come in.

Barry Stuart Sternlicht: And then prepare the card and go back out on the track we are in an enviable position I think both with our footprint.

Barry Stuart Sternlicht: Both here in Europe, where there's more activity.

Barry Stuart Sternlicht: But also with all the liquidity.

Barry Stuart Sternlicht: Being going into this with this much dry powder.

Barry Stuart Sternlicht: Gives us the opportunity to restructure modify take back and basically do the thing that will maximize value for our shareholders. We are unique in our sector that we've always been an equity REIT, we've always owned.

Barry Stuart Sternlicht: We are unique in our sector that we've always been an equity REIT. We've always owned 17,000 affordable housing units that continue to be the guests I'm giving with significant rent growth and assuredly rent growth next year because we couldn't take all the rent growth, as Rina pointed out this year. So affordable housing is the one sector of real estate you can actually count on being full and for rental growth for the foreseeable future, which is material to us and will help us.

Barry Stuart Sternlicht: 17000 affordable housing units.

Barry Stuart Sternlicht: <unk> continues to be the gift that keeps on giving with.

Barry Stuart Sternlicht: Significant rent growth and surely rank growth next year, because we couldn't take all of that growth.

Jeff: Pointed out this year. So affordable housing is the one sector of real estate, you can actually count on being full.

Jeff: And for rental growth for the foreseeable future, which is material to Austin will help us and the other thing that you probably don't know.

Barry Stuart Sternlicht: And the other thing that you probably don't know is that there has been significant margin relief in our cost structures, particularly for insurance. And we expect our insurance to be down year over year. As we budgeted the year, we did not expect that. We thought it would be up, as it has been most every year.

Barry Stuart Sternlicht: Is there has been significant.

Barry Stuart Sternlicht: Margin relief in our cost structures, particularly for.

Barry Stuart Sternlicht: Insurance, and we expect our insurance to be down year over year as we budgeted the year, we do not expect that we thought it would be up almost every year.

Barry Stuart Sternlicht: That should help increase margins.

Barry Stuart Sternlicht: Improve or support the value of the game severity childhood huh.

Barry Stuart Sternlicht: But that should help increase margins and improve or support the value and the gains that we already have in our affordable housing book. I do continue to, as we talked about every quarter for 1011 years, the multiple cylinders, we continue to look at other cylinders that would offer new business lines for us and maybe not quite as correlated to the large loan real estate book. The Energy Infrastructure Lending Group is just such a thing, with a 20% target return on the paper we've invested in. We would go deeper there and accelerate that investing. We're also looking at other things. We've always looked at other things.

Barry Stuart Sternlicht: Portable housing books I do like.

Barry Stuart Sternlicht: Continue to like we talked about at every corner shows 10 11 years multiple cylinders, we continue to look at other.

Barry Stuart Sternlicht: Cylinders with.

Barry Stuart Sternlicht: Offer new business lines for us, maybe not quite as correlated to the large loan real estate book.

Barry Stuart Sternlicht: Well the energy infrastructure lending group is just such a thing with the 20% targeted returns on the paper we've invested we would go deeper there.

Barry Stuart Sternlicht: The worst thing.

Barry Stuart Sternlicht: We also are looking at.

Barry Stuart Sternlicht: Other things, we've always looked at other things and with the.

Barry Stuart Sternlicht: And with the General, not just stress, we'll call it stress on other companies in our sector. More companies that are will probably have some issues. I mean, I think we will find some opportunities to be creative on the capital market side and continue to look at differences, things both here and abroad that will grow our enterprise and the goal, of course, to achieve, ultimately, investment growth, which makes us a perpetual flywheel of capital in our industry.

Barry Stuart Sternlicht: General.

Barry Stuart Sternlicht: Hum.

Barry Stuart Sternlicht: I have to stress stress called stress on other companies in our sector.

Barry Stuart Sternlicht: Smaller companies there are.

Barry Stuart Sternlicht: Probably we'll have some issues I mean, I think we will find some opportunities to be creative on the capital market side.

Barry Stuart Sternlicht: We continue to look at different.

Barry Stuart Sternlicht: Things, both here and abroad.

Barry Stuart Sternlicht: That will grow our enterprise and with the goal of course to achieve ultimately investment grade, which makes it perpetual flywheel of capital in our industry and given the pullback of.

Barry Stuart Sternlicht: And given the pullback of the banks, we would like to figure out that we should be the dominant player in this space, much as some of the private credit guys have done that in the corporate space. So it's the largest player; that's our job to execute there.

Barry Stuart Sternlicht: The banks, we yeah, we would like to figure out that we should be the dominant player.

Barry Stuart Sternlicht: And we'll spend as much as the some of the private credit guys have them all in the corporate space. So it's the largest player that's our job to execute there I think are our smaller loan business recent hires in our storage solutions business are just beginning to take route but we hope they become small oaks instead of shopping center portfolio and continue to.

Barry Stuart Sternlicht: I think our small loan business, recent hires, and our startup solutions business are just beginning to take root, but we hope they become small oaks, or at least 200 something over. So you're talking about paying off 70% of debt is not a bad outcome for a short order. It's not that dilutive.

Barry Stuart Sternlicht: Contribute to hire all the way.

Barry Stuart Sternlicht: For our shareholders in a very dependable.

Barry Stuart Sternlicht: Dependable income stream to support our dividend it is.

Barry Stuart Sternlicht: That's an unusual thing.

Barry Stuart Sternlicht: With rates. This five sitting on this cash is not nearly as peanuts and as it used to be we just pay off all our lines I'm only kidding. According to Mount as we need to borrow again.

Barry Stuart Sternlicht: So we're paying off lines that are written off a sofa, which is five three and spreads.

Barry Stuart Sternlicht: Or at least 200, something over so you're talking about paying off seven 8%.

Barry Stuart Sternlicht: This is not a bad outcome for short order, it's not absolutely what is dilutive as well.

Barry Stuart Sternlicht: What is dilutive is the non-accruing REO assets we have on our balance sheet, but we're blessed to be able to support everything without having them accrue, even though they are recovering, and we will continue to work through the portfolio and bring that capital back into an earnings position as soon as it is prudent. The only other thing I'd say is I do think the Fed has the wrong toolkit for this economy. And the faster they realize that, the better off the banking system and the real estate complex will be. It's not working.

Barry Stuart Sternlicht: On accruing.

Barry Stuart Sternlicht: Oh out since we have on our balance sheet, but we're blessed to be able to support it with and without having them crew.

Barry Stuart Sternlicht: Crewing, even though they are recovering and we will continue to work through the portfolio and bring that capital back into an earnings physicians doing the stream.

Barry Stuart Sternlicht: The only other thing I'd say is.

Barry Stuart Sternlicht: I mean, interest rates at this level are not slowing down job growth in many industries. It's not slowing down tech innovation, the new announcements by Meta, Facebook, NVIDIA, Amazon, and Microsoft about the construction of data centers, the nearly $100 billion defense bill, which will power Military Manufacturing of Weapons, and [inaudible] not getting any construction job losses, which you'd normally see with a 500 basis point increase in rates. One of the first things you can kill is construction.

Barry Stuart Sternlicht: I do think so.

Barry Stuart Sternlicht: <unk> has a long tool kit for this economy and on the faster they realize that the better off certainly.

Barry Stuart Sternlicht: <unk> seen them the real estate complex will be it's not working.

Barry Stuart Sternlicht: Working interest rates at this level not slow job growth in many industries.

Barry Stuart Sternlicht: It's not slowing down the tech innovation, so the new.

Barry Stuart Sternlicht: Announcements by Facebook.

Barry Stuart Sternlicht: And Judy Amazon Microsoft in construction.

Barry Stuart Sternlicht: Construction of data centers.

Barry Stuart Sternlicht: Nearly 100 billion dollar defense, Bill, which will power.

Barry Stuart Sternlicht: Military manufacturing weapons.

Barry Stuart Sternlicht: There are moments in the United States is a stimulus.

Barry Stuart Sternlicht: The stimulus Bill obviously, you see the administration laying out the money now for the chips vaccines 5 billion here 8 billion 30 billion there, it's adding up.

Barry Stuart Sternlicht: We are turning on the infrastructure Bill.

Barry Stuart Sternlicht: The government is not getting any construction job losses, which you'd normally see with a 500 basis point increase in rates one of the first things you can kill is construction.

Barry Stuart Sternlicht: On the other hand, almost 45% of the workforce today is in health care, education, and government. And you can point out that those three industries have added 3.1 million jobs since he started raising rates in May of 22. So fact, close the door, it's not working for health care. Nobody doesn't get sick because he's raised interest rates 50 basis points, nor does anyone not go to the hospital or not call their doctor. The other big problem he had, inflation, was driven partly by energy prices and food prices.

Barry Stuart Sternlicht: On the other hand pass almost 45% of the economics of the workforce today's health care education, and government and you can point out that those three industries have added $3 1 million jobs.

Barry Stuart Sternlicht: He started raising rates in may of 'twenty two so.

Barry Stuart Sternlicht: Back close the door, it's not working for health care, nobody doesn't get sick because he's raised interest rates 50 basis points, nor does anyone not go to the hospital not core call their doctor.

Barry Stuart Sternlicht: The big problem, we have inflation was driven partly by energy prices and food prices.

Barry Stuart Sternlicht: And both of those have retreated; he's not going to set car insurance rates with interest rates. So it's kind of a tool that has collateral damage of the banking system, the regional banks, and thrown into disarray the valuations of commercial assets all over the country, and I'd say all over the globe, because many people had to follow us. And that is not just an academic thing because the cities and municipalities depend on the real estate taxes from these commercial assets to run their schools and police and waste management and all the other services that they provide for their communities.

Barry Stuart Sternlicht: Both of those have retreated, but he's not gonna start car insurance with interest rates.

Barry Stuart Sternlicht: So it's kind of a tool that has the collateral damage of which has been the banking system, the regional banks and throwing into disarray devaluations of commercial athletes all over the country and I'd say all over the globe because many people that follow us and that is not just an academic thing because the cities municipalities or depending on the real.

Barry Stuart Sternlicht: Taxes for me as well.

Barry Stuart Sternlicht: Laughs, it's to run their schools and police and waste management.

Barry Stuart Sternlicht: All the other services you can provide there community so they do keep taxiing and to keep decreasing.

Barry Stuart Sternlicht: So if you keep taxing and keep decreasing, then the life you're building has unbelievably bad implications across the country. So maybe the Fed will get ahead of the election and do something. I think he'd like to.

Barry Stuart Sternlicht: And NOI of your buildings.

Barry Stuart Sternlicht: You decreased the property values and you can keep taxing, but what's the barrier to keep going down and pretty soon you're in a spiral far worse than a 2.7 versus the 2% inflation rate you have asset deflation, which has unbelievably bad implications across the country. So maybe the fed will get ahead of the election and do something I think.

Barry Stuart Sternlicht: He'd like to.

Barry Stuart Sternlicht: But I don't think people should think that in this economy, the way it's configured with tech leading and productivity leading from the tech sector, that without causing a serious recession, a hard landing, he can get the job losses he wants to free up the labor force. So I would say, we also would like to take advantage of the data center area and probably wade into some lending opportunities where the private firm with the fourth largest data center player in the country.

Barry Stuart Sternlicht: But I don't think people should think that in this economy the way its configured with tech, leading and productivity leading from the tech sector that without without causing a serious recession, the heartland and he can get the job losses. He wants to re up the labor force.

Barry Stuart Sternlicht: So I would say.

Barry Stuart Sternlicht: We also would like we'll take advantage of the data center area and probably weighted into some funding opportunities where a private firm with its fourth largest state.

Barry Stuart Sternlicht: So we're quite active on the build side; we have 50 people now doing data centers, and that could be a very interesting place for us to continue our new vertical to lend against. And one of the issues there is that those loans are big, and they require a lot of capital, which is good news and bad news. But there are opportunities for lenders to achieve very nice returns in that sector, and it's very good credit.

Barry Stuart Sternlicht: At a central player in the country.

Barry Stuart Sternlicht: So we are quite active on the build side that we have 50 people in them doing data centers there.

Barry Stuart Sternlicht: Well could be a very interesting place for us to.

Barry Stuart Sternlicht: Changed our new vertical to lend against and one of the issues there as those loans are big and they require a lot of capital which is good news bad news, but there are there are opportunities for lenders to achieve very nice returns.

Barry Stuart Sternlicht: In that sector and it's very good credit so that would be something that we'll look forward to doing in the future without it and again I want to thank the team and this is hand to hand combat. This is like hands on the steering wheel time, it's not a time to be.

Barry Stuart Sternlicht: So that would be something that we'll look forward to doing in the future. With that, again, I want to thank the team. And this is combat. This is like hands on the steering wheel time. It's not a time to be out and twiddling your thumbs.

Barry Stuart Sternlicht: Out.

Barry Stuart Sternlicht: It is that teams are working with borrowers and working on our entire investment portfolio to try to maximize returns for the shareholders. So, we are feeling pretty good in a tough world, but I think we're very confident in our ability to weather the storm and emerge as, I think, the leader in our sector. Thanks, everyone. We'll take questions.

Barry Stuart Sternlicht: And Twiddling yourselves.

Barry Stuart Sternlicht: It is.

Barry Stuart Sternlicht: Teams are working with borrowers.

Barry Stuart Sternlicht: And working on our entire investment portfolio to try to maximize return.

Barry Stuart Sternlicht: For the shareholders. So we are feeling pretty good.

Barry Stuart Sternlicht: And a tough world, but I think we are very confident in our ability to weather the storm and emerges.

Barry Stuart Sternlicht: The leader in our sector.

Speaker Change: Thanks, everyone, we'll take questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.

Operator: Before pressing the star keys.

Jade Joseph Rahmani: The first question comes from Jade Rahmani with KBW. Please go ahead. Thank you, Mary.

Operator: First question comes from Jade Rahmani with K P. W. Please go ahead.

Barry Stuart Sternlicht: Thank you very much. I'm curious what you think explains the discrepancy, if it's the nature of the transitional assets or, more so, as you alluded to in your comments, the liabilities. And if it's the liabilities, that should open up opportunities for Starwood to be a net acquirer of weaker players that have very constrained capital.

Jade Joseph Rahmani: Thank you very much this quarter has been a tale of two cities, while theres been the ongoing credit migration that we've seen some positive surprises from the banks in terms of there being no big shoes to drop at the same time with the commercial mortgage REIT, there hasn't been pronounced deterioration and broad recognition of law.

Barry Stuart Sternlicht: Office, Starwood clearly is performing much better than peers.

Barry Stuart Sternlicht: I'm curious what you think explains the discrepancy if its the nature of the transitional assets or more so as you alluded to in your comments the liabilities and if it's the liabilities that should open up opportunities for starwood to be a net acquirer of weaker players that have very constrained capital structures.

Speaker Change: Barry let me to start.

Jeffrey F. DiModica: I will start. You know, Jade, we did foreclose on some things early. You know, we've been advantaged by having a portfolio that's set up to perform better in this market. I hate to keep repeating it, but it's hard to hide from the fact that, with 11 percent U.S. office and the lowest leverage at 2.3 turns, plus tremendous liquidity, you would expect better outcomes there. The difficult thing for this market, I think, and this goes for the banks and the non-banks and all of us, is looking ahead to SOFR.

Speaker Change: I will start you know Jade, we did foreclose on some things early.

Jeffrey F. DiModica: Been advantaged by having a portfolio that's set up to perform better in this market I hate to keep repeating it but its hard to hide from the fact that was 11%.

Jeffrey F. DiModica: S office and the lowest leverage at two point to returns you would expect at bus tremendous liquidity, you would expect better outcomes there.

Jeffrey F. DiModica: The difficult thing for this market I think and it goes for the banks and the non banks and in all of US is looking for its over if you go back to May of last year for it. So far in 2025 was going to be two 6%. If you went back to October of last year. It was four 6% that you went to January of this year.

Jeffrey F. DiModica: You know, if you go back to May of last year, forward SOFR in 2025 was going to be 2.6 percent. If you go back to October of last year, it was 4.6 percent. If you went to January of this year, it was back into the three and a half area.

Jeffrey F. DiModica: It was back into three and a half area well today. So for is expected in the middle of 'twenty five a year from now it would be for 40 and a year later to be 4%. So we don't go below 4% for two years, we thought we were doing that a year from now.

Jeffrey F. DiModica: Well, today SOFR is expected in the middle of 2025, a year from now, to be 440 and a year later to be 4 percent. So we don't go below 4 percent for two years. We thought we were doing that a year from now by over 100 basis points. So I would say these reserve bills with SOFR having made a move significantly higher with the Fed being priced out and the spread versus the 10-year note. The 10-year note was 70 basis points above where forward SOFR was supposed to be in 2025, but now it's below where forward SOFR is supposed to be.

Jeffrey F. DiModica: By over 100 basis point, So I would say these reserve builds with so for having made a move significantly higher with the fed being priced out and the spread versus the 10 year note. The 10 year note was 70 basis points above going back to the beginning of the year.

Jeffrey F. DiModica: We're four it's Oprah was supposed to be in 25, now it's below where for it so for US it's supposed to be so.

Jeffrey F. DiModica: So the Fed being priced out is very difficult for transitional floating rate loans. And to the extent the Fed continues to get priced out of the market, I think you'll continue to see reserves build. And to the extent that we flatten here and take some advantage of some of the weaker numbers we've seen recently, this QT move last week is good.

Jeffrey F. DiModica: The fed being priced out is very difficult to transitional floating rate loans and to the extent the fed continues to get priced out of the market I think you'll continue to see reserves built into the extent that we flattened here and take some advantage from some of the lowest weaker numbers. We've seen recently that this Q T move last week is good we're seeing rates go lower today.

Jeffrey F. DiModica: We're seeing rates go lower today, so I think these reserves will stop building. But it's difficult to say.

Jeffrey F. DiModica: I think these reserves will will stop building, but.

Jeffrey F. DiModica: Uh huh.

Jeffrey F. DiModica: Difficult to say on the good side I think a lot of us have the staying power hopefully our peers have the staying power to live to two years three years whatever that is down the line. We have tremendous liquidity, we have massive access to liquidity, having just issued high yield and so.

Jeffrey F. DiModica: On the good side, I think a lot of us have the staying power, hopefully our peers have the staying power, to live for two years, three years, whatever that is down the line. We have tremendous liquidity. We have massive access to liquidity having just issued high yield bonds. And so I hope that our peers have the same staying power because, ultimately, we will likely head to lower rates. And that will be very helpful.

Jeffrey F. DiModica: I hope that our peers have the same staying power because ultimately we will likely had to lower rates.

Jeffrey F. DiModica: And that will be very helpful. That's for M&A.

Jeffrey F. DiModica: As for M&A, I'll give you my cell phone number if you have anybody whose board would like to be acquired at 50, 60, 70, 80% of book value, and we can look at the assets we'd love to. It's almost impossible in this sector. People don't want to have that discussion. We would love to consolidate and help consolidate the industry. We've had no luck doing that.

Speaker Change: I'll give you my cell phone number if you have anybody who's board would like to be acquired at 50, 60 70, 80% of book value and we can look at the assets would love to its almost impossible. In this sector people don't want to have that discussion, we would love to consolidate and help consolidate the industry.

Jeffrey F. DiModica: Had no luck doing that and I don't expect that we'll have any luck in the near future doing that with management teams and boards, who are looking to do that and would rather try to defend their their book value.

Jeffrey F. DiModica: I don't expect that we'll have any luck in the near future doing that with management teams and boards who aren't looking to do that and would rather try to defend their book value. I'll be a little more optimistic about that. It's not fun when you have nothing to do.

Jeffrey F. DiModica: Alright.

Jeffrey F. DiModica: I'll be a little more optimistic about that it's it's not fun. When you have nothing to do you can issue stock here Youre getting repo calls.

Jeffrey F. DiModica: You can't issue stock. You're getting repo calls. So it's not a question if they want to volunteer.

Jeffrey F. DiModica: Another question you'd want if they want to volunteer it'll be more because they have to.

Barry Stuart Sternlicht: It'll be more because they have to and merge with a stronger balance sheet. One thing that's interesting about the market is, yes, you've seen these I call fairly sophisticated borrowing or managers of books take hits in their books, whether it's REO or just write downs. Almost everyone in the sector, I think, has experienced some form of one or the other. If you think of the regional banks that have trillions of loans and maybe are levered eight to one, you wonder what's going on. Like how could they not be experiencing it? on www.starwoodpropertytrust.com.

Jeffrey F. DiModica: And merge with a stronger balance sheet. It is one one thing that's interesting about the market is yes, you've seen these right.

Barry Stuart Sternlicht: I call it silly sophisticated.

Barry Stuart Sternlicht: Already our managers of books take hits in and their book, whether it's already or just write downs almost everyone. In the sector I think has experienced some form of.

Barry Stuart Sternlicht: One of the other where do you think of the regional banks that have a Chilean line of loans and maybe elaborate eight one.

Barry Stuart Sternlicht:

Barry Stuart Sternlicht: You wonder what's going on like how how how could they not be experiencing.

Barry Stuart Sternlicht: The larger losses, certainly in their office portfolios.

Barry Stuart Sternlicht: And it wouldn't take much so to wipe out an H, one levered book and the equity of that book So.

Barry Stuart Sternlicht: They typically have lent on smaller properties and tertiary markets, which don't.

Barry Stuart Sternlicht: And the liquidity of our the option of being placed in the sea MBS execution. So.

Barry Stuart Sternlicht: There is.

Barry Stuart Sternlicht: You continue to scratch your head. I do think it's an incredible opportunity for us, and will we be fortunate enough to go out and raise additional capital in this market? We could deploy it for extraordinary returns, and we continue to stay active in these markets with our private credit vehicles because we want to keep our people busy, but we're foaming at the mouth to get back in the game, but we have to be prudent about it.

Barry Stuart Sternlicht: Can you continue to scratch your head.

Barry Stuart Sternlicht: Do you think it's an incredible opportunity for us.

Barry Stuart Sternlicht: Will we be fortunate enough to go out and raise additional capital in this market.

Barry Stuart Sternlicht: We can deploy at an extraordinary returns.

Barry Stuart Sternlicht: And we continue to stay active in these markets is a private credit.

Barry Stuart Sternlicht: Vehicles, because we want to keep our people busy but we're foaming at the mouth to get back in in in the game.

Barry Stuart Sternlicht: I'd have to be prudent about it so.

Barry Stuart Sternlicht:

Barry Stuart Sternlicht: You know, we have paid down repos, we have the liquidity to do that where banks have been wobbly, and there's been significant, and still we remain with a billion and a half. I'm not of the camp that rates are going up, I think Powell, forget about what the numbers say about inflation. He has the regional banking system that he's looking at in the corner of his eye. The bank is failing seemingly like every week now.

Barry Stuart Sternlicht: We have paid down repos, we have the liquidity to do that where banks have been wildly and there's been significant and still we remain with it.

Barry Stuart Sternlicht: 1 billion households.

Barry Stuart Sternlicht: Liquidity, so I I'm.

Barry Stuart Sternlicht: I'm I'm I'm not of the camp that rates are going up I think Paolo.

Barry Stuart Sternlicht: And he also knows that the best way to get capital into those banks is to lower rates. It'll help the securities as well as the loans. It's the backdoor way of a bailout, basically. And the second thing he's obviously focused on is his deficit. You know, it's not a free lunch.

Barry Stuart Sternlicht: Forget about the numbers say about inflation. He has the regional banking system that he's looking at a corner at the Die Bank is failing seeming like every week now.

Barry Stuart Sternlicht: And he also knows that that's the best way to get capital into those banks is to lower rates.

Barry Stuart Sternlicht: It'll help the securities as well as the loans.

Barry Stuart Sternlicht: Backdoor way of a bail out basically and the second thing. He is obviously focused on is this deficit is not free lunch everyone's tells them to raise rates, while the biggest victim at the federal government, which if you play this out we'll run the Chilean and half dollars of interest expense to Julian that's almost two times the defense Bill the entire.

Barry Stuart Sternlicht: Everyone tells him to raise rates. Well, the biggest victim is the federal government, which, if you've played this out, will run a trillion and a half dollars in interest expense, a trillion and a half dollars two times the defense budget, the entire defense spending in the United States. I mean, we were running $200 billion in 21. That's seven times the interest expense. And then it becomes the negative flywheel.

Barry Stuart Sternlicht: Defense spending in that space.

Barry Stuart Sternlicht: I mean, we were running 200 billion in 'twenty, one that's seven times, but the interest expense and then it becomes a negative flywheel, we just printing printing printing printing to pay interest and you can't be that foolish actually want the United States, especially in a world that has no huge engine of growth today, they will lower rates in Europe in June almost assuredly.

Barry Stuart Sternlicht: We're just printing, printing, printing, printing to pay interest. And he can't be that foolish to actually want the United States, especially in a world that has no huge engine of growth today. They will lower rates in Europe in June, almost assuredly. The guard will lower rates, too. It'll put pressure on the dollar and make U.S. exports less competitive. I mean, does he want to crack this thing over a rock before he says, "uncle?"

Barry Stuart Sternlicht: The guard with low rates.

Barry Stuart Sternlicht: Pressure on the dollar it'll make U S exports less competitive I mean does he want to crack this thing over a rock before he says uncle, it's not working I mean, the economy is not doing what we all expected it to do which was cave and it's very simple you why Americans have jobs their balance sheets are fixed they have fixed rate.

Barry Stuart Sternlicht: It's not working. I mean, this economy is not doing what we all expected it to do, which was cave. And it's very simple why. Americans have jobs. Their balance sheets are fixed. They have fixed-rate mortgages. They got $235 billion of interest income from their cash that's sitting in money market accounts earning 5%. They still have their jobs. They're in there while the growth rate and wages are flowing, it's not down. And there's no obvious sign of how you actually get people fired in business services.

Barry Stuart Sternlicht: Mortgages, they got $235 billion of interest income from their cash that's sitting in money market accounts, earning 5%.

Barry Stuart Sternlicht: They have their jobs there.

Barry Stuart Sternlicht: The growth rate in wages.

Barry Stuart Sternlicht: Blowed, if not down.

Barry Stuart Sternlicht: And it's not there's no obvious sign of how you actually get people fired and business services, but youre seeing cracks you. If you look hard enough you see Mcdonald's Starbucks you see credit card delinquencies at the non money mine the money center banks Youre beginning to see.

Barry Stuart Sternlicht: But you're seeing cracks. If you look hard enough, you see McDonald's, you see Starbucks, you see credit card delinquencies at the non-Money Center banks. You're beginning to see, as the average American looks at the stimulus savings, a slowdown in the broader economy. You saw Shopify's numbers this morning. I mean, there are cracks.

Barry Stuart Sternlicht: The average American lives out of a stimulus savings.

Barry Stuart Sternlicht: A slowdown in the broader economy plus shop, a five month numbers. This morning, I mean, there there are cracks there are companies beginning and they are not able to pass on the price hikes that you were able to do before.

Barry Stuart Sternlicht: There are companies beginning, and they are not able to pass on the price hikes that they were able to do before. So he won't wait. I don't think he'll wait for the election. I could be wrong because, again, I wouldn't have done what he did either. I wouldn't have listened to, what do you call them?

Barry Stuart Sternlicht: So he won't wait I don't think you'll wait to collection I could be wrong, because again I wouldn't have done what he did either I wouldn't listen to.

Barry Stuart Sternlicht: What do you call them.

Barry Stuart Sternlicht: Backseat drivers you were saying just raise rates one has to think about the implications of that across the capital markets in the globe and we have managed by increasing rates the way we have.

Barry Stuart Sternlicht: You put Europe in that recession, and in Europe, and China will not be the engines of growth to pull us out of this so theres no huge nothing's getting that lit up if he if he drops rates 50 basis points nothing changes no jobs, you're going to get filled.

Barry Stuart Sternlicht: filled. Maybe the housing market, maybe it gets a little bit stronger, but if he wants to solve inflation he should look a year and a half down the road at the ever larger deficit of homes he's creating as builders don't build and then prices will accelerate and take off again because he's creating a shortage of housing today. So I mean you can do what you want and he is but you know I'm pretty clear that I People give him applause well he was the gentleman that told us that rates would stay lower longer and through it in December of 21 and right through May of 22 bought corporate bonds, so I Wasn't he wasn't right then and I don't believe he's gonna he's right now He has to be super careful because his tool his toolkit is flawed.

Barry Stuart Sternlicht: <unk>, maybe the housing market, maybe it gets a little bit stronger, but if he wants to solve inflation. He should look a year and a half down the road at the ever larger deficit of homes, he's creating as builders don't build and then prices will accelerate and take off again, because he is creating a shortage of housing today.

Barry Stuart Sternlicht: So I mean, you can do what you want and he is but you know I'm pretty clear that.

Barry Stuart Sternlicht: And people give them applause well he was a gentleman that told us that rates will stay lower longer and threw it in December 'twenty, one and right through may of 'twenty, two bought corporate bonds. So.

Barry Stuart Sternlicht: Wasn't he wasn't right then and I don't believe he's going on right now he.

Barry Stuart Sternlicht: So this economy is not your grandmother's economy. It's not an economy that is gonna knock millions of jobs out of manufacturing. We will only have 13 million jobs in manufacturing. It's a small industry today. So, we'll see. But we're very well poised, and we're waiting; we're chomping at the bit to turn the heat on now. You're not seeing that many transactions still. So you know, there aren't that many things, and you'll see less construction.

Barry Stuart Sternlicht: He has to be super careful because its too its toolkit is flawed.

Barry Stuart Sternlicht: Economies not your grandmother's economy does not economies can knock.

Barry Stuart Sternlicht: Means of jobs out of manufacturing will only have 13 million jobs in manufacturing, it's a small industry nicely today.

Barry Stuart Sternlicht: So.

Barry Stuart Sternlicht: We'll see but we're very well poised and real waiting we're chomping at the bit to turn.

Barry Stuart Sternlicht: That the heat on now Youre not seeing that many transactions still so you know you there's not that many things and you'll see less construction. So in order to lend we need transactions and not just modification. So one of the things that's happening in one of the reasons of the data set is not as large as it ought to be just because of the ability to bear.

Barry Stuart Sternlicht: So in order to lend, we need transactions and not just modifications. So one of the things that's happening and one of the reasons the data set is not as large as it ought to be is because of the ability of banks who are well capitalized to modify and restructure loans and hope for a low rate environment in the future. So it's not, it's not like. So you see the volume of commercial transactions is down, I think, to the level of 2011. So, you know, we are, people are not trading assets; everybody's waiting for Powell to relent. Hopefully, he will, and the economy will take it, you know, take a step forward. Thanks.

Barry Stuart Sternlicht: Thanks, who are well capitalized to modify and restructured loans and hope for a low rate environment. The future. So it's not it's not like.

Barry Stuart Sternlicht:

Barry Stuart Sternlicht: So you can see the volume of commercial transactions I think down to the levels of 22011.

Barry Stuart Sternlicht: You know, we our people are not trading assets everybody's waiting for.

Barry Stuart Sternlicht: Powell Timberland.

Barry Stuart Sternlicht: Hopefully he will and the economy will take it you know take a step forward.

Barry Stuart Sternlicht: Okay.

Barry Stuart Sternlicht: Okay.

Speaker Change: Next question Josh.

Donald James Fandetti: Don Fandetti with Wells Fargo, please go ahead.

Sam Dirty: God, Sam Dirty with Wells Fargo. Please go ahead.

Jeffrey F. DiModica: Yes, can you talk a little bit about the outlook for the migration of office loans from three to four rated? You know, last quarter, there was a pretty big increase. You've got a few this quarter. Are we just looking at, you know, a handful of loans each quarter? Are we getting closer to the end? And what's driving those movements this quarter?

Donald James Fandetti: Yes can you talk a little bit about the outlook of migration of office loans from three to four rated.

Jeffrey F. DiModica: Last quarter, there was a pretty big increase you've got a few this quarter or are we just looking at you know a handful of loans each quarter are we getting closer to the end.

Jeffrey F. DiModica: And what's driving you know those movements this quarter.

Jeffrey F. DiModica: Yeah.

Jeffrey F. DiModica: Yeah.

Jeffrey F. DiModica: Yeah. Clearly, this SOFR move that I talked about is putting stress on people, and I think the ability and desire to continue to put in capital, and in my prepared remarks, I said we had borrowers put in $1.3 billion last year and almost half a billion already this year. If the forward SOFR curve continues to go higher, people are going to be less aggressive in doing that, and as they are less aggressive in doing that, and we have to have discussions about potentially carrying the loans, or helping carry the loans, or potentially cutting the rates by a little bit, or anything that requires us to really be involved in that the loan is potentially going to go non-current.

Jeffrey F. DiModica: Clearly this folks as sofa move that I talked about is putting stress on people and I think the ability and desire to continue to put in capital and in my prepared remarks, I said, we had borrowers putting $1 billion three last year and almost a half a billion already this year. If the Ford. So Africa continues to go hire people are going to be less aggressive.

Jeffrey F. DiModica: In doing that and as they are less aggressive in doing that and we have to have discussions about potentially carrying the loans are helping carried in the loans or potentially cutting rate by a little bit or anything that that requires us to really be involved and that alone is potentially going to go non current we want to be in front of that and move it from me.

Jeffrey F. DiModica: We want to be in front of that and move it from a three, which signifies something that is fully current and being supported to that date, and we're not making any concessions to a four, where we feel that if this economic environment stays and SOFR stays higher, we could end up having to commit more capital to help support an asset.

Jeffrey F. DiModica: <unk>, which which signifies something that is fully current and being supported to date and we're not making any concessions to a four where where we feel if this economic environment stays in sofa stays higher we could end up having to commit more capital to help support an asset and so you saw two assets.

Jeffrey F. DiModica: You saw two assets in the office space go from three to four this quarter. Neither one was huge. I spoke about both earlier. The other one was an apartment building. But Donna, I think if the forward curve goes as much higher in the next quarter as it did this quarter versus where it's been, I think that's a type of migration that shouldn't be unexpected in a $20 billion balance sheet. It's not huge.

Jeffrey F. DiModica: And the office space go from three to four this quarter.

Jeffrey F. DiModica: Neither one was huge I spoke about both earlier the other one was an apartment.

Jeffrey F. DiModica: I think if you know if the forward curve goes is much higher in the next quarter as it did this quarter versus where it's been.

Jeffrey F. DiModica: I think that's the type of migration that that shouldn't be unexpected in a in a 20 odd billion dollar balance sheet, yeah. Its not not huge it's sort of normal course, but but so for us certainly going the wrong way in the quarter and being conservative given we may have to put capital in to help support assets. So I think this credit.

Jeffrey F. DiModica: It's sort of a normal course, but SOFR certainly is going the wrong way this quarter, and we're being conservative, given we may have to put capital in to help support assets. I think this credit migration will follow SOFR, and hopefully it slows down in the coming quarters as we turn it around.

Jeffrey F. DiModica: Gration I mean, it will follow a sofa and and hopefully it goes down in coming quarters as we turned it around.

Jeffrey F. DiModica: Got it. And Jeff, what's your appetite for residential mortgage credit, you know, is sort of flat-ish? Yeah, if you think about non-QM, I mean, credit's still pretty good. Are you seeing opportunities, or just not a ton of deals out there?

Speaker Change: Got it and then Jeff what's your appetite for residential mortgage credit.

Jeffrey F. DiModica: Portfolio is sort of flattish.

Jeff: Yeah. If you think about non QM I mean credit is still pretty good at are you seeing opportunities are just not a ton of deals out there.

Jeffrey F. DiModica: on residential mortgage credit. Was that the question? I apologize. I was just looking at something else. And would we go back to the investment side? Is that your question?

Jeff: On an <unk> mortgage credit was that the question I apologize I was just looking at some yeah on something else.

Jeff: And would we go back into the investment side is that your question.

Jeffrey F. DiModica: Yeah, just kind of, you know, how are you thinking about the asset growth there? Credit's been pretty good. I mean, are you seeing opportunities? Or are you going to sort of keep the portfolio flat until you go more on off? Yeah, you know, it's interesting.

Speaker Change: Yeah, just kind of how are you thinking about the asset growth there credit's been pretty good I mean are you seeing opportunities or are you going to sort of keep the portfolio flat until you go more on offense.

Jeffrey F. DiModica: Yeah, you know, it's interesting. We talked a lot about credit tightening across markets. Credit is really tightened on the resi side as well. There is certainly a bid, and it's driven by insurance companies for bonds that are highly rated. We're seeing two AAA securitizations this week, Barris, and one other that are in the $130, $135 area for AAAs. What's more interesting to me is that BBBs on those deals are $200 over. I don't remember seeing 70 basis points spread between BBBs and AAAs at any time recently, and that is really tight.

Jeffrey F. DiModica: Yeah, you know it's interesting we talked a lot about credit tightening across markets credit has really tightened on the RASM side as well there is certainly a bit is driven by insurance companies for bonds that are highly rated.

Jeffrey F. DiModica: We're seeing two AAA securitization. This week there is someone out there that are in the $131 35 area for Triple is what's more interesting to me is that triple BS on those deals are 200 over I don't remember 70 basis point spread between Triple BS and Triple is anytime recently and that is really tight so the credit curve is collapsing where the reinsurance spirit and others for.

Jeffrey F. DiModica: So the credit curve is collapsing where the insurance bid and others for the much smaller classes of BBBs, you know, we've tightened those in significantly. So with an active securitization market there, it is pretty interesting. You know, you look at a lot of the non-QM type of assets, the type of things that we have on our books; there are A-plus coupons, gross WAC coupons being produced today. And if you can securitize at those type of spreads in the $130 range for seniors, you can make a tremendous return on an 8% gross WAC resi mortgage, but you are very levered to prepayment speeds. And so the discussion we've had internally about whether to add or not has really been around what do we think happens to speeds?

Jeffrey F. DiModica: Or is it much smaller classes have tripled. These you know we've tightened those in significantly with a active securitization market. There is it is it is pretty interesting you look at a lot of the non QM type of assets the type of things that that we have on our books there.

Jeffrey F. DiModica: There are eight plus coupons gross whack coupons being produced today and if you can securitize at those type of spreads with one.

Jeffrey F. DiModica: 130 over for seniors and you you can make a tremendous return on an 8% gross WAC rosy mortgage, but you are very levered to prepayment speeds and so the discussion we've had internally about whether to add or not it's really been around what do we think happens to speeds berries baseline in our baseline is that rates do.

Jeffrey F. DiModica: You know, Barris' baseline and our baseline is that rates do go lower. And I think a lot of people who take out an 8% to an 8.5% gross WAC coupon residential loan, if rates go 100 basis points lower, and they just got their finances ready for the last loan, they're going to be very quick to repay. I think you could see historically quick repayments on those. So you're going to have something that's in the high 20s IRR that could turn into a significantly lower IRR if rates rally a lot. And, you know, obviously, rates going lower is not great for our earnings, but it's good for credit.

Jeffrey F. DiModica: Go lower and I think a lot of people would take out an eight two and eight 5% gross WAC coupon residential loan if rates go 100 basis points lower than they just got their financials ready for the last one they're going to be very quick to re day I think you can see historically quick repayments on those so you're going to have something that's high twenty's IRR that could turn into a.

Jeffrey F. DiModica: The lower IRR, if if rates rally a lot.

Jeffrey F. DiModica: And you know obviously rates going going lower is not great for our earnings. It's good for credit so to lever into a prepayment negative convexity trade at this time, even though the carriers so enticing and we've looked at it a bunch of it's not something we're looking to do you know we were very happy with the performance over the last couple of years, we increased our hedge we moved our hedge more to the front.

Jeffrey F. DiModica: So to lever into a prepayment negative convexity trade at this time, even though the carry is so enticing and we've looked at it a bunch, it's not something we're looking to do. You know, we're very happy with the performance of the last couple of years. We increased our hedge. We moved our hedge more to the front end. It's outperformed. Our hedges have significantly outperformed our resi book.

Jeffrey F. DiModica: And it outperformed our hedges have significantly outperformed our resi book, our resi book is lower coupon, it's not we could securitize it today, but given whereas liquid as we are we're saving most of 100 basis points in financing costs by keeping it in bank financing rather than securitized financing that will roll in three or four years anyway. So.

Jeffrey F. DiModica: Our resi book is a lower coupon. It's not, we could securitize it today, but given we're as liquid as we are, we're saving most of 100 basis points in financing costs by keeping it in bank financing rather than securitized financing that will roll in three or four years anyway. So we're steady staying the course on the resi side, although we are seeing a tiny bit of resi credit disruption. I wouldn't say that the 90 plus days are troubling in any way.

Jeffrey F. DiModica: It was steady staying the course on the resi side, we are seeing a tiny bit of resin credit Hum disruption I wouldn't say that the 90 plus days are troubling in any way. The reality is most of our book was written 67567 years ago, you've had a lot of HPA, so absent fraud, and some places like that.

Jeffrey F. DiModica: The reality is that most of our book was written six, seven, five, six, seven years ago, and you've had a lot of HPA. So, absent fraud and some places like that, the resi credit for the time that we wrote our loans should have been awfully good. If we were correct in writing 65 LTV loans, they should be 50 LTV loans today. So they should really only be ones where we have a fraud situation, which unfortunately does happen in this space.

Jeffrey F. DiModica: The credit for the.

Jeffrey F. DiModica: The time that we wrote off loans should be obviously, good if we were writing if we were correct in writing 65, LTV loans. They should be 50, LTV loans today. So it should really only be ones, where we have where we have a fraud situation, which unfortunately does happen in this space that the newer loans will will obviously have less home price appreciation to support them. So.

Jeffrey F. DiModica: The newer loans will obviously have less home price appreciation to support them, so you'll probably have more resi credit issues over the next couple of years on the higher coupon, newer loans. But our book is more 2018 to 2021 or 22, the latest.

Jeffrey F. DiModica: You'll probably have more Reds had credit issues over the next couple of years on the higher coupon newer loans.

Jeffrey F. DiModica: Our book is more 2018 to 2021 or 'twenty two.

Jeffrey F. DiModica: <unk>.

Jeffrey F. DiModica: Thanks.

Richard Barry Shane: Next question, Rick Shane with J.P. Morgan, please go ahead.

Jeffrey F. DiModica: Next question, Rick Shane with J P. Morgan. Please go ahead.

Jeffrey F. DiModica: Hey guys, thanks for taking my question this morning. Just one thing. I'm curious behaviorally about the really significant change in sentiment in terms of rate outlook starting in January, higher for longer, if either within your portfolio or within the special servicing portfolio, you saw some sort of behavioral capitulation. Borrowers who thought they were going to get relief have an opportunity to buy caps cheaper, refinance in more attractive markets, or start to throw in the towel even more aggressively than

Richard Barry Shane: Hey, guys. Thanks for taking my question. This morning, just one thing I'm curious behaviorally with.

Jeffrey F. DiModica: Really a significant change in sentiment in terms of rate outlook.

Jeffrey F. DiModica: Starting in January higher for longer if either within your portfolio or within the special servicing portfolio. You saw some sort of behavioral capitulation borrowers who thought they were going to get relief have an opportunity to buy caps cheaper refinance.

Jeffrey F. DiModica: In more attractive markets start to throwing the towel even more aggressively than we've seen.

Jeffrey F. DiModica: Yeah, listen, it's a really good question. It's only been a couple of months since we saw this move. You know, volatility is not up. So, the cap expense is still not quite as bad as it was when volatility was a little bit higher, but caps are expensive. You will find borrowers who may decide not to support it. As I said earlier, this is really the multifamily side where somebody's going to make a decision based on their need to buy a cap, and they're going to make a decision based on their view of cap rates, which are going to follow interest rates. So, this is really a multifamily borrower. As I said earlier, 60 of our 72 borrowers have committed more capital out of pocket. The other 12, we are not worried about those loans.

Speaker Change: Yeah listen it's a it's a really good question. It's only been a couple of months since we've seen this moves you know volatility has not.

Jeffrey F. DiModica: So the cap expense it's still.

Jeffrey F. DiModica: Not quite as bad as it was when volatility was a little bit higher but caps are expensive.

Jeffrey F. DiModica: You will find borrowers who who may decide not to support as I said earlier on our multi this is really the multifamily side, where somebody is going to make a decision based on their need to buy a cap and they're going to make a decision based on their view of cap rates, which are going to follow interest rates. So this is really a multifamily borrower I think I said earlier 60 of our 72 borrowers are committed.

Jeffrey F. DiModica: More capital out of pocket. The other 12, we're not worried about those loans. So so we've continued to have people commit capital out of pocket to support their loans. The four loans I think in multifamily that we have rated four or five bucks I, probably not going to continue to support them and they are coming up against that decision. So that decision that you're that you're talking about is the decision to continue to support.

Jeffrey F. DiModica: So, we've continued to have people commit capital out of pocket to support their loans. The four loans, I think, in multifamily that we have rated four or five are probably not going to continue to support them, and they're coming up against that decision. So, that decision that you're talking about is the decision to continue to support it today, and a lot of that's going to depend on the type of equity that you have.

Jeffrey F. DiModica: Today and a lot of that is kind of depends on the type of equity that you have if you are a syndicator and unfortunately, there were a lot of indicators in 2018 1920 21.

Jeffrey F. DiModica: If you are a syndicator, and unfortunately, there were a lot of syndicators in 2018, 2019, 2021, and even early 2022, and you have to pick up the phone and call 100 different wealthy guys to have them put in five grand apiece to be able to make a pay down on a loan, you're probably not going to call all 100 guys, and you're going to not have the capital to continue to support your loan, and that's the most likely person to stop paying.

Jeffrey F. DiModica: And even early 'twenty, two and you have to pick up the phone and call 100 different wealthy guys to have them put in five grand a piece to be able to make a.

Jeffrey F. DiModica: Pay down on alone, you're probably not going to call out 100, guys and you got to not have the capital to continue to support your loan and that's the most likely a person to stop saying Hey, you know, we Barry said in the past we're looking at that as an opportunity. These are the debt yield of our multifamily book is over 6%, we would expect that if we own those effectively.

Jeffrey F. DiModica: You know, Barry said in the past, we're looking at that as an opportunity. The debt yield of our multifamily book is over 6%. We would expect that if we own those at effectively a six cap going forward, and we hit the rate cycle that we think we'll hit over the next three or four years, we'll have an opportunity to make money on that and get our capital back, first of all, for shareholders, which is our job, and potentially have these as good investments.

Jeffrey F. DiModica: Six cap going forward and we hit the rate cycle that we think will hit over the next three or four years that will have an opportunity to make money on that and get our get our capital back first of all for shareholders. That's our job and potentially have these are good investments I think the larger well capitalized people are going to be much more likely would have been more likely to continue to put money in on a over six.

Jeffrey F. DiModica: I think that larger, well-capitalized people are going to be much more likely, and have been more likely to continue to put money in on an over-six debt yield because it's effectively selling a six cap, and if you have some money to hang in, you will probably hang in. So I think that the capitulation trade will be the syndicators, and we've seen that, and the rest of the real money will hold on, and we're happy to step in for the syndicators and be the real money and wait for a better cycle. Barry, anything to add to that?

Barry: Yes, because it's effectively selling a six cap and if you have some money to hanging you will probably hang in so I think that that can.

Barry: <unk> trade will be the syndicators and we've seen that.

Barry: And the rest of the real money well hold on and we're happy to step into the syndicators and be the real money and wait for a better cycle, Gary anything to add to that.

Barry Stuart Sternlicht: No, I just caution anyone to think the forward curve is right. You know, it changes with this, with this, with the breeze. Yeah, I really think people were a little surprised that the last jobs reported was one seventy five in the downgrades to the prior reports again. Open the jobs report on 100,000 jobs in health care. I mean it again, it's the power of this service economy and that the interest rates are not changing. So I do think if the cracks open and you can start seeing them, you know, obviously, he will be worried about breaking the economy.

Jeffrey F. DiModica: No.

Barry: Just caution anyone to think the forward curve is right you know it changes with this with this with the Breeze.

Barry Stuart Sternlicht: Yeah, I I really think people were a little surprised to see that lapse jobs report at $1 75, and the downgrades to.

Barry Stuart Sternlicht: It reports again.

Barry Stuart Sternlicht: I hope in the jobs report 100000 jobs and health care I mean again the power of this economy service economy and that the interest rates are not changing that.

Barry Stuart Sternlicht: So I do think if the cracks open and you can start seeing them you know obviously he will be worried about breaking the okay.

Barry Stuart Sternlicht: On me.

Barry Stuart Sternlicht: Not really a sign of it today.

Barry Stuart Sternlicht: It's not really a sign of it today. I mean, it's small cracks, but, and so I don't, I don't, I think a lot of people, and I think a lot of high net worth, I'm at this conference with a lot of capital out on the West Coast, you're seeing a lot of interest in property sector from, is an unattractive if you have a lot of capital, they don't need 22 IRRs, they're happy to get 10.

Barry Stuart Sternlicht: It's small cracks.

Barry Stuart Sternlicht: And so I don't I don't I think a lot of people and I think a lot of high net worth them with confidence with a lot of capital out of the West Coast Youre seeing a lot of interest in property sector from.

Barry Stuart Sternlicht: Regions of the World that we probably are not overweighted in there they're even interested in the unlevered yields that they know that probably treasuries at four and a half may go lower but even if they're five having an asset at a 6789 unlevered.

Barry Stuart Sternlicht: Isn't unattractive if you have a lot of capital they don't need 22, IRR, they're they're they're happy to get 10 and as you know every every endowment in the world tries to get them to eat. So if you can get even an office building, that's well leased with with Walt.

Barry Stuart Sternlicht: And as you know, every endowment in the world tries to get, so if you can get even an office building that's well leased with walls and your purchase price is significantly below replacement cost to protect you on the way out, you probably will see some major trades as you've seen in the hotel industry and the apartment sector. People are sort of taking advantage of this opportunity when there are fewer shoppers and taking a long-term position that they're positioning themselves for the inevitable recovery of the multi-sector and re-acceleration in the industrial markets.

Barry Stuart Sternlicht: Your your purchase prices significantly below replacement costs, you protect you on the way out.

Barry Stuart Sternlicht: You probably will see some some major trades as you've seen in the hotel industry and the apartment sector people sort of taking advantage of this opportunity. When there are there are fewer shoppers.

Barry Stuart Sternlicht: And and taking the long term position that they are positioning themselves for the inevitable recovery of the multi sector and a reacceleration in the industrial markets.

Barry Stuart Sternlicht: And in the office markets, you know, you can see exactly what's happening; the entire office market in the United States is being covered with one brush. Banks do not want office exposure, they do not want to have to explain it to the OTC, they don't want the buildings back. But on the other hand, if you have the right buildings, in cities like New York and San Francisco, they are 100% full, and there are no rent concessions.

Barry Stuart Sternlicht: And the office market.

Barry Stuart Sternlicht: But you can see exactly what's happening the entire office market, United States being covered with one brush banks do not want office exposure. If they do not want to have to explain that the OTC. They don't want the buildings back but on the other hand, if you have the right buildings and even in cities like New York and San Francisco, They are 100% full.

Barry Stuart Sternlicht: And there are no rent concessions.

Barry Stuart Sternlicht: People are going to buildings that they like, and they're fully occupied. In our HQ building in Miami, a lease came up, a sublet from a smaller tenant on the other side of the tower from our offices, and it was a sublet for two weeks at $20 higher rent, which is a 20% increase. In New York City, at our offices in the Meatpacking District, a floor came up for lease, it's very expensive, and they leased it within a month at the asking rent.

Barry Stuart Sternlicht: We are going to buildings that they like and they're fully occupied and all of our headquarter building in Miami at least came up.

Barry Stuart Sternlicht: Sublet from a smaller tenant on the other side of the tower from our offices in and it was sublet in two weeks at $20 higher rents, which is a 20% increase in New York City in our offices in the Meatpacking District, Oh, a floor. It came up for release of its very expensive they relate it within a month at the asking rents so.

Barry Stuart Sternlicht: So the markets are broad brush; there's a huge issue with BNC office space, most of which will come down and get converted to something else. It's not trading cheaply enough for people to scrape it yet, but it eventually will. Or governments will come forward with credits and concession packages to turn mid-block buildings that have no conversion opportunity to anything into residential, probably by tearing them down.

Barry Stuart Sternlicht: The markets are broad brush there is a huge issue with PNC office, most of which will come down and get converted into something else, it's not trading cheaply enough.

Barry Stuart Sternlicht: For people to scrape it yet, but it eventually will and or the governments will come forward with credits and concession packages to turn midblock buildings that have no conversion opportunities anything into residential probably by tearing them down.

Barry Stuart Sternlicht: And I'll start on another cycle. So real estate is a long-lived and long asset class, and it's not a day trading asset class, but it is the largest asset class in the world. And it's not going away.

Barry Stuart Sternlicht: And I'll start another another cycle so.

Barry Stuart Sternlicht: Real estate is a long life and long asset class and its not a day trading asset class, but it is the largest asset class in the world.

Barry Stuart Sternlicht: It's not going away and if you take your stuff, you'll make money both on the lending side and on the investing side.

Speaker Change: Sorry, I'm, losing my voice.

Barry Stuart Sternlicht: Yeah.

Stephen Albert Laws: And if you pick your stocks, you'll make money both on the lending side and on the investing side. Sorry, I'm losing my voice. Next question, Stephen Laws with Raymond James, please go ahead. Hi, good morning. Appreciate the commentary so far. Jeff, you talked a little bit about, you know, upcoming original maturity dates or cap expirations, maybe providing some opportunity, you know, looking

Stephen Albert Laws: Next question, Stephen Laws with Raymond James, please go ahead. Hi, good morning.

Barry Stuart Sternlicht: Next question Stephen laws with Raymond James Please go ahead.

Stephen Albert Laws: Hi, good morning.

Stephen Albert Laws: I appreciate the commentary so far Jeff you know you talked a little bit about you know upcoming original maturity dates are where capex operations, maybe providing some opportunity you know looking at the other way on the rates.

Stephen Albert Laws: No what would increase transactions is there a clearing level on rates if it goes back to four and a quarter or for other people that maybe.

Stephen Albert Laws: We're hoping for three and a half early this year that all of a sudden move quickly because it gets back before they missed the window now how do you think about it.

Stephen Albert Laws: Clearing level for rates of what creates more transaction opportunities.

Jeffrey F. DiModica: You know, it's interesting. I think it's going to be cap rate dependent as well, right? You're seeing some multifamily trade in the low fives. We've just seen some recently. You're seeing some office trade, cap rates that are tighter than you think. They are sort of one-offs.

Stephen Albert Laws: You know it's interesting I think it's gonna be cap rate dependent as well right youre seeing some multifamily trade in the low fives. We've just seen some recently youre seeing some office trade at cap rates that are tighter than you think they are sort of one off I I believe if you get to the point where people can get some equity out where they were.

Jeffrey F. DiModica: I believe if you get to the point where people can get some equity out where they weren't sure yesterday if they could get equity out, you know, everybody gets deal fatigue, and people want to move on from things. And if they can start repatriating some equity and turning to do something else, I think that's where deal flow really starts to pick up, which you're not far from today, but you probably need, you know, every 50 to 100 today means more than it ever meant as I look at it.

Jeffrey F. DiModica: Arent sure yesterday, if they could get equity out that everybody gets deal fatigue and people want to move on from things and if they can start repatriating some equity and turning to do something else I think that that's where deal flow really start to pick up which youre not far from today, but you probably need every 50 to 100 today means more than it's ever mentioned it.

Jeffrey F. DiModica: As I look at it as I look at it we all started by lending at 70% LTV and with cap rate expansion that we've seen to date that cushion has been eaten into so is that Cushing gets eaten into every basis point, where we end up in batteries are 100% correct. The foreign curve has not been right for 30 years. So let's just assume that we don't know where it is.

Jeffrey F. DiModica: As I look at it, we all started by lending at 70% LTV. And with the cap rate expansion that we've seen to date, that cushion has been eaten into. So every basis point where we end up, and Barry's 100% correct. The forward curve has not been right for 30 years.

Jeffrey F. DiModica: So let's just assume that we don't know where it's going to go. But given some of our lending cushion has been eaten up by cap rate expansion, every basis point actually matters more than it has historically because lenders and math are closer to are closer to the equity than they were when they made the loan. So I would say, you know, 50 to 100 basis points on the forward curve or 50 to 100 basis points on the 10 year, I think transaction volume starts to pick up very quickly.

Jeffrey F. DiModica: But given some of our lending question has been eaten up by cap rate expansion every basis point actually matters more than it has historically because lenders.

Jeffrey F. DiModica: Or closer to it.

Jeffrey F. DiModica: Or closer to the equity than they were when they made the loan. So so I would say 50 to 100 basis points forward curve or 50 to 100 basis points from the 10 year I think transaction volume starts to pick up very significantly I don't think you need a large move but you need to sustain it we were there in January and had we sustained January rates volumes I think.

Jeffrey F. DiModica: It would be tremendously higher today, both on the lending side and the equity side, we've just been unable to sustain anything that it's been a very choppy market. It's trended 50 basis up 50 basis points down every three months for the last sort of year year, and a half and its difficult by the time you get to those rates you start setting something up three months later rates or the other way and I think that's why you haven't seen the volumes.

Jeffrey F. DiModica: But if we get six months sustained back at sort of january's rates 50 to 70 basis points lower than this in the 10 year and 75 basis points organism for its over I think you'll see a lot of transaction volume I think theres a lot of people, who would like to trade if they see that stability and that's exciting opportunity for us we have significant.

Jeffrey F. DiModica: Unknown Executive, Sarah Barcomb, Rina Paniry, Zachary Tanenbaum, Donald Fandetti, Sean Murdock, Adam Behlman, If we decided to use all of our liquidity, we could use almost all of our liquidity in the next six months between our energy and our CRE lending businesses. We're going to choose the best of those, but we're starting to see opportunities. Some of those are refis. It's not to your question where transactions really happen, but refis where the previous lender is where you're up against a final majority, and the previous lender has deal fatigue.

Jeffrey F. DiModica: Capital today to deploy our our pipeline I touched on it briefly but we sat for a couple of hours yesterday, it's as big of a debt pipeline as I've seen here in a couple of years, if we decided to use all of our liquidity, we could use almost all of our liquidity in the next six months between our energy and freight into our CRE lending businesses were going to choose the best.

Jeffrey F. DiModica: Of those but we're.

Jeffrey F. DiModica: Turning to see opportunities some of those are revised its not to your question, where transactions really happen, but refis, where the previous lenders, where youre up against a final maturity in the previous lender has deal fatigue, so theyre going to look for somebody else. So I'd say the majority of what we're seeing is that over the transactions Barry was talking about but.

Jeffrey F. DiModica: So I'd say the majority of what we're seeing is that over the transactions Barry was talking about, but we have a decent pipeline from a lender's perspective. The equity pipeline will pick up, I think, with a decent rally, Barry. I don't know if... I don't have anything to add to that. No, we're good. We're running out of time, so thank you. Next question, Doug Harter with UBS, please go ahead. Thanks. I was hoping you could talk a little.

Douglas Harter: We have a decent pipeline from a lender's perspective, the equity pipeline I'll pick up I think with a decent rally Barry I don't know if you.

Douglas Harter: Anything to add to that.

Douglas Harter: No because we're running out of time so.

Douglas Harter: Thank you.

Douglas Harter: Next question, Doug Harter with UBS, please go ahead. Thanks. I was hoping you could talk a little bit.

Douglas Harter: Next question, Doug harder with UBS. Please go ahead.

Douglas Harter: Oh, Thanks, So hoping you could talk a little bit more about the refinance on the medical office building.

Douglas Harter: Looks like you're you're dead against the property came down a little over 100 million you know thoughts on that and does that imply anything about the the value of the of the properties.

Jeffrey F. DiModica: I think you nailed it. The properties continue to perform, but they're performing against a higher cap rate today, so the valuation is lower. It's not an income problem. It is a higher cap rate problem, and the agencies are going to allow you to take on a little bit less debt. Now, the good news against that is that we tightened 25 basis points. The market felt really good about this. The agencies gave us good enhancement levels.

Douglas Harter: <unk>.

Douglas Harter: Leslie.

Jeffrey F. DiModica: More of it.

Jeffrey F. DiModica: Service coverage.

Speaker Change: Go ahead.

Jeff: Go ahead, Jeff.

Jeffrey F. DiModica: I think you know that the properties continue to perform at the performing against the higher cap rate today. So the valuations are.

Jeffrey F. DiModica: Not an income problem. It has a higher cap rate problem and the agencies are going to allow you to take a little bit less of that now the good news against that is against that we tightened 25 basis points of market felt really good about that's the agencies gave us good enhancement levels, we don't need like we were sort of happy to under lever. This asset so yes, we do.

Jeffrey F. DiModica: We're sort of happy to under-lever this asset, so yes, we did put $100 million of equity in, but it's a decent return for us on cash, and we're sitting on a lot of cash, and so we got a really good rate at 252 over on what we did take, which in this market feels pretty good given the high yield we just issued at, well, so for the equivalent of 312 over. No, I was just going to say that we could have taken more leverage, but the junior classes are diluted to the dividends.

Jeffrey F. DiModica: Did put 100 million of equity and but it's a decent return for us of cash and we're sitting on a lot of cash and so we got a really good rate at $2 52 over on the on what we did take in this market feels pretty good given high yield we just issued at well silver equivalent at 312 over.

Jeffrey F. DiModica: Sure.

Jeffrey F. DiModica: No I was just going to say that we could've taken more leverage but the junior classes are dilutive to the dividend. So you know with that.

Jeffrey F. DiModica: So, you know, it's not the spread; it's just where base rates are. So it wasn't so much the cap rate; it's really debt service coverage to get debt that's attractive enough to take it. The 250 million was pretty decent debt, and if we increased the leverage level higher, which we could have, it would be silly money, and we'd want to buy it, not borrow it. So we just cut the proceeds to a level that we thought was attractive and accretive to the company. And that's it.

Jeffrey F. DiModica: But the spread it's just where base rates are so it wasn't so much the cap rate, it's really a debt service coverage to get debt that's attractive enough to take it the $2 50 over was pretty decent debt and if we increase the leverage levels higher which we put out it was.

Jeffrey F. DiModica: Silly money, we'd want to buy it not not borrow it so.

Jeffrey F. DiModica: We just cut the proceeds to a level that we thought was attractive and accretive.

Jeffrey F. DiModica: To the company.

Jeffrey F. DiModica: Yeah.

Jeffrey F. DiModica: Yeah.

Speaker Change: Thank you.

Speaker Change: Thanks, Doug.

Barry Stuart Sternlicht: I would like to turn the floor over to Barry Sternlicht for closing remarks.

Speaker Change: I would like to turn the floor over to very stern likes for closing remarks.

Barry Stuart Sternlicht: Well, thank you, everyone. We appreciate you listening in, and good luck to you and may all your loans pay off. Take care. Thanks, team.

Barry Stuart Sternlicht: Well. Thank you everyone. We appreciate you listening in and good luck to you in my health care loans pay off take care. Thanks team.

Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Operator: Okay.

Operator: Okay.

Operator: [music].

Operator: Uh huh.

Operator: Yeah.

Operator: Sure.

Operator: [music].