Q1 2025 Starwood Property Trust Inc Earnings Call
Speaker Change: [music].
Greetings and welcome to the Starwood property Trust first quarter 2025 earnings Conference call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Zach Tanenbaum director of Investor Relations. Thank you Sir you may begin.
Speaker Change: Thank you operator, good morning, and welcome to Starwood property Trust's earnings call.
Speaker Change: This morning, we filed our 10-Q and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC.
Speaker Change: Before the call begins I would like to remind everyone that certain statements made in the course of this call are forward looking statements, which do not guarantee future events or performance.
Speaker Change: Please refer to our 10-Q and press release for cautionary factors related to these statements.
Speaker Change: Additionally, certain non-GAAP financial measures will be discussed on this call.
Speaker Change: For reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Please refer to our press release filed this morning.
Speaker Change: Joining me on the call today are Barry starting like the company's chairman and Chief Executive Officer, Jeff to Monica, The company's President and Rina <unk>, the company's Chief Financial Officer.
Rina: I'm now going to turn the call over to arena.
Rina: Thank you Zach and good morning, everyone. This quarter, we reported distributable earnings our D E F $156 million or 45 five per share.
Rina: GAAP net income was $112 million or 33 cents per share.
Rina: Across businesses, we committed 2.3 billion towards new investments, our highest quarter in nearly three years with infrastructure lending committing its highest level of capital in a single quarter. Since we acquired the business from GE in 2018.
Overall strong investing pace continued after quarter end with 1.3 billion already closed.
Rina: I will begin my segment discussion this morning, with commercial and residential lending, which contributed <unk> of $179 million for the quarter are 51 cents per share and.
Rina: In commercial lending we grew our loan book by $859 million, which will help drive our long term earnings potential we originated $1 4 billion of loans of which $886 million was funded and funded another $250 million of preexisting loan commitments.
Rina: Many of our originations were back ended to the last half of the quarter. So the full earnings potential will not be realized until Q2.
Rina: Repayments totaled $363 million, which is higher than we expected, leaving the book at $14 5 billion at quarter end.
Rina: The growth in our portfolio also led to a slight decrease in our weighted average risk rating from three point there of last quarter to 2.9 weed.
Rina: We began executing on our resolution plan that we discussed on our last call and have resolved $230 million across three assets. So far this year at pricing at or above our GAAP basis.
Rina: The first is a $38 million non accrual loan secured by a hospitality asset in California.
Rina: During the quarter, we received $39 million and the full repayment of the loan resulting in a $1 million gap and D E gain.
Rina: The second is a $55 million apartment building in Texas that we foreclosed on in 'twenty 'twenty four subsequent to quarter end, we sold the asset at our underappreciated GAAP basis, which is the same as our D E basis for this asset because we never took any GAAP reserves.
Rina: The third is a $137 million office building in Texas that we foreclosed on in 2022.
Rina: Subsequent to quarter end, we sold this asset for a $5 million premium to our GAAP basis, reflecting the adequacy of the GAAP reserve we recorded in 2023.
Rina: The corresponding D loss of $44 million will be recognized in the second quarter.
Rina: To clarify we do not consider an asset to be resolved until it is legally exited our balance sheet. So the resolutions I just mentioned exclude this quarter's foreclosure of a $45 million previously five rated nonaccrual loan on a multifamily property in Georgia.
Rina: We obtained a third party appraisal for the asset, which indicated a value above or at our basis. So no reserve was recorded.
Rina: Our seasonal reserve decreased by 26 million in the quarter to a balance of $456 million, reflecting the macroeconomic forecast together with our previously taken Oreo impairments of 198 million. These reserves represent 4.2% of our lending and our your portfolios and translate to a dollar.
Rina: 93 per share book value, which is already reflected in todays unappreciated book value of $19.76.
Rina: Next I will turn to residential lending where our on balance sheet loan portfolio ended the quarter at $2 4 billion.
Rina: The loans in this portfolio continue to repay at par with $55 million of repayments this quarter.
Rina: Our retained our MBS portfolio ended the quarter relatively flat at 422 million with an $8 million positive mark to market offset by repayments.
Rina: In our property segment, we recognized $16 million of D E or five cents per share in the quarter, driven by our Florida affordable multifamily portfolio.
Rina: Subsequent to quarter end HUD released the new maximum rent levels, which were set 8.4% higher than last year.
Rina: Certain properties, where in geographies, where the rent increases were once again capped by HUD, which resulted in six 7% of incremental rent growth being deferred to next year.
Rina: This would be in addition to any increase determined by the HUD formula in 2026.
Rina: As a reminder, the majority of these rent increases will be implemented in June so the impact to earnings will not be fully reflected until the third quarter.
Rina: Turning to investing and servicing segment contributed D E a $50 million or 14 cents per share to the quarter.
Rina: Our conduit Starwood mortgage capital completed for securitization totaling $268 million at profit margins that were at or above historic level.
Rina: And our special Servicer, we continue to be ranked the number one conduit special servicer, a ranking we have maintained over the last two and a half years.
Rina: Our active servicing portfolio ended the quarter at $9 6 billion with 800 million of new transfer, which were again dominated by office properties are named servicing portfolio ended the quarter at 107 billion.
Rina: And our see MBS portfolio, two large loan payoffs resulted in principal collections of $62 million. We also added new purchases of $12 million.
Rina: Concluding my business segment discussion is our infrastructure lending segment, which contributed D E of $20 million or six cents per share to the quarter as I mentioned earlier, we committed to a record 677 million of loans of which 601 million was funded.
Rina: Repayments totaled $436 million, bringing the portfolio to a record 2.8 billion at quarter end.
Rina: As with the growth in our commercial loan book growth in this portfolio will likewise helped drive our overall long term earnings potential.
Rina: Subsequent to quarter end, we completed our fifth infrastructure CLO for $500 million with a record low cost of fun and a weighted average coupon of sofa plus 173.
Rina: This brings our term non mark to market CLO financing to 58% of infrastructure debt and are non mark to market financing for the entire company to 84%.
Rina: And finally, this morning, I will address our liquidity and capitalization.
Rina: Subsequent to quarter end, we completed the $500 million issuance of a five and a half year six 5% senior unsecured sustainability notes, which we swapped to a floating rate of tso for plus $2 61.
Rina: In addition, we repaid the remaining $250 million of our 500 million March 'twenty twenty-five high yield notes at maturity.
Rina: Our corporate debt activity over the past two quarters increased our weighted average corporate debt maturity from 2.2 to 3.7 years and leaves us with no corporate debt maturities until July 2020.
Rina: $400 million matures.
Rina: Our current liquidity stands at 1.5 billion, which does not include liquidity that could be generated from cash-out refinancings sales of assets in our property segment direct leveraging of our $4 9 billion of unencumbered assets issuing high yield backed by these unencumbered assets or issuing term loan b we.
Rina: Also continued to have significant credit capacity across our business lines with $9 5 billion of availability.
Rina: Our adjusted debt to underappreciated equity ratio ended the quarter at 2.25 times with that I'll turn the call over to Jeff.
Jeff: Thanks Ryan.
Jeff: We informed you last quarter that we intended to raise incremental capital to increase our lending base and what is one of the best origination environments. We've seen in some time.
Jeff: As Rina said, we originated $2 $3 billion of new investments in the first quarter and are on pace for a strong second quarter with more than $1 billion already closed in the first month.
Jeff: The opportunities that should be large in CRE record origination volume from 2021, and 2022 needs to be refinanced in the coming quarters real estate transaction volumes have picked up see MBS single asset single borrower market pullback given the steepening of the credit curve.
Jeff: Many lenders are capital constrained and bank earned higher ROE lending to us than competing with us on their own origination.
Jeff: The year started strong and that strength continues today I just got off a call with the co head of U S debt for a major brokerage. We told me they have 50% more debt and equity deals in the market today than the same period last year.
Jeff: These factors create an opportunity for well capitalized lenders with consistent access to capital markets to prosper as.
Jeff: As we have in the past we have again proven our unique ability to raise both debt and equity capital Accretively in this cycle.
Speaker Change: In March we were four five times oversubscribed on the issuance of $500 million in sustainability bonds that Rina mentioned, which we swapped the sofa plus $2 61, or six basis points off the record tight spread that we achieve just four months earlier in December 'twenty 2024.
In the last year, we issued a reprice 4 billion in debt and equity instruments $2 6 billion of that was completed in just the three months from December to March where there was very little capital markets activity.
Speaker Change: These activities leave us today with one $5 billion of capital to invest after closing the pipeline I just mentioned.
Speaker Change: We also enjoyed historically low leverage at 225 times and have significant unencumbered assets, which can be levered to continue our accelerated investing pace as we move into the second half of 2025.
Speaker Change: We expect our balance sheet to grow materially this year, allowing us to maintain a dividend that we've paid for 45 straight quarters. We.
Speaker Change: We uniquely have approximately $4 50 per share and harvest the gains on our owned real estate portfolio.
Speaker Change: We are the only 2.0 commercial mortgage REIT that has never cut its dividend and we believe our diversified low leverage business model provides us with a unique ability to ride out market disruption.
Speaker Change: We are seeing green shoots of liquidity and optimism return to our sector. The market's expectation of where the benchmark rate sofa would be in 2026, and 2027 was 100 basis points higher at this time last year and is now back in the low threes for the for 2020 and beyond.
Speaker Change: This is good for legacy positions as they will have an easier backdrop in more debt service coverage to enable our borrowers to refinance with these lower benchmark rates.
Speaker Change: Dr. <unk> brought back their liberation day losses, but the credit curve has steepened as insurance capital now is lower risk based capital charges on higher rated bond classes.
Speaker Change: They're moved to higher rated credit assets with lower risk based capital charges has created more opportunity for us in subordinate positions of the capital structure, where we have invested over $100 billion over the last 16 years.
Speaker Change: As I, just said, thanks get better capital treatment lending to us in direct lending and we continue to see borrowing spread to us decline, allowing us to maintain our return with likely less competition.
Speaker Change: This along with volatility and single asset single borrower Securitizations has created a bigger opportunity for us in 2025, and we expect to continue our elevated investment pace in all of our business line.
Speaker Change: In CRE lending, we originated $1 4 billion in the first quarter.
Speaker Change: We committed more equity in Q1 than we did in all of 2024.
Speaker Change: We've been leaning in on three investment themes this year and expect to continue to Datacenters Europe in multifamily.
Speaker Change: When fully funded 70% of the equity in our Q1 originations was in data centers with long term leases to investment grade tenants.
Speaker Change: Our second largest loan is on a broadly diversified multifamily asset and well leased German markets with a 61% origination LTV.
Speaker Change: 30% of our lending book is now in markets outside the U S, where we benefit from a large dedicated team and long history of operating in these markets.
Speaker Change: Additionally, we have a large pipeline closed during closing in Q2, the vast majority of which are on multifamily assets in the United States.
Speaker Change: At quarter end, our CRE loan portfolio is up $859 million as Rina mentioned, the 14 5 billion and we expect it will reach a record high by year end, which should support our efforts in 2026.
Speaker Change: As we looked at legacy credit I would remind you that we have over $650 million in reserves for our CRE lending book reflected on our balance sheet today.
Speaker Change: Resolutions, which we expect to accelerate the next two years should lead to lower reserves in the future and higher earnings as we recycle that capital.
Speaker Change: As Rina said, we have resolved $230 million of assets. So far this year at values in line or better than our GAAP reserve levels and expect that trend to continue.
Speaker Change: In the quarter, our U S office exposure declined to just 9% we lowered our seats. The reserve for the first time in four years and with no new additions to our four or five rated categories in the quarter.
Speaker Change: We moved our only life science deal.
Speaker Change: Five rated $73 million alone on a renovated but empty asset in Boston Seaport district to nonaccrual in the quarter and will update you on progress there in the coming quarter.
Speaker Change: Moving to energy infrastructure lending, you've all seen oil and gas prices moved lower this quarter, but our earnings are not dependent on these commodity moves.
Speaker Change: Our loan book is split between assets that produce power and midstream assets that store and transmit the commodities, but it's not levered to the commodity price itself.
Speaker Change: We continue to enjoy excellent returns at some of the lowest lending ltvs in our portfolio in this business today.
Speaker Change: In the quarter, we deployed a record $677 million at above trend return, allowing our portfolio to increase again to nearly $3 billion.
Speaker Change: Though we have ample ability to finance the growth of this business on bank lines, we issued our fifth safe energy infrastructure CLO in the quarter at the lowest cost of funds to date.
Speaker Change: I'll finish today with the property segment, where Rina mentioned, we received eight 4% rent increases and would start this year and we'll defer six 7% to next year, ensuring continued property appreciation.
Speaker Change: We have spoken many times about the embedded value for SPT shareholders of the woods our portfolio.
Speaker Change: We have over $1 5 billion of harvest the bogie gains on our 59 owned property.
Speaker Change: Actual rents have continued to increase since we purchased the portfolio in 2015 through 2018, and we expect it to continue which will add significant value to our portfolio in the coming years.
Speaker Change: We have told you that there is also significant upside as we are able to roll these properties to market rate from affordable once they reach the end of their affordability restrictions, which is typically 25 to 30 years after construction.
Speaker Change: We told you that these restrictions started to burn off last year and in eight years over a third of the rent restrictions will roll off, allowing us to either increase rents to market rents or stay in the affordable program and continue to benefit from abated real estate taxes.
Speaker Change: In short you may be under the assumption that multifamily rents are flat or falling nationally, but this has not been the case in the affordable space and the continued lack of supply and income growth should lead to even more upside for shareholders going forward.
Speaker Change: With that I will turn the call to my friend, Barry who is right off the red eyes. So take it easy on him two hours of sleep.
Speaker Change: Good morning, everyone, Thanks, Zach Rina and Jeff.
I guess for US, let's just start with the economy. The economy is gonna weekend.
Speaker Change: I just was talking to Ceos.
Speaker Change: A portion of 100 companies in the past few days returning from the West coast in and there will be.
Speaker Change: Issues on shelves and there will be a prices prices for consumers to absorb and you've kind of already were in a recession you kind of saw the lower half of the country in the top 10%, 15% of the country was carrying spending and consumption.
Speaker Change: And now we'll see how the wealth effect actually plays through the oxy the markets have recovered.
Speaker Change: Shockingly the free.
Speaker Change: Liberation day highs, but that doesn't really feel right and things like travel or clearly off.
Speaker Change: I guess it was expedia that reported.
Speaker Change: And then Airbnb.
Speaker Change: We've seen the travel numbers in your lines have talks about their stress.
As international travelers in United States dissipate.
Speaker Change: But they will go somewhere so Canadians will go to Europe or they go to the.
I'm here with the number one tourist in United States and the Europeans will probably say in Europe, and frequent Greece other locations rather than covenant.
Speaker Change: Coming to visit us.
Speaker Change: So the economy will weaken and that.
Speaker Change: That means Powell sooner or later will lower rates and for sure when he's out in may of 'twenty six there's no chance rates will be higher.
Speaker Change: Because the selection will depend on somebody who.
Speaker Change: Common it's the lower rate environment that is all good for the property segment and so I feel like we're through the worst of it and.
Speaker Change: It's getting get better from here.
Speaker Change: And transaction volumes, which kind of slowed again, given the blow out of spreads.
Speaker Change: And certainty in the markets and people worrying about additional where the next deal is going to go.
Speaker Change: That will Reaccelerate however.
Speaker Change: We've been in the market now open for business for the past year.
Speaker Change: We never entered this period with a better balance sheet.
Speaker Change: A better team.
Speaker Change: More opportunities in all of our sectors to return to achieve excess returns.
Speaker Change: And I think we're executing really well.
Speaker Change: So for US I think the story of the economy as a weakening obviously the now the forward curve is four cuts so for.
Speaker Change: Even three would be fine down to the threes that at the end of the real estate as a yield view product and largest asset class in the world.
We will come back into favor and we'll probably have more people on this phone call in the future.
Speaker Change: But it is our opportunity to continue or to our north star, which is to achieve investment grade.
Speaker Change: And continue to do that to do that we have to grow all of our investments leaves and add additional ones. We've looked at resi originated this quarter, we've been on a $2 billion regional bank portfolio been priced inside of our hurdles.
Speaker Change: We've looked at other.
Speaker Change: Companies in our sector, including the public.
Speaker Change: Opportunities that might exist and we're turning over lots of.
Speaker Change: Stones to find them.
Speaker Change: What are you finding or stone Pearl is that a claim to claim so looking for the pearls under the under the sea. It's interesting that we for our board. We just did a presentation just a week or so ago and we are the only.
Speaker Change: Two point on mortgage REIT that is trading above its IPO price as Jeff said, we're the only one who's never cut their dividend.
Speaker Change: Our dividend is solid.
Speaker Change: And we have a very unusual portfolio, we own starwood capital owns over 110000 apartments, including 43000 affordable assets in the portfolio of this company is the shining star of the whole bunch and you when you have 15% rent increases in one of our geographies.
Speaker Change: There is nothing that's the highest I've seen in anything market radar if.
Speaker Change: And he asked the question real estate frankly.
Speaker Change: And thank.
Speaker Change: The gift that keeps on giving.
Speaker Change: When we bought those assets my theory was once on stuff and start property Trust, we could hold forever.
Speaker Change: An increase of the duration of our portfolio, essentially though they'd give us cash flow forever and being affordable they're always for.
Speaker Change: Being in growth markets that are dependent and rent growth is dependent on income growth.
Speaker Change: We picked wisely and we vastly outperformed our expectations being that the rents are so low compared to market.
Speaker Change: You actually don't have to worry about people moving in and out as much people stay.
Speaker Change: Our only job is to manage them, well and meet customers' expectations and keep them full.
Speaker Change: Which the team has done admirably so.
Speaker Change: That is a real hidden source of value for the company as it stands today and we want to increase our real estate book and locate Youre looking back at the.
Speaker Change: The kinds of real estate deals that provide the cash on cash yields that we think are accretive to our enterprise.
Speaker Change: And one other thing of course, some of our peers are trading at fractions of their book values.
Speaker Change: You know at some point they can't raise capital.
Speaker Change: You know, there's an uncle thing, we should just fold up shop, and obviously is the largest in our sector and largest in the world.
Speaker Change: We'd love to be there.
Speaker Change: Acquirer, but.
Speaker Change: And also partner with Starwood capital group.
Speaker Change: We can split these portfolios if theres lots of bad assets, we're able to work on them and figure out how to split the assets. We actually did when we bought LNR 232 years ago.
Speaker Change: There are some assets in there that did not fit S. Twd's.
Speaker Change: Work you have to look at the book today, and just sort of astonished you have.
Speaker Change: We continue to earn.
Speaker Change: Hit our numbers, while carrying nearly almost $2 billion in nonaccrual assets, which is astonishing that is bad news and really good news at some point, we're going to be able to.
Speaker Change: Harvest that capital and put it back to work can't wait don't want to do stupid things have the ability of the <unk>.
Speaker Change: Reinvest in those assets repositioned them bring them back to market and try to get a great.
Speaker Change: Great returns on our incremental capital, but it is future earnings power and.
Speaker Change: Even though he carries $650 million of reserves against it.
Speaker Change: Would you think that.
Speaker Change: That's a significant capital, though we look forward to redeploying and we watch those assets, Jeff and the team watched the assets pretty much every day.
Speaker Change: Our liquidity is excellent and our.
Speaker Change: And our.
Speaker Change: Universe, I'd say, we have what I think Jamie Diamond referred to as a fortress balance sheet.
Speaker Change: The extension of maturities the rates at which we're capable of raising debt securities.
Not only in our real estate book, but our energy book.
Speaker Change: Really position us well against our comp said provide sustainable competitive advantage.
Speaker Change: So at the end of the day, it's all about our team and we have over 350 people and another 450 at SCG that are dedicated to finding opportunities for the company both here and abroad.
Speaker Change: And.
Speaker Change: We have whether it's the CBS team or.
Speaker Change: So.
Speaker Change: Special servicing team with 100, and what was the 107 billion of named.
Speaker Change: Servicing.
Speaker Change: We are positioned to continue to outperform over a long periods of time so.
Speaker Change: I've got nothing else to add I think our job now is just execution execution execution.
Speaker Change: Be patient.
Speaker Change: Grow in every one of our business lines as we can.
Speaker Change: Be more aggressive in utilizing unusual access to data to make better faster decisions, we're doing a giant AI projects over the whole company right now to help us be more efficient.
And.
Speaker Change: I look forward to the implementation of that over the coming year.
Speaker Change: I was getting a tutorial on the flight home yesterday.
Speaker Change: From a tech Wizard.
Speaker Change: That was astonishing so we have a lot to do there and most companies do and I think it only bodes well for our productivity and our margins.
Speaker Change: So excited for the next quarter the road has not paid.
Speaker Change: Paved with gold, there's bumps youre going to see things come up and down I'm sure of it.
Speaker Change: The outcome of.
Speaker Change: The Trump administration's policies is still unknown.
Speaker Change: Well, we couldnt, probably even better positioned for that and I look forward to.
Speaker Change: The year end.
Speaker Change: We're working going forward.
Speaker Change: Now, we'll take any questions.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: You would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Doug Harter with UBS. Please proceed with your question.
Doug Harter: Oh, thanks, so it sounds like you've started to make some progress on resolving your nonperforming loans.
Doug Harter: If you look at the remaining assets. There you know how should we think about the pace of resolution.
Doug Harter: Whether you can be you know a kind of a successful at exiting those with minimal losses.
Doug Harter: Yeah, Hey, Doug Thanks for the question.
Doug Harter: There is a couple of apartment deals that we know we can likely so at our basis and we will do so in the.
Doug Harter: This year, we have apartments, the Chatsworth building on the upper west side, and the scaffolding coming down in May and we expect that significantly more progress. There. We just sold the unit for seven $5 million. This week.
Doug Harter: In line with our underwriting so that's good.
Doug Harter: Have a.
Doug Harter: Office building in Brooklyn.
Doug Harter: <unk> just signed a second lease now two thirds full with long term credit tenant leases, where we have someone looking at the last third that could resolve easily this year. We got a we have an asset in downtown and Dallas is.
Doug Harter: That is something that we have to work through its the combination of our mixed use property with a hotel and multifamily I think that we could likely worked through this year and we have a couple of downtown L. A office buildings that could push into 26 or beyond but that's generally the flavor multi is if we get to this forward is over and the low.
Doug Harter: Threes three in a quarter you pick a number and you have a five and a half or six debt yield do you have a high likelihood of getting out at par and most of the stuff that we wrote loans on against three and a half and forecast at the very lowest the tightest part of the market in 2021, they are performing at that high fives debt yield on the low end.
Doug Harter: And that high fives that Youll gets out low threes ofer.
Doug Harter: Low fours sofa.
Doug Harter: And we'll have to hold it for a little bit for a little while longer but where the forward curve is now expect things to sort of stop coming in and start picking up progress on the others, we have staying power and a lot of these loans.
Doug Harter: We have eight years of war.
Doug Harter: <unk> done a lot of the office loans in there.
Doug Harter: I would just add that.
Doug Harter: No.
Doug Harter: I want them all.
Doug Harter: And they're not giving them back they give them back to us. Your your attachment point is so good on replacement costs.
Doug Harter: You would love to own them with the coming.
Doug Harter: Massive decrease in supply comes at a multimarket, so rents will improve.
Doug Harter: Certainly next year in the back half of next year is 27, and one obvious impact of.
Doug Harter: The administration's policies or people are very nervous about new starts and nobody really knows whether anything is going to cost and it's not just materials not just the steel.
Doug Harter: So the labor is it available what will happen with the deportations of Ami.
Doug Harter: Regrets illegal immigrants and then.
Doug Harter: The third what people don't talk about as the supply chain.
Doug Harter: You need to get every component to a building to finish it.
Doug Harter: <unk> 90, or 95% of them so.
Speaker Change: Oh, I know and I just returned from a industry conference, where developers are talking about not starting projects and pushing them off which bodes well for any existing assets and their performance in almost every city in the asset classes are performing.
Speaker Change: You know now remarkably well I mean people look at though were not exactly the hottest kill them and them.
Speaker Change: Today on it.
Speaker Change: But the multimarket just sitting at 95 ish 90, 495% Occupancies with record supply.
Speaker Change: Usually in my youth they might have fallen to the low Ninety's high Eighty's.
Speaker Change: And for the most part that's a flattish slightly up some few cities down some cities up more than that.
So when there's new supply the week and where there's very little supply there relatively strong.
Speaker Change: We really needed a shallow recession.
Speaker Change: Deep one that creates demand destruction, even the office markets are shockingly plant. If you have a good collateral one thing I'd say on our book I mean, one of the things like we have to consider we have a building we took back in downtown CBD Washington.
Speaker Change: Yeah.
Speaker Change: D C. It can be converted and is ready to be converted to residential and I just suggested we hold off.
Speaker Change: Work right now to understand the situation in D C with the employment base, but.
Speaker Change: But we do another plumbing readily and all that we're doing all the plumbing, Oregon border, although just not deciding on one year ago, and whether we're putting a shovel in the ground on that date or not but we will be ready to go into here, we're going to be ready to go. We're just taking a moment we wanted to do that so it's relatively we plan by the entire conversion is actually a very handsome property, which is we want to make sure.
Speaker Change: Sure the rents or what we think they are going to be.
Speaker Change: So with that in the next year.
Doug Harter: And part of that question Doug.
Speaker Change: The follow up will probably be on the three the three large office that are maturing this year one.
Speaker Change: It's the Brooklyn Office building, where I told you we signed a second lease and got up to two thirds leased and we're talking now about a third credit tenant lease and that will work out.
Speaker Change: <unk> March <unk>.
Speaker Change: Maturity. The June maturity is an asset in California, five debt yields that we have a basis in the low two hundreds of what we sold 15% of that.
Speaker Change: Complex by selling one building.
Speaker Change: At $280, a foot $66 above our basis. So we feel okay, and we think there's good leasing prospects, we're working on updating the lobbies and doing some work there. So we actually felt pretty good about that and then the October maturity. This year is our large loan in downtown D. C really trophy.
Speaker Change: Terrific building is 84% leased at eight years of Walton.
Speaker Change: Have a six ish debt yield and likelihood to be able to go up from there, but our capital given we have such liquidity and access to capital we have the ability to ride this out and wait for the optimal time and we will move on at the optimal time, when we have what we have cash flow it doesn't necessarily make sense to go today, we're going to we're going to wait and see.
Speaker Change: What the market gives us and we sort of know where our downside, but we think we have upside on these two and thats part of being a 110 billion CRE manager.
Speaker Change: Italy like we have in the past, where I think we had going into this cycle of $112 million of gains on our Oreo, we'd like to work on assets and Barry likes to be involved and Thats why he knows all the details of our rental in D C and what we're going to do and so we're very involved and we'll work it out as best we can.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from the line of Don Vendetti with Wells Fargo. Please proceed with your question.
Don Vendetti: Hi, can you talk a bit more about the opportunity youre seeing residential credit.
Speaker Change: Clearly you have a lot of capital banks are selling.
Speaker Change: And I think you said you put out in our portfolio.
Speaker Change: Or are you constrained in terms of not wanting to put on a lot of leverage there or is this a significant opportunity for growth.
Speaker Change: Yeah, So you're absolutely right. It's a portfolio that we looked at was a $2 billion portfolio of commercial that was coming out of a middle market Bank 10 million or so loans kind of thing thats perfect for us with LNR as our servicer. We just have so much information, we can rip through a massive portfolio like that very quickly and come up with a value that that's accretive to us.
Speaker Change: A couple of people I think thought it was worth a little bit more but we went a few rounds on that in red the credit you have noticed we havent.
Speaker Change: Restarted the resi machine, we took a write down of 230 or $240 million in 2020, or so on our <unk> book, we own lowered coupons and market as the rate went up and we've been a little bit reticent to go again, but resi team has been looking at just about every opportunity every platform I could.
Speaker Change: Absolutely see us buying an originator building, an origination business around non QM or which we've done in the past and some agency and maybe some industrial alone things like some of our peers do I do think that there is a tremendous liquidity available to us from a financing play on that I think levered yields are.
Speaker Change: Our attractive there has been.
Speaker Change: A decent opportunities also in sort of secondary there, but we are we are going to reemerge in resi. It's just a matter of when and we are looking at every opportunity to figure out how we how we do that to buy a resident originator with licenses that does two or $3 billion, a year, you might pay $125 million to $150 million.
Speaker Change: <unk> premium.
Speaker Change: We're trying to decide if that's something we can build and create a $125 million to $150 million of shareholder value by building it ourselves rather than going outside but you will see us in the next year reemerged and start putting some putting some credit trades on NYSE. We do think there is.
Speaker Change: Our long term opportunity and its something that fits us really well I'd love to see our dividend yields come down from 10%, where I don't really understand it there, but if it did come down and our cost of capital James in that business becomes a lot more attractive.
Speaker Change: But.
Speaker Change: Where our dividend yield is today, our CRE lending and our energy infrastructure businesses feel like the best home for capital.
Speaker Change: Got it and then.
Speaker Change: On corporate M&A or are you sort of still thinking that sellers are reluctant, especially you know.
Speaker Change: Fed cuts or do you feel like you're starting to feel more optimistic there could be a seller and some consolidation opportunities for you.
Speaker Change: Given given very hard to buy you can't buy more than nine 9%. There's a lot of rules that they have to want to be bought corporate M&A in the REIT world is very difficult unless a seller wants to wants to be a seller.
Speaker Change: It's not where they are trading its what the board will do a deal at.
Speaker Change: <unk>.
Speaker Change: No I think youll see some action in the sector.
Speaker Change: Because there is sort of dead men walking.
Speaker Change: But yeah.
Speaker Change: It really it really depends on the board and the management team's cooperation we you need to get in there on some of these books you need you can't do it easily from the outside you need to get inside and they understand the complexity of your asset base.
Speaker Change: You can guess, but guessing in this business and obviously a lot of.
Speaker Change: One of them smaller entities don't have our corporate debt.
Speaker Change: Oh down or they have other you have to really understand the terms and conditions of that stuff. So it's a little bit complicated from the outside looking in especially when they want.
Speaker Change: Prices on the surface.
Speaker Change: Achievable and obviously, we'd like these investments to be accretive to our shareholders.
Speaker Change: But I think I'm optimistic that as we come out of this.
Speaker Change: It will become more.
Speaker Change: Painful for some management suite basically almost nothing you can't do anything on the balance sheet that can raise capital accretively.
And in some cases, we'll see the management fees will overwhelm there.
Speaker Change: We believe the payer so inevitably there'll be substitute.
Speaker Change: We are a huge part of the REIT index, given we're more than twice as big as the next biggest competitor in almost as big as the rest of the universe right. So if we could reduce G&A and consolidate the entire business. We would certainly love to do that at the right prices. The hardest time to do M&A is when someone trading at 20 or 30% of book, because you're going to pay them. Some.
Speaker Change: You can't discount to book that might Joe untenable to their border their shareholders. The easiest M&A is probably at 70 or 80% of book, where you can pay somebody 90% to 100% of book kind of G&A and make it makes sense for both.
Speaker Change: It'll be difficult somebody's going to have to want to be consolidated.
Speaker Change: Our next.
Speaker Change: Question comes from the line of Jade Rahmani with <unk>. Please proceed with your question.
Jade Rahmani: Thank you very much.
Jade Rahmani: I think earlier Rina mentioned that the timing of loan closings weighed on interest income and the theory lending business in the quarter are you expecting an increase into two and going forward.
Jade Rahmani: Yes. This is something that I'm always reticent to talk about J because it feels like it's been in every peers transcripts for the last five years, but it but we did close the tremendous amount right on March 31 that you didn't see any any interest income. So I think it's the first time, we've used that arrow in our quiver, but it was very true this quarter, where we had a lot of a lot of closings, but our pipeline is really good.
Jade Rahmani: Rina always gets Mad at me, if I want to say, what we're going to end up at but I expect this run rate to be a run rate for a little bit and.
It's difficult out there we've lost a number of deals in the last week or two that we hope to get but we have.
Jade Rahmani: As long of a pipeline as I've seen both in Europe and in the U S and there's a lot of really interesting opportunities. So hoping that we can we can maintain that and maintain the success in our energy infrastructure book as well we want to grow growing is the way to ensure that getting this portfolio back up above our previous high which I think we will do this year is the <unk>.
Jade Rahmani: Best way to offset the drag of the non accruals as Barry said until we can work out of them. So so we are in a growth mode, but it's not growth at any cost we were reticent on the last five basis points on every deal and we're trying to not chase anything to do it.
Jade Rahmani: Gross <unk>.
Jade Rahmani: Is the mantra.
Jade Rahmani: You mentioned something interesting on subordinate debt.
Speaker Change: I was wondering if you plan to execute on that opportunity by originating whole loans and bifurcate them doing more syndication or will you just be looking to originate mezz loans, how do you see executing on that.
Speaker Change: Runs the gamut Adam dominance in the room. He runs our LNR business NRC MBS business I think there are opportunities in b pieces, we're going to we're going to do a few this year when I said subordinate debt I'm basically saying that what we create when we write at 65 or 70, LTV loan and we financed 45% or 50% of it is effectively equivalent to a triple b or a double b asset and that's the one.
Speaker Change: <unk> hundred billion dollars of money that we put out over the last 16 years and with the credit curve in security deepening. We think we should be able to earn a little bit more on our loan book that sort of mirrors the look through rating.
Speaker Change: We can also obviously play in subordinate securities as well and Thats something that the team has been looking at it.
Speaker Change: Got cheap, but not super cheap, we don't like putting leverage on leverage we havent done that here in a long time and so.
Speaker Change: If they're if they're unlevered yields on double BS or 10% or so.
Speaker Change: It doesn't quite hit the hurdle that we're hoping for and we are relevant to our leverage but on the REIT securities where we have the ability to underwrite every loan in every <unk> and have a real strong opinion that book Adam has probably returned over 20% for us in the 16 years that we've owned it.
Speaker Change: If that becomes an 11 or 12, we will be a large buyer of secondary along with our liquidity.
Speaker Change: Okay.
Speaker Change: Those levels you start losing interest on the solar side.
Speaker Change: So it's not that we haven't reached the sweet pointed out yes.
Speaker Change: Thanks Chip.
Speaker Change: Final question comes from the line of Rick Shane with J P. Morgan. Please proceed with your question.
Rick Shane: Hey, guys. Thanks for taking my questions. This morning.
Speaker Change: Barry when I sort of parse through your comments what I hear.
Rick Shane: <unk> are a lot of crosscurrents that youre sort of.
Rick Shane: Confronting the consumer slowing down, but you see rates going lower as a result.
Rick Shane: It's an attractive financing market so.
Rick Shane: There is capital available in the market, but your competitors many of them are on their heels.
Rick Shane: Really two questions here one.
Rick Shane: Is that.
Speaker Change: Does that put you guys on the front foot now in terms of being aggressive deploying capital do you want to be a little bit more conservative and also is the sort of.
Rick Shane: Okay.
Rick Shane: As you described them the dead men walking.
Speaker Change: For many of your competitors, but the availability of capital.
Speaker Change: And the market is it creating new competitors or new types of competition for you guys.
Speaker Change: It's.
Speaker Change: The competitor competitors as you point out are shifting.
Speaker Change: I think we see the private credit guys much more.
Speaker Change: And.
Speaker Change: But I think.
Speaker Change: We still have an advantage in our scale like we were able to.
Speaker Change: $500 million arm junior position like not many people get that phone call.
Speaker Change: And because we know the property classes and were active people know we're going to perform.
Speaker Change: They know that it won't take us seven years, we can do as expeditiously I think the amount of capital needed in the data center space is.
Speaker Change: Staggering.
Speaker Change: And.
Speaker Change: The credits are great and the debt yields to our positions are phenomenal and spreads have come in.
Speaker Change: But there is we can pick up the juniors and those positions, we actually probably don't know it.
Speaker Change: Very active on the equity side and data centers, we probably come in at over $10 billion.
Speaker Change: To the space and have a good one five gigawatts of power under our control.
Speaker Change: One of them on the top 10 largest players in the states and number one in Ireland and we have about 160 people working in the datacenter space.
Speaker Change: So.
Speaker Change: So we can underwrite this stuff quickly.
Speaker Change: Credits, we know the tenants we know the issues with leases, we've written them all to Amazon Oracle.
Speaker Change: Alright, Dan successor so.
Speaker Change: I think thats a space area, we could we could add infinite capital.
Speaker Change: Net.
Speaker Change: And we do like.
Speaker Change: The physicians there so that's a big new Giants take take the scale of the commitments from the majors is something like 250 to 300 billion leverage <unk> 900 billion.
Speaker Change: 1 billion Thats, almost as big as the infrastructure Bill Thats. This year, so maybe 25% of its offshore there's a lot of capital that needs to go into this space.
Speaker Change: We've done some we'd like to do a lot more.
Speaker Change: And I don't see it.
Speaker Change: A big enough area and there's enough and finally money is kind of contracting a little bit people are a little nervous about private credit.
Speaker Change: So I think it should be in corporates.
Speaker Change: If we do have a recession.
Speaker Change: And I think.
Speaker Change: With uncertainty as Marc Rowan talked about breeds.
Speaker Change: Delays and you just wait for clearer picture.
Speaker Change: As you've seen M&A is it I think.
Speaker Change: Lows not seen in 20 years, I mean, nobody can do anything with anyone so.
Speaker Change: But I think.
Speaker Change: I'm kind of happy.
Speaker Change: For Us. This is this is a good environment right.
And because we have conviction that we've been doing this for so long.
Speaker Change: So our capital joining 34th year so.
Speaker Change: We have the data also to support our and helped us make better decisions.
Speaker Change: I think it's a good.
Speaker Change: Good.
Speaker Change: And in a way more less worried.
Speaker Change: Secondly, fine.
Speaker Change: Pricing, we need with the banks as Jeff pointed out multiple times.
Speaker Change: So much better now lending to us and making the loans themselves.
Speaker Change:
Speaker Change: Tumult in the spreads of the CBS market enable us to come in and ensure bids on deals and the other thing. We've learned is the borrower, which is becoming super important when you go to the banks and the originated for you.
Speaker Change: We just did this the other day by the way.
Speaker Change: Theyre going to syndicate, the loan, it's not going to CBS and they syndicated in many cases, the syndicated probably offshore accounts.
Speaker Change: And then it is a bump in the road youre dealing with somebody in Korea, you don't know or Europe.
Speaker Change: And we've been willing to take excess spread to let to know who our counterparty is going to be.
Speaker Change: And I think that a lot of borrowers are paying more and more attention to that that you'll give up 25 bps 50 bps. Because you want to know if something ever happens I can speak to Jeff or Dennis our team or Adam whoever is our scorecard.
Speaker Change: We will work it out with you.
Speaker Change: Create a win win so I think people are.
Speaker Change: It's interesting I think borrowers are smarter.
Speaker Change: Don't want to five bps right now they want to know where their loans.
Speaker Change: And that's a really important feature that's kind of emerged that I would say it was not here five years ago, we werent paying attention to it I think what happened to all of US is obviously the world changed interest rates went up 500 basis points and we look at our stacks and we're trying to do something on the equity side and some bank. We've never heard of US know everyone else says yes.
Speaker Change: Yeah.
Speaker Change: You can have a guy with a 10% position he's like I'm not doing that you guys came in part as well.
Speaker Change: Morgan Stanley you take them out at par because you sold to listen to them, we never knew who they were.
Speaker Change: And.
Speaker Change: That's the kind of negotiations to see so I think that's really good for us I mean relationship banking and the debt side is actually when you get to these big deals its a big deal and we've been doing a long time, we got a great team. So.
Speaker Change: And interesting.
Speaker Change: Got it.
Speaker Change: And calculate that by saying as the REIT and the banks have written less loans since COVID-19, you've certainly seen insurance debt funds and see MBS pick up the slack.
Speaker Change: As you look at the forward silver curve and expectations are forward rates if rates do go down you're going to have less annuity sales insurance is very yield driven and they will pull back so in that environment, where we moved to the forward curve and rates go lower.
We expect that our position in the market will only improve versus insurance and debt funds and MBS and then last thing I would say as Barry talked about data centers. The only thing that he didn't mention is that our all of our loans have been made on sort of 15 or longer year leases.
Speaker Change: Seven credit tenants on the other side.
Speaker Change: So not a lot of speculation there other than getting the getting the construction project finished which we have a significant time to do in this core and shell, it's not that hard to figure out too.
We really like that space.
Speaker Change: Got it.
Speaker Change: As always a very interesting answer I really appreciate it guys. Thank you. Thanks Rick.
Speaker Change: Thank you operator.
Speaker Change: Thank you we've reached the end of the question and answer session. Mr. Stern look and I would like to turn the floor back over to you for closing comments.
Speaker Change: Thanks for joining US everyone. We look forward to talk to you next quarter have a great.
Speaker Change: Memorial Day I guess.
Speaker Change: As we entered the summer season.
Speaker Change: Yes.
Speaker Change: And our public shout out to Mark Cagley, who retired from the firm last month and this is the first call in 10 years without them hope.
Speaker Change: Hope you're enjoying your retirement and listening in.
Capex dropping.
Speaker Change: Thanks.
Speaker Change: Yes.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.