Q2 2025 Starwood Property Trust Inc Earnings Call
Greetings and welcome to the Starwood property Trust second quarter 2025 earnings call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It's now my pleasure to introduce Zachary Tanenbaum director of Investor Relations. Thank you Sir you may begin.
Thank you operator, good morning, and welcome to Starwood property Trust's earnings call.
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.
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. Please refer to our 10-Q and press release for cautionary factors related to these statements.
Additionally, certain non-GAAP financial measures will be discussed on this call.
For a 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.
Joining me on the call today are Barry Stern like the company's chairman and Chief Executive Officer, Jeff <unk>, The company's President Rina <unk>, the company's Chief Financial Officer.
With that I'm now going to turn the call over to arena.
Thank you Zach and good morning, everyone. This quarter, we reported distributable earnings or D. E F 151 million or 43 cents per share.
GAAP net income was 130 million or 38 cents per share.
Across businesses, we committed 3.2 billion like new investment, including $1 9 billion in commercial lending and 700 million in infrastructure lending.
It brings capital deployment for the perfect most of the year to $5 5 billion already surpassing all of 'twenty 'twenty four.
I will begin my segment discussion this morning, with commercial and residential lending, which contributed D. E. F 174 million for the quarter of 49 cents per share.
In commercial lending, we grew our loan portfolio by 946 million, bringing it to a balance of $15 5 billion.
We originated $1 9 billion of loans of which $1 3 billion with funded unfunded and another $198 million a preexisting loan commitments.
Our volume this quarter included $500 million for the construction of two data centers that are 100% pre leased to investment grade tenants.
We continue to resolve a foreclosed asset selling to in the quarter for $115 million.
The first relates to a $137 million office building in Houston that we discussed on our last call.
The impact of the sale are shown in two separate line in our GAAP income statement loss on property and a related gain on extinguishment of debt.
Net there was a $4 million GAAP gain and a $44 million D E law.
The second resolution relates to a 55 millions of our apartment building in North Lake, Texas.
We never recorded any GAAP or D reserves on this asset and sold it at our basis fully recovering our original investment.
Also during the quarter, we sold an equity kicker for a $51 million gap N V game.
We originally obtained this equity kicker for zero cost from a 47 million dollar loan origination in 2013 that repaid in full in 2022.
On the subject of credit our portfolio ended the quarter with a weighted average risk rating of 2.9 consistent with last quarter.
We had two non accrual loans migrate out of the five risk rating category as a result of foreclosure.
The first is an $84 million multifamily property in Windermere, Florida and the other is a 56 million dollar lifetime property in Boston are only life science loans.
We obtained third party appraisals for both assets with the Wyndham you're asked that appraisal at our basis in the Boston asset appraising for $17 million lower than our basis.
We reserve just for GAAP purposes be a specific people reserve that we subsequently charged off in connection with the foreclosure.
Also migrating out of the five risk rating category with a $137 million office property in Brooklyn.
The loan was upgraded its way for risk rating do the 230, plus year leases, one signed and the other pending which would bring occupancy to 100%.
Our general peaceful reserve decreased by $14 million in the quarter to a balance of $438 million, reflecting slightly improved macroeconomic forecast.
Together with our previously taken Oreo impairments of 173 million. These reserves represent 3.7% of our lending and Oreo portfolios and translate to one dollar and 80 cents per share book value, which is already reflected in todays unappreciated book value of $19 65.
Next I will turn to residential lending were on balance sheet loan portfolio ended the quarter at 2.3 billion.
The loans in this portfolio continue to repay at par with $60 million of repayments in the quarter.
Our retained our MBS portfolio ended the quarter at $414 million with a small decrease from last quarter driven by repayments.
In our property segment, we recognized $17 million of D E or five cents per share in the quarter driven by Wood Star, Our Florida affordable multifamily portfolio concentrated in the Orlando and Tampa Submarket.
In June we began rolling out the new authorized HUD rent increases of approximately 8%, which had a partial impact to earnings in the quarter of $1 2 million.
As a reminder, rent increases for certain geographies, where cap, resulting in six 7% of incremental rent growth deferred to next year.
The rents for these properties are at or below 60% of market rate rents on average, which should ensure continued high occupancy.
Also in North Star, we have $325 million of what started out maturing over the next six months, but we are currently working to refinance.
Given the appreciation and NOI growth of this portfolio, we are anticipating an upsize of approximately $300 million or $250 million share of which can be reinvested to increase future earnings.
Turning to investing and servicing this segment contributed D E a $52 million or 15 cents per share to the quarter.
Our conduit Starwood mortgage capital completed for securitization totaling $435 million at profit margins that were in line with historic level.
This includes a $324 million contribution into a single transaction our largest since inception.
And our special Servicer Morningstar and Fitch each once again reaffirmed lnr's existing ratings of the S. One and C. S F. One their highest ratings available.
Our active servicing portfolio ended the quarter at $10 3 billion with 1 billion of new transfer again dominated by office properties.
Our named servicing portfolio ended the quarter at $102 billion.
Lastly, our see MBS portfolio increased by $55 million driven by new purchases.
Concluding my business segment discussion is our infrastructure lending segment, which contributed D E of $21 million or six cents per share to the quarter.
We committed to a record $700 million alone of which $642 million was funded.
Repayments totaled $288 million, bringing the portfolio to a record $3 1 billion at quarter end.
Next I will address our liquidity and capitalization.
After quarter end, we repriced, our two term loan b's at record low spreads, which Jeff will discuss.
We also announced the acquisition of fundamental income properties, a fully integrated net lease real estate operating platform and our own portfolio for 2.2 billion.
We funded the purchase with $1 3 billion of assumed debt and a $500 million equity raise with the remainder funded with cash on hand.
We will report more fully on this acquisition in our third quarter 10-Q.
After a strong origination quarter in the fundamental acquisition. Our current liquidity stands at $1 1 billion. This does not include liquidity that could be generated from cash out refinancing sales of assets in our property segment direct leveraging of our unencumbered asset issuing high yield backed by these unencumbered.
Assets are issuing term lumpy.
We also continue to have significant credit capacity across our business lines with $9 3 billion of availability.
Our adjusted debt to underappreciated equity ratio ended the quarter at two five times, increasing slightly from last quarter due to new origination volume.
And finally this morning I wanted to conclude with a few remarks on the recognition we received this quarter by the rating agencies and NAREIT.
Our credit rating where firms by all three rating agencies.
It's a challenging market backdrop, they collectively recognized our diversity leveraged profile liquidity position stable earnings and credit track record are key elements supporting our rating.
We were also once again awarded the NAREIT Gold Investor Care Award an award given to one company and each industry, which recognizes communications and reporting excellence.
This is our ninth time, receiving the award in the mortgage REIT category in the last 11 years exemplifying our long term commitment to both our stakeholders and transparent financial reporting we.
We are honored to once again be recognized by NAREIT for this award.
With that I will turn the call over to Jeff.
Thanks Rina.
Before I begin Barry the entire Starwood team and I would like to send our heartfelt condolences to the friends families and loved ones of the real estate professionals and first responders, who are senselessly taken too soon and last week $3 45 Park App tragedy.
Both real estate professionals, who are very well known and respected at Starwood.
As you know we pre released earnings on July 16, and raised $500 million of equity to help finance our purchase of fundamental income.
This will be our ninth business and gives us a portfolio of 467 owned properties and 12 million square feet that is 100% occupied by 92 tenants at an average Walt for 17 years with two 2% average annual rent escalation.
The assets are split fairly evenly between service and industrial with a small component of retail effort.
As Rina said, we used $1 $3 billion of in place debt $879 million of which is an ABS Master Trust and we used approximately $400 million of cash to round out the transaction capital stack and expect to earn increasingly higher ROE as we leverage the overhead in place.
Most importantly, this business sits at the intersection of the cornerstone of our and our managers expertise real estate and credit, making it an obvious place for us to invest.
We thought about incubating this business ourselves, but ultimately thought having an established team and scaling quickly made more sense.
The team consists of 28 experienced professionals, who spent their careers at large net lease businesses.
Deep expertise in origination underwriting portfolio management and capital markets.
Their strong relationships with middle market companies and private equity sponsors will significantly enhance our capabilities and market reach.
Team is scale to grow.
This is not our first foray into the net lease space.
Successful investment in the Bath broke cabela's transaction demonstrate the attractive risk adjusted returns and long term value that can be achieved in this sector.
The acquisition of fundamental built on that success and reflects our confidence in the continued opportunity within that Lee while opening the door to new growth opportunities in this sector, both domestically and internationally.
Okay.
Fundamental maintains an ABF Master trust, which to date has issued three securitizations, which sequentially priced tighter as the trust grew in size.
We expect to continue to grow the Avs Master Trust, where we can borrow for up to 10 years on a fixed rate basis.
Executing this strategy will leave us with a portfolio that would look a lot like public peers trade at a significant premium to JV.
With a conservative FCC are of six four times on the in place portfolio, we are buying.
We expect this business to be accretive to earnings next year and more meaningfully beyond that should we achieve our business plan.
When we bought our energy infrastructure business in 2018, we paid a similar gross amount for assets that yielded much less.
We likewise added an experienced team and trusted that the synergies with our platform would yield incremental return.
We've turned that business into a compelling investing platform over the last seven years we.
We look at fundamental the same way and believe with a lower cost of capital than their previous owner.
That we will be able to grow this business accretively.
The team is up and running and building a pipeline and having seen strong deal flow in the days since our purchase.
Given the growth in our property infrastructure <unk> MBS and now net lease businesses. Our CRE loan portfolio is today, just 52% of the assets on our balance sheet versus 65% in 2022.
Our diversification has created compelling consistency and has left us as the only mortgage REIT to never cut its dividend.
We announced our board authorized our Q3 dividend of <unk> 48 for the 47th straight quarter.
In capital markets, we recently re priced both our term loans due in 2030, and 2027 totaling $1 $6 billion at record low spreads for our sector. So for plus 200, and silver plus 175 and both at par.
Optimizing the right side of our balance sheet has always been as important to us as the investments we make and we've been very busy repricing our liabilities at the tightest spreads and our 16 year existence.
Over the last 18 months between the issuance of equity senior secured notes and term loans, we have completed over $6 billion of capital markets transactions.
Of our $5 billion in corporate debt today, only $400 million of it matures prior to 2027, and we have unencumbered assets and term loan b collateral today to issue $2 billion of incremental corporate debt.
As we told you last quarter, our board approved business plan is to continue to grow the scale of our business to offset the drag created by previous cycle non accrual assets that we have largely held onto to create the best total return outcome for our shareholders.
To that end, we've originated $5 5 billion in the first half of 2025 more than all of 2024 led by our two largest lending businesses commercial and infrastructure lending with the benefits to be seen in 2026 and beyond.
In CRE lending, we closed $1 9 billion in loans in the quarter and $4 1 billion in loans through June 30th with over 70% of the quarter being industrial and multifamily assets with an on trend weighted average IRR and LTV.
I'll bet, all loans renewed to Starwood property Trust, 16% were international and 74% were to repeat customers proving the strength of the relationships in our 16 year old firm.
Went over $100 billion.
Its inception.
We expect this elevated investment pace to continue in the second half of 2025, leaving us with the largest CRE loan portfolio in our history by year end after a 20% decline in 2023 and 2024.
Our risk ratings and reserves held steady in the quarter and as we expected CRE market are stable with forward rate expectations, continuing to move lower and all credit market trading at very tight spreads, which has catalyzed activity in the <unk> MBS FASB lending and real estate equity markets.
Rina told you or five risk rated bucket was reduced in the quarter with a large upgrade and two oreos we expected.
So I will just touch on our two new four rated loans as I always do.
The first is a $91 million of apartment deal in Phoenix that recently underwent a full property renovation with the borrower experiencing liquidity challenges.
We have been successful in Oreo optimizing multifamily performance and if sold two assets at our basis and expect to use the scale and information advantage of our manager Starwood capital group one of the largest multifamily owners in the country to do the same going forward.
The second is a $46 million office to residential conversion in Hawaii that is pivoting to a hotel execution.
In the quarter Rina also mentioned the resolution of a $137 million and $55 million RVO and we're working through a couple more Oreo resolutions, we expect to be finalized this year and we'll give you more detail upon execution.
Our energy infrastructure business continues to benefit from growth in power demand, creating lower ltvs.
As Rina said, we committed $700 million of new capital in the quarter at mid teens returns.
This portfolio now stands at a record $3 1 billion and we expect to continue to grow this portfolio.
We completed our fifth CLO in the quarter and I will add that it was at the lowest coupon silver plus 173 and cost of funds in our history.
We expect to issue, 1% to two more CLO this year, which will increase our term non mark to market debt even further.
And <unk> I will note that our active servicing portfolio is over $10 billion today, the highest in this cycle and likely headed higher which will produce significant incremental revenue as these loans resolved.
As a reminder, our servicer as a positive carry credit hedge that earns more money in times of real estate and distressed.
In closing we are very excited to have added our new business line. We are excited about the return on liquidity and opportunities in our core businesses in that CRE finance markets continued to repair with better performance and lower expected forward rates.
The forward market has though for declining to 3% in the first quarter of 2027, which is 50 basis points below the expectations, just 10 weeks ago, which should have a material positive effect on our legacy credits.
With that I will turn the call to Barry.
Thank you Zach Rina and jeffs.
Good afternoon, everyone.
Good morning.
Happy August and thanks for listening in.
Well it seems that the world changes a lot quarter to quarter.
The World has certainly changed this quarter.
The jobs report was quite a shock consumable restatement of prior job gains.
And it seems tightening logmein thoughtful sold will cut rates in September.
Alright. Thank at this point I mean, most of us will be Greenville rates are coming down. So just a question of their speed.
26, I think the short end will be 70 basis points lower than it was today probably more.
The other thing that we know for sure is that the real estate complex and gaming constraints on getting healthy.
At the end of the Avalanche of new supply created for different interest rate environment.
Particularly affecting the multifamily industrial sectors.
While construction remains strong and has tremendous job gains in construction of minerals from data centers.
And also from the infrastructure Bill and the chips at some other programs and now will accelerate.
With all the repatriation was showing us.
Plants and equipment in factories being I'll say, it's in things like the pharmaceutical industry, which will.
Probably have to vacate iron on the middle class back to United States to satisfy the administration.
With both lower rates and us.
Firming of the real estate complex.
Alright, thank youll see a significant pickup in transaction volumes for the real estate market United States you already are seeing that in Europe.
As late as rates dropped from 42 likely hitting one in three quarters.
So.
There is a lot of activity in Europe, we have our busiest years ever in Europe, there's a private equity firm in real estate.
Transaction volumes in the states or subdued and people are holding onto their best assets, hoping that they can sell into a more favorable climate supported by these lower interest rates that we will now know are now coming.
The other fact, you've seen is the repair of the credit markets as you've seen with our own comments from Jeff's comments. There was a lot of liquidity in the markets and everyone is really going to refinance it spreads.
The Boston Globe machines are comparable.
And that is probably the case because of Europe.
China, having seen low interest rates of our rates are high.
Then theres still attractive from global credit investors and you cannot ignore the United States, Obviously, we have.
Plenty of supply to satisfy demand, but I think most of us would have gotten wrong way, Virginia rubles I'll speak.
Given the situation with one beautiful bill and we'll see what the economy does accelerate.
Now to cover the cost of the program.
Another interesting development I would say on a macro level as energy deflation.
The world is sort of a digestion disruptions in the middle East.
And now between Opex position of continuing to grow.
Bruce oil and the government's desire to remove restrictions on development.
The energy deflation dividends to support customers and continue delivering the growth in the United States.
Which is.
The most evident change of all is the continued massive.
<unk> behind the data centers.
Hi.
In the aggregate all those equivalent of Levered, probably the Chilean.
Federal government spending and that is moving and dramatically concentrating United States growing our economy versus others in the world.
Shifting to our company I would say we're in very good shape as Jeff and Rina pointed out I think we built a fortress balance sheet best in the sector. We've moved as aggressively as we can to move unsecured corporate debt take out.
Repos and others that we have and we are agile and that we have Tom Jeff and the team has done amazing work on our balance sheet.
I wanted to talk a little bit about fundamental and com, which we just bought a $2 billion business.
I think from the start as you know, we endeavored to fuel a finance company not just a mortgage REIT.
We have multiple cylinders and that strategy has more complicated has borne fruit of us being the only mortgage REIT in the country that trades above its IPO price and I think many shareholders forget that we spun off to our residential single family rental business, which is equivalent to almost $5 a share.
In addition, as favorable diversification has been able to enable us to keep our dividend and chats.
In a very tough time.
And now we just had this dividend I think so.
14 years or something like that and I hope it fundamentally can actually begin to grow earnings materially over time.
<unk> work to increase that or get the benefit of what's a much more secure income stream and a lower dividend yield for our company, which of course words.
We think we deserved.
Fundamental as a business benefits from scale and the bigger we are likely more accretive businesses to us.
A proven team, we take Tom and team of 20 people involved with store and spirit and grew those companies to their ultimate sale shareholders made a lot of money.
Not lost on us that standalone.
Net lease companies traded dividend yields $450 or 400 basis points inside our own.
So we think this is.
We will be able to highlight the value of about <unk> <unk>.
New Division Hasnt side of our company.
While I think it's modestly dilutive this year to the company because we've only picking it up for a short period of time the faster we grow the company in a more accretive it will be given the overhead gets scaled and there's something like 12% of our revenues today, but it's scale, it's more like five.
And the team is positioned to do that and incentives of physician incentives to position to do that.
And we will figure out ways to continue to grow that please just to make it a more material portion of our company.
A couple of other points I'd make it's interesting to me is here.
Sure our infrastructure, but once we bought 10 years ago from.
General electric.
I'll start with infrastructure lending business.
It has a single Harold just wondering its portfolio.
I'm pretty recycled and continues earned.
Mid double digit yield on equity.
The other point I would like to highlight again as our affordable book, which is really unusual and enjoy the day.
Close to a 7% rent growth this year and has embedded rent growth next year of six 7%.
And that doesn't take into account the opportunity the movies ramps to market as these assets begin to come off their 15 year restrictions.
Also want to point out.
SMC, our conduit business because it's the gift that keeps on giving the team does a superb job.
The schools and so I think we've.
Part of the business for 48 quarters, and I only had one mildly negative any lost a penny in one quarter. So we've been profitable in 40 748 quarters.
And that's just a great business.
By a great team.
Superb job for us.
One more point about.
<unk>.
Fundamental.
Is it fundamental will provide a real estate depreciation expense or a tax shield for us.
Over time, that's going to become important because we cannot as you know hold onto any cash that we produce we have to basically pay it out.
Per the REIT regulations, but as with fundamentals depreciation as we grow the business. We would have the opportunity I don't we're not saying we would we would have the opportunity to not pay out all the cash we produce thank you reinvested in the company and growing at a faster rate going forward.
So overall im very excited about the future right now we still have some potholes to get through.
But we're confident we can navigate through them.
The company is setting itself for future growth.
Really powerful team can do great things.
<unk> our ultimate.
Call us, becoming investment grade, which all arrows are pointing to how do we get there and what would be the benefits of getting there, but in general were doing all the right things to accomplish that.
Yes, I will.
I'll say one last question one last general comment about tariffs because I think.
We haven't seen their impact yet I think the second quarter will sort of overstating by Freeloading are front running of inventories to try to get things on the shelves without saying quite good tariffs I do think they are one time I don't think can be sustained and logic would tell you if prices went up demand will fall.
<unk> seen increasing supply prices and then you might see a decrease in prices that will be cut in order to generate excess demand sadly.
Charles will impact those as a country, who don't have that.
With all the pay additional.
Cost for the daily needs of their lives.
And I think that could create great social anxiety.
Potential continued to wear.
Splits in our society and to the left on the road I think we are going when you start talking about them a number of new terms coming up.
By that time, we will definitely know what the impact of these.
These tariffs and whether they are benign or.
There are benefits of increased revenue offset a social cost.
Of companies, having lower margins or consumers having.
That's money in their pocket, so the jury's out.
And I think we expect the back half of this year to be.
Meaningfully less.
<unk> in the first half the net jobs class was probably though.
The indication of that.
And now we'll see what companies can do as they try to figure out what's permanent and what's temporary the more stability, we have and the rules are more businesses can figure out what to do.
With that I'd like to say, thank you and take your questions.
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Moment, while we poll for questions.
Yeah.
And our first question comes from the line of Dan of Don <unk> with Wells Fargo. Please proceed with your question.
Hi, Good morning can you talk a little bit about your expectations for CRE loan growth I think your portfolio was up 6% quarter over quarter.
I guess, if the fed does cut rates would you expect the velocity of that loan growth to accelerate.
Yes.
Thanks, Don I'll take it first and can have dewberry after.
We've done $4 2 billion I think through two quarters. We have obviously closed more since the end of June that will put us on a mid $8 billion pace. The record we ever did with $10 billion of transitional floating obviously, that's taken away the other cylinders the MBS.
And all the other things that we do lend on.
That we will end this year very close to that $10 billion number that we did in 2021 and 2021, you're at 670 billion of transaction volume I think you're probably closer to 400.
So transaction volume hasn't picked up it will pick up in your scenario lower rates will help that.
Lower rates will also help refis, you'll have some assets that have not yet re <unk> from from pre rate rise in 2000 2021 early 'twenty two vintages that were very large some of them have not yet moved through those will move forward, creating more opportunities and obviously business plans that have played out on the 2022 23 and 24.
Loans will be more likely to refi as we see spreads come in so we're on pace, even without that great environment to have close to a record year. We are very much on offense. I think there are a number of people who have not been able to be on offense. We've invested in every quarter since our inception, we've been investing aggressively for the last few years as I said our goal.
Is to continue to grow the balance sheet to offset non accruals. So we can sit on assets and work them out to the benefit of shareholders rather than selling it at a more distressed level and this will also help that lower rate environment will also help but non accrual book and many of them are have debt yields that are just below where they might be able to refinance today and there'll be able to.
<unk> in your outlook. So we hope that's right, but we have built the business to be okay. In either direction, we will be fine in a higher rate environment as we're showing you in the first half of the year and we're prepared for that.
Certainly we would all like to see that low rate environment that Barry pointed out it is likely that I pointed out the forward curve is saying it will happen and that youre proposing.
Feels like we have upside from here not downside is right to potentially go lower and we move further away from the beginning of that 'twenty two rate hike cycle.
Got it.
Talk a little bit about the ramp ups of Jeff Let me.
Can you hear me, Jeff perfectly Barry.
Eric.
Yeah.
I'd say I mean, we have a lot of business line sale. So.
I mean, we're really agnostic to where we have the capital and.
You also know of capitalism doesn't grow on trees. So.
We're going to be.
Even more focused on not just dollar origination, but the returns.
And hold our profits the likelihood the money stays out longer than we've probably been in the past and lean into credit now, we'll do it with fundamental as we've done with SaaS, we'd like to continue to grow our infrastructure lending business and we're continuing to look at other businesses. So.
We don't have infinite access to capital and not.
No not at this dividend yields so we have to be careful and judicious.
Got it.
Okay.
Yes.
Barry you cut out of the yen.
Barry you cut out at the last 20 seconds I'm going to hand, it to Dan.
Maybe you get a better connection great.
Great. Okay. Thanks, Barry.
In terms of my follow up Jeff If you could talk a little bit about the ramp up of the net lease portfolio of business. It sounds like theres going to be some domestic and international opportunities with our portfolios or would this just be sort of a.
Kind of smaller acquisitions over time type strategy.
Yeah listen we outlaid.
<unk> laid out for you the portfolio that we have in that portfolio was sort of 20% to $30 million of assets. That's the sweet spot for this company that's often the sweet spot for this segment I will say in the first week that we owned the business. We saw a 160 million dollar trade that revolves around some school buildings, we saw a 400 $600 million.
So opportunity.
Two different ones there for a total of $1 6 billion and three potential opportunities. The last two were industrial assets well located that that we've looked at I'm not sure that we're ready to jump in on that scale today, but the team is rebuilding a pipeline that did sort of closed their pipeline a bit over the last couple of months, but the pipeline is growing again.
Today, and I would expect that.
Mentioned, we underwrote $4 million to $500 million a year for the first three or four years just to get to our accretion dilution number. My guess is we can do double that the team is really strong.
Pipeline builds we have great confidence that they're going to do significantly more and as Barry said doubling the size of this business will make it look a lot more like some of the public comps.
Create at one four times.
With our FCC or a six four times and I think the industry closer to three we have really good credits in our book, we're very happy with we spent a tremendous amount of time Starwood capital group and our team. There can you hear about med <unk> and Peter Reed and our team did a tremendous job of underwriting together with our team the credit. So we feel really good about what's on the books.
We will be looking to grow in the $20 million to $30 million in space that they've historically done, but we will look at these bigger trades.
If we found the credit that we like I think we could certainly supercharge that growth, but but the the modeled number is not our expectation from management. We think we can grow faster, but it's going to take them a couple of quarters to rebuild the pipeline and for the world to really realize that Starwood is very behind this business, we have a lower cost of capital than their previous owner had.
And we're super excited to be able to go into cap rates that are a little bit lower than what they've been able to buy previously, which will give us better credits and with our financing and getting better financing than what they had historically, we think that that will create even higher returns. So super excited about where this is going to go.
Okay, great and on <unk>.
Next question comes from Rick Shane with J P. Morgan. Please proceed with your question.
Thanks for taking my questions. This morning.
Look the organic growth in the infrastructure business has accelerated nicely.
Curious about really three things here.
One.
It looks like the spreads on this business are a little bit wider cures.
Curious, if you see that as sustainable or converging given our.
The competition in that space too.
Also look some Jeff you'd alluded to the fact that alluded to actually stated.
We're just focused on the right side of your balance sheet is on the left side. It looks like the funding spreads in that business are also wide or is there an opportunity for additional efficiency. There and then finally can you help us understand the duration of those assets in the context of the remainder of the.
Core balance sheet.
Sure I think Sean Murdock, probably on here. So I may he doesn't speak very often and he runs that business tremendously well for us, but I'm going to start with a couple of the other questions.
Side as far as the funding goes it's really interesting what happened here at the bank, who went here tend to be more corporate credit lending banks than they are and they are real estate lending bank. So.
Early 'twenty two when rates my entire we went from borrowing on cash flowing multifamily at $1 25 to $1 50 over sofa.
Up to $2 50 to 300 over so for the same assets spreads widened on everything that office. They went to three times that on.
Hotels, it went significantly higher.
And we saw a pretty steep move wider and that has now come back we're getting close on commercial real estate to back to where we were but we got whipsawed a bit at the same time, we've got much higher coupons for making alone on commercial real estate asset. So are our return ended up about the same over that period the infrastructure business.
Very different.
The right side the funding spreads that you said a little bit wider stayed about the same our lines are between sort of 175 and 200 over before we go to.
Hello, and that never really moved wider so asset spreads did move wider for a few years and has allowed us to go from earning low mid teens, earning mid high teens for a couple of years, we're back in the mid teens today as the asset spreads have come in a bit you've seen that in the term loan b market with a number of re pricings in the.
A portion of our book and term loans.
The CLO market and we just priced our fifth.
173 over cost of funds is tighter tighter than what we're going to do anything in the commercial real estate side. When we did our first three CLO and CRE I think the bond spreads were 195 over then down to 180 over.
Maybe one got to $1 65 in term memory back four years ago, but you are in line with where the CRE CLO spreads are.
And we are likely to do a couple of more this year. So I think with with repo lines that will probably all be moving towards $1 75 for that business and with the CLO market that on the last one was $1 73, and I think it will be tighter today.
It funds itself really well given we are still getting a higher coupon today than what we were getting pre pre 2022, so feel really good about that I mean by the time, we do another one or two CLO is we will have most of two thirds of our assets funded and nonrecourse non mark to market CLO debt there that's an.
<unk> statistic versus where we are and where the industry is in commercial real estate. So we're sort of super happy there did not have any potential margin calls the ltvs on that book have moved down from mid Sixty's low sixties. When we might have written them I think our blended LTV is about 46 or 47% for that book is the power needs of increased in the United States.
Really helped our energy producing assets.
And then you asked about organic infer about growth in the in there and John are you on maybe talk a little bit about the fact that we've done a couple of our own deals and we're not as reliant Sharon profit syndicated deals.
Yes, I think the way we've tried to sort of maintain interest margin is exactly that Jeff mentioned, we're doing more deals ourselves there may be a little bit smaller infrastructure assets, but where we can saw underwrite and still execute that tends to command a little bit more margin so while margins in the sort of.
<unk> broadly syndicated markets are tightening a little bit we've been able to maintain margin, but doing more deals ourselves.
And I think.
The opportunity around how much infrastructure growth there will be in the next few years as data center effects. The energy infrastructure market will allow us to grow that origination channel significantly.
Got it and then just one quick follow up.
Making the distinction between the syndicated or club loans.
And.
Individually.
Single lender.
Assets.
<unk>.
Is that simply in that that's not really your core business in the property lending.
Side is it just because the transactions there are so much larger because of the inherent cost of building the projects that it makes more sense to club them up.
Exactly.
Okay, great. Thank you so much.
These are visa visa $1 billion power plants.
<unk> costs have gone from what Jon under 1002, probably closer to $2000 a megawatt now so they're very expensive, they're very large Rick one of the questions that didn't answer with duration, Sean as long as the energy infrastructure business as loans tend to be five to seven year loans, where the commercial real estate loans tend to be three to five year loans.
Obviously, if things work out things can pay off a little bit earlier than that but I expect a little bit more duration on our energy book than I do on our commercial book.
Got it okay very helpful and thanks for the extra time on this one.
Thanks, Rick.
Thank you.
Our next question comes from the line of Jade Rahmani with <unk>. Please proceed with your question.
Thank you very much.
Don't often get credit from mistakes, we avoid and I have to take my hat off to you for only doing one life science deal and Super competitive market in the last cycle, the $17 million loss doesn't seem all that bad.
In a broader context so.
<unk> you for taking action on that and the $51 million equity kicker gain also a nice surprise. So the question is on credit you believe credit in the portfolio to stabilize based on what we know now do you expect a gradual improvement on resolution plans you have in place.
And also if you could comment on the hotel exposure in the loan portfolio.
Absolutely. Thanks, Jade I appreciate the.
The nice words, then on the life science market. We looked at you had a lot of B office that was getting converted the life science back in the days when everybody was that was taking more coming out of Covid. Obviously, there was a great need in COVID-19, but we didn't feel like we needed a multiple more of life science space. You just didn't graduate enough scientists to create a significant as significant of a.
Demand and we knew AI was coming in that would.
<unk> the number of trials.
He might make going after a gene or whatever it is from you might've gone after at 10 different ways with AI you might only go after a couple of different ways. So I think we've had a relatively bearish view on that for a while unfortunately, we did that one through we thought it would be a good conversion to regular office resi.
But youre right, we did end up taking a $17 million.
Right down on that and hopefully we can work out of it the kicker gain was was nice as well. So thank you for thank you for bringing that up.
The hotel exposure I'm, giving my percentages right now I think it's 6% of our overall asset base.
I don't have any hotels at all in my four or five rated loans I don't expect any there we've not lost any money on hotels.
We went into the Covid cycle, we actually said something in 2020, and I'm going to turn it to Barry if he's here because he is the greatest hotel expert either met but in 2020, we said, we didnt expect to lose any money on our hotel portfolio and that was when they were all shot.
Right now we feel really good about the exposures that we've taken it's a broad mix of some destination.
Hum roadside and drive two and some in some in more major cities, but the hotel book continues to hold up very well with hotels can miss on their cash flow by a little bit, but when youre lending at 65% or 70%, we have a lot more cushion there.
Income has gone up as you've seen anyone who has come into New York City in the last year as being where hotel rates are.
Income has gone up expenses have gone up also so we're very careful on expenses, but.
Erode 30, or 35% when the cushion that we have in hotels is a lot harder if if things don't go.
This higher rate environment has been met with higher income as well. So Fortunately there we have that where you don't necessarily have that on office broadly Barry you're trying to jump in.
Is that you are very high.
Can you hear me.
Yes can you hear me yes.
Yes life Sciences scared the.
Daylights out of us.
Was sort of a conversion of office life science. So it's kind of like timeshare for hotel that doesn't work for a while it was as good as it got.
I think I think.
Interesting you bring that up because I think its datacenter space will be interesting.
Spreads have contracted dramatically if the building is being leased or it's fully leased.
But some people are beginning to do are trying to spec data centers didn't get pretty wide spreads as you should.
Data center, but it's something we're not choosing to do right now so.
I think there are.
Similar thing it's like you can go stack that you can go so it's something that is obviously not spectrum. This is Scott.
The credits that are in the world.
There have dropped.
Dramatically contracted.
Probably 200 basis points or 175 basis points from where they were when we started in the lending business and data centers and we are a data center developer with $19 billion of it.
Pipeline ourselves so we know the market from the equity side and debt side and we've seen as we finance those buildings, we've seen what's happened the hotels I mean, you have to be careful of the blue cities right now because the unions are really strong.
New York City contracts coming up in May of next year, that's going to look.
Like what happened in la so even though it remains fairly strong shockingly strong at the rest of our lives given the depreciation of the dollar and its impact on foreign tourism.
It is not Vegas. This week there are markets that are weak and we just cherry pick the opportunities and I don't know I think we're fine.
We often land and say when we get the asset at.
The debt balance we'd love to own it's Eric So I think thats, probably applies to almost all of our hotel loans.
Thanks.
And there is liquidity, we just got paid off on a New York City Hotel to a bank balance sheet, we got paid off on Atlantis, which was a large position we're going to get paid off in the next quarter on our Hawaii asset.
And obviously your hotels, how to really high debt yield going in that.
That high debt yield enables them to navigate.
The higher sulfur more easily and Jay you did ask one more thing on the credit cycle I don't want to be too I don't want to skip over that but if the forward curve is right and we had towards 3%. So for my gut is that the industry is likely over reserved if you end up in the high threes to four the industry probably is reserved for that forward curve ends up above.
Sure.
We'll be more problems, so today, where we sit with the forward curve heading to 3% by the end of 2006 early 'twenty seven I feel really good but that forward curve has moved around by 100 basis points three times each direction over the last year and a half so we.
We'll continue to watch it and we will continue to try to work out of things that if the forward curve does stay above 4% that we have we have a path to away from but with the forward curve heading where it is today I think everybody in our seats are feeling a little bit better.
Thanks, a lot.
Thank you Jay.
Thank you and our.
Next question comes from the line of Douglas Harter.
With UBS. Please proceed with your question.
Thanks, and good morning.
Hoping you could give us an update on kind of the timeline for resolution.
On some of the problem assets, our foreclosed assets.
How we should think about kind of getting that capital back and.
Kind of how much.
And just the magnitude of capital against those.
Unproductive today.
Yes, I think it's I think it's about a $1 billion and 701 billion eight today of non accrual assets.
Where we have some control, where we're making a choice today not to sell at today's level and that we think we have.
A better outcome by holding on and so far that's been working better than than we might have thought it would I think we told you two quarters ago that we had a plan that we would try to be half out of it by the end of 2006, and then half again of that by the end of 2007, which would be well in the quarter.
That book.
That's our patient forecast hopefully we can do better there are certainly some some assets that we've spoken about here before that that we can't do a lot on is a few that were syndicated on like a large retail asset and we're going to have to wait and work together with a with a group there that will take a while there are a couple of things in downtown La and downtown La.
It's just not moving forward as quickly as possible. So we're looking at other potential options on those we have a few small apartments that make that up you've seen us sell two or three of the apartment that we've taken back out our basis. My gut is we'll sell a couple more of those at our basis in the in the coming quarter or two so.
Oreo book.
The.
Things that we think we have a handle on being able to move being able to move out in that timeline.
But as I said there are a couple of other larger broadly syndicated things that that might take a while but that is built into what we produced for the board for a three year plan and we're sort of very comfortable with where that plan is and that that will allow us to continue to.
To earn the dividend over the next three years or so so we're not going to rush rushing would cause you go from our nine 5% cost of capital you sell something to an opportunistic fund and they have a 20% cost of capital and then they bid it back for any downside that could happen and thats not necessarily the best outcome hitting a bit today on an asset for our shareholders.
We've seen some of our peers do that but we have capital we have access to capital and we're going to act with our manager Starwood Capital Group was $110 billion of assets under management.
We look at each individual asset to try to to try to.
Go forward.
In makeup our best plan.
Great I appreciate that Jeff.
Any update on the Washington.
Residential conversion.
Kind of what's the updated timeline.
Timeline and thoughts of kind of getting that property online cash flowing.
Yes.
And you after we have some beautiful pictures of what that asset will ultimately look like we're monitoring rents in that market rents have actually gone up on class a multi rentals. So we're starting to feel better and better about it we have not begun construction. We're in the permitting phase and we have the final drawing so I feel pretty good that that.
It's going to be a tremendous product it's in the right spot in D. C that we that we hope to be able to give you a lot more information on over the next couple of years. It's a couple year project, we've reserved money for that and and we'll see.
Alright, Thanks John.
Yes.
We do have ourselves getting back our basis and more on that asset as we've told you in the past.
Once we're done with the conversion.
Yes.
Thank you.
With that this does conclude our question and answer session I would like to turn the call back to Jeff <unk> for closing remarks.
Well normally I put it to Barry but.
Connection isn't great today I want to thank everybody.
For joining us.
Thanks to the team who did a lot of work to get a lot of things over the line in the last quarter I appreciate everybody's time.
Thank you and with that this does conclude today's teleconference. We thank you for your participation you may disconnect at this time and have a wonderful day.
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