Q3 2025 Starwood Property Trust Inc Earnings Call
And and demonstrating the continued diversification and strength of our unique multi cylinder platform.
I will begin my segment discussion this morning, with commercial and residential lending, which contributed $159 million a day each of the quarter or <unk> 43 cents per share.
In commercial lending, we originated $1 4 billion of loans of which nearly always funded along with another 219 million our preexisting loan commitments.
After repayments of 123 billion, including a $58 million off the phone this portfolio grew $271 million to $15 8 billion.
On the topic of credit quality, we continue to resolve our higher risk weighted loans and foreclosed assets, which Jeff will discuss.
We have $642 million of reserves $469 million in Stifel and 173 million of previously taken Oreo impairment.
Together these represent three 8% of our lending in Oreo portfolios and translate to $1 73 per share book value, which is already reflected in todays on depreciated book value of $19.39.
You will notice in our 10-Q that we classified a 33 million dollar five rated mezzanine loan on a Dublin office portfolio credit deteriorated loans already maintained inadequate general reserve, but in light of our pending loan modification. The reserve was reclassified from general to step back.
Turning to residential lending our on balance sheet loan portfolio ended the quarter at $2 3 billion consistent with last quarter at 50.
$2 million of repayments were largely offset by $41 million a positive mark to market adjustment.
Our routine our MBS portfolio remained relatively steady at $409 million.
In our property segment, which now includes our newly acquired net lease platform, we reported D E a $28 million or eight cents per share.
On July 23rd we completed the $2.2 billion acquisition of fundamental income property, which contributed $10 million of D E and the partial quarter from acquisition to quarter end.
Purchase was treated as an asset acquisition for GAAP purposes, which means the purchase price was allocated to property and at least an intangible.
Portfolio consists of 475 properties diversified across 61 industry in 43 states with a weighted average lease term of 17.1 years and occupancy a 100%.
Two comments I would like to make on the accounting ramifications of this acquisition.
First from a GAAP perspective, you will see elevated depreciation and amortization level. The impact was four cents for the partial period with this pace expected to accelerate as the business contributes fully to future quarters and as we acquire new assets.
Second from a D E perspective, we introduced a new GAAP to D E reconciling item for straight line rent, which is noncash.
And our wordstar affordable multifamily portfolio, we refinanced 30% of the portfolios out there with $614 million of new debt.
Of this amount 310 million repaid maturing debt and 302 million was received incremental proceeds evidenced the significant value growth in this book during our ownership period.
The new debt carries a weighted average spread a sofa plus 176, and a 10 year term.
$368 million of this refinancing closed in the quarter with the remaining clothing in October.
Our investing and servicing segment contributed $47 million of D. E. R 12 cents per share for the quarter.
Our special Servicer continued to benefit from elevated transfer volume, which were once again dominated by off with one.
Our named servicing portfolio ended the quarter at $99 billion.
Active servicing balances rose to 10.6 billion did a 300 million of net transfers in most of which were often driving special servicing fees higher in the quarter.
In our conduit Starwood mortgage capital, we completed five securitization totaling $222 million at profit margins consistent with historic levels.
Our infrastructure lending segment contributed $32 million of D E or eight cents per share to the quarter.
We committed a record $791 million of loans of which $678 million was funded and received 691 million of repayments, leaving our portfolio balance steady at $3 1 billion.
Subsequent to quarter end, we completed our six actively managed infrastructure CLO, a $500 million transaction that priced at a record low coupon of sofa plus 172.
Other extending our nonrecourse capital base.
Turning to liquidity and capitalization, we ended the quarter with $2 2 billion of total liquidity elevated due to our recent capital raises and cash out refinancing.
Our debt to unappreciated equity ratio remained stable at 2.5 times and we continue to maintain over $9 billion of available credit capacity across our business line.
During the quarter, we executed $3 $9 billion of capital markets transactions, including $1 6 billion in term loan repricing at 175 basis points, and 200 basis points over sofa to high yield issuances, one for $550 million and one for $500 million at fixed rates.
5.75% and 5.25% of $700 million seven year term loan b at 225 over sofa, and a $534 million equity raise that was accretive to GAAP book value.
These actions increased our average corporate debt maturity to 3.8 years with only $400 million of corporate debt maturing between now and 2027.
With that I will now turn the call over to Jeff.
Thanks, Rina and good morning, everyone.
This quarter, we continued to operate in an environment of improving stability in credit market performance.
Before so for curb now points to rates falling into the low 3% range by late 2026 about 100 basis points below where expectations stood a year ago, which is positive for our legacy credits.
That shift combined with steady credit spreads that supported a more constructive real estate financing market in which we expect to maintain our elevated origination pace.
In commercial real estate, we're seeing signs of increasing transaction velocity as buyers and sellers narrow valuation gaps and capital flows returned to higher quality assets.
Thanks remains selective and continue to favor growing their secured financing lines over competing with us for a whole loans.
This allows well capitalized lenders like Starwood property trusts to lend at today's tighter spreads, while maintaining consistent risk adjusted returns and strong structural protections.
We built this company to perform in all environments diversified across lending verticals servicing and owned properties, which creates a balance sheet that provides flexibility and durability.
That diversification combined with consistent access to capital allows us to invest through cycles and position for growth as the markets normalize.
Following the capital markets activity that Rina mentioned, our liquidity stood at $2.2 billion, leaving our balance sheet well positioned to support continued investment across our debt and equity businesses and our intent is to continue to grow.
Our commercial lending originations through the first nine months of the year alone totaled $4 $6 billion on paid for our second highest year in our 16 year history.
Our total investing pace through the first nine months across all businesses was $10 2 billion.
Also putting us on pace for a record year.
The full earnings power of these new investments will be felt in 2026 as we continue to fund our existing loans and add new ones.
In commercial lending, we continue to lean in on our core investment themes, Datacenters multifamily industrial and Europe, while maintaining a disciplined credit posture.
Our U S office exposure remains low at 8% of our total assets down from 9% last quarter.
As always we remain highly focused on credit.
Our total Cecil and Oreo reserves Rina mentioned reflect prudent additions on a small number of challenged assets, which were somewhat offset by the upgrade of a $139 million office born in Brooklyn from affordable three risk rating in the quarter.
The improvements all of those strong leasing progress that is expected to bring the property to full occupancy in the fourth quarter.
This quarter, we downgraded two loans two of five risk rating of $242 million mixed use property in Dallas, and a $91 million multifamily in Phoenix.
Of which were previously four rated.
We expect to foreclose on these loans in the coming months and we use our internal asset management function and the expertise of our manager Starwood capital group to stabilize operations can reduce elevated expenses before we look to exit in the coming year.
To date, we've resolved seven loans totaling 512 million there.
There are another $230 million of resolutions currently in progress.
All of which are expected to recover our original basis.
To clarify we did not consider an asset to be resolved until it is legally exited our balance sheet. So these resolutions exclude foreclosures of $1 $1 billion.
Inclusive of foreclosures are resolutions total would be 16 loans for an aggregate of $1 $6 billion U K E D D.
We also had three loans moved from a three to a four rating in the quarter, a $107 million studio alone and Queens of $267 million in Newbuild industrial assets just outside the Midtown tunnel.
And a $33 million multifamily in Dallas with the downgrades due to slower than expected leasing and sponsor liquidity challenges.
Our infrastructure lending platform again delivered strong results with origination volume of $2 2 billion in the first nine months of the year exceeding every full year. Since we acquired this platform from GE in 2018.
As Rina mentioned, we completed our sixth infrastructure CLO subsequent to quarter end with nonrecourse non mark to market CLO is now financing two thirds of this portfolio.
And residential lending, we continue to evaluate strategic opportunities to reenter the residential origination space as credit spreads tightened treasury yields are stable and market dynamics improve.
Our <unk> business continues to be stable and counter cyclical contributor with LNR continuing to be ranked the number one special servicer in the U S and we expect above trend revenues to continue in the coming quarters and years.
Our C N BS conduit lending business continues to be a strong performer in our MBS portfolio continues to benefit from significant demand for credit assets and the resulting spread compression.
Turning to our property segment and our new net lease platform. The team has already begun originating new transactions and after they were out of the market for a number of months during the marketing process. We are building a very strong pipeline.
The Triple net assets, we acquired have strengthened our portfolio diversification by increasing recurring cash flow from long term triple net leases financed with long term fixed rate debt.
We remain focused on scaling this business through its established a b S Master Trust securitization program.
Post quarter end, we completed the first issuance under our ownership for $391 million that a record tight spread of 145 basis points over the seven year amid strong investor demand.
We expect subsequent securitizations to continue to tighten.
Given the Master trust grows and becomes more diversified with more securitizations.
Rina mentioned the significant depreciation of the portfolio creates which will lower our book value overtime and thus we will once again be encouraging investors to look at our on depreciated book value.
We underwrote and expected this business to create near term earnings dilution through integration as it did this quarter, but we expect it to contribute positively to distributable earnings as we scale.
This quarter's results highlight the strength of our diversified franchise and our unrivaled access to multiple sources of capital.
We remain proud to be the only commercial mortgage REIT that has never cut its dividend.
With strong liquidity and our opportunity set increasing we are positioned to grow and thrive as markets evolve with a balance sheet built to withstand volatility and capitalize on opportunity.
We continue to invest in technology, and artificial intelligence to enhance efficiency and decision, making across our lending and servicing platforms.
These efforts are already yielding better analytics and faster response times, and we expect them to support long term margin expansion as they scale.
In fact, I used AI to write the bones of my comments today.
With that I'll turn the call to Barry.
Thank you, Jeff and thank you Regina and good morning, everyone.
Just some quick filling comments I guess, just chat with the bones of Jeff's comments.
You can use this as an agent they don't talk anymore or we can just have this agent speak for himself [laughter].
But moving back to filling in some comments I think it was an interesting quarter, obviously only half our book today is still a large loan lending.
It's about half of our assets about $15 5 billion I'm almost 30 billion of assets.
I think we created a near term near term trough for ourselves with the fundamental acquisition was a strategic move and while it was dilutive.
At least four cents in the quarter.
You have it is very leveraged so its overhead we bought an entire business, including the management team and as you scale. The book the results of the accretion of the book becomes rather dramatic and two things we see one our cost of financing has dropped as Chuck mentioned in his final comments at 145 over that's materially better than we underwrote when we bought the business.
And to the opportunities that we didn't realize that they have been out of the market for as long as they were during the sale process. So we didnt produce enough net lease in the quarter, but by stretching the duration of the book from the 17 years average.
Please.
Inherent bumps in rent, which are between two and 3%.
Actually stretched and duration of our book and now we have a business inside of US and if you look at Triple net lease REIT in the marketplace. They're trading between what was what was too but normally on five or six 6% dividend yield. So you have a business that's worth inherently more and us with a parent paying close to 10 and a half.
At the moment, so we will grow this rapidly ill hop to spin it off and we realize the value of the extraordinary business, we bought it will get better and better over time, but near term.
Jeff for me are suffering from solution and probably didn't communicate quite willing up to the analyst community.
So we remain very optimistic about the pipeline and the future growth and step back for a second and talk about.
The company and then the economy's starting with the economy and economy is a bit bifurcated as you know with the low end of the market not doing very well in the luxury market doing extremely well, but one thing.
It affects real estate as Youll see we see tremendous volume and transactions in Europe and has the rates complex comes down as the short end comes down and we all know it will come down.
Certainly by May of 'twenty, three when powers or place, but likely before then and it's only a question of.
The pacing between now and then.
Transaction volumes in United States should pick up dramatically too and what Youre seeing is a lot of people thought rates would be lower.
They're not through the woods, yet rents haven't yet responded.
And the growth phase in most asset classes in real estate, but I think if you're looking backwards, you're looking at the wrong way I mean, what we saw was a 500 basis point nearly vertical increase in rates have been very suddenly company's asset.
Portfolios had to adjust to that their caps burned off over time, but in front of you you have a declining interest rate curve and more importantly ever very can be seen that states are very meaningful drop in supply. So fundamentals should improve unless we get something of a serious recession.
Which isn't likely to happen in many quarters of the.
Of the country, because net worths are up and people are doing okay energy prices or com inflation, while higher than people would like is probably one time with the tariffs.
It will bleed through in the fourth quarter and the first quarter, but the labor market should continue that weekend.
And I think that sets up for a pretty benign period for real estate and a priest sound fundamentals coming up in 'twenty, six and as we emerge from this.
Still increasing.
The increase in supply in the multifamily and the market rate multifamily one of the other interesting thing is when you look at our company and you're talking about the dilution, which is we hope temporary from fundamentalists, we're sitting on a billion and half dollar gain in our affordable book and there were you mentioned last quarter, but not this quarter rents in the portfolio will rise six points.
7%, we know already that's the carryover from 25 to 26 there'll be an additional increase most likely in April of next year that might put the increase to closer to eight or you can hire 10 will only probably it would take a carryover tubes. The following year, so that inherent growth in our book that.
<unk> is available if we wanted to ever to cover the dividend, but we choose to enjoy the fruits of that portfolio and Jeff mentioned, we did a $300 million of cash out refi on just 30% of the book this quarter and I will say that that is one of the most important things about this year for the.
For our company as the complete fortress balance sheet that we've been building at ever lower spreads to sofa, and stretching duration and moving to less secured debt and repaying repos. The it's a fundamental change in the balance sheet was probably for sure the best in industry.
We'll continue to do that and continue to diversify and continue to strengthen our balance sheet in an effort to continue to bring down our costs.
Allow us and in the case of fundamental we can do a deal on the 707, a quarter and instead of a seven three quarters, because our cost of funds has dropped dramatically and as a competitive advantage for the franchise.
So I think I don't really have much more I want to say I think we were very productive affirm is producing lots of new.
Paper across all of its platforms the businesses, particularly the residential business now with lower rates, perhaps we can recapture some of that capital. That's there also we look to resolve our R. R.
Oreo and non accrual assets and we can see the future in our book as well.
The capital has laid out are we know where we can grow our earnings and and get back to a place that we want to be which is earning well north of our dividend.
From regular way business, we can always get there if we want so thanks and with that we'll take questions.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of.
John fan Dirty with Wells Fargo. Please proceed with your question.
Hi, Good morning can you talk a little bit more about your near term day expectations, I mean, youre running below the dividend obviously that.
Wasteful wrap up and some other factors can you just sort of give us a framework there on the timing of covering the dividend.
Barry do you want to take that.
Well.
You know, we can lay out our book and we can see here in Houston and in the end.
As usual a quarter like this one if you put the money out in the last month of the quarter you don't get the full benefit of the capital deployment, so it'll ramp going up.
Hopefully settle each quarter or we're looking at other assets that are are that we think can become productive earnings assets again that are turning the corner.
So I don't really want to go about it in a little bit more but I think in general you know, we're probably having one more quarter of of our I would say rougher, but not the real earnings power of the company and then I think it's a pretty clear sailing.
Yes, we expected very over a year ago, when we modeled the sort of.
Troughs and in this period that goes into early next year and then those earnings start to pick up as we get future funding is as the fundings on a lot of these portfolios increased at its fundamental starts to grow and we have a few other good news things that we hope will happen in early 'twenty six of them. We believe that we're on a path to it.
Getting back to where we've historically been.
Not too distant future.
Got it and.
Can you talk a little bit about where we are on the credit migration front and building reserves I mean do you think.
You know are we looking at like two or three more quarters of drift uncertainty, but credit migration and rescue building reserves.
Yeah. It's a great question, Yeah, we obviously did move a couple of things before we moved one back down an office building that people probably would've thought would've been terrible in Brooklyn, We've now got three very large leases that will fill that entire building and we'll decide whether we're going to hold it or or move on from from that.
But well be back at our basis, and so that was a great outcome on an office and on the other side. It's been a few under capitalized sponsors who just haven't leased up as quickly that's moving some loans to four I think we tend to know the flavor of what these look like.
Few of the apartments that we did in 2021 against forecasts that we expected a five and a quarter five and ethics at that yield we'd probably got there, but given the rate rise, it's probably not quite enough to get out of those.
It would be very small losses, if we if we did take losses in the multis, but for the most part we've already worked out of three and we have another two coming at.
At our basis on the multi side and in general I think we don't expect to have larger losses, there in the office side, it's known problems.
Do they get slightly better or slightly worse from here is what's going to create any movement within four and five but I think we know what the subset is today three years. After the rate rises began it takes a while to figure it out in general our sponsors have continued to put in equity across these assets even the ones that we've got that we've moved from three to four all that new equity coming in from this.
Sponsored so you get a little bit surprised sometimes at the sponsor decided not to not to defend a significant amount of equity but for the most part I think we see the playing field now.
I wouldn't expect a significant build from here if that's the direction of your question.
Thank you.
Thank you. Our next question comes from the line of Jade Rahmani with Kiwi W. Please proceed with your question.
Thank you very much regarding the Oreo and non accruals are you expecting sort of a steady cadence of dispositions and ultimate resolution and over what timeframe.
Yes, I think we said we've got about 500 million that we've resolved in and 1 billion won that we foreclosed on so some people would say that's 1 billion six Oh, that's not how we look at it though we.
We have a three year plan with our board and its about a third per year is how we're looking at it and so we hope to we hope to have this.
Pig, mostly through the Python.
Some point in 2027 late 2027.
Along with that with our larger lending book picking up and offsetting it.
The loss of that drag at the same time that we have a much larger book contributing we really look forward to getting through next year and looking at a much brighter horizons beyond but I don't have a perfect timeline, but it's about a 30 year.
I will go ahead I was just kind of say that.
We still have too much liquidity and $2 2 billion is probably a 1 billion higher than we normally carry so that's additional earnings power is just a question of how fast we can deploy it and we just do not do models, but.
And now you are seeing also repayments you know people are paying us back again, which is good news and we can lay out the capital with <unk>.
<unk> lenses, but it will pick up I think you'll see additional repayments in the U S. As rates fall, so much rates and spreads and spreads or are crashing and across our corporate and real estate credit markets. Fortunately our lines are going with it but keeping our O arm net spreads retract.
And consistent with prior years, but it is a it is a leading to a loss in refinancings I think the parent company, which is something like $30 billion of refinancing this year, and that's where like everyone else. We're refinancing anything that's not nailed to the ground because of the attractiveness of spreads.
Yes, and Thats $2 2 billion as it really big headline number the low point.
This month, we'll be probably closer to $1 4 billion. After we pay down the unsecured debt that we expect it to pay down on these high yield issuances, we have a bunch of expected fundings and as Barry said, we did have significant repayments, we had $1 three in CRE and 700 and stuff that's $2 billion of repayments. So it's over $500 million of equity.
That came in at the same time as these high yield deals that we either we accretively did in a term loan that we accretively did but with the expectation that we are paying down secured repos and a bunch of fundings on this larger pipeline happening in the near future. If you add in $150 million or so of equity per month that we expect to generic we can put out in our run rate businesses today.
Maintain todays case.
We're right back to a very normal liquidity position in a few months with a lot of firepower computer.
Thanks, I wanted to ask about the multifamily market I think it's been somewhat disappointing.
Second half of this year, where everyone expected you know turning the corner on the supply overhang and rents chopping and starting to perhaps grow that seems to be pushed out but generally speaking aside from the Florida affordable housing portfolio. What are your views on the multifamily sector I know you'd be more bullish about the outlook in <unk>.
Uh huh.
Okay.
It's Barry.
While we while supply will dropped 60, 65% or more in some of the markets in which we own a 110000 apartments of which 53000 of our affordable and the balanced market rate.
Our city by city rent increases and I think one of the I think really walkers firms just put out a.
No three 5% rent growth next year, I think you'll see it in the back half of the year I think the surprise definitely going down, but it's still here and and everyone, finishing a deal right now everyone in lease up is offering fairly significant concession for a month or two months to lease up so they can pay their debt service and they can try to sell.
These assets, what's interesting is that the the depth of the purchase market. I mean people are we're selling and our other opportunity funds doesn't have a dozen or so projects cap rates range from four three to five and a half depending on the market I'd say around five four and three quarters five is clearing and why are people buying this first of all.
The negative arb is going away as the short end comes down second of all you are buying this asset at a huge discount to replacement cost so unless the country goes into negative population growth.
Youre going to see a continued demand and demand as you know we're 95% occupied in most every market and rents are affordable the affordability of for instance, incomes went up and rents didn't go anywhere for two or three years now your affordability has dropped in our own portfolio from like 25 26 warning is 30.
For 'twenty to 'twenty one.
So again, it's really we're all watching what's happening to the 18 to 24 year olds that I think the unemployment rate has more than doubled in 18 months, whether that's chat or people just wanting to do different things in their careers or mismatch of education versus the job opportunities.
I think that isn't your typical rent or they are usually a little older than that.
They may be if you are a senior in college. So 18 to 22 is a college aged child.
I do think we're all watching and we're all sort of scratching our heads but in reality you still have this wave of apartments, finishing in all these markets and some of them are better than others, you're seeing green shoots in some of the Florida markets, we expect that to accelerate next year and.
So it really depends on where your footprint is but cities some of the other talents I mean, Austin is a very difficult market.
Probably isn't the worst in the country and ran the furthest quickest and now it's getting a lot of attack, but rents are falling double digit in that town.
If you go to as you know Mark cities with no supply, you're seeing four 5% rent growth and California, San Francisco's positive seven positive eat.
There is no supply and there's job growth is as companies return to the valley for three I Adventures. So it is it is a national stat, but it's a very local thing that we have to watch and certain Phoenix is tough interestingly you'd worry about.
Holmes competing against departments, but they still remain on affordable.
And the mortgage spreads are historically high.
So and you can see the moribund housing market. So I think people are it will we will still be in the renter community, but it was helped by the way if we had some legal immigration, which has always grown our population in U S and I think it's the first time in 10 or 15 years. The U S population will fall year over year.
Cause if net immigration and 017 times the birth rate, which is quite low we have the same birthrate is France.
So maybe two months Netflix.
Anyway.
Thanks, J J mentioned, the Florida Gerrick Jade you also mentioned the Florida multi as part of that and Barry said 1 billion and a half dollar gain it could be higher than that we would see but this cash out refinancing is the first time that we've shown you guys something that could look somewhat like a mark if you were to extrapolate yeah. We had 309 million of agency debt previously from our purchase.
With $75 million of original equity, we took new debt at 614 million so over $300 million more that's a $225 million gain or it's four times, our original equity of $75 million in that portfolio, which is plus minus 30% of our portfolio and that's again just on the debt equity also.
It has a gain obviously so I think that they are giving you that $1 5 billion plus a gain on that portfolio. I think this should make people feel very comfortable that that is in fact, the number given this is agency to agency debt.
And that we have that large of a game just on the debt side without even including a gain on our equity. So I just wanted to touch on that given you brought it up.
Thanks, a lot.
Thank you. Our next question comes from the line of Rick Shane with Jpmorgan. Please proceed with your questions.
Hey, guys. Thanks for taking my questions. This morning.
Look you know what.
One of the things that we're hearing anecdotally is that companies start to deploy capital again the market is competitive spreads are fairly tight.
I guess in some ways.
It seems to us like the window.
Opportunity window.
And are closed very quickly I'm, not even sure which direction to describe it as.
Is that what you guys are seeing two and what do you attribute that to is it competitive is it competition from your traditional peers is it private capital is it just the funding costs are so tight as you've noted on your on your own side, what what's driving us.
Sorry, I missed that and then you can go.
Sure or 10, Denis can also talk about the market. So I think he's on the call is Dan.
Dennis why don't you I wanted to go ahead.
Sure Rick obviously, we haven't we had a pretty big quarter in Q3, it was primarily multifamily and industrial and I think we had we earned above trend.
Universities, the last handful of quarters, so despite spread sort of.
Contracting our financing is also contracted sort of with it. So we're still we're still hurting.
So a number that's above trend.
Right.
Yeah, I'd add to that.
Yes, Rick to yourself positioned more money has been raised in private credit and in the debt space and there is less transaction volumes and more people are going after similar loan ultimately as Dennis has said, we're earning trend returns in multifamily loans generically went from at the beginning of the year, probably 300 over two 240 overs, though today for us.
Transitional multifamily floater.
You would think that would hurt or are we so we've been able to move our repos lower at the same time, you know I mentioned in my in my earlier that the banks are really leaning in to lend to us. It's a much higher ROE business. They have a 10% capital George and making a whole loan on real estate and they only have 20% of that 10% if they make a loan to us.
So you go from 10 times leverage to 50 times leverage at the bank and that creates a great ROE story for the bank. So thanks, it really leaned into giving us tighter and tighter financing they have room to continue to tighten so I'd say, if we tighten a bit more we should we expect to still earn a similar returns to what we're earning but at some point I think everybody tapped out.
If you start getting significantly tighter than that but we're certainly not worried about it in the near future and as Dennis said, we have a large pipeline coming in and we expect to maintain this space. This will be our second largest origination year ever and my expectation for next year with the market starring a bit is that we hopefully do more more again next year.
Then this year so things are definitely opening up but they are on a tight and as you suppose very anything to add.
Yeah, I just add I mean, if you look at our production is.
As you know near records and the yield on equity and return on equity is.
Actually consistently with path I think there's one other new kid on the block, which you should not ignore which is data center financing as you can see there's massive paper being written hundreds of billions of dollars will hit the market.
On the market, let's figure out where to price it but many people buying in or are arguing background.
And whether its Apollo areas tomorrow at Blackstone or any of the.
K R. I mean everyone's participating in some of this and it's virtually endless and it's really from a portfolio construction that we're really careful about.
Credit quality, others may not be short term and and.
Yeah, we are we are.
Constructive.
We're paying a lot of attention not only the tenant but the underlying tenants.
As we as we build the book we did participate in the large financings.
In the quarter like most of our peer set so that that pricing works for us so at the moment and it and spreads have tightened dramatically even in that space, but it's still going on the road, we would like to turn.
Not.
We've been through like six or seven Oh, My God This market's too crowded.
We have a pretty long relationship in the marketplace now having <unk>.
And over $100 billion alone.
And when.
People know I think one thing people have grown to favor us knowing that their counterparties can own their loan and they're dealing with one person I think that has become a really important.
Nursing for borrowers who previously had a bank you know originally alone and then they syndicated into someone offshore and then they tried to restructure it and some possible. So I think that's helping players like us across the marketplace. Because we are a holder, we're gonna resolved and work through with them. So I think that's been a that's been a significant shifts in that.
Barbara community, they really wanted to come to a one stop shop.
And though there will be there for them to paper they can talk to us. So I think that that's quite helpful.
Got it okay and I appreciate the thoughtful answer and I know, it's taken a lot of time, but I would like to do one follow up.
You had talked about data center financing.
And I think one of the potential risks associated with that is we're talking about long lived assets, but those buildings are really going to be still with rapidly in the multiple of the technology versus the property.
Pretty significant width.
Potentially very quickly depreciating assets inside how do you guys think about that as you measure risk and I suspect a lot of it has to do with counterparty, but I'm curious how different.
Data center financing is versus your traditional businesses.
Well it depends actually what you're financing sometimes you are financing the building and sometimes you have a chance in the building and equipment.
The equipment can be 60% of the cost of the building.
And that includes everything I guess.
There are certain credits we favor in certain certain credits we wouldn't favor I mean, you can just look from the credit default swap market and see how the market thinks about the different credit so far I will say that I'm actually on the west coast in nine out of 10.
All of these events and.
I think the numbers that are chatter going to astonish people in terms of their revenue growth, which will be significantly higher than.
The market thinks the same is true of anthropic.
And I think these companies do have in the aggregate a trillion dollars of free cash flow.
Other than one of them they don't carry much net debt.
So these are really good credits and I think we're going to rely on the credits and I think if you look at what we're going to sign a deal with them or Hyperscale. You know we're in the data center business, we have about a $20 billion book, we're building for Amazon.
Mike Dance for hopefully Google Oracle.
Microsoft.
I'd say that they're not investing like they're walking or investing like they're gonna.
Continue to upgrade their equipment to stay competitive.
And the burden won't fall on the landlord I mean these are if the markets are correct that the need for data center space. So what you see in the assumption of I don't know about you, but my chat has gotten slower I mean, it's definitely slower than it was three months ago. So I think there are capacity and.
If you listen to them and believe them and believe the productivity gains that will come through.
Corporate P&l's.
I think we're pretty sanguine.
On most of the credits I think there are a few of them that worry us and and there will be a correction as inevitably is so are we.
You just have to be Oh, great with great.
That yields great lease coverage and the best credits in the World is your guarantor with steps.
Not awful.
Oh, that's pretty good it's a pure cash flow because there's no capital that because there's no capex. So.
For us.
So where we are.
I'll answer it I mean, we got to balance it.
Rick you framed it as counterparty risk and talked about depreciation, but the lease doesn't depreciate our loan fully amortize we've done probably for large win alone fully amortize over the lease term and there's no reliance on residual value in our underwriting. So again it comes back to counterparty risk as Barry talked about and these are pretty good risks to take.
When you talk about the companies that we're talking about.
Okay. Appreciate it guys. Thank you.
Thank you as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Doug Harter with UBS. Please proceed with your question.
Thanks Sheila.
The new Triple net lease.
Business it looks like the.
What kind of a cap rate that you show on that slide is kind of in the 5% range, which seems below peers.
There anything that's affecting that in the short term and as that business scales kind of where do you think.
Cap rates can can get too yes.
We we only had two quarters in there and so this quarter it will look funky too soon.
Excuse me.
So, it's a $6 nine or 7% implied cap rate with no goodwill on.
This portfolio was that was the purchase price.
So there is a normalization that it will scare people if they see that five handle number that is not a correct number.
Great I appreciate the clarity and then Jeff you briefly touched on it but just hoping you could talk a little bit more about you know kind of the value and how to lenders for evaluating would star kind of as you went through that a debt refinance process.
Yeah. Thanks, Thanks, Doug.
I did briefly but we had $75 million of original equity that with this from cash out refinancing we took $300 million out obviously.
Four times, our equity return so the portfolio has done really really well and if you gross that up on our entire portfolio of $500 million in change purchase price.
And that's just under debt. The equity piece also has a gain I think you'd get very easily to where Barry came in at about 1 billion and a half dollar gain pretty quickly. So I think the market should feel pretty good about about that being being something that is available to us should we choose to take some of it and and that will be up to Barry and the board as to the timing and when.
Great appreciate it thank you.
Thanks, Matt.
Thank you.
That concludes our question and answer session I will turn the floor back to Mr. Steven for any final comments.
Barry before you go we have some things that are new that it makes it just price, but we placed our fourth CLO in the CRE side, just a few minutes ago. So I couldn't really say anything previously 165 basis points over so for 87% advance rate.
That's a that's a very strong deal for US we have three large billion dollar cielo as previous to that.
On the CRE side.
Actually brought out a decent amount of paper over the bondholders have done very well on those in theory Cielo is we'll never be a business for us it's a trade when it when it makes sense and it's made since then today. It made a lot of sense in the energy infrastructure business as well, where we just priced their six CLO and I think two thirds or almost three quarters of our debt is now.
And CLO is on the energy side. So we're very happy to have a priced CLO really tight with a great advance rate.
Minutes. It gives them. Good news also there, but very I'll turn it to you for final comments.
No I'd say this is because of primarily fundamentalists dimensions missionary.
Quarter for us, but the underlying businesses are super strong.
The curve is favorable for team has proven originators across the entire platform.
So.
We'll get through I think we've made the right long term decision by buying fundamental this is a quarter, where you wouldn't recognize that decision, but I think it'll be super happy as we scale. The business. We were betting. So so we own a lot of our stock thanks for being with us today and enjoy your week.
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Right.