STWD Earnings Call Transcriptbeta

Operator: Welcome to the Starwood Property Trust Second Quarter 26 Earnings Call. At this time, all participants are in a listen-only mode. Question and answer session will follow the formal presentation. Please note this conference is being recorded. Ladies and gentlemen, please standby. The event will begin shortly. Again, we thank you for your patience. Please standby. The event will begin shortly. Ladies and gentlemen, we apologize for the technical difficulties. Welcome to the Starwood Property Trust Second Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the floor over to Starwood Property Trust to begin the event.

Zachary Tanenbaum: Thank you, operator. Good morning, and welcome to Starwood Property Trust 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, 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 reconciliation of these non-GAAP financial measures. Joining me on the call today are Barry Stuart Sternlicht, the company's Chairman and Chief Executive Officer Jeffrey F. DiModica, the company's President and Rina Paniry, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rina.

Rina Paniry: Thank you, Zachary, and good morning, everyone. Our distributable earnings were $152 million or $0.40 per share in the second quarter, Our results continue to reflect the carry on our non accrual and OREO assets and elevated cash balances, the 2 items which are creating the gap between our reported earnings and the true underlying earnings power of this company. I will start my remarks by addressing both. Regarding our non accrual and REO, we had no new nonaccrual or new 5-rated loans in the quarter or the year, We also had no new REO in the quarter. As our new nonaccrual and REO loans have slowed, we have gained momentum in resolution. To clarify our definition of resolution, means disposition of the asset in the case of an REO, or returning to accrual in the case of a non accrual loan. It is not the transfer of a loan to REO. We have a total of $706 million of reserves against our non-accrual and REO assets, after recording an increase of $30 million in the quarter due to third party modeled macroeconomic conditions which worsened as a result of the rise in interest rates. This consists of $485 million CECL and $221 million of REO reserves, which translate to $1.97 per share, which is already reflected in today's undepreciated book value of $18.02. As we continue our efforts to resolve these underperforming assets, we are currently under contract or in discussions to sell 3 OREO assets and multiple units in our New York City residential project. In aggregate, these sales are expected to generate cash proceeds of $148 million and resolve $195 million of assets on a DE basis and $160 million on a GAAP basis in the third quarter, comprising 10% of our current nonaccrual and OREO balance. 1 of the 3 assets was retraded recently due to rate increases. Resulting in a $12 million divergence from our GAAP marks. Absent that, our GAAP reserves were in line with the anticipated sales price demonstrating our ability to fully resolve these assets consistent with our estimates. The realized loss will flow through DE upon sale in Q3 and totals approximately $47 million for these assets. As a reminder, when assets are resolved at our carrying value, their reserves naturally progress to DE. But the reserve is already accounted for in our book value. Reinvesting these proceeds would add approximately $0.03 to annual DE as we continue on our path to earning our dividend in our core businesses. Our total nonaccrual NREO portfolio stands at $1.9 billion on a DE basis at quarter end. Not including the $706 million of reserve that are already reflected in book value. Subject to market conditions, we are on track to resolve approximately $800 million or 40% of our current nonaccrual and REO by year end. Regarding elevated cash balances, we were especially active in the capital markets this quarter. Issuing $1.1 billion of unsecured senior notes and upsizing our term loan B by $275 million. Offsetting this elevated cash was our accelerated investing pace as we deploy capital of $2.5 billion across our businesses and another $1.7 billion in July bringing year to date investments $6.7 billion I will now take you through our individual segment results beginning with commercial and residential lending, which contributed DE of $186 million to the quarter or $0.49 per share. In commercial lending, we originated $1.4 billion of which we funded $754 million and another $250 million of preexisting loan commitments. For a total of over $1 billion funded in the quarter. After factoring in repayments of $447 million our funded loan portfolio grew to a record $17.3 billion We received another $554 million of repayments in July approximately $170 million of which were office. I previously mentioned the absence of any new REO, nonaccrual, or 5-rated loans this quarter. Our 4 rated loans increased $212 million to $2 billion reflecting the downgrade of 3 multifamily loans that Jeffrey will speak to. Turning to residential lending. Our on balance sheet loan portfolio ended the quarter at $2.4 billion, up $164 million driven primarily by our decision to exercise the call option on 1 of our securitizations. Moving the majority of the financing to more attractively priced repo at SOFR plus 150. As a result, our retained RMBS portfolio declined to $313 million at quarter end. Turning to our Property segment. We recognized $34 million of DE or $0.09 per share across our legacy and net lease portfolios. I will start with Woodstar, our Florida affordable multifamily portfolio. On July 1, we began rolling out the new authorized HUD rent increases of 8.4% that we mentioned to you on our last call. The related earnings impact will appear in our results starting next quarter. The discount to market rate rents across the portfolio is 38% on average which should ensure continued high occupancy, and allow us to push through most of these rent increases. Also in Woodstar, we have $416 million of Woodstar debt maturing over the next 6 months that we are currently working to refinance. Given the appreciation and NOI growth in this portfolio, we are anticipating an upside of approximately $140 million at attractive spreads our $110 million share of which can be reinvested to increase future earnings. In net lease, or DE, increased to $0.05 from $0.03 last quarter. We closed a $179 million of purchases in the quarter at a blended cap rate of 7.39% bringing our total post acquisition purchases to $532 million at a blended 7.45% cap rate. The portfolio now stands at $2.7 billion comprising 27 properties across 44 states a weighted average lease term of 16.8 years, average annual rent escalations of 2.3%,, and 100% occupancy with zero default. Included in our balance at June 30 are $91 million of build to suit projects still under construction with $65 million of incremental cost to complete. All of these projects are subject to executed leases. Upon completion of construction, these leases will add $9.9 million of annual base rent to revenue. We continue to optimize this platform's capital structure completing another ABS transaction after quarter end, our third securitization since acquiring the platform a year ago. The ABS financing totaled $321 million at a weighted average fixed rate of 5.47%. With our continued optimization of the capital structure, our first year of rent escalations in place and our investing pace we continue to build toward the earnings power embedded in this platform. Concluding my business segment discussion is our investing and segment. Which contributed DE of $42 million or $0.11 per share to the quarter. Special servicing fees were $20 million this quarter with the decline from last quarter due to timing of resolutions. Our conduit, Starwood Mortgage Capital, securitized $320 million of loans more than double last quarter's volume, have profit margins that were in line with historic levels. I will conclude with a comment on this segment's REO equity portfolio. Which now has just 5 assets remaining. We sold 1 asset during the quarter, for a DE gain of $2 million. Turning to liquidity and capitalization. Our current liquidity stands at $1.2 billion This does not include liquidity that could be generated from cash out refinancing, sales of assets in our property segment, direct leveraging, or expected proceeds from REO sales which as I have mentioned, could be relatively material. Jeffrey will discuss the cap capital markets transactions we completed in the quarter. There is 1 item I would like to highlight regarding the early redemption of our $500 million January 2027 unsecured debt which was subject to an interest rate hedge. In order to minimize interest rate risk, our policy is to hedge floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liability. When we issued these notes in 2022 to a fixed coupon, we entered into a received fixed pay floating interest rate hedge to lock in SOFR plus $2.95 as a financing cost. In connection with the early redemption, we unwound the hedge. Due to higher interest rates today, this resulted in a loss on early extinguishment of debt of 6.3 million which will be reflected in both GAAP and DE in the third quarter. The amount represents the present value of receiving the below market fixed rate through maturity. It is the onetime cost of retiring an above current market SOFR plus $2.95 obligation and replacing it with 5 and 7 eighths paper which if issued today, would be 6.5 percent? To 6 and 3 quarters percent saving us over $15 million over the next 5 years. We continue to operate at conservative leverage levels, ending the quarter at a debt to undepreciated equity ratio of 2.74x. Our unencumbered asset pool stands at $6.9 billion against $4.5 billion of unsecured debt, a coverage ratio of 1.5x. 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. During the quarter, both Fitch and Moody's affirmed our ratings at BB+ and Ba2, respectively, collectively recognizing our diversity, leverage profile, liquidity position, stable earnings, and credit track record as key elements supporting our rating. We were also once again awarded the NAREIT Gold Investor CARE Award, an award given to 1 company in each industry which recognizes communications and reporting excellence. This is our 10th time receiving the award in the mortgage REIT category in the last 12 years, exemplifying our long term commitment to both our stakeholders and transparent financial reporting. We are honored to once again be recognized by NAREIT for this award. With that, I will now turn the call over to Jeffrey.

Jeffrey F. DiModica: Thanks, Rina, and good morning, everyone. Despite a volatile macro backdrop, we have accretively deployed our near record $6.7 billion year to date. The breadth of opportunity across our global platform continues to grow. Higher rates have been partially offset by tighter credit spreads, and activity has remained robust. CMBS issuance is tracking near multiyear highs, and CRE transaction volumes continue to recover gradually. But steadily. The breadth of opportunity across our global investment platform remains as active as it has been since 2021. We have strong pipelines across our businesses, across continents, and we are on pace for a record year of investment activity across our cylinders. Supporting the continued growth of our portfolio. In volatile markets, investors have the opportunity to step back and examine the effectiveness of different business models. Our company has consistently outperformed in times of stress over our 17 years. I have said repeatedly that we built and diversified this company to operate through cycles and across macro environments. In the last 5 months, we have tested that thesis. Our unique diversified business model with only half our revenue coming from CRE lending has again absorbed this volatility. We see improving conditions in commercial real estate with higher absorption, less supply, and more transaction activity. Our lack of credit migration and outlook again showcase the durability of the platform we have constructed. In our commercial lending segment, our best in class financing and access to liquidity, which I will discuss more later, have allowed us to deploy near record amounts of capital this year. The third quarter looks to be our strongest origination quarter. Reflecting the strength of our global origination platform, and further diversifying our business. Despite the leveling off of credit deteriorated loans, as Rina mentioned, we did have 3 multifamily loans moved to a 4 risk rating during the quarter. A $73 million multifamily asset in Phoenix, Arizona, a $63 million multifamily asset in Clearwater, Florida, and a $74 million multifamily asset in Mesa, Arizona. These downgrades reflect the effect of higher forward rates I mentioned, and broader softness in certain Sunbelt multifamily markets where elevated supply that is mostly behind us has put pressure on near term cash flow. We have over $6 billion in multifamily loans, representing 20% of our balance sheet and more than 2x as large as any other exposure. Despite this being our largest asset class, it is a relatively low percentage of our reserves. We have increased occupancy and improved performance on assets we have taken back, in some cases, materially positioning us to begin exiting them as we have before. In a more thoughtful way that returns the highest return to shareholders. Rina said, we expect over $800 million of resolutions in the second half of 2020 with the majority coming from REO sales on multifamily assets under PSA or actively being marketed. The redeployment of which will generate DE. For shareholders. In addition to the REO sales Rina mentioned, I wanna point out a few additional positive credit outcomes in the quarter. We had previously told you about a $300 million office building in Brooklyn. During the quarter, the borrower signed the third and final lease for 32 years to a credit tenant bringing the building to 100% occupancy with 30 years of WALT. Allowing the remaining portion of the loan to return to accrual status and putting the borrower in a position to refinance or sell the property. Subsequent to quarter end, 2 office loans repaid at par for $171 million in total. Reducing our office exposure in The US to just 7.6% of our assets. And globally to 8.9% of our assets. Both the lowest in our company's history an important indicator of lower potential losses. Turning to our infrastructure lending segment. In the 0.25, we committed $441 million of returns consistent with historic levels. After similar size repayments, the portfolio ended the quarter at $3.1 billion With the pricing of our 7th SIFT CLO this year, our infrastructure loans benefit from term non mark to market financing, on 75% of our assets, reducing funding volatility and improving our overall cost of capital in the segment. The SIF loan portfolio benefits from outstanding credit quality. 92% of the portfolio is rated 1 or 2 by our internal review process. It has been 10 quarters since we downgraded a credit to watch list status, and our portfolio today only has 1 watch list credit. With $16 million in market value. 97% of our loans benefit from public or private Moody's credit ratings, and 2/3 of those loans are rated Ba3 or higher. Risk adjusted returns on this portfolio add tremendous value. to shareholders. Additionally, we acquired an asset in our infrastructure lending business via a debt for equity swap on a defaulted loan in 2019. As part owner of the asset today, we are under contract to sell it in the second half. For a material gain to DE and book value. We will tell you more about it in the coming quarter or 2 once consummated. In our property segment, our 1.2 thousand K Street office to multifamily conversion received residential conversion permits in June, and we have completed demolition and started construction in a market where we have seen Class A rents rise significantly since beginning this conversion process, which we expect to complete in 2028. In our investing and servicing segment, our active special servicing portfolio, a key indicator for us on the future segment profitability, increased by $1 billion in the quarter to $10.9 billion with new SASB transfers totaling $1.3 billion coming in. Our named servicing portfolio stands at $93.6 billion and is the pipeline that will increase our active special service portfolio over time. I also wanna recognize Adam Behlman. The head of Reiss in our SMC and conduit lending businesses. Adam was recognized by Cresty as the recipient of the prestigious Founders Award and we wanna congratulate him on this well deserved recognition for his leadership of our Reiss business. Congratulations, Adam. I wanna finish with our capital markets activity. Because I believe it is 1 of the most important stories of this quarter and the last 18 months. And 1 that I think is underappreciated by the market. In the second quarter alone, we executed $2.1 billion of corporate debt transactions, including $1.1 billion in senior unsecured notes that were the tightest price financial sector unsecured notes of 2026 for a high yield bond issuer. $600 million that was swapped to SOFR plus $2.22 $500 million at 5 7/8% fixed. We also executed a $275 million Term Loan B upsize. And a repricing of our $696 million existing Term Loan B to SOFR plus 200,. Which was 25 basis points inside our prior pricing. Subsequent to quarter end, we repaid $400 million of maturing July 2026 high yield notes. And early prepaid $500 million of our January 2027 high yield notes as Rina mentioned. We do not have any more corporate debt maturities until July 2027. Importantly, these transactions extended our weighted average corporate debt maturities significantly to 3.7 years, nearly double what it was before $6 billion-plus of capital markets transactions we have executed in the last 18 months. While we also reduced the weighted average spread of our debt. Finally, as Rina mentioned, Fitch and Moody's both affirmed our credit ratings in the quarter, a signal of the institutional confidence in this platform that underpins our ability to access capital at the lowest financial services spreads in the high yield market. We repurchased $30 million of our $400 million approved stock buyback year to date. Management and the board own over $350 million of stock alongside our shareholders. More than all our peers combined. Our investing pipeline is robust, and we believe in long term value of this platform. And are confident in our earnings trajectory over time. We have been telling you for years that access to capital at scale is 1 of our defining competitive advantages, and this quarter is a concrete demonstration of that. We are not a pure play mortgage REIT. and are, in fact, only half a mortgage REIT. This is why our results and trajectory are different. We are a diversified finance company with over $32 billion of assets, 8 distinct business lines, and the broadest access to capital markets of anyone in our peer group. The ability to invest accretively and in scale every quarter and to issue high yield notes upsize and reprice term loans, execute CLOs, ABS, and CMBS conduit securitizations across multiple asset classes. Signaling is also unique and differentiated at a time when the traditional mortgage REIT model has come under pressure due to continued credit deterioration. And a lack of investor confidence. And it is a competitive moat that compounds to our company, and for shareholders over time. With that, turn the call over to Barry.

Barry Stuart Sternlicht: Good morning, everyone. Thanks for joining us. But first item of my day is to wish Rina and Cary a happy birthday. Happy birthday to you. The first management team to sing to their CFO. Maybe that is a violation of SEC decorum. I do not know. We will find out. Little surprised by the stock's reaction this morning. I think actually had a pretty good quarter. And not deviant from anything we have talked about. I think we are kinda throwing the baby out with the bathwater. Remember, half our company is not large loan lending anymore. And I am sure there is worries of in the world about the stability of these mortgage folks given our competitors reports heretofore. So I think, you know, we look at it differently, and it goes to, of course, our dividend, which we are very public about, and you could see we are not covering. We are pretty confident in our ability to get back to the earnings power that we will need to drive the dividend and restore our coverage of dividend. And why are we confident? So let's start with what is actually happening at the property level in this United States today, almost all the real estate asset classes here and in Europe are in repair. I mean, everything is getting better. If you just look at all the equity REITs, the multifamily sector and logistics sector, self storage, senior housing, everything is getting better. that is basically driven by steady demand. And rapidly deteriorating or nonexistent supply. Think retail construction is, like, less than 1%, office at historic lows if you take out built to suits, there is almost nothing being built in this country. Apartments start to drop 70%. Logistics starts down 70%. So and you are beginning to see improvements in rent in the multisector, which we have been waiting for god knows how many quarters. But the markets are absorbing. there is still new supply completing. And, things are getting better market by market. Basically, the weakness is in the Sunbelt cities, and it is pretty strong on the 2 coasts. Given nobody was built in California or New York City. And now it is even harder with the rent the prospects of rent control in those markets. So the bad news is for the whole sector on the legacy books, are the flattening of the yield curve. The interest rates have gone up. So we have a lot of multis that borrowers are saying, oh, I will survive for 2025. Lower rates will allow me to refinance, and I can hold on to what we know will be pretty good years if you listen to Camden or UDR or Avalon. Or Essex. I mean, they are all different geographies, but they are all talking about pretty good year in the back half of 2026 and really good in 2027 and stupendous in 2028 is the kind of comments from those management teams. A lot of borrowers were holding on for that. They are not making a lot of money. You know, they are-- they did not, but they are paying their debt service. And now it is getting a little more challenging for these guys because they are not refinancing at 3%. They are refinancing at 4% SOFR. or 4.8%. I actually, you know, fundamentally, cannot really understand the Fed's position on raising rates to this economy. it is not gonna open the Strait of Hormuz it is not gonna change the price of oil in The United States. It will only impact the interest rate sensitive portions of the economy So, like, a broken record, almost 1/3 of the of the economy is really health care. Education, and government hires. that is those sectors have added almost 6 million jobs since the Fed started raising rates. 500 basis points in May 2022. It does not work on this economy. Listen to these bubble heads on TV in the morning talking about the manufacturing sector. it is 12 million jobs. it is irrelevant to The United States economy today. We need to bring back manufacturing. And how are you gonna that with a 4% unemployment rate?? Most people likely are working in the service economies. So it is really a funny concept, but it is a tax. You know? The rise in oil price is a tax. so the proper the proper move might actually be a lower rate. Order to induce the interest rate sensitive sectors like housing, to be affordable and to recover and to take a burden off the consumer that increases price represent to the consumer. We are very busy investing capital. The opportunity sets are great. We are having record just flows of investments. They are double digit yields consistent with, everything we have ever produced in the past. And this is all new stuff, and it is obviously becoming a bigger and bigger portion of our book. Going forward. So what we have to do is nurse the older stuff. And, we are pretty confident of our abilities to turn what does not earn much or almost nothing, some of the assets we are getting back into being able to sell them and return the capital to invest at these double digit returns which will ultimately support the dividend. And I will give you a few examples in our book and what you see with probably do not appreciate, and Jeffrey cannot mention it, but I will double dip on the comment. When our borrowers get stressed, you know, they stop investing in these assets, and they kind of some cases, they cannot even they do not put the money to turn the apartment units. They are actually trying to strip what they can before they give it back to us. They stop CapEx. Another property did not do elevator repairs, you could not get to the units on the top of the property. 1 property we did foreclose on, which is a mixed use development in Texas, our team, since we took it over, like, 3 months ago, has taken the NOI of the hotel from 1.2 to $4.6 million The apartments, which we had to fix the elevators in, have gone from 60 to 80%. We are confident we will get that into the nineties, and the hotel will stabilize probably in 7, 8. We will we will get out of this hole in my opinion, but at the moment, it is earning not much for our shareholders. So we are an equity shop. These are equity assets. Our capital is an equity shop. I always joke to our team. it is really fun to get these multis back because you are getting them back at a really good price per key. And if I was an opportunity fund, I would buy And we are selling it. We are getting them back. And within a month or 2 or 3 months, they are gone. In fact, we fix it. We just sell it, and we do not lose money. They could be a loss of $5 million or $10 million. Completely irrelevant to the company as a whole. In some cases, we might actually make a little bit of money if we are seeing cap rates there is a portfolio of apartments that just sold in, like, a week at it will trade in the 5.02%. it is a very large deal. And you did it with almost no due diligence. So there is great appetite to buy apartments because everyone knows what is coming down the road, and you see this across the whole country fact, we have been bidding on apartments on the West Coast. Cap rates are dipping below 4.04%, 4.06%, 4.07%. We have a bid of 4.03% on apartment deal in Florida. So the cap rates are there to support these loans but we have to work through it. there is there is no fast answer here. And the resolutions of these deals is not always in our in our control. We have to take it back with to minimize transfer taxes if it is in the states with transfer taxes. But we are confident in our ability to restore the earnings power of the company in the near term, although that could take a little longer than we would like. And so, you know, we think, we are not considering our dividend changing our dividend policy at the moment. If things go differently, if something erupts that we do not know about and we see, we will we would have to revisit that. But right now, we are confident in our dividend. And as a shareholder myself, and the management team knows exactly what we are doing. We are obviously overpaying our dividend. We are deteriorating our book value slightly. But we believe our shareholders have wanted to be consistency and transparency, and that is why I am talking so much today to actually tell you what is actually going on. When we look at our book, I can break it down between the really good stuff the stuff that, and then the stuff that is not doing much. And to us, it represents just tremendous earnings power. You know, we are going to look if we have to take small losses to redeploy that capital now and get to 12% and 13% and better that we can produce on the capital when we get it back, we are going to do it. So and we will just do it measuredly. And we have gains in our book, so we can offset the some losses with gains. And you know where they are. We have talked about them for the last 13 years. And that stuff is only getting better. So when you break down our businesses, look at our really good stuff. Obviously, our infrastructure business has been terrific, continues to be great. Our special servicer, our conduit, our resi book are all fine. Woodstar, our apartment portfolio, terrific. Triple net lease business, not adding much to our, earnings right now, but I look at it as an opportunity because we have a business that trades at a 6. A triple net lease business, 17 year leases, zero defaults, It trades at a 6 in the public market, and it trades at an 11% or 12% dividend yield in us and that is dumb. Right? We are not that stupid. So we have to look at what we can do here. We love the earnings. We I mean, the stability of the earnings. We love the depreciation shield it gives us, but we have a large business in inside of us would be worth materially more if we sold it. And then we sold it or we somehow spun it off or did something with it, We obviously think we could enhance our earnings profile. it is not something we really wanna do, but it is something we know that we have in our pocket that we could do if we if we if we could figure out the right way to do it. So I will give you 1 other REO story because I actually just visited the asset in Washington DC. We took back an office building from 1 of the top 3 or 4 real estate sponsors in The United States, a company that most people actually, this particular company is even though we have taken multiple buildings back from them, they have never reported the defaults and the losses they occurred in all these assets which is fascinating. But leaving that to the side, this former office building we inherited we'we have got approval, and we have begun the process of turning into an apartment complex. I looked at oh, we already started. Rents have gone up in DC. What we thought would just get us our capital back now cost we could make money on. there is no way to accelerate this. Like, it is a couple hundred million dollar assets sitting on our books. Giving it zero value because it is not there to produce the dividend. It is a work in progress. It will be finished. It will lease. Plus or minus something, and it will be a additive asset, and we will get our cap back. So I do not know how to do that any differently. For as you take the long view, which we have or the longest surviving firm in our space and the largest in our space. So we are gonna do that. Other cases, like, we have restructured a loan on a portfolio of apartments, and we might look to just sell the loan. it is fine. it is it is the loan the assets are definitely worth the loan balance. But it is it is underperforming. We cannot we cannot materially increase the ROE on that loan. It was restructured, and we agreed to a fixed rate loan. So it is under it is earning, but it is not earning the levels of returns we wanna earn on capital of that scale in our company. So asset by asset, we will and our modified loan and non accrual loans, we are going through them all, and we are gonna figure out the right way to maximize shareholder value and build back our book value. So I think I think I actually feeling pretty good about things. I really I am looking at the future, and all the earnings power of all these underperforming assets as well as the our ability to put out the capital plus a very differentiated platform. At very attractive returns consistent or better than we have had in the past. And we are gonna we are going to go into a new line of business, which we will tell you about next quarter. At least we are highly confident we are going into it. Which will add another cylinder to our company. Again, nothing to do with commercial Well, income producing commercial loans. And continue to look at acquisition opportunities and opportunities to consolidate our sectors, some other people throw in the towel and their stocks are trading at material discounts to book value. We should be a sector consolidator. And still keep our eye on the ball, which is to try to make investment grade down the road. So our what Jeffrey and the Rina and the team have done to our balance sheet is heroic. We have, by far, the best balance sheet in the sector. I call it a fortress balance sheet in our sector. With very little near term maturities, we have lowered our cost of capital And if I am right, which is a counter view, that rates will not go up, as much as people say, You know, I think, things will get better. Continue to get better. So I am happy that I cannot tell you it is perfect today, Very happy that I can tell you how we can grow and restore our earnings power. Pretty obvious to everyone in the room. And we are doing about what we told you we were gonna do. So there is not much of a surprise It is nice to see we had no deterioration in our credit book. CECL reserve just went up because interest rates went up. And, that is a economic model that we cannot control. We have $700 million of reserves against this book. I will give you a little hint. We will probably use a lot of that down the road. But, we are that will not impact book value when that happens. And when and if it happens. But, again, things are picking up. I mean, even the office markets are getting leases with we been consistent for now 2 years. The good buildings are leased and have tremendous rental, power. And even in our suburban book, in our equity book, not this company, book, but Star Capital's book, we are we are kinda surprised the velocity of office leasing coming back to markets that you have here to fork considered to be weak. And the industrial markets, I can tell you, like, not getting away from this. We are we are quite busy in getting bids again on industrial assets. All that bodes really well for the majority of our book. And for the opportunities that we have in front of us. So with that, I thank you for your time, and I hope you have a great rest of summer. And I know you joined me in wishing Rina a happy birthday. Thank you. Questions.

Operator: Thank you. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press You may press *2 if you would like to remove your question from the queue. Pick up your handset before pressing the star keys. Moment while we pull for questions. Our first question comes from Jade Joseph Rahmani with KBW. Please proceed with your question.

Jade Joseph Rahmani: Thanks very much. From an equity perspective, when you are bidding on multifamily, you mentioned 4.3% cap rate on the California portfolio. How are you thinking about that? Is there an opportunity to create rent growth and there is, supply shortfalls down the road. So the fundamentals are really going to turn the corner. Is that the thesis there? Because I think multifamily has been challenged with taking a lot longer to turn the corner on rent growth. And now with the recent spike in interest rates that potentially weighing on valuations.

Barry Stuart Sternlicht: So 4.3% was actually in Florida. It was not in California, but we bid on some apartments in the Bay Area. And think the cap rates were 5%. We lost, by the way. They are seeing 14% lease trade outs in the Bay Area. So, like, this is in both renewals and new leases are positive. You see across the country, both in SFR and in apartments, that renewals are positive, and the propensity of people to stay is higher than it is been in the past because there is nowhere for them to go. They are not buying houses. So that is been good. They are positive, but the new leases have been challenged. So what we are seeing is concessions are burning off, and that is the first thing you see before market rates go up. So instead of 3 months or 2.5 months, 2 months, or 1.5 months, that translates into rental growth actually. Effective net rents are going up. And I think it is market by market there is you know, I think the Northern Florida market seems to be turning a little faster. Than some other markets. And even in a city like Austin, which is probably the worst department market in the country, we have assets that are positive on both renewals and new leases, and others that are down materially. So I think it is totally right now, it is like stock market picking. You pick your market. You pick your asset in the market. You pick your ZIP code in that. Sub market. You see a lot of the new construction of data centers and to some extent, manufacturing facilities, if you are so lucky to have a apartment building near 1 of these, you have a great pricing power. Saw the hotel companies talk about the lower end of the market getting better. Lindy consistent with that since it is c shaped economy. We are beginning to see this bottom turn around, which we have not seen. In our lower end extended stay stuff. Not stuff you own here. But Starwood controls 110 thousand apartments, 60 thousand units, and 50 thousand market rate. And we get data trailing 30, 60, and 90 days in every market we are in from our portfolio. Obviously, with AI, now we are collecting data on everything else that comes in the shop. So we are you know, it is for me, I am an equity guy. This is-- we are sort of masquerading the debt the debt world. We would not mind holding some of these assets if we thought they are gonna take off We have been trying to turn them quickly and get rid of the REO and the REO and the multi-family book. But at half the time, I turned to our team and say, why are we selling at that price per unit? it is half of replacement cost. So, you know, I think but I do not it is funny. My own team showed me a read the other day, that they classified as an office wreath. This office wreath is really an apartment wreath. So the market thinks they are an office REIT. it is still classified there about 80%, 70% of their income is from apartments. We are a mortgage REIT. You are treating us like we are just a mortgage REIT. Even if I took back all this equity book, we are you will still treat me like a mortgage REIT. So I wanna make money for the shareholders, so I wanna own these assets. As a mortgage REIT, I should get rid of them. So, I mean, we could convince people that, like, half of us is a, you know, and you know, equity REITs are trading probably at 4.5% dividend yields. Not a 12. So and our high ROE businesses, which is our servicer, the nation's largest, $100 billion of loans that it serves as an almost $11 billion in our special right now. That is a great business. I mean, that is a fantastic ROE business stuck inside of us No 1 else has 1, and we get no value for it in our current structure. We are treated just like everyone else, and no 1 else looks like our company. Not even remotely close. A few have pivoted to try to build some of these verticals, but they are irrelevant given their scale. We are half other things. Right? So we have we have the tail for that reason, you will see us get more aggressive on our stock repurchase programs. We you know, the and personally, you know, we will see what we do. But you do not get gifts like this every day. So I think represent a pretty good value in a very volatile world where obviously, we are in the data center business ourselves. We probably have $2 to $3 billion of deployed in that sector. So we are a lender to the sector in the business. But, that is a crazy business right now, people. there is a moratorium going up, for review, I guess, in Dulles County. Which is the largest data center market in the world. It is so big. It is bigger than all of Europe and Asia combined. it is been the king of data centers. And all of a sudden, they seem to have caught the political headwinds of not in my backyard. So, it is sort of pregnant on data centers. They 8.5 gigawatts on their way to 10 or 12. So it is like that business is getting airy. And, you know, we have stocks are trading at all time highs, assuming all these data centers get built with They better just hurry up and get space ready because The United States, whether it is Chinese influence or not, is getting really hard to get approvals for data centers. And I think the market has adjusted not a data not a basis point for a slowdown in the ability of us to get all of us in the development world to get these data centers approved and up and ready in time. And you know, it makes those that are approved even more valuable. But you know, I think look, the volatility of the world has always been good for the real estate sector. Real assets are someplace. Everybody wants to come, and real estate loans are pretty attractive relative to tech credit. Where, you know, I laughed. I was telling talking to 1 of my children the other day. Said, at least we go to bed knowing a garage in Mongolia coming up with a new LLM that is gonna put us out of business. Sean, the pressure of our business is different. Right? Like, we are not we do not really care about a building built in Tokyo. Right? And if you are in a tech world, you can go out of business literally overnight. And this sector you know, we are resilient. We are the world's largest asset class. And there is always something to do. Our job is to go find out where the good risks returns are for the least risk. And we have built a company that has lots of ability to deploy capital and other things. We have been looking at other things too. We are we are very, we are very careful, and we have the SIFT team brought us a very interesting transaction, which we may or may not go back and do. But know, that we are looking at doing what we are supposed to do, which is build a consistent earning stream and be transparent. And I think the shareholders do approve appreciate that. that is why we have gotten these NAREIT's award for 8 years. Okay. 10 years in a row. So most, best reporting. Probably these earnings calls too. Thank you, Jay.

Jade Joseph Rahmani: Is there anything that you have experienced this cycle that changes your views on how Starwood Property Trust should invest For example, the regional banks have pulled back materially. Does that open up an opportunity in perhaps fixed rate lending, attack the middle market and also liability management? I think the mortgage REITs you mentioned that are under so much pressure, it has to do with their liability structure, which makes them a forced seller in many cases.

Barry Stuart Sternlicht: Starwood has been wise to diverse and continue to diversify the right side of the balance sheet.

Jeffrey F. DiModica: Yeah.

Barry Stuart Sternlicht: Like, the new business we will talk about next quarter is actually a business that the regional banks have left. And or greatly reduced their capital allocation too, and we think it could be a particular good vertical for us going forward. We have been working on it, but we finally found a way to get in it. And I would say you know, construction is interesting for us. Today. And I guess the other thing people need to be aware of, of course, is rising construction costs across the globe in The United States are still in place.

Jeffrey F. DiModica: And 1 of our board members was we just recently had a board meeting. I think it was last week.

Barry Stuart Sternlicht: and 1 of our board members is in the construction industry, and I you know, there you have gotten reports from the some of the housing companies that prices have come down. what is what is really happening is labor is becoming harder to get again, because the electrician and the plumber are getting picked off to build the data center. At 2 times what they are getting paid to build a house. So that applies to commercial real estate too. All of the construction that needed to build all this stuff they are just stealing workers from other verticals in the economy and putting pressure on wages. Materials are okay. You know, we will see where oil winds up because everything in a building is some derivative of oil. Plastics and piping. Copper prices are pretty high. So I think you are not getting a big help there, but construction prices are it is not getting cheaper to build across the country, particularly in the unions. Union dominated cities. it is brutally hard. To make the economics work. So I think I do not know. I mean, we are we had 3 phones, I think, we approved yesterday. We are still seeing lots of lots of opportunity globally. Pretty constructive in Europe. And continue to find good opportunities in the you know, I we have been through a lot of cycles in our in our 15 years, I guess. What I call credit cycles up and down our sector. And we continue to we continue to find opportunities to deploy capital. that is when you should be worried, by the way. I mean, you should be worried about us when we cannot produce double digit yields on our on the books we originate. We will we will tell you when that happens. But right now, that is that is not the case. And it is been fairly consistent. The yields are returning over the last 4, 5, 6 years even. On a levered basis.

Jeffrey F. DiModica: You know, you said 2 things, Jade. You talked about banks and the banks pulling back, it certainly helped our repo. We have talked about that ad nauseam, so I will not go into that. But they are significantly better off lending to us a regulatory capital perspective than making whole loans, and that is helped where we finance ourselves. You also mentioned fixed rate lending. You know, the insurance companies with a lower cost of capital and us tend to lend fixed. And when rates go up like this, they have a yield target, and that tends to drive spreads lower they are willing to lend at an all in yield, and that helps drive spreads. Both of those things are helpful to us. From a borrowing perspective where we are borrowing at lower spreads. So we draft up that, but we are unable to compete in fixed rate lending. Away from the CMBS conduit world we are doing a decent amount of 5 and 10 year fixed rate lending, and we are the number 1 nonbank originator of CMBS for the last 2 or 3 years in a row. But most of these things create tailwinds, what Barry said, which is our pipeline that will continue to earn double-digit yields on.

Barry Stuart Sternlicht: Operator, next question.

Operator: Our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

Richard Shane: Hey, guys. Thanks for taking my questions. Barry, I have no idea what the SEC will say about you singing, but I believe that they put happy birthday into the public domain So at least Rina will not have to expense you singing tour this morning. The 1 question for you. You alluded to not alluded to, but you started to talk about data centers. Starwood Digital Ventures has a partnership with Mara. I am curious how we should think about how that partnership interfaces with Starwood Property Trust, how that partnership is going, and how you see allocation to data centers between equity and debt across the platform.

Barry Stuart Sternlicht: For those shareholders who do not that is anyone listening does not know what we are what we are speaking about. Start on the private side, has a JV with Mara, a Bitcoin mining company. Where we are the we take their Bitcoin line, and we take over and turn it into a data center. They have a number of projects, and there is been tremendous tenant interest in their projects. there is no crossover between start Property Trust and the activities of the of STARR Digital Ventures. At the moment or the MARA partnership. So they are totally separate. But, yeah, I think you saw a ERCOT moratorium in Texas and that I think that is just a slowdown to, like, figure out what they are gonna do. But getting approvals for deals has been harder. Since the public sentiments determined that data centers are evil So even in Texas, it is put a kink in things. We do have unbelievable tenant interest in the properties, and you know, I think for all of us in the data center world, we have to figure out what the credit profile is of some of the tenants. there is obviously the we have only done deals with the hyperscalers. But even the hyperscale world, have the different credit of Oracle versus know, Meta or Amazon or Microsoft. And then we have not done any data center work with any of the NeoScalers or CoreWeave or any of those guys. And I think, the whole and the whole data center world is being driven by the ability of the availability and proceeds levels and pricing of the debt. Because everybody's you know, trying to do basically the same thing with the same half a dozen tenants. And some people are willing to build it is funny. They it is so new in the in the markets that jeez, I got ASML and people, oh, it is great. But some of them are maybe they are billing to a 7. Some may be billing to an 8. Some may billing to a 9. Some may billing to 10. Alright. We built a data center to do 12. Sean, it is it is it is you do not know. You do not know. You cannot know. I was seeing 1 of the 1 of you has written about another REIT, equity REIT that is big in data center businesses, and they are making assumption. Some of the analysts are what the yields on costs are. there is no way you know that. Know, because nobody's told you that. At least it has not been signed, so how could you know? So you know, I think from our perspective is that our lending to that sector is very we are we are we are very comfortable in where we are and in the syndicates that we participated in. We will continue to look at the credits and make sure that, we are comfortable know, with the credits.

Jeffrey F. DiModica: And once these things are completed, they will be refinanced. Because, I guess, another view is with you have a 15 or 20 year lease from a hyperscaler, to end their it is backed by their credit. To it depends what kind of data center it is. But the real question is, why should their real estate credit be 500, 400, 300, 200 basis points wide of their corporate credit? And that is what the market sees. So this seems to be in a tremendous appetite, at least in the public markets, for data center debt. And you have seen some very large deals get done in still in the market. And we are looking we look at everything. So we wanna participate in and not typically today, that spreads on a on a Microsoft deal will not work for us. We will not we will not be able to make that But we were fairly early on, and we do have some much higher yielding data center exposure.

Barry Stuart Sternlicht: Our largest 1 will pay off later this year. it is already out of construction. But the book that we put on, we are very comfortable with.

Jeffrey F. DiModica: Future funds to about a $1.8 billion total of our $30 billion book, but it is at higher yield than you can get today.

Barry Stuart Sternlicht: that is exactly the point. it is a finished data center gets refinanced and we get taken out. So Got it.

Richard Shane: Appreciate the answers, guys.

Barry Stuart Sternlicht: Thank you. Happy birthday, Rina.

Rina Paniry: Thanks, Rina.

Barry Stuart Sternlicht: Do not ask your hard questions on her birthday. Wait till tomorrow.

Operator: Thank you. Our next question comes from Chris Moeller with Citizens Capital Markets.

Chris Moeller: Hey, guys. Thanks for taking the question. So I wanted to touch on the net lease business a little bit. The interest rate environment has shifted pretty dramatically since you guys first acquired that. We have 2 rate hikes priced in by midyear next year. So I guess, generally, how do you guys expect that business to perform in a rising rate environment and maybe both on the demand side and the existing portfolio?

Barry Stuart Sternlicht: We have not-- We play in this space with a niche, which is sort of sale leaseback of core facilities. Usually associated with some transaction that is taking place. What we have actually seen is not what you would have expected with rising rates.

Jeffrey F. DiModica: So those cap rates are coming down. there is a lot of money chasing net lease, and we have a lot of peers. That are raising money privately to compete And, we are scratching our heads on some of them. We cannot understand the cap rates that they are buying at and the leverage they must be putting in place, how they could be producing the returns they are they are talking about. it is simply not possible, frankly. I do not understand what they are reporting. This is other companies, not us. So, you know, our book steps up in the 2 or 2 and a quarter percent, you know, rent bumps every year. We have got a great leverage structure in place with this ABS securitization trust, which we have done. And even in there, you know, I think the spreads come down probably 50 bps from where we started. And leverage levels have risen. So the ROE goes up because even though you are paying you are coming down on the cap rate, you are getting a little more leverage. it is matchbook. And we have got 70-day advance or so off our warehouse facility. In the interim before they go to ABS. So you are still super competitive, but we hear you.

Barry Stuart Sternlicht: I mean, it is around the world. You know, capital is looking for safe high returns, and I think triple net lease is just a bond equivalent kind of thing. You would think normally a long dated bond would go down in value, but it is I think this is just still a question for yield everywhere. And then and 1 of the enigmas of our of our of our business is like, Tokyo. Cap rates are in the threes. You all know what is happened to Tokyo interest rates. Like, cap rates are plummeting, and they are plummeting because rents are going And I have always told our team, I mean, rents are more important than interest rates. If you think rents are going up, you are gonna buy down the cap rate. And you do not really give a hoot about a quarter point in interest rates. So I think you will see the same thing in properties. You will not be directly linked if there is significant growth. You see this today in active senior housing. Senior housing, and we are you are buying down the cap rate because the growth is so strong. there is no construction. So the rise in interest rates, not and believe me, we are in the market bidding on this stuff all the time and getting outbid all the time. it is really about rental growth. it is it is 3/4 of the of the of the of the of the underwriting. it is interesting. We lost these deals and probably regret doing it on, like, for apartments in the West Coast, some of these markets where you know, they are gonna when you see 10% rent increases, and, of course, you should do it with the prospects of rent regulation and everything else in the blue states. But you can buy down the cap rate pretty quickly because you are not worried about the cap rate or the yield being that same number. 2, 3 years from now. So you are you are right. I mean, I think our capital deployment to be honest, has been slower than I hoped. it is been what they planned. To be clear. But I kind of thought as we got more aggressive with our in our ability to finance the business, we put out more money. And it is been steady, but not I high. And that is 1 of the reasons the you know, it is not as accretive as we had hoped early We knew it would be dilutive when we bought it, but we thought we could get it to materially accretive faster. And that has not been the case because yields have come down. Cap rates have come down for the triple net lease. And too fast for us, you know, even though the financing's come down, it has not been enough to get the and, actually, there is 1 thing you see, there is fewer buyouts. there is fewer deals because rates have gone up and people are you know, scratching their heads on their terminal values and their multiples. Are they right? Are they wrong? So I it is solid, and it is a great business. it is just, know, it is not been as not as accretive. And, obviously, I should stock to buy the company at a higher price. So sort of unfortunate, but it is not a bad thing. it is just it is just and, again, it sits in our business, and you can look at the public comps and know what it would trade at. It would not trade in the.

Chris Moeller: So That was all very helpful. I appreciate that.

Operator: Thanks, Chris. And our final question comes from Gabe Foggy with Raymond James. Please proceed with your question.

Gabe Foggy: Hey, all. Thank you for taking the question, and happy birthday, Rina. Barry and Jeffrey, I wanna go back to the comments, you know, thinking about look, Starwood Property Trust is a diversified commercial real estate business. Period. You guys have been around for 15 years in the bellwether in the space. They got a lot of cylinders. How do you think about the world we live in now right, still being bucketed as a mortgage REIT, having a net lease business, having Woodstar, taking on more REO, Barry, to your comments of, you know, we would like to own these assets for a long time. How do you think about that in the construct of right, cash flows, The dividend has been a constant since day 1, which you guys have talked about in a good way. But thinking about that, and then arguably, what is the best total return? Right? If you had a buck today, what is the best total return profile from an asset allocation perspective? Is it making new loans, you know, just cranking out twelves? Is it taking back keys on Sunbelt Multi, waiting a few years, hoping to not hoping is the wrong word. Fixing them, the market, the Iranian conflict settles, rates come down as Scotia, etcetera, and there is a way to move those faster. I wanna get a dynamic of how kind of the big machine Starwood Capital thinks about what STWD can do while you play the long game.

Barry Stuart Sternlicht: Yes, yes, and yes. it is really a good question. I mean, we should we should you know, maybe we can sorry. Most of you follow the mortgage REITs, but maybe we could get some equity REITs to buy. Analysts to follow and move to our own little bucket. We have you know, the bad news is we created a weird company in the capital markets and that, you know, I you have seen other REITs diversify, and sometimes they you know, they get it does not seem to pan out the way they hoped. I think if we were structurally gonna change ourselves, you know, that is something that is a very material strategic decision. And right now, we are-- we are supposed to be a mortgage REIT or I would say a commercial finance company. Or finance company. And, you know, I thought we are Jeffrey tells me we are about 26% on real estate today.

Jeffrey F. DiModica: I do not know if that is good or bad news.

Barry Stuart Sternlicht: I mean, in the Woodstar case, it is good news. When we bought those,, I we own the stock. I said these are things I never wanna sell. You know? Like, they are they are how could affordable housing, again, you know, rents do not go down. it is impossible. And they go up based on income growth. And over time, you are gonna have income growth. So and they have no real estate taxes. So we are not gonna get pressured by municipalities They are gonna keep raising taxes to tax those wealthy people that own buildings. So they are just as fundamentally a fantastic business. And, look, it is not a 30% IRR business every day. But we made $2 billion in our in that $2 billion in this trade for our shareholders. Which Start Capital Group did. So you know and it is given us a potpourri of opportunities to help ourselves you know, with potential gains if we wanna harvest them to help us offset some of the other challenges in the book. But I yeah. it is a good question. Well, we are going to have to think about this over time. And see how this all, you know, comes to fruition.

Jeffrey F. DiModica: We are not gonna have the stock traded at 12 dividend yield.

Barry Stuart Sternlicht: I mean, that seems to be that is you know, we cannot-- that is so silly. Why would we even do anything? that is why, you know, we will go back in the markets and start buying stock again.

Jeffrey F. DiModica: If you think there is 26% commercial real estate owned commercial real estate, you trade at a lower dividend yield, which I the world is telling you low income housing tax credit to that lease does the few multi twos taken back due. You are effectively implying 14% dividend yield on your lending businesses. And our lending businesses are performing in line with what we are telling you, and we have outsized return lending businesses like our infrastructure business, etcetera.

Barry Stuart Sternlicht: So it Well, you know the markets. We are caught in ETFs. They are probably ETFs are getting redemptions. I am sure that is part of the issue with our sector. And we are big, so we get hit with redemptions as much and more than others. Just have to distinguish ourselves over time, but Jeffrey makes a superb point, which I will say again so good. 26% of your book should trade at a 6%., know, it is like, look at the cap rates of apartments or which are fives. In the public market, and at least dividend yields are 6. I think the underlying analyzer looked at 6 to 7 cap rates. To take that out, 6 or 7, there are mortgage books, what, 14% or 15%? that is ridiculous. So with this credit, what do what is our LTV exposure from 0 to, what, 40% to 57%? it is ridiculous. You know, we it is we have whole loans. And it is it is it is ridiculous. But that is okay. We have we are playing long ball. I sort of painful on the mark, and I am I am I fear for our shareholders, particularly the retail that does not probably understand what going on. As much, and is nervous that we are gonna go the way of some of the other mortgage REITs. it is structurally not really possible. Right now, the way we have built the company. So we will see how this plays out. But short term, you know, I think I think some of our peers that were a little more aggressive on the recovery, or the straight line, and then they should have been. And we are we, too, were surprised, by the way, By some of the reports of these other firms. So but again, look at the amount of capital we are putting out and new stuff 2 point o stuff. Versus in the past. Record deployments And then what did we put out already this quarter?

Jeffrey F. DiModica: You just said it.

Barry Stuart Sternlicht: it is 700 million for the year.

Jeffrey F. DiModica: 7 billion already closed in July.

Barry Stuart Sternlicht: We are have the big origination quarter and a couple of years this quarter. So Okay. Right now is not the time. You should look at it as a as a hidden earnings machine. As we get this stuff back online. But, gosh, it does just I cannot get our team to build out that those stuff faster. I mean, they you have to do it do it so it does not fall down. So and we do have to turn around these assets we are getting back. it is just the nature of the business.

Gabe Foggy: The only quick follow-up to that would be is, I have to imagine, and you have alluded to it, Barry, that buying back stock has gotta be a 10 the top of the best investments you can make list right now. With the implication that Yeah.

Barry Stuart Sternlicht: I have more information. And yeah.

Gabe Foggy: You do.

Barry Stuart Sternlicht: We have what are you authorized to buy back? 100 million.

Jeffrey F. DiModica: We are well aware of it, and we had to be out of the market. Because we knew our earnings were.

Barry Stuart Sternlicht: But as of this moment, we can go back in the market. So we are, we are on your side. Thank you. Have a great summer. The rest of it, and we will see you in the fall. Bye.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.