And we’re not making any concessions to a four, where we feel if this economic environment stays and SOFR stays higher, we could end up having to commit more capital to help support an asset. And so you saw two assets in the office space go from three to four this quarter. Neither one was huge. I spoke about both earlier, the other one was in apartment. But Don, I think if the forward curve goes as much higher in the next quarter as it did this quarter versus where it’s been, I think that’s a type of migration that shouldn’t be unexpected in a $20 billion balance sheet. It’s not huge, it’s sort of normal course, but SOFR certainly is going the wrong way in the quarter and we’re being conservative, given we may have to put capital in to help support assets.
So I think this credit migration, it will follow SOFR and hopefully it slows down in the coming quarters as we turn it around.
Don Fandetti : And Jeff, what’s your appetite for residential mortgage credit portfolio? It’s sort of flattish. If you think about non-QM, I mean, credit is still pretty good. Are you seeing opportunities or just not a ton of deals out there?
Jeff DiModica: On resi mortgage credit, was that the question? I apologize. I was just looking at some notes on something else. And would we go back on into the investment side? Is that your question?
Don Fandetti : Yes. Just kind of how are you thinking about the asset growth there? Credit’s been pretty good. I mean, are you seeing opportunities? Are you going to sort of keep the portfolio flat until you get more on offense?
Jeff DiModica: Yes. It’s interesting. We talked a lot about credit tightening across markets. Credit is really tightened on the resi side as well. There is certainly a bid, it’s driven by insurance companies for bonds that are highly rated. We’re seeing two AAA securitizations this week Verus and one other that are in the 130, 135 area for AAA. What’s more interesting to me is that BBBs on those deals are 200 over. I don’t remember 70 basis point spread between BBBs and AAAs at any time recently, and that is really tight. So the credit curve is collapsing, where the insurance bid and others for the much smaller classes of BBBs, we’ve tightened those in significantly. So with an active securitization market there, it is pretty interesting.
You look at a lot of the non-QM type of assets, the type of things that we have on our books, there are eight plus coupons, gross WAC coupons being produced today. And if you can securitize at those types of spreads within the 130 over for seniors, you can make a tremendous return on an 8% gross WAC resi mortgage, but you are very levered to prepayment speeds. And so the discussion we’ve had internally about whether to add or not has really been around, what do we think happens to speed? Barry’s baseline and our baseline is that rates do go lower. And I think a lot of people who take out an 8% to 8.5% gross WAC coupon residential loan, if rates go 100 basis points lower and they just got their financials ready for the last loan, they’re going be very quick to repay.
I think you could see historically quick repayments on those. So you’re going to have something that’s high 20s IRR that could turn into a significantly lower IRR if rates rally a lot. And obviously, rates going lower is not great for our earnings. It’s good for credit. So lever into a prepayment negative convexity trade at this time, even though the carry is so enticing and we’ve looked at it a bunch, it’s not something we’re looking to do. We’re very happy with the performance over the last couple of years. We increased our hedge. We moved our hedge more to the front end. It’s outperformed. Our hedges have significantly outperformed our resi book. Our resi book is lower coupon. It’s not we could securitize it today, but given as liquid as we are, we’re saving most of 100 basis points in financing costs by keeping it in bank financing rather than securitized financing that will roll in three or four three or four years anyway.
So we’re steady, staying the course on the resi side. We are seeing a tiny bit of resi credit disruption. I wouldn’t say that the 90 plus days are troubling in any way. The reality is most of our book was written five, six, seven years ago. And you’ve had a lot of HPA. So absent fraud and some places like that, the resi credit for the time that we wrote our loans should be awfully good. If we were writing if we were correct in writing 65 LTV loans, they should be 50 LTV loans today. So it should really only be once where we have a fraud situation, which unfortunately does happen in the space. The newer loans will obviously have less home price appreciation to support them. So you’ll probably have more resi credit issues over the next couple of years on the higher coupon newer loans.
But our book is more 2018 to 2021 or ’22 at the latest.
Operator: Next question, Rick Shane with JPMorgan. Please go ahead.
Rick Shane : Just one thing, I’m curious behaviorally with really a significant change in sentiment in terms of rate outlook starting in January higher for longer. If either within your portfolio or within the special servicing portfolio, you saw some sort of behavioral capitulation borrowers who thought they were going to get relief have an opportunity to buy caps cheaper, refinance in more attractive markets start to throw in the towel even more aggressively than we’ve seen?
Jeff DiModica: Yes. Listen, it’s a really good question. It’s only been a couple of months since we’ve seen this move. Volatility is not up. So the cap expense is still not quite as bad as it was when volatility was a little bit higher, but caps are expensive. You will find borrowers who may decide not to support. As I said earlier, on our multi — this is really the multifamily side, where somebody is going to make decision based on their need to buy a cap and they’re going to make a decision based on their view of cap rates, which are going to follow interest rates. So this is really a multifamily borrower. I think I said earlier, 60 of our 72 borrowers have committed more capital out of pocket. The other 12, we are not worried about those loans.
So we’ve continued to have people commit capital out of pocket to support their loans. These four loans, I think, the multifamily that we have rated four or five are probably not going to continue to support them and they’re coming up against that decision. So that decision that you are talking about is the decision to continue to support today and a lot of that kind of depends on the type of equity that you have. If you are a syndicator, and unfortunately there were a lot of syndicators in 2018, 2019, 2021, and even early ’22. And you have to pick up the phone and call 100 different wealthy guys to have them put in $5 a piece to be able to make a pay down on a loan. You’re probably not going to call all 100 guys, and you’re going to not have the capital to continue to support your loan, and that’s the most likely person to stop paying.
And we Barry said in the past, we’re looking at that as an opportunity. These are the debt yield of our multifamily book is over 6%. We would expect that if we own those at effectively a six cap going forward and we hit the rate cycle that we think will hit over the next three or four years, then we’ll have an opportunity to make money on that and get our capital back, first of all, for shareholders, which our job and potentially have these as good investments. I think that larger well capitalized people are going to be much more likely and have been more likely to continue to put money in on an over six debt yield, because it’s effectively selling a six cap. And if you have some money to hang in, you will probably hang in. So I think that capitulation trade will be the syndicators, and we’ve seen that, and the rest of the real money will hold on, and we’re happy to step in from the syndicators and be the real money and wait for a better cycle.
Barry, anything to add to that?
Barry Sternlicht : No. I just caution anyone to think the forward curve is right. It changes with the breeze. I really think people were a little surprised that last jobs reported 175 and the downgrades to prior reports. Again, hope in the jobs report, 100,000 jobs in health care. I mean, again, the power of this economy, service economy and the interest rates are not changing that. So I do think if the cracks open and you can start seeing them, obviously, he will be worried about breaking the economy. It’s not really a sign of it today. I mean, it’s small cracks. And so I don’t, I think a lot of people and I think a lot of high net worth, I’m at this conference with a lot of capital out in the West Coast. You’re seeing a lot of interest in property sector from regions of the world that we probably are not overweighted and they’re even interested in the unlevered yields that they know that probably treasuries of 4.5 may go lower.
But even if they’re five having an asset of six, seven, eight, nine unlevered isn’t unattractive if you have a lot of capital. They don’t need ’22 IRRs. They’re happy to get 10. And as you know, every endowment in the world tries to get an eight. So if you can get even an office building that’s well leased with Walt and your purchase price is significantly below replacement cost to protect you on the way out, you probably will see some major trades as you’ve seen in the hotel industry and the apartment sector people sort of taking advantage of this opportunity when there are fewer shoppers and taking a long-term position that they’re positioning themselves for the inevitable recovery of the multi-sector and reacceleration in the industrial markets.
And in the office markets, you can see exactly what’s happening. The entire office market in United States is being covered with one brush. Banks do not want office exposure. They do not want to have to explain it to the OTC. They don’t want the buildings back. But on the other hand, if you have the right buildings in even cities like New York and San Francisco, they are 100% full and there are no rent concessions. People are going to buildings that they like and they’re fully occupied. And our headquarter building in Miami at least came up and a sublet from a smaller tenant on the other side of the tower from our offices, and it was sublet in two weeks at $20 higher rents, which is a 20% increase. In New York City, in our offices in the Meatpacking District, a floor came up for lease, it’s very expensive.
