Jeff DiModica: I think it could be higher depending on the portion that’s coming from the local income growth. So, it’s like I said, it gives a keeps on giving.
Stephen Laws: So, it’s a strong market there. One quick follow-up, Jeff, could you talk a little bit about the Washington, D.C. office asset, it looks like the maturity in early Q4. I know you guys, I think have 4-rated, but correct me if I am wrong there. But can you give us a little more detail and update on that conversations and how you expect the resolution or pay-off together?
Jeff DiModica: Yes. So, there was one that I spoke about earlier, which is not the other asset that we touched there. So, there is one that you see in our deck that’s a 2023 maturity. We are working with the sponsor right now to potentially extend that asset into late €˜23, early €˜24 and get a pay-down. There is another asset that I spoke today about that is a 4-rated loan, if that was your question. And that’s a downtown asset. How did GSA tenant, it’s 370,000 square feet office asset. The good news is it’s completely vacant with that GSA tenant leaving, and we think it’s a really good candidate for residential conversion. We haven’t taken the asset back yet. The sponsor is still touring some potential GSA tenants. But if they strike out and we take it back, we think there will be a lot of interest to convert this asset to resi, and we have €“ we are in significant discussions already at our basis to do exactly that.
One of the difficult things sometimes is emptying these buildings out for resi. You obviously have to have the right floor plan. You have to have the right center €“ core. You have to have the right size, floor plate. You have to be an area that’s desirable for resi that this one sort of checks all of those boxes. And along with our Houston asset that we are working on a resi conversion we think these are two really prime examples of what can happen in the office space when the office market pulls back and resi is a better play. So, we are optimistic that there is a better play on that one to move forward if they don’t clip a GSA tenant before the maturity this year.
Stephen Laws: Great. Appreciate the color there Jeff. Thank you.
Operator: Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Jade Rahmani: Thank you very much. Just in terms of the outlook on commercial real estate credit overall, trying to understand how nervous or worried you are about the environment and also the Starwood portfolio and hoping you can comment on each separately?
Barry Sternlicht: I mean the fundamentals of real estate, as you can see from all the equity REITs are okay. It’s the issue of spreads rising and rates rising and what the impact is on cap rates. Different asset classes, cap rates are expanding at different levels, different amounts. And a lot of €“ as you may know, there is a lot of stuff isn’t being sold because people expect if they don’t have to sell, they won’t sell. It’s a little like even though it’s not the GFC, it mirrors that in the sense that there is a big bid ask spread between buyers and sellers. And everybody doesn’t want to have to sell today isn’t going to sell. And if there is a sale, it’s pretty much a distressed sale. A loan is coming due. You are going to give the building back to the lender, which in this case is to us.
To see an institution, a household name institution hand us back a building in D.C. that had a third of it was equity is kind of shocking actually. But I think in the office sector, it is really tricky. Loans are almost 10% today, probably SOFR plus 400 to 500, 600. It depends on what the building is. If you have a cash flowing hotel, you can get a loan. Maybe it’s 400 over, which is 8.5% close to 9%. But if you don’t have a cash flowing hotel, you are going to see €“ but you think can turnaround, it’s going to be significantly wider than that. So, lending €“ lenders are scarce. They are not looking to put out capital. Now that makes the environment tricky. I mean bigger quality borrowers are able to borrow. Many banks are shutting down credit to smaller players.
The Fed has no idea, it seems that what’s going on in the commercial real estate markets. And it’s not I mean these buildings are basically the backbone of tax receipts for municipalities around the country and will exacerbate the problems in the blue states which are already reporting multibillion dollar deficits. So, if they intend to write themselves by raising taxes, it will only drive these cities further and their people into the ground. So, it’s not €“ it’s a tricky environment, there is no doubt, and we are all doing the best we can. Long-term, we are going to make more money in this environment. That’s the funniest thing. And we are going to make more money because our new loans will be better. But if we get these buildings €“ any of these buildings back, getting back that building in Washington, a two-thirds of the €“ we land like 60%, like 62% of cost.
I mean our basis is fantastic, right. So, we are the Saudis in that market. We should be able to convert that building to a resi in attractive basis, but we will pick and choose how we deploy capital. And ultimately, I think we will make more money on these investments we have for the last 13 years. As Jeff is proud of saying all the time, all of our foreclosed real estate, we have sold in the aggregate of profit, significant profit to the value of the loans that we put in place because we are an equity shop too and we are used to taking assets back, fixing them up and selling them and the REIT has done an amazing job with that. Even buying assets from the trust and from the loan book, it’s been an incredible source of earnings for us for 13 years.
So, I expect that would continue, and you get it significantly cheaper than the last guy who was a smart person who bought that building or built it expecting a sort of a different outcome, of course. We will see how it plays out.
Jeff DiModica: Hey Jade, I want to jump back to Stephen’s question for a second because now I am realizing what you guys are seeing on Page 13 that’s up, but on Page 13, the first asset, the largest asset in our office exposure, which is what I think you were talking about. That’s a tremendously well leased, 93% leased 10-year weighted average life of lease term, excuse me, $313 million loan, and that will pay off in October of this year. That is a very strong asset, I think probably a risk rated too for us. The ones I spoke about were the North Carolina and Virginia, where we think that there will be a material pay-down or potentially a short extension. And again, I talked about the 4-rated loan when I was talking about the conversion to resi. But I don’t want anyone to think that largest loan in that bucket is in anything, but really good shape.
Jade Rahmani: Okay. Thanks for taking that clarification. And it’s good to know that, because I did get some questions on it. On the LNR side, I wanted to ask about if there is an opportunity to broaden the scope of business to do special servicing loan workouts, portfolio consultations to others away from the CMBS market because the fixed rate nature of that business means you probably won’t see an uptick in special servicing fees until probably 2024 and beyond. So, in the meantime, there is all these capabilities, why not put them to work?
Jeff DiModica: I thought I saw something in the bushes outside our Board meeting two weeks ago, Jade, it must have been you. It’s something Barry has been pushing us on for a significant amount of time. We actually have an active search out there for the right person to lead that. We have a deck all put together on all the different services that we can do out of LNR. And as you said, we have tremendous capabilities there from valuation on down. And we will be out with a business plan on that, and there will be an employee of ours knocking on doors that insurance companies and banks and others to create fee-based revenue from our capabilities in LNR in the next six months, I promise you.
Barry Sternlicht: I am smiling. We have been talking about this for 3 years, so maybe longer. But there is no reason we can’t be a fighters in the service to people. I am not sure anyone being the largest in the nation. I don’t know if anyone has the credit that we do in the space. And we are the highest rated servicer by multiple agencies. So, if you are picking the best and an experienced group, and we only do it for ourselves, which seems like a mistake. So, we will hopefully have an opportunity to make some serious money. It goes to our book value. We are not unlike everyone else in the industry. We are not just a collection of loans. Like we have a team of 300 people that run six different cylinders for us. We are really a company in the form of a REIT.
We are a lender. We could be a bank. But €“ so it’s really an interesting thing. We are different than everyone else in the sector on the purpose, and we can deploy capital to any one of these leads, as you know. So, the idea was not to have to force one and there was nothing to do. It is interesting in overriding that we will earn the dividend, we think. We are confident we can probably earn the dividend and making no new €“ virtually no new investments, which is something that I find is surprising and good news. So, we have to work the balance sheet. We get paid to do that. So, we are going to do that. That’s really the right side of the balance sheet, that the side where the assets are liabilities, which is €“ we decide where the assets are.
I wasn’t it very good at accounting, but I can’t add.
