Starwood Property Trust, Inc. (NYSE:STWD) Q4 2024 Earnings Call Transcript

Starwood Property Trust, Inc. (NYSE:STWD) Q4 2024 Earnings Call Transcript February 27, 2025

Starwood Property Trust, Inc. beats earnings expectations. Reported EPS is $0.48, expectations were $0.46.

Operator: Greetings, and welcome to Starwood Property Trust, Inc.’s fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I’d like to hand the conference call over to Zachary Tanenbaum, Head of Investor Relations. Zachary, you may begin.

Zachary Tanenbaum: Thank you, Operator. Morning, and welcome to Starwood Property Trust, Inc.’s earnings call. This morning we filed our 10-Ks and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward-looking statements, which do not guarantee future events or performance. Please refer to our 10-Ks and press release for cautionary factors related to these statements. Additionally, certain non-GAAP financial measures will be discussed on this call. For a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, please refer to our press release filed this morning.

Joining me on the call today are Barry Sternlicht, the company’s Chairman and Chief Executive Officer, Jeffrey DiModica, the company’s President, and Rina Paniry, the company’s Chief Financial Officer. With that, I’m now going to turn the call over to Rina.

Rina Paniry: Thank you, Zachary, and good morning, everyone. Today, we reported distributable earnings, or DE, of $167 million or $0.48 per share for the quarter, and $675 million or $2.02 per share for the year. Across businesses, we committed $1.6 billion towards new investments this quarter and $5.1 billion for the full year, with 67% of our annual investing in businesses other than commercial lending. As a testament to our diverse business model, commercial real estate lending now comprises just 54% of our asset base. I will begin my segment discussion with commercial and residential lending, which contributed DE of $193 million to the quarter or $0.55 per share. In commercial lending, we originated $477 million of loans, which brings our full-year originations to $1.7 billion.

Repayments totaled $1 billion in the quarter and $3.6 billion in the year. Our $13.7 billion loan portfolio ended the year with a weighted average risk rating of 3.0, consistent with the prior quarter. In the quarter, we foreclosed on three previously five-rated loans totaling $190 million, all of which were multifamily, two in Texas and one in Phoenix. We obtained third-party appraisals for all three assets, with one indicating a value below our basis. We took a $15 million specific CECL reserve against this $46 million loan prior to foreclosure. In total, the three assets had $61 million of lost sponsor equity. As we work to resolve our existing REO assets, we sold our previously mentioned Portland multifamily asset on our DE basis of $61 million.

In addition, subsequent to quarter-end, we received $39 million in repayment of a nonaccrual loan secured by a hospital asset in California that was destroyed in the 2020 wildfires. The insurance proceeds were $1 million in excess of our DE basis. And finally, we are under contract to sell an REO multifamily asset in Texas at our DE basis. Our CECL reserve increased by $36 million in the quarter to a balance of $482 million. Together with our previously taken REO impairments of $198 million, these reserves represent 4.6% of our lending and REO portfolios and translate to $2.02 per share of book value, which is already reflected in today’s undepreciated book value of $19.94. Next, I will turn to residential lending. Where our on-balance sheet loan portfolio ended the year at $2.4 billion.

The loans in this portfolio continue to repay at par with $56 million of repayments in the quarter, and $256 million for the year. Our retained RMBS portfolio ended the quarter at $421 million with a slight decrease from last quarter driven by repayments, and offset by a positive mark to market. In our property segment, we recognized $14 million of DE or $0.04 per share in the quarter driven by our Florida affordable multifamily portfolio. For GAAP purposes, we recorded an unrealized fair value increase related to this portfolio of $60 million in the quarter net of non-controlling interest. The value was determined by an independent appraisal which we are required to obtain annually. NOI for this portfolio increased 9% this year. We expect rents to increase again in 2025 once HUD releases its maximum rent levels in a couple of months.

As a reminder, there was a 3.8% holdback from last year that we expect to implement in 2025. Turning to investing in servicing, which we often call Reese, this segment contributed DE of $49 million or $0.14 per share to the quarter. Our conduit, Starwood Mortgage Capital, was the largest nonbank CMBS loan contributor in 2024. During the quarter, we completed five securitizations totaling $595 million at profit margins that were at or above historic levels. This brings our year-to-date total to 17 securitizations for approximately $1.6 billion, the highest level since 2016. And our special servicer, our named servicing portfolio regained position as the largest named servicer in the US ending the year at $110 billion, the highest level in a decade.

This was driven by $5 billion of new servicing assignments in the quarter, and $24 billion during the year. Our active servicing portfolio ended the year at $9.2 billion with $1.5 billion of new transfers nearly 60% of which were office. In our CMBS portfolio, we purchased a $49 million BP’s. And in this segment’s property portfolio, we acquired $14 million of property investment. Concluding my business segment discussion is our infrastructure lending segment. Which contributed DE of $22 million or $0.06 per share to the quarter. Our strong investing pace continued this quarter with $532 million of new loan commitments bringing our total for the year to $1.4 billion, its highest annual level to date. With this performing loan book ending the year at $2.6 billion.

And finally, this morning, I will address our liquidity and capitalization. During the quarter, we executed $2.3 billion in debt transactions, which Jeff will talk more about. We repaid our $400 million December unsecured at maturity, and early repaid half or $250 million of our March 2025 high yield maturity. After repaying the remaining $250 million next month, we will have no other 2025 maturities, and our next corporate debt maturity is not until July 2026. Our liquidity position remains strong at $1.8 billion. This does not include liquidity that could be generated through sales of assets in our property segment, direct leveraging of our $4.9 billion of unencumbered assets, or issuing high yield or term loan B backed by these unencumbered assets.

We continue to have significant credit capacity in our business lines. With $10.5 billion of availability under our existing financing lines, and unencumbered assets of $4.9 billion. Our leverage continues to remain low with an adjusted debt to undepreciated equity ratio of just 2.1 times, its lowest level in over four years. With that, I will turn the call over to Jeffrey.

Jeffrey DiModica: Thanks, Rina. We ended 2024 with a flurry of capital markets transactions where we extended the average term on our corporate debt from 2.2 to 3.5 years. Repriced upside and extended $1.4 billion in term loans, extended and upsized our corporate revolver, and issued high yield unsecured debt, all at the tightest floating rate spreads in our company’s history. We raised almost $800 million in incremental proceeds in this process. Leaving us with significant investable firepower as we enter 2025. We’ve seen significant spread compression across our investment cylinders in CRE, EMBS, fifth, residential loan and financing spreads. And in CRE cap rates, where spread tightening has offset most of the rate rise since the election.

Liquidity has returned to all of these markets for both new transactions and the refinancing of the record loan originations volume from late 2020 through early 2021, giving us as strong a loan pipeline as we have seen in three years. In Banks continue to earn significantly higher ROEs lending to nonbank lenders like us than making their own direct whole loans to borrowers. They’ve also reduced the lending spreads to us in line with the spread compression I just spoke about. Allowing us to compete at tighter spreads across our platform on higher quality, low leverage loans at today’s lower basis. Which we believe will create outsized opportunities for us in 2025. We’ve already closed $1.5 billion of loans in the first quarter and our business plan for 2025 is to write the most loans we have in any year since our inception other than 2021.

Which was a record year for lenders across the board. Our unique diversified business model has a cycle load debt to equity ratio of 2.1 times today. Leaving us significant room to invest our near record cash levels while still maintaining our low leverage business model. Investing an incremental billion dollars of equity will offset the drag created by our REO and non-accrual balances today. And given we can borrow today at record low spreads, allowing us to more than absorb tighter lending spreads. Our approximately 350 employees at Starwood Property Trust, Inc. in addition to the employees of our manager, Starwood Capital Group, are working toward this goal of significantly increasing our investing pace across under Although we have a lot of work to do, we believe we will be able to start exiting legacy non-accrual NREO assets at a faster pace.

We presented our board with our 2025 plan this quarter and in that, we have a plan to reduce this portfolio, which has caused significant drag on earnings by half in 2025 then by half again in 2026 as we look to exit our difficult legacy positions by 2027. While we have earned our dividend in these difficult years where CRE was the hardest hit by the Fed’s unprecedented interest rate increases, freeing up this trapped equity while simultaneously taking advantage of tighter spreads to grow our investment portfolio will allow us to increase earnings in the coming years while holding on to the vast majority of our over $1.5 billion in unique harvestable gains in our own real estate portfolio. We had $3.6 billion in repayments in CRE, and with near record liquidity and access to capital, we have looked at resolutions differently than most of our peers.

And focused on the highest NPV to shareholders after factoring in the workout timetable and cost of capital of exiting loans today versus improving performance waiting for a better exit window. We work with our manager, Starwood Capital, with over $110 billion under management across nearly all CRE asset classes. To find the most accretive business plan for difficult assets. If you’ll recall, back in 2021 and 2022, we made $93 million for shareholders after foreclosing, holding, and repositioning our first defaulted loans, two former Winn Dixie industrial assets. This quarter, we sold our Portland REO Multi at our basis Looking to Q1 of 2025, we will sell an ARIO multi in Texas at our basis. And we already were repaid a hotel in Napa that burned down at $1 million above our basis.

All of these were as we expected and signaled. We are beginning interior demolition on a $115 million office building we’ve foreclosed on in DC are converting it into a beautiful multifamily. Which you will see on the cover of our supplemental. Rather than sell this asset in a depressed DC office market, our underwriting has us returning a gain to shareholders upon completion. We have resolved or modified 25 assets totaling $2.8 billion to date. With 12 modifications and 12 assets we have taken into REO to reposition or sell as we did in the previous example. With markets repairing, we expect the pace of resolution to pick up going forward as I mentioned previously. Rina mentioned our significant liquidity. And I will add that we are through the vast majority of our projected deleveraging.

Our four and five rated loans, which were optimally levered with $794 million of repo and $901 million as CLO debt. Today, have only $144 million and $620 million of debt, respectively. Down 81% and 31% on the same asset base. Having paid down 81% of our repo borrowings, already on these fours and fives, are left with only $144 million of repo debt subject to any potential margin calls remaining on these assets. As a result, we have significantly more clarity into our future liquidity than we have had at any point in this higher rate cycle. Which gives us comfort that now is the time to go fully on offense with our incremental liquidity. And access to significantly more liquidity. As Rina just mentioned. We will also use tethered spread to continue to increase our unsecured corporate debt as a percentage of our overall debt.

And we’ll use proceeds to continue to pay down secured asset level debt. Which we believe will put us in discussions with our rating agencies to upgrade our corporate debt ratings. Thereby further reducing our cost of capital and making our planned growth even more accretive to shareholders. And keeping us on our stated path of getting to investment grade. In commercial real estate lending, although we’ve foreclosed on three multifamily loans, our four and five rated loans were down this quarter. We have said in the past that late cycle multifamily loans will be the hardest hit by stubbornly high forward so far as undercapitalized borrowers will struggle to buy new caps and extend loans. Well, more work for our asset managers Our manager is one of the largest owners of multifamily in the country with 106,000 units and we expect as we have done in the past, that we will quickly improve performance and be able to exit these assets at or near our basis we have done multiple times recently, or choose to hold them as accretive long term investments.

As I mentioned, financing costs continue to improve. And our pipeline is as big as it’s been in years. We plan to add to our personnel again this year to take advantage of what we see as one of the best new lending environments we’ve seen. In infrastructure lending, CLO and borrowing spreads continue to move down. Offsetting tighter lending spreads and after making $1.4 billion in accretive investments in 2024, we expect to grow at a much faster pace in 2025, given tailwinds in the energy sector and the much discussed need for incremental power in our country. We’re off to a strong start. With $229 million closed and $763 million in the process closing. All a blended ROE in excess of what we can earn. In our core CRE lending business. We hope and expect this business will continue to grow and become a bigger part of our asset base going forward.

In our real estate investing and servicing division, as Rina mentioned, are now named special servicer on $110 billion of CMBS loans, our most since 2015, the most in the growing CMBS market. In a slow CRE lending year, lease was a strong contributor to earnings in both special servicing and our CMBS conduit SMC. Highlighting once again the benefit of our multi-cylinder platform and the positive carry credit hedge embedded in our business as our servicer will again make more money as the workouts of loans made in a lower interest rate environment continue to come through in the coming years, With that, I’ll turn the call to Barry. Thank you. Thanks, Zachary. Thanks, Rina, and thanks, Jeffrey.

Barry Sternlicht: This is gonna be one of their interesting calls. I posted in ten years. I think we kinda talk about the macros and probably the windshield has never been murkier. The nobody really knows the effect of tariffs or if they’re gonna go in or they’ll be targeted or broad. But there’s one short term conclusion, which is definitely is inflationary. There’s only three places the price increases can go. They can go to the manufacturers. They can go to the consumer. They can be split between the two of them. And take steel tariffs, for example. The American producers will raise prices something less than the 25% increase on foreign imports. So I think we’ll have to wait and see, and I think I was joking internally for the last nine months.

Ninety nine out of a hundred economists would have thought with our deficits, the tenure was going four five to five five and a half and know, Jeffrey Goenke and Jamie Dimon have both been fairly public about significant increases in the tenure, We sit this morning with the tenure at, like, four twenty eight. And, at the huge rally showing the inherent weakness in the US economy. What you’re seeing in the US economy is ten percent of the population is spending half the money. And the bottom half is not participating because the AI explosion that has led to commitments close $300 billion from seven companies levered is a trillion dollar It is the same thing as infrastructure bill except it’s getting spent much faster. That’s the exceptionalism of the US economy.

It’s not anything else certainly out of I look at just education school system. So we’re have a sort of a distorted economy. And you’re seeing the consumer sentiment fall because of the uncertainty. Coming out of the White House. We’ll see if it’s tactical or not and what but every day, of course, we we have new news feeds, and we have to readjust our pieces. What it means for real estate, though, is interesting. I mean, we’re sort of We’re sitting in a good place. I mean and construction’s come down. You’ve heard it from our peers. Multifamily starts down sixty, seventy percent. Industrial starts down seventy percent. Buying real estate today with today’s interest rates, you’re usually buying it way below replacement cost. We’ve talked about that means, by the way, that rents have to rise in order to justify new construction in many cases.

So it’s bullish for Loans we have in place and bullish for existing assets. And with Canadian tariffs, for example, you’ll see imports of of wood, lumber, it’ll be more expensive creating, shortage of housing, additional shortages of housing, steel prices rise, additional shortages of everything else in real estate because construction costs are going up. It’s it leads to future inflation. If we have a continued short of the multifamily, rents will rise. Looking at some numbers in Denver the other day, going from seventeen thousand homes completed in the quarter to three thousand. You can see the patterns. Rents go up double digit. Those factor into CPI, and they’re a third of CPI, and you’ll see that probably in twenty late twenty six, twenty seven.

So we’re kinda caught we want low rates. To refinance our debt. Great for the real estate complex. Great for LTVs. Great for cap rates. And then we also don’t mind high rates because we can lend at higher spreads. And we make more money on the new book. So it’s a little bit of a tug of war between both ends of the spectrum. We we don’t mind higher higher high rates. Although, one of the reasons that we’re so busy and our peers are talking about going back on offense is that rates are stable. People expect and and it probably in the last month they’ll they’ll sulfur proof is actually changed again and we still we’re looking at so for less than four again, mean, just wait a week and we’ll change again, but really depends on what what this economy does.

And, nobody really knows. Know, we we really don’t know today. It’s soft. Two weeks ago, it was a runaway freight train. So the markets are confused. Companies are confused, and and it leads to a problem, of course, for the average company, not Amazon or Microsoft or Meta or Facebook, Google. For the average company on what the what their capital spending should look like. And I also while we applaud the concept of building manufacturing back in the United States and thirteen of a hundred and sixty million jobs today. And we have a four point something percent unemployment rate. Hard to imagine how you can instantly produce manufacturing jobs in the manufacturing sector that doesn’t have workers. Of course, add that with the, deportation congress approved bill over the over, I guess, last couple of days.

It includes significant funds to deport millions of people. That will put pressure on wages again and, of course, many of these people work in construction. So that also increases, construction costs. So you’ll see a a a lack of a rebound in in construction, and and and these are the jobs that these people are have taken, whether it’s an Uber driver, or construction job, landscaping job, agriculture job, Those are the jobs that many of these people have taken. So the the the good news is the markets are, you know, clearly bought. Now that’s barring a runaway move in the ten year. But right now, that doesn’t look like it’s the case, though. Know, obviously, Trump’s policies, I think, by general consensus, will increase the deficit especially if the senate blocks the spending cuts that the house just put in.

I wanna talk about us now because I think the company is really in fantastic shape. Probably best shape it’s been in in years. And even with our nonaccrual loans, look at the balance sheet, two point one turns of leverage. It’s down from almost a turn We can easily borrow money, as Jeff said, and increase our leverage and increase our earnings power. We’re going to. We’re gonna be aggressive on our lending book. Take some things we didn’t talk about. Our construction book was twenty four percent of the of our loan book today. It’s down to three percent. Forward fundings under those loans were thirty four percent of of our real estate book. Obviously, lending book today, it’s eight percent. So we don’t have any really and and then you look at our how we’ve delevered on our repos and and there’s mentioned by Reno, the future funding.

Required could be required on any margin calls of de minimis. In the in the context of the firm. So the company is really in a rock solid foundation with one point eight billion of liquidity. And maybe better than we’ve ever been. In that context. And I think it’s really exciting to see our businesses like the conduit do seventeen securitizations. Seventeen. That’s more than one a month. That means we’re just a manufacturing facility. We take in paper, we package it up, pretty it up, put a bow tie on it, and sell it. We get a record here, and that continues actually into this new year, which is, I pleased to see. And then LNR now is, again, the largest servicer in the nation. Should go well for future earnings from that subsidiary. Of those businesses, as you know, are unique to us in in the mortgage area.

And have enabled us to be the only mortgage REIT not to cut at the end. In the last eleven years, I guess it’s been. The multifamily, every time they we would foreclose, I kinda throw a little party. The lending group throws a little fit. Because I’d like to own these assets because we land sixty five percent of cost typically And by definition, we’re below a replacement cost. And we all know that the multifamily markets will stabilize as as the new supply has absorbed. It won’t happen this year. There’s still too much supply coming in this year. But it will fall off a cliff in twenty six, and you can see buyers positioning themselves. Probably multifamily cap rates are in seventy five basis points. Already and probably will go further as the future growth becomes more apparent to more people and and and and you wanna get in as late as you can, but not too late because you have to pay up for the the future growth in rents.

We’ll also because L and R is so big, what we’ll have is we’ve always had a front row seat this restructuring. It’s a proprietary deal pipeline for us. It’s unique to us and allows us to work with borrowers and offer them solutions to their borrowing issues Whether it’s preferreds or seniors or equity, we can play in that all those bases. I think we’ll we’ll wind up picking up our residential lending business again, which is a a vertical that’s been closed for quite some time. We’ll be we’ll be looking at that, looking at HPA. And deciding soon how how much capital to deploy there. SIF, our energy business, mean, I really wanna grow it dramatically. It’s been a a gift that keeps on giving. So good that the loans are being paid off pretty fast.

And while, you know, rates are high, as everyone mentions and all our peers have mentioned, spreads have come in dramatically. They’ve crashed. So overall borrowing are probably pretty much where they are. And the CMBS markets are wide open. Had one of the biggest days in history two weeks ago. And you can refinance pretty much anything in the CMBS market. And you will, including office, by the way. The markets have adopt that’s the mark the market has accepted large refinancings of large office buildings, which are much harder to do in the private market. And that’s good for us because all of us, including us, have some exposure to their office markets. I wanna say that that with all these businesses growing, I’ll mention two other things we’re doing.

One, we’ve done our first massive data center loan We’re gonna make two more. That we have in our book and our pipeline. This will be a big business for us. It’s an infrastructure sleeve. I was asking Jeff what we should call infrastructure or commercial real estate lending. Are there unique loans? As you know, you’re making a loan usually to a credit the best credits in the world, triple a credits. There are fifteen year leases in places with bumps. And you’re usually financing something like a nine, ten debt yield. So these are great loans and the market’s becoming very competitive, but we’re finding ourselves as able to reach create the returns we need for our vehicle making those loans too. So you’ll see hope that. Business grow and grow and grow of course, I think as we grow and add more diversity to the portfolio and we’ve made it through this five hundred basis point hurricane that the Fed threw to us the the the more we can actually convince the rating agencies to give us that Investment grade rating.

And we’re a couple notches away, but we are the highest credit in the real world. And, hopefully, that will translate into make being out to me, like, better loans at lower spreads financing tighter than our peers, and become a very powerful machine. One other business that we’ve kinda put on hold, but it’s coming back in to Possibilities today is is buying equity real estate. And I think it’s one of the best investments to start with capital ever made was the seventeen thousand, fifteen thousand homes affordable housing, units that are in STWD. As you know, we have nearly a two billion dollar gain. We have no net equity invested today. And, we could take that off at any time, but it’s the gift that keeps on giving. With eight percent trailing rent growth and eight percent forecast for this year.

There’s no better place to have your investors your capital. Of course, you’re always full And I think Jeff has talked in the past about the built in rent growth as he’s come as his assets come off. Other affordable restrictions, and then we negotiate moving them closer to market. So we think we’re really comfortable with that portfolio, and that would lead us to enter other again, like triple net lease and other areas. So we are looking expanding our equity book. And, again, we can do three to four billion dollars of investments without issuing equity. We can do this just by increasing the leverage on a company to more normal levels. I’d say we’re under leveraged today. And but we don’t really have a need to borrow at the moment, but it’s it’s pipeline gets really big, we will be levering ourselves to probably a more normal level for us and and not not have the low one of the lowest leverage.

It might be the lowest leverage ratio. In in in the REIT in the REIT universe. So I’m really pleased the team is intact. They’re working hard. Excited to be able to open the go on offense again as we’ve happened for quarters. But this is full on open. We’re we’re open. We’re actually losing deals again, which is not fun. Even office construction loans, we’ve lost a few. Which is kinda funny. And the spreads are good, but know, that there it is competitive. There are there are a lot of players today. They wanna put out private credit, and real estates, one of those sleeves are r history has been doing large large deals. And because of our scale, we we get that phone call. And one of these data center deals, the the mezz, is half a billion dollars.

There’s not a lot of people you can call for that. So And we we could take that whole thing down. So we’re very we’re we’re pleased. I mean, I’m happy with where we are. The good news also is we as we do resolve These non accrual loans, which are way too big. And inevitably, we’ll run into other problems in in the portfolio. All that money comes back and can go back into earnings and and is is available firepower, if you will, And we’re pretty excited about that possibility, and you can do the math yourself and figure out the earnings power. The goal of this is to not call us a real estate REIT. We wanna be thought of as a finance company. In a REIT form, which is the most, like, passionate or passionate. It’s the most tax efficient way to pay out our earnings, but we’re a company that Clearly, we’re a company with multiple business lines.

And we’ll continue to add business lines. We have looked at buying some dust lenders. Jeff was debating whether we should talk about it. We weren’t competitive. On one that’s being sold now. But there are other businesses that we’re looking at to add to the portfolio and grow other other lines of business. So with that, I think I’ll stop and thank operator, pass it to the operator. Thank you.

Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question and answer session. Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you like to remove your question from the queue. One moment please while we poll for questions. Our first question comes from Stephen Laws with Raymond James. Please proceed with your question.

Stephen Laws: Hi. Good morning. I see few topics I want to hit on with WoodStar. First on the expense side, you know, cost to run our operations a little higher in Q4. Looks like that’s been the case the last couple of years. So is that seasonal, and how do we think about that moving forward? And then on the interest expense, what’s the remaining term on the the debt there? And how do you think about what that’s gonna cost when you look to to refinance that?

Jeffrey DiModica: Yeah. Thanks, Steven. Appreciate it. You know, we have two and a half years remaining debt there, and we will be opportunistic. We’ll go early if the market gives us an opportunity as we always have you look at the way we treated our unsecured debt, where we’ve gone probably a number of times, we’re gonna do the same here when the market gives us a window, but two and a half years is plenty of runway. And and expenses were really up to date because of the hurricane. There was some maintenance that needed to be done, and that that is not run rate, but we expect that will come back to run rate, and as Barry said, with eight percent rent growth and and probably another eight percent coming next year with moderating expenses.

I think we feel pretty good. Fifty eight. Twenty five. Yeah. Great. And then, you know, just as I think about the fair value mark, you know, we typically have seen that take place, in the second quarter around those annual rent increases. Now how how do I get my hands around what drove that That valuation gain this quarter And how do I, you know, think about forecasting that as we move forward?

Jeffrey DiModica: Yeah. Thanks, Steven. I I know it’s probably difficult to look at the quarter where the tenure went up in the fourth quarter. I’ll I’ll note that it’s down twenty seven basis points since year end. In the second, third, first, second, and third quarter, we use desktop underwriting. In the fourth quarter every year, get an appraisal. The appraisal is a discounted cash flow method It backs into a four four three cap, which our portfolio premium from the appraisal would be equivalent of a four six eight cap. I have a list of the last twenty trades in this sector in in Florida in our markets. And the last twenty of them for significant size have a four point six percent blended cap. As Barry said, cap rates have come down, and they are coming down, and they’re we’re seeing spread tightening, and and I would expect they will continue to come down certainly as we look at our desktop mark for next quarter.

So being higher than the last twenty trades, which date back to twenty three, and have some of the higher cap rate assumptions in them based on the market being weaker than yeah, we we feel like we are, we’re very much in the middle of the range, but the most important thing here is this is an appraisal. Is discounted cash flow method. Looking at assumptions over time. I’ll I’ll say on top of that, they look at the rent growth for for this year and we only effectively get half of that because it’s only for six months. If you take all of that it’s, you know, all of that just the three point eight percent that’s been held back is worth about nineteen basis points in cap. So if I add sick if I do six months, it’s equivalent to ten basis points So the four six eight asset level cap that is effectively used in the appraisal is almost the four Seven eight.

So we’re eighteen basis points above the average of the last eighteen months, which should have gone down. So while it was tighter than where we were on a desktop base, we feel really comfortable that it is where the market is today at worst.

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

Rick Shane: Hey, guys. Thanks for taking my question this morning. Look, one of the anomalies in the market is that you guys are one of the opportunities, I should say, in the market is that you guys are trading at a significant premium to virtually all of your peers. And that creates an interesting arbitrage in terms of acquisition. When we normally raise this question, companies’ responses, hey. Why do we wanna buy anybody else’s problems? But the reality is that giving experience in terms of special servicing. It is analysis that you guys can do really thoughtful, which is probably a lot of loans you’ve looked at in the past. Does it make sense to scale the business at this point by inorganic opportunities as well as the organic opportunities.

Barry Sternlicht: But we’re agnostic. I mean, any business plan that needs a return of capital and is accretive, you know, we’ll we’ll look at. I I wanna say we don’t really have any peers. You know, and we pay a whopping dividend and given the diversity of our business model and its historic ability to cover its dividend from for whatever, is it twelve years or something? Thirteen years? I can’t even keep track. Two thousand and nine. Fourteen years? Fifteen years? So, I mean, I think, you know, we should be training at eight dividend yield or seven and a half, not not the nine and a half reflects broken companies, basically, that are completely busted or have cut their dividend. There’s some of them are not continuing to cover their dividend.

So, yeah, I mean, you could say that it’s booked, then you have to believe us on our books. And maybe, you know, that is what it is. But the ability to pay a dividend that’s too large given the risk inherent in the dividend. I think that pushes us beyond book. And then I think I think if we so that’s why I say we’re a company, not a REIT. And I know we’re a REIT, but it is if you look at it as a company with an efficient tax structure to pay out then we could and should trade away to a to a a a dividend yield that reflects the risk of our business model. And and I I think we have a we’re in a really good position and perhaps, you know, there are that we should look at other vehicles, which we have considered spinning out businesses and things, which will not trade at the discount we do.

As a book, you know, when we bought our SIP portfolio, our business, the GE energy lending business, We inherited, I think, it’s, like, two and a half billion dollar book of loans. And we paid a lot. Know, we were we were moaning and groaning that we’ve paid a lot. And as that book paid off, inevitably, it it pretty much did, we replaced it with a book three times as good. I mean, higher spreads, better credits, much better fin much better financing, CLO financing, are CLOs. That’s gonna happen to our real estate books. You’re gonna wind up getting a bigger and bigger two point o book and less and less of a one point o book. And, like, I guess, as we trade where we trade because when we made these loans. And otherwise, why would you have a nine and a half dividend yield?

So, you know, I think I think we’re way down all due respect by the analyst community that just focuses on multiple to book. And we we we, you know, ask you to look at the diversity of our business. The lending business is half of our business. Fifty four percent of our assets. I mean, there’s no peer to that. You don’t have anyone that comes close to that. Our lending group. They are they don’t look like us. And yet you talk about them as if they’re the same as us, and we’re totally different. And we have three hundred employees in the region. Like, there’s no one else that has three hundred employees in the REITs. So we are a company in a REIT form. And and we’re trying to build a diversified credit business. Rick, I’d add to that and say, you know, we our undepreciated book value is nineteen ninety four.

Were below that on Monday. Right? And today, we’re today, we’re a little bit above that. We’ve averaged close to one point two times because of our diversified business model, because we have businesses like Starboard Capital and LNR that makes fee based revenue, we should trade at a significant Premium. To our peers. What some of the barks. We had one of one of the analysts that that covers us and some of our peers last week put us on it made us a sell. I think it’s our only sell and has one as a buy and one as a hold. And we were told in that note that we have the best management team and the best business model, but we trade too close to book value. I think that’s a ridiculous statement. We’ve traded at one point two. We have businesses that that will that will perform on a on an ROE basis.

We also have the ability to grow our book value. WoodStar is going to go up. Rents are going to go up. And if you look at forward book value, forward book value is going to be higher. We have seven hundred million dollars in reserves, about five percent of our book if I say in the REO reserves that we’ve taken, asset specific reserves and our general CECL reserve. We could we could certainly undershoot that. That that is our conservative number. Right? So why should we trade? At or below book with these very accretive businesses with the ability to grow book value internally. And with the fact that our WoodStar portfolio, which is such a gift that keeps giving, is going to keep going up in value for the next handful of years at a minimum. And as Barry just said, you know, more more likely rent increases across the board, never mind just in this.

So I I think we’re completely mispriced, we were back at one point two, it would be four or five dollars higher. But that’s not management’s job. That’s for people on this call to to determine, but we’re gonna we’re gonna grow the business significantly this year and and try to prove it Right.

Rick Shane: Guys, look, I I I appreciate your passion on this issue and and I’m not saying it’s unfounded, but sort of going back to the original question, Regardless of what your absolute multiple is, it is at a significant premium to these other companies. Call them peers. Don’t call them peers. Does it in fact take make sense to take advantage of that potential arbitrage at whatever level and acquire additional assets.

Jeffrey DiModica: We’d love to acquire other companies at a discount, but they they don’t seem to to to wanna do that. So we’re gonna we’re gonna grow as fast as we can. The the fact is ten percent of our assets are on US office. US office is still difficult. Our peers have significantly higher exposure to US office. So I would say I’d look into why they trade where they do rather than where why we trade where we do. But we should be at a premium.

Operator: Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Jade Rahmani: Thank you very much. Life science has been an area of significant challenge due to oversupply and also The basis. Many of these projects that are spec are being looked at as conversions to office because that’s the cheap option. The only problem is the rents are much lower per square foot in office. So could you just discuss the one Life Science downgrade you experienced and what the outlook is there?

Jeffrey DiModica: Yeah. Thanks, Jade. Yeah. We we we’ve never really leaned in on life science. We saw all the conversion deals. We ended up doing one loan, and it’s under a hundred million dollars. It was in Boston in a great location. In the Seaport. We still like our basis versus today’s now lower rates. You know, we if we can sign a lease somewhere near ninety dollars a foot, which we believe the market is ninety two, We are out of that loan, but we need to find that lease. Life Science is having a difficult run, as you said, because of supply. Always joked that we don’t need three times as men as much lab space if we’re not graduating three times a scientist. Going forward, I think it’s more difficult than that. I think AI, if you look at a certain gene or something that you wanna take on, in the life sciences world, AI is going to take twenty possible conclusions and knock it down to two.

Or some smaller number. And so I think the need for lab space is gonna continue to go down. Unfortunately, we probably have the least amount of life science exposure of of any of our peers. We did that one get through, but we’ve we’ve had a similar reaction to yours that the basis is high. It’s difficult to convert back to office, and if you do, you’re not going to return the equity and you may not return a loan balance. But these are these these are difficult problems, and and, I think the market’s going to become more aware that that it’s a more difficult sector than everybody thought it was a handful of years ago when we converted anything that didn’t work as office hoping to get higher rents. Sorry. I didn’t mean to get Thanks, Jade.

Jade Rahmani: Yes. And then on new initiatives, GSE Multifamily. I know it’s business that you’ve been interested in. Historically, and maybe you’re you know, uncertain about what the new administration does as to privatization and what the implications are there. Meantime, the existing assets generate really good servicing fees So is there potentially a move in that direction without making a huge bet sort of joint venture that you might be interested in.

Barry Sternlicht: Jade, you’re you’re a little distorted for us on the call. Did you say GSE MultiChoice? Multi. What are GSE Multifamily? Multifamily. It’s just lenders. Oh, DUS lenders. Yeah. We’d love to get one. You know? You got one for us, Jane?

Jeffrey DiModica: It’s hard. There’s there’s there’s certainly people that have reasons that they would wanna buy them brokers, etcetera. We’ve we’ve tried now three times buy one, did have to sort of buy into if the caps, hundred and forty billion caps today, Danny and Freddie. If we go through this privatization sort of what happens there, some people could argue would argue that although you’re gonna pay about twelve or thirteen basis points more in a securitization for g fees, that you will actually see them able to increase volume because that hundred and forty billion has really been driven by mission low income housing type of or green housing. Type of mandate. So it would open it up for the GSE lenders if if we if we do that at a slightly higher cost, which is probably competitive with CMBS but not as much inside of CMBS as as it is today and certainly inside of where bridge lenders are.

But, you know, as a bridge lender, we’re doing transitional assets, and these are not transitional properties. These are properties with with high with high cash flows that they are assuming are near the top of cash flows, which is why they’re locking in ten year debt. So we really like the business. Getting licenses has been is is difficult. Adding brokers who you have to pay multiyear guarantees to, you know, go to a golf club and and and schmooze, and and we we like being in the office sixty hours a week. It’s it’s hard to justify having you know, fifty people that you’re gonna pay an awful lot of money for and not not know for sure where the market’s going. It’s a it’s a bullish trade if rates go down for us if we started one. But not having the legacy servicing portfolio if we if we started one de novo certainly makes it a little bit difficult if rates go up.

So we wrestle with these things. We’ve been competitive bidding on them You asked about JVs. Some of our peers have entered JVs. There’s not a tremendous amount of volume that has come out of those JVs. We’ve looked at them, and, ultimately, every time we look, we end up getting somebody else’s underwriting and we don’t like their underwriting as much as we like our own underwriting. And so if we if they think we’re getting in at seventy five LTV when we look at what they’ve done, we think they’re getting it at eighty five LTV, and those JVs are sticky with something that that I think is not like like Othik that that can actually underperform the book that we would put on on our own in a in an unhealthy market. So it’s been a hard thing for us.

We we would love to grow. We have a lot of other places to grow that are zone. Our energy infrastructure business is great. Gary said we wanna start getting back into red. We’ve said we wanna potentially start adding property again. And we’re gonna have a great year in CRE lending. So we have plenty of places to put money out. We struggle with this one. Would love to own one. The cost of entry’s high, and and we will continue to look at every one of them to come. We’ll continue to look at JVs, but have to be on our credit terms, not in someone else’s credit box.

Operator: Our next question comes from Doug Harter with UBS. Please proceed with your question.

Doug Harter: Thanks. You talked about, you know, expanding owned you know, owned getting back into buying properties. Do you think that would come with selling down some of the existing, or would that just be in in deploying some of the the excess liquidity that you have? Today?

Barry Sternlicht: He asked if we started buying properties, would we use our excess liquidity? Or would or would we look to sell down any of our existing properties? No. Well, first, Sorry. Mike was not. First, we we we use our excess liquidity. That’s the most accretive way to to an an issue unsecured. To do so if if we didn’t Obviously, we have a billion of cash and another availability, so it’s not for the foreseeable future. But Yes. We we we would not need to sell anything to buy something, I don’t think. We we do look at, as Jeff mentioned, that office building twelve twelve o one k. DC, I’ve toured it myself. I mean, it’s a really good resi conversion. So And, you know, we’ve decided we wanna do it or have outside do it.

We’ve we’ve made a lot of money in the REO business. Historically. So where we think the investment just sounds, you know, we’ve taken we’ve taken some serious hits on on an off building in Houston that didn’t we got blocked by a tenant that wouldn’t leave We had a pretty nifty deal, for access for that building, but the tenant wouldn’t leave, and we had to sell it as an office building. That that’s unfortunate. It’s the user showed up, so it’s pretty good. But it’s not anywhere near the loan balance. But know, again, this this money went out, and you look at our balance sheet, this is where we stand today. So, you know, we have a liquidity I think we have an adequate CECL reserve And we have quite a large amount of capacity both liquid and and then levering.

So we have billions of things we can do before we have to bother. Stuff. If if if the market show up, if there are great opportunities and people approach to buy something and it’s track it. We’ll just sell it, of course. Know, we’ve we’ve got we also have Blackstone Mortgage Trust announced that they’re getting into Net We’re really happy they are. We we’d love all of our peers to be diversified. It would be great for the sector. To see more stable earnings across the board. That’s something we’ve looked at. And if you look at the REIT on the triple net side, like, triple net or whatever, they’re seven six cap rate, I think, on their more recent acquisitions. I think that that is something we could make work accretively and would actually have positive financing leverage and get you a ten cash or something like that.

I’m I’m a little afraid, you know, fifty six percent of the triple net business is industrial and the rest a lot of their assets, gas stations, bank branches. And whatever. And when you have a great credit, you have to pay up for the credit. I think if that brings it down below a six and a quarter cap rate or so, very difficult for us to justify versus our elevated dividend today. We get our dividend down, I’d love to do both high credit deals. I’m not sure we’re ready to wade into lower credit deals to to sort of chase mid seven cap rates today. I think the market on the things we like are hundred basis points or so tight, but we have a group that’s our capital group that has been looking and will continue to look and continue to show us opportunities.

That’s an obvious place where we could potentially add some more exposure there going forward.

Operator: Great. Thank you. Our next question comes from Donald Fandetti with Wells Fargo. Please

Donald Fandetti: Hi. Can you talk about the Washington DC office and multifamily market? I mean, more people coming to work, but potentially fewer people And how are you thinking about that area?

Barry Sternlicht: Well, we have one building, I think, in Virginia. And two in DC. Which includes the twelve o one? That would have been three. Yeah. So It’s not good. We don’t know. Gonna happen there. I mean, even last night of this morning, I heard that they were firing sixty five percent of e t EPA, and they changed it to the lower expenses by sixty percent. Not necessarily fire that many people. You have two countervailing forces return to work which is really good. And, people will show up in DC. It’d be good for retail at great, the coffee shop The laundry mats and the tenants at the base of our buildings. We’ll we’ll have a field day. But we don’t know yet, really, the outcome. It’s not good for the DC off market. I don’t know how you could say it would be.

We do have some pretty good tenancy and and duration of tenants in our in our properties. So We’re eighty four percent leased on our biggest loan in DC, and and our other loan in DC just just had another re up. So those two aren’t terrible. Our our our Virginia asset, we signed two leases this quarter, but it’s, I think it’s only sixty four percent leased. So that that’s probably more difficult, but it’s a much smaller loan at a hundred and twenty million. But our our two larger DCs know, we we certainly are are hoping that the government isn’t Completely shuttered for new leases because that that market is certainly very dependent on GSA leases. You just haven’t seen them sign in the last four years. So we need to get back to work and it’s great to see people coming back to work and being forced back to work and and that could that could give some green shoots.

To the market, but we’re launching it like you are. If I if I had to guess, Sort of interesting. I mean, my my guess is you’ll have these these layoffs they’ll hit different sectors of the government differently. Many of these people being laid off are being laid off from government owned buildings in government. They may come back on the market. I I don’t know. And then my guess is you’ll be rehiring. To fill the as they had to do with air traffic control people and I’m not sure America knows that Park Rangers are getting laid off. The national parks will have no one in them. This this this summer. I think most people, including me, are super in favor of cutting government waste and bringing accountability to the federal government’s It’s actually know, of the fifty million people employed by government, only three million are federal.

It’s it’s really the municipality of states where the bureaucracy continues to be an impediment to construction development and you shouldn’t have to get take eighteen months to get a permit. And and that we’ll see how that how that works shakes out if any of this trickles out of federal government into the regional local municipalities and states. Because it is I mean, it’s it’s ridiculous how long it takes to get a permit. Of course, that’s all built into the system, but you wanna fix the housing crisis, you can’t ask people to wait eighteen months to get your permits and then the building departments are lethal. So it’ll change slowly. So some of it’s really good. You know? We went in one direction with Lena Khan. We’re go we’re going the other direction now.

And but I firmly believe capital isn’t needs guardrails. So it it cannot be left to its own. It will be havoc. As we did know seven zero eight. So let’s see how this lays out. And and and, you know, we we gave you a sense that only have, I think, a hundred and forty four million dollars of margin call eligible credit mark eligible, repo, on our lending book The three the two assets in DC and the one in Virginia, I don’t think have any. I’ll I’ll confirm that now, but I I think we don’t have any. We paid off completely on one of them, and and and I don’t think we have any repo debt left on any of the three. So if it gets worse, it’s not gonna cause it’s not gonna be a liquidity problem. It’s gonna be figuring out our exit time line, which may be longer.

Donald Fandetti: Got it. Thanks.

Operator: We’ve reached the end of the question and answer session. I’d now like to turn the call back over to Barry Sternlicht for closing comments.

Barry Sternlicht: Thanks everyone for joining us today, and good luck in this Fascinating environment we’re in, and we wish you well. And we’ll see you next quarter.

Operator: Thanks.