Starwood Property Trust Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Starwood deployed a record $3.2 billion in new investments in Q2 and has committed $5.5 billion YTD, already surpassing all of 2024.
  • Positive Sentiment: The company announced a $2.2 billion acquisition of Fundamental Income Properties, expanding into net-lease assets and expected to be accretive to earnings over time.
  • Positive Sentiment: Liquidity remains robust with $1.1 billion of current liquidity, $9.3 billion of credit capacity, and $1.6 billion of term loans repriced at record low spreads.
  • Neutral Sentiment: Credit quality is stable with a weighted average risk rating of 2.9, CECL reserves of $438 million (3.7% of lending and REO), and active resolution of $1.8 billion in nonaccruals.
  • Positive Sentiment: The Board declared a Q3 dividend of $0.48, marking the 47th consecutive quarter without a dividend cut.
AI Generated. May Contain Errors.
Earnings Conference Call
Starwood Property Trust Q2 2025
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Starwood Property Trust Second Quarter twenty twenty five Earnings 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. It is now my pleasure to introduce Zach Tanenbaum, Director of Investor Relations.

Operator

Thank you, Zach. You may begin.

Speaker 1

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, 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 Q and press release for cautionary factors related to these statements.

Speaker 1

Additionally, certain non GAAP financial measures will be discussed on this call. For reconciliation of these non GAAP financial measures 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 Jeff DiMotica, the company's President and Rina Panari, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rina.

Speaker 2

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $151,000,000 or $0.43 per share. GAAP net income was 130,000,000 or 38¢ per share. Across businesses, we committed 3,200,000,000.0 towards new investments, including 1,900,000,000.0 in commercial lending and 700,000,000 in infrastructure lending. This brings capital deployment for the first six months of the year to 5,500,000,000.0 already surpassing all of 2024.

Speaker 2

I will begin my segment discussion this morning with commercial and residential lending, which contributed DE of 174,000,000 to the quarter or 49¢ per share. In commercial lending, we grew our loan portfolio by 946,000,000, bringing it to a balance of 15,500,000,000.0. We originated 1,900,000,000.0 of loans, of which 1,300,000,000.0 was funded and funded another 198,000,000 of preexisting loan commitments. Our volume this quarter included $500,000,000 for the construction of two data centers that are 100% pre leased to investment grade tenants. We continue to resolve our foreclosed assets, selling two in the quarter for $115,000,000.

Speaker 2

The first relates to a $137,000,000 office building in Houston that we discussed on our last call. The impacts of the sale are shown in two separate lines in our GAAP income statement, loss on property and a related gain on extinguishment of debt. Net, there was a $4,000,000 gap gain and a $44,000,000 DE loss. The second resolution relates to a $55,000,000 apartment building in Northlake, Texas. We never recorded any gap or DE reserves on this asset and sold it at our basis, fully recovering our original investment.

Speaker 2

Also during the quarter, we sold an equity kicker for a $51,000,000 GAAP and DE gain. We originally obtained this equity kicker for zero cost from a $47,000,000 loan origination in 2013 that repaid in full in 2022. On the subject of credit, our portfolio ended the quarter with a weighted average risk rating of 2.9 consistent with last quarter. We had two nonaccrual loans migrate out of the five risk rating category as a result of foreclosure. The first is an $84,000,000 multifamily property in Windermere, Florida, and the other is a $56,000,000 life science property in Boston, our only life science loan.

Speaker 2

We obtained third party appraisals for both assets with the Windermere asset appraising at our basis and the Boston asset appraising for $17,000,000 lower than our basis. We reserved this for GAAP purposes via specific CECL reserve that we subsequently charged off in connection with the foreclosure. Also migrating out of the five risk rating category was a 137,000,000 office property in Brooklyn. The loan was upgraded to a four risk rating due to two thirty plus year leases, one signed and the other pending, which would bring occupancy to 100%. Our general CECL reserve decreased by 14,000,000 in the quarter to a balance of 438,000,000, reflecting slightly improved macroeconomic forecast.

Speaker 2

Together with our previously taken REO impairments of $173,000,000 these reserves represent 3.7% of our lending and REO portfolios and translate to 1.8 per share of book value, which is already reflected in today's undepreciated book value of $19.65 Next, I will turn to residential lending, where our on balance sheet loan portfolio ended the quarter at 2,300,000,000.0 The loans in this portfolio continue to repay at par with $60,000,000 of repayments in the quarter. Our retained RMBS portfolio ended the quarter at $414,000,000 with a small decrease from last quarter driven by repayments. In our property segment, we recognized $17,000,000 of DE or 5¢ per share in the quarter driven by Woodstar, our Florida affordable multifamily portfolio concentrated in the Orlando and Tampa submarket. In June, we began rolling out the new authorized HUD rent increases of approximately 8%, which had a partial impact to earnings in the quarter of 1,200,000.0. As a reminder, rent increases for certain geographies were capped, resulting in 6.7% of incremental rent growth deferred to next year.

Speaker 2

The rents for these properties are at or below 60% of market rate rents on average, which should ensure continued high occupancy. Also in Woodstar, we have $325,000,000 of Woodstar debt maturing over the next six months that we are currently working to refinance. Given the appreciation and NOI growth of this portfolio, we are anticipating an upsize of approximately $300,000,000 or $250,000,000 share of which can be reinvested to increase future earnings. Turning to investing and servicing. This segment contributed DE of $52,000,000 or $05 per share to the quarter.

Speaker 2

Our conduit, Starwood Mortgage Capital, completed four securitizations totaling $435,000,000 at profit margins that were in line with historic levels. This includes a $324,000,000 contribution into a single transaction, our largest since inception. In our special servicer, Morningstar and Fitch, each once again reaffirmed LNR's existing ratings of c s one and c s f one, their highest ratings available. Our active servicing portfolio ended the quarter at 10,300,000,000.0 with 1,000,000,000 of new transfers again dominated by office properties. Our named servicing portfolio ended the quarter at 102,000,000,000.

Speaker 2

Lastly, our CMBS portfolio increased by $55,000,000 driven by new purchases. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $21,000,000 or $06 per share to the quarter. We committed to a record $700,000,000 of loans, of which $642,000,000 was funded. Repayments totaled $288,000,000 bringing the portfolio to a record $3,100,000,000 at quarter end. Next, I will address our liquidity and capitalization.

Speaker 2

After quarter end, we repriced our two term loan Bs at record low spreads, which Jeff will discuss. We also announced the acquisition of Fundamental Income Properties, a fully integrated net lease real estate operating platform and owned portfolio for $2,200,000,000 We funded the purchase with $1,300,000,000 of assumed debt and a $500,000,000 equity raise, with the remainder funded with cash on hand. We will report more fully on this acquisition in our third quarter ten Q. After a strong originations quarter and the fundamental acquisition, our current liquidity stands at $1,100,000,000 This does not include liquidity that could be generated from cash out refinancing, sales of assets in our property segment, direct leveraging of our unencumbered assets, issuing high yield backed by these unencumbered assets, or issuing term loan B. We also continue to have significant credit capacity across our business lines with $9,300,000,000 of availability.

Speaker 2

Our adjusted debt to undepreciated equity ratio ended the quarter at 2.5 times, increasing slightly from last quarter due to new origination volume. 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. Our credit ratings were affirmed by all three rating agencies. Despite a challenging market backdrop, they collectively recognized 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 one company in each industry, which recognizes communications and reporting excellence.

Speaker 2

This is our ninth time receiving the award in the mortgage REIT category in the last eleven 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 turn the call over to Jeff.

Speaker 3

Thanks, Rina. Before I begin, Barry, the entire Starwood team, I would like to send our heartfelt condolences to the friends, families, and loved ones of the real estate professionals and first responders who were senselessly taken too soon in last week's 345 Park Ave tragedy. Both real estate professionals were very well known and respected at Starwood. As you know, we pre released earnings on July 16 and raised $500,000,000 of equity to help finance our purchase of fundamental income. This will be our ninth business and gives us a portfolio of four sixty seven owned properties and 12,000,000 square feet that is 100% occupied by 92 tenants at an average WALT of seventeen years, with 2.2% average annual rent escalations.

Speaker 3

The assets are split fairly evenly between service and industrial, with a small component of retail assets. As Rina said, we used $1,300,000,000 of in place debt, dollars $879,000,000 of which is an ABS master trust, and we used approximately $400,000,000 of cash to round out the transaction capital stack and expect to earn increasingly higher ROEs as we leverage the overhead in place. Most importantly, this business sits at the intersection of the cornerstones of our and our managers' expertise, real estate and credit, making it an obvious place for us to invest. We thought about incubating this business ourselves, but ultimately thought having an established team and scaling quickly made more sense. The team consists of 28 experienced professionals who have spent their careers at large net lease businesses.

Speaker 3

They have deep expertise in origination, underwriting, portfolio management, and capital markets. Their strong relationships with middle market companies and private equity sponsors will significantly enhance our capabilities and market reach. This team has scaled to grow. This is not our first foray into the net lease space. Our successful investment in the Bass Procobellas transaction demonstrated the attractive risk adjusted returns and long term value that can be achieved in this sector.

Speaker 3

The acquisition of Fundamental builds on that success and reflects our confidence in continued opportunity within Net Lease, while opening the door to new growth opportunities in the sector, both domestically and internationally. Fundamental maintains an ABS Master Trust, which to date has issued three securitizations, which sequentially priced tighter as the trust grew in size. We expect to continue to grow the ABS Master Trust, where we can borrow for up to ten years on a fixed rate basis. Executing this strategy will leave us with a portfolio that will look a lot like public peers who trade at a significant premium to JV with a conservative FCCR of 6.4 times on the in place portfolio we are buying. We expect this business to be accretive to earnings next year and more meaningfully beyond that should we achieve our business plan.

Speaker 3

When we bought our energy infrastructure business in 2018, we paid a similar gross amount for assets that yielded much less. We likewise added an experienced team and trusted that the synergies with our platform would yield incremental returns. We have turned that business into a compelling investing platform over the last seven years. We look at Fundamental the same way, and believe with a lower cost of capital than their previous owner that we will be able to grow this business accretively. The team is up and running and building a pipeline and having seen strong deal flow in the days since our purchase.

Speaker 3

Given the growth in our property, infrastructure, CMBS, and now net lease businesses, our CRE loan portfolio is today just 52% of the assets on our balance sheet versus 65% in 2022. Our diversification has created compelling consistency and has left us as the only mortgage REIT to never cut its dividend. We announced our Board authorized our Q3 dividend of $0.48 for the forty seventh straight quarter. In capital markets, we recently repriced both our term loans, due in 2,030 and 2027, totaling $1,600,000,000 at record low spreads for our sector, SOFR plus 200 and SOFR plus 175, and both at par. Optimizing the right side of our balance sheet has always been as important to us as the investments we make, and we have been very busy repricing our liabilities at the tightest spreads in our sixteen year existence.

Speaker 3

Over the last eighteen months, between the issuance of equity, senior secured notes, and term loans, we have completed over $6,000,000,000 of capital markets transactions. Of our $5,000,000,000 in corporate debt today, only $400,000,000 of it matures prior to 2027, and we have unencumbered assets in term loan B collateral today to issue $2,000,000,000 of incremental corporate debt. As we told you last quarter, our board approved business plan is to continue to grow the scale of our business to offset the drag created by previous cycle nonaccrual assets that we have largely held onto to create the best total return outcome for our shareholders. To that end, we've originated $5,500,000,000 in the 2025, more than all of 2024, led by our two largest lending businesses, commercial and infrastructure lending, with the benefits to be seen in 2026 and beyond. In CRE lending, we closed $1,900,000,000 in loans in the quarter and $4,100,000,000 in loans through June 30, with over 70% of the quarter being industrial and multifamily assets with an on trend weighted average IRR and LTV.

Speaker 3

Of that, all loans were new to Starwood Property Trust, 16% were international, and 74 were to repeat customers proving the strength of the relationships in our sixteen year old firm that has lent over $100,000,000,000 since inception. We expect this elevated investment pace to continue in the 2025, leaving us with the largest CRE loan portfolio in our history by year end after a 20% decline in 2023 and 2024. Our risk ratings and reserves held steady in the quarter, and as we expected, CRE markets are stable with forward rate expectations continuing to move lower and all credit markets trading at very tight spreads, which has catalyzed activity in the CMBS, SASB, lending, and real estate equity markets. Rina told you our five risk rated bucket was reduced in the quarter with a large upgrade and two REOs we expected. So I will just touch on our two new four rated loans as I always do.

Speaker 3

The first is a $91,000,000 apartment deal in Phoenix that recently underwent a full property renovation with the borrower experiencing liquidity challenges. We have been successful in REO, optimizing multifamily performance, and have sold two assets at our basis and expect to use the scale and information advantage of our manager, Starwood Capital Group, one of the largest multifamily owners in the country, to do the same going forward. The second is a $46,000,000 office to residential conversion in Hawaii that is pivoting to a hotel execution. In the quarter, Rina also mentioned the resolution of a $137,000,000 and a $55,000,000 REO, and we are working through a couple more REO resolutions we expect to be finalized this year, and we'll give you more detail upon execution. Our energy infrastructure business continues to benefit from growth in power demand, creating lower LTVs.

Speaker 3

As Rina said, we committed $700,000,000 of new capital in the quarter at mid teens returns. This portfolio now stands at a record $3,100,000,000 and we expect to continue to grow this portfolio. We completed our fifth CLO in the quarter, and I will add that it was at the lowest coupon, SOFR plus 1.73, and cost of funds in our history. We expect to issue one to two more CLOs this year, which will increase our term non mark to market debt even further. In REES, I will note that our active servicing portfolio is over $10,000,000,000 today, the highest in this cycle and likely headed higher, which will produce significant incremental revenue as these loans resolve.

Speaker 3

As a reminder, our servicer is a positive carry credit hedge that earns more money in times of real estate distress. In closing, we are very excited to have added our new business line. We are excited about the return of liquidity and opportunities in our core businesses in that CRE finance markets continued to repair with better performance and lower expected forward rates. The forward market has SOFR declining to 3% in the 2027, which is 50 basis points below the expectations just ten weeks ago, which should have a material positive effect on our legacy credits. With that, I will turn the call to Barry.

Speaker 4

Thank you, Zach, Rina, and Jeff, and good afternoon, everyone, or good morning. Happy August, and thanks for listening in. Well, it seems that the world changes a lot quarter to quarter, and the world has certainly changed this quarter. The jobs report was quite a shock, particularly the restatement of prior job gains, And it seems likely logically that the Fed will cut rates in September. And I think at this point, we most of us would agree that rates are coming down.

Speaker 4

It's just a question of their speed. And by May '26, I think the short end would be at least a 100 basis points lower than it is today and probably more. The other thing that we know for sure is that the real estate complex is gaining its strength and getting healthy as we see the end of the Appalachian new supply created for a different industry environment, particularly affecting the multifamily industrial sectors. While construction remains strong and there's tremendous job gains in construction, it really is from data centers and also from the infrastructure bill, the CHIPS Act, and other programs, And now we'll accelerate with the repatriation, reshoring of plants and equipment and factories in The United States and things like the pharmaceutical industry, which will probably have to vacate Ireland and move our plants back to United States to satisfy the administration. With both lower rates and the firming of the real estate complex, I think you'll see a significant pickup in transaction volumes for the real estate markets in United States.

Speaker 4

You already are seeing that in Europe. Europe is got had late rates dropped from 42, likely hitting one and three quarters. And so there's a lot of activity in Europe. We have our busiest years ever in Europe as a private equity firm in real estate. While transaction volumes in The States are subdued and people are holding on to their best assets hoping that they can sell to more favorable climate supported by these lower interest rates that we all know know are now coming.

Speaker 4

The other fact you've seen is the repair of the credit markets. As you've seen with our own comments from Jeff's comments, there's a lot of liquidity in the markets and everyone is raising to refinance its spreads that actually are the best we've ever seen for our company. And that is probably the case because of Europe, having seen no interest rates. So though our rates are high, then they're still attractive for global credit investors, and you can't ignore The United States. Obviously, we have plenty of supply to satisfy demand, but I think most of us would have gotten wrong with the ten years as I speak.

Speaker 4

I've given the situation with the one beautiful bill, and we'll see if the economy does accelerate enough to cover the cost of the program. The other interesting development I'd say on a macro level is energy deflation that the world is sort of digested with disruptions in The Middle East. And now between OPEC's position of continuing to produce oil and the government's desire to remove restrictions on development, the energy deflation dividend should support customers and continue favoring the growth in The United States, which is honestly the most evident change of all is the continued massive investment behind the data centers and AI, which in the aggregate is equivalent of levered, probably the trillion dollars that the federal government is spending, and that is new and and dramatically concentrating The United States, building our economy versus others in the world. Shifting to our company, I'd say we're in very good shape. As Jeff and Rina pointed out, I think we built a fortress balance sheet best in the sector.

Speaker 4

We've moved as aggressively we can to use unsecured corporate debt, take out repos and other debt we have, and we are agile in that. We've done Jeff and the team have done amazing work on our balance sheet. And I wanna talk a little bit about fundamental income which we just bought, a $2,000,000,000 business. I think from the start, as you know, we endeavor to create a finance company, not just a mortgage REIT. And we have multiple cylinders, and that strategy has more complicated as born the fruit of us being the only mortgagery in the country that trades above its IPO price.

Speaker 4

And I think many shareholders forget that we spun off our residential single family rental business, which is equivalent to almost $5 a share. In addition, we've been able our diversification has been able to enabled us to keep our dividend intact in a very tough time. And now we've paid this dividend, I think, for fourteen years or something like that. And I hope with fundamental, we can actually begin to grow earnings materially over time and potentially work to increase that or get the benefit of what's a much more secure income stream and a lower dividend yield for our company, which of course would we think we deserve. Fundamental as a business benefits from scale, and the bigger we are, the likely more accretive the business is to us.

Speaker 4

We have a proven team. We picked on a team of 28 people that have been involved with STORE and Spirit and grew those companies to their ultimate sale. Shareholders made a lot of money. It's not lost on us that standalone net lease companies traded dividend yields 450 to 400 basis points inside our own. So we think this is we'll be able to highlight the value that this new division has inside our company.

Speaker 4

And while I think it's modestly dilutive this year to the company, because we've only picked it up for a short period of time, the faster we grow the company, the more accretive it will be given the overhead gets scaled and it's something like 12% of our revenues today, but at scale it's more like five. And the team is positioned to do that, incentive to position, incentive to position to do that, and we'll figure out ways to continue to grow that position, make it a more material portion of our company. A couple other points I'd make, it's interesting to me this year that, CIF, our infrastructure business we bought many years ago from, General Electric, our Starwood infrastructure lending business have no longer has a single heritage loan in its portfolio. The portfolio has been completely recycled and continues to earn mid double digits yield on equity. The other point I'd like to highlight again is our affordable book which is really unusual and enjoyed a, I think close to a 7% rent growth this year and has embedded rent growth next year of 6.7% and that doesn't take into account the opportunity to move these rents to market as these assets begin to come off their fifteen year restrictions.

Speaker 4

I also wanna point out SMC, our conduit business because it it's the gift that keeps on giving. The team does a superb job running this business. I think we've had the business for forty eight quarters and only had one mildly negative. I think we lost a penny in one quarter. So we've been profitable of forty seven to forty eight quarters.

Speaker 4

And that's just a great business led by a great team, he's done a superb job for us. One more point about fundamental is that fundamental will provide a real estate depreciation expense or a tax shield for us. And over time that's gonna become important because we cannot as you know hold on to any cash that we produce, we have to basically pay it out per the REIT regulations but as with fundamentals depreciation as we grow the business, we would have the opportunity, and we're not saying we would, but we would have the opportunity to not pay out all the cash we produce and can reinvest that in the company and growing, at a faster rate going forward. So overall, I'm very excited about the future. Right now, we still have some potholes to get through, but we're confident we can navigate through them and that the company is setting itself for future growth and a really powerful team that continue great things, including our ultimate goal of becoming investment grade, which, all arrows are pointing to how do we get there and what would be the benefits of getting there.

Speaker 4

But in general, we're doing all the right things to accomplish that in our in our, views. I I will say one last quest one last general comment about tariffs because I think, we we haven't seen their I think the second quarter was sort of overstated by freeloading or front running of of inventories to try to get things on the shelves without the impact of tariffs. I do think they're one time. I don't think it'd be sustained.

Speaker 4

And logic would tell you if prices went up, demand will fall. So you might see an increase in supply or or prices, and then you might see a decrease in prices that will be cut in order to generate excess demand. Sadly, the tariffs will impact those of the country who don't have the wherewithal to pay additional cost for the daily needs of their lives. And I think that could create great social anxiety and potential continued

Speaker 5

to

Speaker 4

splits in our society to the left and the right. I think we're gonna start talking about the November midterms coming up and and by that time, we'll definitely know what the impact of these tariffs and whether they're benign or their benefits of increased revenue offset the social costs of of companies having lower margins or consumers having less money in their pocket. So the jury's out, and I think we expect the back half of this year to be meaningfully less, strong than the first half, and that jobs clash was probably the the indication of that. And now we'll see what companies can do as they try to figure out what's permanent and what's temporary. The more stability we have in the rules, the more businesses can figure out what to do.

Speaker 4

With that, I'd like to say thank you and take your questions.

Operator

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue.

Operator

And our first question comes from the line of Don Fandetti with Wells Fargo.

Speaker 6

Can you talk a little bit about your expectations for CRE loan growth? I think your portfolio was up six percent quarter over quarter. And I guess if the Fed does cut rates, would you expect the velocity of that loan growth to accelerate?

Speaker 3

Thanks, Don. I'll take it first and can hand it to Barry after. We've done $4,200,000,000 I think through two quarters. We have obviously closed more since the June that will put us on a mid $8,000,000,000 pace. The record we ever did was $10,000,000,000 of transitional floating obviously that's taking away the other cylinders, CMBS and infra and all the other things that we do lend on.

Speaker 3

I think that we will end this year very close to that $10,000,000,000 number that we did in 2021. In 2021, you had $670,000,000,000 of transaction volume. I think you're probably closer to 400 this year, so transaction volume hasn't picked up. It will pick up in your scenario. Lower rates will help that.

Speaker 3

Lower rates will also help refis. You know, you have some assets that have not yet refied from pre rate rise, the 2020, 'twenty one, and early 'twenty two vintages that were very large. Some of them have not yet moved, so those will move forward, creating more opportunities. And obviously, business plans that have played out on the 2022, 'twenty three, and 'twenty four loans we'll be more likely to refi as we see spreads come in. So, we're on pace, even without that great environment, to have close to a record year.

Speaker 3

We are very much on offense. I think there are a number of people who have not been able to be on offense. We've invested in every quarter since our inception. We've been investing aggressively for the last few years. As I said, our goal is to continue to grow the balance sheet to offset non accruals so we can sit on assets and work them out to the benefit of shareholders rather than selling at a more distressed level.

Speaker 3

And this will also help that lower rate environment will also help that non accrual book. And many of them have debt yields that are just below where they might be able to refinance today and they'll be able to refinance in your outlook. So we hope that's right, but we have built the business to be okay in either direction. We'll be fine in a higher rate environment as we're showing you in the first half of the year and we're prepared for that. But certainly we'd all like to see that low rate environment that Barry pointed out is likely that I pointed out the forward curve is saying will happen and that you're supposing.

Speaker 3

It feels like we have upside from here, not downside as rates potentially go lower and we move further away from the beginning of that 'twenty two rate hike cycle.

Speaker 6

Got it. And talk a little bit about the ramp up of

Speaker 5

Jeff, let me can you hear me, Jeff?

Speaker 3

Perfectly, Barry.

Speaker 5

It's Barry. Can you hear me? Yeah. I'd think I mean, we have a lot of business lines now. So I'm we're really agnostic where we put capital.

Speaker 5

And we also know capital isn't doesn't grow on trees. So, you know, we're we're gonna be even more focused on not just dollar origination, but the returns and whole dollar profits, the likelihood the money stays out longer than we've probably been in the past and lean into good credit. Now we'll do it with fundamental as we've done with SIF. We'd like to continue to grow our infrastructure lending business, and we're continuing look at other businesses. So, you know, we we don't have infinite access to capital and and not at these dividend yields.

Speaker 5

So we have to be careful and judicious to how

Operator

we

Speaker 3

Barry, you cut out at the Barry, you cut out at the last twenty seconds, so I'm going to hand it to Don. Well, maybe you get a better connection.

Speaker 6

Great. Okay. Thanks, Barry. In terms of my follow-up, Jeff, if you could talk a little bit about the ramp up of the net lease portfolio business. It sounds like there's going to be some domestic and international opportunities at our portfolios.

Speaker 6

Or would this just be sort of a kind of smaller acquisitions over time type strategy?

Speaker 3

Yeah, listen, we outlaid out for you the portfolio that we have and that portfolio was sort of 20,000,000 to $30,000,000 assets. That's the sweet spot for this company, that's often the sweet spot for this segment. I will say in the first week that we owned the business, we saw a $160,000,000 trade that revolves around some school buildings. We saw a 400,000,000 and a $600,000,000 potential opportunity, two different ones there, for a total of 1,160,000,000.00 in three potential opportunities. The last two were industrial assets well located that we've looked at.

Speaker 3

I'm not sure that we're ready to jump in at that scale today, but the team is rebuilding a pipeline. They had sort of closed their pipeline a bit over the last couple of months, but their pipeline is growing again today. And, I would expect that you know, I mentioned we underwrote 400 to $500,000,000 a year for the first three or four years just to get to our accretion dilution number. My guess is we can do double that. The team is really strong.

Speaker 3

As the pipeline builds, we have great confidence that they're going to do significantly more. And as Barry said, doubling the size of this business will make it look a lot more like some of the public comps that trade at 1.4 times GAV. And with our FCCR of 6.4 times, and I think the industry closer to three, we have really good credits in the book. We're very happy. We spent a tremendous amount of time Starwood Capital Group and team there, Kahira Mehtaani and Peter Reed and our team did a tremendous job underwriting together with our team the credit, so we feel really good about what's on the books.

Speaker 3

But I think we will be looking to grow in the 20,000,000 to $30,000,000 space that they've historically done, but we will look at these bigger trades. If we found the credit that we like, I think we could certainly supercharge that growth, but the modeled number is not our expectation from management. We think we can grow faster, but it's going take them a couple of quarters to rebuild the pipeline and for the world to really realize that Starwood is very behind this business. We have a lower cost of capital than their previous owner had, and we're super excited to be able to go into cap rates that are a little bit lower than what they've been able to buy previously, which will give us better credits And with our financing and getting better financing than what they had historically, think that that will create even higher returns. Super excited about where this is going to go.

Operator

Okay, great. And our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

Speaker 7

Thanks for taking my questions this morning. Look, the organic growth in the infrastructure business has accelerated nicely. Curious about really three things here. One, it looks like the spreads on this business are a little bit wider. Curious if you see that as sustainable or converging given the competition in that space.

Speaker 7

Two, it also looks and Jeff you'd alluded to the fact or not alluded to actually stated, yours focused on the right side of your balance sheet is on the left side. It looks like the funding spreads in that business are also wider. Is there an opportunity for additional efficiency there? And then finally, can you help us understand the duration of those assets in the context of the core balance sheet.

Speaker 3

Sure. I think Sean Murdock's probably on here, so I may he doesn't speak very often, but he runs that business tremendously well for us. But I'm going to start with a couple of the other questions. The right side, as far as the funding goes, interesting what happened here. The banks who lend here tend to be more corporate credit lending banks than they are real estate lending banks.

Speaker 3

In early twenty two when rates went higher, we went from borrowing on cash flowing multifamily at 125 to 150 over SOFR up to $2.50 to 300 over SOFR for the same assets. Spreads widened on everything on office, it went three times that. On hotels, it went significantly higher. And we saw a pretty steep move wider and that has now come back. We're getting close on commercial real estate to back to where we were but we got whips out of it.

Speaker 3

At the same time, we got much higher coupons for making a loan on commercial real estate assets. So our returns ended up about the same over that period. The infrastructure business was very different. The right side, the funding spreads that you said are a little bit wider stayed about the same. Our lines are between sort of one hundred seventy five and two hundred over before we go to CLO and that never really moved wider.

Speaker 3

So, asset spreads did move wider for a few years and it allowed us to go from earning low mid teens to earning mid high teens for a couple of years. We're back in the mid teens today as the asset spreads have come in a bit. You've seen that in the term loan B market with a number of re pricings and a portion of our book is term loans. But the CLO market, and we just priced our fifth with 173 over cost of funds, that's as tight or tighter than we're going to do anything in the commercial real estate side. When we did our first three CLOs and CRE, I think the bond spreads were 195 over, then down to 180 over, maybe one got to 165 if I'm remembering back four years ago.

Speaker 3

But you're in line with where the CRE CLO spreads are and we are likely to do a couple of more this year. I think with repo lines that we'll probably all be moving towards 175 for that business and with the CLO market that on the last one was 173 and I think will be tighter today, it funds itself really well given we are still getting a higher coupon today than what we were getting pre-twenty twenty two. Feel really good about that. By the time we do another one or two CLOs, we'll have most of two thirds of our assets funded in non recourse, non mark to market CLO debt there. That's an incredible statistic versus where we are and where the industry is in commercial real estate.

Speaker 3

We're sort of super happy there to not have any potential margin calls. The LTVs on that book have moved down from mid-60s, low-60s when we might have written them. I Our blended LTV is about 46 or 47% for that book as the power needs have increased in The United States. It's really helped our energy producing assets. And then you asked about organic about growth in there.

Speaker 3

And Sean, are you on? Maybe talk a little bit about the fact that we've done a couple of our own deals and we're not as reliant on Yeah, broad syndicated

Speaker 8

I think the way we've tried to sort of maintain interest margin is is exactly what Jeff mentioned. We're we're doing more deals ourselves. There may be a little bit smaller infrastructure assets, but where we can sole underwrite and sole execute, that tends to command a little bit more margin. So while margins in the sort of visible, broadly syndicated markets are tightening a little bit, we've been able to maintain margin by doing more deals ourselves. And I think the opportunity around how much infrastructure growth there will be in the next few years as data center affects the energy infrastructure market will allow us to grow that origination channel significantly.

Speaker 7

Got it. And then just one quick follow-up on making the distinction between the syndicated or club loans and individually in single lender assets. Is that simply and that's not really your core business in the property lending side? Is it just because the transactions there are so much larger because of the inherent costs of building the projects that it makes more sense to club them up? Exactly.

Speaker 7

Great. Thank you so much.

Speaker 3

These are billion dollar power plants. Construction costs have gone from what's gone under $1,000 to probably closer to $2,000 a megawatt now. So they're very expensive. They're very large. Rick, one of the questions I didn't answer was duration.

Speaker 3

Sean's loans, the energy infrastructure businesses loans tend to be five to seven year loans where the commercial real estate loans tend to be three to five year loans. Obviously, if things work out, things can pay off a little bit earlier than that. But I expect a little bit more duration on our energy book than I do on our commercial book.

Speaker 7

Got it. Okay. Very helpful. And thanks for the extra time on this one.

Speaker 3

Thanks, Rick.

Operator

Thank you. And our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Speaker 9

Thank you very much. You know, we don't often get credit for mistakes we avoid, and I have to take my hat off to you for only doing one life science deal in a super competitive market in the last cycle. The $17,000,000 loss, doesn't seem all that bad, you know, in a broader context. So I applaud you for taking action on that. And the 51,000,000 equity kicker gain, also a nice surprise.

Speaker 9

So the question is on credit. Do you believe credit in the portfolio has stabilized based on what we know now? Do you expect the gradual improvement on resolution plans you have in place? And also, you could comment on the hotel exposure in the loan portfolio.

Speaker 3

Absolutely. Thanks, Jade. Appreciate the nice words. The life science market, We looked at, you had a lot of B office that was getting converted to life science back in the days when everybody was taking more coming out of COVID. Obviously, there was a great need in COVID.

Speaker 3

But we didn't feel like we needed a multiple more of life science space. We just didn't graduate enough scientists to create significant of a demand and we knew AI was coming and that would reduce the number of trials that somebody might make going after a gene or whatever it is from you might have gone after it 10 different ways, well with AI you might only after it a couple of different ways. I think we've had a relatively bearish view on that for a while. Unfortunately, we did that one through. We thought it would be a good conversion to regular office or resi, but you're right, we did end up taking a $17,000,000 write down on that and hopefully we can work out a bit.

Speaker 3

The kicker gain was nice as well so thank you for bringing that up. The hotel exposure, I'm getting my percentages right now. I think it's 6% of our overall asset base. I don't have any hotels at all in my four or five rated loans. I don't expect any there.

Speaker 3

We've not lost any money on hotels. We went into the COVID cycle. We actually said something in 2020, and I'm going to turn it to Barry if he's here because he's the greatest hotel expert I've ever met. But in 2020, we said we didn't expect to lose any money on our hotel portfolio, and that was when they were all shut. So right now, we feel really good about the exposures that we've taken.

Speaker 3

It's a broad mix of some destinations, some roadside and drive to and some in more major cities, but the hotel book continues to hold up very well. Hotels can miss on their cash flow by a little bit, but when you're lending at 65% or 70%, we have a lot more cushion there as income has gone up, as you've seen anyone who's come into New York City in the last year has seen where hotel rates are. Income has gone up, expenses have gone up also, so we're very careful on expenses, but to erode this 35% lending cushion that we have in hotels is a lot harder if things don't go bad and this higher rate environment has been met with higher income as well. So fortunately there we have that where you don't necessarily have that on office broadly. Barry, you trying to jump in?

Speaker 3

That you, Barry? I can say. Can you hear me? Yes, I can.

Speaker 5

Can you hear me?

Speaker 3

Yes, I can. Yeah,

Speaker 5

life sciences scared the daylights out of us. It was sort of a conversion of office to life science was kinda like timeshare for a hotel that didn't work. But for a while, it was as good as it got. You know, I think I think it's interesting you bring it up because I think the data center space will be interesting. Spreads have contracted dramatically if a building is being leased or is fully leased.

Speaker 5

But some people are beginning to do or trying to do spec data centers. You can get pretty widespread, you should, in a spec data center, but it's something we're not choosing to do right now. So I think there there are it's a similar thing. It's like, you know, you can go spec or you can go to something that is obviously not spec, and this has got the best credits there are in the world. But the spreads there have dramatically contracted, probably 200 basis points or 175 basis points from where they were when we started the lending business and data centers.

Speaker 5

And we are a data center developer with $19,000,000,000 of pipeline ourselves. So we know the market from the equity side and the debt side, and we've seen what's as we finance those buildings, we've seen what's happened. The hotels, I mean, you have to be careful of the blue cities right now because the unions are really strong. The New York City contracts coming up in May, it's gonna look something like what happened in LA. So even though New York remains fairly strong, shockingly strong at the RevPAR line, given the appreciation of the dollar and its impact on foreign tourism, it is not you know, Vegas is weak.

Speaker 5

There are markets that are weak, and we just cherry pick the the opportunities. And I don't I don't know. I I think we're we're fine. You know, I we often lend and say, well, we get the asset at the debt balance, we'd love to own it to Eric. So I think that probably applies to almost all of our hotel loans.

Speaker 3

Thanks. And there is liquidity. We just got paid off on a New York City hotel to a bank balance sheet. We got paid off on Atlantis, which was a large position. We're going get paid off in the next quarter on a Hawaii asset.

Speaker 3

And obviously hotels have a really high debt yield going in and that high debt yield enables them to navigate the higher SOFR more easily. Jade, did ask one more thing on the credit cycle. I don't want to skip over that, but if the forward curve is right and we had towards 3% SOFR, my gut is that the industry is likely over reserved If you end up in the high threes to four, the industry probably has reserved for that and if the forward curve ends up above four, there will be more problems. Today where we sit with the forward curve heading to 3% by the '26 or early twenty seven, I feel really good, but that forward curve has moved around by 100 basis points, three times each direction over the last year and a half. So we'll continue to watch it and we'll continue to try to work out of things that if the forward curve does stay above 4% that we have a path away from, but with the forward curve heading where it is today, I think everybody in our seats are feeling a little bit better.

Speaker 1

Thanks a lot.

Speaker 3

Thank you Jay.

Operator

Thank you. And our next question comes from the line of Douglas Harter with UBS. Please proceed with your question.

Speaker 10

Thanks, and good morning. Hoping you could give us an update on kind of the time line for resolution on some of the problem assets or foreclosed assets, how we should think about kind of getting that capital back and kind of how much and just the magnitude of capital against those that's unproductive today?

Speaker 3

Yeah, think it's about 1,700,000,000.0 or $1.8 today of non accrual assets. There's some where we have control where we're making a choice today not to sell at today's level and that we think we have a better outcome by holding on and so far that's been working better than we might have thought it would. I think we told you two quarters ago that we had a plan that we would try to be half out of it by the '6 and then half again of that by the '7 which would leave only a quarter of that book. That's our patient forecast. Hopefully we can do better.

Speaker 3

There are certainly some assets that we've spoken about here before that we can't do a lot on. There's a few that were syndicated on, like a large asset and we're going have to wait and work together with a group there. That will take a while. There are a couple of things in Downtown LA and Downtown LA is just not moving forward as quickly as possible so we're looking at other potential options on those. We have a few small apartments that make that up.

Speaker 3

You've seen us sell two or three of the apartments that we've taken back at our basis. My gut is we'll sell a couple more of those at our basis in the coming quarter or two. So the REO book is mostly things that we think we have a handle on being able to move out in that timeline,

Speaker 8

but as I said, there are

Speaker 3

a couple of other larger broadly syndicated things that might take a while, but that is built into what we produce for the board for a three year plan and we're sort of very comfortable with where that plan is and that that will allow us to continue to earn this dividend over the next three years or so. We're not going to rush. Rushing would cause you go from our 9.5% cost of capital, you sell something to an opportunistic fund and they have a 20% cost of capital and then they bid it back for any downside that could happen and that's not necessarily the best outcome hitting a bid today on an asset for our shareholders. We've seen some of our peers do that but we have capital, we have access to capital and we're going to act with our manager, Stover Capital Group who has $110,000,000,000 of assets under management and look at each individual asset to try to go forward and make our best plan.

Speaker 10

Great, I appreciate that Jeff. Any update on the Washington residential conversion, kind of what's the updated timeline and thoughts of kind of getting that property online cash flowing?

Speaker 3

Yeah, I'll send you after. We have some beautiful pictures of what that asset will ultimately look like. We're monitoring rents in that market. Rents have actually gone up on Class A multi rentals so we're starting to feel better and better about it. Have not begun construction, we're in the permitting phase and we have the final drawing so I feel pretty good that it's going to be tremendous product, it's in the right spot in DC that we hope to be able to give you a lot more information on over the next couple of years.

Speaker 3

It's a couple of project, we reserve money for that and we'll see.

Speaker 10

Great, thanks John. Yeah,

Speaker 3

do have ourselves getting back our basis and more on that asset as we told you in the past once we're done with the conversion.

Operator

Thank you. And with that, this does conclude the question and answer session. I would like to turn the call back to Jeff Demodica for closing remarks.

Speaker 3

Well, normally I put it to Barry, but his connection isn't great today. I want to thank everybody for joining us, and thanks to the team who did a lot of work to get a lot of things over the line in the last quarter. Appreciate everybody's time.

Operator

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect at this time, and have a wonderful day.

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