Starwood Property Trust, Inc. Aktie

Greetings, and welcome to the Starwood Property Trust First Quarter 2026 Earnings Call. [Operator Instructions]. It is now my pleasure to introduce your host, Zach Tanenbaum, Head of Investor Relations. Thank you. You may begin.

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 results or performance. Please refer to our 10-Q and press release for cautionary factors related to these statements. .

Additionally, certain non-GAAP financial measures will be discussed on this call. For 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; Jeff DiModica, the company's President; and Rina Paniry, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. Today, we reported distributable earnings of $147 million or $0.39 per share for the first quarter. Our results were impacted by continued higher-than-normal cash balances, the resolution of nonperforming assets and the ongoing optimization of our new net lease cylinder, adjusted for which DE would have been $0.47. I will provide more detail for these items within my business segment discussion. .

As we continue on our stated path to grow our investment base, resolve our nonperforming assets and optimize our new net lease platform, our underlying earnings power continues to build. In the quarter, we deployed $2.5 billion of capital across our businesses, including $1.5 billion in commercial lending, $597 million in infrastructure lending and $128 million in net lease, bringing total undepreciated assets to a record $31.7 billion at quarter end. We deployed another $1.5 billion after the quarter, 70% of which was in commercial lending. Our company is diverse with commercial lending comprising just 52% of our investment base and owned property increasing to 25% this quarter. We are really not a typical mortgage REIT.

I will now take you through our individual segment results, beginning with Commercial and Residential Lending, which contributed DE of $172 million to the quarter or $0.45 per share. In commercial lending, we funded $894 million of our $1.5 billion in loan originations, along with another $278 million of pre-existing loan commitments. After factoring in repayments of $835 million, our funded loan portfolio grew to $16.7 billion. This does not include $1 billion of new originations after quarter end which brings our loan portfolio to its highest level since inception or $2.3 billion of unfunded commitments on previously closed loans that will generate future earnings when funded. I mentioned earlier that our run rate earnings were impacted by our resolution of nonperforming assets.

During the quarter, we sold a multifamily asset in [indiscernible], Georgia that was foreclosed in February of last year. We've repositioned the asset during our 1-year hold period, cutting delinquency in half from 16% to 8% and increasing occupancy from 86% to 91%. After a broad marketing campaign in over 20 qualified bids, we sold the asset for a $5 million DE loss and a small GAAP gain, reflecting the adequacy of the GAAP reserves we previously recorded on this asset. We foreclosed on 3 vibrated nonaccrual loans in the quarter, the first of which was a $248 million mixed-use property in Dallas, consisting equally of multifamily and hospitality.

The second was a $71 million multifamily in Phoenix and the third was a $28 million multifamily in Dallas. We obtained independent third-party appraisals for all 3 assets with the mixed-use property that represented 2/3 of this quarter's foreclosures appraising 10% above our basis. The other 2 assets carried a combined $25 million of specific CECL reserves.

The weighted average risk rating on our loan portfolio improved to 2.9 this quarter versus last quarter's 3.0. This improvement is net of 2 small multifamily loans that were downgraded from a 3 to a 4 in the quarter, which Jeff will discuss. We ended the quarter with $676 million of reserves $455 million in CECL and $221 million in REO. Together, these translate to $1.82 per share book value, which is reflected in today's undepreciated book value of $18.97.

Turning to residential lending. Our on-balance sheet loan portfolio ended the quarter at $2.2 billion, down from $2.3 billion last quarter due to repayments of $38 million and a $21 million negative mark-to-market adjustment on the portfolio that was offset by the $31 million positive mark-to-market we recorded last quarter. Our retained RMBS portfolio remained relatively steady at $400 million.

Next is Infrastructure Lending, which contributed DE of $22 million or $0.06 per share to the quarter. Our strong investing pace continued with $597 million of new loan commitments of which $567 million was funded. After factoring in repayments of $320 million, our portfolio increased to a record $3.2 billion. Nearly 70% of this quarter's commitments were self-originated, bringing our total self-origination volume to $950 million.

Also in the quarter, we completed our seventh actively managed infrastructure CLO, a $600 million transaction at a record low spread of SOFR plus [ 168 ]. We used a portion of the proceeds to repay CLO 3 for $330 million. CLOs now represent 75% of our infrastructure debt, providing a durable nonrecourse, non-mark-to-market financing.

Turning to our Property segment. We recognized $29 million of DE or $0.08 per share across all 3 major portfolios. I will start with a brief comment on our Florida affordable multifamily portfolio, Woodstar. Last week, had released the new maximum level Litec rent levels, which were set 8.9% higher than last year. Certain properties were in geographies where the rent increases were once again capped by HUD with the incremental rent growth being deferred to next year. To date, we have recouped 100% of our original equity investment in this portfolio plus an incremental $540 million that we have been able to reinvest across our business lines.

We have $416 million of Woodstar debt maturing in Q4 and anticipate another cash-out refinancing, again affirming our valuation on these assets. In net lease, as I mentioned earlier, we are still in the ramp-up phase of this business. which has been quite dilutive following our acquisition 8 months ago, a dynamic we anticipated and disclosed at the time. If optimized and at scale, this business would have contributed $0.03 of incremental DE to the quarter. The quarter's acquisition volume was in line with our original underwriting, with $128 million of purchases containing a weighted average lease term of 19.5 years and weighted average rent escalations of 2.5% bringing our total portfolio at quarter end to $2.5 billion with a weighted average remaining lease term of 17.4 years and 0 defaults.

As you are aware, we adjust DE for the straight-line rental income reflected in our GAAP numbers. If we were to include straight-line rent in DE, it would add another $0.01 to the quarter. We continue to optimize this platform's capital structure, completing 2 notable refinancing since our last earnings call. The first is a new ABS transaction, which was used to replace a more costly issuance that we assumed in connection with the acquisition. The ABS financing totaled $466 million at a weighted average fixed rate of 5.06%, a record tight spread for this platform. This allowed us to replace $324 million of existing ABS financing, which carried a weighted average fixed rate of 6.65%.

The impact on our Master Trust was a reduction of 44 basis points from 5.3% to 5.29%, a benefit that we will realize in DE over time. However, during the quarter, we recognized a $0.01 nonrecurring DE loss as a result of unwinding the interest rate hedges we had put in place in anticipation of this securitization. The second refinancing was completed after quarter end with the closing of a new 5-year $1 billion warehouse facility. It has a 40% lower spread and is nearly twice the size of the in-place financing we assumed to add acquisition. These accretive financings, combined with the ramp in transaction volume, builds the foundation for the earnings power embedded in this platform and paves the way to overcoming the $0.03 of dilution that we recognized this quarter.

Concluding my business segment discussion is our Investing and Servicing segment. Collectively, the cylinders in this segment contributed a robust DE of $57 million or $0.15 per share to the quarter. Our special servicer, LNR continues to perform as the positive carry credit hedge we have long described. with servicing fees increasing to $52 million this quarter. Our active servicing portfolio totaled $9.9 billion, while our named servicing portfolio was $95 billion. LNR continues to be the highest rated special servicer in the country with a rating of CSS 1, the highest rating possible.

Our conduit, Starwood Mortgage Capital, securitized or priced $153 million of conduit loans in 3 transactions at profit margins that were at or above historic levels. We typically see lower securitization volume in Q1 and expect to see volumes increase in the near term.

Turning to liquidity and capitalization. Our current liquidity stands at $1 billion, which does not include liquidity that could be generated from cash out refinancings, sales of assets in our Property segment, direct leveraging or issuing corporate unsecured debt backed by our unencumbered assets, or issuing term loan B, where we have nearly $1 billion of capacity today. In addition, we have $9.4 billion of availability across our bank financing lines. We continue to operate a conservative leverage levels, ending the quarter with a debt to undepreciated equity ratio of 2.59x.

Also notable this quarter, our Board authorized a $400 million share repurchase program on February 26. In March, we deployed the first $20 million of that program purchasing 1.1 million shares at a weighted average price of $17.67, a discount to both our current stock price and undepreciated book value per share.

And one final note. During the quarter, we are proud to have been awarded the 2025 mortgage REIT of the year by PERE credit. The award reflects the breadth and resilience of our diversified platform across market cycles. With that, I will now turn the call over to Jeff.

Thanks, Rina, and good morning, everyone. Let me start with the broader backdrop because it's important context for the quarter. Capital markets have been volatile to start the year, driven largely by geopolitical developments in the Middle East. Treasury yields and credit spreads have moved with each headline, and while volatility has increased, the overall environment remains relatively stable. .

Refinancing volumes are significantly elevated with loans originated before the 2022 rate rise facing their final extensions and newer vintage loans coming out of call protection and taking advantage of spreads that are today at the tight end of their long-term ranges. This backdrop is constructive for our legacy investments and leaves us well positioned to capitalize on new origination opportunities at scale. Starwood Property Trust is a differentiated multi-cylinder platform that was built to outperform in volatile market environments, spanning commercial, residential and infrastructure lending, owned real estate and special servicing. This diversification gives us the earnings profile of a credit business with the upside from our large owned property portfolio, our countercyclical special servicer, early prepayment income and further resolutions in our lending book.

We have invested in every quarter of our 17-year history. And when we see outsized opportunities like we have over the past year, we have the firepower to lean in. We've done just that with nearly $4 billion of investments closed year-to-date. We are expecting a very robust finish to the first half of the year with an equally strong pipeline extending into the second half.

From a portfolio standpoint, we continue to see the benefit of repositioning we began several years ago. Multifamily and industrial continue to dominate our pipeline, and we continue to grow our non-U.S. loan portfolio, where our manager, Starwood Capital, has large originations team spanning the globe with decades of lending experience. Starwood Capital is also one of the largest private data center owners in the world with over 150 dedicated people in the sector, giving us the expertise to also make loans on data centers with confidence. Their footprint also allowed us to be a first mover lending in this space, taking advantage of wider spreads on loans that generally have 15- to 20-year leases to investment-grade tenants and fully amortized over the initial lease term.

U.S. office represents 7.6% of our assets today, which is well below our peers and represents the bulk of our reserves. Additionally, we only have one life science loan for $56 million. And together, these sectors are less than 8% of our assets, which is extremely low in our industry and allows us to have more certainty regarding potential portfolio outcomes. As Rina mentioned, our overall risk rating fell from 3.0 to 2.9% in the quarter. I will note that nearly half of the over 50 loans in our history that have been risk rated 4 or 5 have now been resolved or returned to a 3 or lower rating. Also, over half of our CRE lending commitments have been originated since 2024 at a lower basis and with better loan coverage metrics. We still have work to do. but we have meaningfully repositioned the portfolio in this cycle, leaving us in a good position relative to where the market is today.

Our approach to credit remains consistent. We lean into situations where we have conviction and control, and we are willing to use our balance sheet and large internal asset management resources to actively manage outcomes rather than fire sale assets at a worse outcome to shareholders. We have a proven track record of successfully stepping in when sponsors stopped supporting and investing in assets. Along with our Manager, we have the willingness and proven operational capability in-house to improve performance and protect and potentially grow value.

We continue to make steady progress resolving legacy assets. Nonaccrual and REO balances declined again this quarter, and we have now resolved over $300 million of assets that were previously a drag on earnings. We have additional REO sales in process and expect further reductions in the remainder of the year and in 2027. We did see some ratings migration in this quarter, which is consistent with where we are in the cycle. Two loans moved into the 4-rated category, both in multifamily. The first is an $81 million multifamily asset in Georgia, where the current debt yield is tracking below the extension threshold required at the upcoming maturity. The second is a $40 million multifamily asset in Texas, where the sponsor has signaled an unwillingness to continue supporting the asset. Both situations are ones we have navigated many times. We have defined action plans. Both are being actively monitored and we are prepared to step in and execute these plans should we need to.

Our 5-rated loan category declined by over $200 million in the quarter, including the $347 million Rina mentioned offset by our purchase of the $114 million senior position on a large industrial asset proximate to Manhattan. We are working to resolve this asset and the sponsor has leases under negotiation for almost all of the available space. Successful resolution of this loan, our largest in the 5 risk category, would decrease our 5-rated bucket by over 50%. That progress along with continued growth in our investment balance represents the core pillars of management's plan to grow earnings and dividend coverage as we have outlined in prior quarters.

In infrastructure, a business we are in our ninth year investing in, we committed $597 million at above-trend returns in the quarter. A majority of that activity was self-originated, which allows us to dictate credit and structure while continuing to grow our portfolio and earn excess return given our ability to finance this business accretively. These loans are also supported by durable long-term demand drivers from the energy transition and AI-driven power infrastructure build-out, leaving us with a pristine low LTV portfolio.

Our financing is diverse, low spread and benefits from nonrecourse non-mark-to-market provisions in our CLOs, which as Rina said, account for 75% of this segment's debt. Our net lease platform, fundamental income continues to ramp as per our acquisition plan. We expect volumes to increase throughout the year as the team completes their first year under Starwood Property Trust. As Rina mentioned, we again made meaningful progress on the financing side in the quarter. The combination of a lower cost of funds and a higher advance rate, which we underwrote and have now executed on is directly accretive to the ROE of the cylinder and demonstrates what Starwood's capital markets relationships help bring to this platform. These improvements should help turn this business accretive in 2027 in line with our underwriting, supporting our thesis of creating long-term shareholder value at the expense of short-term earnings dilution we have experienced to date.

Our REIT segment again performed very well. The servicing platform continues to act as a positive carry credit hedge, generating higher earnings during periods of stress. Since the rate rise, we feel the equity market has undervalued the countercyclical nature of this business on our stock, but it proved again this quarter. It is a real differentiated earnings contributor with our highest ROE.

I would now like to spend a few minutes discussing our low leverage balance sheet. We have been and plan to continue to tactically increase our unsecured debt as a percentage of our company's capital structure. Unencumbering assets to move to more stable, non-mark-to-market financing is supportive of our corporate credit ratings, which we hope to improve as we execute on this plan. Our unsecured debt continues to trade very well, which we view as a reflection of the debt market's confidence in our balance sheet and the value of the diversity of our platform.

Our next corporate unsecured maturity is $400 million in July and we have multiple options to address it. We have ample liquidity to repay it with cash or refinance it to take advantage of the strong current credit market backdrop I started today's call describing. Our access to the debt capital markets is genuinely differentiated. There is no other company in our space with the same footprint across secured, unsecured and securitized funding channels.

Wrapping up, we're the oldest and largest mortgage REIT with an equity base that is larger than our next 4 peers combined and as much trading volume as those peers combined, giving shareholders unparalleled liquidity. In our 17 years, we have built a unique diversified business and invested almost $120 billion of capital while successfully navigating multiple cycles, leaving us as the only mortgage REIT to have never cut our dividend. We have a clear path forward, continue to resolve legacy assets while scaling our investment platforms. Progress across each of these areas is tangible, which we expect to improve earnings and dividend coverage. With that, I will turn the call to Barry.

Thanks, Jeff. Thanks, Rina. Thanks, Zach, and good morning, everyone. I apologize up front, I'm not feeling well. So I'm doing this with half something. Wow, it's an interesting world. I think you'd like to say that there's never been so excited and so terrified at the same time. And it's not just the war. Obviously, it's what is the impact of AI long term on the markets, the office markets, the employment base, what politicians do. In the face of potentially job losses, what will happen with Taiwan, which the markets obviously think is a 0 risk given the [indiscernible] highs. .

I tend to think the real estate sector, in general, is coming out of the frozen tundra of the last 3 years. We're still recovering from the 500 basis point increase in rates. And most -- anyone -- no one saw coming and then the slow sent even though ex rent inflation had clearly defended. If you think about the world, it's sort of an odd concept. I was in the room of a lot of people at West recently, and I ask people to raise their hands how many people would have expected, what's going on in the world, war, oil prices, de-globalization, trade wars, how many people would expect the stock market to be at all-time highs. And it's sort of a strange thing.

But in the middle of this, the real estate markets are curing themselves, although it's slow and it's not quarter-to-quarter. Supply is dropping dramatically in multifamily, supply dropping in industrial, supply stagnant, almost nonexisting in the office market, same in retail, senior housing, all these sectors are benefiting from capital in sucked into other things, including data centers, which is the asset cloud suite plan on in both the equity and the debt side. We're just [indiscernible] beyond worse with the risk of Taiwan, shutting it all down and in the party. I'm sure the Chinese know.

So when it comes to us, we sit here as a unique company with this diversified asset business lines. We keep adding new business lines. We have quite a few assets that aren't earning a fair return, whether REO or their nonaccrual loans. When you look at our stock, you're earning from about 75%, something like that percent of our asset base, it's not our full asset base. It's almost like valuing a company that has a major tower under construction. And on the balance sheet, it shows up in the work in progress, not as an asset, but when it's completed, it will produce earnings. I think it's the same story today here.

We are $0.39 for the quarter. It's not a number we're happy with. If you back up the dilution which will go away over time in fundamental and the triple-net lease business is be [indiscernible] about 1.5 points drag of what we took in the quarter just hits to our earnings from the REOs. And some of those REOs, when fixed up, we expect to actually make money on, but it takes time. We've a property that the developer will lose several hundred million dollars, we'll take it back. And we expect to be able to lease the whole thing and hopefully sell it at a gain. And those are the kinds of opportunities they're not quarter-to-quarter.

But with that confidence, we stepped up and bought stock in the quarter. We actually can't buy stock when we go into a blackout period. So that stops or lease before earnings. We'll continue to repurchase stock as it's a pretty good investment for us. Some of our businesses are really spectacular at the moment in their math and some of the noise of the less and spectacular parts, the special servicer is cranking amazing this far along in the cycle. We still have $100 billion of named servicing and almost -- I think it's [ 8.5 ] in names active in the servicing book, and it's not going to be going down. But there is still a lot of distressed rates are still higher.

I should have mentioned when I talked to you about what we should think the world a 10-year were hovering around [ 4.40, 4.36, 4.32, 4.42 ], I mean that's materially higher than I think mostly would think. We're pressing -- we're creating unprecedented deficits, but the equity markets don't seem to care very much. again, I'm finishing the thought this is all good for real estate. The tide they've gone out and the tide that was turning, we're going from tailwinds -- headwinds to tailwinds and there are really 2 things behind the tailwinds: one -- 3 really. One, the reshoring in the United States be bringing back all of these plant equipment, creating demand for industrial that's a real trend. It's starting. It's not a massive tideway but you're beginning to see the impact a little bit; 2 supply, which we talked about; and 3 interest rates because the forward curve is still lower.

And the markets are very confused as most executives are about a world, I think post World War II record low consumer confidence, but retail spending continues up. I tend to think posted GDP numbers are sort of the loser. You can talk about them as being great and they are what they are, but they're really driven by 2 things AI spending, which is in fell by the average American and by productivity gains. And that kind of GDP is not the kind of GDP that normally within those consumers to the store. And as you know, consumption is 70% of GDP. So it is a miraculous economy, but it's not your grandma's economy and it's creating all kinds of odd things and investors chasing multiples of revenues in the equity markets.

So I think we will catch a bid. I mean, the entire real estate sector. And I can say that we've recently completed or about to complete our 13th fundraise on a fund on the equity side. And robust investor demand whereas a year ago, they wouldn't tire to us. That's really a reflection of the turn in the markets and several of my peers in the asset management business have are on their recent earnings calls, and we tend to agree things will be getting better. our pace of our originations are solid. We're all looking for the earnings to come out of the book. We're confident in the ability to pay the dividend. We sit on $1.5 billion of gains in our multifamily book. We actually made $0.05 selling one asset, just one asset last quarter.

So quarter-to-quarter, we're sequentially up $0.37 to $0.39. But we chose not to take any of those gains. We're playing a long ball, not shortfall, and we're confident in our ability to create a dynamic company that's capable of producing superior earnings and therefore, dividends. And I want to thank the team and continues to work really hard to continue to lead the market in our field. Thank you.

[Operator Instructions]

Our first question comes from the line of Jade Rahmani with KBW.

This is Jason Sabshon for Jade. It would be helpful to hear your thoughts on the outlook for resolving nonaccruals and foreclosed assets. Maybe comment on the time horizon and if possible, give a percentage range for resolutions in 2026 and 2027?

Yes. Thanks so much. I appreciate the question. We -- I think we've told you we've resolved over $300 million -- we have a resolution that you'll see as an upgrade on a lease that was signed for about $100 million in the quarter in Brooklyn that will take an asset that now through 3 large leases has completely moved from a troubled risk rating of 4 or 5 back into something lower. We are expecting potentially a lease, as I spoke about on another asset just outside Manhattan where should we sign that lease, that will go from a 5 or 4. I think I mentioned in the script that 25 of the 53 loans we've ever had at the 4 or 5 have now been either worked out or moved back down. .

Our strategy is just different than other people a bit on these. A lot of people are willing to do fire sales to a higher cost of capital buyer potentially with financing when they have a difficult asset. We look at every loan on a present value of the likely outcome to us. And given our access to liquidity, we have chosen to lean in. Rina gave you some examples in the quarter of even the multi that we lost, $5 million or so on, we increased occupancy significantly decrease the delinquencies significantly in the 6 months or so that we manage that property being managed by Starwood Capital. We have people with expertise in need.

So we're not afraid to take something back. We're not afraid to say, and we don't stay in for the sake of staying in. But if the present value of getting the money back today, versus investing in the asset, if the present value is higher on the latter, we'll do the latter. So we have a few that you'll see play out. It will put us over $500 million or so, I think, in the very near future. we're expecting $900 million by the end of the year in our plan and then another $500-or-so million next year in our base plan that will work most of the way through it. But it's very difficult to judge when you will get a lease and when something will play out and when the present value calculus for us will turn positive versus negative on making our decisions.

Great. Very helpful. And then separately, it'd be helpful to touch on the outlook for net lease and when you'd expect it to become accretive? I know you guys cited 3 dilution, but also issued ABS and entered into a new credit facility. So any commentary there would be helpful?

Yes. Thanks so much. This is an interesting one. We sign on -- you all know we weren't earning the core dividend at the time we closed this deal in July of last year. We made a decision knowing this business is running exactly at what we expected it to run in the short run. We knew we had to optimize the financing. We knew we would get originations up. we made a decision to take on negative DE for up to 6 quarters. I think when we did it, we told people it would become accretive in '27.

And so it's not often that a company like us takes 6 quarters of negative DE at a time where we're not earning the dividend. But we did that because we wanted to own this platform. We were buying a platform that we knew would be short-term dilutive. And as you look at the rent bumps over a number of years, it becomes very accretive down the line. So as large shareholders with management and our Board, we looked at the long term here. We are obviously paying a penalty for it in the market today because missing a number in today's stock price is not something that bought like very much, but we set this up for the long term. We think the business will perform it's -- as you said, we've now optimized the financing, which start kicking in and help it turn to be accretive in '27. It becomes very accretive beyond that. But I'll turn it to Barry for any other comments that you might have.

Well, a couple of things. One, the fundamental business, if it traded separately, we probably trade at a 5 or 6 dividend yields, and it's tucked into us. And obviously, it's hurting us when in fact, it's probably a significant value as a stand-alone business, which isn't lost on us. So one way or another, we're going to get this thing to scale or spin it out or do something that will create like the value of the business is we're not using straight-line accounting on their leases. Some of our peers do that. With that, I mean our yields would be significantly higher even this year.

So 0 default, 100% occupied portfolio, growing at about the pace -- I'd say it's going at the pace we underwrote, but not nearly as fast as I have hoped. So -- and that's one of the reasons you see the dilution. But I think you have to look at just answering the former question. We're going to work as fast as we can to repair these nonaccrual assets and the REO assets. But as Jeff mentioned, we don't have the need to give them away. At the end of the day we're real estate guys.

And so if we can -- what you see in most of these assets, especially the ones that get in trouble is the borrower just stopped taking care of them, right? So you have a multi that has rooms out of service because he just didn't care because he was going to lose the asset or you have tenants that won't take on an office asset because the borrower has no desire or any need to put in tenant improvement dollars. You're just flushing is cash.

So you get these in some cases, really good assets that have been abandoned by the borrowers take time to actually get them back to stabilization and then you sell them. It's not -- sadly, it to be easier if this was a closed-end d of thing. And it's not done to optimize earnings quarter-to-quarter. It's done really to maximize return on the capital that we've invested behind these properties. So -- and we are blessed with the fortress balance sheet so we can put the money into convert as we are 1201. It's a Case Street in D.C., which is being converted from an office building to a rental. And in the time that we've taken the underwriting rents have gone up. So our yields on cost would be even better than we thought and expect they will be. It didn't seem to fire half of D.C.

So when we complete that, but that's not going to get done for another year or 1.5 years. And it's -- so that's the kind of situation. I mean, we're confident we're major shareholders of our stock. As you saw, we repurchased stock. So we're confident in our ability to weather the storm and continue to pay the dividend and wait for cleaner numbers, frankly. If day isn't bad. It's just not very clean. So we know all that. Thanks.

[Operator Instructions]

Our next question comes from the line of Gabe Poggi with Raymond James.

Kind of piggyback on the last question. If $0.48 of the dividend coverage is the goal, help us or me shape kind of where we are in that time line based on these first quarter results. I know Barry just said there's a lot of noise in it and the dilution from net lease, et cetera. But how should we think about kind of the timetable to get to $0.48 as you guys are working through nonaccruals as you're taking time with REO and being patient, et cetera, et cetera? That's question one.

Gabe, thanks for the question. So as I mentioned in my remarks, I think we're there on a recurring basis today, right? We're not there on a reported basis. So we need to work through. We talked about fundamental. And we think that, that becomes breakeven, call it, early next year and then accretive thereafter. So we think on a recurring basis, we would be in excess of the dividend at some point, probably late next year. We had higher-than-normal cash balances that we talked about last quarter. We raised excess financing on our wood start refi, we had 2 debt raises.

So we're still fighting the cash drag from having over $1 billion of cash for the quarter. So we need to get the money deployed, and I think that will help. But I would say you're not going to see kind of above on a recurring basis until next year at some point. And we still have to work through the REO assets. .

That's right. We've been saying that consistently though, Gabe, for a while that end of '26 as we get into 27, that's what we're hoping. There are a little nuances along the way. You talked about [indiscernible]. We don't tend to wind about the timing of cash flow. But in this quarter of the $1 billion [indiscernible] reloans, 57% of them were funded, which means 43% weren't. On average, they're only funded for 27 days on that 57%. So we're getting very little credit there versus -- in the quarter, our repayments were outstanding for 64 days. That probably cost us $0.01 or $0.02 as well.

They are just small nuances. But I think if you normalize [indiscernible] you go into the upside that Rina talked about and the other businesses, we start to get down as per the plan, I just told you on nonaccruals, et cetera. we continue to originate at this very elevated pace with great quality originations. We're really proud of the book that we're building over the last couple of years, half of which is 2024 and beyond origination. It will all come together as we turn the year to getting to that $0.48 that actually is reported in the box like more than today's.

I'm going to be more optimistic than Rina and Jeff because I know about some situations that we will trigger. And if we have to sell some assets to be able to redeploy the capital at the 11%, 12%, 13% ROE, then we'll do it. So I think there are some loans that are toggling to becoming accrual again, they're material. And I'd expect at least one of them to have a resolution in the next -- certainly, by the end of this year. And with that, there might be a -- it's a material earnings mover for us.

So I do think some acceptable to have $0.11 or so or $0.12 of dilution from fundamentals. So that's not a stable situation. If it doesn't get better, we're going to put it in the rightful home, which may not be here. So it's not acceptable. Even though the business are performing well, the noise is too much for shareholders to come through. We could invite you into the house and show you our assets and you see the values are all there and our ability to earn the dividend and exceeded it certainly in the house. It's just -- it is -- we told you about this last quarter. It's going to be a rocky road to get there [indiscernible] assets. We don't -- we got -- it's a puzzle and we've got to manage it in the best way to [indiscernible] for this year. We are, as I said, large shareholders. So very motivated to do the right thing.

Getting back to the $0.48, obviously, would be the holy grail is the only thing that we did with CRE lending. That's 52% of our business. We have $1.3 billion of gains, Gabe, away from this. We we've always had recurring baring gains that come from things. The service had a good quarter this quarter. SMC often has a good quarter. It was light this quarter. We used to get a lot of prepaid penalties. Those are coming back in this tighter spread environment. We're going to start getting prepay penalties again.

All these recurring, nonrecurring things, we'll get us over that number. Never mind the fact we have $1.4 billion of gains sitting outside of it. I think the construct to hold somebody to earning it all in the core business or you take the stock down significantly, doesn't really apply as much to a well-diversified company that's always had recurring nonrecurring gains, and we will have recurring nonrecurring gains through the rest of this year.

So -- that's all very helpful color, especially on the timing stuff, Jeff, and I fully appreciate that it takes time to work through this. Follow-up, Jeff, you had mentioned that you guys -- that there were some REO kind of potentially in the sales process or beginning to kind of kick that ball down the road? Is there any more color you can give on that as it pertains to -- you took some keys this past quarter, just kind of what we're looking like potentially and Barry just alluded to that, where some of those sales -- those sales can be pulled forward to reallocate capital?

Yes. We will -- we prefer to let you know when they happen because the market's moved pretty quickly. There are 2 or 3 that we that we think happen fairly soon. There are a couple of leases that could move some away from nonaccrual. I think you'll see that with some potential upgrade. But I don't want to signal any of the sales quite yet, Gabe. But I gave you the sense that we hope to get through $900 million this year and $500 million next year off that list, and that will be a combination of a number of things, but nothing imminent that we're going to report here looking forward.

Thank you, everyone, for joining us, and we'll see you again next quarter.

Ladies and gentlemen, this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Greetings, and welcome to the Starwood Property Trust Fourth Quarter 2025 Earnings Call. [Operator Instructions]

It is now my pleasure to introduce your host, Zach Tanenbaum, Director of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, we filed our 10-K 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-K 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; Jeff 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.

Thank you, Zach, and good morning, everyone. Today, we reported distributable earnings of $160 million or $0.42 per share for the fourth quarter. While our reported results reflect the timing of capital deployment and balance sheet optimization initiatives, our underlying earnings power continues to build. Importantly, we exited 2025 with enhanced liquidity and embedded earnings from this year's investments and unfunded commitments, all of which will increasingly contribute in 2026, with our dividend coverage expected to improve steadily throughout the year.

Our quarterly results were impacted by temporary timing issues, adjusted for which DE would have been $0.49. The first is our newest net lease cylinder, which on a run rate basis would have contributed $0.06 of incremental DE to the quarter, but instead contributed $0.03. We anticipated this dilution at acquisition, knowing that we would have near-term carry from capital raised and there would be a timing gap while we ramped acquisitions and optimized the platform's capital structure.

As Jeff will discuss further, we have made progress towards these initiatives and expect to see reduced dilution going forward. As a reminder, the weighted average lease term of this portfolio is 17.3 years, with occupancy of 100% and 2.3% annual rent escalations. The second timing issue was higher-than-normal cash balances, which led to $0.04 of reduced earnings. We completed 3 securitizations in the quarter, one in each of commercial lending, infrastructure lending and net lease that combined created incremental proceeds of $290 million.

We also continued to shift secured debt to unsecured debt, issuing $1.1 billion of high yield in the quarter and executed a takeout refinancing on part of our affordable multifamily portfolio, which generated cash of $240 million in late September and October. All of this cash will ultimately be a source of incremental DE as it gets deployed into new investments across our diversified cylinders.

Stepping back to the full year. We reported DE of $616 million or $1.69 per share. As we continue the theme of proactive capital repositioning, we had temporary reductions to earnings of $0.14 this year resulting from our $4.4 billion of equity, unsecured debt and term loan issuances, along with our new $2.2 billion net lease acquisition.

DE adjusted for these timing issues and the $0.12 realized loss we recorded upon sale of a foreclosed asset earlier this year, was $1.95 versus our full year dividend of $1.92. Given our enhanced earnings power as a result of this year's strategic transactions and as we continue on our path to resolving our nonaccrual and REO assets, we see a clear line of sight to earnings that cover our dividend, a dividend that we have never cut.

Our diversified lines of business continue to perform at scale, allowing us to deploy $12.7 billion in 2025, our second largest investing year to date. This included $6.4 billion in commercial lending, a record $2.6 billion in infrastructure lending and $2.4 billion in net lease. $2.5 billion of our deployment was in the fourth quarter, bringing total undepreciated assets to a record $30.7 billion at year-end.

As a testament to our continued diversification, commercial lending now makes up just 54% of our asset base. I will now take you through our individual segment results, beginning with Commercial and Residential Lending, which contributed DE of $176 million to the quarter or $0.46 per share. In commercial lending, we originated $1.7 billion of loans, of which we funded $1.2 billion, along with $223 million of pre-existing loan commitments. After factoring in repayments of $670 million, we grew the funded loan portfolio by $823 million in the quarter to $16.6 billion, our second highest level since inception.

In addition, we have $1.9 billion of unfunded commitments, which will generate future earnings as these loans fund. We also completed our fourth actively managed CLO for $1.1 billion with a weighted average coupon of SOFR plus 1.65%. On the topic of credit quality, our portfolio ended the year with a weighted average risk rating of 3.0 consistent with last quarter. We have $680 million of reserves $40 million in CECL and $200 million of REO impairment. Together, these translate to $1.84 per share of book value, which is already reflected in today's undepreciated book value of $19.25.

This quarter, we classified a $91 million 5-rated first mortgage loan on a multifamily property in Phoenix as credit deteriorated. The loan already maintained an adequate general reserve, but based on our recent appraisal, we reclassified $20 million of our reserves from general to specific. Jeff will go into more detail on our credit migration and asset management initiatives.

Turning to [indiscernible] payment were largely offset by $31 million of positive mark-to-market adjustments resulting from slightly tighter credit spreads. Our retained RMBS portfolio remained relatively steady at $405 million.

Next is infrastructure lending. This segment contributed DE of $27 million or $0.07 per share to the quarter. Our strong investing pace continued with $386 million of new loan commitments in the quarter and a record $2.6 billion in the year. Repayments totaled $568 million during the quarter and $2 billion for the year, with the loan portfolio increasing $300 million this year to $2.9 billion.

We also completed our sixth actively managed CLO for $500 million and priced our seventh for $600 million at record low spreads over SOFR of 1.72 and 1.68, respectively. Nonrecourse, non-mark-to-market CLO financing now constitute 75% of our infrastructure debt.

In our Property segment, we recognized $49 million of DE or $0.13 per share in the quarter. In our Woodstar Fund, comprising our affordable multifamily portfolio, we recorded a net unrealized fair value increase of $17 million in the quarter for GAAP purposes. The value was determined by an independent appraisal, which we are required to obtain annually.

Also during the quarter, we sold a 264-unit multifamily portfolio for a net DE gain of $24 million. The $56 million sales price was in line with our GAAP fair value. And finally, we completed the second part of our takeout refinancing that I discussed earlier, the independent appraisal third-party [indiscernible] or carrying value and take-out refinancings collectively provide market confirmation of our valuation.

Also in this segment is our new net lease platform, which reported its first full quarter of DE totaling $12 million. We acquired 16 properties for $182 million during the quarter, bringing post-acquisition purchases to $221 million, in line with our underwriting, but with the timing back ended to the last month of the quarter.

On the capital markets front, we completed our first ABS transaction since acquisition with $391 million of financing at a weighted average fixed rate of 5.26%, a record tight spread for this platform. Given the back-end acquisition timing and mid-quarter execution of accretive ABS financing, our reported DE understates the earnings power embedded in this platform.

Concluding my business segment discussion is our Investing and Servicing segment. Collectively, the cylinders in this segment contributed DE of $46 million or $0.12 per share to the quarter. Our conduit Starwood Mortgage Capital completed 3 securitizations, totaling $276 million at profit margins that were at or above historic levels. This brings our year-to-date total to 16 securitization for $1.2 billion.

In our special servicer, our active servicing portfolio rose to $11 billion with $1 billion of new transfers in. Our name servicing portfolio ended the year at $98 billion. As a result of near record maturity defaults in CMBS, servicing fees increased to $38 million this quarter, bringing year-to-date fees to $107 million. This is up 47% from last year and the highest level they have been since 2017.

We've always told you that our servicer is a positive carry credit hedge that earns more money in times of real estate distress, and that hedge is once again proving itself this quarter. Our CMBS portfolio grew by $82 million during the quarter, primarily driven by new purchases of $101 million, offset by cash collections of $17 million. As a result of the maturity defaults noted above, we also recognized net DE impairments of $13 million.

And lastly, on the segment's property portfolio. We sold a mixed-use property and retail center for a total of $36 million, resulting in a net GAAP gain of $10 million and a net DE gain of $3 million.

Turning to liquidity and capitalization. We had our most active capital markets year in our history. We executed a record $4.4 billion of corporate debt and equity transactions including $1.6 billion in unsecured notes, $1.6 billion in term loan repricing, a $700 million term loan B and a $534 million equity raise that was accretive to GAAP book value. We continued our focus on conservative leverage, ending the year with a debt to unappreciated equity ratio of 2.4x more than a full turn lower than our closest peer.

With this year's continued shift away from repo, our unsecured debt now represents 18% of our total debt, up from 16% a year ago, and our off-balance sheet debt now stands at 22% of our debt, up from 17% a year ago. Our current liquidity is $1.4 billion, with availability across our financing lines of $11.9 billion. This, along with our ability to consistently access the unsecured and structured credit markets at attractive spreads and across multiple asset classes reflects the strength of our platform and provides significant flexibility as we enter 2026.

With that, I will turn the call over to Jeff.

Thanks, Rina. As we enter 2026, our priorities are clear: resolve legacy credit, maintain a conservative balance sheet and selectively grow our highest-returning businesses to restore full earnings power.

We exited 2025 with continued stabilization in credit markets and improving transaction activity. Activity is still below peak levels, but trending positively as liquidity returns and rates move lower, supporting originations, refinancing and more constructive resolution outcome.

Real estate as an asset class has taken longer to normalize than many other parts of the economy and performance remains uneven across sectors and geographies. We don't expect the volatility in corporate credit markets to have a large impact on CRE fundamentals, which have largely insulated and outperformed in the lower rate environment.

We built Starwood Property Trust to operate through cycles, and this year reflected that. In 2025, we raised and repriced a record $4.4 billion of capital and corporate debt with our debt issued at the tightest spreads in our 16-year history, strengthening liquidity, preserving flexibility to deploy capital accretively, while maintaining low leverage and significantly extending corporate debt maturity.

We continue to diversify our business in 2025 with the acquisition of our net lease business, which added over $2 billion of long-term accretive assets with 2.3% annual rent bumps that will add incremental future distributable earnings for years to come. Cap rates have come down since we closed asset financing costs, which increases the value of the existing portfolio we purchased as we have optimized their financing structure, adding to the long-term tailwinds of the business.

As Rina mentioned, we closed one securitization in Q4 and another after quarter end, both at a lower cost of funds than we underwrote, and we are in the process of significantly improving our bank line financing spreads. We continued to increase our [indiscernible] nesting across businesses in 2025, investing $12.7 billion, including $2.5 billion in the fourth quarter alone. This is our second largest investing year in our 16-year history. And notably, our global team achieved that volume in an environment where overall industry transaction and origination volumes remained well below historical averages.

We anticipate another robust origination year in 2026, which will produce additional earnings, along with the funding of $1.9 billion of unfunded commitments Rina mentioned.

In commercial lending, we originated $1.7 billion in the fourth quarter and $6.4 billion for the full year. Our portfolio is expected to grow to a record $17 billion in the first quarter and we expect to continue this momentum in 2026.

U.S. office loans represent only 8% of our diversified asset base, the lowest percentage in our history and well below that of our peers. We have done this by repositioning our loan book to more stable assets like multifamily and industrial, which accounted for 72% of 2025 origination.

I will start my discussion on credit and asset management with some positive outcomes starting with multifamily loans to undercapitalized borrowers who are unable to continue to fund through resolution. We have executed multiple sales of multifamily REO at our original basis and have more slated for sale at or near our original basis. We have intentionally avoided forced liquidation. And in doing so, have protected shareholder value by taking over management, executing unfinished business plans, and increasing occupancy and property values.

We're seeing tangible improvement across portions of our office portfolio, highlighted by approximately 800,000 square feet of leasing finalized during the fourth quarter. The highest quarterly leasing volume of the year. This total includes a 200,000 square foot lease at a Brooklyn property that was previously risk rated 5. That 630,000 square foot asset was vacant coming out of COVID and with the pending execution of a third substantial lease, we'll be 100% leased to 3 strong credits on a 32-year weighted average lease term with average annual rent escalations of 2.2%. This is a great outcome for shareholders, again, reflecting our patience, active engagement and improved leasing momentum.

Sales activity has also improved, allowing $200 million of office loans to repay at par in 2025. Year-to-date in 2026, an additional $200 million of loans originated as office have sold or in the process of closing, including $115 million related to a formerly risk rated 5 asset also in Brooklyn.

Patience has paid off for us in the past when managing forkloads assets, and we present value and probability weight potential REO outcomes individually as we decide whether to liquidate or hold and reposition assets. Bringing the full strength of the Starwood platform to bear on these situations.

We ended the year with approximately $1 billion of commercial loans on nonaccrual and $624 million of foreclosures. That exposure is concentrated in a small number of assets, and each of those is in an active execution phase with defined business plans being managed by our in-house asset management team at Starwood.

Turning to rating migrations. We had 3 assets migrate to 5 in the quarter. The first is a $108 million studio production asset in New York that we co-originated [indiscernible] with 2 large U.S. banks and own 32% of the first mortgage. Utilization declined materially following the writers and actors strike. The sponsor has invested substantial equity since origination, but the property has not yet stabilized as originally underwritten.

Second is the $269 million industrial asset outside the Midtown Tunnel in New York. We increased the risk rating this quarter due to the sponsor's unwillingness to contribute additional capital. We have increased our involvement and are executing a revised plan with the sponsor who is currently negotiating lease proposals representing a substantial portion of the vacant space. This newly constructed well-located asset is positioned for potential near-term stabilization.

We also downgraded a $33 million multifamily asset outside Dallas. We anticipate assuming ownership via foreclosure in the near term. Upon transition, we intend to implement a focused value-add plan as we have successfully done on similar multifamily projects. Our basis is below replacement cost, and our captive asset management team expects to be able to execute on a value-add business plan in the coming quarters.

We also downgraded 1 loan to a 4 rating, a $90 million mixed-use portfolio in Ireland that we restructured to extend term and provide flexibility, while assets are sold down. While asset sales have taken longer than originally contemplated, transactions completed to date have been in line with underwriting and our base case continues to support full repayment over time. These are active asset management situations with defined action plans. And while resolution timing may vary, we are highly focused on resolving nonearning assets. Redeployment of this capital will be a tailwind to earnings as we achieve resolution.

Our energy infrastructure lending platform had its largest origination year ever in 2025, investing $2.6 billion across the segment. The portfolio now totals almost $3 billion and remains diversified across power and midstream assets and has one of the highest ROEs in our portfolio. These are senior secured asset-backed investments, supported by durable cash flows and long-term demand drivers in energy and power markets. Loan to values continue to fall in this segment as loan performance remains strong, power needs and capacity auction prices continue to increase and returns remain attractive.

Finally, with the pricing of our 7 CLO, 75% of our SIP loans now benefit from term non-mark-to-market financing, reducing funding volatility.

Turning to our new net lease business, fundamental income. Rina mentioned our integration is on plan, and we currently have a large pipeline and expect to increase volumes over the course of this year, which, along with 2.3% annual rent escalations, will increase returns in the cylinder each quarter and year.

Rina told you, we completed our first ABS financing in Q4 and subsequent to quarter end, we executed our second securitization for $466 million, again, at tighter than underwritten spreads, which will allow us to continue to accretively invest in this cylinder at today's cap rate.

Our net lease business, along with our other owned real estate adds duration and contractual cash flow to the platform, and over time, we expect it to become a more meaningful contributor to run rate earnings. We are a hybrid company with approximately $7.5 billion of owned real estate or 24% of our balance sheet. We are different than other mortgage REITs in our peer group.

In a period where our stock has significantly underperformed, the stocks at equity REITs and triple net lease REITs have significantly outperformed STWD and other mortgage REITs with the largest underperformance coming in the last few months.

It is important to remember that we are no longer simply a mortgage REIT. We operate a diversified real estate finance platform with true scale, operating businesses and a strong, well-capitalized balance sheet with access to capital at the lowest spreads in our history. The diversity and stability across our portfolio continues to uniquely insulate us through periods of sector instability.

Our leverage is significantly lower than our peer group at just 2.4 turns today. While we could enhance near-term earnings by increasing leverage, we have deliberately chosen not to do so, instead prioritizing a strong, durable balance sheet to support our generational vehicle. Insider ownership further reinforces that alignment, standing at approximately 6% or $380 million today, greater than the insider ownership of all our peers combined.

We continue to look internally for ways to improve how we operate. We are investing in tools and technology to streamline underwriting, asset management and reporting processes, and we expect to increasingly leverage data analytics and AI-driven tools as part of that effort. The foundation is in place for STWD 2.0 to come out of this cycle successfully as the only CRE mortgage REIT that never cut its dividend.

Looking ahead to 2026 and beyond, resolving our nonaccrual in REO or increasing originations pace or volume would allow us to earn more than the $1.95 we earned this year, excluding temporary items that Rina noted.

With that, I will turn the call to Barry.

Thank you, Zach, Rina and Jeff, and good morning, everyone. I'm going to use a slightly different tack as I talk about our earnings and what's going on in our industry and the greater real estate markets. this quarter. I think you can see that 2025 was a transition year for Starwood Property Trust. I'm going to take some comments out on my -- the earnings release and talk about some of the points I made and elaborate on them.

The really good news is we built an incredible machine here. We have all the pieces in place to outperform for our shareholders in the long run. And some of our core business had exceptional years with a growing loan book, which has reached record highs, as well as the continued great performance of our multifamily book. Jeff mentioned at 24% and 5% of our assets are in real estate. Our affordable housing book is in some of the best markets in the United States, Orlando, in Tampa, where rents remain roughly 50%, 40% below market rates, and we're exceptionally full and have great pricing power. You can see that with the increase in value of the portfolio just in the quarter that Rina talked about.

But in addition to our originations, which were strong throughout the year, our infrastructure lending business, Heritage GE Capital, [indiscernible] itself, I guess, had a great year. The conduit team had the second best year in their history. It's really one of the best conduits in the country, our special servicing arm, formerly LNR, had a great year also counterbalancing some of the weakness in some of the property lending earnings and continues to be the #1 or 2 special service [indiscernible] in the country with an ever-growing book of named servicing and active servicing in its belly.

And those businesses delivered excellent results for the year and even our residential lending businesses, which have been somewhat dormant gain in value over the year as spreads and rates declined. Those are all really good news. So I asked and Rina telling me like, why are we not performing at the levels we have in the past with such good news in the portfolio. And what we saw are 3 real reasons for that: one, the lack of prepayment penalties that have always been part of our business, but as our borrowers stretch maturities and went to not prepaying them, that disappears.

Equally important was we've taken into our earnings noncash losses. And they are used differently by some of our peers, but if you actually include them because they're not noncash, we would have covered our dividend. That also included in that statement, the drag of having excess cash. We used to run this enterprise at 2.4 to 2.5 leverage beginning of the year, we started at 2.1% leverage, which is a turn to 1.5 turns inside many of our peers. And it's really the nature of the composition of our business lines.

And then with the fundamental investment we made in the third quarter of the year, we actually that business because of its stability and the duration of the cash flows we levered 3:1. That dragged our overall leverage levels back to 2.4 at the end of the year, but the bulk of our business ex the fundamental business triple net lease business still remains historically under leveraged, and we have a lot of cash trapped in the business.

We estimate the cash drag at something like $0.07 for the year. You add them combined, it's almost $0.20 of earnings. I think it's 12, 7 and something else and Rina can give you specifics. And that will reliably cover our dividend. So -- and then we look at our nonaccrual book, which certainly look as a problem, and we kind of do, but we also look at it as an opportunity its future earnings power for us when we have first mortgages like Jeff said, along with 2 money center banks. It's inconceivable like property are not valuable. It's just probably a borrower. In many cases, we find our borrowers are underwater. They don't want to put the money in for TIs. They don't want to put their money into reposition the take out of the space for a tenant. So we have to take it back. That takes a lot of time. And once we have control, we can retenant it, reposition it and in fact, then sell it.

So we've chosen long ball. We've chosen the way to approach our company because we own 400 -- roughly $400 million of stock along with our shareholders. our [indiscernible] was bought by a household name firm for $400 million. Our loan was $200 million. We took it back we could sell it, but it's an office building. We're converting it to a rental building it's underway. We've -- it's going to be a great building in the center of Washington, D.C. And we're confident that we'll return our investment or close to it and maybe make some money depending on how well we do with our renovations.

But that's far more attractive to us than just dumping in and then moving on. So you're going to see these assets because we are a real estate player at our heart. You see us take back assets, reposition them and then sell them as Jeff mentioned in their prior years, we've made substantial earnings doing that. We didn't tend to be loan to own. Let's not kid ourselves. But given what's happened in the marketplace with the massive increase in rent rates and then the slowdown of the recovery of rents as the market had opened overbuilt.

We know that going forward, these assets will produce earnings for us in the future, albeit not at the pace that I might have hoped, but real estate isn't really that kind of business. And we're going to -- we're very confident in the future earnings power of our business. I think especially next year, as we continue to roll out the capital we've committed but haven't funded on loans we've made this year, which Jeff mentioned in just one of our -- it's almost, I think, $1.9 billion our triple net lease business, which was dilutive. I think it was $0.06 in the year should turn accretive next year, and we love that business, 15-year plus leases never a default ever -- ever had we actually underwrote it with the thoughts but we've never had a default. And they're just getting to scale now with our capital.

We've also found that with our expertise in capital markets, we've improved -- materially improved their financing. And so our ROEs are rising rapidly. We just have a lot of overhead on the scale of the business it is today. So as we add assets, we get exponential better contribution to our earnings going forward.

And again, I think we will work through this REO book as [indiscernible] we've organized ourselves to do so, but we haven't netted those losses against the assets directly, and we continue to carry them in the manner that Rina has shown you, which is a little different than some of our peers. I think if you look at the industry as a whole, we were facing headwinds for the last 3 or 4 years. I mean real estate wasn't going anywhere, rates were rising, everything was outperforming. But I think it's safe to say as we look forward, that we have tailwinds now. The decreases in supply in the multifamily market dropping 60%, 70% eventually, we will see record absorptions of apartments in the last year in the United States, record absorptions.

So it's supply down and people still being unable to buy homes, we expect the multifamily markets to turn around and that will help our borrowers and that will lower LTVs. And right now, we're going to get an asset back, we're kind of not sure we should sell it or fix it up and then sell it later. But we also think the second big tailwind is interest rates. They're going lower. The pace at which nobody quite can figure out, whether AI, how deflation it is, how fast it will happen, will it be deflationary, but interest rates will be lower.

The economy is bifurcated. I know the administration doesn't like to talk about a key economy, but you see it -- you see in the hotel industry, the only sector of the market that was up last year was luxury, every other sector, upscale, upper upscale, mid-scale, lower scale economy, everything was down.

And also cost to build replacement cost has continued to stay high. And while they may have dropped a little bit, the cost of building a home, they still remain well above our basis in almost any of the assets in our book. So new supply will be hindered until rents begin to rise again. I guess the negative and the thing that gets us concerned, of course, is AI what it will mean for wealth and potentially unemployment.

But I think this will be a little bit the markets wrestling with us right now. We're all watching it and deciding what we think. I think there's one other positive I should mention, which is as rates fall, one of our transaction volumes will pick up, and that will give us more opportunities to refinance other people and other deals or making the loans to new deals. And I think real estate as it usually is, is usually a safe haven during times of tumult in the marketplace.

So overall, I think we had a solid year, and we've positioned ourselves really well for the future for the next couple of years. We're excited with our team. I also think you're going to make an effort of a strong effort to reduce our costs and use AI to do what we do, like everyone else, or more -- with higher productivity and less cost embedded in the structure. And that's unique to us. We have very large businesses tucked into our mortgage book that all of which are supported by the REIT. And we hope we can make our people more productive and do so in an efficient manner, and we're very excited about taking all those challenges.

So with that, I'll thank the team, and thank you for your support, and we'll take your questions.

[Operator Instructions] Our first question comes from the line of Don Fandetti with Wells Fargo.

It seems like you're increasing the CRE loan portfolio again in Q1. Can you talk about the pace throughout 2026 and also the return profile of these originations versus historical?

Thanks, Don. Good morning, by the way. I think I mentioned in my script that we expect the loan portfolio on the CRE side to go over $17 billion in the first quarter. That would be the first time. We've been growing the loan book for every quarter since COVID, every quarter in COVID, every quarter since we started. I think we've made commercial real estate loans. So it's nothing new.

We are obviously sitting on a little bit more liquidity after all of the cash out refinancings and raises that we're able to do last year. So our pace has increased as we try to deploy that. Rina spoke a little bit about drag last year. I think we did $6.5 billion or so of CRE lending. We expect to do at least that this year. My gut is that you're going to have more maturities this year.

You have people who have executed their business plans on post-COVID or post rate rise loans. You have a number of loans from before that period that simply need to move out of the pipe, and we also have lower rates, which will create more transaction volume. In 2021, you had high $600 billion of transactions in the market. You had 2/3 of that this year. So as transactions move up as rates move down, as maturities come, we expect more opportunities. We borrow inside most of our peer group. We -- our last term loan was at 175 over, I believe, on a new issue, which was incredible and in the high-yield markets were somewhere around 200 over -- no one in our space, well, 1 person in our space can borrow there. The rest can't.

I think we have a cost of funds advantage also being the biggest. We have a bigger relationships with the banks who we will tend to repo with. They pick up across from us. The cross is worth more with us than it is with anyone else because our lines are bigger, and we have relationships. So I think it looks like a very good year for originations. Last year was our second biggest. I would hope that we would be able to beat that number this year. We have $2 billion closed or in closing in the quarter. So we are still paradigm.

We know we have to originate more loans and thoughtfully work out of the REOs and nonaccruals to get back to the run rate that we keep talking about by late '26 where we're covering the dividend.

Got it. And I guess what is your expectation for credit migration near term? I mean it sounds like you're playing the long game, which we appreciate. But I guess that also means that we'll continue to see the sort of like one-off type migrations.

Yes. Barry, I'll let you go after it. Maybe I'll start. Migration, there are people who sell things right away. There are people who -- and that as a business plan. There are people like us who will work on them in each -- we don't have a business plan for what we do with a credit and putting it the pig through the python. We look at every one of them individually. We try to present value what we think the value of getting the amount of cash we would get back in a distressed ish sale today without working on the asset and then what's the present value of the cash that we get back over the time that we would do it.

And then against that, we make assumptions to where we think the property could end up positive, negative. We look at our liquidity, our cost of capital, et cetera, and we look at what information can Starwood with the manager bring to bear to make the asset better. We have a great history of making assets better than the next buyer.

The next buyer is going to be a 20% return, private equity guy who's going to buy from us at a 10% to 12% cost of capital, and then he's going to back up his bit a little bit because of the things that he doesn't know. We know the assets. We have a lower cost of capital. We can borrow against the assets significantly cheaper corporate debt than he can.

That all goes into our individual business plans as we look at each individual asset without having a business plan that we are a fore seller or a carrier of assets. And when we look at those, we make the decision as a management team across at Capital and to our Property Trust. To either stay in and ride it, which we've done successfully. Barry gave you an example of another one that we'll be developing, we expect to have successfully done. I gave you examples of a number of them that I think we resolved $300 million last year in actual resolutions, not foreclosures. We don't call foreclosure resolution. Some people do.

We had $130 million more fallout, so it would have been $430 million. We hope to resolve, we have a sheet and we look quarterly at what we expect to resolve. Our goal is to resolve most $1 billion this year. And if we execute on that, great. And if we don't, it's going to be because we looked at the present value of the cash flows and the cash flow we get [indiscernible] and we're going to make the best decision for shareholders on each [indiscernible] asset. So we don't really have a plan.

But you asked about credit migration. I think we have our arms around where we think the potential problems are as you look at that, property types are going to make a difference. The market it's in is going to make a difference. Tenant movements are going to make a difference. It's all very bespoke, but we feel like we really have our arms around where the potential problems are going to be.

Got it.

Should I add a few things? Did you hear me okay?

Yes. Go ahead, Barry.

Yes.

I mean to say we don't have to plan and we have business mentioned assets. And it's been remarkable, the amount of money we had 1 asset that cash back was $1 billion to [indiscernible] $400 million and the borrower lost when they walk, they really haven't -- obviously, tenants want to lease. They know the buildings in trouble. They're not going to go in the building is [indiscernible] to CI. The borrower has absolutely 0 in the center to do anything.

So in multiple spaces in our pipeline, we expect -- and like we are not supposed to be leasing the building stores. And if we're going to put the [indiscernible] for the TI, they don't want to get the asset back [indiscernible] their positions. So we've fines our goal, we pay fair ball and we try to work with our borrowers as we can. I think the multi-business is particularly interesting. I mean it's one of the all remember on [indiscernible] we started [indiscernible] with all Star Financial intestine iStar and wound up taking back a whole bunch of stuff in GFC turn that themselves until the past equity data fortune.

Obviously, the best thing we can do in a loan is get our money back. And that's primarily our business as a of our business, and we're happy to play in that ball game or timing the real estate grow. But long term, you make more money on the assets since we're comfortable owning great assets, although we are looking at what we can recycle once we stabilize our assets. And I'd say like for the most part, it's mostly good news, I get to asset back to find out there's great demand for [indiscernible] and we're in spot to be able to move these properties. But I don't get to [indiscernible] on a quarterly basis. Our sands don't march to our Fort River. And our borrowers don't give up the keys always we in many cases they do and work collaboratively in the exception, they might move slower.

I think people are surprised. I think in the real estate world today, I think borrowers are surprised with the slow pace of program at multifamily market. And why you have some positives to potlines and maybe some of the fare cities that saw no supply, but you haven't seen the green shoots you can look at parent every public company, maybe say one the growth rate of the Sunbelt markets is not great. The rental growth of [indiscernible] rate we're getting positive on renewals and negative on and leases pretty much across the board and maybe a plus 1 or minus 1 or plus 2, I might see that it's not but if expenses continue to march higher.

So you have stressed P&Ls. And the other thing when you look at our attachment , where we're alone is as opposed to like whether you build it or bought it, in many cases, the loans have transitionally some capital position multi, I'm kind of happy to get it that. We are able to move them. You'll see we probably have a [indiscernible] assets. We've even our pipeline in a year today.

But mixed emotion, we really like the market, the Sunbelt maybe overbuild, but it's where all the jobs are. It's where this world is some piece being the better headquarters factory [indiscernible] and it's where the cost of resin is generally less since where they write to workspace. If they're attractive states and attractive markets for the ensuring of the [indiscernible] of the country.

So when you know there's a new factory going up in 1.5 years and say have to build new markets. Do you want to sell the multi now? Or if you want to keep a guy Jeff said, it's an opportunity fund he's going to buy the asset. And we're not exponent what we do in another part of our world. I always tell Jeff like, we'll buy it. We don't do that. But in the case, we already on it. So we'll just keep in the red we only keep the would have sold it.

So I think it's sloppy for you because we're not -- we're uniform in our space. And if we really thought we were -- we had an issue, we're not worried [indiscernible] as Rina said when you take out the noncash losses they've got some good cash track that we to put them to place and we're pretty confident from the mental will reach very leveraged with over net base.

And so once it reaches pivotal math at all so we don't have to have a body or a dollar to go over that. So it becomes pretty positive and reliable referring as stable, which is exactly [indiscernible] used to go public in 2005 with system river. We've had some potholes, but you're on a playing field, you have this kind of disruption. -- in our markets in the condensate office market is inevitable.

So I'm fairly proud to the way we're negotiating a company's REO assets, and we're looking at whether we should turn our tools back on in some asset cases because the performance has improved. So it's a mishmash, it's unfortunately hard to take.

[Operator Instructions] Our next question comes from the line of Gabe Bagge with Raymond James.

I wanted to talk about the residential portfolio and then the infra book. So on resi Jeff, is there a point where -- I don't know in the market where rates get to a certain level where you guys look holistically and say that maybe you can sell the portfolio to kind of under the capital that sits under that to go make more infra or CRE loans? And then Barry, on the infra side, Barry and Jeff let's just remind us, what's the total opportunity set for the infra lending business? Who are your true competitors? And how big can that book get over time?

Thanks, Gabe. Barry, again, I'll start unless you want to start. But on your first question on resi. Resi performance has been great. I think we had a markdown or a GAAP book value of $247 million back in '22 when the rate change happened. We are significantly below that today. I think it's 100 and after hedges might be a little bit higher than that, but we've got back a significant portion of that by holding on the same strategy that we've used.

And also the thing that would surprise you is because we have a lot of legacy RMBS in bonds that we have, I think our ROE on our resi portfolio that's hurt for you to see because you see loans marked at 96 or 97, that we paid 101 or 102. I think our run rate ROE is around 11% today across the entire resi business.

So to your point, 2 things will make it get better, spread tightening or lower rates. Spread tightening has come our way. Spread securitization, spreads have tightened 25 basis points since January 1 alone. We're at the tightest securitization spreads since the middle of 2022. Securitization issuance, I think, is $10 billion year-to-date versus $5.3 billion at this time last year. Insurance cares about these assets, they get great insurance treatment and that along with the 3 conduits and others. There's a great bid for the types of assets that we've historically like -- that's allowed us to mark them up. That's allowed us to reduce that GAAP book value loss significantly.

So from here to get the -- if we can't count on spreads being significantly tighter from here. They probably can tighten a bit, but they've made their move. So to get back from the $966 or $97 or $98 price to par or $101 or $102. Rates you're going to be the other piece, you mentioned that. Lower rates help us because it increases CPRs. We were running at 5 or 6 CPR in our non-QM book, the last couple of years. We're up to 8 or 9 CPR today. We get more back at par when that happens. That's good.

I think in the house, although we never make, that's on rates. We believe rates are probably headed lower. It certainly feels like the AI-driven productivity will match that of previous productivity gains that we've seen and drive rates lower. We don't make any real bets based on that.

But if I'm betting on that and betting on rates going lower, that will certainly help that book. As you know, we hedge that book. And so we're always moving our hedge around a little bit. The only way we'd probably get back to getting that full write-down back is by reducing that hedge a bit and being correct on rates going lower, not something we historically do.

And I think we'll wait and see. You create a distributable earnings loss when you take that GAAP book value hit into earnings. We like the assets. They're returning 11. So I don't think we're going to rush to sell. Barry, unless you have anything on rates, I would then move to infra [indiscernible] in the room. Barry, do you have anything you want to add on residential?

Not really. I mean we want to go back in the adding value in were going back into the business, so there's a good business were between in place capable. We have on the numbers with. So if we can go back and anything that -- we're 1 of the reasons a diversified business models when some are available have to put out like verticals. And we see this introduction to Sean because we position to that business and to have another material lending [indiscernible]

Yes. Well, before we go on, I will say we looked at, I think, 21 different resi originators last year. We've talked about getting back into resi origination. The combination of rates being a little bit low and spreads being a little bit tight, make it a little bit hard to jump in today, but we're always looking. I can't imagine we don't get back in the origination game on the resi side in the near future.

We're just waiting for the right opportunity. And on the infrastructure side, you asked about the potential size of the market. So I'm going to turn it to Sean Murdock, who's done a great job of doing sole originations to kind of get off the treadmill of what that market is, but Sean, who runs that business for us.

Sure. I mean I think the best way to textualize the opportunity is to just talk about energy consumption in the United States and a great -- a couple of great points, electricity consumption over the next 5 years is supposed to grow at sort of a 5% kind of annual CAGR another good statistic to look at is the LNG export boom we've had in the U.S.

We're exporting roughly 15 Bcf a day of gas to consumers around the world that's supposed to double over the next 5 years. So we feel like there's a big tailwind to growth, both from the obvious AI data center value chain as well as LNG exports and other sort of new initiatives that create a bigger market for us in which to prosecute opportunity. You asked about our competitors.

I think it's similar to Dennis' business and CRE lending. We've got commercial banks that still make loans in our space. We also compete with alternative debt funds. They're just maybe not as many as either given ESG constraints around some participants in the market.

The third issuer of infra CLOs did their first deal at the end of last year, concurrent with our Seven Steel Barings Asset Management. So competition is growing a little bit, but I think the tailwinds on demand for energy are significant and inform a much larger opportunity set for us over time.

[Operator Instructions] Our next question comes from the line of Jade Rahmani with KBW.

Just at a high level follow-up to Don's initial question. Do you think credit is getting better or worse. It does seem to have deteriorated in the quarter. However, these could have been primarily problems you already knew about -- and the new problems seem to be not in office, I think that everyone is called over the office exposure quite thoroughly, but in multifamily where, as Barry noted, rents remain soft and also industrial. So could you just comment on your overall view on credit trends?

Barry, I'll go first and you can go after. We had -- I hope you heard in the beginning of my discussion, we had a lot of leasing last year across a lot of assets that we may not have thought we would have that. There are always some [indiscernible] thing that might happen in the portfolio.

And as you mentioned, a couple of industrials, one of them that we moved to 5 that we actually feel very good about potential leasing on, but we felt it was right to move to 5 because the sponsor stepped away. One was a studio deal not something that was really in our office per view.

So I think where it comes from here, as we've seen green shoots, and I mentioned the number of green shoots in the REO sales at our basis in multi. As I look at our multibook, even if you have a 4 cap asset from 2021 that you wrote a loan on expecting a 5.5% debt yield, if you only achieve the 4.75% or 5% debt, you're not losing much money on those. -- they're very close, and it's just a matter of which side of par are you on.

So I think the multi losses across most of our books should be paper cuts unless someone made a really big mistake. So -- we -- rates will help -- bail that out if you end up with a 3% area for SOFR, which is what the market is saying today, those losses should be completely immaterial for just about everybody.

If forward SOFR back up to 4%, then there might be a slightly different discussion. But you know that on a few bespoke industrial assets, whether it's market or tenant or other reasons, that's where we're seeing a couple of things pop up. But I would say, overall, the positives are better than the negative. And when I say positives are better than the negative to your question, to me, that means the credit cycle has turned a bit.

Barry, do you have something to add to that?

No. If real estate is going to catch a bit. I mentioned that over the equity markets rock can shake people come back to the property set to [indiscernible]as fast in the world, we were operating in Europe, U.S., Australia. And in general, markets are better. We're all confused, I think, in the interferon talk about the world in [indiscernible] the margin the fear and the anxieties.

And yes, what you see the market they're behaving pretty well. Cities office market, even despite [indiscernible] been pretty strong. Our housing market remains very strong. So on the West Coast continues to performed pretty well. And I think the political class and political interactions something to watch. I think we have careful about both the union costs and assets we lend against and also cities like, of course, New York City and property tax I mean that takes the value of the office pool and not material in connection to it.

So we're blessed with not that big or portfolio in the city and were most of those loans, but that's going to be a in earth break and he passes that and then some goes through and then you'll see an interesting thing. We think all sometimes in China will pick up the pace in usual you do certainly on the rental on the role of the time. I don't know. But it's -- we need to kind of uncertainty, it's a change or in general, we're definitely not tailwinds and we sell into part of the year.

I think what you're seeing in our lease in our pressure servicing because some bars are just guiding up. I mean they plan for things to get better, we will scale that to '25, '25 is passed. The interests fell, but NOI line didn't go up and what is ad growth in the U.S. population for the first time in a [indiscernible] ever, are 50 years [indiscernible] might have a shot that one.

But I mean that's definitely affected [indiscernible] markets. [indiscernible] to point not only people are integrating voluntarily, but -- we used to get a million or so legal in event year. And the U.S. just as you've seen a rash and travel is not for us places or better people assumptions. And so they're not having here and the work when people leave cutaneous growth.

I think some of the weakness in GDP is a factory of no contribution from immigration. So we -- I think most of us want to shovel or a lower amount of that we run on state completely, but legal undergone something loose much in favor, and we need to get as together we want to see an acception will be to the economy or restatements.

Just on the earnings path to covering the dividend. Over what time frame is reasonable to expect? Is it your expectation that by the fourth quarter of this year, DE will be in line to potentially greater than the dividend? And are there any outsized gains you're expecting in 2026?

Barry, do you want to start?

[indiscernible] right I need it. I think you'll see us get a little better every quarter. We have a lot of things. It's hard to say because there are some things we're considering, I mentioned turning on non-approval loans that we're still evaluating. And so -- and we have some really good things in the pipe where we have to get them done. So I'd say that, again, if you take out the noncash loss of [indiscernible] the 5 years, but by $0.12 debt.

We have the earnings salary. We have it anytime we want it. We can sell up assets that are [indiscernible]. There are 56 of them, Jeff. Yes. Could you leave me, Jeff.

Yes. No.

We're just trying to -- we're -- like I said, we're playing long ball and the assets are great and contributing meaningfully and should have virtually no real serious competition. It is -- I have to say, if you don't know how hard it is to build affordable house in this country, it is ridiculous.

And we're in the business, I sort of entered it on the equity side, and with all of the -- what I'll call the Brits along the way that you pay off the consults brands you need at not for profits, you have to get off. It costs almost twice as much how to build affordable building as a market rate low.

So -- the way to do this is not the current structure you basically should go the market or department tension it to not it, then we'd have more affordable housing. It was an eye-opening experience for me. And it takes 14 different grants of [indiscernible] business associations and you institute [indiscernible] equity is quite a our business, and it doesn't really work very well.

They need to do something about this, but they should track the whole structure and try something else because we need for [indiscernible] housing in all these markets and we have our [indiscernible] guidance. [indiscernible] it's Miami was the most affordable city the United States. Half the population makes less than $50,000 a year. Occupancy in the [indiscernible] 99.5%. Don't remember, afford by housing rent go down. The 1 other down live.

So what we're finding, though, is that the calculation of the rent growth is strong, but our ability to pass it on gets a little tough sometimes you feel bad tend to go. So it's a very odd corner of the world in real estate that we think with the [indiscernible] largest affordable housing on a 62,000 units across our portfolio. So it's a fascinating business.

And you can -- and we look at markets where [indiscernible] rents have approached market rents, which spike [indiscernible] you can't raise longest move out, but in Orlando and Tampa, where the REIT owns its properties were, as I mentioned, 30% market led. So we're pretty protective get good runway and they're also [indiscernible] federal government. So we always line up with lower teens that I think what's the number that rolled over from 2025 and to keep trials in '26 that we can't take last year.

Yes. It's about 9%, Barry, that's carryover.

9% rent growth. So it would allow us to take like 8% or 9% in individual markets and then the rest of it, the calculation on net or I think last year was 15% rent for a we would let us pass it on, but we take 5 or 6 points in the next year. So it's -- as I said, it's the gift giving. And when we bought those -- I think you know me, I said, "I want to buy things in a REIT that we'll never have to sell." That I want to state that have no [indiscernible] and that is that book -- is the same for sell it, but it does have -- we have no equity in the portfolio. We have refinanced all right, we got a $200 million, $300 million out negative basis, and we have a $2 billion gain, something like that. So that's even [indiscernible]

About 1.5%, Barry.

Yes. [indiscernible]

Thanks, Barry. So Jade, I think the earnings trend is improving. I think as Barry just said, our Woodstar $1.5 billion of Woodstar gains give us unique staying power and we'll continue to work the year to maximize shareholder value to Barry's other point. And I made it in my opening remarks, but I don't want it to be lost on people. The equity REITs are doing really well. Owning real estate, long-term assets, like Barry said, has been a pretty good trade. For whatever reason, our stock is not trading very well. But we are 24% owned real estate with long duration and large gains...

Can I interrupt, this is something that we didn't say and I think we should say. Our triple net lease business in the market would be guided, think Jeff yield. That's the comp and you take the high end, there's some trading even tighter than that. So if it gets to scale, and we're not getting the performance of our stock and then continue to like a jump credit, we'll spin it out. because we have a big gain in that business, we'll have a big gain in the business.

And we're -- it's obvious to us that a 6% dividend stream in trading in the 10.8% dividend stock is [indiscernible]. So we're not idiots, I mean -- but we'll grow the book and then we'll spin it out and see like we did long ago when we spin our residential housing business and start rate point. We'll do the same then.

I mean we have to get recognized for the value of the portfolio, and we'll just be the income stream our credit markets actually appreciate it. I mean we have the tightest spreads in our sector, but the equity market still -- and I think it's confusion over some of the different accounting methods between the different firms in our space.

And also, I think some where they don't have diversification. They don't have -- they don't have the kind of something we put together by purpose. We are -- we continue to look at other things, too. So Sean just lost a very large deal. Well, maybe you lost it. We're hoping to get it back. But -- there are other things that we have , which we could deploy capital really rapidly and get us the earnings power we need faster. So that's why it's hard to answer that question that was asked earlier.

Thank you, operator. Are there any more in the queue?

There are no further questions at this time.

Thank you, Barry. Thank you, everyone.

Thanks, everyone. And we'll be with you next quarter.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.

Greetings, and welcome to the Starwood Property Trust Third Quarter 2025 Earnings Call. [Operator Instructions]

As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Zachary Tanenbaum, Head of Investor Relations. Thank you. You may begin.

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.

Additionally, certain non-GAAP financial measures will be discussed on this call. For reconciliations 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; Jeff 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.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings or DE of $149 million or $0.40 per share. GAAP net income was $0.19 per share. Our new net lease acquisition, which I will discuss further in my property segment remarks contributed to lower GAAP earnings due to $0.04 of depreciation and lower distributable earnings due to $0.03 of dilution in part because the new assets contributed to only a portion of the quarter while dividends were paid for the full quarter.

We also experienced higher-than-normal cash drag given the $2.3 billion of capital raises we completed in the quarter, we expect earnings to normalize once this cash is deployed and our new acquisition increases its investment pace and completes the refinancing of the existing facilities. In the quarter, we committed $4.6 billion of new investments across our businesses, including $2.2 billion in net lease, $1.4 billion in commercial lending and a record $791 million in infrastructure lending, bringing total assets to a record $29.9 billion at quarter end, and demonstrating the continued diversification and strength of our unique multi-cylinder platform.

I will begin my segment discussion this morning with commercial and residential lending, which contributed $159 million of DE to the quarter or $0.43 per share. In commercial lending, we originated $1.4 billion of loans, of which nearly all was funded, along with another $219 million of pre-existing loan commitments. After repayment of $1.3 billion, including a $58 million office loan, this portfolio grew $271 million to $15.8 billion.

On the topic of credit quality, we continue to resolve our higher risk-weighted loans and foreclosed assets, which Jeff will discuss. We have $642 million of reserves $469 million in CECL and $173 million of previously taken REO impairment. Together, these represent 3.8% of our lending and REO portfolio and translate to $1.73 per share book value, which is already reflected in today's undepreciated book value of $19.39.

You will notice in our 10-Q that we classified a $33 million 5-rated mezzanine lung on a Dublin office portfolio as credit deteriorated. The loan already maintained an adequate general reserve but in light of a pending loan modification, the reserve was reclassified from general to specific.

Turning to residential lending. Our on-balance sheet loan portfolio ended the quarter at $2.3 billion consistent with last quarter as $52 million of repayments were largely offset by $41 million of positive mark-to-market adjustments.

Our retained RMBS portfolio remained relatively steady at $409 million. In our Property segment, which now includes our newly acquired net lease platform, we reported DE of $28 million or $0.08 per share. On July 23, we completed the $2.2 billion acquisition of fundamental income properties, which contributed $10 million of DE in the partial quarter from acquisition to quarter end.

The purchase was treated as an asset acquisition for GAAP purposes which means the purchase price was allocated to properties and lease intangibles. The portfolio consists of 475 properties diversified across 61 industries and 43 states with a weighted average lease term of 17.1 years and occupancy of 100%. Two comments I would like to make on the accounting ramifications of this acquisition.

First, from a GAAP perspective, you will see elevated depreciation and amortization levels. The impact was $0.04 for the partial period with this pace expected to accelerate as the business contributes fully to future quarters and as we acquire new assets. Second, from a DE perspective, we introduced a new GAAP to DE reconciling item for straight-line rent, which is noncash.

In our Woodstar affordable multifamily portfolio, we refinanced 30% of the portfolio's assets with $640 million of new debt. Of this amount, $310 million repaid maturing debt and $302 million was received as incremental proceeds evidencing the significant value growth in this book during our ownership period.

The new debt carries a weighted average spread of SOFR plus 176 and a 10-year term. $368 million of this refinancing closed in the quarter with the remaining closing in October. Our Investing and Servicing segment contributed $47 million of DE or $0.12 per share to the quarter. Our special servicer continued to benefit from elevated transfer volumes, which were once again dominated by office loans. Our named servicing portfolio ended the quarter at $99 billion.

Active servicing balances rose to $10.6 billion due to $300 million of net transfers in, most of which were office driving special servicing fees higher in the quarter. In our conduit, Starwood Mortgage Capital, we completed 5 securitizations totaling $222 million at profit margins consistent with historic levels. Our Infrastructure Lending segment contributed $32 million of DE or $0.08 per share to the quarter.

We committed a record $791 million of loans of which $678 million was funded and received $691 million of repayments, leaving our portfolio balance steady at $3.1 billion. Subsequent to quarter end, we completed our sixth actively managed infrastructure CLO, a $500 million transaction that priced at a record low coupon of SOFR plus 172, further expanding our nonrecourse capital base.

Turning to liquidity and capitalization. We ended the quarter with $2.2 billion of total liquidity, elevated due to our recent capital raises and cash out refinancing. Our debt to undepreciated equity ratio remains stable at 2.5x, and we continue to maintain over $9 billion of available credit capacity across our business lines. During the quarter, we executed $3.9 billion of capital markets transactions, including $1.6 billion in term loan repricing at 175 basis points and 200 basis points over SOFR, two high-yield issuances, one for $550 million and $500 million at fixed rate of 5.75% and 5.25%, a $700 million 7-year Term Loan B at 2.25 over SOFR and a $534 million equity raise that was accretive to GAAP book value.

These actions increased our average corporate debt maturity to 3.8 years with only $400 million of corporate debt maturing between now and 2027. With that, I will now turn the call over to Jeff.

Thanks, Rina, and good morning, everyone. This quarter, we continued to operate in an environment of improving stability in credit market performance. The forward SOFR curve now points to rates falling into the low 3% range by late 2026 about 100 basis points below where expectations stood a year ago, which is positive for our legacy credits. That shift, combined with steady credit spreads and supported a more constructive real estate financing market in which we expect to maintain our elevated origination pace.

In commercial real estate, we're seeing signs of increasing transaction velocity as buyers and sellers narrow valuation gaps and capital flows return to higher quality assets. Banks remain selective and continue to favor growing their secured financing lines over competing with us for whole loans. This allows well-capitalized lenders like Starwood Property Trust to lend at today's tighter spreads while maintaining consistent risk-adjusted returns and strong structural protections.

We built this company to perform in all environments, diversified across lending verticals, servicing and owned properties, which creates a balance sheet that provides flexibility and durability. That diversification combined with consistent access to capital allows us to invest through cycles and position for growth as the markets normalize. Following the capital markets activity that Rina mentioned, our liquidity stood at $2.2 billion, leaving our balance sheet well positioned to support continued investment across our debt and equity businesses, and our intent is to continue to grow.

Our commercial lending origination through the first 9 months of the year alone totaled $4.6 billion on pace for our second highest year in our 16-year history. Our total investing pace through the first 9 months across all businesses was $10.2 billion, also putting us on pace for a record year. The full earnings power of these new investments will be felt in 2026 as we continue to fund our existing loans and add new ones.

In commercial lending, we continue to lean in on our core investment themes, data centers, multifamily Industrial and Europe while maintaining a disciplined credit posture. Our U.S. office exposure remains low at 8% of our total assets, down from 9% last quarter. As always, we remain highly focused on credit. Our total CECL and REO reserves Rina mentioned, reflect prudent additions on a small number of challenged assets were somewhat offset by the upgrade of a $139 million office loan in Brooklyn from a 4 to a 3 risk rating in the quarter.

The improvements followed strong leasing progress that is expected to bring the property to full occupancy in the fourth quarter. This quarter, we downgraded 2 loans to a 5 risk rating, a $242 million mixed-use property in Dallas and a $91 million multifamily in Phoenix, both of which were previously 4 rated. We expect to foreclose on these loans in the coming months, and we use our internal asset management function and the expertise of our manager, Starwood Capital Group, to stabilize operations and reduce elevated expenses before we look to exit in the coming year.

To date, we resolved 7 loans totaling $512 million. There are another $230 million of resolutions currently in progress, all of which are expected to recover our original basis. To clarify, we do not consider an asset to be resolved until it is legally exited our balance sheet. So these resolutions exclude foreclosures of $1.1 billion.

Inclusive of foreclosures of resolutions total would be 16 loans for an aggregate of $1.6 billion GPD. We also had 3 loans moved from a 3 to 4 rating in the quarter, a $107 million studio loan in Queens, a $267 million new build industrial assets just outside the Midtown Tunnel and a $33 million multifamily in Dallas with the downgrades due to slower-than-expected leasing and sponsor liquidity challenges.

Our infrastructure lending platform, again delivered strong results with origination volume of $2.2 billion in the first 9 months of the year, exceeding every full year since we acquired this platform from GE in 2018. As Rina mentioned, we completed our sixth infrastructure CLO subsequent to quarter end with nonrecourse, nonmark-to-market CLOs now financing 2/3 of this portfolio.

In residential lending, we continue to evaluate strategic opportunities to reenter the residential origination space as credit spreads tighten, treasury yields are stable and market dynamics improve. Our Reis business continues to be a stable and countercyclical contributor with LNR continuing to be ranked the #1 special servicer in the U.S., and we expect above-trend revenues to continue in the coming quarters and years.

Our CMBS conduit lending business continues to be a strong performer and our CMBS portfolio continued to benefit from significant demand for credit assets and the resulting spread compression. Turning to our Property segment and our new net lease platform. The team has already begun originating new transactions.

And after they were out of the market for a number of months during the marketing process, we are building a very strong pipeline. The triple net assets we acquired have strengthened our portfolio diversification by increasing recurring cash flow from long-term triple net leases financed with long-term fixed-rate debt. We remain focused on scaling this business through its established ABS Master Trust securitization program.

Post quarter end, we completed the first issuance under our ownership for $391 million at a record late spread of 145 basis points over the 7-year amidst strong investor demand. We expect subsequent securitizations to continue to tighten given the Master Trust grows and becomes more diversified with more securitization.

Rina mentioned the significant depreciation of the portfolio creates which will lower our book value over time. And thus, we will once again be encouraging investors to look at our undepreciated book value. We underwrote and expected this business to create near-term earnings dilution through integration as it did this quarter, but we expect it to contribute positively to distributable earnings as we scale.

This quarter's results highlight the strength of our diversified franchise and our unrivaled access to multiple sources of capital. We remain proud to be the only commercial mortgage REIT that has never cut its dividend. With strong liquidity and our opportunities set increasing, we are positioned to grow and thrive as markets evolve with the balance sheet built to withstand volatility and capitalize an opportunity.

We continue to invest in technology and artificial intelligence to enhance efficiency and decision-making across our lending and servicing platforms. These efforts are already yielding better analytics and faster response times, and we expect them to support long-term margin expansions as they scale. In fact, I used AI to write the bones in my comments today. With that, I'll turn the call to Barry.

Thank you, Jeff, and thank you, Rina, and good morning, everyone. Just some quick filling comments, I guess, since Chad wrote the bones of Jeff's comments, can use this agent and isn't able to talk anymore. We can just have this agent speak for himself. But moving back to and filling in some comments. I think it was an interesting quarter. Obviously, only half of our book today is still large loan lending. It's about half of our assets, about $15.5 billion on almost $30 billion of assets.

I think we created a near-term trough for ourselves with the fundamental acquisition. It was a strategic move. And while it was dilutive of at least $0.04 in the quarter. You have -- it is very leveraged to its overhead. We bought an entire business, including the management team. And as you scale the book, the results of the accretion of the book becomes rather dramatic and 2 things we see.

One, our cost of financing has dropped, as Jeff mentioned in his final comments at $145 million over, that's materially better than we underwrote when we bought the business and two, the opportunities that we didn't realize that they had been out of the market as far as long as they were during the sale process.

So we didn't produce enough net lease in the quarter. But by stretching the duration of the book, the 17 years average lease and the inherent bumps in the rent, which averaged between 2% and 3%, we've actually stretched the duration of our book. And now we have a business inside of us that -- and if you look at triple net lease REITs in the marketplace, they're trading between -- well, was 2%, but normally on 5% or 6% dividend yield.

So you have a business that's worth inherently more in us with the parent paying close to 10.5% at the moment. So we will grow this rapidly and we'll have to spin it off and we realize the value of the extraordinary business we bought. It will get better and better over time. But near term, we are definitely suffering from the dilution and probably didn't communicate that well enough to the analyst community, though we remain very optimistic about the pipeline and the future growth.

I'm going to step back for a second and talk about the whole company and then the economy -- starting with the economy. And the economy is a bit bifurcated, as you know, with the lower end of the market, not doing very well and the body market doing extremely well. But one thing as it affects real estate as you'll see, we see tremendous volume in transactions in Europe.

And as the rate complex comes down, as the shorting comes down, and we all know it will come down, certainly by May of '23, when power were placed, but likely before then, and it's only a question of the pacing between now and then. Transaction funds in the United States should pick up dramatically, too. And what you're seeing is a lot of people thought rates would be lower.

They're not through the woods yet, rents haven't yet responded in the growth phase in most asset classes in real estate. But I think if you're looking backwards, you're looking the wrong way. I mean what we saw was a 500 basis point early vertical increase in rates happened very suddenly.

Company's have to portfolios had to adjust to that, their caps burned off over time. But in front of you, you have a declining interest rate curve. And more importantly, have a very [indiscernible] the United States, a very meaningful drop in supply. So fundamentals should improve unless we get something of a serious recession, which isn't likely to happen in many quarters of the country because networks are up and people are doing okay.

Energy prices are calm, inflation were higher than people would like, is probably onetime with the tariffs. It will bleed through in the fourth quarter and the first quarter with the labor market should continue to weaken. And I think that sets up for a pretty benign period for real estate.

And the pretty sound fundamentals coming out in '26 and as we emerge from this still increase in supply in the multifamily and the market rate multifamily. One of the other interesting things when you look at our company and you talk about the dilution, which is, we hope, temporary from fundamental is we're sitting on a $1.5 billion gain in our affordable book.

And there, we've mentioned last quarter but not this quarter, rents in the portfolio will rise 6.7% we know already. That's the carryover from '25 to '26. There will be an additional increase most likely in April of next year. that might put the increase closer to 8 or even higher of 10 will only probably be able to take a carryover 2 to the following year.

So that inherent growth in our book, that gain is available if we wanted it ever to cover the dividend. But we choose to enjoy the fruits of that portfolio. As Jeff mentioned, we did a $300 million cash out refi on just 30% of the book this quarter. And I will say that, that is one of the most important things about this year for the -- for our company is the complete fortress balance sheet that we've been building at ever lower spreads to so for and stretching duration and moving to less secured debt and repaying repos, it's a fundamental change in the balance sheet, which is probably for sure, the best in the industry.

We'll continue to do that and continue to diversify and continue to strengthen our balance sheet in an effort to continue to bring down our costs, which will allow us to, in the case of fundamental, we can do a deal at a 7% to 7.25%. And instead of a 7 3 quarters because our cost of funds has dropped dramatically and is a competitive advantage for the franchise.

So I think -- I don't really have much more I want to say. I think that we're very productive at the firm is producing lots of new paper across all its platforms, the businesses, particularly the residential business now with lower rates perhaps we can recapture some of that capital that's there.

Also, we look to resolve our REO and nonaccrual assets. And we can see the future in our book as the capital is laid out, we know we can grow our earnings and get back to a place that we want to be, which is earning well north of our dividend. So from a regular way business, we can always get there if we want. So thanks. And with that, we'll take questions.

[Operator Instructions]Our first question comes from the line of Don Fandetti with Wells Fargo.

Can you talk a little bit more about your near-term DE expectations? I mean you're running below the dividend. Obviously, the net lease will ramp up and some other factors. Can you just sort of give us a framework there on the timing of covering the dividend?

Barry, do you want to take that?

Well, we can lay out our book, and we can see here. In an individual quarter like this one, if you put the money out in the last month of the quarter, you don't get the full benefit of the capital deployment. So it will ramp going up, hopefully settle each quarter.

We're looking at other assets that are -- that we think can become productive earnings assets again that are turning the corner. So I don't know, RIna, you want to fill that in a little bit more. But I think in general, we're -- we probably have one more quarter of, I would say, rougher, but not the real earnings power of the company, and then I think it's a pretty clear sailing.

Yes. We expect to vary over a year ago when we modeled the sort of the trough in this period that goes into early next year and then those earnings start to pick up as we get future funding as the funding on a lot of these portfolios increased as fundamental starts to grow.

And we have a few other good news things that we hope will happen in early '26. So we believe that we're on a path to getting back to where we've historically been in the not-too-distant future.

Got it. And can you talk a little bit about where we are on the credit migration front and building reserves? I mean do you think -- are we looking at like 2 or 3 more quarters of just uncertainty migration and risk of building reserves?

Yes, it's a great question. We obviously did move a couple of things to 4. We moved one back down an office building that people probably would have thought would have been terrible in Brooklyn. We've now the 3 very large leases that will fill that entire building, and we'll decide whether we're going to hold it or move on from that.

But we're back at our basis, and so that was a great outcome on an office. And on the other side, it's been a few undercapitalized sponsors who just haven't leased up as quickly, but moving some loans to 4. I think we tend to know the flavor of what these look like. It's a few of the apartments that we did in 2021 against 4 caps that we expected a 5.25, 5.5x debt yield, we probably got there. But given the rate rise, it's probably not quite enough to get out. Those would be very small losses if we did take losses in the multis.

But for the most part, we've already worked out of 3, and we have another 2 coming at our basis on the multi side. And in general, I think we don't expect to have larger losses there. And the office side, it's known problems, whether they get slightly better or slightly worse from here is what's going to create any movement within 4 and 5.

But I think we know what the subset is today, 3 years after the rate rises began, it takes a while to figure it out. In general, our sponsors have continued to put in equity across these assets, even the ones that we've moved from 3 to 4, all had new equity coming in from the sponsors. So you get a little bit surprised sometimes if the sponsor decides not to defend a significant amount of equity. But for the most part, I think we see the playing field now. So I wouldn't expect a significant build from here, Doug, if that's the direction of your question.

Our next question comes from the line of Jade Rahmani with KBW.

Regarding the REO nonaccruals, are you expecting sort of a steady cadence of dispositions and ultimate resolution and over what time frame?

Yes. I think we said we've got about $500 million that we've resolved and $1.1 billion that we've foreclosed on. So some people would say that's $1.6 billion. That's not how we look at it, though. We have a 3-year plan with our Board, and it's about 1/3 per year is how we're looking at it.

So we hope to have this pick mostly through the python at some point in 2027, late 2027. And along with our larger lending book picking up and offsetting it, the loss of that drag at the same time that we have a much larger book contributing. We really look forward to getting through next year and looking at a much greater horizon beyond. But I don't have a perfect time line, but it's about a 30 years.

I was I was just going to say that we do have too much liquidity. $2.2 billion is probably $1 billion higher than we normally carry. So that's additional earnings power. It's just a question of how fast we can deploy it. We just do models. But -- and now you're seeing also repayments.

People are paying us back again, which is good news. So we can lay it out the capital with fresh lenses. But it will pick up. I think you'll see additional repayments in the U.S. as rates fall. So not so much rate of spreads. I mean spreads are crashing and across the corporate and real estate credit markets, fortunately, aligns are going with it, but keeping our net spreads attractive and consistent with prior years.

But it is leading to a lot in refinancings. I think a parent company will do something like $30 billion of refinancing this year. And that's -- we're like everyone else, we're refinancing anything that's not nailed to the ground because of the attractiveness of spreads.

And that $2.2 billion is a really big [indiscernible] closer to $1.4 billion after we pay down the secured debt that we expected to pay down on these high-yield issuances. We have a bunch of expected fundings. And as Barry said, we did have significant repayments. We had $1.3 billion in CRE and $700 [indiscernible] That's $2 billion of repayment, so it's over $500 million of equity. That came in at the same time as these high-yield deals that we accretively did and the term loan that we accretively did. But with the expectation of we paying down secured repos in a bunch of fundings on this larger pipeline happening in the near future.

If you add in $150 million or so of equity per month that we expect generically to put out in our run rate businesses should they maintain today's pace, we're right back to a very normal liquidity position in a few months with a lot of firepower to continue to grow.

I wanted to ask about the multifamily market. I think it's been somewhat disappointing the second half of this year where everyone expected turning the corner on the supply overhang and rents troughing and starting to perhaps grow that seems to be pushed out. But generally speaking, aside from the Florida affordable housing portfolio, what are your views on the multifamily sector. And now are you more bullish about the outlook in 2016?

It's Barry. While we -- while supply will drop 60%, 65% or more in some of the markets, and we on 110,000 apartments, of which 53,000 are affordable in the balanced market rate. It is city by city rent increases. And I think one of the -- I think Willy Walker's firm just put out a note 3.5% rent growth next year. I think you'll see it in the back half of the year. I think the supply is definitely going down, but it's still here.

And everyone finishing a deal right now, everyone in lease-up is offering fairly significant concessions for a month or 2 months to lease up, so they contain their debt service and they can try to sell these assets. What's interesting is the depth of the purchase market. I mean people are -- we're selling and our other opportunity funds dozen or so projects, cap rates range from 4.3% to 5.5% depending on the market.

I'd say, around 5%, 4.75% is clearing. And why are people buying this? First of all, the negative arb is going away as the short end comes down. Second of all, you're buying this asset a huge discount to replacement cost. So unless the country goes into negative population growth, you're going to see continued demand. And demand, as you know, we're 95% occupied in most every market and rents are affordable.

The affordability of rents since incomes went up and rents didn't go anywhere for 2 or 3 years now, your affordability has dropped in our own portfolio from like '25, '26, warning is 30% down to '22, '21. So again, it's really -- we're all watching what's happening to the 18- to 24-year olds that I think the unemployment rate has more than doubled in 18 months, whether that's chat or people just wanting to do different things in their careers or mismatch of education versus the job opportunities.

I think that isn't your typical rent or they're usually a little older than that. Maybe if you're 18, you're in college, so 18 to 22 as a college stage child. But I do think we're all watching and we're all sort of scratching our heads. But in reality, still have this wave of apartments finishing in all these markets. And some of them are better than others. You're seeing green shoots in some of the Florida markets. We expect that to accelerate next year.

So it really depends on where your footprint is. But some of the other towns, I mean, Austin is a very difficult market. It is the worst in the country. It ran the furthest quickest and now it's giving a lot of it back but rents are falling double digit in that town. And then if you go to -- as you know, Mark, cities with no supply, you're seeing 4% to 5% rent growth in California.

San Francisco is liking positive 7%, positive 8%, there's no supply, and there's job growth as companies return to the valley for their AI adventures. So it is a national stat, but it's a very local thing that we have to watch and certain steaming is tough. Interestingly, you worry about homes competing against departments, but they still remain unaffordable and the mortgage spreads are historically high.

So -- and you can see the more of [indiscernible] housing market. So I think people are -- will still be in the renter community, but it would help, by the way, if we had some legal immigration, which has always grown the population in the U.S. And I think it's the first time in 200 years, the U.S. population will fall year-over-year because of net immigration and a 1.7x birth rate, which is quite low. We have the same birth rate as France. So maybe too much Netflix. Anyway.

Jay, you also mentioned the Florida Multi as part of that, and Barry said $1.5 billion gain it could be higher than that, we would see. But this cash out refinancing is the first time that we've shown you guys something that could look somewhat like a market if you were to extrapolate. We had $309 million of agency debt previously from our purchase with $75 million of original equity.

We took new debt of $614 million, so over $300 million more that's a $225 million gain or it's 4x our original equity of $75 million on that portfolio, which is plus/minus 30% of our portfolio. And that's again just on the debt. The equity also has a gain, obviously. So I think that Barry giving you the $1.5 billion plus gain on that portfolio, I think this should make people feel very comfortable that, that is, in fact, the number given this is agency debt to agency debt and we have that large of a gain just on the debt side without even including the gain on our equity. So I just wanted to touch on that given you brought it up.

Our next question comes from the line of Rick Shane with JPMorgan.

Look, one of the things that we're hearing anecdotally is that companies start to deploy capital again, the market is competitive spreads are fairly tight. I guess, in some ways, it seems to us like the window opportunity window opened or closed very quickly.

I'm not even sure which direction to describe it as. Is that what you guys are seeing too? And what do you attribute that to? Is it competition from your traditional peers? Is it private capital? Is it just that funding costs are so tight, as you've noted on your own side? What's driving this?

Sorry, you want me to start and then you can go.

Sure. and Dennis can also talk about the market. I think he's on the call.

Dennis, why don't you go ahead? .

Sure. Rick, obviously, we had a pretty big quarter in Q3. It was primarily multifamily and industrial. And I think we earned above trend versus the last handful of quarters. So despite spreads sort of contracting, our financing is also contracted sort of with it. So we're still earning a number that's above trend despite that.

Sure. I'd add to that. Yes, Rick, to your supposition, more money has been raised in private credit and in the debt space. And there is less transaction volumes, the more people are going after similar loans.

Ultimately, as Dennis just said, we're earning trend returns and multifamily loans generically went from at the beginning of the year, probably 300 over to 240 over to today for a transitional multifamily floater. And you would think that would hurt our ROE, but we've been able to move our repo lower at the same time.

I mentioned in my earlier that the banks are really leaning in to lend to us. It's a much higher ROE business. They have a 10% capital charge on making a whole loan on real estate. They only have 20% of that 10% if they make a loan to us. So you go from 10x leverage to 50x leverage as a bank and that creates a great ROE story for the bank. So the banks have really leaned into giving us tighter and tighter financing. They have room to continue to tighten. So I'd say if we tighten a bit more, we should -- we expect to still earn a similar returns to what we're earning. But at some point, I think everybody taps out if you start getting significantly tighter than that, but we are certainly not worried about it in the near future.

And as Dennis said, we have a large pipeline coming, and we expect to maintain this pace. This will be our second largest origination year ever and my expectation for next year with market starting a bit is that we hopefully do more again next year than this year. So things are definitely opening up, but they are on tight end as you suppose, Barry, anything to add?

Yes. I'd just add, I mean, if you look at our production, as new records and the yield on equity, return on equity is actually consistent with past, I think there's one other new kid on the block, which you should not ignore, which is data center financing. As you can see, there's massive paper being written hundreds of billions of dollars will hit the market.

On the market, we'll figure out where to price it, but many people buying it are doing back leverage. And whether it's Apollo are with Blackstone or any of the KKR I mean everyone is participating in some of this. And it's virtually endless. And it's really from a portfolio construction that we're really careful about credit quality.

Others may not be short term. And we are constructive. We're paying a lot of attention to not only the tenant but the underlying tenants as we build the book. We did participate in the large financing late in the quarter, like most of our peer set. So -- and that pricing works for us. So at the moment, and spreads have tightened dramatically even in that space, but we still can the ROEs that we would like to earn.

So I'm not -- we've been through like 6 or 7, "Oh my God, the market is too crowded. And we have a pretty long relationship in the marketplace now having originated over $100 billion of loans. And when people know -- I think one thing people have grown to favor is knowing that their counter parties can own their loan, and they're dealing with one person. I think that has become a really important notion for borrowers who previously had a bank originally alone and then they syndicated it to someone offshore and then they try to restructure it and some possible.

So I think that's helping players like us across the marketplace because we are a holder. We're going to resolve it and work through it with them. So I think that's been a significant shift in the borrower community. They really want to come to a one-stop shop and know that we'll be there holding a paper they can talk to us. So I think that's quite helpful.

Got it. Okay. And I appreciate the thoughtful answer. And I I know it's taken a lot of time, but I would like to do one follow-up. Barry, you had talked about data center financing. And I think one of the potential risks associated with that is -- we're talking about long-lived assets, but those buildings are really going to be filled with rapidly and the multiple of the technology versus the property is pretty significant with potentially very quickly depreciating assets inside.

How do you guys think about that as you measure risk? And I suspect a lot of it has to do with counterparty, but I'm curious how different data center financing is versus your traditional businesses?

Well, it depends actually what you're financing, some times you are financing the building and sometimes you're doing building the equipment as you know, the equipment can be 60% of the cost of the building and that includes everything. I guess there's certain credit Suite favor and certain credits we wouldn't favor.

I mean you can just look on the credit swap market and see how the market thinks about the different credit so far. I will say that I'm actually on the West Coast and at a technology event and I think the numbers at a chat are going to astonish people in terms of their revenue growth, which will be significantly higher than the market in is true in Anthropic.

I think these companies do have in the aggregate of $1 trillion of free cash flow and the other than one of them, they don't carry much net debt. So these are really good credits, and I think we're going to rely on the credits. And I think if you look at -- we're going to sign a deal with under hyperscale. You know we're in the data center business. We have about a $20 billion book.

We're building for Amazon for butane for hopefully, Google, Eracle, Microsoft. I'd say that they're not investing like they're walking. They're investing like they're going to continue to upgrade their equipment to stay competitive. And the burden won't fall on the landlords. I mean these are -- if the markets are correct, the need for data center space and what you see in the consumption.

I don't know about you, but my chat has gotten slower. I mean it's definitely slower than it was 3 months ago. So I think they're at capacity. And if you listen to them, I mean, believe them and believe the productivity gains that will come through corporate P&Ls. I mean, I think we're pretty sanguine on most of the credits, I think there are a few of them that were yes.

And there will be a correction as inevitably is. So we just have to be a great debt yields great lease coverage and the best credits in the world is your guarantor with steps. It's not awful. It's not awful. It's pretty good. It's a pure cash flow. There's no capital, there's some CapEx. So for us -- we're on balance -- I mean we got to balance it.

Rick, you framed it as counterparty risk and talked about depreciation, but the lease doesn't depreciate. Our loans fully amortized. We've done probably 4 large ones loans our fully amortized over the lease term. There's no reliance on residual value in our underwriting. So again, it comes back to counterparty risk as Barry talked about, and these are pretty good risks to take when you talk about the companies that we're talking about. .

[Operator Instructions] Our next question comes from the line of Doug Harter with UBS.

As we look at the new triple net lease, business. It looks like the -- kind of the cap rate that you show on that slide is kind of in the 5% range, which seems below peers. Is there anything that's affecting that in the short term? And has that business scales, Kind of where do you think cap rates can get to?

Yes. We only had 2 quarters in there. And so this quarter, it will look from 2.

2 months...

2 Quarters. So it's a 6.9% or 7% implied cap rate with no goodwill on this portfolio was the purchase price, so much higher. So there's a normalization that it will scare keep for the Phase I 5-handle number that is not a correct number.

Great. Appreciate that clarity. And then, Jeff, you briefly touched on it, but just hoping you could talk a little bit more about kind of the value and how the lenders were valuing Woodstar kind of as you went through that refinance process.

Yes. Thanks, Doug. I did briefly, but we had $75 million of original equity that -- with this cash flow refinancing, we took $300 million. Obviously, it's a 4x our equity return. So the portfolio has done really, really well. And if you gross that up on our entire portfolio of $500 million and change purchase price, and that's just on the debt. The equity piece also has a gain. I think you'd get very easily to where Barry came in at $1.5 billion gain pretty quickly.

So I think the market should feel pretty good about that being something that is available to us should we choose to gave some of it and that will be have to Barry and the Board as the timing and when.

That concludes our question-and-answer session. I'll turn the floor back to Mr. Sternlicht for any final comments.

Barry, before you go, we have something sort of new the mix is just price, but we priced our fourth CLO in the CRE side, just priced a few minutes ago. So I couldn't say anything previously. 165 basis points over. So for 87% advance rate, that's a very strong deal for us. We have 3 large billion CLOs previous to that in the in the CRE side, we've actually bought out a decent amount of paper over those.

The bondholders have done very well on those. And CRE CLOs will never be a business for us. It's a trade when it makes sense, and it's made some sense today. It made a lot of sense in the energy infrastructure business as well, where we just priced our sixth CLO. And I think 2/3 or almost 3/4 of our debt is not financed in CLOs on the energy side. So we're very happy to have priced a CLO, really tight with a great advance rate 5 minutes ago. So good news also there. But Barry, I'll turn it to you now for final comments.

No, I'd say this is because of primarily fundamental is a transitionary quarter for us, but the underlying businesses are super strong. The curve is favorable. The team is proven originators across our entire platform. So we'll get through, I think we made the right long-term decision by buying fundamental.

This is a quarter where you wouldn't recognize that decision, but I think you'll be super happy as we scale the business. we're betting. So we own a lot of our stock. Thanks for being with us today and enjoy your week.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Starwood Property Trust Second Quarter 2025 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Zach Tanenbaum, Director of Investor Relations. Thank you, Zack. You may begin.

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 the 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 perform 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 and 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 DiModica, the company's President; and Rina Paniry, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings or DE of $151 million or $0.43 per share. GAAP net income was $130 million or $0.38 per share. Across businesses, we committed $3.2 billion towards new investments, including $1.9 billion in commercial lending and $700 million in infrastructure lending. This brings capital deployment for the first 6 months of the year to $5.5 billion already surpassing all of 2024. I will begin my segment discussion this morning with commercial and residential lending which contributed DE of $174 million for the quarter or $0.49 per share.

In commercial lending, we grew our loan portfolio by $946 million, bringing it to a balance of $15.5 billion. We originated $1.9 billion of loans, of which $1.3 billion was funded and funded another $198 million of pre-existing loan commitments. Our volume this quarter included $500 million for the construction of 2 data centers that are 100% pre-leased to investment-grade tenants. We continue to resolve our foreclosed assets selling 2 in the quarter for $115 million. The first relates to a $137 million office building in Houston that we discussed on our last call. The impact of the sale are shown in 2 separate lines in our GAAP income statement, loss on property and a related gain on extinguishment of debt.

Net there was a $4 million GAAP gain and a $44 million DE loss. The second resolution relates to a $55 million of our apartment building in Northlake, Texas. We never recorded any GAAP or DE reserves on this asset and sold it at our basis, fully recovering our original investment. Also during the quarter, we sold an equity kicker for a $51 million GAAP and DE gain. We originally obtained this equity picker for 0 cost from a $47 million 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 2 nonaccrual loans migrate out of the 5 risk rating category as a result of foreclosure.

The first is an $84 million multifamily property in Windermere, Florida and the other is a $56 million life science property in Boston, our only life science loans. We obtained third-party appraisals for both assets with the Windermere asset appraising at our basis the Boston asset appraising for $17 million lower than our basis. We reserve this for GAAP purposes via specific CECL reserve that we subsequently charged off in connection with the foreclosure. Also migrating out of the 5 risk rating category was a $137 million office property in Brooklyn. The loan was upgraded to a 4 risk rating due to 2 30-plus year leases, 1 signed and the other pending which would bring occupancy to 100%.

Our general CECL reserve decreased by $14 million in the quarter to a balance of $438 million, reflecting slightly improved macroeconomic forecast. Together with our previously taken REO impairments of $173 million, these reserves represent 3.7% of our lending and REO portfolio and translates to $1.80 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 $2.3 billion. The loans in this portfolio continued to repay at par with $60 million of repayments in the quarter.

Our retained RMBS portfolio ended the quarter at $414 million, with a small decrease from last quarter driven by repayment. In our Property segment, we recognized $17 million of DE or $0.05 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 $1.2 million.

As a reminder, rent increases for certain geographies were capped resulting in 6.7% of incremental rent growth deferred to next year. 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 million of Woodstar debt maturing over the next 6 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 million, our $250 million share of which can be reinvested to increase future earnings. Turning to investing and servicing. This segment contributed DE of $52 million or $0.15 per share for the quarter.

Our conduit Starwood Mortgage Capital completed 4 secured decisions totaling $435 million at profit margins that were in line with historic levels. This includes a $324 million 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 CS1 and CSF1, their highest ratings available. Our active servicing portfolio ended the quarter at $10.3 billion with $1 billion of new transfers again dominated by office properties. Our named servicing portfolio ended the quarter at $102 billion.

Lastly, our CMBS portfolio increased by $55 million driven by new purchases. Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $21 million or $0.06 per share to the quarter. We committed to a record $700 million of loans, of which $642 million were funded. Repayments totaled $288 million, bringing the portfolio to a record $3.1 billion at quarter end.

Next, I will address our liquidity and capitalization. After quarter end, we repriced our 2 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 our portfolio for $2.2 billion. We funded the purchase with $1.3 billion of assumed debt and a $500 million equity raise with the remainder funded with cash on hand. We will report more fully on this acquisition in our third quarter 10-Q. After a strong origination quarter and the fundamental acquisition, our current liquidity stands at $1.1 billion. 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 $9.3 billion of availability. Our adjusted debt to undepreciated equity ratio ended the quarter at 2.5x increasing slightly from last quarter due to new origination volumes. 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 3 rating agencies. Despite a challenging market backdrop, they collectively recognize our diversity, leverage profile, liquidity position, stable earnings and credit track record as key elements supporting our rating.

We were also once again awarded the NAREIT Gold Investor Care Award, an award given to 1 company in each industry, which recognizes communications and reporting excellence. This is our ninth time receiving the award in the mortgage REIT category in the last 11 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.

Thanks, Rina. Before I begin, Barry, the entire Starwood team and I would like to send our heartfelt condolences to the friends, families and loved ones of the real estate professionals and first responders who are senselessly taken too soon in last week's 345 Park -- tragedy. Both real estate professionals were very well known and respected at Starwood. As you know, we released earnings on July 16 and raised $500 million of equity to help finance our purchase of fundamental income. This will be our ninth business and gives us a portfolio of 467 owned properties and 12 million square feet that is 100% occupied by 92 tenants at an average WALT of 17 years, with 2.2% average annual rent escalations.

The assets are split fairly evenly between service and industrial with a small component of retail assets. As Rina said, we used $1.3 billion of in-place debt $8 million of which is in ABS Master Trust, and we used approximately $400 million 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. They have deep expertise in origination, underwriting, portfolio management and capital markets. There are strong relationships with middle-market companies and private equity sponsors will significantly enhance our capabilities and market reach. This team is scaled to grow. This is not our first foray into the net lease space.

Our successful investment in the Bass Pro, Cabela's transaction demonstrate the attractive risk-adjusted returns and long-term value that can be achieved in this sector. The acquisition of Fundamental builds on that success and reflects our confidence in the continued opportunity within Net lease while opening the door to new growth opportunities in the sector, both domestically and internationally. Fundamental maintains an ABF Master Trust, which to date has issued 3 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 10 years on a fixed rate basis.

Executing this strategy will leave us with a portfolio that would look a lot like public peers who traded a significant premium to with a conservative FCCR of 6.4x 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. 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 return. We have turned that business into a compelling investing platform over the last 7 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 in building a pipeline and having seen strong deal flow in the days since our purchase. 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 47th straight quarter. In Capital Markets, we recently repriced both our term loans due in 2030 and 2027 and totaling $1.6 billion at record low spreads for our sector, so for 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 16-year existence. Over the last 18 months, between the issuance of equity, senior secured notes and term loans, we have completed over $6 billion of capital markets transactions.

Of our $5 billion in corporate debt today, only $400 million of it matures prior to 2027, and we have unencumbered assets in Term Loan B collateral today to issue $2 billion 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 on to create the best total return outcome for our shareholders.

To that end, we've originated $5.5 billion in the first half of 2025 more than all of 2024, led by our 2 largest lending businesses, commercial and infrastructure lending, with the benefits to be seen in 2026 and beyond. In CRE lending, we closed $1.9 billion in loans in the quarter and $4.1 billion 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. Of that, all loans were new to Starwood Property Trust were international and 74% were to repeat customers, proving the strength of the relationships in our 16-year-old firm that has lent to over $100 billion since inception.

We expect this elevated investment pace to continue in the second half of 2025, leaving us with the largest CRE loan portfolio in our history by year-end after a 20% decline in 2023 and 2024. I -- 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 in all credit markets trading at very tight spreads, which has catalyzed activity in the CMBS lending and real estate equity markets. Rina told you our 5 risk-rated bucket was reduced in the quarter. creating lower LTVs. As Rina said, we committed $700 million of new capital in the quarter at mid-teens returns. This portfolio now stands at a record $3.1 billion, 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 17 and cost of funds in our history. We expect to issue 1 to 2 more CLOs this year, which will increase our term nonmark-to-market debt even further. In Reis, I will note that our active servicing portfolio is over $10 billion today, the highest in this cycle and likely had it higher, which will produce significant incremental revenue as these loans resolve.

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 and that CRE finance markets continue to repair with better performance and lower expected forward rates. The forward market had SOFR declining to 3% in the first quarter of 2027, which is 50 basis points below the expectations just 10 weeks ago, which should have a material positive effect on our legacy credits. With that, I will turn the call to Barry.

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 seem slightly lag that the sale will cut rates in September. And I think at this point, most of us would agree that rates are coming down, just a question of the speed. And by May of 26, I think the short end would be at least 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 in strength and being healthy as we see the end of the avalanche of new supply created for a different interest rate environment, particularly affecting the multifamily and industrial sectors. While construction remains strong and is tremendous job gains in construction, it really is from data centers and also from the infrastructure bill, the chips Act and other programs and that will accelerate with the repatriation reshoring of plants and equipment in factories in the United States, some things like the pharmaceutical industry, which will probably have to vacate Ireland and move our plants back to the 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 the United States. You already are seeing that in Europe has had rates drop from 42, likely hitting 1.75. 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 bias in the states are subdued and people are holding on to their best assets, hoping that they can sell to a more favorable climate supported by these lower interest rates that we know are now coming.

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 it spreads that actually are the best we've ever seen for our company. And that is probably the case because of Europe, China, I mean seeing no interest rates, so though our rates are high. 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 where the 10 years as I speak, given the situation with the 1 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 has sort of digested the 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 lastly 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 $1 trillion that the federal government is spending, and that is new and dramatically concentrating in the United States being our economy versus others in the world. Now shifting to our company, I'd say we're in a very good shape.

As Jeff and Rina pointed out, I think we built a fortress balance sheet best in the sector. We've moved as aggressively as 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 want to talk a little bit about fundamental income, which we just bought a $2 billion business. I think from the start, as you know, we endeavor to beat a finance company, not just a mortgage REIT, and we have multiple cylinders. And that strategy has while complicated is going the fruit of us being the only mortgage in the country that trades above its IPO price. And I think many shareholders forget that we spun off our residential single-family rental business, which is equipment almost $5 a share.

In addition, paywellour 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 4 years or something like that. And I hope it's 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 likely more accretive businesses to us. 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 stand-alone net lease companies trade 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. And while I think it's modestly dilutive this year to the company because we're only picking 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 5%. And the team is positioned to do that incentive position incentive to position to do that, and we'll figure out ways to continue to grow that business and make it a more material portion of our company.

A couple of other points I'd make. It's interesting to me is here that our infrastructure business we bought 10 years ago from General Electric. -- our Starwood Infrastructure lending business no longer has a single heritage loan in its portfolio, the portfolio has been completed recycled and continues to earn mid-double-digit yield on equity. The other point I'd like to highlight again is our affordable book, which is really unusual and enjoyed our, 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 rents to market as these assets begin to come off their 15-year restrictions. I also want to point out SMC, our conduit business because it's the gift that keeps on giving the team does a superb job for in this business. I think we've had the business for 48 quarters and only had 1 mildly negative. I think you lost $0.01 in 1 quarter. So we've been tooth bull of 47 to 48 quarters. And that's just a great business led by a great team. doing 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 going to 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 -- I know we're not saying we would, but we would have the opportunity to not pay out all the cash we produce and could 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 at the company is setting itself for future growth and really powerful teams that can 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. But in general, we're doing all the right things to accomplish that in our views. I will say 1 last general comment about tariffs because I think -- we haven't seen their impact yet. I think the second quarter was sort of overstating by free loading or front-running of inventories to try to get things on the shelves without the impact of tariffs. I do think they're onetime and don't think be sustained.

And logic would tell you if prices went up, demand will fall, you might see an increase in supply or prices, and then you might see a decrease in prices that will be caught in order to generate excess demand. Sadly, the tariffs will impact those of the country who don't have that where with all to pay additional cost for the daily needs of their lives. And I think that could create great social anxiety and potential continued to split in our society to the left and the right I think we're going to start talking about the November midterms coming up. 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 cost of companies having lower margins or consumers having less money in their pocket.

So the jury is out, and I think we expect the back half of this year to be meaningfully less strong than the first half and the jobs cash was probably 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. With that, I'd like to say thank you and take your questions.

[Operator Instructions] And our first question comes from the line of Dan -- Don Fandetti with Wells Fargo.

Can you talk a little bit -- what about your expectations for CRE loan growth, I think your portfolio was up 6% quarter-over-quarter. And I guess got loan growth to accelerate.

Thanks, Don. I'll take it first and can hand to Barry after we've done $4.2 billion, I think, through 2 quarters. We have obviously closed more since the end of June that will put us on a mid-$8 billion pace. The record we ever did was $10 billion of transitional floating obviously, that's taking away the other cylinders CMBS and Infra and all the other things that we do lend on. I think that we will end this year very close to that $10 billion number that we did in 2021. A in 2021, you had $670 billion of transaction volume. I think you're probably closer to $400 million this year. So transaction volume hasn't picked up. It will pick up in your scenario.

Lower rates will help that. lower rates will also help refis -- you have some assets that have not yet refiled from pre rate rises, the 2020, '21 and early '22 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, '23 and '24 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. We are very much on offense. I think there are a number of people who have not been able to be on offense. -- 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 nonaccruals so we can sit on assets and work them out to the benefit of shareholders rather than selling it at a more distressed level.

And this will also help that lower rate environment. will also help that nonaccrual 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 in that you're supposing, feels like we have upside from here, not downside as rates potentially go lower and we move further away from the beginning of that 22 rate hike cycle.

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

Yes, -- can you hear me, Jeff? .

Perfectly, Barry.

It's Barry. Can you Yes. I'd say I mean we have a lot of business line sales. So we're really agnostic of where we've put capital. And we also know capital doesn't grow on trees. So we're going to be even more focused on not just dollar originations, but the returns and the full dollar profits the likelihood that 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 to look at other businesses. So we don't have infinite access to capital and not at these dividend yields. So we have to be careful and judicious to...

Barry, you cut in the end. Barry, you cut out at the last 20 seconds, so I'm going to hand it to Don. Well, maybe you get a better connection..

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

Yes. Listen, we laid out for you the portfolio that we have and that portfolio was sort of $20 million to $30 million 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 own the business, we saw a $160 million trade that revolves around some school buildings. We saw a $400 million and $600 million potential opportunity, 2 different ones there for a total of $1.16 billion in 3 potential opportunities. The last 2 were industrial assets, well located that we've looked at. 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 -- I mentioned we underwrote $400 million to $500 million a year for the first 3 or 4 years just to get to our accretion dilution number. My guess is we can do double that, the team is really strong 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 1.4x GAV. And with our FCCR of 6.4x and I think the industry closer to -- we have really good credits in the book.

We're very happy with -- we spent a tremendous amount of time to start Capital Group and our team there CahirMedani 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 book, but I think we will be looking to grow in the $20 million to $30 million 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 to 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, we think that, that will create even higher returns. So super excited about where this is going to go.

And our next question comes from Rick Shane with JPMorgan.

Look, the organic growth in the infrastructure business has accelerated nicely. Curious about really 3 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. Two, it also looks -- and Jeff, you alluded to the fact -- or not alluded to, actually stated you're 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 earth core balance sheet? .

Sure. I think Sean Murdock is probably on here. So I may -- he doesn't speak very often. 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, it's really interesting what happened here. The banks who lend here tend to be more corporate credit lending banks than they are real estate lending banks. So in early '22 when rates went higher, we went from borrowing on cash flowing multifamily at 125 to 150 over, so for up to 250 to 300 over so for the same assets. Spreads widened on everything on office, they went 3x that on hotels that 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 whipsaw of it. At the same time, we got much higher coupons for making a loan on a 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 175 and 200 over before we go to a CLO, and that never really moves wider -- 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 repricings 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 is tight or tighter than we're going to do anything in the commercial real estate side. When we did our first 3 CLOs in CRE, I think the bond spreads were $1.95 over then down to 180 over maybe 1 got to 165 remembering back 4 years ago. But you're in line with where the CRE CLO spreads are. And we are likely to do a couple of more this year. So 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 1 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-2022.

So feel really good about that. I mean, by the time we do another 1 or 2 CLOs, we'll have most of 2/3 of our assets funded in nonrecourse, 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. So 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 think 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. 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 syndicated deals?

Yes. I think the way we've tried to sort of maintain interest margin is exactly what Jeff mentioned, we're doing more deals ourselves. There may be a little bit smaller infrastructure assets, but where we can sell underwrite and so execute that tends to come in tension between the syndicated or club loans and individually in single lender assets. -- great -- thank you so much. .

These are $1 billion power plants. Construction costs have gone from Watson under 1,000 to probably closer to $2,000 a megawatt now. So they're very expensive. They're very large. Rick, 1 of the questions I didn't answer was duration. Sean's loan, the energy infrastructure businesses loans tend to be 5- to 7-year loans, where the commercial real estate loans tend to be 3- to 5-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.

Got it. Okay. Very helpful. on this one.

And our next question comes from the line of Jade Rahmani with KBW.

Thank you very much -- we don't often get credit for mistakes we avoid, and I have to take my hat off to you for only doing 1 life science deal in a super competitive market in the last cycle. The $17 million loss doesn't seem all that bad in a broader context. So I pole you for taking action on that and the $51 million equity kicker gain also a nice surprise. So the question is on credit. Do you believe credit in the portfolio stabilized based on what we know now. Do you expect the gradual improvement on resolution plans you have in place? And also if you could comment on the hotel exposure in the loan portfolio. .

Absolutely. Thanks, Jade. I appreciate the nice words. The life science market we looked at -- you had a lot of 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. But we didn't feel like we needed a multiple more of life science space. You just didn't graduate enough scientists to create a significant of a demand.

And we knew AI was coming in 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 go after it a couple of different ways. So I think we've had a relatively bare. -- view on that for a while. Unfortunately, we did that 1 through. We thought it would be a good $1 million write-down on that, and hopefully, we can work out a bit. The kicker gain was nice as well. So thank you for bringing that up.

The hotel exposure, I'm getting my percentage is right now, I think it's 6% of our overall there, we've not lost any money on hotels. We went into the COVID side, but we actually said something in 2020, and I'm going to turn it to Barry if he's here because he is 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. It's a broad mix of some destination, 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 gone into New York City in the last year has been where hotel rates are. income has gone up, expenses have gone up also. So we're very careful on expenses. But to erode this 30% or 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, are you trying to jump in because -- is that you, Barry?

I could say it. Can you hear me? .

Yes, I -- can you hear me?

Yes. Life Sciences secured the daylight side of us. it was sort of a conversion of office to life science was kind of like time share for a hotel that didn't work for a while, it was as good as it got. I think it's interesting you bring it up because I think data center space will be interesting spreads have contracted dramatically if a building is being leased or is fully leased, but some people are beginning to do or trying to expect data centers to get pretty widespread as you should in the spec data center, but it's something we're not choosing to do right now. So I think there are -- it's a similar thing. It's like you go back where you can go, so it's something that is obviously not spectrum we've got the best credits that 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 in the lending business in data centers. And we are a data center developer with $19 billion of pipeline ourselves. So we know the market from the equity side and the debt side, and we've seen what -- as we finance those buildings, and 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.

New York City contracts coming up in May of next year, it's going to look something like what happened in L.A. So even though New York remains fairly strong, shockingly strong at the rest of our line given the depreciation of the dollar and its impact on foreign tourism. It is not Vegas is weak. There are markets that are weak, and we just SP1 Cherrypick opportunities. And I don't, I think we are fine. We often lend and say, well we get the asset at the debt balance, we'd love to own a fair so I think that probably applies to almost all of our hotel loans.

On Atlantis, which was a large position. We're going to get paid off in the next quarter on a Hawaii asset. And obviously, hotels have a really high debt yield going in, and that high debt yield enables them to navigate the higher sulfur more easily. And Jade, you did ask 1 more thing on the credit cycle. I don't want to be too -- I don't want to skip over that. But if the forward curve is right and we head towards 3%. So for my gut is that the industry is likely overreserved. If you end up in the high 3s to 4%, the industry probably has reserved for that.

And if for curve ends up above 4, there will be more problems. So today where we sit with the foriture of heading to 3% by the end of '26 early '27. I feel really good. But that forward curve has moved around by 100 basis points, 3x each direction over the last 1.5 years. 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. -- thank you, Jay.

And our next question comes from the line of Douglas Harter with UBS.

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?

Yes. I think it's about $1.3 billion or $1.4 billion today of nonaccrual assets, Doug. There's some where we have some 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 2 quarters ago, that we had a plan that we would try to be half out of it by the end of '26 and then half again of that by the end of 2017, which would be only 1/4 of that book. that's our patient forecast. Hopefully, we can do better.

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 retail asset, and then we're going to have to wait and work together with a group there that will take a while. There are a couple of things in Downtown L.A. and Downtown L.A. is just not moving forward as quickly as possible. So we're looking at other potential options on those. a few small apartments that make that up.

You've seen us sell 2 or 3 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 -- so the REO book is mostly things that we think we have a handle on being able to move out in that time line. But as I said, there are a couple of other larger broadly syndicated things that might take a while. But that is built into what we produced to the Board for a 3-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 3 years or so. So we're not going to rush rushing would cause you go from our 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 bit today on an asset for our shareholders.

We've seen our peers do that. But we have capital, we have access to capital, and we're going to act with our managers tower Capital Group has $110 billion of assets under management and look at each individual asset to try to go forward and make our best plan.

Great. I appreciate that, Jeff. And any update on the Washington residential conversion? Kind of what's the updated time line and thoughts of kind of getting that property underlying cash flow?

Yes. We -- 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, but we 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 a tremendous product. It's in the right spot in D.C. that we hope to be able to give you a lot more information on over the next couple of years. It's a couple of year project. We've reserved money for that and we'll see. But we do have ourselves getting back our basis and more on that asset, as we've told you in the past, if -- once we're done with the conversion .

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

Well, normal, I'll put it to Barry, but the 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. I appreciate everybody's time. .

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. .