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spk06: Ladies and gentlemen, good morning and welcome to the Starwood Property Trust second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Tannenbaum, Head of Investor Relations. Please go ahead.
spk02: Thank you, Operator. Good morning and welcome to Starwood Property Trust's earnings call. This morning, the company released its financial results for the quarter ended June 30th, 2023, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the investor relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed in this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlich, the company's Chairman and Chief Executive Officer, Jeff DiMatteca, the company's President, and Rena Paneri, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rena.
spk00: Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $158 million, or 49 cents per share. Gap net income was $169 million, or 54 cents per share. Gap book value per share increased 7 cents to $20.51, with undepreciated book value increasing 9 cents to $21.46. These book value metrics include an accumulated CECL reserve balance of $260 million, or $0.83 per share. Since our last earnings call, we significantly enhanced our liquidity position with the July issuance of $381 million in convertible notes and commercial and infrastructure loan repayments of $1.3 billion during the quarter and $472 million subsequent to quarter end. Net of $787 million in fundings across businesses, our current liquidity increased to $1.2 billion. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $182 million to the quarter, or 56 cents per share. In commercial lending, our pace of repayments picked up, with $1 billion during the quarter and another $386 million in July alone, well in excess of last quarter's $257 million. More than half of these repayments were on mixed-use and hotel loans. These were offset by fundings of $272 million on a refinanced loan and another $235 million of pre-existing loan commitments. Our portfolio, 93% of which represents senior secured first mortgage loans, ended the quarter at $16.4 billion with a weighted average risk rating of 2.9. On the CECL front, we increased our general reserve by $104 million due to our third-party model indicating a worsened macroeconomic outlook. We also applied more negative macroeconomic assumptions to our office loans in addition to loans with four or five risk rating. This brought our general CECL reserve to $228 million. Of this amount, $136 million, or 60%, relates to office. As a reminder, CECL reduces our book value and gap earnings, but does not impact DE. In addition to our general reserve, we recorded a specific reserve of $15 million related to a five-rated mixed-use loan in Phoenix, which was originated in 2015. The original loan was $115 million and was recently paid down to $40 million. The reserve was driven by the current quarter retrade of previously executed purchase and sale agreements relating to the remaining underlying collateral, of which half has been sold and half remains under contract. For GAAP purposes, we charged off the portion of the loan above the current negotiated price of the remaining collateral, which resulted in a corresponding DE loss. Our only specific reserve at quarter end continues to be $5 million related to the entire balance of a retail asset in Chicago. As discussed in our remarks last quarter, in May, we foreclosed on a five-rated $42 million first mortgage loan related to a two-story retail in downtown Chicago. We obtained an appraisal in connection with the foreclosure, which valued the asset at $42 million. As a result, the property was recognized at the carryover basis of our loan with no resulting impairment. As we have successfully done in the past, our intent is to lease up the space, stabilize the asset, and ultimately sell it. We expect to fully recover our basis. For our remaining REO assets, we continue to actively work toward the path of full repayment. During the quarter, we recorded a $24 million gap impairment against a building in LA that we foreclosed on six months ago. We began evaluating alternate paths for this asset during the quarter, some of which were at our basis and others which were not. Given the range of potential outcomes, we determined that a reserve was appropriate. The reserve was determined by reference to an appraisal we obtained in connection with the foreclosure. Next, I will discuss a residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.6 billion, including $1.6 billion of non-QM and $994 million of agency-eligible loans. We fully hedged the fixed-rate interest rate exposure in this portfolio. with our hedges having a positive mark of $170 million at quarter end after $21 million of cash receipts in the quarter. Lower projected prepayment speeds continue to benefit our retained RMBS portfolio, which increased in fair value by $26 million, ending the quarter at $443 million. Next, I will discuss our property segment, which contributed $21 million of DE, or $0.07 per share, to the quarter. Of this amount, $12 million came from our Florida Affordable Housing Fund, which continues to perform exceedingly well. For gap purposes, we recorded an unrealized fair value increase in the fund this quarter of $209 million, or $166 million, net of non-controlling interest. The increase resulted from the impact of HUD's recently released maximum rent levels, which were 7.5% higher than last year. our valuation only factored in these rent increases. Because the new rents will be rolled out beginning in July, there is no positive impact to earnings this quarter. One unique aspect of this year's maximum rent levels is that certain properties were in geographies where the rents were capped by HUD. This cap resulted in 3.5% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula next year and will be included in our valuation at that time. Turning to investing and servicing, this segment contributed DE of $22 million or $0.07 per share to the quarter. In our special servicer, our active servicing portfolio increased from $5.2 billion to $5.7 billion. This is the result of $738 million of loans transferring into servicing during the quarter, nearly 70% of which were office. Our named servicing portfolio declined to 102 billion in the quarter, driven by 4 billion of maturities. As maturities continue through the rest of this year and into next year, we expect to see a continuation of this trend, with active servicing increasing and named servicing decreasing. In our conduit, Starwood Mortgage Capital, despite lower market volumes through this rate cycle, our securitization profits are similar to historic levels. During the quarter, we completed three securitizations and priced an additional securitization totaling $218 million. And on this segment's property portfolio, we sold two assets in the quarter, one classified as property on our balance sheet and the other as a 50% equity method investment. Our share of the proceeds totaled $32 million resulting in a net gap gain of $11 million and a net DE gain of $5 million. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $20 million or $0.06 per share to the quarter. Repayments of $254 million outpaced funding of $78 million on new loans and $11 million on pre-existing loan commitments, bringing the portfolio down slightly from last quarter to $2.3 billion. On the CECL front, we took an incremental $4 million specific reserve on a small legacy GE investment that we discussed last quarter. I will conclude this morning with a few comments about liquidity and capitalization. During the quarter, we repaid the entirety of our April $250 million converts at maturity with cash on hand. Our next corporate debt maturity is in November, which we likewise intend to settle with cash on hand, including the net proceeds from our four-year $381,006.75% convert issuance in July. After that, we have no corporate debt maturities until December 31, 2024. Earlier in my remarks, I mentioned our current liquidity of $1.2 billion. This does not include $1.5 billion of liquidity that could be generated through sales of assets in our property segment. It also does not include over $2 billion of debt capacity that we have via our unencumbered assets and term loan B. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.4 times down from 2.5 times last quarter. And finally, I wanted to mention that this quarter our credit ratings were affirmed by all three rating agencies. Despite challenging conditions in the CRE space, they collectively recognized our diversity, low leverage, liquidity position, stable earnings profile, and credit track record as key elements supporting our rating. With that, I'll turn the call over to Jeff.
spk08: Thanks, Rena. We have run our business conservatively since inception 14 years ago. We've uniquely diversified into multiple cylinders, including commercial and residential lending, energy infrastructure lending, CMBS loan origination and investing, and our $102 billion named special servicer that produces countercyclical income in times of credit distress. We've also built a large owned property portfolio that accounts for a record 29% of our company's underappreciated book value. predominantly in the highly resilient low-income housing multifamily sector. This segment has produced high cash returns and additionally over $1.5 billion of harvestable gains contributing to the liquidity Reena just mentioned. Starwood Property Trust is the diversified low-leverage hybrid we set out to build with no true direct peers. As a result of this diversification, we have managed our exposure to U.S. office assets down from a peak of 26% to just 10% of our assets today. In that time, we significantly increased our allocation to more defensive multifamily and industrial loans and to the owned low-income multifamily investments I just mentioned, all of which sit at all-time highs as a percentage of our balance sheet and continue to perform exceptionally well today. Our company's leverage improved again in the quarter to 2.4 turns, which is about a full turn of leverage lower than our peer group average. If our asset mix looked more like our lending peers, or if we increase leverage by over one full term to look more like them, our company would significantly out-earn its dividend in this higher rate environment. But that is not how we chose to run the company at this time. We built a diversified company with a conservative balance sheet that would best enable it to pay a stable and perhaps at times a growing dividend. We have not and will not change our conservative credit-first business model to chase outsized earnings and will continue to choose conservatism and consistency as we cautiously look for the right time to increase the deployment pace of our near-record liquidity. We have seen markets begin to normalize, with transaction volumes slowly creeping back up and lending markets starting to thaw. We are seeing more lending opportunities and more lenders quoting loans, allowing asset and liability spreads to begin coming in. You can see this shift in sentiment in our loan book, where we have received $1.75 billion of repayments since March 31st. That is more than the previous three quarters combined, and we are seeing investors who have executed their business plans extend their maturities, lower their coupons, and or increase their proceeds. We expect this trend to continue, creating significant reinvestment opportunities at a time when we can redeploy capital at above-trend returns and lower loan-to-values, which are calculated off new lower values in most loan categories. We have $25 billion of bank financing lines across 25 banks. $8 billion of which is undrawn, and $4.4 billion of unencumbered assets, giving us unparalleled access to the corporate unsecured, term loan, asset-specific financing, and convertible bond markets. In June, in a much more difficult capital markets environment than exists today, we were two times oversubscribed for our $381 million convertible bond issuance. In commercial lending, 91% of our CRE lending portfolio have embedded interest rate protection, with 80% of our loans having caps in place and an additional 11% have interest reserves or guarantees. Reena mentioned we use third-party macroeconomic forecasts in calculating our CECL reserves. Their economic outlook is more bearish than markets and forward curves imply, resulting in a higher general CECL reserve, which again reduced the increase in our company's book value this quarter. On July 13th, Bloomberg News referenced the McKinsey Global Institute study that said that office values would decline 26% from 2019 through 2030 in the nine largest global office markets and would decline 42% from their peak in their severe scenario. Our model-driven CECL reserves for our office loans are pricing in an even more severe outcome than McKinsey's severe scenario, and our stock still trades below our gap, our undepreciated and our fair value book values. I will now discuss our four and five rated loans, which are 5% of our assets in total. Reena mentioned our five rated mixed use loan in Phoenix. I want to add that we earned $24 million in that loan since origination. So despite our first DE loss on over $75 billion of Starwood originated loans, we still made $9 million or a 4% positive IRR on that loan. In addition to Phoenix, we downgraded two other loans from a four to a five risk rating in the quarter. The largest is a $252 million office loan in Houston that is 67% leased with a seven-year average remaining lease term. Although the sponsor invested $259 million of equity in front of us, the loan matures in September. The sponsor is working on a recapitalization, but if they are unable to put it together, we will be prepared to take title at maturity. With a 6.4% current debt yield, this well-located trophy asset won't need significant incremental leasing or reduction in borrowing costs for us to recover our basis. The second loan is a $130 million loan on a 381,000 square foot office building in Arlington, Virginia that is currently 65% occupied. With the government even slower to return to the office than the rest of our country, greater D.C. has been a difficult sub-market since COVID. We will need more incremental leasing here than in the Houston loan, but it is a smaller building and has a positive NOI, and the borrower is negotiating a lease that would bring the property to 80%. We have two other loans that are still five rated in the quarter. On our $120 million downtown DC loan I spoke about last quarter, we are running parallel paths to resolution, including a sale to a multifamily conversion developer at our basis we told you about last quarter, And we've been touring an active tenant interested in leasing the entirety of this building. We expect to resolve this loan in 2023. On our $230 million loan on a retail and entertainment asset in New Jersey, the asset is now 80% leased and operationally cash flow positive after year-over-year increases in sales, revenues, and attendance. We received our first operating distribution on the excess collateral underlying this loan this quarter and management expects that our GAAP basis will be below 70% of our legal basis on this asset this year due to it being a non-accrual. Having this loan on non-accrual means we have had $230 million of equity earning nothing, thus reducing our distributable earnings by 11 cents per share per year. Once resolved, This asset and the others on non-accrual will create positive earnings power in the future as we redeploy that equity into income-producing assets, while significantly reducing the likelihood and scale of a future impairment. We have five loans risk-rated for. The first three were all upgraded in the quarter from five due to positive developments. The $156 million Brooklyn loan that we classify as office and we have said is likely transformed to a non-office use given the low per square foot basis which is primarily covered by the excess value of its cross-collateralization with four large multifamily assets. During the quarter, our borrower executed a lease with the City of New York to occupy half the building, with an option for the remainder, which, along with an expected PREF equity investment in one of the multifamily assets, creates sufficient cash flow in this loan to cure the past due interest. Our $37 million remaining balance on a Napa Valley land loan had a favorable ruling in their insurance litigation in the quarter. which would result in a full return of our GAAP basis and some or all of our non-accrued interest. On our 68% leased $197 million office loan in Irvine, California that had bids at our basis in the last year, we intend to close on a $30 million PREF equity investment, giving this asset two years of runway to increase NOI or wait for a better refinancing environment. The other two four-rated loans are a $60 million multifamily loan that remained a four in the quarter due to slow lease up, and a previously three-rated $250 million loan in Brooklyn, where a college has a 30-year lease on the lower 41% of the building, and the sponsors have several executed LOIs to take the building to 100% leased on long-term leases. Our downgrade is precautionary until a lease is signed. Concluding this segment, I will remind you that there is no standard methodology for assigning risk ratings, making them subjective and sometimes hard to compare. Our 4 and 5 rated loans comprise only 5% of our company's assets, or 7.7% of our commercial lending segment assets, which account for just over half of our company's diversified assets and earnings. With this quarter's increased CECL reserves, we now have reserves equal to 19% of the total balance of our 4 and 5 rated loans, which is more than double the percentage our largest peers have in reserves versus their four and five rated loan balances, again, highlighting our conservatism. In our residential lending business, we have seen liquidity return to these financing markets. We have $170 million in hedge gains in this portfolio and have newly closed and in-process financing lines that will extend our maturities and reduce borrowing spreads by over 25 basis points across our loan portfolio, creating significant interest savings in the future. Our owned property assets benefit from fixed rate debt at an average 3.65% fixed coupon with a weighted average remaining term of 3.3 years. This portfolio is levered at just 60% of cost and approximately 50% of today's fair values, which is closer to where an investment grade equity REIT would be levered. We run this portfolio and this company conservatively, and this below market leverage will allow us to create significant liquidity for our company should we choose to harvest it in the future to redeploy into outsized opportunities. Our energy infrastructure lending business continues to benefit from limited competition and changing global energy dynamics. EVs and AI continue to create more power needs globally. The Wall Street Journal had an article on Saturday where Elon Musk predicts we will need three times as much energy by 2045 and says there isn't enough urgency to solve this problem. The supply of new power plants, pipelines, energy storage, and transmission assets are not keeping up, which is benefiting the credits and the terminal value of loans in our energy infrastructure segments. There are less lenders in the space, allowing us to earn more spread at lower LTVs with tighter structures on new deals. Our borrowing spreads have stayed steady in this cycle, allowing us to earn high teens returns on credits that are deleveraging due to increased profitability, making this sector very attractive to our diversified strategy looking forward. In summary, we are seeing more loans pay off. and we'll continue to manage our very low leverage business conservatively with near record amounts of cash and unmatched liquidity available to us. We are also willing to sit back and wait for better entry points. And although we have invested opportunistically every quarter, we have defensively sat on near record cash for most of this recent interest rate cycle.
spk07: With that, I will turn the call to Barry. And good morning, everyone. Thanks for joining us.
spk09: We started this business now almost 13 years ago. We talked about being transparent and predictable, running a conservative business so we could depend on our dividend. I think we proved our transparency in this earnings call. That's a lot of detail. I'm going to go all the way to the top and talk about what I think is going on and how we're going to address it. As you know, many of you know, I've been critical of the Fed. I wasn't really critical of the need to raise interest rates. Obviously, they should have been raised well before the Fed raised them. It was more the pacing of the increases and how quickly they did it, sort of a U-turn. It was more of a V than a U-turn even, and straight up, and now we have the highest interest rates we've seen in 22 years. When you do something like this, my other overarching theme was that the economy was going to slow anyway. You could see that savings were dissipating. that consumer spending was slowing, confidence was falling, and as inflation took hold, people were using less of their wallets. What I didn't really anticipate and what you're seeing now is the scale of the government programs under the Bidenomics legislation, both the infrastructure bill, the Inflation Reduction Act, which is really a stimulus package centered around climate, the CHIPS Act, all that spending is creating a lot of public spending that is offsetting the slowdown in private construction and private setting. Of course, private construction slows only as property is complete. You don't stop a project in the middle of construction when the Fed is raising interest rates. So you sort of have a tug of war with one of the most restrictive monetary policies we've ever seen, but a completely undisciplined fiscal government spending money with a regular spending bill of $1.7 trillion, which is more money than the government spent in 2021 and 22, the pandemic years. So one might have thought those were excess spending years, but in fact, they turned out to be the base of future spending, and our very disciplined parties in Washington approved a $1.7 trillion spending bill, which is the highest on record in a bipartisan manner, trying to appeal to their home affiliates. Anyway, so the Fed, with their foot to the floor on the break, and the government politicians with their accelerated the break and you have to be super careful how that ends. I'm not as sanguine as all the pundits you hear about in the morning press that we're going to avoid a recession and so we've chosen to be fairly conservative here. I kind of feel like we're battling with one arm and three fingers behind our back as we're exceedingly cautious because we know what you see on the surface is a lake that's solid but there are fissures and those are the loans that are maturing both in private equity and in technology, where people have made loans to tech companies that don't have cash flows, and also to real estate. So real estate and the real estate empire complex is really the collateral damage of the Fed's policies. And what you've seen now in the fear in the market is twofold. Not only have rates gone up, but spreads have widened. And what you will see on the other side is the double whammy of rates coming down and spreads coming down as fear dissipates. And that's beginning to happen. So the only good news about what the Fed's done is they're moving so fast, the sunlight will show up faster. You are seeing the dramatic decline in inflation. We were all over that and the contribution of rents to the inflation, the CPI being a third. We knew it was lagging. It was lagging. We said it was lagging and inflation's fallen to 3% and probably continues to trend down. And including, you're seeing a shift in the labor market to lower wage workers. We're feeling, if you saw the reports recently, we're feeling the unfilled leisure and hospitality jobs, several hundred thousand according to ADP, you're done. In another month's time, you'll have filled all the missing jobs that didn't return after the pandemic, and that should also slow dramatically. So I actually think we're beginning to see the sun through the clouds. I would expect that that is done, or maybe it has one quarter point hike in addition to what it's done. And then I think you'll see short rates begin to have to come down because inflation at 2, 2.5 and 5.5 short rates doesn't make a lot of sense, especially as the curve begins to bend or straighten out. And that's a result of the real... victim of the Fed rate increases. While we're collateral damage, the number one victim of the Fed raises is the federal government with $32 trillion of debt and having to pay these interest rates on that debt becomes a vicious cycle. You have to keep refinancing at ever higher rates, putting more and more pressure on rates. And so you see the 10-year today at 4.2, close to 4.2. That's actually what worries me more than anything else. And hopefully, the other culprit, by the way, the other victim is the regional banks. which have a significant portion of their book value in non-mark-to-market fixed securities, and they cannot sell them, they can't move them, and obviously that led to two bank defaults and could lead to others if people want to turn their attention to rating those banks, but right now we have quiet on the set. We're happy about that. What this means, though, is it created a climate in real estate that nobody really wants to sell anything if they don't have to. The big hope is they can just refinance, and if they have to refinance, given what the movement and constants with higher debt interest rates and wider spreads, they typically need to inject equity or preferred or mezzanine into their cap stack in order to roll the existing debt. This issue, and that's what I call the category five hurricane, is really an interest rate hurricane. It is not about the product asset classes. Every asset class, underlying fundamentals in the asset classes in the United States are pretty good. So it's apartments, industrial, logistics, life sciences, student housing, data centers, hotels. The cash flows are pretty robust. But the movement in interest rates has created a balance sheet issue for a lot of really good assets. And so in that environment, you have one of the best environments we've seen since 2009 to deploy capital. We're kind of foaming at the mouth. and would like to go ahead and go on offense and start laying out our excess reserves into what would be sort of best spreads and returns we've probably seen ever since we started the business in 2009. And the climate is also in our favor because the regional banks are sitting on the sidelines. Many of you probably have seen the loan officer surveys. They have to build capital reserves. The government is gonna enforce them with new regulation to increase even further capital reserves. So they will be less willing to lend The money center banks, for the most part, are trying to keep their balance sheets flat. And those that are willing to make loans are kind of like us. They're pretty expensive. And then the CMBS markets are open, but the spreads are pretty wide. When AAAs are 260, 270, we are a serious alternative to creating our own cap stacks to replace debt in place. But we need a bigger balance sheet. We need more capital to do that because, again, what you've seen is transaction volumes fall 60 to 70% and the only people selling are people who have to sell. And then they're looking for debt and then they look at the debt quotes and they're like, I don't know if I want to buy it with that debt quote. So the market's kind of stalled and that's kind of okay, but it creates a great landscape for us going forward. I don't think you'll see the regional banks or even the money center banks come back to the table as fast as we will. And many of the alternative lenders like us are also sitting on the sidelines nursing their own refinancing issues. But I think we prepared for this by raising a record amount of cash. And I'm also very, as Jeff mentioned, I feel very good about the non-income producing assets. You say, well, why are you feeling good about that? Because there's a lot of equity capital tied up in them. And when we can sell them, we're not going to give them away. We don't have to. But we can sell or refinance them or get out of these assets, we will have another 20-odd plus cents of earnings power. which is material for our company, just deploying the capital in today's environment in a safe way. The other thing I think you may not intuit is that with running a lower leverage business that we are, that's turned lower than our peers and comp sets, when the store end goes up and all of our loans are floating, we have less leverage, so it doesn't amplify it. We don't get these beats to your numbers because we're less levered. On the other hand, we're taking reserves and doing other things than setting aside and being conservative on accruals and hopefully on our ratings. So we're managing our balance sheet in a very different way. And you're not going to see as many wild swings up and down probably in our earnings numbers than maybe you see in some of our peer set. I did want to make a point in making a slight commercial that I made this comment about the Category 5 hurricane, which got amplified across the media in many, many places. We also have a non-traded REIT, and that non-traded REIT has 1% of its debt rolling over this year, 1% of its debt rolling over in 2024, 9% of its debt rolling over in 2025. So the non-traded REIT is in really good shape. The people who are in the midst of the hurricane are the people who have to do something right now, and we don't have to do anything in the non-traded REIT. Similarly, STWD, our company here, is heavily hedged. You heard from Jeff about our non-QM book. I mean, we have no net cash outflows, and even though rates continue to rise, we're completely hedged on the book and actually earning a fine ROE on the book, which is kind of shocking. So we have really built a balance sheet that I think is pretty sound and can take us through this, I think, our fifth or sixth storm since we actually started the business 13 years ago. For a while, I was offended by people who said, let's stay alive to 25, anticipating a much more benign interest rate climate. But now it's probably the correct strategy. And I think you can see that with our reserves and our cash and our ability to pay off that converted November with cash, we're not hopefully going to see any kind of major strain. And then we have this secret little sauce in the corner, L&R, the nation's largest. It's sort of It goes one or two, but it's among the one or two largest special servicers in the country. And we are going to get our front row seat to trillions of real estate that will have to be restructured and hopefully will continue or build even a bigger book. It's coming. It's not not coming. You can see the fissures in the lake. The lake's going to crack. So unless he lowers rates fairly dramatically, the short end, you're going to see a lot of problems in all asset classes, even the good ones. because people are a little upside down in their capital stacks. So again, I think we are playing the market with one arm behind our back, but we're really anxious to step out and continue to deploy our capital, and we will start doing that. I think after we see the next September move, we'll see what happens with the Fed. We'll have Jackson Hole coming up, and then we'll hear their comments in September, but Unless I'm really wrong, I don't think. The private sector is weakening. Manufacture is weakening. We know construction, private construction will weaken. We can see the beginnings of the rollover domestically in the hotel markets. Apartment rents are slowing. All positive, by the way. We'd be delighted to have 4% rental growth in apartments. That's a normal growth rate. But it's down from 21%. And that's why we knew inflation would fall. So with that, I think it's a very positive. We're poised to do well. The guys are all ready to go. And we have the balance sheet and obviously the reputation and the willingness to deploy our capital and hopefully get to even a much higher earnings basis than we've had in the past, which would be super exciting for us. So with that, we're going to be careful and we're going to be smart. Historically, we've made money on assets we've taken back into REO. Because we are, at the end of the day, an equity shop, and we can manage these teams. Our teams have been really good at that. So thanks for your time today, and I'll pass it back to Jeff and Reena and you all for questions.
spk07: Thank you.
spk06: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You can press star and 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, a reminder, in consideration of everyone's time, we request you to restrict to one question and please join the queue.
spk07: One moment please while we poll for questions. Our first question comes from the line of Stephen Laws with Raymond James.
spk06: Please go ahead.
spk04: Hi, good morning. Another nice quarter and congratulations on that. I guess for my question, I'd really like to hit on Woodstar. You know, can you talk about the strength there? Pretty material fair value increase. It looked like rental income was relatively flat versus Q1. So, you know, can you talk about the rent rolls that hit in Q2? When we should see those come through? And what assumptions went into the fair value mark for June 30th? Thank you.
spk08: Rena, do you want to start? Sure.
spk00: Yep, I'll start. So, Stephen, the fair value increase that you saw is the result of the 7.5% HUD maximum rent increase. Those increases are going to start taking effect. We roll them out beginning July 1st. So you're not seeing them in our second quarter earnings number. That's why earnings is flat quarter over quarter. But we know that those rents are in place. And so the valuation was based on in place rents at the end of the month, even though you're not seeing them in earnings, if that makes sense. So it's just the seven and a half percent rent growth that we factored into the valuation. And that's how we got the incremental 209 million.
spk09: But let me add one thing that The actual increase was 10, 11, and HUD restricted it to 7.5. And we can take that leftover increase and apply it to next year's increase. So we didn't lose it. We just deferred it. And they'll also be whatever the increase is next year. And the rent for the affordable portfolio is determined by two factors, inflation and also median income. So median income growth will probably remain positive, significantly positive. And so you'd expect the total growth next year. It's also a rolling three-year thing. It's not one last 12 months. So you should have good momentum into further rent growth in the portfolio next year as well. One thing about affordable housing, just as it's obvious, but I should say it, maybe it's not that obvious to everyone, it stays full. It's always full because it's 30% to 40% less than prevailing market rents. The only question is rents and what they're set up by the government. I think it might have been unprecedented for the government to step in and not give you the full amount. It's a calculation. You know how it's a very transparent calculation. So they just decided, I think politically, it wasn't possible to increase affordable rents at that pace in those markets. It was not applied across the country. It was just certain markets. We happened to be in those markets.
spk08: And Steven, you know we have pretty low fixed rate debt on that that doesn't start rolling until 26, and then there's a series of rolls after that. So we have plenty of room on our debt to continue to get similar cash returns and not have to worry about refinancing that portfolio.
spk07: Thank you. We take our next question from the line of Doug Carter with Credit Suisse.
spk06: Please go ahead.
spk01: Thanks. Can you talk about the potential size of the new lending opportunity and whether you would, you know, kind of look to accelerate some of that, the disposition of some of the non-performing assets to, you know, to be able to deploy into that? Or would you continue to be patient on that, on those assets?
spk09: Well, I think, I think, you know, about one of our biggest non-accruing assets is this, we're power pursuing the first mortgage of a giant. property over in New Jersey here. And our basis will be down soon to 70 cents or so. A little below. A little below. And so that's the first mortgage, by the way. There's cross-collateralization and all kinds of goodies on top of that, which is a fairly gigantic property. So I think we challenge ourselves every day to say, even though the property's performance is getting better and better and better, So what's the right time to sell it? But it is... I mean, we could sell it for $0.70 and not take a loss. I'm pretty sure we could sell it for that. And then we could deploy a quarter of a billion dollars into stuff. So we're probably getting close. You know, again, you know that if short rates are lower in a... As soon as it breaks, as soon as the Fed says they're done or it's more obvious, I think spreads come in for new buyers. And then I think... people's expectations and, you know, I think whether they price that mortgage, do they price it to a 10, to an 11, to a 9? That all depends on what they think the future of interest rates will look like. If you think rates are going up, you're going to be on 68 cents, and if you think rates are going down, you're going to pay 75 cents because it is a first mortgage. So, yeah, I mean, we are very much paying attention to that. You know, I just point out with all of this non-income-producing assets, we're still earning our dividend, right? So... It is actually shocking. I think I said this like three quarters ago. We didn't have to make any loans at all to make our dividend. It's a funny thing. It's counterintuitive, but they used to pay us back. We'd deploy the capital out. Now, the duration of loans is getting stretched a little bit, although we did have almost a billion dollars, so a billion two of repayments in the quarter. So we have to put that money out. That's why you saw us put out 500 and something million dollars in 560 new investments. So we're not shut. We're just measured. And if there's something really tantalizing and good and so good, we will go after it. I mean, borrowers are reluctant to borrow from you at 500 over five, 600 over five. You can make any construction loan you want in the United States right now at like 550 over. It's 11% first money mortgage dollars. And, you know, we tend not to do little deals, but there are a lot of little deals getting done at those levels, lots. And we ourselves, on the equity side, if we're looking to borrow, we're getting quotes at $500, $550 over partial recourse. It's a lender's market. You are one happy little Chiquita if you're a lender today and you have capital.
spk08: To put it into scale, we did $15 billion in loans in 2021, a little over $10 in our transitional floating book. We have repo capacity. If we were to do that same volume over the next year, we have repo capacity. Most of our peers I don't think do. We have the equity if we want to create it to do that. And I think the market is turning to where we could probably do 75% of that given what we think the landscape will be over the coming months. It will really come down to how certain we are about what money is coming in and continuing to see loans repay and our desire to further leverage the company to take out to create more equity to do it. But we have the capacity in repo. We've been here before. And I think that we're probably going to run at 60% to 75% pace in terms of opportunities where we've been. And we'll probably pick up our pace where we've slowed down to about $1.5 billion a year. I think you'll see us starting to trend back up.
spk09: What's the amount of the unused repo? $8 billion of unused lines. So we have plenty of capacity. We just have to find. feel comfortable. We can look out in the landscape and we really go loan by loan and see who do we think can take us out, where they're likely to take us out. It is an interesting situation because you've seen it in the media from start with. I mean, there are some office buildings that you are just walking away from. Why are you walking away from the buildings? Many of them are fairly leased, but the loan, what's the cap rate on an office building today? Odyssey will tell you it's a 4-4. I will tell you it's double that. Because if you want to get financing to buy an office building today, it's kind of 7, 8, 9, 10%. So nobody's going to buy an office building at a 4-4. Nobody's a big word. Very few people. Maybe there's a sovereign wealth somewhere that decides they want a trophy in some city for their brochure and will take a 20-year deal. But we're not able to do that. So When you have a building, even if it's 70% lease and you have to get it 90% lease, you have to put in more capital for the tenant improvements. And between the pay down and the debt that's required by the bank and the capital improvements that you have to put in to stabilize the asset. And in the cycle so far, the bank doesn't want to give you a five-year extension for the world to reset itself. You just can't do it. As a fiduciary, that's not a great move. So you've seen, frankly, Blackstone, Brookfield, Starwood all walk away from properties on occasion in markets that we thought were injured. I do think the office markets are better than people think. And it's funny, Vornado reported yesterday, you can go find their earnings report, and they're running a 90% lease book in a really tough market. And the office markets are seeing absorption. You just have to have the right buildings. And it's funny because in this market with record profits of companies, they're not really pressuring you on rents. They're not saying, I'll take it at $70 and you want $90. They'll take it. It's a question of them understanding their own expansion needs. But in Miami, in New York, even in LA, the right buildings are leased and they're full and they're getting the same rents and concessions they had before. As you know, it's just like the mall business. It's evolved like the mall business. There are excellent malls. People, tenants, fight to get in them. They're raising rent, Simon reported. And the crappy malls, you will find, become something else. So it's great for the media and the press to say office is a mess. And again, I believe that people are going to come back to the office, especially as managements, if we have the recession. It's going to be shallow, I hope. But I think most CEOs I know are back in their offices, and they just aren't forcing the young people to get in. But in a downturn, as I mentioned, I think maybe not on this call, the CEO of a major bank said to me, the first person I'm going to fire in a downturn is the one working from home. So maybe these people think the job market has been so robust historically that they didn't care. In a downturn, they will care. They probably will do what we all did when we were kids. We'll go back into the office and wave to our bosses and try to impress them that we're there working hard so we don't get let go. So we'll see. The chapter's not over. This is not, and again, I mentioned before I got chewed up on TikTok, but across the world, workers are back in office. It has become an American thing, and it's really only in some cities, and it's different in different parts, and I was really encouraged to see Amazon say they wanted people in their headquarters in Virginia four days a week, and hopefully they'll convince the federal government to let people come back to work in the federal government, which has been the last of the major employer groups not to come to the work. So that would be helpful. We have a couple assets in D.C., and fortunately they're going to be resi soon.
spk07: Next question.
spk06: Thank you. Our next question comes from the line of Rick Shane with J.P. Morgan. Please go ahead.
spk10: Thanks, guys, for taking my questions this morning. I'd like to talk a little bit about the special servicing at LNR. It looks like the active special servicing went up about 10% quarter over quarter, but the named special servicing declined about 5%. Just like to talk about sort of the movements there and also how we should expect that to play through the P&L over the next six to 12 months.
spk08: Thanks, Rick. Yeah, you're right. The active, we'll move around as you start to see roll off. So one begets the other. So you had about $5 billion or so of maturities and we'll start to see maturities pick up. So our name special servicing absent us continuing to buy new deals and we have recently been investing in newbie pieces. So we will add to that at the same time it gets subtracted. But for a long time, deals weren't maturing. So our balance only went up with named special servicing. Now you're getting into those the end of the 2013 maturity. So you're seeing maturity. So we had about four and a half billion or so roll off and mature. I think we'll have another three and a half billion or so for the rest of this year. some percentage of that four and a half billion rolls in, right? And if 10% of that rolled in, then that's the $500 million increase in active. So one creates the other. And I think that this cycle will continue now for the next few years as you had more originations in 2014 and into 2015, you'll start to see the runoff pick up a little bit and you should see the active pick up a little bit. And obviously we get paid on the active. So we've been saying for the last few quarters that we expect the revenues to really be a 2025 phenomenon as the 2013 and 2014's mature and run through the specials. We're expecting the increase on the revenue side to sort of be later next year. So we always say it's sort of 18 to 24 months of lag. So it's more of a 2025 revenue thing, but it's playing out just as we expected. The percentage of that runoff that rolls into active is what will be interesting. The more office we see, the more you'll probably see roll in. And that was a bulk of what we did see come in this period. But we will pay attention to those maturities and Most of our company is hoping that you don't have a lot of distress. This is the one part where we're hoping that there is distress, and we will make money off of that distress, which makes it this great party to carry hedge for us. So we're staying fully staffed, getting ready for the opportunity, but it will really pick up over the next 12 to 18 months.
spk06: Thank you. Our next question comes from the line of Don Fandedi with Wells Fargo. Please go ahead.
spk05: Yes. Can you talk a little bit about multifamily in terms of the outlook at your largest exposure in CRE lending? I know there's a couple of factors like higher cap rates and also just higher debt service burdens given Fed rate hikes. How do you feel about that, especially if a 10-year were to go higher?
spk09: I'll start at the basics. I mean, the Fed's actions In a strange way, we'll hurt inflation longer term because they're creating a bigger dearth of housing stock. And the lack of existing single-family home sales has created a really odd outcome with the new construction being not only robust but at good prices. And I think everyone's been surprised at the strength of the new home building. I'm not sure in history you've ever seen a situation like this where Rates go up and new home sales go up too. They're not higher than they were, but the backlogs are growing. People are still moving. They want to buy a new house, and nobody's selling their old house, so they have to buy a new house. And that's relevant to multis. Multis, you know, we stress this book. I personally sat down with a team. I think we're selling today multis if there's no attractive debt in the four and three-quarter range. four and a half because really good long-term juicy debt you can get low force um and why are people buying it they do think you're going to see rents accelerate again they are slowing down nationally rents are almost flat um and that came from fannie mae which obviously has loans on pretty much every asset in the country um and they vary from down in california to up in florida to up in new york up in boston you saw that recent That recent report, I think, came out last week on the housing market. They are softening, but they're still, as I mentioned, positive. And we have 120,000 apartments, some of which is a significant chunk of it's affordable. But our market rate stuff, we're around four, four and a half. And some markets are accelerating. Some markets are decelerating. The cap rate where we will have issues will be north of six and a half. So we think our break-even to our book is like six and a half. And if our assets got there, we'll turn ourselves into iStar. We'll gobble up every single multi and own them for you forever. Couldn't wait. Best thing that ever happened to us. Because they are brand new projects and we're getting them at 65 cents on the dollar or 60 cents on the dollar. I think the odds of that happening are less than 5%. There's one problem. We mention it in our earnings. We have one asset in Portland, I think it is, that is not renting at the pace and the rents we would have hoped. Obviously Portland is one of the two cities that was most affected by the racial George Floyd incidents. So that's the only issue we have. And again you know our basis is talk about brand new at fractions replacement costs usually is an attractive place to enter a market. Nothing else can get built until rents move to a place to make your new basis attractive. So So rents would have to increase or there'll be no new supply in the Portland market. And there's still people there. So it's funny, as I travel the country and go to these cities, you would think that San Francisco's a bowling alley. There's no one there. There's still, I don't know what, nobody. These cities are still thriving. They're still active. And I think you have to be careful because the media just wants to create news as they do in the political environment. Hysteria, craziness, and everybody wants, There's a funny thing that people want to pick on New York or they want to pick on San Francisco because they had a big run. I'm in New York right now. I mean, it's busy. And the restaurants are busy. And that's amazing. I mean, it is the only useful city. It's where the kids want to go. And all the problems in California are helping New York. So, you know, then that's what you see. You see the stores re-tenanting. I can't tell you the rents they're having. They're high, but... These cities are dynamic and they're vibrant and they will survive and there will be good lending opportunities in them. So, and, you know, the offices, I'm in a building, we are offices in New York, 100% leased, you know, leased in the pandemic and one floor came up for sublet and was released in two days. So it's actually like you call it like a stock picker's market. That's what this is in real estate now. You have to have the right building with the right ESG footprint and the right location with the right floor plates, and you can lease it. And if you have the wrong building, you have no hope.
spk08: Don, I'll throw on looking at our portfolio. The area we probably bulked up the portfolio was 2021, and that was the lowest cap rate. So you were taking four cap assets, that we thought had 5, 9 or 6% exit debt yields, you pushed rents in 21 and early 22 by 10% or so. In the last 12 months, our portfolio has seen 7.8% rent growth. So by pushing those rents, your exit cap rates have now gone into the mid or mid to high sixes. So for a moment in time on a roll on that loan in 2024 or 2025, If the SOFR curve stays right here for a moment in time, you'd be negative carry for a couple of months. But if the forward curve is at all right, you will be positive carry. And over the life of it, you'll be significant positive carry. Great escape velocity at today's forward curve even against those sort of four cap assets that were at the highs because we pushed rents and expenses haven't gone up nearly as much. So exit debt yields are higher and we think right now we have plenty of escape velocity to get out of all those loans as they start rolling in 24 and 25.
spk07: Thank you.
spk06: Our next question comes from the line of Jade Rahmani with KBW. Please go ahead.
spk11: Thank you very much. You look back to early March and the theory of the storm was really taking hold. Then we had the bank distressed. Fast forward to today and we've gone through second quarter results and it seems no huge shoes to drop. A couple of big credit losses in the mortgage REIT space. You all took up the CECL reserve on macro, nothing really new that large on specific loans. So my main question would be, you know, given the category five hurricane, as you put it, are you surprised that there have not been huge new shoes to drop of late? And do you think it's just a timing issue or do you think this represents kind of a green shoot in your view?
spk07: Sorry, it's a timing issue.
spk09: Again, if you have caps and your loan's not maturing, it's not blowing up until it matures. But it could be offset by what I'd expect to see, a lowering of short rates maybe early next year. But you're not going to see, unless we... If we have a complete crack, every time that's happened, the Fed has gone to zero on short rates. That would be good news and bad news, I suppose. That would be the opposite of collateral damage. That's a windfall for the property sector. If he's measuring his success by rising unemployment, I just think that is really hard. That is a very, I guess the adjective is a blunt tool. It's more like a sledgehammer because the You can only get the unemployment in certain industries, the service industries, the manufacturing industry. It's not going to come from government spending. Government's spending $1.7 trillion. Can you imagine if Apple was spending $1.7 trillion? I mean, $1.7 trillion is a lot of spending. That's just the fiscal budget before you get to the three stimulus programs that are still coursing through the economy. So I think it's, like I said, I think it's a minefield. And that's one of the reasons we're not We're not deploying all this billion dollars today because we have to be careful of every single loan and every single borrower. And each borrower is in a different position. When I was saying about Starwood Blackstone and Brookfield, I was saying big borrowers and small borrowers are being judicious as fiduciaries for their capital in this climate. And it's not like we've seen a deal like the deal in D.C. that we took back. It was a household name borrower, one of the top five borrowers. players in the space, and we got a loan back. So people are willing to, you just think, oh, well, they'll never walk. Well, I don't think that's the case right now. I think it's case by case, asset by asset, and you have to be, you're just being, it's a jigsaw puzzle. So I don't think that this is past. I mean, this is not past. These are just a function of every borrower waiting until the last minute to try to figure out how to fix his capital stack. And if you just run the math, it's nothing to do with us, it has to do with the whole market. You run a coupon that was two and a half or three, now it's nine. You can't borrow the same amount of money if you want any debt service coverage test. So lenders like us, I mean, some people are just chopping their coupons. pay of six and accrue three or something. We haven't done a lot of that, but other people are. And just to bridge people to a brighter sky down the road. I also think you're seeing the government has now told the banks to work with their borrowers. Don't know what that means, but back in... You'll probably see some AB notes. You'll see mortgages chopped in half to induce... the equity to put in money to re-tenant the building. I'm really focused here on the office markets. It's not really applicable to the other major asset classes. But in the office markets, that's what you're going to see happen, that you'll create a hope note, just like you did last time. I think the banks, the good news this time is the banks can do it. In 07, 08, they were so weak and had such thin capital ratios, they couldn't take the losses. Now they either set up reserves or they're making enough money because interest rates are so high and the yield curve is so favorable to them that that they can take these losses and restructure. I'm not saying they're happy about it, but they are in a much better position to work with borrowers than they were in 07-08. That should mean this should resolve more smoothly, but it will take time. And we are definitely not out of the woods.
spk07: And just because you don't hear the bomb doesn't mean the bomb didn't go off. Thank you.
spk06: We take a last question from the line of Sarah Barcom with BTIG. Please go ahead.
spk03: Hi, everyone. Thanks for taking the question. So the single-family resi market has held up pretty well. Could you speak a little more to how that resi credit book is performing and how you view the optionality to move that book? Maybe you could touch on that in the context of the SFR portfolio sale at SREIT Are you seeing any newly emerging bad debt issues that are concerning? And is there any way for Starwood to recycle that into new commercial real estate opportunities? And if so, what sectors or geographies do you find most compelling right now?
spk09: I'll do my part and then Jeff does his part. The REIT's not in the single-family rental lending business. That's not one of our verticals. We have non-QM loans and we have agency assets, but we don't have loans against SFR. The SREIT sale to Invitation Homes was not something we really wanted to do. We love the asset class, we love the prospects for the asset class, but we had redemptions to make and that book was the lowest yielding thing in our portfolio. So it makes sense to sell the thing that's least contributing to the dividend of the company. And it was a sub-five cap rate on our numbers. And I'm fairly sure Invitation can do better, given their scale. And so they were probably looking at a better number than that. But given the debt markets and how it was financed, I think it was a win-win. Unfortunately, we did book a small loss on selling it. But that had nothing to do with our views, actually, of SFR. One of the markets that Starwood's getting out of SFR, not at all. We own 16,000 homes away from that in our equity funds or something like that. And we really like our position. We like, again, the scarcity of new products is exacerbating the deficit of housing. And housing is probably the the least impacted by anything going on in the world. People have to live somewhere. They cannot live in their computer. AI, maybe you'll find your home differently. You'll still have a home. I don't think you can live in the metaverse, even though some people seem to think they can. So until people can live on Mars and the moon, we're probably OK. And the housing market here in the US, alone among most of the Western nations, is actually growing, although it's growing. The other thing that's happening is demographically the, I don't know what gen it is, the millennials? They've moved into the house buying market age. So the demographics have changed and that's a very big positive for SFR because they're moving, instead of buying a house now, if they can't afford it, they'll move into a house and rent it. So we're bullish on the business. We could get into the business here. It is a business of a couple of other firms and they've done quite well. And even focused on small owners, this is such a grander lending business. It's not something we've built, but it is something we could do. The returns are pretty good.
spk08: Regarding our book, Sarah, and thanks for the question, we're going to be patient on selling down that book. As Reena talked about, it's about $2 billion of non-QM loans, about $1 billion of agency-eligible loans. We took a large gap right down about a year ago, over $200 million, I believe. as spreads widened. We don't tend to hedge. There's no easy way to hedge spreads there. In our CMBS book, we hedge about 35% or 40% of our spreads because we have a CMBX market to do so. Post-GFC, there's no way to hedge spreads in residential lending. So we do hedge rates. The early move in that book was massive amount of spread widening. So that is why the gap right down came. But fortunately, we moved our hedges up and up and up. I think Rena and I mentioned that we have about $170 million of hedge gains. So over the last year, our hedges have outperformed collateral. Even though collateral hasn't tightened significantly, you are seeing some green shoots with new securitizations coming tighter. We do believe after the last Fed move that those will continue to tighten. We continue to finance that book on repo and our repo that balances or excuse me, our repo loans are coming in at a tighter and tighter spread. We've opened a couple of new facilities this quarter and expect to open another new one. Next quarter will be about 25 to 30 basis points lower overall in our cost of funds on that book. So even though they're relatively lower coupons and they are negative carry today against the forward curve and looking at the hedge gains that we have and effectively taking that $170 million, you can go pay down repo at 8%. So that's giving us excess income above that's making those a positive carry trade today. And we own a lot of the residual bonds off our first 15 securitizations. And the bottom of those stacks is these slower prepays. We'd like faster prepays on our below-par loans. We're not getting that. But those slower prepays are accretive to the value of our owned position. So overall, when you include the hedge and include the securities, the book's performing fairly well. You asked about credit. And one of the benefits to our book, being about a 4% gross back coupon on the loans that have not been securitized yet, Those lower coupons are going to have better performance than the higher coupons. Today, the current coupon is 8% or so, and those will be the first ones to repay, and those will be the first ones to have stress when stress happens. But we're expecting significantly less stress. We're not seeing it show up in any meaningful way on these lower coupons. And remember, these loans were written two, three, four years ago, so there's a lot of HPA built into those housing values. I don't expect to see credit distress there. The loan book doesn't carry quite as well as we would hope, but it carries positively, and it gets bailed out by the hedges and the legacy book that we own, as well as we own some legacy securities from pre-GFC that have been in our book, $250 million or so, that have performed very well as well. All in all, that book is not performing quite as well as our other cylinders, but it's a lot better than it was a year ago. We have a long-term strategy, and importantly, we have the liquidity to hold on, not force ourselves to lock in bad financing costs and a securitization today because we have access to so much liquidity here at Starwood Trust. We continue to monitor it, but this will be something we're going to talk about for a long time. We're in it for the long run, and the book's performing fine.
spk07: Thank you.
spk06: Ladies and gentlemen, we have reached the end of the question and answer session. I would now hand the conference over to Mr. Barry Sternlicht, Chairman and Chief Executive Officer, for closing comments.
spk09: Thanks for being with us today. As always, we're here to answer any questions and thank our board directors and our great team at the Starter Property Trust who put us in this position that we are. Have a great August, everyone. We'll have the whole political year ahead of us to be entertained.
spk07: Thank you. The conference of Starwood Property Trust has now concluded.
spk06: Thank you for your participation. You may now disconnect your lines.
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