Starwood Property Trust Inc.

Greetings and welcome to Starwood Properties Trust's fourth quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd like to hand the conference call over to Zach Tannenbaum, head of investor relations. Zach, you may begin.

Thank you, Operator.

Good morning and welcome to Starwood Property Trust's 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 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 Sternlich, the company's chairman and chief executive officer, Jeff DeModica, the company's president, and Rena Paneri, the company's chief financial officer. With that, I'm now going to turn the call over to Rena.

Thank you, Zach, and good morning, everyone. Today, we reported distributable earnings, or DE, of $167 million, or 48 cents per share, for the quarter, and $675 million, or $2.02 per share, for the year. Across businesses, we committed $1.6 billion towards new investments this quarter and $5.1 billion for the full year, with 67% of our annual investing in businesses other than commercial lending. As a testament to our diverse business model, commercial real estate lending now comprises just 54% of our asset base. I will begin my segment discussion with commercial and residential lending, which contributed DE of 193 million to the quarter, or 55 cents per share. In commercial lending, we originated 477 million of loans, which brings our full year originations to 1.7 billion. Repayments totaled $1 billion in the quarter and $3.6 billion in a year. Our $13.7 billion loan portfolio ended the year with a weighted average risk rating of 3.0, consistent with the prior quarter. In the quarter, we foreclosed on three previously five-rated loans, totaling $190 million, all of which were multifamily, two in Texas and one in Phoenix. We obtained third-party appraisals for all three assets, with one indicating a value below our basis. We took a $15 million specific CECL reserve against this $46 million loan prior to foreclosure. In total, the three assets had $61 million of lost sponsor equity. As we worked to resolve our existing REO assets, we sold our previously mentioned Portland multifamily asset at our DE basis of $61 million. In addition, subsequent to quarter end, We received $39 million in repayment of a non-accrual loan secured by a hospitality asset in California that was destroyed in the 2020 wildfires. The insurance proceeds were $1 million in excess of our DE basis. And finally, we are under contract to sell an REO multifamily asset in Texas at our DE basis. Our CECL reserve increased by $36 million in the quarter to a balance of $482 million. Together with our previously taken REO impairments of $198 million, these reserves represent 4.6% of our lending and REO portfolios and translate to $2.02 per share of book value, which is already reflected in today's undepreciated book value of $19.94. Next, I will turn to residential lending, where our on-balance sheet loan portfolio ended the year at $2.4 billion. The loans in this portfolio continue to repay at par with $56 million of repayments in the quarter and $256 million for the year. Our retained RMBS portfolio ended the quarter at $421 million with the slight decrease from last quarter driven by repayments and offset by a positive mark to market. In our property segment, we recognized $14 million of DE or 4 cents per share in the quarter driven by our Florida affordable multifamily portfolio. For gap purposes, we recorded an unrealized fair value increase related to this portfolio of $60 million in the quarter, net of non-controlling interest. The value was determined by an independent appraisal, which we are required to obtain annually. NOI for this portfolio increased 9% this year. We expect rents to increase again in 2025, once HUD releases its maximum rent levels in a couple of months. As a reminder, there was a 3.8% holdback from last year that we expect to implement in 2025. Turning to investing and servicing, which we often call REIS, this segment contributed DE of $49 million or 14 cents per share to the quarter. Our conduit Starwood Mortgage Capital was the largest non-bank CMBS loan contributor in 2024. During the quarter, we completed five securitizations, totaling $595 million at profit margins that were at or above historic levels. This brings our year-to-date total to 17 securitizations for approximately $1.6 billion, the highest level since 2016. In our special servicer, our named servicing portfolio regained position as the largest named servicer in the U.S., ending the year at $110 billion, the highest level in a decade. This was driven by $5 billion of new servicing assignments in the quarter and $24 billion during the year. Our active servicing portfolio ended the year at $9.2 billion, with $1.5 billion of new transfers, nearly 60% of which were office. In our CMBS portfolio, we purchased a $49 million B piece, and in the segment's property portfolio, we acquired $14 million of property investments. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $22 million, or six cents per share, to the quarter. Our strong investing pace continued this quarter with $532 million of new loan commitments, bringing our total for the year to $1.4 billion, its highest annual level to date, with this performing loan book ending the year at $2.6 billion. And finally this morning, I will address our liquidity and capitalization. During the quarter, we executed $2.3 billion in debt transactions, which Jeff will talk more about. We repaid our $400 million December unsecured at maturity and early repaid half or $250 million of our March 2025 high-yield maturity. After repaying the remaining $250 million next month, we will have no other 2025 maturities, and our next corporate debt maturity is not until July 2026. Our liquidity position remains strong at $1.8 billion. This does not include liquidity that could be generated through sales of assets in our property segment, direct leveraging of our $4.9 billion of unencumbered assets, or issuing high yield or term loan B backed by these unencumbered assets. We continue to have significant credit capacity across our business lines, with $10.5 billion of availability under our existing financing lines, and unencumbered assets of $4.9 billion. Our leverage continues to remain low with an adjusted debt-to-undepreciated equity ratio of just 2.1 times, its lowest level in over four years. With that, I will turn the call over to Jeff.

Thanks, Reena. We ended 2024 with a flurry of capital markets transactions where we extended the average term on our corporate debt from 2.2 to 3.5 years, repriced, upsized, and extended $1.4 billion in term loans, extended and upsized our corporate revolver, and issued high-yield unsecured debt, all at the tightest floating rate spreads in our company's history. We raised almost $800 million in incremental proceeds in this process, leaving us with significant investable firepower as we enter 2025. We've seen significant spread compression across our investment cylinders in CRE, CMBS, SIF, and residential loan and financing spreads, and in CRE cap rates, where spread tightening has offset most of the rate rise since the election. Liquidity has returned to all of these markets for both new transactions and the refinancing of the record loan originations volume from late 2020 through early 2022, giving us as strong a loan pipeline as we have seen in three years. Banks continue to earn significantly higher ROEs lending to non-bank lenders like us than making their own direct whole loans to borrowers. They've also reduced our lending spreads to us in line with the spread compression I just spoke about, allowing us to compete at tighter spreads across our platform on higher quality, low leverage loans at today's lower basis, which we believe will create outsized opportunities for us in 2025. We've already closed $1.5 billion of loans in the first quarter, and our business plan for 2025 is to write the most loans we have in any year since our inception other than 2021, which was a record year for lenders across the board. Our unique diversified business model has a cycle low debt to equity ratio of 2.1 times today, leaving us significant room to invest our near record cash levels while still maintaining our low leverage business model. Investing in incremental billion dollars of equity will offset the drag created by our REO and non-accrual balances today, and given we can borrow today at record low spreads, allowing us to more than absorb tighter lending spreads. Our approximately 350 employees at Starwood Property Trust, in addition to the employees of our manager, Starwood Capital Group, are working toward this goal of significantly increasing our investing pace across cylinders. Although we have a lot of work to do, we believe we will be able to start exiting legacy non-accrual and REO assets at a faster pace. We presented our board with our 2025 plan this quarter, and in that, we have a plan to reduce this portfolio, which has caused significant drag on earnings, by half in 2025, then by half again in 2026, as we look to exit our difficult legacy positions by 2027. While we have earned our dividend in these difficult years where CRE was the hardest hit by the Fed's unprecedented interest rate increases, freeing up this trapped equity while simultaneously taking advantage of tighter spreads to grow our investment portfolio will allow us to increase earnings in the coming years while holding on to the vast majority of our over $1.5 billion in unique harvestable gains in our own real estate portfolio. We had $3.6 billion in repayments in CRE And with near-record liquidity and access to capital, we have looked at resolutions differently than most of our peers and focused on the highest NPV to shareholders after factoring in the workout timetable and cost of capital of exiting loans today versus improving performance and waiting for a better exit window. We work with our manager, Starwood Capital, with over $110 billion under management across nearly all CRE asset classes to find the most accretive business plan for difficult assets. If you'll recall, back in 21 and 22, we made $93 million for shareholders after foreclosing, holding, and repositioning our first defaulted loans to former Winn-Dixie industrial assets. This quarter, we sold our Portland REO Multi at our basis. Looking to Q1 of 25, we will sell an REO Multi in Texas at our basis, and we already were repaid on a hotel in Napa that burned down at $1 million above our basis. All of these were as we expected and signaled. We are beginning interior demolition on a $115 million office building we foreclosed on in DC and are converting it into a beautiful multifamily, which you will see on the cover of our supplemental. Rather than sell this asset in a depressed DC office market, our underwriting has us returning a gain to shareholders upon completion. We have resolved or modified 25 assets totaling $2.8 billion to date, with 12 modifications and 12 assets we have taken into REO to reposition or sell as we did in the previous example. With markets repairing, we expect the pace of resolutions to pick up going forward, as I mentioned previously. Reena mentioned our significant liquidity, and I will add that we are through the vast majority of our projected deleveraging. Our four and five rated loans, which were optimally levered with $794 million of repo and $901 million of CLO debt, today have only $144 million and $620 million of debt, respectively, down 81% and 31% on the same asset base. Having paid down 81% of our repo borrowings already on these fours and fives, we are left with only $144 million of repo debt subject to any potential margin calls remaining on these assets. As a result, we have significantly more clarity into our future liquidity than we have had at any point in this higher rate cycle, which gives us comfort that now is the time to go fully on offense with our incremental liquidity and access to significantly more liquidity, as Rena just mentioned. We will also use tighter spreads to continue to increase our unsecured corporate debt as a percentage of our overall debt, and we'll use proceeds to continue to pay down secured asset-level debt, which we believe will put us in discussions with our rating agencies to upgrade our corporate debt ratings, thereby further reducing our cost of capital and making our planned growth even more accretive to shareholders and keeping us on our stated path of getting to investment grade. In commercial real estate lending, although we foreclosed on three multifamily loans, our four and five rated loans were down this quarter. We have said in the past that late cycle multifamily loans will be the hardest hit by stubbornly high forward SOFR, as undercapitalized borrowers will struggle to buy new caps and extend loans. While more work for our asset managers, our manager is one of the largest owners of multifamily in the country with 106,000 units, and we expect, as we have done in the past, that we will quickly improve performance and be able to exit these assets at or near our basis, as we have done multiple times recently, or choose to hold them as accretive long-term investments. As I mentioned, financing costs continue to improve, and our pipeline is as big as it's been in years. We plan to add to our personnel again this year to take advantage of what we see as one of the best new lending environments we've seen. In infrastructure lending, CLO and borrowing spreads continue to move down, offsetting tighter lending spreads, and after making $1.4 billion in accretive investments in 2024, we expect to grow at a much faster pace in 2025, given tailwinds in the energy sector and the much discussed need for incremental power in our country. We're off to a strong start, with $229 million closed and $763 million in the process of closing. all a blended ROE in excess of what we can earn in our core CRE lending business. We hope and expect this business will continue to grow and become a bigger part of our asset base going forward. In our real estate investing and servicing division, as Rena mentioned, we are now named special servicer on $110 billion of CMBS loans, our most since 2015 and the most in the growing CMBS market. In a slow CRE lending year, Reese was a strong contributor to earnings in both special servicing and our CMBS conduit, SMC, highlighting once again the benefit of our multi-cylinder platform and the positive carry credit hedge embedded in our business as our servicer will again make more money as the workouts of loans made in a lower interest rate environment continue to come through in the coming years. With that, I'll turn the call to Barry.

Thank you. Thanks, Zach. Thanks, Dreen, and thanks, Jeff. This is going to be one of more interesting calls that I've hosted in 10 years. I think we kind of talk about the macros, and probably the windshield has never been murkier. Nobody really knows the effect of tariffs or if they're going to go in or they'll be targeted or broad. But there's one short-term conclusion, which is definitely is inflationary. There's only three places the price increases can go. They can go to the manufacturers. They can go to the consumer. They can be split between the two of them. And take steel tariffs, for example. The American producers will raise prices something less than the 25% increase on foreign imports. So I think we'll have to wait and see. And I think I was joking internally for the last nine months, 99 out of 100 economists would have thought with our deficits, the 10-year was going four or five to five to five and a half. And, you know, Jeffrey Gundlach and Jamie Dimon have both been fairly public about significant increases in the 10-year. And yet we sit this morning with the 10-year at like 428 and at the huge rally showing the inherent weakness in the U.S. economy. What you're seeing in the U.S. economy is that 10 percent of the population is spending half the money. and the bottom half is not participating. Because the AI explosion that has led to commitments of close to $300 billion from seven companies levered is a trillion dollars. It is the same thing as the infrastructure bill, except it's getting spent much faster. That's the exceptionalism of the US economy. It's not anything else, certainly not a fixed public education school system. So we have a sort of a distorted economy. And you're seeing the consumer sentiment fall because of the uncertainty. coming out of the White House. We'll see if it's tactical or not. But every day, of course, we have new news feeds and we have to readjust our thesis. What it means for real estate, though, is interesting. I mean, we're sitting in a good place. I mean, constructions come down. You've heard it from our peers. Multifamily starts down 60%, 70%. Industrial starts down 70%. Buying real estate today with today's interest rates, you're usually buying it way below replacement cost. We've talked about that means, by the way, that rents have to rise in order to justify new construction in many cases. So it's bullish for loans we have in place and bullish for existing assets. And with Canadian tariffs, for example, you'll see imports of wood, lumber, be more expensive, creating shortages of housing, additional shortages of housing. If steel prices rise, additional shortages of everything else in real estate because construction costs are going up. It leads to future inflation. If we have a continued shortage of multifamily, rents will rise. I was looking at some numbers in Denver the other day, going from 17,000 homes completed in a quarter to 3,000. And you can see the patterns. Rents go up double digit. Those factor into CPI, and they're a third of CPI. And you'll see that probably in late 26, 27. So we're kind of caught. We want low rates. Great to refinance our debt. Great for the real estate complex. Great for LTVs. Great for cap rates. And then we also don't mind high rates because we can lend at higher spreads and we make more money on the new book. So it's a little bit of a tug of war between both ends of the spectrum. We don't mind higher high rates. Although one of the reasons that we're so busy and our peers are talking about going back on offense is is that rates are stable. People expect, and probably in the last month, the SOFR curve has actually changed again. And we're looking at SOFR less than four again. I mean, just wait a week and we'll change again. But it really depends on what this economy does. And nobody really knows. We really don't know today. It's soft. Two weeks ago, it was a runaway freight train. So the markets are confused, companies are confused, and it leads to a problem, of course, for the average company, not Amazon or Microsoft or Meta or Facebook, Google, for the average company on what their capital spending should look like. And I also, while we applaud the concept of building manufacturing back in the United States, it's 13 of 160 million jobs today, and we have a 4-point-something percent unemployment rate. Hard to imagine how you can instantly produce manufacturing jobs in a manufacturing sector that doesn't have workers. Of course, add that with the deportation Congress approved bill over the last couple of days, which includes significant funds to deport millions of people. That will put pressure on wages again. And, of course, many of these people work in construction. So that also increases construction costs. So you'll see a lack of a rebound in construction, and these are the jobs that these people have taken, whether it's an Uber driver or construction job, landscaping job, agriculture job. Those are the jobs that many of these people have taken. So the good news is the markets are now clearly bottomed. Now, that's barring a runaway move in the 10-year. But right now, that doesn't look like it's the case, though. You know, obviously, Trump's policies, I think, by general consensus, will increase the deficit, especially if the Senate blocks the spending cuts that the House just put in. I want to talk about us now because I think the company is really in fantastic shape, probably the best shape it's been in in years. And even with our non-accrual loans, look at the balance sheet, 2.1 turns of leverage. It's down from almost a turn. We can easily borrow money, as Jeff said, and increase our leverage and increase our earnings power, and we're going to. We're going to be aggressive on our lending book. Take some things we didn't talk about. Our construction book was 24 percent of our loan book today. It's down to 3 percent. Forward fundings under those loans were 34 percent of our real estate book. Our real estate lending book today is 8 percent. So, we don't have any, really, and then you look at our, how we've delevered on our repos, and there's a mention by Rena of the future funding. could be required on any margin calls that are de minimis in the concept of the firm. So the company is really in a rock-solid foundation with $1.8 billion of liquidity and maybe better than we've ever been in that context. And I think it's really exciting to see our businesses like The Conduit do 17 securitizations, 17, that's more than one a month. That means we're just a manufacturing facility. We take in paper, we package it up, pretty it up, put a bow tie on it, and sell it. We had a record year, and that continues actually into the new year, which I'm pleased to see. And then L&R now is, again, the largest servicer of the nation. That should bode well for future earnings from that subsidiary. Both of those businesses, as you know, are unique to us in the mortgage area. And it enables us to be the only mortgage rate not to cut its dividend in the last 11 years, I guess it's been. The multifamily, every time we would foreclose, I kind of throw a little party. The lending group throws a little fit because I'd like to own these assets because we lent 65% of cost typically. And by definition, we're below a replacement cost. And we all know that the multifamily markets will stabilize as the new supply is absorbed. It won't happen this year. There's still too much supply coming in this year, but it will fall off a cliff in 26, and you can see buyers positioning themselves. Probably multifamily cap rates are in 75 basis points already and probably will go further as the future growth becomes more apparent to more people. And you want to get in as late as you can, but not too late that you have to pay up for the future growth in rents. We'll also, because L&R is so big, we will have, as we've always had, a front row seat to these restructuring. It's a proprietary deal pipeline for us. It's unique to us and allows us to work with borrowers and offer them solutions to their borrowing issues, whether it's preferreds or seniors or equity, we can play in all those bases. I think we'll wind up picking up our residential lending business again, which is a vertical that's been closed for quite some time. We'll be looking at that, looking at HPA, and deciding soon how much capital to deploy there. SIF, our energy business, I mean, I really want to grow it dramatically. It's been a gift that keeps on giving so good that the loans are being paid off pretty fast. And while rates are high, as everyone mentions and all our peers have mentioned, spreads have come in dramatically. They've crashed. So overall borrowing costs are probably pretty much where they are. And the CNBS markets are wide open. They had one of the biggest days in history two weeks ago. And you can refinance pretty much anything in the CNBS market. And you will, including office, by the way. The market has accepted large refinancings of large office buildings, which are much harder to do in the private market. And that's good for us because all of us, including us, have some exposure to their office markets. I want to say that with all these businesses growing, I'll mention two other things we're doing. One, we've done our first massive data center loan. We're going to make two more that we have in our book, in our pipeline. This will be a big business for us. It's an infrastructure sleeve. I was asking Jeff if we should call it infrastructure or commercial real estate lending. They're unique loans, as you know. You're making a loan usually to a credit, the best credits in the world, AAA credits. There are 15-year leases in places with bumps. And you're usually financing something like a 9, 10 debt yield. So these are great loans and the market's becoming very competitive, but we're finding ourselves as able to create the returns we need for our vehicle, making those loans too. So you'll see hopefully that business grow and grow and grow. And of course, I think as we grow and add more diversity to the portfolio, and we've made it through this 500 basis point hurricane that the Fed threw to us the more we can actually convince the rating agencies to give us that investment grade rating. And we're a couple notches away, but we are the highest credit in the REIT world. And hopefully that will translate into us being able to make better loans at lower spreads, finance them tighter than our peers, and become a very powerful machine. One other business that we've kind of put on hold but is coming back into possibilities today is buying equity real estate. And I think it's one of the best investments Starwood Capital ever made was the 17,000, 15,000 homes, affordable housing units that are in STWD. As you know, we have nearly a $2 billion gain. We have no net equity invested today. And we could take that off at any time, but it's the gift that keeps on giving. With 8% trailing rent growth and 8% forecast for this year, there's no better place to have your investors, your capital. Of course, you're always full. And I think Jeff has talked in the past about the built-in rent growth as these assets come off other affordable restrictions, and then we negotiate moving them closer to market. So, we think we're really comfortable with that portfolio, and that would lead us to enter other businesses, again, like triple net lease and other areas. So, we are looking, expanding our equity book. And again, we can do $3 to $4 billion of investments without issuing equity. We can do this just by increasing the leverage on the company to more normal levels. I'd say we're under leveraged today. But we don't really have a need to borrow at the moment. But if the pipeline gets really big, we will be levering ourselves to probably a more normal level for us and not have one of the lowest leverage. It might be the lowest leverage ratio in the REIT universe. So I'm really pleased the team is intact. They're working hard. We're excited to be able to open the going offense again as we have been for quarters. But this is full-on open. We're open. We're actually losing deals again, which is not fun. Even office construction loans, we've lost a few, which is kind of funny. And the spreads are good, but it is competitive. There are a lot of players today that want to put out private credit, and real estate's one of those sleeves. Our history has been doing large deals, and because of our scale, we get that phone call. And one of these data center deals, the MES, is half a billion dollars. There's not a lot of people you can call for that. And we could take that whole thing down. So we're pleased. I mean, I'm happy with where we are. The good news also is we do resolve these non-accrual loans, which are way too big, and inevitably will run into other problems in the portfolio. All that money comes back and can go back into earnings and is available firepower, if you will. And we're pretty excited about that possibility. And you can do the math yourself and figure out the earnings power. The goal of this is to not call us a real estate REIT. We want to be thought of as a finance company and in a REIT form, which is the most passionate or passionate. It's the most... tax-efficient way to pay out our earnings. But we're a company, clearly we're a company with multiple business lines, and we'll continue to add business lines. We have looked at buying some dust lenders. Jeff was debating whether we should talk about it. We weren't competitive on one that's being sold now. But there are other businesses that we're looking at to add to the portfolio and grow other lines of business. So with that, I think I'll stop and thank the operator, pass it to the operator. Thank you.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 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. One moment, please, while we poll for questions. Our first question comes from Stephen Laws with Raymond James. Please proceed with your question.

Hi, good morning. A few topics I want to hit on with Woodstar. You know, first on the expense side, you know, cost of rental operations a little higher in Q4. It looks like that's been the case the last couple of years. So is that seasonal and how do we think about that moving forward? And then on the interest expense, what's the remaining term on the the debt there, and how do you think about what that's going to cost when you look to refinance that?

Yeah, thanks, Stephen. Appreciate it. You know, we have two and a half years remaining debt there, and we will be opportunistic. We'll go early if the market gives us an opportunity, as we always have. If you look at the way we've treated our unsecured debt, where we've gone early a number of times. We're going to do the same here when the market gives us a window, but two and a half years is plenty of runway. And expenses were really up because of the hurricane. There was some maintenance that needed to be done, and that is not run rate, but we expect that that will come back to run rate. And as Barry said, with 8% rent growth and probably another 8% coming next year with moderating expenses, I think we feel pretty good. This

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

Yeah. Thanks, Stephen. I know it's probably difficult to look at the quarter where the 10-year went up in the fourth quarter. I'll note that it's down 27 basis points since year end. In the first, second, and third quarter, we use desktop underwriting. In the fourth quarter every year, we get an appraisal. The appraisal is a discounted cash flow method. It backs into a 443 cap, which our portfolio premium from the appraisal would be equivalent of a 468 cap. I have a list of the last 20 trades in this sector in Florida in our markets, and the last 20 of them for significant size have a 4.6% blended cap. As Barry said, cap rates have come down, and they are coming down, and we're seeing spread tightening, and I would expect they will continue to come down, certainly as we look at our desktop mark for next quarter. So being higher than the last 20 trades, which date back to 23 and have some of the higher cap rate assumptions in them, um, based on the market being weaker than, you know, we, we feel like we are, uh, we're very much in the middle of the range, but the most important thing here is this is an appraisal. This is discounted cashflow method, looking at assumptions over time. I'll say on top of that, they look at the rent growth for this year, and we only effectively get half of that because it's only for six months. If you take all of that, just the 3.8% that's been held back is worth about 19 basis points in cap. So if I do six months, it's equivalent of 10 basis points. So the 468 asset level cap that is effectively used in the appraisal is almost a 478. So we're 18 basis points above the average of the last 18 months, which should have gone down. So while it was tighter than where we were on a desktop basis, we feel really comfortable that it is where the market is today at worst.

Our next question comes from Rick Shane with JP Morgan.

Please proceed with your question.

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

We're agnostic. I mean, any business plan that meets the return of capital and is creative, you know, we'll look at. I want to say we don't really have any peers. You know, and we pay a whopping dividend, and given the diversity of our business model and its historic ability to cover its dividend for whatever, is it 12 years or something? 13 years? I can't even keep track. 2009. 14 years? 15 years? So, I mean, I think, you know, we should be trading at eight dividend yield or seven and a half, not the nine and a half reflects broken companies, basically, that are completely busted or have cut their dividend. Some of them are not continuing to cover their dividend. So, yeah, I mean, you could say that it's booked, but then you have to believe us on our books. And maybe, you know, that is what it is. But the ability to pay a dividend that's too large, given the risk inherent in the dividend, I think that pushes us beyond... book. And I think if we, that's why I say we're a company, not a REIT. And I know we're a REIT, but it is, if you look at it as a company with an efficient tax structure to pay out, then we could and should trade away to a dividend yield that reflects the risk of our business model. And I think we're in a really good position and perhaps, you know, we should look at other vehicles, which we have considered spinning out businesses and things, which will not trade at the discount we do. It's a book. You know, when we bought our SIPP portfolio, our business, the GE energy lending business, we inherited, I think it was like a $2.5 billion book of loans. And we paid a lot. You know, we were moaning and groaning that we paid a lot. And as that book paid off, inevitably, it pretty much did. we replaced it with a book three times as good. I mean, higher spreads, better credits, much better financing, CLO financing. We do our CLOs. That's going to happen to our real estate books. You're going to wind up getting a bigger and bigger 2.0 book and less and less of a 1.0 book. And I guess as we trade where we trade because of when we made these loans. And otherwise, why would you have a 9.5 dividend yield? So, you know, I think... I think we're weighed down, with all due respect, by the analyst community that just focuses on multiple to book. And we ask you to look at the diversity of our business. The lending business is half of our business, 54% of our assets. I mean, there's no peer to that. You don't have anyone that comes close to that in our lending group. They don't look like us. And yet you talk about them as if they're the same as us, and we're totally different. And we have 300 employees in the REITs. Like, there's no one else who has 300 employees in their REIT. So we are a company in a REIT form, and we're trying to build a diversified credit business.

Rick, I'd add to that and say, you know, our underappreciated book value is $19.94. We were below that on Monday, right? And today we're a little bit above that. We've averaged close to 1.2 times because of our diversified business model. Because we have businesses like Starwood Mortgage Capital and LNR that make fee-based revenue, we should trade at a significant premium to our peers. Some of the parts. Some of the parts. We had one of the analysts that covers us and some of our peers last week put us on – made us a sell. I think it's our only sell and has one as a buy and one as a hold. And we were told in that note that we have the best management team and the best business model, but we trade too close to book value. I think that's a ridiculous statement. We've traded at 1.2. We have businesses that will perform on an ROE basis. We also have the ability to grow our book value. Woodstar is going to go up. Rents are going to go up. And if you look at forward book value, forward book value is going to be higher. We have $700 million in reserves, about 5% of our book, if I take in the REO reserves that we've taken, asset-specific reserves, and our general CECL reserve, we could certainly undershoot that. But that is our conservative number, right? So why should we trade at or below book with these very accretive businesses with the ability to grow book value internally? And with the fact that our Woodstar portfolio, which is such a gift that keeps giving, is going to keep going up in value for the next handful of years at a minimum. And as Barry just said, more likely rent increases across the board, never mind just in this. So I think we're completely mispriced. If we were back at 1.2, it would be $4 or $5 higher. But that's not management's job. That's for people on this call to determine. But we're going to grow the business significantly this year and try to prove it's running.

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

We'd love to acquire other companies at a discount, but they don't seem to want to do that. So we're going to grow as fast as we can. The fact is 10% of our assets are on U.S. office. U.S. office is still difficult. Our peers have significantly higher exposure to U.S. office. So I would say I'd look into why they trade where they do rather than why we trade where we do. But we should be at a premium.

Our next question comes from Jade Romani with KBW. Please proceed with your question.

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

Yeah, thanks, Jade. We've never really leaned in on life science. We saw all the conversion deals. We ended up doing one loan, and it's under $100 million. It was in Boston in a great location in the seaport. We still like our basis versus today's now lower rates. If we can sign a lease somewhere near $90 a foot, which we believe the market is $92, we are out of that loan, but we need to find that lease. Life science is having a difficult run, as you said, because of supply. I've always joked that we don't need three times as much lab space if we're not graduating three times as scientists. Going forward, I think it's more difficult than that. I think AI, if you look at a certain gene or something that you want to take on, In the life sciences world, AI is going to take 20 possible conclusions and knock it down to two or some smaller number. And so I think the need for lab space is going to continue to go down. Fortunately, we probably have the least amount of life science exposure of any of our peers. We did that one get through, but we've had a similar reaction to yours that the basis is high. It's difficult to convert back to office. And if you do, you're not going to return the equity and you may not return a loan balance. But these are difficult problems. And I think the market's going to become more aware that it's a more difficult sector than everybody thought it was a handful of years ago when we converted anything that didn't work as office, hoping to get higher rents.

All right. Thanks, Jay.

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

Jay, you're a little distorted for us on the call. Did you say GSE Multifam? GSE Multifam. What are GFC multis? Multifamily average. Oh, dust lenders. Yeah, we'd love to get one.

You got one for us, Jade?

It's hard.

There are certainly people that have reasons that they would want to buy them, brokers, et cetera. We've tried now three times to buy one, Jade. You have to sort of buy into if the caps, 140 billion caps today, Fannie and Freddie, if we go through this privatization, sort of what happens there, some people would argue that that although you're going to pay about 12 or 13 basis points more in a securitization for G-fees, that you will actually see them able to increase volume because that $140 billion has really been driven by mission, low-income housing type of green housing. So it would open it up for the GFC lenders if we do that at a slightly higher cost, which is probably competitive with CMBS, but not as much inside of CMBS as it is today, and certainly inside of where bridge lenders are. But as a bridge lender, we're doing transitional assets, and these are not transitional properties. These are properties with high cash flows that they are assuming are near the top of cash flows, which is why they're locking in 10-year debt. So we really like the business. Getting licenses is difficult. Adding brokers who you have to pay multi-year guarantees to go to a golf club and schmooze. We like being in the office 60 hours a week. It's hard to justify having 50 people that you're going to pay an awful lot of money for and not know for sure where the market's going. It's a bullish trade if rates go down for us if we started one. But not having the legacy servicing portfolio, if we started one de novo, certainly makes it a little bit difficult if rates go up. So we wrestle with these things. We've been competitive bidding on them. You asked about JVs. Some of our peers have entered JVs. There's not a tremendous amount of volume that has come out of those JVs. We've looked at them. And ultimately, every time we look, we end up getting somebody else's underwriting and we don't like their underwriting as much as we like our own underwriting. And so if they think we're getting in at 75 LTV, when we look at what they've done, we think they're getting it at 85 LTV, and those JVs sort of stick you with something that I think is not cycle agnostic that can actually underperform the book that we would put on on our own in an unhealthy market. So It's been a hard thing for us. We would love to grow. We have a lot of other places to grow that our peers don't. Our energy infrastructure business is great. Barry said we want to start getting back into resi. We said we want to potentially start adding property again. And we're going to have a great year in CRE lending. So we have plenty of places to put money out. We struggle with this one. We'd love to own one. The cost of entry is high, and we will continue to look at every one of them that come. And we'll continue to look at JVs, but they have to be on our credit terms, not in someone else's credit box.

Our next question comes from Doug Harder with UBS.

Please proceed with your question.

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

He asked if we started buying properties, would we use our excess liquidity, or would we look to sell down any of our existing properties?

No, first. Sorry, the mic was on. First, we use our excess liquidity. That's the most accretive way to initiate unsecured. to do so if we didn't. Obviously, we have a billion in cash and other availability, so it's not for the foreseeable future. But, yes, we would not need to sell anything to buy something, I don't think. We do look at, as Jeff mentioned, that office building, 1201K in D.C. I've toured it myself. I mean, it's a really good resi conversion. And we've decided we want to do it or have outside do it. We've made a lot of money in the REO business historically. Where we think the investments are sound, we've taken some serious hits on an office building in Houston that we got blocked by a tenant that wouldn't leave. We had a pretty nifty deal crafted for that building, but the tenant wouldn't leave, and we had to sell it as an office building. Unfortunate, the user showed up, so it's pretty good, but it's not anywhere near the loan balance. But again, this money went out, and you look at our balance sheet, this is where we stand today. So we have the liquidity, I think we have an adequate CECL reserve, and we have quite a large amount of capacity, both liquid and then levering. We have billions of things we can do before we have to bother. If the markets show up, if there are great opportunities and people approach us to buy something and it's attractive, we'll just sell it, of course.

You know, we also have Blackstone Mortgage Trust announced that they're getting into net lease. We're really happy they are. We'd love all of our peers to be diversified. It would be great for the sector to see more stable earnings across the board. That's something we've looked at. And if you look at the REITs on the triple net side, like triple N or whatever, their 7.6 cap rate, I think, on their more recent acquisitions, I think that is something we could make work accretively and would actually have positive financing leverage and get you a 10 cash or something like that. I'm a little afraid, you know, 56% of the triple net business is industrial and a lot of the rest is gas stations and bank branches and whatever. And when you have a great credit, you have to pay up for the credit. And I think if that brings it down below a six and a quarter cap rate or so, it's very difficult for us to justify versus our elevated dividend today. If we get our dividend down, I'd love to do those high-credit deals. I'm not sure we're ready to wade into lower-credit deals to sort of chase mid-7s cap rates today. I think the market on the things we like are 100 basis points or so tight, but we have a group that's our capital group that has been looking and will continue to look and continue to show us opportunities, but that's an obvious place where we could potentially add some more exposure there going forward.

Great. Thank you.

Our next question comes from Don Fandetti with Wells Fargo. Please proceed with your question.

Hi. Can you talk about the Washington, D.C. office and multifamily market? I mean, more people coming to work, but potentially fewer people.

How are you thinking about that area?

Well, we have one building, I think, in Virginia. And two in D.C., which includes the 1201? No, that would have been three. Yeah. So it's not good. We don't know what's going to happen there. I mean, even last night or this morning, I heard that they were firing 65% of the EPA, and they changed it to the lower expenses by 60%. Not necessarily fire that many people. You have two countervailing forces return to work, which is really good. And people will show up in D.C. It would be good for retail at grade, the coffee shops, the laundromats, and the tenants at the base of our buildings will have a field day. But we don't know yet really the outcome. It's not good for the D.C. office market. I don't know how you could say it would be. We do have some pretty good tenancy and duration of tenants in our properties.

We're 84% leased on our biggest loan in D.C. and our other loan in D.C. just had another re-up. Those two aren't terrible. Our Virginia asset, we signed two leases this quarter, but I think it's only 64% leased, so that's probably more difficult, but it's a much smaller loan at $120 million. But our two larger DCs, we certainly are hoping that the government isn't completely shuttered for new leases because that market is certainly very dependent on GSA leases, and you just haven't seen them sign in the last... four years, so we need to get back to work and it's great to see people coming back to work and being forced back to work and that could give some green shoots to the market, but we're watching it like you are.

If I had to guess, sort of interesting, I mean, my guess is you'll have these layoffs. They'll hit different sectors of the government differently. Many of these people being laid off or being laid off in government-owned buildings in government They may come back on the market. I don't know. And then my guess is you'll be rehiring to fill the, as they had to do with aircraft and control people. And I'm not sure America knows that park rangers are getting laid off in national parks. We'll have no one in them this summer. I think most people, including me, are super in favor of cutting government waste and bringing accountability to the federal government's It's actually, you know, of the 50 million people employed by government, only 3 million are federal. It's really the municipalities and states where the bureaucracy continues to be an impediment to construction development. And you shouldn't have to take 18 months to get a permit. And that, we'll see how that works, shakes out if any of this trickles out of federal government into the regional local municipalities and states. Because it is... I mean, it is ridiculous how long it takes to get a permit. Of course, that's all built into the system. But if you want to fix the housing crisis, you can't ask people to wait 18 months to get your permits, and then the building departments are lethal. So it'll change slowly. So some of it's really good. You know, we went in one direction with Lena Kahn. We're going the other direction now. But I firmly believe capitalism needs guardrails. So it cannot be left to its own. It will wreak havoc, as we did in 07-08. So we'll see how this lays out.

And we gave you a sense that we only have, I think, $144 million of margin call eligible, credit mark eligible repo on our lending book. The two assets in D.C. and the one in Virginia, I don't think have any. I'm going to confirm that now, but I think we don't have any. We paid off completely. on one of them, and I don't think we have any repo debt left on any of the three. So if it gets worse, it's not going to be a liquidity problem. It's going to be figuring out our exit timeline, which may be longer.

Got it. Thanks. We've reached the end of the question and answer session.

I'd now like to turn the call back over to Barry Sternlich for closing comments.

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