Starwood Property Trust Inc.

Greetings and welcome to the Starwood Property Trust First Quarter 2025 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Cannonbaum, Director of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning and welcome to Starwood Property Trust Earnings Call. This morning, we filed our 10-Q and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward-looking statements which do not guarantee future events or performance. Please refer to our 10-Q and press release for cautionary factors related to these statements. Additionally, certain non-GAP financial measures will be discussed on this call. For reconciliation of these non-GAP financial measures to the most comfortable measures prepared in accordance with GAP, 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 Demotica, the company's President, and Rena Penary, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rena.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings or DE of $156 million or 45 cents per share, Gap Net Income with $112 million or 33 cents per share. Across businesses, we committed $2.3 billion towards new investments, our highest quarter in nearly three years, with infrastructure lending committing its highest level of capital in a single quarter since we acquired the business from GE in 2018. Our overall strong investing pace continued after quarter end with $1.3 billion already closed. I will begin my segment discussion this morning with commercial and residential lending, which contributed DE of $179 million to the quarter or 51 cents per share. In commercial lending, we grew our loan book by $859 million, which will help drive our long-term earnings potential. We originated $1.4 billion of loans, of which $886 million was funded, and funded another $250 million of pre-existing loan commitments. Many of our originations were back-ended to the last half of the quarter, so the full earnings potential will not be realized until Q2. Repayments totaled $363 million, which is higher than we expected, leaving the book at $14.5 billion at quarter end. The growth in our portfolio also led to a slight decrease in our weighted average risk rating from 3.0 last quarter to 2.9. We began executing on the resolution plan that we discussed on our last call and have resolved $230 million across three assets so far this year at pricing or above our gap basis. The first is a $38 million non-accrual loan secured by a hospitality asset in California. During the quarter, we received $39 million in full repayment of the loan, resulting in a $1 million gap and DE gain. The second is a $55 million apartment building in Texas that we foreclosed on in 2024. Subsequent to quarter end, we sold the asset at our undepreciated gap basis, which is the same as our DE basis for this asset because we never took any gap reserves. The third is a $137 million office building in Texas that we foreclosed on in 2022. Subsequent to quarter end, we sold this asset for a $5 million premium to our gap basis, reflecting the adequacy of the gap reserve we recorded in 2023. The corresponding DE loss of $44 million will be recognized in the second quarter. To clarify, we do not consider an asset to be resolved until it has legally exited our balance sheet, so the resolutions I just mentioned exclude this quarter's foreclosure of a $45 million previously five-rated non-accrual loan on a multifamily property in Georgia. We obtained a third-party appraisal for the asset, which indicated a value above or at our basis, so no reserve was recorded. Our Cecil reserve decreased by $26 million in the quarter to a balance of $456 million, reflecting the macroeconomic forecast. Together with our previously taken REO impairments of $198 million, these reserves represent .2% of our lending and REO portfolios and translate to a $1.93 per share of book value, which is already reflected in today's undepreciated book value of $19.76. Next, I will turn to residential lending, where our on-balance sheet loan portfolio ended the quarter at $2.4 billion. The loans in this portfolio continue to repay at par, with $55 million of repayments this quarter. Our retained RMBS portfolio ended the quarter relatively flat at $422 million, with an $8 million positive -to-market offset by repayments. In our property segment, we recognized $16 million of DE or $0.05 per share in the quarter, driven by our Florida Affordable Multifamily Portfolio. Subsequent to quarter end, HUD released the new maximum rent levels, which were set .4% higher than last year. Certain properties were in geographies where the rent increases were once again capped by HUD, which resulted in .7% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula in 2026. As a reminder, the majority of these rent increases will be implemented in June, so the impact of earnings will not be fully reflected until the third quarter. Turning to investing and servicing, this segment contributed DE of $50 million or $0.14 per share to the quarter. Our conduit, Starwood Mortgage Capital, completed four securitizations totaling $268 million at profit margins that were at or above historic levels. In our special servicer, we continue to be ranked the number one conduit special servicer, a ranking we have maintained over the last two and a half years. Our active servicing portfolio ended the quarter at $9.6 billion with $800 million of new transfers which were again dominated by office properties. Our named servicing portfolio ended the quarter at $107 billion. In our CMBS portfolio, two large loan payoffs resulted in principal collections of $62 million. We also added new purchases of $12 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. As I mentioned earlier, we committed to a record $677 million of loans of which $601 million was funded. Repayments totaled $436 million bringing the portfolio to a record $2.8 billion at quarter end. As with the growth in our commercial loan book, growth in this portfolio will likewise help drive our overall long-term earnings potential. Subsequent to quarter end, we completed our fifth infrastructure CLO for $500 million with a record low cost of funds and a weighted average coupon of SOFR plus 173. This brings our term non-mark to market CLO financing to 58% of infrastructure debt and our market financing for the entire company to 84%. Finally, this morning I will address our liquidity and capitalization. Subsequent to quarter end, we completed the $500 million issuance of our five and a half year, six and a half percent senior unsecured sustainability notes which we swapped to a floating rate of SOFR plus 261. In addition, we repaid the remaining $250 million of our 500 million March 2025 high yield notes at maturity. Our corporate debt activity over the past two quarters increased our weighted average corporate debt maturity from 2.2 to 3.7 years and leaves us with no corporate debt maturities until July 2026 when $400 million matures. Our current liquidity stands at $1.5 billion which does not include liquidity that we have in our property segment. Direct leveraging of our $4.9 billion of unencumbered assets, issuing high yields backed by these unencumbered assets or issuing term loan B. We also continue to have significant credit capacity across our business lines with $9.5 billion of availability. Our adjusted debt to undepreciated equity ratio ended the quarter at 2.25 times. With that, I'll turn the call over to Jeff.

Thanks, Rena.

We informed you last quarter that we intended to raise incremental capital to increase our lending pace in what is one of the best origination environments we've seen in some time. As Rena said, we originated $2.3 billion in new investments in the first quarter and are on pace for a strong second quarter with more than $1 billion already closed in the first month. The opportunity set should be large. In CRE, record origination volume from 2021 and 2022 needs to be refinanced in the coming quarters. Real estate transaction volumes have picked up. The CNBS single asset single borrower market has pulled back given the steepening of the credit curve. Many lenders are capital constrained and banks earn higher ROE's lending to us than competing with us on their own origination. The year started strong and that strength continues today. I just got off a call with the co-head of US debt for a major brokerage who told me they have 50% more debt and equity deals in the market today than the same period last year. These factors create an opportunity for well-capitalized lenders with consistent access to capital markets to prosper. As we have in the past, we have again proven our unique ability to raise both debt and equity capital accretively in this cycle. In March, we were 4.5 times oversubscribed on the issuance of $500 million in sustainability bonds that Rina mentioned, which we swapped to SOFRS 261, our 6 basis points off the record tight spread that we achieved just 4 months earlier in December 2024. In the last year, we issued a reprice $4 billion in debt and equity instrument. $2.6 billion of that was completed in just the 3 months from December to March where there was very little capital markets activity. These activities leave us today with $1.5 billion of capital to invest after closing the pipeline I just mentioned. We also enjoy historically low leverage at 2.25 times in significant unencumbered assets which can be leveraged to continue at our accelerated investing pace as we move into the second half of 2025. We expect our balance sheet to grow materially this year, allowing us to maintain a dividend that we have paid for 45 straight quarters. We uniquely have approximately $4.50 per share in harvestable gains on our own real estate portfolio. We are the only 2.0 commercial mortgage REIT that has never cut its dividend and we believe our diversified low leverage business model provides us with the unique ability to ride out market disruptions. We're seeing green shoots of liquidity and optimism return to our sector. The market's expectation of where the benchmark rate SOFR would be in 2026 and 2027 was 100 basis points higher at this time last year and is now back in the low threes for 2020 and beyond. This is good for legacy positions as they will have an easier backdrop and more debt service coverage to enable our borrowers to refinance with these lower benchmark rates. Stocks have clawed back their liberation day losses but the credit curve has steepened as insurance capital now has lower risk-based capital charges on higher rated bond classes. Their move to higher rated credit assets with lower risk-based capital charges has created more opportunity for us in subordinate positions of the capital structure where we have invested over $100 billion over the last 16 years. As I just said, banks get better capital treatment lending to us than direct lending and we continue to see borrowing spreads to us decline allowing us to maintain our returns with likely less competition. This along with volatility in single asset single borrower securizations has created a bigger opportunity for us in 2025 and we expect to continue our elevated investment pace in all of our business lines. In CRE lending we originated $1.4 billion in the first quarter. We committed more equity in Q1 than we did in all of 2024. We've been leaning in on three investment themes this year and expect to continue to data centers, Europe and multifamily. When fully funded 70% of the equity in our Q1 originations was in data centers with long-term leases to investment grade tenants. Our second largest loan is on a broadly diversified multifamily asset in well-leased German markets with a 61% origination LTV. 30% of our lending book is now in markets outside the US where we benefit from a large dedicated team and long history of operating in these markets. Additionally, we have a large pipeline closed or enclosing in Q2, the vast majority of which are on multifamily assets in the United States. At quarter end our CRE loan portfolio is up $859 million as Rena mentioned to $14.5 billion and we expect it will reach a record high by year end which should support our efforts in 2026. As we look to legacy credits I will remind you that we have over $650 million in reserves for our CRE lending book reflected on our balance sheet today. Resolutions which we expect to accelerate the next two years should lead to lower reserves in the future and higher earnings as we recycle that capital. As Rena said, we have resolved $230 million of assets so far this year at values in line or better than our gap reserve levels and expect that trend to continue. In the quarter our US office exposure declined to just 9%. We lowered our CESA reserve for the first time in four years and with no new additions to our four or five rated categories in the quarter. We moved our only life science deal, a five rated $73 million loan on a renovated but empty asset in Boston's Seaport District to non-accrual in the quarter and we'll update you on progress there in the coming quarter. Moving to energy infrastructure lending you have all seen oil and gas prices move lower this quarter but our earnings are not dependent on these commodity moves. Our loan book is split between assets that produce power and midstream assets that store and transmit the commodities but it's not levered to the commodity price itself. We continue to enjoy excellent returns at some of the lowest lending LPVs in our portfolio in this business today. In the quarter we deployed a record $677 million at above trend return allowing our portfolio to increase again to nearly $3 billion. Although we have ample ability to finance the growth of this business on bank lines we issued our fifth CIF energy infrastructure CLO in the quarter at the lowest cost of funds to date. I'll finish today with the property segment where Rena mentioned we would receive 8.4 percent rent increases in Woodstar this year and will defer 6.7 percent to next year ensuring continued property appreciation. We have spoken many times about the embedded value for SPT shareholders of the Woodstar portfolio. We have over 1.5 billion of harvestable DE gains on our 59 owned properties. Contractual rents have continued to increase since we purchased the portfolio in 2015 through 2018 and we expect it to continue which will add significant value to our portfolio in the coming years. We have told you that there is also significant upside as we are able to roll these properties to market rate from affordable once they reach the end of their affordability restrictions which is typically 25 to 30 years after construction. We told you that these restrictions started to burn off last year and in eight years over a third of the rent restrictions will roll off allowing us to either increase rents or stay in the affordable program and continue to benefit from abated real estate taxes. In short you may be under the assumption that multifamily rents are flat or falling nationally but this has not been the case in the affordable space and the continued lack of supply and income growth should lead to even more upside for shareholders going forward. With that I will turn the call to my friend Barry who is right off the red eye so take it easy on him two hours of sleep.

Good morning everyone. Thanks Zach Green and Jeff. I guess for us let's just start with the economy. The economy is going to weaken. I was just talking to CEOs of a portion of 100 companies the past few days returning from the west coast and there will be issues on shelves and there will be prices for consumers to absorb and you kind of already were in a recession. You kind of saw the lower half of the country and the top 10 percent 15 percent of the country was carrying spending and consumption and now we'll see how the wealth effect actually plays through. Actually the markets have recovered shockingly to pre-liberation day highs but that doesn't really feel right and things like travel are clearly off. I guess it was Expedia that reported and then Airbnb and we've seen the travel numbers the airlines have talked about their stress as international travel in the United States dissipates but it will go somewhere. So Canadians will go to Europe or they'll go to the Caribbean. They may not come here but the number one tourist in the United States and the Europeans will probably stay in Europe and frequent Greece and other locations rather than come to visit us. So the economy will weaken and that means Powell sooner or later will lower rates and for sure when he's out in May of 26 there's no chance rates will be higher because the selection will depend on somebody who accommodates a lower rate environment. That is all good for the property segment and so I feel like we're through the worst of it and it's going to get better from here and transaction volumes which kind of have slowed again given the blowout of spreads and uncertainty in the markets and people worrying about additional where their next deal is going to go. I expect that will reaccelerate. However, we've been in the market now open for business for the past year. We've probably never entered this period with a better balance sheet, a better team, more opportunities in all of our sectors to return to achieve excess returns and I think we're executing really well. So for us I think the story of the economy is a weakening. Obviously now the forward curve is four cuts and so for even three would be fine down to the threes. At the end of the day real estate is a -of-product and largest asset class in the world. We will come back into favor and we'll probably have more people on this phone call in the future. But it is our opportunity to continue to our north star which is to achieve investment grade and continue to do that. To do that we have to grow all of our investment sleeves and add additional ones. We've looked at a Rez originator this quarter. We've been on a two billion dollar regional bank portfolio but priced inside of our hurdles. We've looked at other companies in our sector including the public opportunities that might exist and we're turning over lots of stones to find the pearl. Is that a clam? It's a clam. So looking for the pearls under the sea. It's interesting that for our board we just did a presentation just a week or so ago and we are the only 2.0 mortgage rate that is trading above its IPO price. Jeff said we're the only one who's never cut their dividend. We believe our dividend is solid and we have a very unusual portfolio. We own Starwood Capital owns over 110,000 apartments including 43,000 affordable assets and the portfolio of this company is the shining star of the whole bunch. When you have 15% rent increases in one of our geographies there's nothing that's the highest I've seen in anything market rate or any asset class in real estate frankly. And they call it the gift that keeps on giving. When we bought those assets my theory was I want to own stuff in Star Property Trust that we could hold forever and increase the duration of our portfolio essentially though. They give us cash flow forever and being affordable they're always full. Being in growth markets that are dependent and rent growth is dependent on income growth we picked wisely and we've vastly outperformed our expectations being that the rents are so low compared to market. You actually don't have to worry about people moving in and out as much. People stay. Our only job is to manage them well and meet customers expectations and keep them full which the team has done admirably. So that is a real hidden source of value for the company and today and we want to real estate book and looking back at the kinds of real estate deals that provide the cash on cash yields that we think are creative to our enterprise. And one other thing of course some of our peers are trading at fractions of their book values and at some point they can't raise capital and there's an uncle thing. You should fold up shop and obviously it's the largest in our sector and in the world. We'd love to be the acquirer but and also partnering with Starry Capital Group we can split these portfolios if there's lots of bad assets we're able to work on them and figure out how to split the assets. We actually did when we bought L&R 232 years ago. There were some assets in there that did not fit STWD's work. You have to look at the book today and just be sort of astonished. You have we continue to earn hit our numbers while carrying nearly almost two billion dollars in non-accrual assets which is astonishing. That is bad news and really good news. At some point we're going to be able to harvest that capital and put it back to work. Can't wait. Don't want to do stupid things. Have the ability to reinvest in those assets, reposition them and bring it back to market and try to get great returns on our incremental capital but it is future earnings power and it's even though we carry 650 million dollars of reserves against it. We do think that that's a significant capital that we look forward to redeploying and we watch those assets and Jeff and the team watch the assets pretty much every day. Our liquidity is excellent. In our universe I'd say we have what Jamie Diamond referred to as a fortress balance sheet. The extension of maturities, the rates at which we're capable of raising debt securities not only in our real estate book but in our energy book really position us well against our comps that provide sustainable competitive advantage. At the end of the day it's all about our team and we have over 350 people and another 450 at SCG that are dedicated to finding opportunities for the company both here and abroad. We have whether it's the CNBS team or the special servicing team with 100 and 107 billion of named servicing. We are positioned to continue to outperform over long periods of time. I've got nothing else to add. I think our job now is just execution, execution, execution. Be patient, grow in every one of our business lines if we can, be more aggressive and utilizing our usual access to data to make better faster decisions. We're doing a giant AI project over the whole company right now to help us be more efficient and I look forward to the implementation of that over the coming year. I was getting a tutorial on the flight home yesterday from Tech Wizard. That was astonishing. So we have a lot to do there and most companies do and I think it only bodes well for our productivity and our margins. So excited for the next quarter. The road is not paved with gold. There's bumps. You're going to see things come up and down I'm sure of it and the outcome of Trump administration's policies is still unknown. But we couldn't probably be better positioned for that and I look forward to the year and working

going forward. Now we'll take any questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Doug Harder with UBS. Please proceed with your question.

Thanks. So it sounds like you've started to make some progress on your non-performing loans. As you look at the remaining assets there, how should we think about the pace of resolution and whether you can be as successful at exiting those with minimal losses?

Yeah, hey Doug. Thanks for the question. There's a couple of apartment deals that we know we can likely sell at our basis and we will do so in this year. We have apartments at the Chatsworth building on the upper west side and the scaffolding coming down in May and we expect to have significantly more progress there. We just sold the unit for $7.5 million this week in line with our underwriting, so that's good. We have an office building in Brooklyn that has just signed a second lease. Now two-thirds full with long-term credit tenant leases. We have someone looking at the last third that could resolve easily this year. We have an asset in Dallas that is something that we have to work through. It's the combination of the mixed-use property with a hotel and multifamily. I think that's when we could likely work through this year. And we have a couple of downtown LA office buildings that could push into 26 or beyond, but that's generally the flavor. Multi-s, if we get to this Ford Zoffer in the low threes, three and a quarter, you pick a number and you have a five and a half or six debt yield, you have a high likelihood of getting out of park and most of the stuff that we wrote loans on against three and a half and four caps is the very lowest, the tightest part of the market in 2021. They're performing at that high five yield on the low end and that high five that yield gets out in a low three Zoffer. In a low four Zoffer and we'll have to hold it for a little bit for a little while longer, but where the four curve is now, expect things to sort of stop coming in and start picking up progress on the others. We have staying power in a lot of these loans. We have eight years of wealth on a lot of

the loans. They're not giving them back. They give them back to us, your attachment point is so good on replacement costs and you would love to own them with the coming massive decrease in supply coming to the multi-market. So rents will improve certainly next year in the back half of next year and into 27 and one obvious impact of the administration's policies are people are very nervous about new arts and nobody really knows what anything is going to cost and it's not just materials, not just the steel, those of the labor, is it available, what will happen with the deportations of the immigrants and illegal immigrants and then the third what people don't talk about is the supply chain. You need to get every component to a building to finish it, not 80 or 90 or 95 percent of them. So all people I know and I just returned from an industry conference where developers are talking about not starting projects and pushing them off which bodes well for any existing asset and their performance and almost every and the asset classes are performing you know now remarkably well. I mean people look at the we're not exactly the hottest kid on the table today but the multi-markets are sitting at 95-ish 94-95 percent occupancies with record supply. Usually in my youth they might have fallen to the low 90s, high 80s and for the most part rents are flattish, slightly up, some few cities down, some cities up more than a few pennies. So when there's new supply the weak and when there's very little supply they're relatively strong. What we really need is a shallow recession not a not a deep one that creates demand destruction but even the office markets are shockingly buoyant if you have a good collateral. One thing I'd say on our book I mean one of the things like we have to consider we have a building we took back in downtown CBD of Washington and DC it can be converted and is ready to be converted to residential and I just suggest that we hold off on the work right now to understand the situation in DC with the employment base but but we're doing all the plumbing to be ready and all the we're doing all the plumbing organ all the

all the just not deciding one year forward whether we're putting the shovel in the ground on that date or not but we'll be ready to go in a year

oh we're going to be ready to go we're just taking a moment we want to do that so it's relatively we've planned and designed the entire conversion it's actually a very handsome property it's just we want to make sure the rents are what we think they're going to be. So with that and the next question. Yeah and part

of that question Douglas the the follow-up would probably be on the three large office that are maturing this year you know one is the Brooklyn office building where I told you we signed a second lease and got up to two-thirds lease and we're talking now about a third credit tenant lease and that will work out that's the that's the march maturity the June maturity is an asset in California that has a five debt yield that we have a basis in the low 200s of foot we sold 15 percent of that complex by selling one building at 280 dollars a foot 66 dollars above our basis so we feel okay and we think there's good leasing prospects we're working on updating the the lobbies and doing some work there so we actually felt pretty good about that and then the October majority this year is our large loan in downtown DC really trophy a terrific building it's 84 percent lease that's eight years of waltz and it'll have a six-ish debt yield and likelihood to be able to go up from there but our capital given we have such liquidity and access to capital we have the ability to ride these out and wait for the optimal time and we will move on at the optimal time but when we have waltz we have cash flow it doesn't necessarily make sense to go today we're gonna we're gonna wait see what the market gives us and you know we sort of know where our downside is but we think we have upside on these two and that's part of being 110 billion dollar cre manager hopefully like we have in the past where i think we have going into this cycle 100 plus million dollars of gains on our reo we like to work on assets and barry likes to be involved and that's why he knows all the details of a rental in dc and what we're going to do and so we're we're very involved and we'll work it out as best we can

Great thank you.

Our next question comes from line of Don Vendetti with Wells Fargo please proceed with your question.

Hi can you talk a bit more about the opportunity you're seeing with residential credit you know clearly you have a lot of capital banks are selling and I think you said you've been on a portfolio are you constrained in terms of you know not to put on a lot of leverage there or is this a significant opportunity for growth?

Yeah so you asked already credit the portfolio that we looked at was a two billion dollar portfolio of commercial that was coming out of a middle market bank 10 million dollars so long kind of thing that's perfect for us with LNR as our servicer we just have so much information we can rip through a massive portfolio like that very quickly and come up with a value that's that's creative to us some a couple people I think thought it was worth a little bit more but we went a few rounds on that in resi credit you know you've noticed we haven't restarted the resi machine we took a write down of 230 or 240 million dollars in 2020 or so on our resi book we we owned lower coupons and market as the rate went went up and we've been a little bit reticent to go again but our resi team has been looking at just about every opportunity every platform I could definitely see us buying an originator building an origination business around non-qm or which was down in the past and some agency and maybe some investor loan things like some of our peers do I do think that there is tremendous liquidity available to us from a financing play on that I think levered yields are are attractive there has been there are decent opportunities also in sort of secondaries there but we are we are going to reemerge in resi it's just a matter of when and we are looking at every opportunity to figure out how we how we do you know to buy a resi originator with licenses that does two or three billion dollars a year you might pay 125 to 150 million dollars of premium we're trying to decide if that's something we can build and create 125 to 150 million dollars of shareholder value by building it ourselves rather than going outside but you will see us in the next year reemerge and start putting some putting some credit trades on in resi we do think there's a long-term opportunity and it's come down from 10% where I don't really understand it there but if it did come down in our cost of capital change then that business becomes a lot more attractive but it's without where our dividend yield is today our our cre lending and our energy infrastructure businesses feel like the best home for capital

got it and then on corporate m&a are you sort of still thinking that sellers are reluctant especially you know for fed cuts or you feel like you know you're starting to feel more optimistic that there could be a seller and some consolidation opportunities for you

you know given given reits are very hard to to buy you can't buy more than 9.9 there's a lot of rules that they have to want to be bought and corporate m&a in the re world is very difficult unless a seller wants to wants to be a seller yeah

I mean it's not where they're trading it's what the board will do a deal at and you know I think you'll see some action in the sector because they're they're sort of dead men walking but it really it really depends on the board and the and the management teams cooperation you need to get in there on some of these books you need you can't do it easily from the outside you need to get inside and really understand the complexity of the asset base so you can guess but guessing in this business and obviously a lot of a lot of these smaller entities don't have our corporate debt they have repo debt or they have other you have to really understand the terms and conditions of that stuff so it's a little bit complicated from the outside looking in especially when they want prices that are on the surface aren't really achievable and and obviously we'd like these investments to be accretive to our shareholders so but I think I'm optimistic that as we come out of this you know it'll become more painful for some managements to basically do almost nothing they can't do anything they don't have a balance sheet they can't raise the capital and in some cases the fees the management fees will overwhelm their ability to pay it so inevitably there'll be stuff to do

and you know we're a huge part of the read index given we're more than twice as big as the next biggest competitor and almost as big as is the rest of the universe right so if we could reduce gna and and consolidate the entire business we would certainly love to do that at the right prices the hardest time to do mna is when someone is trading a 20 or 30 percent of book if you're going to pay them some significant discount to book that might feel untenable to their board or their shareholders the easiest mna is probably at 70 or 80 percent of book where you can pay somebody 90 to 100 percent of book cut out gna make it make sense for both so it'll be it'll be difficult somebody's going to have to

want to be consolidated

our next question comes from the line of jade ramani with kbw please receive with your question

thank you very much i think earlier rena mentioned that the timing of loan closings weighed on interest income in the series of ending business in the quarter are you expecting an increase in two q and going forward

yeah you know this is something that i'm always reticent to talk about jade because it feels like it's been in every pierce transcript for the last five years but it but we did close the tremendous amount right on march 31st so you didn't see any any interest income so i think it's the first time we've used that arrow in our in our quiver but it was very true this quarter where we had a lot of a lot of closings like you know our pipeline's really good rena always gets mad at me if i want to say what we're going to end up at but you know i expect this run rate to be a run rate for a little bit and you know we it's difficult out there we've lost a number of deals in the last week or two that we hope to get but we have a as long of a pipeline as i've seen both in europe and in the u.s and there's a lot of really interesting opportunities so hoping that we can we can maintain that and maintain the success in our energy infrastructure book as well we want to grow growing is the way to ensure that getting this portfolio back up above our previous high which i think we will do this year is the best way to offset the drag of the non-accruals as barry said until we can work out of them so so we are in a growth mode but it's not growth at any cost we're we're reticent on the last five basis points on every deal and we're trying to not chase anything to do it so grow smartly is the mantra

you mentioned something interesting on subordinate debt was wondering if you plan to execute on that opportunity by originating whole loans and biodeficating them doing more syndication or will you just be looking to originate mes loans how do you see executing on that no it

runs again adam bellman's in the room he runs our l and r business and our cmbs business i think there are opportunities and b pieces we're gonna we're gonna do a few this year when i said subordinate data i'm basically saying that what we create when we write a 65 or 70 ltv loan and we finance 45 or 50 percent of it is effectively equivalent to a triple b or a double b asset and that's 100 billion dollars of money that we've put out over the last 16 years and with the credit curve in securities deepening you know we think we should be able to earn a little bit more on our own book that sort of mirrors the look-through rating to those we can also obviously play in subordinate securities as well and that's something that the team has been looking at it they've got cheap but not super cheap we don't like putting leverage on leverage we haven't done that here in a long time and so if they're if their unlevered yields on double b's are 10 percent or so you know it doesn't quite hit the hurdle that we're hoping for and we're into a leverage but on the right securities where we have the ability to underwrite every loan in every cmbs deal and have a real strong opinion you know that that book adam has probably returned over 20 percent for us in the 16 years that we've owned it if that becomes an 11 or 12 we will be a large buyer of secondary bond with our liquidity that's unfortunate when

it gets up to those levels you you start losing interest on the seller so yeah so there's

not that we haven't

thanks jade our final question comes from the line of rick shane with jp morgan please proceed with your question

um hey guys thanks for taking the questions this morning um barry when i sort of parse through your comments what i hear um are a lot of cross currents that you're sort of confronting uh the consumer's slowing down but you see rates going lower as a result um it's an attractive financing market so there is capital available in the market but your competitors many of them are on their heels um really two questions here one um does that does that put you guys on the front foot now in terms of being aggressive deploying capital do you want to be a little bit more conservative and also is the sort of you know as you describe them the dead men walking um for many of your competitors but the availability of capital uh in the markets is it creating new competitors or new types of competition for you guys

um

it's

uh

it's your competitors competitors as you point out are but i i think uh you know we still have an advantage in our scale like we wrote a 500 million dollar junior position like not many people get that phone call and because we know the property classes and we're active people know we're going to perform um they know that it won't take us seven years that we can do it expeditiously i think the amount of capital needed the data center space is

staggering and

um the credits are great and the debt yields to our positions are phenomenal and spreads have come in but there's if we can pick up the juniors in those positions we actually you probably don't know it we're very active on the equity side in data centers we've probably committed over 10 billion dollars to the space and have a get 1.5 gigawatts of power under our control we're the one among the top 10 largest players in the states and number one in in ireland and we have about 160 people working in the data center space so um so we can underwrite this stuff quickly um we know the credits we know the tenants we know the issues and leases we've written them all to amazon oracle flight dance etc so um you know that's a space area we could we could add infinite capital if we had it um and we do like the positions there so you know that's a big new giant take take the scale of the commitments from the majors it's something like 250 to 300 billion leverage it's 900 billion that's almost as big as the infrastructure bill and that's this year so maybe 25 percent of it's offshore there's a lot capital that needs to go into the space so we you know we've done some we'd like to do a lot more and i don't see uh it's a big enough area and there's enough and by the way money is kind of contracting a little bit people are a little nervous about private credit um so i think it should be in corporates um if we do have a recession and and you know i think the uncertainty as mark roland's talked about breeds delays and you just wait for a clearer picture and as you've seen m&a has hit i think um loads not seen in 20 years i mean nobody can do anything with anyone so um but i think if you know i'm kind of happy i mean for us this is uh this is a good environment i and because we have conviction and we've been doing this for so long um star capitals enjoying 34th year so you know we we we have the data also to support our and help us make better decisions so um i think it's it's a good opportunity it's good i'm i'm sort of in a way more less worried i guess the opportunities that can we find pricing we need but the banks uh you know as jeff pointed out multiple times the they do so much better now lending to us than making the loans themselves and and um pummeled in the in the spread of the cbs market enable us to come in and shore up bids on deals and the other thing we've learned is the borrower which is becoming super important when you go to the banks and they originate for you we just did this the other day by the way um they're going to syndicate the loan it's not going to cbs and they syndicate it in many cases syndicated to probably offshore accounts and then if there's a bump in the road you know you're dealing with somebody in korea you don't know or europe and and we've been willing to take excess spread to let to know who our counterparty is going to be and and i think that a lot of borrowers are paying more and more attention to that that you know they'll give up 25 bibs 50 bibs because you want to know if something ever happens i can speak to jeff or dennis our team or adam whoever is on our squad and we'll work it out with you and they'll create a win-win so i think people are um it's interesting i think borrowers are smarter like they don't want the five bips right now they want to know where their loan is going and that's a really important feature that's kind of emerged that i would say was not here five years ago we weren't paying attention to it i think what happened to all of us is obviously the world changed interest rates went up 500 basis points we look at our stacks and we're trying to do something on the equity side and some bank we've never heard of says no everyone else says yes you know and you can have a guy with a 10 position he's like i'm not doing it you got to pay me in part well morgan stinley you take them out of part you know because you're you sold the loan to them we never knew who they were um and you then they're you know that's the kind of negotiations you see so i think that's really good for us i mean relationship banking and the debt side is actually when you get to these big deals it's a big deal and we've been doing a long time we got a great team so um kind of interesting

yeah i i'd encapsulate that by saying as the reaps in the banks have written less loans since covid you've certainly seen insurance debt funds and cnbs pick up the slack as you look at the forward silver curve and expectations of forward rates if rates do go down you're going to have less annuity sales insurance is very yield driven and they will pull back so in that environment where we move to the forward curve and rates go lower you know we expect that our position in the market will only improve versus insurance and debt funds and cnbs and then last thing i would say is barry talked about data centers the only thing that he didn't mention is that our all of our loans have been made on sort of 15 or longer year leases to sort of mag seven credit tenants on the other side so not a lot of speculation there other than getting the construction project finished which we have significant time to do and in this core and shell it's not that hard to figure out so we really we really like that space

got it as always a very interesting answer i really appreciate it guys thank you

thanks rick thank you operator

thank you we have reached the end of the question and answer session mr shern look at i'd like to turn back over to you for closing comments

thanks for joining us everyone we look forward to talking next quarter have a great memorial day i guess and as we enter the summer season stay

well and and a public shout out to mark cagley who retired from the firm last month and this is the first call in 10 years without him hope you're enjoying your your retirement and listening in and your

gentlemen this does conclude today's teleconference you may disconnect your lives at this time thank you for your participation and have a wonderful day