Starwood Property Trust, Inc. Q2 FY2022 Earnings Call

Greetings, welcome to the Starwood Property Trust Second Quarter 2022 Earnings Call. And please note that this conference is being recorded. I will now turn the conference over to your host, Zach Tanenbaum, 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, the company released its financial results for the quarter ended June 30, 2022, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company's website. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC. Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer; Jeff DiModica, the company's President; Rina Paniry, the company's Chief Financial Officer; and Andrew Sossen, the company's Chief Operating Officer. With that, I'm now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $162 million or $0.51 per share. GAAP net income was $212 million or $0.67 per share. Our GAAP book value grew by $0.22 in the quarter to $20.68 with undepreciated book value increasing $0.25 to $21.51, an increase of 26% from a year ago. We had an active quarter with $3.8 billion of new investments across our businesses and funding of the same amount. The investments were funded by available cash and loan repayments as well as existing and expanded asset-specific debt capacity, which I will discuss later. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $153 million to the quarter or $0.48 per share. In Commercial Lending, we originated $2.2 billion across 15 new senior loans, all of which were floating rate. We funded $2 billion of these loans as well as $239 million of pre-existing loan commitments with most of our funding back ended to the last month of the quarter. Given decreased and delayed market transaction volume, repayments were lower than our typical run rate at $319 million this quarter. While levels will still likely be lower than normal for the remainder of the year, we expect them to exceed what we had in the second quarter. To that end, for the month of July, we have received $283 million in repayments. Our loan portfolio ended the quarter at a record $16.5 billion, up 43% year-over-year. Of this amount, 92% represents senior secured first mortgage loans and 99% is floating rate. Although we did not see a meaningful impact this quarter from rising interest rates due in part to some of our higher LIBOR floors, we expect to benefit more going forward. Company-wide, inclusive of floating rate assets and liabilities in all of our businesses, a 100 basis point increase in base rates would increase annual earnings by $33 million. With our continued investing outside of the U.S., particularly in Europe and Australia, international loans represented 58% of our second quarter originations and 28% of our loan portfolio at quarter end. We hedge 100% of our expected foreign currency cash flow exposure on these loans, including both principal and interest. As a result, despite significant volatility in currencies this quarter, the impact to book value was an increase of just $0.06. The credit performance of our portfolio continues to be strong with the second quarter origination LTV of 60%, a weighted average LTV of our overall portfolio of 61%, a weighted average risk rating improving to 2.5 from last quarter's 2.6, and 100% of loans current as of quarter end. On the CECL front, our general reserve increased by $8 million from last quarter to a balance of $59 million, reflecting market uncertainty and the impact of rising rates. During the quarter, we foreclosed on a rated $50 million first mortgage and made loans related to a 41-story office building located in the Galleria Office District of Houston. The net assets of the property, including the assumption of an $88 million third-party first mortgage, were recognized at the carryover basis of our loan because the appraised value of the property exceeded the debt. Our last dollar basis in the property is $102 per square foot. Next, I will walk through our residential business, where $1 billion of purchases were offset by sales and securitizations of the same amount. Despite repricing in the securitization market and significant spread widening in the residential loan space, we securitized $828 million of loans in our 18th and 19th securitization and sold $220 million of loans, all at breakeven as a result of related interest rate hedge online. With the loans remaining on the balance sheet at quarter end, we recorded a $108 million unrealized negative mark-to-market adjustment for GAAP purposes, along with an offsetting $22 million unrealized positive mark-to-market on the related interest rate hedges. We continue to believe in the credit quality of these low LTV, high FICO loans, and as a result, have not recognized any DE losses for the loans remaining on the balance sheet. Our loan portfolio ended the quarter at a balance of $2.2 billion, including $400 million of agency loans, average LTV of 68%, a weighted average coupon of 4.6%, and average FICO of 745. Our retained RMBS portfolio ended the quarter at $416 million after retaining $142 million of bonds in our Q2 securitization. Next, I will discuss our Property segment, which contributed $21 million of DE or $0.07 per share to the quarter. Our Florida affordable housing portfolio continues to perform exceedingly well. For GAAP purposes, we recorded an unrealized fair value increase in the Woodstar fund this quarter of $292 million or $232 million net of noncontrolling interests. The vast majority of the increase was driven by the fair value of the property, which increased by $263 million. In-place NOI increased this quarter due to the impact of HUD's recently released maximum rent levels, which were 9.7% higher than last year. The majority of these new rents were implemented in June so you will see just a partial impact to earnings this quarter. Our valuation only factored in these increases to NOI. We did not assume any change to the cap rate, which continues to be based on the third-party transaction price established at the inception of the fund in November of last year. We also recorded a $24 million increase related to the favorable debt on the portfolio due to market interest rates exceeding the 3.7% blended fixed and floating rate debt we currently have in place. Next, I will discuss our Investing and Servicing segment, which contributed DE of $34 million or $0.11 per share to the quarter. In our conduit, Starwood Mortgage Capital, we completed 2 securitizations and priced an additional securitization totaling $372 million in the quarter, all at profits consistent with historic levels. Consistent with past practice, the transaction which priced in June, but settled in July, is treated as realized for DE purposes. As of quarter end, all securitizable loans have been priced or securitized, leaving no mark-to-market exposure on the balance sheet. And in our special servicer, we obtained 9 new special servicing assignments totaling $9 billion during the quarter, bringing our named servicing portfolio to $105 billion, its highest level since 2016. Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $13 million or $0.04 per share to the quarter. We funded $191 million of our $196 million in new loan commitments along with $14 million under preexisting loan commitments. These fundings outpaced repayments of $58 million, increasing the portfolio to $2.4 billion from $2.2 billion last quarter. We also entered into a new $500 million credit facility, which carries a 3-year revolving period and 2 1-year extension options. This is a non mark-to-market facility where the margin call provisions do not permit valuation adjustments based on capital market events. I will conclude this morning with a few comments about our liquidity and capitalization. In addition to the new infrastructure financing facility, we entered into new facilities in Commercial Lending totaling $920 million and completed $300 million in upsizes. As a reminder, 90% of our outstanding on- and off-balance sheet debt is non-mark-to-market. We also entered into an ATM agreement with a syndicate of financial institutions to sell up to $500 million of common stock through an at-the-market equity offering program. We issued 1.4 million shares this quarter for gross proceeds of $33 million at an average share price of $23.54. In addition to financing capacity available to us via the corporate debt and equity and securitization market, we continue to have ample credit capacity across our business lines, ending the quarter with $9.3 billion of availability under our existing financing lines, unencumbered assets of $4 billion and an adjusted debt to undepreciated equity ratio of 2.3x.

Thanks, Rina. As Rina said, we once again used market volatility to our advantage, adding nearly $4 billion of investments in the quarter, bringing our portfolio to a record $27 billion today. We have already closed $1 billion of CRE loans in Q3, which will bring our total for 2022 floating rate CRE lending to over $5 billion year-to-date. That said, we reduced our investment pace in recent months, recognizing that there would be a great opportunity to invest at higher returns later in the year. In early COVID, we had the unique ability to create significant liquidity from our unencumbered assets and own CRE portfolio, and we have the option to do that again today should loan repayments decline. Reduced investment pace does not mean reduced distributable earnings and lower volume period; we have a sharp focus mentality aimed at only the most accretive deals, and that is our second-half plan. Executing our plan is less dependent on investment volume and more dependent on timing sector rotation, performance of our credit, and staying optimally invested, therefore not sitting on too much or too little capital. Finally, interest rate sensitivities continue to move in our favor. Rina mentioned our interest rate floors and SOFR is now over 150 basis points above our average floor, so we will continue to make more money as rates rise. And importantly, our new loans will have floors at today's SOFR levels, which will benefit us should SOFR decline in the future faster than the forward curve. Our $3 billion owned property portfolio continues to be our best-performing investment. As Rina mentioned, we wrote up our Florida multifamily valuation, not based on cap rate, but on experienced rent growth, which we expect to continue to rise with median income growth in the future. We still believe the cap rate on our minority sale last year is significantly higher than where a similar portfolio would trade today and are optimistic we will recognize more embedded value in this portfolio in the coming years. Our net lease and medical office assets also continue to perform exceptionally well and have significant gains. At our marks, we have nearly $5 per share of gains in our owned property portfolio today that can be harvested, reinvested, distributed, or we can continue to create long-term shareholder value by holding them. Today's higher borrowing costs will not hurt our own real estate portfolio in the coming years. We have significant remaining term on our debt across this portfolio and don't need to refinance any debt until November 2024 for our medical office portfolio, August 2026 for our Woodstar portfolio, and October 2027 for our triple-net portfolio. Our below-market debt on this portfolio is a valuable asset for long-term holders. Our CRE lending business had another great quarter with $2.2 billion of new originations at just 60% loan to value. Inclusive of sales we have made, our CRE loan book is now $20 billion for the first time, with 2/3 of those originations coming post-COVID. Although CRE transaction volume is expected to slow in the second half, lending competition is thinner as the single-asset CMBS market, less well-capitalized debt funds, and many banks are on the sidelines. We, therefore, expect to get better structure and pricing on our deals in the second half of the year than at almost any time in our history. The $3 billion of CLOs we issued in prior years at very low borrowing rates are actively managed, giving us the ability to replace assets that pay off in them with other assets that would otherwise be financed at today's higher spreads. Reinvesting allows us to finance higher coupon loans originated in 2022 and 2023 at 2020 and 2021 financing spreads, which are 100 to 150 basis points lower than today and among the lowest in history. 100 basis points of tighter financing increases the return on these new investments by almost 500 basis points. We have replaced over $600 million of maturing loans in our CLOs over the last 12 months and have projected reinvestment requirements of $1.5 billion through 2023. Said simply, in the next year, we expect to be able to leverage $1.5 billion of higher coupon new originations as financing spreads well below current market rates and earn an outsized levered return. You will see in our supplemental that we have completely repositioned our loan book since COVID, focusing on the most defensive sectors: multifamily and industrial. As the agencies and CMBS market were forced to pull back post-COVID, we filled the void. More than half of the loans we wrote since COVID are multifamily, which is now by far our largest asset class, representing 1/3 of our portfolio versus just 13% pre-COVID and 11% in Q1 2020. We have significantly decreased our exposure to office, hotel, and mixed-use investments in that time as well. With the payoffs and a loan sale at par on a previously disclosed 4-rated loans subsequent to quarter end, we now have zero loan exposure in the difficult San Francisco market and less than 3% of our assets are on loans in Manhattan, making our 61% loan-to-value portfolio the most diversified, recession-resilient portfolio in our history. Infrastructure Lending continues to be a growing and important part of our CRE origination. We have large teams in these markets for decades, and this exposure provides diversification in our lending segment collateral types at attractive levered and unlevered returns that continue to increase as rates move higher. As a reminder, we fully hedge foreign exchange risk for interest and principal payments through our expected maturity. Given dollar strength this year, those hedges have a very significant $118 million gain that will protect us should the dollar weaken in the future. Non-agency credit spreads have widened significantly since the Fed stopped buying mortgage-backed securities in February, as a pullback in senior bond buyers with concern about fixed income outflows has kept spreads wider than expected. In our residential lending portfolio, we always hedge interest rate risk, but the spread widening has made financing our loan book more expensive. We were able to execute two securitizations in the quarter at breakeven after unwinding hedges. Over the past couple of weeks, liquidity is returning to the non-QM securitization market as 5 to 6 deals priced this past week alone and spreads are moving in. At the same time, we are buying significantly higher coupon loans that we expect to be accretive in the future. As the markets repair, we will look to securitize the balance of our loans, which will remain on our financing facilities until securitization is more economically viable. Like in our CMBS, CRE, and energy Infrastructure Lending businesses, we have the balance sheet to be long-term holders who will securitize when accretive. Our 59% LTV energy infrastructure portfolio increased to $2.4 billion, and we were on pace for a record origination year in a very accretive return environment. Our LTVs have fallen this year as power plants became more profitable. There is significantly less competition lending in this space. We like the credit and expect to earn mid-teens returns on current originations. We recently added an experienced Houston-based originator with over 2 decades of lending in the energy market to take advantage of these opportunities. As Rina mentioned, we added another term financing facility in this sector as well and hope to execute our third CLO later in the year. Finally, in REIT, our CMBS conduit originations business continues to outperform in a volatile environment. As Rina said, our special servicing portfolio is now back over $100 billion. This is important as the servicer is a long-term positive carry credit hedge that will generate more income for shareholders should markets roll over in the future.

Thank you for joining us this morning. I want to begin by discussing our strategy for navigating the current economic turbulence. It's clear that the Federal Reserve was slow to raise interest rates, allowing consumer behavior to run rampant, particularly in the stock market and tech sector, which has led to a lack of disciplined investing. Now, the Fed is aggressively trying to remedy this by significantly raising rates to combat inflation, which is heavily influenced by commodities, especially oil and gas. This situation impacts transportation, food prices, aviation costs, and consumer spending. Using interest rates to reduce oil demand could severely harm the economy. I would be surprised if the Fed doesn't maintain current rates and if the economy doesn't show signs of softening as we move past the summer months. Europe is facing a tough winter and is already in recession, with reduced industrial production, and China is experiencing slow growth. Therefore, it's unlikely that global economic growth will pick up, as estimates have been revised downward. I wouldn't be surprised if GDP figures for the third and fourth quarters are disappointing, and we'll need to see just how bad they are. While consumers, who are central to the U.S. economy, may still be spending, confidence is at an all-time low, notably worse than in Europe. I anticipate a shift in consumer spending behaviors due to diminishing savings and rising costs for essentials like gas, food, rent, and housing prices. We’ve also witnessed substantial declines in both the stock and crypto markets, erasing around $12 trillion to $15 trillion from global wealth, not counting private market losses in private equity and tech sectors. In real estate, despite rising oil and gas prices, fundamentals remain strong. Apartment rents continue to climb, and our portfolio of 130,000 apartments gives us valuable insights. Hotels are experiencing a successful season, although we are cautious about potential impacts on European travel due to the strong dollar. The industrial sector remains robust, although growth has been tempered. The office market shows a gap between desirable Class A buildings and less appealing options that remain unoccupied. We need to be selective about our financing in this area, as many people prefer working in high-quality office spaces over outdated environments. Increased construction costs due to rising interest rates could lead to a significant slowdown in new projects, benefiting the apartment and hotel sectors by reducing future competition. Regarding our company, we remain cautious with our liquidity and are preparing for various scenarios as economic conditions fluctuate. While our business has performed well overall, we do face some temporary credit challenges in the residential sector, but our loan quality is solid with strong borrower profiles. Our conduit business remains profitable despite market volatility, and our energy lending segment is performing exceptionally well. We see significant potential ahead and are positioning ourselves to take advantage of emerging opportunities as many traditional banks pull back. Our portfolio from the former LNR is growing, and we aim to help borrowers facing challenges as their loans mature. We maintain lower leverage than our peers, allowing us flexibility and options to liquidate certain real estate assets if necessary, bolstering our liquidity. This positions us well in a turbulent market. As Jamie Dimon said, we're navigating a hurricane, and while we may currently be in the eye, the situation remains unpredictable. Observing signs of economic softening, including price reductions in housing, indicates that consumers are under pressure. Yet, we believe we have the right assets and strategies to succeed in this environment. Thank you for your support, and I appreciate my team's dedication during these challenging times.

Thanks, Barry. Operator, with that, let's turn it over to questions.

Our first question comes from the line of Stephen Laws with Raymond James.

Jeff, I wanted to start with Woodstar and the positive valuation gains there, which were much larger than I expected. Can you provide more detail on the assumptions? I know Rina mentioned it was up 9, I believe it was 7% on the NOI. Is all of that included in this new valuation estimate or just the rents that increased in June? How do we consider how the rent increases for the rest of the year may affect the fair value estimate for Woodstar?

Thanks, Stephen. It's an annual reset, as we talked about before. Rina, do you want to take it on or do you want me to?

Sure. I'll take it. So Stephen, the 9.7% is just the rent increase, and the valuation adjustment encompasses the entire amount. So it's the NOI effectively that's in place at June 30, cap. So it's fully reflected in the fair value that you see. The other thing I would mention, though, is that the NOI is not simply 9.7%; it’s actually higher at about 12%, because your costs didn't increase by 9.7%, right? So your overall NOI goes up by more than your growth rate.

I appreciate the color on that, Rina. Looking at the loans held for...

Hold on. It's Barry. One other thing is, the debt is fixed, and it's in the 3- to 6-year range. So there's no impact from rising rates on the portfolio. And one other comment, of course, is that rents can only go up in affordable housing; they cannot go down. We think we're using a cap rate that is conservative compared to the market as well. So we’re taking a cautious approach, and we understand the market dynamics because our equity group has been observing some multi-family transactions, and almost all the market rate sales have been conducted inside of the cap rate materially and the affordable sector is benefiting from its defensive nature.

And Stephen, as I said in my prepared remarks, they are driven by median income and inflation in the median income numbers. We have most of the inputs for the next couple of years, the 3-year look back, and we do expect a couple more years of pretty significant increases.

I appreciate the insights from everyone. As a follow-up, can we discuss the relative appeal of new commercial real estate loans in the U.S. compared to Europe? I know, as Rina pointed out, this makes up nearly a third of your portfolio. From a new dollar perspective, how do these regions compare today?

Barry, do you want to start?

Sure. We've observed a better return on a significant deal in Australia, which has influenced our decisions. In the past, we favored investing in Europe due to the stable market rates. I don't expect rates to increase in the U.S. treasury, but we are facing challenges with supply. Currently, markets in sectors like office space are gradually improving and have not declined like they did before the pandemic; however, this is not true for the U.S. Therefore, there is a subtle shift in asset classes in the U.S., but spreads remain attractive in both regions. We are carefully evaluating our lending options while staying cautious.

I will add. We didn't give much detail on the Australia asset, but Barry brought it up, and you may have heard about it on the Blackstone call. It is the Crown casinos. There's $3.5 billion of new cash equity in front of us. We believe it's about 51% LTV and 44% of replacement cost. It's probably the highest quality casinos in Australia, and we feel very comfortable with that asset, but that definitely drove the international number this quarter, Stephen.

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

For a long time, a significant part of your story has been the gap between value and stock price. This was evident when you weren't issuing acquisition levels that your competitors would have capitalized on. Recently, you conducted an equity issuance at the end of last year and currently have an ATM program in the market. I'm interested to know what has changed. Do you see the opportunity for deploying capital as particularly attractive, or is the shift driven by relative value compared to your peers?

Barry, if you don't mind, I'll start. In December, when we issued equity, I think the stock was at 25.75, and we issued debt multiple times before our last common equity transaction in December 2016. We are making strides towards investment grade at some point. That's been our goal. To achieve that, one of the critical inputs is that our debt-to-equity ratio stays low. We were 2.1x last quarter and we're 2.3x this quarter, which without reciting all of our peers, we are significantly lower than the others. To continue to grow the book with profitable opportunities to lend, we need to maintain some balance of equity along with that debt. So for every billion dollars of debt, we would need $400 million of equity plus or minus, and we had gone several billion dollars of debt without any equity issuance. December's move was more focused on balancing our debt-to-equity ratio to improve our credit rating across the board to BB+ as others join our BB+ rating, with hopes to eventually reach BBB-. Therefore, I think we viewed equity not as cheap at that price, but more as a strategic mechanism to balance our debt-to-equity ratio in pursuit of our investment-grade goal.

Okay. Jeff, that's a really interesting answer. So to some extent, it is about relative value, but I wasn't considering it in terms of the relative value across your balance sheet. It kind of feels like it will be an on-demand source of capital as you mentioned you need it, if you continue to deploy at the rate you are?

Yes, I think that's right. I don't think we looked at 25.75 as the price that we wanted to necessarily sell stock, but we think if we reach investment grade, it's a $30-plus stock. We have to balance a combination of equity along with debt in order to achieve that investment-grade goal.

And our next question comes from the line of Doug Harter with Crédit Suisse.

You mentioned the significant percentage of your portfolio that is kind of a post-COVID vintage. I guess how are you thinking about the ultimate maturity of those loans given that rates are higher and some of your other commentary around kind of the cash flows and higher coupon debt and how that ultimately plays out when those loans reach maturity?

Yes, Barry, please go ahead.

We operate with protection from rollover risk in any loan. I think they probably will stay out longer. We expect repayments in this quarter just as we had early. It was around the second quarter where we had no actual maturities of loans to speak of. It hasn't become complicated looking at our expectations of repayment, as most of our assets are traditional. If they have a structure that can be effective, we’re managing the work and metrics towards understanding, along with the required returns, but there has been significantly less cash investment on new opportunities. Comfort resides in our lending philosophy while we’re not finding multi-year structures at a 6.5x leverage ratio or something similar. We tend to earn more from every asset we've ever foreclosed on. We’re not looking forward to that, but given that we operate the national service arm with around 300 people involved in that sector, we're optimistic about seeing more outside investments where we can compete effectively. Would you like to add anything?

Yes. I'll just add that we run a ton of debt yield sensitivities when we write new loans. Given that rents have risen significantly more than we underwrote, we initially underwrote these loans to account for maybe 1% rent growth to offset expense growth, but our actual experience has shown massive rent growth. Thus, our debt yield expectations are now significantly stronger than we predicted on our post-COVID originations. Consequently, those higher debt yields will support takeouts at elevated interest rate levels. I believe our LTV has actually decreased in this phase and not risen. As Barry mentioned, maintaining a 60 LTV is critical, but given that business plans are executing at a faster pace than we would have anticipated, I think that more than offsets the higher rate environment for loans expected to mature in the same timeline due to these rent increases and tenants seeking to realize some cash based on their achieved business plans.

Great. And if you could just provide a little more detail on the newly foreclosed Houston office. Just what timeline should we expect for a resolution, and how are you thinking about the options there?

Yes. I went down and toured it. Our whole team toured it multiple times. It's a fantastic building in the Galleria District. Houston is definitely starting to benefit a bit from some of the changes in the energy policies that people are looking for, and certainly, commodity prices have shifted. So the outlook is better today for Houston than it was a year ago. This is a fantastic building. There's a lot of prospective tenants circling. We feel very confident that this is a building where we're going to achieve significant leasing, similar to what we've done when we reclaimed assets, as Barry indicated in the previous examples from Orlando and Montgomery, Alabama; we’ve found financial success in the assets we have revitalized compared to simply putting Starwood in front. We believe our competence in office markets will be beneficial; the building is prime, sitting at a little over $100 a foot, so it's something where I believe we have a solid base for attracting large tenants.

Commodity prices are rising significantly. We will take it down and build a camp. It is a landmark asset in its neighborhood without a doubt. I have been going to Houston for longer than I care to say, and everyone knows the Galleria hotels at the Galleria Malls right next to it. We are assessing our strategy and determining our next steps.

Barry, I'm sorry. I think he went a bit off course there, but yes, I think Barry said we'll probably have a resolution in the next six months. We'll be able to report back to you in the next three to six months.

And the next question comes from the line of Eric Hagen with BTIG.

Just a quick follow-up on the Woodstar asset. Are you able to borrow against the appreciated value in the asset? In other words, is it a source of fungibility or liquidity on the balance sheet having appreciated?

Yes, please go ahead, Barry.

The consumer can do that or we can sell shares of interest in it. Those are two options. So yes, there is availability to increase the leverage on the portfolio.

Yes, we could probably increase the leverage by a couple of hundred million dollars today if we chose to. So that's something that we evaluate.

Got you. That's really helpful. And then just looking at the market overall, there's this wall of maturities coming up in the CMBS market at a point in the cycle where, obviously, it could be challenging for those sponsors to refinance in the capital markets. Can you talk about the relative attractiveness you think they might find in refinancing those loans? And what it could mean for the overall market if those sponsors have trouble rolling over?

We couldn’t be happier. You should prepare for a robust lending cycle similar to what we experienced previously, especially since we feel the competition has narrowed considerably. The banks are definitely less involved with lending, and regulatory pressures are affecting them, which is why they’re pulling back. We are expecting a favorable opportunity for alternative lenders like ourselves, given our national footprint. I believe this creates a promising lending environment. We're now approaching another record-setting lending cycle through our business processes and expect to maximize our potential in this changing landscape.

That’s right. Our point is to maintain communication between our loan origination and asset management teams to coordinate as needed. It’s an insightful and developing situation, and we’re positioned to take advantage of several great opportunities in this space.

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to management for any closing remarks.

Barry, any closing remarks?

No, but thanks, team, and thank you for listening today. Enjoy the rest of your day in August. Thank you.

Thanks. Thanks, operator.

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