Starwood Property Trust, Inc. Q2 FY2025 Earnings Call

Thank you, operator. Good morning, and welcome to Starwood Property Trust Earnings Call. This morning, we filed our 10-Q and issued a press release with the presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward-looking statements which do not guarantee future events or performance related to these statements. Additionally, certain non-GAAP financial measures will be discussed on this call. For a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, please refer to our press release filed this morning. Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer; Jeff DiModica, the company's President; and Rina Paniry, the company's Chief Financial Officer. With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings or DE of $151 million or $0.43 per share. GAAP net income was $130 million or $0.38 per share. Across businesses, we committed $3.2 billion towards new investments, including $1.9 billion in commercial lending and $700 million in infrastructure lending. This brings capital deployment for the first 6 months of the year to $5.5 billion, already surpassing all of 2024. I will begin my segment discussion this morning with commercial and residential lending which contributed DE of $174 million for the quarter or $0.49 per share. In commercial lending, we grew our loan portfolio by $946 million, bringing it to a balance of $15.5 billion. We originated $1.9 billion of loans, of which $1.3 billion was funded and funded another $198 million of pre-existing loan commitments. Our volume this quarter included $500 million for the construction of 2 data centers that are 100% pre-leased to investment-grade tenants. We continue to resolve our foreclosed assets, selling 2 in the quarter for $115 million. The first relates to a $137 million office building in Houston that we discussed on our last call. The impact of the sale is shown in 2 separate lines in our GAAP income statement: loss on property and a related gain on extinguishment of debt. Net there was a $4 million GAAP gain and a $44 million DE loss. The second resolution relates to a $55 million apartment building in Northlake, Texas. We never recorded any GAAP or DE reserves on this asset and sold it at our basis, fully recovering our original investment. Also, during the quarter, we sold an equity kicker for a $51 million GAAP and DE gain. We originally obtained this equity kicker at no cost from a $47 million loan origination in 2013 that repaid in full in 2022. On the subject of credit, our portfolio ended the quarter with a weighted average risk rating of 2.9, consistent with last quarter. We had 2 non-accrual loans migrate out of the 5 risk rating category as a result of foreclosure. The first is an $84 million multifamily property in Windermere, Florida and the other is a $56 million life science property in Boston, our only life science loans. We obtained third-party appraisals for both assets with the Windermere asset appraising at our basis and the Boston asset appraising for $17 million lower than our basis. We reserve this for GAAP purposes via specific CECL reserve that we subsequently charged off in connection with the foreclosure. Also migrating out of the 5 risk rating category was a $137 million office property in Brooklyn. The loan was upgraded to a 4 risk rating due to 2 30-plus year leases, 1 signed and the other pending, which would bring occupancy to 100%. Our general CECL reserve decreased by $14 million in the quarter to a balance of $438 million, reflecting slightly improved macroeconomic forecast. Together with our previously taken REO impairments of $173 million, these reserves represent 3.7% of our lending and REO portfolio and translate to $1.80 per share of book value, which is already reflected in today's undepreciated book value of $19.65. Next, I will turn to residential lending, where our On-Balance Sheet loan portfolio ended the quarter at $2.3 billion. The loans in this portfolio continued to repay at par with $60 million of repayments in the quarter. Our retained RMBS portfolio ended the quarter at $414 million, with a small decrease from last quarter driven by repayment. In our Property segment, we recognized $17 million of DE or $0.05 per share in the quarter, driven by Woodstar, our Florida affordable multifamily portfolio concentrated in the Orlando and Tampa submarket. In June, we began rolling out the new authorized HUD rent increases of approximately 8%, which had a partial impact on earnings in the quarter of $1.2 million. As a reminder, rent increases for certain geographies were capped, resulting in 6.7% of incremental rent growth deferred to next year. The rents for these properties are at or below 60% of market rate rents on average, which should ensure continued high occupancy. Also, in Woodstar, we have $325 million of Woodstar debt maturing over the next 6 months that we are currently working to refinance. Given the appreciation and NOI growth of this portfolio, we are anticipating an upsize of approximately $300 million, our $250 million share of which can be reinvested to increase future earnings. Turning to investing and servicing. This segment contributed DE of $52 million or $0.15 per share for the quarter. Our conduit Starwood Mortgage Capital completed 4 secured decisions totaling $435 million at profit margins that were in line with historic levels. This includes a $324 million contribution into a single transaction, our largest since inception. In our special servicer, Morningstar and Fitch each once again reaffirmed LNR's existing ratings of CS1 and CSS1, their highest ratings available. Our active servicing portfolio ended the quarter at $10.3 billion with $1 billion of new transfers, again dominated by office properties. Our named servicing portfolio ended the quarter at $102 billion. Lastly, our CMBS portfolio increased by $55 million driven by new purchases. Concluding my business segment discussion is our Infrastructure Lending Segment, which contributed DE of $21 million or $0.06 per share to the quarter. We committed to a record $700 million of loans, of which $642 million were funded. Repayments totaled $288 million, bringing the portfolio to a record $3.1 billion at quarter end. Next, I will address our liquidity and capitalization. After quarter end, we repriced our 2 term loans at record low spreads, which Jeff will discuss. We also announced the acquisition of fundamental income properties, a fully integrated net lease real estate operating platform and owned portfolio for $2.2 billion. We funded the purchase with $1.3 billion of assumed debt and a $500 million equity raise, with the remainder funded with cash on hand. We will report more fully on this acquisition in our third quarter 10-Q. After a strong origination quarter and the fundamental acquisition, our current liquidity stands at $1.1 billion. This does not include liquidity that could be generated from cash out refinancing sales of assets in our Property segment, direct leveraging of our unencumbered assets, issuing high-yield backed by these unencumbered assets, or issuing term loan B. We also continue to have significant credit capacity across our business lines with $9.3 billion of availability. Our adjusted debt to undepreciated equity ratio ended the quarter at 2.5x, increasing slightly from last quarter due to new origination volumes. And finally, this morning, I wanted to conclude with a few remarks on the recognition we received this quarter by the rating agencies and Nareit. Our credit ratings were affirmed by all 3 rating agencies. Despite a challenging market backdrop, they collectively recognize our diversity, leverage profile, liquidity position, stable earnings, and credit track record as key elements supporting our rating. We were also once again awarded the Nareit Gold Investor CARE Award, an award given to 1 company in each industry, which recognizes communications and reporting excellence. This is our ninth time receiving the award in the mortgage REIT category in the last 11 years, exemplifying our long-term commitment to both our stakeholders and transparent financial reporting. We are honored to once again be recognized by Nareit for this award. With that, I will turn the call over to Jeff.

Thanks, Rina. Before I begin, Barry, the entire Starwood team and I would like to send our heartfelt condolences to the friends, families, and loved ones of the real estate professionals and first responders who were senselessly taken too soon in last week's 345 Park Ave tragedy. Both real estate professionals were very well known and respected at Starwood. As you know, we pre-released earnings on July 16 and raised $500 million of equity to help finance our purchase of fundamental income. This will be our ninth business and gives us a portfolio of 467 owned properties and 12 million square feet that is 100% occupied by 92 tenants at an average WALT of 17 years, with 2.2% average annual rent escalations. The assets are split fairly evenly between service and industrial with a small component of retail assets. As Rina said, we used $1.3 billion of in-place debt—$879 million of which is in ABS Master Trust—and we used approximately $400 million of cash to round out the transaction capital stack and expect to earn increasingly higher ROEs as we leverage the overhead in place. Most importantly, this business sits at the intersection of the cornerstones of our and our managers' expertise, real estate and credit, making it an obvious place for us to invest. We thought about incubating this business ourselves, but ultimately thought having an established team and scaling quickly made more sense. The team consists of 28 experienced professionals who have spent their careers at large net lease businesses. They have deep expertise in origination, underwriting, portfolio management, and capital markets. There are strong relationships with middle-market companies and private equity sponsors that will significantly enhance our capabilities and market reach. This team is scaled to grow. This is not our first foray into the net lease space. Our successful investment in the Bass Pro, Cabela's transaction demonstrates the attractive risk-adjusted returns and long-term value that can be achieved in this sector. The acquisition of Fundamental builds on that success and reflects our confidence in the continued opportunity within Net Lease, while opening the door to new growth opportunities in the sector, both domestically and internationally. Fundamental maintains an ABF Master Trust, which to date has issued 3 securitizations, which sequentially priced tighter as the trust grew in size. We expect to continue to grow the ABS Master Trust, where we can borrow for up to 10 years on a fixed-rate basis. Executing this strategy will leave us with a portfolio that would look a lot like public peers who trade at a significant premium to GAV with a conservative FCCR of 6.4x on the in-place portfolio we are buying. We expect this business to be accretive to earnings next year and more meaningfully beyond that, should we achieve our business plan. When we bought our Energy Infrastructure business in 2018, we paid a similar gross amount for assets that yielded much less. We likewise added an experienced team and trusted that the synergies with our platform would yield incremental return. We have turned that business into a compelling investing platform over the last 7 years. We look at fundamental the same way and believe with a lower cost of capital than their previous owner that we will be able to grow this business accretively. The team is up and running in building a pipeline and having seen strong deal flow in the days since our purchase. Given the growth in our property infrastructure, CMBS, and now net lease businesses, our CRE loan portfolio is today just 52% of the assets on our balance sheet versus 65% in 2022. Our diversification has created compelling consistency and has left us as the only mortgage REIT to never cut its dividend. We announced our Board authorized our Q3 dividend of $0.48 for the 47th straight quarter. In Capital Markets, we recently repriced both our term loans due in 2030 and 2027, totaling $1.6 billion at record low spreads for our sector, SOFR plus 200 and SOFR plus 175 and both at par. Optimizing the right side of our balance sheet has always been as important to us as the investments we make. And we have been very busy repricing our liabilities at the tightest spreads in our 16-year existence. Over the last 18 months, between the issuance of equity, senior secured notes, and term loans, we have completed over $6 billion of capital markets transactions. Of our $5 billion in corporate debt today, only $400 million of it matures prior to 2027, and we have unencumbered assets in Term Loan B collateral today to issue $2 billion of incremental corporate debt. As we told you last quarter, our Board approved business plan is to continue to grow the scale of our business to offset the drag created by previous cycle non-accrual assets that we have largely held on to create the best total return outcome for our shareholders. To that end, we've originated $5.5 billion in the first half of 2025, more than all of 2024, led by our 2 largest lending businesses, commercial and infrastructure lending, with the benefits to be seen in 2026 and beyond. In CRE lending, we closed $1.9 billion in loans in the quarter and $4.1 billion in loans through June 30, with over 70% of the quarter being industrial and multifamily assets with an on-trend weighted average IRR and LTV. Of that, all loans were new to Starwood Property Trust, 16% were international and 74% were to repeat customers, proving the strength of the relationships in our 16-year-old firm that has lent to over $100 billion since inception. We expect this elevated investment pace to continue in the second half of 2025, leaving us with the largest CRE loan portfolio in our history by year-end after a 20% decline in 2023 and 2024. Our risk ratings and reserves held steady in the quarter, and as we expected, CRE markets are stable with forward rate expectations continuing to move lower in all credit markets trading at very tight spreads, which has catalyzed activity in the CMBS lending and real estate equity markets. Rina told you our 5 risk-rated bucket was reduced in the quarter. As Rina said, we committed $700 million of new capital in the quarter at mid-teens returns. This portfolio now stands at a record $3.1 billion, and we expect to continue to grow this portfolio. We completed our fifth CLO in the quarter, and I will add that it was at the lowest coupon SOFR plus 173 and cost of funds in our history. We expect to issue 1 to 2 more CLOs this year, which will increase our term non-mark-to-market debt even further. In REIS, I will note that our active servicing portfolio is over $10 billion today, the highest in this cycle and likely had it higher, which will produce significant incremental revenue as these loans resolve. As a reminder, our servicer is a positive carry credit hedge that earns more money in times of real estate distress. In closing, we are very excited to have added our new business line. We are excited about the return of liquidity and opportunities in our core businesses and that CRE finance markets continue to repair with better performance and lower expected forward rates. The forward market had SOFR declining to 3% in the first quarter of 2027, which is 50 basis points below the expectations just 10 weeks ago, which should have a material positive effect on our legacy credits. With that, I will turn the call to Barry.

Thank you, Zach, Rina, and Jeff, and good afternoon, everyone, or good morning. Happy August, and thanks for joining us. The world is changing rapidly from quarter to quarter, and this quarter has been no exception. The jobs report was quite surprising, especially with the revisions to previous job growth, and there seems to be a slight delay in seeing rate cuts in September. Most observers now agree that rates are likely to decrease; it's just a matter of how quickly. By May 2026, I expect the short-term rates to be at least 100 basis points lower than they are now, if not more. Additionally, the real estate sector is strengthening and becoming healthier as we move away from the surge of new supply that was created under different interest rate conditions, particularly impacting multifamily and industrial markets. Construction continues to be robust, driven significantly by data centers, the infrastructure bill, and the CHIPS Act, along with the repatriation and reshoring of manufacturing in the U.S., particularly in the pharmaceutical sector, which may need to relocate plants from Ireland back to the U.S. to align with government requirements. With both lower rates and a firmer real estate market, we can expect a noticeable increase in transaction volumes in U.S. real estate. We are already witnessing heightened activity in Europe, where rates have dropped significantly, leading to an incredibly busy year for our private equity firm in real estate. While transaction activity in the U.S. has diminished as people hold on to prime assets, anticipating a better selling environment with the forthcoming lower interest rates, the credit markets are showing signs of recovery. There is a lot of liquidity available, and many are rushing to refinance at the most favorable spreads we've ever experienced. This trend is likely influenced by situations in Europe and China, where interest rates remain at zero, making our relatively high rates attractive to global credit investors. We have enough supply to meet demand, but many of us underestimated the current state of the 10-year yield, especially in light of the recent infrastructure bill, and we will see if the economy accelerates sufficiently to manage the costs associated with it. On a macro level, it's interesting to note the energy deflation as the world adjusts to recent disruptions in the Middle East. With OPEC continuing oil production and the government aiming to ease development restrictions, we should see benefits from energy deflation supporting consumers and bolstering growth in the U.S. Lastly, a significant change is the major investment in data centers and AI, which collectively amounts to approximately $1 trillion in federal spending, with a heavy concentration in our economy compared to others worldwide. Turning to our company, I believe we are in an excellent position. As emphasized by Jeff and Rina, we have established a robust balance sheet that stands out in the sector. We have proactively used unsecured corporate debt to streamline our financial responsibilities, and Jeff and the team have successfully strengthened our balance sheet. I want to highlight our recent acquisition of a $2 billion business; from the outset, we have aimed to develop a finance company that goes beyond a traditional mortgage REIT, utilizing diverse strategies. This approach, despite its complexity, has proven beneficial, making us the only mortgage REIT in the nation trading above its initial public offering price. Many shareholders may overlook our spin-off of the residential single-family rental sector, which was valued at nearly $5 per share. Additionally, our diversified strategies have allowed us to maintain our dividend during challenging times, having paid it consistently for about 14 years. I am optimistic that we can grow our earnings substantially over time and potentially enhance our income stream while supporting a lower dividend yield. The scale of our business will be advantageous, as larger operations typically yield more accretive businesses. Our experienced team, including 28 individuals previously involved in Store and Spirit, has guided us through significant growth, benefiting our shareholders. It's notable that independent net lease companies offer dividend yields significantly lower than ours, suggesting we can emphasize the value of our new division. While this acquisition may be slightly dilutive this year due to the short engagement period, rapid growth will make it more accretive as we achieve economies of scale—currently, it represents about 12% of our revenues but could drop to approximately 5% at a larger scale. The team is well-positioned for this growth and is motivated to expand this business so that it becomes a more substantial part of our overall company. Additionally, I want to mention that our infrastructure business, acquired from General Electric a decade ago, is now free of any legacy loans, having completely recycled its portfolio while consistently generating mid-double-digit returns on equity. Our affordable housing portfolio also stands out, experiencing nearly 7% rent growth this year, with an anticipated embedded growth of 6.7% next year, not accounting for the potential to raise rents to market value as our assets exit their 15-year restrictions. I also want to highlight our conduit business, which has been highly consistent; we've operated profitably in 47 of 48 quarters with only one minor setback. Finally, our fundamental business will benefit from real estate depreciation as a tax shield, enabling us to possibly reinvest cash produced rather than distributing all of it according to REIT regulations. Overall, I'm very optimistic about our future despite some remaining challenges. I believe we are well-positioned for growth, bolstered by a strong team that is capable of achieving great results, including our goal of attaining investment-grade status, which remains a priority for us. Lastly, I would like to address the topic of tariffs, as I think we have yet to fully understand their impact. The second quarter results may have been influenced by inventory preloading to mitigate tariff effects. I see this as a temporary situation rather than a long-term trend. If prices increase, demand could decline, leading to supply adjustments which may stabilize prices to boost demand. Unfortunately, those in lower income brackets may bear the brunt of higher costs, potentially exacerbating societal divides. As we approach the November midterm elections, we should gain clarity on the effects of these tariffs, whether they result in beneficial revenue gains or if they ultimately decrease margins and consumer spending. Looking ahead, we expect the second half of the year to be less robust than the first, as recent job reports have suggested. We’re eager to see how companies navigate this uncertain landscape. Greater stability in regulations will help businesses make more informed decisions. Thank you, and I welcome your questions.

Can you talk a little bit about your expectations for CRE loan growth? I think your portfolio was up 6% quarter-over-quarter. And I guess I was wondering if you could get loan growth to accelerate.

Thanks, Don. I'll take it first and can hand it to Barry after. We've done $4.2 billion, I think, through 2 quarters. We have obviously closed more since the end of June that will put us on a mid-$8 billion pace. The record we ever did was $10 billion of transitional floating; obviously, that's taking away the other cylinders, CMBS and Infra and all the other things that we do lend on. I think that we will end this year very close to that $10 billion number that we did in 2021. In 2021, you had $670 billion of transaction volume. I think you're probably closer to $400 billion this year. So transaction volume hasn't picked up. It will pick up in your scenario. Lower rates will help that. Lower rates will also help refis. You have some assets that have not yet refi from pre-rate rises, the 2020, '21, and early '22 vintages that were very large. Some of them have not yet moved, so those will move forward, creating more opportunities. And obviously, business plans that have played out on the 2022, '23, and '24 loans will be more likely to refi as we see spreads come in. So we're on pace, even without that great environment, to have a close to record year. We are very much on offense. I think there are a number of people who have not been able to be on offense. We've invested in every quarter since our inception. We've been investing aggressively for the last few years. As I said, our goal is to continue to grow the balance sheet to offset nonaccruals so we can sit on assets and work them out to the benefit of shareholders rather than selling them at a more distressed level. And this also will help that lower rate environment, which will help that nonaccrual book. Many of them have debt yields that are just below where they might be able to refinance today, and they'll be able to refinance in your outlook. So we hope that's right, but we have built the business to be okay in either direction. We'll be fine in a higher rate environment, as we're showing you in the first half of the year. And we're prepared for that. But certainly, we'd all like to see that low rate environment that Barry pointed out is likely, that I pointed out the forward curve is saying will happen in that you're supposing, but it feels like we have upside from here, not downside as rates potentially go lower and we move further away from the beginning of that '22 rate hike cycle.

Got it. And can you talk a little bit about the ramp-up of the net lease portfolio business? It sounds like there are going to be some domestic and international opportunities. Are there portfolios? Or would this just be sort of a smaller acquisitions over time type strategy?

Yes. Listen, we laid out for you the portfolio that we have, and that portfolio was sort of $20 million to $30 million assets. That's the sweet spot for this company; that's often the sweet spot for this segment. I will say, in the first week that we owned the business, we saw a $160 million trade that revolves around some school buildings. We saw a $400 million and $600 million potential opportunity, 2 different ones there for a total of $1.16 billion in 3 potential opportunities. The last 2 were industrial assets, well located that we've looked at. I'm not sure that we're ready to jump in at that scale today, but the team is rebuilding a pipeline. They had sort of closed their pipeline a bit over the last couple of months, but their pipeline is growing again today. And I would expect that—I mentioned we underwrote $400 million to $500 million a year for the first 3 or 4 years just to get to our accretion dilution number. My guess is we can do double that; the team is really strong as the pipeline builds. We have great confidence that they're going to do significantly more. And as Barry said, doubling the size of this business will make it look a lot more like some of the public comps that trade at 1.4x GAV. And with our FCCR of 6.4x, I think the industry is closer to 3. We have really good credits in the book. We're very happy with—we spent a tremendous amount of time to start Capital Group, and our team there did a tremendous job underwriting together with our team, the credit. So we feel really good about what's on the book, but I think we will be looking to grow in the $20 million to $30 million space that they've historically done, but we will look at these bigger trades. If we found the credit that we like, I think we could certainly supercharge that growth. But the modeled number is not our expectation from management. We think we can grow faster, but it's going to take them a couple of quarters to rebuild the pipeline and for the world to really realize that Starwood is very behind this business. We have a lower cost of capital than their previous owner had, and we're super excited to be able to go into cap rates that are a little bit lower than what they've been able to buy previously, which will give us better credits and with our financing and getting better financing than what they had historically, we think that will create even higher returns. So super excited about where this is going to go.

Look, the organic growth in the infrastructure business has accelerated nicely. Curious about really 3 things here. One, it looks like the spreads on this business are a little bit wider. Curious if you see that as sustainable or converging given the competition in that space. Two, it also looks—and Jeff, you alluded to the fact or not alluded to, actually stated you're focused on the right side of your balance sheet is on the left side. It looks like the funding spreads in that business are also wider. Is there an opportunity for additional efficiency there? And then finally, can you help us understand the duration of those assets in the context of the core balance sheet?

Sure. I think Sean Murdock is probably on here. So I may—he doesn't speak very often. He runs that business tremendously well for us. But I'm going to start with a couple of the other questions. The right side, as far as the funding goes, it's really interesting what happened here. The banks who lend here tend to be more corporate credit lending banks than they are real estate lending banks. So in early '22, when rates went higher, we went from borrowing on cash flowing multifamily at $125 to $150 over SOFR to up to $250 to $300 over SOFR for the same assets. Spreads widened on everything on office; they went 3x that on hotels, that went significantly higher, and we saw a pretty steep move wider, and that has now come back. We're getting close on commercial real estate to back to where we were, but we got whipsawed. At the same time, we got much higher coupons for making a loan on a commercial real estate asset. So our returns ended up about the same over that period. The infrastructure business was very different. The right side, the funding spreads that you said are a little bit wider stayed about the same. Our lines are between sort of 175 and 200 over before we go to a CLO, and that never really moves wider. So asset spreads did move wider for a few years, and it allowed us to go from earning low mid-teens to earning mid-high teens for a couple of years. We're back in the mid-teens today. As the asset spreads have come in a bit, you've seen that in the term loan B market with a number of repricings and a portion of our book is term loans. But the CLO market, and we just priced our fifth with $173 over, cost of funds that is tight or tighter than we're going to do anything on the commercial real estate side. When we did our first 3 CLOs in CRE, I think the bond spreads were $195 over then down to $180 over; maybe 1 got to $165, remembering back 4 years ago. But you're in line with where the CRE CLO spreads are. And we are likely to do a couple more this year. So I think with repo lines, that we'll probably all be moving towards $175 for that business. And with the CLO market that on the last 1 was $173, and I think will be tighter today. It funds itself really well given we are still getting a higher coupon today than what we were getting pre-2022. So feel really good about that. I mean, by the time we do another 1 or 2 CLOs, we'll have most of 2/3 of our assets funded in non-recourse, non-mark-to-market CLO debt there. That's an incredible statistic versus where we are and where the industry is in commercial real estate. So we're sort of super happy there to not have any potential margin calls. The LTVs on that book have moved down from mid-60s, low 60s when we might have written them. I think our blended LTV is about 46% or 47% for that book. As the power needs have increased in the United States, it's really helped our energy-producing assets. And then you asked about organic — about growth in there. And Sean, are you on maybe talk a little bit about the fact that we've done a couple of our own deals, and we're not as reliant on syndicated deals?

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

These are $1 billion power plants. Construction costs have gone from what, Sean, under $1,000 to probably closer to $2,000 a megawatt now. So they're very expensive. They're very large. Rick, one of the questions I didn't answer was duration. Sean's loan, the energy infrastructure business's loans tend to be 5- to 7-year loans, where the commercial real estate loans tend to be 3- to 5-year loans. Obviously, if things work out, things can pay off a little bit earlier than that, but I expect a little bit more duration on our energy book than I do on our commercial book.

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

Absolutely. Thanks, Jade. I appreciate the nice words. The life science market we looked at—you had a lot of office that was getting converted to life science back in the days when everybody was taking more coming out of Covid. Obviously, there was a great need in COVID. But we didn't feel like we needed multiple more pieces of life science space. You just didn't graduate enough scientists to create a significant demand. And we knew AI was coming in that would reduce the number of trials that somebody might make it going after a gene or whatever it is from—you might have gone after it 10 different ways; well, with AI, you might only go after it a couple of different ways. So I think we've had a relatively bearish view on that for a while. Unfortunately, we did have that through. We thought it would be a good $17 million write-down on that, and hopefully, we can work out a bit. The kicker gain was nice as well. So thank you for bringing that up. The hotel exposure, I'm getting my percentages right now, I think it's 6% of our overall there; we've not lost any money on hotels. We went into the COVID side, but we actually said something in 2020, and I’m going to turn it to Barry if he's here because he is the greatest hotel expert I've ever met. But in 2020, we said we didn't expect to lose any money on our hotel portfolio, and that was when they were all shut. So right now, we feel really good about the exposures that we've taken. It's a broad mix of some destination, some roadside and drive to, and some in more major cities. But the hotel book continues to hold up very well. Hotels can miss on their cash flow by a little bit, but when you're lending at 65% or 70%, we have a lot more cushion there as income has gone up as you've seen anyone who's come into New York City in the last year has been where hotel rates are. Income has gone up, expenses have gone up also. So we're very careful on expenses. But to erode this 30% or 35% lending cushion that we have in hotels is a lot harder if things don't go badly and this higher rate environment has been met with higher income as well. So fortunately, there, we have that where you don't necessarily have that on office broadly. Barry, are you trying to jump in?

Yes. I could say it. Can you hear me?

Yes, I can.

Yes. Life Sciences secured the daylight side of us. It was sort of a conversion of office to life science, it was kind of like time share for a hotel that didn't work for a while, and this is as good as it got. I think it's interesting you bring it up because I think data center space will be interesting; spreads have contracted dramatically if a building is being leased or is fully leased, but some people are beginning to do or trying to expect data centers to get pretty widespread as you should in the spec data centers, but it's something we're not choosing to do right now. So I think there are—it's a similar thing. It's like you go back where you can go, so it's something that obviously is not spectrum—we've got the best credits that are in the world. But the spreads there have dramatically contracted probably 200 basis points or 175 basis points from where they were when we started in the lending business in data centers. And we are a data center developer with $19 billion of pipeline ourselves. So we know the market from the equity side and the debt side, and we've seen as we finance those buildings, and we've seen what's happened. The hotels, I mean, you have to be careful of the blue cities right now because the unions are really strong. New York City contracts are coming up in May of next year, it's going to look something like what happened in L.A. So even though New York remains fairly strong, shockingly strong at the level given the depreciation of the dollar and its impact on foreign tourism, it is not Vegas is weak. There are markets that are weak, and we just cherry-pick opportunities. And I don't—I think we are fine. We often lend and say, well, we get the asset at the debt balance; we'd love to own it.

So I think that probably applies to almost all of our hotel loans. On Atlantis, which was a large position. We're going to get paid off in the next quarter on a Hawaii asset. And obviously, hotels have a really high debt yield going in, and that high debt yield enables them to navigate the higher SOFR more easily. And Jade, you did ask one more thing on the credit cycle. I don't want to be too—I don't want to skip over that. But if the forward curve is right and we head towards 3%, so for my gut is that the industry is likely overreserved. If you end up in the high 3s to 4%, the industry probably has reserved for that. And if the forward curve ends up above 4%, there will be more problems. So today, where we sit with the forward pointed to heading to 3% by the end of '26 early '27. I feel really good. But that forward curve has moved around by 100 basis points, 3x each direction over the last 1.5 years. So we'll continue to watch it, and we'll continue to try to work out of things if the forward curve does stay above 4% that we have a path away from. But with the forward curve heading where it is today, I think everybody in our seats are feeling a little bit better.

Hoping you could give us an update on kind of the timeline for resolution on some of the problem assets or foreclosed assets. How we should think about kind of getting that capital back and how much and just the magnitude of capital against those that's unproductive today?

Yes. I think it's about $1.7 billion or $1.8 billion today of nonaccrual assets, Doug. There are some where we have some control where we're making a choice today not to sell at today's level, and that we think we have a better outcome by holding on. And so far, that's been working better than we might have thought it would. I think we told you 2 quarters ago, we had a plan that we would try to be half out of it by the end of '26 and then half again of that by the end of '27, which would be only 1/4 of that book. That's our patient forecast; hopefully, we can do better. There are certainly some assets that we've spoken about here before that we can't do a lot on. There are a few that were syndicated on, like a large retail asset, and then we're going to have to wait and work together with a group there that will take a while. There are a couple of things in Downtown L.A. that are just not moving forward as quickly as possible. So we're looking at other potential options on those. A few small apartments make that up. You've seen us sell 2 or 3 of the apartments that we've taken back at our basis. My gut is we'll sell a couple more of those at our basis in the coming quarter or 2. So the REO book is mostly things that we think we have a handle on being able to move out in that timeline. But as I said, there are a couple of other larger broadly syndicated things that might take a while. But that is built into what we produced to the Board for a 3-year plan, and we're sort of very comfortable with where that plan is. And that will allow us to continue to earn this dividend over the next 3 years or so. So we're not going to rush; rushing would cause you to go from our 9.5% cost of capital, you sell something to an opportunistic fund, and they have a 20% cost of capital, and then they bid it back for any downside that could happen, and that's not necessarily the best outcome hitting a bit today on an asset for our shareholders. We've seen some of our peers do that. But we have capital; we have access to capital, and we're going to act with our managers at Starwood Capital Group, which has $110 billion of assets under management and look at each individual asset to try to go forward and make our best plan.

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

Yes. I'll send you after—we have some beautiful pictures of what that asset will ultimately look like. We're monitoring rents in that market. Rents have actually gone up on Class A multi-rentals. So we're starting to feel better and better, but we have not begun construction. We're in the permitting phase, and we have the final drawing. So I feel pretty good that it's going to be a tremendous product. It's in the right spot in D.C. that we hope to be able to give you a lot more information on over the next couple of years. It's a couple of year project. We've reserved money for that, and we'll see. But we do have ourselves getting back our basis and more on that asset, as we've told you in the past once we're done with the conversion.

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

Well, normally, I'll put it to Barry, but the connection isn't great today. I want to thank everybody for joining us and thanks to the team who did a lot of work to get a lot of things over the line in the last quarter. I appreciate everybody's time.

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect at this time, and have a wonderful day.