Greetings, and welcome to the Starwood Property Trust second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Zach Tannenbaum, Director of Investor Relations. Thank you, Zach. You may begin.

Thank you, Operator. Good morning and welcome to Starwood Property Trust's 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-GAAP financial measures will be discussed on this call. For reconciliation of these non-GAAP financial measures, the most comparable measures prepared in accordance with GAAP, please refer to our press release file this morning. Joining me on the call today are Barry Sternlich, the company's chairman and chief executive officer, Jeff DeModica, the company's president, and Rena Paneri, the company's chief financial officer. With that, I 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 $151 million, or $0.43 per share. Gap 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 six 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 to the quarter for $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 two data centers that are 100% pre-leased to investment-grade tenants. We continued to resolve our foreclosed assets, selling two 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 impacts of the sale are shown in two separate lines in our gap income statement, loss on property and a related gain on extinguishment of debt. Net, there was a $4 million gap gain and a $44 million DE loss. The second resolution relates to a $55 million apartment building in North Lake, 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 for zero 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 two non-accrual loans migrate out of the five risk rating categories 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 loan. 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 reserved this for gaps purposes via specific feeble reserves that we subsequently charged off in connection with the foreclosure. Also migrating out of the five risk rating category was a 137 million dollar office property in brooklyn the loan was upgraded to a four risk rating due to two 30 plus year leases one signed and the other pending which would bring occupancy to 100 percent our general feeful reserve decreased by 14 million in the quarter to a balance of 438 million reflecting slightly improved macroeconomic forecasts together with our previously taken reo impairments of $173 million. These reserves represent 3.7 percent of our lending and REO portfolios 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 continue to repay at par, with $60 million of repayments in the quarter. Our retained RMDS portfolio ended the quarter at $414 million, with the small decrease from last quarter driven by repayments. In our property segment, we recognized $17 million of DE, or five cents per share, in the quarter, driven by Woodstar, our Florida affordable multifamily portfolio concentrated in the Orlando and Tampa sub-markets. In June, we began rolling out the new authorized HUD rent increases of approximately 8%, which had a partial impact to 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 grows 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 six 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 15 cents per share to the quarter. Our conduit, Starwood Mortgage Capital, completed four securitizations 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 L&R's existing ratings of CS1 and CSF1, 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 was 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 two term loan Bs 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 10Q. 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 regenerated 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 2.5 times increasing slightly from last quarter due to new origination volume And finally this morning, I wanted to conclude with a few remarks on the recognition we received this quarter by the rating agencies and NAIRIT. Our credit ratings were affirmed by all three rating agencies. Despite a challenging market backdrop, they collectively recognized 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 NAIREIT Gold Investor Care Award, an award given to one 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 NAIREIT for this award. With that, I will turn the call over to Jeff.

Thanks, Reena. 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 escalation. The assets are split fairly evenly between service and industrial with a small component of retail assets. As Reena said, we use $1.3 billion of in-place debt, $879 million of which is an 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. Their strong relationships with middle market companies and private equity sponsors 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 transaction demonstrated 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 three securitizations, which sequentially priced tighter as the trust grew in size. We expect to continue to grow the ABF 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 traded a significant premium to GAV with a conservative FCCR of 6.4 times 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 returns. We have turned that business into a compelling investing platform over the last seven years. We look at Fundamentals the same way and believe with a lower cost of capital than their previous owner that we will be able to grow this business secretively. 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 48 cents 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 and 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 onto 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 two largest lending businesses, commercial and infrastructure lending, with the benefit 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 30th, with over 70% of the quarter being industrial and multifamily assets with an on-trend weighted average IRR and LTV. Of that, all loans renewed 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 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, SASB, lending, and real estate equity markets. RENA told you our five-risk-rated bucket was reduced in the quarter, with a large upgrade and two REOs we expected. So I will just touch on our two new four-rated loans, as I always do. The first is a $91 million apartment deal in Phoenix that recently underwent a full property renovation with the borrower experiencing liquidity challenges. We have been successful in REO, optimizing multifamily performance, and have sold two assets at our basis and expect to use the scale and information advantage of our manager, Starwood Capital Group, one of the largest multifamily owners in the country, to do the same going forward. The second is a $46 million office to residential conversion in Hawaii that is pivoting to a hotel execution. In the quarter, Rena also mentioned the resolution of a $137 million and a $55 million REO, and we are working through a couple more REO resolutions we expect to be finalized this year, and we'll give you more detail upon execution. Our energy infrastructure business continues to benefit from growth in power demand, creating lower LTVs. 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 one to two more CLOs this year, which will increase our term non-mark-to-market debt even further. In REES, I will note that our active servicing portfolio is over $10 billion today, the highest in this cycle, and likely headed 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 in lower expected forward rates. The forward market has 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, Reena, and Jeff. Thank you for the afternoon, everyone, for good morning. Happy August, and thanks for listening in. Well, it seems that the world changes a lot quarter to quarter, and the world has certainly changed this quarter. The jobs report was quite a shock, particularly the restatement of prior job gains, and it seems likely likely that the Fed will cut rates in September. And I think at this point, most of us would agree that rates are coming down, which is a question of their speed. But May of 26, I think the short end would be at least 100 basis points lower than we is today, and probably more. The other thing that we know for sure is that the real estate complex is gaining in strength and getting healthy as we see the end of the avalanche of new supply created for a different industry environment, particularly affecting the multifamily industrial sectors. While construction remains strong and there's tremendous job gains in construction, it really is from data centers and also from the Infrastructure Bill and the CHIPS Act and other programs. And now we'll accelerate with the repatriation and reshoring of plants and equipment and

factories in the United States and things like the pharmaceutical industry, which will

probably have to vacate Ireland and move their plants back to the United States to satisfy the administration. With both lower rates and the firming of the real estate complex, I think you'll see a significant pickup in transaction volumes for the real estate markets in the United States. You already are seeing that in Europe. Europe has had rates drop from 42, likely hitting one three quarters. And so there's a lot of activity in Europe. We have our busiest years ever in Europe as a private equity firm in real estate. While transaction funds in the States are subdued and people are holding onto their best assets, hoping that they can sell into a more favorable climate supported by these lower interest rates that we all know are now coming. The other fact you've seen is the repair of the credit markets. As you've seen with our own comments from Jeff's comments. There's a lot of liquidity in the markets, and everyone is racing to refinance its spreads that actually are the best we've ever seen for our company. And that is probably the case because of Europe, China, having seen no interest rates. So though our rates are high, they're still attractive for global credit investors, and you can't ignore the United States. Obviously, we have plenty of supply to satisfy demand, but I think most of us would have gotten wrong with the 10 years as I speak, given the situation with the one beautiful bill, and we'll see if the economy does accelerate enough to cover the costs of the program. The other interesting development, I'd say, on a macro level is energy deflation, that the world has sort of digested the disruptions in the Middle East, and now between OPEC's position of continuing to produce oil and the government's desire to remove restrictions on development, the energy deflation dividends that support customers and continue favoring the growth in the United States, which is, lastly, the most evident change of all is the continued massive investment behind the data centers and AI, which in the aggregate is equivalent of levered probably the trillion dollars that the federal government is spending, and that is new and dramatically concentrating in the United States between our economy versus others in the world. So shifting to our company, I'd say we're in very good shape. As Jeff and Reena pointed out, I think we built a fortress balance sheet best in the sector. We've moved as aggressively as we can to use unsecured corporate debt, take out repos and other debt we have, and we are agile in that. Jeff and the team have done amazing work on our balance sheet. and i want to talk a little bit about fundamental income which we just bought a two billion dollar business i think from the start as you know we endeavor to create a finance company not just a mortgage read and we have multiple cylinders and that strategy has while complicated has borne the fruit of us being the only mortgage read in the country that trades above its ipo price and i think many shareholders forget that we spun off our residential single family rental business which is equivalent to almost $5 a share. In addition, our diversification has been able to enable us to keep our dividend intact in a very tough time. And now we've paid this dividend, I think, for 14 years or something like that. And I hope it's fundamental. We can actually begin to grow earnings materially over time and potentially work to increase that or get the benefit of what's a much more secure income stream and a lower dividend yield for our company, which, of course, we think we deserve. Fundamental as a business benefits from scale. And the bigger we are, the likely more creative the business is to us. We have a proven team. We picked on a team of 28 people that have been involved with store and spirit and grew those companies to their ultimate sale. Shareholders made a lot of money. It's not lost on us that standalone, that lease companies trade a dividend yield 450 to 400 basis points inside our own. So we think this is – we'll be able to highlight the value that this new division has inside our company. And while I think it's modestly diluted this year to the company because we're only picking it up for a short period of time, the faster we grow the company, the more creative it will be given the overhead gets scaled. And it's something like 12% of our revenues today, but at scale it's more like five. And the team is positioned to do that, incentive to position to do that. and we'll figure out ways to continue to grow that business and make it a more material portion of our company. A couple other points I'd make. It's interesting to me this year that SIF, our infrastructure business we bought many years ago from General Electric, our Starwood infrastructure lending business, no longer has a single heritage loan in its portfolio. The portfolio has been completely recycled and continues to earn mid-double-digit yield on equity. The other point I'd like to highlight again is our affordable book, which is really unusual. I enjoyed close to a 7% rent growth this year and has embedded rent growth next year of 6.7%. And that doesn't take into account the opportunity to move these rents to market as these assets begin to come off their 15-year restrictions. I also want to point out SMC, our conduit business, because it's the gift that keeps on giving. I think the team does a superb job running this business. I think we've had the business for 48 quarters and only had one mildly negative. I think we lost a penny in one quarter, so we've been profitable in 47 to 48 quarters. And that's just a great business led by a great team. We've done a superb job for us. And one more point about fundamental is that fundamental will provide a real estate depreciation expense or a tax shield for us. And over time, that's going to become important because we cannot, as you know, hold on to any cash that we produce. We have to basically pay it out per the REIT regulations. But as with Fundamentalist Appreciation, as we grow the business, we would have the opportunity, and we're not saying we would, but we would have the opportunity to not pay out all the cash we produce and can reinvest that in the company and growing at a faster rate going forward. So overall, I'm very excited about the future. Right now, we still have some potholes to get through, but we're confident we can navigate through them. and that the company is setting itself for future growth and a really powerful team that can continue great things, including our ultimate goal of becoming investment grade, which all arrows are pointing to how do we get there and what would be the benefits of getting there. But in general, we're doing all the right things to accomplish that in our views. I will say one last question, one last general comment about tariffs because I think we haven't seen their impact yet. I think the second quarter was sort of overstated by freeloading or front-running of inventories to try to get things on the shelves without the impact of tariffs. I do think they're one time. I don't think it'd be sustained. And logic would tell you if prices went up, demand will fall. You might see an increase in supply or prices, and then you might see a decrease in prices that will be cut in order to generate excess demand. And sadly, the tariffs will impact those of the country who don't have the wherewithal to pay additional costs for the daily needs of their lives. And I think that could create great social anxiety and potential continued splits in our society to the left and the right. I think we're going to start talking about the November midterms coming up, and by that time, we'll definitely know the impact of these tariffs and whether they're benign or their benefits of increased revenue offset, the social costs of companies having lower margins or consumers having less money in their pocket. So the jury's out, and I think we expect the back half of this year to be meaningfully less strong than the first half, and that job splash was probably the indication of that. And now we'll see what companies can do as they try to figure out what's permanent and what's temporary. The more stability we have in the rules, the more businesses can figure out what to do. With that, I'd like to say thank you and take your questions.

thank you we will now be conducting a question and answer session if you'd like to ask a question please press star one on your telephone keypad the confirmation tone will indicate your line is in the question queue you may press star two to remove yourself from the queue for participants using speaker equipment it may be necessary to pick up the handset before pressing the star keys one moment while we poll for questions and our first question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.

Hi, good morning. 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 if the Fed does cut rates, would you expect the velocity of that 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 two 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 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 know, you have some assets that have not yet refis from pre-rate rise, the 2020, 2021, and early 2022 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 close to a 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 it at a more distressed level. And this will also help, that lower rate environment will also help that non-accrual book. And 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 would 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 and that you're supposing but 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 talk a little bit about the ramp up of Jeff let me can you can you hear me Jeff

perfectly barry it's barry can you yeah you know i i'd say i mean we have a lot of business lines now so i'm we're really agnostic where we put capital and we also know capital isn't doesn't grow on trees so you know we're going to be even more focused on not just dollar origination but the returns and the whole dollar profits the likelihood the money stays out longer than we've probably been in the past and lean into good credit now we'll do it with fundamental as we've done with sif we'd like to continue to grow our infrastructure lending business and we're continuing to look at other businesses so you know we don't have infinite access to capital and not at these dividend yields. So we have to be careful and judicious to how we've gone.

Barry, you cut out at the end. Barry, you cut out at the last 20 seconds, so I'm going to hand it to Don. Well, maybe you get a better connection.

Okay, thanks, Barry. You know, in terms of my follow-up, Jeff, if you could talk a little bit about the ramp-up of the net lease portfolio business, It sounds like there's going to be some domestic and international opportunities at our portfolios, or would this just be sort of a, you know, kind of smaller acquisitions over time type strategy?

Yeah, listen, we outlaid, laid out for you the portfolio that we have, and that portfolio was sort of $20 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 and a $600 million potential opportunity, two different ones there, for a total of $1.16 billion in three potential opportunities. The last two 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, you know, I mentioned we underwrote $400 million to $500 million a year for the first three or four 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 1.4 times GAV. And with our FCCR of 6.4 times, and I think the industry closer to 3, we have really good credits in the book. We're very happy. We spent a tremendous amount of time. So our capital group and our team there, Kahir Medani and Peter Reed and our team, did a tremendous job underwriting together with our team the credits. So we feel really good about what's on the book. But I think we will be looking to grow in the $20 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 that will create even higher return.

So super excited about where this is going to go. Okay, great.

And our next question comes from Rick Shane with J.P. Morgan. Please proceed with your question.

Thanks for taking my questions this morning. Look, the organic growth in the infrastructure business has accelerated nicely. Curious about really three things here. One, it looks like the spreads on this business are a little bit wider. I'm 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, not alluded to, actually stated yours 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 Murdoch's probably on here, so he doesn't speak very often, but 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, up to 250 to 300 over SOFR for the same assets. Spreads widened on everything. On office, it went three times that. On hotels, it 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 whips out of it. 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 CLO, and that never really moved 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 a 173 over cost of funds, you know, that's as tight or tighter than we're going to do anything in the commercial real estate side. When we did our first three CLOs and CRE, I think the bond spreads were 195 over, then down to 180 over. Maybe one got to 165 if I'm remembering back four years ago. But you're in line with where the CRE CLO spreads are. And we are likely to do a couple of 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 one 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 one or two CLOs, we'll have most of two-thirds 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 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.

Yeah, 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 sole underwrite and sole execute, that tends to command a little bit more margin. So while margins in the sort of visible broadly syndicated markets are tightening a little bit, we've been able to maintain margin by doing more deals ourselves. And I think the opportunity around how much infrastructure growth there will be in the next few years as data center affects the energy infrastructure market will allow us to grow that origination channel significantly.

Got it. And then just one quick follow-up, making the distinction between the syndicated or club loans, and individually, single lender assets. Is that simply, and that's not really your core business in the property lending side, is it just because the transactions there are so much larger because of the inherent costs of building the projects that it makes more sense to club them up?

Exactly.

Okay, great. Thank you so much.

These are billion-dollar power plants. You know, 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 loans, the energy infrastructure business's loans, tend to be five- to seven-year loans, where the commercial real estate loans tend to be three- to five-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.

Got it. Okay, very helpful, and thanks for the extra time on this one.

Thanks, Rick. Thank you. And our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question. Thank you very much.

You know, we don't often get credit for mistakes we avoid, And I have to take my hat off to you for only doing one life science deal in a super competitive market in the last cycle. The $17 million loss doesn't seem all that bad, you know, 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 is stabilized based on what we know now? Do you expect a gradual improvement on resolution plans you have in place? And also, if you could comment on the hotel exposure and the loan portfolio.

Absolutely. Thanks, Jade. Appreciate the nice words, you know, the life science market. We looked at, you had a lot of B 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 a multiple more of life science space. You just didn't graduate enough scientists to create a significant of a demand. And we knew AI was coming, and that would reduce the number of trials that somebody might make going after a gene or whatever it is. 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 that one through. We thought it would be a good conversion to regular office or resi. But you're right, we did end up taking a $17 million write-down on that, and hopefully we can work out of it. 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 asset base. I don't have any hotels at all in my four- or five-rated loans. I don't expect any there. We've not lost any money on hotels. We went into the COVID cycle. 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. You know, hotels can miss on their cash flow by a little bit, but when you're lending at 65 or 70 percent, 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 seen where hotel rates are. You know, income has gone up. Expenses have gone up also. So we're very careful on expenses, but, you know, to erode this 30% or 35% lending cushion that we have in hotels is a lot harder if things don't go bad in 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? Is that you, Barry?

I can sit. Can you hear me?

Yes, I can. Can you hear me?

Yes, I can. I mean, I'm sorry. Life science has scared the daylights out of us. It was sort of a conversion of office to life science was kind of like timeshare for a hotel that didn't work. For a while, it was as good as it got. I think it's interesting you bring it up because I think the 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 do spec data centers. You can get pretty wide spreads as you should in the spec data center, but it's something we're not choosing to do right now. So I think it's a similar thing. It's like, you know, you can go spec or you can go to something that is obviously not spec and got the best credits there 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 and 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 what's, as we finance those buildings,

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. The New York City contract's coming up in May of next year. It's going to look something like what happened in LA. So even though New York remains fairly strong, shockingly strong at the res bar line, given the appreciation of the dollar and its impact on foreign tourism, it is not, you know, Vegas is weak. There are markets that are weak. And we just cherry pick the opportunities. And I don't know. I think we're fine. You know, we often lend and say when we get the asset at the debt balance, we'd love to own it there. So I think that probably applies to almost all of our hotel loans.

And there is liquidity. You know, we just got paid off on a New York City hotel to a bank balance sheet. We got paid off 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 over-reserved. If you end up in the high threes to four, the industry probably has reserved for that. And if the forward curve ends up above four, you know, there will be more problems. So today where we sit with the forward curve 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 three times each direction over the last year and a half. So we'll continue to watch it, and we'll continue to try to work out of things that 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.

Thanks a lot.

Thank you, Jay. Thank you. And our next question comes from the line of Douglas Harder. with UBS. Please proceed with your question. Thanks and good morning.

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

Yeah, I think it's about $1.7 billion or $1.8 billion today of non-accrual assets. You know, 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 two quarters ago that 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 leave only a quarter 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's a few that were syndicated on, like a large retail asset, and 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 LA. And downtown LA is just not moving forward as quickly as possible. So we're looking at other potential options on those. We have a few small apartments that make that up. You've seen us sell two or three 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 two. So the REO book is, you know, it's 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 produce for the board for a three-year plan, and we're sort of very comfortable with where that plan is, and that that will allow us to continue to earn this dividend over the next three years or so. So we're not going to rush. Rushing would cause, you know, you 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 bid 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 manager, Starry Capital Group, who 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? You know, kind of what's the updated timeline and thoughts of kind of getting that property online cash flowing? Yeah, 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 rental 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 that it's going to be a tremendous product it's in the right spot in DC that we we hope to be able to give you a lot more information on over the next couple years it's a couple year project we've reserved money for that and 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 Dematica for closing remarks.

Well, normally I put it to Barry, but his 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.