Starwood Property Trust, Inc. (NYSE:STWD) Q2 2023 Earnings Call Transcript

Starwood Property Trust, Inc. (NYSE:STWD) Q2 2023 Earnings Call Transcript August 3, 2023 Starwood Property Trust, Inc. beats earnings expectations. Reported EPS is $0.49, expectations were $0.48. Operator: Ladies and gentlemen, good morning and welcome to the Starwood Property Trust Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Tanenbaum, Head of Investor Relations. Please go ahead. Zachary Tanenbaum: Thank you, operator. Good morning and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended June 30, 2023, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. 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'm now going to turn the call over to Rina. Rina Paniry: Thank you, Zach and good morning, everyone. This quarter, we reported distributable earnings or DE of $158 million or $0.49 per share. GAAP net income was $169 million or $0.54 per share. GAAP book value per share increased $0.07 to $20.51 with undepreciated book value increasing $0.09 to $21.46. These book value metrics include an accumulated CECL reserve balance of $260 million or $0.83 per share. Since our last earnings call, we significantly enhanced our liquidity position with the July issuance of $381 million in convertible notes and commercial and infrastructure loan repayments of $1.3 billion during the quarter and $472 million subsequent to quarter end. Net of $787 million in fundings across businesses, our current liquidity increased to $1.2 billion.

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Beginning my segment discussion this morning is Commercial and Residential Lending which contributed DE of $182 million to the quarter or $0.56 per share. In commercial lending, our pace of repayments picked up with $1 billion during the quarter and another $386 million in July alone, well in excess of last quarter's $257 million. More than half of these repayments were on mixed-use and hotel loans. These were offset by fundings of $272 million on a refinanced loan and another $235 million of pre-existing loan commitments. Our portfolio, 93% of which represents senior secured first mortgage loans ended the quarter at $16.4 billion with a weighted average risk rating of 2.9. On the CECL front, we increased our general reserve by $104 million due to our third-party model indicating a worsened macroeconomic outlook. We also applied more negative macroeconomic assumptions to our office loans in addition to loans with 4 or 5 risk rating. This brought our general CECL reserve to $228 million. Of this amount, $136 million or 60% relates to office. As a reminder, CECL reduces our book value and GAAP earnings but does not impact DE. In addition to our general reserve, we recorded a specific reserve of $15 million related to a 5-rated mixed-use loan in Phoenix which was originated in 2015. The original loan was $115 million and was recently paid down to $40 million. The reserve was driven by the current quarter retrade of previously executed purchase and sale agreement relating to the remaining underlying collateral, of which half has been sold and half remains under contract. For GAAP purposes, we charged off the portion of the loan above the current negotiated price of the remaining collateral which resulted in a corresponding DE loss. Our only specific reserve at quarter end continues to be $5 million related to the entire balance of our retail asset in Chicago. As discussed in our remarks last quarter, in May, we foreclosed on a 5 rated $42 million first mortgage loan related to 2-story retail in downtown Chicago. We obtained an appraisal in connection with the foreclosure which valued the asset at $42 million. As a result, the property was recognized at the carryover basis of our loan with no resulting impairment. As we have successfully done in the past, our intent is to lease up the space, stabilize the asset and ultimately sell it. We expect to fully recover our basis. For our remaining REO assets, we continue to actively work towards the path of full repayment. During the quarter, we recorded a $24 million GAAP impairment against the building in L.A. that we foreclosed on 6 months ago. We began evaluating alternate path for this asset during the quarter, some of which were at our basis and others which were not. Given the range of potential outcomes, we determined that a reserve was appropriate. The reserve was determined by reference to an appraisal we obtained in connection with the foreclosure. Next, I will discuss our residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.6 billion, including $1.6 billion of non-QM and $994 million of agency eligible loans. We fully hedged the fixed rate interest rate exposure in this portfolio with our hedges having a positive mark of $170 million at quarter end after $21 million of cash receipts in the quarter. Lower projected prepayment fees continue to benefit our retained RMBS portfolio which increased in fair value by $26 million, ending the quarter at $443 million. Next, I will discuss our Property segment which contributed $21 million of DE or $0.07 per share to the quarter. Of this amount, $12 million came from our Florida affordable housing fund which continues to perform exceedingly well. For GAAP purposes, we recorded an unrealized fair value increase in the fund this quarter of $209 million or $166 million net of noncontrolling interests. The increase resulted from the impact of HUD recently released maximum rent levels which were 7.5% higher than last year. Our valuation only factored in these rent increases. Because the new rents will be rolled out beginning in July, there is no positive impact to earnings this quarter. One unique aspect of this year's maximum rent level is that certain properties or in geographies where the rents were capped by HUD. This cap resulted in 3.5% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula next year and will be included in our valuation at that time. Turning to investing and servicing. This segment contributed DE of $22 million or $0.07 per share to the quarter. In our special servicer, our active servicing portfolio increased from $5.2 billion to $5.7 billion. This is the result of $738 million of loans transferring into servicing during the quarter, nearly 70% of which were office. Our named servicing portfolio declined to $102 billion in the quarter, driven by $4 billion of maturities. As maturities continue through the rest of this year and into next year, we expect to see a continuation of this trend with active servicing increasing and name servicing decreasing. In our conduit, Starwood Mortgage Capital, despite lower market volumes through this rate cycle, our securitization profits are similar to historic levels. During the quarter, we completed 3 securitizations and priced an additional securitization totaling $218 million. And on this segment's property portfolio, we sold 2 assets in the quarter, 1 classified as property on our balance sheet and the other is a 50% equity method investment. Our share of the proceeds totaled $32 million, resulting in a net GAAP gain of $11 million and a net DE gain of $5 million. Concluding my business segment discussion is our Infrastructure Lending segment which contributed DE of $20 million or $0.06 per share to the quarter. Repayments of $254 million outpaced funding of $78 million on new loans and $11 million on pre-existing loan commitments, bringing the portfolio down slightly from last quarter to $2.3 billion. On the CECL front, we took an incremental $4 million specific reserve on a small legacy GE investment that we discussed last quarter. I will conclude this morning with a few comments about our liquidity and capitalization. During the quarter, we repaid the entirety of our April $250 million convert at maturity with cash on hand. Our next corporate debt maturity is in November which we likewise intend to settle with cash on hand, including the net proceeds from our full year $381 million, 6.75% [ph] convert issuance in July. After that, we have no corporate debt maturities until December 31, 2024. Earlier in my remarks, I mentioned our current liquidity of $1.2 billion. This does not include $1.5 billion of liquidity that could be generated through sales of assets in our Property segment. It also does not include over $2 billion of debt capacity that we have via our unencumbered assets and Term Loan B. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.4x, down from 2.5x last quarter. And finally, I wanted to mention that this quarter, our credit ratings were affirmed by all 3 rating agencies. Despite challenging conditions in the CRE space, they collectively recognized our diversity, low leverage, liquidity position, stable earnings profile and credit track record as key elements supporting our rating. With that, I'll turn the call over to Jeff. Jeffrey DiModica: Thanks, Rina. We have run our business conservatively since inception 14 years ago. We've uniquely diversified into multiple cylinders, including commercial and residential lending, energy infrastructure lending, CMBS loan origination and investing and our $102 billion named special servicer that produces countercyclical income in times of credit distress. We've also built a large owned property portfolio that accounts for a record 29% of our company's undepreciated book value, predominantly in the highly resilient low-income housing multifamily sector. This segment has produced high cash returns and additionally, over $1.5 billion of harvestable gains contributing to the liquidity Rina just mentioned. Starwood Property Trust is the diversified low leverage hybrid we set out to build with no true direct peers. As a result of this diversification, we have managed our exposure to U.S. office assets down from a peak of 26% to just 10% of our assets today. In that time, we significantly increased our allocation to more defensive multifamily and industrial loans and to the owned low-income multifamily investments I just mentioned; all of which sit at all-time highs as a percentage of our balance sheet and continue to perform exceptionally well today. Our company's leverage improved again in the quarter to 2.4 turns which is about a full turn of leverage lower than our peer group average. If our asset mix looked more like our lending peers or if we increase leverage by over 1 full turn to look more like them, our company would significantly outearn its dividend in this higher rate environment. But that is not how we chose to run the company at this time. We built a diversified company with a conservative balance sheet that would best enable it to pay a stable and perhaps at times a growing dividend. We have not and will not change our conservative credit first business model to chase outsized earnings and we'll continue to choose conservatism and consistency as we cautiously look for the right time to increase the deployment pace of our near record liquidity. We have seen markets begin to normalize with transaction volumes slowly creeping back up and lending markets starting to fall. We are seeing more lending opportunities and more lenders quoting loans, allowing asset and liability spreads to begin coming in. You can see this shift in sentiment in our loan book, where we have received $1.75 billion of repayments since March 31. That is more than the previous 3 quarters combined and we are seeing investors who have executed their business plans, extend their maturities, lower their coupons and/or increase their proceeds. We expect this trend to continue creating significant reinvestment opportunities at a time when we can redeploy capital at above-trend returns and lower loan to values which are calculated off new lower values in most loan categories. We have $25 billion of bank financing lines across 25 banks, $8 billion of which is undrawn and $4.4 billion of unencumbered assets, giving us unparalleled access to the corporate unsecured term loan asset-specific financing and convertible bond markets. In June, in a much more difficult capital markets environment that exists today, we were 2x oversubscribed for our $381 million convertible bond issuance. In commercial lending, 91% of our CRE lending portfolio have embedded interest rate protection with 80% of our loans having caps in place and an additional 11% have interest reserves or guarantees. Rina mentioned, we use third-party macroeconomic forecasts in calculating our CECL reserves. Their economic outlook is more bearish than markets and forward curves imply resulting in a higher general CECL reserve which again reduced the increase in our company's book value this quarter. On July 13, Bloomberg News referenced the McKinsey Global Institute study that said that office values would decline 26% from 2019 through 2030 in the 9 largest global office markets and would decline 42% from their peak in their severe scenario. Our model-driven CECL reserves for our office loans are pricing in an even more severe outcome than McKinsey's severe scenario. And our stock still trades below our GAAP, our undepreciated and our fair value book values. I will now discuss our 4 and 5-rated loans which are 5% of our assets in total. Rina mentioned our 5-rated mixed-use loan in Phoenix. I want to add that we earned $24 million in net loans since origination. So despite our first DE loss on over $75 billion of Starwood originated loans, we still made $9 million or a 4% positive IRR on that loan. In addition to Phoenix, we downgraded 2 other loans from a 4 to a 5 risk rating in the quarter. The largest is a $252 million office loan in Houston that is 67% leased with a 7-year average remaining lease term. Although the sponsor invested $259 million of equity in front of us, the loan matures in September. The sponsor is working on a recapitalization but if they are unable to put it together, we will be prepared to take title at maturity. With a 6.4% current debt yield, this well-located trophy asset won't need significant incremental leasing or reduction in borrowing costs for us to recover our basis. The second loan is a $130 million loan on a 381,000 square foot office building in Arlington, Virginia that is currently 65% occupied. With the government even slower to return to the office than the rest of our country, Greater DC has been a difficult submarket since COVID. We will need more incremental leasing here than in the Houston loan but it is a smaller building and has a positive NOI and the borrower is negotiating a lease that would bring the property to 80%. We have 2 other loans that are still 5-rated in the quarter. On our $120 million downtown DC loan I spoke about last quarter, we are running parallel path to resolution, including a sale to a multifamily conversion developer at our basis, we told you about last quarter and we've been touring an active tenant interested in leasing the entirety of this building. We expect to resolve this loan in 2023. On our $230 million loan on a retail and entertainment asset in New Jersey, the asset is now 80% leased and operationally cash flow positive after year-over-year increases in sales, revenues and attendance. We received our first operating distribution on the excess collateral underlying this loan this quarter and management expects that our GAAP basis will be below 70% of our legal basis on this asset this year due to it being on nonaccrual. Having this loan on nonaccrual means we have had $230 million of equity earning nothing, thus reducing our distributable earnings by $0.11 per share per year. Once resolved, this asset and the others on nonaccrual will create positive earnings power in the future as we redeploy that equity into income-producing assets, while significantly reducing the likelihood and scale of future impairment. We have 5 loans risk-rated 4. The first 3 were all upgraded in the quarter from 5 due to positive developments. The $156 million Brooklyn loan that we classify as office and we have said is likely transformed to a nonoffice use given the low per square foot basis which is primarily covered by the excess value of its cross-collateralization with 4 large multifamily assets. During the quarter, our borrower executed a lease with the City of New York to occupy half the building with an option for the remainder which, along with an expected pref equity investment in one of the multifamily assets creates sufficient cash flow in this loan to cure the past due interest. Our $37 million remaining balance on a Napa [ph] Valley land loan had a favorable ruling in their insurance litigation in the quarter which would result in a full return of our GAAP basis and some or all of our nonaccrued interest. On our 68% leased $197 million office loan in Irvine, California that had bids at our basis in the last year, we intend to close on a $30 million pref equity investment giving this asset 2 years of runway to increase NOI or wait for a better refinancing environment. The other 2 4-rated loans are a $60 million multifamily loan that remained 4% in the quarter due to slow lease-up and a previously rerated $250 million loan in Brooklyn, where college has a 30-year lease on the lower 41% of the building and the sponsors have several executed LOIs to take the building to 100% leased on long-term leases. Our downgrade is precautionary until the lease is signed. Concluding this segment, I will remind you that there is no standard methodology for assigning risk ratings, making them subjective and sometimes hard to compare. Our 4 and 5-rated loans comprise only 5% of our company's assets or 7.7% of our commercial lending segment assets which account for just over half of our company's diversified assets and earnings. With this quarter's increased CECL reserves, we now have reserves equal to 19% of the total balance of our 4 and 5-rated loans which is more than double the percentage our largest peers have in reserves versus their 4 and 5-rated loan balances, again, highlighting our conservatism. In our residential lending business, we have seen liquidity return to these financing markets. We have $170 million in hedge gains in this portfolio and have newly closed and in process financing lines that will extend our maturities and reduce borrowing spreads by over 25 basis points across our loan portfolio, creating significant interest savings in the future. Our owned property assets benefit from fixed rate debt at an average 3.65% fixed coupon with a weighted average remaining term of 3.3 years. This portfolio is levered at just 60% of cost and approximately 50% of today's fair values which is closer to where an investment-grade equity REIT would be levered. We run this portfolio and this company conservatively and this below-market leverage will allow us to create significant liquidity for our company should we choose to harvest it in the future to redeploy into outsized opportunities. Our energy infrastructure lending business continues to benefit from limited competition and changing global energy dynamics. EVs and AI continue to create more power needs globally. The Wall Street Journal had an article on Saturday where Elon Musk predicts we will need 3x as much energy by 2045 and says there isn't enough urgency to solve this problem. The supply of new power plants, pipelines, energy storage and transmission assets are not keeping up which is benefiting the credits and the terminal value of loans in our Energy Infrastructure segment. There are less lenders in the space, allowing us to earn more spread at lower LTVs with tighter structures on new deals. Our borrowing spreads have stayed steady in the cycle, allowing us to earn high teens returns on credits that are deleveraging due to increased profitability, making this sector very attractive to our diversified strategy looking forward. In summary, we are seeing more loans pay off and we'll continue to manage our very low leverage business conservatively with near record amounts of cash and unmatched liquidity available to us. We are also willing to sit back and wait for better entry points. And although we have invested opportunistically every quarter, we have defensively sat on near-record cash for most of this recent interest rate cycle. With that, I will turn the call to Barry. Barry Sternlicht: Thanks, Jeff and good morning, everyone. Thanks for joining us. We started this business now almost 13 years ago, we talked about being transparent and predictable [ph] running a conservative business. So we could depend on our dividend I think we proved our transparency in this earnings call. That's a lot of detail. I'm going to go all the way to the top and talk about what I think is going on and how we're going to address it. As you know, many of you know, I've been critical of the Fed. I wasn't really critical of the need to raise interest rates. So obviously, they should have been raised as well before the Fed raised them. It was more the pacing of the increases and how quickly they did it, sort of a U-turn, it was more to me than a u-turn even and straight up and then we have the highest interest rates we've seen in 22 years. When you do something like this, my other overarching theme was that the economy was going to slow anyway. You can see that savings were dissipating that consumer spending was slowing, confidence was falling. And as inflation too cold, people were using less of their wallets. What I didn't really anticipate and what you're seeing now is the scale of the government programs under the Vynamic [ph] legislation, both the Infrastructure Bill, the inflation reduction actually which is really a stimulus package centered around climate, the CHIPS Act, all that spending is creating a lot of public spending that is offsetting the slowdown in private construction and private setting. And of course, private construction slows only as property is complete. You don't stop a project in the middle of construction when the Fed is raising interest rates. So you sort of have a tug of war with one of the most restrictive monetary policies we've ever seen but a completely undisciplined fiscal government spending money with a regular spending bill of $1.3 trillion [ph] which is more money than the government spent in 2021 and '22, the pandemic years. So one might have thought those were excess spending years but in turn, in fact, they turn out to be the base future spending in our very disciplined parties in Washington approved a $1.7 trillion spending bill which is the highest on record in a bipartisan Henner [ph] trying to appeal to their home affiliates. Anyway, see the Fed with the foot to the floor on the brake and the government politicians with their accelerator of the brake and you have to be super careful how that ends. I'm not as sanguine as all the pundits you hear about in the morning press that we're going to avoid a recession. And so we've chosen to be fairly conservative here. I kind of feel like we're battling with 1 arm and 3 fingers behind our back, as we're exceedingly cautious because we know what you see on the surface is a lake that's solid but there are fissures and those loans that are maturing both in private equity and technology where people have made loans to tech companies that don't have cash flows. And also to real estate. So real estate and the real estate Empire complex is really the collateral damage of the Fed's policies. And what you've seen now in this -- in the fear in the market is twofold. Not only have rates gone up but spreads have widened. And what you will see on the other side is the double-whammy [ph] of spread rates coming down and spreads coming down as here dissipates. And that's beginning to happen. So the only good news about what the Fed has done is they're moving so fast, the sunlight is -- it will show up faster. You are seeing the dramatic decline in inflation. We were all over that and the contribution of rents to the inflation, the CPI being 1/3. We knew it was lagging. It was lagging. We said it was lagging and inflation falling to 3% and probably continues to trend down. And including are you seeing a shift in the labor market to lower wage workers were feeling if you saw recently the reports recently, we're feeling the unfilled leisure and hospitality jobs several hundred thousand according to ADP, you're done. In another months' time, you like fill all the missing job that didn't return after the pandemic and that should also slow dramatically. So I actually think you're going to -- we're beginning to see the sun through the clouds. I would expect that is done or maybe it has 1.5 point hike in addition to what it's done. And then I think you'll see short rates begin to have to come down because inflation is 2, 2.5 and 5.5 short rates doesn't make a lot of sense, especially as the curve begins to bend or straightened out. And that's a result of the real victim of the Fed rate increases. While we're a collateral damage the number one victim of the Fed raises of the federal government with $32 trillion of debt and having to pay these interest rates on that debt becomes a vicious cycle. You have to keep refinancing at ever higher rates, putting more and more pressure on rates since you see the 10-year today in close to 4.2 [ph]. That's actually what worries me more than anything else. And hopefully, the other color, by the way, the other victim is the regional banks which have a significant portion of their book value and on mark-to-market fixed securities. And they cannot sell them, they can't move them. And obviously, that led to two bank defaults and could lead to others if people want to turn their attention to raising those banks. But right now, we have quite onset happy about that. What this means, though, is it's created a climate in real estate that nobody really wants to sell anything if they don't have to. The big hope is they can just refinance. And if they have to refinance, given what the movement in constant with higher debt interest rates and so and wider spreads, they typically need to inject equity or preferred or a mezzanine into their cap stack in order to roll the existing debt. This issue and that's what I call the Category 5 hurricane is really an interest rate hurricane. It is not about the product, asset classes. Every asset class underlying fundamentals and the asset classes in the United States are pretty good. It's apartments, industrial, logistics, life sciences, student housing, data centers, hotels, the cash flows are pretty robust. But the movement in interest rates has created a balance sheet issue for a lot of really good assets. And so in that environment, you have one of the best environments we've seen since 2009 to deploy capital or kind of forming at the mouth and would like to go ahead and go on offense and start laying out our excess reserves into what would be sort of best spreads and returns we've probably seen ever since we started the business in 2009. And the climate is also in our favor because the regional banks are sitting on the sidelines. Many of you probably have seen the loan officer surveys, they have to build capital reserves. The government is going to force them with new regulation to increase even further capital reserves. So they all be less willing to lend. The money center banks, for the most part, are trying to keep their balance sheets flat. And those that are willing to make loans are kind of like us, they're pretty expensive. And then the CMBS markets are open but the spreads are pretty wide and AAAs are 260, 270, we are a serious alternative to draining our own cap stack to replace debt in place but we need a bigger balance sheet. We need more capital to do that because again, what you've seen is transaction volumes fall 60% to 70% and the only people selling or people will have to sell. And then they're looking for debt. And then they look at the debt quotes and they're like, I don't know, if I want to buy it with that quote. So the market's kind of stalled. And that's kind of okay but it creates a great landscape for us going forward. I don't think you'll see the regional banks or even the money center banks come back to the table as fast as we will. And many of the alternative lenders like us are also sitting on the sidelines, nursing their own refinancing issues. But I think we prepared for this by raising a record amount of cash. And also very, as Jeff mentioned, I feel very good about the nonincome-producing assets and you say, why are you feeling good about that because there's a lot of equity capital tied up in them. And when we can sell them in to give them away, we don't have to. But we can sell or refinance them or get out of these assets, we will have another 20-odd-plus cents of earnings power which is material for our company. Just deploying the capital in today's environment in a safe way. The other thing I think you may not into is that we're running a lower leverage business that we are, it's a turn lower than our peers and concepts. When the store end goes up and all of our loans are floating, we have less leverage. So it doesn't amplify it, right? We don't get these beats to your numbers because we don't -- we're less levered. On the other hand, we're taking reserves and doing other things than setting aside and being conservative on accruals and hopefully, on our ratings. So we're managing our balance sheet in a very different way. And you're not going to see as many wild swings up and down probably in our earnings numbers than maybe you see in some of our peer set. I did want to make a point and then making a slight commercial that I made this comment about the Category 5 hurricane which got amplified across the media in many places. We also have a nontraded REIT. And that non-traded REIT has 1% of its debt rolling over this year. 1% of its debt rolling over in '24, 9% of its debt rolling over in '25. So the nontraded REIT is in really good shape. The people who are in the midst of the hurricane or the people who have to do something right now. And we don't have to do anything in the nontraded REITs. Similarly, STWD, our company here is heavily hedged and we have -- you heard from Jeff about our non-QM book, I mean, we have no net cash outflows, even though rates continue to rise, we're completely hedged on the book and actually earning a fine ROE on the hook [ph] is kind of shocking. So we have really built a balance sheet that I think is pretty sound and can take us through this, I think, our fifth or sixth storm since we actually started the business 13 years ago. For a while, I was offended by people who said, "Let's stay alive to '25 anticipating a much more benign interest rate climate." But now it's probably the correct strategy. And I think you can see that with our reserves and our cash and our ability to pay off that converted November with cash, we're not hopefully going to see any kind of major strain. And then we have this secret little soft in the corner, LNR, the nation’s largest. It's sort of -- it was 1 or 2 but among the 1 or 2 largest special servicers in the country and we are going to get a front row seat to trillions of real estate that will have to be restructured and hopefully, we'll continue or build even a bigger book. It's coming. It's not, not coming. You can see the fissures in the lake, the lake's going to crack. So unless he lowers rates, it's fairly dramatically the short end. You're going to see a lot of problems in all asset classes, even the good ones because people are a little upside down in their capital stacks. So again, I think we are playing the market with 1 arm behind our back but we're really anxious to step out and continue to deploy our capital. And we will start doing that. I think after we see the next September move, we'll see what happens with the Fed. We'll have Jackson Hole coming up and then we'll hear their comments in September. But unless I'm really wrong. I don't think the private sector is weakening, manufacturers weakening. We know construction, private construction will weaken. We can see that the beginnings of the rollover domestically in the hotel markets, apartment rents are slowing, all positive, by the way. We'd be delighted to have 4% rental growth in apartments. That's a normal growth rate but it's down from '21. And that's why we know into fall. So with that, I think it's a very positive. We're poised to do well. The guys are all ready to go. We have the balance sheet and obviously, the reputation and the willingness to deploy our capital and hopefully, get to even a much higher earnings basis than we've had in the past which would be super exciting for us. So with that, we're going to be careful and we're going to be smart. Historically, we've made money on assets we've taken back into REO because we are, at the end of the day, an equity shop and we can manage these teams, our teams have been really good at that. So thanks for your time today. And I'll pass it back to Jeff and Rina and you all for questions. See also 15 European Countries with Best Healthcare for Expats and 12 Best Eastern European Countries to Meet Women.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Stephen Laws with Raymond James. Stephen Laws: Another nice quarter and congratulations on that. I guess for my question, I'd really like to hit on Woodstar. Can you talk about the strength there, pretty material fair value increase? It looks like rental income was relatively flat versus Q1. So can you talk about the rent rolls that hit in Q2, when we should see those come through? And what assumptions went into the fair value mark for June 30? Jeffrey DiModica: Rina, do you want to start? Rina Paniry: Yes, I'll start. So Stephen, the fair value increase that you saw is the result of the 7.5% HUD maximum rent increase. Those increases are going to start taking effect. We roll them out beginning July 1. So you're not seeing them in our second quarter earnings number. That's why earnings is flat quarter-over-quarter but we know that those rents are in place. And so the valuation was based on in-place rents at the end of the month, even though you're not seeing them in earnings, if that makes sense. So it's just the 7.5% rent growth that we factored into the valuation and that's how we got the incremental $209 million. Barry Sternlicht: Let me add one thing that the actual increase was 10% -- 11%, 11% [ph] and HUD restricted it to 7.5% [ph]. And we can take that left over increase in applied to next year's increase. So we didn't lose it, we just deferred it. And they'll also be whatever the increases next year. And the rent for the affordable portfolio is determined by 2 factors, inflation and also media income. So media income growth will probably remain positive, significantly positive and so you'd expect the total growth next year. It's also a rolling 3-year thing. It's not 1 last 12 months. So you should have good momentum into further rent growth in the portfolio next year as well. One thing about affordable housing, just as it's obvious but I should say maybe it's not that obvious to everyone. It stays full, always full because it's 30% to 40% less than prevailing market rents. So the question is rents and what they're set up by the government. So it was -- I think it might have been unprecedented for the government to step in and not give you the full amount of their calculation, you know how it's a very transparent calculation. So they just decided, I think politically, it wasn't possible to increase affordable rents at that pace in those markets. It was not applied across the country. It was just certain markets we happen to be in those markets. Jeffrey DiModica: And Stephen, you know we have pretty low fixed rate debt that doesn't start rolling until '26 and then there's a series of roles after that. So we have plenty of room on our debt to continue to get similar cash returns and not have to worry about refinancing that portfolio. Operator: We take our next question from the line of Doug Harter with Credit Suisse. Douglas Harter: Can you talk about the potential size of the new lending opportunity and whether you would kind of look to accelerate some of that, the disposition of some of the nonperforming assets to be able to deploy into that? Or would you continue to be patient on that -- on those assets? Barry Sternlicht: Well, I think you know about one of our biggest non-accruing assets is as we're part pursuing the first mortgage of a giant property over in New Jersey here. And our basis will be down soon to $0.70 or so, a little below -- a little below. And so that's the first mortgage, by the way. There's cross collateralization and all kinds of good on top of that which is a fairly gigantic property. So I think we challenge ourselves every day to say, even though the property's performance is getting better and better and better. So what's the right time to sell it. But it is -- and we can sell it for $0.70 and on take a loss, I'm pretty sure we can sell it for that. And then we can deploy a couple $25 million [ph] into stuff.

So we're probably getting close. Again, you know that if short rates are lower in -- as soon as it breaks, as soon as the Fed says they're done, or it's more obvious, I think spreads come in. for new buyers. And then I think people's expectations and I think whether they price that mortgage, do they price it to 10 to 11 to 9 [ph]. That all depends on what they think the future of interest rates will look like. It's -- if you think rates are going up, you're going to be $0.68. And if you think rates are going down, you're going to $0.75. So -- because it is the first mortgage. So yes, I mean, we are very much paying attention to that. I'll just point out with all of these nonincome-producing assets, we're still learning our dividend, right? So is actually shocking. I think I said this like 3 quarters ago, we didn't have to make any loans at all to make our dividend. So -- and that is a funny thing. It's counterintuitive but they used to pay us back and we deploy the capital out. Now the duration of the loans is getting stretched a little bit, although we did have almost $1 billion, so $1.2 billion [ph] of repayments in the quarter. So we have to put that money out. That's why you saw us put out $500-something million [indiscernible] new investments. So we're not shock. We're just measured. And if there's something really channelizing in good and is so good, we will go after it. I mean borrowers are reluctant to borrow from you $500 million over 5, $600 million over 5 [ph]. You can make any construction loan you want in the United States right now at like 550 [ph] over, it's 11% first money mortgage. And we tend not to do little deals but there are a lot of little deals getting done at those levels, lots. And we, ourselves, on the equity side, are looking to borrow and we're getting close to $500 million, $550 million [ph] over partial recourse. It's a lender's market. You were one happy little [indiscernible] if you're a lender today and you have capital. Jeffrey DiModica: To put it into scale, we did $15 billion in loans in 2021, a little over $10 million in our transitional floating book. We have repo capacity. If we were to do that same volume over the next year, we have retail capacity. Most of our peers, I don't think do. We have the equity if we want to create it to do that. And I think the market is turning to where we could probably do 75% of that given what we think the landscape will be over the coming months. It will really come down to how certain we are about what money is coming in and continuing to see loans repay and our desire to further leverage the company to take out, create more equity to do it. But we have the capacity in repo. We've been here before and I think that we're probably going to run at 60% to 75% pace in terms of opportunities where we've been and we'll probably pick up our pace where we've stopped -- we slowed down to about $1.5 billion a year. I think you'll see us starting to trend back up. Stephen Laws: What's the amount of the unused repo? Jeffrey DiModica: Three point something of unused loans [indiscernible] feel comfortable. We can look out in the landscape and we really go along by loan and like who do we think can take us out, where they're likely to take us out. It is an interesting situation because you've seen it in the media from Starwood. I mean there are some office buildings that you are just walking away from. Why are you walking away from the building? Many of them are fairly lease but the loan, what's the cap rate on an office building today? Odyssey will tell you, it's a 4.4. I will tell you, it's double that because if you want to get financing to buy an office building today, is in 7%, 8%, 9%, 10%. So nobody is going to buy an office building at a 4.4. Nobody is a big word, very few people. Maybe there's a sovereign well somewhere that decides they want a trophy in some city for their brochure and we'll take a 20 years or but we're not able to do that. So when you have a building, even if it's 70% leased and you have to get it 90% leased, you have to put in more capital for the tenant improvements and between the paydown and the debt that's required by the bank and the capital improvements that you have to put in to stabilize the asset. And in the cycle so far, the bank doesn't want to give you a 5-year extension for the world to reset itself. You just can't do it. As a fiduciary, that's not a great move. So you've seen, frankly, Blackstone, Brookfield Starwood all walk away from properties on occasion in markets that we thought were injured. I do think the office markets are better than people think. And it's funny Vornado reported yesterday, you can go find their earnings reporting. They're running at 90% lease book in a really tough market. And the office markets are seeing absorption. You just have to have the right building. And it's funny because in this market with record profits of companies, they're not really pressuring you on rents. It's not a rent, they're not saying, I'll take it at $70 and you want $90. They'll take it. It's a question of them understanding their own expansion needs and. But in Miami, in New York, even in L.A., the right buildings are leased and they're full and they're getting the same rents and concessions they had before. As you know, it's just like the mall business.

It's evolved like the mall business, the excellent malls people, tenants fight to get in them. They're raising rents, Simon [ph] reported. The crappy malls, you will find become something else. So it doesn't -- it's great for the media and the press to say office is in this. And again, I believe that people are going to come back to the office, especially as management, if we have the recession -- it's going to be shallow, I hope. But if we have -- I think management and most CEOs, I know, are back in their offices and they just aren't forcing the young people to get in. But in a downturn, as I mentioned, I think maybe not on this call, the CEO of a major bank said to me, the first person I'm going to fire in a downturn is the one working from home. So maybe these people think the job market has been served us historically, that didn't care. In a downturn, they will care probably, we'll do what we all did when we were kids, we'll go back into the office and wave to our bosses and try to impress them that we're there working hard. So we don't get like -- so we'll see. The chapter is not over. This is not -- and again, I mentioned before, I got chewed up on TikTok. But across the world, workers are back in office. It has become an American thing and it's really only in some cities and it's different in different parts. And I was really encouraged to see Amazon say they want people in their headquarters and Virginia 4 days a week and hopefully, they'll convince the federal government to people come back to work in the federal government which has been the last of the major employer groups not to come to the work. So that would be helpful. We have a couple of assets in D.C. and fortunately, they're going to be resi soon [ph]. Operator: Our next question comes from the line of Rick Shane with JPMorgan. Richard Shane: I'd like to talk a little bit about the special servicing at LNR. It looks like the active special servicing went up about 10% quarter-over-quarter but the name special servicing declined about 5% I'd just like to talk about sort of the movements there and also how we should expect that to play through the P&L over the next 6 to 12 months? Jeffrey DiModica: Thanks, Rick. Yes, you're right. The active will move around as you start to see roll off. So one gets to the other. So you had about $5 billion or so of maturities and we'll start to see maturity take up. So our named special servicing absent us continuing to buy new deals and we have recently been investing in newbie pieces. So we will add to that at the same time it gets subtracted. But for a long time, deals weren't maturing, so our balance only went up of named special servicing. Now you're getting into those the end of the 2013 maturities. So you're seeing maturities that we had about $4.5 billion or so roll off and mature. I think we'll have another $3.5 billion or so for the rest of this year. Some percentage of that $4.5 billion rolls in, right? And if 10% of that rolled in, then that's the $500 million increase in active; so one creates the other. And I think that this cycle will continue now for the next few years as you had more originations in 2014 and into 2015. You'll start to see the runoff pick up a little bit and you should see the active pick up a little bit. And obviously, we get paid on the active. So we've been saying for the last few quarters that we expect the revenues to really be a 2025 phenomenon as the 2013 and 2014 is mature and run through the special. So we're expecting the increase on the revenue side to sort of be later next year. So we always say it's sort of 18 to 24 months of lag. So, more of a 2025 revenue thing but it's playing out just as we expected it. The percentage of that runoff that rolls into active is what will be interesting. The more office we see, the more you'll probably see roll in and that was a bulk of what we did see come in this period but we will pay attention to those maturities. And most of our company is hoping that you don't have a lot of distress. This is the one part where we're hoping that there is distress and we will make money off of that distress which makes this great carry hedge for us. So we're staying fully staffed, getting ready for the opportunity but it will really pick up over the next 12 to 18 months. Operator: Our next question comes from the line of Don Fandetti with Wells Fargo. Donald Fandetti: Can you talk a little bit about multifamily in terms of the outlook at your largest exposure in CRE lending? I know there's a couple of factors like higher cap rates and also just hire debt service burdens given Fed rate hikes. How do you feel about that, especially if the 10-year were to go higher? Barry Sternlicht: Started the basics. I mean the Fed's actions in a strange way will hurt inflation longer term because they're creating a bigger dearth of housing stock and the lack of single family -- existing single-family home sales have created a really odd outcome with the new construction being not only robust but at good prices. And I think everyone's been surprised at the strength of the new home building. When -- I'm not sure in history, you've ever seen a situation like this where rates go up and existing -- new home sales go up not higher than they were but the backlogs are growing. People are still moving. They want to buy a new house and nobody is selling their old house. So they have to buy a new house. And that's relevant to multis. Multis -- we stress this book, I personally sat down with the team. I think we're selling today multis, there's no attractive debt in the 4.75% range. Because it's really good long-term juicy debt, you can get low force. And why are people buying it, they do think you're going to see rents accelerate again. They are slowing down. Nationally, rents are almost flat. And that came from Fannie Mae which obviously has loans on pretty much every asset in the country. And they vary from down in California up in Florida, it's up in New York, up in Boston, you saw that recent report, I think, came out last week on the housing market. They are softening but they're still, as I mentioned, positive and we have 120,000 apartments, some of which is significant chunk of it is affordable but our market rate stuff.

We're around 4, 4.5. And some markets are accelerating and some markets are decelerating. The cap rate where we will have issues will be north of 6.5. So we think our breakeven to our book is like 6.5. And if our assets got there, we'll turn ourselves into iStar, will gobble up every single multi and own them for you forever, couldn't wait, best thing that ever happened to us because they are brand new projects and we're getting the $0.65 or $0.60 on the dollar. It adds to that happening are less than 5%. There's one problem we mentioned it in our earnings. We have 1 asset in Portland, I think it is, that is not renting at the pace and the rents we would have hoped. Obviously, Portland is 1 of the 2 cities that was most affected by the racial [ph] George Floyd incident. So that's the only issue we have. And again, our basis is about brand-new fractions replacement costs usually is an attractive place to enter a market. Nothing else can get built until rents move to a place to make your new bases attractive. So you have -- rents would have to increase but there will be no new supply in the Portland market and there's still people there. So it's funny as I travel the country and go to these cities, you would think that San Francisco is a bowling alley. There's no one there. There's still, I don't know, nobody -- these cities are still thriving. They're still active. And I think you have to be careful because the media just wants to create news as they do in the political environment, they book hysteria, craziness and at everybody. There's a funny thing that people want to pick on New York or they want to pick on San Francisco because they had a big run in New York right now. I mean, it's busy and the restaurants are busy. And that's amazing. I mean, the only useful city like where the kids want to go and all the problems in California are helping New York. So then that's what you see. You see the stores re-tenanting. I can't tell you the rents they're having, they're high but -- these cities are dynamic and they're vibrant and they will survive and there will be good lending opportunities in them. So -- and the office is -- I'm in a building. We are our offices in New York are 100% leased, leased in pandemic and 1 floor came up for sublet and was released in 2 days. So it's actually like you call it like a stock pickers market, that's what this is in real estate now. You have to build -- have the right building with the right ESG footprint in the right location with the right floor plates and you can lease it. And if you have the wrong building, you just it's nothing -- that you have no hope. Jeffrey DiModica: I'll throw on looking at our portfolio, right? The area we probably built up the portfolio was 2021 and that was the lowest cap rate. So you were taking 4 cap assets that we thought had 5%, 9% [ph] or 6% exit debt yields. You pushed rents in '21 and early '22 by 10% or so. In the last 12 months, our portfolio has seen 7.8% rent growth. So by pushing those rents, your exit cap rates have now gone into the mid- or mid- to high 6s. So for a moment in time, on a roll on that loan in 2024 or 2025, if the silver curve [ph] stays right here, for a moment in time, you'd be negative carry for a couple of months but if the forward curve is at all right, you will be positive carry. And over the life of it, it'll be significant positive curve. So we have great escape velocity at today's forward curve, even against those sort of 4 cap assets that were at the highs because we pushed rents and expenses haven't gone up nearly as much. So exit debt yields are higher. And we think right now, we have plenty of escape velocity to get out all those loans as they start rolling in '24 and '25. Operator: Our next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: You look back to early March and the Siri, the storm was really taking hold, then we had the bank distress. Fast forward to today and we've gone through second quarter results and it seems no huge shoes to drop a couple of big credit losses in the mortgage REIT space. You all took up the CECL reserve on macro nothing really new, that large on specific loans. So my main question would be, given the category 5 hurricane as you put it, are you surprised that there have not been huge new shoes to drop of late? And do you think it's just a timing issue? Or do you think this represents kind of a green shoot in your view? Barry Sternlicht: Sorry, it's a timing issue. Again, if you have caps, your loan is not maturing, it's not blowing up until it matures but it could be offset by what I'd expect to see a lowering of short rates maybe early next year. But I don't -- I know you on going to see a month [ph]. If we have a complete crack every time that's happened, the Fed has gone to 0 on short rates. That would be good news and bad news. That would be the opposite of collateral damage. That's the windfall for the property sector. It is what -- if he is measuring his success by rising unemployment, I just think that is really hard. That is a very -- I guess, the additive is a blood tool. It's more like a sledgehammer because the -- you can only get the unemployment in certain industries, the service industries, manufacturing industry.

it's not going to come from government spending; government being 3 and 7 [ph]. You imagine Apple was spending a $1.7 trillion. I mean, $1.7 billion is a lot spending. That's just the fiscal budget before you get to the stimulus programs that are still coursing through the economy. So I think it's -- like I said, I think it's a mine field. And that's one of the reasons, we're not deploying all this $1 billion today because we have to be careful of every single loan and every single borrower each borrower was in a different position when I was saying about Starwood Blackstone and Brookfield, I think big borrowers and small borrowers are being judicious as fiduciaries for their capital in this climate. And it's not like we've seen a deal like the deal in D.C. that we took back the -- it was a household name borrower 1 of the top 5 players in this space and we got a loan back. So people are willing to -- you just think, oh, well, we'll never walk. Well, I don't think that's the case right now. I think the it's case by case, asset by asset and you have to be -- you're just being -- it's a jigsaw puzzle. So I don't think that this is past, this is not passed. These are just a function of every borrower waiting till the last minute to try to figure out how to fix this capital stack. And if you just run the map, not -- it's nothing to do with us and it's to do with the whole market. You're on a coupon that was 2.5 or 3, now it's 9. You can't borrow the same amount of money if you want any debt service coverage test. So lenders like us, I mean, some people are just chopping their coupons, you pay us 6 and a crew 3 or something. We haven't done a lot of that but other people are. And just to bridge people to a brighter sky down the road. I also think you're seeing the government has now told the banks to work with their borrowers. Don't know what that means. But back in -- you'll probably see some AB [ph] notes, you'll see mortgages chopped in half to induce the equity to put in money into retenant of building. I'm really focused here on the office markets. It's not really applicable to the other major asset classes. But in the office markets, that's what you're going to see happen that you'll create a hope now, just like you did last time, I think the banks -- the good news this time, the banks can do it. They don't -- in '07, '08 they were so weak and it stem [ph] capital ratios, they couldn't take the losses. Now they have either set up reserves or they're making enough money and because interest rates are so high and the yield curve is so favorable to them that they can take these losses and restructure -- I'm not saying they're happy about it. But they are a much better position to work with borrowers than they were in '07, '08. That should mean it should resolve more smoothly but it's going to -- it will take time. And we are definitely not out of the woods. And just because you don't hear the BOM doesn't mean the BOM didn't go off. Operator: We take the last question from the line of Sarah Barcomb of BTIG. Sarah Barcomb: So the single-family resi market has held up pretty well. Could you speak a little more to how that resi credit book is performing and how you view the optionality to move that book. Maybe you could touch on that in the context of the SFR portfolio sale at SREIT, are you seeing any newly emerging bad debt issues that are concerning and is there any way for Starwood to recycle that into new commercial real estate opportunities? And if so, what sectors or geographies do you find most compelling right now? Barry Sternlicht: I'll do my part and then Jeff to his part. We're not -- the REIT is not in the single-family rental lending business. That's not one of our verticals. We have non-QM loans and we have agency assets but we don't have loans against SFR. The SREIT sale to invitation homes was not something we really wanted to do. We love the asset class. We love the prospects for the asset class but we had redemptions to make and that book was the lowest-yielding thing in our portfolio. So it makes sense to sell the thing that's at least contributing to the dividend of the company. And it was a sub-5% cap rate on our numbers. And I'm fairly sure invitation can do better given their scale. And so they're probably looking at a better number than that. But given the debt markets and where that was and how it was financed, it was something -- I think it was a a win-win. Unfortunately, we did book a small loss on selling it but that had nothing to do with our views actually at SFR. One of the markets that Starwood getting out of SFR, not at all. We own 16,000 homes away from that in our equity funds or something like that. And we really like our position. We like, again, the scarcity of new product is exacerbating the deficit of housing and housing is probably the least impacted by anything going on in the world. People have to live somewhere. They cannot live in their computer. The AI, maybe you'll find your home differently. You'll still have a home. I don't think you can live in the metaverse, even though some people seem to -- so until we look and live on Mars, in the moon, we're probably okay in the housing market given the U.S. alone among most of the Western nations is actually growing, although it's going.

And the other thing that's happening is demographically, the -- I don't know what's the generation of millennials, they've moved into the house buying market age. So the demographics have changed and that's a very big positive for SFR because they're moving -- instead of buying a house now if they can't afford it, they'll move into a house and rent it. So we're bullish on the business. We could get into the business here. It is a business of a couple of other firms and they've done quite well. And it didn't focus on small owners. This is such a granular lending business. It's not something we built but it is something we could do. The returns are pretty good. Jeffrey DiModica: So regarding our books, Sarah and thanks for the question. We're going to be patient on selling down that book, as Rina talked about, it's about $2 billion of non-QM loans, about $1 billion of agency eligible loans. We took a large GAAP write-down about a year ago, over $200 million, I believe, as spreads widened. We don't tend to hedge. There's no easy way to hedge spread there. In our CMBS book, we hedge about 35% or 40% of our spreads because we have a CMBX market to do so post GFC, there's no way to hedge spreads in residential lending. So we do hedge rates. The early move in that book was a massive amount of spread widening. So we -- that is why the GAAP write-down came. But fortunately, we moved our hedges up and up and up. But I think Rina and I mentioned that we have about $170 million of hedge gains. So over the last year, our hedges have outperformed collateral, even though collateral hasn't tightened significantly. You are seeing some green shoots with new securitizations coming tighter. We do believe after the last Fed move that those will continue to tighten. We continue to finance that book on repo and our repo balances -- or excuse me, our repo loans are coming in at a tighter and tighter spread. We've opened a couple of new facilities this quarter and expect to open another new one. Next quarter, we'll be about 25 to 30 basis points lower overall in our cost of funds on that book. So even though they are relatively lower coupons than they are negative carried today against the forward curve and looking at the hedge gains that we have and effectively taking that $170 million, you can go pay down repo at 8%. So that's giving us excess income above that's making those a positive carry trade today. And we own a lot of the residual bonds off our first 15 securitizations in the bottom of those stacks is the lower prepays, we like faster prepays on our below par loans. We're not getting that. But those slower prepays are accretive to the value of our owned position. So overall, when you include the hedge and include the securities, the book is performing fairly well. You asked about credit. And one of the benefits to our book being about a 4% gross coupon on the loans that have not been securitized yet, those lower coupons are going to have better performance than the higher coupons. Today, the current coupon is 8% or so and those will be the first ones to repay and those will be the first ones to have stress when stress happens but we're expecting significantly less stress. We're not seeing it show up in any meaningful way on these lower coupons. And remember, these loans were written 2, 3, 4 years ago. So that is a lot of HPA built into those housing values. So I don't expect to see credit distress there. The book doesn't -- the loan book doesn't carry quite as well as we would hope but it carries positively and it gets bailed out by the hedges and the legacy book that we own as well as we own some legacy securities from pre-GFC that have been in our book to $250 million or so that have performed very well as well. So all in all, that book is not performing quite as well as our other cylinders but it's a lot better than it was a year ago. We have a long-term strategy. And importantly, we have the liquidity to hold on, not force ourselves to lock in bad financing cost and a securitization today because we have access to so much liquidity here or so. We continue to monitor it but this will be a long -- this will be something we're going to talk about for a long time. We're in it for the long run and the book is performing fine. Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now hand the conference over to Mr. Barry Sternlicht, Chairman and Chief Executive Officer, for closing comments. Barry Sternlicht: Thanks for being with us today. And as always, we're here to answer any questions and thank our Board of Directors and our great team at the start of property cash put us in this position that we are and have a great August, everyone. And we'll have the whole political year ahead of us to be entertained. Operator: Thank you. The conference of Starwood Property Trust has now concluded. Thank you for your participation. You may now disconnect your lines.