Starwood Property Trust, Inc. (STWD) Q3 2026 Earnings Call Transcript

Operator: Greetings. Welcome to Starwood Property Trust Third Quarter 2026 Earnings Call. At this time, all participants will be in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, Please note this conference is being recorded. At this time, I will now turn the conference over to Zachary Tanenbaum, Director of Investor Relations.

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

Rina Paniry: Thank you, Zachary, and good morning, everyone. DE was $0.31 per share in the quarter or $0.41 excluding realized gains and losses from commercial lending resolution. In order to provide a comparable metric to commercial mortgage REIT, and additional perspective on assessing the run rate earnings of our portfolio, we have added this new measure of distributable earnings to our press release supplement and 10-Q this quarter. I will begin today with this quarter's progress towards resolving nonaccrual loans and REO, and the changes in our reserves and book value. Before turning to our individual businesses. During the quarter, we resolved $254 million of non accrual and REO including the sale of 2 multifamily REO assets with an aggregate DE basis of 134 million or 97 million and 2 units in our New York City residential project for an additional 12 million. All sales were in cash with no seller financing. We also returned the final $108 million portion of our formerly 4 rated Brooklyn office loan to accrual after securing a lease with a credit tenant and bringing the underlying office property to 100% occupancy. In commercial lending, we have $1 billion of reserves against our non accrual NREO assets after recording an increase of 369 million in the quarter due to third party modeled macroeconomic conditions, which worsened as a result of the rise in rates. This consists of 822 million of CECL, and 217 million of REO reserves which translate to $2.85 per share that is already reflected in today's undepreciated book value of $17.22. This book value also reflects a $0.24 reduction in the quarter resulting from the effect of higher interest rates, on the fair value of the fixed to floating rate swaps on our corporate debt. To the extent that debt finance's floating rate assets we swap that debt to a floating rate. Over time, higher interest income on the floating rate assets supporting this corporate debt are expected to offset this book value reduction. In commercial lending, we originated $2.4 billion of investments in the quarter, of which $1.5 billion was funded. We also funded $236 million of preexisting loan commitments. Net of 1.2 billion of repayments, the portfolio increased by 528 million to a record 17.8 billion. Turning to residential lending. Our on-balance-sheet loan portfolio ended the quarter at 2.2 billion and our retained RMBS portfolio at $310 million. We recognized a $39 million negative mark to market on loans net of related hedges primarily due to spread widening. On a year to date basis, the net mark to market was $5 million evidencing the effectiveness of our hedge strategy. In addition, we improved financing costs on $350 million of financing lines in the quarter, reducing spreads by a weighted average 24 basis points. I will now turn to our property segment, starting with Woodstar, our 15 thousand-unit affordable multifamily portfolio in Florida. We implemented the authorized HUD rent increases effective July 1 averaging 8.9% which increased earnings in the quarter by 1.7 million In September, we refinanced $415 million of debt in this portfolio, $35 million of which closed in the quarter, and the remainder in October. Given appreciation in NOI growth, we were able to upsize $146 million at SOFR plus 165, a $116 million share of which can be reinvested to increase future earnings. Since acquisition, this portfolio has returned the entirety of its original cost basis plus an incremental 275 million through cash out refinancing providing an infinite return on our original capital. In net lease, we acquired 32 million of properties at a blended cap rate of 7.37%, bringing purchases since acquiring the platform to $556 million at a 7.45% cap rate. The portfolio now stands at 2.8 billion comprising 34 properties across 44 states a weighted average remaining lease term of 16.6 years, average annual rent escalations of 2.3% and 100% occupancy with zero defaults. Annualized base rent increased to $193 million from $187 million last quarter as certain construction assets were brought online. During the quarter, we reduced some of the platform's overhead helping the business become accretive to DE per share. Next, I will turn to our investing and servicing segment. In our special servicer, LNR, we continued to benefit from elevated resolution volume. Which drove $37 million of special servicing fees in the quarter Our active servicing portfolio ended the quarter at $10.2 billion and our named servicing portfolio was $90.8 billion. During the quarter, Fitch reaffirmed L&R's CFS1 special servicer rating, the highest rating available. LNR remains the only special servicer to hold this distinction. And finally, our conduit, Starwood Mortgage Capital, securitized 210 million of loans at profit margins in line with historic levels. Including my business segment discussion this morning is our infrastructure lending segment. We committed $505 million while repayments totaled $389 million the portfolio ending the quarter at 3.1 billion Credit in this portfolio remains strong with 100% of its loans rated 3 or better. Turning to liquidity and capitalization. Our current liquidity stands at 1.1 billion. This does not include liquidity that could be generated from expected proceeds from REO sales of assets in our property segment, cash out refinancing, direct leveraging, or excess capacity to raise incremental corporate debt. We continue to operate at conservative leverage levels ending the quarter at a debt to undepreciated equity ratio of 3.15 times. Our unencumbered asset pool stands at 7.2 billion against 4.5 billion of unsecured debt. A coverage ratio of 1.6x at quarter end again, well in excess of a 1.2x covenant. With that, I will now turn the call over to Jeffrey.

Jeffrey F. DiModica: Thanks, Rina, and good morning, everyone. I want to start with the progress we are making in resolving legacy assets and reducing our exposure to loans originated in the pre 2023 rate environment. As Rina said, we completed over $250 million of resolutions in the quarter and remain on track to achieve the over $800 million resolution target for 2026 we outlined previously. Which would be more than 40% of our nonaccrual NREO. We had no new nonaccrual loans and no new foreclosures again this quarter. Beyond resolving legacy assets, our other 2 priorities remain putting capital to work in attractive new investments and optimizing our capital structure. We made progress on all of these this quarter. We invested $3.2 billion across the platform, including $2.4 billion in commercial lending, bringing year to date investments to $8.2 billion and total undepreciated assets to a record $32.3 billion. We also made progress on the right side of our balance sheet. In July, we repaid the $500 million of corporate debt 6 months before maturity at its first par call date. That debt cost of SOFR plus 295 basis points. Compared with an average equivalent spread of approximately SOFR plus 203 basis points on the 2.1 billion of corporate debt we issued or repriced this year. A reduction of approximately 92 basis points. These transactions lowered our funding spreads while extending our corporate debt maturity. We also redeemed 2 CLOs during the quarter in commercial lending. Having access to multiple financing channels, allows us to move assets between funding sources and optimize our borrowing costs. Today, we have $1.1 billion of liquidity. Our unique access to liquidity supports our consistent selective investment activity. And our ability to manage pre 2023 assets originated at lower interest rates for their best economic outcome. Not the 1 that creates short-term liquidity at the expense of long-term shareholder value. Our liquidity also allows us to act on our conviction in the value of the company. In the quarter, we repurchased $108 million of common stock. Bringing year to date repurchases to $138 million. We will continue to weigh repurchases against new investments and other uses of capital with the same focus on long-term shareholder returns. We received $1.2 billion of loan repayments during the quarter. and an additional $320 million after quarter end. Bringing year to date repayments to approximately $2.8 billion More than 2 thirds of our repayments came from loans originated before 2023. These borrowers were most affected by the rate rise, but continued to execute their business plans and refinance. Even in office, where we had a significant pay down on 1 of our higher risk rated loans. In that case, the borrower sold 1 of the buildings at a price per square foot materially above our existing loan basis. Meaningfully reducing our exposure on the remaining collateral. Our internal underwriting, driven by our in house asset management team has projected elevated quarterly repayments in line with the 1.2 billion we saw this quarter to continue for the foreseeable future. Combined with our continued and significant investment activity, these repayments should materially reduce the percentage of our portfolio originated in the prior rate environment. Which stands at 8.5 billion today. Representing 40% of our loan portfolio or 20% of our total assets. Among the lowest in our peer group. This percentage will continue to fall as loans are repaid or resolved. And as we continue to invest in new loans, as we have consistently done. Of that 8.5 billion, $3.8 billion are rated 4 or 5 today. And 4.7 billion are rated 1 to 3 with average debt yields of 6.2% in multifamily, 9.3% in hospitality, 8.9% in office. These healthy debt yields help explain the repayment activity we continue to see from loans originated before 2023. Next, I will address our CECL reserve. The 10 year treasury rose 80 basis points during the quarter. And forward SOFR increased by 100 basis points. As we have discussed before, we use a third party model based methodology that incorporates forward looking interest rates and economic assumptions. The bulk of this quarter's reserve increased was driven by that increase in interest rates. Higher projected interest rates increased borrowers' expected debt service and reducing the proceeds available to refinance their loan. Even where property level operations continue to improve. Our CECL model produced significantly higher reserves on more rate sensitive assets. Including multifamily loans originated. Before 2023. Our total CECL reserves increased approximately $337 million this quarter to $822 million, and owned real estate reserves increased $32 million to 217 million. Substantially, all of the increase was in our general reserve. Our 4 rated loan balance increased $290 million in the quarter, and our 5 rated loan balance increased by $440 million All of this quarter's downgrades were on loans originated before 2023, and more than half were on multifamily assets. Given their consistent performance in rent growth, investors buy multifamily assets at lower cap rates than other CRE assets. This makes them the most interest rate sensitive assets in our lending portfolio. Since quarter end, rates in forward SOFR have declined, which is a positive for these borrowers and their ability to refinance. In addition, the majority of our multifamily loans are rated 1 through 3 and carry a healthy 7% debt yield,. Which are refinanceable in today's higher rate environment. We believe the impact of higher rates and the challenges in our portfolio are substantially reflected in our book value. Moving on to our asset resolution process. Our approach remains consistent. We evaluate the proceeds available today against the time and capital required to achieve a better outcome. Where a sale makes sense, we sell. where operating the asset, improving performance, taking on deferred maintenance, and completing the business plan produces a better expected recovery, we have the people, resources, and liquidity to do that. Our 300 plus person company combined with our manager, Starwood Capital, gives us access to operating expertise, and property level information across sectors and markets. And we bring that experience directly to our assets. The objective is to maximize recoveries, and recycle capital into investments that contribute to future earnings. A good example of the value of hands on management and patience in resolving legacy loans is the $300 million loan we originated in 2021 on a 600 thousand-square-foot office project in Brooklyn, New York. With the execution of the third and final lease the building is now fully occupied, And as Rina said, we moved that piece to accrual in the quarter as a result. With the sponsor unwilling to contribute additional equity, we restructured the loan to support continued leasing in lieu of pursuing foreclosure. Over the last 2 years, our close collaboration with the sponsor helped drive occupancy to 100% with 3 accretive long term leases materially improving the loan's risk profile and positioning the asset for sale or refinancing. I will note that sponsors have contributed $710 million of additional equity since closing to our 4 and 5 rated loans. including $128 million on loans downgraded this quarter. These contributions demonstrate borrowers' continued faith in their investments as they contribute capital to execute their business plan. I want to conclude my remarks today with a discussion on the valuation of our stock price. And what 1 could infer the market is implying. CRE loans represent roughly half of our assets. The other half includes infrastructure lending, residential lending, our equity portfolio, and our investing and servicing business. Some of these businesses have countercyclical earnings drivers, different financing sources, and different opportunities to create value. These assets continue to perform well, especially our energy infrastructure business, which benefits from long-term increased demand. Our net lease business, which provides long-term contractual rental income and significant annual rent increases. And our special servicer, LNR, with over $90 billion of named servicing and a significant pipeline of revenue opportunities. We have spent years diversifying and building those differentiated businesses which have dampened earnings volatility versus our peer group through this historic rate rise. And in this quarter, which saw the largest quarterly rate increase we have seen in this century. These businesses allow us to allocate capital to the opportunities we find most attractive as markets evolve. Today, our undepreciated book value stands at $17.22 per share. Today's share price implies a discount to that book value of $1.6 billion beyond the $1 billion of CECL and REO reductions already on our balance sheet. If you attribute that entire discount to our $4.5 billion of 4 and 5 rated loans, and REO, the market is implying a loss of 58%, on those predominantly first mortgage assets which were all originated before 2023. Recovering only $0.42 on the dollar on loans originated at 65% LTV, would imply collateral worth roughly 27% of its original underwritten value. In other words, today's stock price is implying a 73% decline in collateral values across that entire pool. For perspective, our owned real estate resolutions in the quarter were sold at 72% of our original basis and our owned real estate sales currently under contract are at 71% of our original basis. Both well above the 42% implied recovery in our stock price. An alternate valuation approach is the sum of the parts analysis. If you were to value the businesses outside commercial real estate, lending using public market yields, today's stock price implies an approximately 20% yield on our CRE loan book. Which is well above monoline commercial mortgage REITs. We believe the market is assigning too little value to the earnings and diversification provided by the other parts of our company. To conclude, we continue on our stated path of increasing our balance sheet with accretive new investments while strategically decreasing our exposure to loans originated prior to 2023. We are on track with our 2026 resolution target, We expect repayments to remain robust. And we continue to put capital to work in new investments. Our diversified businesses provide earnings and flexibility, as we execute that plan. With that, I will turn the call over to Barry.

Barry Stuart Sternlicht: Good morning, everyone. Thank you, Zachary, Rina, and Jeffrey. We have had an interesting time to do a call, like this. Every 30 days, it seems like you have a totally different picture that you are facing. I mean, 30 days ago, the 10 year was approaching 05d today, it is $4.87. I remember where it was at the end of the quarter I wanna step back a little bit and talk about the real estate asset class as a whole because with all the chaos of their interest rate markets, and the volatility in the political politics, real estate is healing. Underlying asset classes are getting better and better. At an increasingly better pace. Just yesterday, CoStar raised the rent growth for apartments by 50%. Actually, you have office rents going up. Almost 3%, 3.5 percent. Also have industrial rents rising 2%, and the actual print for the quarter was 3.5 percent. So because of the reduction in supply, which is only going to fall further because of the rise in interest rates and rising construction costs and some of the inflation in construction is coming from the well, heretofore, the data center stealing all the construction workers. And paying them 2x, 3x what they were making building commercial office buildings. So for the first time in history, you had more data centers being built in almost all the other asset classes in real estate, particularly the office market. I think you have to look at that as the foundation of our book. We are a $32.3 billion enterprise. Our nearest largest competitor is 17. We are more than twice the size by equity, more than 2.5x their scale. And you look at what is happened to us, if you take the longer view, several of our competitors have actually left the playing field Apollo just is liquidating its commercial mortgage REIT with a dividend in the sale group. Few remaining assets there. Several others that are studying their future. They are subscale, and they do not have the diversification that we have. So at least in the public sector, we are still 1 of the biggest gorillas when we have adequate liquidity and an incredible mix of array of businesses that will power us through this turbulence, which I think might be the best way you can describe it. But the impact, again, of higher rates, the beneficial impact is less supply. And less supply means better outcomes, we think, for rents rising across the landscape of our asset base. it is also true in asset categories like senior housing, which have less than 1% by student housing and hotels where you see pretty robust numbers coming out of the higher end assets, especially luxury. And a turnaround now at the bottom end of which is slow, but we have not seen a positive move in lower end of the markets for several years. Construction jobs increase reshoring creates manufacturing jobs extended stay hotels. Begin to get pricing power again, And, again, with supply being hit, this should get better and better. So in the meantime, you have to deal with what we are dealing with today. Which is higher rates, and much more importantly, a very a much higher forward curve. And I continue to say, and I said it on CNBC the other day, that I do think Kevin Worsch and most of the people talking on TV are knuckleheads. In the sense that rates are not working on this economy. Maybe they worked on a different complexion of economy. They do not work on this economy. What is actually gonna slow the economy is the credit crisis in data centers when CoreWeave's bonds are trading at 15%, you cannot build data centers. And the Neo Cloud faced some serious issues as does Oracle. Look at their credit default swaps. Spreads. And the markets are breaking themselves, and it has nothing to do with worse just quarter point or next December, another quarter point increase. Also, raising rates is not opening the Straits Of Hormuz. it is not gonna make foreign buyers jump for joy and buy our debt. We have pissed off most of the world. This economy created 5 million jobs since the Fed raised rates 500 basis points. In the 3 sectors of the economy that are growing the economy there, which are health care, education, and government. And in fact, manufacturing, which is impacted by higher rates, no doubt, the you will not buy your refrigerator or even make them here anymore, washers and dryers. I mean, that part of the economy is 12 million of 160 million jobs, the health care, government education is nearly 50 million jobs, and they are not impacting. In fact, those industries added jobs in the GFC. So you cannot use this, which you do create a victim, which the federal government has to pay ever higher interest expense on an ever increasing deficit. And it does hurt the housing market, and it has hurt real estate. Obviously, higher rates have made our borrowers think they cannot refinance. And get us out even on our loans. Across not just us, across the whole country, You have seen a dozen BDCs lower their dividends. You have seen every mortgage rate to date other than us lower their dividends. Because they are all nervous about their borrowers' ability to refinance us. And you have to question the V in an LTV in this rising interest rate environment. So, again, I think my guess is, if we continue to see the weakness given the Democrats very impressive performance in the election, that you will see. We already saw the moratorium, and the market had not really corrected for it. But now it will be harder. It will take longer. To get data centers completed. It will be more expensive build. They have already changed dramatically the return on investment. Is you have to provide power on your on your own, or you have to provide LCs for the power that you are taking through a take or pay contract. Only the big boys can play. Supply was gonna come down anyway. But it will not happen immediately because there is stuff being built today. You will see it in the markets anticipating with the chip stocks, the future of economy slowing GDP coming down. If that happens, rates come down. So, and I think that is gonna be a very sunny day for us in the real estate property sector. Because I think rates will come down with a slowing economy. And, again, it did not happen because worse rates at quarter point. It happened because the credit markets could not handle the scale of the spending. And started to differentiate and question the credit quality. And probably the most important event the fourth quarter will be the Anthropic IPO. coming in a few weeks. That will stabilize or destabilize I think, some of this AI spending half of the backlog of Oracle is to open AI. Nearly $350 billion. And as goes them, we will go probably the expansion of the data centers for a while. But this technology is real. It will change the world. it is just a hiccup. I mean, I mean, you started the auto industry with, like, 90 car companies, you brought it up with half a dozen, and then 3. So you are seeing the same thing in this business. You will have survivors, big balance sheets, big capital. And it will happen. it is critically important we put the infrastructure in place to compete with foreign capital. If we do not, many of these data centers will go off offshore. And they will not go to space anytime soon, by the way, but they will go offshore. They will go to Europe where you have power or China, unfortunately, or Australia and Japan, we actually are active in all these markets. We can tell you that demand is shifting already. As they do not have the opposition that you have seen in The United States rise up, and nobody can really tell you why it happened, but it did happen very quickly. So right now, I would say you know, I think 1 of the things you saw and we do not know about is what will happen to the job markets and I think nobody. The jury's out. Well, people be able to hold their jobs as AI spreads? I think what you saw America was saying, let's slow down AI because I am gonna lose my job, and only the wealthy will benefit from this AI boom. They do not own interest in OpenAI, Anthropic, and data centers. And I think at times like this, you see a significant price discovery taking place. Right now, I mean, we are gonna stuff, and we are on the equity side, obviously. We have seen some of our multisales hold their bids, and we ourselves are bidding on industrial in Europe and repriced the deal down 10% to 15% because with higher rates, to get the same IRR, you have to lower the price. Some buyers are saying, Some buyers are saying, I will just wait for a rainy day. Even the German bond has dropped 30 to 40 basis points now. So global rates are shifting down, and I think the market's also anticipating that rates are mostly a function of inflation. And, I guess, the strength of AI spending. But inflation has been driven almost in entirely in Europe by energy prices. So if there is a resolution to the Iran situation, whatever that may be, and oil flows, I think most people expect oil to drop quickly. Even though you read about some of the disruptions in production, I do think you will see, and then you can see it every time there is a hint of a resolution you see. And with oil prices coming down, inflation comes down. All the ancillary pieces of inflation impacted by oil prices come down. Rates come down, the forward curve shifts, then we are gonna be smiling. But right now, with price discovery unclear and rates much higher on the short end and the curve shifted higher, And many borrowers are definitely hurting. And what you have is 2 things that happen. 1, they stop investing in their assets. Because they feel like they are just putting money in for the debt. So if it is the multi, maybe they do not turn the unit. And if it is or they do not do the pool repairs, so they do not fix the broken equipment in the gym. And if it is an office building, they do not have the TI. They will not put the money for the TI to bring the tenant in building because you are just putting TI for the borrower's case. Starwood is uniquely positioned, really, to handle all this stuff. I mean, we are we are in the midst of converting an office building we took back. A very large public company gave us the building back after losing a $150 million. And we are converting it into a residential project. And we are on our way we expect to make money on the asset of who we sold. We would have lost probably close to a $100 million because somebody else would have to do the work. We can do that work, and we can take over a multi, and we can finish the pool. Get the pool furniture. And then we will sell it, and we have done it successfully now for years, and it is actually our core business is REO. And I think when you look at our company, you have to really look at the nature of what we do. I mean, we have $3 billion of assets that we purposely bought. Including our significant multifamily portfolio we call Woodstar. Which Rina told you we have a $1.5 billion gain. We have no money in the deal. We have also expanded the cap rate on that portfolio from 4.2 to 5.2. And it is been able to hold and keep its value gains because of this dramatic increases in rent. Donald't forget, we have no real estate tax taxes in that portfolio. So if that is not gonna happen, you pay no real estate taxes in affordable. So it is just expenses and earnings growth. And expenses are not real estate taxes, which is an area that has been a bit of a black eye for a lot of real estate owners as municipalities try to balance their budgets increasing real estate taxes. So real estate actually does turn into a safe haven in volatile times, and it was not very exciting. Real estate's boring. And when your tech stocks and your chip stocks are rising, 50 points a day, we are kind of a boring sector of the market, but we are a reliable place to convert ordinary income into capital gains, and we expect investors in every like, 5th or 6th crisis mean, usually, you always get capital flows back into the real estate markets. You can see that because our parent company just raised a $10 billion fund. Did not think we would reach that. But we were able to get there because investors said, hey. This is a good time to invest in equity real estate. And that is actually good because there is capital to clear the markets when the when the. We are in sort of the, again, the lap car is on the track at Daytona, and we are waiting for the race to go again. But there is capital. There is dry powder and there is interest. In this asset class globally because the fundamentals underlying the asset class almost all over the world are actually getting better. So I will say 1 last thing. I am selling assets in this environment because of the bid ask spread, takes longer. And again, we are not distressed. When we have plenty of liquidity, we have got great earnings power, we have a lot of other businesses doing fine. I will highlight again our energy infrastructure business. Which is a powerhouse business for us. And as I think, a loss ratio of 99.996% performing. And it is really an incredible asset to our firm and provides solid footing for us going forward in an area we continue to work to expand. Been so good that it is actually repaid faster than we wanted and even today, you saw repayments in the quarter is liquidity. I should have mentioned that spreads in real estate really have not blown out very much. But we have competition when AAA is for the hyperscalers are trading, 30, 40, 50 basis points wide. You know, you have competition for capital, but real estate in the credit markets is reflecting the quality of the asset base today. Lending spreads throughout the time of the year right now. Lending spreads are at the tightest of the year. I did not know that, but I knew they were tight. So I think the credit markets are always sort of ahead of the equity markets. And the equity markets are nervous. But our ability to refinance our debt and drive the enterprise forward is great. But we have to be realistic. I mean, we are probably not gonna be able to resolve some of our assets as fast as we hope. We expect to hit the $850-ish million that told you about for the year. We will most of it is already complete or about to close. That will happen, but we may get other assets that we cannot-- We have to deal with. And we will manage those as we go forward. So given all these uncertainties, I think we will have to examine what we are gonna do with our dividend. Which has been paid well above the DE rates, the earnings rates we have been producing the last couple of quarters. I did think as we looked out, we could see what we expected to be the resolutions of our assets base, and we were fairly confident we would be able to restore earnings power. But I think there is a question of prudency Should we reduce the dividend and then increase it as we get the earnings power off of these underperforming legacy asset base that Jeffrey talked about, Most of this is from the assets we had. Almost all of it is from assets we had pre- the rate rise. But it is only 20% of our total asset base today. And, obviously, all of it is not impaired. So we will have a meeting with our board and discuss this and figure out a rate that we think is, I think, the market obviously is expecting it. Look. Our stock is trading but I do not think the market appreciates again, the diversity of our enterprise And everyone's fired up. I mean, it will be a great opportunity for us going forward To continue to extend our business, grow our business, And I do think as we resolve some of these loans, we will definitely have the ability to restore our earnings power and the dividend again. So I am not sure many of our peers will be able to do that. And so, anyway, I think that is and we also can use our depreciation shield, which allows us to actually have a lower payout ratio. And, again, our goal is long term. We are all major shareholders of our own company. I have I have to say I have never sold a share. So it hurts me to do anything to the dividend, but I think the right thing to do is navigate through this valley and I think you are gonna see some pretty good sunshine ahead for us and so with that, we will take questions.

Operator: Thank you. We will now be conducting A question-and-answer session. We ask that you please limit yourself to 1 question and 1 follow-up. To ask a question at this time, press star 1 on your telephone keypad. Our first question is from the line of Donald Fandetti with Wells Fargo. Please proceed with your questions.

Don Fandetti: Hi. Good morning. Can you talk a little bit more about kind of your thinking in the reserve and provision? I am just trying to get a sense obviously, the Fed could raise again maybe another 1 or 2 times. Like, what sort of built in there and did you. Do you feel like you kind of leaned in here to kitchen-sink or is this the type of thing that we will just kind of see, like, a couple quarters of higher provision, kind of like we have seen in past with the pandemic and other periods of time?

Jeffrey F. DiModica: Thanks, Don. As you know, our CECL is kind of tied to our 4s and 5s. But in terms of where rates are going, our CECL also run against forward interest rates. So with Fed funds expected to go from 3 and 3 quarters On March 1 let me put some perspective. On March 1, of this year, the first day of the war, forward SOFR for the end of 2 thousand 27 was supposed to go to 2.9%. Was supposed to be 2.9%. As of middle of September, it was up to 5%. Right now, today, it is saying it will be around 4.45 or 4.50, up from 3.75. So the Fed is pricing in. The curve is pricing in more rate hikes, but our CECL model with the reserves we have today are already using that because we use forward SOFR. And the CECL model, as we told you, is 90-plus percent allocated towards our fours and fives where we think the most difficult assets will come. And as I said in the prepared remarks, that is You can hear me. I am really trouble with this. Mics. that is sort of an internal allocation in our mind. Not a specific reserve, but we look at those and say, okay. That covers that. And just for the benefit of all of you, which you know, but I will say it anyway in case there is people with less sophistication on the phone. We do not control the CECL reserve. it is a mechanical exercise. exercise, and we put it into a machine, and it pops out where your CECL reserve. So it is what it is. And we take what it says, and that is what happened to us. Quarter, and that is most of what you saw in the-- that are-- so I think now what you are asking is where would you have to go from here? And we cannot tell you because if we look back last quarter, we would have expected this level of reserve build. But then we have the trade move. And so take a look as we go. We have a very healthy debt yield, as I said, on our 1 through 3 rated, the ones that do not have the bulk of that allocated sort of reserve. We have very healthy debt yields on them as we said. So hopefully, rates stabilize, and we can get to a top here.

Don Fandetti: Got it. And, you know, on the multifamily, in Barry's comments about supply, going down with the rate rise, is a good point. Are you still feeling like when you take these multifamily assets back that you can sort of value is protected and ultimately come out of the other side? you know, even or higher?

Barry Stuart Sternlicht: Yeah. I mean, the chips. We have 374 million shares outstanding or something like that. So, you know, you are talking small losses. You know, if they are losses at all. it is 10 million here, 8 million here, 3 million there. it is not really that material in the scheme of things because we are so big. that is 1 of the reasons I said, you have to keep in mind how big we are. When we even talks about 400 million or 300 million, or Jeffrey talks about that, we are $30.32300000000 dollar balance sheet. We are not a billion-dollar, $2 billion balance sheet. We got a big balance sheet. So reason I mentioned it and I am not really I am not really worried about our multi book, and I actually know, there is-- we will make more money, like if we-- if we are-- It really depends on where the asset is. But I can tell you because we just agreed to sell half a dozen multis in our equity book. I was expecting price cuts. And some have sold at a 5.3, a 5. 1 is below a 5. People are buying the future now, and it is a good asset. In a good market. If it is really crappy stuff, you are talking sevens. You know? So it really goes to the quality of what you lent against also. Which you guys cannot see. So. But overall, I am not really worried. We will have defaults in our multi book because that is where they just do not have the money typically. They do not have. They have gone back to their LPs. They have gone back for 1 refinancing or 2 or small paydowns. And it is all taken much longer. Look what the curve look like. We were expecting a 3 forward curve. So against that. And then we had a war in Iran, and we had the tariffs. And the tariffs halted Powell's rate cuts. He said, I wanna wait. And inflation did not show up, really, but we all thought it would. I think the average man thought it would. And then you had, you know, this very powerful AI boom, which drove GDP growth, and then we had the war. And inflation just took off and went the other way again. And so rates follow that. And so, you know, if you are a multi guy, you were expecting that the world would get better faster. Some markets are not great. You can look at the publics and see the different returns of the different geography. The portfolios on the coast are doing better than the Sunshine State. So we are seeing green shoots. We are seeing some of the South Of The Smile States, the Texas Tennessee, Florida, we are seeing city by city. Beginning to see you see it first in less concessions, and then you see it in lower lease trade outs. All of us, we are renewing a tenant, we are getting rent growth. it is the new tenant that where the lease trade-out where they went negative. Overall, I think you are positive 1% or 2% or something like that. And, again, it is city by city. But it is definitely trending the right direction. And, again, because housing is getting hit hardest by the rate increases, new construction of single family homes is gonna collapse, It is falling. Not actually collapsing. it is just down. Because the balance sheets of the builders are so good, that they can continue to subsidize mortgages for buyers. So I think the press has gotten slightly wrong. Their margins are coming in as they offer more and more come up with concessions in the form of mortgage buy downs. The balance sheets to the homebuilders that are left, and they now dominate the market, Pre this period, they did not. But now these giant builders are, like, 60% of the housing market. And so I think overall, you know, I-- It just. It is gonna be a brighter future. For sure. Thank you.

Operator: The next question is from the line of Jade Joseph Rahmani with KBW.

Jade Rahmani: Please proceed with your questions. Thank you very much. Distributable earnings excluding realized losses came in at $0.41 And just wanted to get your thoughts weighing the puts and takes timing of loan closings, repayments, and where rates are today. You think there is upward or downward pressure on that?

Jeffrey F. DiModica: On the $0.41, Jade, if I look back to Barry's comments earlier, last quarter, as he said, we looked out in that rate environment, we had a path to getting to the $0.48 that we said we were paying out with the new higher rates. In a few-- in a few quarters. Being at $0.41, I think we have our projections would be a little bit higher, but that is based on what we know today and not what we do not know yet that could happen. So, yeah, our projections are there or a little bit better, but I think you can use that as sort of a base earnings rate. You know? And we have a lot of levers. We have a lot of things we can do, but I think that is a reasonable number That we are. and hopefully, as I mentioned, it goes up as we restore our and can put this capital back to work at the kinds of returns we are getting and the stuff we are doing today. And obviously, in retaining capital, we will in creating capital, we will allow us to get that back up, Jade. The 2 things that are important are reducing the reducing accruals, which we are making progress on and continuing to grow. Our pace of growth has been really good. If we can execute on that, you know, our plan is to get this back up. To where we had hoped it would be last quarter. On the run rate.

Jade Rahmani: Okay. And then the second question is just the CECL reserves you noted, the increase was mainly a macro model. It was a general reserve. No asset specific changes and no new nonaccruals. So it is kind of like a model formulation. that is that is correct. that is correct, yes. At the same time,, we did see risk 4 and 5 rated loans increase, and then we saw NPAs decrease. The question is if despite what the model suggests, are you seeing any new indications of default or nonperformance so far in the fourth quarter?

Jeffrey F. DiModica: Yeah, listen, in as you headed into September 30, the ultimate high rates was September 30, right around there that week. And so if you look at the 4s and 5s, it was people trying to make a decision on a 5 ish debt yield multi, do I continue to put money into that asset, or do I do I hand it over? So given that we thought that the market might start capitulating, we definitely more cautiously moved people at the end of the quarter, which is when we mark the book. To a. To more of a 4 or a 5 stance. So I would expect that we are able to work out of fours and fives as quickly as anything new comes in. We do not know the full effect of the September October rate highs. But if. As rates moderate to where we are today, I would expect that there is a significant decrease and a stop. Remember, we did not have any new REOs or foreclosures for 2 quarters in a row. This move in September really drove us to make some moves on some of the lower debt yield assets that moved up to the 4 and 5 category.

Barry Stuart Sternlicht: And if rates meet. Moderate, who knows? They could help out. Just some of the multis in particular, they are just toggling. Right? They are just sitting at debt yields where you thought they would clear, and then when rates go up, they will not clear their Maybe the 5.5 is now a 5 and 3 quarters or a 6. Nobody knows because, actually, we do not have them back, but Rina has some significant. I would say, 40%, 30% of the resolutions are risk taking in multis and selling them. Something like that. So this quarter, we had 2. Multis that fit this year, there were 2 multis that sold, and there was 1 office that was converted to, call it, other. That was put on accrual. So that resolved. Yeah. So, you know, again, you have to remember people are buying down cap rates and asset classes like senior housing because do not know if you can hear me. People are buying down cap rates and assets like senior housing because they are having 5 to 7% rent growth, and so you have seen that translate into cap rates. And those prices are holding, even with higher rates. And there is infinite demand at the moment. You see that reflected in the prices of Welltower and Ventas. I mean, it is really a good business right now. So if we get this recovery in Maltese, cap rates will come down. You know, because people will buy the future growth, which should. Donald't forget your attachment point. When you are buying these assets. Are fractions of replacement cost. So you have a reasonable runway before you. You know, you are gonna face what I call material new supply. I just thought the stats on multi's in 2027. They are coming down. Even if you thought it was getting built, people are not gonna build because the cost of capital's gone up. So, you know, we. We are trying to every asset category, to figure out what is actually getting built. And, you know, the office markets are kind of extremely odd. You know, you have the best buildings, a 100% full in almost every city in the world. And almost price insensitive on rents. I mean, there is a new building going up in Manhattan of all places. They are. I think they are gonna break $400 a foot that is that is $200 higher than you saw 5 years ago. $200. And the market is 18% vacant, but people want the best stuff, and they are willing to pay for it. So it is it is hard to underwrite. Because you. If you have 1 of those buildings, well, the target. what is the exit cap? what is the cap? If you are not in 1 of those buildings, what is the cap? I am guessing it is a 200 basis-point difference, maybe 3. So it is a complicated market right now. But it is healing. And it is not like things are getting worse. Things are getting better other than rates. And, you know, I kinda like the slowdown in the economy. I kinda think it is just fine. 1 or 2% GDP growth is wonderful. Especially if it is driven by wage growth. And, hopefully, we will get we will get some of that. It will be interesting to see what the Democratic sweep. Wages. And what happens with union wages in large cities. Could be very adverse to some asset classes that have a big component of their cost structures in labor like hotels. In major cities. So the unions were pretty robust before this happened, but holy moly, it will be interesting now. Thank you.

Operator: The next As a reminder, to ask a question at this time, you may press 1 from your telephone keypad. Our next question is from the line of Gabe Poggi with Raymond James.

Gabe Poggi: Please proceed with your questions. Hey. Good morning. Thanks for taking the questions. Barry, Jeffrey, I wanted to go to the stock price comments you guys laid out. I know the sum of the parts and the size of the business, etcetera, what levers. If the market just refuses for the time being, right, hopefully not forever, time being, refuses to kind of see the sum of the parts, what levers you guys considering pulling to try to highlight the sum of the parts? You obviously bought back a $108 million of shares in the quarter. Is that something you pull on? Is there a potential to rotate out the residential business? Right? You have got equity stuck there to go buy back more, to go do more accretive, investing. Just help us out there.

Jeffrey F. DiModica: There are. yeah. I mean, you. If you were an equity REIT, if we spun off our equity assets, we would create value, presumably because they do not trade like they trade buried in our stock. I cannot start with a different place rather than what things we might do that way. You know, I think 1 of the great opportunities in this market today is I think there will be M&A opportunities. I think there will be M&A opportunities across a lot of a lot of REITs that are. That do residential, or commercial or other. And although our book value is not where we. Our price to book value is not where we want it, I think it could be accretive still. And when we spend time when I spend time with Barry, it is more about how do we grow the business. Than how do we. How would we unlock We obviously wanna unlock hidden value in any of these businesses, but I think I think that the focus is more on growing, and I actually think we have a great opportunity to grow the business. Today given the way a lot of these a lot of these names are trading, and there are some things that we do not do that I think we could do better. So now, Barry, if you wanted to talk more about the existing, but I just wanted to put a perspective on that.

Barry Stuart Sternlicht: You know, again, I mean, we. Our triple net lease business, well, you have multiple examples of companies trading and 4.5 to 6 dividend yields. And ours, your double digit dividend yield. So we have got. We gotta look at all these things. We are on it. And we are also looking at acquiring things still, you know, but it is a little trickier. Because we are trading at such a discount to book. We have to do discount to book to discount to book. Let's do a share deal that reflects the enterprise value of both enterprises. So but there are people throwing in the towel. And maybe we can find something interesting. We have had our sights on a few things for a long time, and 1 of them just did something interesting. So and you know, we are going to pursue things that we think create long term shareholder value.

Gabe Poggi: I got 1 follow-up if I can. And I think you guys get asked this every quarter or at least every quarter in 2026. Considering the rate move, I figured I would ask it again. Obviously, Starwood Capital Group owns a lot of multifamily. Starwood Property Trust has a lot of multifamily exposure. Rate volatility has happened. Things are harder to pencil as you guys have discussed for the last, you know, 54 minutes. Barry, is there an opportunity at the REIT? With the REIT's exposure either to cobble together, and I am thinking about third party capital to own more multifamily outright in the diversified REIT. Because that may be very well a better total return over time to own the bricks than to be the lender.

Barry Stuart Sternlicht: It may be. Yeah. I mean, we control 110 thousand apartments in our various vehicles. This is 17 thousand of them. They are all affordable. They are all in they are all in Florida, actually. So yeah, I think I think, actually, partnering with outside capital in our various verticals to leverage and create value for the parent. Is a viable strategy and we were I.

Jeffrey F. DiModica: I would rather go into more higher ROE businesses, frankly, And balancing that against the fact that income is not qualified income. But we have those businesses today, like our servicer. And know, we think there is a lot of pain, obviously, across the sector. And across the real estate world right now. So it should open up interesting opportunities for us. If we see some. Something compelling, we are going to do it. Gabe, when we added the portfolio, it was basically fixed caps financed at 4%. They gave us a 10% cash return and ultimately that paid our dividend, which was 8% or 9% at the time. So it was a layup when we added the first $3 billion Today, it was low 5 caps. You cannot finance them inside of there. So we cannot really create a cash return that would cover our elevated dividend today. So it is a hard time to leg into multis as much as I think we think performance will continue to elevate. Hard time to leg into it here for a cash pay, dividend pay instrument like property trust.

Gabe Poggi: Thank you.

Operator: The next question is from the line of Chris Moeller with Citizens. Please proceed with your question.

Chris Moeller: Hey, guys. Thanks for taking my questions. I guess given the shift in rates and pickup in CRE and property valuations, how are you guys thinking about the special servicing business going forward? And how quickly do loans typically move to special after we see rate shocks like we saw in the third quarter?

Jeffrey F. DiModica: Yes. Thanks so much. Typically, an asset is going to for an average of 12 to 18 months within the servicer. So as I look at this stress, it really sets us up well with 90 billion of main and over 10 billion in-house today. It really sets us up well for good revenues into later into 2027 and early 28. And, you know, Rina interface model does not does not really change those that much based on where we know the stress came out in that 12 to 18 month timeline that I just said, but typically an asset will sit here. It takes us a while to get our arms around it. And figure out the best disposition path. So the distress that I think will be the highest level of distress will probably be these September rate highs, and that should lead to late 27 or early 28. Significant income. Growth. But that is about the timeline. Got it. that is very helpful.

Chris Moeller: And I think it was on the last call, Barry, said that he was hoping for more momentum in the net lease business. But as you guys talked about, rates have shifted pretty dramatically since then. So just any updated outlook on the net lease business, that would be very helpful.

Barry Stuart Sternlicht: Well, yeah, we are a little boxed out right now. Our cost capital is a little high. We are we are we are working on finding attractive continue to invest. We have had to rightsize some of the overhead we had in the business. But it made money for us this quarter which is the first. And we will And we will continue to since 100% occupied in 17 years or something like that at Wall. So we are gonna give it a really good shot, but it is a business that either should raise outside capital or spin out from us. If we cannot give them the cost of capital, they need to grow their business. So. And we think. I think it would be accretive to us. Either of those. Increasingly accretive.

Jeffrey F. DiModica: And it is getting. it is about a $3 billion business. it is it is total enterprise. I think it is large enough to stand on its own. If we wanted to do that, and we will have to examine whether that is a smart thing to do or not and how that would work. But the team is talented, They are veterans. They. Most of these people were in public companies before. And they know what they are doing. So we hope it becomes a more meaningful part of our of our asset base and contribute to our earnings. But again, I think given our cost of capital right now, I mean, it is not adding enough value or cannot grow as fast as we would like it to grow. it is a brutally hard market for them. You know, sale leaseback volume has fallen off a cliff in the left year and change. Our financing costs, we have an ABS structure. But as you guys seen, ABS senior spreads have widened a bit in addition to the base rate being higher. So it is hard to finance, and there is less to do in rates are up. I think we get a little bit of rate stability in around where we are today, and you will start to see sale leasebacks happen again. And I think we can really start to grow that portfolio. But in addition to all those, you have had a number of our competitors in the year since we bought this last July come into this, so there is more competition. Hopefully, we end up getting more volume. We have the right team to execute it. And we definitely wanna grow it.

Barry Stuart Sternlicht: And it will continue to benefit from these large annual rent bumps with 17-year lease. You know, 1 of the things we would like to do is expand their catchment basin. 1 of our peers has gone to the business and not doing just sale leasebacks. So again, it is all tied to interest rates. 1 good thing is rising rates. It means we can buy, you know, what sevens are trading at eights. But, again, there is a bid ask spread. People do not wanna trade it at So if the cap rate's back up, we will be back in business. Given. it is all about the spreads and it will. We are a big enterprise. We will have a quarter of slowdowns, and then we will pick up again. that is why we have 8 cylinders or something. This 1 is having a time out, but it is no longer dilutive and will only get accretive. So that is good. Thank you.

Operator: At this time, we have come to the end of our question and answer session. I will hand the floor back to Barry for any closing comments.

Barry Stuart Sternlicht: No. I wish you all a safe trading and investing in this turbulent time. it is gonna be an amazing lame-duck period until the congress has sat could be fascinating and wild. And then we will see what the Democrats decide to focus on. And if they drop the ball or take the ball and move the country in a better place. We wish you all a happy Thanksgiving, and we will be talking to you again in 3 months' time. Thank you.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.