Starwood Property Trust : Fourth Quarter 2023 Transcript

Starwood Property Trust

Fourth Quarter 2023 Earnings Call Transcript February 22, 2024 | 10:00am ET

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

Call Participants

EXECUTIVES

Barry Stuart Sternlicht

Chairman & CEO

Jeffrey F. DiModica

President & Managing Director

Rina Paniry

CFO, Treasurer, Principal Financial Officer & Chief

Accounting Officer

Pawan Melgiri

Managing Director

Adam Behlman

President & Chief Investment Officer, Real Estate

Investing & Servicing

Zachary H. Tanenbaum

Managing Director, Head of Investor Strategy

ANALYSTS

Donald James Fandetti

Wells Fargo Securities, LLC, Research Division

Douglas Harter

UBS, Research Division

Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division

Richard Barry Shane

JPMorgan Chase & Co, Research Division

Sarah Barcomb

BTIG, LLC, Research Division

Stephen Albert Laws

Raymond James & Associates, Inc., Research Division

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

Presentation

Operator

Greetings. Welcome to Starwood Property Trust's Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll hand the conference over to Zach Tanenbaum, Managing Director, Head of Investor Relations. Zach, you may now begin.

Zachary H. Tanenbaum

Managing Director, Head of Investor Strategy

Thank you, Operator. Good morning, and welcome to Starwood Property Trust Earnings Call. This morning, the company released its financial results for the quarter and year ended December 31, 2023, filed its Form 10-K 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. A 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

CFO, Treasurer, Principal Financial Officer & Chief Accounting Officer

Thank you, Zach, and good morning, everyone. Starting with our results. We reported distributable earnings or DE of $189 million or $0.58 per share for the quarter, and $663 million or $2.05 for the year. The strong quarter was highlighted by contributions across our businesses, although it likely does not constitute a run rate. We had outsized performance from our conduit this quarter after a slow start to the year, and also had $0.04 of earnings related to Commercial Lending repayments, including prepaid penalties and foreign currency hedge on line.

GAAP net income was $71 million or $0.22 per share for the quarter, and $339 million or $1.07 per share for the year. GAAP book value per share ended the year at $19.95, with undepreciated book value at $20.93. These metrics were impacted by an increase in our Commercial Lending reserves, including increases in our general CECL reserve, charge- offs and impairments related to REO properties totaling $129 million and $351 million for the quarter and year.

I will begin my segment discussion with Commercial and Residential Lending, which contributed DE of $205 million for the quarter, or $0.63 per share. In Commercial Lending, we originated $707 million of loans, which brings our full year

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

originations to $1.1 billion. Repayments of $815 million in the quarter and $2.9 billion in the year outpaced fundings of $664 million and $1.7 billion.

Our portfolio of predominantly senior secured first mortgage loans ended the year at $15.9 billion with a weighted average risk rating of 2.9. This is consistent with last quarter despite downgrades of four loans totaling $502 million to a 4-risk rating, of which $450 million were U.S. office. Offsetting this were upgrades from a 4 to a 3-risk rating, totaling $197 million, including a $159 million formerly vacant office loan in Brooklyn that was converted to multifamily and brought current by the sponsor. In the quarter, we had one new foreclosure on a $61 million multifamily loan and one new non-accrual related to a $124 million office loan. Both loans were 5-rated and will be covered in Jeff's remarks.

Last quarter, I mentioned that our CECL balance doesn't tell the whole story of our asset reserves because some of our loans have been moved to REO, and some loans that are still on our balance sheet have reported charge-offs. Although these have already been taken out of GAAP book value, neither of these appear in our CECL reserve. However, they are really no different than a specific reserve just on another financial statement line.

In the quarter, our general CECL reserve increased by $28 million to a balance of $307 million, of which 74% relates to U.S. office, while REO impairments increased by $101 million to a balance of $172 million. Together, these reserves represent 3% of our lending portfolio.

To clarify the REO component of this, I want to briefly discuss the GAAP accounting model. Once an asset is transferred into REO, it follows property accounting. This means it has held at amortized cost unless events or changes in circumstances indicate that its carrying amount may not be recoverable. We encountered these indicators on two previously foreclosed assets, which were either underwritten agreement or active discussion to be sold at our basis to unrelated third parties. Both transactions failed to materialize.

The first asset is our vacant building in Downtown L.A. that has a DE basis of $245 million. Because our current quarter negotiations to sell this asset were ultimately unsuccessful, we commissioned an updated appraisal, which resulted in an incremental $71 million GAAP impairment.

The second asset is our office building in Houston that has a DE basis of $126 million. After an LOI at our basis was terminated last quarter, we engaged an updated appraisal. Shortly thereafter, we entered into an LOI with another unrelated third party to sell the property at a price lower than our basis. That transaction was also unsuccessful. Although the appraisal indicated full recovery of our basis, we conservatively utilized the value implied by the most recent LOI to determine our GAAP impairment of $30 million. You will find these impairments presented in the "other loss, net" line in our GAAP P&L, and reflected as a reduction of the "properties, net" line in our balance sheet.

Next, I will discuss our Residential Lending business. Our on-balance sheet loan portfolio ended the year at $2.6 billion, including $916 million of agency loans. The loans in this portfolio continue to repay at par with $60 million of repayments during the quarter and $239 million year-to-date. Given tighter spreads and a decline in longer rates, the mark-to-market on our portfolio improved by $152 million this quarter, partially offset by a negative hedge mark of $99 million. In our $450 million retained RMBS portfolio, lower prepay speeds continued to benefit this book with tighter spreads contributing to a positive $6 million mark-to-market.

Next, I will discuss our Property Segment, which contributed $22 million of DE or $0.07 per share to the quarter. Of this amount, $13 million came from a Florida affordable housing fund. For GAAP purposes, we recorded an unrealized fair value increase related to this portfolio of $18 million in the quarter net of non-controlling interest. The value was determined by an independent appraisal, which we are required to obtain annually.

Turning to Investing and Servicing, this segment contributed DE of $33 million or $0.10 per share to the quarter. Our conduit, Starwood Mortgage Capital helped drive our outperformance in the quarter, completing 5 securitizations, totaling $467 million, which represented 61% of their securitization volume for the year. We expect to continue seeing higher volumes from this business in 2024 as loan maturities and originations pick up. The year is off to a good start, with two securitizations totaling $118 million of loans completed in January.

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

In our special servicer, fees increased to $14 million in the quarter due to $500 million of loan resolutions. These resolutions were offset by $1 billion of new transfers into active servicing, nearly two-thirds of which were office or contained in office component. Our named servicing portfolio ended the year at $98.7 billion, driven by $1.8 billion of new servicing assignments in the quarter and $6.7 billion during the year.

And on this segment's property portfolio, we sold one asset in the quarter for $32 million. Since inception of this portfolio, we have sold 30 assets, totaling $412 million for DE gains of $144 million, demonstrating our ability to successfully acquire and reposition transitional real estate.

Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $23 million or $0.07 per share to the quarter. We continue to see strong investing this quarter, with $425 million of new loan commitments, bringing our total for the year to $1.1 billion, its highest level since we acquired this business in 2018. Repayments totaled $182 million for the quarter, and $905 million for the year, with the portfolio ending the year at a balance of $2.6 billion.

And finally this morning, I will address our liquidity and capitalization. Our leverage continues to remain low with an adjusted debt to undepreciated equity ratio of just 2.47x. This reflects the fourth quarter repayment of our $300 million unsecured notes, which leaves us with no corporate debt maturities until December 31, 2024, when our $400 million unsecured notes mature. In addition to low leverage, our liquidity position remains strong today at $1.2 billion. This does not include liquidity that could be generated through sales of assets in our property segment or debt capacity that we have via the unsecured and Term Loan B market.

With that, I'll turn the call over to Jeff.

Jeffrey F. DiModica

President & MD

Thanks, Rina. Our industry originated more loans from late 2020 through early 2022 than any other period in our history, thus creating a significant amount of initial maturities in the late 2024 and early 2025. Fortunately, the 10-year treasury yield fell 100 basis points in the fourth quarter and forward SOFR made a similar move and is now pricing at a 175 basis point reduction to 3.6% in 2025. While this more optimistic interest rate environment has reduced tail-risk for the 90% of our assets that are not loans on U.S. office. The rate move to date has not been large enough to materially change U.S. office market outcomes, as office pricing also has to deal with lower net effective rent, the persistence of work from home, and a lack of liquidity in the office lending markets.

Being managed by one of the largest Real Estate Private Equity firms in the world, asset management has always been a hallmark of our company's outperformance, and our entire team is focused on asset management today. We have had net realized gains on REO to date, but with lenders continuing to move away from the office sector, we have had multiple asset sales fall out of contract at our basis in recent months, and we are evaluating alternate disposition plans. Rather than wait for a better option that may not come, we have uniquely moved over $600 million of loans into REO to date. These assets are now the focus of our asset management teams, and our goal is to maximize shareholder value. We will continue to evaluate options including adding capital and repositioning assets rather than quickly selling into a distressed market with seller financing that could put a longer term drag on earnings.

Rina mentioned we placed a $124 million 5-rated office loan in Arlington, Virginia on non-accrual in the quarter. As you likely know, Greater DC has been the hardest hit by work from home, with the majority of government employees still at home four years after COVID, making this long-term stable and consistent office market one of the most difficult to underwrite today. This loan went into payment default in the quarter and we are evaluating foreclosing in the coming quarters to either reposition or sell the assets. The property is operationally cash flow positive and has 4.5 years of remaining WALT. We will continue to look for accretive leasing while we decide on the right time to potentially sell the asset, assuming we take title.

Rina also mentioned we foreclosed on our first multifamily loan in the quarter, a $61 million loan on a recently-built multi in the Pacific Northwest that has been slow to reach stabilized occupancy. Should we choose to sell this asset, we

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

expect to see a return of our basis in 2024. This asset is systemic of what we expect to see as this cycle moves to its next phase, undercapitalized borrowers who lack the staying power to protect assets until stabilization will be replaced by large balance sheets with staying power like ours, or we will move the assets to the substantial pools of third-party capital that have been raised to recapitalize them.

The majority of our industry's multifamily loans have stabilized debt yields above 6%, and assuming today's forward curve is correct, we expect most of these will be able to refinance at our loan proceeds, or have sponsors who will see value in paying down their debt, buying interest rate caps and replenishing reserves to qualify for extensions. Most of these borrowers bought new interest rate caps in 2022 or 2023 that were more expensive than they are today, so we expect them to do the same to qualify for extensions in 2024. Should they choose not to protect what is essentially a six plus cap multifamily asset, and should we choose to foreclose, we expect to recover our basis or more if interest rates and cap rates continue to normalize going forward. As I just mentioned, we have profitably bridged assets to stabilization in the past. We will be patient where we see long-term investment opportunities and believe there is significant liquidity at or near our basis on lease up multifamily assets where we don't choose to stay in them longer term.

Looking at our broader CRE lending portfolio, we proactively cut our office exposure in half since 2019, while also reducing our construction and future funding exposure by half. Pro-forma for a data center loan that paid off in full last week, our future funding obligations sell to $800 million net of senior financing, a fraction of our company's typical and historic level. Less future funding obligations will allow us to maintain our significant liquidity as we look to pay off corporate debt maturities in December 2024 and March 2025. While we expect to refinance these in the capital markets, should we choose not to, we have ample liquidity to repay them with cash while maintaining a significant liquidity cushion. As Rina said, we received $4.8 billion of repayments in 2023, and we funded $3.6 billion of loans. Our projected excess liquidity will allow us to continue to invest accretively in 2024, albeit still at a measured pace.

We created this diversified company and have maintained low leverage over the years to the benefit of both our equity and debt investors. You've heard us say, we would like to be investment grade in the future, and to do that we need to maintain our lower leverage and increase the amount of unsecured debt on our balance sheet as a percentage of total debt. The high-yield index hit 600 basis points over treasuries in the fall of 2022 and is at 355 basis points today. Our borrowing spreads have followed that trend. As we continued to lend in every quarter since COVID, we made many loans at higher asset spreads and finance them with nearly $2 billion of higher-cost bank lines, while still creating accretive shareholder returns. Should unsecured borrowing spreads continue to fall, we will be in a position to replace these expensive, really prepayable bank lines in the unsecured debt markets, at little to no cost to us for the first time in our history. Pro-forma for that debt replacement strategy, we would be in position to argue for a potential ratings upgrade as our unsecured debt percentage would increase substantially. I will note that our BB and BB+ corporate ratings were affirmed by all three rating agencies in the higher rate environment we faced in 2023.

As I just mentioned, the vast majority of our borrowings today are non-corporate debt. Our focus has always been on maintaining significant covenant ratio cushion in those facilities. We have a fixed charge covenant ratio, defined as EBITDA over cash interest expense of 1.4x on our non-corporate debt, as do most of our peers. Our lower leverage model creates lower interest expense, which in turn gives us significant flexibility under this and our other debt covenants. Our FCCR today sits at 1.8x, giving us billions of dollars of additional debt capacity should we choose to use it and over $100 million of EBITDA cushion, leaving us with tremendous flexibility on how to grow or further optimize the right side of our balance sheet going forward.

We are addressing two opportunities created by the noticeable pullback of regional banks in middle market CRE lending. Our Starwood Solutions business is now up and running, and we believe a significant portion of the demand for valuation and workout services will come from the regional banking system. We also hired a seasoned CRE professional to create a middle market lending vertical at STWD for the first time, to focus on the $15 million to $50 million loan size that regional banks historically dominated, and we have historically not participated in. This smaller balance loans segment offers premium unlevered yields, and we believe this increased ROE will be very accretive to shareholders in the coming years, albeit on less equity than in our large loan business.

Moving to our Energy Infrastructure Lending business. 2023 marks our highest origination volume year since we purchased the business from General Electric in 2018. We wrote $1.1 billion in loans in 2023, which is the same amount as we wrote in our core business, CRE lending. We continue to like the attractive risk-reward of power and midstream assets, and with funding costs remaining steady, we were again able to earn above historic levered returns in this

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

segment in 2023, and we expect to continue to grow this segment in 2024.

Finally, our low leverage and uniquely diversified business model that was built to outperform in volatile markets has allowed STWD to earn the only positive total return in our sector since the beginning of COVID.

With that, I will turn the call to Barry.

Barry Stuart Sternlicht

Chairman & CEO

Thanks, Jeff, thanks, Rina, and thanks, Zach. Good morning, everyone. I wrote a colorful quote in our press release, but I do think it's worth noting that the real estate industry just has a balance sheet crisis. It's affected nearly every asset class, maybe save data centers. But even there, yields on costs have to rise to reflect the increased cost of capital. And the real estate industry has caused this economic situation. We were just an unintended consequence. But a material consequence for cities and municipalities as values drop and real estate values -- real estate taxes based on values will come down and cities and municipalities won't be able to fund their police, fireman, waste management, and schools. So, the Fed has three victims of their current policy, and we're headed towards 300 basis point real rates unless they relent. The first is the government themselves paying 5%, 5.3% on $33 trillion, a third of which rolls over this year. The second are the regional banks, which cannot stay solvent with these current interest rates, with $1.9 trillion of real estate exposure, not to mention the mark-to-market or not required mark-to-market on the securities book. And the third would be probably the entire real estate industry in the complex.

People talk to me about the level of rates in the 4.3% 10-year is not an issue. We all could adjust to it. We've adjusted to it before. But simply the pace of the increase, the rapid increase and of course, the statements that we were going to stay lower longer in December of 2021 and then actually easing into May of 2022, and the fact that the Fed relied on stale data or very delayed data for a third of its CPI, so when rents were flying, they showed no inflation. And now that rents are falling, they are still showing a significant increase in rents in the apartment and residential sector.

So, it's not clear why we use data for residential that's not current, when we use current data for energy and for food. It would take a minute for the Fed to call Fannie and Freddie and find out what's really happening in the apartment market, in the residential markets. They have more data than you want on earth. And they would see that they are running the economy and the global markets and causing recession, both in Japan and now in parts of Europe. Based on the other governments needs to increase rates to defend their currencies because of the Fed's actions.

And when people applaud the current Fed for their policies, they don't pay attention to the fact that $6 trillion of stimulus was--hit the shelves or hit pocket books as the things on the shelves disappeared. And so, inflation was simply too much money chasing too few goods. And that it was going to correct on its own, which it has, the supply chains are largely fixed, and consumers are now running out of the $6 trillion. And the economy continues to be healthy, healthier than thinking most anyone thought because of fiscal spending, and they cannot impact the economy with -- or the job market with interest rates anymore. When the half of your labor force is in healthcare, in education and in local governments, as you saw last month, 107,000 health care jobs were created. They're going to continue to be created despite anything the government does, other than crushing what's left of the economy, which would probably be the retail sector or the services sector and that would include layoffs at store, in the hotels, airlines, Goldman Sachs, all the investment banks, all the banks, that-that they can only do with a real recession. You're going to have to be careful to land this plane softly and the government spending continues apace, and we are not getting construction job losses that we expected.

Now, all the asset classes in real estate have been impacted differently. You are going to see and we continue to see a wave of multifamily assets complete there, and in the total number of units being completed is not out of line between single-family and apartments, but it shifted from 40-60 apartment single-family, to 60-40 apartment single-family. And that -- the good news is the markets are absorbing this, but it's causing market rents or existing rents to weaken, which is why we've been so confident, inflation will come down and it will show up eventually in the CPI numbers, it is a third of CPI. That wave of new supply fortunately, will die at the end of -- middle of 2025, almost all those units will be complete and we'd expect to see rent growth accelerate again in the apartment markets.

I think for that reason, with 40% of our lending book in the apartment space, we would like to get these assets back. We

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

will make more money if we actually -- if our borrowers give us these assets back, our loans are 65% of typically of cost. We're buying it at -- our basis would be super attractive. And the best we can do when we lend is get our capital back in our coupons, we have infinite opportunity with well-positioned assets to make more money, frankly, if they were to fall into our lap. We've only had one default. And as mentioned in the call, we would expect to sell it at the basis of the loan very shortly.

But while there's light at the end of the tunnel because all of us believe, I believe, I think all of us believe, most -- all of us believe, that the Fed is done hiking. When they lower rates, is going to be very interesting. And I'm pretty sure they're aware of the consequences and the teetering side of regional banks, the losses that you cannot exactly track, both in office, resi and even in the industrial markets, which were being acquired at yields that are no longer market passing yields.

So, there is strain in the real estate markets. We are in the ship. We are in the boat. We are navigating these waters. We are going to take some losses. We are going to be okay. We have set ourselves the company up with a massive amount of liquidity. The decline in future funding that Jeff mentioned, $800 million of net funding -- of future funding calls on us, is really 60% construction, all of which is fine and 40% we could call good news, you committed to do a tenant improvement or lease a building. And those will happen if they happen, the borrower may not actually even call the capital because he's worried that the money that goes into TI, the building may not be worth that when - or par -- if he goes and heads and puts these tenants in these buildings.

So, I think we've certainly got a very diversified business model. We're delighted that we can invest incremental capital in the energy space right now, which is providing very attractive double-digit yields. And we continue to build that book. It's actually the biggest it's ever been, I think, since we started and we bought that business from GE years ago.

It is notable about the light at the end of the tunnel, the conduit markets are strong, and we've had a good launch this quarter, the credit spreads are coming in, the market's anticipating rates coming down, and AAAs have come in probably 60 basis points, 70 basis points across the board just in the last three months. That's the first sign that the markets are healing and the CMBS markets are pretty wide open to act as a new exit strategy for borrowers who are trying to repay loans. Heretofore, it was really just the existing lender. But now, if the asset is stable and secure and it's in probably one of the favorite asset groups, but even office is finding its way into conduits and securitizations and now like 16% to 20% of the securitization might have office in its portfolio.

So, you really are playing hand-to-hand combat, in our case, partnering with our borrowers and figuring out workable solutions, using our entire organization both here and in Europe to get through what is a challenging period. But I think we feel pretty comfortable that our dividend will be secure, very comfortable our dividend will be secure for the foreseeable future. And we just had a really significant payoff of a loan, a very large loan in the book and there are some other things that are mentioned in Jeff's and Rina's comments that will provide additional liquidity to us. And we're very cognizant of getting through all of this. Sometimes, you don't really know. We'll be taking - I've visited recently an asset we took back in Washington, D.C., 1200 K Street's a beautiful building.

It's an unimaginably amounts of equity our borrowers have lost, unfortunately. But in that case, we will reposition that office building as an apartment building. It's actually quite beautiful. And we'll just take a little bit of capital, but it will come out of our book and when I look at the company, we have almost $1 billion of assets that aren't earning much, if anything. So, that's additional earnings power as we've rationalized and redeployed the capital into things that could earn a substantial return on investment.

This is actually as good a time to be a lender, since maybe 2009 when we started the company, but we have to be very careful how much offense we go on, and we are still investing. Unlike many of our peers, we are actually still finding opportunities and playing here and there, taking through the opportunities that the team sees and it's -- that is good news for us. And we have an office loan in Europe that was 100% leased. It's going to repay. We know it will repay. And so, our office exposure will continue to drop. Our biggest office loan in Europe.

So, the complexion of the portfolio is solid. We have a $15 billion loan book against the $25 billion, $27 billion, $26 billion asset base. So, we are not just a commercial mortgage lender today, we have other businesses that are higher ROE

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

businesses, that are continuing to accelerate, like the special servicer who is - you just wonder how many of these office buildings are going to wind up in LNRs laps. But I would say a lot of them. And you will see a lot of people still have caps on their loans, and they can cover debt service, but they cannot refinance and if anybody thinks that the real estate markets have repaired themselves, and that wouldn't be the case just yet. Although we do believe that, of course, if the Fed lowers rates where we expect 150 basis points real rates instead of 300 basis points of real rates, this will get much better faster in many asset classes that we're exposed to.

The office markets in the U.S. are unique. They're not like the European office markets. I recently returned from Germany, where rents were up 5% to 15% last year, and pretty much everything we've done in the construction has leased or pre-leased. Same is true in the Middle East and Asia. So, this is a U.S. phenomenon really only, and there in the U.S., you have a bifurcation between the really good buildings, which actually remain full and are holding your tenants, and the B and C. So, I think U.S. office is going to look a lot like the mall market. The best malls are full, tenants scramble to get in them, they have pricing power. And the B and C malls are going the way of the dodo bird. And many of these generic buildings, we'll probably have to find alternative use, which might include tearing them down.

So, the team has dug in. Everyone is in their seats; the Board is supportive and creative. We started Starwood Solutions, and I hope it becomes a meaningful contributor to our earnings growth going forward. And we thank you for your support. With that, we'll take any questions, I guess.

Starwood Property Trust | Fourth Quarter 2023 Earnings Call | February 22, 2024

Question and Answer

Operator

[Operator Instructions] First question comes from Sarah Barcomb with BTIG.

Sarah Barcomb

BTIG, LLC, Research Division

I'm wondering if you can talk a bit more about your new focus on middle market lending strategy. What's driving the decision to enter that market? Is it mostly a function of regional banks backing away or maybe reduce takeout liquidity on the large balance side? And would you consider looking at an existing middle-market loan portfolio or primarily focused on new originations?

Barry Stuart Sternlicht

Chairman & CEO

We definitely will look at existing books if they work, I mean, they have to be performing. We're not really in the NPL business here. It's just -- it's really hard to run a public company because you don't have any earnings until you can restructure the loan, and that would -- it may not be much return on capital. As far as middle-market, if you look at the pyramid of opportunities in the world, it's a pyramid that the biggest deals, over $1 billion deals, which we've written loans as large as I think $800 million. There are not that many of those. And today, there are not many large transactions being done. And most of our opportunities are refis, $160 million multi-loan. Those are the kinds of things you see at the moment, there are not any really giant transactions being financed, and most of those will probably get done in the CMBS markets right now.

So, in terms of opportunity, there are the best opportunities in the middle markets and the smaller loans, which have been cleared out by the regional banks, which are not lending. So, recently in two different situations, we went out on assets we own, not in the REIT, but in the Starwood Opportunity Funds and one was an office building fully leased in Tennessee. The other one was a hotel in a Midwestern state. And you send out 128 books and you get four letters of intent and they're all from debt funds at 500 over. So, we want to play in those markets. And the gentleman we hired to do that is actually sitting to my left. Say hi.

Pawan Melgiri

Managing Director

Hi guys.

Jeffrey F. DiModica

President & MD

That's Pawan Melgiri. Pawan joined us from Stellar. He was at Citi and Wells, a banker before that. And after Wharton, he spent nine years, I guess, at Stellar running their investments on both the debt and equity side, and we're super happy to have him joining us this week. So, it will be a work in progress.

Barry Stuart Sternlicht

Chairman & CEO

We hope it's just another cylinder, it's obviously in the same sector, but it's a totally different scale asset. If we can build a giant book, that's a couple of billion of dollars of mid-market loans would be very happy.