Starwood Property Trust Inc

NYSE:STWD

Earnings Call Transcript 2023-Q1

[Operator]

Greetings, and welcome to the Starwood Property Trust First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Tanenbaum, Director of Investor Relations. Thank you, Zach. You may begin.

[Zach Tanenbaum, Director, Investor Relations]

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended March 31, 2023, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company’s website at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company’s filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. 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, Chief Financial Officer]

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings or DE of $157 million or $0.49 per share. GAAP net income was $52 million or $0.16 per share. One of the primary differences between GAAP and DE is a $43 million increase in our CECL reserve, which I will discuss later. GAAP book value per share ended the quarter at $20.44 with undepreciated book value at $21.37. These book value metrics including accumulated CECL reserve balance of $153 million or $0.49.

Beginning my segment discussion this morning is Commercial and Residential Lending, which contributed DE of $192 million to the quarter or $0.60 per share. In Commercial Lending, we funded $260 million, including $222 million of pre-existing loan commitments and a new $59 million loan, of which $38 million was funded. These were offset by $257 million of repayments during the quarter, more than half of which were office loans. Our portfolio ended the quarter at $16.9 billion with a weighted average risk rating of 2.8, of which 93% represents senior secured first mortgage loans and 99% of which is floating rates.

On the CECL front, we increased our general reserve by $31 million in the quarter due to worsening macroeconomic conditions in our model, particularly in the U.S. office sector, bringing our general CECL reserve for Commercial Lending to $125 million. As a reminder, CECL requires you to estimate a life of loan loss with the forecasted macroeconomic environment being a critical component of the resulting reserve estimate. It is not a current market conditions only number like it used to be under the pre-CECL incurred loss methodology when we reserved a certain percentage of our 4 and 5 risk-rated loans. We use third-party software to model these losses, which, in turn, utilizes macroeconomic advisers for purposes of determining the economic outlook.

If we have specific information related to a particular loan, which would suggest a loss, we would remove the loan out of the modeled general reserve category and into an asset-specific reserve. We currently have no specific reserves other than one legacy $5 million reserve on the entire balance of a retail asset in Chicago.

Regarding our risk ratings, we downgraded five loans this quarter into the 4 and 5 categories, of which 3 were U.S. office and upgraded one previously 4-rated loans. Jeff will speak more about these loans shortly. We also placed two of our 5-rated loans by non-accrual status, a $121 million senior secured loan on an office complex in Washington, D.C. and a $42 million senior secured loan on a two-story retail in downtown Chicago, both of which we expect to foreclose upon in the near term. We continue to actively work towards the path of full repayment of our non-accrual loans and REO. Once we are able to resolve them and reinvest the funds, the related equity would significantly contribute to our earnings power.

Next, I will discuss our Residential Lending business. Our on-balance sheet loan portfolio ended the quarter at $2.7 billion, including $1.7 billion of non-QM and $994 million of agency loans. We fully hedged the fixed rate interest rate exposure in this portfolio with our hedges having a positive mark of $107 million at quarter end after $15 million of cash receipts in the quarter. Because of our hedge strategy, the spread mark-to-market from our lenders during the quarter actually resulted in an $18 million net cash inflow. Lower projected prepayment fees benefited our retained RMBS portfolio, which increased in fair value by $15 million, ending the quarter at $428 million.

Next, I will discuss our Property segment, which contributed $21 million of DE or $0.06 per share to the quarter. Of this amount, $11 million came from our Florida affordable housing fund, $5 million from each of our master lease and medical office portfolios. For the Woodstar Fund, our GAAP valuations were relatively consistent with last quarter. We are still awaiting HUD, which governs the max rents for the over 15,000 units in this portfolio to release the rent increases for 2023. We expect their announcement later this month with the increased rents taking effect in July.

Turning to Investing and Servicing. This segment contributed DE of $13 million or $0.04 per share to the quarter. In our conduit, Starwood Mortgage Capital, we originated $74 million of loans for securitization next quarter. We typically see lower securitization volume in Q1 and expect to see volumes increase over the remainder of the year. In our special servicer, we obtained two new servicing assignments totaling $1.5 billion with our named servicing portfolio, ending the quarter at $107 billion amongst the highest levels we have seen since 2016.

Including my business segment discussion is our Infrastructure Lending segment, which contributed DE of $20 million or $0.06 per share to the quarter. We funded $160 million of new loan commitments and $15 million of pre-existing ones, which was offset by repayments totaling $204 million. The balance of the portfolio remained consistent with the quarter at $2.4 billion, which was 100% floating rate. During the quarter, we increased our CECL reserve by $12 million, principally for two small legacy investments from our GE acquisition in 2018. Their combined DE basis was $29 million, and both assets were placed on non-accrual.

I will conclude this morning with a few comments about our liquidity and capitalization. As a reminder, 87% of our total outstanding on and off balance sheet debt is non-mark-to-market, as is 92% of our Commercial Lending debt, with the majority having no capital markets margin call provisions at all. After repaying our April $250 million convertible notes and our first quarter dividend in cash, we had $620 million of liquidity as of last week. This includes $449 million of approved undrawn borrowings under our repo facilities, all of which are with global banks, represent immediately available funds and are not subject to further credit approval with the lender. In addition to $1.5 billion of harvestable DE gains in our Property portfolio, we have $4.2 billion of unencumbered assets that together with our Term Loan B capacity can be fully levered to generate additional liquidity. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.5x, consistent with last quarter.

With that, I will turn the call over to Jeff.

[Jeff DiModica, President]

Thanks, Rina. We added a new slide to our supplemental on Page 9, where you can now clearly see our differentiated total asset base. You will see only 13% of our assets are invested in office loans globally with just 10% in the U.S. office, including life sciences. This compares very favorably to our peers, and it’s part of why you see our cumulative CRE CECL reserves of $130 million against our $28.5 billion diversified balance sheet and $7 billion of equity are lower than our peers per dollar of equity. We built STWD to perform well in normal markets and outperform in volatile ones.

So we are pleased that our stock has outperformed since the Fed’s aggressive rate hikes and the unprecedented spread volatility we have seen in the last year. In addition to our smaller exposure to domestic office loans, we have thematically increased our exposure away from high tax negative migration areas to lower tax positive migration areas. Following the lead of our manager, Starwood Capital, over 60% of our $5.7 billion multifamily exposure is in the Southeast and Southwest. And today, we have no loan exposure in any asset class in San Francisco and only 1% of our loan book is in Manhattan, two of the weakest office markets in the country.

We have always run our company to a significantly lower leverage than our peer group who also write predominantly first mortgage loans. At 2.5x debt to equity, we, in fact, manage our business over a full turn of leverage lower than our largest peers despite having 25% of our equity in businesses like Residential and Infrastructure Lending that are run to significantly higher leverage by others in the public markets investing in those disciplines. Running our business with significantly less leverage and financing it with more – sales, CLOs and corporate debt also narrows the range on possible liquidity needs should markets deteriorate.

Our loans have over 30% sponsor equity sitting behind us in the capital stack at loan origination. We are uniquely positioned to absorb volatility in underlying asset valuations should that sponsor equity become impaired as our diversified low leverage business model also benefits from almost $5 per share in unrealized gains in our owned property segment.

To-date, in our 13-year history, our organization of over 300 real estate professionals along with the support of another 350 professionals at our manager, Starwood Capital Group, have generated significant gains on REO when we have taken loans back on to our balance sheet. We have tremendous internal asset management expertise across sectors and markets. We are in the process of closing our second conversion of office to residential and should borrow stumble, we have a proven track record of creating value on assets we take over.

In sum, our low origination LTVs, our low leverage and our almost $1.5 billion in durable property gains give us enviable cushion to run our business in volatile markets. We have by far the most unencumbered assets of our peer group, which we believe can be quickly levered to create liquidity, if needed, without creating incremental drag on our balance sheet when they are not. Despite all this, on Article Friday discussed the increase in interest in STWD and other CRE stocks as a short on office fundamentals. It is my view that in times like this, funds indiscriminately short a sector and disproportionately the largest, most liquid and lowest dividend yielding stocks like STWD. We believe in our differentiated diverse low-leverage model and think there is significant short covering upside when people who understand the resilience of our business model realize that our unique company, which has historically traded at 122% of book value in our 13-year history, is mispriced at today’s level.

I said earlier that U.S. office and life science loans make up only 10% of our diversified asset base today. Holding the rest of our $28.5 billion balance sheet constant versus just onetime book value, the market is effectively pricing in 50% losses on our $2.7 billion U.S. office portfolio, and that is after 30-plus percent sponsor equity is depleted. Versus our 13-year average price to book of 1.22x, our price today implies we will lose 96% of our investment after borrower equity on our office loans. To state the obvious, our low leverage diversified company with large property gains seems mispriced.

Rates were down significantly since we last spoke. I am sure Barry will touch on rates, but lower rates are generally positive for CRE valuations. In our CRE lending segment, we only wrote one small loan in the quarter. And as you can imagine, our team remains focused on asset management and continuing the progress we talked about last quarter. Our non-office loans are generally performing very well and in line with our original underwriting assumptions. 83% of our loans have interest rate caps in place for our fixed rate loans and an additional 11% of our book has interest reserves or guarantees. So 94% of our loans have interest rate protection in place today, offsetting a significant amount of interest rate stress for our borrowers. Finally, 82% of our office exposure globally is on Class A properties.

Our European office portfolio is performing very well as is our entire European loan portfolio. We have a significant competitive advantage due to our scale and decades of history investing in and lending in these less competitive markets we know very well. Rina mentioned we downgraded three loans from a 4 to a 5 risk rating in the quarter. We downgraded a $197 million office loan in Irvine, California with $160 million of sponsor equity behind us due to a near-term maturity. As I mentioned last quarter, the asset is being marketed for sale and the sponsors received bids above and near our debt basis. To the loan not repay, we are considering several options, including an extension.

The second downgrade is our $156 million loan on a property in Brooklyn that we classify as office, but is more likely to be converted accretively at our basis into mixed-use multifamily and/or self-storage. Last quarter, I mentioned that this asset benefits from cross collateralization against the new build multifamily portfolio, which are the only other assets in this sponsor’s $500 million fund. The fund has no uncalled capital to support debt service shortfalls and CapEx needs. Thus, we have cautiously downgraded it. Given the excess collateral, we continue to feel secure in our very low resulting basis on this property that we believe is fully recoverable.

The final downgrade to 5 is on a $120 million office asset in downtown D.C. that we have not foreclosed on yet but are working on a consensual transfer. The asset is 100% vacant since the departure of a GSA tenant, which was a known event at the time of underwriting. The original business plan with this top 5 global sponsor who invested almost $70 million of equity in the asset was to completely renovate and add additional square footage to the top of this building, which they are no longer pursuing in this environment. Having the building empty is actually a benefit to us given no detenanting costs and minimal operating expenses as we consider alternative uses for the property.

Assuming we take title, we are already under LOI with a new sponsor to purchase the asset at our loan basis and convert it to multifamily. Most office assets don’t convert easily to residential because of location, floor place, windows or elevator configuration, but we see this asset as a relatively easy conversion like the asset we just completed the sale on in Honolulu in the quarter. The two loans we downgraded from 3 to 4 in the quarter are relatively small loans. The first is a $65 million exposure to a mixed-use asset in Phoenix that we downgraded since the sponsor declared they will no longer put money into it. The sponsor has sold components of the asset to date worth $49 million and we expect this loan to pay down significantly with the borrowers component sales in the coming months, and we expect full repayment on the loan at the completion of this process.

The other is our only multifamily loan in our 4s and 5s, a $60 million loan we made on an asset in the Pacific Northwest, which we are downgrading due to slow lease-up and cash flow shortfalls with rates higher. The sponsor is expected to sign a mezzanine loan term sheet imminently, which would pay down our loan and likely result in a near-term risk rating upgrade. We have final maturities in 2023 on 16 loans, representing less than 10% of our loan book, and only half of that is office. Two of those office loans are risk rated 4 or 5. The DC conversion I just spoke about and a 50% LTC loan we made on an office building in Houston that we extended 6 months while the sponsor explores a sale or recapitalization. Rina mentioned our liquidity, and I will note that we expect the largest equity return in our 2023 final maturities, $125 million of equity to pay off on Friday, which will add $125 million to the liquidity numbers Rina mentioned tomorrow.

Finally, I will touch briefly on our three REO assets. On our mixed-use asset in Los Angeles, we continue to work on non-office conversion strategies, but at the same time, are receiving bids, which we expect will be at or near our basis. On our former office asset in Houston, we are under a signed PSA at our basis for residential conversion. And on the condos on the Upper West side, we began selling renovated units this quarter and are under contract on three of our remaining units for just over $10 million.

In Residential Lending, we continue to work to lower our financing costs as more banks aggressively push into residential financing. Loan prices have increased as rates have moderated. And as Rina said, unlike a lot of the banks you have recently read about, we fully interest rate hedge this book and have received $107 million in gains on that rate hedge to date.

Our Property segment continues to perform very well. And Rina mentioned, we are waiting for HUD to provide us with allowable rent increases for 2023 this month, which will be passed through midyear. These increases are CPI and median income base, and I would expect them to be in excess of 6%, which will increase income and at the same cap rate book value in the coming quarters. Our energy infrastructure business continues to provide very attractive returns. We invested $160 million in the quarter at high-teens levered returns and we believe we can continue to grow this book accretively in the coming years.

Finally, in REIS, we continue to make money in a choppy CMBS market with $13 million of earnings in the quarter. As Rina said, LNR is named special servicer on $107 billion of loans, and we expect to earn higher fees if this high rate credit cycle continues beyond what the forward curve is telling us. Also this quarter, LNR again received the highest servicer rating by Fitch of CSS1. We are the only special servicer with this highest rating and are proud of the hard work it recognizes.

With that, I will turn the call to Barry.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Thanks, Zach, Rina and Jeff. Good morning everyone. While we joined the day after the Fed did their 10th increase in a row. I think I’ve been pretty clear what I think of this. It is bordering on idiotic. The biggest victims of this are the regional banks, which every quarter point is a $50 billion loss in their books. Last we checked, a point is $200 billion, and they’re going to have two choices. They’re going to take 100 banks back and have to sell their loans as they’re doing in assets, as they’re doing in Signature and Silicon Valley Bank, and it doesn’t look like they did because they supported the First Republic acquisition. And you’ll have RTC2. Clearly, the government will have to step in and save all these banks who really are a victim of the Fed zone stupidity, frankly.

I mean you had a situation where the government set the rules. They said, you buy treasuries with all these deposits that are floating – flooding your banks because of the stimulus we’ve put in, buy treasuries have advantaged tax capital regulations and you don’t have the market to market. And it’s kind of like if you had a hurricane or told everyone, you’d never experienced a hurricane. So why would you buy a hurricane insurance?

Now I think what the management’s missed is the pace at which the deposits could disappear obviously helped by social media today. But realistically, you have a really nearly insolvent regional banking system based on the rules that were set up by a government that has 30,000 people to monitor the banks. That’s between the FDIC, the OCC and the Federal Reserve itself, but we are filled with PhDs running models that make no sense. There’s no question that credit will decline that’s already the highest credit in history.

And you see the markets vote on this with the steepest yield curve inversion in the history of this country. So despite the fact that some people call for credibility, besides the regional banks and obviously, real assets, the other victim is the federal government itself. The only benefit to them is they are going to have to spend more on interest expense and their deficit will grow because the value of assets drop capital gains or income and other receipts drop. So the deficit widens. I continue to worry that he hits the point of no return where people realize that a $3 trillion interest expense is significantly higher than the $480 billion it ran in ‘21, which is 5% on $32 trillion only hit it in one direction.

So I’m done with my speech about that because I really understand that our view is we need to navigate between now and then. Then is when the yield curve says at the end of this year will be 80 basis points lighter on LIBOR. But let’s forget about that, let’s say, a year from now or even 1.5 years from now. And clearly, the economy should slow given what’s going on in the – with interest rates, decline in manufacturing.

The service sector remains strong. There is no doubt. The travel will remain strong. We will see how long this can continue. But it does defy most logic. And obviously, employment is solid, and that is what’s keeping the economy alive, but the Fed seems adding in to increase unemployment and so you see this inverted yield curve, more or less suggesting that we’re going to go into not a shallow recession as Powell said yesterday, but something more severe.

Let’s talk about the real estate markets because, again, we were not the reason for this recession or this crisis. This was all the government too much money, too few goods, then a lot of goods and now dwindling money, prices went up. They are now coming down. Oil is $68 a barrel. The only person who seems to not know inflation is going down is Chairman Powell and his merry band of Fed governors.

So in the real estate markets, you have like three or four superb segments that are really behaving quite well. Anything in single-family and multifamily is doing fine. Industrial remains fine. Hotels are record high. Occupancies and rates, you saw Marriott’s earnings this week. Hilton reported earlier in the week. Business travel remains good. Leisure travel remains good. The only – real data centers are good. Life sciences are good. The only issue is office. Office is a story. It’s a very – it is a tale of countries anywhere but the United States. Office is full. We have a large exposure to Germany in the office market. Not only are our buildings remaining full, but rents are actually rising across Germany, 5% to 7% in places like Berlin, Hamburg, Munich.

In the U.S., you have a tale of city by city. You have the bluish states, the Chicago, the West Coast, New York, really experiencing maybe 2 days a week in some cases. I was recently with one of the state pension plans in California, and there are 2 days a week. They own the building they are in. It’s sort of a shame but that is what’s happened in the U.S. It is unique to the U.S.

And then in the office market, you have a bifurcation. The good buildings are full. They are holding their rents and is actually hard to get into. We recently even tried to renegotiate a lease in San Francisco of our own Starwood Capital Group lease. The landlord insisted on a 10-year deal. We wanted a 5-year deal. We sell it on a 7-year deal. My team wanted to be in that building. I wanted them to be in a big building that they’d be happy in. So you can see that it is a city-by-city, market-by-market underwriting exercise and you are throwing – or the markets are throwing and in the federal government is throwing the baby out with the bath water. The federal government make no mistake is leaning across all the banks, big and small, and saying reduce your exposure to the Office segment. I don’t know what they think is going to happen to a $3 trillion asset class but it will take down the banks.

When you look at the regional mix, we’re marking their securities to market and seeing that they are virtually insolvent. Those are their treasuries, which are money good. We haven’t really even touched their CRE books. And obviously, they are 4x is dependent on CRE lending as are the major banks or 28% of their assets, and it’s a $1.9 trillion of loans. So it is a serious situation that I hope will improve as the Fed realizes what it’s doing. Our friends in the industry talk to the Fed, but they are seeking credibility. So I guess they are taking credibility as destroying the U.S. economy.

Anyway, in this morass, you want to lend to get good assets that have bad balance sheets. And they weren’t bad per se when we started, but they become stretched when interest rates go from 0 to 5%. And so those are the assets that actually as an equity player. Starwood is an equity player. We have $120 billion of assets. We don’t want to take them back, but we have made money taking back assets every time we have done it in our 12-year history. And as an equity player, whether it’s the conversion of our museum building in Los Angeles or the new building we got from a major sponsor in Washington, D.C., we’re confident we will recover, if not every dollar then most every dollar across the board. And if we have more money, we might actually take on the development ourselves.

We actually – those of you who have been with us for a long time, we started Starwood Financial, that’s today called iStar Financial, and they survived their 2007-2008 crisis, took back tons of assets and started to build real value for their shareholders. We will make more money as an equity REIT than we will have a debt REIT, but we don’t expect to be there. But we would be delighted – take our multifamily book, which is 33% of our loan book, not including the $2 billion of multifamily own on balance sheet, which are affordable housing that remains solid. And I would expect the rent increase to be above 8%, 9% that we will see this month from the federal government for those assets in the asset class.

But going back to that multifamily book, the debt yield stabilized on that book is a 7 1. I would be delighted if we would take every single asset back. I don’t think that will happen, but that would make it the cheapest REIT in the United States, including all the fallen angels at that cap rate. So we would be very happy to see on our balance sheet. We don’t think we will see maybe one asset in that portfolio in a city that was hit by the George Floyd fallout crisis. It’s not coming to us yet. It’s just leasing slower than we anticipated.

So we do think the economy is going to slow, and our job is really to manage through the cycle, keep our liquidity high. Obviously, our stock is an intoxicating value at these levels. But caution is the right word for us as we play defense and decide when again, we will go on offense. We are, again, somewhat excited by this. You should see that – note that we are loan-to-values. We’re 60% to 65%. So again, when we get assets back, we’re getting them back at an attractive basis that allows us to do things the prior borrower couldn’t. Perfect example, as Jeff mentioned, was that building in D.C., which works as a residential conversion because we funded $0.60 of the cost. It wouldn’t work as an office conversion. So it’s under LOI. We will see if we can get rid of it.

And you should know also that we believe we can make our earnings with no new investments. That is a benefit of having floating rate debt. Having said that, between non-accrual and REO assets, if we could put that capital to work, which we intend to do over the coming months or, let’s say, 6 months, we could earn an incremental $0.30 to $0.40 a share. That’s between earning a 12, which would be easy today on the new capital and also not having to spend the money. We do carrying those assets until we can put them back – or sell them and put them back in the market.

So I also want to highlight what Jeff said that our lending book really did mirror the strategy of our equity book, which is we have very little – no exposure to San Francisco and de minimis exposure to Manhattan, which are two very difficult markets right now. These states are running massive budget deficits. And the only way they can cover them is to continue to increase taxes, which, of course, create this negative cycle for both cities where they can’t support their social infrastructure.

So in summary, I think we feel confident we will navigate through the cycle. It is choppy. The headlines are bad. We do expect there will be losses here and there, but we also expect that we will begin to offset them over time. We do have this unique business model and I’m sitting in Eleonore’s offices in Miami today. We have 300 people that are foaming at the mouth ready for the what the market assumes will be a massive onslaught of defaults and restructurings required in the commercial real estate industry. So they act as an enormous hedge for us, and it’s different – makes us different than then the other business in the sector. We have the owned real estate assets, which are material. The lending business is only 60% of our earnings today. So we have many other cylinders that will hopefully function even better and offsetting the softness in the lending portfolio that we are well positioned for what we think we’re going to see over the next 12 months.

So with that, I want to thank our team, which remains dedicated and focused on navigating through this crisis. This is a Fed-induced crisis. The beginning of – the government did all of this. The government did all the stimulus package. The government created the inflation by throwing money at everyone. Some of it went offshore apparently. And then the government decided that inflation were not to be transient and then increase interest rates the fastest pace in history, and it isn’t the level of rates at the pace at which we got there. And then the set of rules for the banks that made in hindsight very little sense. And HCM would be a lovely thing for us to have. We don’t have it really.

And as you see, because we are not a bank, we hedged our RMBS exposure. We – our interest expense – our hedges covered 100% of our losses in that book and we have no real exposure to rates. So we behaved as probably the regional banks should have behaved, but we’re told by the government they didn’t have to do. So you can blame management or you can blame the Fed but I only hold the management responsible for not understanding how fast deposits could leave, but $42 billion in a single day. That also was a world record. That was a swan. And now, of course, with ETFs, the regional banks are facing serious issues that the government is going to have to cover.

Not every bank has the franchise of First Republic. And many of these banks won’t have residual value. And it is a criminal to put all these people out of business. These people that work at these banks, it is not right and it should all be on the Fed. It’s their fault. So they did this and they don’t need to be a blast for killing inflation at what cost. You can’t manage the employment rate United States with 25-point interest rating increase.

So with that, which is kind of an aggressive line of part, but you know how I feel. Inflation will fall as soon as the rent index, they are delayed. Rent index gets included in the CPI. We should be in the 2s by the fourth quarter. I think it’s a shame. There is no point to doing what they are doing, and I don’t know who they are trying to get credit with, but it’s just not the right thing to do for this country at this time.

So with that, and my diatribe is over, we’re going to take questions. Thank you all.

[Operator]

Thank you. [Operator Instructions] Our first question is from Stephen Laws with Raymond James. Please proceed with your question.

[Stephen Laws, Raymond James]

Hi. Good morning. Congrats on a solid quarter, and I appreciate the new Page 9. That’s helpful to look at the company that way. Rina, I’d like to start with special servicing and maybe leverage off Barry’s comments. If we’ve got all of this debt maturity coming, whatever amount $1 trillion something over the next 2 to 3 years. When you look at your special servicing book, I think it’s only got about $5 billion in active right now, how should we think about that number or what the range of that active servicing book could be over the next 12 or 24 months? And then kind of what would the resulting revenue be at those ranges as you think about that working through the system as transaction volumes increase?

[Jeff DiModica, President]

Thanks, Stephen. Good to hear from you. It’s Jeff. The way I think about the CMBS book is sort of simple. You went through a period from 2008 to 2011, where there was really no CMBS. You had a little bit in 2012, and 2013 was the first year above $100 billion again. We maintained above that and grew it through 2019 and beyond. And you’re now starting to see those 2013 originations come on a 10-year. A lot of them were IO. They don’t tend to add significant cash flow with 2x to 4x debt service coverage at origination. So they make it to the 10th year. And at the 10th year, we may see some fall in. So we’re just at the beginning of what will be a bigger wave of maturities. There is been a lot written about those maturities but the CMBS market is just starting in the maturity cycle. So when something does mature and it gets put to our special and we’re a little over $5 billion, as you said today, we will start earning ticking fees for the next year, 1.5 years as we maybe reposition more work to sell the asset and then we get the largest fee at the end.

So even on the 2013, it’s really ‘24 revenue. It could be ‘25 revenue. And as we look at the credit cycle that we’re in today, if it’s met with the rate environment that we’re at today versus what was underwritten, we’re going to have a bevi. So when you’re modeling it, you can take $107 billion. You pick the percentage of losses that you want on that, and that’s what’s going to add on to the $5 billion. And for sort of simple math, we tend to multiply that by 1.25% to 1.5% of that will become revenue at some point in the future, a year to 2 years later. So we’re really excited about 2024, later part of ‘24 and heading into ‘25 and there is a lag and a delay there. So just wanted to make sure everybody understood that.

[Stephen Laws, Raymond James]

That’s helpful. I mean from a run rate standpoint, $7 million, $8 million, $9 million a quarter, I mean, I’m looking at my model from 2Q ‘13 into ‘15. I mean, you’re running $50 million or $60 million of revenue to that segment. I mean are those levels sort of attainable? Or is it pricing and how it works a little different on...

[Barry Sternlicht, Chairman and Chief Executive Officer]

Given what we’re seeing today, that could be a [indiscernible]. I mean a lot of these losses will have to be slides and [indiscernible] be restructured, right? There’ll be A note – to B noted and you get paid, not at the end, you get paid when you restructure it. So that’s this differ from Jeff. I mean, we might do two exits. It might be the restructuring and then the final deal then. So there’ll be two opportunities for us. And I think that’s probably the only way the office markets are going to get restructured. You’re going to have to set a new level with an A note and then there’ll be a new capital coming with the press, and then there’ll be a – note for the back. And that is – I would guarantee you that’s probably 80% of the restructurings in the office market.

Nobody wants the assets back, right? But no borrower is really keen on putting capital in, in this environment when the government telling banks don’t make office loans. So the bank – the real lender for office is the existing lender and there is no other lender. So we’re happy because – I mean, we will get the coupons. There are tenants in place in most buildings and some, as I mentioned, are full. And most of our book is A class office building, so they’ll tend to be full, but there will be capital cost. And I think for the first time in 35 years, everyone is focused on these capital costs now. And what is the cap rate that clears the building value and makes the investment of the TI worthwhile for the borrower? It’s interesting that in prior soft cycles, borrowers in strained credit conditions that we won’t put the TI in. You put the TI in and we will give you a break on the rent. And you might actually see that come to fruition because I think that’s going to be an easier way to solve some of these issues. They tend to have the money theoretically, a Facebook, a Google and Apple, any of the – they have the money. They can put the TI up. It’s just the convention has been for the landlords to do an allowance, and then the tenants invest over that. But typically, let’s take a building in New York, the allowance might be $100 a foot, the tenants putting $300 a foot into the space. They only put $300 instead of $200. If they want the space, it’s not a big deal. It will just be restructured.

And the office asset class is not going away. It is not going to be every building is going to be empty. Frankly, we all know Amazon goes to work in 4 to 5 days, may be 9. And we will see which tech companies follow. But I would say I just – and I think many of you would agree, and we are so much more productive in the office than we are at home. And some industries probably a little work from home, particularly the tech industries, but that’s not the majority of the country. And we will see Tesla is telling everybody in the office or you’re fired. So there is quite a variety of approaches. I was talking to one of the banks yesterday, major top four bank. And they said, well, they noticed that a significant number of their people, 20%, 30% weren’t coming in the mid day is required and the executive said, those are the first people we will fire and none of them will get raises. So – and that was a blanket statement, but I think that’s how management feel. And as you probably know, so the propensity want to come back to the office is inverted with age. Managers want their people in and the kids want to dial in from – and Jackson Hole. So that is not going to be acceptable in a recession in my view.

So I think you will see the office environment where people can walk by an office and say, hey, what about that? And it’s not a scheduled Zoom call for 30 minutes, leaving 22 minutes empty, and you have now figuring out how to manage your time better. I mean, it’s simply a better model. And I think we will see that. But it’s going to take some time in the U.S. It is just wild that this is just a U.S. phenomenon not in Asia, not in the Middle East, not in Europe, not in London, not in Berlin, Paris, Milan. I mean, the Europeans, they are the ones that supposed to work-from-home, and they are working. They are in the office. So they are traditionally less productive than we are, but we have adopted this new model of this new economy where people – with labor so far has been able to dictate how they are going to work. It is so fascinating. We built the new headquarters in Miami and the – is in this building. The accounting team was going to work-from-home in the old building, which was kind of dingy and dark. We built a nice building. Everyone shows up at work. And we didn’t ask anyone to come in. They all came in themselves. So – and they like to be here. They like – they have beautiful offices. And that’s what you’re going to need to compete in the world today. You cannot have cubes in dark holes. Nobody wants that environment, period. So improve your space, and you’ll have a full office and a happy firm.

[Operator]

Thank you. Our next question is from Jade Rahmani with KBW. Pleas proceed with your question.

[Jade Rahmani, KBW]

Thank you very much. I’m trying to square two things. When I look at the CECL reserve, it’s amongst the lowest. I know it’s an accounting treatment, but it is amongst the lowest of the commercial mortgage REITs and much below that of the banks. I understand it’s a different methodology. The loans are shorter in duration, floating rate. There is capital that’s come in. So there is reasons for that. And then I look at disclosure around properties held in the lending segment that have gone through foreclosure as well as the non-accrual non-performing loans. And I appreciate the disclosure you’ve provided. It is amongst the higher end of the range. It’s not as high as some of your peers, but it’s higher than a few. And then from Jeff’s comments loan by loan, it seems like there is a plan on many, if not most of these assets to recover value close to Starwood’s basis. So just – I think one of the reasons the stock is down today is nervousness about what’s coming on credit and if the CECL reserve has to move meaningfully higher to accommodate that. Can you address that, please?

[Jeff DiModica, President]

Yes. Listen, Jade, when something – we’ve taken two into REO, and I appreciate that you heard my comments, but you seem to be very skeptical on them. So we’re more than happy to go over the five assets that I said we expect full repayment on. So therefore, there is no reason to take a CECL reserve. We also use the most draconian version of the model because we know we’re lower than our peers. We’re significantly lower than our peers. By the way, we have 10% U.S. office. Our peers are in the 30% or above 30%, like there is a reason why we’re a lot lower than our peers.

We just spent 25 minutes in prepared comments hoping people would understand why we set up this business so dramatically different than our peers with massively lower leverage than our peers. Those are the reasons we have significantly lower CECL reserves. Management may or may not be right in our assumption on all of those loans that we’re going to get repaid fully, but we believe it today, and this is a public earnings call, and that is our best guess of where things go, but we feel very good. We are willing to take things into REO. We’ve done it. We’ve made money off of it. And we are using the most draconian model that we can possibly use to bring our reserves up because we know people are going to be skeptical of our reserves. So we pushed the model as hard as we could to increase it. But this is just the reality of what we see. And it’s the reality of the business that we built, which is the underlying piece to compare us to anyone else. Well, I will tell you what, take – add a turn of leverage to us, 1.5 turns versus our biggest peer of leverage to us, we would have more CECL reserves. Add 25% more office we would have more CECL reserves. That’s not how we built this business. So, it’s sort of frustrating when the people who know us the best, don’t see that, but we are happy to spend more time on any one of those assets and repeat what we said or go deeper.

[Barry Sternlicht, Chairman and Chief Executive Officer]

I am going to add another point, like we have marked our non-accrual loans is like $0.80 on the dollar. So – but obviously, we expect – one is as low as $0.76. We have already taken those into these. So, we think they have marked appropriately, and that’s one of the reasons. Again, it’s a puzzle, right. And then the CECL reserve you see is formulaic. It is a math model that we don’t control, but an asset is already which doesn’t get more done. And so, it’s just hard to mark. And based on bids we have, we can see where we think the values are. So, we have tried to be conservative. I don’t – don’t get us wrong. You could see a drop of the dollars. You could see some book value deterioration, but the earnings power of the company is tremendous. And I think we will come out of this stronger. And when we can go back into the aggressive lending, this is the best lending environment since 2009. It is an amazing thing there. And we will, if we have to take the gains in our book to offset the losses, we can sell down our fee income book, which no one else has to actually preserve and actually – obviously, there is a delta between our book value and our fair value. So, it’s – our gains are 10x our CECL reserves. So, we – and we are confident and this is affordable housing. This is an insured asset class where rents are being adjusted by inflation and by wage growth. I mean two really good things that are driving the rents much higher than we ever thought they would be. So, you have a very flexible balance sheet. And we have got our CLOs. We have got our corporate debt. There are some extraordinary opportunities today. I give you an example of the lending environment. We were – we have a site in Midtown Manhattan. This is in our equity book. This isn’t part of this company. And it’s a spectacular building that’s to be constructed on the Upper East Side of New York City. The single best quote we could get for a construction loan was 50% and that’s 500. That is guaranteed by a massive fund. So, it will be completed because it has a $10 billion fund behind it and 500 today is 10% on a first mortgage. With light leverage, you are – I don’t know what you are 13%, 14%, 15%. And that attachment point on that project would be half, less than half of what properties are selling per square foot in Manhattan today. I mean back up the truck, empty your kids’ trust funds and invest in credit today. I mean this is crazy. And the fact that there is this sort of prices that the Fed created creates enormous opportunity on the investing side today in our sector. If you know what you are doing, just be careful. Not everything is relevant today. But in the asset classes that are fundamentally performing well you have a really good opportunity. The housing complex – well, sadly, those Fed’s actions will do the opposite of what he wants long-term. He will increase supply of everything, everything, and so rents will rise, again, more smartly than they would have had he not crushed starts. And that’s all coming to a movie theater near you. You don’t get to see it yet because everybody is completing everything they started because everyone has completion guarantees to us and to every other lender in the country. So, as soon as our projects are finished, we will be laying off the construction workers. And though this government has a $1 trillion infrastructure build, they are not going to be able to get their act together fast enough to actually employ people to spend the money, given that the Federal Government is so screwed up. So, let’s go do an investigation of a meaningless relative of a prior President. That’s really important. That’s really helpful to growing the U.S. economy.

[Jeff DiModica, President]

And just one other thing to what I said earlier, lending, as Barry said, is 60% of our balance sheet. It’s not 100% of our balance sheet. So, unless you are going to assume losses on property and some of our other areas, we should also come in lower on the CECL side. Thank you.

[Operator]

[Operator Instructions] Our next question is from Rick Shane with JPMorgan. Please proceed with your question.

[Rick Shane, JPMorgan]

Thanks guys for taking my question. And I may try to squeeze two in here. But when – Barry, you talked about the opportunity related to capital freed up from the REO and the non-accruals. You talked about an intoxicating stock price and Jeff, laid out the disconnect between the implied losses and your expectations. As you think about capital allocation, how aggressively should you be allocating some of that additional capital, particularly given the low leverage to your buyback?

[Barry Sternlicht, Chairman and Chief Executive Officer]

I would still like to build our reserves up slightly. I think if we achieved north of $1 billion of liquidity, we would aggressively go back in the market. So – and that would be attainable with some of the REO sales and loan sales that we could achieve them. So, I think that’s kind of where we would like to be. And we have a few things cooking that – including the repayment of a large loan that will happen as a week, we think. And that would include repurchase of the stock. It’s not just making new loans. Our stock is now a better – probably a better investment than most new homes we would make. I mean the issue with construction loans is we don’t get to put money out of that coupon upfront. They are drawn over time, whereas we are saving the dividend yield on our stock on day one. So, that would – as we have in the past, every time the stock has gotten down, we have repurchased it. So, we would do the same this time as soon as we clear what I think is – look, you know that your credit is constrained today, so we have to be careful. But you know for the multis, the agencies are wide open. That’s a third of our lending book, right. So, that’s not an issue. We expect that spread – the first thing that will happen in the credit markets, and we will see if – once this banking crisis sort of clears and they take back 100 banks at the rate they are going or might be more, spreads will come in. Some of the spreads in the security markets, including RMBS and CMBS markets are wide because the regional banks are dumping their security, so – and people are fearful to tread in the water. You cannot have a functioning market with AAAs at 2.20, 2.40. They were coming in, but Silicon Valley Bank and everything else that’s transpired post that sort of shook the can again. And it’s like, what do they call, the snow gloves, I mean the dust is in the air, it will settle and spreads will come in. There is – as you can see, there is so much money out there and it’s looking for homes. And frankly, a 3.35, 10-year is a lot different than a 4.25 10-year. So, to get duration today, you are going to want to buy securities with higher yields. And the short end is lovely, but it’s only three months to six months, and you are in 5%. So, the shape of the curve is going to help force capital into longer term assets, which will look really good as the yield curve inevitably flattens. So, I think this is a great opportunity for people and for us, but we do – first and foremost, we are always been predictable and safe, and we want to protect, if we can at all cost our dividend. So, we are not going to be cowboys, but it is accretive to buying the stock, obviously, at these levels to our dividend.

[Jeff DiModica, President]

And I would add that – I would add to that, that Rina mentioned the $620 million of cash. We have a loan closing tomorrow that’s coming back to us. There will be $750 million of cash. The reality is we have $4.2 billion of unencumbered assets. We can go borrow against those unencumbered assets tomorrow. At today’s SOFR and paying up – taking a loan and taking debt at 300 or 325 over, which is where the market has moved to, we are going to pay 8.5% to create more liquidity. So, we have more liquidity available to us, but the cost of that is 8.5%. So, it’s very difficult to convince yourself against cost of liquidity of 8.5% to sort of lever up the balance sheet or try to create a lot more that you end up ultimately sitting on and doing this borrowing also would increase our leverage. And we are very cognizant of our credit rating. And at 2.5 turns of leverage, and we believe we are going to have a great opportunity to issue unsecured later in the year against this higher cost financing we have taken. When we do that, we will have increased the amount of unsecured debt to secured debt that we have on our company. And we believe that along with holding the line on low leverage is tremendously important, because it will lead to a ratings upgrade for our debt. We will borrow cheaper than we win. So, being cognizant of the cost of that excess borrowing today to create a tremendous amount of liquidity that we could flash to you guys and you would see billions of dollars, well, we would be paying 8.5% for it and others are effectively too. So, we are choosing to run our liquidity where we are. And as Barry said, if we come up with excess liquidity that sort of doesn’t cost 8.5%, I think we would love buying back our stock rather.

[Operator]

Thank you. And our next question is from Don Fandetti with Wells Fargo. Please proceed with your question.

[Don Fandetti, Wells Fargo]

Barry, if the Fed did come in and cut rates like the futures market is projecting, do you think that would change sort of the psychology and the CRE property markets and kind of put a floor on values you talked about a lot of money on the sidelines?

[Barry Sternlicht, Chairman and Chief Executive Officer]

Again, I think if spreads come in first and then rates go down. Those are – that’s a double whammy. Spreads are twice as wide as it used to be because there as fear in the markets. I think – look, I think the office asset class is going to evolve a little like the malls, right. The mall market, we all thought and we read and everyone was completely panicked that there will never be another physical store. We thought the world was ending in retail like done, and yet look at Simon’s results yesterday. I mean the good malls are full, right. We are near Aventura. They just added like a several hundred thousand foot expansion and it’s completely full. So, the office markets will behave exactly like the retail markets. They will be good buildings and dead zombies all around. And you will have a great opportunity to lend against the good buildings. And that’s what we get paid to do, be smart investors and take the right risks. I think – but right now, it’s fun to hear every day. And Charlie Munger say, the real estate asset class is getting pummeled. It’s not really about the asset – single family say, look at even the prices of homes, they have held up really well, far better than most people thought. And you see multifamily rents have reaccelerated. They were – there was a weird thing that happened at the end of last year where tourists for rentals dropped, but they then have gone bananas in the first quarter of the year. We don’t want and don’t expect to see 20% increase in multifamily rents. That is – that’s some weird condition that’s never happened before. We saw it in ‘21. Everyone saw it in real estate, except the Fed, which waited six months to realize their inflation number was going to go way up, and that’s one of the reasons they were so late. Now, they are doing the exact opposite. They still have it rising every month. It’s the biggest component of CPI, and it’s falling dramatically from 20% to 4%. That’s national rental growth – multifamily rental growth. So yes, I think it will take a little time to people – this regional banking prices, you cannot have these banks having value every day. You are – it’s a little tornadoes and hurricanes blowing over the system and they will be real estate, people who still want to live somewhere. They will shop some place. We are just going to have to adjust balance sheet to this. And we were formed at the RTC. I have started this firm in 1991, buying assets from the RTC. We made a lot of money, and we made a lot of good returns I think this trip will be more like ‘07, ‘08, there where the government participated in the sale of the assets and they financed the purchasers. I mean the difference – the big difference here is in ‘07, ‘08, they lowered rates to zero when the economy blew up. And so banks were fine because all they had to do is keep their doors open and they rebuilt their capital basis, and they didn’t have to mark anything to market. They are doing the opposite, right. The increasing interest rates into a falling asset class and economy, and so the banks – I look at our – I looked at a bank, we have a small – it’s not the REIT, but we have an investment, I have a personal investment in. And they have billions of deposits earning zero and billions of deposits that are insurers of the balance. I mean that is, those can leave with 10 to 1 leverage, banks can’t make up. They can’t liquefy that fast. There is no way. So, they wind up being custodial of the state. And whether I let JPMorgan buy every bank or Wells, they won’t allow us do anything. I mean the government is completely screwed up. And I don’t know how to handicap that because I don’t know what they are looking at, but they aren’t looking at what everyone in the real estate industry is telling them to look at. And office asset class is $3 trillion. $3 trillion, I mean that’s noticeable. And the losses will go somewhere. They will go into CMBS securities, into regional banks and the major banks and bonds. And fortunately, LNR will have a good time. But again, it’s not going to be uniform. It’s going to be like retail. They are really good retail. Look at it happen to strips. I mean they will full. And the tenants are doing well, except for Bed, Bath and Beyond, but most of the tenants are doing well. So, new uses, we get ports and old anchor space. I mean it’s – people are repurposing stuff. And they do make good housing sites. So, there is value here, and smart investors are going to make a lot of money in the cycle again. But right now, we have to deal with the conditions as they are and we will, and we have the balance sheet and liquidity to do it, so.

[Operator]

Thank you. Our next question is from Doug Harter with Credit Suisse. Please proceed with your question.

[Doug Harter, Credit Suisse]

Thanks. As you look forward, is there any need or desire to kind of reallocate any of your capital in the coming year, so towards this lending opportunity that you said is building?

[Jeff DiModica, President]

Okay. In the next year, will we look at lending opportunities towards what? I am so sorry.

[Doug Harter, Credit Suisse]

Alright, sorry. But in the commercial real estate space, as you are talking about this potentially being a good lending opportunity, is there opportunity to reallocate capital away from say the residential portfolio or the property portfolio to be able to take advantage of the lending opportunity kind of on the other side of this downturn?

[Jeff DiModica, President]

Yes. Listen, the easy one to say is we are not adding property today at sort of today’s financing costs, our cash-on-cash returns were nowhere near our dividend. So, that’s not getting bigger. Could it get smaller, obviously. As you look across the other ones, I think we really like our Energy Infrastructure segment. Right now, we earned almost 20%. If we ultimately earn what we believe we will earn on the investments we made in the last quarter, that’s been as big of an investment cylinder for us recently as CRE lending. We think CRE lending is fantastic today. We think there are opportunities to get really good spread. Obviously, you are financing it at an expensive rate. The more we can do there, as I mentioned before, the more repo we can take or if we don’t choose the CLO financing, which is unlikely today or an A note financing, which is more difficult today. If you use repo and you take more expensive repo, it’s a great opportunity later to pay that off with unsecured, as I talked about that, that ability to potentially get a ratings upgrade on our debt. So, we would love to do more. We think it’s a great environment to do more. But our cost of debt is really expensive. CMBS originations are really interesting heading into the back half of this year. Our team has done an amazing job over the last couple of years of making money every quarter when every bank lost money in most of those quarters. So, we hedge the credit risk there. We hedge the interest rate risk there. And we think that there will be a significant pickup later this year. So, we are – we have a great team on the field that we are excited to run into the second half of this year and start picking up there. So, there is a lot of things to choose from. Property is the one place we won’t be investing. Resi is probably unlikely today, but our book is certainly moving in our favor a bit. But the other ones, we have a great business model. We get to wake up every day and choose where to invest of. It’s awesome. I would hate being at a job where I had to make commercial real estate loans every day I woke up regardless of whether I wanted to make a commercial real estate loan. And going back to credit, I think we made a lot of great credit decisions by not investing in loans at times when others did. And so to the question on CECL reserves, there are 50 reasons why I think ours should be better. But one of them is we are not forced to make a loan on a day we don’t make a loan. There were a lot of loans that probably looking back to people in 2016 or so that probably don’t look as good. The lending markets were really tight. Well, guess what, we bought a massive equity portfolio in 2016, and we are up $1.5 billion on it. So, we are going to make decisions every day into what’s the best investment to make. Other people can only make a loan today. Let’s make another loan, and you are going to ultimately get into more trouble when you can only make a loan today. So, the diversification we think is a great upside for us and we like just about everything that we are looking at today in terms of opportunities.

[Operator]

Thank you. Our next question is from Sarah Barcomb with BTIG. Please proceed with your question.

[Sarah Barcomb, BTIG]

Hi everyone. Thanks for taking the question. So, in the prepared remarks, you mentioned the high concentration to the Southeast and Southwest within the multifamily bucket, and I am specifically curious about the deals that were underwritten in the back half of 2021 and front half of 2022, when we saw rapid rent growth and higher LTV lending. And while we are still seeing high rent growth in those markets, are you starting to see any signs of NOI at the property level coming in below expectations on deals that were penciled with negative leverage back then when rates were near zero? And are you seeing any risk in the sponsor’s ability to service their debt in those situations? Are you seeing any issues on the ground here pop up yet?

[Jeff DiModica, President]

So, I am sorry, I thought Barry was going to take it. I guess I will start. From a rents perspective, you have obviously seen rent push from late ‘21 into today, so income is up. Expenses are up a little, but income is up a lot more. So, even the loans that we wrote, I think you are implying that we all, as an industry, wrote loans on lower cap rate than today. We have gone over this, and our portfolio in total is sort of 6.2% in-place debt yield going to 7.1%. As Barry said, that feels pretty cheap to us. I would say the stuff we did at the very bottom, they are – there may be some high-5 debt yields of the things that we did in late ‘21. But again, you have had rents pushed, and we expect rents to continue to push, but at a more moderated pace today. And as long as they outpace expense growth, I think there is a lot of [ph] in those loans.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Honestly, if we get these assets back where we win a fraction of their construction costs, we would be happy to say our careers. We will just add them to our REO book alone. I mean we will leverage them when the spreads come down with Fannie and Freddie and we will loan. And they bring new assets, and we – they are good assets in good markets. So, that would be a really positive outcome for us. We are happy. We are the only mortgage REIT that had always had fee assets. We always went into the fee ownership business. We just couldn’t get the yields on cost we got for the initial portfolio. But even there, we never anticipated the rent growth we saw in the affordable housing portfolio. That’s frankly I think the deal is like 100 IRR. I mean we have refinanced our equity of the deal and still have $1.5 billion of gains, some of which we obviously took with the sale of the minority interest. So, we have issues that are different issues like these gains are taxable. So, we have to be very careful how to harvest them. And so we want to make sure that we pay as little taxes as we can on the gains in our portfolio.

[Jeff DiModica, President]

They are distributable not necessarily taxable...

[Barry Sternlicht, Chairman and Chief Executive Officer]

It is distributable not taxable.

[Jeff DiModica, President]

And we have to…

[Barry Sternlicht, Chairman and Chief Executive Officer]

That doesn’t help us that much on liquidity. That’s what we are saying. Yes.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Barry Sternlicht for any closing comments.

[Barry Sternlicht, Chairman and Chief Executive Officer]

Thank you all. I mean these are trying times so we are available to talk to you as long as you want and transparency has been our hallmark. I think our new disclosure page is very helpful to all of you, whether you look at our company different from others in the sector, we don’t wish anyone ill. But we are a slightly different company than most. And we built this business on a purpose. And as Jeff said, having the ability to do nothing or investing in all these other alternative businesses is an asset and benefit to the firm. So, with our 300-plus people that are dedicated to activities here, hope you navigate these waters well, and we look forward to talking to you next quarter. Thank you.

[Operator]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.