Starwood Property Trust, Inc. (STWD) Q3 2023 Earnings Call Transcript

Starwood Property Trust, Inc. (NYSE:STWD) Q3 2023 Earnings Conference Call November 8, 2023 10:00 AM ET

Company Participants

Zach Tanenbaum – Director, Investor Relations

Rina Paniry – Chief Financial Officer

Jeff DiModica – President

Barry Sternlicht – Chairman & Chief Executive Officer

Sean Murdock – Co-President, Starwood Infrastructure Finance

Conference Call Participants

Stephen Laws – Raymond James

Sarah Barcomb – BTIG

Don Fandetti – Wells Fargo

Jade Rahmani – KBW

Operator

Greetings. Welcome to Starwood Property Trust’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

At this time, I’ll hand the conference over to Zach Tanenbaum, Director of Investor Relations. Zach you may now begin.

Zach Tanenbaum

Thank you, operator. Good morning and welcome to the Starwood Property Trust Earnings Call. This morning the company released its financial results for the quarter ended September 30, 2023 filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company’s website at www.starwoodpropertytrust.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the company’s filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call.

Additionally certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and can be accessed through our filings with the SEC at www.sec.gov.

Joining me on the call today are Barry Sternlicht, the company’s Chairman and Chief Executive Officer; Jeff DiModica, the company’s President; and Rina Paniry, the company’s Chief Financial Officer.

With that, I’m now going to turn the call over to Rina.

Rina Paniry

Thank you, Zach, and good morning, everyone. This quarter we reported distributable earnings or DE of $158 million or $0.49 per share. GAAP net income was $47 million or $0.15 per share. GAAP book value per share ended the quarter at $20.18 with undepreciated book value at $21.15. These book value metrics include $404 million or $1.29 per share of reserves related to our CRE and infrastructure lending businesses, including $15.8 billion of commercial loans, $2.3 billion of infrastructure loans and $535 million of combined REO.

Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $207 million to the quarter or $0.64 per share. In commercial lending, we had $762 million of repayments during the quarter, which outpaced fundings of $263 million. Subsequent to quarter end, we collected another $331 million in repayments. This includes $52 million from a non-accrual loan on a retail and entertainment asset in New Jersey, which represents 90% of the retail exposure in our loan portfolio. Because the loan is on cost recovery, any cash received is used to reduce basis.

Our portfolio of predominantly senior secured first mortgage loans ended the quarter at $15.8 billion with a weighted average risk rating of 2.9. Of the $600 million balance decline from prior quarter, $160 million was due to foreign currency fluctuations. This was offset by the FX impact of our foreign denominated debt as well as our FX hedges, which together had unrealized gains totaling $153 million.

As a reminder, we hedged 100% of our expected cash flow exposure on non-USD loans including both projected principal and interest.

Turning to CECL. We have previously discussed the third-party software we use to model our CECL reserves. That model in turn utilizes macroeconomic advisers, for purposes of determining the economic outlook. In running our third-party model this quarter, we selected a more pessimistic outlook for our office loans, which increased our general reserve by $51 million bringing our total reserve to $280 million of which $177 million relates to US office.

When looking at our loan reserves, it is important to look beyond just our CECL reserve. Some of our loans have been moved to REO, while some loans that are still on balance sheet have reported charge-offs. Neither of these appear in our GAAP CECL reserve, although both have already been reflected as a reduction to book value. When we include these components, our commercial lending reserves are 2.24% of our lending portfolio, which is at the median of our peers despite our low office exposure.

During the quarter, we placed one new loan on non-accrual, a $61 million mortgage and mezzanine loan on a multifamily property in Portland, Oregon, which Jeff will discuss. As of quarter end, our nonaccrual loans and REO represented less than 4% of our total assets.

Next, I will discuss our residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.5 billion including, $873 million of agency loans. We continue to be patient while the loans and has held to maturity portfolio repay. Despite our GAAP mark, these loans continue to prepay at PAR. We received $66 million of PAR repayments during the quarter and $180 million year-to-date.

Lower prepaid speeds continued to benefit our retained RMBS portfolio, which ended the quarter at $451 million. As a reminder, we fully hedged the interest rate exposure in this portfolio with our hedges having a positive mark of $196 million at quarter end after $25 million of cash received in the quarter.

Next, I will discuss our Property segment, which contributed $23 million of DE or $0.07 per share to the quarter. Of this amount, $14 million came from our Florida affordable housing fund where we rolled out the HUD maximum rent level discussed last quarter. A change in HUD MAX rent calculation this year, resulted in 3.8% of rent growth being deferred to 2024. This portfolio is 3.7% blended fixed and floating rate debt, with just under four years of average remaining duration continues to be an asset and gives us ample time to wait for an opportune time to extend the debt in the coming years.

Turning to investing and servicing. This segment contributed DE of $16 million or $0.05 per share to the quarter. In our special servicer, our active servicing portfolio increased from $5.7 billion to $6.1 billion. We continue to see loans transfer into servicing, with $700 million of new loan transfers this quarter nearly two-thirds of which were office.

Our named servicing portfolio declined to $101 billion in the quarter, with new assignments of $2.4 billion offset by $3 billion in maturities. In our conduit, Starwood Mortgage Capital, we completed two securitizations totaling $63 million at profits consistent with historic levels. We expect to see higher volumes from this business in the fourth quarter and into 2024 as loan maturities pick up.

And on the segment’s property portfolio, we sold two assets in the quarter for a total of $35 million in proceeds resulting in a net GAAP gain of $11 million and a net DE gain of $6 million.

Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $9 million or $0.03 per share to the quarter. The majority of our investing this quarter was in this segment where we entered into $444 million of new loan commitments. Fundings on these new loans of $351 million outpaced repayments of $265 million bringing the portfolio up slightly from last quarter to $2.3 billion.

On the CECL front we charged off $11 million of our specific reserve related to a legacy GE investment that we discussed last quarter, which resulted in a corresponding CE loss.

I will conclude this morning with a few comments about our liquidity and capitalization. Our liquidity position remains strong at $1.1 billion after the $300 million repayment of our unsecured notes at maturity on November 1. This does not include liquidity that could be generated through sales of our assets in our Property segment or debt capacity that we have via our unencumbered assets and term loan B.

As a reminder, 83% of our total outstanding on and off-balance sheet debt is non-mark-to-market as is 91% of our commercial lending debt. With the repayment of our unsecured notes last week we now have no corporate debt maturities until December 31, 2024. Our leverage remains low with an adjusted debt to un-depreciated equity ratio of just 2.42 times at quarter end or 2.37 times after the repayment of our unsecured notes.

With that I’ll turn the call over to Jeff.

Jeff DiModica

Thanks Rina. We’ve maintained very low leverage at just 2.4 turns today and invested in every quarter since our inception including $650 million this quarter and $2.7 billion in the last 12 months. This quarter’s originations were across business segments but primarily in our very accretive low loan-to-value energy infrastructure lending segment with expected returns in the high teens.

Despite higher interest rates today many of our borrowers continue to execute their business plans and loan repayments have continued to outpace our conservative expectations this year, giving us significant capital to accelerate our investing pace and/or continue to build our liquidity.

Rina mentioned, we are sitting on near record cash today. Due to the accordion nature of our bank warehouse lines we are able to delever our balance sheet with excess cash by paying these lines down reducing our interest expense by an average of — 260 basis points today. This means for the first time in our history we are saving and thus earning 8% on cash balances.

When LIBOR was 25 basis points we earned less than 3% on our cash which created significant earnings drag, if we didn’t reinvest excess liquidity immediately. Earning an incremental 5% on our cash allows us to conservatively bolster our balance sheet with more cash in today’s volatile interest rate environment while creating very little earnings drag.

We have $1.6 billion in loans financed today on bank lines at throughput for plus 275 basis points or higher. And as I’ve explained in the past this relatively expensive bank debt is potentially an asset of the firm. As it sets us up to opportunistically replace that secured debt with unsecured debt in the future should our unsecured borrowing spreads normalize to historic averages.

We would then replace secured debt with unsecured bonds at little or no cost. Creating more unsecured debt as a percentage of total leverage at our company is a key metric along with our already low leverage in achieving our long-term goal of receiving an investment-grade bond rating.

As I mentioned we were busy in our Energy Infrastructure Finance business this quarter committing to $444 million of new investments with a high teens return on equity. We continue to believe this low loan-to-value business is our most accretive opportunity today, and expect to continue to see outsized growth in this business line in the coming year.

Massive demand for power and lack of competition for financing gas-fired power plants and midstream gas transmission and storage assets has allowed us to earn higher unlevered yields on better credits with better structures. Our asset spreads have increased, but our financing spreads have not risen in line with our other businesses, thus creating even more accretive levered returns for shareholders today. Our post General Electric acquisition portfolio now makes up almost 90% of our SIP portfolio with a high-teens levered return and no realized losses to date.

In commercial lending, our five rated loans decreased by 27% to $555 million or 2% of assets in the quarter and our four-rated loans increased by $284 million to $987 million or 3.6% of assets, primarily due to the upgrade of the retail and entertainment loan in New Jersey that Rina mentioned paid down by $52 million in October. We downgraded a $61 million multifamily loan in Portland to five in anticipation of our taking control for a UCC foreclosure on the asset at which time we plan to sell the property at our basis to an unrelated third party.

We also downgraded a $118 million office loan in California from a three to a four as the loan went into payment default at the end of the quarter. This asset is 75% leased and produces almost 7% debt yield today with a rapidly growing $50 billion market cap tenant expanding into one-third of the space and potentially more in the future. We are finalizing negotiations with the sponsor to give the asset runway to fund accretive leasing through 2024.

Office remains our industry’s most challenged asset class. We are happy to have cut our OpEx exposure in half over the last few years with loans on US office comprising just 10.5% of our assets today. Following the repayment at PAR of two B-quality office loans in Midtown Manhattan in the quarter, we now have no loan exposure to Manhattan office and no loan exposure to any asset class in San Francisco. 85% of our CRE loans have interest rate caps in place or our fixed rate loans not affected by rate increases, and another 6% of interest reserves or guarantees. So we have interest rate protection on 91% of our CRE loans today.

Since COVID, we reduced our exposure to construction loans and therefore to future funding obligations. Construction loans now comprise less than 10% of our funded loan book, the lowest in over 10 years. Pro forma for a senior loan payoff we expect in Q4, this decrease has reduced our future funding obligations on both construction and nonconstruction loans to just 4% of assets. Having less future funding exposure and over a year until our next corporate debt maturity, allows us to wait for the most opportune time to raise capital in the coming years should we choose to go more aggressively on offense.

In our residential lending business, we were able to offset lower prices on our loan book due to the rising rate, with gains in our rate hedges and in the value of securities held from previous securitizations which have outperformed as prepaid fees have gone down. In the quarter, we executed on our plan to move over $2 billion dollars in residential loan collateral financed on bank lines to other money center banks, leaving us no regional bank counterparties, extending our facility duration, increasing potential advance rates and most importantly significantly lowering our borrowing spreads and costs.

Finally, this quarter in our REIT business, we are launching a third-party services business we will call Starwood Solutions. This team will solicit and execute on third-party fee-based services including individual asset or portfolio valuations, restructuring and balance sheet consulting, collateral management and surveillance, underwriting and due diligence for equity portfolios, loan portfolios or securitizations and a full spectrum of capital markets and investment consulting services.

Starwood Solutions will partner with our 200-plus professional team at REIT that together have worked out over 7,000 loans, totaling $88 billion in value over the 32 years they’ve been in this business. We are working with broker partners and engaging directly with CRE asset owners to provide these high value-add services that we expect will create high multiple fee-based revenue for Starwood Property Trust shareholders in the future.

There has never been a better time to launch this vertical one we hope will become our eighth business line. We are keen to continue to add fee-based business lines as a real estate investment and services business that continue to pull us away from a price-to-book valuation methodology. I would love to introduce anyone listening brokers, owners, lenders and consultants to our team to discuss what we can do for you and your clients in more detail.

With that I will turn the call to Barry.

Barry Sternlicht

Thank you, Jeffrey and Zach and good morning everyone. Thanks for being with us. If I sound like I’m under the weather. I am home with COVID. So I might not be — I’m not sure anyone would call me go here before, but I might be less going on that might normally be.

I have just some quick comments on the real estate markets. The as you many of you know I’ve been very critical of the fed for a number of reasons, but the key one was the economy was slowing on its own and the COVID stimulus package was being spent, and the sales were being restocked so there was no longer so too much money chasing too few goods.

Now you had less money and the shelves were full, and you can see that by retail sales. What we missed in my forecast was the scale of the dynamics of spending packages of infrastructure bill, which has kept construction jobs flat even though rates have risen 500 basis points, the delay in the travel business that supported the economy while other sectors kind of weakened the CHIPS Act, Inflation Reduction Act and of course even the remaining money from the American Recovery Act have been enough to keep the public economy stronger, while the private economy began to build.

And I do think as I’ve been very vocal about that inflation is coming down. I think I’ve been saying that for months on TV, following one-third of inflation comes through rents and rents were trending down particularly in the apartment segment, which we have a front row seat too.

So rents are still positive, but they’re not running 10% and 20%, which they were running when the fed missed it. But they’re up at 3% or 4% today. And just the move of the current fed numbers almost 7% for rents it’s coming down to 3%. Inflation falls below 2% except for the wildcard of oil prices. And I think we’re all scratching our head with oil around $80 with the situation in the Middle East. That’s when you scratch your head and you cannot forecast what might happen to inflation should there be disruptions to the oil supply.

But I will say in general, I think you’ve seen the top in rates. I think Powell and his crew are paying a little more attention to the delays in their own data they actually mention it now.

And actually what’s happened in the regional banking world and the contraction of credit and the reduction of credit in the corporate world from the money center banks will have a significant impact though it’s delayed on this economy. So I think you have seen the top of rates, you saw this rapid move 40 basis points in the 10-year just last week that supports the real estate complex.

And again I’d say that real estate is the unintended consequence of a fight that that is fighting. We didn’t — he’s after inflation but he’s crushing other industries that are material to the US government like real estate where significant capital gains help fuel the revenues to offset the increased interest expense of spending all this money on our $33 trillion of debt. So I also said the government really can’t afford 5%, almost $10 trillion of our $33 trillion of debt rolls in the next 12 months. I think it’s slightly more than that it’s like one-third. So you have a $500 billion interest bill coming in very soon. And the current interest expense in the budget is absurdly low. It will climb probably closer to $1 trillion if he doesn’t relent. And again, I just adore people who compare what he’s doing to Volcker. Volcker had almost a negligible deficit. He operated with $200 billion number, $33 trillion deficit.

All this is important because it forms the framework of what we’re doing and what the opportunity set is for us going forward. So, one thing that’s happened of course and one more thing about the deficit, the largest delta to the budget of February, March of this year when they just announced the deficit, it would be $2 trillion not $1.3 trillion was the decline in receipts. There’s $170 billion miss by the COB which is amazing because if I — if our guys were off by 40% on a number, I don’t think they’d have their jobs. We are plotting the sky and he doesn’t seem to be realizing what he’s doing to the other side of the deficit equation which is the revenue side. Obviously, they sold down their book. That created a $91 billion variance to their original forecast for the deficit.

And then the $171 billion in receipts, interest expense was low $100 billion off. So he was off new who was doing, but they didn’t forecast it properly. Anyway what that led to is a dramatic reduction in transactions in corporate M&A, everything is down. Real estate transactions are way down 60%, 65%. That limits the number of opportunities we have to deploy capital in other players in our field. But what’s more interesting of course is that the regional banks which have loaded up on $1.2 trillion of real estate debt and the money center banks are getting tremendous pressure from the OCC and Powell Federal Reserve group, the FDIC to reduce their exposure to real estate. That has left us with probably one of the best lending environments, maybe the best lending environment since we started this firm back in 2009 in the GFC again when there was no credit.

So there are really remarkable opportunities for private credit and we hope that Starwood can position itself as the preeminent private lender in this space going forward, much of the way other alternative managers have taken advantage of — and the market seems to enjoy their position in corporate credit. We want to be the guy in real estate credit. So we are working to make sure that our engines are going and we’re fine-tuning our team and hope to come out of this what I call it kind of like the cars on the — what we call it the cars going around the racetrack the flag is out and you’re trying to figure out like when it’s safe to get back on the track and drive full speed.

I do think we’re very well positioned for full speed. A lot of our business lines are kind of a sweep. The conduit business only did two securitizations. There just aren’t a lot of transactions to do. We have a bunch of REO that’s not producing any cash, but there’s significant value there and as the markets recover including our largest loans in those books as we can redeploy that capital which is not our earnings that will be accretive to the company. Jeff mentioned how accretive or not dilutive it is for us to build up cash and pay off lines earning by 8% of our cash because we’re paying off lines. And it is true today that the only lender for many of these assets is the existing lender. So a lot of borrowers are just working with their existing lenders, which limits the opportunity set for new capital to come in, deploy capital at these extremely favorable spreads and rates. And I think the first thing people talk about the reduction of rates and we’ll all follow what happens I think the forward curve is good.

I mean it’s favorable if rates should come down but I would guess that the curve is long and rates will come down further because I don’t think you’ll have a 300 basis point real interest rate because the economy can’t stand it and either kind of the global markets. The market is too fragile. There’s no real engine of growth worldwide, right now pulling the global economy up, other than maybe defense spending which is a sad comment.

So I think when you see rates that are peaked you’ll see spreads come in and that will be a double whammy. So rates will come down. It’s sort of an unnatural world for AAAs to be 250 over 240 over in some asset classes at 180 but they used to be 80. So you should see when spear dissipates and we’re on the backside of this you’ll see both base rates come down and spreads come down, which means you really want to be a lender today if you can.

And hopefully, we’ll be in a position to go more on offense next year. But we are being careful because it is a minefield out there. There are a lot of situations today out in the marketplace where you can see there could be trouble and we just want to be careful. We’re here for stability and the consistency of our distributions and transparency, which we’ve gone from the start of this company 13 years ago. So – and I’m really excited to finally get into Starwood Solutions business long ago, a small firm name BlackRock created a credit software package to help them manage their book and exposures that became BlackRock Solutions and they built that into – last I looked about $0.5 billion EBITDA business.

We do many things that banks do but don’t do that well and other people which is workouts. And L&R being the one or second largest special service in the nation has a large dedicated team with huge experience backed by a massive database and technology-powered database that helps it and maximize value of real estate assets. So we are going to expand that business dedicated researches to it. It’s incredibly high ROE. Obviously, ROI there’s no invested capital. It just free streams off of the intellectual capital of our business. And I would hope that become over time a meaningful new business line for the firm.

And last I mean I want to talk quickly about the question I get every time I speak about anything today is US office. US office is clearly bifurcated. New ESG-compliant great buildings are full and holding their rents and everything else has struggled. And there is leasing volume. It’s not like there’s none in the United States so the net – there’s no net new absorption. But in general these real estate markets are not an issue. There’s some overbuilding of multis and downtowns in certain markets that will pass.

Obviously, the good news for multi and the construction is people can’t buy homes either not being built but they can’t afford them you have 50-year loads in homes. So even though apartment rents are slowing, I would expect they would reaccelerate over the coming 24 months supporting that asset class and everything in the residential asset class. So hotels continue to hold their own shockingly.

And now they’re full with their employees. They hired everyone back that they didn’t have some margins are normalized. I would expect the leisure travel to weekend it already is in the United States not so much so in Europe yet, but we have a good margin of safety and we’ve had some of our hotel loans paid off.

And one other comment and then I’ll stop which is future funding. One of the things that sort of worries me is when we don’t have the liquidity we want it for most repaying, but we have commitments on future funding. And that’s one the lowest it’s ever been in our firm’s history. So I think we’ve set up ourselves to succeed going forward and the team is locked in and doing a job and thanking the Board again for their gracious support and advice since we navigate these choppy waters.

So with that I hope I’m going to stop and thank everyone for listening and we’ll take questions.

Question-and-Answer Session

Operator

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

Stephen Laws

Hi. Good morning. First off Barry I hope you feel better soon. I hate to hear about the — under the weather. To follow-up on your last comment, can you touch base on office I thought a follow-up more detail on office. I thought it was notable no exposure now to Manhattan office and no exposure at all to San Francisco. Are there certain marquee assets or Class A assets that you would look to do loans with an office? Or you feel other opportunities better to put capital to work? And sort of along that front how is office potentially going to be disrupted around the WeWork filing for bankruptcy?

Jeff DiModica

Barry, I will hand..

Barry Sternlicht

I’ll do rework then to do the rest of it. We work at a profitable business underneath the business. They just have too many sites and they need to — I mean they were hit with a 1-2 punch, right? The space and then the pandemic hit and that kind of really hurt them. And they didn’t have they never had the right capital structure and SoftBank was very reluctant to support the company and increasing the cost of debt and interest rates rise of course they were the only lender to save the company and they kind of, not just kind of wanted to wash the hands of the thing.

But there is a real viable business that a shared office space business is a real business and we work as a global brand. So my guess is they will reorganize and they will come out as a profitable entity much smaller than they went in. They’re just getting rid of unprofitable leases and — but — so the impact on the office markets like New York will not be good. I think I’ve read they’re giving back 30 or 40 spots. But we work well I guess survive certainly without debt they can in a profitable company and they’ll have to figure out the right overhead levels for a company that’s not in hypergrowth because even though they cut them hard they probably have to cut them even harder. So that’s WeWork. And on office, Jeff do you want to give your thoughts and then I’ll see if I have any different thoughts obviously not next year.

Jeff DiModica

Absolutely. Let me touch on WeWork a little bit more for a second. We don’t know which leases will be given back yet of the 20 million square feet. There are articles would say that it won’t affect leases outside the US, obviously we’re not sure how that plays out. We do have four assets that have exposure. WeWork represents 1.2% of our total office square footage and less than 1% if you exclude a Dublin lease that’s 100% occupied by Tiktok.

That number becomes less than 0.5% if you take out a Southern California asset where we have a $4 million letter of credit that covers rent through exploration. And of that 0.5% — more than half of that is a Berlin asset that they brought current just this week. So them bringing the current just this week tells us they likely plan to stay leaving us one asset in D.C. where 9% of the building is WeWork.

So we feel really good about what our exposure looks like here. We never really leaned in on lending to WeWork occupied buildings. So we feel pretty good about that. As far as office you guys know there has been a massive bifurcation between Class A and Class B. The best buildings are leasing. They’re leasing at incredible rents and the weaker buildings are not going to see that kind of rental growth going forward.

So we will look at high-quality Class A office buildings, Class B lease up. As I mentioned, we got out of two Class B office buildings. That won’t be the case for a lot of Midtown Manhattan Class B office buildings with the tenant improvements and leasing commissions and money you have to put in on these assets the net effect of rents after free rent just do not cover you in a lot of different scenarios and a lot are not able to be converted. So Barry, I’ll hand it to you if you have anything different to say on the office side.

Barry Sternlicht

Well, the office market reminds you of the retail market when malls were all going bankrupt, and obviously, they didn’t all go bankrupt and Simon recently reported with real same-store sales growth. So the capital markets dry up for an asset class. And obviously office is a four-letter word much like a mall or retail was a couple of years ago.

So it is unbelievable opportunity set loans on office buildings today are problems if you’re borrowing at 9%, 10%, 11%. What’s the cap rate on the office even a good one?

So if you have a trophy building and it’s well leased it’s really about the stability of the cash flow stream the rollover schedule. You probably would want to do anything that was full today and had an opportunity to roll with low leverage on some trophy office buildings in major markets that had great credit profiles because we’re going to get probably the best returns of any loan we can make. And we’ll just use our equity real estate underwriting skills to make sure we feel comfortable about that real estate in that market.

And — it’s interesting what you see in our book. I mean, we’ve had sort of great assets with I’d say not overly well-capitalized borrowers then we have great assets with great borrowers. Household names the largest — we’re the — I think the third largest real estate player in the opportunity set that we compete in. And all of us are getting back buildings. And why are we doing that to lenders. We’re doing that because if you’re in San Francisco which we’re not you have a 30% going to be then you actually lease but you also don’t know what the TI package is.

And if you’re the borrower now you’re looking at the building and saying; I got to put another $50 million. I have $50 million and they got to put $50 million to retenant debt and may they have to pay down the existing loan and you’re just really nervous about when you look at the exit cap you need in order to justify putting that capital and get a return on it. And that equation is still murky. So again as rates fall will 6s and 7s and 8s return even five to best office building in the United States. My guess is they will at some point.

In Europe, you’re already there. In Europe, we’re where rates are lower in Germany with a 10 years to 80. The office markets are fairly full and rents are actually rising. So — but even there where there are some great markets offices still in the investing world a four-letter word or if it’s like not a four-letter word, but it’s close to it.

And so I think at the moment all the press and it will have to play out. You’ll have to see it play out. I think there’ll be really good opportunities for smart investors to pick off very good leverage returns in the space going we wouldn’t put a red circle around it if that was the question. We won’t not lent to office

And when everybody runs away that’s — I think it was David Bonderman has said when there are tanks rolling down the street, is when he wants to invest. I’m not sure we’re the tank down the street, but for office we probably are. And we’re not — we’ll have explain every office alone we make to you. So, we’ll have to in order to make an office loan. But I wouldn’t say, never. I’d say, at the moment it’s not really our top choice of things to invest in, but not never.

Q – Stephen Laws

Great. Yes, there’ll be no surge of questions on that. I appreciate the comments this morning.

Jeff DiModica

Thanks, Stephen.

Operator

Our next question come from the line of Sarah Barcomb with BTIG. Please proceed with your question.

Q – Sarah Barcomb

Hey, everyone. Thanks for taking the question. Maybe to just pivot from office to multifamily for a second. On last quarter’s call, you spoke to a sort of breakeven cap rate on the multifamily book of about 6.5% and a willingness to take over those assets at say $0.65 on the dollar where sponsors walk away. I was curious, if you could provide some updated thoughts there just given the forward curve has come up since then we’ve heard Powell reiterate that he’s not thinking about rate cuts yet. Also just curious, where the debt yields are looking on for those assets. Thank you.

Jeff DiModica

Barry, do you want to start?

Barry Sternlicht

Yes. There’s probably no — it’s interesting as you think about 30 years of doing this, capital flows sometimes are overwhelmed fundamentals. And the rent growth is slowing and in some markets like Austin, they’re negative. For apartments, the asset class is definitely going to be a favorite for institutional investors going forward. You can’t take a $3 trillion office class — asset class like office. Shut it off from an investment, and the real estate capital is going to have to go somewhere. And hotels are kind of bought for voting [ph] for a lot of institutions.

So retail, maybe — I mean nobody is rushing to do tons of retail deals today, even though the markets are relatively healthy. Industrial, possibly it’s a bond and the economy was slow. So rents will come down and the pace of rent increases are coming down, also in industrial. So I think multi-benefit and that was why the comment was we’d be happy to take assets back and we are taking one back and selling it immediately it, looks like someone in Portland, on one of our troubled multis.

I think in general, what we said before is true, we will make more money in my view, if we can take these assets back and we will just staying as a lender, though we will stay as a lender that’s our primary job. So if we’re in fact at 65% of value or 65% of construction costs or 65% of the renovation totally renovation cost city-by-city, I look at that as sort of an opportunity and not a bad thing. They are — they’re not going to be empty. We took back an office building in DC. It’s an interesting building.

We have it on our books. It was bought by a household name. They emptied the building, reskin the building and then realize that the amount of capital they have to put into retenant the building, justify them walking away from $100 million of equity. That deal is empty. So, that’s a drag. Any multis, we get back are partially full and probably yielding 5.75% or 6%. So, not terrible. And if we like the assets which hopefully we do we lent against them this should be good opportunities for us going forward.

Jeff DiModica

Yes Barry I don’t have much to add. I did make those comments about our breakeven cap rate being around 6.5%. As I look at our portfolio our in-place debt yields are mid-6s today and we expect they’ll stabilize significantly higher than that. But obviously as Sarah, as you mentioned the forward curve it’s gone up.

So, a lot of this is going to depend on what does the forward curve look like a year out in a year if people are faced with the refinance. Will they make the decision to hold on or not?

And I think that decision to hold on will be mostly about liquidity. I think that people will think that they’re going to have an opportunity at a lower cap rate in the future to be able to sell it. And will they be able to hold on? Will they have the cash flow available to buy a cap and wait it out. We obviously do. We will support the assets.

As Barry said the have debt yields that almost that would almost cover today even on the lowest debt yield assets it would not cost us a lot to stay in those assets and for the right to own them at 65% of cost. And wait for a better environment to either refinance them or to sell them. I think that’s something that would be a great investment for us and we would do that in defense.

Sarah Barcomb

Thanks for the comment.

Operator

Our next questions come from the line of Don Fandetti with Wells Fargo. Please proceed with your question. Mr. Fandetti, your line is live for question, perhaps you’re mute.

Don Fandetti

Yes, Jeff, should we expect continued growth in infrastructure lending relative to CRE? And also can you talk about the competitive dynamic in infrastructure and how those assets would perform if we did go into a recession?

Jeff DiModica

Sean’s [ph] sitting next to me. We do expect to have continued growth here. We think it’s tremendously attractive as I was saying before. Where I started was to say that our asset spreads what we’re earning have gone up commensurate with what our asset spreads have gone up in other asset classes like CRE lending.

The liability side hasn’t increased by as much. The banks aren’t retrenching the way that they’re retrenching in CRE. So, we’re able to earn sort of the highest yields that we’ve had in a while. A couple of other headwinds — tailwinds excuse me, global power demand is going up massively and it could double or triple in the next 15 years or the estimates that you see.

So, the power plants that we have that start off with a low loan to value generally deleverage over the life of the loan they’re going to be worth more not less. I think the transition to more ESG, solar, wind, royalties is going to take a lot longer last quarter I talked about the fact that even if it doubles every year it still will get to low 20% of total energy demand in the next 10 or 12 years.

So, the rest has to be done somewhere. The traditional markets are not there in depth to finance the power plant assets in mid midstream storage and transmission assets. We believe that this transition is going to take a lot longer. It’s going to be a great opportunity. And the structural nature of these assets where we get significant amount of deleveraging over the life end up at $1 per kilowatt that feels really cheap on the role makes this a super-attractive asset class for us.

Sean Murdock is sitting to me. Sean anything to add to that?

Sean Murdock

Not really Jeff. The only thing I’d add is just the Jeff’s view of the energy transition it’s going to take longer. Banks have decided with their lending strategies that’s going to come sooner if it hasn’t already come. So, I think that’s where we get the tailwinds in this sort of market for putting new loans out. Most banks have decided the transitions happened and they’ve reduced their lending to traditional energy assets.

Don Fandetti

Thank you, guys.

Barry Sternlicht

Thanks. Just I want to go backwards just on one thing. I talk about multi — the key is that the wave of construction will be over next year and construction starts from multis have dropped to 250 from $600,000 or so. So that should bode really well for rental growth going forward. So we — real estate is a long-term game.

Also construction is in the downtown. It’s not in the Cyber so much. So it’s pretty concentrated. You understand a lot of these deals were built for a different rate environment. So there will be a lot of opportunity I think to take advantage of that if you’re a long-term player and you have the capital to do so. I think we have both.

And then on infrastructure, yes, I mean infrastructure has been our highest returning asset class. So yes, we will continue 90% of our book as mentioned is post acquisition of the GE business. So the team is intact and finding great stuff to do and a lot of our investments are behind that platform right now. Safer — a safer place to be.

Jeff DiModica

Thanks Don. Next question, operator?

Operator

Next question is from the line of Jade Rahmani with KBW.

Jade Rahmani

Thank you very much. Good to hear the comments around Starwood Solutions. I was worrying that Star might miss this moment. So the banks we estimate their season reserves and NPL ratios are 1.5% to 2.5%. And which on their balances of CRE loans is massive and are still increasing up 25 to 90 basis points per quarter. Do you see working with the banks to special service assets as the biggest opportunity in front of the Starwood Solutions initiative?

Jeff DiModica

Yes, Jade. We would love to have the banks come to us. We’re super fortunate to have this L&R business. As I mentioned on the prepared remarks, we have over 200 people who have done this for over 30 years and worked out $88 billion of assets. It could be the banks. Hopefully the FDIC is listening and they give us a call. There are certainly lots of property owners, pensions, insurance, other investors, large players who could use our health, the broker network that we use every day at Starwood Capital and have relationships with all the biggest brokers. They get asked to do reviews and portfolio valuations every day. They are not experts at working out assets. They are experts at buying and selling and financing assets and we want to go to them and have them bring us the opportunities that they’re seeing to both evaluate and help in work out. We — this is what we do, dealing with workouts between bespoke, interactions between banks and clients or securitizations. We have experience in doing it all.

And you’re one of the people who pushed us over the last few years. So we appreciate that. We’ve now hired a team. And we think it’s an extremely exciting opportunity. And hope that, people listening.

Who are wondering about their portfolio valuations or asset valuations or what to do in a difficult time want to come to a shop that has done this 88 billion times over the last 30 years. So we think we have a lot of expertise to offer here. And we’re really hopeful that we can grow this into something you are right. The time is now.

Barry Sternlicht

Just a quick — not everyone in our group has been at 30 years. The head of the group is 30 years.

Jeff DiModica

But the group all together is 30 years.

Barry Sternlicht

Yeah. And we’ve been doing this, 30 years. But — and the guy who runs it with us is actually 31 or two years. It is much like Guggenheim surge as the front-end and for small insurance companies we should be the back-end for many regional banks and maybe some of the larger players like the FDIC, but we do have an incredible ability to do this.

I think they’ll work in tandem, Jade. I think the increase in the name or the actual book that we have $101 billion or $102 billion in servicing — named servicer, that number is what’s actually being REO or serviced by us, I think it’s seven or eight today or six to eight something like that that number should go back up.

I mean you can see we’re going to get a lot of business. It won’t be as profitable as it was before, because the CMBS securities, the loan documents have changed. They’ll still be profitable. This could be bigger and could that. So we’ll get to work and get the shot.

Jade Rahmani

And do you see as a follow-up M&A as an interesting deployment opportunity within this segment. There’s many financials in the non-bac space that are under duress due to their capital structure and there could be fee income services businesses within that.

We’ve seen others in my coverage such as Newmark, grow in the servicing sector. And there’s also the private broker and maybe brokers cover the rigs that are faced in track.

Barry Sternlicht

Send us their names.

Jeff DiModica

Anyone listening please call us. We got a difficult time. The premium book value to our peers obviously it’s accretive, if we are able to consolidate the industry. We would love to consolidate the industry. We think we’re well positioned to consolidate the industry.

Boards of directors who own a book value that they believe in more strongly than the market believes in or have been unwilling to-date, to date us, but we would love to go on a lot of dates, if you have anyone listening to this call that would like to become part of Starwood.

Operator

Thank you. At this time, we have reached the end of the question-and-answer session. Now I’ll hand the floor back to Mr. Sternlicht, for closing remarks.

Barry Sternlicht

Thank you everyone for being with us and good luck navigating these choppy waters. So hopefully Powell. Powell will get a vacation and the markets will get a bid. Thanks for being with us today. And hope none of you get COVID. Take care.

Operator

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