Starwood Property Trust, Inc. (STWD) Q3 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Starwood Property Trust Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Zach Tanenbaum, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Starwood Property Trust Earnings Call. This morning, we filed our 10-Q and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward-looking statements, which do not guarantee future events or performance. Please refer to our 10-Q and press release for cautionary factors related to these statements. Additionally, certain non-GAAP financial measures will be discussed on this call. For reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, please refer to our press release filed this morning. Joining me on the call today are Barry 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.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $149 million or $0.40 per share. GAAP net income was $0.19 per share. Our new net lease acquisition, which I will discuss further in my Property segment remarks, contributed to lower GAAP earnings due to $0.04 of depreciation and lower distributable earnings due to $0.03 of dilution in part because the new assets contributed to only a portion of the quarter, while dividends were paid for the full quarter. We also experienced higher-than-normal cash drag given the $2.3 billion of capital raises we completed in the quarter. We expect earnings to normalize once this cash is deployed and our new acquisition increases its investment pace and completes the refinancing of its existing facilities. In the quarter, we committed $4.6 billion of new investments across our businesses, including $2.2 billion in net lease, $1.4 billion in Commercial Lending and a record $791 million in Infrastructure Lending, bringing total assets to a record $29.9 billion at quarter end, and demonstrating the continued diversification and strength of our unique multi-cylinder platform. I will begin my segment discussion this morning with Commercial and Residential Lending, which contributed $159 million of DE to the quarter or $0.43 per share. In Commercial Lending, we originated $1.4 billion of loans, of which nearly all was funded, along with another $219 million of pre-existing loan commitments. After repayment of $1.3 billion, including a $58 million office loan, this portfolio grew $271 million to $15.8 billion. On the topic of credit quality, we continue to resolve our higher risk-weighted loans and foreclosed assets, which Jeff will discuss. We have $642 million of reserves $469 million in CECL and $173 million of previously taken REO impairment. Together, these represent 3.8% of our lending and REO portfolio and translate to $1.73 per share book value, which is already reflected in today's undepreciated book value of $19.39. You will notice in our 10-Q that we classified a $33 million 5-rated mezzanine loan on a Dublin office portfolio as credit deteriorated. The loan already maintained an adequate general reserve, but in light of a pending loan modification, the reserve was reclassified from general to specific. Turning to Residential Lending. Our on-balance sheet loan portfolio ended the quarter at $2.3 billion, consistent with last quarter as $52 million of repayments were largely offset by $41 million of positive mark-to-market adjustments. Our retained RMBS portfolio remained relatively steady at $409 million. In our Property segment, which now includes our newly acquired net lease platform, we reported DE of $28 million or $0.08 per share. On July 23, we completed the $2.2 billion acquisition of Fundamental Income properties, which contributed $10 million of DE in the partial quarter from acquisition to quarter end. The purchase was treated as an asset acquisition for GAAP purposes, which means the purchase price was allocated to properties and lease intangibles. The portfolio consists of 475 properties diversified across 61 industries and 43 states with a weighted average lease term of 17.1 years and occupancy of 100%. Two comments I would like to make on the accounting ramifications of this acquisition. First, from a GAAP perspective, you will see elevated depreciation and amortization levels. The impact was $0.04 for the partial period with this pace expected to accelerate as the business contributes fully to future quarters and as we acquire new assets. Second, from a DE perspective, we introduced a new GAAP to DE reconciling item for straight-line rent, which is noncash. In our Woodstar affordable multifamily portfolio, we refinanced 30% of the portfolio's assets with $614 million of new debt. Of this amount, $310 million repaid maturing debt and $302 million was received as incremental proceeds, evidencing the significant value growth in this book during our ownership period. The new debt carries a weighted average spread of SOFR plus 1.76% and a 10-year term. $368 million of this refinancing closed in the quarter with the remaining closing in October. Our Investing and Servicing segment contributed $47 million of DE or $0.12 per share to the quarter. Our special servicer continued to benefit from elevated transfer volumes, which were once again dominated by office loans. Our named servicing portfolio ended the quarter at $99 billion. Active servicing balances rose to $10.6 billion due to $300 million of net transfers in, most of which were office, driving special servicing fees higher in the quarter. In our conduit Starwood Mortgage Capital, we completed 5 securitizations totaling $222 million at profit margins consistent with historic levels. Our Infrastructure Lending segment contributed $32 million of DE or $0.08 per share to the quarter. We committed a record $791 million of loans, of which $678 million was funded and received $691 million of repayments, leaving our portfolio balance steady at $3.1 billion. Subsequent to quarter end, we completed our sixth actively managed infrastructure CLO, a $500 million transaction that priced at a record low coupon of SOFR plus 172, further expanding our nonrecourse capital base. Turning to liquidity and capitalization. We ended the quarter with $2.2 billion of total liquidity, elevated due to our recent capital raises and cash out refinancing. Our debt to undepreciated equity ratio remained stable at 2.5x, and we continue to maintain over $9 billion of available credit capacity across our business lines. During the quarter, we executed $3.9 billion of capital markets transactions, including $1.6 billion in term loan repricing at 175 basis points and 200 basis points over SOFR, 2 high-yield issuances, one for $550 million and one for $500 million at fixed rates of 5.75% and 5.25%, a $700 million 7-year Term Loan B at 225% over SOFR and a $534 million equity raise that was accretive to GAAP book value. These actions increased our average corporate debt maturity to 3.8 years with only $400 million of corporate debt maturing between now and 2027. With that, I will now turn the call over to Jeff.

Thanks, Rina, and good morning, everyone. This quarter, we continued to operate in an environment of improving stability in credit market performance. The forward SOFR curve now points to rates falling into the low 3% range by late 2026, about 100 basis points below where expectations stood a year ago, which is positive for our legacy credits. That shift, combined with steady credit spreads has supported a more constructive real estate financing market in which we expect to maintain our elevated origination pace. In commercial real estate, we're seeing signs of increasing transaction velocity as buyers and sellers narrow valuation gaps and capital flows return to higher quality assets. Banks remain selective and continue to favor growing their secured financing lines over competing with us for whole loans. This allows well-capitalized lenders like Starwood Property Trust to lend at today's tighter spreads while maintaining consistent risk-adjusted returns and strong structural protections. We built this company to perform in all environments, diversified across lending verticals, servicing and owned properties, which creates a balance sheet that provides flexibility and durability. That diversification, combined with consistent access to capital allows us to invest through cycles and position for growth as the markets normalize. Following the capital markets activity that Rina mentioned, our liquidity stood at $2.2 billion, leaving our balance sheet well positioned to support continued investment across our debt and equity businesses, and our intent is to continue to grow. Our Commercial Lending originations through the first 9 months of the year alone totaled $4.6 billion on pace for our second highest year in our 16-year history. Our total investing pace through the first 9 months across all businesses was $10.2 billion, also putting us on pace for a record year. The full earnings power of these new investments will be felt in 2026 as we continue to fund our existing loans and add new ones. In Commercial Lending, we continue to lean in on our core investment themes, data centers, multifamily, industrial and Europe, while maintaining a disciplined credit posture. Our U.S. office exposure remains low at 8% of our total assets, down from 9% last quarter. As always, we remain highly focused on credit. Our total CECL and REO reserves Rina mentioned reflect prudent additions on a small number of challenged assets, which were somewhat offset by the upgrade of a $139 million office loan in Brooklyn from a 4 to a 3 risk rating in the quarter. The improvement follows strong leasing progress that is expected to bring the property to full occupancy in the fourth quarter. This quarter, we downgraded 2 loans to a 5 risk rating, a $242 million mixed-use property in Dallas and a $91 million multifamily in Phoenix, both of which were previously 4 rated. We expect to foreclose on these loans in the coming months, and we use our internal asset management function and the expertise of our manager, Starwood Capital Group, to stabilize operations and reduce elevated expenses before we look to exit in the coming year. To date, we've resolved 7 loans totaling $512 million. There are another $230 million of resolutions currently in progress, all of which are expected to recover our original basis. To clarify, we do not consider an asset to be resolved until it has legally exited our balance sheet. So these resolutions exclude foreclosures of $1.1 billion. Inclusive of foreclosures, our resolutions total would be 16 loans for an aggregate of $1.6 billion UPB. We also had 3 loans move from a 3 to a 4 rating in the quarter, a $107 million studio loan in Queens, a $267 million new build industrial asset just outside the Midtown Tunnel and a $33 million multifamily in Dallas, with the downgrades due to slower-than-expected leasing and sponsor liquidity challenges. Our Infrastructure Lending platform again delivered strong results with origination volume of $2.2 billion in the first 9 months of the year, exceeding every full year since we acquired this platform from GE in 2018. As Rina mentioned, we completed our sixth infrastructure CLO subsequent to quarter end with nonrecourse, non-mark-to-market CLOs now financing 2/3 of this portfolio. In Residential Lending, we continue to evaluate strategic opportunities to reenter the residential origination space as credit spreads tighten, treasury yields are stable and market dynamics improve. Our REIS business continues to be a stable and countercyclical contributor with L&R continuing to be ranked the #1 special servicer in the U.S., and we expect above-trend revenues to continue in the coming quarters and years. Our CMBS conduit lending business continues to be a strong performer, and our CMBS portfolio continues to benefit from significant demand for credit assets and the resulting spread compression. Turning to our Property segment and our new net lease platform. The team has already begun originating new transactions. And after they were out of the market for a number of months during the marketing process, we are building a very strong pipeline. The triple net assets we acquired have strengthened our portfolio diversification by increasing recurring cash flow from long-term triple net leases financed with long-term fixed rate debt. We remain focused on scaling this business through its established ABS Master Trust securitization program. Post quarter end, we completed the first issuance under our ownership for $391 million at a record tight spread of 145 basis points over the 7-year amid strong investor demand. We expect subsequent securitizations to continue to tighten given the Master Trust grows and becomes more diversified with more securitizations. Rina mentioned the significant depreciation the portfolio creates, which will lower our book value over time. And thus, we will once again be encouraging investors to look at our undepreciated book value. We underwrote and expected this business to create near-term earnings dilution through integration as it did this quarter, but we expect it to contribute positively to distributable earnings as we scale. This quarter's results highlight the strength of our diversified franchise and our unrivaled access to multiple sources of capital. We remain proud to be the only commercial mortgage REIT that has never cut its dividend. With strong liquidity and our opportunity set increasing, we are positioned to grow and thrive as markets evolve with a balance sheet built to withstand volatility and capitalize on opportunity. We continue to invest in technology and artificial intelligence to enhance efficiency and decision-making across our lending and servicing platforms. These efforts are already yielding better analytics and faster response times, and we expect them to support long-term margin expansions as they scale. In fact, I used AI to write the bones of my comments today. With that, I'll turn the call to Barry.

Thank you, Jeff, and thank you, Rina and Zach, and good morning, everyone. Just some quick filling comments, I guess, since chat wrote the bones of Jeff's comments, we can use his agent, and he doesn't have to talk anymore. We could just have this agent speak for himself. But moving back to and filling in some comments, I think it was an interesting quarter. Obviously, only half our book today is still large loan lending. It's about half of our assets, about $15.5 billion on almost $30 billion of assets. I think we created a near-term trough for ourselves with the fundamental acquisition. It was a strategic move. And while it was dilutive of at least $0.04 in the quarter, you have -- it is very leveraged to its overhead. We bought an entire business, including the management team. And as you scale the book, the results of the accretion of the book becomes rather dramatic. And 2 things we see. One, our cost of financing has dropped, as Jeff mentioned in his final comments, at 145 over. That's materially better than we underwrote when we bought the business. And two, the opportunities that we didn't realize that they had been out of the market for as long as they were during the sale process. So we didn't produce enough net lease in the quarter. But by stretching the duration of the book, the 17 years average lease and the inherent bumps in the rent, which average between 2% and 3%, we've actually stretched the duration of our book. And now we have a business inside of us that -- and if you look at triple net lease REITs in the marketplace, they're trading between, well, as low as 2%, but normally on 5%, 6%, 6% dividend yields. So you have a business that's worth inherently more in us with the parent paying close to 10.5% at the moment. So we will grow this rapidly, and we'll have to spin it off and realize the value of the extraordinary business we bought. It will get better and better over time. But near term, we are definitely suffering from dilution and probably didn't communicate that well enough to the analyst community though we remain very optimistic about the pipeline and the future growth. I'm going to step back for a second and talk about the whole company and then the economy. Starting with the economy. I mean the economy is a bit bifurcated, as you know, with the low end of the market not doing very well and the luxury market doing extremely well. But one thing as it affects real estate is you'll see, we see tremendous volume in transactions in Europe. And as the rate complex comes down, as the short end comes down, and we all know it will come down, certainly by May of '23 (sic) [ May of '26 ] when Powell is replaced, but likely before then, and it's only a question of the pacing between now and then. Transaction volumes in the United States should pick up dramatically, too. And what you're seeing is a lot of people thought rates would be lower. They're not through the woods yet. Rents haven't yet responded in the growth phase in most asset classes in real estate. But I think if you're looking backwards, you're looking the wrong way. I mean what we saw was a 500 basis point nearly vertical increase in rates happened very suddenly. Companies' assets, portfolios had to adjust to that. Their caps burned off over time. But in front of you, you have a declining interest rate curve. And more importantly, you have a very -- at least in the United States, a very meaningful drop in supply. So fundamentals should improve unless we get something of a serious recession, which isn't likely to happen in many quarters of the country because net worth are up and people are doing okay. Energy prices are calm. Inflation, while higher than people would like is probably onetime with the tariffs. It will bleed through in the fourth quarter and the first quarter, but the labor market should continue to weaken. And I think that sets up for a pretty benign period for real estate and pretty sound fundamentals coming out in '26 and as we emerge from this still increase in supply in the multifamily, the market rate multifamily. One of the other interesting things when you look at our company and you talk about the dilution, which is, we hope, temporary from fundamental is we're sitting on a $1.5 billion gain in our affordable book. And there, we mentioned last quarter, but not this quarter, rents in the portfolio will rise 6.7% we know already. That's the carryover from '25 to '26. There'll be an additional increase most likely in April of next year. That might put the increase to closer to 8% or even higher of 10%. We'll only probably be able to take a carryover to the following year. So that inherent growth in our book, that gain is available if we wanted it ever to cover the dividend. But we choose to enjoy the fruits of that portfolio. And Jeff mentioned, we did a $300 million cash out refi on just 30% of the book this quarter. And I will say that, that is one of the most important things about this year for the -- for our company is the complete fortress balance sheet that we've been building at ever lower spreads to SOFR and stretching duration and moving to less secured debt and repaying repos. It's a fundamental change in the balance sheet, which is probably for sure, the best in the industry. We'll continue to do that and continue to diversify and continue to strengthen our balance sheet in an effort to continue to bring down our costs which will allow us, in the case of fundamental, we can do a deal at a 7%, 7.25% and instead of a 7.75% because our cost of funds has dropped dramatically and is a competitive advantage for the franchise. So I think -- I don't really have much more I want to say. I think that we're very productive. The firm is producing lots of new paper across all its platforms. The business is particularly residential business now with lower rates, perhaps we can recapture some of that capital that's there. Also, we look to resolve our REO and nonaccrual assets. And we can see the future in our book as the capital is laid out. We know we can grow our earnings and get back to a place that we want to be, which is earning well north of our dividend. So from regular way business, we can always get there if we want. So thanks. And with that, we'll take questions.

[Operator Instructions] Our first question comes from the line of Don Fandetti with Wells Fargo.

Can you talk a little bit more about your near-term DE expectations? I mean you're running below the dividend. Obviously, the net lease will ramp up and some other factors. Can you just sort of give us a framework there on the timing of covering the dividend?

Barry, do you want to take that?

Well, we can lay out our book, and we can see the earnings. And in an individual quarter like this one, if you put the money out in the last month of the quarter, you don't get the full benefit of the capital deployment. So it will ramp going up hopefully steadily each quarter. We're looking at other assets that are -- that we think can become productive earnings assets again that are turning the corner. So I don't know, [ Rina ], do you want to fill that in a little bit more? But I think in general, we're probably having one more quarter of, I would say, rougher, but not the real earnings power of the company. And then I think it's a pretty clear sailing.

Yes. We expected, Barry, over a year ago when we modeled sort of this trough in this period that goes into early next year and then those earnings start to pick up as we get future funding as the fundings on a lot of these portfolios increase as fundamental starts to grow, and we have a few other good news things that we hope will happen in early '26. So we believe that we're on a path to getting back to where we've historically been in the not-too-distant future.

Got it. And can you talk a little bit about where we are on the credit migration front and building reserves? I mean do you think -- are we looking at like 2, 3 more quarters of just uncertainty on the credit migration and risk of building reserves?

Yes, it's a great question. We obviously did move a couple of things to 4. We moved one back down an office building that people probably would have thought would have been terrible in Brooklyn. We've now got 3 very large leases that will fill that entire building, and we'll decide whether we're going to hold it or move on from that. But we'll be back at our basis. And so that was a great outcome on office. And on the other side, it's been a few undercapitalized sponsors who just haven't leased up as quickly that's moving some loans to 4. I think we tend to know the flavor of what these look like. It's a few of the apartments that we did in 2021 against 4 caps that we expected a 5.25%, 5.5% exit debt yield. We probably got there. But given the rate rise, it's probably not quite enough to get out. Those would be very small losses if we did take losses in the multis. But for the most part, we've already worked out of 3, and we have another 2 coming at our basis on the multi side. And in general, I think we don't expect to have larger losses there. And the office side, it's known problems. Whether they get slightly better or slightly worse from here is what's going to create any movement within 4 and 5. But I think we know what the subset is today, 3 years after the rate rise began. It takes a while to figure it out. In general, our sponsors have continued to put in equity across these assets, even the ones that we've moved from 3 to 4, all had new equity coming in from the sponsors. So you get a little bit surprised sometimes if the sponsor decides not to defend a significant amount of equity. But for the most part, I think we see the playing field now. So I wouldn't expect a significant build from here, Don, if that's the direction of your question.

Our next question comes from the line of Jade Rahmani with KBW.

Regarding the REO and nonaccruals, are you expecting sort of a steady cadence of dispositions and ultimate resolution? And over what time frame?

Yes. I think we said we've got about $500 million that we've resolved and $1.1 billion that we've foreclosed on. So some people would say that's $1.6 billion. That's not how we look at it though. We have a 3-year plan with our Board, and it's about 1/3 per year is how we're looking at it. So we hope to have this pig mostly through the python at some point in 2027, late 2027. And along with that, with our larger lending book picking up and offsetting it, the loss of that drag at the same time that we have a much larger book contributing, we really look forward to getting through next year and looking at a much brighter horizon beyond. But I don't have a perfect time line, but it's about 1/3 a year.

I was just going to say that we do have too much liquidity. $2.2 billion is probably $1 billion higher than we normally carry. So that's additional earnings power. It's just a question of how fast we can deploy it. And we just do models. But -- and now you're seeing also repayments. People are paying us back again, which is good news, and we can lay it out the capital with fresh lenses. But it will pick up. I think you'll see additional repayments in the U.S. as rates fall. It's not so much rates as spreads. I mean spreads are crashing and across the corporate and real estate credit markets. Fortunately, our lines are going with it, but keeping our net spreads attractive and consistent with prior years. But it is leading to a lot and refinancings. I think the parent company will do something like $30 billion of refinancing this year. And that's -- we're like everyone else, we're refinancing anything that's not nailed to the ground because of the attractiveness of spreads.

And that $2.2 billion is a really big headline number. The low point this month will be probably closer to $1.4 billion after we pay down the secured debt that we expected to pay down on these high-yield issuances. We have a bunch of expected fundings. And as Barry said, we did have significant repayments. We had $1.3 billion in CRE and $700 million in SIF. That's $2 billion of repayments. So it's over $500 million of equity that came in at the same time as these high-yield deals that we accretively did and the term loan that we accretively did, but with the expectation that we'll be paying down secured repos and a bunch of fundings on this larger pipeline happening in the near future. If you add in $150 million or so of equity per month that we expect generically to put out in our run rate businesses, should they maintain today's pace, we're right back to a very normal liquidity position in a few months with a lot of firepower to continue to grow.

I wanted to ask about the multifamily market. I think it's been somewhat disappointing the second half of this year where everyone expected turning the corner on the supply overhang and rents troughing and starting to perhaps grow. That seems to be pushed out. But generally speaking, aside from the Florida affordable housing portfolio, what are your views on the multifamily sector? And are you more bullish about the outlook in '26?

It's Barry. While we -- well, supply will drop 60%, 65% or more in some of the markets, and we own 110,000 apartments, of which 53,000 are affordable in the balance market rate. It is city-by-city rent increases. And I think one of the -- I think Willy Walker's firms has put out a note 3.5% rent growth next year. I think you'll see it in the back half of the year. I think the supply is definitely going down, but it's still here. And everyone finishing a deal right now, everyone in lease-up is offering fairly significant concessions a month or 2 months to lease up so they can pay their debt service and they can try to sell these assets. What's interesting is the depth of the purchase market. I mean people are -- we're selling in our other opportunity funds, a dozen or so projects. Cap rates range from 4.3% to 5.5%, depending on the market. I'd say around 5%, 4.75% is clearing. And why are people buying this? First of all, the negative arb is going away as the short end comes down. Second of all, you're buying this asset at a huge discount to replacement cost. So unless the country goes into negative population growth, you're going to see continued demand. And demand, as you know, we're 95% occupied in most every market. And rents are affordable. The affordability of rents since incomes went up and rents didn't go anywhere for 2 or 3 years now, your affordability has dropped in our own portfolio from like 25%, 26%, warning is 30% down to 22%, 21%. So again, it's really -- we're all watching what's happening to the 18- to 24-year-olds that I think the unemployment rate has more than doubled in 18 months, whether that's chat or people just wanting to do different things in their careers or mismatch of education versus the job opportunities. I think that isn't your typical renter. They're usually a little older than that. They may be if you're 18, you're in college, so 18 to 22 is a college age child. But I do think we're all watching and we're all sort of scratching our heads. But in reality, you still have this wave of apartments finishing in all these markets. And some of them are better than others. You're seeing green shoots in some of the Florida markets. We expect that to accelerate next year. So it really depends on where your footprint is. But city of some of the other towns, I mean, Austin is a very difficult market. Probably it is the worst in the country. It ran the furthest, quickest, and now it's giving a lot of it back. But rents are falling double digit in that town. And then if you go to, as you know, [ mark ] cities with no supply, you're seeing 4% to 5% rent growth in California. San Francisco is looking positive 7%, positive 8%. There's no supply, and there's job growth as companies return to the valley for their AI adventures. So it is a national stat, but it's a very local thing that we have to watch and sort of Phoenix is tough. Interestingly, you'd worry about homes competing against apartments, but they still remain unaffordable and the mortgage spreads are historically high. So -- and you can see the more abundant housing market. So I think people are -- will still be in the renter community, but it would help, by the way, if we had some legal immigration, which has always grown the population in the U.S. And I think it's the first time in 250 years, the U.S. population will fall year-over-year because of net immigration and 1.7x birth rate, which is quite low. We have the same birth rate as France. So maybe too much Netflix, anyway.

Jade, you also mentioned the Florida multi as part of that. And Barry said $1.5 billion gain. It could be higher than that, we would see. But this cash out refinancing is the first time that we've shown you guys something that could look somewhat like a mark if you were to extrapolate. We had $309 million of agency debt previously from our purchase with $75 million of original equity. We took new debt of $614 million, so over $300 million more. That's a $225 million gain or it's 4x our original equity of $75 million on that portfolio, which is plus/minus 30% of our portfolio. And that's a gain just on the debt. The equity also has a gain, obviously. So I think that Barry giving you the $1.5 billion plus gain on that portfolio, I think this should make people feel very comfortable that, that is, in fact, the number given this is agency debt to agency debt and that we have that large of a gain just on the debt side without even including the gain on our equity. So I just want to touch on that given you brought it up.

Our next question comes from the line of Rick Shane with JPMorgan.

Look, one of the things that we're hearing anecdotally is that companies start to deploy capital again, the market is competitive, spreads are fairly tight. I guess in some ways, it seems to us like the window -- the opportunity window opened or closed very quickly. I'm not even sure which direction to describe it as. Is that what you guys are seeing, too? And what do you attribute that to? Is it competition from your traditional peers? Is it private capital? Is it just that funding costs are so tight, as you've noted on your own side? What's driving this?

Barry, you want me to start, and then you can go?

Sure. And Dennis can also talk about the markets. I think he's on the call, isn't he?

Yes. Dennis, why don't you go ahead?

Sure. Rick, obviously, we had a pretty big quarter in Q3. It was primarily multifamily and industrial. And I think we earned above trend versus the last handful of quarters. So despite spreads sort of contracting, our financing has also contracted sort of with it. So we're still earning a number that's above trend despite that.

Yes. I'd add to that. Yes, Rick, to your supposition, more money has been raised in private credit and in the debt space. And there is less transaction volume, so more people are going after similar loans. Ultimately, as Dennis just said, we're earning trend returns and multifamily loans generically went from at the beginning of the year, probably 300 over to 240 over or so today for a transitional multifamily floater. And you would think that would hurt our ROEs, but we've been able to move our repos lower at the same time. I mentioned in my earlier that the banks are really leaning in to lend to us. It's a much higher ROE business. They have a 10% capital charge on making a whole loan on real estate. They only have 20% of that 10% if they make a loan to us. So you go from 10x leverage to 50x leverage as a bank, and that creates a great ROE story for the bank. So the banks have really leaned into giving us tighter and tighter financing. They have room to continue to tighten. So I'd say if we tighten a bit more, we should -- we expect to still earn a similar returns to what we're earning. But at some point, I think everybody taps out if you start getting significantly tighter than that, but we are certainly not worried about it in the near future. And as Dennis said, we have a large pipeline coming, and we expect to maintain this pace. This will be our second largest origination year ever. And my expectation for next year with the market starring a bit is that we hopefully do more again next year than this year. So things are definitely opening up, but they are on the tight end as you suppose. Barry, anything to add?

Yes. I'd just add, I mean, if you look at our production, it's as near records and the yield on equity, the return on equity is actually consistent with past. I think there's one other new kid on the block, which you should not ignore, which is data center financing. As you can see, there's massive paper being written and hundreds of billions of dollars will hit the market. And the market will figure out where to price it, but many people buying it are doing back leverage. And whether it's Apollo, Ares with Blackstone or any of the KKR, I mean, everyone is participating in some of this, and it's virtually endless. And it's really from a portfolio construction, we're really careful about credit quality. Others may not be short term. And we are constructive. We're paying a lot of attention to not only the tenant, but the underlying tenant as we build the book. We did participate in the large financing late in the quarter, like most of our peer set. So -- and that pricing works for us at the moment. And spreads have tightened dramatically even in that space, but we still can earn the ROEs that we would like to earn. So I'm not -- we've been through like 6 or 7, oh my God, the market is too crowded. And we have a pretty long relationship in the marketplace now having originated over $100 billion of loans. And people know -- I think one thing people have grown to favor is knowing that their counterparty is going to own their loan and they're dealing with one person. I think that has become a really important notion for borrowers who previously had a bank originated a loan and then they syndicated it to someone offshore and then they try to restructure it in some possible. So I think that's helping players like us across the marketplace because we are a holder. We're going to resolve it and work through it with them. So I think that's been a significant shift in the borrower community. They really want to come to a one-stop shop and know that we'll be there holding the paper, they can talk to us. So I think that's quite helpful.

Got it. Okay. And I appreciate the thoughtful answer, and I know it's taking a lot of time, but I would like to do one follow-up. Barry, you had talked about data center financing. And I think one of the potential risks associated with that is we're talking about long-lived assets, but those buildings are really going to be filled with rapidly and the multiple of the technology versus the property is pretty significant with potentially very quickly depreciating assets inside. How do you guys think about that as you measure risk? And I suspect a lot of it has to do with counterparty, but I'm curious how different data center financing is versus your traditional businesses?

Well, it depends actually what you're financing. So sometimes you are financing the building and sometimes you're financing the building, the equipment, as you know the equipment can be 60% of the cost of the building. And that includes everything. I guess there are certain credits we favor and certain credits we wouldn't favor. I mean you can just look in the credit default swap market and see how the market thinks about the different credits so far. I will say that I'm actually on the West Coast and had a technology event. And I think the numbers out of chat are going to astonish people in terms of their revenue growth, which will be significantly higher than the market thinks. Same is true in Anthropic. I mean I think these companies do have in the aggregate, $1 trillion of free cash flow. And they -- other than one of them, they don't carry much net debt. So these are really good credits, and I think we're going to rely on the credits. And I think if you look at -- we're going to sign a deal with the hyperscale, you know we're in the data center business. We have about a $20 billion book. We're building for Amazon, for ByteDance, for hopefully, Google, Oracle. Microsoft. I'd say that they're not investing like they're walking. They're investing like they're going to continue to upgrade their equipment to stay competitive and the burden won't fall on the landlords. I mean these are -- if the markets are correct, the need for data center space and what you see in the consumption of -- I don't know about you, but my chat has gotten slower. I mean it's definitely slower than it was 3 months ago. So I think they're at capacity. And if you listen to them, I mean, believe them and believe the productivity gains that will come through corporate P&Ls. I mean, I think we're pretty sanguine on most of the credits, I think there are a few of them that worry us, and there will be a correction as the inevitably is. So we just have to be -- we have great debt yields, great lease coverage and the best credits in the world as your guarantor with steps. It's not awful. It's not awful. It's pretty good. It's a pure cash flow. There's no capital, there's no CapEx for us. I mean we got to balance it.

Rick, you framed it as counterparty risk and talked about depreciation, but the lease doesn't depreciate. Our loans fully amortized. We've done probably 4 large ones. Our loans fully amortized over the lease term. There's no reliance on residual value in our underwriting. So again, it comes back to counterparty risk, as Barry talked about, and these are pretty good risks to take when you talk about the companies that we're talking about.

[Operator Instructions] Our next question comes from the line of Doug Harter with UBS.

As we look at the new triple net lease business, it looks like the kind of the cap rate that you show on that slide is kind of in the 5% range, which seems below peers. Is there anything that's affecting that in the short term? And as that business scales, kind of where do you think cap rates can get to?

Yes. We only had 2 quarters in there. And so this quarter, it will look funky at [indiscernible] so it's a 6.9% or 7% implied cap rate with no goodwill on this portfolio was the purchase price. So much higher. So there's a normalization that it will scare people if they see that 5 handle number that is not a correct number.

Great. I appreciate that clarity. And then, Jeff, you briefly touched on it, but just hoping you could talk a little bit more about kind of the value and how the lenders were valuing Woodstar kind of as you went through that refinance process.

Yes. Thanks, Doug. I did briefly, but we had $75 million of original equity that with this cash out refinancing, we took $300 million out. Obviously, it's 4x our equity return. So the portfolio has done really, really well. And if you gross that up on our entire portfolio of $500 million and change purchase price, and that's just on the debt. The equity piece also has a gain. I think you get very easily to where Barry came in at $1.5 billion gain pretty quickly. So I think the market should feel pretty good about that being something that is available to us should we choose to take some of it, and that will be up to Barry and the Board as to the timing and when.

That concludes our question-and-answer session. I'll turn the floor back to Mr. Sternlicht for any final comments.

Barry, before you go, we have something sort of new that just came in. It just priced, but we priced our fourth CLO in the CRE side. It just priced a few minutes ago, so I couldn't really say anything previously. 165 basis points over SOFR, 87% advance rate. That's a very strong deal for us. We have 3 large billion-dollar CLOs previous to that in the CRE side. We've actually bought out a decent amount of paper over those. So bondholders have done very well on those. And CRE CLOs will never be a business for us. It's a trade when it makes sense, and it's made some sense today. It's made a lot of sense in the energy infrastructure business as well, where we just priced our sixth CLO, and I think 2/3 or almost 3/4 of our debt is now financed in CLOs on the energy side. So we're very happy to have priced a CLO really tight with a great advance rate 5 minutes ago. So good news also there. But Barry, I'll turn it to you now for final comments.

No, I'd say this is because of primarily fundamental, this has been a transitionary quarter for us, but the underlying businesses are super strong. The curve is favorable. The team is proven originators across our entire platform. So we'll get through. I think we made the right long-term decision by buying Fundamental. This is a quarter where you wouldn't recognize that decision, but I think you'll be super happy as we scale the business. We're betting so. So we own a lot of our stock. Thanks for being with us today, and enjoy your week.

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