STWD - NYSE

Greetings, and welcome to the Starwood Property Trust's Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I would like to hand the conference call over to

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 June 30, 2024, 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 will now turn the call over to Rina.

Thank you,

Thanks, Rina. As we approach our 15th anniversary this month, we're the longest-standing commercial mortgage REIT of our post-GFC peer group and the only company who has never cut its dividend. We built a diversified, low-leverage business positioning us to outperform regardless of market cycle. Our inception-to-date return of over 10% per year is higher than the Equity REIT Index and more than double the mortgage REIT index in that time. Even though we have the best valuation in our sector, the market has only given us partial credit for this diversification and for the over $4 per share in unrealized DE gains. As I will discuss shortly, those gains, which provide a unique safety net to ensure our dividend paying ability, are likely significantly higher. 15 years later, we aren't really a mortgage REIT anymore. The 10-year has rallied 75 basis points since we last spoke, and forward SOFR is now indicating 165 basis point reduction in the Fed funds rates by March, both of which are very good news for CRE credit as they provide relief both through cap rate compression and improved debt service coverage ratios. As Rina shared, our sponsors have contributed nearly $2 billion of fresh equity on our $14.7 billion CRE loan book since last year. When rates move like this, we typically see borrowers step up and support their assets more aggressively, and I would expect that continues. We have spoken often about loans on U.S. Office, which are 10% of our assets, but this rate move will mostly help other sectors or our loan book more, like multifamily, which is 21% of our assets and has a blended 6.3% debt yield across 70 loans, and hospitality, which is 8% of our assets and has a blended 11.4% debt yield across 20 loans. Should this rate move hold, both these asset classes will likely stabilize. We have said since the beginning of COVID that we didn't expect any losses from our hospitality book, and I still believe that. And we have said on past earnings calls that we view taking back multifamily assets from undercapitalized borrowers in this cycle as an opportunity to own solid assets at a significant discount. When academics write about this cycle, the focus will be the stubbornly slow unwind of work from home, creating low net effective rents in office that can't cover debt service post-fed hike. We are not immune from that stress, but with only 10% of our assets on loans on U.S Office and owned property gains that are almost as big as the entirety of our office loan portfolio, this narrative won't define us as this cycle enters its final chapters. I will note we avoided the temptation to lean into life science construction and conversion and have only made one loan in Boston Seaport District that is our 13th largest office loan and included in our 10% U.S. Office allocation. With little to report on our legacy downgrades, I want to talk briefly about the loans we downgraded in the quarter. Our one new 5-rated loan and two of our new 4-rated loans are multis that share a similar story and have the same syndicator sponsor on all three. As lenders, we are taught to learn from our mistakes, and we as an industry should have been more wary of syndicated equity structures who would have a difficult time calling capital in times of distress. We will be going forward. The multifamily assets we have downgraded mostly fall into this category. As rates rose and undercapitalized sponsors ran out of money, they underperformed their business plans, stopped upgrading units, and allowed vacancy to creep up, forcing lenders to step in. Fortunately, this is what we do. Our manager, Starwood Capital Group, manages over 100,000 multifamily units, and we have the capital at STWD to take these assets back, finish renovation, insert new management, and ultimately increase debt yields. Upon stabilization, we will then decide whether to hold or sell these assets. The one new 5-rated loan is a small multi-loan in Phoenix, and two of our four new 4-rated loans are in Texas, and all fall into this description. Our largest new 4-rated loan is an office in Dallas, very well located near Uptown, where the sponsor recently told us they would no longer contribute capital to support the asset. As with the syndicator story in multi, office defaults have had a common thread also. The high cost of re-tenanting due to TIs and LCs is hard to justify at yesterday's basis as net effective rents fall. Someone with a strong balance sheet and a better basis that is willing to invest in re-tenanting needs to step in and show strength and conviction to the market to energize brokers and bring in tenants to well-located assets like this one. Our borrower's inability to convince the market they were in for the long run allowed occupancy to fall to 57% and our debt yield to deteriorate to 6.4%. The team and I visited the asset again in July, and given the great location, we believe there is an opportunity to invest capital into this project to stabilize the tenancy and we'll begin working through that business plan or potentially a partial conversion as we move forward. The final new floor rating this quarter is a relatively small $27 million loan on an office portfolio in Dublin, Ireland that is 76% leased and produces a 6.5% debt yield It is early stages, but the sponsor is evaluating a large single tenant lease. But should that not be executed, we will need to work with the sponsor on other stabilization plans. Should the sponsor choose to walk away in the future, we have the capital and a better basis to step in and help stabilize the assets. As with our other higher risk assets, we will share any major developments on these assets as appropriate. Our energy infrastructure lending business continues to be a great performer with mid-teens levered returns on the loans made since we purchased the platform from General Electric in 2018. Importantly, after pricing our third CLO, we are earning these premium returns with 59% of our loan book financed in the CLO market, which gives us term non-mark-to-market financing. Our LTVs have continued to fall as the energy demand curve continues to shift higher. Our LTVs are the lowest since we bought this business. Last week, we got the results of the annual PJM capacity auction, which determines how much power plants are paid to provide excess power to the grid. The results came in well above expectations, which will allow power LTVs to continue to decline. In REITs, our CMBS conduit originations business has already made this year what it made in all of 2023. And as Rina said, our special servicer LNR saw a 30% increase in active special servicing this quarter alone, which will provide tens of millions of dollars of incremental revenue in the coming few years. As this cycle continues to play out, we expect the servicer to continue to outperform. Moving to our Property segment, we have discussed the approximately $2 billion of embedded DE gains we have created in the 7 years we have owned our Florida low-income multifamily portfolio. As a reminder, we own approximately 80% or $1.6 billion of these gains. Rina discussed last quarter the rent holdback of 3.8% that will be added to next year's formulaic income and inflation-based rent increases. Holding cap rate constant, formulaic rent increases over the 7 years we have owned this portfolio have increased spare value by nearly $800 million. I will remind you, rents cannot be mandated lower in this portfolio. Now I want to talk about the next 8 years. If rents increase at just half the pace of the last 7 years, expenses grow by 2%, and you hold cap rate constant, our portfolio will be worth $800 million more in that time. In addition to that, the first 5,300 units representing 21 properties and 31% of the Woodstar portfolio will roll from affordable to market rate in that time period as their affordability restrictions burn off. This will allow us to begin to execute on our original investment thesis to create incremental shareholder value by rolling our portfolio from affordable to market rate units. When we purchased these portfolios, we shared that we expected to maintain nearly full occupancy as units rented at the time for 70% of comparable market rate units, creating tremendous demand for these below market units. In the 7 years since we have owned the portfolio, market rents in the major markets this portfolio is in, like Orlando and Tampa, have increased even more than contractual affordable rents have, leaving affordable rents at just 55% of market rate rents today and providing us more upside on a roll to market than when we originally purchased these assets. Although we will have to invest in the units when we roll them to market, this is more than offset by the revenue increase you get by rolling to market, creating significant incremental gains for shareholders. To put this gain into perspective, once converted to market and assuming no rent growth from today, just this subset alone should create an additional $200-plus million of book value and future gains. As the remaining 69% rolls in future years, and assuming rents continue to trend higher, one could easily extrapolate the gains after rolling to market to be worth significantly more. While some of these gains are already reflected in book value, there's a significant portion that will not appear in book value until rents rise or until the units are rolled to market. To sum this all up, we have three pockets of gains that are each a multiple of our lost reserves today. The gains that are reflected on our balance sheet today, gains yet to be reflected from increasing rents that cannot go down, and gains yet to be reflected from rolling affordable units to market. We have invested in every quarter since our inception, and as Rina said, we invested $975 million again this quarter across business segments. Our Board has shown confidence in our liquidity position throughout COVID and this higher rate Fed cycle. Our Board expressed confidence in our dividend paying ability 2 weeks ago when it authorized our third and fourth quarter dividend early. The significant in-place and expected future gains in our own property portfolio give us unique flexibility. As this multi-portfolio and our other non-CRE lending businesses like LNR and Energy Infrastructure Lending continue to perform well, our company moves further and further away from being just a mortgage REIT. Unfortunately, the market has historically traded our stock with the mortgage REIT index. We will continue to execute on our low leverage diversified business model, which will hopefully move us away from pure comparisons, and we eventually become known as the only company in the diversified REIT index. With that, I would like to thank our team for their incredible diligence and our Board for their confidence, and I will turn the call to Barry.

Thank you, Jeff. Thanks, Rina. Thanks,

[Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan. Please proceed with your question.

Thanks, everybody, for taking my question. Look, ultimately credit is always a function of willingness to pay and ability to pay. And I'm curious given the quality of the sponsors underlying your loans, if the shift that you're looking at right now is about willingness to pay and is this really sentiment driven given the really radical shift in terms of forward rate expectations as we move into '25?

I think it's too early to tell, this just happened. So, I mean, people are being constructive but ourselves as an equity player, when we're looking at restructuring or carrying an asset, I mean, we will -- we're looking at a forward curve that has moved dramatically, and the 10-years moved dramatically and nobody expected that. Most people expected the 10-year to sit at four with our deficit from as far as the eye can see. I don't know if that's a technical trade or actually the new reality of people [technical difficulty] short end is super important and for our borrowers. And I'd expect that this will on the margin help materially in their desires to stay alive until '25. I think you can, like I said, you can now see. Don't forget, like, you go back 2 months and heads of the major banks are saying no rate cuts this year at all. They're also saying some people, a small minority, were talking about rate hikes. So this is the [indiscernible]. You've seen that this economy is super narrow. The GDP is being driven by centers and spending on stuff that the average person doesn't feel. And so they don't feel like this economy is working for them. Their wages are marginally above inflation now, like 3% and falling, and none of us feel pressure in the job market the way we did in the craziness of the pandemic. So -- and immigration, both legal and illegal, has helped the picture on the employment side, and we'll see what happens. I mean, obviously, the election itself will have some consequences for the labor market if there are deportations and things like that. So, we'll have to see how that plays out.

Rick, I'll add that our seats reserve is up to $380 million. So our optimism on rates, and it's really the last couple of weeks that this optimism has taken shape, as Barry spoke about, is not really reflected. We're still looking at every asset. There are a lot of knife [ph] fights out there, and we are not going to put optimism into our reserve expectations and our CECL reserve has still gone up. Clearly what we've seen in the last couple of weeks, if that holds, you could see things turn around, but we're not baking optimism into our financials today.

Got it.

It's so nuanced, by the way, because if you have an office building and it's a [indiscernible] yield and its 55%, 60% leased, you're looking at higher rates and negative returns as far as I can see, you're not going to invest in the office thing. And that's the biggest issue in the office market. Are you going to put the TI in for the tenant that wants to move in? And how sure can you be of the exit cap? And every office borrower in the country is looking at their assets, maybe not their REITs because they don't sell assets and they just want to keep them alive. But all the private owners of real estate, including the household things you talked about, like the best borrowers, everyone has decided that there isn't a PE -- real estate PE firm in the country that hasn't walked away from an office building. I mean, everyone, ourselves, Blackstone, Brookfield, every single person has walked away from properties saying, this is throwing good money after bad money. But the market will bifurcate exactly like the mall [ph] market did, where the B's and C's had a tough time getting financing, sell at 12 caps, and the good malls are still getting finance from the C and the S market using 5 or 6 cap rates now on the malls, and they're actually performing. They're performing [indiscernible] yesterday. But the office markets will become obvious that the best buildings in the best -- in the right cities are full, even in the United States, and they're commanding decent rent, [indiscernible], for example. I don't know if that's [indiscernible] assets. And then there are buildings in New York that are completely empty. They're trading for $100 a foot because what one was on the ground lease, others are kind of like, you got to do something. It's just field value and land value. That's on the residual scrap model. These buildings have to come down. So -- or find some use that, but nobody's figured it out yet. And it's going to be in the office markets, it's going to be a while. It's going to take time and it's not just rates. I would say rates impact every other asset class in real estate. Office has a different situation in the U.S., different in [technical difficulty].

Look, it's an interesting distinction versus what you said about multifamily where you basically said, hey, we'd be happy if everybody sold us everything at our basis right now. So I suspect there's going to be a pretty huge divergence between what you see going forward on the properties.

Huge, huge divergence, exactly.

Thank you.

Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Good morning. I wanted to start with originations. I noticed a pretty strong quarter. CRE loans up, infrastructure loans up a good bit from Q1. Can you talk about the pace of originations moving forward as you put your excess liquidity to work? And also, where you're seeing the best returns, do you expect to see opportunities elsewhere, maybe banks more willing to sell now that some of their investments aren't as underwater as maybe 3 or 6 months ago? And kind of how you think about allocation of your excess liquidity into new investments?

Barry, you want me to start? We are seeing consistently higher returns in our energy infrastructure business, and the LTVs are moving in our favor as the demand for power has continued to increase. So I would say that we expect to continue to lean in there. As I look at our, and I believe the next couple of weeks, we're really going to see with this rate move, we're going to see the pipeline for CRE lending pick up even more. But our pipeline has, I would say, tripled over the last three quarters of actionable deals on the CRE side. So there are things to do. Things are becoming unglued and unfrozen, I should say. And I believe that we have the ability to put out a run rate that's probably 2x to 3x the run rate you've been seeing at accretive returns in the similar sort of 11.5% to 13% levered return on the CRE side and significantly higher than that on the energy infra side. We've talked before about the fact that property is very difficult to buy today with negative leverage and cash returns that are mid digits. You're betting too much on the excel spreadsheet allowing you to push rents up, et cetera, so we're probably not increasing much there. We haven't increased the resi book. There are some trades in the resi book that we think are potentially getting closer to interesting. So you could see us put money back to work there at some point. We have been buying a few CMBS [indiscernible] where we think there's great value, and that's also supporting our CMBS originations business. So the two likely places are going to be energy infra, where we're going to continue to lean in, and CRE, where we're seeing a bigger pipeline. Barry, I don't know what you would want to add to that.

I think origination team thinks we have more than a $1 billion of actionable CRE loans that we can do if we want to do them. We're just balancing our needs to actually fix our assets up against a whole bunch of other stuff, but we're doing it with a company that's materially lower leveraged than we've been, 2.2x materially lower, I think, than most any of our peers. And also it's a little nuanced, but we've cut our forward funding obligations from a peak of $3 billion to a $1.2 billion. So we're much more -- in much better shape there that we don't have to fund stuff that we don't want to fund. And that's sort of a nuance, but it's important to the overall picture of how we put out capital. So I think transaction volumes are down like 70%. And the CMBS markets been the only place the financial real estate really has scaled in the last 6 months. Most of our peers and ourselves have been cherry-picking around the edges in private debt and some of the insurance companies are making some loans, and we have our own private debt funds. But because there just aren't that many big transactions to finance, it just hasn't been that rich a population set. So we've had a really hard time finding actionable deals. There's more liquidity or more trades or more lending and smaller assets. But if you're going to apartment building, you didn't want to sell it. It's very public that we lowered redemptions or lowered redemptions materially in our $25 billion [indiscernible] property company. And that was $25 billion basically industrial assets. And we said, we're not going to sell them into a distressed market and we were convinced rates would come down and add enormous liquidity and make our dividend more valuable. And all those things hopefully seem to be -- will come true and then you'll continue to sell assets. But we're not like anyone else, everyone, or just like everyone else. Everyone else says [ph], I don't want to sell this. There's no trade. There's nothing to refinance. There's no new loans. So, you will see the market come on, I said the unglued, but then you corrected on stock. There will be more transactions. You're seeing that already. I actually think you'll see a pretty strong buying appetite for this asset class. The volatility in equity markets reminds people of the compounding nature of real estate, the world's largest asset class. We're not going away. People will have to live somewhere. Most people will travel on vacation, and this asset class is a material component of the world's capital markets, and it's obviously got a different risk profile than a new chip that may or may not live forever or get taken down and go into the way of the dodo bird. So just a different outlook and it'll find favor in a different market.

And Stephen, to repeat something Rina said earlier about things becoming unfrozen, we had $606 million of capital returned in Q2, but we had $620 million of capital returned just in July. So you are definitely seeing a trend with more capital starting to be returned, which means they have the ability to refinance assets away from us. And that is a good part of the unfreezing of the markets, but you're certainly seeing a trend line that is constructive.

Yes. Appreciate the comments. Just a quick follow-up. Barry has been pretty well covered, slowing rent growth that will likely accelerate as the new supply slows. But last quarter you mentioned something that was interesting that insurance costs across multifamily were coming in lower than expected. Can you maybe update us on that and generally kind of how you're seeing expenses run on the multifamily side?

Yes, the pressures on multifamily expenses have come off a bunch. We were down year-over-year on insurance, property insurance, and I'm not sure that was across the United States or given our scale that we pull all our $100 billion plus assets together to get insurance. And I know that at least one other large person has similar insurance, but I can't speak to what small guys are borrowing at. We don't think they have our insurance. So -- but I would say overall our experience has been good. And you can see the -- some of the expenses, like, it's interesting, I was looking at some of the SFR companies, they're all over the place. And we own some of that family [indiscernible] too. So they are all over the place. The states are in different positions with tax increases and real estate tax increases. So I do think you have obviously two states that are running a surplus, a big surplus, Texas and Florida, and two states running a massive deficit, or three, Illinois, New York and California. And so pressure on real estate taxes is really different in [indiscernible] situation of each of the states. So -- and in fact, Texas lowered taxes. They went in and lowered their taxes, which doesn't happen because they should have a gong. I think I've seen that once, twice in 35 years. So it's just state-by-state, and there is even the new construction is so all over the place. The East and West Coast have less construction, the Northeast and New York and California because the growth was in the [indiscernible] states, the Texas, the Georgia, the Tennessee, and the Florida, and they got the bulk -- Raleigh, North Carolina, they got the bulk of the new construction and that's where people are moving. And so the rents are higher and materially different in some places. But I think one of our towns in Kentucky is up like 5%. I think D.C. is up materially. The other markets are down double digits in rents. So we talk about a national rent profile. There's really no such thing. It's just an average of all the major markets. The problem, of course, that Powell has is that by reducing the stock of single-family homes and apartments so significantly, he's setting us up for another inflationary cycle in rents and that's the negative of pounding keeping rates for time and artificially reducing the supply of new homes, which has shifted market share dramatically to the major and national home builders away from smaller builders that can't get money because the regional banks don't want to lend to them. So it's created quite an interesting new dynamic in the markets and it won't, it shouldn't, I mean, as an apartment owner, I'm hoping we get these big apartment rents, but as an American, he'll be late to the game again if he does. If he keeps the way he's looking at his 400 PhDs coming up with a model that makes no sense. And if they keep this lag in the rental [indiscernible] of inflation, he'll miss it again on the way out. So [indiscernible].

Great. Appreciate the comments this morning. Thank you.

Thanks, Stephen.

Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.

Yes. Commercial real estate has been hit so hard through this cycle, and as you talked about, Barry, kind of unintended consequence. When the Fed does cut, are you thinking that this is sort of a trickle of capital coming in, or do you see more of a meaningful sort of shift in sentiment and cap rates where a lot of players might be just kind of waiting to get confirmation of cuts?

The equity side of real estate is pretty complex. And the areas of the world that were investing heavily in [indiscernible] and real estate funds, in the Middle East with the position of oil and some other issues back home, they're a little less on the margin. They're still investing, but I think not at the pace they were before. Domestic needs have overwhelmed some of the international desires to invest offshore. I think the Koreans and the Southeast Asians who are major players in the markets, I think they'll be induced to invest more heavily. And the U.S market, I'm talking institutional market, will depend on where the stock market is. If the stock market craters, it's obviously the denominator and the portfolio allocations come into play, and they'll be overweight in the property sector. So I do think you'll see individuals show up and high net worths and they're a major force in the market in real estate. But in fact, through this entire cycle, the people most likely buying individual properties with no competition with families. And they were saying, I'm owning this at a six or seven, yes, I know, but I could never get it in a better market and I'm buying it for 30 years. So you've seen guys add real estate, so they're high net worths. And you're talking many institutions, some of these people have enormous balance sheet. So on the whole, I'd say there's a ton of dry powder and there's enough money there to propel the markets higher and create tremendous demand. The REITs will probably, as you can see, the stocks are rising and they get back into the acquisition business. And I'd expect that by the time some of the dry powder is used up, the buckets will be refilled and there'll be more money coming to the asset class. We're always competing as an asset class against other asset classes. And we have six stocks carry the stock market. So, I mean, if you're in them, you're up a lot. And if you weren't in them, you weren't up that much. So, anything that it's like, okay, we're boring. We produce a 10%, 11% consistent return, which of course meets every actual need of every institution in the United States, every endowment, but it's not, we're not venture. So, I think troubles in other asset classes throughout my career have always helped real estate. And then it come back to -- it gets a bid again, and real estate's going to get a bid again. The office market is going to work itself out. And it's unbelievable the federal government hasn't gone back to work. Washington is decimated. And it's like they haven't mandated workers to come back to the office in Washington, D.C. It's something. So that's not the case in Miami where the REIT is based. And we have 80% occupancy, physical occupancy in office buildings today. People are back in the office. But it's not true in L.A. or San Francisco or Austin. And we'll see. A good recession will change a lot of things, I think, on the office front. I mean I think people will go back to the office. I just think we're better together.

Thanks.

Thank you. [Operator Instructions] Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Thank you. Can you give any update on Starwood Solutions? Have you gotten any traction with that? And just the CMBS market, your comments about the banks, I see that market as having the potential to be meaningfully bigger in size post all of this than it was with the banks shrinking, do you agree with that and do you see an opportunity to meaningfully grow both the conduit and the special servicer?

Yes, thanks, Jade. We've had our first couple of clients in solutions. The revenue is still fairly small. We are talking to the potential big players on the government side in a number of ways about potentially helping out there, and those could be the needle movers that we're really playing for, and we'll keep you posted as that goes. I think we've had something like 300 meetings in solutions, and it is starting to grow. So that is good. I would say on the CMBS side, it's been a really interesting market. The banks are very happy to do agent business like CMBS that comes on and leaves their balance sheet fairly quickly. They're more reticent to do portfolio loans. So I don't think the large banks have pulled back and the smaller banks were never big CMBS conduit originators. So our conduit originations pace of a 1.5 billion or 2 billion a year probably maintains in what is today still a smaller market than what it has been. We've seen a shift in the CMBS market. You had a significant bid for 5-year loans. Investors at yesterday's higher rates did not want to lock in 10 years of a high interest rate. And so they really pushed to 5-year loans. Those 5-year loans are available on the fixed rate side through insurance companies. You're seeing a lot of insurance company growth in 5-year fixed rate loans. And the CMBS market has become probably 80% 5-year loans. That was 10% a couple of years ago. So the borrowers have moved in the curve. We're very willing to provide that capital. It's a little bit of a different B piece that ends up coming out. It's a higher dollar price piece. It has less time to accrete back to par, but it is something that is moving at similar rates to where they were over the last couple of years. So, with the [indiscernible] in place and demand for 5-year, we do expect 5-year CMBS originations to continue to grow as a percentage. And with rates coming in here, I think you will see an increase over the coming couple of months on a lot of things that have been pent up. People have refinancings coming up. They're willing to move now as they see the lights of the eyes of a 370 or 380 10-year note, and that's going to bring things back in. Spreads are a little bit wider in the last week as rates made this move, but that will settle in if we go back to yesterday's spreads, today's interest rates. I think the CMBS market picks up a bit. As I said in my opening remarks, we've made more money in the first 6 months this year than we did all of last year, and last year was a decent year. Part of that is spreads have been tightening, but I think that our place in that market where we write smaller loans, $10 million to $12 million loans, is probably still the place where we will play. We have a couple of larger loans in the pipeline, but we sort of prefer that smaller mid-market loans there, and that is something that I think could get up to $2 billion $2.5 billion, but it's probably not likely much bigger than that. And the overall CMBS market probably doesn't grow significantly, although a rate move like this will move forward a bunch of supplies. So we're optimistic that that business continues to perform well.

Yes, I think the CMBS market is going to grow in size. But the thing is for borrowers, it doesn't work for transitional loans. They have to be cash flowing assets and they also have to be at a certain scale to make them worthwhile given the cost to borrowers of the transaction fees. So the private loans will always sit alongside the CMBS executions. And I do think I've been remarking on some of the deals done that I think have been quite aggressive in the CMBS market, both in coverage ratios and very tight. And I -- but it's been the only way to finance a large portfolio is really through the banks. As Jeff pointed, they're happy to act as conduits, but they're not happy to have this stuff sit on their balance sheet. And there's a lot of pressure from the OCC as they've been for 2 years, 2.5 years to reduce their real estate exposure, which hasn't helped anything, especially with us and other borrowers in our sector who like to get refinanced out. Who's going to take you out? And who takes you out of an office loan today? It's like, who's going to finance it? And I think when I mentioned the markets, I didn't talk about the debt markets for those asset classes. I mean, obviously, a Fannie & Freddie still in the apartment market, but like in the motel market, you're seeing loans 400 over, 450 over, those are loans that we want to do. And they're not as in a borrower wants to borrow back. But if you have a very stable cash flowing hotel, we just refinanced and asked it at 240 over, but I think it was like, if I remember correctly, it's probably 12 or 13 [indiscernible] yield. So, when things are really safe, there's money for it today. And I think this key change, and it has to be a key change in the real estate markets, of a lower rate -- of almost a certain lower rate profile in the future, at least the near future, so next June, is going to mend a lot of issues and be good for the whole industry and for the country frankly. So you didn't want the regional banks to collapse. That wasn't -- and they were a victim of the Fed. Three things benefit, real estate, the treasury because they have to pay less interest expense on 34, 35 [indiscernible] of debt and the regional banks which every drop in rates is an equity infusion into the balance sheet. So there's a triple header of wounded ducks that will be better off. And I just hope you hurry.

And Jade, I'll add that on the solution side, you saw this quarter, I think Rina quoted, that our servicing portfolio increased by $2 billion, but we did have $3 billion transfer out. So we actually added $5 billion of servicing this quarter across six deals, and that's a big part of that as a result of the number of meetings that we've been having on the solution side, which opens the door for other businesses there. And my last thing, when I did talk about conduit, CMBS before, I was talking about fixed rate conduit and not SASB. Certainly, there will be growth in SASB. We are seeing growth in SASB. I think that is what Barry is speaking to as well and I would expect that to continue.

That's right.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Barry Sternlicht for any closing remarks.

Thank you everyone for joining us today. It was interesting. We don't often have that much to talk about, but I think we're very happy, given all the issues that the industry face, we're pretty happy we are. Again, I thank our shareholders, the Board, and our really hard working team for executing through this really difficult time that we had nothing to do with. And I'm optimistic about our future and I look forward to getting all the cylinders working again. So pull forward and continue to provide outstanding returns for our shareholders. Thank you so much.