Greetings, welcome to the Starwood Property Trust Fourth Quarter and Full year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Zach Tanenbaum, Head of Investor Relations for Starwood Property Trust. Thank you. You may begin.
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 December 31, 2022, filed its Form 10-K with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available in 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 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 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, Rina Paniry, the company's chief financial officer, and Andrew Sossen, the company's chief operating officer. With that, I'm now going to turn the call over to Rina.
Thank you, Zach, and good morning, everyone. Our unique multi-cylinder platform once again demonstrated consistent performance with distributable earnings or DE of $161 million or $0.50 per share for the quarter and $726 million or $2.28 for the year. Undepreciated book value ended the year at $21.70, up 26% from two years ago and up 5% over last year, driven by NOI growth in our 15,000+ unit Florida affordable housing portfolio, which I will touch on later.
In 2022, we completed $10.7 billion of new investments across businesses with initial fundings of $9.3 billion and follow-on fundings of $1.1 billion. Against that, we had repayments and sales of $3.7 billion, including $1.9 billion from commercial lending, securitization proceeds of $3 billion, and newly issued corporate debt of $1.1 billion. We continue to have significant liquidity with $1.1 billion of cash today, $250 million of which we will use to repay our convertible notes maturing on April 1st.
We also benefit from excess unencumbered assets and gains within our property portfolio, both of which can be utilized to create additional liquidity. I will start my segment discussion this morning with commercial and residential lending, which contributed DE of $172 million to the quarter. In commercial lending, we originated $266 million of loans, including a $112 million loan on an industrial build to suit that is pre-lease d to an investment-grade tenant. This brings our full-year originations to $5.3 billion, of which 56% was multifamily and industrial.
At quarter end, our aggregate multifamily and industrial exposure is 39%, which is nearly 3 times the pre-COVID level. Our predominantly Class A office exposure continues to be just 23% of our commercial loan book, which is down from 29% a year ago and 38% pre-COVID. In 2022, we received $362 million of office repayments, and subsequent to quarter end, a $92 million office loan in Canary Wharf, London, repaid early, further reducing our office exposure today.
During the quarter, we funded $84 million of new loans and $395 million of pre-existing loan commitments, which were partially offset by $301 million of loan repayments. This brought our loan portfolio to a record $16.8 billion, up 18% year-over-year, with 99% positively correlated to rising interest rates. Company-wide, inclusive of floating rate assets and liabilities in all of our business lines, a further 50 basis point increase in base rates would increase annual earnings by $19 million or $0.06 per share.
On the CECL front, we increased our general reserve by $27 million in the quarter to a balance of $94 million or just over half a percent of our commercial lending portfolio. In looking at credit performance and the adequacy of our CECL reserve, one of the key indicators of future loss is historical experience. Unlike our peers, our model focuses more on its actual historical loss experience as well as property type and LTV, while placing no emphasis on the more subjective internal risk ratings.
To that end, we had no new specific reserves in the quarter. However, we downgraded 4 office loans totaling $724 million from a 3 to a 4 in the quarter, which Jeff will discuss. One $142 million retail loan from a 4 to a 5, bringing our total 4-rated loans to $872 million and 5-rated loans to $287 million. We are confident in the underlying real estate and ultimately believe these assets are fully recoverable.
During the quarter, we foreclosed on a 5-rated $245 million first mortgage loan related to an office building in L.A., which Jeff will discuss in more detail. The property was recognized at the carryover basis of our loan, and we have in-place financing on the asset totaling $117 million. In our residential business, we acquired $745 million of loans, including $713 million of agency investor loans that we discussed last quarter, bringing our on-balance sheet portfolio to $2.8 billion.
As prepayments have flowed, we recognized a $17 million GAAP mark-to-market increase in our retained RMBS portfolio this quarter, bringing the balance to $423 million. We've previously discussed our equity interest in a residential mortgage originator. During the quarter, we exited this investment, resulting in an $11 million GAAP and DE loss. Next, I will discuss our property segment, which contributed $17 million of DE to the quarter. Of this amount, $9 million came from our Florida affordable housing portfolio.
For GAAP purposes, we recorded an unrealized fair value increase related to this portfolio of $68 million in the quarter or $555 million for the year, net of noncontrolling interest. The value was determined by an independent appraisal, which we are required to obtain annually. The implied cap rate is consistent with our prior valuations. In our master lease portfolio, we recognized a 10.6% increase in rents effective October first as part of the five-year contractual rent bump in this portfolio. This will result in $2.8 million of higher rental income annually.
Next, I will discuss our investing and servicing segment, which contributed DE of $31 million to the quarter. Our conduit, Starwood Mortgage Capital, completed 1 securitization totaling $93 million in the quarter, bringing our total volume for the year to $1.2 billion across 9 securitizations. In our special servicer, we obtained 4 new special servicing assignments totaling $4 billion during the quarter and 27 assignments totaling $24 billion during the year, bringing our named servicing portfolio to $109 billion, the highest level since 2017.
Our active servicing portfolio declined slightly to $5.4 billion as $700 million of resolutions were offset by transfers into servicing of $300 million. On this segment's property portfolio, this quarter we sold one asset for proceeds of $37 million, resulting in a net GAAP gain of $25 million and a net DE gain of $23 million, once again demonstrating the embedded value of this portfolio, which has been a source of consistent and recurring gains across cycles.
Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $18 million to the quarter. We acquired $76 million of loans in the quarter, bringing our total volume for the year to $726 million. Funding totaled $68 million, with repayments and sales totaling $75 million, keeping the balance of the portfolio consistent with last quarter at $2.4 billion, which was 97% floating rate.
I will conclude this morning with a few comments about our capital markets activity and capitalization. We continue to focus on non-recourse and non-mark-to-market financing, with 88% of our outstanding financings not containing spread marks, which are solely based on market events.
During the quarter, we issued a 5-year $600 million sustainability Term Loan B at SOFR plus 325. This is in addition to our ATM capital raises early in the quarter, where we issued 750,000 shares of common stock for gross proceeds of $16 million at an average share price of $21.17, bringing our full year ATM issuance to 2.2 million shares for $49 million at an average share price of $22.72.
We continue to have ample credit capacity across our businesses, ending the year with $8 billion of availability under our existing financing lines, unencumbered assets of $3.9 billion, and an adjusted debt-to-undepreciated equity ratio of 2.5 times. With that, I will turn the call over to Jeff.
Thanks, Rina. We strategically built our business over the last 14 years to perform well in normal markets and outperform in volatile ones. Higher leverage would have created higher earnings in normal markets, but our focus has always been on tail risk and dividend sustainability. We've held the line on very low leverage, diversified both sides of our balance sheet, and added a special servicer that makes more money in times of distress.
This model has proven itself through cycles, and with $1.5 billion or $5 per share in harvestable gains in our owned property portfolio, we have significantly grown book value, yet our stock has lagged with our sector. On average, our stock has traded at 123% of book value since inception, and today we trade below 90% of book value. Given the significant rise in base rates this year, the market's focus is clearly on credit and specifically on office credit. Rina said we have reduced our exposure to office loans from 38% to 23% of our CRE lending portfolio since COVID.
Since we have other investment cylinders on our balance sheet, lending segment loans on office make up only 13.6% of our assets, which is by far the smallest percentage of our peers and a fraction of most of them. One would expect lower office exposure to require lower reserves in the current environment, and that is the case again this quarter. Other than our previously disclosed $4.9 million reserve on the entire balance of a retail loan in Chicago, we have no asset-specific CECL reserves today.
With $1.5 billion in harvestable property gains over 15 times our cumulative model-driven CECL reserve, we are the only mortgage REIT with multiples of cushion to cover potential losses should CRE markets weaken from here. We have re-underwritten our portfolio multiple times in the past few months to ensure we maintain significant liquidity to both run our business and to be able to go on offense as markets stabilize.
We aren't dependent on raising incremental capital in the next year, even after the cash repayment of a maturing $250 million convertible bond in April and a maturing $300 million unsecured bond in November. Our ability to earn our dividend also doesn't depend on raising incremental capital. As spreads and rates normalize, we will continue to monitor the capital markets for capital raising opportunities to execute on the very accretive investment opportunities we see today, and we will continue to optimize our existing investments by rotating credits and sectors as we always have.
In the fourth quarter, we invested $1.2 billion, which is a fraction of our multi-year run rate, and we expect to maintain this defensive posture in the coming months. Credit spreads have begun to stabilize since peaking in early Q4. Once longer-term credit spreads stabilize, we expect to resume our run rate investment pace. We have produced significant gains on assets we have taken into REO since inception, proof that scale and experience matter in volatile markets.
We will again use the experience of our manager, Starwood Capital Group, and our 350 person dedicated team to execute on our liquidity enhancement strategies this year. Resolving our REO and non-accrual loans and reinvesting that equity into new current pay assets is management's greatest focus. In doing so successfully, as we have in the past, we'll increase earnings by over $0.20 per share annually.
Without the benefit of any reduction in drag or realizing any recurring non-recurring gains, we project we will continue to earn our dividend each quarter this year in our core businesses alone. I want to spend a minute on our REO and newly downgraded positions. As Rina said, we added an REO asset in the quarter, having taken title to a vacant office building in downtown Los Angeles during the quarter.
We are working through several non-office redevelopment scenarios and are in discussion with a number of interested parties to redevelop with us or sell the property to. We talked previously about an office asset we foreclosed on in the Galleria section of Houston, an area we believe is better suited for residential use than office use.
Since we last spoke to you, we have executed a purchase and sale agreement at our loan basis with a third party for a residential conversion, and we will keep you updated on progress in future quarters. Finally, in the quarter, we began selling the 21 units we own in our Upper West Side condo conversion called The Chatsworth, which shows terrifically. We have put two units under contract since quarter end at pricing in line with our expectations, and we expect that exposure to shrink this year.
Risk ratings can be very subjective, and we cautiously downgraded four office loans to a 4 rating this quarter due to pending maturities, but did not take any asset-specific reserves as we believe them to be fully collectible. The assets are in Brooklyn, Washington, D.C., Orange County, and Houston. All of these borrowers are large institutional real estate investors, and we are working with them to find the best solution on each.
In all four cases, there are sponsor fund-related reasons they may be unwilling to support the assets if they can't stabilize them this year. Against that, we feel secure at our basis in Brooklyn due to having significant excess loan collateral. D.C. is a great candidate for resi conversion, and we are already in discussions with third parties at our loan basis should we get control of the assets.
In Orange County and Houston, the assets are being marketed and the sponsor has received, or we expect them to receive bids at or above our basis. In residential lending, we have stopped buying loans. We exited our small preferred equity investment in a mortgage originator, and we saw securitization spreads begin to normalize in January. Banks have become very competitive funding unsecuritized residential loans, and we expect to close on new financing facilities at materially better financing terms in the coming months.
As Rina said, our securities book has performed well as prepayment speeds have slowed, helping to offset below-target returns on our unsecuritized loan portfolio. We continued to add to our energy infrastructure lending portfolio in Q4 and in Q1 at above-trend risk-adjusted returns. When we go back on offense, I would expect we will invest more heavily in this attractive lending segment.
Finally, we have talked about the earnings power of our special servicer in times of distress. As Rina said, today we're named special servicer on $109 billion worth of CMBS, up from $68 billion just 4 years ago. Maturities will start picking up this year and going forward as we are now past the 10-year anniversary of CMBS 2.0 or post GFC loans. If markets continue to be volatile, this could produce significant earnings for our company in 2024 and beyond. With that, I will turn the call to Barry.
Thank you, Zach. Thank you, Rina, thank you, Jeff, good morning, everyone. Welcome to our earnings call. Thanks for being with us. I usually start with the economy, those of you who have seen me on TV, I've been fairly aggressively trying to get the Fed to stop raising rates and let the impact of what they've done, the largest increase in rates and the fastest increase in rates in the history of the country, coupled with the balance sheet reduction, coupled with the OCC telling most of the banks to cut back lending and shrink their balance sheets, has created incredibly tight conditions.
I saw a report this morning that construction in the U.S. has dropped 27%. That's commercial construction. Obviously, single-family homes have fallen off a cliff. When we complete this wave of construction, I would expect many projects to get tabled. When we look back at the great financial crisis and where job losses were, they were really in 2 categories, manufacturing and construction.
If you look at manufacturing, which is about to go negative, you will get the some of the job losses in manufacturing. Construction will be a tug-of-war between commercial projects ending for private developers and whatever it is the government gets their act together to spend their billion-dollar infrastructure budget. That can be a little harder, which is one of the reasons I wonder where the Fed is going to be effective knocking jobs off without actually destroying real wages and real jobs across the service economy.
During 2007, 2008, 2009, actually education and healthcare went up. You can't change that with interest rates. The only place you really hurt the economy is in the service sector, which would be retail, travel, airlines, and things of that such. Business services already let go of 400,000 people, but you see the first and the largest dichotomy between unemployment claims and job layoffs.
It's never happened before, but this has been a white-collar recession. All these people are getting unemployment benefits, and you'll see these numbers show up when the unemployment benefits, which could last as long as 6 months from tech companies actually come off. I think the economy, you're seeing the numbers from Target, the moans and groans from retailers, and yet you see these retail prints. I think that was clearing of inventories in January because obviously everybody wants to restock for the summer.
People forget that because of inflation, when you're getting a retail number up 3, it's actually down 2 because prices are up 6. You're getting a nominal growth, but you're not getting unit volume. Eventually, the unit volume will fall further than price increases, and you'll see those let up. The other thing I think about inflation, which will definitely head south, as I said, and we're just waiting for these rent data to fall into the CPI. That's the single reason the government was so late raising rents.
When rents were up 13%-20% in the United States, it wasn't in the Fed CPI numbers because of the delay in their reporting. Now that rents are falling, they're still having them rising. It's black and white. It's not. It's a fact. I don't know why they choose to do that one category with such a lag. Eventually, we expect I've said inflation could actually go negative. It will depend on other categories right now, I think, given the world's complex.
The reopening of China is great. I don't expect it to be super inflationary. Basically, it'll help the supply chain. When you're building a building and you can't get the dishwasher, you need all the components of the building there. If 80% of the supply chain is fixed, you need 100% of the supply chain to be fixed to actually get things done on time and on budget. I wouldn't call that in and of itself necessarily inflationary, but actually you could argue it's deflationary. If demand comes down, supply increases, prices will fall.
That really goes to the structure in the company, and that's why I set it up that way. Let's talk about the real estate landscape for a second. It is a bit of a minefield. You can't really tell looking at companies in private or public today what's going on exactly in these companies, because many of us have floating rate debt, which is fantastic.
Our earnings are going up with floating rate debt. Our borrowers, most of whom have caps in place and can pay us, till the loan maturity. Also you'll see, the key is the asset class they have, of course, and what's happened to rents in the time we made those loans, or we as an industry made loans and the banks, some include the bank then the insurance companies in this.
Of course, what, what could they can refinance at and where the spreads are and where rates are. In general, this probably is as good an opportunity to put capital out as it was in 2009 when we started Starwood Property Trust. In a, in a way, I wish we had a $900 million blind pool that we had in 2009. We've never seen spreads like this. Construction loans, I was in Washington the other day, and I was driving near a site, and the driver told me that they made a loan on a hotel at SOFR plus 950, a new construction loan at 60% of cost. That's 14% for a new loan.
I mean, I'd love to own a hotel at 60% of construction cost. I'd back up the truck, end up, empty the kids' trust and make that loan today. Many of the companies are not in a position to do that right now. We're mostly playing defense, and picking and choosing where to deploy the capital, but we can't wait to go back on offense. We will as soon as we see the landscape clear and the Fed basically says they're done, and what we expect to be a recession comes into place, forcing the Fed to probably lower rates.
I saw a report yesterday that once they have done this, the rates will fall 200 basis points. It's probably been pushed off a quarter or 2 because there's some remnants of rolling strength in the economy. But I still expect it to happen in the fourth quarter.
Let's talk about the asset classes for a second. A multifamily, which has become a bigger and bigger focus of our firm and our lending book, is gonna go through a little spate of supply right here, but then it's gonna end. The most projects in multifamily will be halted until not only are cap rates up, but cost of financing is way up. The ability to get financing construction loans is gone. You already have a 1.7 million housing shortage.
Short and long term, you're gonna see rents. Headline rents are going down, but in-place rents are going up because there's a big gap in these buildings. In our portfolio loan on the loan book, Jeff tells me our rents have increased more than 20% since we started making those loans. That, they will hit their stabilized yields, we think fairly quickly. I would be delighted, and sad, but delighted, if we take the multis back because the long game for multis is excellent.
There's no ChatGPT issue, gonna attack the residential sector. Because housing, single-family home supply is going down, single-family construction costs are going up, interest rates and the cost of owning a home are going up, it makes rental homes that much more attractive. Long term, the asset class is solid as a rock, and the values will be supported by over $250 billion of capital singly raised to buy multis.
The issues in other asset classes are gonna help the multifamily asset class. People will run to it as a safe haven away from things they can't really understand or underwrite or they can't get loans for. The multifamily sector, of course, is supported by Fannie and Freddie, where spreads today are available like 200 over.
Fixed rate debt is pretty cheap, 130-150 over, and that actually total cost of funds for fixed rate debt is lower than floating cost debt today. If you wanna park up some money away, if you're a high net worth or in family, it's an interesting place to invest even into the softness of the market at the moment.
Make no doubt about it, The Wall Street Journal, of course, writing six months after we talked about it, the supply has been evident. It's coming through. It's A-class stuff. They're charging a fortune or trying to get a fortune, and the B-class assets will have a longer runway than the A-class, which will fight against each other and compete and probably. We'll lease up because of the shores of supply.
Industrial has been a great market going to a good market. The market's bifurcated again. The markets remain occupancies across the country remain solid. Big boxes are bonds. If you have an Amazon 15-year lease and you don't have steps, your bond has negative convexity, and the debt on industrial is not supported by a government agency.
It's under more pressure from a cap rate perspective, but having the most solid and strongest income growth of any asset class at the moment. You do wonder how that, if that slows down, which inevitably should, and pricing's been under some strain. The office markets, you have a tale of two worlds, which is everything but the United States and the United States.
Everywhere but the United States, offices are leasing. We have some investments in Europe, particularly in Germany. The vacancy rate in Berlin is 4%. In Munich, it's less than that. Rents are up in Munich 12%. If you look at, Asia, the Middle East, Korea, Japan, Australia, people have gone back to the office. It is a U.S. phenomenon, probably led by the tech sector, which has created this unusual situation in U.S. office.
In the US, you have a tale of two cities. You have newer buildings and A buildings leasing and everything else emptying. It's almost a one-for-one switch. If you are in the A sector, you're doing okay. You're probably. We were just renewing a lease in probably the worst office market in the United States. It's a Starwood Capital Group lease.
We had 10 buildings to choose from of A quality in San Francisco, and they're not lowering their rents. I was incredulous. I mean, I can't believe it. It's like a 40% vacant market, and we had to pay more, much more than we're paying today to be in the best buildings. There's very good demand for high-quality assets. There's no demand at all for other assets. Over time, these buildings will be converted to other uses.
They'll become grain silos in cities or wastelands, indoor parks. I don't know what will happen to them, but they will be removed from the stock unless people really go back to the office in a big way. I personally like being in the office. I don't like working from home. Most of the younger generation actually likes working from Jackson Hole and Montauk.
I think that's gonna change in a recession. It has been easier for people to fire people that are not in their offices. You obviously don't see them. You're not attached to them, and they aren't exactly raising the banner for the company and making it a big, great place to work. I do think that will change. Having said that, the office markets are the toughest.
It's only 13% of our overall asset book, a little over 13%, as Jeff mentioned, which I think might be the lowest of any commercial mortgage REIT out there today. We made that switch long ago. As you know, we have almost no exposure to New York or San Francisco to speak of in that portfolio, which have been 2 of the toughest markets.
Interestingly, the red states, the Austins, the Nashvilles, that's not a state, the Texas, Tennessee, and Florida, Research Triangle Park, those markets have performed pretty well and continue to not only hold their occupancies better, there's fewer subletting, and they continue to attract space, and there is some net positive absorption in these cities. You're going city by city as you'd expect.
There is still a migration of people out of the blue states to the red states, where there are no trade unions. There's the right to work, and obviously there's no income taxes. That will continue for the office markets. Hotels have been incredibly strong. One of the things you all know how much you're paying for your hotel rooms, you don't pay as attention to is the hotel industry is missing almost 25% of its workers that it used to have in 2019.
The rates are higher. The workers aren't there. The margins are really good. Your service is probably not as good as it was. You should bring your own sheets to a hotel today because we're not going to change them for you. That may change in January. Half of the jobs added were in the hospitality industry. It was 250,000 jobs in the hospitality industry, which went a long way back to hiring the people that we couldn't hire.
The debt markets are a mess. Nobody wants to lend against hotels, which we would be delighted to step into that vacuum. It's an asset class we obviously know very well. I'm not sure anyone has made more loans or bought more hotels than Starwood Capital Group in the last 30 years. Those are really the major food groups. Data centers continue to be strong. You have credit issues you have to watch.
I think the key is that this is probably the best lending environment we've seen since 2009. We used to, three or four times during the last 12 years of our existence, like are we at 13 yet or still at 12?
13.5.
13.5. We've moaned and groaned about too much competition, or this is not an issue of that today, because the lenders, the banks are on the sidelines. Insurance companies are actually filling the void, but playing at low leverage. Given our background in credit, our knowledge of the markets, our real-time data from a $120 billion asset base, we feel we could deploy capital extremely well and at incredible spreads in this market.
We've always not issued equity below book value. If we were above book value, we think we could make extraordinary loans today with incredible risk-reward characteristics. At the moment, we're going to play defense and make sure we have the liquidity to handle almost anything that comes our way as we navigate through this unusual situation that the world finds itself in.
What we're doing here is really running multiple scenarios, which is we do nothing, and virtually nothing. We can earn our dividend earning, doing almost nothing, which is phenomenal and probably shocking to surprising to me at least. But it's primarily because the floating rate book is carrying the firm. The loans, you know, we always got repaid. Not getting repaid is actually a good thing because we don't have the downtime, the money doesn't go into cash, and we're earning the coupon, and we get paid currently.
You kno w, the other thing we're doing is how do we get focus on turning the asset base over faster. Look at things that are not earning their keep, and if we're earning, let's say, a 7% on a situation, but we can redeploy it at 14%, maybe we sell the 7%, take whatever small loss there might be to redeploy that capital into a 14%.
The last thing, of course, is to get the, as Jeff mentioned, the unproductive assets from our book out, whether it's the buildings in Houston or the Museum Tower in Los Angeles or The Chatsworth Apartments. They're not contributing anything. They tie up capital in them, and they're a source of equity for us. Of course, we could create additional liquidity by selling additional interests in the Woodstar portfolio, our multifamily assets, if we wanted to. We've not really wanted to do that.
We have lots of ways to create liquidity for the firm on top of the $1.1 billion of liquidity we sit on today. I think we're excited about the opportunities. We're cautious about the environment. It's nice to have this special servicer, the largest in the country, that will continue to perform and is a hell of a hedge against everything else going on in the world. They have unparalleled knowledge both of the CMBS markets and of the loan book. We employ something inside the firm, something like 16 people in IT who run the databases that power the LNR service business.
We have information that is mind-boggling, and it's been accumulated over 30 years. Actually, the head of servicing has been here 30 years, Joe Horshaw, and he's one of the original employees of our company. They do an amazing job, and I think it'll be an amazing opportunity for him to grow and add additional earnings to the company in the foreseeable future. The worse it gets, the better their life will be and the more they'll earn.
Today we earn roughly, I think, a third of what we earned in the peak in 2007, 2008, something like that. There's good upside, hopefully for that business, which is a pure ROE business. It doesn't deploy any capital. It raises the ROE of the firm. Hopefully, we'll see positive things, although we don't want them to get too good because obviously it would probably be bad for the loan book if it was too good.
I think we're positioned to take advantage, and what we're looking for is a signal from the Fed that they're done. I think the first thing that happens is spreads come in. A AAA is a 200+ over is an anomaly. It should not be that way. That's fear in the markets. There's tons of capital out there. You see it run to the equity markets. I do think the equity markets are a bit ahead of themselves. You can see the speculation creep back in with AMC and Bed Bath & Beyond, all these companies that get raided by the guys I thought were dead.
The meme stocks show up again. That is not healthy. We want these markets to settle down and be driven on fundamentals, on a growth potential and really a fundamental analysis of the future and the cost of capital of equity and debt normalizing. I do think we can get back to 3% inflation. I'm not sure we can get to 2.
I don't know how he could actually try to hold a number like that, and was he really gonna just crush the economy and then try to balance it at 2% inflation? That would be. The Wizard of Oz couldn't do that. I'm not even sure the Lord himself could actually make that happen. Jerome Powell better be the Lord because we're gonna need him and his team to actually do something that I think is virtually impossible.
We have a great balance sheet today, a great fortress balance sheet. We've worked hard over the past decade to rely on outside, our CLOs and our balance sheet debt, not repo debt. We've done pretty much what we could do to sit in a really excellent position to prosper into the future. We're all hands on deck. Everyone's committed. We got a great team, a great board, and a great shareholder base. Thank you. We'll take questions.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Thanks. Hoping you could touch on, you know, you talked about not being interested in selling down Woodstar, but you know, I guess just curious, given your comments that this is as good a lending opportunity, have you seen, you know, kind of your appetite or willingness to sell down Woodstar to raise additional funds for, or capital for lending opportunities?
Yeah, we could do it. Actually, we were talking about it yesterday in a different situation. One of our clients has come to us for a separate account to buy affordable housing. Of course, we want to go to the two institutions that took the interest first. It hasn't been-- We don't need a ton of excess liquidity, but we'd love to have it to deploy. I think my number one source would be taking the condos in Chatsworth, forgetting about the book value.
We probably are right around, we're realizing prices consistent with where our marks are. There are other assets that we'd like to move on and just redeploy the capital first. Woodstar is like selling gold. You know, don't forget, in affordable housing, rents can't go down. All this building, none of it's affordable. There's no risk of not being 100% full or virtually full. The only question is what rents are going to be, and they can't go down. We have attractive debt in place.
It's always something you can sell. When we bought those, I took the, I literally said, "This is what I want to own with my kids' trust accounts." As you know, I've never sold a share of stock in 13 years of Starwood Property Trust. I'd love to own that stuff. If we, you know, should we sell another 20% and raise a couple hundred million dollars? Yeah, maybe we'll do that. I mean, we'll look at other things.
We can move some of our resi assets that aren't yielding that double-digit return of everything else. We are hedged on interest rates, but the market's gotten a little better in the non-QM book. It's too big at the moment, and we know it's too big. That would be a place that, you know, has less. It may be a shame.
I mean, the markets will rally, you know, when the world gets better. If you can earn 14s and you're selling 7s, and you get a couple years, you can quickly make up for any deterioration in book by, with great earnings power. It'd be nice to. Don't forget, some of the stuff, if you go to a 14 or a 13, as soon as the world gets better, they're going to try to refinance you. That's also a kind of a trick.
We have to be careful, because we'll get the book back, earn 14 for a year, and then everything will be liquid again, which is not great. It's a balance and it's. The good news is we have so many ways we can deploy capital. I didn't say it, but the energy infrastructure or the energy lending has been, is extraordinary. It's probably the highest returns on equity we can get today. You know, I keep killing deals, transactions and investments just because I want to maintain our liquidity right now.
It's probably, maybe it's an overabundance of caution, but I am very worried about Powell and them doing the exact reverse of what they did during the pandemic, which is keeping fiscal policy too stimulative or their policy too stimulative over. Now they'll do the opposite. They'll tighten too long, and when it's evident, it'll be too late. They won't be able to correct it. It'll cause real pain. Of course, I go back that wage growth is good inflation.
We should applaud wage growth, and they should applaud wage growth. Everything else is bad inflation. We want wage growth. It isn't about killing wage growth. It is about killing commodity price inflation, which really came from dislocations in the supply chain, and then throwing trillions of dollars at consumers that went out and spending because they had nothing else to do. They sat home, bought everything they could buy.
We all know it. We all tried to buy a couch. We tried to buy a chair. We tried to buy a desk. You want to buy a golf cart, a golf bag. You couldn't get anything. Watches, used cars, everything went insane. Now they've reversed. You know, I just think we have to be careful. We've chosen really to our dividend. I get letters from shareholders, complimenting us on our dividend. They count on us in their retirement accounts.
WoodStar provides a great amount of safety, and a very consistent and growing cash flow stream to help us support the dividend. Not like, it doesn't come without a cost. We marked up the book, with the sale, and of course, it actually went up. The third-party appraisal took it up based on NOI increases, which were substantial. You know, we could sell it and probably have a little gain, I would think, realize the gain again.
Big gain.
A big gain.
Almost all gain.
Almost all gain. We'll look at it. We're turning over. No, nothing's not available to be sold.
Great. Thanks.
Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi. Good morning. kind of follow up on the Woodstar, and Rina, you touched on this a little bit, but, can you talk about, you know, I think you mentioned the rent increases? I'm not sure if that was trailing or as we look forward, but, you know, when you think about AMI and CPI, when do those numbers come out? I believe it might have been last year in May, that drives the forward increases that roll through. How should we think about that given you know, really continue to see strength in Florida, as you guys mentioned about the red states in your prepared remarks?
Hey, Stephen. Thanks for the question. You know, they'll come out again in April. As usual, they will have a 3-year look on CPI and on median income. We know those inputs for the next 2 years look really good. For the next few years, we feel really comfortable that we're gonna continue to see rent increases. The new data will come actually in April. We, we actually expect that number to be north of 10%.
The government changed their way of calculating this, and they gave us notice, and the numbers could exceed 10%, which is unbelievable. That will be the strongest sector in multifamily, obviously, will be affordable if that's true. I think it could be higher depending on the portion that's coming from the local income growth. I t's like I said, it's the gift that keeps on giving.
It's a strong market there. One quick follow-up. Jeff, could you talk a little bit about the Washington D.C. office asset? Looks like a maturity in early Q4. I know you guys, I think, have it four-rated, but correct me if I'm wrong there. Can you give us a little more detail and update on that and conversations and how you expect the resolution or payoff to go there?
There was one that I spoke about earlier that is not the other asset that we talked about. There's one that you see in our deck that's a 2023 maturity. We're working with a sponsor right now to potentially extend that asset into late 2023, early 2024, and get a pay down. There's another asset that I spoke today about that is a 4-rated loan, if that was your question. And that's a downtown asset. Had a GSA tenant. It's 370,000 sq ft office asset.
The good news is it's completely vacant with that GSA tenant leaving, and we think it's a really good candidate for residential conversion. We haven't taken the asset back yet. The sponsor is still touring some potential GSA tenants. If they strike out and we take it back, we think there'll be a lot of interest to convert this asset to resi. We're in significant discussions already at our basis to do exactly that.
You know, one of the difficult things sometimes is emptying these buildings out for resi. You obviously have to have the right floor plan. You have to have the right center core. You have to have the right size floor plate. You have to be in an area that's desirable for resi. This one sort of checks all of these boxes.
Along with our Houston asset that we're working on a resi conversion on, we think these are two really prime examples of what can happen in the office space when the office market pulls back and resi is a better play. We're optimistic that there's a better play on that one to move forward if they don't clip a GSA tenant before the maturity this year.
Great. Appreciate the color there, Jeff. Thank you.
Thank you. Our next question comes from line of Jade Rahmani with KBW. Please proceed with your question.
Thank you very much. Just in terms of the outlook on commercial real estate credit overall, trying to understand how nervous or worried you are about the environment, and also the Starwood portfolio, and hoping you can comment on each separately.
I mean, the fundamentals of real estate, as you can see from all the equity REITs are okay. It's the issue of spreads rising and rates rising and what the impact is on cap rates. Different asset classes, cap rates are expanding at different levels, different amounts. As you may know, there's a lot of stuff isn't being sold because people expect if they don't have to sell, they won't sell.
It's a little like, even though it's not the GFC, it mirrors that in the sense that there's a big bid-ask spread between buyers and sellers. Everybody doesn't wanna have to sell today isn't gonna sell. If there's a sale, it's pretty much a distressed sale. A loan's coming due, they're gonna give the building back to the lender, which in this case is to us. To see an institution, a household name institution hand us back a building in D.C. that had a third of it was e quity, you know, is kind of shocking, actually.
I think in the office sector, it is really tricky. Loans are almost 10%, today, probably SOFR plus 400 to 500 to 600. Depends on what the building is. If you have a cash flowing hotel, you can get a loan. Maybe it's 400 over, which is 8.5%. It pretty soon could be close to 9%. If you don't have a cash flowing hotel, you're gonna see, you know... You think you turn around, it's gonna be significantly wider than that.
Lenders are scarce. They're not looking to put out capital. That makes the environment tricky. I mean, big, bigger quality borrowers are able to borrow. Many banks are shutting down credit to smaller players. The Fed has no idea, it seems that what's going on in the commercial real estate markets, and it's not yuck. I mean, these buildings are basically the backbone of tax receipts for municipalities around the country and will exacerbate the problems in the blue states, which are already reporting multi-billion dollar deficits.
If they intend to right themselves by raising taxes, it'll only drive these cities further and their people into the ground. It's not. It's a tricky environment. There's no doubt. We're all doing the best we can. Long term, we're gonna make more money in this environment. That's the funniest thing. We're gonna make more money because our new loans will be better. If we get these buildings, any of these buildings back, getting back that building in Washington at, like, two-thirds of the... We lent, like, 60% or 62% of cost.
I mean, our basis is fantastic, right? We're the Saudis in that market. We should be able to convert that building to a resi on attractive basis. We'll pick and choose how we deploy cap, and ultimately, I think we'll make more money on these investments as we have for the last 13 years, as Jeff is proud of saying all the time. All of our foreclosed real estate we've sold in the aggregate at a profit, significant profit to the value of the loans that we put in place. 'Cause we are an equity shop too, and we're used to taking assets back, fixing them up, and selling them.
The REIT has done an amazing job with that, even buying assets from the trust and from the loan book. It's been a incredible source of earnings for us for 13 years. I expect that would continue. You, you get it significantly cheaper than the last guy who ostensibly was a smart person who bought that building or built it at expecting a sort of a different outcome, of course. We'll see how it plays out.
Hey, Jade, I wanna jump back to Stephen's question for a second 'cause now I'm realizing what you guys are seeing on page 13 of the sup that on page 13, the first asset, the largest asset in our office, the exposure, which is what I think you were talking about, that's a tremendously well-leased, 93% leased, 10-year weighted average life of lease term, excuse me, a $313 million loan, and that will pay off in October of this year.
That is a very strong asset, I think probably risk rated too for us. The ones I spoke about were the eighth one, McLean, Virginia, where we think that there will be a material pay down or potentially a short extension. Again, I talked about the four-rated loan when I was talking about the conversion to resi. I don't want anyone to think that largest loan in that bucket is in anything but really good shape.
Okay. Thanks for that clarification. It's good to know that 'cause I did get some questions on it. On the LNR side, wanted to ask about if there's an opportunity to broaden, you know, the scope of business to do special servicing, loan workouts, portfolio consultations to others away from the CMBS market because the fixed rate nature of that business means you probably won't see an uptick in special servicing fees until probably 2024 and beyond. In the meantime, there's all these capabilities. Why not put them to work?
I thought I saw something in the bushes outside our board meeting two weeks ago, Jade. It must have been you. It's something Barry's been pushing us on for a significant amount of time. We actually have an active a search out there for the right person to lead that. We have a deck all put together on all the different services that we can do out at LNR.
As you said, we have tremendous capabilities there, from valuation on down. We will be out with a business plan on that. There will be an employee of ours knocking on doors at insurance companies and banks and other to create fee-based revenue from our capabilities in LNR in the next six months, I promise you.
I'm smiling. We've been talking about this for three years, so, maybe longer. There's no reason we can't be a scientist in the service to people. I'm not sure anyone being the largest in the nation, I don't know if anyone has the cred that we do in this space. We are the highest rated servicer-
By multiple agencies.
By multiple agencies. If you're picking the best and an experienced group, and we only do it for ourselves, which seems like a mistake. We'll hopefully have an opportunity to make some serious money. You know, it goes to our book value. We're not unlike everyone else in the industry. We're not just a collection of loans.
Like, we have a team of 300 people that run seven different cylinders for us. We're really a company in the form of a REIT. We're a lender. We could be a bank. So, you know, it's really an interesting thing. We're different than everyone else in the sector on purpose. We can deploy capital to any one of these sleeves, as you know.
The idea was not to have to force feed one, when there was nothing to do. It is interesting and overriding that we'll earn the dividend, we think. We're confident we can probably earn the dividend making no new virtually no new investments, which is something that I find surprising and good news. We have to work the balance sheet. We get paid to do that. We're gonna work. We're gonna do that. It's really the right side of the balance sheet. Is that the side where the assets are?
It's the liabilities.
Which is
Assets.
Okay. The side where the assets are. Wasn't very good at accounting. I can add.
Thank you. Our next question comes from the line of Donald Fandetti with Wells Fargo. Please proceed with your question.
Like, can you talk a little bit about how you're balancing, you know, a willingness to work with a borrower, you know, as their rate cap expires or whatever the other event is, versus just kind of playing hardball and saying, "You know what? We wouldn't mind owning this asset because we think, you know, this is temporary. The Fed will cut, you know, outside of office." Like, how are you thinking about that sort of, those two scenarios?
I'll turn it to Barry, but, you know, it depends a lot on how we have it financed and how our senior partner, whether it's a bank or a CLO, what they want us to do or require us to do, whether they're forcing us to have a new rate cap bought in, at what strike that new rate cap has to be bought in. They're very expensive, as you know, or whether they'll allow us to take interest reserves or other guarantees towards that.
With our, with our premier borrowers, we're certainly open to talking about the different potential solutions in a very difficult rate cap environment. A lot of times it's set by where our senior lender requires us to do, and we will hold the line to what the senior lenders do. Our senior lenders are tremendously important to the success of the business. Barry, anything to add to that?
Not really.
Yeah. I guess my follow-up is, on the infrastructure portfolio, are the caps, the interest rate caps similar, you know, where almost all the loans have them and they're protected? Can you talk a little bit about that relative to CRE loans?
These are broadly syndicated loans that some that do and don't, but for the most part, they do have very similar, I'll get you the exact numbers on after this on exactly what percentage do have them. You know, broadly speaking, it is more protected than not. I'll come back with the exact numbers on rate caps there.
Okay. Thanks.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from line of Richard Shane with J.P. Morgan. Please proceed with your question.
Hey, this is AJ on for Richard Shane. First, just on the loans that were downgraded, I know there are no specific reserves on those assets today, but if any of those loans don't work out, would we see additional reserve build, or is that already included in your December 31st reserves, and we would just see kind of a shift from general to specific?
They are part, AJ, of the general reserve currently. It would probably be twofold. If there was further deterioration in the asset, you would have a transfer from a general reserve to a specific reserve, and it would be increased at that point.
Okay, great. That's helpful. Thank you. You said there were sponsor fund related reasons for the office downgrades. I mean, is there anything you can share with us? What are the reasons sponsors wouldn't wanna support the assets?
You know, it's a fully invested fund in a few cases. In a case, there is a large fund that is leaving commercial real estate, and they are not putting more money in. It's different in each one. You know, I think you're seeing a similar trend, where a lot of people either don't have the cash available today or are unwilling to.
These are more scenarios where they don't have the cash available in the specific funds that the assets are owned in to be able to continue to support the project. Those are the opportunities where if we do step in, tend to be more accretive to us, where we do have the capital to be able to continue.
Great. Thank you.
Thank you. Ladies and gentlemen, this concludes our question and answer session. Mr. Sternlicht, I'll turn the floor back to you for any final comments.
Thank you, operator. Thank you, everyone. Thanks for your questions, and we obviously are here to be transparent and welcome your questions, and the team is available. Thank you and have a great first quarter. Stay warm. Bye.
Thank you. This concludes today's conference. You may disconnect your lines at this time.