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spk01: Greetings. Welcome to the Starwood Property Trust first quarter 2021 earnings conference 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. Please note this conference is being recorded. I will now turn the call over to your host, Zach Tannenbaum, Director of Investor Relations.
spk02: Thank you, Operator. Good morning and welcome to Starwood Property Trust's earnings call. This morning, the company released its financial results for the quarter ended March 31, 2021, filed its Form 10-Q 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 a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied and 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 may be discussed on this conference call. A presentation of this information is not intended to be considered in isolation or as the 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 Sternlich, the company's chairman and chief executive officer, Jeff DiMatteca, the company's president, Rina Paneri, the company's chief financial officer, and Andrew Sossin, the company's chief operating officer. With that, I am now going to turn the call over to Rina.
spk00: Thank you, Zach, and good morning, everyone. This quarter once again highlighted the power of our diverse platform, with distributable earnings, or DE, of $151 million, or 50 cents per share. We were active on both the left and right-hand sides of our balance sheet, deploying $2.7 billion of capital in the quarter and successfully completing two CLOs totaling $1.8 billion after quarter end. I will start my segment discussion with commercial and residential lending, which contributed DE of $147 million to the quarter. In commercial lending, We originated $2.2 billion across 12 loans for an average loan size of $184 million. We funded $2 billion of these new loans, along with $175 million of pre-existing loan commitments. These fundings were offset by $1.1 billion in loan repayments, bringing our commercial lending portfolio to a record $11.2 billion at quarter end. We continue to see strong credit performance in our loan portfolio. with our weighted average risk rating improving from 2.7 to 2.6 in the quarter and only one loan for $188 million rated in the five category. This loan comprises the majority of our limited retail exposure and was placed on non-accrual in the quarter. We believe that the principal and interest accrued to date on this loan are fully collectible. As of March 31st, only 2% of our loans are on non-accrual. The remainder are 100% current and we have seen nearly all of our loans, which required partial interest deferrals during COVID, return to performing status. Since COVID began, we granted 11 partial interest deferrals for loans with a UPB of $1.1 billion. Today, we have only one $41 million retail loan remaining on its partial interest deferral of $84,000 a month. Our weighted average LTV remains strong, falling again this quarter to 60.1%. We continue to see our sponsors support the significant equity in their assets with $582 million invested and $715 million committed since COVID began. Consistent with this positive credit performance, our general CECL reserve remained relatively flat at $61 million. As we have discussed previously, the CECL rules require that we take reserves on all loans, including newly originated loans. Although we recorded $1.4 million in reserves on new loans in the quarter, we also saw reductions in reserves for repayments and for improvements in performance on existing loans. As a reminder, these reserves are typically added back for DE purposes. However, during the quarter, we recognized a DE loss of $8 million related to an unsecured loan for which we recorded a specific GAAP CECL reserve last quarter. Just two years ago, we discussed with you our first foreclosure on a loan that was net leased to a single grocery tenant who filed for bankruptcy. The 440,000 square foot distribution center in Montgomery, Alabama had a loan balance of 17 million. And at the time, we established an $8 million GAAP reserve based on its appraised value. Over the past two years, we leveraged the Starwood platform to release and market the property. The property was sold this quarter for $31 million, resulting in a GAAP gain of $18 million and a DE gain of $8 million, a very successful outcome for our shareholders. Turning to our residential lending business, we securitized $384 million of loans in our 10th securitization for a net securitization DE gain of $13 million and sold 87 million of our high LTV loans for a net VE gain of 4 million. These sales, net of purchases of 209 million in the quarter, brought our loan portfolio to a balance of 596 million, a weighted average coupon of 5.9%, average LTV of 67%, and average FICO of 732. Over the past several months, we have worked to transition the loans on our $2 billion federal home loan bank facility which was fully repaid this quarter at its maturity. In connection with the transition, we executed a new $1 billion warehouse facility in the quarter, bringing our total non-QM financing capacity to $2 billion. With these new facilities, we expect to realize returns on our loan book that are consistent with historical levels. Next, I will discuss our property segment, which contributed $22 million of distributable earnings to the quarter, Credit performance remains strong in this segment, with rent collections at 98% and weighted average occupancy remaining steady at 97%. This quarter, we obtained supplemental financing of $83 million for Woodstar II, our second affordable housing portfolio. The upsides increased the cash-on-cash yield for this portfolio to 18.8% and increased yields on the overall segment to 16.9%. The performance of our Florida affordable housing portfolio continues to exceed our expectations. Area median income levels, which govern rent for the over 15,000 units in this portfolio, were recently released. Higher median income for Northern and Central Florida, where this portfolio is concentrated, resulted in a blended rent increase of 4.1% for 2021. This is in addition to the 4.7% increase released last year. These rents create a new floor from which rents cannot decrease going forward. Despite the new maximum rent levels, we did not increase rent on any of our affordable housing tenants last year due to COVID. We instead began rolling out these higher rents on January 1st and will continue to do so over the next 12 months. As a result, the effect on earnings will be gradual over the coming quarters. Next, I will turn to our investing and servicing segment. which reported DE of 24 million in the quarter. In our CMBS portfolio, we continued to opportunistically sell assets, with $12 million of securities sold in the quarter for a net DE gain of 3 million. In special servicing, 517 million of loans entered servicing in the quarter, while a similar amount resolved, resulting in our active servicing portfolio remaining steady at 8.8 billion. As we have said before, We expect slightly longer resolution times and thus delayed fee recognition for the assets which recently entered servicing. Our NAMES portfolio ended the quarter at $80 billion. And finally, in our conduit, we securitized $85 million of loans in one transaction at profit levels consistent with last quarter. We typically see lower securitization volume in Q1 and expect to see significantly higher volume next quarter. Concluding my business segment discussion today is our infrastructure lending segment, which contributed DE of $7 million to the quarter. We acquired $86 million related to new loans and funded $14 million under pre-existing loan commitments. These fundings were offset by repayments of $19 million, increasing the portfolio to $1.7 billion at quarter end. We continue to be pleased with the credit performance of this portfolio, which once again had 100% interest collections in the quarter. I will conclude this morning with a few comments about our liquidity and capitalization. Subsequent to quarter end, we completed two CLO financings, our inaugural $500 million infrastructure CLO, which was the first of its kind, and our $1.3 billion CRE CLO, the largest CRE CLO issued after the GFC. Both represent a significant expansion of our credit capacity and a continued diversification of our funding sources. They also include many structural benefits, including flexibility to provide replacement collateral, match funding, and the removal of recourse and credit marks. Jeff will discuss each of these in more detail during his remarks. We ended the quarter with $7.3 billion of availability under existing financing lines unencumbered assets of $2.8 billion, and an adjusted debt-to-undepreciated equity ratio of 2.3 times. Pro forma for the two CLOs, this ratio is 2.1 times, in line with last quarter. This credit capacity, in addition to our current liquidity of $642 million, provides us with ample dry powder to execute on our pipeline. With that, I'll turn the call over to Jeff for his comments.
spk04: Thanks, Rena. We are pleased with the performance of our stock price, which we believe recognizes the durability of our business model, our demonstrated ability to create shareholder value across market cycles, and our ability to pay our dividend. To date, Star Property Trust shareholders have earned a greater than 13% annualized total return since inception in late 2009, the highest in our peer group. I will talk today about a few themes that we believe differentiated our business this past year and will continue to create value for shareholders in the coming quarters. The credit of our CRE loan book continues to improve. The collections are very high, and our base case modeling today suggests we will have little to no losses on our loan book as a result of COVID. I will discuss this more in detail later. The valuations on our owned properties continue to increase. At our mark today, we have approximately $1.1 billion in unrealized gains, $200 million more than we have disclosed previously, and approaching $4 per share. Our liquidity and access to some of the cheapest capital in our sector is unparalleled, and we could issue new five-year corporate bonds at 4% or below today, the lowest in our history. We have the benefit of having excess unencumbered assets on our balance sheet, which allow us to come to market early to create liquidity to pay off our $700 million of 5% notes maturing in December at their open date, September 1st, and accretively versus the existing 5% coupon. Finally, we were one of a few market participants who were able to take advantage of dislocated markets to make significant investments across our business every quarter since COVID began. We had a very strong first quarter of 2021 deploying $2.7 billion, $2.2 billion of which was in our core CRE lending business, and we have continued that momentum into the second quarter. I'd like to start my sector remarks with a deep dive on our owned property portfolio. We became more defensive in making CRE loans in 2015 as we felt the debt markets had gotten too aggressive in terms of pricing, LTV, and structure. We slowed our originations in 2015 and began to use our excess liquidity to add core equity assets into our investment portfolio, taking advantage of favorable dynamics in the market and becoming a borrower rather than a lender. We purchased $3.2 billion of property assets over a three-year period at significantly higher cap rates than where the assets are currently valued today. This property portfolio today has approximately $1.1 billion in gains in it at our marks and carries a 17% annual cash return at our basis. Our diversified model gives us the ability to pivot to invest in the best available opportunities across our seven business lines and highlights the power of our differentiated multi-cylinder platform. We felt the strategy would prove itself out in distressed and volatile markets and waited patiently for the markets to dislocate. When lending markets were frozen last spring, we bought almost $1 billion of residential mortgage loans with term non-market-to-market financing at a 10% discount to where the same assets traded pre-COVID. These loans returned to par or higher soon after our purchase, and most have already been securitized, producing large gains and exemplary returns for our portfolio. We have increased the size of our CMBS and energy infrastructure portfolios when returns were accretive and used opportunities to sell down when we thought value had shifted. This quarter, we completed the first CLO of its kind in our energy infrastructure business. And after quarter end, we completed the largest CRE CLO since 2008. We come to work every day and choose where to best invest our capital and how to best finance ourselves and aren't forced to allocate our equity into any one business, regardless of market environment. We believe our results have proven the effectiveness of the strategy, and we are not done as we look for additional business lines which will allow us to continue this flexible approach to capital deployment. The largest of our property assets is our 99% leased 15,000-unit Florida low-income housing tax credit, or LIHTC, multifamily portfolio. This portfolio is centered around Orlando and Tampa, two of the fastest-growing markets in the country the last five years. we were drawn to this investment for its very bond-like characteristics. Owners are allowed to raise rents based on increases in the median income level of the MSA, but rents never go down, even if income falls. Although we conservatively underwrote very modest income growth at the time of purchase, pro forma for this year's increase, we've been able to increase rents by over 20% since acquisition, while leaving average rents at approximately 60% of current market rate rents. At the same time, cap rates have fallen dramatically from 6% at acquisition to recent sales in the low 4% cap rate area, and we believe there's upside from there. In 2018, the state of Florida reduced property taxes by 50% on LIHTC assets as an incentive for owners to forego their contractual right to roll these units to market rate over a 30-year schedule and keep this critical source of affordable housing available to families in Florida. Last Friday, The state of Florida passed the bill, HB7061, that removes the other 50% of taxes, leaving these assets tax-free as long as they remain in the affordable program. If signed into law by the governor, this bill will further incentivize behavior that supports the state's desire to have more affordable housing available for its residents. Although we are still evaluating our options, this bill will make owners like us rethink what was always the best economic strategy to roll affordable units into market rate units over time. thus reducing affordable supply. We believe this portfolio is worth in excess of $2 billion today, and after accretive refinancings, our remaining equity now returns a 30% cash return per year. At our evaluations, we believe we could now generate over $1 billion in GAAP gains and approximately $900 million in distributable earnings gains in this portfolio. As we told you last quarter, we continue to evaluate selling a minority share in this portfolio, which would give investors more comfort around our valuation metrics and provide us with incremental capital we believe we can deploy accretively today. In addition to the gains from this investment, at our internal marks, we believe we have over $200 million of incremental gains from the remainder of our own real estate portfolio. Eighty percent of this incremental gain is split fairly evenly between our Cabela's, Bass Pro Shops, long-term net lease assets, our medical office portfolio, and the Orlando industrial asset we foreclosed on back in 2019. Rena told you we reversed an $8 million impairment on the Montgomery industrial asset that we took over at the same time as the Orlando asset, and we sold it in the quarter for an $18 million gap and $8 million distributable earnings gain. When we choose to ultimately sell the remaining Orlando asset, now fully leased to Amazon, we believe we will report a gain of approximately $60 million. a great outcome for shareholders and statement on our platform's ability to reposition difficult assets. Moving to our core CRE lending business, we continued our momentum from 2020 with a very strong CRE originations quarter of $2.2 billion, with an above-average optimal IRR of over 13%. 77% of those loans were to repeat borrowers, a theme that we believe helped drive the strong credit performance of our portfolio through COVID-19. our borrowers who have contributed $582 million of fresh equity to support their projects since COVID began and committed more than 100 million more put great value in the flexibility, consistency, liquidity in any cycle, and ability to close on large complex deals quickly. We have a very robust pipeline for the second quarter and continue to focus our originations on only the most stable assets with durable future cash flows. To that end, We have reshaped the characteristics of our loan book in the last 12 months. Year over year, we have reduced both future funding and construction exposure by approximately half. By property type as a percentage of our loan portfolio, we have increased our exposure to multifamily by 72% and doubled our exposure to industrial assets, while decreasing our exposure to office by 18% and to hotels by 14%. Multifamily loans are seeing the most lender competition today, and if spreads continue to fall, leverage continues to rise, and we hit a floor on our financing levels, we will pivot, as we always have, to sectors or other lines of investing we believe have the best risk-reward going forward. With optimism over the continued strength of the COVID recovery, credit spreads for many target assets have normalized to pre-COVID levels, and we are once again borrowing on our target asset classes at or inside where we were pre-crisis. Our ability to source best-in-class leverage leaves us with similar ROEs to pre-COVID levels, and at slightly lower LTVs as demonstrated by our portfolio LTV, which decreased again this quarter to 60%. The scale of our platform has allowed our manager to build a large team internationally with a focus on Europe and Australia. We have seen tremendous opportunities in these less competitive markets, which have been slower to come out of COVID. Our international portfolio increased 35% year over year and now accounts for over one quarter of our loan book for the first time. And we have large actual pipeline there today and are excited about the existing opportunities. We are very proud that for seven straight years, we have won the Navy gold star in our industry for excellence in investor communications and reporting. Given we were unable to do our biannual investor day in person due to COVID restrictions in April, we launched a first-of-its-kind virtual investor series, which is posted on the investor relations section of our website, www.starwoodpropertytrust.com. We created nearly three hours of content, which provides detailed information on our company and each of our investment businesses, and we hope both new and existing shareholders will find it useful. Over the course of the three-hour presentation, we discussed our differentiated cradle-to-grave investment and credit process, and we believe that this process with multiple investment committees is paramount to our exemplary financial and credit performance since inception. We hope the webinar will help you understand how our credit process is different and why we had confidence in our portfolio that it would outperform as markets normalized. We told you during COVID that we felt very good about the credits in our book. Sponsors have provided tremendous support to their assets, the macro environment has improved, and our outlook has improved daily. Following our day-long quarterly asset review last week, the management team came away thinking that with what we know today, we could exit this cycle with little to no losses on any loans in our portfolio as a result of COVID. Of course, the path of recovery could change, but that is a statement no transitional lender thought they would be able to make a year ago and reinforces our commitment to our differentiated credit process, as I just discussed. Finally, I spoke on our last earnings call about the transformational energy infrastructure CLO we closed in the quarter, and I want to talk today about the highly accretive CRE CLO we priced in April. Our second CRE CLO was the largest post-great financial crisis CLO at $1.275 billion. In a tepid market where spreads were widening and some deals barely had enough bond orders to price, we had 40 different accounts put in orders, allowing us to be multiple times oversubscribed and tighten pricing twice. We picked up 6% in advance rate versus existing financing facilities, and our LibroPlus 150 Day 1 bond coupon was inside our existing financing facilities, allowing us to get term non-recourse financing twice. with no credit marks at a return on our equity of more than 4% more than we were earning on financing lines. Proforma for the CRE CLO, we continue to maintain a peer group low 41% of our CRE loan book on bank warehouse lines. And with only 54% of our balance sheet in CRE lending today, CRE loans on warehouse lines subject to credit marks account for just over 20% of our asset base today. In our REIT segment, We're thrilled to announce that Fitch upgraded our special servicer, LNR, which is named special servicer on over $80 billion of CMBS assets, to the highest rating possible, CSS1. This makes LNR the only special servicer in the world with this highest rating. Fitch cited our technology and the scale of our business, which allowed us to reallocate resources to adeptly deal with over 1,000 new servicing requests in a very short time. On behalf of the management team, I'd like to thank our servicing team for their superhuman performance that earned this spectacular achievement that will undoubtedly lead to more agent business going forward. SMC, or Starwood Mortgage Capital, our conduit originations business, was the largest non-bank originator of CMBS last year, and it's kept that momentum this year. Rena mentioned our Q1 transaction, and subsequent to quarter end, we were the largest contributor to a very successful transaction that priced last week, and our pipeline continues to grow. Our team is best in class, and while we love the quantum of their contribution, more important to us has been their ability to remain consistently profitable quarter after quarter, regardless of market cycle over the last eight years. Because of this consistency, we believe it is a business that investors should value at a very high multiple. Before I turn to Barry, I want to say we are very proud of what we've accomplished together over this difficult period. We built this company to outperform in distress and patiently waited for the markets to give us the opportunity to prove that we would. We are proud of our relative outperformance and believe we have a lot of room to run. Our company is firing on all cylinders and the outlook has never been brighter. With that, I will turn the call to Barry.
spk03: Thanks, Jeff and Rena and Zach. Welcome everyone to this quarter's earnings call. We give you exhaustive detail, and we want you to understand our business. That's why we did the webinar, because this is a company where the more you look at us, I think the more you'll like and understand how we manage capital and how we've navigated this crisis. I want to say that it's such an interesting period. I mean, real estate isn't Wayfair and isn't Peloton. We hit with a bazooka. Worldwide, real estate hit a wall. And to come out of the COVID crisis definitely stronger than we went in with a better balance sheet, no losses, what we think will be no losses from the COVID crisis really speaks to the credit quality and our underwriting process and the equity first attitude we have when we make a loan like would we like to own this asset at this price and we we are working with borrowers to restructure their loans because they can come to us and they don't have to go to a servicer who is detached from the real estate doesn't understand why they need more capital for this or that I think the model has proven to be incredibly strong, and we didn't come out limping from this crisis. We came out galloping from the crisis. We put out almost $6 billion of capital. Many of our mortgage peers don't have other lines of business, had to shore up their balance sheets. Some had to do rescue capital. We were never in that position, and we did. think multiple times about cutting the dividend, obviously. We didn't know what the world would have for us. We made the decision to hold the dividend, and I thank the Board for that. And as Jeff pointed out, with more than $1 billion of gains, unrealized gains in our property book, we're pretty confident we can make the dividend whenever we want for quite some time. So I don't think there's a company that has anything like that. And the other thing that you speak to is the 60% LTV. You know, it's no longer our LTV. This is actually a mark-to-market LTV and checked by Cecil Regs. And that's why we're here with no losses because those really were 60% LTVs. And to demonstrate that, borrowers put in hundreds of millions of dollars to shore up their loans and save their assets from the period of disruption of demand. I want to step back real fast and talk about the property markets. There are five major asset groups in real estate. Industrial and multis, which we've actually gained increasing exposure to on our loan book, but have always been pretty tough for us because the cap rates have fallen because those are the two asset classes that investors are favoring, given that you can't live in your computer. And industrial, obviously, is a play on e-commerce. Then there's the big asset class that's yellow, which is office. And we're all watching as the office markets recover. As Jamie Dimon says, he's done forever with Zoom calls. And I personally believe people go back to the office more than people think. It's a social event. People who are not well off don't have communication devices in their houses and don't want to do Zoom calls in front of their children and potentially their grandparents. And so it really does affect the poor more than the wealthy or maybe calling in from the Hamptons. And I think if you look around the world, whether, and we have offices, 16 offices all over the world in Tokyo and Europe, London, all over the world in the Middle East, they're back in the office. In the Middle East, they're 100% in the office. I'm not sure if you follow any headlines in the Middle East, you'll find anyone talk about work from home. The same thing is true in Tokyo, China, they're back in the office. Hong Kong, they're back in the office or headed to the office. I think there are markets that will suffer. Clearly, New York and San Francisco City, where we have no loan exposure, are going to see some compression, significant compression in net rents as rents fall, concessions go up. There's such enormous shadow vacancy in both of those markets, but that's not where we're really exposed. And even in our equity books, we own no assets in those cities in the office sector. Then you had these two red light categories in real estate, hotels and retail. And hotels have gone from red to yellow. And if you go down the curve to the budget end, it's actually green. We have parts up. Those are mostly domestic travel hotels. And, you know, with the coming something in the infrastructure plan, we think that will get better and better. Group business and international travel take a while to come back. So if you move up into the upper middle class stuff, It's going to be a while before they get anywhere near the revenues of 2019. And then luxury, if it's a resort, it's fantastic. And people pay triple the rates to go to the Amman in Utah or our one hotel here in South Beach where I'm located had a record first quarter and $1,600 a night. We probably thought we'd get $800 a night. People have a lot of money. The nation is rich. It has a $1.3 or $4 trillion of excess savings. And everything they own has gone up, their house, everything. So the nation's balance sheet is up at last by look like $15 trillion. People are well-to-do as a whole. And that actually is across the whole socioeconomic spectrum. That's not just the rich. They may be getting richer as their equity books go up, but people's pension plans are rising. And as a percentage, obviously, lower classes have been helped unbelievably by the stimulus packages. So I think the outlook for our lending, both here and in Europe, is great. We are very active, looking at a lot of large deals that we uniquely can do. And all of our business lines are operating at full speed. It is hard to buy equity real estate today with the kinds of cash returns we were used to. Jeff DiMatteca comes in my office every day asking for more equity assets. And it's hard to generate the cash and cash returns we have. And for those of you who have been with us I think there's seven years we've owned our affordable housing portfolio. I said we were buying assets that I personally never wanted to sell. And I think in 11 years, I don't think I've ever sold a share of stock in this company. So I was pretty happy owning those forever. But we are looking at monetizing some of the gains because we can redeploy the capital and we think it'll be exciting for the company. And now with the pending passage of this legislation in Florida, On real estate taxes, we can look to complete that transaction shortly, but we wanted to wait for that to be enacted and get that reflected in the value of our sale. The other thing I want to point out is that we're responsible. ESG is a big deal to us, and that comes in everything we do. We could have increased rents in that affordable housing portfolio 5%. I think Rena mentioned that. And we chose to defer not to do anything, even though we could have. We did the long-term right thing by not making matters worse for those in need in the affordable housing space, even if they had a job. So now we'll be paying catch-up and gently increase rents and moving them to market. But I think it's nice to know that companies are doing their part to help America when it needed help. And I want to say one more thing. I mean, we do have a Fortress balance sheet. It's the best in the business. I used to envy Jamie Dimon at JP Morgan. He'd say, we have a fortress enterprise. And now I think Starwood has a fortress balance sheet. And these two CLOs we completed recently, particularly the second one in the energy group, means it's a fundamental game changer for that business. We had an issue, as we always do, because we're not interested in quarterly numbers as we are the long-term duration and feasibility of our business. But we had a mismatch. We had debt that was going to mature inside of the maturity of the loans, and it kind of made us nervous. Like, you don't see a problem until there's a problem. Like, if you have 10-year assets and five-year debt, you have to roll that debt in year five, and that inherently creates a problem. We call it the savings and loan crisis, waiting to happen, financing short against long-term liabilities. So with the CLO, we've cleared that up, and now you're match-funded. And you don't see a penny of earnings from that, but that's fundamentally a different risk profile for our shareholders. And that's the confidence we have in the durability of our dividend and hopefully over time perhaps being able to increase it. So we are really pleased with the efforts of the team. There's 350-odd people rolling in the same direction at Starter Property Trust these days. And we have a terrific board who's engaged and shows up and asks tough questions and challenges us. And we just want to say thank you very much for everyone. For the recovery, our stock hit an all-time high about three weeks ago, and it deserves that all-time high because getting a 760 dividend in the world with a 10 years 158 from this collection of businesses and this assets and 60% LTV loans is truly astonishing. Maybe someday we'll actually get that investment grade rating we covet, and then this will become a virtuous cycle, and we will be the largest by far. We're almost a $20 billion company today, 18.8%. And this enterprise will be better bigger. So we are accelerating our efforts to find more loan opportunities around the world, particularly in Europe. We're staffing up. I think we have seven or eight people there. We're also looking at Australia. And, you know, we'll do anything that we think is attractive, long-term risk award for the shareholders. So thanks, and we'll take questions.
spk01: Thank you. We will now be conducting a question-and-answer session. If you would 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 would 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 Steven Laws with Raymond James. Please go ahead.
spk05: Hi, good morning. Congratulations on a number of accomplishments in the first quarter. I guess to start, you know, Jeff, I think you touched on the opportunity to reallocate capital as you target the most attractive investments. As you look out six, nine months, the balance of the year, you know, what business lines do you think are going to see kind of a net increase in capital allocation on a mixed basis? You know, what areas seem less attractive right now where you think things may get allocated away?
spk04: Thanks, Steven. Appreciate it. Last year, we probably said non-QM looked really interesting, and we thought the energy infrastructure business looked really interesting. I would say we agree on both of those still. We were able to get out of the gates during COVID and into the early part of this year ahead of most people in the transitional lending space, so we've been able to put on a very accretive high volume of loans. We earned more at a 13-plus percent IRR than we historically do on the CRE, large transitional loan book, we did more than we expected. We're going to do more in the second quarter than we expected. And I think there is a moment in time here for us to continue to do really creative stuff in our core lending business. So I would say today we're equally excited about those three businesses. CMBS is kind of a steady state business. We brought our book down from about $1.1 billion to just under $700 million, and we're sort of comfortable with it there if an opportunity arises at wider spreads. like we did last year in COVID, we will continue to add there. And Barry made the point about the property book being very difficult to grow today, given where cap rates are in financing and the cash returns available to us. So I think it'll be more of the core three businesses and that the lending business, the area lending business, will take up the lion's share of capital in the near future.
spk03: The other thing, before he goes on, I mean, we are looking at other business lines, you know, and including acquiring other companies. And we are quite active in that vein. It's remarkable how difficult it is to convince boards to give up the flag or to end the waste of effort, frankly. They have no hope. But it's difficult. And, you know, we have multiple situations that we have tried to make, consolidate parts of our sector. So, you know, I'm thinking we might get something done. And, you know, we think it would be accretive to us. And frankly, one and one would be more than two. So, you know, I think whatever reason, some board members like being board members more than they care about their shareholders.
spk05: Thanks. On the CRE lending side, you know, can you talk about what you've seen on the competition front? You know, most of your peers there, a lot of them were on the sidelines, many until the last month or two. So, you know, how has that impacted the opportunities there? And, you know, how much spread tightening has that caused? Or are you seeing that competition play out in other ways?
spk03: Before Jeff goes, I mean, the one thing that's interesting is that the CNBS market is now past the bank market, you know, so that you can finance – I mean, spreads in the CNBS world are very tight. So that has become a bigger competitor than Wells Fargo's balance sheet, for example. And, you know, maybe we ourselves are – Rich Heifeld's business, the conduit business, has been absolutely a star and continues to – they turn – We haven't talked about it in a while, but they turn their book like 11 times a year. So they're a manufacturer of profits or loans. And, you know, I think we were – we won last year? We were the largest non-bank contributor. Largest non-bank contributor in the country. So, you know, that's a nice, incredibly great business for us. They run a terrific company and – or division, I should say.
spk04: And then what were you going to say? He had asked about where the competition is coming from. And realistically, probably only our largest competitor in our space is really a competitor on most things that we look at. Our competition tends to come more from the investment banks and the debt funds. When the investment banks are making money, as they have been for the last six or nine months, they tend to lean in on a lot of these larger, highly structured, complex deals. And we're definitely seeing that now. So I'd say the investment banks are our biggest competition. There are certainly some debt funds and And that's why we've looked more internationally where we have, say, probably a larger staff than anyone but one person, and we're growing that book pretty dramatically, and we think this year will continue to. I could see that book going from 25% of our loan book up to a third of our loan book over the course of the next year or so. We think there are outsized opportunities there as they come out of the COVID a little bit slower, and there's just simply less competition, so. We'll see. So the rest of our sector who recently has enough money to start investing again doesn't tend to be a large competitor for us on a large complex loan.
spk01: Thank you. Our next question comes from Charlie Orestio with J.P. Morgan. Please go ahead.
spk10: Hey, good morning, everybody. Thanks for taking the questions. Barry, I wanted to follow up on your views on the office sector. you know, just thinking about it from a high level, kind of beyond, you know, current occupancy and rent collection trends, you know, I think we'll have some more clarity as people in the U.S. go back to the office more and more over the next few months. But, you know, it seems to me that the current leases are going to play out and, you know, the kind of tenants that you guys lend against are probably going to continue to pay their rent regardless of physical occupancy. But, When you think about those leases coming to an end, and, you know, I realize this is a moving target here and the leases are longer term, but do you think the tenants, when those leases come to an end, will take a harder look at their real estate footprint? And if there's potentially a kind of more fundamental shift that could occur here over time? And I guess ultimately, is this more of an owner problem than a lender problem?
spk03: No, certainly less of a lender problem than an owner problem, especially with 60% LTVs in your book. I think it is zip code specific or city specific. I think the states of Texas, Tennessee, Florida that have no taxes, and Washington has no capital gains tax, they're incrementally benefiting, and there's less pressure on the cost structures. In Miami, we actually were out with the mayor of Miami last night, Jeff and I, and they've reduced the millage rate in town. So taxes are going down. Real estate taxes are going down. No income tax, real estate tax is going down. Budget's going up. I mean, surplus is going up. It's sort of the opposite of the cycle you're seeing in the blue states where services, income taxes are going up, cost of labor is going up, union benefits are going up, real estate taxes because buildings don't vote are going up. At the same time, rents are going down. Vacancies are rising. Companies are relocating to better, cheaper places to live. And it is seriously an issue. You know, I think in some places like Miami and probably all of South Florida, Tampa, Orlando included, demand is up, not down. And you're exceeding your underwriting on rent if you happen to be a developer. We built a building here and rents are 25% higher than we underwrote as we leased the building and slowly left. So, our property trust lease down here is now 25% under market. So, you know, I think it's about basic real estate, right? There's enormous issues now in these dark blue cities. And the worst part is the legislatures of these states actually want property values to fall. because it's more affordable for their people. And that's a direct quote from a New York legislator in Albany. So that's a dangerous game to play. And that is a very difficult real estate environment. And one of my friends who you would know, he's a multi-billionaire, owns tons of apartments in New York City, says, I'm just a janitor. I can't increase my rent. I can't collect the rent. I can't renovate because they won't give me a return on the capital I put in my buildings. And I'm just I'm just a janitor. And, you know, you can see the future if it doesn't change. You go to Mumbai, go look at these gorgeous British buildings that were built when the UK occupied India, and go look at the disrepair they're in, where landlords had no incentive to fix the buildings up, and they're falling apart and falling down, and they were once beautiful buildings. So, you know, you need a tsunami change of attitude in these dark blue states. And it's a travesty. They have so much going for them. There's so much culture, museums, art, sports teams, and wealth. But the attitude is not conducive for excess gains in real estate, that's for sure. And don't forget, we're not talking about... You need rents to go up, right? You need rents to go up. It's not holding your own and expenses going up is going to mean your net profits are going down. So on the margin, these big cities are in trouble because I think the JP Morgan does take 80% space that they used to have 100. On the other hand, by the way, Starwood made an investment in the WeWork pipe. It kind of reminds me of you always make money on being the third owner of real estate. Well, somebody's going to make money in short-term co-working because if you're a small tenant, why would you ever lease a space for 10 years? And so our bet is that people come back. It's a more flexible approach. And that becomes a real business in the United States as it has already become in the U.K. and other places. That's not an issue for us as a lender. We just want the building to be full. And, you know, 50, something like 53% of WeWork tenants are actually Salesforce, Amazon, Google. They're credit tenants where they are using them as a service, which was the original vision of the company. So I think that's fine for office. You know, I think we're going to see a different, I'm betting, I'm thinking we're going to see a different model for some of the small businesses, which is the majority of office leasing 10,000 square foot tenants. changing the way they think about office, especially since you don't even know. I know we were in this situation ourselves. We have a group of people in Connecticut that want to work in New York, and we just don't know how many people are going to show up, and they want space, but are 20 going to show up or 50? And we don't know because I don't think they like the commute, or maybe they want to come for two days and work from home for three days. So I'm like, let's get a shared office space, and then we'll see what it is. And if the people don't show up, we can shrink it or grow it. And I think you're going to see that over and over again across the countries. People try to figure out where the line is between asking people to come back to the office and then being sympathetic or empathetic to the, what do they call it, the YOLO generation? The kids who want to work from Montauk on Fridays. And we'll see how this plays out. I'm not in that camp. The real estate guys in general, all of us, went back to the office. And here in Miami, where I sit with Jeff and Rena, and Adam and Sean Proctor, who co-runs our energy group, I mean, everyone's here. We're 100% in the office, and nobody's complaining.
spk10: Appreciate all the color. Thanks, Barry.
spk01: Next question, Jade Romani with KBW. Please go ahead.
spk08: Thanks very much for taking the questions. Sorry, I have another call as well. Just wanted to ask you if you think that hospitality is a winner post-COVID as state times potentially increase. And, you know, is that something where you think there could be an opportunity in lending since it seems that a lot of lenders are shy on that space still?
spk03: I think you have to be super cautious. You know, the pace of the recovery is probably the markets are ahead of themselves on hotel stocks, in my opinion, particularly the REITs. And, you know, the... you're going to change. If you are working from home or you're working from smaller offices or offices closer to your house, you're probably going to take more corporate team building meetings. You're probably going to have a different kind of asset. There may be more meetings because people have to get to know each other in a company and they're not getting to know each other in an office building. So you might see that. It's just too early to tell how that changes. I think the The experiential high-end take 100 people to, what do they call those things, the cowboys on backpacks, when they go camping, whatever they call that, rodeos, whatever you call that when they go, whatever. So there'll be people who do that. They'll take them out and they'll do team-building exercises. And I think the tech companies in particular, which are the most likely to accept working from home because they're so competitive with each other, and that's how they compete. You can work for Mars, we don't care, just send in your work. But they will do team building exercises and they will go to Vegas and they will probably go to Montana for some ranch, that's what I wanted to talk about, like when you go to Dude Ranch, there we go. Is that acceptable today or is it Dude Dad Ranch? Dude and Dude Dad Ranch. I think it's going to change. I think what we're most worried about are the Marriott Marquis, the 2,000-room hotels in Manhattan that really need a group, the Westin in Atlanta. It's a 92% group building. I used to manage it, so I know what it is. Those businesses, that's going to be a while, and there's going to be tremendous pressure on rates. Airbnb is a force, so you have to now think about how you're differentiating yourself. Having said that, this summer's gonna be a free-for-all. You've seen the stats. 73% of Americans are planning a trip, and the highest in history was 37. It's going to, America is going to party this summer, like 19, like 1929? 99. It better not be 1929. And I think it's going to be, I mean, if you go anywhere, you talk to the ski resorts, like Aspen, everything is full. People are booking, booking, and bookings did their earnings this morning. They said you can cancel at any time. So there's a lot of people booking stuff. They may wind up canceling, but. The numbers will look, if you have the right assets, I don't think a lot of people are headed to the Marama Key in New York, but Virginia Beach, I mean, the Cancun, I mean, it's going to be, the numbers will be astronomical. And that's going to be a bubble, right? That's going to pass. We're going to go back to work after Labor Day. And we'll have to see across the whole economy what's sustainable, like how many people will go back to physical shopping. You know, it's an outing we were talking about yesterday. It's an event. the grocery stores had their best years in the history of the world. Not only was that an outing, but it was the only place open. So to get out of your house, you did something you don't really want to do. You just went shopping, at least with something to do. So, you know, we look at these things, even on the equity side, and we kind of scratch our heads and wonder what the trajectory will be, or especially as the DoorDashes and the Amazons do last-mile delivery and try to now disintermediate grocery and retail. So it is... It's going to be wild to watch the real estate industry as these new technologies and new ways of living change.
spk01: Our next question comes from Doug Harder with Credit Suisse. Please go ahead.
spk06: Thanks. Barry, a little bit ago you mentioned possibly looking at some other business lines, So any more detail you could give on that or kind of what you think, what types of things you're looking at that could be complementary to STWD's existing?
spk03: Well, I'll say that, like, you know, our diversification in the energy business, partial success. It's getting better and better as we get rid of the old book that we bought and originate new loans, which are at or above our ROEs that we intended to execute at. I think it's better than 13. is the return on our remaining equity stubs. But the original book was like six. So this thing has been a problem. And it's probably the one part of our company that we need to grow our book. And we're working on that. So now that we feel comfortable that we can do the CLO financing, we can more aggressively grow the book. We were limited at first because we had a two-year facility from the bank, which was like we didn't want to make five-year loans with two-year debt. So we sort of shut it down until we could improve our debt facilities. And now with the CLO, it's a game changer for that business. And, you know, we've done, how many CLOs? We've done 11 securitizations in non-QM?
spk00: We just did our 10th.
spk03: We just did our 10th. So you'll see us do a lot of these. And we need paper, right? We need, there have to be projects to finance. But that business's ROE will continue to increase. Every loan that burns off what we sell and every new deal raises the ROE and the contribution to the company's earnings. So. There are lots of businesses that might actually fit in the TRS that are not, you know, balance sheet businesses with increased ROE. And I'd rather not talk about them because many of our competitors are on the call with us. So, you know, we'll be judicious and smart. We obviously have a good currency that we can use today and plenty of cash and access to capital. So, you know, we're just kind of not overpaying. and try to find businesses that fit really well with ours. And we think we're a finance company. We're classified as a real estate mortgage trust, but we'd like to be considered more of a finance company. And we have considerable room in our TRS for a more taxable bad income. And that, again, usually means it's a much higher ROE business, fee-based. We have several candidates we'd love to buy, but so far, no luck.
spk04: So I would add that we are now in businesses that are businesses that our parents or capital group is in and has expertise in, and you probably won't see us go far afield from that, but there are certainly things within our areas of expertise that we can add on.
spk06: Great. Appreciate that.
spk01: Next question, Tim Hayes with BTIG. Please go ahead.
spk09: Hey, good morning, guys. Thanks for taking my question. You know, just to follow up, I guess, to that kind of is, you know, how big do you think the investment portfolio can get without M&A based on your current capital base right now?
spk04: Well, we have one of our competitors that's $4.5 billion or so market cap against our $7-plus billion market cap and has a larger loan book than us in CRE lending. So I think we could certainly increase the scale of our CRE lending business And I think all of our business could be larger in scale today. Certainly if cap rates come out, we'd love to add some property assets to get that percentage back up higher. We love the durability of those cash flows, so we'll watch that. But I think all of our businesses can scale a decent bit higher, but there is a ceiling without adding businesses at which it would be difficult.
spk03: The non-QM business and the large lending business are the two. There's a gap in our lending. Rich is small deals, and we tend to do what was the average size of our deal in a large loan lending book?
spk00: 184? Yeah, a quarter.
spk03: So there's a big hole in the middle, and we would have to reorganize and start a new business, sort of a middle market lending where we would hold a $50 million loan instead of selling it. That might open, allow us to add several billion dollars of balance sheet assets. You know, I would call that a core business, just a nuanced niche between what we do, the big deals. We have a problem. You finance a $100 million multi, and by the time you're done financing, you put out $12 million, right, because that's what the MES is after when you're done or what we keep, $20 million. So we have to do giant deals with the book, but that is a business. We just have to organize ourselves to do middle market loans and balance sheet funds. which would be one of the things we looked at acquiring somebody who does that more often than we do that. So, you know, I think there are other businesses, again, we won't go into, but that would fit nicely in our tent. It's hard. I mean, we pay a dividend that's, you know, what, two and a half times the average equity rate. So, you know, we can't buy industrial. We can't compete. You know, the cap rates are three and a half.
spk04: Mm-hmm.
spk03: So we can't support the dividend doing that. Triple net, same thing. So there are businesses that we're blocked out of based on the cost of the capital, really the cost of our dividend. So we need to support that dividend and cover our operating costs. And of course, one of the other reasons we big is better is our overhead shrinks as a percentage of our assets and makes the whole business high ROE. We're $18.8 billion. We have, what, a $10 billion, $10.5 billion, $11 billion loan book? Yeah, if you included our A-note sale. $14.5 billion. $14.5 billion. So, you know, the other guy is more like $18.5 billion in their loan book, but we have all these other businesses, too. So we can clearly stretch our loan book. But, you know, we're going to have – Jeff mentioned we did – when we did $2.5 billion last quarter, he said we'd do $2.5 billion this quarter – You know, I had dinner with Jeff. I mentioned the mayor of Miami. There was one of our borrowers was at dinner, too, and he's got, like, four other deals for us. That's our niche. We want to be repeat customers with our borrowers. We're their friends. We move and shake with them. We're flexible. We'll write the loan the way they need it, and the seniors, all taken care of. Like, we're the guy making the real estate bet in the middle. And not having a single loss in COVID, and I think we've lost, like, We have one loss in our book or two losses in, like, 12 years. I mean, like, holy mackerel. That's a couple of cycles, right? So it's not so bad. Anyway, next question.
spk09: No, it's a lot of good color. I'll leave it there. Thanks, Barry.
spk01: Our final question comes from Don Fandetti with Wells Fargo. Please go ahead.
spk07: Yes, you mentioned that European lending could go up to, maybe a third from 25% of that loan portfolio, um, competition lower, but I guess, are there any sort of other risks in Europe? So for example, do you view financing risk as a little bit higher there? Um, and you know, I would think that maybe side by side, you'd rather put a dollar out in the U S uh, versus Europe from a risk perspective, but maybe I'm just wrong on that.
spk03: Just want to get your thoughts. I actually don't, don't agree with that. Um, The European markets are – it's harder to add supply to the European markets, and fundamentally many of those markets are better than ours. The German property markets, the German office markets, Hamburg, Munich, Frankfurt, Berlin. We don't have any loans there, but we'd love to have a loan there. The problem is cap rates are 3%, so they're not going to write a 7% debt for us. We'd be very constructive on London today. In London versus New York and San Francisco, they're not trying to change the social system. And London will get through Brexit, and it'll be one of the great – it has always been one of the great cities of the world. It will be a major European capital and global capital for capital. There's a lot of Middle East money that kind of calls it a home away from home, and that's not going anywhere. I want to make two completely irrelevant comments, but I forgot to make them in my comments. One of the reasons I'm so positive on our balance sheet, and it does reflect what you said, is our exposure to construction has dropped from 24% to 11%. So today we have very little real estate construction exposure. And our future funding obligations for all of our loans are down almost 45%. So the company is like a rock at the moment. And we'll try not to screw that up. You know, I think that's a – we're poised to add loans in all of our business lines because of that. I mean, we did a really good job, I think, of managing through the crisis. And the other thing is that we're getting – our biggest problem right now is repayments. Who would have thunk? We ran multiple schedules every quarter through the crisis, extending the maturities of these deals and assuming lenders couldn't pay us off. And every day I walk in and somebody mentions to me somebody paid us off. So that's another source of funds. Sadly, I mean, we don't really want those repayments, but they're not in our control. And we just got to reapply the capital. So loan repayments are up dramatically.
spk04: I would add, you talked about financing. There are Fastly more financing counterparties for us today in Europe than there were five years ago in Europe when we started making loans there. A lot of our peers in the U.S. rely on the CLO market when they want to get away from bank warehouse markets, and that's really not an option when you go to Europe. We've been a significant and serial A-note seller. throughout our life as a company. And in Europe, there are great opportunities to sell A-notes. We know how to do that. We're good at that. And we have bank financing lines now, more of them with more people in Europe than we had before. So I think as the banks continue to move in that direction, it makes us more comfortable. And our ability to sell A-notes there makes us able to distinguish ourselves. Thank you.
spk01: I will now turn the call over to Mr. Sternlich for closing remarks.
spk03: Anything to add? Thanks, everyone, for joining us, and look forward to talking to you in three months' time. Thank you so much.
spk01: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
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