Q4 2020 Starwood Property Trust Inc Earnings Call
[music].
Yeah.
Greetings and welcome to the Starwood property Trust fourth quarter and full year 'twenty 'twenty 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. Please note. This.
Conference is being recorded I will now turn the call over to your host Zach Tanenbaum head of Investor Relations 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 31st 2020 filed its form 10-K, with the Securities and Exchange Commission and posted its earnings supplement to its website. These.
These documents are available on the Investor Relations section of the company's website at Www Dot Starwood property Trust Dot 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.
May constitute forward looking statements the.
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 of 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 any forward looking statements made today. The company undertakes no duty to update any forward looking statements may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call.
Sure.
A presentation of this information is not intended to be considered in isolation or as a substitute the <unk>.
All information presented in accordance with GAAP reckon.
Reconciliations of these non-GAAP financial measures to the most comparable measure prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot FCC Dot Gov Joy.
Joining me on the call today are Barry Stern like the company's chairman and Chief Executive Officer, Jeff The moniker of the company's President Rina pin area of the company's Chief Financial Officer, and Andrew sauce from the company's Chief operating officer.
With that I'm now going to turn the call over to arena.
Thank you Zach and good morning, everyone before I walk through our financial results I wanted to briefly comment on our non-GAAP earnings measure what we used to call of core earnings is now called distributable earnings or day in order to more accurately describe what this metric represents.
While the term has changed the calculation has remained the same.
You'll find additional disclosures about this non-GAAP measure in our 10-K.
Despite a volatile market backdrop caused by Covid the fourth quarter capped off another successful year for us with D. E of 50 cents per share for the quarter and of dollar 98 for the year.
Throughout 2020, our liquidity and capital deployment are strong, which would not have been possible without the strength of our balance sheet and our diverse platform with multiple business lines.
Even after a $4.6 billion of capital deployment of 3 billion of which occurred during COVID-19 and after early retiring $500 million of unsecured debt. We maintained an average cash position of over $700 million post COVID-19.
I will start my segment discussion this morning, with commercial and residential lending, which contributed day of $141 million to the quarter and.
In commercial lending, we originated five loans and a small upside for a total of $454 million in the quarter, bringing our full year volume to $1 $9 billion of.
This amount $1 1 billion with the originated after Q1.
During the fourth quarter, we funded $333 million related to new loans and an additional $334 million under preexisting loan commitments. We also received $250 million from loan repayments and $47 million from me not fail, bringing our commercial loan portfolio to a record 10.
$2 billion at yearend.
Our interest collections remained strong with 98 per cent of our loans current as of quarter end, we continue to see improvement in loans, which required partial interest deferral of post COVID-19, particularly in loan secured by hospitality asset at.
At year end, we had five loans, which continue to require the partial interest deferrals granted to them post COVID-19.
The quarterly deferred interest related to these loans is $4 $6 million. These modifications of our short term generally permitting only the temporary deferrals of interest and the repurposing of reserves and where often coupled with additional equity commitments from sponsors which totaled $650 million since the COVID-19 began.
On the Cecil front, we've reduced our reserve by $27 million this quarter, bringing our general reserve to 62 million and our specific reserve to $16 million.
The decline was primarily due to the write off of a $22 million specific reserve related to a 71 million dollar loan on a residential project in New York City, which is now reflected as property on our balance sheet.
We also fully reserved for an $8 million unsecured loan related to this project.
Cause of these loans were on non accrual there is no impact to interest income going forward.
We ended the quarter with a weighted average risk rating of 2.7 on a five point scale down from last quarter of 2.9 and in line with pre Covid level.
Our residential business was also active in 2020 with force securitization totaling $1 $8 billion and loan acquisitions of $1 $6 billion of which $1 2 billion or acquired after Q1.
During the fourth quarter, we unwound the first of our nine life to date, non QM securitization, which will allow us to significantly reduce the financing cost of these loans once they are re securitized.
In addition to the $177 million of loans, we acquired in the unwind, we purchased another $146 million of loans in the quarter.
We also securitized 327 million of loans and our ninth securitization, bringing our loan portfolio to of yearend balance of 933 million of weighted average coupon of 6% and an average FICO of 727.
Our retained our MBS portfolio ended the year at $236 million after selling $136 million of bonds that we retained from our second quarter securitization at a gain to our cost basis.
On the financing front, we executed two new facilities for $725 million wondering the quarter and one subsequent to quarter end.
After the quarter, we repaid our federal home loan bank facility and transition of loans secured by that line onto our existing facilities.
Next I will discuss our property segment, which contributed $19 million of distributable earnings for the quarter.
This portfolio continues to perform very well with blended cash on cash yields of 15, 7%.
'twenty rent collections were strong at 98% and weighted average occupancy remained steady at 97 per cent.
And our investing and servicing segment, we've reported D E of $32 million in the quarter.
Our special servicer of it was very active in 2020 with $5 billion of loans transferring into special servicing since the onset of the pandemic.
This does not include $24 billion of Covid relief requests that were fielded by our servicer and which May result in future transfers.
As we have said before although we expect long of resolution time, and that's delayed fee recognition for these assets. We believe that the earnings contribution from the servicer in the coming years will reflect these increased balances.
We ended the year with an active servicing portfolio of $8 8 billion and the named portfolio of 81 billion.
In our conduit spread tightening in the fourth quarter allowed us to achieve record execution level as we securitized $455 million of loans in two transactions.
This brings our total securitization volume for the year to $942 million in five transactions.
Concluding my business segment discussion is our infrastructure lending segment, which contributed day of $6 million to the quarter.
We funded $81 million related to new loans and $22 million under preexisting loan commitments. These.
These fundings were offset by repayments of $103 million and sales of 22 million, leaving the portfolio at $1.6 billion at year end.
We continue to be pleased with the credit performance of the portfolio, which had 100% interest collections in the quarter.
We also recognized a $7 million decrease in our seasonal reserve due to improved macroeconomic conditions and the project finance space.
Subsequent to quarter end, we priced our inaugural infrastructure, CLO, which Jeff will discuss in more detail during his remarks.
I will conclude this morning with a few comments about our liquidity and capitalization.
As we mentioned last quarter, we executed two debt offerings in October a $250 million of upsides to our term loan b and our first $300 million sustainability bond issuance.
As I mentioned before we also early retired our 500 million unsecured debt that was due in February 2021.
We continue to have ample credit capacity across our business line ending the year with undrawn debt capacity of $7 billion unencumbered assets of $3 billion and an adjusted debt to unappreciated equity ratio of 2.2 times.
In addition, our liquidity remains strong with cash and approved undrawn debt capacity of $649 million of the Friday, providing us with ample capacity to execute on our pipeline.
With that I'll turn the call over to Jeff for his comments.
Thanks Rina.
I want to start today with a couple of non market related topics.
Transparency and Investor reporting are at the core of every decision we make and we are proud to have been recognized by NAREIT as the recipient of their Goldstar Award for excellence in those areas and each of the last seven years.
In March we will release to our website of virtual Investor day Webinar, the Jack in the entire management team put together that we hope will explain exactly what we do as investors across seven businesses in more detail than we have ever gone through in the past with the.
Look forward to sharing that with you and most of the press release when it is uploaded to our website.
Also on our website as the discussion of our corporate ESG initiatives.
I want to highlight a few things you will find there that we're very proud of.
43% of Starwood property trust employees identify as female.
And 49% of employees identify its racially diverse.
Each year, we strive to increase our diverse talent pool and for 2020, we continue that trend with 52% of hires identifying as either female or minority.
We are a top 10 owner of affordable housing in the United States with over 35000 residents in our Florida multifamily portfolios.
In our non QM residential lending business with over $5 billion of capital deployed since 2016, we are a leading provider of mortgages to high quality borrowers, who otherwise struggled to secure access the housing credit.
Our energy infrastructure lending business is financed over $800 million of renewable energy assets since our purchase in 2018, generating 7900 gigawatt hours of energy and avoiding seven 4 million tonnes of Cotwo.
Finally, we are also proud to have issued our inaugural of $300 million sustainability bond in Q4 backed by eligible green <unk> social projects.
Now onto the discussion about our quarter, our year and our prospects two.
2020 was as difficult of a year as most of us can remember, but looking back on what we accomplished it may have been the most satisfying for our firm.
We entered 2021 with tremendous optimism about the overall health of our business, our future prospects and unparalleled confidence in our ability to continue to pay our dividend.
We ended the year with $1.98 in earnings in 2020, despite the earnings drag of holding record levels of sustained liquidity due to having to work through an entire credit cycle in less than 12 months.
We entered Covid with what we believed was a fortress balance sheet near record levels of liquidity and the ability to create significantly more allowing us to be the first of both voluntarily pay down our bank lines at the beginning of Covid and then begin to go on offense and began investing again in April just weeks after the Covid lows.
In the downturn, we never contemplated a dilutive capital raise which would have impacted future earnings growth.
We completed the wholesale review of every projected cash inflow and outflow and we re underwrote every asset multiple times.
We never sold assets for a loss.
We didn't need to create more sources of cash by unwinding of our in the money foreign exchange hedges or LIBOR floors.
To the contrary, we use the knowledge of the quality of our assets and sponsors and of our liquidity prospects to go on offense.
We deployed $3 billion of capital in the last three quarters of 2020, which was over three times more than our five largest commercial mortgage REIT peers deployed in the aggregate over the same period.
We did this with contributions from all of our investment cylinders with term financing and that accretive Roes.
We carried that momentum into.
The into Q1 of 2021, and our first quarter closed and in closing pipeline across business units as well over $2 billion. The vast majority of which comes from the 12 loans, we expect to close in our core CRE lending segment.
The rebound in prices across asset classes has created significant cushion in our financing facilities as well, which is another source of potential liquidity today.
We issued $550 million in high yield and term loan debt that we used to pay off $500 million of high yield bonds that open for prepayment at par in Q4, well in advance of the maturity date in February 2021.
These actions leave us with ample unencumbered assets to create more liquidity in the debt markets, where we could borrow today at or below the best rates, we've seen since our inception.
Yeah.
In our core CRE large loan lending business. Our loan book has an LTV at year end of 64% the lowest in our history and is now over $10 billion per the first time.
We have sold more than any of our peers and if we add back our off balance sheet financing our loan book at year end was almost $14 billion.
Given the uncertain climate last year, we worked hard to reduce our future funding exposure by well over 50%.
Today, we have the least future funding obligations of anytime in the last 10 years, representing just 7% of our total assets down from 18% at year end 2019.
Our world class borrowers of contributed $500 million of equity to the projects. Since Covid began the vast majority of that on hotel loans, where we have only three loans remaining on partial interest deferral with no interest forgiveness.
In addition, we of commitments from our borrowers for an incremental $150 million of equity contributions in our hotel portfolio alone.
Yeah.
At our low Ltvs and with the financial support of our hotel borrowers have continued to provide we are confident this large loan portfolio will significantly outperform expectations absent the divergence in the path of the Covid recovery.
As Rina said interest collections of remains strong and though we continue to work through a few loans, whose business plans have been disrupted by Covid, we remain confident in the strength of our book overall.
We worked hard on the right side of our balance sheet last year as well selling day notes, adding warehouse line capacity and we are working towards pricing of our second CRE CLO in the second quarter, which will which will move over $1 billion of loans off our bank lines, removing both recourse and credit marks.
If today's CLO levels hold we will significantly increase our returns on the equity in these loans.
Pro forma for the CLO, we will have less than 40% of our CRE loan book of financed on bank warehouse lines versus 45% today, which is already the lowest percentage in our peer group.
We continue to benefit from the LIBOR floors on our loans as well and the average LIBOR floor on the 90% of our domestic loans that have them. It's almost 150 basis points in the money today, allowing us to earn returns in excess of our original underwriting.
In non QM residential lending, we added or in the process of documenting bank lines that will bring our financing capacity above $2 billion.
Which more than fully replaces the federal home loan Bank line that actually matured. This month as did the lines of all of their captive insurance companies, who were members of the federal home loan Bank.
One of the new lines, we closed and hope to replicate as a multi year committed non mark to market financing facility, which in addition to our successful securitization program provides the business multiple options for financing going forward.
As Rina mentioned, we reduced the balance of our non QM loans on our balance sheet with our Q4 securitization our ninth to date and took advantage of of significant rally in residential loan prices to separately. So what we deem to be our riskiest loans by geography and credit score out of gain.
Rina mentioned, we executed an optional call right on the first of our non securitizations in the fourth quarter, which will significantly lower our cost of financing on the loans in that transaction.
We of the optional right to call when we securitized three additional securitizations in 2021, and we plan to continue to call Securitizations lower our financing rates and increase our ROE in the quarters and years to come.
And our energy infrastructure lending business, we are very happy to announce that we price our inaugural energy infrastructure Cielo on Tuesday night of <unk>.
First of its kind in the culmination of of two plus of your path, we set out on the after buying that business from general electric.
We were oversubscribed and every offered tranche, allowing us to upsize of the deal from 400 million to $500 million and tightened spreads to an average coupon of LIBOR plus 181 through the triple B bonds had an 82% advance rate.
This significantly increased the ROE on the assets in the CLO with term financing that is non recourse and has no mark to market exposure.
The CLO didn't materialize overnight our team met with potential bond buyers since our portfolio acquisition and had dozens of the spoke meetings to explain why this nascent market offers several meaningful structural advantages and a significant risk reward at wider spreads than broadly syndicated corporate loans close.
We were delighted bond buyers agreed with our thesis.
We intend to CLO to be the first of many of this business.
The assets in our portfolio continued to perform extremely well even in the depths of Covid and were unaffected by the recent freeze in Texas.
With the emergence of accretive term CLO financing, we intend to grow this book significantly in the years to come out of accretive returns.
In rice during 2020, we continued to proactively reduce our exposure to below investment grades the MBS and with a portfolio of balance of $689 million. It is the smallest of yearend balance since our acquisition of LNR in 2013, and 33% lower than our 2017 peak.
Despite choosing to reduce our exposure to see MBS. During this period, we were able to increase our named special servicing portfolio of over $80 billion today through purchases partnerships and being named special servicer by third parties.
We took advantage of the depth and breadth of our platform and during 2020, we reallocated professionals internally to help our special service of deal with over 1000, B spoke special servicing requests since Covid began of.
Of this amount $5 billion has already entered special servicing which we expect will produce in excess of $50 million in incremental revenues in the years to come.
And our <unk> conduit origination business SMT, we had $185 million of unsecured ties loans when loan prices fell and COVID-19.
Securitizing them early and Covid of some chose to do would have crystallized over $20 million in losses, but as investors, we chose to hold the loans and with the reopening of the the MBS market and spread tightening we have now securitized over 90% of those loans at or above par and expect to securitize the balance in the coming quarters.
For the first time SMC was the largest non bank originator of the MBS in 2020 in May with many competitors shut down we chose to go on offense and originate COVID-19 appropriate loans, realizing some of the highest gain on sale margins on our history as bond spreads continued to tighten in the second half of the year.
In addition, we have a robust pipeline for Q2 Securitizations.
Yeah.
Finally, we also had very strong performance in our property segment across our portfolio of stabilized core plus assets.
We expect to close an $80 million cash out financing on one of our Florida multifamily portfolios in the first quarter, which will increase the record 15, 7% cash on cash return we earned on the entire property portfolio in the fourth quarter.
We continue to actively explore ways to monetize a portion of the over $900 million or over $3 per share of gains in our own property.
Doing so would add liquidity increase book value per share and allow us to realize gains that we can reinvest accretively to grow earnings.
In closing we believe there is ample runway for us to continue to outperform in 2021 and beyond regardless of the macro environment.
With that I will turn the call over to Barry.
Thanks, Jeff Thanks, Rina Zac and good morning, everyone.
I don't know how to actually handle this call I'm. So excited about the year, we had and more excited about the future of the firm.
When we created this company 11 years ago, we were of $900 million pile of cash now.
And now we're an $18 billion of balance sheet with 300 extremely talented people with the best in class Board of directors.
And I think if anything it's always when the tide goes out that youll see who's standing tall.
And our business model our strategy of the diversified finance company really showed its strength as we continue.
To do what we do and have the balance sheet to do it.
It was a remarkable year for us I mean as the as you would expect when when.
When the storm hit and the pandemic hit full force every person here man the station their battle station as the.
Smoke cleared.
We decided to go back on the offensive, we looked at our balance sheet and as you know on March 16th on CNBC I was pretty bullish on the stock market and I said this is going to clear and we use that overall driving seemed to get back to work and the board, let us deploy capital, while we had debates and some of the opportunities are extraordinary one trade we made in resi business in the in the.
In the year made us almost $50 million pre tax and we actually never had to deploy any capital behind that no other mortgage REIT and I don't even want to call. It the mortgage REIT anymore no other financing company in our sector could do something like that.
All of our business lines, we had the second most profitable securitization in the company's history in the fourth quarter, followed by a pretty nice securitization earlier this quarter.
So I mean, it's great that we got through the quarter I went on television with the Betsy quick Jim Cramer was talking about our dividend yield not being sustainable when we went public we said we'd be stable we'd be transparent.
And we would we would never force capital into a single business line and that's why we drove the diversification of the company and there are so many incredible things that happened in the year consummated. Most recently by the CLO and the energy book, which will change the can be a game changer for that business for us and should meaningfully contribute to our.
Growth going forward and with no credit losses of any consequence during the 12.
Of the prior 12 months.
Going to be or and we have a great team. So you have 300 people dedicated to the affairs of this company just want to thank them for all of their work they may be listening to the call. Some of them. They were work from home we got through it smoothly then Theres 400 people in 4000 people at Starwood Capital Group, who supported the TWD.
Volume through the crisis, our real estate guys helped out on the loan restructurings and looking at ways. We can be feeling good about the investments it was that conviction in the value of our book that allowed us to go back on the offensive of adjusted Jeff said did five times of the investment of.
Or more of those in the next five guys in the industry combined.
Real estate is really does still recovering from the pandemic.
We turned off of our large loan lending book, largely but other business and we went to the talent.
And so we have that opportunity, which worked out great for everybody.
But going into this year almost every business is in a prime position and we expect all of the cylinders to be functioning to our advantage, which is just remarkable.
We have a great balance sheet all of the mood of the team have done to support the financing you have to look below the line. So you can see that we have more of on balance sheet financing more matched recourse.
Financing than any of our peers.
So we have.
I have to say the team has done just an extraordinary job.
I also said in the third quarter earnings call that we can pay our dividend you know that we had the gains on the book of the comp that we can pay the dividend per <unk>.
Practically ever though whether it was prudent to do so or not if you believe me and not the comments and Kramer made the stock's up almost 70% since that call of $14 67, So he had to call in and some of the companies with the dividend yields usually mean the cutting them.
That wouldn't be the case with us so.
We never really had any doubt whether we could pay the dividend. It was the question of whether we should pay the dividend and obviously, we made the decision with the board support to keep the dividend and.
Honestly with the book value of book loan book loan.
The loan to book value of 60, 60% LTV of 60% and an eight two dividend yield today in the treasury of $1 44, we still believe we have an extraordinary value proposition for shareholders and I would expect I would hope coming out of this that people would look at this as a company that can grow and supported the dividend and we.
We think.
I can't be more positive about the company right now.
What else can I say the.
It's really we've talked to the Jeff Jeff and Rina gave you the extensive comments I mean, we the.
The fact, the LTV of 11 years into the sport Biz.
Business is still 64% that's the big difference between mortgage reads today and mortgage rates prior to the the.
GSE debt.
They were they were lending at 70% to 80% so when things got tough they wanted to falling apart.
Other his most hidden thing they do things in the balance sheet, where we've reduced our senior debt exposure by more than a third.
We also reduced our construction loan in the future funding exposure like by a day.
Matt of 80% sounds like some staggering number.
So the companies absolutely positioned for incredible success going forward and this is sort of the celebratory earnings call because it really.
It was it wasn't fun when our stock had crashed in the people didn't panic the amount of the stations and everyone held their arms together.
And all of our business lines performed beautifully so.
I don't have much more to say I think Jonathan.
Jeff and Rina, Andrew Zach the whole team.
Really cool.
Kudos to you and to our board.
Because I think.
Real estate is not out of the Woods don't don't don't take these comments as well.
The commercial real estate being out of the wood when you can I'll talk about three seconds each of the asset classes industrial fine multis are weak, but there'll be okay. Because of the kids will go back leave their parents and will go back into apartments, and but the business asset classes getting of bid office of the yellow the office of the question.
Mark and it's the.
Deal by deal, but I.
I do believe we of the general feeling that people will go back to the office in some scale and we look offshore to Korea, Tokyo, The Middle East China people are 100% back in the office and we're in in Continental Europe before the second wave hit.
So we despite the sales force comments.
We think that will that that market will be okay.
More than okay, because we are a lender, we only 60% of value.
And then you have two more challenging asset classes hotels, but Jeff.
Jeff I wanted to say that we're going to have no losses in our hotel portfolio.
We took the that's what I just said it so he didn't have to say it and then.
Nothing and then retail which is really difficult to underwrite in this kind of a dark red is you know I'm not telling you anything you don't know so it's interesting because if I look at the book, we probably could sustain maybe of 100 millions of hours of losses.
Out of our $18 billion going forward.
None of it is even one of our red assets, we mark the five.
All of the dollars of doing it so we don't lose more than the dollar not of dollar and and we just had to do it because it went on non accrual status. So.
But it's the third of the cost of the asset and I'd love to get the asset back so.
The couldnt be happier and without I guess, we'll take any questions.
By the way one of more one more thing I should mention is we.
We don't really have exposure.
So the most troubling markets in the country and San Francisco, It's one less than one per cent of our assets.
In New York City is like 3% of our asset So New York is by the way is not going away.
The New York May struggle, a little bit residential prices will be down the office markets, we will take a while to recover rental growth will be nonexistent theres too much sublet space actually rents will drop but our exposure in the Manhattan is pretty good and we're comfortable I think the tourism market will rebound sharply mid week will be tough because of the business travel for the.
While the leisure on the weekends will explode yesterday, you saw of Carnival say, 30% up in the future bookings and rates are up.
Leisure travel is going to be great and that's why merit the stock hit an all time high yesterday I guess, it's I do think the hotel stocks are way ahead of themselves but.
That's an aside and doesn't really impact us.
With that we'll.
We will take questions. Thanks.
Thank you at this time, we will 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 of 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 Stephen laws with Raymond James. Please go ahead.
Hi, good morning.
Jeff.
I wanted to start off really with the your comment of your prepared remarks about the the earnings growth that can be generated organically can you talk about that building off of the roughly $2 per share of distributable earnings. This past year now whats the capacity to deploy capital and the returns we should think about on that that deployment.
As you as you think about where you are putting money to work today.
Yeah, Thanks, Steve and Great question, I think from an earnings growth perspective, there are a few ways you can do that one would certainly be unlocking gains and things like our property portfolio and redeploying those gains.
That's an important thing that we've been working on we then thinking about how to properly do that the other way to grow that is to come up with the couple of ways. One is we can deploy more capital. We've been very defense of you can see that we're moving to our front foot today.
As we deploy more capital that matters for every $100 million of capital that we deploy I'd say of 12.
And instead of paying off of bank line that is the 3% return if you pick up 900 basis points on every $100 million extra that we deploy it's $9 million of year, which is <unk> of the earnings so certainly, bringing our cash balance down in that debt is one of our goals. During this year as we feel more comfortable coming out of COVID-19 with the vaccine that debt.
We will do I would say, we earned significantly overweight premium IRR on things that we invested in at the lows as Barry said the board of Barry allowed us to make some investments at the right time, and we had a premium IRR of last year I would say that today, we're back to something closer to a run rate and that 12 of 12, 5%.
ROE and that's what we're seeing is competitive in the areas that we want to invest in and it probably looks a lot like what other people are trying to do more of a little bit more conservative cash flowing multifamily et cetera, and that's what we've been pursuing but we think there are some great opportunities as Barry mentioned in the energy infrastructure and other places where we can really get some premium returns.
This year and potentially grow earnings of that way as well.
Great and that's the.
A follow up I wanted to hit on the energy infrastructure.
Congratulations getting the first CLO done when you look at the origination pipeline and returns on new investments their yields on new investments.
Versus now where you think you can get the CLO financing done how does that change the ROE equation, an amount of capital you are looking to allocate to that business. Yes, it's massive and if you look back at our purchase portfolio and you remember Steven we bought a lot of lower coupon loans and they were financed on warehouse lines at decent rates, but but.
Not certainly not where we think we can borrow on a go forward basis. The overall ROE was low we bought a team we bought the expertise we wanted best in class to grow this business and with that team post CLO I think as I look back at everything we've done since the acquisition, it's been low teens and I think there's an opportunity to earn mid teens on the best CLO executions there.
And we plan to open up again the.
The stabilized returns on our resi business and in the energy business are higher than the the.
Returns in the large loan real estate business. So.
The high ROE businesses, and the seal only made it higher so.
MBS and the scene.
The <unk> book as well so those are of high ROE businesses and we have as you may know there is a fascinating GAAP challenge with the resi business that we're underwriting Refis of these trust and we mentioned we did the first one in the quarter.
But we can't use that for GAAP. So we're understating the irr's on these deals where we're at three of the Crewing actually probably below though the return of the large loan books with large loans, we have real estate loans the half, but the total IRR is actually hidden until the refi comes through in the.
Mid teens high teens, so the GAAP can't you can't you can't assume the refi so we follow GAAP.
The total return on capital is significantly higher than where we are telling you in the earnings so.
It's a fascinating little business, but we choose to do it here because it's a great use of capital and the team has done an outstanding job. So.
Is that the conduit business also I should mention which is the <unk>. The conduit is driving very high ROE is turning their book of 11 times of year into your question on earnings growth of the kind of it was shut down for the first half of last year. So as you look the earnings that certainly took away last year, what it could have been and if we can stay on trend. This year, we would hope that could provide some of our.
The growth as well.
Great. Thanks for the comments this morning.
Thanks Steven.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Charlie Arista of with J P. Morgan. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions today.
In the few years that I've been covering you guys I'm thinking back further to the IPO.
As you mentioned the platforms, obviously ground, but I think more importantly has gotten more diversified which obviously paid off this year.
When do you think 2021 and beyond.
E Starwood being active in M&A or any other channels to really add additional capabilities to further diversify that platform.
I Should've mentioned, we're taking all of our cash and buying bitcoin.
That's a joke.
[laughter] that would be not the.
[laughter] the word from micro strategy.
<unk>.
Or are we going to continue to diversify was that the question.
Okay.
And also I guess, specifically related to maybe M&A.
Yeah, we are working on a few things in the M&A world.
And.
And also there is at least one business line that we're not in that we've tried to get in that we will still true.
Which will be equally high R. R.
For the firm I'm laughing because we're working on of like for four years, we've come close, but we've never quite succeeded so.
The yes, there are other business lines.
It has to be large enough to make a difference to us and have the potential to and make sure. We have the right people to run the business unit. So.
And we'll do anything that makes sense and finance.
And we are of REIT. So it kind of the Constricts, our what we can do and it has the quality has to be qualified REIT income or can't.
Endanger our Trs so.
But within those confines I mean, some like servicing income some of it is al now REIT eligible assets. So.
There's interesting things to do and we've been we've been working on several of them, we made a bid for.
For one company and the decline of the bid decides the IPO they couldnt get the IPO done and they just sold the company to a bank so where we've.
We've been trying.
See it but we have been trying to do other things that we thought could take advantage of the cycle frankly in the.
And made strategic sense for us.
Okay.
Yes.
Our next question comes from Don <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
Couple of things one it's good to see the stock almost back to pre COVID-19 levels.
I guess two questions one around hotels and macro Barry do you do you lean more towards like a big pent up demand snapback.
<unk> in the U S.
And then my second question is on the M&A comment.
Are you guys interested in getting bigger in residential mortgage origination is that sort of what you were alluding to.
That would be of good guests on.
Nonetheless on the letter of portion of that.
We do have a.
An originator one of your contract.
The complicated.
We've been waiting over a year from the transaction. The two years of you. Thanks for the split of of two things two fingers for the transaction to close there is some issues.
The involve the I guess, the government approvals or something like that is there is nothing to do with us has to do with them.
And the first question hotels macro.
Where do they come back as people start to drive, though I was just looking at this and the one.
Sort of hotels and.
Actually we're doing I'm doing the call ex.
Now the primary headquartered with Cwc's people in Miami some of them in their offices today and our hotel in the South Beach ran 94% of occupancy at 600 <unk> hundred dollars Tonight.
The hotel and the L. A is I think 8% occupancy, but new York is really screaming, it's like 23 so.
The what Youre seeing is exactly what you would expect the economy and roadside travel is actually down not a lot of the economy. I think is down like 6% Revpar right now thats the trailing 12 weeks of trailing.
Maybe just be the week.
Roadside down like 13, the domestic travel come back first the courtyards and merits of along the roads of all over America will come back first it will take a while.
But there they will come back first the biggest challenges of the big urban boxes, how do you fill midweek.
In Seattle, and Chicago without business travel.
We actually just bought a hotel in Copenhagen, because its 87 per center is we think that will snap back of really fast.
Extended stay hotels are crushing it relatively speaking well not I mean doing much better than anything else, we own a chain of hotels called the intown suites.
EBITDA dropped.
The 3% Revpar is now up there, but its low and the extended stay.
Very low end.
$300 of week.
That doesn't value of.
The bathroom at the one zone.
But that stuff is full of the average length of stays like of 140 days and it's quasi apartments and the actually the single strongest place in the real estate markets today of single family and single family rental those are those are crushing it there are multiple cities in the country with 10% year on year growth in <unk>.
Hence in single family rental, which is unbelievably strong so I think hotels won't get back to.
Generically speaking of the big urban boxes of the Marriott Marquis in New York.
$2004 25.
So the.
These 2000 room urban boxes.
The other parts of the hotel market will recover much faster leisure leisure oriented hotels resorts.
Given the 12 months.
And there'll be there'll be a burst of activity to actually produce the one nine trillion dollar stimulus with the value at an all time high with the savings rates at all time highs.
The so crazy and the people stopped.
Stop trading Gamestop, and they're going to take of vacation because they are so rich so.
You saw the numbers yesterday, you heard about European travel of 500% of Greece, and Spain, I mean, it's going to be of Bonanza in leisure.
Because people aren't locked up and there is one of them all the way, but the urban box business travel Theres no questions zoom.
Which isn't that much fun.
The influence of the.
The level of business travel Theres no doubt so I look at the stocks and I wonder how they could be here some of the stocks marriage of an all time highest today you have to either believe.
That all travel is coming back from the stock to be there or you change the discount rate because interest rates of solo using a different DCF on the company.
And I will say that all of the companies, including our hotel company of of our own Hotel management company and we were running tighter leaner boxes. So our margins will get better because were offset by the effect of the minimum wage is going to rise.
And should rise from complying with that so.
So the clarification complicated story.
Go ahead I'm sorry.
Can I get a quick clarification on the residential mortgage origination side I thought you had a small originator of that U S.
The investment in it already effectively all of it are you, saying there is.
Another one.
No dominant.
That's the one we're talking standard.
I'm sorry, the regulatory closed go ahead Andrew.
No.
You're exactly right I mean, we made it we made of preferred equity investment.
The mortgage originator of about about two years ago.
Upon regulatory approval of that preferred equity investment will convert into kind of common ownership and control of the the business, but as Barry mentioned, that's been kind of tied up.
And kind of regulatory approval for the better part of two years and Barry likes to call. It the kind of longest tenured deal and we've ever had at Starwood. So we continue to work closely with that platform, we're kind of embedded in the business and Stephen <unk>, who runs our residential finance business.
The us is very close and kind of helping to manage that business, but until we have that final regulatory approval. We can officially close on the transaction. We will hopeful that that's a mid kind of 2021 event, but again they continue to work with US there of large source of production for us in our in our non QM business.
But we just don't technically have legal legal ownership of the business today.
Got it okay. Thanks.
As of the time, we do want to grow the resi business and we're going to work hard on ways to do that and it's probably the place where we have the most opportunities to grow whether it's in loans or securities or or origination capabilities of prep equity or whatever it is that some of it's something we would love to continue to grow we've had great success in a lot of it.
We're going to push hard on the resi business and our.
Our infrastructure lending business, we're going to we're going to you're going to see us pick up the pace of we can if we can hold our returns and right now we can probably.
Produce really good returns so we're going to be more aggressive there I think I didn't make it.
The re emphasizing the my comments.
But the quarter loan book is fantastic the law.
The loan book as it could be one of the biggest quarters, we've ever had so.
Yeah.
<unk>.
We're using our real estate underwriting skills across the firm to decide where we're going to deploy capital and taking I'd say calculated.
The risk events.
And that's what we've always done so.
I think.
That's why the book looks the way it does.
I sort of last we have to put that loan at the five category, but there is no chance, we're going to lose money on that deal.
<unk>.
No chance actually I hope, we get the asset back I really would love to have similar basis of thoroughly.
The third of the cost of the asset.
So that would be fine.
Hey, Don.
Barry mentioned hotels and I'll, just clarify that our book is predominantly extended the limited service and leisure travel we are not the big city urban boxes or the convention center boxes that I think are in the most in the most risk today, we will be happy to go through the exact weightings later, but.
I think that our hotel one of the reasons, we felt so comfortable making the strong statement about the quality of our hotel book is we didn't choose those boxes that Barry just said won't come back from 'twenty four 'twenty five.
Got it.
If you would like to ask a question. Please press star one on your telephone keypad, if you're on speakerphone. Please pick up your handset before pressing the star keys.
Our final question comes from Tim Hayes with BTG. Please go ahead.
Hey, good morning, guys, congrats on a really strong quarter.
You've talked about monetizing parts of the real estate portfolio and crystallizing game, there for quite a while but now that has become more of a top initiative. It seems in recent quarters. So can you just provide an update there on potential timing the amount of interest you are getting from third parties and on which portfolios in the real estate book.
Specifically I'm sure cap rates on affordable housing in Central Florida comment a lot, but you're only a couple of years out from rolling rents there to the market rate I believe so I'm just curious how you think about those portfolios.
Sure well, whether it transcends all of our of few of our different businesses, our Oreo of business here at LNR, where we still have some gains the winn Dixie warehouses that you know we took back two of we took an $8 million of impairment on our Montgomery asset ultimately sold.
We have a large million square foot Orlando asset fully occupied now by Amazon that we will have a very large gain that will take at some point. We also have a bass pro master lease portfolio and I'm sure you saw coming through Covid bass pro performed extraordinarily well and we think cap rates of tightened significantly we have a pretty good.
Size gain there and if you've been reading on sectors that have done well in Covid MLP has obviously performed well and we think we have of large game there but to your question the obvious place for us to look would be the.
Multifamily low income housing tax credit portfolio that we have in Florida, which makes up probably 75% of the overall gain of over $900 million in the book.
We have been contemplating a way to potentially do something there we love the carry on it I mentioned earlier, we're in the process of doing another cash out refinancing or cash on cash return is extraordinary rents can only go up in these properties youre at 60% of market rate. This is bond like of the cash flow of somebody is going to be able to buy so we think that.
The tremendous interest for something like that if we were to sell the minority interest if it economically made sense for our shareholders of it unlocks the equity that we could redeploy that's really powerful every dollar that we take back of those gains and reinvest we're going to and we can earn 12 cents on that is accretive to earnings and it would also potentially.
The create fees that potentially debt potentially accrue to us.
Yeah, no debt that all makes sense, Jeff I appreciate it so I mean, the <unk> and.
And the pipeline in multiple of your cylinder sear seems really strong and the ROE are of great. Given the types of financing you're on these vehicles are getting on the job. These assets. So just curious, though like is there hesitation to sell any of these assets or the specific lead the Woodstock portfolios given there would be.
Lot of cash you then need to redeploy that could be earning.
Great return.
Or is there any of the.
Yes, all of a bunch of <unk>.
First of all of it.
Since I own a substantial amount of the stock.
And so does the management team here, we treat the shareholder capital that gets our own is the <unk>.
Significant asset to the people employed of this company, so where we would like to put our money and one of the challenges of our loan businesses. We're still stuck in a I'd call of transition real estate loan business and the duration of those loans is short the better the borrower does to improve as asset lease at all.
Or any of those things of the faster he refis US and then we have to go put the money out again or the drag so the the entire equity book here was the stretch our durations that I don't have the I don't the worry about getting the money back and right now theyre producing the equity book producing of $15 seven cash on cash return on our equity which is just.
Staggering and it's growing up not down the.
The affordable housing portfolio only can have rents go up if they can't go down so theyre driving the.
It's liquid gold, it's the kind of stuff literally joked I'd put my Kids' Trust and basically it isn't like the trust.
Hum.
And I'd, rather not sell it but but we will we.
We are going to market and interest in it and redeploy the capital because its so accretive to the company's earnings to do so.
No.
We have to do it and we want to do it because we want to highlight the value of the portfolio.
We can talk about it.
We will show you I believe we will show you that those gains are are more than real and.
The nice thing is you have them in the company. There is no other company in our space that has anything like that.
We have we have all of the and we joke I mean these deals were like 100, Irr's and we thought they were steady.
We're going to be boring 11, 12, 13% bonds and they've turned into this packet of investments for us bass pro shops sales boomed in the in the crisis and you can look at the corporate bonds, the see how valuable our creditors.
I think in order of.
What we would do you know, we'd probably do would star first.
Then maybe we'd look at the Cabela's.
Bass pro shops assets at some of them at some point and it's really a question of how big the can we redeploy the capital Accretively and quickly and right now I would tell you. We can that's why I'm. So excited about the energy book in the CLO. That's the game changer for US we were nervous you couldnt see it it's the mismatch in maturities, we didn't have a match and easy match.
The mismatch of maturities.
I hate that you know I like to match fund our deals so theres no rollover risk and.
And the bonus was we would've done it we started out we thought it would be dilutive we might have to pay a little more for the capital and it's turned out that we.
Paid less slightly less than a higher advance rate of higher advance rates, so like quite freed up money and obviously boom the irr's on the on the paper so having that and then the resi business now we have of brand in the non in the non QM business with the nine securitizations.
The people know us they know our underwriting they see the weighted performed and.
That's given us credit in that market, we've done $5 billion more than that of resi <unk> 5 billion.
No.
We'll grow that business and at some 0.1 of the challenges we look at and we haven't talked about it is.
Both of those businesses can sustain higher leverage levels, and then our real estate book and so our overall leverage levels rise, but not because we are taking the excess risk.
To go up from what was the the answer it in the CLO of 675% to 82 from the bank line to the CLO deal one of the bank lines of allowed you to go to ADP, we had some assets that we hadn't levered and so ultimately of the look somewhat similar but we're allowed more of leverage here well the poor.
Is that that's now match funded that's better debt than the debt, we had with the banks non recourse and nonrecourse market Mark to market. So we were just running the company smart like we're going to do the smart things that match, our duration of our of our debt and if that means the roe's climb up I was when I was on the board of invitation homes.
Each of them now just in the observer on we had the debate should we buy home should we pay down debt or aren't the freaked out about the debt because it's too high and the other REIT scary less debt or should we growth.
Or should we pay a big dividend and I argued that things would happen really nicely for us. If we just grew the enterprise and don't worry about the debt because there is no better credits than 80000 houses.
So they ran a higher debt and obviously the stock went from 18 to 30. So the market agreed with me. So we're going to tell the story and do the right thing for the equity for the capital base.
And I'll note our on balance leverage Hasnt really changed much over the course of the year. It started the year around $2, one and it's today around two point. That's one of the reasons, we're carrying tons of cash, which you know we don't like to do but we did so we had to do because in the field.
Certainty of the market.
Okay.
Great color I appreciate it guys.
Pleasure. Thank you.
We have our final question from Jade Rahmani with <unk>. Please go ahead.
Thank you very much of it.
Just wondering for Barry sounded like curious if you view commercial real estate the.
Outlook for the overall market.
Meaning of the worst the path would be.
Theyre more chairs the drop and it sounds like.
With respect of Starwood portfolio you believe.
And the credit has stabilized as the only about five loans that have interest deferrals and it seems that the credit outlook is fairly positive.
I think we've.
How many of the alone.
The Michigan Avenue in Chicago, and then we have a deal on the West coast, which.
Hi, this is.
Good real estate I, just think we might get it back.
No.
And the market is trying to find the partner right now I'm, okay with it it's going to happen like you can't about 1000.
But it is irrelevant of the scale of the company so.
And we have an idea of what to do with it. This is the borrower has a higher base.
So.
Anyway, the yeah. So I would say in general real estate credit has probably stabilized I do think the cycle. We have a really large equity business. The cycle, there's going to be distressed the banks are going to move as the economy comes out of this theyre going to stop giving the extensions on everything and they're going to start they won't take the titles back because of the.
Buildings of your empty or the hotel's empty and they are going to have negative cash flows so they're going to start selling loans and.
They're already doing that youre, beginning to see a lot of loans come for sale in New York City for example.
The assets are your trouble and movements in cap rates in the NOI in New York City Multis in San Francisco Multis, you've seen the numbers from Avalon Bay, and the QR I mean, they're not good down 20% of NOI.
So you take a five cap of a four cap of an urban assets in your 70% lever you don't have the equity left so the neither of those companies without levered, but this has been a significant ammunition in the value.
In some of these coastal cities right now, which I think is.
The interesting there'll be a point at which a level of which we would be comfortable lending and even those markets.
But I think I think the couple of the commercial blue cities are going to be tricky from an underwriting standpoint.
You all know the stories of people have.
<unk> in New York at $100 a foot in the till the landlords are going to the mill.
Renew but at the $65 a foot.
And the landlord says screw you and they moved to another building from $50 a foot. So you know.
That kind of behavior with this much sublet space in these big urban cities.
Is brutal and you know I don't think the market appreciates how tough those market share right now because there is no net demand really in those markets right now I will say that like we know of Google has gone back to work.
In the sense that they're going to take or they've already turned on additional development theyre taking tons of space.
Amazon did buy that we worked headquarters from us in the middle of the.
Covid and then Facebook made that giant commitment to Union state.
The whenever that station is next to the Madison Square Garden in the middle of the pandemic, so while theyre, saying one thing like work from wherever you want the are increasing their footprints and it's really been Tac and thats been leading the absorption in the city, so whether it's Facebook Google sales force Twitter Amazon they are.
They go home the bigger urban markets, we will have a challenge I don't expect that to be the case I think in the European cities, We Didnt mentioned Europe in our comments I mean, there is massive lending opportunities in Europe right. Now so we'll probably a third of our book going forward is going to be in Europe.
The pipeline is robust and the spreads are good. So it's actually interesting we were happy to make real estate loans and some of the people are sitting back on their hunches and we're okay with that right now and that's why we're holding our roe's because the the.
The there's less capital chasing.
Tracing stuff.
So you know I.
I think you also have to it's a little tricky even looking at headline rents in cities because theres. The concessions are improving or the tenant is a little like what we've experienced in retail like the tenant comes to you and says.
I'll stay on your mall, but from at $50 a foot even though he is paying you a $100 a foot and what choice do you have you can't find another tenant to replace them, that's why retailers so impossible to underwrite today.
And the malls I mean, the tenant has all of the leverage and the tenant doesn't really feel like fixing of store he'd rather work on his online digital strategy, which is what Wall Street Award so you haven't ever.
Vicious cycle in the wrong direction in the physical retail having said that I believe people are going to of shop again, the physical retail.
It won't.
Where will it stabilized rents won't be higher.
I don't see that happening so.
<unk>.
I think I think but I'm not talking about the cost goes in the Walmart from I'm talking about.
Main Street retail New York City is the hardest thing underwriting today is like water Street level rents in places like Manhattan, where Theres no tenants.
And that in some cases, even I am sitting in our in our leased headquarters building here in Miami the this.
The buildings for sale.
The base of the building is.
The 30% retail flow.
How do you how do you underwrite it so it's tricky.
The lease not for sale, sorry, but I mean, we've looked at it and like we don't know how to underwrite it theres no obvious tenants to take all of the street level retail in the United States.
So.
Okay.
Thanks for the question.
On the multi side one.
In addition to selling an interest of ground lease might be attract.
Attractive.
And its long duration capital.
And there seems to be a lot of energy.
Including the fact that I start index.
Yes.
Yeah, Wow the market loves the business.
Yeah.
It doesn't really fit in our company very well because of the cash on cash yields one support our yields of our dividend so we'd have to grow it and spin it out I suppose.
It's not a difficult business to be in.
And it is encumbered by the agency debt long term agency debt throughout the.
Worked through that as well.
You're talking about the Woodstock portfolio some of the business in general.
So.
Anyway, well thanks.
Thanks for the question I mean, we've looked at it because obviously the market of doors that it pays of and they have loans against hotels they of ground leases on hotels that trades of the one cap.
Really.
But the market does what the market does.
Obviously, we should ground lease of our whole Arnold of enterprise.
So everything triple of the stock.
Okay. Thank you I would like to turn the floor over to Barry Starwood for closing comments.
Thanks, everyone for giving us your time today and again thanks, so the.
Of the incredible efforts of the Starwood property Trust.
Partners in making day.
Really a great year end and it's nothing compared to what I expect us to do for you. This year. So stay tuned thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.