Q1 2021 Starwood Property Trust Inc Earnings Call
Greetings and welcome to the Starwood property Trust first quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
And on 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 director of Investor Relations.
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 March 31, 2021 filed its form 10-Q, with the Securities and Exchange Commission and.
And posted its earnings supplement to its website.
These documents are available on the Investor Relations section on 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 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.
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.
And company undertakes no duty to update any forward looking statements and may be made during the course of this call. Additionally, certain non-GAAP financial measures may be discussed on this conference call and.
A presentation on this information is not intended to be considered and isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot FCC Dot Gov.
Joining me on the call today are Barry Sterne <unk>, the company's chairman and Chief Executive Officer, Jeff Day, Monica, The company's President Rina, Panera, and the Companys, Chief Financial Officer, and Andrew sauce, and the company's Chief operating officer.
With that I am now going to turn the call over to arena.
Thank you Zach and good morning, everyone.
This quarter once again highlighted the power of our diverse platform with distributable earnings or D E F $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 and the quarter and successfully completing two CLO totaling $1 $8 billion after quarter end.
I will start my segment discussion with commercial and residential lending, which contributed D E F $147 million to the quarter.
And 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 preexisting loan commitments. These fundings were offset by $1 1 billion and loan repayments, bringing our commercial lending portfolio to a record $11.2 billion at quarter end.
We continue to see strong credit performance and our loan portfolio with a weighted average risk rating improving from 2.722, 0.6, and a quarter and only one loan for $188 million rated and five category.
This long 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 two per cent of our loans are on non accrual and the remainder are 100 per cent current and we have seen nearly all of our loans, which required partial interest deferrals during COVID-19 returned to performing status.
And as COVID-19 began we granted 11 partial interest deferral for loans with a U P. B of $1 1 billion.
Today, we have only $141 million retail loan remaining on its partial interest deferral of $84000 I'm on.
Our weighted average LTV remains strong falling again this quarter to 61 per cent.
We continue to see our sponsors support the significant equity and their assets with $582 million invested and 715 million committed since COVID-19 began.
Consistent with this positive credit performance, our general Cecil Reserve remained relatively flat at $61 million as we have discussed previously the Cecil rules require that we take reserves on all loans, including newly originated loans.
And we recorded $1 $4 million and reserves on new loans and the quarter. We also saw reductions and reserved for repayments and for improvements and performance on existing hunk and.
As a reminder, these reserves are typically added back for de purposes.
However, during the quarter, we recognized a day loss of $8 million related to and unsecured loan for which we recorded a specific and GAAP seafood reserve last quarter.
Just two years ago, we discussed with you our first foreclosure on alone and that was net leased to a single grocery tenant who filed for bankruptcy. The 440000 square foot distribution Center and Montgomery, Alabama had a loan balance of 17 million and at the time, we established and $8 million GAAP reserve based on enterprise 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 day gain of $8 million, a very successful outcome for our shareholders.
Turning to our residential lending business, we securitized 384 million of loans and our 10th securitization for a net securitization day gain of $13 million and sold $87 million of our high LTV loans for a net day a gain of $4 million.
And the sale net of purchases of 209 million and the quarter, but our loan portfolio to a balance of 596 million a weighted average coupon of five 9% average LTV of 67 per cent and average FICO of seven and 32.
Over the past several months, we have worked to transition alone 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 and the quarter, bringing our total non QM and financing capacity to 2 billion.
With these new facilities, we expect to realize returns on our loan book that are consistent with historical level.
Next I will discuss our property segment, which contributed $22 million of distributable earnings for the quarter.
Credit performance remains strong and this segment with rent collections at 98 per cent and weighted average occupancy remaining steady at 97 per cent.
This quarter, we obtained supplemental financing of $83 million for what start to our second affordable housing portfolio. The.
And the upsize increase 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 level, which govern rents for the over 15000 units and this portfolio were recently released.
Higher median income for northern and Central Florida for this portfolio is concentrated resulted in a blended rent increase of $4 one per cent for 2020 one.
This is in addition to the $4 seven per cent increase released last year. These.
And these rents and create a new floor from which rents cannot decrease going forward.
Right the new maximum rent level, we did not increase rent on any of our affordable housing tenants last year due to COVID-19.
We instead began rolling out these higher rents on January 1st and we'll continue to do so over the next 12 months.
And 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 D E F 'twenty 4 million and in the quarter.
And our see MBS portfolio, we continue to opportunistically sell assets with $12 million of securities sold and the quarter for a net day gain of $3 million.
And special servicing.
517 million of loans entered servicing and 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 that's delayed fee recognition for the assets, which recently entered servicing on.
Our named portfolio ended the quarter at 80 billion.
And finally, and our conduit, we securitized $85 million of loans, and one transaction and profit level consistent with last quarter.
And 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 D E F $7 million to the quarter.
We acquired $86 million related to new loans, and funded 14 million under preexisting loan commitments.
These fundings were offset by repayments of 19 million and 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 and the quarter.
I will conclude this morning with a few comments about our liquidity and capitalization.
Subsequent to quarter, and we completed two CLO financing, our inaugural 500 million infrastructure, CLO, which was the first of its kind and our $1 3 billion dollar theory cielo the largest CRE CLO issued after the G F C.
Both represent a significant expansion of our credit capacity and our 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 unappreciated equity ratio of two three times per.
Pro forma for the two CLO. This ratio is two one times in line with last quarter.
This credit capacity and 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.
Thanks, Irina we are pleased with the performance for 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 Starwood property trust shareholders have earned a greater than 13% annualized total returns since inception, and late 2009, the highest and 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 and the coming quarters.
The credit of our CRE loan book continues to improve collections and very high and our base case modeling to Jay today suggests we will have little to no losses on our loan book as a result of COVID-19.
This more in detail later.
The valuations on our owned properties continued to increase at our markets today, we have approximately $1 $1 billion and unrealized gains 200 million more than we have disclosed previously and approaching $4 per share.
Our liquidity and access for some of the cheapest capital and our sector is unparalleled and we could issued new five year corporate bonds at 4% or below today, the lowest and 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 and 5% notes maturing in December at the open day September one 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-19 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've 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 and making CRE loans and 2015 as we felt the debt markets have gotten too aggressive in terms of pricing LTV and structure.
We slowed originations in 2015 and began to use our excess liquidity to add core equity assets into our investment portfolio, taking advantage of favorable dynamics and the market and becoming a borrower rather than a lender.
We purchased $3 $2 billion of property assets over a three year period of significantly higher cap rates and where the assets are currently valued today.
This property portfolio today has approximately $1 $1 billion and gains and it at our marks and carries a 17% annual cash return on our basis.
Our diversified model gives us the ability to pivot to invest and 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 and distressed and volatile markets and waited patiently for the markets to dislocate.
When lending markets for frozen last spring, we bought almost $1 billion of residential mortgage loans with term non mark to market financing at a 10% discount to where the same assets traded pre COVID-19.
These loans returned to par or higher soon after our purchase and most have already been securitized producing large games.
And exemplary returns for our portfolio.
We have increased the size of our C and B S and energy infrastructure portfolios when returns for accretive and use opportunities to sell down when we thought value had shifted.
This quarter, we completed the first CLO of its kind at our energy infrastructure business and after quarter and we completed the largest CRE CLO since 2008.
And 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 are proving the effectiveness of strategy and we are not done as we look for additional business lines, which which will allow us to continue this flexible approach to capital deployment.
The largest of our property assets as our 99% leased for 15000 unit, Florida low income housing tax credit for a life Tech multipart multifamily portfolio.
This portfolio was centered around Orlando and Tampa two of the fastest growing markets and 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% for the acquisition to recent sales and the low 4% cap rate area and we believe there is upside from there.
And 2018, and the state of Florida reduced property taxes by 50% on light tech assets as an incentive for owners to forgo 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 and Florida.
Last Friday, the state of Florida passed a bill H B seven O six one that removes the other 50 per cent of taxes, leaving these assets tax free as long as they remain and 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 was worth in excess of $2 billion today and after accretive refinancings, our remaining equity now returns of 30% cash return per year.
And our valuations we believe we can now generate over $1 billion and GAAP gains and approximately 900 million in distributable earnings gains in this portfolio.
As we told you last quarter, we continue to evaluate and 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 owned real estate portfolio.
80% 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.
Rina told you, we reserved and $8 million impairment on the Montgomery industrial asset that we took over at the same time for the Orlando asset and we sold it in the quarter for and $18 million GAAP and $8 million distributable earnings gain.
When we choose to ultimately sell the remaining Orlando asset now fully leased to Amazon and we believe we will report a gain of approximately $60 million.
Rate outcome for shareholders and statement on our platforms ability to reposition and difficult assets.
Moving to our core CRE lending business, we continue and our momentum from 2020 with a very strong CRE originations quarter of $2 2 billion with and 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-19 began and committed more than 100 million more put great value on the flexibility consistency liquidity and 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 and we've reshaped the characteristics of our loan book and the last 12 months.
Year over year, we have reduced both future funding and construction exposure by approximately half.
And 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 two hotels by 14%.
Family loans are seeing the most lender competition today and our spreads continued to fall leverage continues to rise and we hit a floor on our financing levels. We will pivot as we always have the sectors or other lines of investing we believe have the best risk reward going forward.
With optimism over the continued strength of the COVID-19 recovery credit spreads for many target assets have normalized to pre COVID-19 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 ROE to pre COVID-19 levels.
And at slightly lower Ltvs as demonstrated by our portfolio LTV, which decreased again this quarter to 60 per cent.
The scale of our platform has a lot of our manager to build a large team internationally with a focus on Europe and Australia we.
And we've seen tremendous opportunities and these less competitive markets, which have been slower to come out of COVID-19.
Our international portfolio increased 35 per cent year over year and now accounts for over one quarter of our loan book for the first time and we have large actionable pipeline. There today and are excited about the existing opportunities.
We're very proud that for seven straight years, we have won the NAREIT gold star in our industry for excellence and Investor Communications and reporting.
Given we were unable to do our biannual investor day and person due to COVID-19 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 Dot Starwood property Trust Dot com.
We created and every 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, and we discuss 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 and our portfolio got it would outperform as markets normalized.
We told you during COVID-19 that we felt very good about the credits on our book.
The 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 and our portfolio as a result of COVID-19.
Of course, the path of recovery could change, but that was 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.
And I spoke on our last earnings call about the transformational energy infrastructure CLO, we closed on the quarter and I wanted to talk today about the highly accretive C. R E CLO, we priced and April.
Our second CRE CLO was the largest post great financial crisis CLO at one point to $2 $75 billion.
And a tepid market, where spreads are 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 tightened pricing twice.
We picked up 6% and advance rate versus existing financing facilities and are LIBOR, plus 150 day, one bond coupon, what's inside our existing financing facilities, allowing us to get term nonrecourse financing with no credit marks and a return on our equity of more than 4% more than we were earning on financing lines.
Pro forma for the CRE CLO, we continued to maintain a peer group low 41% of our CRE loan book on Bank warehouse lines.
And with only <unk> 54 per cent of our balance sheet and CRE lending today CRE loans on warehouse lines subject to credit marks accounts for just over 20% of our asset base today.
And our re segment, we're thrilled to announce that Fitch upgraded our special servicer, LNR, which is named special servicer on over $80 billion and C. N B S assets to the highest rating possible C. S. S. One.
This makes LNR the only special servicer in the world with the highest rating.
Fitch cited our technology and the scale of our business, which allowed us to reallocate resources to a definitely deal with over 1000, new servicing requests and a very short time.
On behalf of the management team I'd like to thank our servicing team for their superhuman performance that earn a spectacular achievement that will undoubtedly lead to more agent business going forward.
S N C or starwood mortgage capital.
Our conduit originations business was the largest non bank originator of C. M. B S last year and has kept that momentum this year.
Rina mentioned, our Q1 transaction and subsequent to quarter and 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 it's 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 it to Barry and 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.
We are proud of our relative out performance 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.
Thanks.
Jeff and Rina, and Zac and and welcome everyone to this quarter's earnings call.
And I'm going to give you exhaust the detail.
And we want you to understand our business. That's why we did the webinar.
As we this is a company where we have the more you look at US I think the more you'll like and understand how we manage capital and and.
And how we've navigated this crisis.
I want to say that it's such an interesting period I mean real estate.
And isn't wayfarer and isn't peloton or.
We hit her with a bazooka worldwide.
Real estate hit us hit a wall and to come out of the COVID-19 crisis.
Definitely stronger than we went in with a better balance sheet no losses.
We think we'll be no losses from the COVID-19 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 you like to own this asset at this price.
And 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 and doesn't understand why they need more capital for this or that.
The model has proven to be incredibly strong and we didn't come out limping from this crisis, we came up galloping from the crisis, we've 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 and that position and we did.
I 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.
And as Jeff pointed out with the more than $8 billion of gains unrealized gains and our property book.
And we're pretty confident we can make the dividend.
Whenever you want.
And for quite some time, so I don't think there is a company that has anything like that and the other thing that I speak to is the 60% LTV and it's no longer on LTV. This is actually mark to market LTV with and checked by seasonal rigs and.
That's why we're here with no losses, because those really were 60 per cent ltvs and to demonstrate that borrowers putting hundreds of millions of dollars to shore up their loans and save their assets from the period of disruption of demand and I want to step back real fast and talk about the property market. There are five major asset groups and real estate industrial and multis, which.
And we've actually gained increasing exposure to on our loan book, but I've always been pretty tough for us because the cap rates have fallen because those are the two asset classes and investors are favoring.
Given that you can't live on your computer.
And industrial obviously has a play on E Commerce, and then Theres the big asset class, that's yellow, which is office and we're all watching as the office markets recover.
Jamie Diamond says he's done forever with zoom calls and I.
And I personally believe people will go back to the office more than people think and so.
A social event people, who are not well off don't have communication devices and their houses and don't want to zoom calls and for 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 with her and we have offices and 16 offices, all over the world and Tokyo and.
Europe London.
All over the world and the Middle East and they're back in the office and in the Middle East There are 100% on the office I'm not sure. If you felt any headlines and the middle East you'll find anyone's talking about work from home.
Same thing is true and Tokyo, China, they're back and the office, Hong Kong and it back and the off as we head into the off and so I think there are markets that will suffer clearly in New York and and San Francisco City.
Where we have no loan exposure are going to see some compression significant compression in net rents.
Rents for concessions go up Theres, such enormous shadow vacancy and those both of those markets, but that's not where we're really exposed.
And even in our equity books, we don't know assets and the city and the office sector. And then you had these two red light categories and real estate hotels and.
And retail and hotels and gone from Red to yellow and if you go down the curve to the budget and there. It's actually green Revpar is up those are mostly domestic travel hotels, and and it's becoming something and the infrastructure plan we.
That'll get better and better group business and international travel take awhile 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 luxuries, if it's a <unk>.
Fantastic.
And people will pay triple the rates to go to them on and Utah, where our one hotel here and South Beach, where on located had a record first quarter and $600 and night, and we probably thought we'd get to $800 and night.
People have a lot of money the nation is rich.
Has a 1.3 or four trillion of excess savings and.
And everything they own has gone up their house everything so the nation's balance sheet is up last night it looks like 15 trillion dollars.
People are well to do and and.
As a whole and that actually is across the wholesale so economic spectrum and that's not just the rich and they may be getting for richer as their equity books go up but people's pension plans are rising and and as a percentage obviously the lower and.
Classes that can help.
Unbelievably by the stimulus packages.
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 we were used to just the moniker comes and we all of US every day asking for more for equity.
And it's hard to generate the cash on cash returns, we have and for those of you who've been with us for.
I think for seven years, we go on the affordable housing portfolio I said that we were buying assets that I personally never wanted to sell and I think in 11 years and I don't think I've ever sold a share of stock and and.
And 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 will be exciting for the for the company and now with the pending passage of this legislation in Florida.
On the 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 and the value of our sale.
The other thing I want to point out is that we're responsible for ESG is a big deal to us and.
And that comes and everything we do.
We could have increased rents and therefore for housing portfolio of 5% I think rina 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 and the affordable housing space, even if they have a job.
Now, we'll be paying catch up and gently increase rents and moving them to market but.
And I think it's nice to know that companies are doing their part to help America when it needed help.
And I.
I wanted to say one more thing I mean, we do have a fortress balance sheet is the best and the business.
I used to and <unk>, Jamie Diamond at J P. Morgan you say, we have a fortress enterprise and now I think Starwood has a fortress balance sheet and these two cielo as we completed recently and particularly the second one and the and the energy group means.
And with a fundamental game changer for that business, we had a.
And the issue as we always do because we're not interested and quarterly numbers as we are at the long term.
Duration and feasibility of our business, but we had a mismatch we had.
Net debt 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 is a problem like if you have 10 year assets and five year debt you have to roll that debt and your five and that inherently creates a problem, we called for savings and loan crisis waiting to happen and financing short against long term liabilities.
So with the CLO, we've cleared that up and now and your match funded and you won't see a penny of earnings from that but that's fundamentally different risk profile for our shareholders and that's the confidence we have and the durability of our of our dividend and hopefully overtime.
Perhaps being able to increase it. So we are really pleased with the efforts of the team. There is 350 odd people rolling and the same direction and Starwood property Trust. These days and we have a terrific board is engaged and shows up and ask tough questions and challenges us and we just wanted to say thank you very.
Much for everyone for the recovery of our stock hit an all time high.
Three weeks ago, and it deserves that all time high because getting a 760 dividend and the world where the 10 year's $1 58 from this collection of businesses and assets and 60% LTV loans as Julia astonishing, maybe someday, we'll actually get that investment grade rating. We covered and then this will become a virtuous cycle and we will be the largest by far and almost.
<unk> 20 billion and our company today, and 1918 8 billion and this enterprise will be better bigger. So we are accelerating our efforts to find more loan opportunities around the world, particularly in Europe, and we're staffing up I think we have seven or eight people. There. We're also looking at Australia and.
And we'll do anything and we think is attractive long term risk reward for the for the shareholders. So thanks, and we'll take questions.
Yeah.
Thank you we will now be conducting a question and answer session.
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Our first question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Congratulations on a number of accomplishments and the first quarter.
I guess the starch.
Yes, Jeff I think you've touched on on the opportunity to reallocate capital as you target. The most attractive investments as you look out six to nine months the balance of the year.
And what what business lines do you think youre going to see kind of a net increase and capital allocation on mixed basis, what what areas seem less attractive right now where you think things may.
Get allocated away.
Thanks, Dave and appreciate it.
Last year, we probably said non QM look really interesting and we thought the energy infrastructure business looks really interesting I would say we agree on both of those still we were able to get out of the gates during COVID-19 and into the early part of this year ahead of most people and the transitional lending space. So we've been able to put on you know very accretive high volume of loans.
We earned more on a 13% IRR than we historically do on the CRE large transitional loan book, we did more than we expected we're going to do more on the second quarter than we expected and I think there is a moment in time here for us to continue to do really accretive stuff and our core lending business.
I would say today, we're equally excited about about those three businesses the MBS as kind of a steady state business. We brought our book down from about 1 billion won to just under 700 million and and we're sort of comfortable with it there if an opportunity arises at wider spreads like we did last year and COVID-19. We will we will continue to add there and Barry you made the point about the prop.
Pretty book being very difficult to grow today, given where cap rates are and 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 CRE lending business will take up the lion's share of capital and the near future.
Yes.
Net.
Before it goes on I mean, we are looking at other business lines and.
Including acquiring other companies and.
We're here for quite active in that vein, it's remarkable how difficult is convinced boards to give up the flag ore and.
And the waste.
And.
Yeah.
Whether they have no hope.
But it's difficult and and we have multiple situations that we have tried to.
Meg consolidated parts of our sector. So.
I'm thinking we might get something done.
And.
We think it will be accretive to us and frankly, one on one would be more than two so.
I think.
Whatever reason some board members like being board members more than they care about their shareholders.
Thanks.
On the CRE lending side.
Can you talk about what you've seen on the competition front most of your peers there on a lot of them for on the sidelines many until the last month or two so.
How has that impacted the opportunities there and how much spread tightening is that caused her or are you seeing that competition play out and otherwise.
And before Jeff goes I mean, the one thing that's interesting is that seem to US market has now passed the bank market. So so that you can finance on the.
Its presence and yes were very tight so that that is becoming a bigger competitive and wells fargo's balance sheet for example.
And maybe we ourselves are.
Retry and films business. The conduit business has been absolutely the star and confusion. They turn we've been talked about and a while but they turned their book like 11 time per year, so they're a manufacturer.
From <unk>.
And that's our loans.
And I think we were we won last year, we were the largest non bank and largest non bank contributor and the country. So and that's a nice incredibly great business for us they are running terrific.
Company and.
For Division I should say and then what were you going to say.
He had asked about where the competition is coming from and and you know realistically probably only our largest competitor and 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 and so I'd say the investment banks are for our biggest competition. There is certainly some debt funds and and that's why we've looked more internationally, where we have probably the largest staffed and anyone but one person and and we are we're growing that book pretty dramatically and we think this year, we'll continue to I could see that book going from 25% of our 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-19, a little bit slower and there's just simply less competition. So.
Well, what we will see so the new the.
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 the large complex zone.
Thank you. Our next question comes from Charlie <unk> with J P. Morgan. Please go ahead.
Hey, good morning, everybody. Thanks for taking the questions.
Barry I wanted to follow up on on your views on the office sector you know.
And just thinking about it from a high level kind of beyond.
Current occupancy and rent collection trends I think we'll have.
Some more clarity as people and the US go back to the office more and more over the next few months, but.
It seems to me that the current leases or are going to play out and.
And the kinds 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 and and and I realize this is a moving target here and the leases are longer term, but.
Do you think the tenants when those leases come due and and will take a harder look at their real estate footprint.
And if there is potentially a kind of more fundamental shifts that could occur here over time and I guess ultimately is this more of an owner problems on a lender problem.
And so certainly less of a lender problems on their own and problem.
And it was 60% Ltvs and your book.
I think it is the ZIP code specific or city specific.
And I think.
The states of Texas, Tennessee, Florida and have no taxes.
And from Washington has no capital gains tax there incrementally benefiting.
And there is less pressure on.
On the cost structures and Miami, we actually went out with the mayor of Miami last night, Jeff and I and and they produce the millage rates and town. So taxes are going down real estate taxes are going down no income taxes real estate taxes going down and budgets going up.
Surplus is going up.
The opposite of the cycle, you're seeing and the Blue States.
Where services.
Income taxes are going up.
Cost of labor is going up and union benefits are going up real estate taxes, because buildings don't vote are going up and at the same time rents are going down.
Frequencies are rising companies are relocating to better and cheaper places to live and.
And.
It is is seriously on issue.
I think and 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 rents if you if you happen to be a developer and.
We built the building here and rents are 25% higher than we underwrote and is at least 1 billion and slightly less.
So started property trust lease down here is now 25 per cent under market.
No.
I think it's about basic real estate right and Theres enormous issues now and these dark blue cities and the worst part is the legislature's of these states actually want property values to fall.
On that because it's more affordable for their people and that's a direct COVID-19 from a new York legislator and Albany. So that's a dangerous game to play and that is <unk>.
Very difficult real estate environment, and one of my friends, who you would know as a multibillion dollar on the tons of apartments, and New York City. So is on.
And just a janitor I can increase my ran and I can't collect them.
Can't renovate because they won't give me your return on capital I put in my buildings and I'm, just I'm, just and janitor and and.
You can see the future if it doesn't change your go to Mumbai go look at these gorgeous British buildings that were built and when when UK occupied India and.
And go look at the disrepair, there and where landlords had no incentive to fix the buildings up and theyre falling apart and falling down and they were once beautiful buildings.
So you need to.
Tsunami change on the attitude.
And these dark Blue states and.
It's a travesty, Dave so much going for them is so much culture museums art.
Sports teams and well and.
And.
But the attitude is not conducive for excess gains and real estate, that's for sure and don't forget we're not talking about.
You just you need you need rents to go up right you need rents and go up it's not holding your own and expenses going up there's going to be and your net profits are going down and so on the margin. These big cities are in trouble.
Because I think I think the J P. Morgan does take 80% of space that they used to have 100 on the other hand by the way Starwood made the investment and the we weren't pipe.
And just kind of reminds me of you always make money on this and being the third on our real estate well somebody can make money and short term co working because if you're a small tenant by would you ever leased space for 10 years and.
And so our bet is that people come back in for more flexible approach.
And and that becomes a real business and United States as it has already become and the UK and other places that is not an issue for us as a lender we just want the building before.
And 50, something like 53% of we works tenants are actually.
Salesforce Amazon.
Google their credit tenants, where they where they are using them as a service which was the original vision of the company. So I think that's fine for office I think we're going on we're going to see a different on 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 10000 square foot tenants changing.
And the way they think about office, especially since you don't even know.
And then we were and the situation ourselves we have a group of people and Connecticut that want to work and New York.
And we just don't wondering if youre going to show up and they want space with our 'twenty going to show up for 50, and we don't know because I don't think and like the commute and maybe they want to come for two days and work from home for three days. So Mike Let's go to the shared office space like that and then we'll see what it is and if people don't show up we can shrink or grow it.
And I think you're going to see that over and over again across the country as people try to figure out where the line is between asking people to come back to the office and then being sympathetic and empathetic to.
What do they call it the yolo generation.
Kids, who want to work from Mont.
<unk> talk on Fridays, and and we'll see how this plays out I'm not in that camp the real estate guys and general all of US went back to the office and and here in Miami.
And sit with Jeff and Rina, and Adam and and so on product who runs our co runs on energy group I mean everyone's here, we're 100% on the office, so and nobody is complaining.
I appreciate all the color thanks Barry.
Next question Jade Rahmani with <unk>. Please go ahead.
Yes, thanks, very much for taking the questions.
Okay.
Sorry, seven another call as well.
Just wanted to ask you.
If you think that hospitality is a win on a post COVID-19 as state times potentially increase and you know what was that.
Is that something where you think there could be and opportunity and lending.
Seems that a lot on lenders are shy on that space, though.
And it has to be Super cautious.
For the recovery is probably the markets are ahead of themselves on hotel stocks and my opinion, particularly the rights and.
And the.
The there is going to change if you are working from home or working from smaller offices or where our office is closer to your house you are.
Probably going to take more corporate team building meetings, you are probably going to have a different kind of asset there'll be there may be more meetings because people have to get to know each other and the company and they are not getting to know each other and a.
And an office building so you might see that it's just too early to tell how that changes I think.
The experiential high and take under people too.
I call those things and Cowboys on backpack when they go on it.
And.
And camping whatever they call that.
Rodeos and whether you call that when they go or whatever so.
And there'll be there'll be people, who do that they'll take them out and they'll do and team building exercises and I think the tech companies in particular, which are the Latin and the most likely except working from home because they are so competitive with each other and that's how they compete you can work from Mars, We don't care, just send and you work so but they will do team building exercises and they will go to Vegas, and they will probably go to.
On.
Montana for some ranch and that's what I wanted to talk about like when you go Dude ranch area and.
And does that acceptable today doesn't do that ranch.
Dude and do that ranch.
And so I think it's going to change I think what we were most worried about are the Marriott Marquis the 2000 and room hotels in Manhattan that really needed group west the western and Atlanta.
And it's at 92% group building I used to manage it so and what it is.
And those business and that's going to be awhile, and there's going to be tremendous pressure on rates.
So you know on Airbnb as a as a for US. So you have to now think about how you're differentiating yourself, having said that the summer is going to be a free for all you've seen the stats.
73 per cent of Americans are planning a trip and the highest and history was 37. So it's going on Americas go on a party. This summer like 1919 and $29 90 999.
And I don't know if 19 and 20.
And I think our I think.
It's going to be though I mean, if you go anywhere you talked to the ski resorts with like ASP and everything is full and people are booking booking and bookings through their earnings. This morning, and said you can you can cancel at any time. So there's a lot of people bookings 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 mayor and Mckee and New York, but.
And Virginia Beach, I mean can't Kuehne, and it's going to be the numbers will be astronomical and and <unk>.
And thats going to be a bubble right that's going to pass we're gonna 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.
It's an Audi and we were talking about yesterday, it's an event.
And the grocery stores had their best years, and the history of the world not only was that and Audi.
But it was the only place open.
To get out of your House, you said something you don't really want to do just went shopping and at least with something to do so we look at these things even on the equity side, and we kind of scratch, our heads and wonder what the trajectory will be youre, especially as the door to ashes and the and the Amazons do last mile delivery and China now <unk> grocery anchored retail so it is.
It's gonna be wild to watch.
The real estate industry is that these new technologies and new ways of living change.
Yeah.
Our next question comes from Doug Harter with Credit Suisse. Please go ahead.
Thanks, Barry a little bit ago, you mentioned.
Possibly looking at some other business lines, certainly any more detail you could given the give on that or kind of what you think what types of things. We're looking at that could be complementary to <unk>.
TWD is existing well I'll say that Mike.
Our diversification and 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 on road.
ROE that we intended to execute out I think it's better and 13.
And as the return on our remaining equity subs, but the original book was like six. So this thing has been a problem and.
And it's not it's probably the one part of our company.
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 both.
Grow the book, we were limited at first because we didn't have we had two year facility for.
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 we've done and how many we don't.
On 11, Securitizations and non QM.
And we just did our 10th Youll see us do a lot of these and we need paper right, we need to be project finance, but that business is on ROE will continue to increase.
Every loan that burns off where we sell and every new deal raises the ROE and the contribution to the company's earnings So that's up.
There are lots of businesses that might actually fit and the Trs that are not balance sheet businesses will increase on ROA.
And I'd, rather not talk about them because many of our competitors are on the call with us so.
We'll be judicious and and smart, we obviously have a good currency that we can use today.
And plenty of cash and access to capital. So we're not we're just kind of non overpay and try to find businesses that fit really well with ours and.
And we want and we think we're a finance company were classified as real estate.
Mortgage trust, but we are we'd like to be considered more of a finance company and we have considerable room and our Trs Trs for more taxable net income and that again, usually means it's a much higher ROE business, our fee based and and.
We have several candidates, we'd love to buy but so far and Iraq.
So that I would add that we are now in businesses that are businesses that are parents are capital group is in and has expertise and you probably won't see us go far afield from that but there are certainly things within the.
The expertise that we can add on.
Great I appreciate that.
Next question, Tim Hayes with BTG. Please go ahead.
Yeah.
Hey, good morning, guys. Thanks for taking my question.
Just a follow up I get to that kind of is.
And how big do you think the investment portfolio can get out.
M&A based on your current capital base right now.
Well.
We have one of our competitors that's for $5 billion or so market cap against our seven plus billion market cap and has a larger loan book that out from 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 it could be larger and scale today and certainly if cap rates come out would love to add some property assets.
To get that percentage back up higher and we love the durability of 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 and without adding businesses at which it would be difficult and.
Non QM business and the large lending business are the two.
And we.
There is a gap and our lending the riches small deals and and we tend to do what was the.
The average size of a deal on the large loan lending, but on 180 484 quarter and so there's a big hole on the middle and we would have to reorganize and start a new business sort of on middle market lending, where we would hold a $50 million loan instead of selling it.
That might open.
Several billion dollars of balance sheet.
So.
That's I would call it a core business just.
Our new once niche between what we do the big deals we have a problem and refinance on 100 million on a multi and by the time you're done financing you put up $12 million right because that's what the medicines after when youre done or what we keep $20 million. So we have to do giant deals.
And.
With the book and then but that is a business. We just have to organize yourself to do middle market loans and balance sheet, though.
Which would.
Would be one of the things we looked at acquiring somebody who does that more often than we do that so.
I think.
There are other businesses again, we won't go into but that would fit nicely.
And our and our tent.
Yeah.
It's hard and we pay a dividend.
And what two five times the average equity REIT.
No.
And we can't we can't buy industrial and our.
And if we can't compete on the cap rates are three and a half.
So we can support the dividend doing that triple net same thing.
So there are businesses that were blocked out of.
Based on our cost of capital really the cost of our dividend so.
And we need to support that dividend and cover our operating costs and of course, one of the other reasons.
<unk>.
Big is better as our overhead shrinks as a percentage of our assets and it makes the whole business high ROA. So and were 18 8 billion and we have about a $10 billion 11 billion loan book. If you include our sale of about 14 and at 14 and a half so.
The other guys more like 18, and a half and their loan book that we have all these other businesses too so.
We can clearly stretch our loan book.
We're gonna have Jeff mentioned, we did what we did $2 1 billion last quarter. You said, we do two plus billion dollars this quarter.
And we're.
And I had dinner with Jeff I mentioned, the mayor of Miami, There was one of our borrowers was at dinner too and.
And I've got like for other deals for us that's our niche we want on the repeat customers with our borrowers where their friends and we move and shake with them, we're flexible rates alone on the way they need it and the seniors all taken care of like where the guy and making the real estate that and the middle and.
And not having a single loss and COVID-19 and I think we've lost like and you have one loss and our book or two losses and.
And like 12 years.
Yeah.
Holy Mackerel, that's a couple of cycles. So it's not so bad.
Anyway.
Next question.
And that's a lot of good color I'll leave it there and thanks Barry.
Our final question comes from Don <unk> with Wells Fargo. Please go ahead.
Yes.
Mentioned that European lending could go up to <unk>.
Third from 25% net loan portfolio.
And lower but I guess are there any sort of other risks and Europe. So for example, do you view financing risk is a little bit higher there.
And I would think that may be side by side, you'd rather put a dollar out and the U S versus Europe from a risk perspective, but maybe I'm just wrong just wanted to get your phone I actually don't don't agree with that.
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 that German office markets, Hamburg, Munich, Frankfurt, Berlin, and we don't have any loans, there, but we'd love to have them.
From its cap rates for 3%, so they're not going on right at 7% that for us.
And we'd be very constructive on London today.
And London versus New York, and San Francisco, and they're not they're not trying to change the social system.
And one and we'll get through Brexit and and.
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.
A lot of middle East money that may cause and kind of calls on homeaway from home and that's not going anywhere.
Let me to completely irrelevant comments, but I forget they've got to make it Mike Mike and my comments.
One of the reason and 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 on we have a 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 rock.
At the moment, and we will try not to screw that up but.
And I think I think that we are poised to add loans and all of our business lines because of that I mean, we did a really good job I think and managing through the crisis and.
And the other thing is that we're getting our biggest problem right now is repayments huda thumped and when we ran multiple schedules every quarter through the crisis extending the maturities of these deals and assuming the lenders couldnt pay us off.
And every day I walk in and somebody mentioned for me somebody paid us off so that's another source of funds and sadly I mean, we don't really want those repayments, but then on and our control and we just got to replay the capital so loan repayments are up dramatically.
I would add you talked about financing there are vastly more financing counterparties for us today in Europe, and there were five years ago and Europe, when we started making loans there and a lot of our peers and the U S rely on the CLO market when they want to get away from bank warehouse markets and Thats.
And that's really not an option when you go to Europe, we've been a significant and cereal 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 and we have bank financing lines now more of them with more people in Europe and then we had before so I think as the banks continue to move in that direction and.
Makes us more comfortable and our ability to sell a notes there makes us able to distinguish ourselves.
Thank you.
I will now turn the call over to Mr. <unk> for closing remarks.
And thanks, everyone for joining us and look forward to talking to you and three month's time. Thank you so much.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
Okay.
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