Q4 2021 Starwood Property Trust Inc Earnings Call
[music].
Greetings and welcome to the Starwood property Trust fourth quarter and full year 2021 earnings call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
I didn't want you require operator assistance during the conference. Please press Star zero on your telephone keypad and please note that this conference is being recorded.
I'd now like to turn the conference over to Zach Tanenbaum head of Investor Relations. Thank you you may begin.
Thank you operator, good morning, and welcome to Starwood property Trust's earnings call.
This morning, the company released its financial results for the quarter ended December 31 2021.
And its Form 10-K , with the Securities and Exchange Commission.
Posted its earnings supplement to its website.
These documents are available on the Investor Relations section of the company's website at Www Dot Starwood property Trust's 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.
It may constitute forward looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
I refer you to the company's filings made with the SEC.
For a more detailed discussion on the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Company undertakes no duty to update any forward looking statement that maybe made during the course of this call.
Additionally, certain non-GAAP financial measures will be discussed in this conference call.
A presentation of this information not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliation of these non-GAAP financial measures the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at Www Dot FCC that.
Joining me on the call today are Barry started like the company's chairman and Chief Executive Officer, Jeff The moniker of the company's President.
We end up in the area of the company's Chief Financial Officer, and Andrew sauce, and the company's Chief operating officer with that I'm now going to turn the call over an arena.
Thank you Zach and good morning, everyone. The fourth quarter capped off a record year for us with distributable earnings or D E F $335 million or $1.10 per share for the quarter.
And $794 million or $2.63 for the year.
D. In both periods include a $191 million or 62 cents per share gain related to the sale of an interest in our newly established what start affordable housing investment find which I will walk you through later.
Throughout 2021 we were active on both the left and right hand sides of our balance sheet with a record $16 $7 billion of new investments across business is funded by multiple capital sources, including an equity issuance corporate debt and CLO.
I will start my segment discussion this morning, with commercial and residential lending, which contributed D E F 126 million for the quarter.
In commercial lending, we originated 4.4 billion across 33 loans in the quarter, bringing our full year volume to $10 billion across 72 loans, the highest origination quarter and here in our 13 year history.
Of the full year amount, 42% with multifamily and 15% industrial contributing to the transformation of our collateral mix, which is now 27% multifamily versus 16% a year ago.
During the quarter, we funded $2 6 billion of new loans and $244 million of preexisting loan commitments with most of our funding back ended to the last 35 days of the quarter.
We continue to see increasing lending opportunities across Europe , and Australia with international loans, representing 33% of our fourth quarter originations and 28% of the full year.
The $10 billion of loans, we originated this year were 100% floating rate and 98% of our $14 billion a year end balance is likewise floating rate.
We maintain LIBOR floors are nearly all of our domestic loans as rates were rising our weighted average floor has declined as some of our higher LIBOR floors have repaid.
Our domestic loans it started the year with a weighted average floor of 141 basis points, which is now 66 basis points today.
Our existing above market, Florida will become less impactful to earnings over time as older loans repay.
During the quarter, we received $600 million from loan repayments and $64 million for me note sales, bringing total repayments for the year to $3 7 billion and a note fell to $330 million.
We're only a third of our 2021 repayments were in the office sector, which is now less than 30% of our loan portfolio.
The credit performance of our portfolio continues to be strong with a weighted average LTV still at 61% and a weighted average risk rating falling to 2.6 this quarter.
Our seasonal reserve remained relatively flat to last quarter at 59 million with reserves for new loans, mostly offset.
By a $7 million charge off related to alone on a Chicago Department store out parcel. We previously impaired this loan for GAAP purposes, and recognized the reduction to D. E. This quarter due to unexpected sale of the asset and a corporate guarantee that we previously deemed to be partially collectible.
In our residential business, we acquired $1 8 billion of loans during the quarter, bringing our total purchases for the year to a record $4 $5 billion.
Our on balance sheet loan portfolio ended the year at $2 6 billion, a weighted average coupon of four 2% average LTV of 67% and average FICO of 748.
$1 billion of our year end balance represents agency investor alone, which we acquired Opportunistically and which carry coupons that are approximately 90 basis points tighter than non QM.
Subsequent to quarter end, we sold 745 million of these loans to a third party, bringing our agency investor loan portfolio to $360 million today.
On the non QM side, we securitized $870 million of loans in our 14th and 15th securitization this quarter, bringing our full year volume to six securitization totaling $2 3 billion.
Our retained our MBS portfolio ended the year at $250 million.
Next I will discuss our property segment, which contributed $203 million of D E N the quarter.
As discussed on our last earnings call during the fourth quarter, we established the Winstar fund to hold our over 15000 affordable housing units in Florida. The fund was actively marketed and an aggregate 26% interest was sold to sophisticated global institutional investors at an asset valuation.
Of $2 3 billion.
You will notice a change in the presentation of our financial statements as a result of the accounting for this fund.
For GAAP purposes, the fun follows investment company accounting with investments reported on its balance sheet at fair value and changes in value recognized for GAAP earnings each quarter.
Because we serve as managing member we consolidate the accounts of the fund into our financial statements, which means we retain a fair value basis of accounting for this investment.
Due to this accounting change we recognized a $1.2 billion increased GAAP equity for the step up of 100% of our existing basis from depreciated cost to fair value.
We received cash for the 26% interest that was sold you will see a gap to D. E adjustment for our recognition of a $191 million D E gain related to this portion.
Yeah.
Prior to establishment of the fund we upsize the debt of Wood star one by $163 million in October at a coupon of LIBOR, plus 211 with LIBOR capped at 1%.
Our refinancings to date for this portfolio totaled $350 million more than fully returning our original equity basis in this investment.
In connection with the upsize, we wrote off deferred debt issuance costs of $5 million, which flowed through both GAAP and D E for the quarter.
Despite both the gain and the refinancing generating distribution requirements, we did not pay a special tax distribution.
This is because we were able to meet 100% of our distribution requirement via our carryover dividend from the fourth quarter of 'twenty 'twenty and a full four quarters of dividends in 2020 one we.
We have now largely exhausted our dividend cushion and will not easily be able to shelter future games of this magnitude.
Next I will discuss our investing and servicing segment, which contributed to a $44 million in the quarter.
This year proved to be another record year for our conduit Starwood mortgage capital, who completed two securitizations totaling $207 million in the quarter, bringing our total securitization volume for the year to $1.2 billion in a transaction.
And our special Servicer, we obtained six new servicing assignments totaling $5 billion during the quarter and 26 assignments totaling $21 billion during the year, bringing our named servicing portfolio to 95 billion the highest level since 2017.
Our active servicing portfolio remained steady at $7 3 billion at $500 million of resolutions were offset by transfers into servicing of the same amount.
Concluding my business segment discussion is our infrastructure lending segment, or Sip, which contributed D E of $12 million for the quarter.
We acquired $427 million of loans in the quarter, bringing our total volume for the year to $772 million.
In the quarter, we funded $411 million related to new loans and $17 million under preexisting loan commitments.
These fundings outpaced repayments of $148 million, increasing the portfolio to $2 $1 billion from $1 8 billion last quarter.
I will conclude this morning with a few comments about our liquidity and capitalization.
We continue to focus on nonrecourse and non mark to market financing since quarter end, we completed two CLO, a $1 billion CRE, CLO and a $500 million infrastructure CLO.
We also completed our fourth sustainability bond issuance.
Five year 500 million dollar issue with a fixed coupon of four and three 8%.
This is in addition to our fourth quarter capital raises where we issued $400 million of three year sustainability bonds at a fixed coupon of three and three quarters percent and raised $393 million of common equity at a premium to book value.
We are able to issue these bonds given our unique platform, which has investments across the green and ESG spectrum, including loans on Green certified buildings and commercial lending loans to homebuyers within residential lending affordable housing within our property segment and renewable energy within our infrastructure segment.
In addition to financing capacity available to us via the corporate debt and securitization market. We continue to have ample credit capacity across our business line ending the year with $6 9 billion of availability under our existing financing lines unencumbered assets of $3 $4 billion and an adjusted debt to unappreciated.
Equity ratio of two three times, which is down from 2.5 times last quarter.
With that I'll turn the call over to Jeff.
Thanks Rina.
2021 was an incredible year for Starwood property Trust and we deployed record amounts of capital.
All of our businesses performed extremely well and we.
We're able to take advantage of investment opportunities globally across business lines.
Our seven investing soldiers deployed a record $7 $1 billion in Q4 and $16 $7 billion for the year.
The most among our peers.
Believe the current environment gives us a unique opportunity to deploy accretive capital globally.
Our unappreciated book value was up over 20% this quarter to $20.74 at the highest level since or sway spin in 2013.
Our resulting price to book multiple is 1.12 times.
It can be below the one four times, we ended 2019 up.
The vast majority of our previous fair value marks were validated by the wood store transaction lending credibility to our internal valuation process for marketing these assets.
On a fair value basis at our marks on our property portfolio our price to book multiple is just over one times.
We've been patient with a couple of reasons and it raised equity at an average price of the underappreciated book value multiple of one point to four times since inception.
We've done so in part to keep our leverage low in order to Derisk our balance sheet.
Lower leverage and lower risks should imply a lower dividend yield.
We continue to believe our uniquely diversified company with only two three times leverage and a highly accretive businesses.
And we'll again traded to a higher premium to book value in the future that's a lower dividend yield.
The business environment continues to be attractive for us and we have a large opportunity set of investments to choose from particularly in Europe , and Australia, where we have continued to expand our footprint with 28% of 2021 investments being in Europe and Australia.
We accretively raise debt and equity capital over the last three months to fund increased volumes across our investing sectors.
We also recently issued two fellows to further derisk our balance sheet.
We had $6 $9 billion of credit capacity. In addition to excess unencumbered collateral that gives us the unique ability to incrementally raise over $1 billion each of corporate debt and term loans to continue to fund the robust pipeline in front of us and we expect volumes to remain elevated in the near term.
We have financing capacity and 32 warehouse facilities across 18 banks and are not reliant on any one counterparty.
In total we exceeded $5 billion of Securitizations and CLO in 2021 .
It was a very busy year.
As Rina said in Q4, we originated $4 $4 billion in our CRE lending segment and our theory loan book inclusive of senior loan participation sales with over $18 billion today.
Three quarters of the record 33 loans, we wrote in Q4, where multifamily or industrial.
Both are records for us and our funded multifamily loan book is up 138% versus a year ago to almost $4 billion or 27% of our loan book and is on pace to become our largest lending sector with a robust pipeline and $1 billion of unfunded multifamily commitments coming on the balance sheet over time.
We expect reported another strong quarter of originations in Q1 and have closed 1 billion of loans in Q1 to date again, 75% multifamily and industrial and have well in excess of that in the process of closing.
This floating rate book was built to outperform in inflationary environments and overtime will benefit from the cycle we're entering.
Our weighted average LIBOR floor has fallen almost 50% from last year and it's headed lower at the same time that LIBOR is expected to head higher.
We expect to make more money, if LIBOR falls before curve and that will be expedited in 2022 above market legacy LIBOR floors continue to burn off.
With loans closed to date are funded CRE loan portfolio today is approximately 60% post COVID-19 originations and the credits of our book continued to improve with our weighted average risk rating down to two six in the quarter.
The post Covid recovery is best seen in our hotel loans occupants.
Occupancy was up over 40% in our portfolio last year and NOI at our hotels, which was negative in 2020 , it's almost $300 million in 2021 and expected to head higher this year.
In capital markets, we priced our third $1 billion CRE CLO on January 20th into a market that is digesting records CRE CLO supply.
The 1.63% average bond coupon, we priced our CLO out was 15 basis points cheaper than the 1.78% average coupon of the other five deals that came so far in Q1, both before and after us.
For the other five deals at 100% multifamily collateral, which should always price to a lower cost of funds and the only other mixed collateral deal close to almost 40 basis points behind our deal.
Our CLO increase returns on our portfolio by 200 basis points on that collateral and.
And we already have collateral to issue two to three more CLO opportunistically in 2020 two.
In summary, the bond markets like the Starwood name and our credit process, and we were able to source cheaper liabilities because of that.
Yeah.
Our residential non QM lending business ended a record origination year with another strong quarter purchasing over $1 8 billion in loans and securitizing $900 million in the quarter.
Subsequent to quarter end, we sold over $700 million of agency industrial loans that we bought Opportunistically in 2021 .
With that sale, our upcoming securitization and a significant increase in our non mark to market financing facilities. We believe we will be able to operate our residential business almost entirely with non mark to market aggregation financing and term off balance sheet securitization funding.
As interest rates increase we expect lower prepayments, which should increase the returns on our existing retained portfolio.
After adding $1.6 billion of loans in 2020, we were able to add a record $4 5 billion of loans in 2021 $3 5 billion of which were non QM and are off to a strong start again in Q1.
In our property segment Rina spoke at length about our wood starts though.
I will add that management has observed continued cap rate compression in the sector since our sale and we expect income on these properties to continue to rise with MSA incomes in the fast growing central Florida market.
As a reminder, these rent increases are determined by HUD based on average median income or a M. I.
Three years ago.
Because of the recent increases in a M. I are not yet reflected in the three year look back we expect the pace of these rent increases to continue rising going forward given wage increases in Florida. During 2020 in 2021 that will not yet be reflected in the calculation of rent increases until 'twenty 'twenty, three and 'twenty 'twenty four.
And our bass pro Master lease portfolio, we benefit from a strong credit with significant EBITDAR coverage of 5.1 time or 6.5 times, including their credit card business.
Our long term lease benefits from a CPI based step up provision every five years, which will step up significantly for the first time. This September .
The anniversary of our lease commencement.
Yeah.
With the embedded gains in our book, we believe we've created material shareholder value. After taking this quarters, what's their game at our marks management believes we have nearly $4 per share in the gains still on our books, giving us unique flexibility across market cycles.
And Ruth that's M. C was again, the largest nonbank see MBS loan originator in 2020 one.
We hedge interest rates and credit exposure in this business and it continues to earn consistent high quality gain on sale margins for the firm across market cycles.
Our special Servicer was again affirmed as the only C. M B, a special service with the highest S&P rating.
This business also made consistent high ROE contributions in 2021 .
It's in servicing continue to resolve.
Our subordinates the MBS portfolio was significantly smaller than it was a few years ago and continues to perform very well.
Our <unk> platform is uniquely positioned with decades of experience access to terabytes of data and a robust underwriting infrastructure to continue to find ways to invest accretively.
Rina mentioned, our Sip portfolio increased to $2 $1 billion in the quarter.
We invested $771 million this year at a 14.4% optimal IRR in a post acquisition book continues to lift the overall portfolio yield is lower yielding loans acquired from GE in 2018, repay and become a smaller part of our portfolio.
We continue to diversify this book across power and midstream assets and markets and importantly, also continued to diversify our funding sources, having completed our second actively managed $500 million CLO.
Our ability to to diversify funding will continue to drive our pace of investments as we take a slow and steady approach to this business that continues to improve.
Our team is best in class and has tremendous experience in this sector and we are constantly looking at new accretive low risk areas to lend into and are optimistic we will continue to diversify and grow this business in the coming years.
Management is very pleased with the performance of our company in 2021 and we are grateful that shareholders have begun to recognize the power of the unique diversified platform, we have created with.
With nearly $4 per share in additional D games that we can harvest when we choose we believe our company is undervalued on various earnings price to book value and dividend coverage metrics and we believe our bond like returns are durable across market cycles.
With that I will turn the call to Barry.
Thanks, Jeff Thanks, Rina, Thanks, Zach and good morning, everyone.
I'll start again by really reiterating what Jeff said that it.
It was an incredible unbelievable year for the firm $16 $7 billion of investments across all our business lines.
And then unlocking the but what we told you about the book value of the would start portfolio moving our book value Underappreciated book almost a $21.
And then quickly following on that you know the as Jeff mentioned the equity assets. This would start portfolio is the gift that keeps on giving that portfolio of affordable housing is 50% located in Orlando to remind you and 30% in Tampa and 10% in West Palm Beach.
And what we're seeing in those markets and market rate apartments today are 20% increases in rents.
And as Jeff mentioned, the am I or the rent that is set in affordable housing is on a trailing basis and is based on both average incomes as well as inflation.
And obviously 2019.
What we've seen recently is not well if we get to 2019 and to give you an idea of the orders of magnitude of what that could look like the portfolio makes roughly around $90 million every $10 million increase.
Would be a couple of hundred million dollars increase in our in our book value and we would expect to see 10 million and then compounding more than 10 billion gains in net income for the next several years.
So and it's pretty much locked in because you know what wage inflation is and you know what CPI is so it could be a extraordinary gift that keeps on giving of tune of maybe four or $500 million and that is with no change in the cap rate.
We have seen recent trades well below the cap rate that we executed that trade that because people are buying down cap rates given the built in growth of the cash flow streams, which are unique.
They don't go down they only go up.
So this has become almost like mobile home parks and I see you're seeing cap rates approaching the three's.
Versus the four something we executed that trade up so.
It's really exciting for the company to own assets like that long duration assets that we don't intend to sell but as Jeff said, we can always dip into that account, if we want to support the dividend and the lead times of trouble.
And that's why we only sold such a or create a fun with selling only 20% interest in it because we just wanted to show you. What we were telling you is real.
In Israel that was funded by a couple of sovereigns and I'm sure would love to buy the rest of the portfolio because I'm not sure you can buy risk adjusted cash flow like that anywhere in the marketplace. Today. So that's along the side.
The other highlights of the year were really extraordinary job on the balance sheet again, the number of lenders and the number of funding sources and the movement.
Our corporate debt makes us somewhat unique in the marketplace, we have great liquidity in our stock and great liquidity as a company.
And the other big shifted the loan book to multifamily, which Shouldnt go unnoticed.
That is a tremendous execution by.
Our teams and obviously the the most.
Yeah.
Solid for a secure part of the entire real estate infrastructure right now is is multifamily.
And single family for that matter of single family for rent and also the expansion of our activities in Europe , we've added more and more bodies to our team over there to continue to grow our loan book in and excited about staffing piece.
People some.
And actually in Asia.
To increase up looking for opportunities primarily in countries like Australia.
Which we we know quite well from our equity involvement.
Involvement in that kind of in that part of the world.
So I think in summary, I'll just talk quickly about the property markets because they are at the end of the day you know again.
I can't understand how is 62% loan to book trade at close to a dividend yield.
You actually aggregated our assets sold or went out to the marketplace.
Instead, I'm going to get a loan against 62%.
You can imagine this whole book going together, you know the pricing, we'd probably be L. 400, 375 $3 50.
Which is oh forward LIBOR like four or five dividend yield this is the eighth.
So.
It is surprising to me I mean, one of the reasons, we tried to unlock this book value and move it was because we feel like the multiple of book has actually been a issue for us.
And now we will look more like our peers and you'll see the value of the equity assets in the book value at least partially.
Because not everything was mark to market as you know we didn't we didn't sell our interest in the medical office or in the net lease portfolio. So.
But it's a step in the right direction, so turning back to the property market I think this is the strongest.
Real estate markets I've seen in 30 years 35 years, if you count my time before Starwood.
And the strongest asset classes are obviously multifamily and industrial.
You all know that the speed of rent growth in multifamily that's been accelerating not decelerating, which I see numbers trailing 90 day trailing 60 trailing 30, and we have a portfolio of well over 100000 apartments between our equity book in our assets and the REIT. So we have a really good view place. It can't go on forever and nobody is expecting it to.
It is a very healthy market and tenancy capable and willing to pay these rent increases in their action. The highlight is there actually going up faster than you think because the rollover rents are probably 10, 11%, but the actual increases in rents or north of 20%, So you're going to get catch up and where cash flows are going to continue to rise.
While in place tenants move out and roll to today's market and this is.
Pretty much the case across the country with only a few exceptions that youre seeing that activity.
And the same thing is true on the single family for rent business, which has been extraordinary there are some cautious signs because in many places now it is cheaper to buy a house than it is two <unk>.
Rent one, but there are a lot of reasons why people rent and asset classes become a mature one in the United States with huge investor activity, including us.
Playing in that in that space.
Probably the more interesting.
Is the office markets and we watch really closely what's happening in these markets across the United States.
It is a tale of like everything else, it's the city by city.
The fate of Austin in Miami in Nashville, and Raleigh is very different in Boston actually is really different than some of the weaker towns like San Francisco Houston.
Chicago, New York City is held up better and probably I would have thought.
I don't know if that will last and what we're watching is tours and tour activity and tour activity in some cities like Boston is actually 130% of 2019.
So there are tenants and they're looking and theyre looking at accelerated pace, it's not back to 2019, but I do think you'll see a recovery of office and I'm hearing from my fellow Ceos is that even though they are in three days a week, they're still looking for more space and so I find fascinating and maybe it'll change, but the other thing of course about this.
Pandemic period, as the insensitivity of customers to price.
And that has shown itself in a big way in the hotel market and and there again, it's a tale of haves and have nots, if you're running a resort and we have some exposure in our portfolio to like the Grand Lakes in Orlando.
In the Securities book those assets are flying.
Our one South Beach is 50% ahead of 2019.
A super Bowl here in 2019, so and accelerating at pace. So that the rates are flying in the in the assets that.
People will stay in.
In our resort community or resort oriented places of ski resorts on the Big box City hotels are the weakest and we will probably stay weak for a while.
Not just because of the.
Lack of groups, but the groups, but also because of where they're located and the lack of attractiveness to those cities too.
Two companies, who want to take their employees the way right now youre going to see a burst of group activity judging by our own book, we've seen a real pickup in group activity. So that will come back to retail has been shockingly interesting and.
I think when people couldn't find stuff online they actually ran to the stores to see if they hadn't stocking in the stores and so I don't know, we're still really cautious about retail and have almost no retail exposure, but we're pretty optimistic that the consumer's wealthy and could change the shop, though he may not shop.
So shop differently than he shop before.
No I think that covers the major asset classes and then the question for real estate investors and for US is what happens to values of rents if rates rise.
And rates are obviously forecast horizon and will rise and I think are our feeling is that rent growth will overwhelm a rate rise and keep value stable and many of these asset classes and we have waited 30 years as equity investors I started my career in inflationary environment. The Treasury was 910 year and I've been waiting 30.
As for rates to go up and inflation to hit the real estate markets again.
So I think your big cautious flag as supply, but supply gets harder and harder to build you've seen the difficulty of finding workers trades wage growth is getting really expensive year over year construction cost in many markets were up over 20%.
So normally you would have enormous supply growth to meet all this growth in rents, especially in sectors like apartments and the permits are getting cold pill polled permits are are really high in multifamily, but I'm not sure. These investments will pencil out given that construction costs will be rising rapidly in adult.
Yet when you look at construction costs the.
The government has not started buying anything for the 1.2 trillion dollar infrastructure bill so they will be buying concrete cement steel.
Steel.
PVC piping and all kinds of stuff that will put continued pressure on our materials prices and it's really labor costs that are two thirds of the most construction and I see no no possibility of that letting up anytime soon there's simply arent workers.
So and all overall I think we're sitting really well or 62% LTV on todays asset values would wind up being 55, if we do nothing.
Construction values are going to go up and mature at replacement cost is going up for every asset class in real estate.
So I think we're in a pretty good period, and obviously, we don't want we don't want.
The first six months of this year will be pretty clear ceiling for real estate I think.
And then as the mortgage industry or the fed raises rates I think the economy will slow.
And which they wanted to slow that's why they're raising.
I don't think they can slow it I mean, there's a lot of bullishness numbers in the inflation numbers.
Reflect the supply chain, but the underlying problem is not the supply chain the underlying problem or good news waitrose, which is actually what we all wanted to see to help those who need it most and so it's actually working okay. Even though there's a lot of pain from this whole thing and and I don't think just raising rates for 100 basis points is going to change the inflation rate which is.
It's just driven by wages.
So we're we're optimistic again because it is our year end I want to thank our board of directors and the for the awesome support and.
Engagement in our activities, they're challenging us all the time and we appreciate their efforts and also 12 are.
Partner employees, who made this all happened because this is a big company and it's complex, but and it's and it's.
It really is not that complex I mean, we we run multiple businesses with excellent management teams across the world and have continued to outperform our peers now over our 12 year existence.
Thank you and we will take questions.
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 that your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment, it may be necessary to pick.
Up your handset before pressing the star keys.
One moment, please while we pull for questions.
Our first question comes from the line of Rick Shane with J P. Morgan you May proceed with your question.
Good morning, everybody and thanks for taking my question.
Look I think the only thing that really surprised us in the fourth quarter was the decision to issue equity and in my mind. There are really three reasons you would do that it's either you like your stock price.
Which given your commentary about price to book and dividend yield are clearly not the case for liquidity given your access to the debt markets and.
Everything that happened during the quarter, that's clearly not the case or a leverage issue and that doesn't appear to be the case.
So I'm really curious given your discipline around raising equity over the last 10 years, what drove that decision.
Okay.
We've chosen to run our business with like a two two dead level right and we're not at the $3 75 of our largest peer and we kind of like the security and safety of that leverage level, we've been chatting, whether we should take our leverage up a bunch I mean, it would drive earnings growth and yeah, but it would create an inherently a riskier book.
And.
So we've we've.
We have a pipeline, we look into the future and we see when we need to raise equity and as you pointed out we've never raised equity below book.
And never and we won't so the stock.
We really needed equity at that time because of the forecast of our activities and we did have to also retire the $500 million deadline, which we did with the smaller debt issuance to Jeff you want to add something.
No not really you know at the pace, we're running at today, if we do another $10 billion in CRE lending, which I think the first quarter, we're off to a similar type of number and a little bit more elsewhere.
Going to have to.
We're gonna have to need a a significant amount of capital over time, if we keep running at this very fast paced and so as we look at it.
We care a lot about our ratings and our the way the rating agencies look at us for our corporate bond levels, and we like running our leverage low to down to 232, 4%.
Below that today, if we were to do it all with that we would run that ratio higher and it's sort of a self fulfilling thing where we wouldn't get on that path to investment grade that we ultimately want to get to the mixing in.
One unit of equity for every two four units of that as we grow the company and have a high pace of originations.
Originations I think it's sort of important and ultimately we think we win by having a better credit rating and lower cost of funds.
Got it that's helpful. And then I guess related to that is the other consideration that as you have less opportunity to retain gains as.
As you've sort of.
Worked through all of the.
The deferrals is that the other consideration as well, where we have a problem you know we won't be able to shelter future gains the way we could so either we have to figure that out it's actually come up given our forecast for this year. So just to clarify for anyone who's [laughter], we used up the last of.
Our ability to shelter from from the spin up sway a long time ago from this this way spend we've created almost $1 billion of shelter I think it was we.
We can carry a full quarter's worth of dividend. So it was it's about $150 million of shelter that came into this quarter, but they came into this quarter, but now or now it's all all gone so yes, our or we would have to if we earn more.
Much above the dividend I assume we'd have to pay a special dividend if we don't do something about that so.
And we'd have to raise the dividend obviously so.
We're thinking and talking about that and hopefully that's a good problem for us.
That's a good problem, yeah, Barry I'm guessing investors would rather see a special dividend then you create additional shelters.
We would you know, yes, I mean, we would love it would be lovely to increase the dividend that's not my decision, it's the board's decision but.
You know, we will look at our run rates I mean, I think our equity book affords us a very interesting opportunity, obviously and it's multiple years of harvesting if we want to it's just hard to want it.
Sell something that you would want to buy in your Kids' Trust funds. So this.
This is the bedrock of our company and we just we didn't want to sell 20% necessarily but that was a little a ham sandwich you know.
As for Jeff Arena that we talk about it.
You that the gains that were talked about we're absolutely real and that allowed us to book the.
The 27th floor at book value, which is more reflective of the enterprise book value than the prior when you saw before obviously, we can talk about on depreciated book, All we want but most of the press releases pickup gap and you know they don't they don't adjust for all the managements.
Estimates of value, which is I can understand why in our case I don't agree but it's okay.
And if you go along the path that Barry said earlier that there are hundreds of millions of dollars of upside potentially in our with our portfolio alone you could take cash out refinancing as you go there. They have the same consequence for the problem. We just talked about but we could hold onto these properties and create more equity that we can then invest that will help us grow earnings.
A lot of ways, we can do this while keeping berry's generational trust vannessa.
[laughter] My mind, although I do own a lot of shares this year.
Shareholders asset Thank you Jeff.
Let me give it to me.
Yeah.
Thank you. Our next question comes from Jade Rahmani with K B W. You May proceed with your question.
Thank you very much.
I wanted to get your thoughts on what's driving the surge and nonbank originations that took place in 2021 and it seems to be continuing so far this year and is there anything in that trend that might concern you.
Thanks, Jade I think if you remember last quarter and the quarter before I think I told you that we are going to continue to see elevated volumes and it's going to be rather significant and I think it played out how we thought it would you know you had a bunch of things happen here, obviously, a lower LIBOR means that anybody who had a LIBOR floor and we have LIBOR floors as high as <unk>.
$2 52 in 2019 off of up at one of our largest loan if you have a LIBOR floor that was sitting at $2 50, and today you can get a LIBOR floor at 10 basis point spread could be 240 basis points wider than youre still two basis points better off refinancing. So the desire for people to get out of those as important we had a year in 2020 where business plan.
We're getting executed behind the scenes, but refinancings work happening. So in 2021, a lot of these business plans and ultimately we are investing into business plan execution, a lot of them got executed and they are in position to refinance at lower rates. So we certainly saw that we saw transaction volume in CRE in the United States.
$600 billion last year to level set that we had about $500 billion of transactions. In 2007, we had 500 billion to $5 50 between 2015 and 2019 and this year I think was a record at about 580 billion about 245 billion of that was multifamily which was also a record.
Transaction volume and a tremendous weight of capital that significant amount of equity on the sidelines looking to be deployed. So we expect transaction volume to continue to be elevated but that certainly drove some of what we saw in the fourth in the fourth quarter I think people love inflation real estate and inflation and we're seeing that we're seeing more opportune.
In Europe the <unk>.
All of these things.
Are creating a lot more opportunities I think the non bank universe that we live in.
Up 30% to 40% in 2021 versus <unk> versus 2019, and that's pretty consistent that's probably a $100 billion plus of loans again, if you think theres, probably four to 450 billion of loans off of that higher volume, we're edging up to being you know quarter to a third of that volume and that's probably above.
Where we sit for a while.
If there is risk to that I do think things will slow one of the problems Jade you're very aware of is the CRE CLO market has backed up a bit and as that backed up people who are smaller companies, who don't have the balance sheet to keep these loans on balance sheet, who can't get into the CRE CLO market accretively today like they could three or four months ago.
To be sitting on bank warehouse lines for longer its going to jam up the amount of warehouse exposure that they have and it's going to be hard for them to continue to grow and to continue to get access to capital from banks without the CLO market performing again, we've never relied on it. We told you every quarter, we don't need the CRE CLO market, we have accretive returns on our balance sheet.
But I think that will slow down other people and I think it will give us an opportunity to actually get paid a little bit more than we historically have because of the way we run our balance sheet and it's a great opportunity for us, but but that's the one thing that could slow it down obviously CRE CLO market picks up then everybody will probably rush back into that door, we have enough collateral.
I said before to do a couple more deals today. So we're optimistic the first half of this year will come out very strong.
Sort of feel like things could slow down a bit in the second half as these business plans have subsequently played out and the LIBOR floors have mostly burnt off them. So.
We'll see where we go but it feels like a very good market a lot of opportunity for us globally.
Thank you second question would be you know the mortgage REIT space has some cohort of subscale companies trading below book value not really creating shareholder value at this point you know lots of reasons for that.
Could be corporate structure could be lack of scale.
But I guess what are your thoughts on that cohort of companies and might that represent.
And so picking ground for Starwood in order to grow the scale of the overall platform.
Okay, I'll start going against very but but I'll start by saying if you take our fair very fair market value gains and you'd think berry's right on where we're going with the valuation of something like Woodstock I could argue on a forward basis at our stock price today. It looks like we trade below below book value. So a lot of people a lot of people trade well below us but the market.
Not treating us very well, either but that Barry I'll turn it to you on that I think our boards.
We don't sell any of those companies unless you pay book or close to book and then you wind up with social issues.
As a management team Wanna get retired or not and.
So or and then what is really additive.
For all of us that are in the debt world, whether it's the bdcs or the private debt funds or the public mortgage Reits.
Looking for product, so taking a competitor on Mike.
The market's too fragmented it would give us additional clout in the marketplace. It just it might it might raise the need to deploy capital.
Yeah ever increasing volumes and so I don't know in our business exactly like we run our conduit business pretty much.
The same way for the last 10 years, and we were doing like one two to one 5 billion of loans. They don't actually do want to do three or 4 billion. So.
We would need a we would need a new business line, which we've looked at you know things we could diversify into.
But again, usually in one of those few experiences that we've had which is probably three or four we have approached other people in this space, it's usually the social issues that keep us from getting done.
And maybe in the past some disagreement or whether their book values are actually real.
And that would apply at least two of our peers. So we did not believe that the books were accurate, reflecting the risk of the loan book.
Thank you. Our next question comes from Doug Harter with Credit Suisse. You May proceed with your question.
Thanks, Jeff you talked about you know the backup and with regards to CRE CLO spreads.
Can you talk about the same impact on on the non QM.
Financing markets and how that might influence. The book you held at year end and also kind.
Kind of pricing and appetite for that business as we go through 2022.
Yeah, it's really interesting as kind of the same phenomenon and when buyers are bonds sit back and think that theres going to be a lot of issuance those buyers of bonds will tend to wait for the later issuance and they'll get stuff cheaper so youre seeing a little bit of a buyers' strike today on the non QM securitizations.
It's small I think there are there are definitely people out there who originate loans and have to get them off the balance sheet very quickly and we'll put them and we've seen some lower priced whole loan sale recently because of that we're a long term holder we have great.
Non mark to market financing line, we can sit and wait for the market, we're going to Opportunistically securitize and I think a lot of other people are unable to opportunistically securitize. So we'd been backing pricing up daily as we've seen what you've seen which is dollar prices are coming down slightly in this market.
But being a long term player it's not a huge deal put some context to it I think the sort of low fours gross whack pool today are probably securitize them to about a one O to exit in the low five gross WAC pools, it probably securitizing to about a one O or exit.
We've been buying paper between one O one in 102 and a half for a long period of time here I think we're getting carry along the way while we wait to ultimately securitized at the right moment I think ultimately we'll securitize when it makes sense and we're in the market today, we can't really talk about that because we are in the market and based on that we'll make money on that we.
Hedge our interest rates, we actually overheads versus almost anyone I see on the street, we're always worried about rates going higher and prepayment Viking and our hedge balances our hedge gains are very significant versus the small markdown that we'd probably have versus where we are but ultimately this paper has to clear. The CRE CLO market has a lot of paper that will have to clear because there are weak.
We're dependent on it we're just never going to be one of those and it's the beauty of our business model and that's the beauty of our balance sheet and our ability to finance ourselves in other ways that we will never go to the market at the wrong time, and if you look at how we've opportunistically done our securitizations and our CLO is over time.
Always pricing well inside of where the market is because we wait for the opportunistic time to do so and we'll continue to do that.
Great.
Do you envision there being you know kind of opportunistic bulk bulk purchase opportunities like you've seen at other points of volatility or are we not kind of to that point yet.
No.
I'm hearing of some pools of trading I think ultimately there is an insurance company backstop you know insurance companies are looking for NIM anywhere they can get it if an insurance company can get fixed rates over three 5%, they're going to be awfully excited if they can buy a 5% gross whack pool at <unk>.
Most to par of 101, or one and one and a half or whatever that is they're not going to underperform very much. If if rates go down because youre not getting hurt by prepayments. When you have such a small premium but that's a that's to a faster speed that that's probably a four 5% yield 100 basis points, let's say above where the insurance companies need to be so I would expect.
They'll be coming in Hoovering up hoovering up on.
One of the other things that happens in that market is all securitizations get run to 25 CPR. So if buyers think that pool is going to come at five CPR like a mid fours gross WAC. They think it's going to actually come at five the bonds are going to be a lot longer and what's happened here with the curve, making its making its move.
And rates going higher is that obviously running through a longer part of the curve isn't a very good story.
But the reality is you're going to have very low prepayments and we have this book that's a large book that we've built up through 15, Securitizations now that's going to significantly outperform against these lower prepay speeds.
Having a hedge owning owning a portfolio is certainly it's certainly super helpful.
Well I mean, let me just don't don't get too lost on this we're bogged down in the businesses like 8% of our earnings so.
It's it's it's sort of ice cream.
It's the whipped cream on the ice clear, it's not the ice cream so.
It's a nice business another cylinder, it's what is advertised to be but it is it is massively hedged and I'm actually looking forward to outperforming.
Our underwritings, because we have underperformed actually in the past because of rates crashed.
Prepayments picked up and higher than we underwrote it wasn't a catastrophe. It just we didn't run the ROE.
We think this business is not.
non-GAAP is the 17% to 18% ROE business GAAP doesn't allow us to look at that so we book in sort of at the 10 to 11 currently and then.
It's driven by our refinancing assumption of the trust couple of years out as loans mature. It's complicated it's what we think we're going to earn.
But we cant actually give you that number because it hasn't happened to refinance hasnt happened. So GAAP requires us to sort of just booklets there.
Not use your assumption, but if we were doing this in our private equity funds, we'd be looking to be earning 17 18 IRR is in this paper the way we run the business.
The backup in the markets actually good for US you know, we're very strong player and we were just will slow volumes, probably slow volumes next quarter.
Some origination shops don't want to sell their loans, where we want to buy them right now so they'll slow originations in general obviously the.
Single family mortgage market is.
Volumes are slowing as rates rise. So we'll just it'll just be fine.
It will just fit into alongside our other cylinders in that that is the beauty of the.
The business model right, we take advantage of the effect of the cylinders when they're having great years, we can't wait for the Sip to start making more loans it was the.
The volume and SIF was probably half of what we wanted to see and you know we would like to do $1. Five when we did 700 800 million and now that we've created these two I guess it's too.
Which match fund those investments, which was a problem for us when we started in the business.
That's the that's the model is to Theres no duration risk if theres no theres no refi risk because of its match funded and the CLO, which I think we did the first one in the space.
It was a incredibly exciting.
Yes.
All in this in the interest of being safe and secure and predictable as opposed to being surprised by.
A mismatch duration of a financing versus we had a facility I think with one of the Japanese banks, when we bought that business from GE, which I think had a one or two year term, but were making five year loans. So we were uncomfortable and if you remember we slow down originations just because we didn't want to deal with that mismatch, even though you'd never know until the.
Well, that's something went wrong and then he's asking why we did it.
We don't want to be in ethanol crisis. So we're trying to avoid historic historic performance of mortgage REIT. Doug. Your specific question at the end was would we be buying here and I think we like the risk reward of lot of these oil prices and I think the insurance companies will find tremendous yield at these oil prices, though I think it would be a very short term blip lower.
Thank you. Our next question comes from Tim Hayes with B T. I G. You May proceed with your question.
Hey, good morning, guys.
Look a lot of kind of moving parts in the quarter. Some one time items.
Associated with the capital markets market issuance and extinguishment costs and the charge offs and it sounds like originations were backend loaded and you still have some capital to deploy from from one star So putting that altogether can you just maybe try to frame what run rate earnings looks like going forward, especially given the strong outlook for.
Growth in the first half of the year end.
Do we have to go ahead.
I'd love It if you why do we have.
There is another problem that we have with urban opportunity that you have now it's the thing that the things that didn't work as they fix themselves through the pandemic, we were on non accrual and a bunch of loans and we can't wait to bring them back online. The biggest one is American dream.
So that asset is doing pretty well and at some point that will get restructured and we will get back on and it will earn with some capital tied up in non accruing assets that is material to earnings so material to me it's material.
It's not overall.
Anyway, it's a number so yes, you're right we sat with cash and then we did the wood Starwood can't deploy the capital that quickly and then we had some.
Noise, because we had we.
We raised the money from the equity deal in.
That that region, because you just sit with cash so but you know the earnings potential of the company is higher than.
And it has been in the past and we're feeling pretty good about things right now I'd say I don't see any any real pockets.
My Big worry is just sale.
Sales volume of transaction.
But people slow down sales again, its real estate.
I mentioned, all the asset classes in my comments, but as an asset class as a whole the volatile in the equity markets is good for real estate capital flows into real estate, because it looks like a safe Haven and it does in private real estate and non traded Reits of which we havent won.
They don't Mark to market like the equity market. So the vol. In the equity markets as good capital flows into this asset class, which also keeps cap rates down so because youre going for safety and security and for something that you think is going to behave pro cyclical with inflation that will go with inflation. So.
Again, if rates rise were floating rate book.
Make more money.
And our borrowers the coverage ratios are good because rents are good so it's not going to get squeezed.
By a rising rates their incomes are going up so.
Our coverage ratios will stay pretty much I think intact, if not if not.
You know benefit from the rising rents in many of the asset classes, we rent we lend against.
And Tim you did a great job of talking about the nonrecurring losses in some of the small bits and it's a difficult business. We run rate we missed by pennies you guys hold it against us, but we're creating dollar of the value on the other side.
I think that people on the other side of this miss the forest and the trees looking at the trees and we're running a diversified.
Low Levered company with a massive amount of games and there are going to be nonrecurring things that happen over time, but hopefully we can refocus them on the inbound and the gains embedded gains.
<unk>.
[laughter] unrealized gains.
I asked our guys about this revenue number I saw this morning, and they look to me like that like of Madhu South of that 17 heads because.
That's something we never look at it as that revenue numbers. So so much noise in those numbers.
GAAP revenue that we just bought everything we've ever looked.
I didn't know we missed on it until I read it this morning.
No.
It's not something that we pay much attention to.
Got it well thanks for the comments and for entertaining my question and I appreciate all the color. This morning.
No.
Thank you at this point, we have reached the end of the question and answer session and I will now turn the call back over to Mr. Stern looked for closing remarks.
Just want to say, thank you everyone for giving US your morning, and hope you stay safe. Good luck. Thank you.
Okay.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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