Q1 2022 Starwood Property Trust Inc Earnings Call
Yeah.
[music].
Greetings and welcome to the Starwood property Trust first quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Zach Tanenbaum head of Investor strategy, 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 March 31 2022.
<unk> Form 10-Q, with the Securities and Exchange Commission and 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 and May constitute forward looking statements.
These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied any forward looking statements made today.
The company undertakes no duty to update any forward looking statements that may be made during the course of this call.
Additionally, certain non-GAAP financial measures will be discussed on this conference call.
A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliation 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 <unk>, the company's President Rina.
<unk> 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.
This quarter, we reported distributable earnings or D E F $240 million or <unk> 76 cents per share.
This includes an $85 million or 27 cents per share gain related to the sale of an industrial asset in Orlando that was previously acquired through foreclosure, which we will discuss later.
GAAP earnings for the quarter were $325 million or $1 two per share and include the Orlando game as well as a 55 cent per share increase in the fair value of our what start fine.
GAAP book value grew by 54 cents in the quarter to $20.46 with underappreciated book value increasing to $21.26.
We were active on both the left and right hand sides of our balance sheet with $4 4 billion of new investments across businesses funded by diverse capital sources, including $500 million of corporate sustainability note.
Two CLO totaling $1.5 billion and an increase in funding capacity of $1 $7 billion.
Beginning my segment discussion this morning, if commercial and residential lending, which contributed D. E F 231 million for the quarter or <unk> 73 per share.
In commercial lending, we originated $1 9 billion across 22, new loan, 100% of which were floating rate first mortgages.
We funded $1 1 billion of these loans as well as $241 million of preexisting loan commitments with most of our fundings back ended to the last half of the quarter.
As we continue to transform our collateral mix, 49% of the quarter's originations for multifamily and 22% residential while 83% of the 716 million in loan repayments or hotel and office.
Our loan portfolio ended the quarter at a record $14 8 billion up 33% year over year.
Of this amount, 92% representing senior secured first mortgage loan and 98% is floating rate.
Given the steepness of the forward curve, we expect earnings to increase once we move past our above market LIBOR floors, which have a weighted average of 57 basis points.
Companywide inclusive of floating rate assets and liabilities in all of our business is a 200 basis point increase in base rates would increase annual earnings by $34 million or 11 cents per share.
The credit performance of our portfolio continues to be strong with a first quarter origination LTV of 57% a weighted average LTV of our overall portfolio of 61% and a weighted average risk rating of 2.6.
On the Cecil front, our general reserve declined by $3 million from last quarter to a balance of $51 million.
Looking at credit performance and the adequacy of our seasonal reserve one of the key indicators of future loss is historical experience as <unk>.
Jeff will discuss with you our historical loss experience in 13 years is actually on that day, a gain of $78 million.
Based on this our seasonal reserve could arguably be zero, if not for the fab to be saying that no. One can have is there a reserve.
In cases, where we have to take back and asked that we utilize our decades of experience and starwood broader expertise to control our destiny, a strategy, which has proven to be very successful for our shareholders.
Also in the quarter, we completed our third CRE, CLO, which totaled $1 billion and consisted of a diverse mix of property types, including 29% office let's.
The CLO has actively managed with an initial spread of sofa, plus 164 basis points and an initial advance rate of 84%.
Next I will walk through our residential business, which had an active quarter with purchases of $1 8 billion and sales and securitization of $1 9 billion.
Despite repricing in the securitization markets and significant spread widening in the residential loan space, We securitized $1 1 billion of loans in our 16th and 17th Securitizations and sold $836 million of along all at breakeven as a result of our effective hedging strategy.
Our loan portfolio ended the quarter at a balance of $2 4 billion, including $400 million of agency loans average LTV of 68% and average FICO of 745.
Although we recorded an $83 million unrealized negative mark to market adjustment on our loans for GAAP purposes at quarter end, we recorded an offsetting $69 million unrealized positive mark to market on the related interest rate hedges.
Our retained our MBS portfolio ended the quarter at $311 million after retaining $84 million of bonds in our Q1 securitization.
In addition to our hedging strategy, we continue to expand our non mark to market facilities in order to further insulate us from market volatility.
This quarter, we upsized, one such facility from 250 million to 500 million.
The margin call provisions under this facility do not permit valuation adjustments based on capital market event and are limited to collateral specific credit marks.
Given the LTV and FICO of this portfolio with no charge offs to date credit is much less of a factor.
Inclusive of our securitized loans, 73% of our residential financing at quarter end with non mark to market.
Next I will discuss our property segment, which contributed $22 million of D E or seven cents per share to the quarter.
The performance of our Florida Affordable housing portfolio continues to vastly exceed our expectations for.
For GAAP purposes, we recognized an unrealized fair value increase in the Woods Star Fund this quarter, a $218 million or $173 million net of Noncontrolling interests.
There are three components to this increase the first is property, which represents 137 million of the increase for the first quarter, we utilized the direct cap rate method to determine value.
In place NOI increased due mainly to higher rents and the cap rate with left consistent with last quarter.
As a reminder, that cap rate was based on the third Party fund transaction price, which was supported by an independent appraisal.
The second component is the favorable debt on the portfolio, which represents 65 million of the increase this is because market interest rates exceed the 3.5% blended fixed and floating rate debt. We currently have in place on the portfolio.
And the third component relates to the 1% LIBOR cap we have in place on this portfolio was floating rate debt, which.
Which increased in value by $16 million in the quarter due to rising rates.
Subsequent to quarter end area median income level, which govern rents for the over 15000 units. In this portfolio were released for 2022 higher median income for northern and Central Florida, where this portfolio is concentrated resulted in a blended rent increase of nine 1% for 2020 two.
These rents create a new floor from which they cannot decline going forward.
We expect to implement these increases between June and December with the newly released rents to be reflected in our valuation metrics next quarter.
Next I will discuss our investing and servicing segment, which contributed D E a $30 million or nine cents per share to the quarter.
In our conduit Starwood mortgage capital, we completed two securitizations and priced an additional two securitizations totaling $668 million in the quarter.
Consistent with past practice, the two transactions, which priced in March but settle in April are treated as realized for de purposes.
And our special servicer, we obtained six new servicing assignments totaling $6 billion during the quarter, bringing our named servicing portfolio to $98 billion its highest level since 2016.
And finally on the segments property portfolio during the quarter, we sold an asset with a depreciated basis of $23 million for its original cost basis of $35 million, resulting in a GAAP gain of $12 million and no impact to D E.
At quarter end, the underappreciated balance of this portfolio was 200 million across 13 investments.
Concluding my business segment discussion is our infrastructure lending segment, which contributed D E a $13 million or four cents per share to the quarter.
We executed $231 million of new loan commitments of which $211 million was funded.
These fundings outpaced repayments of 93 million, increasing the portfolio to $2 2 billion from $2 1 billion last quarter.
We also completed our second 500 million infrastructure CLO, which is actively managed with an initial spread of sofa, plus 189 basis points and an initial advance rate of 82%.
Nearly half of the financing for this segment now consists of these term matched nonrecourse non mark to market CLO structures.
I will conclude this morning with a few comments about our liquidity and capitalization.
During the quarter, we completed our fourth sustainability bond issuance, a five year 500 million dollar issue with a fixed coupon of four and three eighths.
We were able to issue these bonds given our unique platform, which has investments across the ESG spectrum, including loans on green certified buildings and commercial lending.
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 lines ending the quarter with $9 6 billion of availability under our existing financing lines unencumbered assets of $3 8 billion and then adjusted debt to unappreciated equity raise.
So a 2.1 times, which is down from two three times last quarter.
With that I'll turn the call over to Jeff.
Thanks Rina.
It had been for my Lousy voice here I'm on the back side and very light COVID-19 experience, but I will try to get through the script.
Let's go to Q&A as well as again, we had another strong quarter of investment activity and value creation, demonstrating the strength of our multi cylinder platform through cycle.
Hitting us from our peers.
I'd like to start by saying how proud I am no it.
Best in class team for continuing to deliver strong results to our shareholders.
During his seamless transition from Goldman.
With the sale in the quarter of 1 million square foot leased distribution center in Orlando, We now have repositioned re tenanted and sold both distribution centers, we took possession of the loan default three years ago.
Distributable earnings gains.
Over $93 million to shareholders in.
In 13 years and over $80 billion of blending that $93 million gain is a multiple of the cumulative impairments we've taken at that time.
As I've said before we take pride in the fact that we underwrite.
We were investing in the equity and just focus on asset selection and detailed real estate underwriting works to our advantage.
The results in lower losses overall.
We do get an asset that we were comfortable with the real estate because we underwrote it.
In the depths of Covid. We told you we believed our loan book would perform well, but not even the most optimistic management team would have predicted that we would have a cumulative game on defaulted loans in our 13 year history.
We would have earned and paid our significant dividend every quarter or that we would have over $4 per share and distributable earnings gains available to us in our own property book.
Our stock has returned 12% annually to shareholders since inception, and this performance is a testament to the power of our manager capital a strong credit process.
And our information advantage.
Rina mentioned the increase in our book value in the quarter and at our fair value marks our book value today of $21.98 per share.
It was scheduled rent increases contractually based on median income in CPI levels that are 15000 unit, Florida multifamily portfolio.
Else equal do you expect your book value to rise significantly over the coming years as we mark this portfolio to market quarterly.
Our stock trades today at one one times, our Q1 fair market book value of 21, 98, which despite our significant outperformance and liquidity such as Covid began is at the low end of our historical range.
With these expected book value gains or stocks sits today at a lower multiple to book than at any point in our history other than 'twenty, 'twenty and well below the multiples of our closest peers.
Rina mentioned the capital to be deployed in the quarter.
After the two largest deployment quarters in our history.
Floyd over $18 billion in capital in the last 12 months, our investment portfolio is now 62% larger than it was during COVID-19.
60% of our loan book is now post Covid loan and we have taken advantage of decreased competition from Fannie Mae Freddie Mac, the MBS market and smaller debt funds, who have limited capacity to grow to increase our multifamily lending booked with 32% of our portfolio and over four times the size. It was at the beginning of Covid.
More than half of the loans, we have made in the last seven quarters and nearly 50%, but loan balances were in a very stable multifamily asset class.
We've done so at low teens are always in line with pre Covid transitional office and hotel loan.
They have reduced their exposure to those asset classes by 30% each in that same time period.
When combined with our own multifamily assets and high quality residential assets.
Equity and loans unstable residential housing assets increased significantly in value since COVID-19 make up more than half of our asset base today.
Last quarter, I mentioned that NOI on our hotel loan portfolio, which is predominantly destination extended stay in limited service hotels, which have performed very well was up $300 million in 2020 one.
For Bama Research hotel occupancy and rate is now above pre COVID-19 levels for the first sustained period.
Let me begin.
Therefore, we upgraded risk ratings on four hotels in the quarter.
We entered Covid significantly underweight in Manhattan, and San Francisco with less than 3% of our athletes on loans in Manhattan, and less than 1% on loans in San Francisco.
That trend and focused on high growth Sunbelt markets that we believe will continue to outperform.
We have been discerning on adding office loans.
Without it are very well leased and we believe well insulated from any potential future economic shocks.
We continue to grow our international CRE lending business, which accounts for one quarter of our lending portfolio today. It should continue to grow.
Starwood had been an investor in the CRE markets for decades, we know the sponsors and we know the assets.
Our best in class International teams operate in less competitive debt markets than the U S. And we believe we can create incremental shareholder return with less leverage and better structure on outlets. We are equally adapted valuing.
Second quarter is shaping up to be strong as well with more loans close and signed up to date and we completed in the first quarter.
We have significant liquidity and unencumbered assets issued nearly $2 billion of unsecured bonds and term loans and we have increased our expanded capacity by 35% over the last year.
Anything else to be able to continue to grow our business accretively.
The average LIBOR floor in our CRE lending portfolio was not well below spot LIBOR and if the forward curve is it all correct. Our earnings will continue to increase in the coming years, we expect our CRE portfolio to outperform showed inflation remain elevated.
In our residential lending business, we increased hedge ratios and have nearly $100 million in hedge gains offset the majority of the displacement we saw in the last three months.
We are currently closing five 5% average unlevered coupon loans that will have higher modeled returns going forward and we continue to securitize. These loans, having closed our third securitization of the year. This week and we expect to close at least two more this quarter, leaving us with matched term non mark financing and we expect to be able to move the remainder.
Or of our unsecured loans, the non mark to market facilities this quarter.
And our energy infrastructure lending business, which usually sees more deals in Q4 than Q1, we had a very productive first quarter.
Energy fundamentals continue to shift in our favor.
Less lenders must be when we're making mid teens optimal returns on our post acquisition portfolio, which now accounts for 70% of our portfolio.
Our research continues to be a solid contributor to earnings across market cycles our.
Our conduit originations business again, a normal run rate net profit in a period of high volatility and spread widening a testament to the quality and consistency of our team that was again the largest nonbank contributor as the MBS loans for the second year in a row.
But having a smaller as the MBS book, we have increased our named special servicing by $18 billion year over year to 98 billion.
Which will provide us significant credit hedge should the economy deteriorate or enter a recession.
We continue to execute our business plan on our owned equity assets that will provide more recurring nonrecurring gains in future quarters.
I will finish by mentioning that S&P raised our corporate rating in the quarter to the highest in our sector, which we expect will lower our borrowing costs in the future.
We will continue to run a diversified lower leverage balance sheet to reduce our borrowing costs and the corporate debt markets. Following our stated goal of becoming investment grade.
Until then our diversified business model.
Certainly outperformed in turbulent markets.
Our unique dividend paying ability.
Our diversified fortress balance sheet.
And our over $1.2 billion in embedded fair market value property gains available to be harvested at any time.
Make management optimistic about 2022 and beyond.
I'll now turn the call to Barry.
Thank you, Zach Rina and Jeff and good morning, everyone.
Yeah Mark.
Got it disintegrate reminiscent of the 2000.
Okay.
Yes.
Yeah.
Uh huh.
Loan book.
Oh.
Yeah.
Uh huh.
Okay.
Oh.
Okay.
Sure.
Oh.
So small changes in values could actually hurt you and you can.
Find yourselves as an equity player by accident.
<unk> testimony is due.
Just the underwriting that we have.
12 theaters.
We're closely vaccine that made money.
Significant money actually.
And we'd expect that to continue.
As we worked through a few of that sits in our portfolio that are nonperforming well I'll give you one calistoga ranch.
With lender with a first mortgage lender.
On an asset out.
But as you know in California, right now not far from there actually.
Burnt down the ground.
Yes.
Crew and asset not saying that the land is the self is substantially more than we have had the answer there's a loan balance.
So it will go.
Gosh.
If I go back to us.
So I really can't be more pleased with the efforts of the team across all of our cylinders.
Sure.
Oh.
Oh, Oh Oh.
So almost all of it.
Sure.
Okay.
Yeah.
Uh huh.
Arsenal.
Yes.
Thank you.
That's right.
Close.
Hi, Paul.
Tomorrow.
Yeah.
Oh.
The U S.
Right.
That for us.
Okay.
Complain.
It is.
Okay.
Okay.
Uh huh.
Sure.
Okay.
Yeah.
Works on average.
Okay.
Oh.
That's a false signal.
Okay.
Okay.
Uh huh.
It shrunk Jeff for you maybe take Q&A and then all of that went off a landline if I could find one.
Hold on.
Jeff can you pick up.
But nobody can hear me.
Operator, sure, yes, Jeff you're live now.
Good how are you can see.
Okay. Yeah. It works, we're going to move to Q&A and with that weren't very good.
It's a better connection.
We'll go back to Barry will start Q&A.
Okay.
We'll be conducting a question and answer session if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
For a start to when she would like to remove your question from the queues for participants using speaker equipment may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Yeah.
Yeah.
Okay.
Yeah.
Yeah.
Our first question.
Okay.
Sally.
Okay.
And our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Hi, This is John College housekeeper on for Doug.
First question would be after another quarter of strong earnings what's the outlook now for the dividend or the potential for a special dividend.
Jeff.
Yeah exactly.
Go ahead Sir.
So that yeah, the special dividend related as it relates to the Orlando gain which was really the you know the the outsized performance for the quarter. When we look to our full year because the dividend is based on full year taxable income and we look to pay that out over four quarters, and so we wouldn't be making a determination.
Termination today as to a special dividend related to that game are we will see how the year plays out and ultimately make that determination as we approach the end of the year to see whether or not we've we've covered so it's it's not a decision that we would make today.
Got it thank you.
The second question would be just around rate sensitivity I understand it's a floating rate book, obviously, it's more attractive as rates move up but at what point does that become unattractive, but can you kind of size the attractiveness as we move maybe 25.
A few bucks do we have those sort of those numbers you for that color.
Yeah, John it's Jeff.
Listen as rates go higher it really depends on the shape of the curve. We have a large book with a large ecosystem short term long term fixed rate floating rate assets and liabilities.
Changes with the shape of the curve, but if we generic we are talking about LIBOR, we benefited greatly from having probably the highest LIBOR floors in our peer set before COVID-19. We fought really hard we are proud of all of our LIBOR floors that we had we had a LIBOR floors that were significantly above 2% through a good part of Covid our average.
A LIBOR floor today, it's only about 54 basis points down from 76, or 77 last quarter, but it's still higher than most of our peers. Because we fought really hard to get LIBOR floors, which helped us as rates went down in the beginning of Covid.
The problem with having highlight broke Florida, having turned off LIBOR sat below the LIBOR floors, we didnt make more money as rates went up or is it widespread literally went up we're now at the point, where LIBOR is above where our LIBOR floors are where we will start to participate in the upside of library going higher.
The higher from here.
Kevin can you hear me.
About a year back.
Great Okay.
Just tell you that will happen today, the fed raises rates the work that we will be in the money on the LIBOR floors.
Yeah.
We actually already are varied.
Because we're at 75, and our average or where it was beating them just to say as rates.
<unk> continue to go higher from here, we will make more than once we get above where all of our LIBOR floors in our highest LIBOR floors.
Five 2% once we get above them. All we will have a maximum velocity. So to answer. Your question. We will do better at 200 basis points, then 100 basis points will do better at 300 basis points higher than 200 basis points, but we will continue to make more money as LIBOR goes higher from here John .
Yeah.
Great. Thank you very much.
Alright.
Jeff can I assume that people couldn't hear anything I said.
And they could hear almost nothing bad there was there was a little bit in the middle of it but if you want to make your key thoughts again I would go for it okay, well, thanks, I'm sorry for the technical difficulties everyone.
It looked like I had of service, but apparently did not so I was I wanted just to start with geopolitics and just say you know our book is in Europe , and the United States and that if he told me that we'd have a loan to book up 61% in the quarter, 57% loan to value of our loans.
I would never have believed that and.
Yeah, the opportunity set for the company is as big as it's ever been in our in our business as banks are kind of shy and pulling back and borrowers with like.
Relationship managers like us and we can do so much repeat business in our book that are the team has done an exceptional job in across the whole platform. The team has executed beautifully I will say that you should understand that given our focus on on the equity on the value of properties.
I guess, it's surprising, but I, probably shouldn't be surprising that we've realized net gains significant net gains on anything we've ever foreclosed on and at 57% LTV unless there's a massive correction and and real estate that should continue as we work our way through the book.
And I or or any of our loans that are you see them in our disclosure high higher rated higher risk we have a loan for example.
On the former Calistoga ranch, one of the best hotels with United States It burnt to the ground.
And it is obviously an calistoga it burned in the fires.
Obviously, we can't accrue it but the land is for sale right now that will sell for more of the loan balance just the loan balance and will be repaid.
So we expect this to continue with any troubled assets and we have the ability and frankly the designer.
To take assets back if they're let these ltvs and work them in and sell them and rationalize and get the gains that we did in these two distribution centers.
Which were combined were over $100 million of gains for the company.
When I look at our our total return the last 12 years annualized over 12% and I say that if you had levered us 40, 50%.
On margin, we'd return, 15% to 16% annually, beating probably every hedge fund that I know of over that time period and certainly in the volatility in equity markets. Today, we are like Sunshine Ray of stability, which we set out to be and as you can see from our quarter earnings in our view.
Dividend.
Simply cover our dividend.
So that we are confident as we told you back in the middle of the <unk>.
Pandemic that we were comfortable paying our dividend it was never in jeopardy and.
And as solid as Iraq going forward, given the amount of unrealized gains in our book and our ability to execute sales at individual assets or larger investments going forward.
One of the assets, which you know.
Our approach to buying equity into the trust was assets that you'd want to give to your kids Trust funds.
And that's the portfolio of multifamily we bought northern Florida.
We call it would star the affordable housing just to remind you rinse can't go down they can only go up and rents are obviously rising across the United States in a fashion that we've never seen before powered by our inflation, but also this lack of units that is this tremendous dearth of homes that is creating this.
Rapidly rising housing complex and we ask ourselves is this going to continue like this or what's the outcome for housing prices given is it a bubble well prices in some cities have run pretty far. This is not a supply issue. This is not like overbuilding that we saw in O seven O eight and it's not powered by people barring 100.
Percent of loans out of the home price with Ninja loans. This is really demand in wealth and people working from home and trying to improve their their homes and yeah well. It means we expect of course it will slow down. It's it's it should be continue to be a source of stability for.
The U S economy, because it really isn't overbuilt.
Most builders one of the reasons, we built almost 15 million fewer units from 2010 to 2020 than we did than.
Every decade prior going back to the forties was builders stopped doing spec homes and couldn't get lines to improve land easily from anyone.
So it just discipline the housing market and the result is what you see today.
And it's bled over into the multifamily markets, which continue to be to enjoy double digit increases in rents. We're the nation's largest owner of apartments, we have 115000 apartments, including the units that are owned by Starwood property Trust.
And what that means actually going forward right affordable housing rents are set by not by inflation, but by the income growth of the S. M S. A in which they operate and so we know because of the rent gains that rina outlined in her comments.
That this portfolio increasing value fairly significantly next quarter, not changing the cap rate and I can tell you our holding cap rate is significantly above current cap rates.
The 25, 30%, obviously as the nation's largest soldier owner of apartments, where in the market, both buying and selling apartments.
And apartment cap rates are probably today in the low threes.
This this is significantly higher what the cap rate, we're using here would just be the gain you'll see most likely next quarter in each quarter going forward. We will mark this portfolio will be a result of the rent increases not because we're going to play with the cap rates, even though they're absurdly conservative at the moment, we actually are selling some assets in southern Florida at the moment in the two.
Who's a cap rate in the two so those are market rates are not affordable, but affordable does have the benefit of having always being full because they're cheaper than everything else.
And there is you cant go down so and this is a rent that is legislated by pods or Fannie or whoever does it the housing authorities and so each year, we kind of know what's going to happen in the following years since the blend of multiple years and the change in rents.
The other comment, which I thought was funny as the seasonal reserve because we do have a seasonal reserve.
We probably don't need, but we can't market to zero and I, it's funny, because banks are coming in and out with increases in reserves and taking money out of their pudding are hitting their reserves are taking where we're just not touching it and we're leaving it alone and we run the models, we do what they ask us to do and we carry this reserve which.
Might come in handy someday and I just wanted to back up and quickly talk about the asset classes is there as you can see what's happening now coming out of the pandemic really focus my comments on the U S. But.
Multifamily is having an incredible run.
Certainly cap rates will be under pressure if rates keep rising but rental growth is so strong it's overwhelming any issues on the horizon rates and I don't expect personally I would not expect LIBOR to hit the levels of the forward curve I think the economy will slow way before then the fed will take notice this is like third.
Quarter fourth quarter fourth quarter first quarter.
So you know I think LIBOR will hit two two and a half I don't think it will go to three I don't think would be necessary to go to three because of the economy and the global economy with what's going on with the supply chain will slow.
Logistics assets, we don't have that many loans because the cap rates are so low it's very hard to borrow from us they're really bonds are most exposed to changes in cap rates because they are long dated bonds. They behave like bonds, but underlying rents are increasing the problem is you can't get to the underlying rents. If you have a long dated industrial lease it kind of doesn't.
Now you have 10 years before you can get up the asset given the leases in place you need short duration logistics to actually do well right now otherwise you've got a negatively correlated cashless stream. The office markets are all over the place and Miami.
Which probably will get overbuilt shortly.
The office markets, you were able to lease buildings in the middle of Covid fully leased brand new buildings with great rents huge rents twice. The rents you would have expected two years ago and the strong southern economies with a red state economies, Texas Dallas Austin.
Nashville, Tennessee, where tax rates are the research triangle Park.
So those are all really powerful and good office markets, even in the weaker markets like New York.
Good assets are leasing and leasing quickly at great rates, but commodity assets are having a harder time so.
So you have to be you have to be careful but theres good opportunities in the office markets and we continue to take advantage of that as we can.
Our retailers are obviously, it's still a four letter word.
And Ah, but it does have presented opportunities occasionally depending on what it is that the nature of the credit and the nature of the leases and then hotels, we had like 21 hotel loans going into Covid really only have one that's and issue it's in San Francisco with small San Francisco is the worst of all hotel market in United States.
A million miles and probably will remain very challenging but the rest of the markets are galloping ahead as consumers basically shut down their Netflix account and go on a trip.
And and they're they're gonna travel this summer in a quantity, we'd probably never seen paying rates nobody's ever contemplated because the consumer does not seem very price sensitive.
So overall, you know I I I can't think we could be better positioned than we are we are a sea of stability in our world. It's extremely volatile and increases in interest rates only help us and help our returns and will help cover the dividend even more than it is covered today.
Bill It's a great place to park cash right now as the World melts the Tech World melts down what I said in comments you Couldnt hear earlier I mean, it is reminiscent of the dotcom crash back in 2000, 2001, I remember when the NASDAQ fell eight 5%.
And we have cash flow beneath us, where we are not a speculative in any way and with a book like we are you kind of wonder how on Earth, we could be trading at a dividend yield we are in a world that's still yield challenged and will remain challenged for a while.
But what will happen to us going forward and as Jeff mentioned is our book value increase and it will continue to increase and we've will because of the affordable housing portfolio and the mark to market on that portfolio, which we can tell you it will be going up next quarter. So as a firm given the platform we run.
The people we employ the geographies we cover the ability of the proven ability of this team to execute in all of these markets in all conditions. You know, we we look to be a very excellent place for people to invest in and ride out this volatility of the geopolitics and and the politics of the sites.
So thanks, we'll take questions now I. Thank you for your time.
Okay.
Hey, Barry just putting a sharper point, but the numbers that you talked about you talked about San Francisco is actually only 40 basis points of our total assets are in loans in San Francisco today.
In Manhattan, as you talked about Blue States Blue cities difficult jurisdiction tax wise and other there's only one 2% of our assets are on loan in Manhattan.
And we almost doubled it when we did the large residents.
Residential project in Chelsea last quarter Barry.
Right.
Which was only a $150 million. So that's a long time long term bet that you and the company had made on being defensive on Manhattan, and San Francisco, That's worked pretty well just one quick comment on that Manhattan loan. It was a foreclosure that we financed and it's mostly residential and.
The equities can make a lot of money, which we tried to get into the equity, but we weren't able to so [laughter].
The next best thing is to make the loan part of the loan. So that's a that's a very big positive as opposed to a concern it's brand new loan.
Thanks, Jeff.
Continuing with the question and answer session. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
I know you touched on this a bit Barry, but I wanted to get a little bit better idea of the visibility you have into the rent increases in the woods store assets.
From when the CPI or any of my data comes out.
How long is it before that rolls into the rent increases.
Then the income statement, what was it three or six months or 12 months kind of kind of how much visibility visibility do you have there.
So if at any time.
We actually have 100% visibility because hard really the nine 1% that I mentioned, they released that two weeks ago. So we know for a fact that for 2022, we're able to roll out 95, 1% of blended increases across the portfolio. We can do that immediately and it's not what we're choosing.
To do we are choosing to roll it out slowly over time over the next six months, but that can take effect right away and so we have 100% visibility into 2022 as far as 2023 goals we.
We have.
And asking it but we really we really don't know because it's based on three year median at three years back median income levels.
Then two years of actual CPI in one year projected C. P I.
Just a couple of unknown, but directionally you can estimate where we would end up.
Hey, Stephen to give you that.
Looking back at the change in median income from three years ago, and then increasing it by CPI as Rina said and the CPI has the variable we thought this would be around 12%, it's around 9% or nine 1%, but all that means is they're delaying a 3% increase that will come the following year or the year after when actual actually come in in a different way. So I think the forward inflation.
<unk> look a little low to me, but I'm not making a judgment based on that but I know that based on the way. The calculation works. If we think there are 3% to low this year, it's going to be 3% higher the following year or the year after to make up for it. So it would be somewhat mean reverting to the numbers that we think and we're going to get a couple of years of really good outcomes.
Oh great.
Just just to add one thing again is that we're in Orlando and Tampa and and you can't get better markets for income growth in those two markets in the country is in migration and job growth.
New companies moving in and so there is going to remain pressure on wages, which makes this more affordable for our for our renters to because their their wages are going up rapidly also.
Yeah.
And as a follow up Jeff you know when you think about capital allocation you know one of the biggest advantages of all your cylinders is reallocating capital and when it's attractive you know given all the movements in the markets and obviously now got another CLO in the infrastructure business, but you know how do you think about the most attractive uses of putting money to work right now.
Well the lending business has been a real chance for the last 18 months, we've averaged about 200 basis points to 170 to 200 basis points above our long term trend or are we in the lending business. Our international lending business has really picked up the slack in and it will probably be over 30% of what we do.
This year and it will be significant to note well it won't be it will be multi jurisdictional would be Australia and core Europe and in the world doing there we feel like at lower competition, better adapt better advance rate to us the better structure for us etcetera. So we're super happy with that our domestic loan book continues to grow with a massive focus on multifamily I talked.
About this in the past and I mentioned it briefly before but reality is with rates going up as quickly as they have the agencies, Fannie and Freddie Kansas, The MBS market simply can't be competitive on proceeds to a multifamily borrower has the nonbank market there.
They are sizing alone based on the trailing 12 month cash flow and we all know that the next 12 months will be higher than the trailing 12 months any borrower can get higher proceeds away from Fannie Freddie and the MBS market baseball last forever, but at the same time that this phenomenon has happened for US we have a lot of smaller competitors who become.
The CRE CLO market has been quiet and it's been difficult to get out to an arbitrage have not done CRE CLO their bank warehouses are full and they're not being competitive because they don't have room to grow. So if you talk about our ability to pivot we have pivoted. We pivoted strongly multifamily is now by far the largest segment that we have and we're taking advantage of a lack of.
Competitors to really add to about it so I think you'll see that happen continuing for the next six to nine months I don't see the CRE CLO.
With problems fixing itself in the short run so I would expect we continue there. We continue internationally, we probably don't add a lot in property as you know the residential business well the non QM loans that we're seeing today with five 5% to 6% coupons at that.
101 type of premiums will be awfully good looking investments at some point down the line and so we're sort of excited about that our energy infrastructure business.
When they get the mid teens, we expect them to do a $1 billion plus and they're off to a great start this year and that portfolio is performing super well I'd say those would be the key adds.
You probably won't get out a lot in property and Barry can speak to this but it's just difficult to get the cash returns that we need and the property world with where interest rates are on financing today. So property probably would be something that you don't see increased again, Barry any comments.
Alright, I think Thats correct, yes.
I have anything to add.
Great I appreciate the comments this morning hope you feel better soon.
Thanks Bill.
Our next question comes from the line of Don Vendetti with Wells Fargo. Please proceed with your question.
Hey, good morning, Jeff If you could two questions one how do you sort of balance.
Pretty strong growth here into what could be an economic recession, and then number two can you talk a little bit more about how you took advantage of the non QM market disruption in the quarter and your outlook for that business.
Yeah, that's fair as far as growth into recession, we wake up every day and decide what we want to invest where what what areas. We want to invest in them and if we think that we're headed for a difficult time, we can simply pull back the range and we will.
Ultimately stay invested by virtue of future funding that we have et cetera.
It's a real advantage to having this very large ecosystem with money coming in and going out most days, we don't have to wake up and do something that we don't want to do I'll leave it to Barry to talk about.
The recession or how we would necessarily change our outlook, but my guess is if we head into an environment like that there will be less to do they'll be blessed purchases and they'll certainly be less refinancings. So in a world where there were $600 billion or so of loans to choose from last year have done in the floating rate world, there 500 and change.
It may be smaller than that where we're expecting that we'll do about 80% of the volume of last year would be okay, and we will be able to stay invested if we did 30% of the volume of last year and that's one of the beauties of our of our system. Barry do you want to talk a little bit about the prospects for recession and how it might change our outlook.
Yeah.
I'm expecting a recession.
But that goes to the LTV of the book.
61% I think we've got it more than adequate cushion it would have to be a complete wholesale destruction of the economy to really dramatic.
Dramatically injuries with demand destruction.
Empty office buildings or cars.
Unemployment has skyrocketed and wage growth to cease in reverse.
It's not and obviously the energy book in the energy complex is absurdly healthy and.
Even though we have a small oil and gas business at the parent level.
And investments we wrote off for now gushing cash flow. So it will just change the opportunity set for us.
Probably they'll be better investment.
Frankly people do have long maturities.
And that was the year. We were created we were created to provide liquidity in capital when banks weren't lending and we thought they were terrific risk return.
Opportunities for us risk reward opportunities for us solving People's capital stack problems.
So in a way those are our best days are competition finished where the biggest of our kind in and have the liquidity in our property book.
Can create liquidity and we don't have to do it by selling hedges are taking off foreign currency hedges, we can just simply sell some of our.
Equity assets or even trade our loans.
Hum I'm not nervous about the portfolio really you know in a slowdown.
And again I guess, the only negative is a LIBOR, probably or sofa goes down not up but we still have our floors and I don't think you'll see rates well you could I mean, if it gets really bad you could see short end of curve drop as it did during the pandemic, but that that wouldn't be a base forecasts.
I think youre going to see a slowing of demand I think the consumer will have <unk>.
He bought everything you needed and now he is traveling and spending lapses.
Emulous savings.
And it's not I would say I'm at a conference actually that I'm attending here in one of the banks this year and they said that their average.
Loan balance of their clients. So this is one of the top five banks in the country. He said there was $400 now $2000 and that's basically the money they save during the pandemic they can spend.
Sadly that savings account can erode with higher food prices and higher gas prices.
You would hope that the food both of those are somewhat transient.
Offsetting that is wage growth, which is substantial particularly at the lower ends of the socioeconomic spectrum and and that's good we should be happy with wage growth. So you know without unemployment rate that would have been two 7% if a million people hadn't decided to join rejoin the workforce.
It's a long way to having something critical we feel bad.
Deals bad you're seeing this tech correction it feels bad you're seeing things box.
So you really explode, but we weren't we were just boring, we just pay our dividend and continue to execute on our business and provide us.
He just a spectacular total returns to shareholders given the volatile world today.
So thanks.
And Jeff non QM Marshall, if you still feel like.
Go ahead Doug.
Do you still feel like you don't have good sort of secular growth and were you guys able to you touched upon it a little bit where we able to take advantage of the spread widening and dislocation in the quarter.
Yeah, I'll touch on that and you know that.
The spread widening in a bunch of places we were at an aggressive investor We wrote I think 1 billion.
Or 1 billion of new loans in the resi business that would be spread widening there are definitely weaker hands in that space. We are a long term player. We have a large balance sheet. We continued to invest the credit on non QM loans and on any rescue loans looks really good the L. P bees, which were mid sixty's to a 730 FICO or whatever are significant.
The below mid sixties today, given the HPA that we've experienced so there's no credit concerns are concerned it is only what's the coupon in and at what speed, the prepay and with premiums down to on a on a post hedge basis. We had we had 100% of our interest rates are 85% to 100% of our interest rates from the time, we law.
[noise] alone so as rates have risen we've had hedge gains, which means net where owning new non QM loans below par.
And then it becomes when theyre below par, we don't have to think about prepay speed as much as we worry about prepay speeds on premium. So we won't worry about credit we won't worry about prepaid because it'll just be a matter of what coupon is leftover on on what we can originate and securitize, we've continued to securitize pricing our third deal.
This month or they actually is priced this week, we have two more coming this quarter and so the extent that we can get some of these newer loans with five and 6% handles and potentially mid to high fixed coupons on these rescue loans I think those will be phenomenal investments. So we're continuing to invest there. It was a it was a rocky quarter spread wise, but again the rate.
Hedges that we had on covered covered most of that significant move and gave us an opportunity now to be a larger investor.
Thank you.
And again as a quick reminder, if anyone has any questions. You May press star one on your telephone keypad joined the queue.
Our last question comes from the line of Jade Rahmani with <unk> W. P proceed with your question.
Thank you very much do you expect that there will ultimately be a correction in commercial real estate prices. How do you balance. The fact, the rising replacement costs against the potential for cap rates to widen do you think that bodes for flattish outlook for commercial real estate prices.
The next year or you expect the correction.
Oh Perry.
Yeah.
So I think the the the lowest cap rate asset classes, we will face some pressure, but they're.
There happened to be low cap rates, because the rent growth has been astounding double digit like it.
And they do Mark to market you know on short leases I'm really referring to apartment number one.
Send me for rent probably similar to apartments industrial I've mentioned in my comments industrial it's trading at three <unk> to three in a quarter. We don't have much exposure to industrial we can't get our returns.
Turning to that asset class. So we've walked away I think I think you could see.
You could see a 25 50 basis point.
The increase in cap rates and in the residential sector in apartments.
But it really is about rent growth. It is very important and it can be far more important.
Then then interest rates and I don't think we have data really because if you go back to the late 70 early eighties. When you had 22% prime rate cap rates Werent 'twenty two than women double digit because everyone looked at the interest rate curves as transient.
And and they were going to come down, which they obviously did and I I I remember my early in my career buying some assets in the U K and five and six cap rates when the when interest rates were 13%. So you know.
I think real estate investors kind of look through the.
The transitory nature of the curve as the Central reserve banks try to accelerate or decelerate growth. So they won't go won't they won't go hand in hand, you will eliminate a class of buyers that have been in let's say multifamily that were buying it before its fours.
And financing it two and a half and three so that you know there was a good cash on cash yield you don't really have that would say cap rates, but as Ive mentioned in my comments, we're selling probably a couple of billion dollars of market rate apartments, right now and there hasnt been much movement in cap rates and obviously, the the ryzen and sofa and a rising treasuries is.
Not a secret so people are still looking at.
Assets and you've seen a couple of take privates by Blackstone, where I think they're saying like a four and a quarter unlevered is fine and they'll refinance when the economy weakens and.
And put their homes doing an equity LBO, if you will they they they they put it out today. They think rates the economy will slow rates will come back down certainly short rates and labor to be able to borrow at more attractive spreads I don't I don't think and then offsetting that but one comment you made which is really critical is replacement cost replacement causes Gallup.
Being ahead, and it's not just commodity prices not just materials. It's also labor in general again labor shortage and its going to get worse, not going to get better because the government hasn't spent a dollar of the infrastructure bill so when they start doing that and buying steel and concrete and poly PVC piping and laying roads.
In asphalt and obviously, where oil is it'll it'll it'll put tremendous demands on.
When those byproducts.
Material prices continue to rise probably for the foreseeable future in the supply chain is going to get worse not better so people talking about inflation rolling over in parts of things like consumer led inflation.
Maybe autos used cars, maybe they will but that's more a function of people already got what they wanted they already bought their new car. They went out and spent money they bought their new house, but I think in other sectors of the economy replacement cost a good gallop ahead of course, that's really good for everyone owns anything today because.
Justice by new construction rents have more room to rise so it as a tug of war as it is the Holy Grail of of what we wake up every night worrying about what's the interplay between cap rates inch.
Interest rates.
And inflation and inflation hyphen replacement cost and I look at multifamily starts for example in United States, which are pretty much at record highs project and I don't think a significant portion of that stuff will ever get built and if it gets built it wont be delivered on time as no project I'm aware of is delivering on time and on budget right now either here or in Europe .
So you know.
It's I was talking to somebody yesterday, who owns the building in a residential project in Miami in there a year and a half way to complete it because of supply chain issues and nobody knows where stuff is it's on CS is in warehouses. It stuck offshore is there waiting for for goods from our closed Chinese factory is.
Not going to be great. It's really good for existing assets and for our loan book is really healthy.
And Barry if cap.
Okay.
Oh, I'm, sorry, sorry Jade.
Catherine.
Here, we have a lot of note at 61 L. P. B to absorb that I think is one of the things we like to talk about and Barry can you just make one comment on what you think would happen to cap rate and affordable housing versus multis and other when we look at them as much more bond like cash flow and less volatility because of that bond like nature. So even if your supposition is significantly higher cap.
Love to hear your opinion on how you think the only cum housing plays it plays.
And as you note your cap rate on a multi use books that we're holding in the fours. So.
We're nowhere near where not marking this down at today's cap rates, we just marking up the value based on rent growth. So you know we have a huge cushion in our mark and and because it can only.
Go up rents can only go up and not down the asset category has become a very very exciting unlevered yields for offshore investors that look at it as an inflation protection bond and basically the index bond to inflation and wage growth.
And so it's almost like a tip you know, it's and the minority investors that we have in and they would start portfolio when we realize that and demonstrated.
To the street and to our shareholders of these gains we talk about are absolutely real and available to us to harvest at anytime.
You know they they were both offshore sovereign wealth funds that.
Well I guess, one of the quasi sovereign wealth funds, but theyre looking this is principally a bond equivalent yield that actually have the kicker on it you know it's a tip. It goes up it doesn't go down so that's going to keep those cap rates are tighter.
And then probably market rate cap rates going forward.
Regarding transaction outlook what.
What do you expect for the market do you expect I assume a decline this year last year was a record we had a surge driven by not just the number of properties that traded but much higher values. I would expect you think that would decline, particularly in the second half of this year with higher rates and for Starwood itself on commercial real estate lending what do you think.
To for originations this year.
Well I'll start with us because we don't even give you this quarter, but I would say you know we did $10 billion in transitional lending last year that was our goal coming into the year for the reasons you said I would expect it to be slightly below that but not significantly below that I think that I think theres a lot to do for us.
And in times like this where you're as you're seeing bank warehouse lines are full a lot of our smaller competitors are sort of out of the market. When we can get pricing and when we can when we can do things that are attractive and very complex and we've been doing a lot of large complex deals. We're gonna tend to do a little bit more so my guess is that the our market, including our peer.
Group is down 20, 25%, but were closer to flat than not but Barry I'll, let you talk about commercial real estate and what you think happens.
Well right now there's a lot of there's a lot of assets on the market. So there are a lot of people selling assets.
Chimney multifamily of course people are trying to lock in today's cap rates, which again are in.
In the threes low threes three three in a quarter.
In some cases breaking three.
So I think there has been a surge of assets for sale you haven't seen.
A ton of other asset classes trade dramatically people are tested the waters on hotels, the astor's Super high.
The bids are not at the as you haven't seen a ton of trades.
We are quite active on the equity side.
There is there are you know.
We are and it's not as if some of our peers.
And there's.
A lot of people holding onto property because of the rent growth and lack of alternatives.
Alternatives, but.
I would probably agree that volumes will go down we don't need transactions, we just refinancing opportunities.
So I am.
No idea what the what the what the cadence of maturities looked like in the U S.
Commercial mortgage market, but assuming it's it's it will always be opportunities for us I think.
And Jackie.
This morning people pulling back their expectations for the MBS market Emmis Asbury market for the year I think you and are you at all.
Written about that being smaller.
That is the case, we will obviously pay offs and flock is without the market does less deals. If you can move away from 10 year fixed two transitional stuff.
I'm going to be able to note.
Two other comments I mean, the difficulties of other asset classes in times like this always help real estate, we always get a big institutions find the fact that we don't mark to market overnight kind of refreshing as it looked at the collateral damage in the VC book or even in their equity book right now.
And so that's always benefited to some extent real estate also the where the capital is in the world.
Right now as primarily an oil well nations, including the middle East and they have a predilection to buy real assets. They they like real assets and so I expect that you'd see them participate more in the markets unless and I guarantee that frankly.
And these two there's one other new Kid on the block, which has been extremely immaterial to last.
12 to 24 months, which are the non traded Reits of which we're the second largest in the nation behind Blackstone and.
These entities have to put up capital right. They have to find things to buy it because they can't sit on cash they don't earn anything on cash and they have been very important drivers of what is acceptable pricing.
And and so there they are very active buyers and end up in a scale.
The Blackstone non traded REIT has to almost by the entire volume of commercial mortgage transactions prior to Covid every year. So they'd have a hub to have 100% market share of what was the.
Basically.
Got the number but it's a it was and you'd have to have all of it. So that that alone is driving transaction volume by itself and obviously, where we're bigger than the next date guys behind this combined but.
You find things to do you create you create deals because.
You look for the opportunities and what you're seeing obviously.
It shouldn't surprise anybody I think I've talked about it maybe not to eat in this audience, but youll.
You'll continue to see take privates in the public market, whether its PS business parks or ACC or those are all being driven by the non traded REIT volumes and they need to put up that money and scale. So you'll continue to see a take private for a while of the public companies, which will drive loan volume origination and.
We're working we've financed Blackstone Blackstone finances us.
On the equity side, and we've partnered historically before them on some large loans and have a large loan that we expect will close with them shortly actually.
Thanks.
Yes.
And we have reached the end of the question and answer session I will now turn the call back over to Barry certainly for closing remarks.
Thanks, everyone I just can't tell you I mean, we are obviously I'm a large shareholder started property trusts and so is the team and it's a really nice place to be hanging out well as the world Mills. So we hope others shareholders and other capital sources will increase their positions in our company because we really look good in this times of trouble in.
We expect them.
Not sure any mortgage REIT in our sector can cover their dividend the way we can.
And that's not reflected any premium actually we'd be trading at a discount to some of our peers based on our new book value. So thanks for your support and thanks for listening and have a great day.
Yeah.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
[music].