Starwood Property Trust Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2025
Skip to Participants
Operator

Greetings, and welcome to the Starwood Property Trust First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Tanenbaum, Director of Investor Relations.

Operator

Thank you, sir. You may begin.

Zachary Tanenbaum
Zachary Tanenbaum
MD & Head of Investor Strategy at Starwood Property Trust

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, we filed our 10 Q and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward looking statements, which do not guarantee future events or performance. Please refer to our 10 Q and press release for cautionary factors related to these statements.

Zachary Tanenbaum
Zachary Tanenbaum
MD & Head of Investor Strategy at Starwood Property Trust

Additionally, certain non GAAP financial measures will be discussed on this call. For reconciliation of these non GAAP financial measures to the most comparable measures prepared in accordance with GAAP, please refer to our press release filed this morning. Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer Jeff Demodica, the company's President and Rina Panari, the company's Chief Financial Officer. With that, I'm now going to turn the call over to Rina.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $156,000,000 or $0.45 per share. GAAP net income was $112,000,000 or $0.33 per share. Across businesses, we committed $2,300,000,000 towards new investments, our highest quarter in nearly three years, with infrastructure lending committing its highest level of capital in a single quarter since we acquired the business from GE in 2018. Our overall strong investing pace continued after quarter end with 1,300,000,000 already closed.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

I will begin my segment discussion this morning with commercial and residential lending, which contributed DE of $179,000,000 to the quarter or $0.51 per share. In commercial lending, we grew our loan book by eight fifty nine million dollars which will help drive our long term earnings potential. We originated $1,400,000,000 of loans, of which $886,000,000 was funded and funded another $250,000,000 of pre existing loan commitments. Many of our originations were back ended to the last half of the quarter, so the full earnings potential will not be realized until Q2. Repayments totaled $363,000,000 which is higher than we expected, leaving the book at $14,500,000,000 at quarter end.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

The growth in our portfolio also led to a slight decrease in our weighted average risk rating from three point zero last quarter to 2.9. We began executing on the resolution plan that we discussed on our last call and have resolved $230,000,000 across three assets so far this year at pricing at or above our GAAP basis. The first is a $38,000,000 non accrual loan secured by a hospitality asset in California. During the quarter, we received $39,000,000 in full repayment of the loan, resulting in a $1,000,000 GAAP and DE gain. The second is a $55,000,000 apartment building in Texas that we foreclosed on in 2024.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

Subsequent to quarter end, we sold the asset on our undepreciated GAAP basis, which is the same as our DE basis for this asset because we never took any GAAP reserves. The third is a $137,000,000 office building in Texas that we foreclosed on in 2022. Subsequent to quarter end, we sold this asset for a $5,000,000 premium to our GAAP basis, reflecting the adequacy of the GAAP reserve we recorded in 2023. The corresponding DE loss of $44,000,000 will be recognized in the second quarter. To clarify, we do not consider an asset to be resolved until it has legally exited our balance sheet, so the resolutions I just mentioned exclude this quarter's foreclosure of a $45,000,000 previously five rated non accrual loan on a multifamily property in Georgia.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

We obtained a third party appraisal for the asset, which indicated a value above or at our basis, so no reserve was recorded. Our CECL reserve decreased by $26,000,000 in the quarter to a balance of $456,000,000 reflecting the macroeconomic forecast. Together with our previously taken REO impairments of $198,000,000 these reserves represent 4.2% of our lending and REO portfolios and translate to $1.93 per share of book value, which is already reflected in today's undepreciated book value of $19.76 Next, I will turn to residential lending, where our on balance sheet loan portfolio ended the quarter at $2,400,000,000 The loans in this portfolio continue to repay at par with $55,000,000 of repayments this quarter. Our retained RMBS portfolio ended the quarter relatively flat at $422,000,000 with an $8,000,000 positive mark to market offset by repayments. In our Property segment, we recognized $16,000,000 of DE or $05 per share in the quarter, driven by our Florida affordable multifamily portfolio.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

Subsequent to quarter end, HUD released the new maximum rent levels, which were set 8.4% higher than last year. Certain properties were in geographies where the rent increases were once again capped by HUD, which resulted in 6.7% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula in 2026. As a reminder, the majority of these rent increases will be implemented in June, so the impact to earnings will not be fully reflected until the third quarter. Turning to investing and servicing.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

This segment contributed DE of $50,000,000 or $0.14 per share to the quarter. Our conduit, Starwood Mortgage Capital, completed four securitizations totaling $268,000,000 at profit margins that were at or above historic levels. In our special servicer, we continue to be ranked the number one conduit special servicer, a ranking we have maintained over the last two and a half years. Our active servicing portfolio ended the quarter at 9,600,000,000.0 with $800,000,000 of new transfers, which were again dominated by office properties. Our named servicing portfolio ended the quarter at $107,000,000,000 In our CMBS portfolio, two large loan payoffs resulted in principal collections of $62,000,000 We also added new purchases of $12,000,000 Concluding my business segment discussion is our infrastructure lending, segment, which contributed DE of $20,000,000 or $06 per share to the quarter.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

As I mentioned earlier, we committed to a record $677,000,000 of loans, of which $6.00 $1,000,000 was funded. Repayments totaled $436,000,000 bringing the portfolio to a record $2,800,000,000 at quarter end. As with the growth in our commercial loan book, growth in this portfolio will likewise help drive our overall long term earnings potential. Subsequent to quarter end, we completed our fifth infrastructure CLO for $500,000,000 with a record low cost of funds and a weighted average coupon of SOFR plus 173. This brings our term non mark to market CLO financing to 58% of infrastructure debt and our non mark to market financing for the entire company to 84%.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

And finally, this morning, I will address our liquidity and capitalization. Subsequent to quarter end, we completed the $500,000,000 issuance of our five point five year, six point five percent senior unsecured sustainability notes, which we swapped to a floating rate of SOFR plus 2.61. In addition, we repaid the remaining $250,000,000 of our $500,000,000 March 20 20 5 high yield notes at maturity. Our corporate debt activity over the past two quarters increased our weighted average corporate debt maturity from two point two to three point seven years and leaves us with no corporate debt maturities until July 2026 when $400,000,000 matures. Our current liquidity stands at $1,500,000,000 which does not include liquidity that could be generated from cash out refinancings, sales of assets in our property segment, direct leveraging of our $4,900,000,000 of unencumbered assets, issuing high yield backed by these unencumbered assets, or issuing term loan B.

Rina Paniry
Rina Paniry
CFO at Starwood Property Trust

We also continue to have significant credit capacity across our business lines with $9,500,000,000 of availability. Our adjusted debt to undepreciated equity ratio ended the quarter at 2.25x. With that, I'll turn the call over to Jeff.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Thanks,

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

We informed you last quarter that we intended to raise incremental capital to increase our lending pace in what is one of the best origination environments we've seen in some time. As Rina said, we originated $2,300,000,000 in new investments in the first quarter and are on pace for a strong second quarter with more than $1,000,000,000 already closed in the first month. The opportunity set should be large. In CRE, record origination volume from 2021 and 2022 needs to be refinanced in the coming quarters. Real estate transaction volumes have picked up.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

The CMBS single asset single borrower market has pulled back given the steepening of the credit curve. Many lenders are capital constrained, and banks earn higher ROEs lending to us than competing with us on their own originations. The year started strong and that strength continues today. I just got off a call with the co head of U. S.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Debt for a major brokerage who told me they have 50% more debt and equity deals in the market today than the same period last year. These factors create an opportunity for well capitalized lenders with consistent access to capital markets to prosper. As we have in the past, we have again proven our unique ability to raise both debt and equity capital accretively in this cycle. In March, we were 4.5 times oversubscribed on the issuance of $500,000,000 in sustainability bonds that Rina mentioned, which we swapped to SOFR plus $2.61 or 6 basis points off the record tight spread that we achieved just four months earlier in December 2024. In the last year, we issued a repriced $4,000,000,000 in debt and equity instruments.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Dollars 2,600,000,000.0 of that was completed in just the three months from December to March, where there was very little capital markets activity. These activities leave us today with $1,500,000,000 of capital to invest after closing the pipeline I just mentioned. We also enjoy historically low leverage at 2.25 times and have significant unencumbered assets, can be levered to continue at our accelerated investing pace as we move into the second half of twenty twenty five. We expect our balance sheet to grow materially this year, allowing us to maintain a dividend that we have paid for forty five straight quarters. We uniquely have approximately $4.5 per share in harvestable gains on our owned real estate portfolio.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

We are the only two point zero commercial mortgage REIT that has never cut its dividend, and we believe our diversified, low leverage business model provides us with the unique ability to ride out market disruption. We are seeing green shoots of liquidity and optimism return to our sector. The market's expectation of where the benchmark rate, SOFR, would be in 2026 and 2027 was 100 basis points higher at this time last year, and is now back in the low 3s for 2026 and beyond. This is good for legacy positions as they will have an easier backdrop and more debt service coverage to enable our borrowers to refinance with these lower benchmark rates. Stocks have clawed back their Liberation Day losses, but the credit curve has steepened as Insurance Capital now has lower risk based capital charges on higher rated bond classes.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Their move to higher rated credit assets with lower risk based capital charges has created more opportunity for us in subordinate positions of the capital structure, where we have invested over 100,000,000,000 over the last sixteen years. As I just said, banks get better capital treatment lending to us than direct lending, and we continue to see borrowing spreads to us decline, allowing us to maintain our returns with likely less competition. This, along with volatility in single asset single borrower securitizations, has created a bigger opportunity for us in 2025, and we expect to continue our elevated investment pace in all of our business lines. In CRE lending, we originated $1,400,000,000 in the first quarter. We committed more equity in Q1 than we did in all of 2024.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

We've been leaning in on three investment themes this year and expect to continue to: data centers, Europe and multifamily. When fully funded, 70% of the equity in our Q1 originations was in data centers with long term leases to investment grade tenants. Our second largest loan is on a broadly diversified multifamily asset in well leased German markets with a 61% origination LTV. 30% of our lending book is now in markets outside The U. S.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Where we benefit from a large dedicated team and long history of operating in these markets. Additionally, we have a large pipeline closed or in closing in Q2, the vast majority of which are on multifamily assets in The United States. At quarter end, our CRE loan portfolio is up $859,000,000 as Rina mentioned, $14,500,000,000 and we expect it will reach a record high by year end, which should support our efforts in 2026. As we look to legacy credits, I will remind you that we have over $650,000,000 in reserves for our CRE lending book reflected on our balance sheet today. Resolutions, which we expect to accelerate the next two years, should lead to lower reserves in the future and higher earnings as we recycle that capital.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

As Rina said, we have resolved $230,000,000 of assets so far this year at values in line or better than our GAAP reserve levels and expect that trend to continue. In the quarter, our U. S. Office exposure declined to just 9%. We lowered our CECL reserve for the first time in four years and with no new additions to our four zero five rated categories in the quarter.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

We moved our only Life Science deal, a five rated $73,000,000 loan on a renovated but empty asset in Boston Seaport District to nonaccrual in the quarter, and we'll update you on progress there in the coming quarters. Moving to energy infrastructure lending. You've all seen oil and gas prices move lower this quarter, but our earnings are not dependent on these commodity moves. Our loan book is split between assets that produce power and midstream assets that store and transmit the commodities, but is not levered to the commodity price itself. We continue to enjoy excellent returns at some of the lowest lending LTVs in our portfolio in this business today.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

In the quarter, we deployed a record $677,000,000 at above trend returns, allowing our portfolio to increase again to nearly $3,000,000,000 Although we have ample ability to finance the growth of this business on bank lines, we issued our fifth SIF Energy Infrastructure CLO in the quarter at the lowest cost of funds to date. I'll finish today with the Property segment, where Rina mentioned we received 8.4% rent increases in Woodstar this year and will defer 6.7% to next year, ensuring continued property appreciation. We have spoken many times about the embedded value for SPT shareholders of the Woodstar portfolio. We have over $1,500,000,000 of harvestable DE gains on our 59 owned properties. Contractual rents have continued to increase since we purchased the portfolio in 2015 through 2018, and we expect this to continue, which will add significant value to our portfolio in the coming years.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

We have told you that there is also significant upside as we are able to roll these properties to market rate from affordable once they reach the end of their affordability restrictions, which is typically twenty five to thirty years after construction. We told you that these restrictions started to burn off last year, and in eight years, over a third of the rent restrictions will roll off, allowing us to either increase rents to market rent or stay in the affordable program and continue to benefit from abated real estate taxes. In short, you may be under the assumption that multifamily rents are flat or falling nationally, but this has not been the case in the affordable space and the continued lack of supply and income growth should lead to even more upside for shareholders going forward. With that, I will turn the call to my friend Barry, who is right off the red eye, so take it easy on him. Two hours of sleep.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

Good morning, everyone. Thanks Zach, Greene and Jeff. I guess for us, let's just start with the economy. The economy is going to weaken. I was to CEOs of Fortune 100 companies in the past few days returning from the West Coast, and there will be issues on shelves, and there will be prices for consumers to absorb.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And you kind of already were in a recession. You kind of saw the lower half of the country, and the top 10%, fifteen % of the country was carrying spending and consumption. And now we'll see how the wealth effect actually plays through. Actually, the markets have recovered shockingly to pre liberation day highs, but that doesn't really feel right. And things like travel are clearly off.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

I guess it was Expedia that reported and then Airbnb and we've seen the travel numbers. The airlines have talked about their stress as international travel to The United States dissipates. But it will go somewhere. So Canadians will go to Europe or they'll go to The Caribbean. I mean, I come here with the number one tourist in The United States.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And Europeans will probably stay in Europe and frequent Greece and other locations rather than come to visit us. So the economy will weaken, and that means Powell, sooner or later, will lower rates. And for sure, when he's out May of twenty six, there's no chance rates will be higher because the selection will depend on somebody who accommodates a lower rate environment. That is all good for the property segment. And so I feel like we're through the worst of it, and it's gonna get better from here.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And transaction volumes, which kind of have slowed again, given the blowout of spreads and uncertainty in the markets and people worrying about additional where their next deal is gonna go. I expect that will re accelerate. However, we've been in the market now open for business for the past year. We probably never entered this period with a better balance sheet, a better team, more opportunities in all of our sectors to achieve excess returns. And I think we're executing really well.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

So for us, I think the story of the economy is a weakening. Obviously, now the forward curve is four cuts. So for even three would be fine down to the threes. That at the end of the real estate is a yield to be a product and largest asset class in the world. We will come back into favor and we'll probably have more people on this phone call in the future.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

But it is our opportunity to continue to our North Star, which is to achieve investment grade and continue to do that. To do that, we have to grow all of our investment sleeves and add additional ones. We've looked at a RESI originator this quarter. We've been on a $2,000,000,000 regional bank portfolio, but priced inside of our hurdles. We've looked at other companies in our sector, including the public opportunities that might exist.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And we're turning over lots of stones to find the what do you find under a stone? Pearl? Is that a clam? It's a clam. So look looking for the pearls under the under the sea.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

It's interesting that we for our board, we just did a presentation just a week or so ago, and we are the only two point o mortgage REIT that is trading above its IPO price. Jeff said we're the only one who's never cut their dividend. We believe our dividend is solid. And we have a very unusual portfolio. Own Starwood Capital owns over 110,000 apartments, including 43,000 affordable assets.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And the portfolio of this company is the shining star of the whole bunch. You have 15% rent increases in one of our geographies, there's nothing. That's the highest I've seen in anything market rate or any asset class in real estate, frankly. And they call it the gift that keeps on giving. When we bought those assets, my theory was I want to own stuff and start a property trust that we could hold forever And increase the duration of our portfolio essentially, though they give us cash flow forever.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And being affordable, they're always full. Being in growth markets that are dependent and rent growth is dependent on income growth, We picked wisely and we vastly outperformed our expectations being that the rents are so low compared to market. You actually don't have to worry about people moving in and out as much, people stay. Our only job is to manage them well and meet customers' expectations and keep them full, which the team has done admirably. So that is a real hidden source of value for the company as it stands today.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And we want to increase our real estate book and looking back at the kinds of real estate deals that provide the cash on cash yields that we think are accretive to our enterprise. And one other thing of course, some of our peers are trading at fractions of their book values. At some point, can't raise capital. There's an uncle thing. We should fold up shop.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And obviously it's the largest in our sector and largest in the world. We'd love to be the acquirer. And also partnering with Stardt Capital Group, we can split these portfolios. If there's lots of bad assets, we're able to work on them and figure out how to split the assets. We actually did when we bought LNR two thirty two years ago.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

There were some assets in there that did not fit STWDs work. You have to look at the book today and just be sort of astonished. We continue to earn, hit our numbers while carrying nearly almost $2,000,000,000 in non accrual assets, is astonishing. That is bad news and really good news. At some point, we're going to be able to harvest that capital and put it back to work.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

Can't wait. Don't want to do stupid things. Have the ability to reinvest in those assets, reposition them, and bring them back to market, and try to get great returns on our incremental capital. But it is future earnings power. And even though we carry $650,000,000 of reserves against it, we do think that that's a significant capital that we look forward to redeploying.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And we watch those assets, and Jeff and the team watch the assets pretty much every day. Our liquidity is excellent. In our universe, I'd say we have what I think Jamie Dimon referred to as a fortress balance sheet. The extension of maturities, the rates at which we're capable of raising debt securities, not only in our real estate book, but in our energy book, really position us well against our comp set and provide sustainable competitive advantage. At the end of the day, it's all about our team, and we have over three fifty people and another four fifty at SCG that are dedicated to finding opportunities for the company, here and abroad.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

We have, whether it's the CMBS team or special servicing team with 107,000,000,000 of named servicing, we are positioned to continue to outperform over long periods of time. So I've got nothing else to add. I think our job now is just execution, execution, execution. Be patient. Grow in every one of our business lines that we can.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

Be more aggressive and utilizing our usual access to data to make better faster decisions. We're doing a giant AI project over the whole company right now to help us be more efficient. And I look forward to implementation of that over the coming year. I was getting a tutorial on the flight home yesterday from a tech wizard. That was astonishing.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

We have a lot to do there and most companies do and I think it only bodes well for our productivity and our margins. So excited for the next quarter. The road is not paved with gold. There's bumps. You're gonna see things come up and down, I'm sure of it.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And the outcome of Trump administration's policies is still unknown. But we couldn't probably be better positioned for that and I look forward to the year and and work working going forward. Now we'll take any questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Doug Harter with UBS. Please proceed with your question.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Thanks. So it sounds like you've started to make some progress on resolving your nonperforming loans. As you look at the remaining assets there, how should we think about the pace resolution and whether you can be kind of as successful at exiting those with minimal losses?

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Yes. Hey, Doug, thanks for the question. There's a couple of apartment deals that we know we can likely sell at our basis, and we will do so in this year. We have apartments at Chatsworth Building on the Upper West Side and the scaffolding coming down in May, and we expect to have significantly more progress there. We just sold the unit for $7,500,000 this week, in line with our underwriting.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

So that's good. We have an office building in Brooklyn that has just signed a second lease. It's now two thirds full with long term credit tenant leases. We have someone looking at the last third that could resolve easily this year. We have an asset in Dallas that is something that we have to work through.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

It's a combination of a mixed use property with a hotel and multifamily. I think that's one we could likely work through this year. And we have a couple of Downtown LA office buildings that could push into 26 or beyond, but that's generally the flavor. Multis, if we get to this forward so far in the low threes, three and a quarter, you pick a number. And you have a five and a half or six debt yield, you have a high likelihood of getting out of par.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And most of the stuff that we wrote loans on against 3.54 caps at the very lowest, the tightest part of the market in 2021, they're performing at that high five debt yield on the low end. And that high five debt yield gets out in a low threes over. In a low fours SOFR, then we'll have to hold it for a little bit, for a little while longer. But where the forward curve is now, expect things to sort of stop coming in and start picking up progress on the others. We have staying power in a lot of these loans.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Have eight years walls on a lot of the office loans and.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

I

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

would just add that I want them all to get back. And they're not giving them back. They give them back to us. Attachment point is so good on replacement cost and you would love to own them with the coming massive decrease in supply coming to the multi market. So rents will improve certainly next year in the back half of next year and it's 27.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

One obvious impact of the administration's policies are people are very nervous about new starts and nobody really knows what anything is going to cost. And it's not just materials, just the steel, those are the labor, is it available? What will happen with the deportations of the immigrants and illegal immigrants? And then the third, what people don't talk about is the supply chain. You need to get every component to a building to finish it, not 80 or 90 or 95% of them.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

So all people I know and it's just returned from an industry conference where developers are talking about not starting projects and pushing them off which bodes well for any existing asset and their performance. And the asset classes are performing now remarkably well. I mean people look at the, we're not exactly the hottest kid today on table. But the multi markets are sitting at 95 ish, 94, 90 five percent occupancies with record supply. Usually in my youth, they might have fallen to the low nineties, high eighties.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And for the most part, rents are flattish, slightly up, some few cities down, some cities up more than a few pennies. So when there's new supply, weak and when there's very little supply, they're relatively strong. What we really need is a shallow recession, not a deep one that creates demand destruction. Even the office markets are shockingly buoyant if you have a good collateral. One thing I'd say on our book, I mean one of the things like we have to consider, we have a building we took back in Downtown CBD Of Washington.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And DC, it can be converted and is ready to be converted to residential. And I just suggest that we hold off on the work right now to understand the situation in DC with the employment base.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

But we're doing all the plumbing to be ready We're doing

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

all the plumbing, getting all the We're just not

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

deciding one year forward whether we're putting the shovel in the ground on that date or not, but we'll be ready to go in a year.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

Oh, we're we're gonna be ready to go. We're just taking the moment we wanna do that. So it's relatively we planned in designing entire conversion. It's actually a very handsome property. It's just we want to make sure the rents are what we think they're going to be.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

So with that, next question.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And part of that question, Doug, the follow-up would probably be on the three large offices that are maturing this year. Is the Brooklyn office building where I told you we signed a second lease and got up to two thirds lease. And we're talking now about a third credit tenant lease and that will work out. That's the March maturity. The June maturity is an asset in California that has a five debt yield.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

We have a basis in the low 200s a foot. We sold 15% of that complex by selling one building at $280 a foot, dollars 66 above our basis. So we feel okay and we think there's good leasing prospects. We're working on updating the lobbies and doing some work there. So we actually feel pretty good about that.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And then the October majority this year is our large loan in Downtown DC, really trophy, terrific building. It's 84% leased. It has eight years of wall and it'll have a six ish debt yield and likelihood to be able to go up from there. But our capital, given we have such liquidity and access to capital, we have the ability to ride these out and wait for the optimal time. And we will move on at the optimal time.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

But when we have walled, we have cash flow, it doesn't necessarily make sense to go today. We're going to wait, see what the market gives us, and, you know, we we sort of know where our downside is, but we think we have upside on these two. And that's part of being a hundred and $10,000,000,000 CRE manager. Hopefully, like we have in the past where I think we had, going into this cycle, a hundred plus million dollars of gains on our REO. We like to work on assets.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And Barry likes to be involved. And that's why he knows all the details of a rental in DC and what we're going to do. And so we're very involved. And we'll work it out as best we can.

Douglas Harter
Douglas Harter
Equity Research Analyst at UBS Group

Great. Thank you.

Operator

Our next question comes from the line of Don Fendetti with Wells Fargo. Please proceed with your question.

Donald Fandetti
Donald Fandetti
Managing Director at Wells Fargo

Hi. Can you talk a bit more about the opportunity you're seeing in residential credit? Clearly, you have a lot of capital, banks are selling. And I think you said you've been on a portfolio. Are you constrained in terms of not wanting to put on a lot of leverage there?

Donald Fandetti
Donald Fandetti
Managing Director at Wells Fargo

Or is this a significant opportunity for growth?

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Yes. So you asked for resi credit. The portfolio that we looked at was a $2,000,000,000 portfolio of commercial that was coming out of a middle market bank, 10,000,000 or so loans, the kind of thing that's perfect for us with LNR as our servicer. We just have so much information. We can rip through a massive portfolio like that very quickly and come up with a value that's accretive to us.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Some a couple of people I think thought it was worth a little bit more, but we went a few rounds on that. In resi credit, you've noticed we haven't restarted the resi machine. We took a write down of $230,000,000 or $240,000,000 in 2020 or so on our resi book. We owned lower coupons than market as the rate went up. And we've been a little bit reticent to go again, but our resi team has been looking at just about every opportunity, every platform.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

I could definitely see us buying an originator, building an origination business around non QM or which we've done in the past and some agency and maybe some investor loan things like some of our peers do. I do think that there is tremendous liquidity available to us from a financing play on that. I think levered yields attractive. There has been there are decent opportunities also in sort of secondaries there, but we are going to reemerge in resi. It's just a matter of when and we are looking at every opportunity to figure out how we do that.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

To buy a Resi originator with licenses that does 2,000,000,000 or $3,000,000,000 a year, you might pay $125,000,000 to $150,000,000 of premium. We're trying to decide if that's something we can build and create 125,000,000 to $150,000,000 of shareholder value by building it ourselves rather than going outside. But you will see us in the next year reemerge and start putting some credit trades on in RESI. We do think there's a long term opportunity and it's something that fits us really well. I'd love to see our dividend yields come down from 10% where I don't really understand it there.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

But if it did come down and our cost of capital changed, then that business becomes a lot more attractive. But where our dividend yield is today, CRE lending and our energy infrastructure businesses feel like the best home for capital.

Donald Fandetti
Donald Fandetti
Managing Director at Wells Fargo

Got it. And then on corporate M and A, are you sort of still thinking that sellers are reluctant, especially if we're looking at Fed cuts? Or do you feel like you're starting to feel more optimistic that there could be a seller and some consolidation opportunities for

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Given REITs are very hard to buy, you can't buy more than 9.9%. There's a lot of rules that they have to want to be bought. And corporate M and A in the REIT world is very difficult unless a seller wants to be a seller. Yeah, I mean

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

it's not where they're trading, it's what the board will do a deal at. And I think you'll see some action in the sector because they're sort of dead man walking. But it depends on the board and the management team's cooperation. You need to get in there on some of these books. You can't do it easily from the outside.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

You need to get inside and really understand the complexity of the asset base. So you can guess, but guessing in this business and obviously a lot of a lot of these smaller entities don't have our corporate debt. They have repo debt or they have other you have to really understand the terms and conditions of that stuff. So it's a little bit complicated from the outside looking in, especially when they want prices that are on the surface aren't really achievable. And obviously we'd like these investments to be accretive to our shareholders.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

I think I'm optimistic that as we come out of this that it'll become more painful for some managements to basically do almost nothing. You know, they can't do anything. They don't have a balance sheet. They can't raise capital accretively. And in some cases, the fees the management fees will overwhelm their ability to pay it.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

So inevitably, there'll be stuff to do.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And we're a huge part of the REIT index given we're more than twice as big as the next biggest competitor and almost as big as the rest of the universe. Right? So if we could reduce G and A and consolidate the entire business, we would certainly love to do that at the right prices. The hardest time to do M and A is when someone's trading at 20% or 30% of book. If you're going to pay them some significant discount to book that might feel untenable to their board or their shareholders.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

The easiest M and A is probably at 70% or 80% of book, where you can pay somebody 90% to 100% of book, cut out G and A, make it make sense for both. So it'll difficult. Somebody's going to have to want to be consolidated.

Operator

Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

Thank you very much. I think earlier, mentioned that the timing of loan closings weighed on interest income in the senior lending business in the quarter. Are you expecting an increase in 2Q and going forward?

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Yeah. This is something that I'm always reticent to talk about, Jade, because it feels like it's been in every peer's transcript for the last five years. But we did close a tremendous amount right on March 31, so you didn't see any interest income. So I think it's the first time we've used arrow in our quiver, but it was very true this quarter where we had a lot of closing play. Our pipeline is really good.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Rina always gets mad at me if I want to say what we're going to end up at, but I expect this run rate to be a run rate for a little bit. And we it's difficult out there. We've lost a number of deals in the last week or two that we hope to get, but we have as long of a pipeline as I've seen both in Europe and in The U. S. And there's a lot of really interesting opportunities.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Hoping that we can maintain that and maintain the success in our energy infrastructure book as well. We want to grow. Growing is the way to ensure that getting this portfolio back up above our previous high, which I think we will do this year, is the best way to offset the drag of the non accruals, as Barry said, until we can work out of them. So we are in a growth mode, but it's not growth at any cost. We're reticent on the last five basis points on every deal and we're trying to not chase anything to do it.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

So grow smartly is the mantra.

Jade Rahmani
Managing Director at Keefe, Bruyette & Woods (KBW)

You mentioned something interesting on subordinate debt. I was wondering if you plan to execute on that opportunity by originating whole loans and bifurcating them, doing more syndication? Or will you just be looking to originate mezz loans? How do you see executing on Yes.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

It runs the gamut. Adam Bellman is in the room. He runs our L and R business and our CMBS business. I think there are opportunities in B pieces. We're going to do a few this year.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

When I said subordinate data, I'm basically saying that what we create when we write 65% or 70% LTV loan and we finance 45% or 50% of it, it's effectively equivalent to a BBB or a BB asset. And that's the $100,000,000,000 of money that we put out over the last sixteen years. And with the credit curve in security deepening, we think we should be able to earn a little bit more on our loan book that sort of mirrors the look through rating to those. We can also obviously play in subordinate securities as well. And that's something that the team has been looking at.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

They've got cheap but not super cheap. We don't like putting leverage on leverage. We haven't done that here in a long time. And so if their unlevered yields on BBs are 10% or so, it doesn't quite hit the hurdle that we're hoping for and we're reticent to leverage. But on the right securities where we have the ability to underwrite every loan in every CMBS deal and have a real strong opinion, book, Adam, has probably returned over 20% for us in the sixteen years that we've owned it.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

If that becomes an eleven or 12, we will be a large buyer of secondary bond with our liquidity.

Adam Behlman
Adam Behlman
President of Real Estate Investing & Servicing at Starwood Property Trust

Okay. So it's unfortunate when it gets up to those levels, you start losing interest on the sellers. There's not that we haven't reached the sweet point of that.

Operator

Our

Operator

final question comes from the line of Rick Shane with JPMorgan. Please proceed with your question.

Richard Shane
Richard Shane
Analyst at JP Morgan

Hey guys, thanks for taking my questions this morning. Barry, when I sort of parse through your comments, what I hear are a lot of cross currents that you're sort of confronting. The consumer slowing down, but you see rates going lower as a result. It's an attractive financing market. So, there is capital available in the market, but your competitors, many of them are on their heels.

Richard Shane
Richard Shane
Analyst at JP Morgan

Really two questions here. One, does that put you guys on the front foot now in terms of being aggressive deploying capital? Do you want to be a little bit more conservative? And also is the sort of as you described them, the dead men walking for many of your competitors, but the availability of capital in the markets, is it creating new competitors or new types of competition for you guys?

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

It's the competitors, as you point out, are shifting. I mean I think we see the private credit guys much more. But I think we still have an advantage in our scale. We wrote a $500,000,000 junior position. Not many people get that phone call.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And because we know the property classes and we're active, people know we're going to perform. They know that it won't take us seven years, we can do it expeditiously. I think the amount of capital needed in the data center space is staggering. And the credits are great, and the debt yields to our positions are phenomenal. Spreads have come in, but if we can pick up the juniors in those positions, we actually, you probably don't know it, we're very active on the equity side in data centers.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

We probably committed over $10,000,000,000 to the space and have a 1.5 gigawatts of power under our control. We're the one among the top 10 largest players in The States and number one in in Ireland. And we have about a 60 people working in the data center space. So we can underwrite this stuff quickly. We know the credits, we know the tenants, we know the issues and leases.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

We've written them all to Amazon, Oracle, ByteDance, etcetera. So I think that's a space, an area we could add infinite capital to if we have it. And we do like the positions there. So that's a big new giant. Take the scale of the commitments from the majors, it's something like $2.50 to 300,000,000,000 leverage, it's 900,000,000,000, that's almost as big as the infrastructure bill.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And that's this year. So maybe 25% of it's offshore. There's a lot of capital that needs to go into this space. We've done some, we'd like to do a lot more. And I don't see it's a big enough area.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And by the way, money is kind of contracting a little bit. People are a little nervous about private credit, which I think they should be in corporates if we do have a recession. I think the uncertainty, as Mark Rowlands talked about, breeds delays. And you just wait for a clearer picture. As you've seen, M and A has hit think loads not seen in twenty years.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

Nobody can do anything with anyone. But I think I'm kind of happy. I mean, for us, this is a good environment. Because we have conviction and we've been doing this for so long, Star Capital is enjoying its thirty fourth year. We have the data also to support and help us make better decisions.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

I think it's good. I'm certainly in a way more or less worried. It's the opportunity set can we find, pricing we need. But the banks, as Jeff pointed out multiple times, they do so much better now lending to us than making the loans themselves. Tumult in the spreads of the CMBS market enable us to come in and shore up bids on deals.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

The other thing we've learned as a borrower, is becoming super important, when you go to the banks and they originate for you we just did this the other day, by the way. They're going to syndicate the loan. It's not going to CMBS. And they syndicate it, in many cases they'll syndicate it to probably offshore accounts. And then if there's a bump in the road, you're dealing with somebody in Korea you don't know or Europe.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And we've been willing to take excess spread to let them know who our counterparty is going to be. And I think that a lot of borrowers are paying more and more attention to that. That they'll give up 25 bips, 50 bips because you want to know if something ever happens. I can speak to Jeff or Dennis, our team, or Adam, whoever it is on our squad, and we'll work it out with you. And they'll create a win win.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

So I think people are it's interesting. I think borrowers are smarter. Like, they don't want the five bips right now. They want to know where their loan is going. And that's a really important feature that's kind of emerged that I would say was not here five years ago.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

We weren't paying attention to it. I think what happened to all of us is obviously the world changed. Interest rates went up 500 basis points. And we look at our stacks and we're trying to do something on the equity side and some bank we've never heard of says no. Everyone else says yes.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

And you can have a guy with a 10% position and he's like, I'm

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

not doing this, you've pay me out of par.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

He says, well Morgan Stanley, you take them out of par. You sold the loan to them, we never knew who they were. And that's the kind of negotiations you see. So I think that's really good for us. Relationship banking and the debt side is actually when you get to these big deals, it's a big deal and we've been doing it a long time and we've a great team.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

It's kind of interesting.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

I'd encapsulate that by saying as the REITs and the banks have written less loans since COVID, you've certainly seen insurance, debt funds, and CMBS pick up the slack. As you look at the forward silver curve and expectations of forward rates, if rates do go down, you're going have less annuity sales, insurance is very yield driven and they will pull back. So in that environment where we move to the forward curve and rates go lower, we expect that our position in the market will only improve versus insurance and debt funds and CMBS. And then last thing I would say, as Barry talked about data centers, the only thing that he didn't mention is that all of our loans have been made on fifteen or longer year leases to Mag seven credit tenants on the other side. So not a lot of speculation there other than getting construction project finished, which we have significant time to do.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And this core and shell is not that hard to figure out. So we really like that space.

Richard Shane
Richard Shane
Analyst at JP Morgan

Got it. As always, very interesting answer. I really appreciate it, guys. Thank you.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Thanks, Rick. Thank you, operator.

Operator

Thank you. We have reached the end of the question and answer session. Mr. Schirnlichke, I'd like to turn the floor back over to you for closing comments.

Barry Sternlicht
Barry Sternlicht
Chairman and CEO at Starwood Property Trust

Thanks for joining us everyone. We look forward to talking to you next quarter. Have a great Memorial Day, I guess, as we enter the summer season. Stay well.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

And a public shout out to Mark Cagley, who retired from the firm last month. And this is the first call in ten years without him. Hope you're enjoying your retirement and listening in. And your handicap is dropping. Take care.

Jeffrey Dimodica
Jeffrey Dimodica
President at Starwood Property Trust

Thanks, everyone.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Executives
    • Zachary Tanenbaum
      Zachary Tanenbaum
      MD & Head of Investor Strategy
    • Rina Paniry
      Rina Paniry
      CFO
    • Jeffrey Dimodica
      Jeffrey Dimodica
      President
    • Barry Sternlicht
      Barry Sternlicht
      Chairman and CEO
    • Adam Behlman
      Adam Behlman
      President of Real Estate Investing & Servicing
Analysts
Powered by Quartr

Key Takeaways

  • This quarter Starwood reported distributable earnings of $156 million ($0.45 per share) and GAAP net income of $112 million ($0.33 per share), while committing a record $2.3 billion to new investments—the highest quarterly pace since 2022.
  • In commercial lending the loan book grew by $859 million to $14.5 billion, with $1.4 billion of originations and the resolution of $230 million of non-accrual assets at or above GAAP basis, driving a CECL reserve reduction to $456 million.
  • Infrastructure lending hit a milestone with $677 million of new commitments—its largest quarter since acquisition—bringing the portfolio to $2.8 billion, and closed its fifth infrastructure CLO at a record low cost of funds (SOFR+173 bps).
  • Liquidity and capitalization strengthened post-quarter with $1.5 billion of cash, $9.5 billion of available credit, no major corporate debt maturities until July 2026, and an adjusted debt to equity ratio of 2.25×.
  • Management highlighted a robust CRE origination backdrop driven by refinancing demand, strategic focus on data centers, Europe and multifamily, and unique access to subordinate debt and servicing markets as sources of future growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Starwood Property Trust Q1 2025
00:00 / 00:00

Transcript Sections