Starwood Property Trust - Earnings Call - Q4 2020

Transcript

Operator (participant)

Greetings. Welcome to the Starwood Property Trust fourth quarter and full year 2020 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, Zach Tanenbaum, head of investor relations. You may begin.

Zach Tanenbaum (Head of Investor Relations)

Thank you, operator. Good morning and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended December 31st, 2020, filed its Form 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the investor relations section of the company's website at www.starwoodpropertytrust.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 in 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. Our 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. Reconciliations of these non-GAAP financial measures to the most comparable measure prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov.

Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer, Jeff DiModica, the company's President, Rina Paniry, the company's Chief Financial Officer, and Andrew Sossen, the company's Chief Operating Officer. With that, I am now going to turn the call over to Rina.

Rina Paniry (CFO)

Thank you, Zack, and good morning, everyone. Before I walk through our financial results, I wanted to briefly comment on our non-GAAP earnings measure. What we used to call core earnings is now called distributable earnings, or DE, in order to more accurately describe what this metric represents. While the term has changed, the calculation has remained the same. You will find additional disclosures about this non-GAAP measure in our 10-K. Despite a volatile market backdrop caused by COVID, the fourth quarter capped off another successful year for us, with DE of $0.50 per share for the quarter and $1.98 for the year. Throughout 2020, our liquidity and capital deployment were strong, which would not have been possible without the strength of our balance sheet and our diverse platform with multiple business lines.

Even after $4.6 billion of capital deployment, $3 billion of which occurred during COVID, and after early retiring $500 million of unsecured debt, we maintained an average cash position of over $700 million post-COVID. I will start my segment discussion this morning with commercial and residential lending, which contributed DE of $141 million to the quarter. In commercial lending, we originated five loans and a small upsize for a total of $454 million in the quarter, bringing our full year volume to $1.9 billion. Of this amount, $1.1 billion was originated after Q1. During the fourth quarter, we funded $333 million related to new loans and an additional $334 million under pre-existing loan commitments. We also received $250 million from loan repayments and $47 million from annual sales, bringing our commercial loan portfolio to a record $10.2 billion at year-end.

Our interest collections remain strong, with 98% of our loans current as of quarter end. We continue to see improvements in loans, which required partial interest deferrals post-COVID, particularly in loans secured by hospitality assets. At year-end, we had five loans which continued to require the partial interest deferrals granted to them post-COVID. The quarterly deferred interest related to these loans is $4.6 million. These modifications were short-term, generally permitting only the temporary deferrals of interest and the repurposing of reserves, and were often coupled with additional equity commitments from sponsors, which totaled $650 million since COVID began. On the CECL front, we reduced our reserve by $27 million this quarter, bringing our general reserve to $62 million and our specific reserve to $16 million.

The decline was primarily due to the write-off of a $22 million specific reserve related to a $71 million loan on a residential project in New York City, which is now reflected as property on our balance sheet. We also fully reserved for an $8 million unsecured loan related to this project. Because these loans were on non-accrual, there is no impact to interest income going forward. We ended the quarter with a weighted average risk rating of 2.7 on our five-point scale, down from last quarter's 2.9 and in line with pre-COVID levels. Our residential business was also active in 2020, with four securitizations totaling $1.8 billion and loan acquisitions of $1.6 billion, of which $1.2 billion were acquired after Q1.

During the fourth quarter, we unwound the first of our nine life-to-date non-QM securitizations, which will allow us to significantly reduce the financing cost of these loans once they are resecuritized. In addition to the $177 million of loans we acquired in the unwind, we purchased another $146 million of loans in the quarter. We also securitized $327 million of loans in our ninth securitization, bringing our loan portfolio to a year-end balance of $933 million, a weighted average coupon of 6%, and an average FICO of 727. Our retained RMBS portfolio ended the year at $236 million after selling $136 million of bonds that we retained from our second quarter securitization at a gain to our cost basis. On the financing front, we executed two new facilities for $725 million, one during the quarter and one subsequent to quarter end.

After the quarter, we repaid our Federal Home Loan Bank facility and transitioned the loans secured by that line onto our existing facilities. Next, I will discuss our property segment, which contributed $19 million of distributable earnings to the quarter. This portfolio continues to perform very well, with blended cash-on-cash yields of 15.7%. 2020 rent collections were strong at 98%, and weighted average occupancy remained steady at 97%. In our investing and servicing segment, we reported DE of $32 million in the quarter. Our special servicer was very active in 2020, with $5 billion of loans transferring into special servicing since the onset of the pandemic. This does not include $24 billion of COVID relief requests that were fielded by our servicer and which may result in future transfers.

As we have said before, although we expect longer resolution times and thus delayed fee recognition for these assets, we believe that the earnings contribution from the servicer in the coming years will reflect these increased balances. We ended the year with an active servicing portfolio of $8.8 billion and a non-agency portfolio of $81 billion. In our conduit, spread tightening in the fourth quarter allowed us to achieve record execution levels as we securitized $455 million of loans in two transactions. This brings our total securitization volume for the year to $942 million in five transactions. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $6 million to the quarter. We funded $81 million related to new loans and $22 million under pre-existing loan commitments.

These fundings were offset by repayments of $103 million and sales of $22 million, leaving the portfolio at $1.6 billion at year-end. We continue to be pleased with the credit performance of this portfolio, which had 100% interest collections in the quarter. We also recognized a $7 million decrease in our CECL reserve due to improved macroeconomic conditions in the project finance space. Subsequent to quarter end, we priced our inaugural infrastructure CLO, which Jeff will discuss in more detail during his remarks. I will conclude this morning with a few comments about our liquidity and capitalization. As we mentioned last quarter, we executed two debt offerings in October, a $250 million upsized to our Term Loan B and our first $300 million sustainability bond issuance. As I mentioned before, we also early retired our $500 million unsecured debt that was due in February 2021.

We continue to have ample credit capacity across our business lines, ending the year with undrawn debt capacity of $7 billion, unencumbered assets of $3 billion, and an adjusted debt-to-undepreciated equity ratio of 2.2 times. In addition, our liquidity remains strong, with cash and approved undrawn debt capacity of $649 million as of Friday, providing us with ample capacity to execute on our pipeline. With that, I'll turn the call over to Jeff for his comments.

Jeff DiModica (President)

Thanks, Rina. I want to start today with a couple of non-market-related topics. Transparency and investor reporting are at the core of every decision we make, and we are proud to have been recognized by NAREIT as the recipient of their Gold Star Award for excellence in those areas in each of the last seven years. In March, we will release to our website a Virtual Investor Day webinar that Zack and the entire management team put together that we hope will explain exactly what we do as investors across seven businesses in more detail than we have ever gone through in the past. We look forward to sharing that with you and will send a press release when it is uploaded to our website. Also on our website is a discussion of our corporate ESG initiatives.

I want to highlight a few things you will find there that we are very proud of. 43% of Starwood Property Trust employees identify as female, and 49% of employees identify as racially diverse. Each year, we strive to increase our diverse talent pool, and for 2020, we continue that trend with 52% of hires identifying as either female or a minority. We are a top-10 owner of affordable housing in the United States, with over 35,000 residents in our Florida multifamily portfolios. In our non-QM residential lending business, with over $5 billion of capital deployed since 2016, we are a leading provider of mortgages to high-quality borrowers who otherwise struggle to secure access to housing credit. Our energy infrastructure lending business has financed over $800 million of renewable energy assets since our purchase in 2018, generating 7,900 gigawatt-hours of energy and avoiding 7.4 million tons of CO2 emissions.

Finally, we are also proud to have issued our inaugural $300 million sustainability bond in Q4, backed by eligible green and/or social projects. Now on to the discussion about our quarter, our year, and our prospects. 2020 was as difficult of a year as most of us can remember, but looking back on what we accomplished, it may have been the most satisfying for our firm. We entered 2021 with tremendous optimism about the overall health of our business, our future prospects, and unparalleled confidence in our ability to continue to pay our dividend. We ended the year with $1.98 in earnings in 2020, despite the earnings drag of holding record levels of sustained liquidity due to having to work through an entire credit cycle in less than 12 months.

We entered COVID with what we believed was a fortress balance sheet, near record levels of liquidity, and the ability to create significantly more, allowing us to be the first to both voluntarily pay down our bank lines at the beginning of COVID and then begin to go on offense and begin investing again in April, just weeks after the COVID lows. In the downturn, we never contemplated a dilutive capital raise, which would have impacted future earnings growth. We completed a wholesale review of every projected cash inflow and outflow, and we re-underwrote every asset multiple times. We never sold assets for a loss. We didn't need to create more sources of cash by unwinding our in-the-money foreign exchange hedges or LIBOR floors. To the contrary, we used the knowledge of the quality of our assets and sponsors and of our liquidity prospects to go on offense.

We deployed $3 billion of capital in the last three quarters of 2020, which was over three times more than our five largest commercial mortgage lenders deployed in the aggregate over the same period. We did this with contributions from all our investment silos, with term financing and at attractive ROEs. We carried that momentum into Q1 of 2021, and our first quarter closed and in-closing pipeline across business units is well over $2 billion, the vast majority of which comes from the 12 loans we expect to close in our core CRE lending segment. The rebound in prices across asset classes has created significant cushion in our financing facilities as well, which is another source of potential liquidity today.

We issued $550 million in high-yield and term loan debt that we used to pay off $500 million of high-yield bonds that opened for prepayment at par in Q4, well in advance of the maturity date in February 2021. These actions leave us with ample unencumbered assets to create more liquidity in the debt markets, where we could borrow today at or below the best rates we have seen since our inception. In our core CRE large loan lending business, our loan book has an LTV at year-end of 60.4%, the lowest in our history, and is now over $10 billion for the first time. We have sold more A-notes than any of our peers, and if we add back our off-balance sheet financing, our loan book at year-end was almost $14 billion.

Given the uncertain climate last year, we worked hard to reduce our future funding exposure by well over 50%. Today, we have the least future funding obligations of any time in the last 10 years, representing just 7% of our total assets, down from 18% at year-end 2019. Our world-class borrowers have contributed $500 million of equity to their projects since COVID began, the vast majority of that on hotel loans, where we have only three loans remaining on partial interest deferral with no interest forgiveness. In addition, we have commitments from our borrowers for an incremental $150 million of equity contributions in our hotel portfolio alone. At our low LTVs and with the financial support of our hotel borrowers have continued to provide, we are confident this large loan portfolio will significantly outperform expectations absent the divergence in the path of the COVID recovery.

As Rina said, interest collections have remained strong, and though we continue to work through a few loans whose business plans have been disrupted by COVID, we remain confident in the strength of our book overall. We worked hard on the right side of our balance sheet last year as well, selling A-notes, adding warehouse line capacity, and we are working towards pricing our second CRE CLO in the second quarter, which will move over $1 billion in loans off our bank lines, removing both recourse and credit marks. If today's CLO levels hold, we will significantly increase our returns on the equity in these loans. Pro forma for this CLO, we will have less than 40% of our CRE loan book financed on bank warehouse lines versus 45% today, which is already the lowest percentage in our peer group.

We continue to benefit from the Libor floors in our loans as well, and the average Libor floor on the 90% of our domestic loans that have them is almost 150 basis points in the money today, allowing us to earn returns in excess of our original underwriting. In non-QM residential lending, we added or are in the process of documenting bank lines that will bring our financing capacity above $2 billion, which more than fully replaces the Federal Home Loan Bank line that actually matured this month as did the lines of all other captive insurance companies who were members of the Federal Home Loan Bank. One of the new lines we closed and hope to replicate is a multi-year committed non-marked-to-market financing facility, which, in addition to our successful securitization program, provides the business multiple options for financing going forward.

As Rina mentioned, we reduced the balance of our non-QM loans on our balance sheet with our Q4 securitization, our ninth to date, and took advantage of a significant rally in residential loan prices to separately sell what we deem to be our riskiest loans by geography and credit score at a gain. Rina mentioned we executed an optional call right on the first of our nine securitizations in the fourth quarter, which will significantly lower our cost of financing on the loans in that transaction. We have the optional right to call and resecuritize three additional securitizations in 2021, and we plan to continue to call securitizations, lower our financing rates, and increase our ROEs in the quarters and years to come.

In our energy infrastructure lending business, we are very happy to announce that we priced our inaugural energy infrastructure CLO on Tuesday night, a first of its kind and the culmination of a two-plus-year path we set out on after buying that business from General Electric. We were oversubscribed in every offered tranche, allowing us to upsize the deal from $400 million to $500 million and tighten spreads to an average coupon of Libor plus 181 through the BBB bonds at an 82% advance rate. This significantly increased the ROE on the assets in the CLO with term financing that is non-recourse and has no mark-to-market exposure. This CLO didn't materialize overnight.

Our team met with potential bond buyers since our portfolio acquisition and had dozens of bespoke meetings to explain why this nascent market offers several meaningful structural advantages and a significant risk-reward at wider spreads than broadly syndicated corporate loan CLOs. We were delighted bond buyers agreed with our thesis. We intend this CLO to be the first of many in this business. The assets in our portfolio continued to perform extremely well even in the depths of COVID and were unaffected by the recent freeze in Texas. With the emergence of accretive term CLO financing, we intend to grow this book significantly in the years to come at accretive returns.

In brief, during 2020, we continued to proactively reduce our exposure to below investment-grade CMBS, and with a portfolio balance of $689 million, it is the smallest year-end balance since our acquisition of LNR in 2013 and 33% lower than our 2017 peak. Despite choosing to reduce our exposure to CMBS during this period, we were able to increase our named special servicing portfolio to over $80 billion today through purchases, partnerships, and being named special servicer by third parties. We took advantage of the depth and breadth of our platform, and during 2020, we reallocated professionals internally to help our special servicer deal with over 1,000 bespoke special servicing requests since COVID began. Of this amount, $5 billion has already entered special servicing, which we expect will produce in excess of $50 million in incremental revenues in the years to come.

In our CMBS conduit origination business, SMC, we had $185 million of unsecuritized loans when loan prices fell in COVID. Securitizing them early in COVID, as some chose to do, would have crystallized over $20 million in losses, but as investors, we chose to hold the loans, and with the reopening of the CMBS market and spread tightening, we have now securitized over 90% of those loans at or above par and expect to securitize the balance in the coming quarters. For the first time, SMC was the largest non-bank originator of CMBS in 2020. In May, with many competitors shut down, we chose to go on offense and originate COVID-appropriate loans, realizing some of the highest gain-on-sale margins in our history as bond spreads continued to tighten in the second half of the year. In addition, we have a robust pipeline for Q2 securitizations.

Finally, we also had very strong performance in our property segment across our portfolio-stabilized core plus assets. We expect to close an $80 million cash-out financing on one of our Florida multifamily portfolios in the first quarter, which will increase the record 15.7% cash-on-cash return we earned on the entire property portfolio in the fourth quarter. We continue to actively explore ways to monetize a portion of the over $900 million or over $3 per share of gains in our own property. Doing so would add liquidity, increase book value per share, and allow us to realize gains that we can reinvest accretively to grow earnings. In closing, we believe there is ample runway for us to continue to outperform in 2021 and beyond, regardless of the macro environment. With that, I will turn the call over to Barry.

Barry Sternlicht (Chairman and CEO)

Thanks, Jeff. Thanks, Rina, Zack, and good morning, everyone.

I don't know how to actually handle this call. I'm so excited about the year we had and more excited about the future of the firm. When we created this company 11 years ago, we were a $900 million pile of cash, and now we're an $18 billion balance sheet with 300 extremely talented people, with the best-in-class board of directors. I think, if anything, it's always when the tide goes out that you see who's standing tall. Our business model, our strategy of a diversified finance company, really showed its strength as we continued to do what we do and had the balance sheet to do with. It was a remarkable year for us. I mean, as you would expect, when the storm hit and the pandemic hit full force, every person here manned their station or battle station.

As the smoke cleared, we decided to go back on the offensive. We looked at our balance sheet, and as you know, on March 16th on CNBC, I was pretty bullish on the stock market, and I said, "This is going to clear." We used that overall driving theme to get back to work, and the board let us deploy capital while we had debates, and some of the opportunities were extraordinary. One trade we made in our resi business in the year made us almost $50 million pre-tax, and we actually never had to deploy any capital behind it. No other mortgage REIT, and I don't even want to call it a mortgage REIT anymore, no other finance company in our sector could do something like that.

All of our business lines, we had the second most profitable securitization in the company's history in the fourth quarter, followed by a pretty nice securitization earlier this quarter. So, I mean, it's great that we got through the quarter. I went on TV with Becky Quick. Jim Cramer was talking about our dividend yield not being sustainable. When we went public, we said we'd be stable, we'd be transparent, and we would never force capital into a single business line, and that's why we drove the diversification of the company. There are so many incredible things that happened in the year, consummated most recently by the CLO and the energy book, which will be a game changer for that business for us, and it should meaningfully contribute to our growth going forward with no credit losses of any consequence during the prior 12 months.

It's going to be, and we have a great team. So you have 300 people dedicated to the affairs of this company. I just want to thank them for all their work. They may be listening to the call, some of them. They were working from home. We got through it smoothly. Then there's 400 people and 4,000 people at Starwood Capital Group who supported the STWD team through the crisis. Our real estate guys helped out on the loan restructurings and looking at ways we could feel good about the investments. It was that conviction in the value of our book that allowed us to go back on the offensive, as Jeff said, did five times the investment of, or more investment of the next five guys in the industry combined. Real estate's really just still recovering from the pandemic.

We turned off our large loan lending book largely, but other businesses we went to town on, and so we had that opportunity, which worked out great for everybody, but going into this year, almost every business is in a prime position, and we expect all the cylinders to be functioning to our advantage, which is just remarkable. We have a great balance sheet. All the moves the team have done to support the financings, and you have to look below the lines so you can see that we have more balance sheet financing, more match recourse financing than any of our peers, so I have to say the team has done just an extraordinary job. I also said in the third quarter earnings call that we can pay our dividend, that we had the gains in the book.

I was confident we could pay the dividend for practically forever, though whether it was prudent to do so or not. If you'd believed me and not the comment Jim Cramer made, the stock's up almost 70% since that call. It was $14.67. So he had a call in, and somebody said, "Well, companies with big dividend yields usually mean they're cutting them." That wouldn't be the case with us. So we never really had any doubt whether we could pay the dividend. It was a question of whether we should pay the dividend. And obviously, we made the decision with the board's support to keep the dividend. And honestly, with a loan-to-book value of 60%, LTV of 60%, and an 8.2% dividend yield today, and the Treasury at 1.44, we still believe we have an extraordinary value proposition for shareholders.

I'd expect, I'd hope coming out of this, that people would look at this as a company that can grow and support its dividend. We think I can't be more positive about the company right now. What else can I say? We've talked to Jeff, and Rina gave you extensive comments. I mean, the fact that LTV 11 years into this business is still 60.4%, that's the big difference between mortgage rates today and mortgage rates prior to the GFC, that they were lending at 70%-80%. When things got tough, they wound up falling apart. The other most hidden things in the balance sheet were we've reduced our CMBS exposure by more than a third, and we also reduced our construction loan and future funding exposure by a dramatic 80%, some staggering number. The company's absolutely positioned for incredible success going forward.

And this is sort of a celebratory earnings call because it really wasn't fun when our stock had crashed, and people didn't panic. They manned the stations, and everyone held their arms together, and all of our business lines performed beautifully. So I don't have much more to say. I think Jeff and Rina, Andrew, Zach, the whole team, really kudos to you and to our board because I think real estate is not out of the woods. Don't take these comments as commercial real estate being out of the woods. I'll talk about in three seconds each of the asset classes. Industrial's fine. Multi's are weak, but they'll be okay because kids will go back, will leave their parents, and they'll go back into apartments. But the business asset class is getting a bid. Office is a yellow.

Office is a question mark, and it's deal by deal, but I do believe, and we have the general feeling, that people will go back to the office in some scale, and we look offshore to Korea, Tokyo, the Middle East, China. People are 100% back in the office, and we're in continental Europe before the second wave hit, so despite the Salesforce comments, we think that market will be okay, more than okay, because we're a lender. We're only at 60% of value, and then you have two more challenging asset classes, hotels, but Jeff wanted to say that we're going to have no losses in our hotel portfolio. We took that out. I just said it, so he didn't have to say it, and then it'll be nothing, and then retail, which is really difficult to underwrite and is kind of dark red, as you know.

I'm not telling you anything you don't know. It's interesting because if I look at the book, we probably could sustain maybe $100 million of losses out of our $18 billion going forward. None of it is even one of our red assets we marked a five. I'll bet dollars to donuts so we don't lose more than a dollar, not a dollar, and we just had to do it because it went on non-accrual status. But it's a third of the cost of the asset, and I'd love to get the asset back. So I couldn't be happier. With that, I guess we'll take any questions. By the way, one more thing I should mention is we don't really have exposure to the most troubling markets in the country.

In San Francisco, it's less than 1% of our assets, and New York City, it's like 3% of our assets. So New York, by the way, is not going away. New York may struggle a little bit. Residential prices will be down. The office markets will take a while to recover. Rental growth will be nonexistent. There's too much sublet space. Actually, rents will drop, but our exposure in Manhattan is pretty good, and we're comfortable. I think the tourism market will rebound sharply. Midweek will be tough because of business travel for a while, but leisure on the weekends will explode. Yesterday, you saw Carnival say 30% up, and future bookings and rates are up. Leisure travel is going to be great, and that's why Marriott stock hit an all-time high yesterday, I guess.

I do think the hotel stocks are way ahead of themselves, but that's an aside and doesn't really impact us. So with that, we'll take questions. Thanks.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question comes from Steven Laws with Raymond James. Please go ahead.

Steven Laws (Analyst)

Hi, good morning. Jeff, I wanted to start off really with your comment and your prepared remarks about the earnings growth that can be generated organically.

Can you talk about that building off the roughly $2 per share of distributable earnings this past year? What's the capacity to deploy capital and the returns we should think about on that deployment as you think about where you're putting money to work today?

Jeff DiModica (President)

Yeah. Thanks, Steven. Great question. I think from an earnings growth perspective, there are a few ways you can do that. One would certainly be unlocking gains in things like our property portfolio and redeploying those gains. That's an important thing that we've been working on. We've been thinking about how to properly do that. The other way to grow it is to come up with a couple of ways. One is we can deploy more capital. We've been very defensive. You can see that we're moving to our front foot today. As we deploy more capital, that matters.

For every $100 million of capital that we deploy at, say, a 12, and instead of paying off a bank line that is a 3% return, if you pick up 900 basis points on every $100 million extra that we deploy, it's $9 million a year, which is $0.03 to earnings. So certainly, bringing our cash balance down, and that is one of our goals during this year as we feel more comfortable coming out of COVID with the vaccine, that we will do. I would say we earned a significantly overweight premium IRR on things that we invested in at the lows. As Barry said, the board and Barry allowed us to make some investments at the right time, and we had a premium IRR last year.

I would say that today we're back to something closer to our run rate in that 12%-12.5% ROE, and that's what we're seeing. It is competitive in the areas that we want to invest, and it probably looks a lot like what other people are trying to do more of, a little bit more conservative cash flowing, multifamily, etc. And that's what we've been pursuing. But we think there are some great opportunities, as Barry mentioned, in energy infrastructure and other places where we can really get some premium returns this year and potentially grow earnings that way as well.

Steven Laws (Analyst)

Great. And as a follow-up, I wanted to hit on the energy infrastructure. Congratulations getting the first CLO done.

When you look at the origination pipeline and returns on new investments there, yields on new investments versus now where you think you can get the CLO financing done, how does that change the ROE equation and amount of capital you're looking to allocate to that business?

Jeff DiModica (President)

Yeah. It's massive, and if you look back at our purchase portfolio, and you remember, Steven, we bought a lot of lower coupon loans, and they were financed on warehouse lines at decent rates, but certainly not where we think we can borrow on a go-forward basis. The overall ROE was low. We bought a team. We bought the expertise. We wanted best-in-class to grow this business.

And with that team, post-CLO, I think as I look back at everything we've done since the acquisition, it's been low teens, and I think it's an opportunity to earn mid-teens on the best CLO executions there, and we plan to open up the gate. The stabilized returns on our resi business and the energy business are higher than the returns in the large loan real estate business. So they're higher ROE businesses, and the CLO only made it higher. And the CMBS REIT's book as well. So those are our high ROE businesses. And we have, as you may know, there's a fascinating GAAP challenge with the resi business that we're underwriting refis of these trusts, and we mentioned we did the first one in the quarter, but we can't use that for GAAP. So we're understating the IRRs on these deals.

We're accruing actually probably below, though, the return on the large loans we have, real estate loans we have. But the total IRR is actually hidden until the refi comes through, and they're mid-teens, high-teens. So you can't assume the refi, so we follow GAAP. The total return on capital is significantly higher than we're telling you in the earnings. So it's a fascinating little business, but we choose to do it here because it's a great use of capital, and our team has done an outstanding job. So it's that, the conduit business also, I should mention, which is REITs. The conduit is driving very high ROEs, turning the book 11 times a year. And to your question on earnings growth, the conduit was shut down for the first half of last year.

So as you look to earnings, that certainly took away last year what it could have been. And if we can stay on trend this year, we would hope that could provide some earnings growth as well.

Steven Laws (Analyst)

Great. Thanks for the comments this morning.

Jeff DiModica (President)

Thanks, Steven.

Operator (participant)

Once again, if you would like to ask a question, please press Star 1 on your telephone keypad. Our next question comes from Charlie Arestia with JPMorgan. Please go ahead.

Charlie Arestia (Analyst)

Hey, good morning, guys. Thanks for taking the questions today. In the few years that I've been covering you guys and thinking back further to the IPO, as you mentioned, the platform's obviously grown, but I think more importantly has gotten more diversified, which obviously paid off this year.

When you think 2021 and beyond, do you see Starwood being active in M&A or any other channels to really add additional capabilities to further diversify that platform?

Jeff DiModica (President)

Well, I should have mentioned we're taking all our cash and buying Bitcoin. That's a joke. That would be not the safest and transparent. I work for MicroStrategy. Are we going to continue to diversify? Was that the question? Yeah. And also, I guess specifically related to maybe M&A. Yeah. We are working on a few things in the M&A world. And also, there's at least one business line that we're not in that we've tried to get in that we'll still try to get in, which will be equally high ROE for the firm. I'm laughing because we've been working on it for four years. We've come close, but we've never quite succeeded.

So yes, there are other business lines that would have to be large enough to make a difference to us and have the potential to make sure we have the right people to run the business unit. So we'll do anything that makes sense in finance. And we are a REIT, so it kind of constricts what we can do. It has to be qualified REIT income or can't endanger our TRS. But within those confines, I mean, some like servicing income, some of it is now REIT eligible assets. So there's interesting things to do, and we've been working on several of them. We made a bid for one company, and then they declined the bid, decided to IPO. They couldn't get their IPO done, and they just sold the company to a bank. So we've been trying.

You don't see it, but we have been trying to do other things that we thought could take advantage of the cycle, frankly, and made strategic sense for us.

Operator (participant)

Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti (Managing Director and Senior Equity Research Analyst)

Hi, good morning. A couple of things. One, it's good to see the stock almost back to pre-COVID levels. I guess two questions. One around hotels and macro. Barry, do you lean more towards a big 10-up demand snapback in T&E in the U.S.? And then my second question is on the M&A comment. Are you guys interested in getting bigger in residential mortgage origination? Is that sort of what you were alluding to?

Jeff DiModica (President)

That would be a big guess on the latter portion of that. We do have an originator under contract. It's complicated. We've been waiting over a year for the transaction, two years.

Everything for the split of two fingers, two fingers for the transaction to close. There are some issues that involve, I guess, the government's approvals or something like that. It has nothing to do with us. It has to do with them. The first question was hotels, macro thought on where do they come back as people start to travel. I was just looking at this. We own a lot of hotels. Actually, I'm doing the call. Actually, I'm now primarily headquartered with STWD's people in Miami, so I'm in their offices today. Our hotel in South Beach ran 94% occupancy at $1,600 a night. Our hotel in LA is at, I think, 8% occupancy, but New York's really screaming at like 23%. What you're seeing is exactly what you'd expect. Economy and roadside travel is actually down not a lot.

The economy, I think, is down like 6% RevPAR right now. That's trailing 12 weeks and trailing, I think it may just be the week. Roadside down like 13%. So domestic travel will come back first. The courtyards and Marriott's along the roads of all over America will come back first. It will take a while, but they'll come back first. The biggest challenges are the big urban boxes. How do you fill midweek in Seattle and Chicago without business travel? We actually just bought a hotel in Copenhagen because it's 87% tourists. We think that'll snap back really fast. Extended stay hotels are crushing it, relatively speaking. Well, not, I mean, doing much better than anything else. We own a chain of hotels called InTown Suites. EBITDA dropped like 3%. RevPAR is now up, but it's low-end extended stay. It's very low-end, like $300 a week.

That doesn't buy you a bathroom at the One Sound Beach, but that stuff is full. The average length of stay is like 140 days, and it's quasi-apartments, and actually, the single strongest place in the real estate markets today is single-family and single-family rental. Those are crushing it. There are multiple cities in the country with 10% year-on-year growth in rents in single-family rental, which is unbelievably strong, so I think hotels won't get back to, generically speaking, the big urban boxes of Marriott Marquis in New York, 2024, 2025, so these 2,000-room urban boxes, other parts of the hotel market will recover much faster. Leisure-oriented hotels, resorts. Give them 12 months, and there'll be a burst of activity to actually produce a $1.9 trillion stimulus with the Dow at an all-time high, with savings rates at all-time highs. It's so crazy.

People are going to stop trading GameStop, and they're going to go take a vacation because they were so rich. You saw the numbers yesterday. You heard about European travel up 500% to Greece and Spain. I mean, it's going to be a bonanza in leisure because people have been locked up, and they want to go away. The urban boxes, business travel, there's no question Zoom, which isn't that much fun, is going to influence the level of business travel. There's no doubt. I look at the stocks, and I wonder how they could be here. Some of the stocks hit an all-time high yesterday. You have to either believe that all travel is coming back. I mean, for the stock to be there, or you change the discount rate because interest rates are so low. You're using a different DCF on the company.

I will say that all the companies, including our hotel company, we have our own hotel management company, and we're running tighter, leaner boxes. Our margins will get better because we're offset by the fact that minimum wage is going to rise and should rise. I'm fine with that.

Don Fandetti (Managing Director and Senior Equity Research Analyst)

Can I get a clarification on this?

Jeff DiModica (President)

Go ahead. I'm sorry.

Don Fandetti (Managing Director and Senior Equity Research Analyst)

Can I get a quick clarification on the residential mortgage origination side? I thought you had a small originator that you had investment in and already effectively owned. Are you saying there's another one?

Jeff DiModica (President)

No, Don, that's one we're talking about. It's regulatory closing. Go ahead, Andrew.

Andrew Sossen (COO)

No, you're exactly right. I mean, we made a preferred equity investment in a mortgage originator about two years ago. Upon regulatory approval, that preferred equity investment will convert into kind of common ownership and control of the business.

But as Barry mentioned, that's been kind of tied up in kind of regulatory approval for the better part of two years. And Barry likes to call it the kind of longest tenured deal that we've ever had at Starwood. So we continue to work closely with that platform. We're kind of embedded in the business. And Steven Ujvary, who runs our residential finance business with us, is very close in kind of helping to manage that business. But until we have that final regulatory approval, we can't officially close on the transaction. And we're hopeful that that's a mid kind of 2021 event. But again, they continue to work with us. They're a large source of production for us in our non-QM business, but we just don't technically have legal ownership of the business today.

Don Fandetti (Managing Director and Senior Equity Research Analyst)

Got it. Okay. Thanks, Malcolm.

Jeff DiModica (President)

But Don, we do want to grow the resi business, and we're going to work hard on ways to do that. It's probably the place where we have the most opportunities to grow, whether it's in loans or securities or origination capabilities or prep equity or whatever it is. Certainly something we would love to continue to grow. We've had great success in a lot of these areas.

Barry Sternlicht (Chairman and CEO)

We're going to push hard on the resi business and our infrastructure lending business. We're going to see us pick up the pace if we can, if we can hold our returns. Right now, we can't probably produce really good returns. We're going to be more aggressive there. I think I didn't make it my—I didn't reemphasize it in my comments, but the quarter loan book is fantastic.

The large loan book could be one of the biggest quarters we've ever had, so we're using our real estate underwriting skills across the firm to decide where we're going to deploy capital, taking, I'd say, calculated risk bets. And that's what we've always done, so I think that's why the book looks the way it does. I sort of laugh. We have to put that loan in the five category, but there's no chance we're going to lose money on that deal, so no chance. Actually, I hope we get the asset back. I really would love to have the asset at our basis, less than a third of the cost of the asset, so that would be fine.

Jeff DiModica (President)

Don. Barry mentioned hotels, and I'll just clarify that our book is predominantly extended stay, limited service, and leisure travel.

We are not the big city urban boxes or the convention center boxes that I think are in the most risk today. We'll be happy to go through the exact weightings later. But I think that our hotel, one of the reasons we felt so comfortable making a strong statement about the quality of our hotel book is we didn't choose those boxes that Barry just said won't come back till 2024 or 2025.

Operator (participant)

Thanks. If you would like to ask a question, please press Star 1 on your telephone keypad. If you are on speakerphone, please pick up your handset before pressing the Star keys. Our final question comes from Tim Hayes with BTIG. Please go ahead.

Tim Hayes (Analyst)

Hey, good morning, guys. Congrats on a really strong quarter.

You've talked about monetizing parts of the real estate portfolio and crystallizing gains there for quite a while, but that has become more of a top initiative, it seems, in recent quarters. So can you just provide an update there on potential timing, the amount of interest you're getting from third parties, and on which portfolios in the real estate book specifically? I'm sure cap rates on affordable housing in Central Florida have come in a lot, but you're only a couple of years out from rolling rents there to market rate, I believe. So I'm just curious how you think about those portfolios.

Jeff DiModica (President)

Sure. Well, it transcends all of our, or a few of our different businesses. Our REO business here at LNR, where we still have some gains, the Winn-Dixie warehouses that you know we took back two of.

We took an $8 million impairment on our Montgomery asset that we ultimately sold. And we have a large 1.1 million sq ft Orlando asset fully occupied now by Amazon that will have a very large gain that we'll take at some point. We also have a Bass Pro Master Lease portfolio, and I'm sure you saw coming through COVID, Bass Pro performed extraordinarily well. We think cap rates have tightened significantly. We have a pretty good size gain there. And if you've been reading on sectors that have done well in COVID, MOB has obviously performed well, and we think we have a large gain there. But to your question, the obvious place for us to look would be the multifamily low-income housing tax credit portfolio that we have in Florida, which makes up probably 75% of the overall gain of over $900 million in the book.

We have been contemplating a way to potentially do something there. We love the carry on it. I mentioned earlier we're in the process of doing another cash-out refinancing. Our cash-on-cash return is extraordinary. Rents can only go up in these properties. You're at 60% of market rate. This is as bond-like of a cash flow as somebody's going to be able to buy. So we think there'd be tremendous interest for something like that if we were to sell a minority interest, if it economically made sense for our shareholders, if it unlocked some equity that we could redeploy that's really powerful. Every dollar that we take back of those gains and reinvest, and we can earn 12 cents on, that is accretive to earnings. And it would also potentially create fees that potentially accrue to us.

Tim Hayes (Analyst)

Yeah. No, that all makes sense, Jeff. I appreciate it.

I mean, the pipeline in multiple of your cylinders here seems really strong, and the ROEs are great given the types of financing you're on these vehicles. We're getting on these assets. Just curious, though, is there hesitation to sell any of these assets or specifically the Woodstar portfolios, given there would be a lot of cash you would then need to redeploy that could be earning a really great return in that asset? Or is there any other? Yeah, I'll let you respond to that. Yeah.

Jeff DiModica (President)

Yeah. Since I own a substantial amount of the stock of the company, and so does the management team here, we treat this shareholder capital like it's our own, and it's a significant asset to the people employed at this company. Where would we like to put our money?

One of the challenges of our loan business is we're still stuck in a, I'd call it, transition real estate loan business, and the duration of those loans is short. The better the borrower does to improve his asset, lease it, or any of those things, the faster he refis us, and then we have to go put the money out again, or it's a drag. The entire equity book here was to stretch our durations, that I don't have to worry about getting the money back. Right now, they're producing, the equity book's producing a 15.7 cash-on-cash return on our equity, which is just staggering, and it's going up, not down. The affordable housing portfolio only can have rents go up. They can't go down. They're driving the, it's liquid gold.

It's the kind of stuff I literally joked, "I put it in my kid's trust." And basically, it is in my kid's trust. And I'd rather not sell it, but we will - we are going to market an interest in it and redeploy the capital because it's so accretive to the company's earnings to do so. So we have to do it. And we want to do it because we want to highlight the value of the portfolio. Also, if we can talk about it, we will show you - I believe we will show you that those gains are more than real. And the nice thing is you have them in the company. There's no other company in our space that has anything like that. I mean, we have all the - we joke, I mean, these deals were like 100 IRRs.

I mean, we thought they were steady, going to be boring 11%, 12%, 13% bonds, and they've turned into spectacular investments for us. Bass Pro Shops's sales boomed in the crisis, and you can look at their corporate bonds to see how valuable our credit is, so I think in order of what we would do, we'd probably do Woodstar first, and then maybe we'd look at Cabela's, the Bass Pro Shops's assets at some point, and it's really a question of how big can we redeploy the capital accretively and quickly, and right now, I would tell you we can. That's why I'm so excited about the energy book and the CLO. That's a game changer for us. We were nervous. You couldn't see it. It's a mismatch in maturities. We didn't have a match, an easy match for the mismatch of maturities, and I hate that.

I like to match fund our deals. So there's no rollover risk. And the bonus was we would have done it, when we started out, we thought it would be dilutive. We might have to pay a little more for the capital. And it turned out that we paid less. Slightly less and a higher advance rate. So quite freed up money and obviously boomed the IRRs on the paper. So having that and then the resi business, now we have a brand in the non-QM business. We've done nine securitizations. The people know us. They know our underwriting. They see the way they've performed. And that's given us creds in that market. We've done $5 billion, more than that of resi, $5 billion. So we'll grow that business.

At some point, one of the challenges we look at, and we haven't talked about it, is both of those businesses can sustain higher leverage levels than our real estate book. And so our overall leverage levels rise, but not because we're taking any excess risk. I mean, to go up from what was the advance rate in the CLO? 67.5-82 from the bank line to the CLO deal? Well, the bank lines allowed you to go to 80, but we had some assets that we hadn't levered. And so ultimately, it'll look somewhat similar, but we're allowed more leverage here. Well, the point is that that's now match funded. That's better debt than the debt we had with the banks. Non-recourse. And non-recourse. Non-mark-to-market. So we're just running the company smart. We're going to do the smart things that match our duration of our debt.

If that means the ROEs climb up, when I was on the board of Invitation Homes, which I'm now just an observer on, we had a debate. Should we buy a home? Should we pay down debt? Or aren't they freaked out about the debt because it's too high and other REITs carry less debt? Or should we grow? Or should we pay a big dividend? I argued that things would happen really nicely for us if we just grew the enterprise. Don't worry about the debt because there's no better credit than 80,000 houses. They ran a higher debt, and obviously, the stock went from 18-30. The market agreed with me. We're going to tell the story and do the right thing for the equity, for the capital base.

I'll note our on-balance leverage hasn't really changed much over the course of the year. It started the year around 2.1, and today around 2.1. That's one of the reasons we're carrying tons of cash, which we don't like to do, but we did. So we had to do because of the uncertainty of the market.

Tim Hayes (Analyst)

That's great, Cutler. Appreciate it, guys.

Jeff DiModica (President)

Pleasure. Thank you.

Operator (participant)

We have our final question from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani (Managing Director and Equity Research Analyst)

Thank you very much. Hope you can hear me. Just wondering for Barry Sternlicht, curious if you view commercial real estate credit, the outlook for the overall market as having stabilized, meaning the worst has passed. Or do you think there are more shoes to drop? And it sounds like with respect to Starwood's portfolio, you believe indeed credit has stabilized.

There's only about five loans that have interest deferrals, and it seems that the credit outlook is fairly positive.

Barry Sternlicht (Chairman and CEO)

Yeah. I think we have a tiny little loan in Michigan Avenue in Chicago, and then we have a deal on the West Coast, which it's good real estate. I just think we might get it back. I don't know. They're in markets trying to find a partner right now. I'm okay with it. It's going to happen. You can't bet 1,000, but it's irrelevant to the scale of the company, and we have an idea what to do with it. The borrower has a higher basis. So anyway, yeah, so I would say in general, real estate credit has probably stabilized. I do think this cycle, we have a fairly large equity business. The cycle, there is going to be distress.

The banks are going to move as the economy comes out of this. They're going to stop giving extensions on everything, and they're going to start. They won't take the titles back because the buildings are either empty or the hotel is empty, and they're going to have negative cash flows. So they're going to start selling loans. They're already doing that. You're beginning to see a lot of loans come for sale in New York City, for example. The assets are in dire trouble, and movements in cap rates in NOIs in New York City Multies, in San Francisco Multies. You've seen the numbers from AvalonBay and EQR. I mean, they're not good. Down 20% in NOI. You take a 5 cap or a 4 cap on urban assets and you're 70% levered, you don't have any equity left.

So neither of those companies were that levered, but there's been a significant diminution in value in some of these coastal cities right now, which I think is going to be interesting. There'll be a point at which, a level at which we would be comfortable lending in even those markets. But I think a couple of the commercial blue cities are going to be tricky from an underwriting standpoint. You all know the stories of people who have leases in New York, $100 a foot, and they tell the landlord they're going to renew, but it's $65 a foot. And the landlord says, "Screw you," and they move to another building for $50 a foot. So that kind of behavior with this much sublet space in these big urban cities is brutal.

I don't think the market appreciates how tough those markets are right now because there's no net demand really in those markets right now. I will say that we know Google has gone back to work in the sense that they're going to take. They've already turned on additional development. They're taking tons of space. Amazon did buy the WeWork headquarters from us in the middle of COVID. And then Facebook made that giant commitment to Penn Station or I guess it's Penn Station, whatever that station is next to Madison Square Garden in the middle of the pandemic. So while they're saying one thing, "Work from wherever you want," they are increasing their footprints. And it's really been tech, and that's been leading the absorption in these cities. So whether it's Facebook, Google, Salesforce, Twitter, Amazon, if they go home, the big urban markets will have a challenge.

I don't expect that to be the case. I think in the European cities, we didn't mention Europe in our comments. I mean, we have massive lending opportunities in Europe right now. So probably a third of our book going forward is going to be in Europe, and the pipeline is robust, and the spreads are good. So it's actually interesting. We're happy to make real estate loans, and some of the people are sitting back on their haunches, and we're okay with that right now, and that's why we're holding our ROEs because there's less capital chasing stuff. So I think you also have to. It's a little tricky even looking at headline rents in cities because the concessions are improving for the tenant. It's a little like what we've experienced in retail.

The tenant comes to you and says, "I'll stay in your mall, but I'm at $50 a foot even though he's paying you $100 a foot." And what choice do you have? You can't find another tenant to replace him. That's why retail is so impossible to underwrite today. In the malls, I mean, a tenant has all the leverage, and the tenant doesn't really feel like fixing his store. He'd rather work on his online digital strategy, which is what Wall Street rewards. So you have an ever vicious cycle in the wrong direction in physical retail. Having said that, I believe people are going to go shop again in physical retail. It won't. Where will it stabilize? Rents won't be higher. I don't see that happening. So I think, but I'm not talking about the Costcos and the Walmarts. I'm talking about Main Street retail, New York City.

The hardest thing underwriting today is what are street-level rents in places like Manhattan when there's no tenants? And that, in some cases, even I'm sitting in our leased headquarters building here in Miami. This building's for sale, and the base of the building is 30% retail. So how do you underwrite it? So it's tricky. It's for lease, not for sale. Sorry. But I mean, we've looked at it, and we don't know how to underwrite it. There's no obvious tenants to take all the street-level retail in the United States. So thanks for the question.

Jade Rahmani (Managing Director and Equity Research Analyst)

On the multi side, wondering if in addition to selling an interest, a ground lease might be attractive given its long-duration capital, and there seems to be a lot of entrants, including your friends at iStar in that space.

Jeff DiModica (President)

Yeah. Wow. The market loves that business. Yeah.

It doesn't really fit in our company very well because the cash-on-cash yields won't support our yield, our dividend. We'd have to grow it and spin it out, I suppose. It's not a difficult business to be in. It's encumbered by agency debt, long-term agency debt. We'd have to work through that as well. We are talking about the Woodstar portfolio. I'm talking about the business in general. Yeah. Anyway, thanks for the question. I mean, we've looked at it because obviously the market adores it. It pays it. They have loans against hotels. They have ground leases on hotels. That trades at a one cap. Really? The market does what the market does. I mean, obviously we should ground lease our whole enterprise. We should ground lease everything, triple the stock. Okay.

Operator (participant)

Thank you.

I would like to turn the floor over to Barry Sternlicht for closing comments.

Barry Sternlicht (Chairman and CEO)

Thanks, everyone, for giving us your time today. And again, thanks to the incredible efforts of the Starwood Property Trust partners in making a really great year. And it's nothing compared to what I expect us to do for you this year. So stay tuned. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.