Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Starwood Property Trust Inc (STWD, Financial) reported distributable earnings of $158 million or $0.48 per share for the quarter.
- The company committed to $925 million of new investments, with 62% in businesses other than commercial lending.
- The residential lending segment saw a net positive mark-to-market of $34 million for GAAP purposes.
- The infrastructure lending segment contributed $24 million of distributable earnings, with new loan commitments of $237 million.
- The company's liquidity position is strong with $1.2 billion in current liquidity and significant credit capacity across business lines.
Negative Points
- The weighted average risk rating of the $14.7 billion loan book increased to 3.0 from 2.9 last quarter.
- Two loans were placed on nonaccrual status, including a $46 million multifamily loan in Phoenix and a $57 million multifamily loan in Fort Worth.
- The company foreclosed on two previously 5-rated bonds, resulting in a specific CECL reserve of $9.8 million for one asset.
- The CECL reserve increased by $33 million to a balance of $380 million, with 70% related to office loans.
- The office loan portfolio, which makes up 10% of assets, continues to face stress due to low net effective rents and high re-tenanting costs.
Q & A Highlights
Q: Given the quality of the sponsors underlying your loans, is the current shift more about willingness to pay rather than ability to pay?
A: Barry Sternlicht, Chairman and CEO: It's too early to tell, but the recent dramatic shift in forward rate expectations is likely to help borrowers' desires to stay afloat until 2025. The optimism on rates is not yet reflected in our financials, and we are not baking optimism into our reserve expectations.
Q: Can you discuss the pace of originations moving forward and where you see the best returns?
A: Jeffrey Dimodica, President: We expect to continue leaning into our energy infrastructure business, which offers higher returns and lower LTVs. Our CRE lending pipeline has tripled over the last three quarters, and we anticipate a run rate 2-3 times higher than current levels, with levered returns of 11.5% to 13% on the CRE side and higher on the energy infra side.
Q: How are you seeing expenses run in the multifamily side, particularly insurance costs?
A: Barry Sternlicht, Chairman and CEO: Pressures on multifamily expenses have eased, with year-over-year insurance costs down. This may be due to our scale, but overall, our experience has been positive. However, real estate tax pressures vary significantly by state.
Q: When the Fed cuts rates, do you expect a trickle of capital or a meaningful shift in sentiment and cap rates?
A: Barry Sternlicht, Chairman and CEO: There's a ton of dry powder and enough money to propel the markets higher. Institutional and high-net-worth investors will likely show up, and REITs may get back into the acquisition business. The office market will take time to work itself out, but other sectors should see increased demand.
Q: Can you give an update on Starwood Solutions and the CMBS market?
A: Jeffrey Dimodica, President: We've had our first couple of clients in Starwood Solutions, and it's starting to grow. On the CMBS side, the market has shifted to favor five-year loans, and we expect our conduit originations to maintain a pace of $1.5 billion to $2 billion a year. The SASB market is also expected to grow.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
