Starwood Property Trust Inc

NYSE:STWD

Earnings Call Transcript 2021-Q1

[Operator]

Greetings. Welcome to the Starwood Property Trust First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]

Please note this conference is being recorded. I will now turn the call over to your host, Zach Tanenbaum, Director of Investor Relations.

[Zach Tanenbaum, Director, Investor Relations]

Thank you, Operator. Good morning. And welcome to Starwood Property Trust’s earnings call. This morning, the company released its financial results for the quarter ended March 31, 2021, filed its Form 10-Q 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 measures 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, Chief Financial Officer]

Thank you, Zach, and good morning, everyone. This quarter once again highlighted the power of our diverse platform with distributable earnings or DE of $151 million or $0.50 per share. We were active on both the left- and right-hand sides of our balance sheet, deploying $2.7 billion of capital in the quarter and successfully completing two CLOs totaling $1.8 billion after quarter end.

I will start my segment discussion with Commercial and Residential Lending, which contributed DE of $147 million to the quarter. In Commercial Lending, we originated $2.2 billion across 12 loans for an average loan size of $184 million.

We funded $2 billion of these new loans, along with $175 million of pre-existing loan commitments. These findings were offset by $1.1 billion in loan repayments, bringing our Commercial Lending portfolio to our record $11.2 billion at quarter end.

We continue to see strong credit performance in our loan portfolio, with our weighted average risk rating improving from 2.7 to 2.6 in the quarter and only one loan for $188 million rated in the 5 category. This loan comprises the majority of our limited retail exposure and was placed on non-accrual in the quarter. We believe that the principal and interest accrued to-date on this loan are fully collectible.

As of March 31st, only 2% of our loans are on non-accrual. The remainder are 100% current and we have seen nearly all of our loans which required partial interest deferrals during COVID return to performing status.

Since COVID began we granted 11 partial interest deferral for loans with the UPB of $1.1 billion. Today, we have only one $41 million retail loan remaining on its partial interest deferral of $84,000 a month.

Our weighted average LTV remains strong falling again this quarter to 60.1%. We continue to see our sponsors support the significant equity in their assets, with $582 million invested and $715 million committed since COVID began.

Consistent with the positive credit performance our general CECL reserve remained relatively flat at $61 million. As we have discussed previously, the CECL rules require that we take reserves on all loans, including newly originated bonds. Although, we recorded $1.4 million in reserves on new loans in the quarter, we also saw reductions in reserves for repayments and for improvements in performance on existing loans.

As a reminder, these reserves are typically added back for DE purposes. However, during the quarter, we recognized a DE loss of $8 million related to an unsecured loan for which we recorded a specific GAAP CECL reserved last quarter.

Just two years ago, we discussed with you our first foreclosure on a loan that was net leased to a single grocery tenant who filed for bankruptcy. The 440,000 square foot distribution center in Montgomery, Alabama had a loan balance of $17 million, and at the time, we established an $8 million GAAP reserve based on its appraised value.

Over the past two years, we leverage the Starwood platform to release and market the property. The property was sold this quarter for $31 million, resulting in a GAAP gain of $18 million and a DE gain of $8 million, a very successful outcome for our shareholders.

Turning to our Residential Lending business, we securitized $384 million of loans in our 10th securitization for a net securitization DE gain of $13 million and sold $87 million of our high LTV loans for a net DE gain of $4 million. These sales net of purchases of $209 million in the quarter, but our loan portfolio to a balance of $596 million, a weighted average coupon of 5.9%, average LTV of 67% and average FICO of 732.

Over the past several months, we have worked to transition the loans on our $2 billion Federal Home Loan Bank facility, which was fully repaid this quarter at its maturity. In connection with the transition, we executed a new $1 billion warehouse facility in the quarter, bringing our total non-QM financing capacity to $2 billion. With these new facilities, we expect to realize returns on our loan book that are consistent with historical level.

Next, I will discuss our Property segment, which contributed $22 million of distributable earnings to the quarter. Credit performance remains strong in this segment with rent collections at 98% and weighted average occupancy remaining steady at 97%.

This quarter, we obtained supplemental financing of $83 million for Woodstar II, our second affordable housing portfolio. The upsize increased the cash on cash yield for this portfolio to 18.8% and increased yields on the overall segment to 16.9%.

The performance of our Florida affordable housing portfolio continues to exceed our expectations. Area median income levels, which govern rents for the over 15,000 units in this portfolio were recently released. Higher median income for Northern and Central Florida where this portfolio is concentrated resulted in a blended rent increase of 4.1% for 2021. This is an addition to the 4.7% increase released last year. These rents create a new floor from which rents cannot decrease going forward.

Despite the new maximum rent levels, we did not increase rent on any of our affordable housing tenants last year due to COVID. We instead began rolling out these higher rents on January 1st and we will continue to do so over the next 12 months. As a result, the effect on earnings will be gradual over the coming quarters.

Next, I will turn to our Investing and Servicing segment, which reported DE of $24 million. In our CMBS portfolio, we continued to opportunistically sell assets with $12 million of securities sold in the quarter for a net DE gain of $3 million.

In special servicing $517 million of loans entered servicing in the quarter, while a similar amount resolved, resulting in our active servicing portfolio remaining steady at $8.8 billion. As we have said before, we expect slightly longer resolution times and that’s delayed fee recognition for the assets which recently entered servicing. Our named portfolio ended the quarter at $80 billion.

And finally, in our conduit, we securitized $85 million of loans in one transaction at profit levels consistent with last quarter. We typically see lower securitization volume in Q1 and expect to see significantly higher volume next quarter.

Concluding my business segment discussion today is our Infrastructure Lending segment, which contributed DE of $7 million to the quarter. We acquired $86 million related to new loans and funded $14 million under pre-existing loan commitments. These funding were offset by repayments of $19 million, increasing the portfolio to $1.7 billion at quarter end. We continue to be pleased with the credit performance of this portfolio, which once again had 100% interest collections in the quarter.

I will conclude this morning with a few comments about our liquidity and capitalization. Subsequent to quarter end, we completed two CLO financing, our inaugural $500 million infrastructure CLO, which was the first of its kind and our $1.3 billion CRE CLO, the largest CRE CLO issued after the GFC. Both represent a significant expansion of our credit capacity and a continued diversification of our funding sources.

They also include many structural benefits, including flexibility to provide replacement collateral, match funding and the removal of recourse and credit mark. Jeff will discuss each of these in more detail during his remarks.

We ended the quarter with $7.3 billion of availability under existing financing lines, unencumbered assets of $2.8 billion and an adjusted debt to undepreciated equity ratio of 2.3 times. Pro forma for the two CLEs, this ratio is 2.1 times in line with last quarter. This credit capacity, in addition to our current liquidity of $642 million, provides us with ample dry powder to execute on our pipeline.

With that, I’ll turn the call over to Jeff for his comments.

[Jeff DiModica, President]

Thanks, Rina. We are pleased with the performance of our stock price, which we believe recognizes the durability of our business model, our demonstrated ability to create shareholder value across market cycles and our ability to pay our dividend. To-date, Starwood Property Trust shareholders have earned a greater than 13% annualized total return since inception in late 2009, the highest in our peer group.

I will talk today about a few themes that we believe differentiated our business this past year and will continue to create value for shareholders in the coming quarters. The credit of our CRE loan book continues to improve, collections are very high and our base case modeling today suggests we will have little to no losses on our loan book as a result of COVID. I will discuss this more in detail later.

The valuations on our owned properties continued to increase. At our market today we have approximately $1.1 billion in unrealized gains, $200 million more than we have disclosed previously and approaching $4 per share.

Our liquidity and access to some of the cheapest capital in our sector is unparalleled and we could issue new five-year corporate bonds at 4% or below today, the lowest in our history. We have the benefit of having excess unencumbered assets on our balance sheet, which allow us to come to market early to create liquidity to pay off our $700 million or 5% notes maturing in December at their open date September 1st, and accretively versus existing 5% coupon.

Finally, we were one of a few market participants who were able to take advantage of dislocated markets to make significant investments across our business every quarter since COVID began. We had a very strong first quarter of 2021 deploying $2.7 billion, $2.2 billion of which was in our core CRE Lending business and we have continued that momentum into the second quarter.

I’d like to start my sector remarks with a deep dive on our owned property portfolio. We became more defensive in making care loans in 2015 as we felt the debt markets had gotten too aggressive in terms of pricing, LTV and structure.

We slowed our originations in 2015 and began to use our excess liquidity to add core equity assets into our investment portfolio, taking advantage of favorable dynamics in the market and becoming a borrower rather than a lender.

We purchased $3.2 billion of property assets over a three-year period at significantly higher cap rates than where the assets are currently valued today. This property portfolio today has approximately $1.1 billion in gains in it at our marks and carries a 17% annual cash return at our basis.

Our diversified model gives us the ability to pivot to invest in the best available opportunities across our seven business lines and highlights the power of our differentiated multi-cylinder platform. We felt this strategy would prove itself out in distressed and volatile markets, and waited patiently for the markets to dislocate.

When lending markets were frozen last spring, we bought almost $1 billion of residential mortgage loans with term non-mark-to-market financing at a 10% discount to where the same assets traded pre-COVID. These loans returned to par or higher soon after our purchase and most have already been securitized producing large gains that -- and exemplary returns for our portfolio.

We have increased the size of our CMBS and Energy Infrastructure portfolios when returns were creative and use the opportunity to sell down when we thought value had shifted. This quarter we completed the first CLO of its kind in our Energy Infrastructure business, and after quarter end, we completed the largest CRE CLO since 2008.

We come to work every day and choose where to best invest our capital and how to best finance ourselves and aren’t forced to allocate our equity into any one business regardless of market environment.

We believe our results have proven the effectiveness of the strategy and we are not done as we look for additional business lines, which will allow us to continue this flexible approach to capital deployment.

The largest of our property assets is our 99% lease 15,000 unit Florida low-income housing tax credits or LIHTC multiple port -- multifamily portfolio. This portfolio is centered around Orlando and Tampa, two of the fastest growing markets in the country the last five years.

We were drawn to this investment for its very bond like characteristics. Owners are allowed to raise rents based on increases in the median income level of the MSA. But rents never go down even if income falls.

Although, we conservatively underwrote very modest income growth at the time of purchase, pro forma of this year’s increase, we’ve been able to increase rents by over 20% since acquisition, while leaving average rents at approximately 60% of current market rate rents.

At the same time, cap rates have fallen dramatically from 6% at acquisition to recent sales in the low 4% cap rate area and we believe there’s upside from there. In 2018, in the State of Florida reduce property taxes by 50% on LIHTC assets as an incentive for owners to forego their contractual right to roll these units to market rate over a 30-year schedule and keep this critical source of affordable housing available to families in Florida.

Last Friday, the State of Florida passed the bill HB 7061 that removed the other 50% of taxes, leaving these assets tax free as long as they remain in the affordable program. If signed into law by the Governor, this bill will further incentivize behavior that supports the state’s desire to have more affordable housing available for its residents. Although, we are still evaluating our options, this bill will make owners like us rethink what was always the best economic strategy to roll affordable units into market rate units over time, thus reducing affordable supply.

We believe this portfolio was worth in excess of $2 billion today and after accretive re-financings, our remaining equity now returns a 30% cash return per year. At our valuations, we believe we can now generate over $1 billion in GAAP gains and approximately $900 million industry distributable earnings gains in this portfolio.

As we told you last quarter, we continue to evaluate selling a minority share in this portfolio, which would give investors more comfort around our valuation metrics and provide us with incremental capital, we believe we can deploy credibly today.

In addition to the gains from this investment, at our internal markets, we believe we have over $200 million of incremental gains from the remainder of our owned real estate portfolio. 80% of this incremental gain is split fairly evenly between our Cabela’s Bass Pro shops long term net lease assets, our medical office portfolio and the Orlando Industrial asset we foreclosed on back in 2019.

Rena told you we reversed an $8 million impairment on the Montgomery Industrial asset that we took over at the same time as the Orlando asset and we sold it in the quarter for an $18 million GAAP and $8 million distributable earnings gain.

When we choose to ultimately sell the remaining Orlando asset, now fully leased to Amazon, we believe we will report a gain of approximately $60 million, a great outcome for shareholders and statement on our platform’s ability to reposition difficult assets.

Moving to our core CRE Lending business, we continued our momentum from 2020 with a very strong CRE originations quarter of $2.2 billion, with an above average optimal IRR of over 13%, 77% of those loans were to repeat borrowers, a theme that we believe helped drive the strong credit performance of our portfolio through COVID.

Our borrowers who have contributed $582 million of fresh equity to support their projects since COVID began and committed more than $100 million more, put great value in the flexibility, consistency, liquidity in any cycle and ability to close on large complex deals quickly. We have a very robust pipeline to the second quarter and continue to focus our originations on only the most stable assets with durable future cash flows.

To that end, we have reshaped the characteristics of our loan book in the last 12 months. Year-over-year, we have reduced both future funding and construction exposure by approximately half.

By property type as a percentage of our loan portfolio, we have increased our exposure to multifamily by 72% and doubled our exposure to industrial assets, while decreasing our exposure to office by 18% and to hotels by 14%.

Multifamily loans are being the most lender competition today and its spreads continue to fall, leverage continues to rise and we hit a floor on our financing levels. We will pivot as we always have the sectors or other lines of investing, we believe have the best risk reward going forward.

With optimism over the continued strength of the COVID recovery, credit spreads for many target assets have normalized to pre-COVID levels and we are once again borrowing on our target asset classes at our inside where we were pre crisis.

Our ability to source best-in-class leverage leaves us with similar ROI to pre-COVID levels and at slightly lower LTVs as demonstrated by our portfolio LTV, which decreased again this quarter to 60%.

The scale of our platform is about our manager to build a large team internationally with a focus on Europe and Australia. We have seen tremendous opportunities in these less competitive markets, which have been slower to come out of COVID.

Our international portfolio increased 35% year-over-year and now accounts for over one quarter of our loan book for the first time and we have large actual pipeline there today and are excited about the existing opportunities.

We are very proud that for seven straight years we have won the NAREIT Gold Star in our industry for excellence in investor communications and reporting. Given we were unable to do our biannual Investor Day in person due to COVID restrictions in April, we launched a first of its kind virtual investor series, which is posted on the Investor Relations section of our website, www.starwoodpropertytrust.com.

We created nearly three hours of content, which provides detailed information on our company and each of our investment businesses, and we hope both new and existing shareholders will find it useful.

Over the course of the three hour presentation, we discuss our differentiated cradle to grave investment and credit process, and we believe that this process with multiple investment committees is paramount to our exemplary financial and credit performance since inception.

We hope the webinar will help you understand how our credit process is different and why we had confidence in our portfolio that it would outperform as markets normalized. We told you during COVID that we felt very good about the credits in our book, sponsors have provided tremendous support to their assets, the macro environment has improved and our outlook is improved daily.

Following our day long quarterly asset review last week, the management team came away thinking that with what we know today, we could exit this cycle with little to no losses on any loans in our portfolio as a result of COVID.

Of course, the path of recovery could change, but that is a statement no transitional lender thought they would be able to make a year ago and reinforces our commitment to our differentiated credit process, as I just discussed.

Finally, I spoke on our last earnings call about the transformational energy infrastructure CLO we closed in the quarter and I want to talk today about the highly accretive CRE CLO we priced in April.

Our second CRE CLO was the largest post great financial crisis CLO at $1.275 billion. In a tepid market where spreads are widening and some deals barely had enough bond orders to price we had 40 different accounts put in orders allowing us to be multiple times oversubscribed and tighten pricing twice.

We picked up 6% in advance rate versus existing financing facilities in our LIBOR + 150 day one bond coupon with inside our existing financing facilities, allowing us to get term non-recourse financing with no credit marks at a return on our equity of more than 4% more than we were earning on financing lines.

Pro forma for the CRE CLO, we continued to maintain a peer group low 41% of our CRE loan book on bank warehouse funds and with only 54% of our balance sheet in CRE Lending today. CRE loans and warehouse lines subject to credit marks account for just over 20% of our asset base today.

In our REIT segment, we’re thrilled to announce that Fitch upgraded our special servicer LNR, which is named special servicer over $80 billion of CMBS assets to the highest rating possible CSS1. This makes LNR the only special servicer in the world with this highest rating.

Fitch cited our technology and the scale of our business which allowed us to reallocate resources to adeptly deal with over 1000 new servicing requests in a very short time. On behalf of the management team, I’d like to thank our servicing team for their superhuman performance that earned this spectacular achievement that will undoubtedly lead to more agent business going forward.

SMC or Starwood Mortgage Capital, our conduit originations business was the largest non-bank originator of CMBS last year and it’s kept that momentum this year. Rina mentioned our Q1 transaction and subsequent to quarter end we were the largest contributor to a very successful transaction that priced last week and our pipeline continues to grow.

Our team is best-in-class and while we love the quantum of their contribution, more important to us has been their ability to remain consistently profitable quarter-after-quarter, regardless of market cycle over the last eight years. Because of this consistency, we believe it is a business that investors should value at a very high multiple.

Before I turned to Barry, I want to say we are very proud of what we’ve accomplished together over this difficult period. We built this company to outperform in distress and patiently waited for the markets to give us the opportunity to prove that we would. We are proud of our relative outperformance and believe we have a lot of room to run. Our company is firing on all cylinders and the outlook has never been brighter.

With that, I will turn the call to Barry.

[Barry Sternlicht, Chairman and CEO]

Thanks, Jeff, and Rina, and Zack, and welcome everyone to this quarter’s earnings call. I’m going to -- we will give you exhaustive detail and we want you to understand our business. That’s why we did the webinar. Because we -- this is a company where we -- the more you look at us, I think the more you’ll like and understand how we manage capital and how we’ve navigated this crisis.

I want to say that such an interesting period, I mean, real estate isn’t way fair and isn’t peloton or we hit a with a bazooka, worldwide real estate hit a wall. And to come out of the COVID crisis definitely stronger than we went in with a better balance sheet, no losses, what we think will be no losses from the COVID crisis really speaks to the credit quality and our underwriting process.

And the equity first attitude we have when we make a loan, like would we like to own this asset at this price and we are working with borrowers to restructure their loans because they can come to us and they don’t have to go, like, well, would we like to own this asset at this price. And we are working with borrowers to restructure their loans because they can come to us and they don’t have to go. We didn’t come out limping from this crisis. We came out galloping from the crisis.

We put out almost $6 billion of capital. Many of our mortgage peers don’t have other lines of business, had to shore up their balance sheets, some had to rescue capital. We were never in that position and we did think multiple times about cutting the dividend, obviously. We didn’t know what the world would have for us. We made the decision to hold the dividend and I thank the Board for that.

And as Jeff pointed out with a more than $1 billion of gains -- unrealized gains in our property book, we’re pretty confident we can make the dividend whenever we want for a quite some time. So I don’t think there’s a company that has anything like that.

And the other thing that I speak to you is a 60% LTV. It’s no longer our LTV. This is actually a mark-to-market LTV with the -- and checked by CECL Regs. And that’s why we’re here with no losses because those really were 60% LTVs. And to demonstrate that borrowers put in hundreds of millions of dollars to shore up their loans and save their assets from the period of disruption of demand.

I want to step back real fast and talk about the property market. There are five major asset groups in real estate, industrial and multies [ph] which we’ve actually gained increasing exposure to on our loan book, but it’s always been pretty tough for us because the cap rates have fallen, because those are the two asset classes that investors are favoring, given that you can’t live in your computer and industrial, obviously, play on e-commerce.

Then there’s the big asset class the CLO, which is office and we’re all watching as the office markets recover. As Jamie Dimon says he’s done forever with zoom calls. And I personally believe people go back to the office more than people think it’s a social event. People who are not well off, don’t have communication devices in their houses and don’t want to do Zoom calls in front of their children and potentially their grandparents and so it really does affect the poor more than the wealthy or maybe calling in from the Hamptons.

And I think if you look around the world whether and we have offices -- 16 offices all over the world, in Tokyo and Europe, London, all over the world, in the Middle East. They’re back in the office. In the Middle East, they are 100% in the office. I’m not sure. You found any headlines in the Middle East, you’ll find anyone talking about work-from-home. The same thing is true in Tokyo, China they are back in the office. Hong Kong they are back in the office, they are headed to the office.

So I think there are markets that will suffer clearly New York and San Francisco City, where we have no loan exposure. We’re going to see some compression -- significant compression in net rents, as rents fall, concessions go up. There’s such enormous shadow vacancy in those -- both of those markets, but that’s not where we’re really exposed and even in our equity books, we don’t know assets in those cities in the office sector.

Then you had these two red light categories in real estate hotels and retail. And hotels have gone from red to yellow and if you go down the curve to the budget and there -- it is actually green, red bar is up, those are mostly domestic travel, hotels and it’s becoming something in the infrastructure plan, we think that will get better and better.

Group business and international travel took a while to come back. So if you move up into the upper middle class stuff, it’s going to be a while before they get anywhere near the revenues of 2019.

And then luxury is, if it’s a resort, it’s fantastic and people will pay triple the rates to go the Amman in Utah or our one hotel here in South Beach where I’m located had a record first quarter and 16 $100 a night, we’ve probably thought we’d get $800 a night. It’s -- people have a lot of money, the nation is rich, that has a $1.3 trillion or $4 trillion of excess savings and everything they own has gone up, their house, everything.

So the nation’s balance sheet is up last night look like $15 trillion. People are well to do and -- as a whole and that actually is across the whole socio economic spectrum. That’s not just the rich. They may be getting richer as their equity books go up. But people’s pension plans arising and as a percentage, obviously, the lower classes have been helped unbelievably by the stimulus packages.

So I think the outlook for lending both here and in Europe is great. We are very active, looking at a lot of large deals that we uniquely can do. And all of our business lines are operating at full speed. It is hard to buy equity real estate today with the kinds of cash returns we were used to.

Jeff DiModica come to my office every day asking for more equity and it’s hard to generate the cash and cash returns we have and for those of you who have been with us for I think the seven years we built our affordable housing portfolio. I said, we were buying assets that I personally never wanted to sell and I think in 11 years, I don’t think I’ve ever sold a share of stock in this company.

So I was pretty happy owning those forever. But we are looking at monetizing some of the gains because we can redeploy the capital and we think it will be exciting for the company and now with the pending passage of this legislation in Florida on real estate taxes, we can look to complete that transaction shortly. But we wanted to wait for that to be enacted and get that reflected in the value of our sale.

The other thing I want to point out is that we’re responsible. ESG is a big deal to us and that comes in everything we do. We could have increased rents within the affordable housing portfolio 5%, I think, Rina mentioned that, and we chose to defer not to do anything, even though we could have.

We did the long-term right thing by not making matters worse for those in need in affordable housing space, even if they have a job. So now we’ll be playing catch up and gently increase rents and moving to market. But, I think, it’s nice to know that companies are doing their part to help America when it needed help.

And I want to say one more thing, I mean, we do have a fortress balance sheet. It’s the best in the business. I used to envy Jamie Dimon at JP Morgan. He said we have a fortress enterprise and now I think Starwood has a fortress balance sheet and these two CLOs we completed recently, particularly the second one in the Energy group, means we -- with a fundamental game changer for that business.

We had an issue, as we always do, because we’re not interested in quarterly numbers as we are the long-term duration and feasibility of our business. But we had a mismatch. We had debt that was going to mature inside of the maturity of the loans and it kind of made us nervous, like, you don’t see a problem until there’s a problem. Like if you have 10-year assets and five-year debt, you have to roll that debt in your five and that inherently creates a problem. We call it the savings and loan crisis waiting to happen financing short against long-term liabilities.

So with the CLO we’ve cleared that up and now you’re matched funded. And there’s -- you don’t see a penny of earnings from that. But that’s fundamentally different risk profile for our shareholders. And that’s the confidence we have and durability of our dividend, and hopefully, over time, perhaps, being able to increase it.

So we are really pleased with the efforts of the team. There’s 350 odd people rolling in the same direction in Starwood Property Trust these days and we have a terrific Board is engaged and shows up and asked tough questions and challenges us and we just want to say thank you very much for everyone for the recovery.

Our stock had an all time high about three weeks ago and it deserves that all time high, because getting a $760 million dividend than the world were at 10 years $158 million from this collection of businesses and this assets and 60% LTV loans is truly astonishing.

Maybe someday we will actually get that investment grade rating recovered and then this will become a virtuous cycle and we will be the largest by far we’re -- almost a $20 billion company today, $19.88 billion and this enterprise will be better bigger.

So we are accelerating our efforts to find more loan opportunities around the world particularly in Europe. We’re staffing up, I think, we have seven or eight people there. We’re also looking at Australia and we’ll do anything that we think is attractive long-term risk reward for the shareholders.

So, thanks and we’ll take questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Steven Laws with Raymond James. Please go ahead.

[Steven Laws, Raymond James]

Hi. Good morning. Congratulations on the number of accomplishments in the first quarter. I guess to start, Jeff, I think, you’ve touched on the opportunity to reallocate capital as you target the most attractive investments. As you look out six months, nine months, the balance of the year, what business lines do you think are going to see kind of a net increase in capital allocation on mix basis? What areas seem less attractive right now where you think things may get allocated away?

[Jeff DiModica, President]

Thanks, Steven. Appreciate it. Last year, we probably said non-QM looks really interesting and we thought the Energy Infrastructure business looked really interesting. I would say we agree on both of those still.

We were able to get out of the gates during COVID into the early part of this year ahead of most people in the transitional lending space. So we’ve been able to put on a very creative high volume of loans, we earned more at a 13% plus IRR than we historically do on the CRE large transition a loan book.

We did more than we expected. We’re going to do more in the second quarter than we expected. And I think there is a moment in time here for us to continue to do really accretive stuff in our core lending business. So I would say today, we’re equally excited about those three businesses.

CMBS is kind of a steady state business. We brought our book down from about $1.1 billion to just under $700 million and we’re sort of comfortable with it there if an opportunity arises at wider spreads like we did last year in COVID, we will continue to add there.

And Barry made the point about the property book being very difficult to grow today given where cap rates are in financing and the cash returns available to us. So I think it’ll be more of the core three businesses and that the lending business -- CRE Lending business will take up the lion’s share of capital in the near future.

[Barry Sternlicht, Chairman and CEO]

The other thing…

[Jeff DiModica, President]

And…

[Barry Sternlicht, Chairman and CEO]

Before he goes on, I mean, we are looking at other business lines and including acquiring other companies. And we are quite active in that vein. It’s remarkable how difficult is to convince Boards to give up the flag or to end the waste of effort, whether they have no hope. But it’s difficult.

And we have multiple situations that we have tried to make consolidate the parts of our sector. So I -- I’m thinking we might get something done and we think it’d be accretive to us, and frankly, one-and-one would be more than two. So I think whatever reason some Board members like the Board members willing care about their shareholders.

[Steven Laws, Raymond James]

Thanks. On the CRE Lending side, can you talk about what you’ve seen on the competition front, most of your peers there, a lot of them are on the sidelines, many until the last month or two. So how has that impacted the opportunities there and how much spread tightening does that caused or are you seeing that competition play out in other ways?

[Barry Sternlicht, Chairman and CEO]

Before Jeff goes, I mean, the one thing that’s interesting is that the CMBS market is now past the bank market, so that you can finance. The spread in CMBS were very tight. So that has become a bigger competitor than Wells Fargo’s balance sheet for example.

And maybe we ourselves are re-titled business that conduit business has been absolutely a star and continue. They turn -- we’ve been talked about in a while, but they turn their book like 11 times a year, so they’re a manufacturer of profits or loss.

And I think we were one last year we were the largest non-bank, employees non-bank contributor in the country. So that’s a nice incredibly great business for us. They run a terrific company or division I should say and what we’re going to say.

[Jeff DiModica, President]

He had asked about where the competition is coming from and realistically, probably, only our largest competitor in our space is really a competitor on most things that we look at. Our competition tends to come more from the investment banks and the debt funds.

When investment banks are making money as they have been for the last six month or nine months, they tend to lean in on a lot of these larger highly structured complex deals and we’re definitely seeing that now. So I’d say the investment banks are our biggest competition, there are certainly some debt funds.

And that’s why we’ve looked more internationally where we have a probably a larger staff than anyone, but one person and we are growing that book pretty dramatically and we think this year we’ll continue to, I could see that book going from 25% of our of our loan book up to a third of our loan book over the course of the next year or so.

We think there are outsized opportunities there as they come out of the COVID a little bit slower, and it’s just simply less competition. So we will see. So the new -- the rest of our sector, who recently has enough money to start investing again doesn’t tend to be a large competitor for us on a large complex loan.

[Operator]

Thank you. Our next question comes from Charlie Arestia with JPMorgan. Please go ahead.

[Charlie Arestia, JPMorgan]

Hi. Good morning, everybody. Thanks for taking the questions. Barry, I wanted to follow-up on your views on the office sector. Just thinking about it from a high level kind of beyond current occupancy and rent collection trends, I think we’ll have some more clarity as people in the U.S. go back to the office more and more over the next few months. But it seems to me that the current leases are going to play out and the kind of tenants that you guys went against, they’re probably going to continue to pay their rent regardless of physical occupancy. But when you think about those leases coming to an end and I realize this is a moving target here and the leases are longer term. But do you think the tenants when those leases come to an end will take a harder look at their real estate footprint? And if there’s potentially a kind of more fundamental shifts that could occur here over time? And I guess, ultimately, is this more of an owner problem than a lender problem?

[Barry Sternlicht, Chairman and CEO]

No. Certainly less of a lender problem that an owner problem, especially 60% LTVs in your book. I think it is a zip code specific or city specific. I think the states of Texas, Tennessee, Florida, that have no taxes or Washington has no capital gains tax. They’re incrementally benefiting. And there’s less pressure on the cost structures. In Miami, we actually were out with the Mayor of Miami last night, Jeff and I, and they’ve reduced the millage rates in town.

So taxes are going down, real estate taxes are going down, no income tax, real estate tax is going down, budgets going up. It’s -- I mean surpluses going up. It’s sort of the opposite of the cycle you’re seeing in the blue states, where services, incomes actually going up, cost of labor is going up, union benefits are going up, real estate taxes because buildings don’t vote are going up. At the same time, rents are going down, vacancies are rising, companies are relocating to better cheaper places to live.

And it is seriously an issue. I think in some places like Miami, and probably, all of South Florida, Tampa, Orlando included, demand is up, not down. And you’re exceeding your underwriting on rents if you happen to be a developer and we built a building here and rents are 25% higher than we underwrote as we leased the building slowly less. So, Starwood Property Trust least down here is now 25% under market.

I think it’s about basic real estate, right, and there is enormous issues now in the dark blue cities. And the worst part is the legislatures of these states actually want property dais to fall. Because it’s more affordable for their people and that’s a direct quote from a New York legislator in Albany.

So that’s a dangerous game to play and that is very difficult real estate environment. And one of my friends who you would know, he is a multi-billionaire, owns tons of apartments in New York City says I’m just a janitor, I can’t increase my rents. I can’t collect the rents. I can’t renovate, because they won’t give me a return on the capital I put in my buildings. And I’m just a janitor.

And you can see the future if it doesn’t change. You go to Mumbai. Go look at these gorgeous British buildings that were built in when U.K. occupied India and go look at the disrepair they are in, where landlords had no incentive to fix the buildings up and they’re falling apart and falling down, and they were once beautiful buildings.

So you need a tsunami change of attitude in these dark blue states and it’s a travesty. They have so much going for them. There’s so much culture museums, art, sports teams and wealth, and -- but the attitude is not conducive for excess gains in real estate, that’s for sure.

And don’t forget, we’re not talking about what you’re just - you need gain, you need rents to go up, right, you need rents to go up. It’s not holding your own and expenses going up is going to mean your net profits are going down. So on the margin, these big cities are in trouble. Because I think the JPMorgan does take 80% space, but they have raised over 100.

On the other hand, by the way, Starwood made an investment in the rework type [ph], it’s kind of reminds me of you always make money on being the third owner of real estate, well, somebody is going to make money in short-term co-working, because if you’re a small tenant, why would you ever lease a space for 10 years. And so our bet is that people come back and for more flexible approach and that becomes a real business in United States, as it has already become in the U.K. and other places.

That’s not an issue for us as a lender. We just want the building to be full. And 50% -- something like 53% of rework tenants are actually Salesforce, Amazon, Google, their credit tenants where they are using them as a service, which was the original vision of the company.

So I think that’s fine for office. I think we’re going to see a different, I’m betting, I’m thinking, we’re going to see a different model for some of the small businesses, which is the majority of office leasing 10,000 square foot tenants, changing the way they think about office, especially since you don’t even know.

I know we were in a situation ourselves, we have a group of people in Connecticut that want to work in New York. And we just how many people going to show up and they want space, but are 20 going to show up or 50. And we don’t know, because I don’t think like the commute or maybe they want to come for two days and work from home for three days. So I’m like let’s get a shared office space, like, and then we’ll see what it is and if people don’t show up, we can shrink it or grow it.

And I think you’re going to see that over and over again across the country as people try to figure out where the line is between asking people to come back to the office and then being sympathetic, empathetic to the what do they call the yellow generation with kids who want to work from montauk on Fridays and we’ll see how this plays out. I’m not in that camp. The real estate guys in general, all of us went back to the office. And here in Miami, where I sit with Jeff and Rina and Adam and Solomon perhaps [ph] who runs our Energy group, I mean, everyone is here. We’re 100% in the office. So -- and nobody is complaining.

[Charlie Arestia, JPMorgan]

Appreciate all the color. Thanks Barry.

[Operator]

Next question Jade Rahmani with KBW. Please go ahead.

[Jade Rahmani, KBW]

Thanks very much for taking the questions. Sorry, have a lot of call as well. Just wanted to ask you if you think that hospitality is a winner post-COVID, as fate times potentially increased, and is that something where you think there could be an opportunity in lending since it seems that a lot of lenders are shy on that space still?

[Barry Sternlicht, Chairman and CEO]

I think it would be super cautious. The pace of the recovery is probably the markets are ahead of themselves on hotel stocks, in my opinion, clearly the REITs. And the -- there is a -- if you’re going to change, right, if you are working from home or you’re working from smaller offices or work offices closer to your house, you’re probably going to take more corporate team building meetings, you’re probably going to have a different kind of asset. They’ll be -- there may be more meetings, because people have to get to know each other in the company and they do not getting to know each other in an office building.

So you might see that. It’s just too early to tell how that changes. I think the experiential high end take on people to, where they call those things to cowboys on backpacks, when they go and camping whatever they call that, Rodeos, that whether you call that when they go whatever. So there’ll be people who do that, they’ll take them out and they’ll do team building exercises.

And I think the tech companies win ticket, which are the last, the most likely except working from home because they’re so competitive with each other and that’s how they compete. You can work from Mars, we don’t care, just send in your work.

So, but they will do team building exercises and they will go to Vegas and they will probably go to Montana for some ranch. That’s why I want to talk about rent, like when you go do ranch, there we go and is that acceptable today or they do debt ranch. Do your debt ranch [ph].

And so I think it’s going to change. I think, we’re most worried about of the Marriott Marquis. There are 2000 room hotels in Manhattan that really needed group the West in Atlanta. It’s a 92% group building I used to manage it so I know what it is. Those business is going to be a while and there’s going to be tremendous pressure on rates. So Airbnb is a force. So you have to now think about how you differentiating yourself.

Having said that the summer is going to be a free for all, you’ve seen the stats, 73% of Americans are planning a trip and the highest in history was 37. So it’s going to -- America is going to party the summer like 19 -- like it’s 1929.

[Jeff DiModica, President]

That’s 1999.

[Barry Sternlicht, Chairman and CEO]

1999. I don’t know like 1920. And I think it’s going to be, though, I mean, if you go anywhere you talk to the SKI resorts, you’d like to ask and everything is full, people are booking, booking and bookings did their earnings this morning. They said you can cancel at any time. So there’s a lot of people booking stuff they may wind up cancelling. But the numbers will look. If you have the right assets, I don’t think a lot of people are headed to the Marriott Marquis in New York, but Virginia Beach, I mean, like, Cancun, it’s going to be the numbers will be astronomical.

And that’s going to be a bubble, right? That’s going to pass. We’re going to go back to work after Labor Day. And we’ll have to see across the whole economy, what’s sustainable, like, how many people will go back to physical shopping? It’s an outing we were talking about yesterday, it’s an event. The grocery stores had their best years in the history of the world. Not only was that an outing, in fact it was only place open, so to get out of your house, you did something you don’t really want to do just went shopping, at least with something to do.

So, we look at these things, even on the equity side and we kind of scratch our heads and wonder what the trajectory will be or especially as the DoorDash and the Amazons do last mile delivery in China now disintermediate grocery anchored retail. So it is going to be wild to watch the real estate industry is that these new technologies and new ways of living change.

[Operator]

Our next question comes from Doug Harter with Credit Suisse. Please go ahead.

[Doug Harter, Credit Suisse]

Thanks, Barry a little bit ago, you mentioned possibly looking at some other business lines. Certainly any more details you could give on that or kind of what you think -- what types of things you’re looking at that could be complimentary to PWD existing?

[Barry Sternlicht, Chairman and CEO]

Well, I’ll say that, like, our diversification entity business partial success to getting better and better as we get rid of the old book that we bought and originating new loans, which are at or above our ROEs that we intended to execute out, I think, it’s better than 13. It is the return on remaining equity stubs. But the original book was like six, so this thing has been a problem.

And it’s not -- it’s probably the one part of our company that we need to grow our book. And we’re working on that. So now that we feel comfortable that we can do the CLO financing, we can more aggressively both grow the book.

We were limited at first, because we didn’t have -- we had a two-year facility from the bank, which was like, we didn’t want to make five-year loans with two-year debt. So we sort of shut it down until we could improve our debt facilities and now with the CLO, it’s a game changer for that business. And we’ve done how many CLO, have we done 11 securitizations in non-QM.

[Rina Paniry, Chief Financial Officer]

We just did our 10.

[Barry Sternlicht, Chairman and CEO]

We just did our 10. You’ll see us do a lot of these and we need paper, right? We need to be project stuff finance, but that businesses ROE will continue to increase, every loan that burns off what we sell, and every new deal raises the ROI and the contribution to the company’s earnings.

So that’s -- we have -- there are lots of businesses that might actually fit in the TRS that are not balance sheet businesses, but increase ROE and I’d rather not talk about them, because many of our competitors are on the call with us.

So we’ll be judicious and smart. We obviously have a good currency that we can use today and plenty of cash and access to capital. So we’re not -- we are just going to not overpay and try to find businesses that fit really well with ours.

And we want to -- we think we’re a finance company. We classified as a real estate mortgage trust, but we are -- we’d like to be considered more of a finance company and we have considerable room in our TRS for more taxable VAT income. And that again usually means it’s a much higher ROE business, a fee-based and we have several candidates we’d love to buy, but so far no luck.

So that I would add that we are now in businesses that are businesses that are panic, those effort is in and has expertise and you probably won’t see us go far afield from that. But there are certainly things within our areas of expertise that we can add on.

[Doug Harter, Credit Suisse]

Great. Appreciate that.

[Operator]

Next question Tim Hayes with BTIG. Please go ahead.

[Tim Hayes, BTIG]

Hey. Good morning, guys. Thanks for taking my question. Just a follow up, I get to that kind of is, how big do you think the investment portfolio can get without M&A based on your current capital base right now?

[Barry Sternlicht, Chairman and CEO]

Well, we have one of our competitors that $4.5 billion or so market cap against our $7 plus billion market cap and has a larger loan book than CRE lending. So I think we can certainly increase the scale of our CRE lending business.

And I think all of our business could be larger and scale today, certainly, if cap rates come up, would love to add some property assets to get that percentage back up higher. We love the durability of those cash flows. So we’ll watch that.

But I think all of our businesses can scale a decent bit higher, but there is a ceiling without adding businesses at which it would be difficult. The non-QM business and the large lending business are the two. We -- there is a gap in our lending with the richest small deals and we tend to do, what was the large -- average size of a deal on a large loan lending but…

[Rina Paniry, Chief Financial Officer]

184.

[Barry Sternlicht, Chairman and CEO]

184?

[Rina Paniry, Chief Financial Officer]

Yeah.

[Barry Sternlicht, Chairman and CEO]

So and there’s a big hole in the middle and we would have to reorganize and start a new business sort of a middle market lending where we would hold up a $50 million loan instead of selling it. That might open outside several billion dollars of balance sheet assets.

So these -- that’s I would call that a core business just a nuanced niche between what we do the big deals. We have a problem in finance $100 million multi. And by the time you’re done financing, you put out $12 million, right? Because that’s what the mess is after when you’re done, or what we keep $20 million.

So we have to do giant deals and with the book, and then but that is a business, we just have to organize yourself to do middle market loans and balance sheet them, which would be one of the things we were looking at acquiring somebody who does that more often than we do that. So I think there are other businesses, again, we won’t go into, but that would fit nicely in our tent.

It’s hard -- and we pay a dividend that’s 2.5 times the average equity REIT. So we can’t buy industrial and we can’t compete, the cap rates are 3.5. So we can’t support the dividend doing that. Triple net same thing. So there are businesses that were blocked out of based on cost of capital, really the cost of our dividend.

So that we need to support that dividend and cover our operating costs. And of course, one of the other reasons we dig is better is our overhead shrinks as a percentage of our assets and makes the whole business high ROE.

So you’re $18.8 billion and we’ve got about $10 billion, $10.5 billion, $11 billion loan book if you included our A note sale [ph], we have got $14.5 billion. So the other guys more or like $18.5 million in their loan book. We have all these other businesses too. So we can clearly stretch our loan book. But we were going to have, Jeff mentioned what we did $2 plus billion last quarter, he said we do $2 plus billion this quarter.

We are -- I had dinner with Jeff, I mentioned, the Mayor of Miami, there was one of our borrowers was at dinner too. And he got like four other deals for us. That’s our niche. We want to be repeat customers with our borrowers that we’re their friends.

We move and shake with them. We’re flexible, right? The loan the way they need it and the senior is all taken care of. Like we’re the guy making the real estate bet in the middle and not having a single loss in COVID and I think we’ve lost like, we have one loss in our book or two losses in like 12 years as couple of cycles, right? So it’s not so bad. Anyway, next question.

[Tim Hayes, BTIG]

A lot of good color. I’ll leave it there. Thanks, Barry.

[Operator]

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

[Don Fandetti, Wells Fargo]

Yes. You mentioned that European lending could go up to like a third from 25% of that loan portfolio competition lower, but I guess are there any sort of other risks in Europe? So for example, do you view financing risk is a little bit higher there. And I would think that maybe side-by-side you’d rather put $1 out in the U.S. versus Europe from a risk perspective, but maybe I’m just wondering that…

[Barry Sternlicht, Chairman and CEO]

No.

[Don Fandetti, Wells Fargo]

Just want to get your thought?

[Barry Sternlicht, Chairman and CEO]

I actually don’t agree with that. The European markets are, it’s harder to add supply to the European markets. And fundamentally, many of those markets are better than ours, the German property markets and German office markets, Hamburg, Munich, Frankfurt, Berlin, we don’t have any loans there, but we’d love to have from this cap rate to 3%. So they’re not going to write at 7% that for us. We’d be very constructive on London today. In London versus New York and San Francisco, they’re not trying to change the social system.

And one will get through Brexit and it’ll be one of the great -- it has always been one of the great cities of the world, it will be a major European capital and global capital for capital. There’s a lot of Middle East money that may cause -- ton of calls at home away from home. And that’s not going anywhere.

I like to completely irrelevant comments, but I forgot to make them in my comments. One of the reasons so positive on our balance sheet and it does reflect what he said is, our exposure to construction has dropped from 24% to 11%. So today we have very little real estate construction exposure. And our future funding obligations for all of our loans are down almost 45%. So the company is like rock at the moment and we’ll try not to screw that up. But…

[Don Fandetti, Wells Fargo]

Yeah.

[Barry Sternlicht, Chairman and CEO]

…I think that’s a -- we were poised to add loans in all of our business lines because of that. I mean, we did a really good job, I think, of managing through the crisis. And then the other thing is that we are getting -- our biggest problem right now is repayment to the fund. When we ran multiple schedules every quarter through the crisis, extending the maturities of these deals and assuming lenders couldn’t pay us off.

And every day I walk in and somebody mentions to me somebody paid us off. So that’s another source of funds. Sadly, I mean, we don’t really want those repayments, but they’re not in our control and we just got to redeploy the capital. So loan repayments are up dramatically.

[Jeff DiModica, President]

I would add. You talked about financing, they’re vastly more financing counterparties for us today in Europe than they were five years ago in Europe, when we started making loans there. A lot of our peers in the U.S. rely on the CLO market when they want to get away from bank warehouse markets and that’s really not an option when you go to Europe.

We’ve been a significant in serial A note seller throughout our life as a company and in Europe, there are great opportunities to sell A notes, we know how to do that. We’re good at that. And we have banks financing lines, now more of them with more people in Europe than we had before. So I think as the banks continue to move in that direction that makes us more comfortable in our ability to sell A notes there makes us able to distinguish ourselves.

[Don Fandetti, Wells Fargo]

Thanks.

[Operator]

I will now turn the call over to Mr. Sternlicht for closing remarks.

[Barry Sternlicht, Chairman and CEO]

I don’t have anything to add. Thanks everyone for joining us and look forward to talking to you in three months time. Thank you so much.

[Operator]

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.