Starwood Property Trust Inc
NYSE:STWD
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Starwood Property Trust Inc
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Greetings. Welcome to the Starwood Property Trust First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Zach Tanenbaum, Head of Investor Strategy. You may begin.
Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended March 31, 2022, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company's website at www.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. Reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.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'm now going to turn the call over to Rina.
Thank you, Zach, and good morning, everyone. This quarter, reported distributable earnings or DE of $240 million or $0.76 per share. This includes an $85 million or $0.27 per share gain related to the sale of an industrial asset in Orlando that was previously acquired through foreclosure, which we will discuss later.
GAAP earnings for the quarter were $325 million or $1.02 per share and include the Orlando gain as well as a $0.55 per share increase in the fair value of our Woodstar fund. Our GAAP book value grew by $0.54 in the quarter to $20.46 with un-depreciated book value increasing to $21.26. We were active on both the left and right-hand sides of our balance sheet with $4.4 billion of new investments across businesses, funded by diverse capital sources, including $500 million of corporate sustainability notes, two CLOs totaling $1.5 billion and an increase in funding capacity of $1.7 billion.
Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $231 million to the quarter or $0.73 per share. In Commercial Lending, we originated $1.9 billion across 22 new loans, 100% of which were floating rate first mortgages. We funded $1.1 billion of these loans as well as $241 million of pre-existing loan commitments with most fundings back ended to the last half of the quarter.
As we continue to transform our collateral mix, 49% of the quarter's originations were multifamily and 22% were residential, while 83% of the $716 million in loan repayments were hotel and office.
Our loan portfolio ended the quarter at a record $14.8 billion, up 33% year-over-year. Of this amount, 92% represents senior secured first mortgage loans and 98% is floating rate. Given the steepness of the forward curve, we expect earnings to increase once we move past our above-market LIBOR floors, which have a weighted average of 57 basis points.
Company-wide, inclusive of floating rate assets and liabilities in all of our businesses, a 200 basis point increase in base rates would increase annual earnings by $34 million or $0.11 per share. The credit performance of our portfolio continues to be strong with a first quarter origination LTV of 57%, a weighted average LTV of our overall portfolio of 61% and a weighted average risk rating of 2.6%.
On the CECL front, our general reserve declined by $3 million from last quarter to a balance of $51 million. In looking at credit performance and the adequacy of our CECL reserve, one of the key indicators of future loss is historical experience.
As Jeff will discuss with you, our historical loss experience in 13 years is actually a net DE gain of $78 million. Based on this, our CECL reserve could arguably be zero, if not for the saying that no one can have a zero reserve.
In cases where we have to take back an asset, we utilize our decades of experience and Starwood's broader expertise to control our destiny, a strategy which has proven to be very successful for our shareholders.
Also in the quarter, we completed our third CRE CLO, which totaled $1 billion and consisted of a diverse mix of property types, including 29% office. The CLO is actively managed with an initial spread of SOFR plus 164 basis points and an initial advance rate of 84%.
Next, I will walk through our residential business, which had an active quarter with purchases of $1.8 billion and sales and securitizations of $1.9 billion. Despite repricing in the securitization markets and significant spread widening in the residential loan space, we securitized $1.1 billion of loans in our 16th and 17th securitization and sold $836 million of loans, all at breakeven as a result of our effective hedging strategy.
Our loan portfolio ended the quarter at a balance of $2.4 billion, including $400 million of agency loans, average LTV of 68% and average FICO of 745. Although we recorded an $83 million unrealized and negative mark-to-market adjustment on our loans for GAAP purposes at quarter end, we recorded an offsetting $69 million unrealized positive mark-to-market on the related interest rate hedges.
Our retained RMBS portfolio ended the quarter at $311 million after retaining $84 million of bonds in our Q1 securitization. In addition to our hedging strategy, we continue to expand our non-mark-to-market facilities in order to further insulate this book for market volatility.
This quarter, we upsized one such facility from $250 million to $500 million. The margin call provisions under this facility do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks.
Given the LTV and FICO of this portfolio with no charge-off to date, credit is much less of a factor. Inclusive of our securitized loans, 73% of our residential financing at quarter end was non-mark-to-market.
Next, I will discuss our Property segment, which contributed $22 million of DE or $0.07 per share to the quarter. The performance of our Florida affordable housing portfolio continues to vastly exceed our expectations.
For GAAP purposes, we recognized an unrealized fair value increase in the Woodstar fund this quarter of $218 million or $173 million net of non-controlling interest. There are three components to this increase.
The first is property, which represents $137 million of the increase. For the first quarter, we utilized the direct cap rate method to determine value. In-place NOI increased due mainly to higher rents and the cap rate was left consistent with last quarter. As a reminder, that cap rate was based on the third-party fund transaction price, which was supported by an independent appraisal.
The second component is the favorable debt on the portfolio, which represents $65 million of the increase. This is because market interest rates exceed the 3.5% blended fixed and floating rate debt, we currently have in place on the portfolio.
And the third component relates to the 1% LIBOR cap that we have in place on this portfolio floating rate debt, which increased in value by $16 million in the quarter due to rising rates.
Subsequent to quarter end, area median income level, which govern rents for the over 15,000 units in this portfolio were released for 2022. Higher median income for Northern and Central Florida, where this portfolio is concentrated, resulted in a blended rent increase of 9.1% for 2022. These rents create a new floor from which they cannot decline going forward. We expect to implement these increases between June and December with the newly released rents to be reflected in our valuation metrics next quarter.
Next, I will discuss our Investing and Servicing segment, which contributed DE of $30 million or $0.09 per share to the quarter. In our conduit, Starwood Mortgage Capital, we completed two securitizations and priced an additional two securitizations totaling $668 million in the quarter. Consistent with past practice, the two transactions which priced in March but settled in April are treated as realized for DE purposes.
In our special servicer, we obtained six new servicing assignments totaling $6 billion during the quarter, bringing our named servicing portfolio to $98 billion, its highest level since 2016.
And finally, on the segment's property portfolio. During the quarter, we sold an asset with a depreciated basis of $23 million for its original cost basis of $35 million resulting in a GAAP gain of $12 million and no impact to DE.
At quarter end, the undepreciated balance of this portfolio was $200 million across 13 investments. Concluding my business segment discussion is our Infrastructure Lending segment, which contributed DE of $13 million or $0.04 per share to the quarter.
We executed $231 million of new loan commitments, of which $211 million was funded. These fundings outpaced repayments of $93 million, increasing the portfolio to $2.2 billion from $2.1 billion last quarter.
We also completed our second $500 million infrastructure CLO, which is actively managed with an initial spread of SOFR plus 189 basis points and an initial advance rate of 82%. Nearly half of the financing for this segment now consists of these term matched, non-recourse non-mark-to-market CLO structures.
I will conclude this morning with a few comments about our liquidity and capitalization. During the quarter, we completed our fourth sustainability bond issuance, a five-year $500 million issue with a fixed coupon of 4% and 3.8%.
We are able to issue these bonds given our unique platform, which has investments across the ESG spectrum, including loans on green-certified buildings and commercial lending, loans to homebuyers within residential lending, affordable housing within our Property segment and renewable energy within our Infrastructure segment. In addition to financing capacity available to us via the corporate debt and securitization markets, we continue to have ample credit capacity across our business lines, ending the quarter with $9.6 billion of availability under our existing financing lines, unencumbered assets of $3.8 billion and an adjusted debt to undepreciated equity ratio of 2.1 times, which is down from 2.3 times last quarter.
With that, I'll turn the call over to Jeff.
Thanks, Rina. Sorry, in advance for my lousy voice here, I'm on the backside of a very light COVID experience, but I will try to get through the script and get through the Q&A as well as I can.
We had another strong quarter of investing activity and value creation, demonstrating the strength of our multi-cylinder platform through cycles and differentiating us from our peers.
I'd like to start by saying how proud I am of our best-in-class team for continuing to deliver strong results to our shareholders in ensuring a seamless transition through COVID. With the sale in the quarter of our one million square foot leased distribution center in Orlando, we now have repositioned, retenanted and sold, both distribution centers, we took possession of via loan default three years ago, creating distributable earnings gains of over $93 million for shareholders.
In 13 years and over $80 billion of lending, that $93 million gain is a multiple of the cumulative impairments we have taken in that time. As I've said before, we take pride in the fact that we underwrite debt as if we were investing in the equity and this focus on asset selection and detailed real estate underwriting works to our advantage. It results in lower losses overall. And if we do get an asset back, we are comfortable with real estate, because we underwrote it.
In the depths of COVID, we told you we believe our loan book would perform well, but not even the most optimistic management team would have predicted that we would have cumulative gain on defaulted loans in our 13-year history that we would have earned and paid our significant dividend every quarter or that we would have over $4 per share in distributable earnings gains available to us in our owned property book.
Our stock has returned 12% annually to shareholders since inception, and this performance is a testament to the power of our manager, Tower Capital, our strong credit process and our information advantage.
Rina mentioned the increase in our book value in the quarter. And at our fair value marks, our book value today is $21.98 per share. With scheduled rent increases contractually based on median income and CPI levels at our 15,000 unit Florida multifamily portfolio, all else equal, we expect our book value to rise significantly over the coming years as we mark this portfolio to market quarterly.
Our stock trades today at 1.1 times our Q1 fair market book value of $21.98, which despite our significant outperformance and liquidity since COVID began, is at the low end of our historical range. With these expected book value gains, our stock sits today at a lower multiple to book than at any point in our history other than 2020 and well-below the multiples of our closest peers.
Rina mentioned the capital to be deployed in the quarter. And after the two largest deployment quarters in our history and having deployed over $18 billion in capital in the last 12 months, our investment portfolio is now 62% larger than it was during COVID. 60% of our loan book is now post-COVID loans, and we have taken advantage of decreased competition from Fannie Mae, Freddie Mac, the CMBS market and smaller debt funds who have limited capacity to grow, to increase our multifamily lending book to 32% of our portfolio and over four times the size it was at the beginning of COVID.
More than half of the loans we have made in the last seven quarters and nearly 50% of the loan balances were in the very stable multifamily asset class. We have done so at low-teens ROEs in line with pre-COVID transitional office and hotel loans, and have reduced our exposure to those asset classes by 30% each in that same time period. When combined with our own multifamily assets and high-quality residential assets, equity and loans on stable residential housing assets that have increased significantly in value since COVID make up more than half of our asset base today.
Last quarter, I mentioned that NOI on our hotel loan portfolio, which is predominantly destination, extended stay and limited service hotels, which have performed very well, was up $300 million in 2021. For BAML Research, hotel occupancy and rate is now above pre-COVID levels for the first sustained period since the pandemic began. Therefore, we upgraded risk ratings on four hotels in the quarter. We entered COVID significantly underweight in Manhattan and San Francisco with less than 3% of our assets on loans in Manhattan and less than 1% on loans in San Francisco. We've continued that trend and focused on high-growth Sunbelt markets that we believe will continue to outperform.
We have been discerning on adding office loans and the few we've added are very well leased, and we believe well insulated from any potential future economic shocks. We continue to grow our international CRE lending business, which accounts for one-quarter of our lending portfolio today and should continue to grow. Starwood has been an investor in the CRE markets for decades. We know the sponsors and we know the assets. Our best-in-class international teams operate in less competitive debt markets than the US, and we believe we can create incremental shareholder return with less leverage and better structure on assets we are equally adept at valuing.
Second quarter is shaping up to be strong as well, with more loans closed and signed up to date than we completed in the first quarter. We have significant liquidity and unencumbered assets to issue nearly $2 billion of unsecured bonds and term loans. And we have increased our expansion capacity by 35% over the last year, positioning us to be able to continue to grow our business accretively. The average LIBOR floor on our CRE lending portfolio is now well below spot LIBOR. And if the forward curve is at all correct, our earnings will continue to increase in the coming years, while we expect our CRE portfolio to outperform should inflation remain elevated.
In our Residential Lending business, we increased hedge ratios and have nearly $100 million in hedge gains to offset the majority of the displacement we saw in the last three months. We are currently closing 5.5% average unlevered coupon loans that will have higher modeled returns going forward, and we continue to securitize these loans having closed our third securitization of the year this week, and we expect to close at least two more this quarter, leaving us with matched term non-mark financing. And we expect to be able to move the remainder of our unsecuritized loans to non-mark-to-market facilities this quarter.
In our Energy Infrastructure Lending business, which usually sees more deals in Q4 than Q1, we had a very productive first quarter. Energy fundamentals continue to shift in our favor. There are less vendors in the space, and we are making mid-teens optimal returns on our post-acquisition portfolio, which now accounts for 70% of our portfolio. Our REIT business continues to be a solid contributor to earnings across market cycles. Our conduit originations business, again, earn normal run rate net profit in a period of high volatility and spread widening, a testament to the quality and consistency of our team. That was again the largest non-bank contributor of CMBS loans for the second year in a row.
Despite having a smaller CMBS book, we have increased our named special servicing by $18 billion year-over-year to $98 billion, which will provide a significant credit hedge should the economy deteriorate or enter a recession, and we continue to execute our business plan on our owned equity assets that will provide more recurring, non-recurring gains in future quarters.
I will finish by mentioning that S&P raised our corporate rating in the quarter to the highest in our sector, which we expect will lower our borrowing costs in the future. We will continue to run a diversified lower leverage balance sheet to reduce our borrowing costs in the corporate debt markets, following our stated goal of becoming investment grade.
Until then, our diversified business model that had consistently outperformed in turbulent markets, our unique dividend paying ability, our diversified fortress balance sheet and our over $1.2 billion in embedded fair market value property gains available to be harvested at any time, make management optimistic about 2022 and beyond.
I'll now turn the call to Barry.
Thank you, Zach, Rina and Jeff, and good morning, everyone. [Technical Difficulty] so small changes in values could actually hurt you, and you could find yourselves as an equity player by accident. I think this testimony [Technical Difficulty] the underwriting that we have. Over 12 years [Technical Difficulty] actually made money -- significant money actually. And we'd expect that to continue as we work through a few assets in the portfolio that are nonperforming.
I'll give you one, Calistoga Ranch, with a lender. We're the first mortgage lender on an asset out in [Technical Difficulty] California right now, not far from there, actually. And the asset burn down the ground [Technical Difficulty] accruing assets, not paying. But the land is the sale or substantially more than we have the asset as a loan balance. So we'll go back [Technical Difficulty]. So I really can't be more pleased with the efforts of the team across all our cylinders. [Technical Difficulty] I will manage phone. Jeff, do you -- maybe take Q&A, and then I'll dial in off the land line if I can find one. Hold on. Jeff, can you pick up.
But nobody can hear me. Operator?
Sure. Yes, Jeff. You're live now. You may proceed.
We're going to move to Q&A. When Barry gets a better connection, we'll go back to Barry, but we'll start Q&A.
Okay. So, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your questions.
Hi. This is John [indiscernible] for Doug. I guess first question would be after another quarter of strong earnings, what's the outlook now for the dividend or the potential for a special dividend?
Yeah, John…
Jeff, do you want me to take that?
Go ahead, sorry.
So, the special dividend related -- as it relates to the Orlando gain, which was really the outsized performance for the quarter, we look to a full year because the dividend is based on full year taxable income and we look to pay that out over four quarters. And so, we wouldn't be making a determination today as to a special dividend related to that gain. We will see how the year plays out and ultimately make that determination as we approach the end of the year to see whether or not we've covered. So, it's not a decision that we would make today.
Got it. Thank you. And second question would be just around rate sensitivity. I understand the floating rate book obviously, it's more attractive as rates move up. But at what point does that become unattractive? And can you kind of size the attractiveness as we move maybe 25 bps and 50 bps? Do we have those -- sort of those numbers that gives that color?
Yeah, John, it's Jeff. Listen, as rates go higher, it really depends on shape of the curve. We have a large book with a large ecosystem, short-term, long-term, fixed rate, floating rate, assets and liabilities. So, it changes with the shape of the curve. But if we generically are talking about LIBOR, we benefited greatly from having probably the highest LIBOR floors in our peer set before COVID. We fought really hard. We were proud of our LIBOR floors that we had.
We had LIBOR floors that were significantly above 2% through a good part of COVID. Our average LIBOR floor today is only about 54 basis points, down from 76 or 77 last quarter, but it's still higher than most of our peers, because we fought really hard to get LIBOR floors, which helped us as rates went down in the beginning of COVID.
The problem with having high LIBOR floors is still having proof as LIBOR sat below the LIBOR floors. We didn't make more money as rates went up or why the premium place [ph] went up. We're now at the point where LIBOR is above where our LIBOR floors are, where we will start to participate in the upside of LIBOR going higher. The higher --
Jeff, this is Barry, can you hear me?
Yes, Barry, you're back. Great.
Okay. I'll just tell you, what happened today. The Fed has raised the rates the -- it looks like we will be in the money on the LIBOR floors.
Yes. We actually already are, Barry. And so, because we're at 75 and our average is 64, and where I was leading them is, to say, as rates continue to go higher from here, we will make more. And once we get above where all of our LIBOR floors. And our highest LIBOR floors are 2.52%. Once we get above them all, we will have maximum velocity.
So to answer your question, we'll do better at 200 basis points, than 100 basis points, and we'll do better at 300 basis points higher than 200 basis points, but we will continue to make more money as LIBOR goes higher from here, Doug.
Great. Thank you very much.
All right. Jeff, can I assume that people couldn't hear anything I said.
I would assume they could hear almost nothing, Barry. There was a little bit in the middle, but if you want to make your key thoughts again, I would go for it.
Okay. Well, thanks. I'm sorry for the technical difficulties, everyone. It looked like I had service, but certainly I did not. So I was -- I wanted to start with geopolitics and just say, our book is in Europe and the United States. And that if you told me that we’d have a loan to book of 61% in the quarter, 57% loan-to-value of our loans. I would never have believed that.
And yet, the opportunity set for the company is as big as it's ever been in our business as banks are kind of shy in pulling back and borrowers would like relationship managers like us, and we do so much repeat business in our book that the team has done an exceptional job. And across the whole platform, the team has executed beautifully.
I will say that, you should understand that, given our focus on the equity, on the value of properties, I guess, it's surprising, but it probably shouldn't be surprising that we've realized net gains -- significant net gains on anything we've ever foreclosed on.
And at 57% LTV, unless there's a massive correction in real estate, that should continue, as we work our way through the book. And I -- or any of our loans that are -- you see them in our disclosure, higher-rated -- higher risk.
We have a loan, for example, on the former Calistoga Ranch, one of the best hotels in the United States. It burnt to the ground. And it is obviously in Calistoga. It burned in the fires. Obviously, we can't accrue it. But the land is for sale right now. It will sell for more than the loan balance, just the loan balance and will be repaid.
So we expect this to continue with any troubled assets, and we have the ability. And frankly, the desire to take assets back, if they -- at these LTVs and work them and sell them and rationalize and get the gains that we did in these two distribution centers, which were combined, well, over $100 million of gains for the company.
And then I look at our total return in the last 12 years, annualized over 12%. I say that if you had levered us 40%, 50% on margin, we’d returned 15% to 16% annually, beating probably every hedge fund that I know of over that time period.
And certainly, in the volatility of the equity markets today, we are a sunshine array of stability, which we set out to be. As you can see from our quarter earnings and our dividend, we amply cover our dividend, so that we are confident. We told you back in the middle of the pandemic that we were comfortable paying our dividend. It was never in jeopardy and is solid as a rock going forward, given the amount of unrealized gains in our book and our ability to execute sales at individual assets or larger investments going forward.
One of the assets which our approach to buying equity into the trust was, assets that you'd want to give to your kids' trust funds. And that's the portfolio of multifamily. We bought Northern Florida. We call it WoodStar. Affordable housing, just to remind you, rents can't go down. They can only go up, and rents are obviously rising across the United States in a fashion that we've never seen before, powered by inflation, but also this lack of units that is tremendous dearth of homes that is creating this rapidly rising housing complex.
And we ask ourselves, is this going to continue like this, or what's the outcome for housing prices given -- is it a bubble? While prices in some cities have run pretty far, this is not a supply issue. This is not like overbuilding that we saw in '07, '08. And it's not powered by people borrowing 100% of loans of the home price with Ningalons [ph]. This is really demand in wealth and people working from home and trying to improve their homes. And we expect, of course, it will slow down. It should be -- or continue to be a source of stability for the US economy because, it really isn't overbuilt.
Most builders -- one of the reasons we built almost 15 million fewer units from 2010 to 2020 than we did in every decade prior going back to the 40s with builders stop doing spec homes and couldn't get blinds to improve land easily from anyone, and so it's just disciplined in the housing market and the result is what you see today. And it's bled over into the multifamily markets, which continue to be to enjoy double-digit increases in rents. We're the nation's largest owner of apartments. We have 115,000 apartments, including the units that are owned by Starwood Property Trust.
And what that means actually going forward -- affordable housing rents are set by -- not by inflation, but by the income growth of the SMSA, in which they operate. And so we know because of the rent gains that Rina outlined in your comments, that this portfolio will increase in value -- fairly significantly next quarter, not changing the cap rate. And I can tell you, our holding cap rate is significantly above current cap rates, probably 25% to 30%, obviously, as the nation's largest older owner of apartments were in the market, both buying and selling apartments.
Apartment cap rates are probably today in the low 3s. This is significantly higher. The cap rate, we're using here will it just be the gain you'll see most likely next quarter. And each quarter going forward, we will mark this portfolio will be a result of the rent increases, not because we're going to play with the cap rates, even though they're absurdly conservative at the moment. We're actually selling some assets in Southern Florida at the moment in the 2s, a cap rate in the 2s. So, those are market rate. They're not affordable. But affordable does have the benefit of having always been full because they're cheaper than everything else.
And there's -- rents can't go down. So -- and this is a rent that is legislated by HUD or Fannie or whoever it does with the housing authorities. And so each year, we kind of know what's going to happen in the following year since the blend of multiple years and the change in rents.
The other comment, which I thought was funny is the CECL reserve, because we do have a CECL reserve, which we probably don't need, but we can't market to zero. And it's funny because banks are coming in and out with increases in reserves and taking money out of – putting – hitting their reserves or taking – we're just not touching it, and we're leaving it alone. We run the models. We do what they ask us to do. And we carry this reserve, which might come in handy someday. And I just wanted to back up and quickly talk about the asset classes as you can see what's happening now coming out of the pandemic.
I don't really focus my comments just on the US, but multifamily is having an incredible run. Certainly, cap rates will be under pressure if rates keep rising but rental growth is so strong. It's overwhelming any issues on the rising rates. And I don't expect personally, I would not expect LIBOR to hit the levels of the forward curve. I think the economy will slow way before then the Fed will take notice. This is like third quarter, fourth quarter – like fourth quarter, first quarter.
So I think LIBOR will hit two, two and half. I don't think it will go to three. I don't think it would be necessary to go to three, because I think the economy and the global economy with what's going on with the supply chain will slow. Logistics assets, we don't have that many loans because the cap rates are so low, it's very hard to borrow from us. They're really bonds that are most exposed to changes in cap rates because they're long-dated bonds, they behave like bonds, but underlying rents are increasing.
The problem is you can't get to the underlying rent. If you have a long-dated industrial lease, it kind of doesn't matter if 10 years before you can get at the asset given the leases in place. You need short duration logistics to actually do well right now. Otherwise, you've got a negatively correlated cash flow stream.
The office markets are all over the place. In Miami, which probably will get overbuilt shortly in the office markets, you were able to lease buildings in the middle of COVID, fully leased brand new buildings at great rents, huge rents, twice the rents you would have expected two years ago. And the strong southern economies or the red state economies, Texas, Dallas, Austin, Nashville, Tennessee, tax rates, Research Triangle Park, those are all really powerful and good office markets.
So even in the weaker markets like New York, good assets are leasing and leasing quickly at great rates, but commodity assets are having a harder time. So you have to be careful, but there's good opportunities in the office markets, and we continue to take advantage of that as we can.
Our retail is obviously – it's still a four-letter word. And – but it does have presented opportunities occasionally, depending on what it is that the nature of the credit and the nature of the leases. And then hotels, we had like 21 hotel loans going into COVID. We really only have one that's an issue. It's in San Francisco. It's small. San Francisco is the worst of hotel market in the United States by 1 million miles and probably will remain very challenging. But the rest of the markets are galloping ahead as consumers basically shut down their Netflix account and go on a trip. And they're going to travel this summer in quantity, we've probably never seen, paying rates nobody has ever contemplated because the consumer does not seem very price sensitive.
So overall, I can't think we could be better positioned than we are. We are a sea of stability in a world that's extremely volatile, and increases in interest rates only help us and help our returns and will help cover the dividend even more than it's covered today. It's a great place to park cash right now as the world melts – the tech world melts down.
I said in comments, you couldn't hear earlier, I mean, it is reminiscent of the dot-com crash back in 2000/2001, I remember when the Nasdaq fell 85%, and we have cash flow beneath us. We are not speculative in any way. And with a book like we are, you kind of wonder how on earth we could be trading at the dividend yield we are in a world that's still yield challenged and will remain yield challenged for a while.
But what will happen to us going forward, as Jeff mentioned, is our book value increase. And it will continue to increase. And we will -- because of the affordable housing portfolio and the mark-to-market on that portfolio, which we can tell you, will be going up next quarter.
So as a firm, given the platform we run, the people we employ, the geographies we cover, the ability to -- proven ability of this team to execute in all these markets and all conditions, we look to be a very excellent place for people to invest and ride out this volatility of the geopolitics and the politics of the United States.
So we'll take questions now. Thank you for your time.
And Barry, just putting a separate point, the numbers that you talked about, as Zachary talked about, San Francisco is actually only 40 basis points of our total assets, but there are loans in San Francisco today. And in Manhattan, as you talked about Blue States, Blue cities its difficult jurisdiction tax-wise and other, there's only 1.2% of our assets are on loans in Manhattan.
And we almost doubled it, when we did the large residential project in [Indiscernible] last quarter, Barry. So you're talking about $300 million, which was only $150 million. So that's a long time, long-term bad debt that you and the company have made on being defensive on Manhattan and San Francisco that does work pretty well.
Just one quick comment on the Manhattan loan, it was a foreclosure that we financed. And it's mostly residential. And the equity is going to make a lot of money, which we tried to get into the equity, but weren't able to show. Next best thing is make the loans or part of the loan. So that's a very big positive as opposed to a concern its brand new loans, so thanks, Jeff.
And now we are continuing with the question-and-answer session. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi. Good morning. Rina, you touched on this is Barry, but I wanted to get a little bit better idea of the visibility you have into the rent increases in the Woodstar assets. From when the CPI or AMI data comes out, how long is it before that rolls into the rent increases? And then the income statement is it three or six months or 12 months. Kind of how much visibility do you have there?
So for 2022, we actually have 100% visibility, because HUD relief the 9.1% that I mentioned. They released that two weeks ago. So we know for a fact that for 2022, we're able to roll out 9.1% of blended increases across the portfolio.
We can do that immediately. It's not what we're choosing to do. We are choosing to roll it out fully overtime over the next six months, but that can take effect right away. And so, we have 100% visibility into 2022.
As far as 2023 goes, we have an estimate, but we really don't know because it's based on three-year median -- three years back, median income levels. Then two years of actual CPI and one year of projected CPI. So there's, just a couple of unknowns, but directionally, you can estimate where we would end up.
Got it.
Thanks Stephen. Maybe I give you a sense that the -- looking back at the change in median income from three years ago and then increasing it by CPI, as Rina said, and the CPI is the variable, we thought this would be around 12%. It's around 9% to 9.1%.
What all that means is the delaying of 3% increase that will come in the following year or the year after when actual actually comes in at a different place. So I think the forward inflation numbers look a little low to me, but I'm not making a judgment based on that.
But I know that based on the way the calculation works, if we think they're 3% too low this year it's going to be 3% higher the following year or the year after to make up for it. So it will be somewhat mean reverting to the numbers that we think, and we're going to get a couple of years of really good outcomes.
Just to add one thing. Again, this is -- we're in Orlando and Tampa, and you can't get better markets for income growth than those two markets in the country. There's in-migration, job growth, new companies moving in, and so there is going to remain pressure on wages, which makes this more affordable for our renters, too, because their wages are going up rapidly also.
Yes. As a follow-up, Jeff. When you think about capital allocation, one of the biggest advantages of all your cylinders is reallocating capital when it's attractive. Given all the movements in the markets and obviously, you've now got another CLO in the infrastructure business, but how do you think about the most attractive uses of putting money to work right now?
Well, the lending business has been a real cap for the last 18 months. We've averaged about 200 basis points, between 170 and 200 basis points above our long-term trend ROE in the lending business. Our international lending business has really picked up the slack and will probably be over 30% of what we do this year, and it will be significant, and it won't be -- it will be multi-jurisdictional, Australia and core Europe and the loans competition better advance rates to us, better structure for us, et cetera. So, we're super happy with that.
Our domestic loan book continues to grow with a massive focus on multifamily. I talked about it in the past and I mentioned it briefly before, but the reality is with rates going up as quickly as they have, the agencies, Fannie and Freddie and the CMBS market simply can't be as competitive on proceeds to a multifamily borrower as the nonbank market can.
They are sizing the loans based on the trailing 12-month cash flow. And we all know that the next 12 months will be higher than the trailing 12 months. So any borrower can get higher proceeds away from the Fannie, Freddie in the CMBS market. This will last forever.
But at the same time that this phenomenon has happened for us. We have a lot of smaller competitors who because of the CRE, CLO market has been quiet, and it's been difficult to get out to an arbitrage, have not done CRE, CLOs, their bank warehouses are full, and they're not being competitive because they don't have room to grow.
So as you talk about our ability to pivot, we have pivoted. We pivoted strongly multi-families now by far the largest segment that we have, and we're taking advantage of a lack of competitors to really add to that. So I think you'll see that happen continuing for the next six to nine months. I don't see the CRE CLO bandwidth problem fixing itself in the short run.
So, I would expect we continue there. We continue internationally. We probably don't add a lot in property. As you know the residential business, well, the non-QM loans that we're seeing today with 5.5% to 6% coupons at 1-0-1 type of premiums will be awfully good-looking investments at some point down the line. So we're sort of excited about that our energy infrastructure business. It's lending at the mid-teens.
We expect them to do $1 billion plus, and they're off to a great start this year, and that portfolio is performing super well. I'd say those would be the key adds You probably won't see us add a lot in property. And Barry can speak to this, but it's just difficult to get the cash returns that we need in the property world with where interest rates are on financing today. So, property probably will be something that you don't see increasing. Barry, any comments?
I think that's correct, Jeff. Nothing to add.
Great. Appreciate the comments this morning. I hope you feel better soon Jeff.
Thanks.
Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.
Hey good morning Jeff. If you could two questions. One, how do you sort of balance pretty strong growth here into what could be an economic recession? And then number two, can you talk a little bit more about how you took advantage of the non-QM market disruption in the quarter and your outlook for that business?
Yes. Sure. As far as growth into recession, we wake up every day and decide what we want to invest, where -- what areas we want to invest in. And if we think that we're headed for a difficult time, we can simply pull back the reins and we will ultimately stay invested by virtue of future funding that we have, et cetera. So it's a real advantage having this very large ecosystem with money coming in and going out.
Most days, we don't have to wake up and do something that we don't want to do. I'll leave it to Barry to talk about chances of a recession or how we would necessarily change our outlook. But my guess is, if we head into an environment like that, there will be less to do. There'll be less purchases, and there will certainly be less refinancings.
So in a world where there were $600 billion or so of loans to choose from last year done in the floating rate world or 500 and change, it may be smaller than that. We're expecting that we'll do about 80% of the volume of last year, would be okay, and we'll be able to stay invested if we did 30% of the volume of last year. And that's one of the beauties of our system.
Barry, do you want to talk a little bit about the prospects for recession and how it might change your outlook?
Yes. I'm expecting a recession, but that goes to the LTV of the book at 61%. I think, we've got more than adequate cushion. It would have to be a complete wholesale destruction of the economy to really dramatically injure us with demand destruction. That would empty office buildings or cause unemployment to skyrocket and wage growth to cease and reverse.
It's not -- and obviously, the energy book and the energy complex is absurdly healthy. And even on -- we have a small oil and gas business at the parent level, and investments we wrote off are now gushing cash flow. So it will just change the opportunity set for us. Probably there will be better investments to be made frankly.
People do have loan maturities, and that was the year we were created. We were created to provide liquidity and capital when banks warrant lending, and we thought there were terrific risk return opportunities for us, risk reward opportunities for us, solving people's capital stack problems. So in a way, those are our best days, our competition.
We're the biggest of our kind and have the liquidity in our property book. We can create liquidity, and we don't want to do it by selling hedges or taking off foreign currency hedges. We can just simply sell some of our equity assets or even trade our loans. So I'm not nervous about the portfolio really in a slowdown.
And again, I guess, the only negative is LIBOR probably or SOFR goes down, not up, but we still have our floors. And I don't think you'll see rates. Well, you could. I mean if it gets really bad, you could see short end of curve drop as it did during the pandemic. But that wouldn't be a base forecast.
I think you're going to see a slowing of demand. I think the consumer will have, first, he bought everything he needed and now he's traveling and spending the last of his stimulus savings. And it's -- I was -- I'm at a conference actually that I'm attending here in -- one of the banks this here, and they said that their average loan balance of their clients. This is one of the top five banks in the country said there was $400, now $2,000, and that's basically the money they save during the pandemic bidding spend.
Sadly, that savings account can erode with higher food prices and higher gas prices. And you would hope that the food -- both of those are somewhat transient. Offsetting that is wage growth, which is substantial, particularly at the lower end of the socioeconomic spectrum and that's good. We should be happy with wage growth.
So, with an unemployment rate that would have been 2.7%, if million people haven't decided to join – re-join the workforce, it's a long way to having something critical. We feel bad. It feels bad. You're seeing this tech correction. It feels bad. You're seeing the fantasy explode. But we were just boring. We just pay our dividend and continue to execute our business and provide just a spectacular total return to shareholders given the Val [ph] of the world today.
And Jeff, non-QM market, do you still feel like...
Go ahead, Don.
Do you still feel like it has good sort of secular growth? And were you guys able to -- you touched upon it a little bit. Were you able to take advantage of the spread widening and dislocation in the quarter?
Yes. I'll touch on that. There's spread widening in a bunch of places. We were an aggressive investor. We wrote, I think, $1.8 billion of new loans in the resi business. There was obviously spread widening. There are definitely weaker hands in that base. We are a long-term player. We have a large balance sheet. We continue to invest. The credit on non-QM loans and on any resi loan looks really good. The LTVs, which were mid-60s to a 735 or whatever are significantly below mid-60s today, given the HPA that we've experienced.
So there's no credit concerns, but concern is only what's the coupon and at what speed that speed at. And with premiums down to -- on a post-hedge basis, we hedge 100% of our interest rates or 85% to 100% of our interest rates from the time, we lock alone. So as rates have risen, we've had hedge gains, which means net we're owning new non-QM loans below par.
And then it becomes – when they're below par, we don't have to think about prepay speeds as much as we worry about prepaid fees on premiums. So, we won't worry about credit. We won't worry about prepaid fees. It will just be a matter of what coupon is left over on what we can originate and securitize.
We've continued to securitize pricing our third deal this month or actually priced this week. We have two more coming this quarter. And the extent that we can get some of these newer loans with 5% and 6% handles and potentially mid to high fixed coupons on these resi loans, I think those will be phenomenal investments. So, we're continuing to invest there. It was a rocky quarter spread-wise. But again, the rate hedges that we had on covered both to that significant move and gave us an opportunity now to be a larger investor.
Thanks.
[Operator Instructions] Our last question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thank you very much. Do you expect that there will ultimately be a correction in commercial real estate prices? How do you balance the fact of rising replacement costs against the potential for cap rates to widen? Do you think that bodes for flattish outlook for commercial real estate prices, say, next year, or you expect the correction?
I'll take that. Yes. So, I think the lowest cap rate asset classes will face some pressure, but there happen to be low cap rates because the rent growth has been astounding double-digit like. And they do mark-to-market on short leases, I'm really referring to apartments, number one, single-family for rent probably similar to apartments.
Industrial, I've mentioned in my comments, Industrial is trading at 3 caps to 3.25. We don't have much exposure to industrial. We can't get our returns lending to that asset class. So we've walked away. I think you could see a 25, 50 basis point increase in cap rates in the residential sector and the apartments, but it really is about rent growth. It is very important and it can be far more important than interest rates. And I don't think we have data really because if you go back to the late '70s, early '80s, when you had at 22% prime rate, cap rates weren't 2022. They weren't even double digit because everyone looked at the interest rate curves as transient, and they were going to come down, which they obviously did.
And I remember in my earlier in my career buying some assets in the UK at 5 and 6 cap rates when interest rates were 13% so I think real estate investors kind of look through the transitory nature of the curve as the central reserve banks try to accelerate or decelerate growth. So they won't go hand in hand. You will eliminate a class of buyers that have been in, let's say, multifamily that were buying it before it and financing it 2.5% and 3%, so there was a good cash-on-cash yield. You don't really have that with today cap rates.
But as I mentioned in my comments, we're selling probably a couple of billion dollars of market rate apartments right now. And there hasn't been much movement in cap rates and obviously, the rise in SOFR and the rise in treasuries is not a secret. So people are still looking at assets, and you've seen a couple of take privates by Blackstone where I think they're saying like a 4.25% unlevered is fine, and they'll refinance when the economy weakens and put -- they're almost doing an equity LIBOR, if you will. They put it out today. They think rates -- the economy will slow, rates will come back down, certainly short rates and will be able to borrow at more attractive spreads. I don't think -- and then offsetting that, the one comment you made, which is really critical is replacement cost.
Replacement cost is galloping ahead. And it's not just commodity prices, it's not just materials, it's also labor and a general -- again, labor shortage, and it's going to get worse. It's not going to get better because the government hasn't spent $1 of the infrastructure bill. So when they start doing that and buying steel and concrete and PVC piping and laying roads and asphalt and obviously, where oil is, it will put tremendous demands on those byproducts. Material prices continue to rise probably for the foreseeable future, and the supply chain is going to get worse, not better. So people are talking about inflation rolling over.
In parts of things like consumer-led inflation, maybe autos, used cars, maybe they will -- that's more a function of people already got what they wanted. They already bought their new car. They went out and spent money. They bought their new house. But I think in other sectors of the economy, replacement cost ahead. Of course, that's really good for everyone who owns anything today because in order to justify new construction rents have more room to rise. So it is a tug-of-war. It is the holy grail of what we wake up every night worrying about. What's the interplay between cap rates, interest rates and inflation hikes and replacement costs.
And I look at multifamily starts, for example, in the United States, which are pretty much at record highs. And I don't think a significant portion of that stuff will ever get built. And if it gets built, it won't be delivered on time. There is no project I'm aware of that is delivering on time and on budget right now, either here or in Europe. So it's -- I was talking to somebody yesterday who owns -- who's building a residential project in Miami, and they're 1.5 years late to complete it because of supply chain issues. And nobody knows where the stop is, it’s on seas, it’s in warehouses, it's stuck offshore. It's -- they're waiting for goods from a closed Chinese factory. It is not going to be great. It's really good for existing assets and for our loan book. It's really healthy.
And Barry, cap rate is higher. We have a lot of room at 61% LTV to absorb that. I think it's one of the things we like to talk about. And Barry, can you just make one comment on what you think would happen to cap rates in affordable housing versus multi and other? We look at them as a much more bond like cash flow and less volatility because of that bond like nature. So even if your supposition is significantly higher cap rates, Barry, I'd love to hear your opinion on how you think low income housing plays?
As you know, Jade, our cap rate on the multi books, we're holding in the force. So we're nowhere near. We're not marking this down at today's cap rate. We're just marking up the value based on rent growth. So we have a huge cushion in our mark. And because it can only go up, rents can only go up and not down, the asset category has become a very, very exciting unlevered yields for offshore investors that look at it as an inflation protection bond and basically index bond to inflation and wage growth.
And so it's almost like a tip. It's -- and the minority investors that we have in the WoodStar portfolio when we realized and demonstrated to the street and to our shareholders of these gains, we talk about are absolutely real and is available to us to harvest at any time. They were both offshore sovereign wealth funds that -- I guess one is a quasi sovereign wealth fund. But they're looking this is basically bond equivalent yields that actually have a kicker in it. It's a tip. It goes up. It doesn't go down. So that's going to keep those cap rates higher and then probably market rate cap rates going forward.
Regarding transaction outlook, what do you expect for the market? Do you expect, I assume, a decline this year? Last year was a record. We had a surge driven by not just the number of properties that traded but much higher values. I would expect you think that would decline, particularly in the second half of this year with higher rates? And for Starwood itself on commercial real estate lending, what do you think you guys do for originations this year?
Well, I'll start with us because we don't even give you this quarter, but I would say we did $10 billion in transitional lending last year. That was our goal coming into the year for the reasons you said. I would expect it to be slightly below that, but not significantly below that. I think that -- I think there's a lot to do for us in times like this where, as you're seeing, bank warehouse lines are full, a lot of our smaller competitors are sort of out of the market. When we can get pricing and when we can do things that are attractive and very complex, and we've been doing a lot of large complex deals, we're going to tend to do a little bit more. So my guess is that our market, including our peer group, is down 20%, 25%, but we're closer to flat than not. But Barry, I'll let you talk about commercial real estate and what you think happens?
Right now, there's a lot of assets on the market. So there are a lot of people selling assets, particularly multi-family, of course, people trying to lock in today's cap rates, which again, are in the 3s -- low 3s, like 3, 3.25 and, in some cases, breaking 3. So I think there's been a surge of assets for sale. You haven't seen a ton of other asset classes trade dramatically. People have tested the waters on hotels. The asks are super high. The bids are not at the ask. You haven't seen a ton of trades. We are quite active on the equity side.
There is -- there are -- we are -- as are some of our peers. And there's a lot of people holding on to property because of the rent growth and lack of alternatives. But I would probably agree that volumes will go down. We don't need transactions. We just need refinancing opportunities. So I have no idea what the cadence of maturities look like of the U.S. commercial mortgage market. But assuming it's -- it will always be opportunities for us, I think.
Thank you.
And Jade, even this morning, people holding back their expectations for the CMBS market and the SASB market for the year. I think you have written about that being smaller. If that is the case, we will obviously pick up some slack as the SASB market does less deals and if people move away from 10-year fixed to transitional. So I would have you going to be able to…
Two other comments. I mean, the difficulties of other asset classes in times of like this always help real estate. We always get a bid. Institutions find the fact that we don't mark-to-market overnight kind of refreshing as they look at the collateral damage in the VC book or even in their equity book right now.
And so that's always benefited, to some extent, real estate. Also, where the capital is in the world, right now is primarily in oil wealth nations, including the Middle East, and they have a predilection to buy real assets. They like real assets. And -- so I expect that participate more in the markets than less, and I would guarantee that, frankly. And these two -- there's one other new kid on the block, which has been extremely material in the last 12 to 24 months, which are the non-traded REITs,, which were the second largest in the nation behind Blackstone. And these entities have to put out capital, right? They have to find things to buy because they can't sit on cash, they don't earn anything on cash. And they have been very important drivers of what is acceptable pricing. And so they are very active buyers. And in the scale -- the Blackstone non-traded REIT has to almost buy the entire volume of commercial mortgage transactions prior to COVID every year.
So they have a 100% market share of what was -- basically I forgot the number, but it was -- they have all of it. So that alone is driving transaction volume by itself. And obviously, we're bigger than the next eight guys behind us combined. But you find things to do. You create deals because you look for opportunities. And what you're seeing, obviously, it's not -- it shouldn't surprise anybody.
I think I've talked about it maybe not to this audience, but you'll continue to see take privates in the public market, whether it's PS Business Parks or ACC or -- those are all being driven by the non-traded REIT volumes and the need to put up that money and scale. So we'll continue to see take privates for a while of the public companies, which will drive loan volume origination. And we're working -- we finance Blackstone. Blackstone finances us on the equity side, and we've partnered historically before on some large loans and have a large loan that we expect will close with them shortly, actually.
Thanks.
And we have reached the end of the question-and-answer session. I'll now turn the call back over to Barry Sternlicht for closing remarks.
Thanks, everyone. I just can't tell you -- I mean we are obviously, on the large shareholders, Starwood Property Trust, and so is the team. And it's a really nice place to be hanging out well as the world melts. So we hope other shareholders and other capital sources will increase their positions in our company because we really look good in this times of travel, and we expect -- I'm not sure any mortgage REIT in our sector can cover the dividend the way we can. And that's not reflected in any premium. But actually, we've traded out at a discount to some of our peers based on our new book value. So thanks for your support, and thanks for listening in. Have a great day.
And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.