When the coronavirus started to take hold, Barry Sternlicht compared it to World War III.
With the pandemic having completely overwhelmed the global economy, Starwood Property Trust’s CEO updated that statement during the company’s first-quarter earnings call on Monday.
“We’re about halfway” through the war/crisis, he said, adding that Starwood has been on the lookout for opportunities, especially when it comes to hotel acquisitions. “It’s really ugly…But obviously when it’s really ugly, it’s a good time to invest.”
The real estate investment trust reported a net loss of $66.8 million from January through March, compared to a net loss of $70.4 million over the same period in 2019. It reported revenue of $312.6 million for the first three months of the year, compared to $310.5 million in Q1 2019. The company’s stock dipped on the news but has since climbed back, rising 2.9 percent to $13.60 per share, up from $13.23 on Monday morning.
Starwood still has more than $870 million in cash, Sternlicht said, and access to more than $1 billion in additional liquidity “if ever needed.”
Dialing in from his Miami Beach home, Sternlicht addressed questions about Starwood’s hotel loan portfolio, which represents 12 percent of the company’s total assets. Starwood’s retail loans account for less than 2 percent of its assets.
Starwood, an affiliate of Miami Beach-based Starwood Capital, downgraded the majority of its hotel loans. The REIT is expecting that to change after hotels reopen and the battered industry begins to pick up, though Sternlicht said that “all hotels will figure out how to operate with lower break-evens,” which could mean eliminating room service or keeping hotel restaurants closed.
“Hotels, they will recover,” he said. “I personally don’t think Americans are going to change their habits forever.”
Sternlicht said the virus has not yet led to a panic among hotel investors. “Nobody is selling hotels at fire sales. Nobody. And believe me we looked. … Not many people are willing to give up yet.”
About half of its hotel borrowers have asked for some payment relief on their loans, Starwood chief credit officer Mark Cagley said on the call. The REIT is giving borrowers about nine months to work out their payments, but Cagley said it doesn’t plan to waive all interest payments. Only one of its 120 commercial real estate borrowers did not pay in April.
“We would like to own these hotels but that’s not what we’re trying to do,” Sternlicht said. “We’re not trying to be vultures to our own borrowers.”
The good and the bad
The low end of the market is outperforming the rest, with Sternlicht pointing to its portfolio of InTown Suites hotels, at 80 percent occupancy, which he said were more like “quasi apartments.”
He also predicted that while it’s too early to tell what could happen to hotel property values, they could drop between 10 and 15 percent.
In terms of residential lending, Starwood is being cautious about where “we’re buying and taking loans,” Sternlicht said. “We all want to know what’s going to happen to incomes across the country.” On Thursday, the Department of Labor reported another 3.2 million Americans filed for unemployment for a total of more than 33.5 million since mid-March.
Starwood collected 98 percent of rent in April for its property portfolio, which includes affordable housing developments in north and central Florida. Though the area median income rose, leading to a blended rental increase of 5 percent for the Florida portfolio, Starwood will likely defer the increase in rent until it determines the full impacts of Covid-19, the company said.
Starwood’s special servicer LNR has also been busy, onboarding about 500 loans that represent more than $14 billion in assets. Company officials said they expect revenues from special serving to increase.