Starwood expects to boost offshore investing as US economy slows

REIT reported a 10.5% drop in net income in 2018, to $359M

Barry Sternlicht Chairman of Starwood Capital Group (Credit: Wikipedia)
Barry Sternlicht Chairman of Starwood Capital Group (Credit: Wikipedia)

Starwood Property Trust’s Barry Sternlicht told analysts the real estate investment trust increased its offshore spending in 2018, particularly “in the beer-drinking countries” of Europe, and expects to continue investing internationally this year as the U.S. economy keeps slowing.

On Thursday, the REIT, an affiliate of Miami Beach-based Starwood Capital, reported a drop in profits in 2018, a year in which it invested a record $11.6 billion, up 58 percent compared to 2017.

In 2018, Starwood’s net income totaled $358.8 million, or $1.42 per share, down 10.5 percent year-over-year. Its fourth quarter earnings dipped only slightly, down 0.5 percent to $92.1 million or 33 cents per share.

Its core earnings in the fourth quarter totaled $155.4 million, or 54 cents per share, meeting analysts’ expectations. For the full year, Starwood’s core earnings totaled $608.1 million, or $2.19 per share.

The REIT has nearly $900 million in offshore investments, mostly in northern Europe, and committed to $450 million in February, said Sternlicht, chairman and CEO.

In 2018, the company lowered its borrowing costs, creating a larger cash cushion that will allow it to act quickly on deals without raising new debt or equity. Starwood expects to sell “some of the more senior bonds we’ve held onto,” increasing its return on equity, Sternlicht said

Sternlicht said the 2020 election will create uncertainty for the U.S. economy. Starwood pulled back on investing in late 2018 in the U.S., due to turbulence in the market.

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“We have to be super careful in the hotel space” because of “supply and volatility of the economy,” Sternlicht said.

Overall, Starwood continued diversifying outside of real estate last year, closing on the $2.5 billion acquisition of a GE energy-finance business in September.

“Diversification allows us to sleep at night,” Sternlicht said, later adding that the REIT “looks more like a bank than a mortgage trust.

Its total assets at the end of 2018 totaled nearly $68.3 billion, up from about $63 billion the previous year.

Existing property, like Starwood’s portfolio of affordable housing in Florida, is worth more because of rising construction costs, Sternlicht said. The drop in multifamily construction starts is due to an “extreme rise in construction prices, up 10 percent in some markets” year over year.

“Slow growth is nirvana for the property cycle,” he said, adding that it keeps cash in the pockets of the real estate community as they evaluate their next moves.