Starwood earnings down 30% as REIT writes off losses from regional malls

Barry Sternlicht’s Starwood Property Trust saw earnings fall by nearly a third at the start of the year as the company wrote down losses from struggling malls.

The real estate investment trust, an affiliate of Miami Beach-based Starwood Capital, reported a year-over-year drop in net income of nearly 30 percent, down to $70.4 million, or 25 cents per share in the first quarter of 2019. The company’s core earnings totaled $82.9 million, down 47 percent compared to the first quarter of 2018, or 28 cents per share, which missed estimates of 58 cents per share.

“The one place where I’ll say there’s trouble is the retail market,” Sternlicht said during Starwood Property Trust’s first quarter earnings call.

Starwood’s profits reflect a write down of its interest in a regional mall portfolio, the company said. Rina Paniry, chief financial officer, said the loss of anchor tenants and bankruptcies of inline tenants contributed to those losses.

With regard to the hotel market, Sternlicht suggested caution on a macro level due to the “very rapid increases in real estate taxes” hotel owners are facing across the country. “A large increase in revenue isn’t going to cover the rapid increases in taxes,” he said.

But in Manhattan, occupancy is strong, Starwood executives noted.

Overall, Sternlicht and other executives were optimistic during Wednesday’s call with analysts. In the first quarter, the company invested $2 billion of capital, including $1 billion in commercial lending, bringing its commercial lending portfolio to $8.2 billion. Starwood said its real estate portfolio reported 98 percent occupancy.

Jeff Dimodica, president and managing director of Starwood Property Trust, expects 2019 will “be a very strong year for loan originations” and that Starwood will add unsecured debt in the coming quarters.

Dimodica said the company’s property portfolio had unrealized gains of over $500 million in the first quarter, and that its multifamily properties in Florida – primarily in Orlando and Tampa – “performed exceedingly well” with high single-digit rental growth.

Starwood was also involved in WeWork’s purchase of Lord & Taylor’s Fifth Avenue flagship for $850 million, as one of the lenders. WeWork financed the deal with a $900 million loan for JPMorgan Chase, Starwood Property Trust and a third unknown offshore lender. “Having a very large mezzanine lender behind us made this a really smart trade on a beautiful building,” Dimodica said.

“Shared office is the real business now,” Sternlicht said. “In the major markets like New York and London, they’re actually quite profitable. It adds a shift to the enterprise. They’re trying to sell office space as a service.”

Sternlicht, who said he is “super happy with the pipeline of deals” the company has today, also referred to Starwood’s investments in Europe, where it is expanding its presence. “[There’s] more opportunity in Europe. Rates are maturing,” he said. “We’re really pleased with the team we have” in Europe.