Barry Sternlicht on 1031s: Kill them

Barry Sternlicht compares the coronavirus pandemic to a race at the Indianapolis Speedway gone wrong. As a pace car laps around the track, lenders have to pull into the pit to change the tires and replace auto bodies.

“We have never experienced that,” said Sternlicht, chairman and CEO of Miami Beach-based Starwood Property Trust, during a second quarter earnings call with analysts on Wednesday. Sternlicht previously compared the pandemic to World War III, as well as a Category 5 hurricane pummeling the economy since March.

Two real estate sectors in which demand will not return to pre-Covid levels are hotels and retail, Sternlicht said.

“You have to predict the future and it’s not going to look like 2019. Not for a while. There’s no question business travel will be injured,” he added. “Underwriting is going to be different. If Covid goes on for years, it’s going to be tough.”

Still, Starwood is sitting on more than $800 million in cash and undrawn debt capacity, executives said. Sternlicht said the real estate investment trust is “quite blessed” with its scale.

“The ability to continue earning these types of returns … is truly something surprising,” he added.

Starwood reported $139.7 million in second quarter earnings, or 49 cents per share, up 10 percent percent from $127 million, or 45 cents per share, in the same period in 2019. The REIT reported $265.6 million in revenue for the second quarter, down 14.6 percent from $311 million in the second quarter of last year. The company’s stock rose 2 percent to $15.24 per share at 12:35 p.m. on Wednesday, following the earnings call.

The REIT said it has deleveraged its balance sheet by more than $350 million, lowering its future funding obligations by more than $700 million.

During the second quarter, Starwood said it negotiated modifications to 11 loans and is working on one more, offering partial interest deferrals to its borrowers. A majority of these loans are for hotel properties.

Jeff DiModica, the company’s CFO, said its hotel sponsors contributed $150 million in “fresh equity” and are projected to invest another $150 million of their own equity in the second half of this year. He said the REIT is “cautiously on offense.” Sternlicht later added that globally, transaction volume is still low as sellers are waiting “until the dam breaks” to sell, and many see a light at the end of the tunnel.

Starwood’s extended stay hotels, which have averaged 80 percent occupancy, represent about 20 percent of its hotel portfolio.

During the most recent quarter, Amazon signed a lease for a Starwood-owned distribution center in Orlando that was formerly leased to Winn-Dixie, DiModica said.

“Industrial has been fine. The housing markets are on fire. Multifamily is holding its own with some deterioration,” Sternlicht said, adding that there has been a flight to suburbia due to the perception of a lack of safety in some major cities, including New York. As a result, other cities, such as Nashville, Austin, Tampa, Orlando and Miami could benefit, he said.

As to the impact of a Joe Biden presidency on real estate and Biden’s proposal to eliminate 1031 exchanges, Sternlicht instead cautioned about the potential effect on interest rates and property taxes. Sternlicht said he has never used 1031 exchanges, which he referred to as lifetime exchanges, and that the tax code “should go away.”

“It isn’t required and it isn’t helpful to real estate,” he said. “There’s pressure on real estate taxes and we have to watch out for that.”

Write to Katherine Kallergis at kk@therealdeal.com