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“The only thing we worry about is the calamitous recession”: Barry Sternlicht tells analysts in Q2 earnings call

Sternicht said it’s “tricky to lend in these markets because the cap rates feel a little artificial”
By Katherine Kallergis | August 07, 2019 12:13PM

Barry Sternlicht (Credit: Getty Images)

Barry Sternlicht (Credit: Getty Images)

On the heels of a strong second quarter for Starwood Property Trust, Chairman and CEO Barry Sternlicht spoke to analysts during an earnings call Wednesday about the slowing economy and “trade wars fought at 4 a.m. with tweets” that are eroding confidence in the markets.

The real estate investment trust reported net income up 16 percent, year-over-year, to $127 million, or 45 cents per share for the second quarter, meeting analysts’ expectations. The company’s core earnings totaled $153.9 million, up 3.7 percent compared to the same period of 2018.

Starwood Property Trust, an affiliate of Miami Beach-based Starwood Capital, lent $1.1 billion in commercial loans in the second quarter, and plans to lend a similar amount in the third quarter, Sternlicht said. Despite that, Sternlicht acknowledged that it is “tricky to lend in these markets because the cap rates feel a little artificial.”

“I’m sure you’re looking at your [stock] quote machines and wondering what’s going on in your world,” he said, adding that it is a “troubling time.”

He said he was “frustrated with our stock price” given the strength of Starwood’s lines of business.

He also spoke candidly about the potential for a “calamitous recession,” and criticized the “polarization of the electorates” and President Trump’s trade war with China – without naming him directly.

Rina Paniry, Starwood Property Trust’s CFO, said 19 percent of Starwood’s commercial loan originations in the second quarter were outside of the U.S., including $159 million in lending in Australia. Starwood executives again said they expect the firm’s international pipeline to grow as it adds employees in Europe and Australia.

Starwood’s affordable housing portfolio in Florida “continues to exceed expectations” with a blended rent increase of just over 6 percent, effective June 1, Paniry said. The portfolio, focused on north and central Florida, is 97 percent occupied. Sternlicht said he would be reluctant to sell those units and that it is “unimaginable that Florida is going to suffer any income downturn for the foreseeable future.”

Sternlicht said the apartment markets have strengthened as millennials increasingly choose to rent over buy. He also said that industrial continues to be the strongest asset class and that while hotels are reporting modest growth in revenue per available room, he is cautious about an oversupply of hotel rooms.

“We don’t expect anything to fall off the cliff but there is a lot of construction,” Sternlicht added. “We have to be uber careful.”

He also said that he is a “little spooked out” about San Francisco’s office market. If there is a correction, Sterlicht said the biggest exposure will be in tech valuation.