Starwood Property Trust is playing the market with one hand behind its back — a move its billionaire chairman and CEO Barry Sternlicht considers a “conservative strategy” to navigate the choppy market.
“I’m not as sanguine as all the pundits you hear about in the morning press, that we’re going to avoid a recession,” Sternlicht said during the real estate investment trust’s second quarter earnings call. “Not only have rates gone up, but spreads have widened. And what you will see on the other side is the double whammy of rates coming down and spreads coming down.”
Sternlicht has been critical of the Federal Reserve’s timing and pacing of interest rate hikes.
“We’ve created a climate in real estate that nobody really wants to sell anything if they don’t have to,” he said.
He also sounded off on the federal government’s spending — citing the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act.
“The number one victim of the Fed raises is the federal government, with $32 trillion of debt and having to pay these interest rates on that debt becomes a vicious cycle,” he said.
On the flip side, the Fed “moving so fast” in raising rates resulted in the “dramatic decline in inflation,” Sternlicht said.
Sternlicht compared the economy to an icy lake. It’s solid, he said, but there are fissures. Those fissures are loans maturing in private equity, technology and real estate. Real estate is suffering because of the Fed’s policies, Sternlicht said, with problems expected for all asset classes.
“Even the good ones, because people are a little upside down in their capital stacks,” he added.
Greenwich and Miami Beach-based Starwood’s $168.8 million in second-quarter earnings, or 54 cents per share, marked a 20 percent decline compared to the same period last year. The REIT reported $515.7 million in revenue, up 58 percent.
Rina Paniry, Starwood’s chief financial officer, said Starwood boosted its liquidity by issuing $381 million in convertible notes in July and receiving $1.3 billion of commercial and infrastructure loan repayments in the second quarter.
In May, Starwood foreclosed on the $42 million loan backing a two-story retail building in downtown Chicago. Paniry said the property was appraised at the same amount, and that it plans to lease the property and sell it.
Starwood is working toward being fully repaid for remaining REO (real estate-owned) properties, Paniry added. Last year, the firm acquired through foreclosure the Broadway Trade Center in downtown Los Angeles, the trophy property Joel Schreiber lost after bankruptcy and a failed sale.
“During the quarter, we recorded a $24 million gap impairment against the building in LA that we foreclosed on six months ago,” Paniry said. “We began evaluating alternate paths for this asset during the quarter, some of which were at our bases and others which were not. Given the range of potential outcomes, we determined that a reserve was appropriate.”
Starwood downgraded three loans in the second quarter, including a $252 million office loan in Houston that matures in September. If the borrower can’t recapitalize, Starwood president Jeff DiModica said the firm “will be prepared to take title at maturity.” The property is 67 percent leased and “won’t need significant incremental leasing or reduction in borrowing costs for us to recover our bases,” he said.
Again, Sternlicht and other company executives emphasized Starwood’s position compared to its competitors. The REIT is “kind of foaming at the mouth” to deploy capital. LNR, its special servicing platform, is Starwood’s secret sauce, Sternlicht said.
“We are going to get a front row seat to trillions of real estate that will have to be restructured and hopefully will continue to build even a bigger book,” he said.
He also was confident in Starwood’s non-income producing assets “because there’s a lot of equity capital tied up in them.”
“We can sell or refinance them or get out of these assets, we will have another 20 plus cents of earnings power, which is material for our company, just deploying capital in today’s environment the safe way.”
Read more
Commercial
National
Starwood eyes taker for 2,000 rentals
New York
The Closing: Barry Sternlicht
Commercial
National
Barry Sternlicht: Fed rate hikes are “bordering on idiotic”