Starwood Property Trust

Housing

Starwood’s CEO said the company was benefitting from nationwide rent increases due to the lack of housing supply

Starwood’s CEO told analysts one benefit of buying affordable housing is that “rents can’t go down. They can only go up,” and said that the lack of supply is pushing up rents everywhere, “Barry Sternlicht — Chairman and Chief Executive Officer: We bought Northern Florida. We call it Woodstar. Affordable housing, just to remind you, rents can’t go down. They can only go up, and rents are obviously rising across the United States in a fashion that we’ve never seen before, powered by inflation, but also this lack of units that is a tremendous dearth of homes that is creating this rapidly rising housing complex. And we ask ourselves, is this going to continue like this? Or what’s the outcome for housing prices given — is it a bubble? While prices in some cities have run pretty far, this is not a supply issue. This is not like overbuilding that we saw in ’07, and ’08. And it’s not powered by people borrowing 100% of loans of the home price with NINJA loans. This is really demanded in wealth and people working from home and trying to improve their homes.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood’s CEO said that housing “wasn’t overbuilt” was because the market “built almost 15 million fewer units from 2010 to 2020 than we did in every decade prior going back to the 40s.”Barry Sternlicht — Chairman and Chief Executive Officer: And we expect, of course, it will slow down. It should be — or continue to be a source of stability for the U.S. economy because it really isn’t overbuilt. Most builders — one of the reasons we built almost 15 million fewer units from 2010 to 2020 than we did in every decade prior going back to the 40s with builders stop doing spec homes and couldn’t get blinds to improve land easily from anyone, and so it’s just disciplined in the housing market and the result is what you see today.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood’s CEO said the lack of supply “bled over into the multifamily markets, which continue to be to enjoy double-digit increases in rents. We’re the nation’s largest owner of apartments.” “Barry Sternlicht — Chairman and Chief Executive Officer: And it’s bled over into the multifamily markets, which continue to be to enjoy double-digit increases in rents. We’re the nation’s largest owner of apartments. We have 115,000 apartments, including the units that are owned by Starwood Property Trust. And what that means actually going forward — affordable housing rents are set by — not by inflation, but by the income growth of the SMSA, in which they operate.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood predicted supply chain issues would prevent new housing from being built, benefitting their existing assets

Starwood’s CEO predicted labor and supply problems would get worse and “that’s really good for everyone who owns anything today because in order to justify new construction rents have more room to rise.” “Barry Sternlicht — Chairman and Chief Executive Officer: I don’t think — and then offsetting that, the one comment you made, which is really critical is replacement cost. Replacement cost is galloping ahead. And it’s not just commodity prices, it’s not just materials, it’s also labor and a general — again, labor shortage, and it’s going to get worse. It’s not going to get better because the government hasn’t spent $1 of the infrastructure bill. So when they start doing that and buying steel and concrete and PVC piping and laying roads and asphalt and obviously, where oil is, it will put tremendous demands on those byproducts. Material prices continue to rise probably for the foreseeable future, and the supply chain is going to get worse, not better. So people are talking about inflation rolling over. In parts of things like consumer-led inflation, maybe autos, used cars, maybe they will — that’s more a function of people already got what they wanted. They already bought their new car. They went out and spent money. They bought their new house. But I think in other sectors of the economy, replacement costs are ahead. Of course, that’s really good for everyone who owns anything today because in order to justify new construction rents have more room to rise. So it is a tug of war. It is the holy grail of what we wake up every night worrying about, what’s the interplay between cap rates, interest rates, and inflation hikes and replacement costs. “ (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood’s CEO predicted that a “significant portion” of multifamily construction would not get built because of supply chain issues, which is “really good for existing assets and for our loan book. It’s really healthy.” “Barry Sternlicht — Chairman and Chief Executive Officer: And I look at multifamily starts, for example, in the United States, which are pretty much at record highs. And I don’t think a significant portion of that stuff will ever get built. And if it gets built, it won’t be delivered on time. There is no project I’m aware of that is delivering on time and on a budget right now, either here or in Europe. So it’s — I was talking to somebody yesterday who owns — who’s building a residential project in Miami, and they’re a year and a half late to complete it because of supply chain issues. And nobody knows where stuff is. It’s on seas, it’s in warehouses, it’s stuck offshore. It’s — they’re waiting for goods from a closed Chinese factory. It is not going to be great. It’s really good for existing assets and for our loan book. It’s really healthy.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood said the company’s real estate was receiving interest from offshore investors, particularly in the Middle East

Starwood’s CEO said thanks to the housing crunch “I can’t think we could be better positioned than we are…It’s a great place to park cash right now as the world melts — the tech world melts down,” “Barry Sternlicht — Chairman and Chief Executive Officer: So overall, I can’t think we could be better positioned than we are. We are a sea of stability in a world that’s extremely volatile, and increases in interest rates only help us and help our returns and will help cover the dividend even more than it’s covered today. It’s a great place to park cash right now as the world melts — the tech world melts down. I said in comments, you couldn’t hear earlier, I mean, it is reminiscent of the dot-com crash back in 2000, 2001. I remember when the NASDAQ fell and we have cash flow beneath us. We are not speculative in any way. And with a book like we are, you kind of wonder how on earth we could be trading at the dividend yield we are in a world that’s still yield challenged and will remain yield challenged for a while. But what will happen to us going forward, as Jeff mentioned, is our book value increase, and it will continue to increase.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood’s CEO said that because “rents can only go up and not down” for their affordable housing, they were getting lots of interest from “ offshore investors that look at it as an inflation protection bond,” including “sovereign wealth funds.” “Barry Sternlicht — Chairman and Chief Executive Officer: As you know, Jeff, our cap rate on the multi books, we’re holding in the fours. So we’re nowhere near. We’re not marking this down at today’s cap rate. We’re just marking up the value based on rent growth. So we have a huge cushion in our mark. And because it can only go up, rents can only go up and not down, the asset category has become a very very exciting unlevered yield for offshore investors that look at it as an inflation protection bond and basically index bond to inflation and wage growth. And so it’s almost like a tip. It’s — and the minority investors that we have in the Woodstar portfolio when we realized and demonstrated to the street and to our shareholders of these gains, we talk about are absolutely real and available to us to harvest at any time, they were both offshore sovereign wealth funds that — I guess one is a quasi-sovereign wealth fund.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)

Starwood’s CEO said that “difficult times….always help real estate,” noting that “where the capital is in the world, right now is primarily in oil wealth nations, including the Middle East, and they have a predilection to buy real assets.” “Barry Sternlicht — Chairman and Chief Executive Officer: Two other comments. I mean the difficulties of other asset classes in times of like this always help real estate. We always get a bid. Institutions find the fact that we don’t mark-to-market overnight kind of refreshing as they look at the collateral damage in the VC book or even in their equity book right now. And so that’s always benefited, to some extent, real estate. Also, where the capital is in the world, right now is primarily in oil wealthy nations, including the Middle East, and they have a predilection to buy real assets. They like real assets. And — so I expect that participate more in the markets than less, and I would guarantee that, frankly. And these two — there’s one other new kid on the block, which has been extremely material in the last 12 to 24 months, which are the nontraded REITs, which were the second largest in the nation behind Blackstone. And these entities have to put out capital, right? They have to find things to buy because they can’t sit on cash, they don’t earn anything on cash. And they have been very important drivers of what is acceptable pricing. And so they are very active buyers. And in the scale — the Blackstone nontraded REIT has to almost buy the entire volume of commercial mortgage transactions prior to COVID every year.” (Starwood Property Trust Q1 2022 Earnings Call Transcript, 5/4/2022)