Greetings. Welcome to the Starwood Property Trust Fourth Quarter and Full Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the call over to your host, Zach Tanenbaum, Head of Investor Relations. You may begin..

Thank you, operator. Good morning, and welcome to Starwood Property Trust’s earnings call. This morning, the company released its financial results for the quarter ended December 31, 2020, filed its Form 10-K with the Securities and Exchange Commission, and posted its earnings supplement to its website.

These documents are available in the Investor Relations section of the company’s website at www.starwoodpropertytrust.com..

Thank you, Zach, and good morning, everyone. Before I walk through our financial results, I wanted to briefly comment on our non-GAAP earnings measure. What we used to call core earnings is now called Distributable Earnings or DE in order to more accurately describe what this metric represents.

While the term has changed, the calculation has remained the same. You will find additional disclosures about this non-GAAP measure in our 10-K. Despite of volatile market backdrop caused by COVID, the fourth quarter capped off another successful year for us with DE of $0.50 per share for the quarter and a $1.98 for the year.

Throughout 2020, our liquidity and capital deployment were strong, which would not have been possible without the strength of our balance sheet and our diverse platform with multiple business lines.

Even after $4.6 billion of capital deployment, $3 billion of which occurred during COVID and after early retiring $500 million of unsecured debt, we maintained an average cash position of over $700 million post-COVID..

Thanks, Rina. I want to start today with a couple of non-market related topics. Transparency and invest reporting are at the core of every decision we make. And we are proud to have been recognized by NAREIT as the recipient of their Gold Star Award for Excellence in those areas in each of the last seven years.

In March, we will release to our website of virtual Investor Day webinar that Zach and the entire management team put together that we hope will explain exactly what we do as investors across seven businesses in more detail than we’ve ever gone through in the past.

We look forward to sharing that with you and we’ll send a press release when it is uploaded to our website. Also, on our website is a discussion of our corporate ESG initiatives. I want to highlight a few things you will find there that we are very proud of.

43% of Starwood Property Trust employees identify as female, and 49% of employees identify as racially diverse. Each year we strive to increase our diverse talent pool and for 2020, we continue that trend with 52% of hires identifying as either female or minority.

We are a top 10 owner of affordable housing in the United States with over 35,000 residents in our Florida multifamily portfolios. In our non-QM residential lending business with over $5 billion of capital deployed since 2016, we are leading provider of mortgages to high-quality borrowers, who otherwise struggled to secure access to housing credit.

Our energy infrastructure lending business has financed over $800 million of renewable energy assets since our purchase in 2018, generating 7,900 gigawatt hours of energy and avoiding 7.4 million tons of CO2 emissions.

Finally, we are also proud to have issued our inaugural $300 million sustainability bond in Q4 backed by eligible green and/or social projects..

Thanks, Jeff. Thanks, Rina, Zach and good morning, everyone. I don’t know how to actually handle this call. I’m so excited about the year we had and more excited about the future of the firm. I – when we created this company 11 years ago, we were a $900 million pile of cash.

And now, we’re an $18 billion balance sheet with 300 extremely talented people with a best-in-class Board of Directors.

And I think if anything, it’s always, when the tide goes out, that you see who’s standing tall and our business model, our strategy of a diversified finance company really showed a strength as we continued to do what we do and have the balance sheet to do with it. It was a remarkable year for us.

I mean, as the – as you would expect when the storm hit and the pandemic hit full force, every person here, man their station – their battle station and as the smoke cleared, we decided to go back on the offense. We looked at our balance sheet and as you know, on March 16 on CNBC, I was pretty bullish on the stock market.

And I said, this is going to clear and we use that overall driving theme to get back to work and the board let us deploy capital while we have today. some of the opportunities were extraordinary. One trade we made in our resi business in the year made us almost $50 million pretax and we actually never had to deploy any capital behind it.

no other mortgage REIT and I don’t even want to call it some mortgage REIT anymore. No other finance company in our sector could do something like that. And all of our business lines, we have the second, most probable securitization in the company’s history in the fourth quarter, followed by a pretty nice securitization earlier this quarter.

So, I mean, it’s great that we got through the quarter. I went on TV with Betsy Quick; Jim Cramer was talking about our dividend yield, not being sustainable. When we went public, we said, we’d be stable, we’d be transparent and we would never force capital into a single business line. And that’s why we drove the diversification of the company.

And there’s so many incredible things that happen in the year consummated most recently by the CLO and the energy book, which will change the – can be a game changer for that business for us.

And it should meaningfully contribute to our growth going forward and with no credit losses of any consequence during 12 months – prior 12 months, it’s going to be – and we have a great team. So, you have 300 people dedicated to the affairs of this company. I just want to thank them for all their work. They may be listening to the call.

Some of them, they were worked from home. We got through it smoothly, then there’s 400 people and 4,000 people at Starwood Capital Group, who supported the STWD team through the crisis. Our real estate guys helped out on the loan restructurings and looking at ways we can be feeling good about the investments.

There was that conviction in the value of our book that allowed us to go back on the offense and that Jeff said, it’s five times the investment of – more than the next five guys in the industry combined. Real estate is really just still recovering from a pandemic.

We turned off our large loan lending book largely, but other businesses, we went to town. And so we had that opportunity, which worked out great for everybody like going into this year almost every business is in a prime position and we expect all the cylinders to be functioning to our advantage, which is just remarkable.

We have a great balance sheet; all the moves that team have done to support the financing. You have to look below the lines. You can see that we have more on balance sheet financing, more match recourse financing in any of our peers. So, we have – I have to say the team has done just an extraordinary job.

I also said in the third quarter earnings call that we can pay our dividends that we have the gains in the book, I was confident that we could pay the dividend for practically ever though whether it was pruned to do so or not. If you believe me and not the comment, Jim Cramer made the stocks up almost 70% since that calls 1467.

So, he had a call in and some companies would big dividend yields usually, mean they’re cutting them. That wouldn’t be the case with us. So, we never really had any doubt whether we could pay the dividend. It was a question of whether we should pay the dividends.

And obviously, we made the decision with the board support to keep the dividend and honestly, with a book – a loan book – loan-to-book value of 60% – LTV of 60% and an 82% dividend yield today in the treasury at 144. we still believe we have an extraordinary value proposition for shareholders.

And I would expect I’d hope coming out of this that people would look at this as a company that can grow and support its dividend. And we think it’s – I can’t be more positive about the company going right now. What else can I say? The – it’s really we’ve talked – Jeff and Rina gave you extensive comments.

I mean, we – the fact that LTV 11 years into the support of business is still 60.4%. That’s the big difference between mortgage REITs today and mortgage REITs prior to the GFC that they were lending at 70%, 80%. So, when things got tough, they wound up falling apart.

The other most hidden things in the balance sheet, where we’ve reduced our CMBS exposure by more than a third, and we’ve also reduced our construction loan and future funding exposure by a dramatic 80%, some like – some staggering number. So, the companies are absolutely positioned for incredible success going forward.

And this is sort of a celebratory earnings call, because it really – it was – it wasn’t fun when our stock had crashed and the people didn’t panic, they mound the stations and everyone held their arms together. And all of our business lines perform beautifully.

So, I don’t have much more to say, I think Jeff and Rina, Andrew, Zach, the whole team, really kudos to you and to our Board. Because I think, real estate is not out of the woods. Don’t take these comments as commercial real estate thing out of the woods.

When you can – I’ll talk about in three seconds, each of the asset classes, industrials find multi-user week, but there’ll be okay, because kids will go back, leave their parents and like go back into apartments and – but that the business asset classes getting a bid.

office is a yellow, office is a question mark and it’s deal-by-deal, but I do believe and we have the general feeling that people will go back to the office in some scale. And we look off shore to Korea, Tokyo, the middle East, China, people are 100% back in the office and we’re in continental Europe before the second wave hit.

So, we – despite the sales force comments, we think that will – that market will be okay – more than okay. And because we’re lender, we own a 60% of value. And then you have two more challenging asset classes, hotels, but Jeff wanted to say that we’re going to have no losses in our portfolio. We took that out. I just said it.

So, he didn’t have to say it. And then it would be nothing. And then retail, which is really difficult to underwrite in this kind of dark red is, I’m not telling you anything you don’t know. So, it’s interesting, because if I look at the book, we probably could sustain maybe, $100 million of losses in our – out of our $18 billion going forward.

None of it is even one of our red assets we marked a five. I’ll bet dollars to doing it, so we don’t lose more than $1, not $1. And we just had to do it, because it went on a non-accrual status. So – but it’s a third of the cost of the asset and I’d love to get the asset back. So, it couldn’t be happier. And with that, I guess we’ll take any questions.

by the way, one more thing I should mention is, we don’t really have exposure to the most troubling markets in the country in San Francisco. It’s less than 1% of our assets and New York city is like 3% of our assets. So New York, by the way, is not going away. New York may struggle a little bit. Residential prices will be down.

The office markets will take a while to recover. Rental growth will be non-existent, there’s too much sublet space, actually rents will drop, but our exposure in Manhattan is pretty good and we’re comfortable. I think the tourism market will rebound sharply. midweek will be tough, because of business travel for awhile.

But leisure on the weekends will explode. yesterday, you saw carnivals; say 30% up in future bookings and rates are up. Leisure travel is going to be great and that’s why merit stock at an all-time high yesterday. I guess, I do think that hotel stocks are way ahead of themselves, but that’s an aside. It doesn’t really impact us.

So with that, we’ll take questions. Thanks..

Thank you. Our first question comes from Steven Laws with Raymond James. please go ahead..

Hi, good morning. Jeff, wanted to start off really with the – your comment in your prepared remarks about the earnings growth that can be generated organically.

Can you talk about that building off another roughly $2 per share of distributable earnings this past year? what’s the capacity to deploy capital and the return suite we should think about on that deployment as you think about, where you’re putting money in work today?.

Yes. Thanks, Steven. Great question. I think from an earnings growth perspective, there are a few ways you can do that. One would certainly be unlocking gains and things like our property portfolio and redeploying those gains. That’s an important thing that we’ve been working on. We’ve been thinking about how to properly do that.

The other way to grow that is to come up with – there’s a couple of ways. One is we can deploy more capital. We’ve been very defensive. You can see that we’re moving to our front foot today. As we deploy more capital that matters for every $100 million of capital that we deploy at say a 12 and instead of paying off a bank line, that is a 3% return.

If you pick up 900 basis points on every $100 million extra that we deploy, its $9 million a year, which is $0.03 to earnings. So certainly, bringing our cash balance down and that is one of our goals during this year, as we feel more comfortable coming out of COVID with the vaccine that we will do.

I would say we earned a significantly overweight premium, IRR and things that we invested in at the lows. as Barry said, the board, Barry allowed us to make some investments at the right time and we had a premium IRR last year. I would say that today we’re back to something closer to our run rate in that 12%, 12.5% ROE and that’s what we’re seeing.

It is competitive in the areas that we want to invest and it probably looks a lot like what other people are trying to do more of, a little bit more conservative cash flowing, multifamily, et cetera.

And that’s what we’ve been pursuing, but we think there are some great opportunities, as Barry mentioned in energy infrastructure and other places, where we can really get some premium returns this year and potentially grow earnings that way as well..

Great. And as a follow-up, I wanted to hit on the energy infrastructure. Congratulations getting the first CLO done.

When you look at the origination pipeline and returns on new investments, their yields on new investments versus now where you think you can get the CLO financing done, how does that change the ROE equation and amount of capital you’re looking to allocate to that business?.

Yes, it’s massive. And if you look back at our purchase portfolio and you remember Steven, we bought a lot of lower coupon loans and they were financed on warehouse lines at decent rates, but not – certainly not where we think we can borrow on a go-forward basis the overall ROE was low. We bought a team. We bought the expertise.

We wanted best-in-class to grow this business. And with that team post-CLO, I think as I look back at everything we’ve done since the acquisition, it’s been low teens and I think there’s an opportunity to earn mid teens on the best CLO executions there and we plan to open up the gate..

The stabilized returns on our resi business and the energy business are higher than the returns in the large loan real estate business. So, there are high ROE businesses and the CLO only made it higher and the CMBS REIT book as well. So, those are our high ROE businesses.

And we have – as you may know, there’s a fascinating GAAP challenge with the resi business that we’re underwriting refis of these trusts and we mentioned we did the first one in the quarter, but we can’t use that for GAAP.

So, we’re understating the IRRs and these deals were created for crewing actually probably below though – the return of on the large loan books, large loans, we have real estate loans to have, but the total IRR is actually hidden until the refi comes through. And they’re mid teens, they are high teens. So, the GAAP – you can’t assume the refis.

So, we follow GAAP. The total return on capital is significantly higher than we’re telling you in the earnings. So, it’s a fascinating little business, but we choose to do it here, because it’s a great use of capital and our team has done an outstanding job. So it’s down to conduit business also, I should mention, which is REIT.

The conduit is driving very high ROEs, turning a book 11 times a year..

into your question on earnings growth, the conduit was shut down for the first half of last year. So, as you look to earnings, so that certainly took away last year, what it could have been. And if we can stay on trend this year, we would hope that could provide some earnings growth as well..

Great. Thanks for the comments this morning..

Thanks, Steven..

Our next question comes from Charlie Arestia with JPMorgan. Please go ahead..

Hey, good morning guys. Thanks for taking the questions today. When I – in the few years that I’ve been covering you guys and thinking back further to the IPO, as you mentioned, the platforms obviously grown, but I think more importantly has gotten more diversified, which obviously, paid off this year.

When you think 2021 and beyond, you see Starwood being active in M&A or any other channels to really add additional capabilities to further diversify that platform..

Well, I should have mentioned we’re taking all our cash and buying bitcoins. That’s a joke. that would be not the work for micro strategy.

Are we going to continue to diversify? Was that the question?.

Yes. And also, I guess specifically related to maybe M&A..

Yes. We are working on a few things in the M&A world and also, there’s at least one business line that we’re not in that we’ve tried to get in that we’ll still try getting, which will be equally higher ROE for the firm. I’m laughing, because we’ve been working on it like for four years. We’ve come close, but we’ve never quite succeeded.

So the – yes, there are other business lines that – it has to be large enough to make a difference to us and have a potential to – and make sure we have the right people to run the business unit. So, we’ll do anything that makes sense in finance and we are a REIT, so it kind of constricts or what we can do.

It has to qualify – it has to be qualified REIT income or can’t endanger our TRS. So – but within those confines, I mean, some like servicing income, some of it is out and they’re REIT eligible assets. So, there’s interesting things to do and we’ve been working on several. Then we made a bid for one company and then they declined to bid besides IPO.

They couldn’t get the IPO done and they just sold the company to a bank. So, we’ve been trying – you don’t see it, but we have been trying to do other things that we thought could take advantage of the cycle, frankly, and made strategic sense for us..

Our next question comes from Don Fandetti with Wells Fargo. please go ahead..

Hi, good morning. A couple of things; one, it’s good to see the stock almost back to pre-COVID levels. I guess two questions; one, around hotels and macro, Barry, do you lean more towards like a big pent-up demand, snapback and T&E in the U.S.? and then my second question is on the M&A comment.

Are you guys interested in getting bigger and residential mortgage origination? Is that sort of what you’re alluding to?.

That would be a good guess, on the latter portion of that? We do have an originator on the contract. It’s complicated. We’ve been waiting over a year for the transaction two years, everything for a split of two things – two things for the transaction to close.

There’s some issues that are involved with, I guess, the government’s approvals or something like that. There’s nothing to do with us, has to do with them. In the first question, what….

Hotels macro thought on where do they come back as people start to travel?.

So, I was just looking at this and we own a lot of hotels, and actually, we’re doing – I’m doing a call actually. I’m now primary headquartered with STWD’s people in Miami. So, I’m in their offices today and our hotel in South Beach in 94% occupancy at $1,600 a night.

Our hotel in LA is I think 8% occupancy, but new York’s really screening it’s like 23%. So in our – what you’re seeing is exactly what you’d expect, economy and roadside travel is actually down, not a lot.

The economy I think is down like 6% RevPAR right now that’s trailing 12 weeks, it’s trailing and it may just be the week, roadside down like 13 weeks. So, domestic travel come back first, the courtyards in Marriott so along with roads of all over America will come back first, it will take awhile. But they’ll come back first.

The biggest challenges are the big urban boxes. How do you feel midweek in Seattle, in Chicago without business travel? we actually just bought a hotel in Copenhagen, because it’s 87% tourist. We think that’ll snap back really fast. Extended stay hotels are crushing it relatively speaking. Well, not, I mean, doing much better than everyone else.

We own a chain of hotels called InTown suites. EBITDA dropped like 3%. RevPAR is now up. But it’s low end extended stay. It’s a very low end, like $300 a week. That doesn’t value a bathroom at the one South Beach. But that stuff is full. The average length of stay is like 140 days and it’s quasi apartments.

And this is actually, the single strongest place in the real estate markets today is single family and single family rental. Those are crushing it. there are multiple cities in the country with 10% year-on-year growth in rents in single family rental, which is unbelievably strong.

So, I think hotels won’t get back to generically speaking, the big urban boxes of Marriott Marquis in New York, 2024, 2025. These 2,000 room urban boxes, other parts of the hotel market will recover much faster.

Leisure-oriented hotels, resorts, like give them 12 months, give – and there’ll be a burst at activity to actually reduce a $1.9 trillion stimulus with the dollar at an all-time high with saving rates, ready to all-time highs.

It’s so crazy and people, they only stopped trading GameStop, and they’re going to go take a vacation, because they were so rich. So, you saw the numbers yesterday. You heard about European travel up 500% in Greece and Spain. I mean, it’s going to be a bonanza in leisure, because people didn’t locked up and they want to go away.

but the urban boxes business travel, there’s no questions zoom, which isn’t that much fun is going to influence the level of business travel. There’s no doubt. So I – look at the stocks and I wonder how they could be here. Some of the stocks, Marriott all-time high yesterday, you have to either believe that all travels coming back.

I mean, for the stock to be there, or you change the discount rate, because interest rates are so low using a different DCF on the company. And I will say that all the companies, including our hotel company, we have our own hotel management company and we were running tighter leaner boxes.

So, our margins will get better, because we’re offset by the fact that minimum wage is going to rise and should rise. I’m fine with that..

So, can I just get a clarification….

Go ahead, I’m sorry..

can I get a quick clarification on the residential mortgage origination, so I’d tell you’ve had a small originator that you had investment in and already effectively owned? Or are you saying there’s another one?.

No, Don. That’s when we’re talking about – go ahead, Andrew..

No. You’re exactly right. I mean, we made a preferred equity investment in a mortgage originator about two years ago. And upon regulatory approval that preferred equity investment will convert into kind of common ownership and control of the business.

But as Barry mentioned, that’s been kind of tied up in kind of regulatory approval for the better part of two years. And Barry likes to call, it’s a kind of longest tenure deal that we’ve ever had at Starwood. So, we continue to work closely with that platform.

We’re kind of embedded in the business and Steven Ujvary, who runs our residential finance business with us, is very close and kind of helping to manage that business. But until we have that final regulatory approval, we can’t officially close on the transaction and we’re hopeful that that’s a mid kind of 2021 event.

but again, they continue to work with us or a large source of production for us in our non-QM business. But we just don’t technically have a legal ownership of the business today..

Got it. Okay, thanks..

Don, we do want to grow the resi of the business and we’re going to work hard on ways to do that. And it’s probably the place, where we have the most opportunities to grow, whether it’s in loans or securities or origination capabilities or press equity or whatever it is. That’s certainly something we would love to continue to grow.

We’ve had great success and a lot of….

We’re going to push hard on the resi business and our infrastructure lending business. We’re going to see us pick up the pace if we can, if we can hold our returns right now, we can probably produce really good returns. So, we’re going to be more aggressive there. I think, I didn’t make it my neck.

I didn’t reemphasize it in my comments, but the quarter loan book is fantastic. The large loan book is it could be one of the biggest cores we’d ever had. So, it’s – we’re using our real estate underwriting skills across the firm to decide, where we’re going to deploy capital and taking, I’d say calculated risk and that’s what we’ve always done.

So, I think that’s why the book looks the way it does. And I sort of laughed, we have to put that one in the five category, but there’s no chance we’re going to lose money on that deal, so no chance. actually, I hope we get the asset back. I really would love to have the asset or basis a third – less than a third of the cost of the assets.

So that’s – that would be fine..

Don, Barry mentioned hotels and I’ll just clarify that our book is predominantly extended today limited service and leisure travel. We are not the big city urban boxes or the convention center boxes that I think are in the most – in the most risk today.

We’ll be happy to go through the exact weightings later, but I think that our hotel is one of the reasons we felt so comfortable making a strong statement about the quality of our hotel book is we didn’t choose those boxes that Barry just said, won’t come back till 2024 or 2025..

Got it. Thanks..

Our final question comes from Tim Hayes with BTIG. Please go ahead..

Hey, good morning guys. Congrats on a really strong quarter. You’ve talked about monetizing parts of the real estate portfolio and crystallizing gains there for quite a while, but that it has become more of a combination of it seems in recent quarters.

So, can you just provide an update there on potential timing, the amount of interest you’re getting from third parties and on which portfolios, in the real estate book specifically, I’m sure cap rates on affordable housing in central Florida have come in a lot. but you’re only a couple of years out from rolling rents there to market rate, I believe.

So, I’m just curious how you think about those portfolios..

Sure. Well, it transcends all of our – a few of our different businesses, our REO business here at LNR, where we still have some gains, the Winn-Dixie warehouses that we took back to – we took an $8 million impairment on our Montgomery asset that we ultimately sold it.

And we have a large million, one square foot Orlando assets fully occupied now by Amazon that will have a very large gain that we’ll take at some point. we also have a Bass Pro Master Lease Portfolio, and I’m sure you saw coming through COVID Bass Pro performed extraordinarily well. We think cap rates have tightened significantly.

We have a pretty good size game there. And if you’ve been reading on sectors that have done well in COVID, MOB has obviously performed well, and we think we have a large gain there.

But to your question, the obvious place for us to look would be the multifamily low-income housing tax credit portfolio that we have in Florida, which makes up probably, 75% of the overall gain of over $900 million in the books. We have been contemplating a way to potentially do something there. We love to carry on it.

I mentioned earlier, we’re in the process of doing another cash out refinancing. our cash-on-cash return is extraordinary. Rents can only go up in these properties. You’re at 60% of market rate. This is as bond like of a cash flow, as somebody going to be able to buy.

So, we think there’d be tremendous interest for something like that if we were to sell a minority interest, if it economically made sense for our shareholders, if it unlocked some equity that we could redeploy, that’s really powerful, every dollar that we take back of those gains and reinvest we’re going to, and we can earn $0.12 on that is accretive to earnings, and it would also potentially create fees that potentially accrued to us..

Yes. that all makes sense, Jeff. I appreciate it. So, I mean – and the pipeline in multiple of your cylinders here seems really strong and ROEs are great given the types of financing you’re on these vehicles. So, we’re getting on these assets.

So, just curious though, like, is there hesitation to sell any of these assets or specifically the Woodstar portfolios given there would be a lot of cash yield that need to redeploy that could be earning a really great return in that asset or is there any other, yes – once you respond to that..

Since I own a substantial amount of the stock company, and so does the management team here and we treat this shareholder capital like it’s our own, and it’s a significant asset to the people employed at this company.

So, where would we like to put our money? And one of the challenges of our loan businesses, we’re still stocking, I call it transition real estate loan business and the duration of those loans is short. The better than borrower does to improve his asset, lease it or any of those things, the faster he refi’s us.

And then we have to go put the money out again or to drag. So, the entire equity book here was to stretch our durations that I don’t have to – I don’t have to worry about getting the money back. And right now, they’re producing the equity books producing a $15.7 cash-on-cash return on our equity, which is just staggering and it’s going up, not down.

The affordable housing portfolio only can have rents go up if they can’t go down. So, they’re driving the – it’s liquid gold, it’s a kind of stuff, literally joked, I put in my kids trust, and basically it isn’t my kids trust.

And I’d rather not sell it, but we will – we are going to market an interest in it, and redeploy the capital, because it’s so accretive to the company’s earnings to do so. So, we have to do it and we want to do it, because we want to highlight the value of the portfolio that we can talk about it.

We will show you – I believe, we will show you that those gains are more than real. And the nice thing is you have them in the company, I think there’s no other company in our space that has anything like that.

I mean, we have all – we joke on these deals were like a 100 IRS, and then we thought they were steady, I’m going to be boring 11%, 12%, 13% bonds. And they’ve turned into spectacular investments for us. Bass Pro shops sales boomed in the crisis and you can look at their corporate bonds to see how valuable our credit is.

So, I think in order of what we would do, we’d probably do Woodstar first and then – and maybe, we look at Cabela’s, the Bass Pro shops assets at some point. And it’s really a question, how big can we redeploy the capital accretively and quickly? And right now, I would tell you, we can, that’s why I’m so excited about the energy book in the CLO.

That’s a game changer for us. We were nervous. You couldn’t see it. it’s a mismatch and maturities. We didn’t have a match, an easy match for the mismatch of maturities. We were – and I hate that, I like to match fund our deals. So, there’s no rollover risk. And the bonus was we would have done it. If when we started out, we thought we’d be diluted.

We might have to pay a little more for the capital. And it turned out that we paid less, like less than at a higher advantage advance rate. So, like quite freed up money and obviously, boom the IRRs on the paper.

So having that, and in the resi business, now we have a brand in the non-QM business, we’ve done nine securitizations that people known us, they know underwriting, they see the way they performed and that’s given us creds in that market. We’ve done the $5 billion more than that, of resi $5 billion. So, we’ll grow that business.

And at some point, one of the challenges we look at, and we haven’t talked about is both of those businesses can sustain higher leverage levels and then than our real estate book.

And so our overall leverage levels rise, but not because we’re taking an access risk, I mean, to go up from what was the advance rate in the CLO 675 to 82 from the bank line to the CLO deal..

While the bank lines allowed you to go to 80, but we had some assets that we haven’t levered. And so ultimately, it’ll look somewhat similar, but we’re allowed more leverage here..

Well, the point is that that’s now match funded. That’s better debt than the debt we had with the banks and non-recourse, yes, market-to-market. So, we’re just running a company smart, like we’re going to do the smart things that match our duration of our debt.

And if that means the ROEs climb up, I was – when I was on the Board of Invitation Homes, which are now just an observer on, we had a debate, should we buy home? Should we pay down debt? Or – they were freaked out about the debt, because too high and other REITs carry less debt, or should we grow or should pay a big dividend.

And I argued that things would happen really nicely for us, if we just grew the enterprise and don’t worry about the debt, because there’s no better credit than 80,000 houses. So, they ran a higher debt and obviously, the stock went from 18 to 30. So, the market agreed with me.

So, we’re going to tell the story and do the right thing for the equity for the capital base..

And I’ll note our on balance leverage hasn’t really changed much over the course of the year. It started the year around 2.1 and it’s today around 2.1..

That’s one of the reasons we’re carrying tons of cash, which we don’t like to do, but we did. So, we had to do because there’s uncertainty in the market..

That’s great color. Appreciate it, guys..

Pleasure. Thank you..

We have our final question from Jade Rahmani with KBW. Please go ahead..

Thank you very much. I’m just wondering for Barry, certainly curious if you do commercial real estate credit, the outlook for the overall market as having stabilized, meaning the worst has passed, or do you think there are more choose to drop? And it sounds like with respect to Starwood’s portfolio, you believe in the credit has stabilized.

There’s only about five loans that have the interest deferrals, and it seems that the credit outlook is fairly positive..

Yes. I think, tiny little loan in Michigan Avenue in Chicago, and then we have a deal, on the West Coast, which – it’s good real estate. I just think we might get it back. I don’t know, they’re in markets trying to find a partner right now. I’m okay with it. It’s going to happen like you can’t bet 1,000. But it’s irrelevant the scale of the company.

So, we have an idea what to do with it. This is the borrower has a higher basis. So anyway, yes, so, I would say in general, real estate credit is probably stabilized. I do think this cycle; we have a fairly large equity business, the cycle is – there is going to be distressed.

The banks are going to move as the economy comes out of this, they’re going to stop giving extensions on everything and they’re going to start, they won’t take the titles back, because the buildings are either empty or the hotel is empty and they’re going to have negative cash flows.

So, they’re going to start selling loans and they’re already doing that. You’re beginning to see a lot of loans come for sale in New York City, for example.

The assets are your trouble and movements and cap rates, in these – in NOIs, in New York City multis in San Francisco multis, you’ve seen the numbers from AvalonBay in EQR, I mean, they’re not good, down 20% NOI. So, you take a five capital, or four capital urban assets and you’re 70% lever. You don’t have any equity left.

So, neither of those companies without leverage, but this has been a significant diminution and value in some of these coastal cities right now, which I think, it’s going to be interesting. There’ll be a point at which a level at which we would be comfortable lending and even those markets.

But I think a couple of the commercial blue cities are going to be tricky from an underwriting standpoint. You all know the stories of people have leases in New York, a $100 a foot, and they tell that the landlords are going to renew, but it’s $65 a foot. And the landlord says, screw you and they moved to another building for $50 a foot.

So, that kind of behavior with this much sublet space in these big suburban cities is brutal and I don’t think the market appreciates how tough those markets are right now. because there’s no net demand really in those markets right now.

I will say that, like we know Google has gone back to work in the sense that they’re going to take, or they’ve already turned on additional development. They’re taking tons of space. Amazon did buy that. We work headquarters from us in the middle of COVID.

And then Facebook made that giant commitment to union state or whatever that station is next to the Madison Square Garden in the middle of the pandemic. So, while they’re saying one thing like work from wherever you want, they are increasing their footprints and it’s really being taxed. And that’s been leading the absorption in these cities.

So, whether it’s Facebook, Google, Salesforce, Twitter, Amazon. if they go home, the big urban markets will have a challenge. I don’t expect that to be the case. I think in the European cities, we didn’t mention Europe in our comments. I mean, there’s – we have massive lending opportunities in Europe right now.

So, we’re probably a third of our book going forward is going to be in Europe and the pipeline is robust and the spreads are good. So, it’s actually interesting, but we’re happy to make real estate loans and some of the people who are sitting back on their haunches and we’re okay with that right now.

And that’s why we’re holding our ROEs, because there’s less capital adjacent stuff. So yes, I think you also have to – it’s a little tricky even looking at headline rents in cities, because there’s – the concessions are improving or for the tenant.

It’s a little like what we’ve experienced in retail, like the tenant comes to you and says, I’ll stay in your mall, but on the $50 a foot, even though he’s paying you a $100 a foot, and what choice do you have. You can’t find another tenant to replace him. That’s why retail is so impossible and underwrite today.

In the malls, and I mean the tenant has all the leverage and the tenant doesn’t really feel like fixing his store. He’d rather work on his online digital strategy, which is what Wall Street rewards. So, you haven’t ever vicious cycle in the wrong direction in physical retail.

Having said that, I believe people are going to shop again, its physical retail, it’s just – it won’t, is it this – where will it stabilize, rents won’t be higher. I don’t see that happening. So I think, but I’m not talking about the Costcos and the Walmarts, and I’m talking about main street retail, New York City.

The hardest thing underwriting today is like, what are street level rents in places like Manhattan when there’s no tenants? And that in some cases, even I’m sitting in our least headquarter building here in Miami, this building is for sale and the base of the building is 30% retail. So, how do you underwrite it? So, it’s tricky.

It’s for lease, not for sale. Sorry. But I mean, we’ve looked at it and like, we don’t know how to underwrite it. There’s no obvious tenant to take all the street level retail in the United States. So, thanks for the question..

On the multi-side, wondering if in addition to selling an interest, a ground lease might be attractive, given its long duration capital and there seems to be a lot entrance, including your friends that iStar in that space..

Yes. Wow. The market loves that business. Yes. it doesn’t really fit in our company very well, because the cash-on-cash yields won’t support our yields, our dividends. So, we’d have to grow it and spin it out, I suppose. It’s not a difficult business to be in..

And it’s encumbered by agency debt – long-term agency debt. So, it would have to work through that as well..

You’re talking to me about the Woodstar portfolio. I’m talking about the business in general. Yes. So, anyway well, thanks for the question. I mean, we’ve looked at it, because obviously, the market adores it and it takes – and they have loans against hotels.

They have ground leases on hotels, that trades at a one cap, really the market does what the market does. I mean, obviously we should ground lease start our whole enterprise, like everything triple the stock..

Okay. Thank you. I would like to turn the floor over to Barry Sternlicht for closing comments..

Thanks, everyone for giving us your time today and again, thanks for the incredible efforts of the Starwood Property Trust, partners in making really, a great year and it’s nothing compared to what I expect us to do for you this year. So, stay tuned. Thank you..

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation..