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Edited Transcript of STWD earnings conference call or presentation 4-May-20 12:30pm GMT

·72 mins read

Q1 2020 Starwood Property Trust Inc Earnings Call GREENWICH May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Starwood Property Trust Inc earnings conference call or presentation Monday, May 4, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Barry Stuart Sternlicht Starwood Property Trust, Inc. - Chairman & CEO * Jeffrey F. DiModica Starwood Property Trust, Inc. - President & MD * Mark Cagley Starwood Property Trust, Inc. - Chief Credit Officer * Rina Paniry Starwood Property Trust, Inc. - CFO, Treasurer, Principal Financial Officer & CAO * Zachary Tanenbaum Starwood Property Trust, Inc. - Director of IR ================================================================================ Conference Call Participants ================================================================================ * Donald James Fandetti Wells Fargo Securities, LLC, Research Division - Senior Analyst * Douglas Michael Harter Crédit Suisse AG, Research Division - Director * George Bahamondes Deutsche Bank AG, Research Division - Senior Research Analyst * Jade Joseph Rahmani Keefe, Bruyette, & Woods, Inc., Research Division - Director * Richard Barry Shane JP Morgan Chase & Co, Research Division - Senior Equity Analyst * Stephen Albert Laws Raymond James & Associates, Inc., Research Division - Research Analyst * Steven Cole Delaney JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst * Timothy Paul Hayes B. Riley FBR, Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to the Starwood Property Trust First Quarter 2020 Earnings Call. (Operator Instructions) Please note this conference is being recorded. At this time, I'll turn the conference over to Zachary Tanenbaum, Director of Investor Relations. You may begin. -------------------------------------------------------------------------------- Zachary Tanenbaum, Starwood Property Trust, Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, and welcome to Starwood Property Trust Earnings Call. This morning, the company released its financial results for the quarter ended March 31, 2020, filed its Form 10-Q 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. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed in this conference call. A presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the company's Chief Executive Officer; Jeff DiModica, the company's President; Rina Paniry, the company's Chief Financial Officer; and Andrew Sossen, the company's Chief Operating Officer. With that, I am now going to turn the call over to Rina. -------------------------------------------------------------------------------- Rina Paniry, Starwood Property Trust, Inc. - CFO, Treasurer, Principal Financial Officer & CAO [3] -------------------------------------------------------------------------------- Thank you, Zach, and good morning, everyone. Despite a clearly volatile market backdrop resulting from the impacts of COVID-19, our liquidity, core earnings and portfolio performance were strong this quarter, once again demonstrating the benefits of our diverse platform with multiple business lines. Core earnings for the quarter was $162 million or $0.55 per share. However, as I will discuss later, our GAAP results were impacted by the current economic environment and our implementation of the new credit loss accounting standard known as CECL. We do not believe the GAAP charges we took against our assets this quarter are reflective of the credit characteristics of these assets. I will divide my comments this morning into 3 main parts: First, I will discuss our quarterly results across each segment; I will then highlight several items that impacted our GAAP results, including CECL and mark-to-market; and finally, I will conclude with comments on our capitalization, financing facilities and liquidity. Our performance this quarter was led by our largest segment, Commercial and Residential Lending, which contributed core earnings of $148 million to the quarter. On the Commercial Lending side, despite the increase in our loan loss allowance resulting from the implementation of CECL, we experienced no losses or impairments, and the credit quality of our portfolio remained strong, with a weighted average LTV of 61%. In fact, one of the loans we risk rated a 5 last quarter, which carried a $3 million loan loss allowance, paid off this quarter at par. During the quarter, we originated 7 loans totaling $853 million, with an average loan size of $120 million. We funded $1.1 billion of loans in the quarter, including $350 million under preexisting loan commitments. We also received $703 million in loan repayments, bringing our Commercial Lending portfolio to a record $9.5 billion. Also this quarter, over 90% of our domestic floating-rate loans had LIBOR floors. For the month of April, we received over 99% of total interest due on our loans, with all but one borrower making their required payments. On the Residential Lending side, we continued our expansion of this business by purchasing $386 million of non-QM loans and completing our fixed securitization, totaling $381 million. Our residential loan portfolio ended the quarter with a balance of $1.2 billion, an average LTV of 69% and an average FICO of 730. Our retained RMBS portfolio grew to $150 million this quarter, consisting entirely of retained securities on our fixed securitization. Next, I will discuss our Property Segment, which contributed $23 million of core earnings for the quarter. The assets in this segment continued to perform very well with blended cash-on-cash yields of 14.6% and weighted average occupancy of 97%. For the month of April, 95% of the total rent due from the tenants in this portfolio was received. The performance of our Florida affordable housing portfolio continues to vastly exceed our expectations. Area median income levels, which govern rents for the over 15,000 units in this portfolio, were recently released. Higher median income for Northern and Central Florida, where this portfolio is concentrated, resulted in a blended rent increase of just under 5%. These rents create a new floor which cannot decrease going forward. While the increases were released on April 1, we will likely defer them until the impacts of COVID-19 to our tenants can be assessed. As of quarter-end, the properties we own carried accumulated depreciation of $334 million or $1.18 per share. As we have said in the past, we continue to believe that these assets have appreciated meaningfully since we acquired them and the appreciation is not reflected in our GAAP book value. At a minimum, adding back $334 million or $1.18 per share to our GAAP book value would arrive at a purchase price for these assets. The gains that we believe exist in this portfolio would be an incremental increase to undepreciated book value. Next is our Investing and Servicing Segment, which contributed core earnings of $35 million for the quarter. In our CMBS portfolio, we continue to opportunistically sell assets. During the quarter, we sold $21 million of securities, for a net GAAP gain of $9 million and a net core gain of $11 million. In our conduit, we securitized $336 million of loans in 2 transactions this quarter at profitability levels consistent with our historical performance. And in our special servicing business, we obtained 5 new special servicing assignments, with a total unpaid principal balance of $4.2 billion, bringing our named servicing portfolio to $94.7 billion. Our fees this quarter do not reflect any impacts from COVID-related modifications, but we have seen a meaningful increase in activity after quarter-end, which Jeff will discuss. Concluding my segment discussion is our Infrastructure Lending Segment, which contributed core earnings of $6 million to the quarter. We acquired loans of $15 million and funded $48 million under pre-existing loan commitments. We also received $78 million from sales and repayments. Our total portfolio stands at $1.6 billion at the end of the quarter, with the loans we acquired from GE representing $687 million of this amount, a 64% decrease since acquisition. We also increased our borrowing capacity by upsizing one of our financing facilities from $500 million to $750 million, bringing our total financing capacity in this segment to $2.5 billion, of which, $1.2 billion was drawn. For the month of April, we collected all interest due on the loans in this segment. Next, I would like to walk you through 2 of the larger items that impacted our GAAP results this quarter, CECL and mark-to-market adjustments, both of which are noncash and unrealized. Combined, these resulted in a $0.70 decrease to our GAAP earnings, $0.17 for CECL and $0.53 for mark-to-market; and an $0.87 decrease to book value per share, $0.29 for CECL and $0.58 for mark-to-market. As we discussed last quarter, we were required to adopt the new CECL accounting standard on January 1 for assets within our commercial real estate and infrastructure portfolios that are recorded at amortized costs. Because CECL requires you to estimate a life-of-loan loss, the forecasted macroeconomic environment is a critical component of the resulting reserve estimate. The environment which existed when we adopted CECL on January 1 was very different than the one which existed at March 31, and that change drove an increase to the reserve. Our adoption on January 1 resulted in a general CECL reserve of $36 million. The net impact of this new reserve and reversal of our prior year general reserve of $4 million was recorded directly against equity. On March 31, while the credit characteristics of our assets had not changed, the macroeconomic environment had changed drastically. That change resulted in an increase to the reserve by $49 million, of which $40 million related to Commercial Lending. Unlike the establishment of the reserve at January 1, these changes went through our GAAP P&L. Next, on the topic of mark-to-market. Our CMBS and residential lending businesses were most impacted by the significant spread widening that occurred at the end of the quarter. There are a few important items to consider when looking at the mark-to-market effect on these assets. As we have said before, ours is not a short-term business model. To the contrary, we intend to hold the vast majority of these investments long term, and unrealized spread marks are not an indicator of value recovery over time. Second, we were not forced sellers of any of these instruments during the quarter and did not realize any losses from the spread widening which occurred in March. Consistent with past practice, due to the noncash and unrealized nature of both the CECL and mark-to-market charges we took this quarter, they were not included in core earnings. I will conclude this morning with a few comments about our liquidity, financing facilities and capitalization. We continue to have ample credit capacity across our business lines. We ended the quarter with undrawn debt capacity of $8.6 billion and an adjusted debt-to-undepreciated equity ratio of 2.1x. As of Friday, we had $870 million of cash and approved undrawn debt capacity. This amount is after payment of our first quarter dividend and after $253 million of deleveraging across our facilities. The deleveraging includes voluntary paydowns on our warehouse facilities, which contain hotel collateral, where we have secured modifications with 94% of these warehouse lenders. The modifications cover $1.4 billion of the total $1.5 billion in hotel assets that we have financed on warehouse lines and relate to $1 billion of warehouse debt on our balance sheet. In exchange for these voluntary paydowns, we have been provided with a margin call moratorium for a minimum of 6 months after any hotel loan modification. In addition, we have been afforded a suite of pre-approved modifications that we can make to the underlying hotel loans without going back to our warehouse lender for approval. This provides us with maximum flexibility to enter into constructive discussions with our borrowers going forward. And finally, I wanted to comment about the alignment and commitment of our manager to our shareholders. During the quarter, our Board approved a $400 million repurchase program. Pursuant to this program, in March, we purchased 1.9 million shares of common stock with a weighted average repurchase price of $14.95 per share for a total cost of $29 billion (sic) [$29 million]. Also, with regards to our first quarter base management fee, which totaled $19 million, our manager has agreed to take this amount in stock. With that, I'll turn the call over to Jeff for his comments. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [4] -------------------------------------------------------------------------------- Thanks, Rina, and good morning, everyone. It feels like much more than 10 weeks ago that we last spoke, and we hope you and your families are healthy and safe. We closed our offices on March 15, and since then, I've been working alongside other Starwood executives out of Barry's house in Miami. Despite the circumstances, the senior management team has never been more connected, and I am proud of the hours and work the entire organization has put in to optimize our liquidity position, protect our balance sheet, and importantly, ensure we come out of this period in a position of strength. We are confident enough in our excess liquidity position that we have, in fact, recently gone on the offensive and begun investing capital selectively at extremely attractive levels. We moved our earnings call up 3 days this week to provide more information to the market earlier and heard that people think we did so to allow us to come to market quickly to raise capital. That is not our plan. We have no need or plans, given our excess liquidity, to raise debt or equity capital in the near future, absent an unforeseen opportunity. We have been saying for over 7 years that our diversified investment strategy was built to perform well in normal markets and outperform in periods of duress. Q1 gave us both. The strength and quality of our multicylinder portfolio has never been more apparent. We have $3.3 billion of unencumbered assets on our balance sheet, which include unlevered loans and securities, and various other sources of liquidity. As Rina said, after paying down our financing lines by over $250 million since COVID-19 and paying our dividend, we have $870 million of cash and undrawn capacity. We are in a unique position of having substantial unlevered assets, equity and property assets and other levers we can pull to create well over $1 billion-plus of potential liquidity, if needed, adding strength to our already strong balance sheet. Our unlevered loans and property assets can be borrowed against, sold or pledged to delever our warehouse lines. Pledging assets would lower our bank lenders' LTVs and return cash we have previously paid down lines with. Simply put, while every subsector of mortgage REITs face a liquidity crisis and many of our peers were hours or days away from defaulting on bank lines or selling any assets that they could, there was never a point where our solvency was in question. Although our stock went down with our sector, we believe there are very few of our peers who can say that. Regardless of the pace of credit market improvement, we are prepared to be in position to go on offense. We did not make any distressed sales during this crisis, and we did not take any losses, which will leave us in position to recover more quickly. Given our liquidity, we have begun to go on offense to invest in loans that are mispriced due to the liquidity crisis in the capital markets. With credit spreads wider and capital more expensive, we do expect loan repayments to slow, perhaps significantly. Fortunately, our balance sheet is not solely reliant on loan repayments to create liquidity. In our stress testing, we conservatively moved $2 billion of repayments out of our 2020 forecast, leaving only $718 million, or $130 million of net equity, being returned to us from our lending portfolio over the next 3 quarters, which is less than 10% of the $1.5 billion of net equity returned to us in the last 3 quarters. Even with these conservative assumptions, we are comfortable looking for opportunities to deploy a portion of this excess cash today. We are pleased that the third-party appraisal methodology we adopted with CECL confirmed the credit of our 61% LTV lending book. At 61% LTV, and after recent paydowns, our bank lenders' attachment points are significantly below 50% LTV today, lessening the likelihood of margin calls. Pro forma for Q2, construction loans are less than 15% of our lending segment assets, the lowest they have been in our book in over 6 years. Since quarter-end, we executed on $640 million of off-balance sheet senior mortgage A Note sales, helping reduce our future funding needs by almost 40% from their third quarter 2019 peak. We have talked over recent quarters about how we reduced our warehouse line exposure through A Note sales and our CLO. Less than half of our CRE loans are financed on warehouse lines, leaving us less exposure to credit marks. Hotel loans are only 12% of our total assets today, and retail is less than 2%. Given our strong cash position, we proactively addressed the uncertainty around our hotel loan exposure by being the first to proactively pay down on our warehouse lines in exchange for a 6- to 9-month moratorium on incremental paydowns, allowing us to work with select borrowers on forbearance plans, while giving us confidence in our future liquidity needs. To date, we have reached agreement with 94% of our lenders, and of those agreements, 93% of the voluntary paydowns have already been made. We have some good news to share with you. If you'll recall, about 18 months ago, we took back 2 loans secured by industrial properties located in Montgomery, Alabama, and Orlando, Florida, after Winn-Dixie rejected their leases coming out of bankruptcy. At the time, we told you we were confident that besides taking an impairment, that we would ultimately break even or make money on those assets. We are happy to report that a high-quality tenant signed a long-term lease and moved into the Montgomery facility, and we have executed a long-term lease on 100% of the Orlando facility to another very high-quality tenant. We will decide soon whether to sell or hold those properties and earn very high cash yields, but expect approximately $80 million, $40 million of which would be a gain on those properties if we choose to sell them. We believe this example highlights the value of the alignment with our manager, Starwood Capital Group, one of the largest real estate managers in the country, working together with our large special servicer, who together made this outcome possible. We have approximately $90 million in gains in the LIBOR floors embedded in our loans today. And as the U.S. dollar has appreciated, we have over $50 million of gains on our foreign exchange hedges on our international loan book. We could take those gains to increase liquidity today, but with no liquidity needs, we have not. Selling your floors or foreign exchange gains is making a call on future direction of rates or currencies, which is not what we do. Taking those gains today for liquidity would likely lower future returns on those assets by more than the cash they would raise and create more uncertainty around future earnings. We spoke on our November earnings call about the cash management strategy some were employing in our sector to buy senior CLO or CMBS assets, with massive amounts of leverage to earn higher yields on their cash. We said we would not do that, that the assets were near their lowest historic spreads over treasury bonds and that the bid-offer spreads can widen significantly as liquidity dries up. In our February earnings call, we talked about being prepared for capital markets events, significantly reducing our CMBS book and significantly reducing the warehouse line exposure in our CRE loan book. We said that we manage the left and right sides of the balance sheet for a potential credit event if we were to get one. We finished by saying we set the company up to outperform if and when the credit markets do deteriorate. They clearly have, and we believe we have. On to our property book. Our property book continues to perform well with fair market value gains of over $700 million, in mid-teens, and increasing cash returns on our invested capital. We are in the process of refinancing our first Florida multifamily portfolio, which will raise $85 million of additional liquidity while lowering our loan rate by 100 basis points today. In REITs, we told you last quarter that we have sold retail-heavy CMBS securities to reduce our non-investment-grade CMBS portfolio from 10.5% of our assets to under 5% of our assets, while increasing our named special servicing mandates. Our special servicer has not been busier in the 7-plus years we have owned L&R. We have onboarded over 500 loans since COVID-19, representing over $14 billion in assets. Having doubled the amount of assets we are working on, we have re-purposed multiple professionals to help the servicer work through this backlog and expect revenues to increase in the coming years. In our residential lending business, we completed our sixth securitization in Q1 and expect to execute multiple securitizations in Q2, with expected returns similar to pre-COVID returns. Looking back to the great financial crisis of 2008, loans similar to the 730 FICO, 66% LTV portfolio we have created, had losses of less than 1%. Originators, residential REITs and banks aggressively sold whole loans in March and April, creating a potential market opportunity for us to add loans with term financing and exceptionally attractive returns. Finally, I want to talk about our energy Infrastructure Lending segment, given the drop in commodity prices. The bulk of our loan book is on power plants that have contracted cash flows that contribute to the repayment of our debt, and the plants' profitability is based on the difference between where they can buy gas and sell electricity, commonly referred to as the spark spread. With natural gas prices lower, spark spreads remain significantly above our debt breakeven. All of our loans benefit from strong structural protection and/or financial maintenance covenants to ensure our debt is being serviced adequately. We do not have market price-based margin calls on these loans. Margin calls would require a specific credit event at the project level, typically leading to an acceleration of the loan. We have 4 financing facilities with roughly $2.5 billion of capacity and $1.2 billion of current utilization. Only $162 million of our facilities are subject to ratings-based margin calls, requiring a 2-notch downgrade in the credit rating or a commensurate nonmarket-driven deterioration in price of our loan investments. To date, we have not had any of those experience even a 1-notch downgrade. The rest of the loans require an event-of-default payment forgiveness that is unanimously agreed to by the lender group or a debt service coverage ratio breach. We feel very good about the quality of our book, the return profile of the loans we have originated since acquisition and the stability of our financing. With that, I will turn the call to Barry. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Thanks, Jeff. Thanks, Rina. Thanks, Zach. And thank you all for dialing in this morning. This is a strange process, and I know you're all having -- enjoying the strangest time. It is odd to be doing an earnings call from your home and with your colleagues' home in their own locations. I'd like to start my comments. First of all, I know you just heard somewhat exhaustive detail about the plumbing of the company. From the start, we said we'd be transparent and we'd try to be consistent, predictable. And we built the company to do that. We built a company with multiple business lines, with different credit characteristics that react differently to different times. And it was really when the tide goes out that you see the strength of the platform. And there, you can simply look at the cash on the balance sheet, the property book and some of the other incredibly valuable assets this company owns. I wanted to back up and compare this time because I saw what you all saw, which was a comparison of the '07/'08 crisis to today, and the fact that commercial mortgage REITs, most of them blew up in 2007, 2008, one of them which I actually started, Starwood Financial that became iStar, actually survives, but many of them disappeared. If you go back to that time period, for those of you who weren't analysts or even alive, there was negative leverage. People were lending at 6%, 7%. Property yields were 3%, 4% and 5%. You also had an undisciplined lending market. You had typically loans 95%, 80%, 85%, 100%, 105% of LTV. It was a totally different time period, and the mortgage REITs were constructed totally differently. I want to make sure that we separate the commercial mortgage REITS, which were primarily the commercial mortgage REITs, from the residential mortgage REITs today, because they have totally different balance sheets, they look totally different, they had totally different risk profiles. Sadly, they're both included in the same ETFs, and so when money swings in and out of the ETFs and mortgage REITs, all the stocks go up and down. And to some extent, I'm beginning to feel like the Rodney Dangerfield of commercial mortgage REITS; you get no respect. Going back to what the world was like before. Today, you should start with our LTV. Our LTV actually fell when the CECL rankings came in. It was the first time you had a third-party appraiser come in and looked at our loans. Or if you go back to our mark in third quarter of last year, it was like 64%, and CECL marked them around 59%. And this month, they went back to 61%, but they're still as low as they've ever been since the company was started in the last 10 years of the company. And that is a third-party mark, and what happened there was the shift, as Rina said, to a recession scenario, and that created these paper losses in the book, similar to what you saw the commercial banks take. In general, though, our marks were the, I think, best-in-class in the industry. That's a tribute to the quality of the book we have. So what we did in -- oh, and I should say one more thing. The banks which lend us money against the 61% marks, well, they're maybe 70%, 75%. In average, they're less than 50% exposure, something like 48%, 45% exposure LTV. So the banks are super safe. So there's no particular need for them to write down their loans or call us on any facilities if they could, and they really haven't. We worked with them proactively to restructure our hotel loans, which we're, obviously, going to have interrupted cash flow, and it's been a very good conversation. The banks have been super supportive. We really appreciate their partnership and we're not -- they know we're not their issues. So the company remains strong. And one of our quandaries in showing the strength of this company, it might actually entice the banks to ask for some of our liquidity, which we're not interested in sharing with them and don't need to. So the first thing you do in a situation like this, which is, obviously, unprecedented, is you run multiple scenarios on what the future of the company might look like. We pushed back all of our repayments. There were a lot of -- management had estimated early repayment on so many loans, and now we have almost nothing maturing this year in our forecast, and we end the year extremely strong. We halted all of our investments per se, although, obviously, we had to fund some of our future commitments. Our underlying lending partners funded theirs. And after paying down $250 million of debt facilities, mostly on our securities, we still have over $800 million of liquidity in the company. That's not necessarily good news. Cash does not earn anything in this environment, but that is what we're facing: the tug-of-war between investing this capital and making sure we have liquidity on hand should something unthinkable happen or there'll be another downturn in the market going forward. It's also extremely exciting to see all the loans performing. And the underlying conditions in the property market and in most of the sectors are okay. The multifamily market, particularly the exposure this company has to the affordable housing sector, is fantastic. Everybody gets paid. And where you see the unpaid is actually the medical office portfolio, where doctors simply went out of business temporarily, but we think there'll be no impairment to the future of those cash flow streams going forward. So you batten down the hatches. You test everything you can today. You run all these scenarios and you look then what you're going to earn. Sitting with nearly $1 billion in cash is not in the model we had and have never run this company this way. So that creates an earnings scenario that we have to be careful about. It's not just creating liquidity. We can do that easily with $3 billion of unencumbered assets. The issue is what are we giving up in the future of the company. And we're here for the long haul. We're not here -- we're not built for a quarter and impress you, we're here to produce earnings that are consistent and an excellent risk/reward for our shareholders going forward. I want to stress our business lines are incredibly solid. As Jeff said, the infrastructure business had a great quarter. It has almost no -- it has no credit markdowns, no rating decreases in the portfolio. Our property portfolio led by our multis is exemplary. It's been the Rock of Gibraltar, earning a 15% return, and they cannot go down. The rent cannot go down in the multifamily market, though we're going suspend the rent increases that we're entitled to as we work through the COVID situation with our tenants. Our conduit business is a solid business, but it's no big deal to the company. It securitizes 11 times a year. We have always run around $150 million, $200 million of loan balances. We got a bunch done. We have some of these loans on our books. They're small loans. The CMBS business has been strong, and it provides us extraordinary insight into the capital markets. We've always been in the business. It comes with the servicer. The servicer business has reversed. We always mentioned this would be a hedge against a downturn. Well, we have a downturn. And interesting enough, as Jeff pointed out and Rina, we shifted a bunch of assets over to that side because the servicer is now overwhelmed with requests for forbearance, particularly in the hotel space. The residential lending business is a very solid business. We've held up one securitization. We hope to get it done later in the year. But the holding both the conduit loans and the securitization of the resi loans is actually earnings accretive. We have in-place facilities. We can hold these loans. We don't have to rush to market. We don't need the liquidity, though we would like to complete the securitizations. And then the large loan lending book speaks for itself. I mean that's a business that is the core of the company, and it has performed exceedingly well, surprisingly well. So I think now you see a situation where our industry has been split between the haves and the wish-they-have, the people who are -- can go on offense and those that are trying to protect the limited liquidity they have or, in fact, have to reach out to do dilutive deals. We put up our book value every quarter, including our fair value of our assets, because we want you to know we've always been dedicated to not issuing equity below book value. And we're not going to do that unless we have an extraordinary opportunity to deploy the capital immediately into something that's massively accretive for the company. So our job right now is to figure out what is, in fact, excess capital and to figure out how much of it we want to invest. As Jeff mentioned, we are looking at an opportunity -- several opportunities. I have an Investment Committee call following this -- in this afternoon on a situation. The opportunity to put capital out at spreads wider than we have historically, is obviously evident right now. There aren't that many transactions, so it's not a flooded situation, but there are several. And because we're in multiple businesses, many of these business lines are finding there are compelling opportunities to put out. So we've turned our conduits back on, for example. We've given them some capital to go ahead and make additional loans, which will entice the yields or improve the portfolio and the eventual securitization of those assets. We're also looking at a few whole loans in our lending book. And we're also quite excited about the residential opportunities, given our expertise and the general distress in the area despite, obviously, the situation on forbearance of mortgage payments that is rolling through the country, home mortgage payments. So I think we're feeling the book is very safe. And I should talk for a second about the dividend. Our dividend policy will follow the philosophy of safety for the company. Can we earn our dividend? Yes. Should we pay it out? We're going to decide as the future unfolds. So we will wait until June to see how the year looks, what's happened to the return of the economy, how our borrowers are faring. It's going to be a little bit -- we don't know. I mean nobody can really know. Signs are good, and we've seen all this cash. So we're going to do the prudent thing and make sure that -- obviously, as a major shareholder myself, I would like us to pay the maximum dividend we can. But we are here for the long run, and that will be a Board decision. So I want to thank all the people of the company who are working incredibly hard. That means you have to batten down the hatches and look through every loan in every corner of the company. Doing this remotely has been a fascinating challenge. Even producing your financials for every company in the country remotely has been fascinating. And I want to also thank our Board because the Board has worked really hard with weekly calls, as we gave them updates of the situation, and giving us advice on how to navigate this. It's been exceptional. So with that, I think I'm going to stop. It was a good quarter. I think you'll see less earnings from us. I will -- but, obviously, we can produce earnings anytime you want. We harvest the gains in our books, and we've always done that. Well, I was really pleased at the -- oops, I almost said their name -- at this major tenant, tech tenant, signed a lease on the warehouse. I connect those to the strength, as Jeff said, of the platform, because the -- we can also play on the equity side. So this was a loan. We didn't want to take it back on 2 distribution centers. And one was just signed this week with one of the largest companies in the United States and the world and should produce a $40 million gain, reversing an $8 million reserve we took against the asset. So a $50 million swing plus basis in the asset, you're talking $75 million, $80 million of cash on an asset that really didn't have anything to do with our core business but is now leased for the long term at very attractive rates. So we think it's exciting for us. We'd love to get back on offense, put everyone back to work finding great investment opportunities. It's kind of tricky when your stock is trading like Rodney Dangerfield. But we're excited, and we hope you'll see the power of the platform as we go forward. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [6] -------------------------------------------------------------------------------- We'll take questions, operator. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question is from the line of Doug Harter with Credit Suisse. -------------------------------------------------------------------------------- Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2] -------------------------------------------------------------------------------- Can you talk about how you're viewing buyback in the context of those opportunities that you mentioned over and above what you did in March? -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Obviously, in the world as it's falling apart early -- mid-March, and we suspended the buyback. And again, it all fits together. It's a puzzle. We're keeping liquidity of $800 million. It seems like not the smartest thing to buy back stock and to hopefully wait for the stock to recover to levels on its own. We can't fight these ETFs, and it's simply just a waste of energy and capital. I think where the -- I mean we may be the only commercial mortgage REIT that's bought back stock. But I'm -- maybe I'm not sure of any others that have done so. That's because we come from protect the book value of the company. And I think we're going to do -- we're going to sit for now on that. We're not going to repurchase stock right now. It's somewhat enticing, but there's -- we also have some bonds outstanding that are trading cheap or -- and so our -- we'd rather, if we could do so, repurchase the debt of the company, which was close to investment grade and now it doesn't trade like much. So that's probably something that we'd focus on first -- we are focusing on first, I should say. -------------------------------------------------------------------------------- Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [4] -------------------------------------------------------------------------------- Great. And then I guess the opportunities that you talked about, I guess, on the loan side, would that solely be kind of newly originated loans? Or are there kind of loans in the secondary market that you'd be looking at kind of given dislocations? Just kind of your thoughts around that. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. Securities, one of the things we're looking at is buying some whole loans, but they are security -- securitization -- pre-securitization. And we are looking at some. There will be some people that need to refi stated maturities, and they'll probably take fairly significant spread widening, if you will. I mean the markets are better, but they're not great. And we have urged Congress to do what they did in '07/'08, despite the investment grade -- all of the investment-grade securities of CMBS. But so far, they've put in high-yield debt for some reason, but they did not put an investment-grade, nongovernment CMBS. They've put the AAAs in. As you know, I don't believe that repurchased facilities are even actually activated yet. But I think it would help the property markets if they did include, which they did in '07, '08, or '09, whenever that TALF was, the rated classes of commercial mortgage-backs. So I think you see a lot more stability. And the problem in the market, as you saw in March, was the repo banks and the repo facilities are quite different than the guys who are individually approving loans that go on their credit lines. They're more mechanical in what they do. And we were looking at situations, I'll mention one of them, where our security was 50% of what -- one of the largest PE firms in the United States paid for the assets not 6 months ago. And if you -- when they told us what they were marking the bonds at, I said, "Well then, deliver us all the bonds at that price. We would love to buy them all." And of course, you can't find $5 million worth. They're just artificial marks, and they were driven off of some computer and any property guy in the nation would love to buy the asset at that price, including us. And so it's a tricky time. And as you know, as we said, we have less than like just over $100 million of debt on almost $400 million of positions left in the security suite, and we don't believe we have any real issues there going forward. So we believe that these are money-good paper, I mean we have the financial strength to just wait it out. We had the same situation a couple of years ago, where the CMBS book was marked down and it recovered fully and actually went to a gain again. So look, this is going to be different. This is going to be slower, but we do think that the country will open and cash flow will be restored to quality assets in good locations, and in the hotel space, the resorts will do better than the big urban boxes and the big convention hotels of either Atlanta, or New Orleans, or Vegas and so -- and Manhattan. So I think our exposure, we have very little exposure than we've had frankly. In the aggregate, very little. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [6] -------------------------------------------------------------------------------- And Doug, it's Jeff. I would say that Barry and the Board have certainly helped guide us towards what our future will look like and it look a little bit different. We'll avoid spread mark repos to the extent that we can. There are opportunities in securities on leverage. CMBS, BBBs, for example, will probably trade at 11%. And as you know, with 300 people at LNR, we can underwrite every loan and every deal, and we've been very successful doing that. So there are opportunities in security without taking leverage. But we as an industry will take more spread -- less spread mark leverage than we have in the past. As Barry said, we have very little left against a decent-sized book there. So not a place where we're particularly worried. I think when we look to get aggressive on the CRE lending side, you'll see us selling more A notes and using less warehouse as an industry. Our last 2 earnings calls, we've told you that our company has already done that, and we had brought our warehouse exposure down significantly, below 50% of our book and I think before others did, I think you'll see others join that, where we're all trying to sell more A notes and have less potential credit marks in an unknown world. So our playbook will change a little bit, but we have the resources to do it, and these are things that we've been doing for a long time. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question is from the line of Rick Shane with JPMorgan. -------------------------------------------------------------------------------- Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [8] -------------------------------------------------------------------------------- I think we're right now in a situation where you've got long-lived assets that are facing somewhere between 3 and 6 to 9 months of revenue compression. I'm curious, given your multipronged approach, does it make sense to, in that environment, move more towards ownership as opposed to being a lender? And will there be opportunities there for you? -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [9] -------------------------------------------------------------------------------- Thanks for the question. In Starwood, in the REIT-owned, I think it's 15,000-or-so apartment units and, overall, 80,000 apartments. So our collections have been, I think, 97% in our portfolio. So I'm going to first object to the tenor that our revenues are compressed, because in what we own in the geographies we own, we don't own anything in New York City, we don't want anything in the West Coast of California, where populism has infected the desire of tenants to pay their rents. So -- and our portfolio in the REIT is not in -- it's in Florida, almost exclusively. So Northern Florida, in fact. On the office side, I think 94% or 95% of our tenants have paid, 96%. It's the real weakness in the office side is not --is from the shared office guys, as you would think. In our experience, one of the largest that's quite, what's the word, talked about a lot, that's not the word, but I couldn't think of any other words, notorious. That's not the word either I want. They pay in every location, but one, and we're negotiating that one. So offices held up pretty well. Again, it obviously depends who your tenants are. We don't have any of the airline companies as tenants. And in our portfolio, we're not seeing any issue and Rina mentioned that. And again, when you're 60% LTE, guys are going to try to pay you if they can. And if they don't, we would -- we probably would like to take the property back, but that's not our core business. I don't think, given the uncertainty in the markets, hotels, 0 cash flow, and they are all shut. Actually, it's not quite true. The very low end of the market is actually doing fine. We have a chain of hotels that is running 80% occupancy. It's at the low end of the market, called InTown Suites. That's quasi-apartments. That's why it kind of trades like that. But for the most part, hotels are closed. Our portfolio, I think, I'm pretty sure, most of the hotels are closed, and that ramp will be interesting. All the borrowers are working collaboratively with us, and the underlying line lenders are working with us because it's nobody's fault. Would we like to own these hotels? If they give us the keys, I suppose it'd be okay taking them, but that's not really what we're trying to do. We're not trying to be vultures to our own borrowers. Industrial, we don't have much exposure to. It will be an interesting asset class. It will be a bit of a minefield, I think. It's always -- it's had a hell of a run, but if companies like Crew file or Penneys file, you can imagine their distribution centers might, if nothing else, they'll renegotiate the rents down, just like they will in the mall or High Street retail. So I think industrial, with the explosion of Amazon, I'm pretty sure Amazon doesn't lease every single square foot of industrial in the United States. So I wonder what the future might look like there. And then the resi markets, I think we're pretty careful about where we're buying or where we're taking on loans and, obviously, trying to avoid right now the oil patch from single-family homes and trying to make sure we're in a part of the price points that are more stable. And you saw this huge drop in home purchasing, but on the other hand, the resi markets are fairly solid. We all want to know what's going to happen to incomes across the country going forward. And will they -- how much will they fall? And how fast will they come back? We're not really investing at that, at the very low end of the market, but more in the middle market. Non-QM loans tend to be larger than qualified loans, obviously. That's not the only reason why they're non-QM, but the average loan balance is really higher, often higher than what Fannie and Freddie will take. So I think the long way of answering, I was just -- I did it because I thought I should give you our perspective on the market. We're really focused on the equity side when we buy assets on replacement costs and making sure it's a relevant replacement cost, the asset has real value, and we can buy it really cheaply. We've been through -- I've been through -- sadly, I'm old, and I've been through 4 cycles. So I started the company in the RTC days. And we had the best returns ever back then, 76 IRRs, I think, in our first fund. And we made a fortune coming out of the '07, '08 cycle, we made a lot of money. I was running Starwood Hotels through the dot.com bust and then 9/11. So I've been to this movie before. There's no question the U.S. will recover. It's just a question of when and how fast. And it's a linear line between now and the vaccine, and excited to hear about the Roche antibody test this morning. And we can all go back to work if we know that half of country's already been exposed and won't get it. So I'm optimistic. I think -- and as you've seen me, I've been on TV. I said World War III for 90 days, March 13 on CNBC, and we're about halfway. So it's really ugly. But obviously, when it's really ugly, it's a good time to invest. So they don't ring a bell. And we're going to -- we got Board approval to make an investment, I guess, 2 days ago. So it's -- we will put money to work. And I'd say the returns on the deal are probably 2x what we would have seen. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [10] -------------------------------------------------------------------------------- Significantly higher. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [11] -------------------------------------------------------------------------------- Significantly higher. 1.8x what we would have gotten in credits a while back. So we do want to make -- it's interesting. If we can earn twice as much on our capital, we can put out half as much money, half as much of our liquidity and still preserve our liquidity, is how we're thinking about it. So be very choice -- very choosy on what you invest in. Make sure there's no downside. If the money you put out is the only money you could put out, you won't have a capital fall of any nature, ever. So -- and you earn a very attractive rate of return on your equity investment. So we're not in the business of doing equity deals in the REIT. I don't think you've seen -- right now in the -- the transaction market is frozen. Buyers are not selling assets at prices you and I would want to buy them. You go back, yes, the rates are 0. So if a bank would let you cover, I mean -- even in retail, even in the most distressed markets like malls, most of these assets can cover debt service. They just can't mature. Nobody will lend you the proceeds that the original loan was at. But if you can produce 2% all-in cost and 2.5%, you can cover a lot of sins, and that's what happened '07, '08. The blend and extend became the mantra of '07, '08, and you never saw the kinds of fire sales really that you saw in prior crashes. And right now, you can have the same outcome. And we can cover debt service or our borrowers forever, but we would like to redeploy this capital into new opportunities, at better spread. So we think it's an interesting time. We're actually really -- we got to really like where we're sitting at this time. We are one of the haves, we're not one of the wish we had. And we're not restructuring the company. We don't need outside capital. We even heard a rumor when we accelerated earnings that we were going to go raise money and needed to raise money. We were accelerating our earnings release because we really wanted to tell you how good we've sat, and that was the entire reason we did it. We've never done it before. We just don't want to sit on the good news. So -- and that was our rationale. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [12] -------------------------------------------------------------------------------- Rick, I think you asked specifically and Barry partially answered it about properties and whether we would be adding here. I think that with low- to mid-teens available, at 70% LTV lending, and very little transparency on cap rates and high-quality assets that we would buy if we were to add to the property sector, plus the back of cap rates are relatively low still and our financing costs would go up on those, I just don't think you can return double-digit yields today versus where our dividend yield is. The Property Segment is probably going to be a hard place for us to add in the near future. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from the line of Don Fandetti with Wells Fargo. -------------------------------------------------------------------------------- Donald James Fandetti, Wells Fargo Securities, LLC, Research Division - Senior Analyst [14] -------------------------------------------------------------------------------- It's definitely good to see you guys having made the right moves to get to the other side. I wanted to see, Jeff, if you could talk a little bit about the hotel loan portfolio. Are the majority of the owners just prepared to sort of dig into their pockets for a few months? Is it kind of playing out like you thought? And can you give us a sense on how many of the loans have been modified? Obviously, that's proprietary to some degree, but can you just give us a sense of that? -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [15] -------------------------------------------------------------------------------- Great. I think I have Mark Cagley on the line, who's our Chief Credit Officer. I would say that we -- one of the main things that we look at is the sponsor capability and their financial condition when we go into a loan, and we have some very well-heeled sponsors on the hotel side, both other sides of our business. We expect them to pay at a much higher rate and to avoid special servicing and avoid forbearance and other things. And then you have some properties where you certainly need to work with people and we've been fairly open about that. We were very quick to call our repo lenders and cut deals where we got ourselves 6 to 9 months to be able to allow us to put hotel borrowers who needed the help into forbearance, come up with a plan together as their partner and try to figure out a way that we could all come out on the other side. So we did that. We paid a lot of -- a decent amount of money to do that, but it gave us the ability to sleep very well at night, by the fact that we have 9 months to work this out, and it gave our borrowers an opportunity to get into loans the way that they wanted to. You look to our downgrades this quarter, and it sort of speaks to what happened in hotels. We had fairly significant amount of loans downgraded. We moved $940 million worth of loans. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [16] -------------------------------------------------------------------------------- Downgraded by us. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [17] -------------------------------------------------------------------------------- By us, I apologize, Barry, on our 1 through 5 rating scale, where we start a loan at a 3 and they generally tend to stay there. We have very little in the 4 to 5 buckets. We moved assets there, and we moved them there because we have a very quantitative way of thinking about it, between sponsor capability and loan structure, that's about 40% of the risk rating we internally give ourselves. But the other 2 pieces, loan and collateral performance relative to underwriting and the quality and stability of projected project cash flows, those are about 60%. And clearly, on hotels, those 2 pieces of the ratings had to change because of what's going on with COVID and the fact that they just don't have revenue, they're not open. So we use it as an opportunity to move a few ratings worse. We think these are ratings that we will move back the other way when these hotels open up again, but being consistent with the guidelines that we've set up for ourselves, we wanted to make sure that we did that and the vast majority of what we moved was on the hotel side. I'm going to turn it to Mark Cagley to talk. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [18] -------------------------------------------------------------------------------- Yes. But before Mark does, you can't say a hotel loan got better, right? So I couldn't say they were. They had to move. So we moved them. It doesn't mean we think, as Rina started in our comments, we had a 5-month payoff. So it doesn't really mean much. It's just for our own management. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [19] -------------------------------------------------------------------------------- Mark, do you want to just speak specifically about how we're dealing with hotel borrowers and talk about some of the things that we've done and percentages of loans that were talking about here? -------------------------------------------------------------------------------- Mark Cagley, Starwood Property Trust, Inc. - Chief Credit Officer [20] -------------------------------------------------------------------------------- Sure. I'd love to. This is Mark Cagley. We -- in our loan hotel portfolio, about half of the loan portfolio in terms of numbers of borrowers have asked for some sort of payment relief. So speaking, glass half full, that means that half of them have not asked for that and are planning to and continue to make full interest payments on the loan. So we have no borrowers whatsoever that we plan to completely waive all interest payments on. And so we're working out plans with those borrowers to make partial payments and potentially defer partial payments, but then they will be on cash flow sweep until it's repaid during the -- as things rebound into the market. So our borrowers have been universally committed to support their properties and to put equity in and to use resources and use PPP funds to support the assets as we try to figure out what's going to happen for the next 3 to 6 months through -- with these assets. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [21] -------------------------------------------------------------------------------- I'll note that all but 1 of our 120-or-so loans in the CRE lending book paid their debt service payments in April, and we'll know soon in May. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question is from the line of Jade Rahmani with KBW. -------------------------------------------------------------------------------- Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [23] -------------------------------------------------------------------------------- Good to hear from all of you, and hope you're all doing well. I've gotten a lot of questions about the company's liquidity position over the last month, as you can imagine, and just going through details of, for example, the unencumbered assets. I was wondering if you could provide color on the $1 billion of additional liquidity that you cited. What does that consist of? And on the unencumbered assets, how does that break out between senior unlevered positions and subordinate positions? How much of the unencumbered assets can actually be tapped, if necessary? -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [24] -------------------------------------------------------------------------------- So thank you, Jade. Thanks for the question. Appreciate it. We used the number of a little bit over -- of over $1 billion because feel like we have a decent amount more than that. Our property portfolio alone at our current marks, if we were to liquidate our property portfolio, would create over $1 billion on its own. In addition to that, I talked in my scripts about our ability to sell LIBOR floors to unwind FX hedges. Those could create well north of $100 million. We have other unencumbered assets that could create north of another $100 million. We have some assets we could sell. We talked about the 2 industrial properties. We have another industrial property that we could sell. So all in, you get to over $1 billion with just the property portfolio, and everything else is above that, over and above the $870 million of cash and cash equivalents or cash and approved but undrawn. That's still on the balance sheet today. So we feel really comfortable that if we had to, we could make the moves. Those are not moves that we're jumping into making. We certainly have looked at levering some unencumbered assets over the course of the last 1.5 months, and we've done that in a few instances, but we haven't made any panic move. And as Rina said, we haven't sold any assets at a loss to try to create liquidity in an emergency because we haven't felt like we're there. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [25] -------------------------------------------------------------------------------- Every sale has an earnings impact, right? So it's a balance. We're not just trying to pile up cash because we're not having a liquidation sale here. -------------------------------------------------------------------------------- Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [26] -------------------------------------------------------------------------------- Okay. Great. And then secondly, can you touch on just your broader expectations in terms of commercial real estate prices? Maybe specific to the hotel space, do you have a view on how much values have declined? Or would you say it's too early to tell? -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [27] -------------------------------------------------------------------------------- Well, I think it's way too early to tell, Jade. And it's like -- again, it depends where you are in the cycle. What's a casino worth in Las Vegas? That could be the hardest call. That's likely to be the slowest to recover, primarily because big groups aren't going to book Vegas for a while. I just can't see that happening right now. On the other hand, I think a resort hotel probably comes back pretty quickly, particularly if it's smaller and higher end. So it's asset -- if you run the math, you're probably down 10% to 15% in value. One of the things as a property investor that you're sort of scratching your head about is rates are going to be lower, longer than you've had pre-COVID, like you're going to -- you see a curve and a LIBOR curve and you go out 3 years and I think it's like never gets above 50 or 60 basis points. That supports property. And just as the equity markets are being held up by -- there's no place else to put cash, the property market should be held up, even in a slow growth scenario, by the fact that they produce yield, which is incredibly rare and precious in this world today. So then for the underwriter of the equity, it's a question of which direction are the rents going. In hotels, they will recover. I personally don't think Americans are going to change their habits forever. I think this is the flu. It started as a flu. It's a bad flu. Even the data today is all over the place about, if you're 0 to 30, your death rate is not measurable. You'll get the flu and you'll recover from the flu, presuming you don't have some of these more serious preconditions. But obviously, this is an awful disease that is really affecting the aged and they have to stay at home and take care of themselves, and I think everyone else can kind of go back at it and recognize we'll have to moderate and change our policies and procedures as this thing unfolds. So I can't tell you, tell me when they're going to have a cure, and I'll tell you what the decline in the hotel is, value. But nobody's selling hotels at fire sales, nobody, and believe me, we look. We try to buy here and there, but their values, they're not going to sell at 11 cap on trailing 2019 earnings. Nobody is doing that. So not yet. And I don't -- that's why some of these markdowns, frankly, or these pricing on some of these securities are embarrassing, like it's sort of silly. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [28] -------------------------------------------------------------------------------- And the hotel borrowers that have the CARES Act to help them weather the storms, they have interest reserves, some of them... -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [29] -------------------------------------------------------------------------------- The nonpublic ones. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [30] -------------------------------------------------------------------------------- Reserves. So they've had opportunities to come up with ways to help weather the storm... -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [31] -------------------------------------------------------------------------------- But let's be candid. If the country doesn't open, these companies' assets will run out of ability to support themselves. Sadly, the real estate taxes and the insurance costs haven't dropped. Even though the properties dropped in value, the municipalities are not exactly giving waivers on real estate taxes. And then you have to actually keep the box operating. So if we don't get -- I think hotels, all hotels will figure out how to operate with lower breakevens, with fewer, less profitable parts. There won't be restaurants, there may not be room service. But they will try to fill heads and beds and staff to demand. They'll work with the union and I know they're trying to. It's the union -- the union structure in cities like New York will not allow a hotel to make money at 30% or 40% occupancy. So either the union will change its structure or these hotels will never open, or they all go bankrupt in the major union cities. So I'm looking to the unions to actually help the owners open these assets and get their workers back on payroll. But in the rest of the country, in the nonunion markets, you will be surprised how deft these management teams will be to make money at much lower breakevens than you think. Full-service hotels have the same margins as limited service hotels in the rooms, they just don't have that in the other part of their box, like the banquets, which probably will not happen or there'll be weddings outside, and other parts of the hotel P&L, which are lower margin, will simply cease to exist for a while until these hotels get open and stabilized. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- The next question is from the line of Stephen Laws with Raymond James. -------------------------------------------------------------------------------- Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [33] -------------------------------------------------------------------------------- The dislocation that's out there and everything that we're all seeing, can you talk about any opportunities that may present to -- in the past, you've obviously acquired LNR. You've moved into single-family rental, non-QM resi, a number of things. You've tried to acquire Crexus. Is there anything out there that either due to the higher relative stock multiple or just simply attractive business lines you think fit that you're revisiting now that may be more attractive, given what's going on and cheaper to add that to the Starwood platform? -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [34] -------------------------------------------------------------------------------- Yes, I'll take that. Sure. We're looking all the time. We have to do a relative value trade. So we're a 0.7x book. We can't pay more than 0.7x book for them. So it has to be that kind of combination. We can't issue stock down here, unless it was like a 35 IRR or something. So we make up the discount to book. I made that up. I don't know what the number is, but there's a number that you might be willing to do something like that. And in fact, I looked at a bunch of situations. But to use up -- let's say we have $400 million of -- $400 million, $500 million of what I would call excess liquidity. We always ran the company with like $250 million reserved cash. So the rest of it is sort of excess. We'd love to put it to work but it would be imprudent to put it all to work given nobody really knows if there'll be a second downturn, how this opening will work. So we have to balance the 2. And yes, there are companies in our business and companies or product lines we would love to look at. But simply, like I said before, I think transaction volumes are down like 90% in property. Not many people are willing to give up yet. And there are situations that we're looking at that are attractive. But again, we have to preserve our ability. We're not going to put it all in res here. We want to preserve our ability to continue to grow and prosper and be the dominant player in this business for the next 20 years. So that's our goal. -------------------------------------------------------------------------------- Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [35] -------------------------------------------------------------------------------- Yes. And then as a quick follow-up, I think in the prepared remarks, you guys mentioned you, in the discussions on the hotel financing, had gotten, I think, a list of some preapproved modifications that they're okay with. Can you give some examples of what those modifications are that you're able to offer that have really already been addressed on the -- by your counterparties and just kind of any examples of those? -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [36] -------------------------------------------------------------------------------- Sure. Mark Cagley, he spoke earlier. He's going to get to be on twice today because he's been on the front line as our Chief Credit Officer, dealing with each one of these loans individually and maybe I'll hand it to Mark to go through the types of things that he's been dealing with on other applications. -------------------------------------------------------------------------------- Mark Cagley, Starwood Property Trust, Inc. - Chief Credit Officer [37] -------------------------------------------------------------------------------- Sure. High level, as we talked about, there's the forbearance or the modification of the payment stream has obviously been near and dear to our heart the most. But in general, people are -- we're talking to them about FF&E reserves. If the flag is allowing them to defer future contributions for a period of time, we're -- we have approval to do that. We have approval to use some of the FF&E reserves as long as we're making the decision if the property is newly renovated or a newer property and doesn't need those reserves in the near term, then we have approval to do those kind of things as well. We're not eliminating any LIBOR floors. We're not forgiving interest. So it really is approval to close hotels. As Barry said, I would say probably half of our hotels are closed. Most of them are closed or operating at 10% kind of occupancy levels for transient workers that need to be there or for others. So closure of hotels, use of FF&E, how we're dealing with that, payment forgiveness, how long we're doing the accruals for? We're trying to keep them shorter rather than longer. Barry asked us to keep them shorter so that we can stay within the window within our lines, and also just see what the world looks like 90 to 120 days out. So those are the -- we're modifying some of their extension tests that give them room to qualify for additional time within the loan period. Those are really the basics. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [38] -------------------------------------------------------------------------------- And I'd say back to your first question, we do think we'll be going into a period of less competition, whether it's our direct peers or investment banks who lose money every 18 months and pull back when they do and will have lost money in this quarter, and will be less aggressive in our space or just being able to find loans that stand on their own on an unlevered basis, which I think we'll be able to do. And if we spend liquidity there, we can always get liquidity back by levering those later if we needed it. But I think there will be a decent amount of opportunities coming through in the lending space in the next few months, as Barry said. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question is coming from the line of Steve Delaney with JMP Securities. -------------------------------------------------------------------------------- Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research & Senior Research Analyst [40] -------------------------------------------------------------------------------- Congrats on a strong report, given this environment. A bit surprised by your remarks about the opportunity in residential. The Fed has not put AAA RMBS in TALF yet, and we've seen a lot of problems in warehouse financing. So I'm just curious, Jeff, if you could comment on what's working for you. And do you think that you can see a securitization getting done in the next 3 to 4 months? -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [41] -------------------------------------------------------------------------------- Thanks, Steve. Appreciate it. Yes, I do. You're going to have a CMBS deal later this week, you'll probably have a couple more in 1 week, 1.5 weeks. So we think that market is coming back. And talking to our bankers who are talking directly to the bond buyers, we think that there is a very good chance that we could get a non-QM securitization done in the next month or so. We don't need to. We have terrific financing lines that we can -- we actually earn as much or more, leaving them on. Our goal has always been to reduce those, and we think we're a month away from being able to be in the market at a pretty accretive -- in a pretty accretive way. I think the only way, like we were talking about earlier, we're going to avoid, we're going to do less things with potential spread marks. We're going to do less on warehouse, more A notes. We're going to go to a pretty plain vanilla playbook here. So as we look to add, and Barry mentioned that in and I sort of mentioned that, I think if we can get term financing, nonrecourse, non-mark-to-market until a securitization, that's super interesting. And depending who the holder is, if it's a bank who owns the loan, the whole loan, and wants to get out of the whole loans and it's willing to offer that, that's something that's super interesting to us. So I don't think you'll see us increasing our potential spread mark risk in any way in the book, given what we've seen in the last couple of months here. But I think there will be some terrific opportunities, and there have been some terrific opportunities to do things, where you get non-recourse, non-mark-to-market term financing on assets that are, frankly, trading at $0.90 on the dollar or low $0.90 on the dollar that going through the great financial crisis, took less than 1% of losses on assets like this. So it's an example of places that I think are dislocated. And specifically, you just have more duress from the mortgage REITs in banks and originators in that space probably than on the commercial side. So we brought that up. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- The next question comes from the line of Tim Hayes with B. Riley FBR. -------------------------------------------------------------------------------- Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [43] -------------------------------------------------------------------------------- Just a quick follow-up on Steve's question there. I know that you were under contract to acquire an originator. Can you just remind us where you're at in the process there and if -- what type of capital equipment that could entail? And is that kind of still on track to close? -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [44] -------------------------------------------------------------------------------- Sure. Thanks for the question. From a capital perspective, it's really not going to change anything. It's a relatively small one, and we've been working with the seller now for a good amount of time. We're going to continue to work with them through this quarter, and we'll see how it plays out. But there's no great rush to get over the finish line. We have some things that we need to work through. But when we do, it will not be a major capital difference in any way for us. So we're looking forward to getting that over the line, but we've been taking our time with it, given the market condition. -------------------------------------------------------------------------------- Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [45] -------------------------------------------------------------------------------- Okay. Got it. That's helpful. And then just one quick -- one more for me. You noted, Jeff, just adding resources in LNR, given how busy that platform is right now. Just wondering if, in the near term, maybe the next quarter or 2, we should see kind of the increased staffing there weigh on earnings power? And then what level of delinquencies we'd really need to see for those fees to... -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [46] -------------------------------------------------------------------------------- Yes. I think the increased staffing decrease earnings power. We will have increased earnings power over the next few years. I mentioned $14 billion of loans over 500 bespoke loans, that a large number of them we'll get -- we will get fees on over the next 18 to 24 months. Those don't happen in a quarter. The revenue side won't pick up next quarter. You're setting yourself up for the long run. It's why we've gone into so many partnerships on our special servicing to have to own less CMBS, particularly own less retail-oriented CMBS, but have more servicing, significantly more servicing today than we did 2 years ago, it's something that we thought was really important for our firm. We're now in a position to start harvesting that. We, fortunately, with 350 employees, have a lot of people who have had some slack. There are areas that we're doing less. We're doing less investing on the CMBS side. We're doing -- we're writing less conduit loans, so we've been able to repurpose a significant amount of people to help to service the bridge this short period of time, where we're onboarding so many new loans. But it's the beauty of having a very large company with real estate executives who have kind of grown up through different areas of the company. So when we need it, 12 or 15 people, we grab them, and they've mostly been through -- rotated through, understand the business or they work there full time in the servicers. So we're able to repurpose people within the company to make sure that everybody is being used optimally. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [47] -------------------------------------------------------------------------------- So the one thing I'd add, just the service, you just think about how servicers get paid. Most people are -- if anyone asked for forbearance, it has to be approved by the special. So the loan comes in, and these are forbearance. We don't get paid a ton of money for approving a forbearance transaction. Where the servicer begins to make a lot of money is when the loans default, they have to work them out, and they ultimately have to resolve the loan and sell it or take back the asset. So it's early in the life cycle of the servicer. That company once made hundreds of millions of dollars. While it'd be exciting, it probably would mean that we've faced more issues on some of our hotels on the other side of the house. So we're happy here where we are. And it's nice to see what that revenue stream increase. But don't think of it as a massive windfall yet. It's just a hedge against everything else we do. -------------------------------------------------------------------------------- Jeffrey F. DiModica, Starwood Property Trust, Inc. - President & MD [48] -------------------------------------------------------------------------------- And I'll throw out that there's been a lot of discussion over the last few months about servicing advances. We are not responsible at special service around CMBS deals to make any servicing advances. There's no potential liquidity impact of that. We know that, that gets confusing for people. It's a confusing topic, but that does not fall to the special servicer in a CMBS deal. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Our final question is from the line of George Bahamondes with Deutsche Bank. -------------------------------------------------------------------------------- George Bahamondes, Deutsche Bank AG, Research Division - Senior Research Analyst [50] -------------------------------------------------------------------------------- I just have a follow-up for Mark or anyone on the team. Are you guys able to disclose the number of borrowers in the portfolio who have asked for interest deferral, forbearance or other loan modifications? -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [51] -------------------------------------------------------------------------------- Are we going to disclose it? I don't think we probably will. Mark, do you want to just speak briefly in percentages, weightings between interest deferral, forbearance and modification, where you're seeing most of it? I think you partially answered this earlier. -------------------------------------------------------------------------------- Mark Cagley, Starwood Property Trust, Inc. - Chief Credit Officer [52] -------------------------------------------------------------------------------- Sure. Yes. It is in the hotel book, as Barry points out. There's a couple in the other category that where they've asked for interest accruals. But quite frankly, we're not inclined to do that. Our approach with this is, if a borrower has the ability to pay and the resources to pay, if they have significant levels of equity in the transaction, which most of our borrowers do to protect, we expect them to stand up for their property. And so Jeff said in the earlier comments, that I would say that, round numbers, that we've had probably 60% of the book ask for accruals. We're not giving it in all cases and -- or partial accruals. We're not giving full accruals to anybody at this point. So I would say half of the ones that have asked for it and I would say 25% round numbers of the total loan book have asked for some sort of modification. So you're doing the math there, it's 25% of the total book and half of those, 55% of those, are getting some sort of interest rate deferral. So it's -- and when you look in the total of the portfolio, it's 12.5%, 13%, 14% would get some sort of monetary deferral for a period of time. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [53] -------------------------------------------------------------------------------- Just as a comment, that is mostly the hotel book of the loan book. Remember, our loan book is $9-plus billion and the total asset base of the company and 17, something like that, 17.5. So it's 25, I'm guessing 80% of that is hotel. So -- and it's of the 9 out of the 17. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- At this time, I'll turn the floor back to Mr. Sternlicht for closing remarks. -------------------------------------------------------------------------------- Barry Stuart Sternlicht, Starwood Property Trust, Inc. - Chairman & CEO [55] -------------------------------------------------------------------------------- Well, thank you, everyone. I'm glad you could join us today. Hope we provided some clarity to you, and we appreciate your support and interest in the company. And again, I want to thank all the people at Starwood Property Trust. We've done virtual cocktail hours. And in a strange way, we're better together. We're getting through this, and I look forward to a $25 stock price again. Thank you very much for being with us. Have a nice day. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.