Starwood Property Trust(US:STWD)2023-05-04 18:40Financial Data and Key Metrics Changes - The company reported distributable earnings (DE) of $157 million or $0.49 per share, with GAAP net income at $52 million or $0.16 per share [2] - GAAP book value per share ended at $20.44, with undepreciated book value at $21.37, including a CECL reserve balance of $153 million or $0.49 [2] - The CECL reserve increased by $43 million due to worsening macroeconomic conditions, particularly in the U.S. office sector [35] Business Line Data and Key Metrics Changes - The Residential Lending business had an on-balance sheet loan portfolio of $2.7 billion, including $1.7 billion of non-QM and $994 million of agency loans [3] - The Commercial Lending segment contributed DE of $192 million or $0.60 per share, with a portfolio ending at $16.9 billion and a weighted average risk rating of 2.8 [80] - The Property segment contributed $21 million of DE or $0.06 per share, with expectations of rent increases in excess of 6% for 2023 [41][81] Market Data and Key Metrics Changes - The company noted a bifurcation in the office market, with good buildings remaining full while others struggle [12] - The European office portfolio is performing well, with rising rents in cities like Berlin and Munich [44] - The company has a low exposure to U.S. office loans at just 10%, compared to peers with over 30% [76] Company Strategy and Development Direction - The company aims to maintain low leverage, with an adjusted debt to undepreciated equity ratio of 2.5x, which is lower than peers [5][76] - The management is focused on navigating through the current economic cycle while maintaining liquidity and considering stock buybacks when appropriate [24][91] - The company is exploring opportunities in converting office assets to residential use, leveraging its internal asset management expertise [38][85] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating through the current economic cycle, despite expecting some losses [14] - The company anticipates that the yield curve will flatten, creating opportunities for investment in longer-term assets [24] - Management criticized the Federal Reserve's approach to interest rates, suggesting it has negatively impacted regional banks and the broader economy [42][89] Other Important Information - The company has $620 million of liquidity, including $449 million of approved undrawn borrowings [4] - The company has $4.2 billion of unencumbered assets that can be leveraged for additional liquidity [4] - The company has a significant competitive advantage in European markets due to its scale and experience [38] Q&A Session Summary Question: What is the outlook for the special servicing book given the upcoming debt maturities? - Management indicated that the special servicing book is currently around $5 billion and expects it to grow as transaction volumes increase [49] Question: How does the company plan to allocate capital in the current environment? - Management stated that they would prefer to buy back stock if liquidity allows, as the stock is seen as a better investment than new loans [24][56] Question: Can you address concerns regarding the CECL reserve and potential credit losses? - Management acknowledged the low CECL reserve compared to peers but emphasized their strategy to recover value close to Starwood's basis on many assets [98]