Starwood Property Trust, Inc. Q4 FY2021 Earnings Call

Greetings. Welcome to the Starwood Property Trust Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And please note that this conference is being recorded. I would now like to turn the conference over to Zach Tanenbaum, Head of Investor Relations. Thank you. You may begin.

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 December 31, 2021, filed its Form 10-K with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available in the Investor Relations section of the company's website at www.starwoodpropertytrust.com. 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 on 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 on this conference call. Our 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. Reconciliation 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 Chairman and 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.

Thank you, Zach, and good morning, everyone. The fourth quarter capped off a record year for us with distributable earnings or DE of $335 million or $1.10 per share for the quarter and $794 million or $2.63 for the year. DE in both periods includes a $191 million or $0.62 per share gain related to the sale of an interest in our newly established WoodStar Affordable Housing Investment Fund, which I will walk you through later. Throughout 2021, we were active on both the left and right-hand sides of our balance sheet with a record $16.7 billion of new investments across businesses funded by multiple capital sources, including an equity issuance, corporate debt, and CLOs. I will start my segment discussion this morning with Commercial and Residential Lending, which contributed DE of $126 million to the quarter. In commercial lending, we originated $4.4 billion across 33 loans in the quarter, bringing our full year volume to $10 billion across 72 loans, the highest origination quarter and year in our 13-year history. Of the full year amount, 42% was multifamily and 15% industrial, contributing to the transformation of our collateral mix, which is now 27% multifamily versus 16% a year ago. During the quarter, we funded $2.6 billion of new loans and $244 million of pre-existing loan commitments with most of our fundings back ended to the last 35 days of the quarter. We continue to see increasing lending opportunities across Europe and Australia, with international loans representing 33% of our fourth quarter originations and 28% of the full year. The $10 billion of loans we originated this year were 100% floating rate and 98% of our $14 billion year-end balance is likewise floating rate. We maintain LIBOR floors on nearly all of our domestic loans as rates were rising. Our weighted average floor has declined as some of our higher LIBOR floors have repaid. Our domestic loans started the year with a weighted average floor of 141 basis points, which is now 66 basis points today. Our existing above-market floors will become less impactful to earnings over time as older loans repay. During the quarter, we received $600 million from loan repayments and $64 million for A-note sales, bringing total repayments for the year to $3.7 billion and A-note sales to $330 million. Nearly a third of our 2021 repayments were in the office sector, which is now less than 30% of our loan portfolio. The credit performance of our portfolio continues to be strong with a weighted average LTV still at 61% and a weighted average risk rating falling to 2.6% this quarter. Our CECL reserve remained relatively flat to last quarter at $59 million with reserves for new loans mostly offset by a $7 million charge-off related to a loan on a Chicago department store outparcel. We previously impaired this loan for GAAP purposes and recognized the reduction to DE this quarter due to an expected sale of the asset and a corporate guarantee that we previously deemed to be partially collectible. In our residential business, we acquired $1.8 billion of loans during the quarter, bringing our total purchases for the year to a record $4.5 billion. Our on-balance sheet loan portfolio ended the year at $2.6 billion with a weighted average coupon of 4.2%, average LTV of 67%, and average FICO of 748. $1 billion of our year-end balance represents agency investor loans which we acquired opportunistically and which carry coupons that are approximately 90 basis points tighter than non-QM. Subsequent to quarter end, we sold $745 million of these loans to a third party bringing our agency investor loan portfolio to $360 million today. On the non-QM side, we securitized $870 million of loans in our 14th and 15th securitizations this quarter bringing our full year volume to 6 securitizations totaling $2.3 billion. Our retained RMBS portfolio ended the year at $250 million. Next, I will discuss our Property segment, which contributed $203 million of DE to the quarter. As discussed on our last earnings call, during the fourth quarter, we established WoodStar Fund to hold over 15,000 affordable housing units in Florida. The fund was actively marketed and an aggregate 20.6% interest was sold to sophisticated global institutional investors at an asset valuation of 2.3 billion. You will notice a change in the presentation of our financial statements as a result of the accounting for this fund. For GAAP purposes, the fund follows investment company accounting, with investments reported on its balance sheet at fair value and changes in value recognized through GAAP earnings each quarter. Because we serve as managing member, we consolidate the accounts of the fund into our financial statements, which means we retain the fair value basis of accounting for this investment. Due to this accounting change, we've recognized a $1.2 billion increase to GAAP equity for the step-up of 100% of our existing bases from depreciated cost to fair value. Because we received cash for the 20.6% interest that was sold, you will see a GAAP-to-DE adjustment for our recognition of a $191 million DE gain related to this portion. Prior to establishment of the fund, we upsized the debt of WoodStar I by $163 million in October at a coupon of LIBOR plus 2.11% with LIBOR capped at 1%. Our refinancing to-date for this portfolio totaled $350 million, more than fully returning our original equity basis in this investment. In connection with the upside, we wrote off deferred debt issuance cost of $5 million, which flowed through both GAAP and DE for the quarter. Despite both the gain and the refinancing generating distribution requirements, we did not pay a special tax distribution. This is because we were able to meet 100% of our distribution requirements via our carryover dividend from the fourth quarter of 2020 and a full four quarters of dividends in 2021. We have now largely exhausted our dividend cushion and will not easily be able to shelter future gains of this magnitude. Next, I will discuss our Investing and Servicing segment, which contributed DE of $44 million in the quarter. This year proved to be another record year for our conduit, Starwood Mortgage Capital, who completed two securitizations totaling $207 million in the quarter, bringing our total securitization volume for the year to $1.2 billion in each transaction. In our special servicer, we obtained six new servicing assignments totaling $5 billion during the quarter and 26 assignments totaling $21 billion during the year, bringing our named servicing portfolio to $95 billion, the highest level since 2017. Our active servicing portfolio remained steady at $7.3 billion as $500 million of resolutions were offset by transfers into servicing of the same amount. Concluding my business segment discussion is our Infrastructure Lending segment, or SIP, which contributed DE of $12 million for the quarter. We acquired $427 million of loans in the quarter, bringing our total volume for the year to $772 million. In the quarter, we funded $411 million related to new loans and $17 million under pre-existing loan commitments. These fundings outpaced repayments of $148 million increasing the portfolio to $2.1 billion from $1.8 billion last quarter. I will conclude this morning with a few comments about our liquidity and capitalization. We continue to focus on nonrecourse and non-mark-to-market financing. Since quarter end, we completed 2 CLOs, a $1 billion CRE CLO and a $500 million infrastructure CLO. We also completed our fourth sustainability bond issuance, a 5-year $500 million issue with a fixed coupon of 4% and 3.8%. This is in addition to our fourth quarter capital raises where we issued $400 million of 3-year sustainability bonds at a fixed coupon of 3.75% and raised $393 million of common equity at a premium to book value. We are able to issue these bonds given our unique platform, which has investments across the green and ESG spectrum, including loans on green-certified buildings and commercial lending, loans to homebuyers within residential lending, affordable housing within our property segment and renewable energy within our infrastructure segment. In addition to financing capacity available to us via the corporate debt and securitization markets, we continue to have ample credit capacity across our business lines, ending the year with $6.9 billion of availability under our existing financing lines, unencumbered assets of $3.4 billion and adjusted debt to undepreciated equity ratio of 2.3 times which is down from 2.5 times last quarter.

Thanks, Rina. 2021 was an incredible year for Starwood Property Trust, and we deployed record amounts of capital. All of our businesses performed extremely well, and we were able to take advantage of investment opportunities globally across business lines. Our seven investing cylinders deployed a record $7.1 billion in Q4 and $16.7 billion for the year, the most among our peers. And we believe the current environment gives us unique opportunities to deploy accretive capital globally. Our undepreciated book value was up over 20% this quarter to $20.74, the highest level since our SWAY Spin in 2013. Our resulting price to book multiple is 1.12x, significantly below the 1.4x we ended 2019 at. The vast majority of our previous fair value marks were validated by the WoodStar transaction, lending credibility to our internal valuation process for marking these assets. On a fair value basis, at our marks on our property portfolio, our price to book multiple is just over one time. We have been patient with our capital raises and have raised equity at an average price to undepreciated book value multiple of 1.24 time since inception. We have done so in part to keep our leverage low in order to derisk our balance sheet. This lower leverage and lower risk should imply a lower dividend yield. We continue to believe our uniquely diversified company with only 2.3 times leverage in highly accretive businesses should and will again trade to a higher premium to book value in the future, thus a lower dividend yield. The business environment continues to be attractive for us, and we have a large opportunity set of investments to choose from, particularly in Europe and Australia, where we have continued to expand our footprint with 28% of 2021 investments being in Europe and Australia. We accretively raised debt and equity capital over the last three months to fund increased volumes across our investing sectors. We also recently issued 2 CLOs to further derisk our balance sheet. We have $6.9 billion of credit capacity in addition to excess unencumbered collateral that gives us the unique ability to incrementally raise over $1 billion each of corporate debt and term loans to continue to fund the robust pipeline in front of us, and we expect volumes to remain elevated in the near term. We have financing capacity in 32 warehouse facilities across 18 banks and are not reliant on any counterparty. In total, we executed $5 billion of securitizations and CLOs in 2021. It was a very busy year. As Rina said, in Q4, we originated $4.4 billion in our CRE lending segment and our CRE loan book, inclusive of senior loan participation sales is over $18 billion today. Three-quarters of the record 33 loans we wrote in Q4 were multifamily or industrial, both are records for us, and our funded multifamily loan book is up 138% versus the year ago to almost $4 billion or 27% of our loan book and is on pace to become our largest lending sector with a robust pipeline and $1 billion of unfunded multifamily commitments coming on the balance sheet over time. We expect to report another strong quarter of originations in Q1 and have closed $1 billion of loans in Q1 to-date, again, 75% multifamily and industrial and have well in excess of that in the process of closing. This floating rate book was built to outperform in inflationary environments and over time will benefit from the cycle we're entering. Our weighted average LIBOR floor has fallen almost 50% from last year, and it's headed lower at the same time that LIBOR is expected to head higher. We expect to make more money if LIBOR follows the forward curve, and that will be expedited in 2022 as above-market legacy LIBOR floors continue to burn off. With loans closed to date, our funded CRE loan portfolio today is approximately 60% post-COVID originations and the credits of our book continued to improve with our weighted average risk rating down to 2.6% in the quarter. The post-COVID recovery is best seen in our hotel loans. Occupancy was up over 40% in our portfolio last year and NOI at our hotels, which was negative in 2020, is almost $300 million in 2021 and expected to head higher this year. In Capital Markets, we priced our third $1 billion CRE CLO on January 20 into a market that is digesting record CRE CLO supply. The 1.63% average bond coupon we priced our CLO at was 15 basis points cheaper than the 1.78% average coupon of the other five deals that came so far in Q1, both before and after us. Four of the other five deals had 100% multifamily collateral, which should always price to a lower cost of funds and the only other mixed collateral deal priced almost 40 basis points behind our deal. Our CLO increased returns on our portfolio by 200 basis points on that collateral, and we already have collateral to issue two to three more CLOs opportunistically in 2022. In summary, the bond markets like the Starwood name and our credit process, and we are able to source cheaper liabilities because of that. Our residential non-QM lending business ended a record origination year with another strong quarter, purchasing over $1.8 billion in loans and securitizing $900 million in the quarter. Subsequent to quarter end, we sold over $700 million of agency investor loans that we bought opportunistically in 2021. With that sale, our upcoming securitization and a significant increase in our non-mark-to-market financing facilities, we believe we will be able to operate our residential business almost entirely with non-mark-to-market aggregation financing and term off-balance sheet securitization funding. As interest rates increase, we expect lower prepayments, which should increase the returns on our existing retained portfolio. After adding $1.6 billion of loans in 2020, we were able to add a record $4.5 billion of loans in 2021, $3.5 billion of which were non-QM and are off to a strong start again in Q1. In our Property segment, Rina spoke at length about our WoodStar sale. I will add that management has observed continued cap rate compression in this sector since our sale, and we expect income on these properties to continue to rise with MSA incomes in the fast-growing Central Florida market. As a reminder, these rent increases are determined by HUD based on average median income, or AMI, from three years ago. Because the recent increases in AMI are not yet reflected in the 3-year look back, we expect the pace of these rent increases to continue rising going forward given wage increases in Florida during 2020 and 2021 that will not yet be reflected in the calculation of rent increases until 2023 and 2024. In our Bass Pro master lease portfolio, we benefit from a strong credit with significant EBITDAR coverage of 5.1 times or 6.5 times, including their credit card business. Our long-term lease benefits from a CPI-based step-up provision every five years, which will step up significantly for the first time this September, the fifth anniversary of our lease commencement. With the embedded gains in our book, we believe we have created a material shareholder value. After taking this quarter's with their gain at our marks, management believes we have nearly $4 per share in DE gains still on our books, giving us unique flexibility across market cycles. In REIS, SMC was again the largest non-bank CMBS loan originator in 2021. We had interest rates and credit exposure in this business and it continues to earn consistent high-quality gain on sale margins for the firm across market cycles. Our special servicer was again affirmed as the only CMBS special service with the highest S&P rating. This business also made consistent high ROE contributions in 2021 as assets in servicing continue to resolve. Our subordinate CMBS portfolio is significantly smaller than it was a few years ago and continues to perform very well. Our REIT platform is uniquely positioned with decades of experience, access to terabytes of data and a robust underwriting infrastructure to continue to find ways to invest accretively. Rina mentioned our SIP portfolio increased to $2.1 billion in the quarter. We invested $771 million this year at a 14.4% optimal IRR and our post-acquisition book continues to lift the overall portfolio yield as lower-yielding loans acquired from GE in 2018 repay and become a smaller part of our portfolio. We continue to diversify this book across power and midstream assets and markets and importantly, also continued to diversify our funding sources, having completed our second actively managed $500 million CLO. Our ability to diversify funding will continue to drive our peso investments as we take a slow and steady approach to this business that continues to improve. Our team is best-in-class and has tremendous experience in this sector, and we are constantly looking at new accretive low-risk areas to lend into and are optimistic we will continue to diversify and grow this business in the coming years. Management is very pleased with the performance of our company in 2021, and we are grateful that shareholders have begun to recognize the power of the unique diversified platform we have created. With nearly $4 per share in additional DE gains that we can harvest when we choose, we believe our company is undervalued on various earnings, price to book value and dividend coverage metrics, and we believe our bond-like returns are durable across market cycles.

Thanks, everyone. I'll start by reiterating what Jeff mentioned about it being an incredible year for the firm with $16.7 billion in investments across all our business lines. We have made progress with the WoodStar portfolio, increasing its undepreciated book value to nearly $21. This portfolio, primarily focused on affordable housing, is heavily located in Orlando, Tampa, and West Palm Beach, where we are witnessing substantial rent increases of up to 20%. Affordable housing rent calculations are based on average incomes and inflation, and recent trends are not reflected in 2019 data. The portfolio generates approximately $90 million; thus, for every $10 million increase, we expect about $100 million in book value increase over the next several years, driven by predictable wage inflation and CPI trends. This translates to potential gains of $400 million to $500 million, assuming stable cap rates. Recent market trades indicate lower cap rates as buyers see the built-in growth of cash flows, making our long-term assets especially valuable. We are retaining these assets, only selling a small portion to demonstrate their value. The balance sheet performance has been outstanding, with a diverse range of lenders and strong liquidity. The shift towards multifamily properties is significant due to their stability in the current real estate market. We are also expanding operations in Europe and Asia to grow our loan book. As for the property markets, I'm witnessing the strongest conditions I've seen in decades, particularly within multifamily and industrial sectors. Rent growth is not only consistent but accelerating. While we do not expect these conditions to last indefinitely, they remain robust, with tenants able and willing to pay increases. The single-family rental market is also strong, though rising home purchase affordability raises concerns. The office market is mixed; cities like Austin and Miami are recovering better than slower markets like San Francisco. Activity in office tours is promising, indicating potential recovery. The hotel market is showing varying performance; resorts are thriving, while city hotels are struggling. Retail has surprised us, and consumers are shopping differently. We're cautious about retail exposure but optimistic overall. The increasing interest rates will likely be counterbalanced by rent growth. While I've anticipated inflation impacting the real estate market for years, supply constraints and rising construction costs present challenges. Even if we do nothing, our loan-to-value ratio will improve due to rising asset values. Looking ahead, I see positive conditions in the real estate market for the upcoming months. I appreciate our Board of Directors for their support and our dedicated teams who drive our success. Thank you, and I'm ready to take questions.

Our first question comes from the line of Rick Shane with JPMorgan. You may proceed with your question.

Good morning everybody and thanks for taking my question. Look, I think the only thing that really surprised us in the fourth quarter was the decision to issue equity and in my mind, there are really three reasons you would do that. It's either you like your stock price, which given your commentary about price to book and dividend yield, clearly not the case. For liquidity given your access to the debt markets and everything that happened during the quarter, that's clearly not the case or a leverage issue, and that doesn't appear to be the case. So I'm really curious, given your discipline around raising equity over the last 10 years, what drove that decision?

We've chosen to run our business like a 2.2 debt level, right? And we are not at the 3.75% of our largest peer. We kind of like the security and safety of that leverage level. We've been chatting about whether we should take our leverage up a bunch. I mean, it would drive earnings growth, yes, but it would create inherently a riskier book. We have a pipeline. We look into the future and we see when we need to raise equity. As you point out, we've never raised equity below book and never, and we won't. So the stock we really needed equity at that time because of the forecast of our activities. We did have to also retire the $500 million deadline, which we did with the smaller debt issuance, too. Jeff, you want to add something?

No, not really. At the pace we're running at today, if we do another $10 billion in CRE lending, which I think in the first quarter, we're off to a type of number and a little bit more elsewhere, we’re going to have to need a significant amount of capital over time if we keep running at this very fast pace. As we look at it, we care a lot about our ratings and the way the rating agencies look at us for our corporate bond levels. We like running our leverage low down to 2.3%, 2.4%. If we were to do it all with that, we would run that ratio higher, and it’s sort of a self-fulfilling thing where we wouldn't get on that path to investment grade that we ultimately want to get to. So mixing in one unit of equity for every 2.4 units of debt as we grow the company and have a high pace, ultimately we think we win by having a better credit rating and lower cost of funds.

Got it. That’s helpful. And then I guess related to that, is the other consideration that as you have less opportunity to retain gains as you've sort of worked through all of the deferrals, is that the other consideration as well?

Well, we have a problem. We won't be able to shelter future gains the way we could. So we either we have to figure that out. It's actually come up given our forecast for this year. So just to clarify for anyone who's listening, we used up the last of our ability to shelter from the spin say a long time ago from spin. We created almost $1 billion of shelter. I think it was.

And we can carry a full quarter's worth of dividends. So it was about $150 million of shelter that came into this quarter.

They entered this quarter, but now it's all depleted. Therefore, if we earn significantly beyond the dividend, we would likely need to issue a special dividend unless we address the situation. Naturally, we would also need to increase the dividend. We are considering and discussing this, and we hope it turns out to be a positive issue for us.

Yes, Barry. I'm guessing investors would rather see a special dividend than you create additional shelters.

Yes, we would love to increase, but that's a decision for the Board. We'll evaluate our run rate. I believe our equity book presents a fascinating opportunity, and it offers us multiple years of potential growth if we choose to pursue it. It's difficult to consider selling something that we would want to invest in for our children's future. This is fundamental to the company. I didn't intend to sell 20% specifically, but it served as a demonstration to show that the gains we discussed are indeed real, which enabled us to establish the 2017 book value that better reflects the enterprise book value compared to the earlier figures. We can discuss undepreciated book as much as we like, but most press releases focus on GAAP without considering management's valuation estimates, which I understand, though I don't necessarily agree with that perspective. And if you go along the path, as Barry said earlier, that there are hundreds of millions of dollars of upside potentially in our WoodStar portfolio alone. You could take cash-out refinancing as you go. They have the same consequence for the problem we just talked about, but we could hold on to these properties and create more equity that we can then invest that will help us grow earnings. So there are a lot of ways we can do this while keeping Barry's generational trust fund assets. It's not mine, though I do want to lose the shareholders' asset. Thank you, Jeff.

Our next question comes from Jade Ramani with KBW. You may proceed with your question.

Thank you very much. I wanted to get your thoughts on what's driving the surge in non-bank originations that took place in 2021 and seems to be continuing so far this year? And is there anything in that trend that might concern you?

Thanks, Jade. I think if you remember last quarter and the quarter before, I think I told you that we are going to continue to see elevated volumes, and it's going to be rather significant. I think it played out how we thought it would. You had a bunch of things happen here. Obviously, a lower LIBOR means that anybody who had a LIBOR floor, and we have a lot of our floors as high as 2.52% in 2019 off of one of our largest loans. If you have a LIBOR floor that was sitting at 2.50% and today, you can get a LIBOR floor at 10 basis points, your spread could be 240 basis points wider, and you're still two basis points better off refinancing. So the desire for people to get out of those is important. We had a year in 2020, where business plans were getting executed behind the scenes, but refinancings weren't happening. So in 2021, a lot of these business plans and ultimately, we are investing into business plan execution. A lot of them got executed, and they are in a position to refinance at lower rates. So we certainly saw that. We saw transaction volume in CRE in the United States, almost $600 billion last year. To level set that, we had about $500 billion of transactions in 2007. We had $500 billion to $550 million between 2015 and 2019 and this year, I think it was a record at about $580 billion, about $245 billion of that was multifamily, which was also a record. You have a transaction volume and a tremendous weight of capital; there’s a significant amount of equity on the sidelines looking to be deployed. So we expect transaction volume to continue to be elevated, but that certainly drove some of what we saw in the fourth quarter. I think people love inflation, they love real estate and inflation, and we're seeing that. We're seeing more opportunities in Europe. All of these things are creating a lot more opportunities. I think the non-bank universe that we live in was probably up 30% to 40% in 2021 versus 2019. That's pretty consistent. That's probably $100 billion plus of loans. Again, if you think there are probably $400 million to $450 billion of loans off of that higher volume. We're edging up to being one-fourth to one-third of that volume, and that's probably about where we sit for a while. You asked if there's risk to that; I do think things will slow. One of the problems, Jade, you are very aware of is the CRE CLO market has backed up a bit. And as that backs up, people who are smaller companies than us who don't have the balance sheet to keep these loans on balance sheet who can't get into the CRE CLO market accretively today like they could three or four months ago, they're going to be sitting on bank warehouse lines for longer. It's going to jam up the amount of warehouse exposure that they have, and it's going to be hard for them to continue to grow and to continue to get access to capital from banks without the CLO market performing again. We've never relied on it. We've told you every quarter; we don't need the CRE CLO market and we have accretive returns on our balance sheet, but I think that will slow down other people. I think it will give us an opportunity to actually get paid a little bit more than we historically have because of the way we run our balance sheet, and it's a great opportunity for us. But that's the one thing that could slow it down. Obviously, if the CRE CLO market picks up, then everybody will probably rush back into that door. We have enough collateral, as I said before, to do a couple more deals today. So we're optimistic the first half of this year will come out very strong. I sort of feel like things could slow down a bit in the second half as these business plans have subsequently played out and the LIBOR floors have mostly burned off. So we'll see where we go, but it feels like a very good market, a lot of opportunities for us globally.

Thank you. My second question would be the mortgage REIT space has some cohort of some scale companies trading below book value, not really creating shareholder value at this point. Lots of reasons for that could be corporate structure, it could be lack of scale. But I guess, what are your thoughts on that cohort of companies and might that represent potential picking ground for Starwood in order to grow the scale of the overall platform?

Okay. I'll start going to hint to Barry, but I'll start by saying if you take our fair market value gains and you think Barry is right on where we're going with the valuation of something like WoodStar, I could argue on a forward basis at our stock price today, it looks like we trade below book value. A lot of people trade well below us, but the market is not treating us very well either, but Barry, I'll turn it to you.

I think Boards won't sell any of those companies unless you pay book or close to book, and then you wind up with social issues. Does the management team want to get retired or not? And then what is really additive for all of us that are in the debt world, whether it's the BDCs or the private debt funds or the public mortgage REITs, we're all looking for product. So taking a competitor on, I mean the market is too fragmented; it wouldn't give us additional cloud in the marketplace. You just it might raise the need to deploy capital. We have increasing volumes. So I don't know in our business exactly like we run our conduit business pretty much the same way for the last 10 years. And we're doing like $1 billion to $1.5 billion of loans. They don't actually do $1 billion to $2 billion, $3 billion or $4 billion. So we would need a new business line, which we've looked at; things we could diversify into. But again, usually, in those few experiences that we've had, which is probably 3 or 4, we have approached other people in the space. It's usually the social issues that keep us from getting done. And maybe in the past, some disagreement on whether their book values are actually real. So that would apply at least to 2 of our peers. We did not believe that the books were accurate, reflecting the risk of the loan book.

Our next question comes from Doug Harter with Credit Suisse. You may proceed with your question.

Thanks. Jeff, you talked about the backup with regards to CRE CLO spreads. Can you talk about the same impact on the non-QM financing markets and how that might influence the book you held at year-end and also kind of pricing and appetite for that business as we go through 2022?

Yes, it's really interesting. It's kind of the same phenomenon. And when buyers of bonds sit back and think that there's going to be a lot of issuance, those buyers of bonds will tend to wait for the later issuance and they'll get stuff cheaper. So you're seeing a little bit of a virus strike today on the end-to-end securitization. It’s small. I think there are definitely people out there who originate loans and have to get them off their balance sheet very quickly, and we've seen some lower-priced whole loan sales recently because of that. We're a long-term holder; we have great non-mark-to-market financing line. We can sit and wait for the market. We're going to opportunistically securitize. I think a lot of other people are unable to opportunistically securitize. So we've been backing pricing up daily as we've seen what you've seen, which is dollar prices coming down slightly in this market. But being a long-term player, it's not a huge deal. I'll put some context to it. I think the sort of low 4s gross WAC pool today is probably securitizing to about 102 exit in the low five gross back pools; they're probably securitizing about 104 exit. We've been buying paper between 101 and 102.5 for a long period of time here. We're getting carry along the way while we wait to ultimately securitize at the right moment. I think ultimately, we'll securitize when it makes sense, and we're in the market today. We can't really talk about that because we're in the market. Based on that, we'll make money on that. We hedge our interest rates. We actually over hedge versus almost anyone I see on the street. We're always worried about rates going higher and prepayment spiking and our hedge balances, our hedge gains are very significant versus the small markdown that we probably have first where we are. But ultimately this paper has to clear the CRE CLO market; there's a lot of paper that would have to clear because they're a weekend. We're dependent on it. We're just never going to be one of those, and it's the beauty of our business model and it's the beauty of our balance sheet and our ability to finance ourselves in other ways that we will never go to the market at the wrong time. If you look at how we've opportunistically done our securitizations and our CLOs over time, we're almost always pricing well inside of where the market is because we wait for the opportunistic time to do so, and we'll continue to do that.

Great. Do you envision there being kind of opportunistic or purchase opportunities like you've seen at other points of volatility? Or are we not kind of to that point yet?

I am hearing of some tools that are trading. I think ultimately there's an insurance company backstop. Insurance companies are looking for NIM any way they can get it if an insurance company can get six rates over 3.5%, they're going to be awfully excited. They can buy a 5% gross WAC pool at close to par or 1.01% or 1.015% or whatever that is, they're not going to underperform very much if rates go down because you're not getting hurt by prepayments when you have such a small premium. But that's to a faster speed. That's probably a 4.5% yield; 100 basis points, let's say, above where the insurance company needs to be. So I would expect that they'll be coming in to bring up bonds. One of the other things that happens in this market is all securitizations get run to 25 CPR. So if buyers think that the pool is going to come at 5 CPR like a mid-4s growth WAC, they think it's going to actually come at 5%. The bonds are going to be a lot longer. What's happened here with the curve making it move and rates going higher is that obviously running to a longer part of the curve isn't a very good story. The reality is you're going to have very low prepayments, and we have this book that's a large book that we built up through 15 securitizations now that's going to significantly outperform against these lower prepay speeds. So having a hedge owning a portfolio is certainly super helpful.

Let me not get too bogged down in this. The business accounts for about 8% of our earnings. It's somewhat of an accessory rather than the main component. It's a good business and performs as expected, but it's heavily hedged. I'm looking forward to outperforming or underwriting because we have actually underperformed in the past due to falling rates and increasing prepayments, which were higher than we anticipated. It wasn't a disaster; we didn't lose ROEs. We believe this business non-GAAP is in the range of 17% to 18% ROE, but the gap doesn’t allow us to reflect that accurately. Currently, it's averaging about 10% to 11%. This is predicated on a refinancing assumption of the trust a few years ahead as the loans mature, which complicates things. While we expect to earn certain returns, we can't provide a specific number since the refinancing has not yet occurred. GAAP requires us to assess only what's currently on hand without using assumptions. However, if we were in private equity funds, we would be targeting 17% to 18% IRRs with these assets, aligning with how we manage the business. The current market slowdown is beneficial for us; we're a robust participant, though we may reduce volumes next quarter. Some origination firms are hesitant to sell their loans at this moment, which could slow their originations. The single-family mortgage market is also witnessing a decline in volumes as rates rise, but that will integrate smoothly with our other business segments. Our business model thrives on the performance of various segments during strong years. We are eager for the market to begin producing more loans. The volume in CIF is currently about half of our target; we aimed for $1.5 billion but achieved only $700 million to $800 million. Now that we have established two CLOs to match fund those investments, which was an initial concern, we have mitigated duration and refinancing risks. This match funding, particularly with the CLOs, represents a significant milestone for us as it enhances our safety, security, and predictability while avoiding surprises from mismatched durations. Previously, we faced discomfort with funding terms that didn’t align with the longer-term loans we were making, notably when we acquired the business; we had a facility with a Japanese bank that offered a 1- or 2-year term while we issued 5-year loans. This mismatch prompted us to slow down originations to prevent complications, even though unforeseen issues can always arise. We aim to avoid a crisis similar to that of S&Ls.

Doug, your specific question at the end was about being buying here. I think we like the risk reward a lot of these old prices. I think the insurance companies will find tremendous yield at the dollar prices. So I think this will be a very short-term blip lower.

Our next question comes from Tim Hayes with BTIG. You may proceed with your question.

Good morning guys. Look, a lot of kind of moving parts in the quarter, some one-time items associated with the capital market issuance and extinguishment costs and the charge-off and it sounds like originations are back-end loaded, and you still have some capital deployed from WoodStar. So putting that all together, can you just maybe try to frame what run rate earnings looks like going forward, especially given the strong outlook for growth in the first half of the year?

We have some challenges and opportunities stemming from issues that arose during the pandemic. Currently, we are not accruing on several loans and are eager to get them back on track, with American Dream being the most significant among them. This asset is performing well and will eventually be restructured, which will allow us to generate income again. We have a substantial amount of capital tied up in these non-accruing assets, which is important to our earnings. While we currently have cash and have engaged with WoodStar, we recognize that deploying capital quickly is not feasible. We also experienced some disruption due to our recent equity deal and debt update, but I believe the company’s earnings potential is greater now than ever before. Overall, I feel optimistic about our situation, although my primary concern is a slowdown in sales transactions. Real estate, as a whole, is positively impacted by the volatility in equity markets, which leads to increased capital flows into real estate investments perceived as safe havens. These investments, such as private real estate and managed REITs, do not fluctuate with market changes in the same way that equities do. This volatility benefits capital inflow into real estate, helping to maintain lower cap rates as investors seek safety and security, particularly when considering inflation. If interest rates rise, our floating rate book will benefit, and since our borrowers' coverage ratios are strong due to rising rents, they won't be adversely affected by higher rates. Overall, I believe our coverage ratios will remain stable or even improve as rents increase across many asset classes we finance.

Tim, you did a great job of talking about the nonrecurring losses in some of the small bits. It's a difficult business we run, right? We missed by pennies; you guys hold it against us, but we're creating dollars of value on the other side. I often think that people on the other side miss the forest in the trees, looking at the trees, and we're running a diversified base low-levered company with a massive amount of gains. There are going to be nonrecurring things that happen over time. But hopefully, we can refocus them on the gains embedded gains. The gains are in unrealized gains. I asked our guys about this revenue number. I saw this morning, and they looked to me like Medusa had 17 heads because that's something we never look at is that revenue number. There's so much noise in those numbers. GAAP revenue, we do not everything we've ever looked at. I didn't know we missed one until I read it this morning, so it's not something that we pay much attention to.

Thank you. At this point, we have reached the end of the question-and-answer session. And I will now turn the call back over to Mr. Sternlicht for closing remarks.

Just want to say thank you, everyone, for giving us your morning, and hope you stay safe. Good luck. Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.