Starwood sees commercial real estate opportunities in Europe volatility
The CEO of commercial real estate investment trust Starwood Property Trust (STWD) said the current banking and sovereign crisis in Europe is creating a wealth of opportunity for investments, both domestic and abroad. During the third-quarter conference call, CEO Barry Sternlicht said "in Europe there isn't enough money" and large European banks are exiting American real estate exposures en masse. He cited the recent Credit Suisse (CS) decision to close its CMBS desk as leaving an opportunity for lenders such as his. Inquiries for CRE funding are increasing as more Europe-backed commercial financiers leave the space. Indeed, once-hobbled CIT Group (CIT) announced market conditions are favorable enough to get back into commercial real estate lending. Starwood is hiring more staff in its London office and is looking for investments in the commercial real estate markets of Europe's capitals, citing their geographic strength. "London is not Leeds, Paris is not Leon," Sternlicht told investors. However, Starwood needs more money in order to make the most of the current opportunities. Sternlicht said fund-raising may come in several stages in different forms. Starwood may offer shares, he said, and is about to roadshow investment opportunities to big pockets next week. It is likely to be successful. In the third quarter the carrying amount of target assets is approximately $2 billion, which Starwood believes will generate an annualized levered return of approximately 11.6%. During the quarter ended Sept. 30, 2011, Starwood originated, acquired or funded $193.3 million of new investments, including $69.4 million of target investments, bringing net investments since its initial public offering to approximately $2.4 billion. Starwood's total capital deployed is currently more than $3.5 billion. Nonetheless, profits are down. Starwood reported third-quarter income of $14.5 million, or 15 cents a share, compared to $22.7 million, or 47 cents, in the year before. Chief Financial Officer Stew Ward said volatility on the credit side provided the greatest drag on earnings. Events from the summer to the present rocked secondary markets, and Starwood Capital suffered as a result. The decision by Standard & Poor's to pull ratings from a priced CMBS, thereby collapsing a done deal Starwood vested into, provided a negative singularity, the echoes of which are still being felt. Four months on, and the CFO could see no reason why the deal should not have happened. "If Starwood was to hold these loans and associated interest-rate hedges until maturity and each of these loans were repaid at par, Starwood would realize a levered return of approximately 5.9% and would not recognize any loss on its existing portfolio of held-for-sale loans or associated interest rate hedges," he said. The earnings describe the S&P decision as particularly reputation damaging to the ratings agency due to "escalating investor concerns surrounding the integrity of the credit ratings process for commercial mortgage-backed securities." However, the recent Wells Fargo (WFC) CMBS deal is a clear market positive, Ward added. Sternlicht concluded that commercial real estate is splitting into the 'have' and 'have nots,' with Starwood quickly working to position solidly in the 'have' category. "The credit metrics of our portfolio remain strong," he said. "We believe that our target portfolio, (with) an expected return of 11.6%, a more than 10% premium to the 5-year Treasury note, and weighted average loan to value of approximately 66%, remains a compelling risk-adjusted return for our shareholders in a world with little yield." Write to Jacob Gaffney. Follow him on Twitter @jacobgaffney.