Starwood Property Trust (STWD) Q1 2021 Earnings Call Transcript

Starwood Property Trust (STWD -1.50%)
Q1 2021 Earnings Call
May 06, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Starwood Property Trust first-quarter 2021 earnings conference call. [Operator instructions] Please note, this conference is being recorded. I will now turn the call over to your host, Zach Tanenbaum, director of investor relations.

Zach Tanenbaum -- Director of Investor Relations

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, 2021, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on 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 may be discussed on 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 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.

Rina Paniry -- Chief Financial Officer

Thank you, Zach, and good morning, everyone. This quarter once again highlighted the power of our diverse platform with distributable earnings, or DE of $151 million, or $0.50 per share. We were active on both the left and right-hand sides of our balance sheet, deploying $2.7 billion of capital in the quarter and successfully completing two CLOs totaling $1.8 billion after quarter end. I will start my segment discussion with commercial and residential lending, which contributed DE of $147 million to the quarter.

In Commercial Lending, we originated $2.2 billion across 12 loans for an average loan size of $184 million. We funded $2 billion of these new loans along with $175 million of pre-existing loan commitments. These fundings were offset by $1.1 billion in loan repayments for our Commercial Lending portfolio to a record $11.2 billion at quarter-end. We continue to see strong credit performance in our loan portfolio, with our weighted average risk weighting improving from 2.7 to 2.6 in the quarter and only one1 loan for $188 million rated in the five categories.

This loan comprises the majority of our limited retail exposure and was placed on nonaccrual in the quarter. We believe that the principal and interest accrued to date on this loan are fully collectible. As of March 31, only 2% of our loans are on nonaccrual. The remainder are 100% current, and we have seen nearly all of our loans which required partial interest deferrals during COVID returned to performing status.

Since COVID began, we granted 11 partial interest deferrals for loans with a UPB of $1.1 billion. Today, we have only one $41 million retail loan remaining on its partial interest deferral of $84,000 a month. Our weighted average LTV remains strong, falling again this quarter to 60.1%. We continue to see our sponsors support the significant equity in their assets, with $582 million invested and $715 million committed since COVID began.

Consistent with this positive credit performance, our general CECL reserve remained relatively flat at $61 million. As we have discussed previously, the CECL rules require that we take reserves on all loans, including newly originated loans. Although we recorded $1.4 million in reserves on new loans in the quarter, we also saw reductions in reserves for repayments and for improvements in performance on existing loans. As a reminder, these reserves are typically added back for DE purposes.

However, during the quarter, we recognized a DE loss of $8 million related to an unsecured loan for which we recorded a specific GAAP CECL reserve last quarter. Just two years ago, we discussed with you our first foreclosure on a loan that was net leased to a single grocery tenant who filed for bankruptcy. The 440,000 square foot distribution center in Montgomery, Alabama had a loan balance of $17 million, and at the time, we established an $8 million GAAP reserve based on its appraised value. Over the past two years, we leveraged the Starwood platform to release and market the property.

The property was sold this quarter for $31 million, resulting in a GAAP gain of $18 million and a DE gain of $8 million, a very successful outcome for our shareholders. Turning to our residential lending business. We securitized $384 million of loans in our tenth securitization for a net securitization DE gain of $13 million and sold $87 million of our high LTV loans for a net DE gain of $4 million. These sales, net of purchases of $209 million in the quarter, put our loan portfolio to a balance of $596 million, a weighted average coupon of 5.9%, average LTV of 67% and average FICO of 732.

Over the past several months, we have worked to transition the loans on our $2 billion Federal Home Loan Bank facility, which was fully repaid this quarter at its maturity. In connection with the transition, we executed a new $1 billion warehouse facility in the quarter, bringing our total non-QM financing capacity to $2 billion. With these new facilities, we expect to realize returns on our loan book that are consistent with historical levels. Next, I will discuss our property segment, which contributed $22 million of distributable earnings to the quarter.

Credit performance remained strong in this segment, with rent collections at 98% and weighted average occupancy remaining steady at 97%. This quarter, we obtained supplemental financing of $83 million for Woodstar II, our second affordable housing portfolio. The upsize increased the cash-on-cash yield for this portfolio to 18.8% and increased yields on the overall segment to 16.9%. The performance of our Florida affordable housing portfolio continues to 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 4.1% for 2021. This is in addition to the 4.7% increase released last year. These rents create a new floor from which rents cannot decrease going forward.

Despite the new maximum rent levels, we did not increase rent on any of our affordable housing tenants last year due to COVID. We instead began rolling out these higher rents on January 1 and will continue to do so over the next 12 months. As a result, the effect on earnings will be gradual over the coming quarters. Next, I will turn to our investing and servicing segment, which reported DE of $24 million in the quarter.

In our CMBS portfolio, we continue to opportunistically sell assets, with $12 million of securities sold in the quarter for a net DE gain of $3 million. In special servicing, $517 million of loans entered servicing in the quarter, while a similar amount resolved, resulting in our active servicing portfolio remaining steady at $8.8 billion. As we have said before, we expect slightly longer resolution times and thus delayed fee recognition for the assets which recently entered servicing. Our named portfolio ended the quarter at $80 billion.

And finally, in our conduit, we securitized $85 million of loans in one transaction at profit levels consistent with last quarter. We typically see lower securitization volume in Q1 and expect to see significantly higher volume next quarter. Concluding my business segment discussion today is our Infrastructure Lending segment, which contributed DE of $7 million to the quarter. We acquired $86 million related to new loans and funded $14 million under pre-existing loan commitments.

These fundings were offset by repayments of $19 million, increasing the portfolio to $1.7 billion at quarter end. We continue to be pleased with the credit performance of this portfolio, which once again had 100% interest collections in the quarter. I will conclude this morning with a few comments about our liquidity and capitalization. Subsequent to quarter end, we completed two CLO financings, our inaugural $500 million infrastructure CLO, which was the first of its kind, and our $1.3 billion CRE CLO, the largest CRE CLO issued after the GFC.

Both represent a significant expansion of our credit capacity and a continued diversification of our funding sources. They also include many structural benefits, including flexibility to provide replacement collateral, match funding and the removal of recourse and credit mark. Jeff will discuss each of these in more detail during his remarks. We ended the quarter with $7.3 billion of availability under existing financing lines, unencumbered assets of $2.8 billion and an adjusted debt to undepreciated equity ratio of 2.3 times.

Pro forma for the two CLOs, this ratio is 2.1 times, in line with last quarter. This credit capacity, in addition to our current liquidity of $642 million, provides us with ample dry powder to execute on our pipeline. With that, I'll turn the call over to Jeff for his comments.

Jeff DiModica -- President

Thanks, Rina. We are pleased with the performance of our stock price, which we believe recognizes the durability of our business model, our demonstrated ability to create shareholder value across market cycles and our ability to pay our dividend. To date, Star Property Trust shareholders have earned a greater than 13% annualized total return since inception in late 2009, the highest in our peer group. I will talk today about a few themes that we believe differentiated our business this past year and will continue to create value for shareholders in the coming quarters.

The credit of our CRE loan book continues to improve. Collections are very high, and our base case modeling today suggests we will have little to no losses on our loan book as a result of COVID. I will discuss this more in detail later. The valuations on our owned properties continued to increase.

At our mark today, we have approximately $1.1 billion in unrealized gains, $200 million more than we have disclosed previously and approaching $4 per share. Our liquidity and access to some of the cheapest capital in our sector is unparalleled, and we could issue new five-year corporate bonds at 4% or below today, the lowest in our history. We have the benefit of having excess unencumbered assets on our balance sheet, which allow us to come to market early to create liquidity to pay off our $700 million of 5% notes maturing in December at their open date, September 1, and accretively versus the existing 5% coupon. Finally, we were one of a few market participants who were able to take advantage of dislocated markets to make significant investments across our business every quarter since COVID began.

We had a very strong first quarter of 2021, deploying $2.7 billion, $2.2 billion of which was in our core CRE lending business, and we have continued that momentum into the second quarter. I'd like to start my sector remarks with a deep dive on our owned property portfolio. We became more defensive in making CRE loans in 2015 as we felt the debt markets have gotten too aggressive in terms of pricing, LTV and structure. We slowed our originations in 2015 and began to use our excess liquidity to add core equity assets into our investment portfolio, taking advantage of favorable dynamics in the market and becoming a borrower rather than a lender.

We purchased $3.2 billion of property assets over a three-year period at significantly higher cap rates than where the assets are currently valued today. This property portfolio today has approximately $1.1 billion in gains in it at our marks and carries a 17% annual cash return at our basis. Our diversified model gives us the ability to pivot to invest in the best available opportunities across our seven business lines and highlights the power of our differentiated multi-cylinder platform. We felt this strategy would prove itself out in distressed and volatile markets and waited patiently for the markets to dislocate.

When lending markets were frozen last spring, we bought almost $1 billion of residential mortgage loans with term non-mark-to-market financing at a 10% discount to where the same assets traded pre-COVID. These loans returned to par or higher soon after our purchase, and most have already been securitized, producing large gains that -- and exemplary returns for our portfolio. We have increased the size of our CMBS and energy infrastructure portfolios when returns were accretive and use opportunities to sell down when we thought value had shifted. This quarter, we completed the first CLO of its kind in our energy infrastructure business, and after quarter end, we completed the largest CRE CLO since 2008.

We come to work every day and choose where to best invest our capital and how to best finance ourselves and aren't forced to allocate our equity into any one business regardless of market environment. We believe our results have proven the effectiveness of the strategy, and we are not done as we look for additional business lines which will allow us to continue this flexible approach to capital deployment. The largest of our property assets is our 99% leased 15,000-unit Florida low-income housing tax credit, or LIHTC multifamily portfolio. This portfolio was centered around Orlando and Tampa, two of the fastest-growing markets in the country in the last five years.

We were drawn to this investment for its very bond-like characteristics. Owners are allowed to raise rents based on increases in the median income level of the MSA but rents never go down even if income falls. Although we conservatively underwrote very modest income growth at the time of purchase, pro forma for this year's increase, we've been able to increase rents by over 20% since acquisition while leaving average rents at approximately 60% of current market rate rents. At the same time, cap rates have fallen dramatically from 6% at acquisition to recent sales in the low 4% cap rate area, and we believe there's upside from there.

In 2018, the state of Florida reduced property taxes by 50% on LIHTC assets as an incentive for owners to forgo their contractual right to roll these units to market rate over a 30-year schedule and keep this critical source of affordable housing available to families in Florida. Last Friday, the state of Florida passed the bill, HB-7061, that removes the other 50% of taxes, leaving these assets tax-free as long as they remain in the affordable program. If signed into law by the governor, this bill will further incentivize behavior that supports the state's desire to have more affordable housing available for its residents. Although we are still evaluating our options, this bill will make owners like us rethink what was always the best economic strategy to roll affordable unit into market REIT units over time, thus reducing affordable supply.

We believe this portfolio was worth in excess of $2 billion today, and after accretive refinancings, our remaining equity now returns a 30% cash return per year. At our valuations, we believe we could now generate over $1 billion in GAAP gains and approximately $900 million in distributable earnings gains in this portfolio. As we told you last quarter, we continue to evaluate selling a minority share in this portfolio, which would give investors more comfort around our valuation metrics and provide us with incremental capital we believe we can deploy accretively today. In addition to the gains from this investment, at our internal marks, we believe we have over $200 million of incremental gains from the remainder of our owned real estate portfolio.

80% of this incremental gain is split fairly evenly between our Cabela's Bass Pro Shops long-term net lease assets, our medical office portfolio and the Orlando industrial asset we foreclosed on back in 2019. Rina told you we reversed an $8 million impairment on the Montgomery industrial asset that we took over at the same time with the Orlando asset, and we sold it in the quarter for an $18 million GAAP and $8 million distributable earnings gain. When we choose to ultimately sell the remaining Orlando asset now fully leased to Amazon, we believe we will report a gain of approximately $60 million, a great outcome for shareholders and statement on our platform's ability to reposition difficult assets. Moving to our core CRE lending business.

We continued our momentum from 2020 with a very strong CRE originations quarter of $2.2 billion, with an above-average optimal IRR of over 13%. 77% of those loans were to repeat borrowers, a theme that we believe helped drive the strong credit performance of our portfolio through COVID. Our borrowers who have contributed $582 million of fresh equity to support their projects since COVID began and committed more than $100 million more, put great value in the flexibility, consistency, liquidity in any cycle and ability to close on large complex deals quickly. We have a very robust pipeline for the second quarter and continue to focus our originations on only the most stable assets with durable future cash flows.

To that end, we have reshaped the characteristics of our loan book in the last 12 months. Year over year, we have reduced both future funding and construction exposure by approximately half. By property type as a percentage of our loan portfolio, we have increased our exposure to multifamily by 72% and doubled our exposure to industrial assets while decreasing our exposure to office by 18% and to hotels by 14%. Multifamily loans are being the most lender competition today, and the spreads continue to fall, leverage continues to rise and we hit a floor on our financing levels.

We will pivot as we always have to sectors or other lines of investing, we believe, have the best risk/reward going forward. With optimism over the continued strength of the COVID recovery, credit spreads for many target assets have normalized to pre-COVID levels, and we are once again borrowing on our target asset classes at or inside where we were precrisis. Our ability to source best-in-class leverage leaves us with similar ROEs to pre-COVID levels and at slightly lower LTVs, as demonstrated by our portfolio LTV which decreased again this quarter to 60%. The scale of our platform has allowed our manager to build a large team internationally with a focus on Europe and Australia.

We have seen tremendous opportunities in these less competitive markets which have been slower to come out of COVID. Our international portfolio increased 35% year over year, and now accounts for over one quarter of our loan book for the first time, and we have large actionable pipeline there today and are excited about the existing opportunities. We are very proud that for seven straight years, we have won that NAREIT Gold Star in our industry for excellence in investor communications and reporting. Given we were unable to do our biannual investor day in person due to COVID restrictions in April, we launched a first-of-its-kind virtual investor series, which is posted on the investor relations section of our website, www.starwoodpropertytrust.com.

We created nearly three hours of content which provides detailed information on our company in each of our investment businesses, and we hope both new and existing shareholders will find it useful. Over the course of the three-hour presentation, we discussed our differentiated cradle-to-grave investment in credit process, and we believe that this process with multiple investment committees is paramount to our exemplary financial and credit performance since inception. We hope the webinar will help you understand how our credit process is different and why we had confidence in our portfolio that it would outperform as markets normalize. We told you during COVID that we felt very good about the credits in our book.

Sponsors have provided tremendous support to their assets, the macro environment has improved and our outlook has improved daily. Following our day long quarterly asset review last week, the management team came away thinking that with what we know today, we could exit this cycle with little to no losses on any loans in our portfolio as a result of COVID. Of course, the path of recovery could change, but that is a statement no transitional lender thought they would be able to make a year ago and reinforces our commitment to our differentiated credit process, as I just discussed. Finally, I spoke on our last earnings call about the transformational energy infrastructure CLO we closed in the quarter, and I want to talk today about the highly accretive CRE CLO we priced in April.

Our second CRE CLO was the largest post-great financial crisis CLO at $1.275 billion. In a tepid market where spreads are widening and some deals barely had enough bond orders to price, we had 40 different accounts put in orders, allowing us to be multiple times oversubscribed and tightened pricing twice. We picked up 6% in advance rate versus existing financing facilities, and our LIBOR plus 150 day one bond coupon was inside our existing financing facilities, allowing us to get term non-recourse financing with no credit marks and a return on our equity of more than 4% more than we were earning on financing lines. Pro forma for the CRE CLO, we continued to maintain a peer group low 41% of our CRE loan book on bank warehouse lines.

And with only 54% of our balance sheet in CRE lending today, CRE loans on warehouse lines, subject to credit marks account for just over 20% of our asset base today. In our REIT segment, we're thrilled to announce that Fitch upgraded our special servicer, LNR, which is named special servicer on over $80 billion of CMBS assets, to the highest rating possible, CSS1. This makes LNR the only special servicer in the world with this highest rating. Fitch cited our technology and the scale of our business, which allowed us to reallocate resources to adeptly deal with over 1,000 new servicing requests in a very short time.

On behalf of the management team, I'd like to thank our servicing team for their superhuman performance that earned the spectacular achievement that will undoubtedly lead to more agent business going forward. SMC, or Starwood Mortgage Capital, our conduit originations business, was the largest nonbank originator of CMBS last year and has kept that momentum this year. Rina mentioned our Q1 transaction and subsequent to quarter end, we were the largest contributor to a very successful transaction that priced last week, and our pipeline continues to grow. Our team is best-in-class.

And while we love the quantum of their contribution, more important to us has been their ability to remain consistently profitable quarter after quarter regardless of market cycle over the last eight years. Because of this consistency, we believe it is a business that investors should value at a very high multiple. Before I turn to Barry, I want to say we are very proud of what we have accomplished together over this difficult period. We built this company to outperform in distress and patiently waited for the markets to give us the opportunity to prove that we would.

We are proud of our relative outperformance and believe we have a lot of room to run. Our company is firing on all cylinders, and the outlook has never been brighter. With that, I will turn the call to Barry.

Barry Sternlicht -- Chairman and Chief Executive Officer

Thanks, Jeff and Rina and Zach, and welcome, everyone to this quarter's earnings call. Yes. I'm going to -- we give you exhaustive detail, and we want you to understand our business that's why we did the webinar because we -- this is a company where we -- the more you look at us, I think the more you'll like and understand how we manage capital and how we've navigated this crisis. I want to say that it's such an interesting period.

I mean real estate isn't Wayfair and it isn't Teleton or -- we hit -- with a bazooka. Worldwide, real estate hit a wall. And to come out of the COVID crisis, definitely stronger than we went in with a better balance sheet, no losses, what we think will be no losses from the COVID crisis, really speaks to the credit quality and our underwriting process and the equity-first attitude we have when we make a loan, like would we like to own this asset at this price, and we are working with borrowers to restructure their loans because they can come to us, and they don't have to go to a servicer who is detached from the real estate and doesn't understand why they need more capital for this or that. I think the model has proven to be incredibly strong.

And we didn't come out limping from this crisis, we came out galloping from the crisis. We've put out almost $6 billion of capital. Many of our mortgage peers don't have other lines of business, had to shore up their balance sheet. Some had to do rescue capital.

We were never in that position. And we did think multiple times about cutting the dividend, obviously, we didn't know what the world would have for us. We made the decision to hold the dividend, and I thank the board for that. And as Jeff pointed out, with the more than $1 billion of gains, unrealized gains in our property book, we're pretty confident we can make the dividend whenever we want for quite some time.

So, I don't think there's a company that has anything like that. And the other thing that you speak to is the 60% LTV. It's no longer our LTV, this is actually a mark-to-market LTV with -- and checked by CECL regs. And that's why we're here with no losses because those really were 60% LTVs and to demonstrate that, borrowers put in hundreds of millions of dollars to shore up their loans and save their assets from the period of disruption of demand.

If I want to step back real fast and talk about the property market. There are five major asset groups in real estate. Industrial and multis, which we've actually gained increasing exposure to on our loan book, but have always been pretty tough for us because the cap rates have fallen because those are the two asset classes that investors are favoring given that you can't live in your computer, and industrial, obviously, is a play on e-commerce. Then there's a big asset class that's yellow, which is office, and we're all watching as the office markets recover.

As Jamie Dimon says, he's done forever with Zoom calls. And I personally believe people go back to the office more than people think. It's a social event. People who are not well off, don't have communication devices in their houses and don't want to do Zoom calls in front of their children and potentially their grandparents and -- so it really does affect the poor more than the wealthy who may be calling in from the Hamptons.

And I think if you look around the world, whether -- and we have offices -- 16 offices all over the world in Tokyo and Europe, London, all over the world, in the Middle East, they're back in the office. In the Middle East, they're 100% in the office. I'm not sure if you followed any headlines in the Middle East, you'll find anyone talk about work from home. The same thing is true in Tokyo, China at the back in the office.

Hong Kong are back in the office or headed to the office. So, I think there are markets that will suffer. Clearly, New York and San Francisco City where we have no loan exposure are going to see some compression -- significant compression in net rents as rents fall concessions go up. There's such enormous shadow vacancy in both of those markets, but that's not where we're really exposed.

And even in our equity books, we don't know assets in those cities in the office sector. Then you had these two red light categories in real estate hotels and retail, and hotels that gone from red to yellow, and if you go down the curve to the budget and the -- it's actually green. RevPAR is up. Those are mostly domestic travel, hotels and with the coming something in the infrastructure plan, we think that will get better and better.

Group business and international travel to go out, will come back. So, if you move up into the upper middle class stuff, it's going to be a while before they get anywhere near the revenues of 2019. And then, luxury is -- if it's a resort, it's fantastic. And people paid triple the rates to go the Oman in Utah or one hotel here in South Beach where I'm located, had a record first quarter.

At $1,600 a night, we probably thought we'd get $800 a night. People have a lot of money. The nation is rich that has a 1.3 or 4 trillion of excess savings. And everything they own has gone up, their house, everything.

So, the nation's balance sheet is up. Last I looked like 15 trillion. People are well to do and as a whole. And that actually is across the whole socioeconomic spectrum.

That's not just the rich. They may be getting richer as their equity books go up, but people's pension plans are rising. And as a percentage, obviously, lower and classes have been helped unbelievably by the stimulus packages. So, I think the outlook for our lending both here and in Europe is great.

We are very active looking at a lot of large deals that we uniquely can do, and all of our business lines are operating at full speed. It is hard to buy equity real estate today with the kinds of cash returns we were used to. Jeff DiModica comes in my office every day asking for more equity, and it's hard to generate the cash and cash returns we haven't. And for those of you who have been with us for, I think, the seven years we've owned our affordable housing portfolio, I said we were buying assets that I personally never wanted to sell.

And I think in 11 years, I don't think I've ever sold a share of stock in this company. So, I was pretty happy owning those forever, but we are looking at monetizing some of the gains because we can redeploy the capital, and we think it will be exciting for the company, and now with the pending passage of this legislation in Florida on real estate taxes, we can look to complete that transaction shortly, but we wanted to wait for that to be enacted and get that reflected in the value of our sale. The other thing I want to point out is that we're responsible. ESG is a big deal to us, and that comes in everything we do.

We could have increased rents within the affordable housing portfolio of 5%, I think Rina mentioned that, and we chose to defer not to do anything even though we could have. We did the long-term right thing by not making matters worse for those who need the affordable housing space even if they have a job. So, now we'll be playing catch-up and gently increase rents and move them to market, but I think it's nice to know that companies are doing their part to help America when it needed help. And I want to say one more thing.

I mean we do have a fortress balance sheet. It's the best in the business. I used to -- and Jamie Dimon at JP Morgan say we have a fortress enterprise. And now, I think Starwood has a fortress balance sheet, and these two CLOs we completed recently, particularly the second one in the energy group means we -- was a fundamental game changer for that business.

We had an issue, as we always do, because we're not interested in quarterly numbers as we are the long-term duration and feasibility of our business, but we had a mismatch. We had debt that was going to mature inside of the maturity of the loans, and it kind of made us nervous. Like you don't see a problem until there's a problem. Like if you have 10-year assets and five-year debt, you have to roll that debt in Year 5, and that inherently creates a problem.

We call it the savings and loan crisis waiting to happen, financing short against long-term liabilities. So, with the CLO, we've cleared that up, and now you're match funded. And you don't see a penny of earnings from that, but that's fundamentally a different risk profile for our shareholders. And that's the confidence we have in the durability of our dividend and, hopefully, over time, half being able to increase it.

So, we are really pleased with the efforts of the team. There's 350-odd people rowing in the same direction at Starwood Property Trust these days. And we have a terrific board who's engaged, and shows up and asks tough questions, and challenges us. And we just want to say thank you very much for everyone for the recovery.

Our stock hit an all-time high about three weeks ago, and it deserves that all-time high because getting a 760 dividend in the world with a 10-year 1.58 from this collection of businesses and these assets and 60% LTV loans is truly astonishing. Maybe someday, we'll actually get that investment-grade rating post-COVID. And then, this will become a virtuous cycle, and we will be the largest by far. We're almost a $20 billion company today, 19 -- $18.8 billion, and this enterprise will be better, bigger.

So, we are accelerating our efforts to find more loan opportunities around the world, particularly in Europe, we're staffing up. I think we have seven or eight people there. We're also looking at Australia, and we'll do anything that we think is attractive long-term risk/reward for the shareholders. So, thanks, and we'll take questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws -- Raymond James -- Analyst

Good morning. Congratulations on a number of accomplishments in the first quarter. I guess to start, Jeff, I think you touched on the opportunity to reallocate capital as you target the most attractive investments. As you look out six, nine months, the balance of the year, what business lines do you think you're going to see kind of a net increase in capital allocation on a mix basis? What areas seem less attractive right now where you think things may get allocated away?

Barry Sternlicht -- Chairman and Chief Executive Officer

Thanks, Stephen. Appreciate it. Last year, we probably said non-QM looked really interesting, and we thought the energy infrastructure business looks really interesting. I would say we agree on both of those still.

We were able to get out of the gate during COVID and into the early part of this year, ahead of most people in the transitional lending space. So, we've been able to put on very accretive high volume of loans. We earned more at a 13-plus percent IRR than we redo on the CRE large transitional loan book. We did more than we expected.

We're going to do more in the second quarter than we expected, and I think there is a moment in time here for us to continue to do really accretive stuff in our core lending business. So, I would say today, we're equally excited about those three businesses. CMBS is kind of a steady-state business. We brought our book down from about 1.1 billion to just under 700 million, and we're sort of comfortable with it there if an opportunity arises that wider spreads like we did last year in COVID, we will continue to add there.

And Barry made the point about the property book being very difficult to grow today given where cap rates are in financing and the cash returns available to us. So, I think it will be more of the core three businesses, and that the lending business, the area lending business, will take up the lion's share of capital in the near future. And the other thing, before it goes on, I mean, we are looking at other business lines and including acquiring other companies, and we are quite active in that vein. It's remarkable how difficult it is convinced the board to give up the flag or to end the waste of effort where they have no hope, but it's difficult.

And we have multiple situations that we have tried to make consolidate parts of our sector. So, I'm thinking we might get something done, and we think it would be accretive to us, and frankly, one in one would be more than two. So, I think whatever reason, some board members like being board members more than care about their shareholders.

Stephen Laws -- Raymond James -- Analyst

On the CRE lending side, can you talk about what you've seen on the competition front? Most of your peers there, a lot of them are on the sidelines many until the last month or two. So, how has that impacted the opportunities there? And how much spread tightening has that caused? Or are you seeing that competition play out in other ways?

Barry Sternlicht -- Chairman and Chief Executive Officer

Before Jeff goes, I mean, the one thing that's interesting is that the CMBS market is now past the bank market, so that you can finance the spreads in CMBS world are very tight. So, that has become a bigger competitor than Wells Fargo's balance sheet, for example. And maybe we ourselves are rich high fields business. The conduit business has been absolutely a star and continues to -- they turn -- we've been talked about in a while, but they turned their book like 11 times a year.

So, they're a manufacturer of profits or loans. And I think we were -- we won last year.

Jeff DiModica -- President

We were the largest nonbank contributor --

Barry Sternlicht -- Chairman and Chief Executive Officer

We were the largest nonbank contributor in the country. So, that's a nice incredibly great business for us. They run a terrific company and -- or division, I should say. And then, what were you going to say?

Jeff DiModica -- President

You had asked about where the competition is coming from. And realistically, probably only our largest competitor in our space is really a competitor on most things that we look at. Our competition tends to come more from the investment banks and the debt funds when the investment banks are making money, as they have been for the last six or nine months, they tend to lean in on a lot of these larger highly structured complex deals, and we're definitely seeing that now. So, I'd say the investment banks are our biggest competition.

There are certainly some debt funds. And that's why we've looked more internationally where we have probably a larger staff than anyone but one person, and we're growing that book pretty dramatically. And we think this year, we'll continue to. I could see that book going from 25% of our loan book up to a third of our loan book over the course of the next year or so.

We think there are outsized opportunities there as they come out of the COVID a little bit slower, and there's just simply less competition, so we'll see. So, the new -- the rest of our sector who recently has enough money to start investing again doesn't tend to be a large competitor for us on the large complex loans.

Operator

Thank you. Our next question comes from Charles Arestia with JPMorgan. Please go ahead.

Charles Arestia -- JPMorgan Chase & Co. -- Analyst

hey Good morning, everybody. Thanks for taking the questions. Barry, I wanted to follow up on your views on the office sector. Just thinking about it from a high-level kind of beyond current occupancy and rent collection trends, I think we'll have some more clarity as people in the U.S.

go back to the office more and more over the next few months, but it seems to me that the current leases are going to play out, and the kind of tenants that you guys lend against are probably going to continue to pay their rent regardless of physical occupancy. But when you think about those leases coming to an end, and I realize this is a moving target here and the leases are longer term, but do you think the tenants when those leases come to an end will take a harder look at their real estate footprint and if there's potentially a kind of more fundamental shift that could occur here over time? And, I guess, ultimately, is this more of an owner problem than a lender problem?

Barry Sternlicht -- Chairman and Chief Executive Officer

No, certainly less of a lender problem than an owner problem, especially with 60% LTVs in your book. I think it is ZIP code specific or city specific. I think the states of Texas, Tennessee, Florida that have no taxes or Washington has no capital gains tax, they're incrementally benefiting and there's less pressure on the cost structures. In Miami, we actually were out with the Mayor of Miami last night, Jeff and I, and they've reduced the millage rate in town.

So, taxes are going down. Real estate taxes are going down. No income tax -- real estate taxes going down, budget is going up. I mean, surplus is going up.

It's sort of the opposite of the cycle you're seeing in the blue states where services income tax are going up, cost of labor is going up, union benefits are going up, real estate taxes, because buildings don't vote, are going up. At the same time, rents are going down, vacancies are rising, companies are relocating to better, cheaper places to live. And it is seriously an issue. I think in some places like Miami and probably all of South Florida, Tampa, Orlando included, demand is up, not down.

And you're exceeding your underwriting on rents if you happen to be a developer and we built a building here and rents are 25% higher than we underwrote as we lease the billing is fully lest. So, our property trust lease down here is now 25% under market. So, I think it's about basic real estate, right? I mean there's enormous issues now in these dark blue cities. And the worst part is the legislatures of these states actually want property values to fall because it's more affordable for their people, and that's a direct quote from a New York legislator in Albany.

So, that's a dangerous game to play. And that is very difficult real estate environment. And one of my friends who you would know is a multibillion who owns tons of apartments in New York City. So, I'm just a janitor, I can't increase my rent, I can't collect the rent, I can't renovate because they won't give me a return on my capital I put in my buildings.

I'm just a janitor. And you can see the future if it doesn't change, you go to them and buy. Go look at these gorgeous British buildings that were built when U.K. occupied India and go look at just repair they're in, where landlords had no incentive to fix the buildings up and they're falling apart and falling down and they were once beautiful buildings.

So, you need a tsunami change of attitude in these dark blue states. And it's a travesty, they have so much going for them, there's so much culture, museums, art, sports teams and wealth and -- but the attitude is not conducive for excess gains in real estate, that's for sure. And don't forget, we're not talking about -- you're just -- you need -- you need rents to go up, right? You need rents to go up. It's not holding your own and expense is going up, this is going to mean your net profits are going down.

So, on the margin, these big cities are in trouble because I think the JPMorgan does take 80% space that they have at 8,700. On the other hand, by the way, Starwood made an investment in the WeWork pipe. It kind of reminds me of always make money being the third owner of real estate. Well, somebody is going to make money in short-term co-working because if you're a small tenant, why would you ever lease the space for 10 years? And so our bet is that people come back into a more flexible approach, and that becomes a real business in the United States has already become in the U.K.

and other places. That's not an issue for us as a lender. We just want the building to be full. And 50 -- something like 53% of WeWork tenants are actually Salesforce, Amazon, Google, their credit tenants where they are using them as a service which was the original vision of the company.

So, I think that's fine for office. I think we're going to see a different -- I'm betting I'm thinking we're going to see a different model for some of the small businesses, which is the majority of office leasing 10,000 square foot tenants changing the way they think about office, especially since you don't even know -- I mean, we were in a situation ourselves. We were a group of people in Connecticut that want to work in New York, and we just -- I don't know how many people were going to show up. And they want space, but are 20 going to show up, or 50, and we don't know because I don't think they like the commute, or maybe they want to come for two days and work from home for three days.

Someone said, let's go to a shared office space. Like -- and then, we'll see what it is. And if people don't show up, we can drink it or grow it. And I think you're going to see that over and over again across the country as people try to figure out where the line is between asking people to come back to the office and then being sympathetic or empathetic to the-what are they call it the YOLO generation, kids who want to work from home, talk on Fridays.

And we'll see how this plays out. I'm not in that camp. The real estate guys, in general, all of us went back to the office. And here in Miami, when I sit with Jeff and Rina and Adam and Sean product who runs our energy group, I mean everyone's here.

We're 100% of the office, and nobody is complaining.

Charles Arestia -- JPMorgan Chase & Co. -- Analyst

Appreciate all the color. Thanks.

Operator

Next question, Jade Rahmani with KBW. Please go ahead.

Jade Rahmani -- KBW -- Analyst

Thanks very much for taking the questions. Sorry, several calls as well. Just wanted to ask you if you think that hospitality is a winner post-COVID as state times potentially increase? And is that something where you think there could be an opportunity in lending since it seems that a lot of the lenders are shy on that space still?

Barry Sternlicht -- Chairman and Chief Executive Officer

I think you have to be super cautious; the pace of the recovery is probably the markets are ahead of themselves on hotel stocks in my opinion, specifically to REITs. There is a -- you're going to change. Like if you are working from home or you're working from smaller offices or offices closer to your house, you're probably going to take more corporate team-building meetings. You're probably going to have a different kind of asset.

There'll be -- there may be more meetings because people have to get to know each other in the company and they do not get to know each other in an office building. So, you might see that, it's just too early to tell how that changes. I think the experiential high end take 100 people to -- what do they call those things the cowboys on backpack when they go camping, whatever they call that, rodeos, whether you call that when they go -- whatever. So, there'll be people who do that.

They'll take them out and they'll do team building exercises. And I think the tech companies are particularly which are the latter. The most likely accept working from home because they're so competitive with each other. And that's how they compete.

You can work from ours; we don't care, just send in your work. So, -- but they will do team building exercises, and they will go to Vegas and they will probably go to Montana for some ranch, that's what I wanted to talk about like when you go do ranch there. And is that acceptable today? Or is it due that ranch -- due to new debt ranch. And I think it's going to change.

I think what we were most worried about are the Marriott Marquis, the 2,000 room hotels in Manhattan that really needed group, the West in Atlanta, it's a 92% group building. I used to manage it, so I know what it is. Those business, that's going to be a while, and there's going to be tremendous pressure on rates. So, Airbnb is a force.

So, you have to now think about how you're differentiating yourself. Having said that, the summer is going to be a free for all. You've seen the stats. 73% of Americans are planning a trip and the highest in history was 37%.

So, it's going to -- America is going a party this summer, like 19 -- like 1929 -- '99, better not be 1929. And I think it's going to be tough -- I mean, if you go anywhere, you talk ski resorts, like Aspen, everything is full. People are booking, booking and bookings did their earnings this morning, they said you can cancel at any time. So, there's a lot of people booking stuff they may wind up canceling, but the numbers will look, if you have the right assets, I don't think a lot of people are headed to the Maria Marquee in New York, but Virginia Beach, I mean, can't con, it's going to be -- the numbers will be astronomical.

And that's going to be a bubble, right? That's going to pass, we're going to go back to work after Labor Day. And we'll have to see across the whole economy, what's sustainable? Like how many people will go back to physical shopping. It's an outing we were talking about yesterday. It's an advance.

The grocery stores had their best years in the history of the world. Not only was that an outing, but we only play open. So, to get out of your house, something you don't really want to do, you just went shopping at least with something to do. So, we look at these things, even on the equity side, and we kind of scratch our heads and wonder what the trajectory will be or especially the Door Dashes and the Amazons to last mile delivery and try to now disintermediate grocery anchor retail.

So, it's going to be a while to watch the real estate industry with these new technologies and new ways of living change.

Operator

Our next question comes from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Barry, a little bit ago, you mentioned possibly looking at some other business lines. Sort of any more detail you could give on that or kind of what you think -- what types of things you're looking at that could be complementary to STWD's existing book?

Barry Sternlicht -- Chairman and Chief Executive Officer

Well, I'll say that like Our diversification in the energy business, partial success. It's getting better and better as we get rid of the old book that we bought and originate new loans which are at or above our ROEs that we intended to execute at. I think it said in 13% is the return on our remaining equity stubs, but the original book was like 6%. So, this thing has been a problem.

And It's not -- it's probably the one part of our company that we need to grow our book, and we're working on that. So, now that we feel comfortable that we can do the CLO financing, we can more aggressively grow the book. We were limited at first because we didn't have -- we had a two-year facility from the bank which was like we didn't want to make five-year loans with two-year debt. So, we sort of shut it down until they could improve our debt facilities.

And now, with the CLO, it's a game-changer for that business. And we've done -- how many CLOs -- have we done 11 securitizations in non-QM?

Rina Paniry -- Chief Financial Officer

We just did our 10th.

Barry Sternlicht -- Chairman and Chief Executive Officer

We just did our 10th. You'll see us do a lot of these, and we need paper, right? We need to have to be projects to finance, but that business's ROE will continue to increase. Every loan that burns off what we sell and every new deal raises the ROE and the contribution to the company's earnings. So, that's -- there are lots of businesses that might actually fit in the TRS that are not balance sheet business but will increase our ROE, and I'd rather not talk about them because many of our competitors are on the call with us.

So, we'll be judicious and smart. We obviously have a good currency that we can use today and plenty of cash and access to capital, so we're not -- we're just kind of not overpay and try to find businesses that fit really well with ours. And we want to -- we think we're a finance company. We're classified as a real estate mortgage trust, but we are -- we'd like to be considered more of a finance company.

And we have considerable room in our TRS for more taxable bad income. And that, again, usually means it's a much higher ROE business, fee based. And we have several candidates we'd love to buy, but so far no luck.

Jeff DiModica -- President

So I would add that we are now in businesses that are businesses that our parents or capital group is in and has expertise, and you probably won't see us go far afield from that, but there are certainly things within our areas of expertise that we could add on.

Doug Harter -- Credit Suisse -- Analyst

Great. Appreciate that.

Operator

Next question, Tim Hayes with BTIG. Please go ahead.

Tim Hayes -- BTIG -- Analyst

Good morning, guys. Thanks for taking my question. Just a follow-up, I guess, to that kind of is how big do you think the investment portfolio can get without M&A based on your current capital base right now?

Barry Sternlicht -- Chairman and Chief Executive Officer

Well, we have one of our competitors, that $4.5 billion or so market cap against our $7-plus billion market cap and has a larger loan book than us in CRE lending, so I think we could certainly increase the scale of our CRE lending business. And I think all of our business could be larger in scale today. Certainly, if cap rates come out would love to add some property assets to get that percentage back up higher. We love the durability of those cash flows, so we'll watch that.

But I think all of our businesses can scale a decent bit higher, but there is a ceiling without adding businesses at which it would be difficult to -- the non-QM business and the large lending business are the two. There's a gap in our lending. The richest small deals and we tend to do -- what was the average size of a deal in the large loan lending?

Rina Paniry -- Chief Financial Officer

1 84 and [Inaudible].

Barry Sternlicht -- Chairman and Chief Executive Officer

So there's a big hole in the middle, and we would have to reorganize and start a new business sort of a middle market lending where we would hold a $50 million loan instead of selling it. That might open out to add several billion dollars of balance sheet assets. So, that's -- I would call that a core business, just a nuanced niche between what we do, the big deals. We have a problem; you financed a $100 million multi.

And by the time you've done financing, you put out $12 million, right, because that's what the mezz is after when you're done or what we keep $20 million. So, we have to do giant deals and -- with the book. And then, -- but that is a business we just have to organize ourselves to do middle-market loans and balance sheet them which would be one of the things we looked at acquiring somebody who does that more often than we do that. So, I think there are other businesses, again, we won't go into, but that would fit nicely in our tent.

It's hard, and we pay a dividend. That's what, two and a half times the average equity rate. So, we can't buy industrial, and we can't compete. The cap rates are 3.5%, so we can't support the dividend, doing that, triple net, same thing.

So, there are businesses that we're blocked out of based on the cost of capital, really the cost of our dividend. So, we need to support that dividend and cover our operating costs. And of course, one of the other reasons we -- big is better is our overhead shrinks as a percentage of our assets and makes the whole business high ROE. So, they were 18.8 billion, we go out of 10 billion $10.5 billion to 11 billion loan book.

Jeff DiModica -- President

Yeah. If you included our --

Barry Sternlicht -- Chairman and Chief Executive Officer

We're about 14 and a half. The other guys more like 18 and a half in their loan book. We have all these other businesses, too. So, We can clearly stretch our loan book.

But we're going to have, Jeff mentioned, we did -- we did 2-plus billion last quarter. We said we did 2-plus billion this quarter. I had dinner with Jeff. I mentioned the mayor of Miami who was one of our borrowers, was at dinner, too.

And you got like further deals for us. That's our niche. We want to be repeat customers with our borrowers. We're their friends.

We move in shape with them. We're flexible. We'll write the loan the way they need it. And the senior is all taken care of, like we're the guy making the real estate bet in the middle.

And not having a single loss in COVID, and I think we've lost like -- we have one loss in our book or two losses in like 12 years. Like, holy mackerel, that's a couple of cycles, right? So it's not so bad. Anyway, next question.

Tim Hayes -- BTIG -- Analyst

Yeah. A lot of good color. I'll leave it there. Thanks.

Operator

Our final question comes from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti -- Wells Fargo Securities -- Analyst

Yeah. You mentioned that European lending could go up to a third from 25% of that loan portfolio competition lower. But I guess, are there any sort of other risk in Europe? So for example, do you view financing risk is a little bit higher there? And I would think that maybe side by side, you'd rather put a dollar out in the U.S. versus Europe from a risk perspective, but maybe I'm just on that, just want to get your thoughts.

Barry Sternlicht -- Chairman and Chief Executive Officer

I actually don't agree with that. The European markets are -- it's harder to add supply to the European markets. And fundamentally, many of those markets are better than ours, the German property market, the German office markets, Hamburg, Munich, Frankfurt, Berlin. We don't have any loans there, but we'd love to have them there.

For their cap rate to 3%, so they're not going to write a 7% debt for us. We'd be very constructive on London today. In London versus New York and San Francisco, they're not trying to change the social system. And in London, we'll get through Brexit and it will be one of the great -- it has always been one of the great cities of the world.

It will be a major European capital and global capital for capital. There's a lot of Middle East money that may cause -- kind of cause it a home away from home, and that's not going anywhere. I'll make two completely irrelevant comp comments, but I figure everyone to make it in my comments. One of the reasons I'm so positive on our balance sheet, and it does reflect what you said, our exposure to construction has dropped from 24 to 11%.

So, today, we have very little real estate construction exposure, and our future funding obligations for all of our loans are down almost 45%. So, the company is like a rock at the moment, and we'll try not to screw that up. But I think that's -- we're poised to add loans in all of our business lines because of that. I mean we did a really good job, I think, of managing through the crisis.

And the other thing is that we're getting -- our biggest problem right now is repayments, we would have thumbs. We had multiple schedules every quarter through the crisis, extending the maturities of these deals and assuming lenders couldn't pay us off. And every day I walk in, somebody mentions to me, somebody paid us off. So, that's another source of fund.

Sadly, I mean, we don't really want those repayments, but they're not in our control, and we just got to replay the capital. So, the loan repayments are up dramatically.

Jeff DiModica -- President

I would add, you talked about financing. There vastly more financing counterparties for us today in Europe than there were five years ago in Europe when we started making loans there. A lot of our peers in the U.S. rely on the CLO market when they want to get away from bank warehouse markets, and that's really not an option when you go to Europe.

We've been a significant in serial A note seller throughout our life as a company. And in Europe, there are great opportunities to sell A notes. We know how to do that, we're good at that and we have bank financing lines now more of them with more people in Europe than we had before. So, I think as the banks continue to move in that direction, it makes us more comfortable in our ability to sell A notes there makes us able to distinguish ourselves.

Operator

I will now turn the call over to Mr. Sternlicht for closing remarks.

Barry Sternlicht -- Chairman and Chief Executive Officer

I don't have anything to add. Thanks, everyone, for joining us, and look forward to talking to you in three months' time. Thank you so much.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Zach Tanenbaum -- Director of Investor Relations

Rina Paniry -- Chief Financial Officer

Jeff DiModica -- President

Barry Sternlicht -- Chairman and Chief Executive Officer

Stephen Laws -- Raymond James -- Analyst

Charles Arestia -- JPMorgan Chase & Co. -- Analyst

Jade Rahmani -- KBW -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Tim Hayes -- BTIG -- Analyst

Don Fandetti -- Wells Fargo Securities -- Analyst

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