Against soaring inflation and interest rates, a global economic slowdown and trillions of dollars wiped from the stock and crypto markets, billionaire Barry Sternlicht believes real estate has “held up well” this year.
But despite an upbeat second-quarter earnings report, the chairman and CEO of Starwood Property Trust and Starwood Capital Group said he is proceeding with caution.
“The markets are expecting rates will fall sometime in the middle of next year. I agree with that,” Sternlicht said on Starwood Property Trust’s second-quarter earnings call Thursday. “We’ll all settle into this period of time where we’ll be in a slow, stuck negative cycle, but it will be easy to build off of that.”
Sternlicht criticized the Federal Reserve for moving too slowly to address inflation by raising interest rates.
“They’re now trying to make up for being so far behind by using the sledge hammer, increasing interest rates at a pace we’ve hardly ever seen to try to get in the way of inflation,” he said.
The fact that banks have largely taken a step back creates “tremendous opportunities for alternative lenders” like Starwood, Sternlicht said. He expects that Starwood’s Real Estate Investment and Servicing arm, formerly known as LNR Partners, will soon be the country’s largest mortgage servicer.
“There will be a lot of workouts, people,” he said, adding that “we’re in the eye of the hurricane.”
Starwood reported $212.3 million in second-quarter earnings, or 67 cents per share, up 83 percent compared to the second quarter of last year. The REIT, based in Miami Beach and Greenwich, Connecticut, reported $325.6 million in revenue for the quarter, up about 12 percent from $294 million in the same period last year. Starwood’s shares, which opened at $23.48 Thursday, ended the day at $23.58, up 0.6 percent.
President Jeff DiModica said Starwood has reduced its debt exposure to office buildings, hotels and mixed-use properties and has an overall loan-to-value ratio of 61 percent, the lowest in the REIT’s history. Starwood doubled down on multifamily and industrial-backed loans during the pandemic, and has also continued to tout the strength of its affordable housing portfolio in Florida, where rents are poised to continue rising.
Chief financial officer Rina Paniry acknowledged that repayments have been lower than usual, given current market conditions.
“We expect to get better structure and pricing on what we do in the second half of the year than almost any time in our history,” DiModica said, referring to the firm’s commercial loan portfolio.
Sternlicht spent much of his time discussing the bigger picture and how it affects consumers.
High oil and gas price increases are “really temporary,” he said. Apartment rents will continue to grow. Hotels, which are having a “wonderful season,” could face headwinds soon, and the industrial markets are still “very strong” despite Amazon’s pullback on last-mile warehouses.
The only real cause for concern, he said, are office markets, depending on the city and the quality of a given building. And as a result of high labor and construction costs, a number of projects won’t get built. (Sternlicht built a new headquarters for Starwood in Miami Beach last year, and is looking to build more offices in the city.)
Sternlicht said he expects that a recession in Europe and slowdown in China will affect the U.S. economy in the second half of the year.
“I wouldn’t be surprised if the third quarter or fourth quarter GDP numbers were bad,” Sternlicht said. “The question will be how bad? The consumer, the backbone of the U.S. economy, may be spending, but his confidence is at the lowest point it’s been in decades. There is no question the consumer will stop spending.”