Starwood Property Trust (STWD) Q4 FY25 earnings call: guidance and Q&A

Inquired about the expected pace of CRE loan portfolio growth in 2026 and the return profile of new originations compared to historical levels.

Jeff DiModica stated the CRE loan portfolio is expected to exceed $17 billion in Q1, with an expectation to at least match last year's $6.5 billion in originations, potentially beating it due to increased maturities, lower rates, and higher transaction volumes. He highlighted a cost of funds advantage and strong bank relationships.

“My gut is that you're going to have more maturities this year. You have -- people who have executed their business plans on post-COVID or post-rate rise loans. You have a number of loans from before that period that simply need to move out of the pipe, and we also have lower rates, which will create more transaction volume.”

asked by Donald Fandetti · answered by Jeffrey Dimodica

Asked about the expectation for credit migration in the near term, acknowledging the company's long-term approach to asset resolution.

Jeff DiModica explained that the company evaluates each asset individually, comparing the present value of immediate distressed sale proceeds versus holding and repositioning, leveraging Starwood's lower cost of capital and asset management expertise. Barry Sternlicht added that some borrowers walk away, necessitating the company to take back and re-tenant/reposition assets, which takes time but is ultimately more attractive than dumping them.

“We look at every one of them individually. We try to present value what we think the value of getting the amount of cash we would get back in a distressed-ish sale today without working on the asset and then what's the present value of the cash we get back over the time that we would do it.”

asked by Donald Fandetti · answered by Jeffrey Dimodica

Asked if there's a point where the residential portfolio might be sold to redeploy capital into infrastructure or CRE loans.

Jeff DiModica stated that the residential portfolio's performance has been strong, with a significant recovery in GAAP book value after a 2022 markdown. He noted an 11% run-rate ROE and tightening securitization spreads. While they are always looking for opportunities, they are not rushing to sell given the strong returns and potential for further improvement with lower rates. Barry Sternlicht added that they are looking to get back into resi originations when the numbers work.

“I think our run rate ROE is around 11% today across the entire resi business.”

asked by Gabriel Poggi · answered by Jeffrey Dimodica

Asked about the total opportunity set for the infrastructure lending business, its competitors, and potential for growth.

Sean Murdock (who runs the business) highlighted significant tailwinds from energy consumption growth (5% annual CAGR for electricity over 5 years) and LNG export boom (expected to double in 5 years). Competitors include commercial banks and alternative debt funds, with growing but manageable competition.

“electricity consumption over the next 5 years is supposed to grow at sort of a 5% kind of annual CAGR. Another good statistic to look at is the LNG export boom we've had in the U.S. We're exporting roughly 15 Bcf a day of gas to consumers around the world. That's supposed to double over the next 5 years.”

asked by Gabriel Poggi · answered by Sean Murdock

Asked for management's overall view on whether credit is getting better or worse, noting recent downgrades in multifamily and industrial.

Jeff DiModica acknowledged idiosyncratic issues but emphasized positive outcomes like leasing activity and REO sales at basis. He believes multifamily losses should be "paper cuts" and immaterial if SOFR stays around 3%. He concluded that "the positives are better than the negatives," indicating the credit cycle has turned. Barry Sternlicht added that markets are generally better, and real estate is a safe haven, despite some borrowers giving up.

“I would say, overall, the positives are better than the negatives. And when I say positives are better than the negative, to your question, to me, that means the credit cycle has turned a bit.”

asked by Jade Rahmani · answered by Jeffrey Dimodica

Inquired about the reasonable timeframe to expect DE to cover or exceed the dividend, and if any outsized gains are expected in 2026.

Barry Sternlicht stated they expect to "get a little better every quarter" and have the earnings power, especially when considering non-cash losses and cash drag. He mentioned the potential to spin out the net lease business if the stock continues to be undervalued, highlighting its 6% dividend yield versus STWD's 10.8% dividend stock.

“Our triple net lease business in the market would be valued, I think Jeff said 6% dividend yield. That's the comp. If you take the high end, there's some trading even higher than that. So if it gets to scale, and we're not getting the performance of our stock and continue to treat us like a junk credit, we'll spin it out because we have a big gain in that business.”

asked by Jade Rahmani · answered by Barry Sternlicht