Starwood Eager to Deploy Capital

Good morning,

Starwood is eager to deploy capital, and the self-storage industry faces growth limits after pandemic boom. Let’s delve into today’s topics.

📈 Market Update

🏢 Starwood Eager to Deploy Capital

Starwood Property Trust reported strong Q2 earnings, beating analyst expectations. However, CEO Barry Sternlicht struck a cautious tone about the economic outlook during the REIT’s earnings call.

Sternlicht warned that he is “not as sanguine as all the pundits” that the US will avoid a recession. He believes the Fed’s aggressive interest rate hikes and widening credit spreads point to challenges ahead across real estate and other asset classes. The CEO criticized the pace of Fed tightening, saying it had created a climate where few want to sell assets if not neccesary.

Starwood Well-Positioned to Weather Downturn
Despite Sternlicht’s concerns, he emphasized Starwood’s conservative approach makes it well prepared to navigate choppy markets. The REIT boosted liquidity in Q2 through convertible note issuances and loan repayments. Sternlicht said Starwood is “foaming at the mouth” to deploy capital at attractive risk-adjusted yields.

The CEO touted the firm’s special servicing arm, LNR, as providing unique advantages to capitalize on distressed opportunities. Sternlicht believes Starwood will have a “front row seat” to provide solutions as properties require restructuring.

Strong Core Earnings Offset Write-Downs:
Starwood generated $169M in Q2 core earnings, down 20% YoY but beating consensus. Revenue jumped 58% to $516M. However, results were impacted by $24M in impairment charges, mainly related to a foreclosed LA office building.

The REIT also downgraded 3 loans, including a $252M Houston office property. Management believes Starwood can recover its basis even if forced to take title. Sternlicht expressed confidence in recovering value from non-income producing assets over time as capital markets stabilize.

🔐 Self-Storage Industry Faces Growth Limits After Pandemic Boom

The self-storage industry was one of the biggest winners of the pandemic, as remote work and downsizing fueled record demand. Public storage companies like CubeSmart and Extra Space Storage saw their stocks surge. Now the question is whether the industry is nearing saturation after its growth spurt.

Occupancy rates have slipped from recent peaks as office reopenings lead some to retrieve their stored items. Construction of new facilities has stalled due to higher borrowing costs. Public storage stocks have declined this year despite the broader market rebound. Industry executives acknowledge that matching the blockbuster performance of the past 2 years will be difficult.

Storage Demand Supported by American Consumer Culture:
The self-storage industry has thrived for decades due to Americans’ propensity to accumulate more possessions than their homes can hold. Consumers have proven willing to pay many times the actual value of their stored items over time. Moves, life events, and changing family needs provide an ongoing pipeline of new customers.

Looking Forward:
Competition is ever-increasing as investors chase high returns. Even with more competition, companies are looking farther out to find yield. Business plans often include renovations, better management, and tech advancements to optimize profits.

✍️ Further Reading

• Amazon to Double Number of Same Day-Delivery Centers of Initial Success (CS)

• These Transit-Oriented Developments Align More with Real Estate Projects with Commuting (CS)

• Marcus & Millichap Posts Loss as Property Sales Slow (CS)

• Spin Cycle: Earnings Call Optimistic After Tumultuous Quarter for Real Estate (RD)

• Bill Ackman Predicts Rising Treasury Yields. How will CRE Fare? (GS)

• Here’s How CRE Will Benefit if the Fed Really has Stopped Raising Rates (GS)

• Home Prices hit Record Highs in 60% of US Markets (CNBC)

• BX CEO Steven Schwarzman on reaching $1T Milestone, Real Estate, and Economy (CNBC)

📊 Chart of The Day