Greetings. Welcome to the Starwood Property Trust first quarter 2022 earnings call. At this time, all participants are on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Zach Tanenbaum, Head of Investor Strategy. You may begin.
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 31st, 2022, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in 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 will be discussed on this conference call. Our 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. Reconciliation 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.
Thank you, Zach, and good morning everyone. This quarter, we reported distributable earnings or DE of $240 million or $0.76 Per share. This includes an $85 million or $0.27 Per share gain related to the sale of an industrial asset in Orlando that was previously acquired through foreclosure, which we will discuss later. GAAP earnings for the quarter were $325 million or $1.02 per share, and include the Orlando gain as well as a $0.55 per share increase in the fair value of our Woodstar Fund. Our GAAP book value grew by $0.54 In the quarter to $20.46, with undepreciated book value increasing to $21.26.
We were active on both the left and right-hand sides of our balance sheet with $4.4 billion of new investments across businesses funded by diverse capital sources, including $500 million of corporate Sustainability Notes, two CLOs totaling $1.5 billion, and an increase in funding capacity of $1.7 billion. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $231 million to the quarter or $0.73 per share. In commercial lending, we originated $1.9 billion across 22 new loans, 100% of which were floating rate first mortgages. We funded $1.1 billion of these loans as well as $241 million of pre-existing loan commitments, with most of our funding back ended to the last half of the quarter.
As we continue to transform our collateral mix, 49% of the quarter's originations were multifamily and 22% were residential, while 83% of the $716 million in loan repayments were hotel and office. Our loan portfolio ended the quarter at a record $14.8 billion, up 33% year-over-year. Of this amount, 92% represents senior secured first mortgage loans and 98% is floating rate. Given the steepness of the forward curve, we expect earnings to increase once we move past our above market LIBOR floors, which have a weighted average of 57 basis points. Company-wide, inclusive of floating rate assets and liabilities in all of our businesses, a 200 basis point increase in base rates would increase annual earnings by $34 million or $0.11 per share.
The credit performance of our portfolio continues to be strong with a first quarter origination LTV of 57%, a weighted average LTV of our overall portfolio of 61% and a weighted average risk rating of 2.6%. On the CECL front, our general reserve declined by $3 million from last quarter to a balance of $51 million. In looking at credit performance and the adequacy of our CECL reserve, one of the key indicators of future loss is historical experience. As Jeff will discuss with you, our historical loss experience in 13 years is actually a net DE gain of $78 million. Based on this, our CECL reserve could arguably be zero if not for the FASB saying that no one can have a zero reserve.
In cases where we have to take back an asset, we utilize our decades of experience and Starwood's broader expertise to control our destiny, a strategy which has proven to be very successful for our shareholders. Also in the quarter, we completed our third CRE CLO, which totaled $1 billion and consisted of a diverse mix of property types, including 29% office. The CLO is actively managed with an initial spread of SOFR plus 164 basis points and an initial advance rate of 84%. Next, I will walk through our residential business, which had an active quarter with purchases of $1.8 billion and sales and securitizations of $1.9 billion.
Despite repricing in the securitization markets and significant spread widening in the residential loan space, we securitized $1.1 billion of loans in our sixteenth and seventeenth securitizations and sold $836 million of loans, all at breakeven as a result of our effective hedging strategy. Our loan portfolio ended the quarter at a balance of $2.4 billion, including $400 million of agency loans, average LTV of 68% and average FICO of 745. Although we recorded an $83 million unrealized negative mark-to-market adjustment on our loans for GAAP purposes at quarter end, we recorded an offsetting $69 million unrealized positive mark-to-market on the related interest rate hedges. Our retained RMBS portfolio ended the quarter at $311 million after retaining $84 million of bonds in our Q1 securitizations.
In addition to our hedging strategy, we continue to expand our non-mark-to-market facilities in order to further insulate this book from market volatility. This quarter, we upsized one such facility from $250 million to $500 million. The margin call provisions under this facility do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks. Given the LTV and FICO of this portfolio with no charge-offs to date, credit is much less of a factor. Inclusive of our securitized loans, 73% of our residential financing at quarter end was non-mark-to-market. Next, I will discuss our property segment, which contributed $22 million of DE, or $0.07 per share to the quarter. The performance of our Florida affordable housing portfolio continues to vastly exceed our expectations.
For GAAP purposes, we recognized an unrealized fair value increase in the Woodstar Fund this quarter of $218 million, or $173 million net of non-controlling interest. There are three components to this increase. The first is property, which represents $137 million of the increase. For the first quarter, we utilized the direct cap rate method to determine value. In-place NOI increased due mainly to higher rents, and the cap rate was left consistent with last quarter. As a reminder, that cap rate was based on the third-party fund transaction price, which was supported by an independent appraisal. The second component is the favorable debt on the portfolio, which represents $65 million of the increase.
This is because market interest rates exceed the 3.5% blended fixed and floating rate debt we currently have in place on the portfolio. The third component relates to the 1% LIBOR cap we have in place on this portfolio's floating rate debt, which increased in value by $16 million in the quarter due to rising rates. Subsequent to quarter end, area median income levels, which govern rents for the over 15,000 units in this portfolio, were released for 2022. Higher median income for Northern and Central Florida, where this portfolio is concentrated, resulted in a blended rent increase of 9.1% for 2022. These rents create a new floor from which they cannot decline going forward.
We expect to implement these increases between June and December, with the newly released rents to be reflected in our valuation metrics next quarter. Next, I will discuss our investing and servicing segment, which contributed DE of $30 million or $0.09 per share to the quarter. In our conduit, Starwood Mortgage Capital, we completed two securitizations and priced an additional two securitizations totaling $668 million in the quarter. Consistent with past practice, the two transactions which priced in March but settle in April are treated as realized for DE purposes. In our special servicer, we obtained six new servicing assignments totaling $6 billion during the quarter, bringing our named servicing portfolio to $98 billion, its highest level since 2016.
Finally, on this segment's property portfolio, during the quarter, we sold an asset with a depreciated basis of $23 million for its original cost basis of $35 million, resulting in a GAAP gain of $12 million and no impact to DE. At quarter end, the undepreciated balance of this portfolio was $200 million across 13 investments. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $13 million or $0.04 per share to the quarter. We executed $231 million of new loan commitments, of which $211 million was funded. These fundings outpaced repayments of $93 million, increasing the portfolio to $2.2 billion from $2.1 billion last quarter.
We also completed our second $500 million infrastructure CLO, which is actively managed with an initial spread of SOFR plus 189 basis points and an initial advance rate of 82%. Nearly half of the financing for this segment now consists of these term matched, non-recourse, non-mark-to-market CLO structures. I will conclude this morning with a few comments about our liquidity and capitalization. During the quarter, we completed our fourth sustainability bond issuance, a five-year, $500 million issue with a fixed coupon of 4 3/8. We are able to issue these bonds given our unique platform, which has investments across the ESG spectrum, including loans on green certified buildings and commercial lending, loans to home buyers within residential lending, affordable housing within our property segment, and renewable energy within our infrastructure segment.
In addition to financing capacity available to us via the corporate debt and securitization markets, we continue to have ample credit capacity across our business lines, ending the quarter with $9.6 billion of availability under our existing financing lines, unencumbered assets of $3.8 billion, and an adjusted debt to undepreciated equity ratio of 2.1x , which is down from 2.3x last quarter. With that, I'll turn the call over to Jeff.
Thanks, Rina. Sorry in advance for my lousy voice here. I'm on the backside of a very light COVID experience, but I will try to get through the script and get through the Q&A as well as I can. We had another strong quarter of investing activity and value creation, demonstrating the strength of our multi-cylinder platform through cycles and differentiating us from our peers. I'd like to start by saying how proud I am of our best in class team for continuing to deliver strong results to our shareholders in ensuring a seamless transition through COVID. With the sale in the quarter of our 1 million sq ft leased distribution center in Orlando, we now have repositioned, re-tenanted, and sold both distribution centers we took possession of via loan default three years ago, creating distributable earnings gains of over $93 million for shareholders.
In 13 years and over $80 billion of lending, that $93 million gain is a multiple of the cumulative impairments we have taken in that time. As I've said before, we take pride in the fact that we underwrite debt as if we were investing in the equity, and this focus on asset selection and detailed real estate underwriting works to our advantage. It results in lower losses overall, and if we do get an asset back, we are comfortable with the real estate because we underwrote it.
In the depths of Covid, we told you we believed our loan book would perform well, but not even the most optimistic management team would have predicted that we would have a cumulative gain on defaulted loans in our 13-year history, that we would have earned and paid our significant dividend every quarter, or that we would have over $4 per share in distributable earnings gains available to us in our owned property book. Our stock has returned 12% annually to shareholders since inception, and this performance is a testament to the power of our manager, Starwood Capital Group, our strong credit process, and our information advantage. Rina mentioned the increase in our book value in the quarter and at our fair value marks. Our book value today is $21.98 per share.
With scheduled rent increases contractually based on median income and CPI levels at our 15,000-unit Florida multifamily portfolio, all else equal, we expect our book value to rise significantly over the coming years as we mark this portfolio to market quarterly. Our stock trades today at 1.1x our Q1 fair market book value of $21.98, which despite our significant outperformance and liquidity since COVID began, is at the low end of our historical range. With these expected book value gains, our stock sits today at a lower multiple to book than at any point in our history other than 2020 and well below the multiples of our closest peers.
Rina mentioned the capital to be deployed in the quarter, and after the two largest deployment quarters in our history and having deployed over $18 billion in capital in the last 12 months, our investment portfolio is now 62% larger than it was during Covid. 60% of our loan book is now post-Covid loans, and we have taken advantage of decreased competition from Fannie Mae, Freddie Mac, the CMBS market and smaller debt funds who have limited capacity to grow to increase our multifamily lending book to 32% of our portfolio and over four times the size it was at the beginning of Covid. More than half of the loans we have made in the last seven quarters and nearly 50% of the loan balances were in the very stable multifamily asset class.
We've done so at low teens ROEs in line with pre-COVID transitional office and hotel loans and have reduced our exposure to those asset classes by 30% each in that same time period. When combined with our own multifamily assets and high quality residential assets, equity and loans on stable residential housing assets that have increased significantly in value since COVID make up more than half of our asset base today. Last quarter I mentioned that NOI on our hotel loan portfolio, which is predominantly destination, extended stay and limited service hotels which have performed very well, was up $300 million in 2021. Per BofA Global Research, hotel occupancy and rate is now above pre-COVID levels for the first sustained period since the pandemic began. Therefore, we upgraded risk ratings on four hotels in the quarter.
We entered COVID significantly underweight Manhattan and San Francisco, with less than 3% of our assets on loans in Manhattan and less than 1% on loans in San Francisco. We've continued that trend and focused on high growth Sun Belt markets that we believe will continue to outperform. We have been discerning on adding office loans, and the few we've added are very well leased and we believe well insulated from any potential future economic shocks. We continue to grow our international CRE lending business, which accounts for one quarter of our lending portfolio today and should continue to grow. Starwood has been an investor in these CRE markets for decades. We know the sponsors and we know the assets.
Our best in class international teams operate in less competitive debt markets than the U.S., and we believe we can create incremental shareholder return with less leverage and better structure on assets we are equally adept at valuing. Second quarter is shaping up to be strong as well, with more loans closed and signed up to date than we completed in the first quarter. We have significant liquidity and unencumbered assets to issue nearly $2 billion of unsecured bonds and term loans, and we have increased our financing capacity by 35% over the last year, positioning us to be able to continue to grow our business accretively.
The average LIBOR floor on our CRE lending portfolio is now well below spot LIBOR, and if the forward curve is at all correct, our earnings will continue to increase in the coming years while we expect our CRE portfolio to outperform should inflation remain elevated. In our residential lending business, we increased hedge ratios and have nearly $100 million in hedge gains to offset the majority of the displacement we saw the last three months. We are currently closing 5.5% average on levered coupon loans that will have higher modeled returns going forward. We continue to securitize these loans, having closed our third securitization of the year this week. We expect to close at least two more this quarter, leaving us with match-term non-mark financing.
We expect to be able to move the remainder of our unsecuritized loans to non-mark-to-market facilities this quarter. In our energy infrastructure lending business, which usually sees more deals in Q4 than Q1, we had a very productive first quarter. Energy fundamentals continue to shift in our favor. There are less lenders in the space, and we are making mid-teens optimal returns on our post-acquisition portfolio, which now accounts for 70% of our portfolio. Our REITs business continues to be a solid contributor to earnings across market cycles. Our conduit originations business again earn normal run rate net profits in a period of high volatility and spread widening, a testament to the quality and consistency of our team. That was again the largest non-bank contributor of CMBS loans for the second year in a row.
Despite having a smaller CMBS book, we have increased our named special servicing by $18 billion year-over-year to $98 billion, which will provide a significant credit hedge should the economy deteriorate or enter a recession. We continue to execute our business plan on our owned equity assets that will provide more recurring non-recurring gains in future quarters. I will finish by mentioning that S&P raised our corporate rating in the quarter to the highest in our sector, which we expect will lower our borrowing costs in the future. We will continue to run a diversified, lower leveraged balance sheet to reduce our borrowing costs in the corporate debt markets, following our stated goal of becoming investment grade.
Until then, our diversified business model that has consistently outperformed in turbulent markets, our unique dividend paying ability, our diversified fortress balance sheet, and our over $1.2 billion in embedded fair market value property gains available to be harvested at any time make management optimistic about 2022 and beyond. I'll now turn the call to Barry.
Thank you, Zach, Rina, and Jeff, and good morning everyone. I'd say with the equity market kind of disintegrating reminiscent of 2001. It's a loan book to date. The origination loan was for some of the time. For people who are skeptical about Mars and the real companies that we've worked for in all more 80, 90. Small changes in values could actually hurt you, and you could find yourself as an equity player by accident. I think it's testimony to what Rina said, the underwriting that we have. Over the 12 years that we've never foreclosed, we've actually net made money, significant money actually. We'd expect that to continue as we work through a few assets in the portfolio that are non-performing.
Well, I'll give you one, Calistoga Ranch, with a lender, with a first mortgage lender on an asset out in Napa. I'm actually out in California right now. I'm not far from there, actually. The asset burned down to the ground, and the fire took place. Obviously an accruing asset, it's not paying. The lender says the sale price is potentially more than we have the asset as a loan balance. We'll go cash positive to use. I really can't be more pleased with the efforts of the team across all our cylinders. It is work. It's working because the U.S. and the European lender, and then obviously instead of for us, over these 12 years, kind of claiming to be kind of significant. It is.
The U.S. and the European lender. It's a full signal. Do this. I will finish phones. Jeff, will you maybe take Q&A and then I'll dial in off the landline if I can find one. Hold on. Jeff, can you pick up? Nobody can hear me. Operator?
Sure. Yes, Jeff, you're live now.
I'm live now. Good. Thank you.
Shall we proceed? Okay.
Yeah. We're gonna move to Q&A. When Barry gets a better connection, we'll go back to Barry. We'll start Q&A.
Okay. We'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Our first question.
Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.
Hi, this is John Slowik on for Doug. I guess first question would be after another quarter of strong earnings, what's the outlook now for the dividend or the potential for a special dividend?
Jeff, you want me to take that?
Yeah. You can start. Go ahead, sir.
Okay. The, you know, the special dividend related as it relates to the Orlando gain, which was really the, you know, the outsized performance for the quarter. We look to a full year because the dividend is based on full year taxable income, and we look to pay that out over four quarters. We wouldn't be making a determination today as to a special dividend related to that gain. We will see how the year plays out and ultimately make that determination as we approach the end of the year to see whether or not we've covered. It's not a decision that we would make today.
Got it. Thank you. Second question would be just around rate sensitivity. I understand the floating rate book, obviously it's more attractive as rates move up, but at what point does that become unattractive? Can you kind of size the attractiveness as we move maybe 25 bits and 50 bits? Do we have those sort of numbers or that color?
Yeah, John, it's Jeff. Listen, as rates go higher, it certainly depends on shape of the curves. We have a large book with a large ecosystem, short term, long term, fixed rate, floating rate assets and liabilities. So it changes with the shape of the curve. But if we generically are talking about LIBOR, you know, we benefited greatly from having probably the highest LIBOR floors in our peer set, before COVID. We fought really hard. We're proud of our LIBOR floors that we had. We had LIBOR floors that were significantly above 2% through a good part of COVID. Our average LIBOR floor today is only about 54 basis points down from 76 or 77 last quarter.
It's still higher than most of our peers because we fought really hard to get LIBOR floors, which helped us as rates went down in the beginning of COVID. The problem with having high LIBOR floors is, as LIBOR sat below the LIBOR floors, we didn't make more money as rates went up, or as LIBOR in this case went up. We're now at the point where the LIBOR is above where our LIBOR floors are, where we will start to participate in the upside of LIBOR going higher. The higher it goes from here.
Jeff, it's Barry. Can you hear me?
Yeah, Barry, you're back. Great.
Okay. I'll just tell you that will happen today. When the Fed raises rates, the LIBOR, we will be in the money on the LIBOR floors.
Yeah. We actually already are, Barry. Because we're at 75 and our average is 54, and where I was leading them is to say, as rates continue to go higher from here, we will make more. Once we get above where all of our LIBOR floors and our highest LIBOR floors are 2.5 to 2%. Once we get above them all, we will have maximum velocity. To answer your question, we'll do better at 200 basis points than 100 basis points. We'll do better at 300 basis points higher than 200 basis points, but we will continue to make more money as LIBOR goes higher from here, John.
Great. Thank you very much.
All right. Jeff, can I assume that people couldn't hear anything I said?
I would assume they could hear almost nothing, Barry. There was a little bit in the middle, but if you want to make your key thoughts again, I would go for it.
Okay. Well, thanks. I'm sorry for the technical difficulties, everyone. It looked like I had service, but apparently I do not. So I wanted to start with geopolitics and just say, you know, our book is in Europe and the United States, and that if you told me that we'd have a loan to book of 61% in the quarter, 57% loan to value of our loans, I would never have believed that. Yet the opportunity set for the company is as big as it's ever been in our business as banks are kind of shut and pulling back and borrowers would like relationship managers like us, and we do so much repeat business in our book that the team has done an exceptional job.
Across the whole platform, the team has executed beautifully. I will say that you should understand that given our focus on the equity on the value of properties, I guess it's surprising, but it probably shouldn't be surprising that we've realized net gains, significant net gains on anything we've ever foreclosed on. At 57% LTV, unless there's a massive correction in real estate, that should continue as we work our way through the book. Or any of our loans that are, you see them in our disclosure, higher rated higher risk. We have a loan, for example, on the former Calistoga Ranch, one of the best hotels in the United States. It burnt to the ground. It is obviously in Calistoga. It burned in the fires.
Obviously, we can't accrue it. The land is for sale right now. It'll sell for more than the loan balance, just the loan balance, and we'll be repaid. We expect this to continue with any troubled assets, and we have the ability and, frankly, the desire, to take assets back if they're at these LTVs and work them and sell them and rationalize and get the gains that we did in these two distribution centers, which were combined were over $100 million of gains for the company. I look at our total return the last 12 years annualized over 12%. I say that if you had levered us 40%, 50% on margin, we'd return 15%-16% annually, beating probably every hedge fund that I know of over that time period.
Certainly, in the volatility of the equity markets today, we are a sunshine ray of stability, which we set out to be. As you can see from our quarter earnings and our dividend, we amply cover our dividend, so that we are confident, as we told you back in the middle of the pandemic, that we were comfortable paying our dividend. It was never in jeopardy and is solid as a rock going forward, given the amount of unrealized gains in our book and our ability to execute sales at individual assets or larger investments going forward. You know, our approach to buying equity into the trust was assets that you'd wanna give to your kids' trust funds, and that's the portfolio of multifamily we bought in Northern Florida. We call it Woodstar.
The affordable housing, just to remind you, rents can't go down. They can only go up. Rents are obviously rising across the United States in a fashion that we've never seen before, powered by inflation, but also this lack of units that is this tremendous dearth of homes that is creating this rapidly rising housing complex. We ask ourselves, "Is this gonna continue like this?" Or, "What's the outcome for housing prices given? Is it a bubble?" While prices in some cities have run pretty far, this is not a supply issue. This is not like overbuilding that we saw in 2007, 2008, and it's not powered by people borrowing 100% of the home price with NINJA loans. This is really demand and wealth, and people working from home and trying to improve their homes.
We expect, of course, it will slow down. It should continue to be a source of stability for the U.S. economy because it really isn't overbuilt. Most builders. One of the reasons we built almost 15 million fewer units from 2010 to 2020 than we did in every decade prior, going back to the 1940s, was builders stopped doing spec homes and couldn't get lines to improve land easily from anyone. It just disciplined the housing market, and the result is what you see today. It's bled over into the multifamily markets, which continue to enjoy double-digit increases in rents. We're the nation's largest owner of apartments. We have 115,000 apartments, including the units that are owned by Starwood Property Trust.
What that means actually going forward, affordable housing rents are set by, not by inflation, but by the income growth of the SMSA in which they operate. We know, because of the rent gains that Rina outlined in her comments, that this portfolio will increase in value fairly significantly next quarter, not changing the cap rate. I can tell you our holding cap rate is significantly above current cap rates, probably 25%-30%. Obviously, as the nation's largest older owner of apartments, we're in the market both buying and selling apartments. Apartment cap rates are probably today in the low threes. This is significantly higher, the cap rate we're using here. We'll just be.
The gain you'll see most likely next quarter and each quarter going forward, we will mark this portfolio, will be a result of the rent increases, not because we're gonna play with the cap rates, even though they're absurdly conservative at the moment. We are selling some assets in Southern Florida at the moment in the 2s, a cap rate in the 2s. Those are market rate. They're not affordable. Affordable does have the benefit of having always being full because they're cheaper than everything else. Rents can't go down. This is a rent that is legislated by HUD or Fannie Mae or whoever does it, the housing authorities. Each year we kind of know what's gonna happen in the following year since the blend of multiple years and the change in rents.
The other comment, which I thought was funny, is the CECL reserve, because we do have a CECL reserve, which we probably don't need, but we can't mark it to zero. It's funny 'cause banks are coming in and out with increases in reserves and taking money out of their reserves. We're just not touching it, and we're leaving it alone. We run the models. We do what they ask us to do, and we carry this reserve, which might come in handy someday. I just wanted to back up and quickly talk about the asset classes. As you can see, what's happening now, coming out of the pandemic, and I'll really focus my comments just on the U.S., but multifamily is having an incredible run.
Certainly cap rates will be under pressure if rates keep rising. Rental growth is so strong, it's overwhelming any issues on the rise in rates. Personally, I would not expect LIBOR to hit the levels of the forward curve. I think the economy will slow way before then. The Fed will take notice. This is like third quarter, fourth quarter. More like fourth quarter, first quarter. You know, I think LIBOR will hit 2.5. I don't think it'll go to 3. I don't think it'll be necessary to go to 3 because I think the economy and the global economy, with what's going on with the supply chain, will slow. Logistics assets, we don't have that many loans because the cap rates are so low, it's very hard to borrow from us.
They're really bonds. They're most exposed to changes in cap rates because they're long-dated bonds. They behave like bonds. Underlying rents are increasing. The problem is you can't get to the underlying rents. If you have a long-dated industrial lease, it kind of doesn't matter. You have 10 years before you can get up the asset, given the leases in place. You need short duration logistics to actually do well right now, otherwise you've got a negatively correlated cash flow stream. The office markets are all over the place. In Miami, which probably will get overbuilt shortly in the office markets. You were able to lease buildings in the middle of COVID, fully lease brand-new buildings at great rents, huge rents, twice the rents you would have expected two years ago.
The strong southern economies or the red state economies, Texas, Dallas, Austin, Nashville, Tennessee, low tax rates, Research Triangle Park, those are all really powerful and good office markets. Even in the weaker markets like New York, good assets are leasing, and leasing quickly at great rates. Commodity assets are having a harder time. You have to be careful. There's good opportunities in the office market, so we continue to take advantage of that as we can. Retail is obviously, it's still a four-letter word. It does have presented opportunities occasionally, depending on what it is that, the nature of the credit and the nature of the leases. Then hotels, we had, like, 21 hotel loans going into COVID.
We really only have one that's an issue. It's in San Francisco. It's small. San Francisco is the worst office hotel market in the United States by a million miles, and probably will remain very challenging. The rest of the markets are galloping ahead as consumers basically shut down their Netflix account and go on a trip. Their trip, they're gonna travel this summer in a quantity we've probably never seen, paying rates nobody's ever contemplated because the consumer does not seem very price sensitive. Overall, you know, I can't think we could be better positioned than we are. We are a sea of stability in a world that's extremely volatile.
Increases in interest rates only help us and help our returns, and will help cover the dividend even more than it's covered today. It's a great place to park cash right now as the world melts, the tech world melts down. I said in comments you couldn't hear earlier, I mean, it is reminiscent of the dot-com crash back in 2001. I remember when the Nasdaq fell 85%. We have cash flow beneath us. We are not speculative in any way. With a book like we are, you kind of wonder how on earth we could be trading at the dividend yield we are in a world that's still yield challenged and will remain yield challenged for a while.
What will happen to us going forward, as Jeff mentioned, is our book value increase. It will continue to increase. We'll because of the affordable housing portfolio and the mark-to-market on that portfolio, which we can tell you will be going up next quarter. As a firm, given the platform we run, the people we employ, the geographies we cover, the ability, the proven ability of this team to execute in all these markets, in all conditions, you know, we look to be a very excellent place for people to invest and ride out this volatility of the geopolitics and the politics of the United States. Thanks. We'll take questions now. I thank you for your time.
Hey, Barry, just putting a sharper point to the numbers that you talked about, the places you talked about. San Francisco is actually only 40 basis points of our total assets are on loans in San Francisco today. In Manhattan, as you talked about blue states, blue cities, difficult jurisdiction tax-wise and other, there's only 1.2% of our assets are on loans in Manhattan. We almost doubled it when we did the large residential project in Chelsea last quarter, Barry. You're talking about 300, which is only $150 million. That's a long-term bet that you and the company have made on being defensive on Manhattan and San Francisco that's worked pretty well.
Just, one quick comment on that Manhattan loan. It was a foreclosure that we financed, and it's mostly residential. These equities can make a lot of money, which we tried to get into the equity but weren't able to. Next best thing is make the loan or part of the loan. That's a very big positive as opposed to a concern. It's a brand-new loan. Thanks, Jeff.
All right. Continuing with the question and answer session. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi. Good morning. Rina, you touched on this, as did Barry, but I wanted to get a little bit better idea of the visibility you have into the rent increases in the Woodstar assets. You know, from when the CPI or AMI data comes out, you know, how long is it before that rolls into the rent increases? And then, you know, the income statement, you know, is it three or six months or 12 months? Kinda how much visibility do you have there?
For 2022, we actually have 100% visibility because HUD released the 9.1% that I mentioned. They released that two weeks ago. We know for a fact that for 2022, we are able to roll out 9.1% of blended increases across the portfolio. We can do that immediately. It is not what we are choosing to do. We are choosing to roll it out slowly over time, over the next six months. But that can take effect right away. We have 100% visibility into 2022. As far as 2023 goes, we have an estimate, but we really do not know because it is based on three years back median income levels, then two years of actual CPI and one year of projected CPI.
There, there's just a couple of unknowns, but directionally, you can estimate where we would end up.
Hey, Steve, just to give you a sense. Looking back at the change in median income from three years ago and then increasing it by CPI, as Rena said, and the CPI is the variable. We thought this would be around 12%. It's around 9% or 9.1%. All that means is they're delaying a 3% increase that will come the following year or the year after when actuals actually come in at a different place. I think the forward inflation numbers look a little low to me, but I'm not making a judgment based on that. I know that based on the way the calculation works, if we think they're at 3% too low this year, it's going to be 3% higher the following year or the year after to make up for it.
It will be somewhat mean reverting to the numbers that we think, and we're gonna get a couple of years of really good outcomes.
Great.
Just to add one thing. Again, this is we're in Orlando and Tampa, and you can't get better markets for income growth than those two markets in the country. There's in-migration, job growth, new companies moving in, and so there is gonna remain pressure on wages, which makes this, you know, more affordable for our renters too, because their wages are going up rapidly also.
Yeah. As a follow-up, Jeff, you know, when you think about capital allocation, you know, one of the biggest advantages of all your cylinders is reallocating capital when it's attractive. You know, given all the movements in the markets and obviously you've now got another CLO in the infrastructure business. You know, how do you think about the most attractive uses of putting money to work right now?
Well, the lending business has been a real champ for the last 18 months. We've averaged about 200 basis points, between 170 and 200 basis points above our long-term trend ROE in the lending business. Our international lending business has really picked up the slack and it will probably be over 30% of what we do this year, and it will be significant, and it won't be. It will be multi-jurisdictional. It'll be Australia and core Europe. The loans we're doing there, we feel like have lower competition, better advance rates to us, better structure for us, et cetera. We're super happy with that. Our domestic loan book continues to grow with a massive focus on multifamily.
Yeah, I talked about this in the past, and I mentioned it briefly before, but the reality is, with rates going up as quickly as they have, the agencies, Fannie and Freddie and the CMBS market, simply can't be as competitive on proceeds to a multifamily borrower as the non-bank market can. They are sizing a loan based on the trailing twelve-month cash flow, and we all know that the next twelve months will be higher than the trailing twelve months. Any borrower can get higher proceeds away from the Fannie, Freddie, and the CMBS market. This won't last forever, but at the same time that this phenomenon has happened for us, we have a lot of smaller competitors who, because the CRE CLO market has been quiet and it's been difficult to get out to an arbitrage, have not done CRE CLOs.
Their bank warehouses are full, and they're not being competitive because they don't have room to grow. As you talk about our ability to pivot, we have pivoted. We've pivoted strongly. Multifamily is now by far the largest segment that we have, and we're taking advantage of a lack of competitors to really add to that. I think you'll see that happen continuing for the next 6-9 months. I don't see the CRE CLO bandwidth problem fixing itself in the short run. I would expect we continue there. We continue internationally. We probably don't add a lot in property. As you know the residential business well, the non-QM loans that we're seeing today with 5.5%-6% coupons at 101 type of premiums will be awfully good-looking investments at some point down the line.
We're sort of excited about that. Our energy infrastructure business is lending at the mid-teens. You know, we expect them to do $1 billion+ , and they're off to a great start this year, and that portfolio is performing super well. I'd say those would be the key adds. You probably won't see us add a lot in property, and Barry can speak to this, but it's just difficult to get the cash returns that we need in the property world with where interest rates are on financing today. Property probably will be something that you don't see increase again. Barry, any comments?
I think that's correct, Jeff. I don't have anything to add.
Great. Well, appreciate the comments this morning. Hope you feel better soon, Jeff DiModica.
Thanks.
Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.
Hey, good morning, Jeff. If you could, two questions. One, how do you sort of balance pretty strong growth here into what could be an economic recession? Number two, can you talk a little bit more about how you took advantage of the Non-QM market disruption in the quarter and your outlook for that business?
Yeah, sure. As far as growth into recession, you know, we wake up every day and decide what we want to invest, where, what areas we want to invest in. If we think that we're headed for a difficult time, we can simply pull back the reins, and we will ultimately stay invested by virtue of future funding that we have, et cetera. It's a real advantage having this very large ecosystem of money coming in and going out. Most days, we don't have to wake up and do something that we don't wanna do. I'll leave it to Barry to talk about chances of recession or how we would necessarily change our outlook. My guess is if we head into an environment like that, there will be less to do. There'll be less purchases, and there'll certainly be less refinancing.
In a world where there were $600 billion or so of loans to choose from last year done in the floating rate world or $500 and change, it may be smaller than that. We're expecting that we'll do about 80% of the volume of last year, would be okay, and we'll be able to stay invested if we did 30% of the volume of last year. That's one of the beauties of our system. Barry, do you wanna talk a little bit about the prospects for recession and how it might change our outlook?
Yeah. You know, I'm expecting a recession, but that goes to the LTV of the book. You know, at 61%, I think we've got a more than adequate cushion. It would have to be a complete wholesale destruction of the economy to really dramatically injure us with demand destruction. You know, that would empty office buildings or cause unemployment to skyrocket and wage growth to cease and reverse. It's not. Obviously, the energy book and the energy complex is absurdly healthy. Even on, we have a small oil and gas business at the parent level, and investments we wrote off are now gushing cash flows. It will just change the opportunity set for us. Probably there'll be better investments to be made, frankly.
People do have loan maturities, and that was the year we were created. We were created to provide liquidity and capital when banks weren't lending, and we thought there were terrific risk-return opportunities for us, risk-reward opportunities for us, solving people's capital stack problems. In a way, those are our best days. Our competition's thinnest. We're the biggest of our kind and have the liquidity in our property book. We can create liquidity, and we don't have to do it by selling hedges or taking off foreign currency hedges. We can just simply sell some of our equity assets or even trade our loans. I'm not nervous about the portfolio really in a slowdown. Again, I guess the only negative is LIBOR probably or SOFR goes down, not up.
We still have our floors and I don't think you'll see rates. Well, you could. I mean, if it gets really bad, you could see short ends of curve drop as it did during the pandemic. That wouldn't be a base forecast. I think you're gonna see a slowing of demand. I think the consumer will have first, he bought everything he needed, and now he's traveling and spending the last of his stimulus savings. I always said I'm at a conference actually that I'm attending here, and one of the banks is here, and they said that their average loan balance of their clients, this is one of the top five banks in the country, said it was $400, now $2,000.
That's basically the money they saved during the pandemic they didn't spend. Sadly, that savings account can erode with higher food prices and higher gas prices. You would hope that both of those are somewhat transient. Offsetting that is wage growth, which is substantial, particularly at the lower ends of the socioeconomic spectrum. That's good. You know, we should be happy with wage growth. You know, with an unemployment rate that would have been 2.7% if 1 million people hadn't decided to rejoin the workforce. It's a long way to having something critical. We feel bad. It feels bad. You're seeing this tech correction. It feels bad. You're seeing the bank stocks really explode. We were just boring.
We just pay our dividend and continue to execute our business and provide just a spectacular total return to shareholders given the volatility of the world today. Thanks.
Jeff, Non-QM market.
Go ahead, Don.
Do you still feel like, you know, it has good sort of secular growth? Were you guys able to, you touched upon it a little bit. Were we able to take advantage of the spread widening and dislocation in the quarter?
Yeah. I'll touch on that. You know, there was spread widening in a bunch of places. We were an aggressive investor. We wrote, I think, $1.9 billion or $1.8 billion of new loans in the resi business. There was obviously spread widening. There were definitely weaker hands in that space. We are a long-term player. We have a large balance sheet. We continue to invest. You know, the credit on non-QM loans and on any resi loan looks really good. The LTVs, which were mid-sixties to a 730 FICO or whatever, are significantly below mid-sixties today given the HPA that we've experienced. So there's no credit concern. The concern is only what the coupon and at what speed does it prepay.
With premiums down to, on a post-hedge basis, we hedge 100% of our interest rates or 85%-100% of our interest rates from the time we lock a loan. As rates have risen, we've had hedge gains, which means net we're owning new non-QM loans below par. And then it becomes a—when they're below par, we don't have to think about prepaid speeds as much as we worry about prepaid speeds on premiums. We won't worry about credit. We won't worry about prepaid speeds. It'll just be a matter of what coupon is left over on what we can originate and securitize. We've continued to securitize pricing our third deal this month, or actually priced this week. We have two more coming this quarter.
To the extent that we can get some of these newer loans with 5% and 6% handles and potentially mid- to high-6% coupons on these resi loans, I think those will be phenomenal investments. We're continuing to invest there. It was a rocky quarter. Spreads widened. Again, the rate hedges that we had on covered most of that significant move and gave us an opportunity now to be a larger investor.
Thank you.
Again, as a quick reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. Our last question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thank you very much. Do you expect that there will ultimately be a correction in commercial real estate prices? How do you balance the fact of rising replacement costs against the potential for cap rates to widen? Do you think that bodes for flattish outlook for commercial real estate prices, say, next year? Or you expect a correction?
I'll take that. Yeah. I think the lowest cap rate asset classes will face some pressure, but they happen to be low cap rates because their rent growth has been astounding, double-digit like. They do mark-to-market, you know, on short leases. I'm really referring to apartments, number one. Single-family for rent, probably similar to apartments. Industrial, I mentioned in my comments, industrial is trading at 3 caps to 3.25. We don't have much exposure to industrial. We can't get our returns lending to that asset class. We've walked away. I think you could see a 25-50 basis point increase in cap rates in the residential sector in apartments, but it really is about rent growth.
It is very important and can be far more important than interest rates. I don't think we have data really, because if you go back to the late 70s, early 80s when you had 22% prime rate, the cap rates weren't 22. They weren't even double-digit because everyone looked at the interest rate curves as transient. They were gonna come down, which they obviously did. I remember early in my career buying some assets in the U..K at 5 and 6 cap rates when interest rates were 13%. You know, I think real estate investors kind of look through the transitory nature of the curve as the central banks try to accelerate or decelerate growth. They won't go hand in hand.
You will eliminate a class of buyers that have been in, let's say, multifamily, that were buying it before at 4s and financing at 2.5 and 3. You know, there was a good cash and cash yield. You don't really have that with today's cap rates. But as I mentioned in my comments, we're selling probably $2 billion of market rate apartments right now. There hasn't been much movement in cap rates. Obviously, the rise in SOFR and the rise in Treasuries is not a secret. People are still looking at assets, and you've seen a couple take privates by Blackstone, where I think they're saying like a 4.25 unlevered is fine, and they'll refinance when the economy weakens. They're almost doing an equity LBO, if you will.
They put it out today. They think rates, the economy will slow, rates will come back down, certainly short rates, and they'll be able to borrow at more attractive spreads. I don't think. Then offsetting that, the one comment you made, which is really critical, is replacement costs. Replacement costs is galloping ahead. It's not just commodity prices, it's not just materials, it's also labor and a general, again, labor shortage. It's gonna get worse. It's not gonna get better because the government hasn't spent a dollar of the infrastructure bill. When they start doing that and buying steel and concrete and poly PVC piping and laying roads and asphalt, and obviously where oil is, it'll put tremendous demands on those byproducts.
Material prices continue to rise probably for the foreseeable future, and the supply chain is gonna get worse, not better. Some people talking about inflation rolling over. In parts of things like consumer-led inflation, maybe autos, used cars, maybe they will. That's more a function of people already got what they wanted. They already bought their new car. They went out and spent money. They bought their new house. I think in other sectors of the economy, replacement costs are gonna gallop ahead. Of course, that's really good for everyone who owns anything today because in order to justify new construction, rents have more room to rise. It is a tug of war. It is the holy grail of. This is what we wake up every night worrying about.
What's the interplay between cap rates, interest rates and inflation and inflation hikes and replacement costs. I look at multifamily starts, for example, in the United States, which are pretty much at record highs. I don't think a significant portion of that stuff will ever get built. If it gets built, it won't be delivered on time, as no project I'm aware of is delivering on time and on budget right now, either here or in Europe. I was talking to somebody yesterday who's building a residential project in Miami, and they're a year and a half late to complete it because of supply chain issues. Nobody knows where stuff is. It's on seas, it's in warehouses, it's stuck offshore. They're waiting for goods from a closed Chinese factory.
It is not gonna be great. It's really good for existing assets and for our loan book. It's really healthy.
Thanks very much.
Barry, if cap rates.
Sorry. Sorry, Jade. Cap rate higher. We have a lot of room at a 61 LTV to absorb that. I think it's one of the things we like to talk about. Barry, can you just make one comment on what you think would happen to cap rates in affordable housing versus multis and other? We look at them as much more bond-like cash flow and less volatility because of that bond-like nature. Even if your supposition is significantly higher cap rates, Barry, I'd love to hear your opinion on how you think low-income housing plays into that.
As you know, Jeff, our cap rate on our multis books that we're holding in the fours. You know, we're nowhere near. We're not marking this down at today's cap rates. We're just marking up the value based on rent growth. You know, we have a huge cushion in our mark. And because it can only go up, rents can only go up and not down, the asset category has become a very, very exciting unlevered yield for offshore investors that look at it as an inflation protection bond and basically an index bond to inflation and wage growth. And so it's almost like a TIPS, you know. It's
The minority investors that we have in the Woodstar portfolio, when we realized and demonstrated to the street and to our shareholders that these gains we talk about are absolutely real and available to us to harvest at any time, you know, they were both offshore sovereign wealth funds that. Well, I guess one's a quasi sovereign wealth fund, but they're looking at this as basically a bond equivalent yields that actually have a kicker in it. You know, it's a TIPS. It goes up. It doesn't go down. So, that's gonna keep those cap rates tighter, and then probably market rate cap rates going forward.
Regarding transaction outlook, what do you expect for the market? Do you expect, I assume, a decline this year? Last year was a record. We had a surge driven by not just the number of properties that traded, but much higher values. I would expect you think that would decline, particularly in the second half of this year with higher rates. For Starwood itself, on commercial real estate lending, what do you think you guys do, for originations this year?
Well, I'll start with us because we don't even give guidance this quarter. I would say, you know, we did $10 billion in transitional lending last year. That was our goal coming into the year. For the reasons you said, I would expect it to be slightly below that, but not significantly below that. I think there's a lot to do for us in times like this, where, as you're seeing, bank warehouse lines are full. A lot of our smaller competitors are sort of out of the market. When we can get pricing and when we can do things that are attractive and very complex, and we've been doing a lot of large, complex deals, we're gonna tend to do a little bit more.
My guess is that our market, including our peer group, is down 20%-25%, but we're closer to flat than not. Barry, I'll let you talk about commercial real estate and what you think happens.
Well, right now there's a lot of assets on the market. There are a lot of people selling assets. Typically multifamily, of course, people trying to lock in today's cap rates, which again, are in the 3s, low 3s, like 3%, 3.25%, and in some cases breaking 3%. I think there's been a surge of assets for sale. You haven't seen a ton of other asset classes trade dramatically. People have tested the waters on hotels. The asks are super high. The bids are not at the ask. You haven't seen a ton of trades. We are quite active on the equity side. You know, we're, as are some of our peers.
There's a lot of people holding onto property because of the rent growth and lack of alternatives. I would probably agree that volumes will go down. We don't need transactions. We just need refinancing opportunities. I have no idea what the cadence of maturities look like of the U.S. commercial mortgage market, but assuming it's, there'll always be opportunities for us, I think.
Thank you.
Jade, even this morning, people pulling back their expectations for the CMBS market and the SASB market for the year. I think you and I have written about that being smaller, that is the case. You know, we will obviously pick up some slack as the SASB market does less deals and people move away from 10-year fixed to transitional. I would expect we're gonna be able to.
No. Two other comments. I mean, the difficulties of other asset classes in times like this always help real estate. We always get a bid. Institutions find the fact that we don't mark to market overnight kind of refreshing as they look at the collateral damage in their VC book or even in their equity book right now. That's always benefited to some extent real estate. Also, where the capital is in the world right now is primarily in oil wealth nations, including the Middle East, and they have a predilection to buy real assets. They like real assets. I expect that you'd see them participate more in the markets than less, and I would guarantee that, frankly. These two.
There's one other new kid on the block, which has been extremely material the last 12-24 months, which are the non-traded REITs, which we're the second largest in the nation behind Blackstone. These entities have to put out capital, right? They have to find things to buy because they can't sit on cash. They don't earn anything on cash. They have been very important drivers of what is acceptable pricing. They are very active buyers. On a scale, the Blackstone non-traded REIT has to almost buy the entire volume of commercial mortgage transactions prior to COVID every year. They'd have 100% market share of what was basically a
I forgot the number, but it was. They'd have to have all of it. That alone is driving transaction volume by itself. Obviously we're bigger than the next eight guys behind us combined. You find things to do. You create deals 'cause you look for opportunities. What you're seeing, obviously, it shouldn't surprise anybody. I think I've talked about it, maybe not to this audience, but you'll continue to see take privates in the public market, whether it's PS Business Parks or ACC. Those are all being driven by the non-traded REIT volumes and the need to put out that money and scale. You'll continue to see take privates for a while of the public companies, which will drive loan volume origination.
We're working. We finance Blackstone finances us on the equity side. We've partnered historically before on some large loans and have a large loan that we expect will close with them shortly, actually.
Thanks.
We have reached the end of the question and answer session. I'll now turn the call back over to Barry Sternlicht for closing remarks.
Thanks everyone. I just can't tell you. I mean, we are obviously large shareholders of Starwood Property Trust, and so is the team, and it's a really nice place to be hanging out while the world melts. We hope other shareholders and other capital sources will increase their positions in our company because we really look good in these times of trouble and we expect. I'm not sure any mortgage REIT in our sector can cover their dividend the way we can. That's not reflected in any premium. Actually, we've traded now at a discount to some of our peers based on our new book value. Thanks for your support, and thanks for listening in. Have a great day.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.