Starwood Property Trust (STWD) Q4 2020 Earnings Call Transcript

Starwood Property Trust (STWD -1.99%)
Q4 2020 Earnings Call
Feb 25, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Starwood Property Trust's fourth quarter and full-year 2020 earnings call. [Operator instructions] Please note, this conference is being recorded. I will now turn the call over to your host, Zach Tanenbaum, head of investor relations.

You may begin.

Zach Tanenbaum -- Head of Investor Relations

Thank you, operator. Good morning, and welcome to Starwood Property Trust's earnings call. This morning, the company released its financial results for the quarter ended December 31, 2020, filed its Form 10-K 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. 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. Reconciliations of these non-GAAP financial measures to the most comparable measure 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. Before I walk through our financial results, I wanted to briefly comment on our non-GAAP earnings measure. What we used to call core earnings is now called distributable earnings, or DE, in order to more accurately describe what this metric represents. While the term has changed, the calculation has remained the same.

You will find additional disclosures about this non-GAAP measure in our 10-K. Despite a volatile market backdrop caused by COVID, the fourth quarter capped off another successful year for us, with DE of $0.50 per share for the quarter and $1.98 for the year. Throughout 2020, our liquidity and capital deployment were strong, which would not have been possible without the strength of our balance sheet and our diverse platform with multiple business lines. Even after $4.6 billion of capital deployment, $3 billion of which occurred during COVID, and after early retiring $500 million of unsecured debt, we maintained an average cash position of over $700 million post-COVID.

I will start my segment discussion this morning with Commercial and Residential lending, which contributed DE of $141 million to the quarter. In Commercial Lending, we originated five loans and a small upside for a total of $454 million in the quarter, bringing our full-year volume to $1.9 billion. Of this amount, $1.1 billion was originated after Q1. During the fourth quarter, we funded $333 million related to new loans and an additional $334 million under pre-existing loan commitments.

We also received $250 million from loan repayments and $47 million from A note sales, bringing our commercial loan portfolio to a record $10.2 billion at year end. Our interest collections remain strong, with 98% of our loans current as of quarter end. We continue to see improvements in loans, which required partial interest deferral COVID, particularly in loans secured by hospitality assets. At year-end, we had five loans, which continue to require the partial interest deferrals granted to them post-COVID.

The quarterly deferred interest related to these loans is $4.6 million. These modifications were short-term generally permitting only the temporary deferrals of interest and the repurposing of reserves and were often coupled with additional equity commitments from sponsors, which totaled $650 million since COVID began. On the CECL front, we reduced our reserve by $27 million this quarter, bringing our general reserves to $62 million and our specific reserve to $60 million. The decline was primarily due to the write-off of a $22 million specific reserve related to a $71 million loan on a residential project in New York City, which is now reflected as property on our balance sheet.

We also fully reserved for an $8 million unsecured loan related to this project. Because these loans were on nonaccrual, there is no impact to interest income going forward. We ended the quarter with a weighted average risk rating of 2.7 on our five-point scale, down from last quarter's 2.9 and in line with pre-COVID levels. Our residential business was also active in 2020, with four securitizations totaling $1.8 billion and loan acquisitions of $1.6 billion, of which $1.2 billion were acquired after Q1.

During the fourth quarter, we unwound the first of our nine life-to-date non-QM securitizations, which will allow us to significantly reduce the financing cost of these loans once they are securitized. In addition to the $177 million of loans we acquired online, we purchased another $146 million of loans in the quarter. We also securitized $327 million of loans in our ninth securitization, bringing our loan portfolio to a year-end balance of $933 million, a weighted average coupon of 6%, and an average FICO of 727. Our retained RMBS portfolio ended the year at $236 million after selling $136 million of bonds that we retained from our second-quarter securitization at a gain to our cost basis.

On the financing front, we executed two new facilities for $725 million, one during the quarter and one subsequent to quarter end. After the quarter, we repaid our federal loan bank facility and transition the loan secured by that line onto our existing facilities. Next, I will discuss our Property segment, which contributed $19 million of distributable earnings for the quarter. This portfolio continues to perform very well, with blended cash-on-cash yield of 15.7%.

2020 rent collections were strong at 98%, and weighted average occupancy remained steady at 97%. In our investing and servicing segment, we reported DE of $32 million in the quarter. Our special servicer was very active in 2020, with $5 billion of loans transferring into special servicing since the onset of the pandemic. This does not include $24 billion of COVID relief request that were fielded by our servicer and which may result in future transfers.

As we have said before, although we expect longer resolution time and thus delayed fee recognition for these assets, we believe that the earnings contribution from the servicer in the coming years will reflect these increased balances. We ended the year with an active servicing portfolio of $8.8 billion and a named portfolio of $81 billion. In our conduit, spread tightening in the fourth quarter allowed us to achieve record execution levels as we securitized $455 million of loans in two transactions. This brings our total securitization volume for the year to $942 million in five transactions.

Including my business segment discussion is our infrastructure lending segment, which contributed DE of $6 million to the quarter. We funded $81 million related to new loans and $22 million under preexisting loan commitments. These fundings were offset by repayments of $103 million and sales of $22 million, leaving the portfolio at $1.6 billion at year end. We continue to be pleased with the credit performance of this portfolio, which had 100% interest collections in the quarter.

We also recognized a $7 million decrease in our CECL reserve due to improved macroeconomic conditions in the project finance based. Subsequent to quarter end, we priced our inaugural infrastructure CLO, which Jeff will discuss in more detail during his remarks. I will conclude this morning with a few comments about our liquidity and capitalization. As we mentioned last quarter, we executed two debt offerings in October, a $250 million upside to our Term loan B and our first $300 million sustainability bond issuance.

As I mentioned before, we also early retired our $500 million unsecured debt that was due in February 2021. We continue to have ample credit capacity across our business lines, ending the year with undrawn debt capacity of $7 billion, unencumbered assets of $3 billion and an adjusted debt to undepreciated equity ratio of 2.2 times. In addition, our liquidity remains strong, with cash and improved undrawn debt capacity of $649 million out of Friday, providing us with ample capacity to execute on our pipeline. With that, I'll turn the call over to Jeff for his comments.

Jeff DiModica -- President

Thanks, Rina. I want to start today with a couple of non-market-related topics. Transparency and investor reporting are at the core of every decision we make. And we are proud to have been recognized by NAREIT as the recipient of their Gold Star award for excellence in those areas in each of the last seven years.

In March, we will release to our website a virtual Investor Day webinar that Zach and the entire management team put together that we hope will explain exactly what we do as investors across seven businesses in more detail than we have ever gone through in the past. We look forward to sharing that with you, and we'll send a press release when it is uploaded to our website. Also on our website is a discussion of our corporate ESG initiatives. I want to highlight a few things you will find there that we are very proud of.

43% of Starwood Property Trust employees identify as female and 49% of employees identify as racially diverse. Each year, we strive to increase our diverse talent pool. And for 2020, we continue that trend with 52% of hires identifying as either female or a minority. We are a top 10 owner of affordable housing in the United States, with over 35,000 residents in our Florida multifamily portfolios.

In our non-QM residential lending business with over $5 billion of capital deployed since 2016, we are a leading provider of mortgages to high-quality borrowers who otherwise struggle to secure access to housing credit. Our energy infrastructure lending business has financed over $800 million of renewable energy assets since our purchase in 2018, generating 7,900 gigawatt hours of energy and avoiding 7.4 million tons of CO2 emissions. Finally, we are also proud to have issued our inaugural $300 million sustainability bond in Q4, backed by eligible green and/or social projects. Now on to the discussion about our quarter, our year, and our prospects.

2020 was as difficult of a year as most of us can remember. But looking back on what we accomplished, it may have been the most satisfying for our firm. We entered 2021 with tremendous optimism about the overall health of our business, our future prospects, and unparalleled confidence in our ability to continue to pay our dividends. We ended the year with $1.98 in earnings in 2020 despite the earnings drag of holding record levels of sustained liquidity due to having to work through an entire credit cycle in less than 12 months.

We entered COVID with what we believed was a fortress balance sheet, near-record levels of liquidity, and the ability to create significantly more, allowing us to be the first to both voluntarily pay down our bank lines at the beginning of COVID and then begin to go on offense and begin investing again in April, just weeks after the COVID lows. In the downturn, we never contemplated a dilutive capital raise, which would have impacted future earnings growth. We completed a wholesale review of every projected cash inflow and outflow, and we reunderwrote every asset multiple times. We never sold assets for a loss.

We didn't need to create more sources of cash by unwinding our in-the-money foreign exchange hedges or LIBOR floors. To the contrary, we use the knowledge of the quality of our assets and sponsors and of our liquidity prospects to go on offense. We deployed $3 billion of capital in the last three quarters of 2020, which was over three times more than our five largest commercial mortgage REIT peers deployed in the aggregate over the same period. We did this with contributions from all our investment cylinders with term financing and accretive ROEs.

We carry that momentum into Q1 of 2021. And our first quarter closed and in the closing pipeline across business units is well over $2 billion, the vast majority of which comes from the 12 loans we expect to close in our core CRE lending segment. The reline in prices across asset classes has created significant cushion in our financing facilities as well, which is another source of potential liquidity today. We issued $550 million in high-yield and term loan debt that we used to pay off $500 million of high-yield bonds that opened for prepayment at par in Q4, well in advance of the maturity date in February 2021.

These actions leave us with ample unencumbered assets to create more liquidity in the debt markets where we could borrow today at or below the best rates we have seen since our inception. In our core CRE large loan lending business, our loan book has an LTV at year end of 60.4%, the lowest in our history, and is now over $10 billion for the first time. We have sold more A notes than any of our peers. And if we add back our off-balance-sheet financing, our loan book at year-end was almost $14 billion.

Given the uncertain climate last year, we worked hard to reduce our future funding exposure by well over 50%. Today, we have the least future funding obligations of any time in the last 10 years, representing just 7% of our total assets, down from 18% at year-end 2019. Our world-class borrowers have contributed $500 million of equity to the projects since COVID began. The vast majority of that on hotel loans where we have only three loans remaining on partial interest deferral with no interest forgiveness.

In addition, we have commitments from our borrowers for an incremental $150 million of equity contributions in our hotel portfolio alone. At our low LTVs and with the financial support our hotel borrowers have continued to provide, we are confident this large loan portfolio will significantly outperform expectations, absent the divergence in the path of the COVID recovery. As Rina said, interest collections remain strong, and though we continue to work through a few loans whose business plans have been disrupted by COVID, we remain confident in the strength of our book overall. We worked hard on the right side of our balance sheet last year as well.

Selling A notes, adding warehouse line capacity, and we are working toward pricing our second CRE CLO in the second quarter, which will move over $1 billion in loans off our bank lines, removing both recourse and credit marks. If today's CLO levels hold, we will significantly increase our returns on the equity in these loans. Pro forma for the CLO, we will have less than 40% of our CRE loan book financed on bank warehouse lines versus 45% today, which is already the lowest percentage in our peer group. We continue to benefit from the LIBOR floors in our loans as well.

And the average LIBOR floor on the 90% of our domestic loans that have them, it's almost 150 basis points in the money today, allowing us to earn returns in excess of our original underwriting. In non-QM residential lending, we added or in the process of documenting bank lines that will bring our financing capacity above $2 billion, which more than fully replaces the Federal Home Loan Bank line that actually matured this month as did the lines of all other captive insurance companies who are members of the Federal Home Loan Bank. One of the new lines we closed and hope to replicate is a multi-year committed nonmark-to-market financing facility, which, in addition to our successful securitization program, provides the business multiple options for financing going forward. As Rina mentioned, we reduced the balance of our non-QM loans on our balance sheet with our Q4 securitization, our ninth to date, and took advantage of a significant rally in residential loan prices to separately sell what we deem to be our riskiest loans by geography and credit score at a gain.

Rina mentioned, we executed an optional call right on the first of our nine securitizations in the fourth quarter, which will significantly lower our cost of financing on the loans in that transaction. We have the optional right to call and securitize three additional securitizations in 2021. And we plan to continue to call securitizations, lower our financing rates and increase our ROEs in the quarters and years to come. In our energy infrastructure lending business, we are very happy to announce that we priced our inaugural energy infrastructure CLO on Tuesday night, a first of its kind and the culmination of a two-plus year path we set out on after buying that business from General Electric.

We were oversubscribed in every offer tranche, allowing us to upsize the deal from $400 million to $500 million and tighten spreads to an average coupon of LIBOR plus 181 through the BBB bonds at an 82% advance rate. This significantly increased the ROE on the assets in the CLO with term financing that is non-recourse and has no mark-to-market exposure. This CLO didn't materialize overnight. Our team met with potential bond buyers since our portfolio acquisition and had dozens of bespoke meetings to explain why this nascent market offers several meaningful structural advantages and a significant risk-reward at wider spreads than broadly syndicated corporate loan CLOs.

We were delighted bond buyers agreed with our thesis. We intend this CLO to be the first of many in this business. The assets in our portfolio continued to perform extremely well even in the depths of COVID and were unaffected by the recent freeze in Texas. With the emergence of accretive term CLO financing, we intend to grow this book significantly in the years to come at accretive returns.

In REITs, during 2020, we continued to proactively reduce our exposure to below-investment-grade CMBS. And with a portfolio balance of $689 million, it is the smallest year-end balance since our acquisition of LNR in 2013 and 33% lower than our 2017 peak. Despite choosing to reduce our exposure to CMBS during this period, we were able to increase our named special servicing portfolio to over $80 billion today through purchases, partnerships, and being named special servicer by third parties. We took advantage of the depth and breadth of our platform.

And during 2020, we reallocated professionals internally to help our special servicer deal with over 1,000 bespoke special servicing requests since COVID began. Of this amount, $5 billion has already entered special servicing, which we expect will produce in excess of $50 million in incremental revenues in the years to come. In our CMBS Conduit Origination business, SMC, we had $185 million of unsecuritized loans when loan prices fell in COVID. Securitizing them early in COVID as some chose to do would have crystallized over $20 million in losses.

But as investors, we chose to hold the loans. And with the reopening of the CMBS market and spread tightening, we have now securitized over 90% of those loans at or above par and expect to securitize the balance in the coming quarters. For the first time, SMC was the largest nonbank originator of CMBS in 2020. In May, with many competitors shut down, we chose to go on offense and originate COVID-appropriate loans, realizing some of the highest gains on sale margins in our history as bond spreads continue to tighten in the second half of the year.

In addition, we have a robust pipeline for Q2 securitizations. Finally, we also had very strong performance in our property segment across our portfolio of stabilized core-plus assets. We expect to close an $80 million cash-out financing on one of our Florida multifamily portfolios in the first quarter, which will increase the record 15.7% cash-on-cash return we earned on the entire property portfolio in the fourth quarter. We continue to actively explore ways to monetize a portion of the over $900 million or over $3 per share of gains in our own property.

Doing so would add liquidity, increase book value per share and allow us to realize gains that we can reinvest accretively to grow earnings. In closing, we believe there is ample runway for us to continue to outperform in 2021 and beyond, regardless of the macro environment. With that, I will turn the call over to Barry.

Barry Sternlicht -- Chairman and Chief Executive Officer

Thanks, Jeff. Thanks, Rina, Zach, and good morning, everyone. I don't know how to actually handle this call. I'm so excited about the year we had and more excited about the future of the firm.

When we created this company 11 years ago, we were a $900 million pile of cash. And now we're an $18 billion balance sheet with 300 extremely talented people with a best-in-class board of directors. And I think, if anything, it's always when the tide goes out that you see who's standing tall. And our business model, our strategy of a diversified finance company really showed strength as we continue to do what we do and have the balance sheet to do it.

It was a remarkable year for us. I mean, as you would expect, when the storm hit and the pandemic hit full force, every person here manned their station, their battle station. And as the smoke cleared, we decided to go back on the offense that we looked at our balance sheet. And as you know, on March 16, on CNBC, I was pretty bullish on the stock market.

And I said this is going to clear. And we use that overall driver team to get back to work. And the Board led us deploy capital while we have debates, and some of the opportunities are extraordinary. One trade we made in our resi business in the year made us almost $50 million pre-tax, and we actually never had to deploy any capital behind it.

No other mortgage REIT and I don't even want to call some mortgage REIT anymore, no other finance company in our sector could do something like that. And all of our business lines, we have the second most probable securitization in the company's history in the fourth quarter, followed by a pretty nice securitization earlier this quarter. So I mean it's great that we got through the quarter. I went on TV with Betsy Quick.

Jim Cramer was talking about our dividend yield not being sustainable. When we went public, we said we'd be stable. We'd be transparent. And we would never force capital into a single business line.

And that's why we drove the diversification of the company. And there are so many incredible things that happened in the year consummated most recently by the CLO in the energy book, which will be a game-changer for that business for us, and it should meaningfully contribute to our growth going forward. And with no credit losses of any consequence during the prior 12 months is going to be -- and we have a great team. So you have 300 people dedicated to the affairs of this company.

I just want to thank them for all their work. They may be listening to the call, some of them, they were worked from home. We got through it smoothly. Then there's 400 people and 4,000 people at Starwood Capital Group, who supported the STWD team through the crisis.

Our real estate guys helped out on the loan restructurings and looking at ways we can feeling good about the investments. It was that conviction in the value of our book that allowed us to go back on the offense and as Jeff said, did five times the investment or more the next five guys in the industry combined. Real estate is really just still recovering from the pandemic. We turned off our large loan lending book largely, but other businesses we went to talent hunt.

And so we had that opportunity, which worked out great for everybody. But going into this year, almost every business is in our prime position, and we expect all the cylinders to be functioning to our advantage, which is just remarkable. We have a great balance sheet. All of the moves the team have done to support the financing.

So you have to look below the lines, you can see that we have more on balance sheet financing, more matched recourse financing than any of our peers. So I have to say the team has done just an extraordinary job. I also said in the third-quarter earnings call that we can pay our dividend, that we have the gains in the book. I was confident we can pay the dividend practically ever, though whether it was prudent to do so or not.

If you believe me and not the comments in Kramer made, the stock is up almost 70% since that call of $1,467. So he had a call in and some of the low companies with big dividend yields usually mean they're cutting them. That wouldn't be the case with us. So we never really had any doubt whether we could pay the dividend.

It was a question of whether we should pay the dividend. And obviously, we made the decision with the board's support to keep the dividend. And honestly, with the book loan-to-book value of LTV of 60% and an 8.2% dividend yield today and the treasury at 144%, we still believe we have an extraordinary value proposition for shareholders. And I would expect, I'd hope coming out of this that people would look at this as a company that can grow and supports its dividend.

And I can't be more positive about the company right now. What else I can say? It's really -- we've talked to Jeff and Rina gave you extensive comments. I mean, the fact that LTV, 11 years into this business is still 60.4%. That's the big difference between mortgage REITs today and mortgage REITs prior to the GFC, that they were lending at 70%, 80%.

So when things got tough, they wind up falling apart. The other most hidden things in the balance sheet, where we've reduced our CIS exposure by more than a third, and we also reduced our construction loan and future funding exposure, like by a dramatic 80%, like some staggering number. So the company is absolutely positioned for incredible success going forward. And this is sort of a celebratory earnings call because it really wasn't fun when our stock had crashed and the people didn't panic.

They manned their stations and everyone held their arms together, and all of our business lines performed beautifully. So I don't have much more to say. I think Jeff and Rina, Andrew, Zack, the whole team, really kudos to you and to our Board. Because I think real estate is not out of the woods.

Don't take these comments as commercial real estate being out of the woods, you can -- I'll talk about in three seconds each of the asset classes. Industrial is fine. Multi is weak, but they'll be OK. Because kids will go back -- we'll leave their parents and they'll go back into apartments.

But the business asset class is getting a bit. Office is yellow. Office is a question mark, and it's deal by deal, but I do believe we have a general feeling that people will go back to the office in some scale, and we look offshore to Korea, Tokyo, the Middle East, China, people are 100% back in the office. And we're in Continental Europe before the second wave hit.

So despite the sales force comments, we think that that market will be more than OK because we're lender. We're only 60% of value. And then you have two more challenging asset classes, hotels, but Jeff wanted to say that we're going to have no losses in our own. We took that up.

I just said it, so he didn't have to say it, and then it'll be nothing. And then retail, which is really difficult to underwrite, and it's kind of dark red, as you know, I'm not telling you anything you don't know. So it's interesting because if I look at the book, we probably could sustain maybe $100 million of losses out of our $18 billion going forward. None of it is.

Even one of our red assets we marked to five, I'll bet dollars to doing it, so we don't lose more than $1, not $1. And we just had to do it because it went a nonaccrual status. So but it's a third of the cost of the asset, and I'd love to get the asset back. So couldn't be happier.

And with that, I guess, we'll take any questions. By the way, one more thing I should mention is we don't really have exposure to the most troubling markets in the country. In San Francisco, it's less than 1% of our assets. And New York City is like 3% of our assets.

So New York, by the way, is not going away. New York may struggle a little bit. Residential prices will be down. The office markets will take a while to recover.

Rental growth will be nonexistent. There's too much sublet space. Actually, rents will drop. But our exposure in Manhattan is pretty good, and we're comfortable.

I think the tourism market will rebound sharply. Midweek will be tough because of business travel for a while, but leisure on the weekends will explode. Yesterday, you saw Carnival, say, 30% up in future bookings and rates are up. Leisure travel is going to be great.

And that's why Marriott stock hitting all-time high yesterday, I guess. I do think the hotel stocks are way ahead of themselves, but that's an aside that doesn't really impact us. So with that, we'll take questions. Thanks.

Questions & Answers:

Operator

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

Stephen Laws -- Raymond James -- Analyst

Hi. Good morning, Jeff. I wanted to start off really with the -- you commented in your prepared remarks about the earnings growth that can be generated organically. Can you talk about that building off the roughly $2 per share of distributable earnings this past year? What's the capacity to deploy capital and the returns we should think about on that deployment as you think about where you're putting money to work today?

Jeff DiModica -- President

Yes. Thanks, Stephen. Great question. I think from an earnings growth perspective, there are a few ways you can do that.

One would certainly be unlocking gains in things like our property portfolio and redeploying those gains, that's an important thing that we've been working on. We've been thinking about how to properly do that. The other way to grow it is to come up with -- there's a couple of ways. One is we can deploy more capital.

We've been very defensive. You can see that we're moving to our front foot today as we deploy more capital, that matters. For every $100 million of capital that we deploy at, say, at $12. And instead of paying off a bank line that is a 3% return, if you pick up 900 basis points on every $100 million extra that we deploy, it's $9 million a year, which is $0.03 to earnings.

So certainly, bringing our cash balance down, and that is one of our goals during this year as we feel more comfortable coming out of COVID with the vaccine that we will do. I would say we earned a significantly overweight premium IRR on things that we invested in at the lows. As Barry said, the board and Barry allowed us to make some investments at the right time. And we had a premium IRR last year.

I would say that today, we're back to something closer to our run rate in that 12%, 12.5% ROE, and that's what we're seeing. It is competitive in the areas that we want to invest, and it probably looks a lot like what other people are trying to do more of, a little bit more conservative cash flowing, multifamily, etc., and that's what we've been pursuing. But we think there are some great opportunities, as Barry mentioned, in Energy Infrastructure and other places where we can really get some premium returns this year and potentially grow earnings that way as well.

Stephen Laws -- Raymond James -- Analyst

Great. And as a follow-up, I wanted to hit on the Energy Infrastructure. Congratulations getting the first CLO done. When you look at the origination pipeline and returns on new investments there, yields on new investments versus now where you think you can get the CLO financing done.

How does that change the ROE equation and amount of capital you're looking to allocate to that business?

Jeff DiModica -- President

Yes. It's massive. And if you look back at our purchase portfolio, and you remember, Stephen, we bought a lot of lower coupon loans, and they were financed on warehouse lines at decent rates, but certainly not where we think we can borrow on a go-forward basis, the overall ROE was low. We bought a team.

We bought the expertise. We wanted best-in-class to grow this business. And with that team post-CLO, I think as I look back at everything we've done since the acquisition, it's been low teens, and I think it's an opportunity to earn mid-teens on the best CLO executions there, and we plan to open up the gate.

Barry Sternlicht -- Chairman and Chief Executive Officer

The stabilized returns on our resi business and the energy business are higher than the returns into the large loan real estate business. So they're higher ROE businesses and the CLO only made it higher.

Jeff DiModica -- President

Yes.

Barry Sternlicht -- Chairman and Chief Executive Officer

So and the CMBS res book as well. So those are our high ROE businesses. And we have, as you may know, there's a fascinating gap challenge with the resi business that we're underwriting refis of these trusts, and we mentioned we did the first one in the quarter. But we can't use that for GAAP.

So we're understating the IRRs on these deals. We're accruing actually probably below, though, the return on the large loan books, with large loans, we have real estate loans to have. But the total IRR is actually hidden until the refi comes through and they're mid-teens, high teens. So GAAP, you can't assume the refi, so we follow GAAP.

The total return on capital is significantly higher than we're telling you in the earnings. So it's a fascinating little business, but we choose to do it here because it's a great use of capital, and our team has done an outstanding job. So it's that the conduit business also, I should mention, which is rice, the conduit is driving very high ROEs turning a book 11 times a year.

Jeff DiModica -- President

And to your question on earnings growth, the conduit was shut down for the first half of last year. So as you look to earnings, that certainly took away last year what it could have been. And if we can stay on trend this year, we would hope that could provide some earnings growth as well.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks for the comments. Appreciate it.

Jeff DiModica -- President

Thanks, Stephen.

Operator

[Operator instructions] Our next question comes from Charlie Arestia with J.P. Morgan. Please go ahead.

Charlie Arestia -- J.P. Morgan -- Analyst

Hey. Good morning, guys. Thanks for taking the question today. When I -- in the few years that I've been covering you guys and thinking back further to the IPO, as you mentioned, the platform has obviously grown, but I think, more importantly, has gotten more diversified, which obviously paid off this year.

When you think 2021 and beyond, do you see Starwood being active in M&A or any other channels to really add additional capabilities to further diversify that platform?

Barry Sternlicht -- Chairman and Chief Executive Officer

Well, I should have mentioned, we're taking all our cash and buying bitcoin. That's a joke. That would be not the safe work for micro strategy. Are we going to continue to diversify? Was that the question?

Charlie Arestia -- J.P. Morgan -- Analyst

Yes. And also, I guess, specifically related to maybe M&A?

Barry Sternlicht -- Chairman and Chief Executive Officer

Yes. We are working on a few things in the M&A world. And also there's at least one business line that we're not in that we've tried to get in that we'll still try, which will be equally high ROE for the firm. I'm laughing because we've been working on, like, for four years, we've come close, but we've never quite succeeded.

So the -- yes, there are other business lines that -- it has to be large enough to make a difference to us and have the potential and make sure we have the right people to run the business unit. So we'll do anything that makes sense in finance. And we are a REIT. So it kind of constricts what we can do.

It has to be qualified REIT income or can't endanger our TRS. But within those confines, I mean, some like servicing income, some of it is out now REIT eligible assets. So there's interesting things to do, and we've been working on several of them. We made a bid for one company and then they decline the bid decides to IPO, they couldn't get their IPO done and they just sold the company to a bank.

So we've been trying. You don't see it, but we have been trying to do other things. That we thought could take advantage of the cycle, frankly, and made strategic sense for us.

Operator

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

Don Fandetti -- Wells Fargo Securities -- Analyst

Good morning. A couple of things. One, it's good to see the stock almost at pre-COVID levels. I guess two questions.

One around hotels and macro. Barry, do you lean more toward like a big pent-up demand snapback in T&E in the U.S.? And then my second question is on the M&A comment. Are you guys interested in getting bigger in residential mortgage origination? Is that sort of what you were alluding to?

Barry Sternlicht -- Chairman and Chief Executive Officer

That would be a good guess on the latter portion of that. We do have an originator under contract. It's complicated. We've been waiting over a year for the transaction two years, of two things.

Two fingers for the transaction to close. There are some issues that involved, I guess, the government's approvals or something like that. There's nothing to do with us, has to do with them. And the first question?

Don Fandetti -- Wells Fargo Securities -- Analyst

Hotel macro thought on where do they come back as people serve to travel?

Barry Sternlicht -- Chairman and Chief Executive Officer

So I was just looking at this. And we own a lot of hotels. And actually, we're doing -- during the call, actually, I'm now primary headquartered with as people in Miami, some in their offices today. And our hotel in South Beach ran 94% occupancy at $1,600 a night.

Our hotel in LA is, I think, 8% occupancy. But New York is really screening, it's like 23%. And what you're seeing is exactly what you'd expect. The economy and roadside, travel is actually down not a lot.

The economy, I think, is down like 6% RevPAR right now, that's the trailing 12 weeks. A trailing -- I may just be the week roadside down like 13%. So domestic travel will come back first. The Courtyards and Marriotts, along with roads of all over America will come back first.

It will take a while. But they'll come back first. The biggest challenges are the big urban boxes, how do you fill midweek in Seattle and Chicago without business travel? We actually just bought a hotel in Copenhagen because it's 87% tourist. We think that will snap back really fast.

Extended stay hotels are crushing it, relatively speaking, well, I mean, doing much better than everything else. We own a chain of hotels is called Intown Suite. EBITDA dropped like 3%. RevPAR is now up, but it's low end extended today.

It's a very low end like $300 a week. That doesn't buy you the bathroom at the. But that stuff is full. The average length of stay is like 140 days and it's quasi apartments.

And actually, the single strongest place in the real estate markets today is single-family and single-family rental. Those are crushing it. There are multiple cities in the country with 10% year-on-year growth in rents in single-family rental, which is unbelievably strong. So I think hotels won't get back to, generically speaking, the big urban boxes, the Marriott Marquis in New York, '24, '25.

So these 2,000 room urban boxes, other parts of the hotel market will recover much faster. Leisure-oriented hotels resorts, like, give them 12 months. And they'll be there'll be a burst of activity to actually produce a $1.9 trillion stimulus with the at an all-time high with saving rates at all-time highs. So crazy.

And people they're going to stop trading games stop, and they're going to go take a vacation because they were so rich. So you saw the numbers yesterday, you heard about European travel up 500% to Greece and Spain. I mean, it's going to be a bonanza in leisure. Because people haven't locked up and they want to go away.

But the urban Box is business travel. There's no question zoom, which isn't that much fun, is going to influence the level of business travel. There's no doubt. So I look at the stocks, and I wonder how they could be here, some of the stocks marriaging all the time high yesterday.

You have to either believe that all travel is coming back. I mean, for the stock to be there or you change the discount rate because interest rates are so low using a different DCF on the company. And I will say that all the companies, including our hotel company, have our own hotel management company, and we're running tighter leaner boxes. So our margins will get better because we're offset by the fact that minimum wage is going to rise and should rise.

I'm fine with that. So the --

Don Fandetti -- Wells Fargo Securities -- Analyst

Can I get a clarification --

Barry Sternlicht -- Chairman and Chief Executive Officer

Go ahead. Sorry.

Don Fandetti -- Wells Fargo Securities -- Analyst

Can I get a quick clarification on the residential mortgage origination side? I thought you had a small originator that you had investment in and already effectively owned. Are you saying there's another one?

Barry Sternlicht -- Chairman and Chief Executive Officer

No, Don. That that's one we're talking about. So regulatory close. Go ahead, Andrew.

Andrew Sossen -- Chief Operating Officer

No. You're exactly right. I mean, we made a preferred equity investment in a mortgage originator about two years ago. And upon regulatory approval, that preferred equity investment will convert into kind of common ownership and control of the business.

But as Barry mentioned, that's been kind of tied up in kind of regulatory approval for the better part of two years. And Barry likes to call it the kind of longest tenured deal that we've ever had at Starwood. So we continue to work closely with that platform, we're kind of embedded in the business. And Stephen, you've already who runs our residential finance business with us is very close and kind of helping to manage that business.

But until we have that final regulatory approval, we can't officially close on the transaction. We're hopeful that, that's a mid- kind of 2021 event. But again, they continue to work with us. They're a large source of production for us in our non-QM business, but we just don't technically have legal ownership of the business today.

Barry Sternlicht -- Chairman and Chief Executive Officer

We do want to grow the resi business, and we're going to work hard on ways to do that. And it's probably the place where we have the most opportunities to grow, whether it's in loans or securities or origination capabilities or press equity or whatever it is, but certainly something we would love to continue to grow. We've had great success in a lot of PE.

Jeff DiModica -- President

We're going to push hard on the resi business. Our infrastructure lending business, we're going to -- you're going to see us pick up the pace if we can, if we can hold our returns. And right now, we can probably produce really good returns. So we're going to be more aggressive there.

I think I didn't make it -- we emphasized it in my comments, but the quarter loan book is fantastic. Large loan book could be one of the biggest quarters we've ever had. So we're using our real estate underwriting skills across the firm to decide where we're going to deploy capital in taking, I'd say, calculated risk, that's and that's what we've always done. So I think that's why the book looks the way it does.

I sort of laugh. We have to put that loan in the five category, but there's no chance we're going to lose money on that deal. So no chance. Actually, I hope we get the asset back.

I really would love to have the other basis, less than a third of the cost of the asset. So that would be fine.

Andrew Sossen -- Chief Operating Officer

Don, Barry mentioned hotels, and I'll just clarify that our book is predominantly extended today, limited service and leisure travel. We are not the big city urban boxes or the convention center boxes that I think are in the most risk today. We'll be happy to go through the exact weightings later, but I think that our hotel -- one of the reasons we felt so comfortable making a strong statement about the quality of our hotel book as we didn't choose those boxes that Barry just said won't come back until '24 or '25.

Operator

[Operator instructions] Our final question comes from Tim Hayes with BTIG. Please go ahead.

Tim Hayes -- BTIG -- Analyst

Good morning, guys. Congrats on a really strong quarter. You've talked about monetizing parts of the real estate portfolio and crystalizing gains there for quite a while, but that has become more of a top initiative, it seems in recent quarters. So can you just provide an update there on potential timing, the amount of interest you're getting from third parties, and on which portfolios in the real estate book? Specifically, I'm sure cap rates on affordable housing in Central Florida come in a lot, but you're only a couple of years out from rolling rents there to market rate, I believe.

So I'm just curious how you think about those portfolios?

Jeff DiModica -- President

Sure. Well, transcends all of our -- or a few of our different businesses. Our REO business here at LNR, where we still have some gains. The Winn Dixie warehouses that you know we took back to -- we took an $8 million impairment on our Montgomery asset that we ultimately sold.

And we have a large 1.1 million square foot Orlando asset fully occupied now by Amazon that will have a very large gain that we'll take at some point. We also have a fast pro master lease portfolio, and I'm sure you saw coming through COVID, BASSPRO performed extraordinarily well. We think cap rates have tightened significantly. We have a pretty good-sized gain there.

And if you've been reading on sectors that have done well in COVID, MOB has obviously performed well, and we think we have a large game there. But to your question, the obvious place for us to look would be the multifamily low-income housing tax credit portfolio that we have in Florida, which makes up probably 75% of the overall gain of over $900 million in the book. We have been contemplating a way to potentially do something there. We love the carry-on it.

I mentioned earlier, we're in the process of doing another cash-out refinancing. Our cash-on-cash return is extraordinary. Rents can only go up in these properties. You're at 60% of market rate.

This is a bond like of a cash flow as somebody is going to be able to buy. So we think they'd be tremendous interest for something like that if we were to sell a minority interest. If it economically made sense for our shareholders, if it unlocks some equity that we could redeploy, that's really powerful every dollar that we take back of those gains and reinvest, we're going to -- and we can earn $0.12 on that is accretive to earnings. And it would also potentially create fees that potentially accrue to us.

Tim Hayes -- BTIG -- Analyst

Yes. No. That all makes sense, Jeff. I appreciate it.

So I mean -- and the pipeline in multiple of your cylinders here seems really strong, and the ROEs are great given the types of financing your on these vehicles. So for getting on these assets. So just curious, though, like, is there hesitation to sell any of these assets or specifically the Woodstar portfolios, given there would be a lot of cash you then need to redeploy that could be earning a really great return in that asset? Or is there any -- yes. How would you respond to that?

Jeff DiModica -- President

Yes. When since I own a substantial amount of the stock of the company, and so does the management team here, we treat this shareholder capital like it's our own, and it's a significant asset to the people employed to this company. So where would we like to put our money? And one of the challenges of our loan business is we're still stocking, I'd call it, transition real estate loan business, and the duration of those loans is short. The better the borrower does improve its asset, lease it, or any of those things, the faster he refis those.

And then we have to go put the money out again or a drag. So the entire equity book here was to stretch our durations that I don't worry about getting the money back. And right now, they're producing the equity books producing a 15.7% cash-on-cash return on our equity, which is just staggering, and it's growing up, not down. The affordable housing portfolio only can have rents go up.

They can't go down. So they're driving the -- it's liquid gold. It's the kind of stuff literally joked, I put in my kids' trust. And basically, it isn't my kids' trust.

So and I'd rather not sell it, but we are going to market interest in it and redeploy the capital because it's so accretive to the company's earnings to do so. So we have to do it. And we want to do it because we want to highlight the value of the portfolio that we can talk about it. We will show you -- I believe we will show you that those gains are more than real.

And the nice thing is you have them in the company. I think there's no other company in our space that has anything like that. I mean, we have all -- I mean, these deals were like 100 IRRs. I mean we thought they were steady.

I'm going to be boring 11%, 12%, 13% bonds, and they've turned into spectacular investments for us. Gas Pro shops, sales boomed in the crisis. And you can look at their corporate bonds to see how valuable our credit is. So I think in order of what we would do, we'd probably do Woodstar first and then maybe we look at Cabela's, the Basspro shops assets at some point.

And it's really a question of how big can we deploy the capital accretively and quickly? And right now, I would tell you we can. That's why I'm so excited about the energy book and the CLO. That's a game-changer for us. We were nervous you couldn't see it.

It's a mismatch in maturities. We didn't have a match, an easy match for the mismatch of maturities. We were -- I hate that. I like to match fund our deals.

So there's no rollover risk. And the bonus was, we would have done it. When we started out, we thought it would be dilutive. We might have to pay a little more for the capital.

And it turned out that we paid slightly less in a higher advance rate. So like quite freed up money and obviously, boom the IRRs on the paper. So having that and in the resi business, now we have a brand in the non-QM business. We've got nine securitizations the people know us.

They know our underwriting. They see the way they performed. And that's given us creds in that market. We've done $5 billion more than that of resi, $5 million? So we will grow that business.

And at some point, one of the challenges we look at, and we haven't talked about, is both of those businesses can sustain higher leverage levels than our real estate book. And so our overall leverage levels rise, but not because we're taking excess risk. I mean, to go up from what was advance rate in the CLO 675 to 82% from the bank line to the CLO deal?

Barry Sternlicht -- Chairman and Chief Executive Officer

Well, the bank lines allowed you to go to 80%. We had some assets that we haven't levered. And so ultimately, it will look somewhat similar, but we're allowed more leverage here.

Jeff DiModica -- President

Well, the point is that that's now match-funded. That's better debt than the debt we had with the banks.

Barry Sternlicht -- Chairman and Chief Executive Officer

Not.

Jeff DiModica -- President

And nonrecourse market. Mark-to-market. So we're just running the company smart, like we're going to do the smart things that match our duration of our debt. And if that means the ROEs climb up when I was on the Board of Invitation Homes, which I'm now just an observer on, we had a debate, should we buy home, should we pay down debt? Or are they free doubt about the debt? It's too high and other REITs carry less debt? Or should we grow or should pay a big dividend? And I argue that things would happen really nicely for us if we just grew the enterprise.

Don't worry about the debt because there's no better credit than 80,000 houses. So they ran a higher debt. And obviously, the stock went from $18 to $30. So the market agreed with me.

So we're going to tell the story and do the right thing for the equity for the capital basis.

Barry Sternlicht -- Chairman and Chief Executive Officer

And I'll note, our on-balance leverage hasn't really changed much over the course of the year. It started the year around 2.1 and today, around 2.1.

Jeff DiModica -- President

That's one of the reasons we're carrying tons of cash, which we don't like to do, but we did, so we had to do given the uncertainty of the market.

Tim Hayes -- BTIG -- Analyst

That's great color. Appreciate it, guys.

Operator

We have our final question from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani -- KBW -- Analyst

Thank you very much. I mean, just wondering for Barry, so I'm like curious if you view commercial real estate credit, the outlook for the overall market as having stabilized, meaning the worst is passed? Or do you think they're more choose to drop? And it sounds like with respect to portfolio, you believe indeed, credit has stabilized. There's only about five loans that have interest deferrals, and it seems that the credit outlook is fairly positive?

Barry Sternlicht -- Chairman and Chief Executive Officer

Yes. I think we're in it alone in Michigan Ave in Chicago. And then we have a deal on the West Coast, it's good real estate. I just think we might get it back.

I don't know. They're in markets trying to find a partner right now. I'm OK with it. It's going to happen, like you can't bat $1,000, but it's relevant the scale of the company.

And we have an idea what to do with it. The borrower has a higher basis. So anyway, yes, I would say, in general, real estate credit has probably stabilized. I do think this cycle, we have a fairly large equity business.

The cycle is -- there is going to be distress. The banks are going to move as the economy comes out of this. They're going to stop giving extensions on everything. And they're going to start -- they won't take the titles back because the buildings are either empty or the hotel is empty, and they're going to have negative cash flows.

So they're going to start selling loans. And they're already doing that. You're beginning to see a lot of loans come for sale in New York City, for example. The assets are geared trouble and movements in cap rates in NOIs, in New York City multis, in San Francisco multis.

You've seen the numbers from Avalon Bay and EQR. I mean they're not good, down 20% NOI. So you take a five cap or a four cap on urban assets and you're 70% levered. You don't have any equity left.

So neither of those companies were that levered, but there's been a significant diminution in value in some of these coastal cities right now, which I think it's going to be interesting. There'll be a point at which a level at which we would be comfortable lending in even those markets. But I think I think the couple of the commercial blue cities are going to be tricky from an underwriting standpoint. You all know the stories of people have leases in New York, $100 a foot, and they tell the landlord, they're going to -- they'll renew, but at $65 a foot.

And the landlord says screw you, and they moved to another building from $50 a foot. So that kind of behavior with this much sublet space in these big urban cities is brutal. And I don't think the market appreciates how tough those markets are right now because there's no net demand really in those markets right now. I will say that like we know Google has gone back to work in the sense that they're going to take -- they've already turned on additional development.

They're taking tons of space. Amazon did buy that. We work headquarters from us in the middle of COVID. And then Facebook made that Giant commitment unit whenever that station Amazon.

If they go home, the big urban markets will have a challenge. I don't expect that to be the case. I think in the European cities, we didn't mention Europe in our comments. I mean, we have massive lending opportunities in Europe right now.

So probably a third of our book going forward is going to be in Europe. And the pipeline is robust, and the spreads are good. So it's actually interesting. We're happy to make real estate loans and some of the people who are sitting back on their launches, and we're OK with that right now.

And that's why we're holding our ROEs because there's less capital and chasing stuff. So I think you also have to -- it's a little tricky even looking at headline rents in cities because the concessions are improving or for the tenant. It's a little like what we've experienced in retail, like the tenant comes to you and says, I'll stay in your mall, but on a $50 a foot, even though we're paying you $100 a foot. And what choice do you have? You can't find another tenant to replace them.

That's why retail is so impossible to underwrite today. In the malls, I mean, the tenant has all the leverage and the tenant doesn't really feel like fixing his store, he'd rather work on his online digital strategy, which is what awards. So you have an ever a vicious cycle in the wrong direction in physical retail. Having said that, I believe people are going to shop again in physical retail.

It's just -- it won't -- where will it stabilize? Rents won't be higher. I don't see that happening. So I think -- but I'm not talking about the Costcos and the Walmart, I'm talking about Main Street retail, New York City. It's the hardest thing underwriting today is like what are street-level rents in places like Manhattan when there's no tenants.

And that, in some cases, I'm sitting in our least headquarter building here in Miami, this building is for sale. And the base of the building is 30% retail, so how do you underwrite it? So it's tricky. It's for lease, not for sale, sorry. But I mean, we've looked at it and like, we don't know how to underwrite it.

There's no obvious tenants to take all the street-level retail in the United States. So thanks for the question.

Jade Rahmani -- KBW -- Analyst

On the multi side, wondering if, in addition to selling an interest, a ground lease might be attractive, given its long duration capital and there seems to be a lot of entrants, including front and iStar in that space?

Barry Sternlicht -- Chairman and Chief Executive Officer

Yes. Wow. The market loves that business. Yes, it doesn't really fit in our company very well because the cash-on-cash yields won't support our yield, our dividend.

So we have to grow it and spin it out, I suppose. It's not a difficult business to be in.

Jeff DiModica -- President

It's encumbered by agency debt, long-term agency debt. So we'd have to work through that as well.

Barry Sternlicht -- Chairman and Chief Executive Officer

We are talking about the footprint. I'm talking about the business in general. Yes. So anyway, well, thanks for the question.

I mean, we've looked at it because, obviously, the market adores it at pace. And they have loans against hotels. They have round leases on hotels, that trades at one cap. Really? But the market does what the market does.

I mean, obviously, we should grant our whole enterprise, i.e., everything triple the stock.

Operator

Thank you. I would like to turn the floor over to Barry Sternlicht for closing comments.

Barry Sternlicht -- Chairman and Chief Executive Officer

Thanks, everyone, for giving us your time today. And again, thanks to some of the incredible efforts of the Starwood Property Trust partners in making a really great year, and it's nothing compared to what I expect us to do for you this year. So stay tuned. Thank you.

Operator

[Operator signoff]

Duration: 71 minutes

Call participants:

Zach Tanenbaum -- Head of Investor Relations

Rina Paniry -- Chief Financial Officer

Jeff DiModica -- President

Barry Sternlicht -- Chairman and Chief Executive Officer

Stephen Laws -- Raymond James -- Analyst

Charlie Arestia -- J.P. Morgan -- Analyst

Don Fandetti -- Wells Fargo Securities -- Analyst

Andrew Sossen -- Chief Operating Officer

Tim Hayes -- BTIG -- Analyst

Jade Rahmani -- KBW -- Analyst

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