Walker & Dunlop’s Walker Webcast series continues with our latest installment, “The Crisis, the Recovery, and the CRE Markets” with our CEO, Willy Walker, and Starwood Capital Group CEO, Barry Sternlicht.
Willy and Barry discussed:
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Willy Walker is chairman and chief executive officer of Walker & Dunlop. Under Mr. Walker’s leadership, Walker & Dunlop has grown from a small, family-owned business to become one of the largest commercial real estate finance companies in the United States. Walker & Dunlop is listed on the New York Stock Exchange and in its first seven years as a public company has seen its shares appreciate 547%.
Barry Sternlicht is Chairman & CEO of Starwood Capital Group, the private alternative investment firm he formed in 1991 focused on global real estate, hotel management, oil and gas, and energy infrastructure. Mr. Sternlicht also serves as Chairman of Starwood Property Trust (NYSE: STWD), the largest commercial mortgage REIT in the U.S.; and French crystal maker Baccarat S.A.; as well as member of the Board of Directors of Invitation Homes (NYSE: INVH) the largest publicly traded investor, owner and operator of single-family homes in the U.S.
If you have any comments or questions about the evolving economic landscape and how it is impacting the CRE space, our experts are available and fully operational to help. Additionally, if you have topics you would like covered during one of our future webcasts, we would be happy to take your suggestions.
Willy Walker (WW): Thank You Susan and welcome everyone to the sixth installment of the Wednesday Walker webcast. It's a real pleasure to have Barry Sternlicht joining me today. We had an exceptional session last week with Mary Erdoes of JP Morgan. Mary's insights on the market, her candor about the gravity of the current crisis and her personal anecdotes about working from home and managing a global team during these challenging times were really fantastic.
I had my weekly Children's National Hospital board call yesterday and as we have seen since the beginning of this pandemic the frontline doctors, nurses and caregivers are acting in a heroic way each and every day. Seventy employees at Children's National have gotten the COVID-19 virus and forty of them have already returned to work and every one of those forty has already given their plasma, for plasma therapy treatments, that are showing significant promise. I would add that Children’s National is losing a million dollars per day right now and like many other hospitals in the country they are putting all of their resources to fighting this pandemic and in the process not providing other services and not making money. I would encourage anyone who can help support your local medical system during these challenging times to do so. I also add that Starwood has established a Relief Fund for hospitality workers in their hotels and I am pleased to say that Walker &Dunlop employees have donated $7,000 to that fund to support The One Hotel employees and to thank Barry for his time today.
Barry Sternlicht (BS): Thank you.
WW: You’re welcome. I'm going to open with some remarks on what we are seeing at W&D right now in the commercial real estate markets and then I'm going to turn the floor over to Barry for some opening remarks and then the two of us are going to dive into some Q&A.
I think the daily ups and downs of the equity markets are reflective of most people's attitudes about the pandemic. One moment the world feels like it's coming to an end and the next we see signs of optimism, ingenuity, and hope. My friend Josh Carper from Greystar sent me a copy of the New York Times from October 30, 1941 last week with a report on Winston Churchill's famous speech at Harrow School where he said, “Never give in. Never, never, never in nothing great or small, large or petty, never give in except to convictions of honor and good sense.” And after reading Churchill's inspiring words I read the rest of the paper from front to back and what struck me were a couple of things. First of all, in 1941 human beings were killing one another, not trying to save one another. Second, there was a lot of political strife in 1941 with Mayor LaGuardia of New York comparing his opponent in the Mayoral race to a Nazi. Third, the labor movement in the United States was up in arms and acting worker strikes across the country. And, finally, there was plenty of financial hardship around the world due to the war with the Italian government issuing clothing ration cards, where Italians could have either a suit or a pair of shoes during the coming year, but not both. We are in tough times today, but we've been here before and we will invariably find a way to the other side.
Focusing for a moment on collections in the multifamily space, multifamily properties were a lot stronger in the month of April than we'd expected. Most of our clients that I've spoken to personally collected well over 90 percent of rents for the month. I had a call yesterday with a client who was at 98 percent collections for the month of April. The number of forbearance requests on Fannie and Freddie loans has been de minimis. Our HUD portfolio has significantly more forbearance requests, particularly on senior housing properties. Close to 50 percent of the retail properties in our portfolio have asked for forbearance and close to 70 percent of the hospitality properties. While Walker & Dunlop has no credit risk on the HUD, retail, and hospitality loans we service, we are obviously working very diligently to process those forbearance requests and help our borrowers through these challenging times.
There's still a significant volume of financing going on in the multifamily space with Fannie, Freddie, and HUD all very active. We rate locked a HUD 223(f) deal this morning at a 2.69 interest rate. We also locked a $17,000,000 seven-year Fannie Mae fixed-rate deal at a 3.45 interest rate and then also a $15,400,000 ten-year fixed rate deal with Freddie Mac at a 3.44 rate. So even with the new reserve requirements that the agencies are asking for multifamily borrowers still have access to very attractively priced capital which is not the case whatsoever in other asset classes.
There’s still some significant questions on the horizon. First, what do may rent roles look like and what percentage of loan requests ask for forbearance. If you think single-family forbearance requests mirror the unemployment rate, which who really knows but that's something to put out there, you'd expect roughly 10 percent of the single-family borrowers to request forbearance. If that same framework is applied to multifamily properties, 10 percent of renters may ask for forbearance which while putting downward pressure on NOI is in no way at a level where multifamily borrowers need to ask for forbearance. As we move through May, the containment of the virus, the restarting of the economy, and whether there is a needed extension of the CARES Act unemployment benefits, will weigh heavily on June payments.
Let me now introduce my guest, Barry Sternlicht. Barry really doesn't need an introduction given his incredibly prolific and successful career in the commercial real estate industry. I'll mention a few quick points. First, Barry is without a doubt one of the most insightful investors of our time. I've spent countless hours in meetings and at conferences with Barry and he is always good for the most insightful, and at times most controversial, comment in the room. Second, he and his team at Starwood have invested in every commercial real estate asset class across the globe. While many investors have had success in one asset class and one geography, Barry and his team have done it on a scale like few others. And, finally, he's a friend. I'm very grateful for his time today and with that I'll turn the floor over to Barry.
BS: Thanks Willy. Good afternoon everyone. I hope you're safe and doing well in your isolation, sequestration, lock-down, whatever you want to call what we're doing. I happen to be in South Florida so I've been here for about six weeks and I can tell you it's getting hotter every day but fortunate not to have been in in New England where it's been much worse than down here.
I don't know where to start. I was listening to some of Willy’s earlier comments. I think just on point on forbearance, I think, like we own about 80,000 apartments and I think we saw like 93/94 percent collection for April. May, talking around the industry most people are more or less exuberant about that and it does depend where you own your multi’s. The blue states, which are frankly, at the moment, led primarily by Democratic governors as well, have been more active in telling tenants not to pay landlords. Which is a humanitarian thing, it sounds wonderful but of course we as landlords have to pay interest expense and operating expenses and real estate taxes and insurance costs so it's not that helpful not to parallel that benevolence down to the underlying lender and asking him to forbear. In the case of Fannie and Freddie at least, the multi industry has two large players that are agreeing to do so if needed to do so.
I think whether people pay or not - our portfolio though is less bi-coastal and more sort of like a “smile” through the southeast and then down through Florida and those states have been better. I have friends who are more heavily concentrated in places like California and California has been on the forefront of not only rent control but also you can't evict a tenant. So I think it will depend where your portfolio is, and even though the averages also belie the fact that in some communities there are vigilante tenants organizing the place and telling everybody not to pay the landlord. So that's been more hearsay than in our actual assets but there are levels of, I don't know what you’d call it, action, that are really not well thought out because we do have to maintain these properties.
I was listening as I walked in here to a friend who was speaking on CNBC saying that we should let all the airlines go bankrupt because they're all owned by hedge funds. That's an idiotic statement. Nothing short of idiotic because the hedge funds own probably 5 to 8 percent of the equity of a stock. The real entities that own stocks today - are pension plans – Blackrock, Fidelity, for individuals in your funds and many of us, not just millionaires and billionaires own stocks so it doesn't help anything to speak outright lies and blatant factual faults on national television and inflame an already divided nation.
So, let's get back to what we're seeing. We are active in every asset class in real estate. I'm sure you all know that office tenants have for the most part paid their rents, a 95 percent collection. I think we have 35 million square feet of office. The only real negotiations are with the shared office tenants, whether it's WeWork or Regis or any of the smaller players. And even there, they're paying their rents site-by-site depending on how profitable they are due to location and they really can't walk out of those leases. In many cases, we have them as tenants in buildings in London, for example, and they're so far below market in their rent, that if they left we would have a party. So, they know that, so they can't stop paying us and they'll pay us through the crisis - we expect.
I'll touch on retail for one second. I mean retail is, as you know, an interesting asset class right now and the collections have been more like 20 percent for us - not much higher for others. Strip centers are better than malls and there it's all over the place. You have some nationals paying you, and some nationals not paying you, and I'm not actually worried about that in the short term, I'm just hoping these tenants can reorganize and open.
I was on a call two nights ago with David Simon from Simon Property Group, the largest mall owner in the country, and he intends to open, and he hopes people will go back to shopping. And I said on CNBC yesterday, I don't really see much of a difference between you going to stand in line six feet apart in the supermarket and you going to stand in line six feet apart at your Macy's counter. So, I hope for the sake of the employment numbers in United States that the retail industry, which is like sixteen million people, will have a chance to go back to their pizza parlors and other places practicing the right social distancing, whether you have to wear a mask, temperature taking and other kinds of protocols that will give us confidence sequentially to get out there.
So, stepping back also, I said yesterday you're going to see a vaccine almost for sure, you know whether it's the first quarter, second quarter or third quarter of next year there will be a vaccine. And they say that this strain is, it will be effective against COVID. There may be a new COVID, but not likely, and I think that the scientific community believes it will be quite effective. So, at that point, when we have a vaccine and people are getting the vaccine and it's widely distributed, you can assume we would be close to back to normal - if we don't screw it up on the way there.
And then, so what do we do between here and then we'll determine if we have really permanent changes to the economy, to income, to trade, to who survives. That’s one of the reasons I've been pushing - with the right protocols - to get the country working again. And even in my town here where - I'm in a zip code where there are more cases and I border a zip code where there are very few cases. So you can imagine that in states that really aren't impacted they could open up, they could watch their stats, they can see if cases are rising. I know there's a delay, but this can be done with real data today and in a humanitarian way because the financial suicide of the country is not really in anyone’s interest and the U.S. government does not have enough money.
This fellow was also saying, Chamath on TV, that the 2.3 trillion dollars the government's put out has gone to hedge funds and millionaires and billionaires and that's absolutely another ridiculous statement. The PPA, the average loan out of the PPP program was like $300,000 and it's going to pizza parlors and they were actually prioritized in the program. We, as an institution, couldn't even apply for those loans until two days after the consumers could apply even through banks like JPMorgan, the small businesses. So, I think I have to say they did a good job. I hope the money goes where it's supposed to go, which is to the employees. But I think they've done a good job of trying to help these businesses bridge what was only allowed to be like a two, two-and-a-half month gap. After that, that program runs out and yesterday they approved another two hundred and something eighty billion for that program.
But you have to begin to worry about all the money the government is printing, and everybody understand what they're doing. Whether you're getting your $600 benefit added to your normal unemployment check, you get your PPP check, you got your $1,200 check in the mail to everyone making less than, I guess a hundred thousand bucks. I hope they’re not overdoing it. I hope, you know it's the right humanitarian aid, but isn't abused and doesn't actually have the negative impact of keeping people from going back to work, which would be a shame because we need all our hotel employees and our retail employees to go back in their stores and go help our guests as they arrive - and they will come back.
BS: Well to be honest I was talking to David Tepper who runs Appaloosa at a Super Bowl event, the Super Bowl’s here in Miami this year. That must have been in early February. And we were chatting and said we think this could be really bad and we just had a suspicion that this would be really nasty. There wasn't much other than selling all your equities you could have really done. I think, I don't know, you can't sell real estate overnight. I'm not sure there's much we could have done with our holdings. And we kind of, at the Starwood Property Trust, our mortgage REIT, we really already slowing down investing, it was harder to find things to do that you liked, so we were fortunate enter the cycle with some significant liquidity in a public company. But I didn't put a big short on the market if that's the question and I don’t think Bill Ackman did either when it started. He actually did that because he couldn't sell his longs fast enough so he bought credit default swaps and made a hell of a trade or series of trades and that was, as you know, that was to break even on his book - so it was a great amazing trade with massive leverage.
But, no, we don't really do that - I mean we're a long, pretty much a long hold real estate owner. And in my family office I had gone to cash, more cash than I'd ever had as percent of my balance sheet probably four or five months ago. You know December was a really bad month and I was getting nervous about the credit margins and I should be worried about interest rates - like why were interest rates falling when the equity market was rising. We would have expected - if you remember the ten year was like three and a quarter and the next thing you knew it was like a buck and three quarters and one seventy five, and within two months it fell to like 75 basis points in January you're like - and the equity markets were just hanging in there - and it was like, something's wrong here. And I always say the credit guys are smarter than equity guys and you really have to pay attention to them. I'm actually watching the ten year right now, it's like 60 basis points and it’s telling you this is going to be a slow recovery or - and I think that's actually what's telling you - or the weight of all the capital that’s been printed - I think there's been something like 300 stimulus programs around the world. All the central banks of the Western democracies have printed money and so the world is flooded with capital and liquidity, PP yield. And that's our basic thesis of why we feel real estate will remain super attractive coming out of the cycle because we ultimately, multifamily included, produce a yield which will be hard to find in the world today, in the world post COVID.
And, sadly, we're going to look a lot like Japan - you know we're going to have, they have something like 285 percent debt to GDP and we're probably passing 120 percent debt to GDP. On our way higher maybe, I haven't kept up because the programs are so rapid. The last program until yesterday, before yesterday, they had printed 13 percent of GDP so this is a whole new ballgame.
It's interesting, I'll tell you one fun thing. Somebody asked me to do a phone call yesterday with Charlie Munger who is Warren Buffett's partner and Charlie Munger is 96 years old. And he did this from his chair in his home somewhere in California, in a modest house just like I’m told Warren Buffett has. And you don't get a chance to talk to somebody who lived through the Great Depression. He was supposed to be asking me questions and I was asking him all these questions. And Charlie said look this isn't the Great Depression, it's not going to be like that because the government is here putting money into people's pockets, the government didn't do that back then, they didn't ease - not like this. And though unemployment reached 30 percent he said there were no prospects of finding jobs. We actually know where all these jobs came from in the last six weeks, right, they came from retail, they came from hospitality, they came from tourism and leisure, they came from the airlines. They didn't come from Netflix and Apple and Google. They didn’t come from Starwood Capital Group - we haven’t laid off a person.
So, we know how to put them back to work. We know what industries have to be revived to get these people jobs again and they are not industries that are going the way of the dodo bird - I mean people will travel and they will go to hotels again and they will visit their families and go to graduations and concerts and parties. I've said from the start that this is a very bad flu. And you can actually look around the world now and see the flu passing through municipalities. And whether you want the country to stay closed or to open you're going to have a chance to see the test kits - all these countries are doing different things. Germany is opening, Georgia is opening, northern Florida is more open than southern Florida, which is appropriate given the spread of the disease or the contagion, northern New York is different than Manhattan. So, we don't need to follow one-size-fits-all, and we can narrow-scape our processes. And I think, again, that people will travel so they'll take these cases - like I think they say thirty cases have been imported into China by foreigners. It's not the end of the world. We all get the flu and not everyone dies. So, if you believe as I do that many more people have seen this disease or are asymptomatic to it, the denominator is marginally greater than the flu. And it's a tragic disease. I advise people to stay indoors - my mom stays indoors, I hope she does.
BS: If I thought we'd go in and out - I was really being more optimistic than I probably am. I think the slope, like I said how do we get out will depend on how quickly we can get back to work, how standardized the processes are for different protocols. So, if you come into my hotel and I temper check you, and I've got a mark on the door that I've sprayed my hotel, kept it clean, sanitized every handle, do it all the time - I think people go back to traveling - and they need to do it everywhere. So, once you standardize these protocols and people have faith in them then they'll have confidence, and they'll travel. Until then the slope is going to be like this (demonstrating). If we get our protocols it'll probably be like that (demonstrating). It's not going to be a V. There’s been too much damage. There are restaurants around the corner and I was told yesterday that two of them aren't going to reopen - you know the guys can't reopen, they don't have the money to open their place. So, I don't think, I think some of the small businesses won't be able to reboot and that's a shame. I'm confident there will be another restaurant there a year from now but it's sad to see these businesses go. So, I think unemployment will probably drop less than half of what it is today, maybe thirty percent, but it won't go away. Some industries have been seriously damaged, and it'll take a while before we travel internationally the way we travelled pre-COVID.
And, it's so interesting, I'm sure like everyone listening you have your optimistic friends and then the world is ending and it will never be the same friends. I choose to be more optimistic than not. I listened to a fella yesterday say that we won't go back to the office, we like working remotely. I don't like working remotely - I like being in an office and seeing people and talking to them and asking how they're doing. So, yeah, some people like working from home but you can always work from home. And I don't think it's going to damage long-term demand for office. If anything, you'll see people move apart in the office so you could have just as much space leased or twice as much spaced leased if you want the same number of people because you need more space for your people. So, the era of people piling on top of each other in three-foot wide cubes, that's over for a while. If you have that arrangement you're going to leave half of your people at home and bring them in every other day so you can space them appropriately. So, I don't really worry.
And another thing about the U.S., the nation, we are a short-term focused nation. We are - you call it shallow, I just call it optimistic. We live for the next week's football game or the next Netflix series or the next Oscar season or parties. We don't really carry a lot of, we're not like Europeans, they remember the war, we didn't have a war. Like they know what their parents did in the war, who died, we don't remember anything like that. It's actually, it's a nice thing about the country, it forges innovation and makes us sort of look to the future as a nation. I think part of the blame for this of course is politics, you know it's sadly the case, I think. You can argue with me, and people get upset about what I'm going to say, but some of the Democrats - and I'm agnostic, I consider myself an independent frankly so I'm not making a political statement, I’m making an observation - but it seems to be that the Democrats and Democratic leadership does not want to open the country. You can say they're being humanitarian - you can also say they want the country stay in recession because Trump's chances of winning in a recession are negligible. So, if it's really compassion, benevolence and they really care about everybody, that's one thing. If it's some master plan to keep the economy closed so the country can't go anywhere and they can ride on desperation so Democrats will flood the zone with gifts for people, that would be sad because that would be, that would be really bad for the country. The country should open when it can, where it can in a smart way. We're all watching Sweden, right? Sweden didn’t close.
BS: You hear everything under the sun about that experiment, but at the moment they're plowing forward and I’m watching it very closely. And, as you know, we both get all kinds of imbalanced stories –scientists on every side of this, drugs work, they don't work, but never has the world's medical establishment been so focused on finding a cure for a single thing and I'm optimistic with all the technology available to them today that they will find something. And if they do that, my slow recovery could be much faster. If you knew you could open and you had a pill that would cure you from the COVID virus you would probably, I would, I would just go back to work. I would get on a plane, even commercially, and go anywhere you want me to go. I'll go.
BS: It’s going to go more to the owner. So, if the owner has the deep pockets, or investors who have deep pockets and commitment, it's going to take a lot of money to replace the tenants that don't make it. And a lot of these companies - you don't have to listen to me, just go to the go to the stock market and see Macy's with a five-dollar stock price and Penny’s is at I think forty cents. Both company’s bonds are trading at like 24% Nielson maturity the other one was 40 last I looked. The market doesn't think the anchors are going to make it. And there are lots of uses for those anchors. Typically though, a lot of mall owners don't own those anchors, they’re owned by Macy's, they're owned by Seritage which is Sears real estate arm. And so for the mall owner you have to actually figure out how to get that anchor, to get somebody like Burlington Coat Factory, like a biotech lab, like an office tenant into that space - reconfigure it, cut holes in the walls so they have windows - it's super expensive. The one thing the mall has going for it is everyone knows where it is. It's usually got more than excessive ample parking, has great signage, great access, that's why they chose the land for the mall. And will there be enough tenants for these malls, like solvent tenants? We’ll see, I mean that will again go to the length of the recovery. If you get these companies funds, they will stay open. Shake Shack's in a lot of malls, they'll be okay. Sephora, they're okay, they're owned by LVMH. But some of the companies you see today - the sale of Victoria's Secret didn't go through and that stock is down around 30 percent, that's L Brands. You know those are typically mall tenants. And the mall owner has nothing to do with this, right, this is not his issue, this is how these companies survive, do they have a big enough online presence to weather the storm and where will they choose to spend their precious dollars. For retailers that were in trouble before the crisis they had three choices of where to spend their money - they could expand, open new stores; they could renovate their existing stores; they could improve their product lines; they could buy back stock or they could build their online presence. And I think you would guess 70 to 80 percent of them went online because that's what Wall Street wanted them to do even though, in many cases, the margins online were not better than in the store.
But, you know, I think there will be physical retail. I think the number of names is going to be smaller and I think the tenants, that the malls will be radically retentive which can only happen if the existing owner has the money to put up the tenant improvements or change them all. We have a loan on the American Dream Mall which is not yet fully open next to the Meadowlands in New Jersey and that's really an amusement park - I wouldn't even call it a mall. We underwrote it as an amusement park. It has Ferris wheels and it has indoor ski slopes and there’s a LEGOLAND inside so it's kind of like Six Flags in New Jersey with a bunch of stores around it.
And, you know, one part of retail which will probably do very well, but it's been a very important component of many companies sales is travel retail, the stores at the airports which are doing fantastically well. Obviously not doing so well right now. That's a very good business for many names and consumers spending and is not good right now.
I don't know about you, but I must get a thousand emails a day. I'll still haven’t figured out how not to get them from all these guys that I’ve go online and bought a pair of socks from. And, you know, one thing about retail also, there were a number of companies - Warby Parker, Bonobos, Allbirds, to some extent Kasper that were actually started online and were moving very aggressively into physical retail and finding that two of them together improved their sales dramatically. And I think Warby was up to last I checked like over a 100 stores on their way to 300 - my guess is about 130. Companies like Sweet Green, these are the tenants that have to find their way into the mall. The mall has a lot of tenants that sadly are not relevant to today's consumer. The mall used to be a home of the happy little teenage girl who went after school and now it's more toward older folk. The ticket is that you get a tenant in there that kids like. They have a little thing called Pandora. It's like little jewelry you put on - you collect the charms and put them on your ring and it’s a huge hit in the mall. So that was a very successful store even, you know, with the names in the mall that were no longer that relevant. So, it's a call to action.
It's interesting, I’m going to relate this to the hotel business for a second. We started One Hotels. One Hotels is a luxury green brand and we have three or four open and we have fifteen or twenty in the pipeline. You have a brand that means something to consumers, we're a green brand, we're a luxury green experience. And so despite the amazing push of Airbnb we run our hotels nearly full and have had even with significant increase in construction of hotels in Manhattan, every year for the last four years we've been able to raise our rates and improve our profitability because we mean something, a brand means something, so it's not just a commodity. Many of the tenants in the mall, some of the brands like the Gap and Abercrombie, The Limited's, they didn't really have a brand DNA. Whereas the brands that were born online like Warby Parker and Allbirds, they're kind of fun, you know what they stand for and everything is tight around a brand image. To survive in this world coming forward you have to stand for something, you have to be affiliated with something, an emotional content that gives you pricing power and people want to be part of their experience and buying your brand physically online says something about them. So whether you're buying Rihanna's lipstick or you're buying, what are those girls, the Kardashians, I mean people - you know there's a shop in New York in Soho that I'd never heard of – Supreme? And I thought it was a homeless shelter, there was a line down the block, I mean it’s a physical store there and there are a hundred people in line to buy some $800 pair of sneakers. And I didn't know what was going on. So, when you have a relevant product, there's demand. I think some management teams have been slow to action to define their brands, to get pricing power, create an experience in the store and the whole industry is going to go through a massive overhaul. There will be there retail at the end it and many of these stores will find alternative uses.
WW: Your story about Supreme reminds me of when you and I were over at The One in Miami – I don’t remember if it was last year or the year before – and you mentioned to me, I was talking about advertising with you and why there was branding in hotels and not branding in apartment buildings and one of the things you said about The One was that Leonardo DeCaprio coming into The One and tweeting out that he had stayed there was worth every paid advertisement you’d ever invested in at The One hotels. And interesting how much of a tie-in there is to social media and all that.
Let me, just for a second on hotels Barry, on high-end verses the sort of Choice Hotels. You know, if you look at occupancy the Choice Hotels right now actually have surprisingly high occupancy levels across the country where there is part of the economy that has to keep moving forward. And Extended stay hotels, which you own as well, have held up pretty well during this downturn, whereas the higher priced point properties are shut. Talk for a moment about how you see those two different sort of markets and hospitality coming back and when you see the higher end … you know, most of the people on this call travel for work. We all, you know, hop on airplanes and travel around the country.
BS: I think, you know, our thoughts are we’ll get back to 2019 occupancy levels sometime in the back half of 2021 - is that next year?
BS: And, again, when will they open, will the NFL open, will the MBA open?
BS: Yes, I do. I'm involved with a soccer team in Europe and they're planning on starting the season with or without fans in the seats. I think the country wants to get back to normal, so I think whether there are people in the seats or they social distance in seats. I don't know if you saw, there was a there was a rally or a protest, I can't tell which one it was, over the new Israeli prime minister, they formed a new government, and people were standing six feet apart at this huge rally. So maybe we'll be sitting every three seats apart, it would be a very nice experience at the games and they’ll pipe in the sound of the roaring crowds. But I think we want original content back. But it goes to travel, that's why I raised it, because if there is a season, people travel.
So what will open first. The roadside hotels will come back faster because you didn't have to get on a plane. And, you know, there may be an infrastructure bill that will help these hotels even further as construction people move around. Transport - you're still shipping stuff by truck and by rail even today to keep products in the supermarkets. And I think you're going to see that first. Extended Stay is really a kind of apartment building. Our chain of lower-end hotels is 24,000 keys and in our assets - we were already renovating a bunch of them. The non-renovated ones, they’re not being renovated right now, they’re renting at almost 80% which is shocking. I was hoping this was going to happen, but I wasn't sure it would happen. And as you move up the chain you get fewer and fewer occupancy - when you get to Vegas and any hotel really in New York. We tried to keep our One Hotel in Manhattan open - we offered it to the medical community too and there was no interest, there was no demand. You read about the Four Seasons giving the hotel to doctors in New York, there were no takers. So, people were just exhausted and went home. So, we closed the hotels everywhere. And group hotels will open later.
I was asked about liability - it has become a big issue. People are saying well if we open our businesses what happens if somebody gets COVID, can they really sue me? Or they come to my hotel, will they sue me because they got COVID in my hotel? I think we're going to have to come up with some kind of liability. They’re asking Congress to come up with some kind of global protection scheme. What I think would work just as well and be a lot cheaper is if we just had people sign, I understand I'm staying in your hotel, you tell me you've done this and this and I understand that I could come up with COVID and I won't sue you if I have it. And you might need that on airlines, on cruise ships, in stores, I don't know, but maybe you know given our propensity to litigate. I would find that a shame if in an effort to open the country people use this an excuse to have class-action lawsuits with people who are getting sick. And, by the way, with 14-day gestation we don't even know where they got sick, how do they know they got sick in my hotel, they could have gotten sick coming to my hotel.
So, again, I don't know. I mean if you look at the deaths, which are awful, and you look at the number of cases which is shocking, the H1N1 - whatever that virus was in 2009 was really bad -and this isn't much worse than that. They did not shut the nation when a million and a half people died around the world with that virus.
BS: There's press on here. I knew Donald Trump fairly well, played many a golf game with him before he went into the office. He sounds pretty much on that call like he sounds on the press conferences that you see these days. I mean, he says we're getting the tests, we're doing well, we're doing better than anyone else. But it was, it was an honor to be selected for the committee. I got a call from Steve Minuchin, who I knew prior to him being named Treasury Secretary, and he asked me if I’d do it, and I said yes, I haven't done any of these Commission's before. This is really to help the country as much as it is something really to do with the President for the United States and the nation's benefit. And people were very, there were questions and statements and I would say there are more statements from CEOs than there were questions, but most people were talking about testing. And if you know a lot about testing, we're not even sure if you test and if you don't have it, you could have it in a week's time and some of them are false positives. And there's also, there might be a second wave. That's why I think we just have to get on with it. And we can test – I’d love to test the antibody. You'd like to say if you haven’t had the disease you appear not to have the antibody. So everyone in my house, that’s six of us, were tested and we don't have, thank God, we don’t have any COVID but we also don't have the antibody so, you know, we’re not sure how we feel about it, we were all kind of hoping we had the antibody so we could be immune. But we’ll see.
I think with Trump, and that call it was exactly an hour, many of the statements - the executives knew they are going to be called on. Jeff Bezos, the CEO of MasterCard, Brian Moynihan from Bank of America - you've seen them before talking with President Trump and the administration. I will give them credit that they set up the Commission and there has been a little bit of follow-up too, but we haven't had a second call. And some of us have reached out to the administration on different things that we think they should be doing to help the capital markets and I'd say with not much success, at the moment. The country did different things in ’07 and ’08 to help the capital markets get back on their feet. You mentioned that the spreads for multi’s aren't terrible right now but the spreads for office and for hotels and for everything else are god-awful and partly because commercial mortgage-backed securities which were floated to finance hotels and retail and everything else are not getting done and existing securities are trading really widely. So, during TALF in 2008 they accepted some of these securities. Even if they just took the rated private-label securities into this TALF program it would stabilize the market, it would bring spreads down and people wouldn't be taking ridiculous losses on paper that's very likely to be money good in any scenario that the nation does open. Now again, if they keep this country closed for nine months to a year, all bets are off, it's going to be, we're going to have the Great Depression. If that happens, you'll see social unrest, it will be a terrible, terrible thing for the country in my opinion.
WW: I mean, I think that that's one of the things - I mean we're obviously headed towards opening back up right now on a state-by-state basis. There are plenty of the Talking Heads that will say to you careful we've got you know the pandemic of 1918 was a W, where it came in the spring and then came back in the fall and then came the next year. I heard you clearly say look we have technology, we know where jobs are, there are a lot of things that are different and so I get that. But I guess one of the concerns that a lot of people have thought about Barry is you start to open back up and then all of a sudden we’ve all got to run back inside and that’s going to lose any kind of confidence. Is there anything there that you are either hearing or seeing that says to you, you know, we're going to be able to manage this.
BS: Don't know, could happen, don't have a choice - that's how I look at it. And I think, I mean in 1918 I’m pretty sure you didn't have an iPhone, I’m pretty sure you couldn't communicate instantly with hospitals in Moscow and China and Israel and in England and get best practices from around the world. It was impossible to communicate around the Spanish flu like you can communicate around COVID from the whole planet Earth with, I don't know, maybe six billion people on earth. So, I think, I don't think we have a choice. I think we isolate it if it comes out and I hope we don't have to shut the whole country again. And again, if you believe there's a vaccine and you believe that Remdesivir will work then you can do this and so far you know the lead study shows it's effective. I don't know, but I think the inverse, the suicide of the nation's system - it's not me being cold, okay, I get all that. My son is angry at me because if you can't open the country what's wrong with you? I'm saying you don't understand financial suicide, you don’t understand the despair of a pizza parlor and a family that had you know, they can't open their pizza parlor and they're going broke and you're destroying their life savings which they invested in their in their pizza parlor or their barber shop or their hair salon. I mean those are the businesses that power the country. And Trump's program has not really gone to big business.
I know Chamath Palihapitiya from Social Capital and that was just garbage, I mean that is not true. I got a loan on one of our hotels and seventy-five percent of the money goes to the employees. I think the largest loan we got was $2 million bucks and seventy-five percent is going right out the door, right to the employees that make less than a hundred thousand bucks. And I'm delighted to have the ability to help them. We were doing it already, like we were giving them health benefits, we've raised a million and a half dollars ourselves to help our employees that are need and internally - with people like you Willy - and that's been great but, you know, that's really going to be June because it took them through April and they weren't helped.
And, again, there are going to be different protocols, best practices by industry, and this country can look to other countries for best practices on reopening - whether it's Sweden's experience, what Germany's doing today, or France or even Italy where, you know you hear about Italy and the age of the population, the propensity to smoke is 10 points higher - 13 percent of adults smoke here, about 26 percent I think it is of Italians smoke. Older than us, they have a bad health care system. Every illness, everyone who died had not one but two pre-existing conditions. So, our high at-risk people have to stay inside and be careful. The elderly population has to be super careful and we should come up with ways to help them - visit them with masks. I sat with my mom in her back yard and brought her groceries and a sandwich, and she still calls me, and we talk all the time. She's running out of books to read but she's okay. I have to get her onto Netflix, she doesn't know how to do that yet.
WW: So you spent your entire career being, if you will, I want to say counter-cyclical, but back from when you started buying assets during the RTC and then buying hotels back in the 1990’s when nobody really wanted to buy hotels, to continuing to expand Starwood through the dotcom bust and then through 9-11 into buying a portfolio of loans from Corus Bank when they were going bust. I mean a lot of people right now are starting to sit there and say okay if this starts to get back going when do I start to put money to work and you are as insightful as anybody on sort of how to put money to work and not catch a falling knife.
As you sit here today and you say alright this thing is going to start to crank back up when are you saying alright team let's go, we're going to start putting capital to work, we're going to start investing.
BS: We're buying now, we're on offense in our private equity funds. We're buying some things. We've bought more debt because we don’t have to travel anywhere, just buy a piece of paper, we understand the companies. I did travel to go look at a hotel this weekend; I would have liked to have bought. The company appears to have gotten their PPP influx and decided they don't want to sell the hotel, and I'm not sure why that is but we'll find out or we'll move on to something else. We're looking at a bunch of stuff today, we're quite busy actually. But, again, you can't really finance much, and if you're going to finance in today's spreads the sellers aren't taking prices that reflect the cost of debt today. So, the transaction market worldwide for assets has sort of gone into a temporary coma. I think when we get back, when we are able to get back on an airplane and look at properties and see the assets we might be buying, it'll be easier to do equity transactions.
But a lot of our focus has been on the public markets. We raised a Special Situations Fund to go into the public markets and take stakes and companies at prices we thought we might never see again in our lifetime. And as you pointed out, Corus Bank was an interesting trade. We bought - that was one of the few major trades out of the government in the ’07, ’08 crisis. And it's very hard to be a contrarian even in my own firm. There are people who think the world is going to totally end and they think I'm insane, so we have, that's why you get the opportunity to make these bets. If everybody knew we were coming out of this the stocks and bonds would be trading hard. So historically the nation has come out of these great falls and historically we've underestimated the strength of the rallies. And in Corus Bank, you may recall, we were condemned and criticized for - I think we outbid our nearest bidder by five hundred million dollars on a two point seven billion dollar deal - that was the Related Companies, they actually were vocal in saying we were crazy. We made almost a billion four on that trade and 60 percent of it by the way went to the government, they were our partner. And had we held it another year we could have easily made another billion dollars - we sold too early.
But my view is when you're buying real estate assets well below the cost of replacement in a country like the United States with land in some cases almost at no value, you’re going to make money because this nation is going to grow. We add three or four million people a year organic growth and we will eventually open up what I'd call smart immigration because the country needs the workers and that will help the country grow. And without immigration you can't get the GDP numbers that the Trump administration would like to see in the economy. This country needs a million, million and a half immigrants - screen them, make sure they're not villains, whatever you want to do but we need immigration to grow this economy and we should be having immigration.
Taking that away was one of the key issues in the in tepid growth that should have been even better in the Trump Administration. And not fixing this fact that we educate foreign students and we won't let them stay here so they go home and compete with us is one of the most idiotic things the political class has ever come up with. One of my son's is going to go to Harvard Business School. A third of the class will be foreign and they're not allowed to stay here. So, I train them to compete with U.S. industries? I mean, how ridiculous is that? So, they want to stay here and we can't keep them so they go back home and they compete with us. Really great program - the idiocy of some of the political classes, beyond comprehension. And you're not talking about a hundred million people, right, you're talking about educated people, people we would want to have stay here. And that's for the record by the way - I know there’s press on here. We can't even get our own people back. We send them to England and we can't get them back here. Like how ridiculous is this, we have to apply for a lottery to get educated, highly intelligent people want to live here and contribute to American society and they're not allowed to? Come on, that is ridiculous.
BS: Well this is an anomaly, zero oil, and we, our energy business is sort of more in electricity generation and that has been pretty stable right now, arguably benefits from low oil prices. The energy market will stabilize - it's going to be a big rocky road. I don’t know where energy or oil prices will come back. Obviously, the producers, including American producers, have to stop producing oil and that was just a futures trade mess that happened on, I guess two days ago, where there's not storage for the oil that's coming over here. If you read Saturday's Journal there were twenty Saudi super tankers on the seas getting ready to deliver forty million barrels of oil to ports that can't take it. So, if you want to drop that oil off, we're saying you have to pay us to take your oil. Which is what you saw - that contract corrected yesterday when it expired and it was like nine dollars for a barrel of oil yesterday at close and then this morning, June oil is I think eleven bucks.
The oil markets are like a scale. Last I saw the world needed like a hundred million barrels of oil a day, maybe it's 103 or 108, I don't really know exactly. If you produce 112, 115, 120 the whole price of oil crashes. If you produce 90 or 91, oil prices rise. Because of the pandemic, I mean global demand has crashed and global supply did not crash, and they announced a 10 percent cut or whatever that was, about 20 million barrels. Nobody believes it's going to happen - they've never been able to hold the cartel together. A lot of the bad actors in the world need oil to fund their regimes - like Iran, to some extent Russia, so it's very difficult for them to comply because it's really the only source of revenue for their economies and so they keep and so you have all this oil on the market.
Again, when the economy gets going again, when planes are flying, and cars are driving, and people are traveling you will suck up a lot of this oil but in the meantime, it's going to be a rocky road. I actually looked at a Contango trade yesterday - I was thinking of getting a ship and getting oil at two dollars and parking it offshore and then bringing it back when oil is 35 bucks a barrel. Oil will be managed higher, so it won't stay here, it's just through this crisis and the fact that nobody knows how long there will be zero demand. If they don't cut production, we're going to see massive bankruptcies of shale producers and other marginal players in the United States and the Marcellus and parts of Texas. It's kind of a, you know, it's kind of a shame. You know gas prices have held steady around $1.75. It's not great but they haven't fallen anywhere near what's happened to gasoline because we need gas for electricity production and other uses. So, it's really the fact that the commodity has no ability to be stored when produced in these amounts.
Our energy business has been solid, although the REIT kind of went on defense. This is Starwood Property Trust. We really were going on defense making sure we could survive this crisis. It wasn't really our loans or our borrowers it was really the behavior of the banks - with the banks how much collateral would they ask us to pose as they arbitrarily, I would argue, mark down the value of a loan. You know people get confused, like the mortgage REITs which have taken it on the chin, most of them were lending sixty-five, seventy percent of value, they weren't lending like in ’07, ’08, ninety percent, ninety-five percent, a hundred percent of value. And then the banks were advancing against those positions if they didn't have secure corporate debt which we have, or CLO’s which we have, if they had just lines from the banks, the banks were lending seventy against seventy. Well that's fifty, forty-nine percent right? So the banks at forty-nine percent of prior COVID value, if the property dropped ten percent in value do they really have to margin call you? And yet there was a collective if I don't do it then the other bank will do it, and I really don't want to do it, but I’ve got to do it.
And that's all passed, I think at the moment the whole credit world looks fairly stable. It's actually rallied as the government added Triple-A CMBS to their bucket of stuff they'll buy with their TALF program. But single, CMBS, the generic assets, like triple B, double B, they've been wobbling and they've gotten some strength but they're not trading where they were pre-crisis. And if the government took at least all the investment grade classes – double A, single A’s, triple B's, I think everything would tighten and they'd probably be facing no losses at all. So that's what we'd like to see them do. Although, I think Starwood Property Trust is pretty solid and we'll get through it.
BS: It doesn’t work right now, which I found out. I found the ships, I found five ships. I'm an investor in a commodities trading platform where they do exactly this and the guy who had the ships, most of them had been leased, people have done this trade. And the rental prices are too high given, you know, they were too high, so the trade doesn't really work. I mean the equivalent like $35 for a year, if you wanted to store it for a year, it’s $35 a barrel. So, it's like okay I'm not really going to say that oil is going to get to fifty bucks a barrel which I buy at $11 today and store it for $35. I have to get $46 to break even. So, he doesn't lose - he wins in every case. So those ships probably rented for $3.00 a barrel before oil went to zero so it's a perfect world Willy.
BS: I work out every morning like you, I try to keep in shape. It keeps my mind clear, it's my time out. I don't meditate although my daughter would like me to do that. I may try to do that but spending an hour in the gym is my alone time. And I'm biking, running. I’m in Miami, they opened the waters so we can go paddle boarding and other things as long as we stay six feet apart. I try to stay in shape, I played tennis today actually - I haven't done that recently but that's a good run. And, actually I have to do that, I get tired when I don't exercise. I'm sure you're the same way.
WW: Agree on that, I hear you on that. Well with that, we're right at the bottom of the hour. So, Barry I want to thank you very much for spending this hour with us. Thanks for your insights, thanks for your friendship, and stay safe and healthy during these challenging times and I'll see you sometime soon.
BS: Thanks Willy. Stay safe.