Good day and welcome to the Starwood Property Trust Fourth Quarter and Full Year 2017 Earnings Conference Call. Today’s conference is being recorded. And now at this time, I will turn the call over to Mr. Zach Tanenbaum, Director of Investor Relations. Please go ahead, sir.

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, 2017 filed its Form 10-K with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on the Investor Relations section of the company’s website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company’s filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that maybe 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 measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Barry Sternlicht, the company’s Chief Executive Officer; Rina Paniry, the company’s Chief Financial Officer; Jeff DiModica, the company’s President; Andrew Sossen, the company’s Chief Operating Officer; and Adam Behlman, the President of our Real Estate Investing and Servicing segment. With that, I am now going to turn the call over to Rina.

Thank you, Zach and good morning everyone. Jeff will covering our annual results in his remarks, so I will focus my discussion on the quarter. Our core earnings this quarter totaled $145 million or $0.55 per share. This includes a negative impact of $0.04 from federal tax reforms and a positive impact of $0.06 from the payoff of our October 2017 converts. I will discuss each of these shortly. I will begin this morning with the results of our largest business, the Lending segment. During the quarter, this segment contributed core earnings of $110 million or $0.42 per share. On the commercial lending side, we originated or acquired $1.4 billion of floating rate loans with an average originated loan size of $166 million and an LTV of 61%. We have funded $1.1 billion, of which $947 million related to new loans and $137 million related to preexisting loan commitment. These funding slightly outpaced repayments of $914 million. Our commercial lending book ended the quarter at $7 billion and continues to be positively correlated to rising interest rates, with 93% of the portfolio being floating rates. The credit quality of our book remains strong, with LTV improving to 52% this quarter. We also saw improvement in some of our poor-rated loans with the loan loss reserve declining from $6.6 million to $4.3 million. This was mostly due to upgrades of two loans, both of which are expected to payoff in the near-term. On the residential lending side, we acquired $220 million of non-agency loans this quarter bringing our total portfolio to $613 million and our net equity to $169 million. The current portfolio has an average 63% LTV, an average FICO of 723 and an optimal annual cash yield in the mid-teens. I will now turn to our property segment. We…

Thanks, Rina. We had an extremely successful fourth quarter deploying over $2.3 billion across all of our investment cylinders and expect to beat that amount with a record Q1 investment pipeline of approximately $2.5 billion. In our Lending segment, we have always focused on the quality of the loans we put into our loan book and not the quantity. Facing large expected payoff in our loan book in 2017 and early 2018, we doubled the size of our originations team in the last 2 years leading to increased loan volume, while maintaining loan quality and expected IRR. In the last three quarters plus the current quarter, we will have realized over $4.2 billion in loan repayments versus just $1.4 billion in the next four quarters ending in Q1 2019. Fortunately, our large loan origination business is hitting on all cylinders and we expect it to continue to be the dominant user of our capital for the foreseeable future. In Q4, we originated $1.4 billion in large loans with an expected IRR of 13% and weighted average loan-to-value of 61%. Our volume and IRR were both the highest in the years and our loan book today is the largest it had been in our history. Our large loan originations were over $4.2 billion in 2017, up approximately 30% versus 2016 and we have seen the retail exposure in our loan book fall to below 5% by the end of this quarter. The first quarter of 2018 is shaping up to be our largest lending quarter on record with over $1.75 billion of loans in various stages of closing. We expect to originate over $5 billion in floating rate balance sheet loans in 2018, while maintaining our credit first culture, the lowest leverage in our peer group and IRR commensurate with or…

Thanks, Rina, thanks, Jeff and good morning everyone. Not sure where to start, I mean I guess I should start as a frustrated CEO of the large enterprise, because our stock obviously hasn’t responded well. And I want to talk about three markets that are interacting here and what’s going on, the real estate market, the fundamentals of the real estate in the United States which is primarily our focus there is really excellent and probably among the most balanced real estate markets I have ever seen in almost 30 years of doing this, whether in the multi-sector, we continue to see our rental growth to office sector which is having rental growth, industrial sector which is having rental growth, the medical office building sector which is having rental growth, you are hard pressed to really find tremendous leasing. There obviously is some uncertainty around retail, but as Jeff pointed out and we have very little exposure to the asset class and where we do. I mean, you can argue it’s not retail in one case, which we will talk about. So, the fundamentals of property class are good and as you think as well as I do that the economy is going to accelerate with [indiscernible] tax cut and $300 billion spending bill, it’s just going to be good. And with that means commodity prices probably rise replacement cost goes up and our LTVs fall as values rice in properties. You could probably even see our book fall into the 50s a year from now, high 50s if in fact that we see what I expect to see, which is inflation in rising rates. So, against that, money is pouring out of the REIT sector and the flow of funds against our company and all real estate REITs is…

I will add to Barry’s comment on Dublin, which was floating rate when we put it on that we are now 3 years in. We are a quarter away from being able to refinance it, which we could do it in either a tighter spread floating rate or a 2.1% fixed rate today as the quote we are getting to, very easy for us to lock in a very low attractive fixed rate there.

And let me go back on the equity markets, I think just comment on the apartments we own, if you can look at apartment multiples, they are probably 5 caps today, 540 and there is 6 that’s 20 times FFO, medical office 20 times FFO, Dublin is a foreign 4.5 cap market and we would sell those assets at 22 to 23 4 times EBITDA. We haven’t told you what we have done with Cabela’s, but we believe there is arbitrage between what we pay for those assets and what they are available to be sold for and I can talk about Cabela’s credit if you would like. At some point, I think that was quintessential of Starwood having conviction in the credit and what our thoughts are, I would be happy to talk about in Q&A. So, these asset classes trade at much higher multiples than our mortgage book and should drag us north and frankly to a multiple book that is well beyond any of our peers, which are simply collections of paper and yet that hasn’t succeeded yet. And I sound frustrated, I m probably frustrated, but I am comfortable. And as you know I have never sold a share of stock. Thank you.

Operator, we will take questions now.

Thank you. [Operator Instructions] You will hear first from Douglas Harter with Credit Suisse.

Thanks. Can you talk about the – your available liquidity and the ability to balance the strong pipeline you referenced and the opportunity to repurchase shares?

I am sorry there was noise in hallway, can you get them to stop talking out there. You asked about it, great. We have like a $1 dollars of capacity including 260 of approved repurchase capability. Rina you might know the cash drag we experienced for the quarter. We have raised our debt when we could and the thing we payoff our credit facilities with the proceeds, but it does create an under-levered balance sheet that is not insignificant. We know our pipeline, so we can see what we are holding cash for. But used in a lot of cash and Rina do you have an estimate of what that might have cost us this quarter?

Probably about $0.02 to $0.03 for the quarter, so we had cash going around the path that converts that we need to – that are maturing tomorrow, that was $370 million that we got on. I will say that $0.02 to $0.03 a drag that we got, yes.

Good bye, converts. I hope you enjoyed owning it.

But Doug, it’s Andrew. I mean just in terms of capacity to your question, I mean where we sit today, we have plenty of capacity to execute on business plan and to the extent we wanted to be out in the market repurchasing stock and not have to access the incremental new capital.

But both are capable, not only cash but also un-drawn – committed to un-drawn capacity which is probably well over $1 billion.

So I guess just to Rina’s point that there might have been $0.03 drag from cash and I guess since that converts payoff tomorrow, I guess should the first quarter see a similar drag and when might that drag be reduced?

We put into those somewhere in the area of $150 million a month of equity. And if you use that number, that value is at around $1 billion and you are five months or six months probably away from being to a more normal. And if you increase the pipeline a bit which we are hoping to do…

Is your number net, like your $150 million is that net?

It’s net of repayment.

No, that number is equity out. I have heard Jeff’s comment. I think you are going to see that drag for the next six months.

Reducing each month for the next six months.

That’s right.

Alright. Thank you.

[Operator Instructions] Now we will hear from Jade Rahmani with KBW.

Thanks very much. I appreciate the frustration on the stock price, dividend yield and personally think management has been doing the prudent thing in terms of pivoting towards unsecured debt issuance as well as continuing to incubate new business lines, just wanted to ask about unsecured debt, is the motivation about having more flexibility in terms of the types of deals that you are able to pursue because warehouse financing can be somewhat constraining or is it a risk management tool in terms of diversification of the liability structure?

How about all the above and in deep in the back of my mind, god forbid the world ever ended. You can buyback unsecured notes in the open market at discount to par. It’s very hard to do at the bank. So it is – that is a proven methodology in terrible cycles to keep these companies informed. And I am not anticipating that happening of course, but it is an asset. But I will say that’s cheap. It’s very important for rating agencies, that we issue unsecured debt and unencumbered assets. And it gives us maximum flexibility. So what we do as you probably know is we attribute that in our minds to different assets that are un-levered. And we look at like our leverage strategy and see if we are under-levered or over-levered. And that might change in our view. It’s management’s view. So we attribute even though it’s unsecured in our mind we are tacking it to a deal and saying we are levering it with unsecured debt.

Yes. I mean Jade at LIBOR plus 160 area for our recent financing, you guys have seen everyone, a lot of CLOs get down the market. The CLOs have flashy headline numbers of what the financing is today. These are floating rate assets that can prepay tomorrow and as they do prepay which they do you pay off the sequentially your AAAs and your cost of funds goes up. We think that the CLOs that are getting done are well north of LIBOR plus 200 after all of that is factored in. And in addition you have to show the world your hand. You have to give the documents on every loan that you have. Those are assets that we are going to go out and make the phone calls on already have every time we see somebody, CLO out there. So we think it’s significantly better than you saw in the flexibility that Barry talked about. From a flexibility perspective, we could assign unsecured to a single loan, but we could also say well the warehouse lines or A notes are willing to lend us 70% of our loan balance at X and 60% at Y and Y is cheaper. But we could do at 60% at Y and top it off with that 10% of our corporate debt and everyone of our loans get the new price offer cheaper liability structure and every 10 basis points is 30 basis points in yield. And we think will save 20 basis points, 30 basis points, 40 basis points of financing by optimizing the strategy that others don’t have. But we think it’s not a big win and it takes a lot of work in creating unencumbered assets and having diligence to do that and it’s something we started to do for 4 years to be able to reap the benefits today.

In terms of the 1Q investment activity of $2.5 billion, can you give some color how that splits by segment as well as the types of deals on the lending side that you are looking at?

It’s all over the place. And that would be another – I should have made that comment. As you told me we have a book that looks like we do. It’s not dominated by hotels. I would have been really surprised. I think if you ask me by segment, it’s pretty diversified, I haven’t seen the stat, but I have seen approved sequentially the deals. Do you have that Rina?

Yes. I do it’s 1.9 in our lending segment and then 450 in our property segment for the rest of the down REIT portfolio and then the rest is sort of split across.

In terms of the $1.9 billion in lending, just good level of transition, the types of deals you are doing, are these construction loans, how much is whole loans versus mezzanine and what’s the level of credit risk do you think?

Are you still [ph] in our first quarter earnings call right now…?

Well, I think you are talking about stock price evaluation and there is a perception that you guys have more credit risk than say BXMT?

Yes. Our construction book continues to fall Jade. I think it stayed at a relatively low level as a percentage of assets over the last year were significantly lower as a percentage of our lending book than we were a year ago in our lending book. So despite this opportunity in construction lending, we have not jumped in with both feet and moved the books entirely in that direction. The first quarter pipeline is a mix of construction and non-construction much as it looks a lot like the existing book today. But I would say it’s important to note that our construction book has not grown.

I understand the recent development. And I am the first one who had said they are building – if you are building a high quality sponsoring you are lending in money at 50%, 60% of what it costs him to build the project. I go to bed every night hoping it will fall and we can buy that asset at 60% of the cost of construction. I know exactly what it’s costing, right. So this isn’t a guess on buying something and it’s [Technical Difficulty]. I know exactly that the cost of construction and getting a brand new asset. And we are smart enough having now a $60 billion booking incredible data to know where this asset and what it’s worth and word and when we will rent that and what the expenses are and what they trade for. So this is – we are an equity book team looking at debt deal and nearly every time we look at a deal in investment committee, what are the guys going to buy assets in that sector in the firm think of it. At this moment, there is an interesting deal right now on the hotel space and it’s a deal where we are not – anyway we look at the these things very closely. And I would put our LTV up against any company in the business and argue with it. Frankly, I’d say its paper, we have been taken out of positions we worried about by other public REITs and we are delighted to get out of those deals. So, I would say LTVs are sometimes in the judgment of management, I would say are conservative.

And Jade, our book sets up very well as we have spoken about before for construction loans, the large diversified nature of it and the amount of repayments that we have coming in from various places ensure that we always have cash coming in for those future fundings, also the fact that we have unsecured debt, which has ultimately significantly more flexibility is makes it a lot easier for us to be competitive in construction, where there are less competitors. So, we can be competitive, because we can use….

Not a material portion of that.

In terms of the uptick in special servicing balance this quarter, is that sort of a one-time thing and you expect further runoff this year or is there any inflection in the trends?

Rina?

I can answer that. We actually took in a transfer from another transaction that brought in the significant amount of new loan in the special servicing from that. So, I think the trend is stabilization of that number over time, I don’t know, but we will seek increases like that, but there have been a couple of more transfers.

It’s obviously a little subtle, but we would point out that if rates were to spike, our servicer would probably have to be busier, our special servicer. So, we have always had that little guy and that little guy is only worth $60 million and $59 million right now on our balance sheet. So, it’s like the services carried is virtually nothing, almost 1% of our assets. And that it’s a nice little option to have on the rest of the businesses of the REITs are operating great. That one is operating great too. It’s just the planned decrease in its book over time, right, and then there are other businesses have to make up for it, we know what’s coming.

The Freddie Mac agency servicing you cited how big in the opportunity is that?

We are doing the small balance deals as a starter. Hopefully, we get involved in the larger case series soon and prove ourselves there. So, I think with our ultimate plan, it’s the decent sized opportunity, but we are taking the baby steps we have to take to get involved in the program and we are going to do a good job in the small balance and then see if we can get into the larger balance.

And lastly, since you guys are pretty bullish on multifamily, what’s your interest level in the GSE multifamily lending business. As I am sure you know, the FHFA slightly reduced their lending caps, but volumes are expected to remain pretty resilient and that business line would seem somewhat complementary to your existing businesses as well as expressed the positive view of multifamily that you have?

Yes, something we look at. We leave it at that.

Thanks very much.

Thanks, Jade.

And we have time for one more question and that will come from Fred Small with Compass Point. Go ahead, please.

Hey, good morning. Thanks for taking my questions. Just leaving aside the depreciation shield and the potential ratings agency impacts, what’s your level of frustration with the implied valuation for something like multifamily property assets inside of Starwood compared with the public market valuations and assuming this persists what’s the probability that you will take some action these are separate – these assets are monetized for valuation discrepancy over the next 12 to 24 months?

I’d call it increasing frustration. I would not say, it’s a panic that we are here for the long run. And as the property book has grown, it’s a more relevant discussion to have and it’s something we have to look at, I mean, but is it in the long-term interest of the firm to spin out of property book. Again, it served the purpose of extending durations and giving us unlike a loan hopefully increasing cash flows. We expect – there are fixed bumps in our medical office building portfolio in the rent. So, their cash flows are going up and the same thing I think would be two of our multifamily assets over time. So, I think we like them. I personally like – I own a lot of stock, we can look it up. I mean, I like them in the book. I am happy that was our strategy, buy assets we want to own for a long time and that’s how we chose the assets. And but, I mean, if we can’t be competitive with a dividend yield like this, when we have to issue stock, because I don’t want to issue stock at this kind of dividend yield. So, it’s too expensive to us and we should be buying it in and that is obviously a very good place to deploy capital. So, we are – obviously our stock is a little higher than it was at the height of the panic recently. And our thought was – my thought was that we are getting in the way of a freight train and nothing to do with us. And we would have had to had we rushed into market to issue stock, to buyback stock, we would have had to accelerate our earnings release for…

Yes, gold medal.

And we are going to do more, exact sitting here and you will say whatever you want to know, but other than borrowers necessarily in the date of the maturity of loans, so we don’t wind up having four of the guys called the borrower. So, we are – I am really pleased with our – you should be very pleased with our loan origination volumes. I mean at this point given what you know the world is like, I mean, they are not the stressed bank of the world, but even increased their rallying. So, I think we compete head-to-head in the marketplace everyday, it’s competitive, where we have a very good cost of funds which Jeff and the team have built and we continue to see banks on our credit facilities and the spreads on those facilities and we are not being impacted, because it’s not like we lend at 375 or 295 over, over for everyone, we are not at a disadvantage with rates rising. They have to borrow from somewhere. So, we have to have the most competitive spreads, cheapest borrowing costs and produce the highest ROE and then this is a virtuous cycle. And that’s what we are trying to achieve. So, I think the market is freaked out, but things like our JPMorgan report and there was is a whole list of 50 stocks you should sell on a rising rate environment and I wrote to Morgan, I said, the analyst take their head out of their butt, because that was really an awful, I think, stupid report. He should have looked at our company before they did a computer screen and look and see their own debt and that’s all we did. So, it was irresponsible, but I will look through that before in my career, not a big problem.

Just stupid.

I think what they called fake news. That was fake news. That was actually a fact. I think that’s it right. One more? Okay.

And now we will take a follow-up from Jade Rahmani with KBW.

Thanks. Do you have the amount of prepayment income in the quarter?

Yes. We have got prepayment penalties at an accelerated accretion of $11 million in the quarter which it flat to last quarter.

We want to run that more or less every quarter. We are always going to get those, Jade, right. I mean, I don’t think as JPMorgan about prepayments penalties in the earnings and we are not JPMorgan, but it’s kind of like we are in the business that we have let a $12 million book. I mean, we are telling to get some especially as spreads came in, Jade, right it’s spreads from people are refinancing at lower spreads and trying to extend their maturities. So, we are always going to have.

So, we try to calculate what your underlying yields are excluding those to see these spread trends?

Yes. Well, the originations numbers we quote you to the expected maturity. And I still say the IRR is actually lot went up higher off in times, because you get the fee in and sometimes the fee out as the paper shortens, because lot of these assets are that it’s empty 10. They get a 10. They go refinance it. It seems they do and so your IRRs go up, not down, but it’s sort of – the good news is you are getting a higher ROE on your paper, the bad news is it’s paid out for them period of time to redeploy it. So, it’s a good question and it’s a fascinating situation.

Alright. Thank you everyone. I hope I am less frustrated next quarter.

With that, ladies and gentlemen this will conclude your conference for today. We do thank you for your participation. You may now disconnect.