Greetings and welcome to the Starwood Property Trust Second Quarter 2018 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Zach Tanenbaum, Director of Investor Relations.

Thank you, Operator. Good morning and welcome to Starwood Property Trust earnings call. This morning the company released its financial results for the quarter ended June 30, 2018 filed its 10-Q 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 website at www.starwoodpropertytrust.com. In addition we’ve also posted a slide presentation relating to the company’s acquisition of GE’s project finance debt business in the Investor Relations section of the website. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company’s filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. 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; and Andrew Sossen, the company’s Chief Operating Officer. With that, I'm now going to turn the call over to Andrew.

Thanks, Zach, and good morning, everyone. As you saw in the press release in our investor presentation released earlier this morning. We are very excited to announce that we've entered into a definitive agreement to acquire GE Capital's energy project finance asset. The acquisition is comprised of both the full service energy project finance platform and a $2.6 billion loan portfolio, including $400 million of unfunded future commitment. The platform is vertically integrated with a seasoned leadership team that averages over 21 years of industry experience and has 21 full-time employees across loan origination, underwriting, Capital Markets and asset management. The platform had successfully originated in excess of $24 billion of loan in 2004 has experienced less than 10 basis points of charge-offs per year over the last 10 years. The $2.6 billion portfolio consists of 51 senior secured loans that are collateralized by energy infrastructure real asset. These assets have an attractive risk-adjusted return with a strong credit profile and are largely backed by long-term purchase contracts with investment grade counterpart. Importantly this acquisition leverages existing expertise at Starwood Energy Group which specializes in energy infrastructure equity investment. Starwood Energy led by Himanshu Saxena was on the call with us today, has a history of over 7 billion of capital deployment since its inception in 2005 and the platform has 17 investment professionals with an average of 15 years of relevant industry experience. We plan to finance $1.7 billion of $2.2 billion purchase price with a committed secured term loan facility from MUFG, the term loan also provides additional committed capacity for the 400 million in the future funding associated with the portfolio we are acquiring from GE. We have ample available liquidity on our balance sheet to close the transaction in addition to a $600 million committed acquisition…

Thanks Andrew and good morning everyone. Our core earnings this quarter totaled $148 million or $0.54 per share; this amount includes a $0.01 of severance expense associated with a reduction in force that we completed in April; I will begin this morning with the results of our lending segment. During the quarter this segment contributed core earnings of $114 million or $0.42 per share; on the commercial lending side we originated $2 billion of loans with an average loan size of $113 million all of which were first mortgage loans; our funded commitments of 1.5 billion outpaced prepayments by nearly two times increasing our target portfolio to $7 billion at the end of the quarter. More than 90% of this balance represents first mortgages and 95% is floating rate. On the residential lending side we acquired $193 million of non-agency loans and received prepayments of $64 million bringing the total portfolio to $793 million and our net equity to 295 million; the current portfolio has an average 63% LTV and 724 FICO. I will now turn to our property segment which contributed core earnings of $30 million or $0.11 per share; the wholly owned assets in this segment has an underappreciated carrying value of $3 billion and continue to generate consistent returns. The blended aggregate cash-on-cash yield for the trailing 12 months period was approximately 11% and weighted average occupancy stood at 98%. We also sold one retail asset from our master lease portfolio this quarter bringing the cost basis of our year-to-date sales in this portfolio to $48 million with core gains of 7 million. I will now turn to our investing and servicing segment which contributed core earnings of $56 million or $0.20 per share; on the servicing front we recognized fees of $25 million this quarter; as…

Thanks Rina and good morning everyone. Qith the acquisition of GE Capital's energy project finance portfolio our balance sheet will now have over $15 billion in asset. We expect to continue to benefiting from our scale both in opportunities and the diversified best in class financing of our business. We deployed $2.8 billion this quarter with over 2 billion of that coming from our primary business of large loan lending. This record origination this quarter encompassed 15 new loans, 100% of which were first mortgages with a optimal IRRs in excess of 12% in line with previous quarter. I will note that our $7 billion, 62.4% LTV loan book is over 90% first mortgages today, the highest since our inception. Our Energy Finance acquisition adds another stone right at the time when our loan book is producing record volumes at accretive yields. This is the third straight quarter that we’ve written more loans than any quarter since 2014 and our pipeline for Q3 is also strong. DAF increases we made last year paid tremendous dividend along with our best in class partnership with all lien banks in the nation from which we benefit. We again significantly lowered the costs of our asset specific financing this quarter allowing us to continue to be able to achieve great risk-adjusted return at lower spreads that will benefit our book for years to come. We deployed $4.7 billion of capital across cylinders in the first half of 2018 up 63% versus 2017, with significant contributions from all of our investment cylinders. In our property segment our Dublin office portfolio and our two-Florida multifamily portfolios continue to benefit from very strong market fundamentals. We spoke in depth about our view on the Florida markets where these assets are located when we purchased them. We’ve seen…

Thanks Jeff. Thanks Rina, thanks Andrew, thanks Zach and good morning everyone. I think I go back to the IPO of our company back in 2009 and I was asked the question by some shareholder prospective shareholder at the time that kind of said, why would I buy a mortgage REIT sale this below and I would say well we don't have to invest capital and we're not going to overstay our welcome in the business and we promise to do that and since the start of the firm back in 2009, we looked at probably seriously chase the dozen and maybe more than 15 different acquisition, including the GE healthcare business, which I'll point out we lost to Bank One in a neck and neck raise which was bigger than this energy business, we're willing to lend capital in any business that meets our risk profile and return objective. And when this business came up for sale Himanshu who is on the call who's led our Energy Group for the past ten years, he brought to our attention and when we looked at the nature of this business it looked awful lot like what we do, with our proxy loans, there are assets whether they're turbines or wind farms or plants behind these loans their credit worthiness 80% of the contracts, credit worthy entities behind that and yield both the return we thoughts were even better than in the property sector and we had our first exposure when we participated in a loan some while back and obviously, I think Himanshu's leading our third fund which just closed at 1.2 billion of commitment I think they done more than $7 billion of transactions, we obviously know we can trade and how we finance our own projects. So I think…

It’s intangible, something intangible…

It’s intangible. And more than half of that now relates to 2.0 not 1.0 so it’s fair -- that number may start going up not down, and we’ve written off as Rina pointed out $250 million of that intangible over the past year, so it hasn't all been gravy, we’ve been writing down the intangible as we booked earnings and lowering the net effective earnings for the company; so that business is no longer that material to us and that’s planned; we knew it’s going to go away and all this moves into the resi business into the energy business into the other -- the property segment were meant to offset what is a sea change from 1.0 that we’re going to lose and now 2.0 as Jeff mentioned the best quarter in our history getting new servicing contracts 13 of them just in the quarter alone to build the servicing business up for inevitably the next cycle. So I am really proud as a company we really are a team I am so proud of the cooperation between our energy team, our Star Capital Group executives that -- we’re ahead of the due diligence on the energy deal and then Star Property Trust executives working together in a way actually supposed to work, that was a tremendous achievement of the team and I want to thank everyone. And we think it is a tremendous deal for us and we’re super excited about the team and in building the company within our company, so with that I think we’ll take any questions.

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Doug Harter with Credit Suisse.

[Indiscernible] when we would expect -- when you would expect to get repaid on it?

Sure we’ve been working for the modification over the last few weeks; we would expect it sort of imminently and we think there’s another year of extension at the most with significant paydowns along the way. So a few months out there’s the balance that will be significantly smaller than it is today.

And just to be clear to what Rina said so of the reserve for impairment against that 15 million is -- would be related to sort of time value discount and the 1 million would be what you baked in now is potential less proceeds that you would receive?

Yes, the time value is the big story because you’ve to use the mezzanine rate which is very high rate when you’re discounting and Rina went through that but that's added the $50 million of it -- all in this project will end up selling out at prices that aren’t far from where we originally underwrote them, it’s just taken longer and we’re very comfortable that these sales process will happen over the next 12 months and then we can just stick with those.

I think it’s fair to say the borrowers think it has willingness to support loan by the way, so, he’s already taken a small recourse facility from us to finish the project which he's drew only a third of there’s a small loan that is like under 20 million but he thinks it’s going to make money; we’re just lenders we don’t get paid to take equity risk in loans.

So if that were the case, then you would get repaid in full.

That will be correct.

Our next question is from Jade Rahmani with KBW. Please proceed.

Just talking about the GE acquisition. Can you give some color on the collateral, the competitive landscape as well who this business competes with directly? And I think you mentioned double-digit cash on cash target returns. But what historical leverage ratios in these projects and I guess that’s the start.

Why don’t we let Himanshu answer that?

On the collateral piece, it's the one generally secured bit…

Himanshu you have to get closer to the phone.

Better. So let’s start with the collateral, from a collateral standpoint these loans would have generally first lien on the underlying project asset, so whether you have a wind farm or a gas powered power plant the loans would be secured by the entirety of the hard assets and any contracts that the project have, many of these agreements are with trade worth customers you would have 10,15, 20 of contracts with high credit counter parties, who are responsible for making payments that ultimately goes to service the loans, so the loans are backed by investment grade counterparties with long-term contracts but the cash flow are very stable and loans are generally if you look at the default rate on these loans over the years, they have very small and highly uncorrelated with the CMBS loans, so it’s a very good and safe play from a cash flow standpoint. From a competitors standpoint there are banks that would invest in this business these banks are generally lending at the highest and safest product in the credit spectrum, so very safe deal. The other competitors include other finance organizations they could be names like Apollo and others who are also in this business lending to similar types of project and then there is a big market on the term loan B side which is comprised of a lot of other financial institutions so generally a play where investors are spending investing money in different credit ranges here competitors change depending on which part of the credit spectrum you want to play.

And in terms of the leverage underlying the projects how much equity is typically behind the first lien.

These efforts are not overly levered in general, you would have something in the 50% to 60% loan to value, so there is substantial amount of equity underneath these loan and the underlying project level.

And is LTV the right way to look at leverage?

It is, it's loan to value, loan to cost and that's how the coverage ratio is of the three metrics we use for credit analysis and the DSTR which is the reflection of how much excess cash you have over the debt for these deals tend in be close to 2 in many of these deals but these are again very, safe loans. A lot of these loans at the underlying level are rated and they are rated generally high investment grade, high non investment grade, low investment grade but several B plus, BBB-, BBB kinds of loans.

And in addition what’s the amortization on the loans look like?

So there are two kinds of amortization profile one that fully amortizes over the life of the underlying customers contract that if we have 15 year contract with a utility, these loans would be fully paid up over the 15 year period. The other structure is where you get paid a mandatory amortization in the cash flow sweep depending on the cash flow generation but really the loans are paid off in its entirety over a five to ten year period. Most of these loans would mature in about five years.

And just can you give any color on the non-U.S. exposure in the portfolio you’re acquiring?

Yes it’s very little non-U.S. exposure, 90% plus of exposure is in the U.S. there is some exposure in Mexico, but the Mexico exposure is with CFE which is a very high credit counterparty and the CFE contracts are all U.S. dollar denominated; if you look at the current exposure predominantly U.S. dollar denominated with investment grade counterparties even if its outside the U.S.

Great, thanks for that. I just wanted to ask Barry what do you think construction costs rising, how do you think that will impact the CRE market, do you expect to limit the amount of new supply and cause an inflow in additional value add and transitional assets?

You’re -- good question I mean, our construction costs are rising, very quickly, across the board, both labor and material costs, and steel costs I know somebody had dinner with Trump on Tuesday night and he said he was going to talk about steel prices; which are up I think I don’t know steel prices but he meant and don’t -- the rough numbers are 700 to 1,100 a metric ton or something like that, so yes the deals won’t cancel, the disciplined people will pull their projects and stop building; and I think it’s good across all sectors of real estate the only thing you'd like to go away now is EB-5 financing because that money is not tied to the economics of the project, it’s used to supplement the capital back where normal capital stack over the project won’t work. So, at the moment EB-5 financing has slowed down, generally from China and maybe it'll go away. But that would also help the markets in the major cities as that net financing disappeared which is clearly not needed in cities like New York, to create jobs at a 3.9% unemployment rate. So, I think the answer is you got to be super careful because prices aren’t rising as fast as construction costs. But as you make these loans and I'm really focused here on the U.S. One should be aware that of the -- if anything would happen in the upper east-west side of New York with us the borrower held out for very high prices we could have cleared these units lower -- lower prices chose not to. And as a lender you kind of just accrete at your coupons while you're waiting for them to sell the units, the longer he sells the more he wants…

And at this point in the cycle do you think lenders are being disciplined or you starting to see notable underwriting standards slippage.

[indiscernible] with no free cash flow for $80 billion. You know I don’t know the answer to that, I would say in the real estate world the lenders are still disciplined. For the most part we’re not seen crazy, we see some guys going little higher, I would say what you call it hate to call it shadow banking, but we had a -- I was laughing at somebody's words for us, specialized lenders. Some of new bids without the 30 years of real estate equity underwriting experience we see them doing stretching little bit on LTV here and there going to 80s. It was a record quarter for us I would say that for I don’t know whether it's 36 quarters that we been public. I sometimes in the prior nine years I kind go when I thought some of the deals in the pricing I don’t actually feel that way right now. I don’t think what we’re seeing and what we’re doing doesn’t make my head spin or not it’s pretty much I'll say that we’re happy with our risk profile and I think where people get, that sometimes lenders lend just off metrics without understanding the actual real estate. And so what looks good on paper is not very good if projects never work or we got asset. And I say in some of the hotel deals that have discussed lately the single asset large hotel deals some of these loans are bananas. But that’s not the space we've been in. So I should say that like for example we have a loan and I think it's like and it’s first mortgage of a billion and just correct me if I'm wrong on Xanadu or what will be the future new project adjacent to the Meadowlands and we fully expect to get repaid, we have a mid price security and malls opening and leasing gone pretty well. So we will be repaid within months if not weeks of the project's completion of construction. Jeff is that right?

We’re couple of $100 million up a just over billion dollar first mortgage senior that we think is up 40% probably 35% of cost loan that will like to be pay off in the spring when it opens.

On the residential mortgage business how big cylinder do you think that could be and are you looking to expand the joint venture with impact.

It could be material and I’m hoping its material. I think it’s a make as much money as servicing that. So we pretty pleased with what we’re doing there and I hope again we're growing these lines to whatever size their natural size is. And I think Rina mentioned there was some repayment actually in the resi book. So we’re not -- I can’t tell you we’re going to have a $5 billion book we've to eke out roughly $1 billion, at the moment I expect it to grow into a more material portion of our earnings and finally fully supplement the income we got from the 1.0 special services at some point in the future.

We first mentioned that donor, there was something we said we didn’t think in the near future it would be 10% of our equity it’ll take some work to get the 10% of our equity over the coming 12 to 18 months.

I should point out that the energy business is 10% of our equity roughly, more like the 8% but something like that.

Our next question is from Tim Hayes with B. Riley FBR. Please proceed.

On the GE acquisition, you note it's accretive and I know you don't provide forward guidance. But can you just help us frame how accretive this transaction could be to earnings and what that could mean for the dividend? Do you suspect that incremental earnings power might influence you to raise the dividend? Or do you think that taxable income might actually be increasing enough that you might need to raise the dividend?

I’ll take a crack at this. I am remote from the team right now. Had some slight trouble this morning. I would say that we’re tracking ahead about how we trade, I mean raising our dividend is that going to matter is our stock going to go up and because of the quarter does it matter. We need to be raising out our company we need to figure out how to get the share price up $3 not a quarter and I don’t expect that us raising our dividend is going to do that, we already trade stupidly; so and we trade beyond our peers and we have the best business, we’re the biggest and our bonds trade the cheapest and we have the best borrowing rates, we’re the number one borrowing trading in United States I mean we trade completely bizarrely in the equity market and I don’t think the dividend increase is going to solve that problem; having said that I would expect that this business will grow as we expand what they can do and financing not only GE projects for example, and actually Himanshu and his team are in the market on Friday for a large $700 million loan of target issuing; and we’re giggling like we could we see the spread we know that deal would fit perfectly in the things we would do. And some of our peers have made a big business of financing their own deals, we haven’t -- we have done that once, and long been repaid, twice I think, once or twice yes. I forgot what I was really thinking of. Well we did one other one so two, but there we wind up taking minority positions in if the loan ever gets in default we’re not the guys negotiating with the shareholders and we let the other person who has majority interest in the paper negotiate we drop out with either holding rate. So that’s how we protect you from being on both sides of the trade. But anyway I do expect this business to be bigger than we underwrote and we’ll be more accretive then we underwrote, particularly at the spreads they’re going to be underwrote. So I do think we were conservative on both on what they’ve originated in the past and I mentioned the GE Healthcare business, we’ve lost that deal was super tight and that business has done much better than we underwrote under the leadership of Bank One. So, we were not -- we were looking at our history and saying we were probably being too conservative on those volume and spread these guys can do in this space going forward.

Just one thing to point out, I mean as you know as a REIT we require to have a minimum 75% of our assets in income, be in the real estate qualifying asset in order to maintain REIT status, just based on the size of our entities we have sufficient cushion to acquire this portfolio outside of the a taxable re-subsidiary so if there won't be any tax impact on cash flows coming from this portfolio and also note that a portion of underlying collateral is a qualifying assets that help drive kind of where the portfolio can fit in our capital structure. But as you think about it going forward again you should kind model this as sitting outside of a taxable re-subsidiary. So not being a taxable business for us.

Okay I appreciate all those comments and would you be able to just touch on the expected G&A and comp expense are increasing expense there just based off of the acquisition and maybe any cost synergies you expect to recognize.

We did a full kind of bottoms up obviously analysis of the platform and there are several million dollars of synergies between the two platform and we're modeling out call it a mid teen, and million dollar G&A number going forward and as I think we mentioned in our comments and we believe this business is highly scalable, so this platform can report significantly more originations then it's currently doing today, so I think you will see kind of the term having G&A.

Okay got it and switching gears a little bit very encouraging to see the strong cherry lending activity this quarter can you just touch on how the yields on new originations compared to the existing portfolio. And if you experienced any -- observed any spread compression this quarter.

I will go and then I’m sure Jeff, we have 12% optimized yield that's better than 24 years ago, we’re in the 11s low 11s but I think so the 12, so how do you get the 12, our credit line are tighter. The spreads across are tighter across the whole real estate section. We can make tighter loan and finance then more cheaply and maintain our return on equity. And that’s being part because of our scale because we have sort of lending sense with your warehouse lenders and also our corporate debt which is pretty cheap. So in fact the banks are willing to do LTV just little tight, they are willing to lower the spreads on warehouse doing to keep us from doing a note sales frankly, they rather just give us warehouse facility, we rather do a note, so little bit of a trick but in the public market give the different synergy strategies, different vehicles nobody seems to care. So you can't say that one guy does A notes, one guy does credit facility and there's a material there is some tax, one that is incredible facilities trading dollars activity in your life and we’re so. I would say that we’re able to manage and that is a really good thing for not an obvious reason. If we can make loans 'one market' I'd say it’s $300 over $275 and still produce 12 the optimized yield in the mezz that we retain there is much likelihood that the guy is going refinance this one loan property stabilize it so the tighter the loan the longer the duration because we can spend it beyond and so it's got a hidden benefit to actually be able to lower or unlever deal and maintain our equity spreads, our yields on those pieces.

Our next question is from Ben Zucker with BTIG. Please proceed.

Well, congrats on the GE acquisition. I understand that this makes sense with the broader platforms experience and the duration that the assets provide. When I look at slide 10 of the acquisition deck, it sounds like most of the loans are backed by fully contracted or partially contracted deals. Is it your expectation that you will focus less on the merchant category? Or is that kind of like mezzanine lending and maybe a little bit riskier, but an ability to get paid more for risk there?

It’s super safe deal in our sector that are completely contracted, generally trading in the mid 100 rates on LIBOR maybe high 100, maybe what these guys going to focus on is something that is combination of contracted cash flows and some contracted cash flows to serve the debt. And then those deals where you look for is really more loan to value, loan to cost and that coverage ratio is for measuring the safety of the loans and those deals are generally priced in our sector at about mid 300, low 300, high 300 ranges that is a spread over LIBOR and I think the plan here is to really focus on those deals which are still super safe from the loan collateral value standpoint but excluding returns that are more commensurate with what a REIT needs which is in the at least lower to mid 300 range.

I got you, that makes sense. One small thing while we're talking about the portfolio. I think I saw that the GE loans are indexed to three-month LIBOR. First of all, is that correct? And second of all, would you expect to finance this with three-month LIBOR index that maintains your interest rate alignment?

The answer to both of those questions is yes.

Great, and then in your prepared remarks you referenced the profit participation you received in the quarter can you remind us if there’re any other significant participations still kind of buried across your loan portfolio or was that the last major one worth keeping track of?

There’re others and that was a portion of that participation, 701 Seventh Ave, we expect at least one probably two more payments in the coming quarters on that and we do have others in the book.

And then real quickly, if I may. Can you guys just provide an update on that JV regional mall portfolio?

I can take that, as you know it’s like 1% of our assets today, we’re not accreting any earnings or any dividends from the portfolio investments because all the money is going back and so the re tenency in the mall and I would say that the mall space is certainly challenged, I recently toured those three of the four malls and they’ve to be repositioned, with what’s happening in the retail space, you couldn’t really guess and if you go file bankruptcy when your tenancy is actually solvent and has a good health ratio in your mall and other malls that the company decided for whatever reasons are I'll take it through bond of bankruptcy by which is subsidiary of Starbucks, for example, and the anchors are all moving around what’s fascinating about the anchors of course, is that they probably have alternative uses, these boxes, either Dave and Busters or Resno or even a shared office facility. You saw recently that New York has made a deal with Lord and Taylor's in one year, so suburban Lord and Taylor's, they make perfect co-working things. The problem is the anchors involved aren’t driving traffic anymore, they were put there to drive traffic. So almost anything will drive more traffic than a Bon-Ton store or Carson Pirie at this point both two tenants actually one of them we have a Carson in one of the four malls in that collateral. So we’re talking to another s department store though about who is very anxious get in this the center because while that they're in when they do $35 million they're closing. So this whole sector is tumultuous. And we think these are good assets, but of course its kind hard to peg where the cap rates because there's nobody that…

Ladies and gentleman we’ve reached the end of the question and answer session. I would like to turn the call back over to Mr. Sternlicht, for closing remarks.

Thank you to everyone, thanks for your generous time. We’re all available to always answer your question and Himanshu can help need to answer any question about energy transaction. Thank you again and have a nice August. Bye.

Thank you. That concludes today’s conference. You may disconnect your lines at this time. and thank you for your participation.