Greetings, and welcome to Starwood Property Trust Second Quarter 2019 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]. Please note, this conference is being recorded.I would now just turn the conference over to host, Mr. Zach Tanenbaum, Director of Investor Relations for Starwood Property Trust. Thank you. You may begin.

Thank you, Operator. Good morning and welcome to Starwood Property Trust earnings call. This morning the company released its financial results for the quarter ended June 30, 2019, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its Web site. These documents are available in the Investor Relations section of the company's Web site 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 thorough discussion of risks and the 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. A 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; Jeff DiModica, the company's President; Rina Paniry, the company's Chief Financial Officer; and Andrew Sossen, the company's Chief Operating Officer.With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning everyone. We reported core earnings of $154 million or $0.52 per share for the second quarter. Our performance was led by our largest segment, the commercial and residential lending segment, which contributed core earnings of $125 million to the quarter. On the commercial lending side, we originated $1.1 billion of loans with an average loan size of $109 million. As we continue to expand our international footprint, 19% of these originations were outside the U.S., including our first loan in Australia for $153 million.During the quarter and consistent with our expectations, we received $763 million from repayments and $103 million from A Note sales. These inflows slightly outpaced findings of $496 million on new loans and $216 million on pre-existing loan commitments. Our commercial loan portfolio ended the quarter at $8.1 billion with a weighted average LTV of just under 65%. As a reminder, we update the LTVs on our loan book at least once a year or more frequently if information becomes available.Our loan book continues to be positively correlated to both rising and falling interest rates. With 94% of our commercial portfolio being floating rate, we estimate that a 200-basis point increase in LIBOR with at $0.11 of floor earnings annually, while a 200-basis point decrease would add $0.12. We are positively correlated to declining rates because of LIBOR floors, which we have on most of our commercial loans.On the residential lending side, we continued our expansion of this business by purchasing $501 million of non-QM loans during the quarter. At quarter end, this loan book totaled $1.2 billion, with a weighted average coupon of 6.1% and average LTV of 66% and an average FICO of 730. Including retained securities of $63 million, the net equity of this business totaled $536 million.…

Thanks, Rina. Our company is 10 years old this week and although many things have changed we have done what we set out to do create a generational vehicle by taking advantage of mid-price sectors to create business line that finance and own the most stable assets finance with the most diverse in state liability structure available to us.We spoke on earlier calls about the stress test, we ran on our business. Following the present stock market fell off in December 2018. Although we had ample liquidity to withstand the large moves we tested for 20% lower on all real estate values in 250 basis points wider on all security spread we decided at the time to redouble our efforts to create the most diverse and stable right side of the balance sheet in our industry in 2019.Given the market volatility in the last week, we're happy to say that we have made tremendous progress diversifying and de-risking the right side of our balance sheet this year. We have never originated loans assuming a CRE CLO exit securitization market can be fickle spreads can move quickly and CLO exit is not always accretive for the same reason and despite our financing advantage we have not chosen to invest in CLOs senior bonds which require tremendous leverage with repo spread marks the earn a modest return have significant spread volatility and can often be illiquid to sell in the secondary market.That said, CRE CLO financing level to followed credit in corporate CLO spreads tighter this year and more importantly their structures have improved dramatically in the issuers favor. On July 26, we priced the largest post-crisis CRE CLO to date $1.1 billion, which settle on August 15, we priced the largest most issuer friendly structure at the lowest cost of funds…

Thanks, Jeff and Rina, and good morning everyone. I'm sure you're looking at your growth machines. I'm wondering what's going on in these chaotic world it is troubling times and for real estate, we have to make calls on the direction of property values as we learned across the sectors across the world what interestingly I mean real estate is a yield vehicle happens to be I can't buy anything and an capital of than our own stock.But the drift of lower rates is obviously good for property as the world has started for yield and it looks like, particularly in Europe. You're not going to see any turnaround in cap rates anytime soon and you probably will see cap rates continue to drift down lenders like, are -- likely to see our LTVs down as Property those increase, and further emphasizing the quality of the book in the security of our lending practices is tricky to lend in these markets because the cap rates feel a little artificial, but so does printing and paper by Western governments that no country has any hope of ever repaying.So I do think the property sectors and also a good place to hang your have right now and if you're in the lending side, you obviously taking the equity risk you're just hoping that will pay you the capital you have but at 64% LTVs 10 years this is our 10th year anniversary August 9 will be our 10th year anniversary as a public company, I mean you told me we could have done the 10 years into our life. I would have never thought possible.And I think in general, that's because of the relative disciplined on the lending markets even non-bank or the -- and what you call us there is other…

I think we see it as something like the fourth or fifth largest in the States now. But I expect we will get bigger. And one other thing, I would say that two others comments to close, we are the biggest market cap and so the timing of loans funding in a quarter affects us less. That was the beauty of scale and so for that reason alone.

Ladies gentlemen please hold, our program will begin momentarily.

Does anyone have any idea?

We are now reconnected.

Rina, can you tell us was the line went dead, because we were talking.

I would say about two minutes ago.

How many?

About two minutes.

What is the last I think Gary spoke about?

It was the growth of the non-QM platform and that we were…

At the end of the year.

End of the year of non-QM.

We expect, I think we're third, fourth, fifth largest in the space and we expect to build that business. Look on balance sheet and continuous securitizations achieve pretty higher ROEs.

And Barry, I mentioned that the non-QM patch if Calabria pushes this through and gets them out of the business is $180 billion of potential loans that could leave the agencies and go to the non-banks.

We would expect to hopefully take advantage of that gain market share and grow the business. Two other things about our scale and one final comment to me being as big as we are means the timing of the loan funding affects us less than maybe smaller peers. It's one of the joys of being big. I wish we were bigger, we also consider more cash and not earn much on it because it will affect us less than our scale. And I also think that being if we could and you asked me if I wave my magic wand in one year's time, we would have a $10 billion, $12 billion, $13 billion loan book. But it's going to require that we continue to drive our cost of funds down.So how this works is instead of lending it all 300 we can lend it out 260. I'm making this up and I'm just giving you an example. And if we can lower our cost of funding from L180 to L150 we preserve our return on equity on the mezzanine. But what happens is the ability or desire of the borrower to refinance us is less because the coupon slower to him. So it's really important we follow this virtuous curve which is what we've been setting ourselves up to do that we can lend ever more competitively increasing the ratio of our book, decreasing repayments and still maintaining our returns on equity. And the last thing, I'll say is as you know I think we are the largest insider owned commercial mortgage rate myself and the team owns hundreds of millions of dollars of stock intuitively. I mean we do treat your capital like it's our own because it is our house and we're doing what we think maybe the market doesn't appreciate and we are frustrated with our stock price an 8.3 dividend yield in the world that's yielding zero is ridiculous.But if you look at the quality of our assets you take out of the equity book and apply market multiples. That side of our company, we have business lines here that are quite our values in other companies actually can take us apart. It can take our resi book apart, you can take our CMBS book apart and look at a company like ladder. So it is what it is but we remain at bar goon in a world of uncertainty.So thank you very much. Start with questions please, Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.

Thanks. I guess if we look back to the December bout of volatility, you guys pulled back kind of as that was happening, kind of the volatility we're going through today, do you kind of view that as an opportunity for and to lend at wider spreads or you're kind of are you looking to kind of pull back into this bout of volatility?

I'd say we're all pedal to the floor for the right opportunities. We're not constrained by size obviously $1 billion on capacity, plenty of cash which we didn't have as much cash back in December. We just thought I think the business and we actually were trying to make sure we didn't have to come back to the market to finance that. So as you know, we've been selling off the lower yielding loans out of the EIF which was I think half the size what we bought it.

And is that between sales and repayment has been about between $800 million and $900 million of sales in repayments?

It is okay because while they were accretive to our cost of that, it was not accretive, it wasn't the highest yielding stuff we had and so we're this is sort of a transition year if you will as we get all our cylinders built next year with the resi business, hopefully a larger loan book maybe this doesn't service finds itself in a happy position. Obviously our CMBS book is worth more not less in this kind of environment. So I think in the ISF business the infrastructure business for full steam ahead putting out loans and you will see us probably securitize those loans much like we have in the non-QM business. And obviously what a conduit business does which also had a good quarter. So all in all, I'm pretty I think we're set up really well continue to drive the enterprise. And if you can create these kinds of earnings in this interest rate environment basis you're doing a really good job.

And so, Doug, I would say that our pipeline report that I'm showing Barry others is up to three pages today, it hasn't been three pages in well over a year we're seeing a lot more opportunities. There is stuff trading, we have more cash as Barry said due to some early prepayments due to sys sales, our term loan B, we took out an incremental $100 million worth of term loan A and we have pro forma as you know an equity sale and some cash out refi. So it's a great time for us if it's an opportunity.

And equity sale being an asset out of their assets not and Jeff also mentioned the cash out refis, I mean we're so flush with cash. This is on two of our equity assets and we have gotten like do we need this money that we're paying off bank loans. So with mortgage debt at cheaper spreads not much cheaper but if it pays off bank loans. So we're going to pay positive carry to hold more cash effective right. So I mean we'll take advantage of the markets is probably even better than it was when we priced it a little while ago. So it's really a bizarre time. But no we're not going to step back, we are very confident and where we think values are in the property markets. And the only thing we worry about obviously is a calamitous recession led in part due to the trade war and the volatility in the global economies. I mean the President got a little lucky. The decline in European, in the European economies have pulled this obviously negative, pulled the U.S. rates down in a time when 100 out of 100 economists would have expected a 10 year to be 3.5 not 1.6. And really you have to attribute that a $1 trillion deficits as far as I can see until last month we were selling. The Fed was reducing its balance sheet. I mean this is truly an astonishing outcome a little scary actually but astonishing.

And then just to be clear on that pipeline report is that mostly in commercial lending or a world. Okay.

That's right. I have got the commercial lending report there's just more activity right now than we've seen in the while.

Great, thank you.

And there is a backlog of loans on EIFs to on the energy infrastructure side.

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Thanks very much. I appreciate the multi-cylinder platform. The long-term value of the special servicer and the steps you've taken on the balance sheet to reduce dependence on warehouse facilities. If you optimize the balance sheet for reinvestment of gains on the property side as well as the refinancings that you talked about undertaking, how much incremental earnings power do you think that could create. Is it possible to put any parameters around that.

You must have been talking to Jeff online. He want me to sell the real estate assets so he can take that $700 million of gains and redeploy it into center intoxicated with a 13-year that actually needs some correction unless incomes fall in Orlando and Tampa which are hard to imagine. That cash on that will continue to rise, so I can't we I can't replace I mean when we bought that stuff. That was my intention to hold these assets forever because I said this is I'd like to own these forever and they're producing a double-digit cash on cash yields and I believe one of them has 17-year debt or 13-year debt, it's fixed.They're both fixed, so we have no exposure to rates, it's the safest thing. I mean you put this in all your kids trust funds and you get to buy to our stock at an age which is ridiculous. So I'm reluctant to sell those, there are affordable housing, they will run 99% occupancy and with any scenario because they're cheaper than market rate obviously even though we're getting these rent increases and it's unimaginable to me that Florida given the economy of those two markets is going to suffer any kind of income downturn over the next foreseeable future let's say five years and that's as far as the crystal ball goes. Those cash will continue to grow and then our medical office that's pretty much 2 plus percent growth built in may be higher but the floor will be 2% or 3% which in this kind of rate environment looks pretty good.And then Cabela's is we're down to a relatively small amount of assets earning us 13 or something. Also cash yield over 13. So and there's no issue there. So we will do the analysis because Jeff is all over me all the time to look at this but I don't want to replace it. The reason that the book exists in here is the duration of our lending business. I mean the loans are 2.6 duration average term, something like that. Some others are three but there's still three not forever. And so it gives us a base of assets earning a double-digit cash on cash yield.Actually they're hurting our book value obviously, we're depreciating them every day. But I tend to think, these are great assets to own, if we stopped buying them, we said to ourselves we would do like 25% to 30% of our cap in equity assets. That was led in part by guidance from the rating agencies. And if other opportunities arise and as our balance sheet grows, we could add as incremental to the portfolio. It's just hard to find 10 cash on cash yield in equity.

So rather than replacing Jade, if we are refinancing them, we'll take cash out and then we get to do part of what I want to do which is eventually reinvest that capital at 10%, 12%, 13%, whatever, a safe return, and incrementally that will add a tremendous amount. So the refis I mentioned earlier will add about $180 million. And if we make up a property sale with a gain that will add some more, and multiply that by whatever you think a safe return we can return it.

That should take a significant portion of that back to work. That's a good point. So you're seeing the gains in that where you're able to take out $180 million and well north of $200 million. It'll be over $300 million if and when we sell the flyover marketing for the [indiscernible] to market.

Is the Dublin portfolio a candidate for asset sales? I believe there's been some reports to that effect?

That's the portfolio we're looking to sell, correct, and that's the rumored and perhaps saying it officially, that sounds correct. And again, they've had a great run, great assets, we expect it will be a profitable sale, and we thought, Jade, it might help if we demonstrated it factually these gains we talk about actually do exist. And then we'll provide all the information [indiscernible]. So you can see that there's about $400 million plus of gains in the multifamily portfolio.

Okay. Lastly, a company that used to be involved with, called iStar has solely pivoted its strategic focus to ground leases. Do you have any views on the merits of either the investment as an investor or whether as a financing tool that can be a way to unlock value within the property segment? They're offering 99-year ground leases with initial cap rates in the 3% range or in some cases below that.

Look, I've been doing this 30-plus years, it's always the ground-leased assets, like encumbered hotels, have fewer buyers. Some buyers want fee, so is the sum of the parts greater than the whole. At the moment there are distortions in the market, and it's possible that's the case. We look at it, and we did ourselves on a portfolio of assets in the U.K., a bunch of hotels we own. So we did some as ground leases, some we sold outright. It's a viable business, a good business. It's not done a lot because people don't -- it's another way of financing, obviously. In this environment I suppose it's something we could look at, especially on maybe our multi, because we're going to hold the upside. But it's -- the competitor that does it, they have a 186 yield, and that's fascinating. We have an 8-3 yield, they're a REIT too. So, it's interesting. I mean I would not have expected a ton of volume in this, but if you're going on own an asset forever, like we might with our multis, that's an interesting suggestion. And we should look at that. It never -- I'm there for the -- we'd have to look at how it works with the financing in place too. I think we could have existing debt, so pretty sure it would be complicated. And until recently, I would have thought that debt was weighing the money, so I'm not sure it is anymore given the rates have moved. I think it was 173-273 the debt on the Wilson portfolio. It was really cheap.

We get it.

Okay, thanks.

Thanks, Jade.

Thanks for the thoughts.

Thank you. Our next question comes from the line of Rick Shane with JPMorgan. Please proceed with your question.

Hey, guys. Thanks for taking my questions this morning. Jeff, back at investor day you had outlined a strategy focusing in part on states that you felt would benefit from Salt [ph] distortion. I'm curious if you -- that is continuing to manifest, and if you're seeing any price dislocations in those markets as peers or competitors pursue that same strategy?

Yes, I think it's the same. Listen, what we do here is we follow our managers, Starwood Capital Group, which has a strong opinion, tremendous amounts of bodies on the ground and data, our manager, Starwood Capital Group, has been leaning into the low tax states, migration states, and we've done the same. Our lending book has certainly moved more into Texas, and Houston, and Dallas, and Austin, and in areas there, and some great areas in Northern Florida. And we've been looking at Nashville and others with others. So we still believe in population demographics and where people are moving in low tax states as a really important trend. And I think it's helping our Orlando and north -- Central Northern Florida multifamily owned portfolio outperform by as much as it is.I think a big part of that is what we're seeing down there for growth in those economies. I think Orlando was the number one or number two growth MSA in the country this year. We just heard Universal Studios is going to add another massive theme park there that was announced late last week, and that'll be another 14,000 jobs for that market. So yes, we continue to follow our manager into those markets, and think that that's a really smart…

Yes, I'd say that the -- we're looking at our attachment points very closely in these markets and what is -- I should say I mean the market are moving a little bit disciplined. When you can finance a higher purchase than you can sell an asset for, and then you're at the 60% of value you're kidding yourself. There's some really aggressive loans being under the hotel space, like end-of-cycle kind of loan, luxury hotels with for cap. I mean hotels shouldn't be in for caps. So interestingly with the trade war, the biggest source of capital for somebody who deals within offshore, particularly Southeast Asia, then Korea, we've seen China is out.So there aren't that many people looking to buy some of these, but you're seeing some incredible deals done, particularly in the hotel space, where I think the caps rates is seriously a cooking question. And the coverage ratios are questionable. And I've seen this movie before, so -- twice I've seen the world end for these assets. So we're being pretty careful about what we lend against, and we'll let the other firms make those loans, and we'll just step aside. And we also, as a matter of course, we've not chosen to do much with our funds, right. We don't lend to ourselves typically. And again, that's never a problem until it's a problem. So I think it's a very -- you have to look below the hood, and our dividend yields just doesn't make any sense given the scale of the company and the competitive universe of companies that trade in like with us on a dividend, it's impossible to see that's the case. They're all mortgage REITs, they have nothing in the mix a bunch of loans. They revert to cash to par, to book. We don't. We don't. We have a property book; we have all these other assets. They don't revert to that. So, look, we say it every quarter, maybe some day we'll be right.

Great. Thank you, guys.

Thank you. Our final question comes from the line of Tim Hayes with B. Riley FBR. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking my questions. My first one, I just wanted to thank you on the comments on the QM patch and non-QM, and all that. And just a follow-up there, I know you mentioned market share, but just wondering what expected annual volumes for Impac is this year, and next year?

Yes, listen, we don't own Impac. We're one buyer, and we've done some straight Impac securitizations. We obviously have a preferred equity investment that will turn to equity on an originator of our own. We have a handful of other originators that we've been working with. There's no one relationship that will significantly dominate where we're getting our production from. And we think it's important to have multiple sources. And when you produce these loans by yourself and you save a point-and-a-half, that point-and-a-half does a heck of a lot to your IRR. And our goal is to originate as many as we can, and then grow smartly in that space rather than just be the highest bid for premium bonds. These loans, the loan prices have gone up relatively significantly as rates have come down, but we don't want to be just buying one or $4.5 price pools from the most prestigious originators. So we'll continue to diversity.

So, just to translate for the layman, Jeff is like a mad -- he's like a super scientist, like a mad scientist. This business will be almost a couple of billion bucks this year, originations. And maybe higher, we're driving it higher as long as the quality stays and the pricing works for us. The key here is the originator, which Jeff mentioned, that we'll close when we have the government approvals, I just have to get fingerprinted. And that will close probably at the end of the year. And that will drive -- it will allow us to accelerate and get better outcomes and better returns, and should build a integrated business for the benefit of the REIT inside of us, one, the business runs on higher leverage level. So it's going slightly skew our financials and might look -- we still won't get close to our largest peer, but we will drift that way. But again we are going to split the book and own of that on our book and create a whole platform of integrated company. So, that business is running quite well. And our team has done a great job. And I hope we will be able to report great things from that business as it grows. And it should/could be material and I hope it is.

Okay. Thanks for the comments there. And then just switching gears to infrastructure. I think you mentioned $800 million to $900 million of aggregate repayments in sales in the portfolio so far since acquiring that from GE. Just how much rotation do we have left there? And then I think you noted a growing backlog. But at what point should we think about the portfolio growing especially now that you have that new facility in place?

Yes. So, hey, Tim, it's Andrew. So I as I said, we had about close to $350 million of sales and around $540 million - $550 million of repayment since we acquired the business back in September. So we have rotated through a majority of the low yielding assets. There is a couple of hundred million left. Call it less than $200 million of loans that we look to opportunistically sell at the right dollar price. But we don't have a gun to our head to force to them into the market. So as I said, we will remain opportunistic in terms of trying to find the right buyers at the right time. We were a little bit on our back foot in the quarter. As Barry mentioned before, we have been working on put our second financing line in place. And it took significantly longer than it was expected. We are really creating a new industry, right?To think about kind of where the financing of this asset class is, it's very reminiscent of where we were back in '09. In 2010, we took Starwood Property Trust public. We are trying to restart their commercial real estate warehouse business. At the time, we put $250 million line [indiscernible] Wells Fargo and that's grown to $2 billion over time. So, we are making really good progress on finding financing. The new facility we put in place has up to kind of nine years of available financing on it. So it's really attractive in terms of kind of matching duration. We have another $500 million line that we are in the process of negotiating, and $500 million plus of term key, so we are…

Risk aversion? Like we could have made those loans on the quarter, right? We could have put them on existing facility that we got one put in place when we did the transaction with GE and we opted not to do that because we didn't want to get hung on the two-year facility with five, three loans. So, we would have done it. We could have taken them off that facility down to the new facility. But, what we just said we don't need to do that. Why should we take that kind of risk?

Yes. We probably passed on $400 million to $500 million of production and nothing we would have done it all, but things that didn't screen because we didn't have available financing. And one other important thing to note as Barry referenced we could be a CLO assured, securitization assured in this space. There is an emerging market for CLO, for energy, infrastructure finance asset. CLO got done in July in the asset class around $0.5 billion facility with pretty attractive term. So the team now we that we've closed our highly successful CRE CLO, the team is turning its full attention to looking at energy infrastructure CRE CLOs. And again, that's something you could see us do in Q4 - Q1.

Again, so resi book is going to do $2 billion, $3 billion, $4 billion origination which if feasible. This business should be over a billion maybe $1.5 billion would be a reasonable target. And the returns are -- actually the shape of the returns is different than those from the resi book. The accounting -- the GAAP accounting for the resi book is in our view dramatically understates the returns available to us. And we have been having a quite a [indiscernible] internally trying to figure out. We follow GAAP obviously and the conventions of the public market. But, we do think returns are actually higher than what we are telling you. There are some assumptions about what happens to these loans if they mature or they get the underlying mortgages pay down. And you can't book any of that even though you think it's going to work out in certain way. So, we think it's quite attractive on the…

And I would say with GAAP, prices having come down a bit I ask the team to run some back of the envelope numbers. And if GAAP halved from here and it drops from the 3s to low 2s, now if it halves from here, our LTV would only go up by 4% on our loan portfolio -- it's our ballpark, yes. So we are not exposed to the price of the underlying commodity.

Oh, you mean in the energy book?

In the energy book.

The whole company? Really? I think the exposure to the energy markets like that? How big is the book now?

It's about a billion - $1.5 billion.

That's what? Five percent of our asset, 8,6,7 so 4% and 5% is nothing.

Great.

Beauty of diversification.

All right. That's really helpful. Thanks for all the commentary there guys.

We appreciate you being with us today and have a great August and the rest of the summer. Thanks and let's hope together. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.