Greetings. Welcome to the Starwood Property Trust Third Quarter 2020 Earnings Call. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'll now turn the conference over to your host, Zach Tanenbaum, Head of Investor Relations. You may begin.

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 September 30, 2020, filed its Form 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available in the Investor Relations section of the company's website at www.starwoodpropertytrust.com. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. 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 Chairman and Chief Executive Officer; Jeff DiModica, the company's President; Rina Paniry, the company's Chief Financial Officer; and Andrew Sossen, the company's Chief Operating Officer. With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. This quarter once again highlighted the power of our diverse platform, with core earnings of $149 million or $0.50 per share, and GAAP earnings of $152 million or $0.52 per share. Our higher GAAP earnings this quarter, driven primarily by realized and unrealized gains in our non-QM residential lending portfolio resulted in a $0.07 increase in GAAP book value per share to $15.86, and a $0.14 increase in undepreciated book value per share to $17.17. These book value metrics include $0.54 of declines related to CECL and mark-to-market adjustments on our assets, both of which are noncash and unrealized. As we have discussed before, these book value metrics do not reflect the fair value of our owned property assets, which we continue to believe have appreciated significantly since we acquired them. Our fair value per share estimate increased by $0.48 this quarter to $20.18. Coming off the heels of a slow and cautious second quarter due to COVID-19, we invested $1.5 billion into new assets this quarter, and funded an additional $273 million under pre-existing loan commitments. We were also active on the right-hand side of our balance sheet, successfully completing 2 debt raises after quarter end, with attractive pricing and $550 million in proceeds. I will discuss these a little later. I will start my segment discussion this morning with Commercial and Residential Lending, which contributed core earnings of $150 million to the quarter. In Commercial Lending, we originated $441 million of loans, with a weighted average LTV of 69%, nearly all of which was funded at closing. We funded an additional $229 million under pre-existing loan commitments and received $335 million in loan repayments, bringing our commercial loan portfolio to $9.8 billion at quarter end. $7.1 billion of these loans benefited…

Thanks, Rina. Our diversified platform enabled us to take advantage of dislocated markets across investing segments, and invest $1.5 billion in the quarter, predominantly in Residential Lending, where $450 million was immediately returned to us though a simultaneous purchase and securitization of loans. As Rina mentioned, we have ample liquidity to continue to invest across our business lines. As we have said in the past, we are not forced to invest only in CRE loans, and will pivot the investment divisions to invest in the best risk-adjusted opportunities we see at any point in time. We are seeing ample opportunities across all of our segments to invest even more capital if our loan repayment assumptions end up being too conservative and capital is returned to us more quickly than expected. Although we are not out of the woods from COVID, we are very pleased with our performance and outlook. Rina mentioned our $550 million in debt issuances, which will pay off our February 2021 bond and also create additional investable liquidity. The bond markets continue to treat us well. Our multicylinder portfolio allowed us to issue our inaugural sustainability bond in October, which was 4x oversubscribed with nearly 100 bespoke investors, allowing us to achieve better-than-expected distribution and pricing. We are pleased with the interest collections and credit performance of our predominantly first mortgage loan book through this unprecedented period. Our 61% LTV portfolio continues to perform well since the depths with COVID. Our sponsors have continued to invest capital into the project with $360 million of the $475 million we expect to receive in 2020 already funded. Our 22 hotel loans make up 12% of our assets, and we expect only 4 of them will require partial interest deferrals as we head into the new year, the pandemic subsides…

Thank you, Zach, Rina and Jeff, and good morning, everyone. Thanks for joining us. I have to say, I'm pretty happy with the quarter, I'm pretty happy with our outlook, which I think was reflected in my quote in the earnings release. We did build a differentiated platform. We're not just a commercial mortgage REIT, we don't rely on 1 business, and we are -- we have platform value, which is expressed and seen in our earnings for the quarter and what you'll see from us going forward. Some of our credit -- our businesses are extremely high ROE, like our conduit facility, which completed the securitization after quarter end and will be the second most profitable securitization in our 11-year history. And other companies that we are compared to don't have those cylinders. They don't -- aren't in those businesses. They have to force capital into a -- and maybe at a time when they shouldn't, into 1 line of business. And that's why we created this multi-cylinder platform, and that is why I think we can continue to perform at the levels we have in the past. We've always created nonrecurring, recurring earnings. And we always will probably create them. And the comfort you should take is the fact that we have $5 of value in our firm above book gap. And that represents huge earnings power, which we can harvest at times we might need to, while other businesses might be having a lull. So let me back up and talk about the real estate markets because I think that's really important as we look at what we're going to be doing going forward. I'll just walk through the 5 major asset categories and give you our view on them, the -- give me a second, I'll…

And our first question is from Steve Delaney with JMP Securities.

Jeff, you mentioned in a number of comments, but you mentioned your conduit lending business. I think you were in 1 deal in July with Morgan Stanley in the third quarter. There was a piece in CMA back, I think, late October, talking about conduit profit margins in the third quarter in excess of 500 basis points. Just curious, as you see the business now, do you see it stepping up in the next few quarters going forward to maybe where you'd be involved in multiple new issues? And what are your thoughts about the sustainability of those profit margins?

Yes. Thanks, Steve. I really appreciate it. We have a great team at Starwood Mortgage Capital. We serviced that quiet in the second quarter. We came into the summer and decided to hold on to some loans and wait for a better opportunity to securitize rather than do a private CLO, get out of risk, sell loans for the discount. And ultimately, we were rewarded with our patience. We make more money in conduit originations. Obviously, when markets are a little bit volatile like they've been, we can price in a little bit more spread than somebody who needs to take a loan is going to be willing to pay that in times of volatility. But most importantly, we, as an industry, make more money when spreads tighten. You've seen AAA thrice tightened back to and through the tights. We hedged our interest rate duration on our loans when we write the loans, and we only hedged a portion of the credit duration. Effectively, whatever we priced in as an industry, we assume that we can take a decent sized credit widening and still do okay, so we don't pay a lot of money. Shorting CMBS is very expensive. Shorting CMBS, at the full collateral that have the amount that the dollar price is below par. So it costs you a lot in sort of negative drag to be short. So we're generally short about 30% of the credit. So when spreads tighten as an industry, we make more money in that business. We had 2 things happened with more volatile market: people pulled back, we were able to write some higher coupon loans; and at the same time, spreads tightened. So this time period of writing loans in Q2 and Q3 and securitizing in Q4, of which we did already, Barry mentioned, and we will do another one in December. I'd be really surprised if anybody who's in this business didn't do very well. We fortunately stepped on the gas a bit when we saw an opportunity. So we're glad we were able to do it.

So looking forward next year, what would you -- just for modeling purposes, rates are low, as I think CMBS issuance volume would be strong. What would you recommend as sort of an average gain on sale margin on your CMBS participation?

Yes. We don't -- we tend to price loans to 2 to 3 points, and when spreads tighten right a little bit more, and when spreads widen, we make a little bit less. So that's -- pretty much the whole market does that, Steve. We do focus on slightly smaller balance loans, which are more profitable than the large loans, large investment grade loans that get done by many of the banks. So we tend to be able to have a little bit more cushion. I think we'll be back to $1.5 billion to $2 billion of originations in 2021.

The turnover in the book, I think we've lost $0.01 -- I think we lost money in 1 quarter in 11 years, and I think it was $0.01. So -- yes, which is like -- we -- this team is exceptional, and they -- we turn the book. So we're not holding giant loans for 4 months or 6 months and lining up in -- we have 11 securitizations a year. I mean this thing is -- and we're a filler for other people, securitization or diversification. We just talked about loans. And then the team has got relationships. I will tell you that this is the team I probably -- well, that's true, but another couple of divisions here, but this one is really self-sufficient. They run an amazing business, and we have people who know me think I'm kind of get involved that -- I might be too involved in certain things and controlling. So we set up a book, a job here -- if loans were kicked out of securitizations, we will come and help them, but we would look down and get involved and it's never happened. And they've never needed more credit than we've allocated to them, and they run a nice business for us, and we supply them with information, and cross fertilization and the balance sheet.

And they provide us with information, too, Steve. And we don't want to spend too much time on this sector, but we're really proud to have this business. And I believe that it will help us be a better CMBS investor and it does help us be a better CMBS investor. We often by the B pieces of loans that we are in. And most importantly, as a massive B piece buyer, we know what loans they're originating are likely to get through the system. And so the kick outs, which caused other people losses in times of distress. We've just never had kick outs, because we're so close with the rating agencies, we understand the process and we're in the B piece market. So that's really helped our profitability over those 11 years, too.

And our next question is from Charlie Arestia with JPMorgan.

Given all the avenues to deploy capital versus your peers, I'm not surprised to see you guys be among the first to kind of go back on offense as these opportunities arise. And as you know, particularly outside of the traditional CRE balance sheet lending market, do you think that coming out of this, Starwood will look pretty similar to pre-COVID Starwood from a capital allocation standpoint? Or do you think there's going to be more kind of fundamental changes to the earnings makeup of the company?

If you ask me, I mean I'd love to be a little more balanced. So for our resi business, to our energy business. We have some other assets that we're not going to talk about that I'd like to turn into a business. So -- and I think we will always be at least half, I would take that from a larger loan business. But it would be lovely if we somehow be 30 to 40 or maybe it's 20, 20, 40, 20 from our servicing business. I mean the more diversified, the better off, I think our shareholders are. And we just need stability to our earnings stream. We went public for those of you who are at our initial road show, when we raised our initial $900 million is safe and predictable and dependable. We were a company that got everything we earn. So we have no shelter other than the depreciation in the book, which would allow us to pay down our payout ratio lower than any other commercial mortgage REIT, frankly. That's why we bought the equity. But originally, I bought the equity book to shelter the -- to create tax shelter for us, so we didn't have to distribute 100% of our earnings, which we did for our first 6 years of our life or whatever it was. So it would allow us to get the flexibility in the distant if we needed it. We now have the flexibility, we don't need it at the moment. But the more diversified we are, I think it's complicated for you, I realize that, for the analyst community, but I own probably more stock in this company than any sponsor does of their commercial mortgage REIT. And I'm going to run it like it was my money, and…

And our next question is from Don Fandetti with Wells Fargo.

It's really interesting to see how quickly these debt markets that have come back and taking a lot of the financing risk off the table. As you look at some of your businesses like the non-QM, where are returns today relative to like pre-COVID? And do you see a lot of opportunity in that business still?

Yes. It's interesting. You're seeing loans trade back up in the $1.03, $1.04 price, securitization is probably $1.05 plus. There's still profitability in that the bonds that we retain, we believe, are still low double digits returns. Obviously, there was a moment in time where there was no liquidity in the loan business. So there's no liquidity in the property business. There was very little liquidity and broadly syndicated energy loans. But there was great liquidity in loans on residential securities and -- on residential security. So part of the reason why we jumped in there, there was great liquidity and an opportunity to take advantage. Part of it was we were able to get sort of non-mark-to-market guaranteed debt if we weren't able to securitize and we were able to securitize. So you have to break it down into gain on sale. I think the gain on sales will be smaller and more in line with what the securitization will be. So you'll go back to securitization yields. We own the IO. We own the bottom of the capital stack, and to the extent that we are correct in that 730 FICOs with new money put down at 65% of the value of the house, putting down 35% that they will defend their mortgages like they did in the great financial crisis. I think we'll be right in that our yield which are low double digits, can be high double digits as we get the ability to call these deals and refinance them in the future. So we're excited about that business, but it was a moment in time that played out and we took advantage of.

Well, 2 things I'd add. And one thing, Jeff, and he talks even more quickly than I do sometimes. Rina and GAAP accounting for non-QM does not allow you to assume a refinance of the trust in 3 years, which is your underwriting. So what we think are 16, 17, 18 IRRs, we're really accounting for more like 11. And that's -- we follow GAAP. And that's because -- and we're going to refinance right now the first of our securitizations, and we're going to lower the debt cost from 3.5 to 1.5. And the IRR is going to zoom up on the trust that we -- what little equity we have left in the trade, if you will. So it's a very funny business, because it's almost better done in private than in public. Because we -- what we think is a 17 Arena, and our team, by the way, argue about this all the time, but Rina wins, and we file a GAAP. And we have to basically model what we're allowed to model. So the IRRs in the business are better than you see. You will see the gains, I guess, later when the resecuritization shows up. So as these things seasoned and they pay down, you now have no leverage against your book. And so you have to refinance, take your equity out and you get a much higher ROE. And that's not a small thing, because the business is -- we have $1.3 billion of exposure there right now or loans in the book. So -- and we've done 9 securitizations.

Ninth one is going to happen in fourth quarter.

Okay. So it was an 8, and the ninth one will be this quarter. So the other thing that strategically is we don't want to buy these loans at these levels. And we -- with the trade we made, that we made a small fortune on we bought at 94 in the middle of the crisis. But we don't want to pay 102. So we've been working on ways to -- when we have under contract an originator basically, that will allow us to buy these apart, driving the yield on the portfolio way higher. So we're working on it. We've been stuck with some agency -- government waiting for an approval for quite some time. There's nothing to do with us, it has to do with them. So we'll -- someday, we may actually close this deal, it's the longest live deal, maybe in Starwood's history. But it is an originator, and it would help us lower the raw product, the raw material for the securitization. So I think those are 2 critical elements for us to increase the book, would require us probably to add that element to our platform essentially. It is under contract. It just hasn't closed.

And our next question is from Doug Harter with Crédit Suisse.

Barry, if you think the market continues to kind of undervalue your collection of assets, kind of how do you weigh the potential for maybe selling some of the assets to recognize that spending them off, or the continued benefit you get from diversity and stability and returns over time?

I'm glad you think it's a benefit. At the moment, I don't think anyone cares. So I care. And our -- and so we've now -- what we think matters to the machines that follow us is book value. And there's a lot of commercial mortgage, REIT's trading at $0.50 a book value, $0.60 a book value. It turns out we are trading at 61% of book value, which surprises the hell out of me. So I've actually -- we've charged our guide for thinking about how to take out some of the gain and actually keeping it in book value because if we just sell the assets, we have to pay out the financial amount of cash, which won't help book value. We'd have to make either put the money to work or an extraordinary dividend. So -- but we could do a JV on our affordable housing portfolio, for example, and take some of the gain, crystallize it prove to the market that the value is the value that even though I swear to god, since I'm buying the stuff every day, we probably bought 4 new portfolios affordable housing in the last 1.5 years, we -- actually, 1 is closing right now. So why is here, it's duration? It gives us dependable cash flows. I don't need to worry about the borrower paying me off suddenly and the money comes back into the bucket. This was a way of increasing duration of our book. And asset -- when we bought these assets, I said I never want to sell them. This is what I want to put my money in. I would give you to my kids. It will be in their trust runs for thousands of years. And they're in great markets, Orlando and Tampa, it's…

Yes, Dalton portfolio.

There's 2, Wilson and Dalton, I just forgot the orders that go, but it's certainly something. Jeff DiModica is in my office like every week talking about. I know it's like, I know it's there, I just don't want to do it, because I can depend on those assets. And there are really no exposure to COVID. And the other ones are the Cabela's deal is like a 13 cash yield now? And boy, the sales take off in COVID, they would run a big gun sales or like skyrocketed. So like we -- and that's a 25-year lease. So we're sitting really good with that book. It is a material amount of our original equity. Now it's been like, I think we have like $15 million left in

$18 million.

$18 million in the multi book, and we refinanced it like 3 times. And so -- and I just -- I don't know exactly, but I do realize that we should probably think about If we take that gain, maybe the shareholders will give us some respect and they move us away from -- then we can be like everyone else, we'd look like commercial mortgage lender, but we obviously are getting no credit for it. Could we spin it out? It's very complicated with our corporate debt, right? We have corporate debt and spinning it out, in its own vehicle, we'd have to sort of figure that out with the corporate bonds.

And if we were to spin it out, the name Dolphin like Snowflake and others, who probably our best spinnable name there. So I think at a premium, I mean in...

Because, it's just like for multiple.

But the last thing I'd say is the longer we hold on to these units do and will roll to market rate, and you will have significant pickup in rents and the cap rates, we're talking about that's a significant advantage to us for the longer we can hold on and roll more of that portfolio to market rate. So there's a lot of push and pull. But we'll continue to take cash out, refis and refinance that portfolio as time goes on if we end up holding it.

And our next question is from Stephen Laws with Raymond James.

I appreciate everything you've covered so far. Can you maybe talk a little bit about rent collection? I know in the -- around the debt offering, cited a 96% collection in July and August, and that was 92% in September as of 9/30. Can you maybe provide some update there on where you're seeing it? You may have mentioned some point in the call in the low 90s, but wanted to get an update and kind of how you -- how that's trended in October and the outlook there?

So Stephen, that's a function of the timing. So September rent, by the time you get to the end of September, you haven't fully collected everything. It typically takes 3 weeks, 3 to 4 weeks after the end of the month in which the rent was due to fully collect. So the 92% was simply a function of the timing that we've released that number, which is why we disclosed July and August. So if you look at collections through the end of October, we're back at 97% for the month of September, if that makes sense. So if the rent was due in September, and you look at cash that came in through the end of October related to September, we're back at 97%. So it's been consistent to the second quarter numbers we disclosed. And the reason we split them was simply timing. So we've not seen a deterioration in rent collections at all. It's been steady.

And our next question is from Jade Rahmani with KBW.

Barry, it's interesting you mentioned iStar, which together with their ground lease REIT called SIF, now has a market cap of $4.3 billion, which is higher than where STWD is trading, yet they generate very little in operating cash flow. I think I still argue their stock is, I think at 50% of where they claim fair value is, you also have a company like Ladder Capital sitting on $900 million in cash, which is about 57% of their book value and 100% of their market cap trading at 50% of book value. So my question is, given the valuation discrepancy that you've enunciated and the current dividend yield that you mentioned for many in the past quarters, what do you think the keys are to getting full recognition? And how do you compare allocating capital to new investments as the book value and buying back stock with some of your peers like ARI have started to do? Or perhaps a firing some of those peers that are trading at a lower valuation?

First, I know about both those companies. And SIF is benevolent, it is -- especially when some of these ground leases are on hotels at levels you are valuing our loans. And we have dividends coming off of those, and they have what, 1% yield or something for their stock at these levels. It's an anomaly that their ground lease since it was an arbitrage. And it sort of, it's available to every -- I guess to everybody probably, they could write a loan or ground lease at levels that would take out our debt and you valued it on one cap, so he should do that. It's completely absurd, frankly. And I've looked at it, I just think it's a joke, the way the market is valuing it. It's a value -- it's a good company, and Jay is going to kill me, but it's not valued appropriately, certainly relative to us. That creates a discount in the parent company. But it has the gene for doing it and the market selling with it, mostly hedged funds. So -- and people consider it safe and secure, and you go figure that out. I mean we paid dividends for 11 years, 44 quarters in a row at these levels. So -- and I don't know, we have 350 people working here, something like that. So this is a big enterprise. We have $100 million of corporate overhead, and we've got a lot of bodies and we're in -- and it's not like every time I look at our earnings, I look at the drag the corporate overhead is it just is what it is. Like we -- that's why we have these people so we can make money on these trades and everything else they do. Otherwise, we wouldn't need…

Okay. Can I ask another question?

Maybe. Go ahead.

Well, I'll ask anyway. I appreciate the Slide 14 disclosure for commercial portfolio snapshot and then the commercial lending commitments. Can you give an update on the American Dream project, which I think was about $175 million of exposure?

I did mention it in my comments, but we'll go back and talk about it. What would you like to know? The assets open now, and the amusement park is kind of open, the stores are by half lease or something like that. We underwrote it is just a theme park assets, and obviously, you need COVID to pass for the theme park to get to what it needs to get. Maybe the jets will win the game and the parking lots will be full on Sunday. So there's -- with the jets performing the way, they are in the giants, the Sunday traffic is down. There's good news is there's lots of parking lots. So I think as you know that we own the first and pay, pursue, the one of the major money center banks and a few others, and our exposure is $1 billion -- with accruals, now $1 billion, almost $1.2 billion.

Our exposure is $1 billion.

Well, our debt -- total debt at our level is $195 million, of which we have $175 million. There's almost $1 billion of debt junior to us, and then our loan is cross-collateralized with the 2 other Ghermezian malls, Mall of America, and what's the other one called?

West Edmonton.

West Edmonton Mall? So we feel very comfortable where we are -- and that's all we can really say about it.

And we have reached the end of the question-and-answer session. And I'll now turn the call over to Barry Sternlicht for closing remarks.

So we just want to thank you for giving us your time. Everyone is busy, and I say something like may the right candidate -- may your favorite candidate win, but I don't know what that is. So anyway, thank you. And of course, we're all here to answer any questions, and thank you again for your support. Have a good election.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.