Greetings. Welcome to the Starwood Property Trust First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the call over to your host, Zach Tanenbaum, Director of Investor Relations.

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 March 31, 2021, 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.

Thank you, Zach, and good morning, everyone. This quarter once again highlighted the power of our diverse platform with distributable earnings or DE of $151 million or $0.50 per share. We were active on both the left- and right-hand sides of our balance sheet, deploying $2.7 billion of capital in the quarter and successfully completing two CLOs totaling $1.8 billion after quarter end. I will start my segment discussion with Commercial and Residential Lending, which contributed DE of $147 million to the quarter. In Commercial Lending, we originated $2.2 billion across 12 loans for an average loan size of $184 million. We funded $2 billion of these new loans, along with $175 million of pre-existing loan commitments. These findings were offset by $1.1 billion in loan repayments, bringing our Commercial Lending portfolio to our record $11.2 billion at quarter end. We continue to see strong credit performance in our loan portfolio, with our weighted average risk rating improving from 2.7 to 2.6 in the quarter and only one loan for $188 million rated in the 5 category. This loan comprises the majority of our limited retail exposure and was placed on non-accrual in the quarter. We believe that the principal and interest accrued to-date on this loan are fully collectible.

Thanks, Rina. We are pleased with the performance of our stock price, which we believe recognizes the durability of our business model, our demonstrated ability to create shareholder value across market cycles and our ability to pay our dividend. To-date, Starwood Property Trust shareholders have earned a greater than 13% annualized total return since inception in late 2009, the highest in our peer group. I will talk today about a few themes that we believe differentiated our business this past year and will continue to create value for shareholders in the coming quarters. The credit of our CRE loan book continues to improve, collections are very high and our base case modeling today suggests we will have little to no losses on our loan book as a result of COVID. I will discuss this more in detail later. The valuations on our owned properties continued to increase. At our market today we have approximately $1.1 billion in unrealized gains, $200 million more than we have disclosed previously and approaching $4 per share. Our liquidity and access to some of the cheapest capital in our sector is unparalleled and we could issue new five-year corporate bonds at 4% or below today, the lowest in our history. We have the benefit of having excess unencumbered assets on our balance sheet, which allow us to come to market early to create liquidity to pay off our $700 million or 5% notes maturing in December at their open date September 1st, and accretively versus existing 5% coupon.

Thanks, Jeff, and Rina, and Zack, and welcome everyone to this quarter’s earnings call. I’m going to -- we will give you exhaustive detail and we want you to understand our business. That’s why we did the webinar. Because we -- this is a company where we -- the more you look at us, I think the more you’ll like and understand how we manage capital and how we’ve navigated this crisis. I want to say that such an interesting period, I mean, real estate isn’t way fair and isn’t peloton or we hit a with a bazooka, worldwide real estate hit a wall. And to come out of the COVID crisis definitely stronger than we went in with a better balance sheet, no losses, what we think will be no losses from the COVID crisis really speaks to the credit quality and our underwriting process. And the equity first attitude we have when we make a loan, like would we like to own this asset at this price and we are working with borrowers to restructure their loans because they can come to us and they don’t have to go, like, well, would we like to own this asset at this price. And we are working with borrowers to restructure their loans because they can come to us and they don’t have to go. We didn’t come out limping from this crisis. We came out galloping from the crisis. We put out almost $6 billion of capital. Many of our mortgage peers don’t have other lines of business, had to shore up their balance sheets, some had to rescue capital. We were never in that position and we did think multiple times about cutting the dividend, obviously. We didn’t know what the world would have for us. We made…

Thank you. Our first question comes from Steven Laws with Raymond James. Please go ahead.

Hi. Good morning. Congratulations on the number of accomplishments in the first quarter. I guess to start, Jeff, I think, you’ve touched on the opportunity to reallocate capital as you target the most attractive investments. As you look out six months, nine months, the balance of the year, what business lines do you think are going to see kind of a net increase in capital allocation on mix basis? What areas seem less attractive right now where you think things may get allocated away?

Thanks, Steven. Appreciate it. Last year, we probably said non-QM looks really interesting and we thought the Energy Infrastructure business looked really interesting. I would say we agree on both of those still. We were able to get out of the gates during COVID into the early part of this year ahead of most people in the transitional lending space. So we’ve been able to put on a very creative high volume of loans, we earned more at a 13% plus IRR than we historically do on the CRE large transition a loan book. We did more than we expected. We’re going to do more in the second quarter than we expected. And I think there is a moment in time here for us to continue to do really accretive stuff in our core lending business. So I would say today, we’re equally excited about those three businesses. CMBS is kind of a steady state business. We brought our book down from about $1.1 billion to just under $700 million and we’re sort of comfortable with it there if an opportunity arises at wider spreads like we did last year in COVID, we will continue to add there. And Barry made the point about the property book being very difficult to grow today given where cap rates are in financing and the cash returns available to us. So I think it’ll be more of the core three businesses and that the lending business -- CRE Lending business will take up the lion’s share of capital in the near future.

The other thing…

And…

Before he goes on, I mean, we are looking at other business lines and including acquiring other companies. And we are quite active in that vein. It’s remarkable how difficult is to convince Boards to give up the flag or to end the waste of effort, whether they have no hope. But it’s difficult. And we have multiple situations that we have tried to make consolidate the parts of our sector. So I -- I’m thinking we might get something done and we think it’d be accretive to us, and frankly, one-and-one would be more than two. So I think whatever reason some Board members like the Board members willing care about their shareholders.

Thanks. On the CRE Lending side, can you talk about what you’ve seen on the competition front, most of your peers there, a lot of them are on the sidelines, many until the last month or two. So how has that impacted the opportunities there and how much spread tightening does that caused or are you seeing that competition play out in other ways?

Before Jeff goes, I mean, the one thing that’s interesting is that the CMBS market is now past the bank market, so that you can finance. The spread in CMBS were very tight. So that has become a bigger competitor than Wells Fargo’s balance sheet for example. And maybe we ourselves are re-titled business that conduit business has been absolutely a star and continue. They turn -- we’ve been talked about in a while, but they turn their book like 11 times a year, so they’re a manufacturer of profits or loss. And I think we were one last year we were the largest non-bank, employees non-bank contributor in the country. So that’s a nice incredibly great business for us. They run a terrific company or division I should say and what we’re going to say.

He had asked about where the competition is coming from and realistically, probably, only our largest competitor in our space is really a competitor on most things that we look at. Our competition tends to come more from the investment banks and the debt funds. When investment banks are making money as they have been for the last six month or nine months, they tend to lean in on a lot of these larger highly structured complex deals and we’re definitely seeing that now. So I’d say the investment banks are our biggest competition, there are certainly some debt funds. And that’s why we’ve looked more internationally where we have a probably a larger staff than anyone, but one person and we are growing that book pretty dramatically and we think this year we’ll continue to, I could see that book going from 25% of our of our loan book up to a third of our loan book over the course of the next year or so. We think there are outsized opportunities there as they come out of the COVID a little bit slower, and it’s just simply less competition. So we will see. So the new -- the rest of our sector, who recently has enough money to start investing again doesn’t tend to be a large competitor for us on a large complex loan.

Thank you. Our next question comes from Charlie Arestia with JPMorgan. Please go ahead.

Hi. Good morning, everybody. Thanks for taking the questions. Barry, I wanted to follow-up on your views on the office sector. Just thinking about it from a high level kind of beyond current occupancy and rent collection trends, I think we’ll have some more clarity as people in the U.S. go back to the office more and more over the next few months. But it seems to me that the current leases are going to play out and the kind of tenants that you guys went against, they’re probably going to continue to pay their rent regardless of physical occupancy. But when you think about those leases coming to an end and I realize this is a moving target here and the leases are longer term. But do you think the tenants when those leases come to an end will take a harder look at their real estate footprint? And if there’s potentially a kind of more fundamental shifts that could occur here over time? And I guess, ultimately, is this more of an owner problem than a lender problem?

No. Certainly less of a lender problem that an owner problem, especially 60% LTVs in your book. I think it is a zip code specific or city specific. I think the states of Texas, Tennessee, Florida, that have no taxes or Washington has no capital gains tax. They’re incrementally benefiting. And there’s less pressure on the cost structures. In Miami, we actually were out with the Mayor of Miami last night, Jeff and I, and they’ve reduced the millage rates in town. So taxes are going down, real estate taxes are going down, no income tax, real estate tax is going down, budgets going up. It’s -- I mean surpluses going up. It’s sort of the opposite of the cycle you’re seeing in the blue states, where services, incomes actually going up, cost of labor is going up, union benefits are going up, real estate taxes because buildings don’t vote are going up. At the same time, rents are going down, vacancies are rising, companies are relocating to better cheaper places to live. And it is seriously an issue. I think in some places like Miami, and probably, all of South Florida, Tampa, Orlando included, demand is up, not down. And you’re exceeding your underwriting on rents if you happen to be a developer and we built a building here and rents are 25% higher than we underwrote as we leased the building slowly less. So, Starwood Property Trust least down here is now 25% under market. I think it’s about basic real estate, right, and there is enormous issues now in the dark blue cities. And the worst part is the legislatures of these states actually want property dais to fall. Because it’s more affordable for their people and that’s a direct quote from a New York legislator in…

Appreciate all the color. Thanks Barry.

Next question Jade Rahmani with KBW. Please go ahead.

Thanks very much for taking the questions. Sorry, have a lot of call as well. Just wanted to ask you if you think that hospitality is a winner post-COVID, as fate times potentially increased, and is that something where you think there could be an opportunity in lending since it seems that a lot of lenders are shy on that space still?

I think it would be super cautious. The pace of the recovery is probably the markets are ahead of themselves on hotel stocks, in my opinion, clearly the REITs. And the -- there is a -- if you’re going to change, right, if you are working from home or you’re working from smaller offices or work offices closer to your house, you’re probably going to take more corporate team building meetings, you’re probably going to have a different kind of asset. They’ll be -- there may be more meetings, because people have to get to know each other in the company and they do not getting to know each other in an office building. So you might see that. It’s just too early to tell how that changes. I think the experiential high end take on people to, where they call those things to cowboys on backpacks, when they go and camping whatever they call that, Rodeos, that whether you call that when they go whatever. So there’ll be people who do that, they’ll take them out and they’ll do team building exercises. And I think the tech companies win ticket, which are the last, the most likely except working from home because they’re so competitive with each other and that’s how they compete. You can work from Mars, we don’t care, just send in your work. So, but they will do team building exercises and they will go to Vegas and they will probably go to Montana for some ranch. That’s why I want to talk about rent, like when you go do ranch, there we go and is that acceptable today or they do debt ranch. Do your debt ranch . And so I think it’s going to change. I think, we’re most worried about of the Marriott Marquis. There are 2000 room hotels in Manhattan that really needed group the West in Atlanta. It’s a 92% group building I used to manage it so I know what it is. Those business is going to be a while and there’s going to be tremendous pressure on rates. So Airbnb is a force. So you have to now think about how you differentiating yourself. Having said that the summer is going to be a free for all, you’ve seen the stats, 73% of Americans are planning a trip and the highest in history was 37. So it’s going to -- America is going to party the summer like 19 -- like it’s 1929.

That’s 1999.

1999. I don’t know like 1920. And I think it’s going to be, though, I mean, if you go anywhere you talk to the SKI resorts, you’d like to ask and everything is full, people are booking, booking and bookings did their earnings this morning. They said you can cancel at any time. So there’s a lot of people booking stuff they may wind up cancelling. But the numbers will look. If you have the right assets, I don’t think a lot of people are headed to the Marriott Marquis in New York, but Virginia Beach, I mean, like, Cancun, it’s going to be the numbers will be astronomical. And that’s going to be a bubble, right? That’s going to pass. We’re going to go back to work after Labor Day. And we’ll have to see across the whole economy, what’s sustainable, like, how many people will go back to physical shopping? It’s an outing we were talking about yesterday, it’s an event. The grocery stores had their best years in the history of the world. Not only was that an outing, in fact it was only place open, so to get out of your house, you did something you don’t really want to do just went shopping, at least with something to do. So, we look at these things, even on the equity side and we kind of scratch our heads and wonder what the trajectory will be or especially as the DoorDash and the Amazons do last mile delivery in China now disintermediate grocery anchored retail. So it is going to be wild to watch the real estate industry is that these new technologies and new ways of living change.

Our next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks, Barry a little bit ago, you mentioned possibly looking at some other business lines. Certainly any more details you could give on that or kind of what you think -- what types of things you’re looking at that could be complimentary to PWD existing?

Well, I’ll say that, like, our diversification entity business partial success to getting better and better as we get rid of the old book that we bought and originating new loans, which are at or above our ROEs that we intended to execute out, I think, it’s better than 13. It is the return on remaining equity stubs. But the original book was like six, so this thing has been a problem. And it’s not -- it’s probably the one part of our company that we need to grow our book. And we’re working on that. So now that we feel comfortable that we can do the CLO financing, we can more aggressively both grow the book. We were limited at first, because we didn’t have -- we had a two-year facility from the bank, which was like, we didn’t want to make five-year loans with two-year debt. So we sort of shut it down until we could improve our debt facilities and now with the CLO, it’s a game changer for that business. And we’ve done how many CLO, have we done 11 securitizations in non-QM.

We just did our 10.

We just did our 10. You’ll see us do a lot of these and we need paper, right? We need to be project stuff finance, but that businesses ROE will continue to increase, every loan that burns off what we sell, and every new deal raises the ROI and the contribution to the company’s earnings. So that’s -- we have -- there are lots of businesses that might actually fit in the TRS that are not balance sheet businesses, but increase ROE and I’d rather not talk about them, because many of our competitors are on the call with us. So we’ll be judicious and smart. We obviously have a good currency that we can use today and plenty of cash and access to capital. So we’re not -- we are just going to not overpay and try to find businesses that fit really well with ours. And we want to -- we think we’re a finance company. We classified as a real estate mortgage trust, but we are -- we’d like to be considered more of a finance company and we have considerable room in our TRS for more taxable VAT income. And that again usually means it’s a much higher ROE business, a fee-based and we have several candidates we’d love to buy, but so far no luck. So that I would add that we are now in businesses that are businesses that are panic, those effort is in and has expertise and you probably won’t see us go far afield from that. But there are certainly things within our areas of expertise that we can add on.

Great. Appreciate that.

Next question Tim Hayes with BTIG. Please go ahead.

Hey. Good morning, guys. Thanks for taking my question. Just a follow up, I get to that kind of is, how big do you think the investment portfolio can get without M&A based on your current capital base right now?

Well, we have one of our competitors that $4.5 billion or so market cap against our $7 plus billion market cap and has a larger loan book than CRE lending. So I think we can certainly increase the scale of our CRE lending business. And I think all of our business could be larger and scale today, certainly, if cap rates come up, would love to add some property assets to get that percentage back up higher. We love the durability of those cash flows. So we’ll watch that. But I think all of our businesses can scale a decent bit higher, but there is a ceiling without adding businesses at which it would be difficult. The non-QM business and the large lending business are the two. We -- there is a gap in our lending with the richest small deals and we tend to do, what was the large -- average size of a deal on a large loan lending but…

184.

184?

Yeah.

So and there’s a big hole in the middle and we would have to reorganize and start a new business sort of a middle market lending where we would hold up a $50 million loan instead of selling it. That might open outside several billion dollars of balance sheet assets. So these -- that’s I would call that a core business just a nuanced niche between what we do the big deals. We have a problem in finance $100 million multi. And by the time you’re done financing, you put out $12 million, right? Because that’s what the mess is after when you’re done, or what we keep $20 million. So we have to do giant deals and with the book, and then but that is a business, we just have to organize yourself to do middle market loans and balance sheet them, which would be one of the things we were looking at acquiring somebody who does that more often than we do that. So I think there are other businesses, again, we won’t go into, but that would fit nicely in our tent. It’s hard -- and we pay a dividend that’s 2.5 times the average equity REIT. So we can’t buy industrial and we can’t compete, the cap rates are 3.5. So we can’t support the dividend doing that. Triple net same thing. So there are businesses that were blocked out of based on cost of capital, really the cost of our dividend. So that we need to support that dividend and cover our operating costs. And of course, one of the other reasons we dig is better is our overhead shrinks as a percentage of our assets and makes the whole business high ROE. So you’re $18.8 billion and we’ve got about $10 billion, $10.5 billion, $11 billion loan book if you included our A note sale , we have got $14.5 billion. So the other guys more or like $18.5 million in their loan book. We have all these other businesses too. So we can clearly stretch our loan book. But we were going to have, Jeff mentioned what we did $2 plus billion last quarter, he said we do $2 plus billion this quarter. We are -- I had dinner with Jeff, I mentioned, the Mayor of Miami, there was one of our borrowers was at dinner too. And he got like four other deals for us. That’s our niche. We want to be repeat customers with our borrowers that we’re their friends. We move and shake with them. We’re flexible, right? The loan the way they need it and the senior is all taken care of. Like we’re the guy making the real estate bet in the middle and not having a single loss in COVID and I think we’ve lost like, we have one loss in our book or two losses in like 12 years as couple of cycles, right? So it’s not so bad. Anyway, next question.

A lot of good color. I’ll leave it there. Thanks, Barry.

Our final question comes from Don Fandetti with Wells Fargo. Please go ahead.

Yes. You mentioned that European lending could go up to like a third from 25% of that loan portfolio competition lower, but I guess are there any sort of other risks in Europe? So for example, do you view financing risk is a little bit higher there. And I would think that maybe side-by-side you’d rather put $1 out in the U.S. versus Europe from a risk perspective, but maybe I’m just wondering that…

No.

Just want to get your thought?

I actually don’t agree with that. The European markets are, it’s harder to add supply to the European markets. And fundamentally, many of those markets are better than ours, the German property markets and German office markets, Hamburg, Munich, Frankfurt, Berlin, we don’t have any loans there, but we’d love to have from this cap rate to 3%. So they’re not going to write at 7% that for us. We’d be very constructive on London today. In London versus New York and San Francisco, they’re not trying to change the social system. And one will get through Brexit and it’ll be one of the great -- it has always been one of the great cities of the world, it will be a major European capital and global capital for capital. There’s a lot of Middle East money that may cause -- ton of calls at home away from home. And that’s not going anywhere. I like to completely irrelevant comments, but I forgot to make them in my comments. One of the reasons so positive on our balance sheet and it does reflect what he said is, our exposure to construction has dropped from 24% to 11%. So today we have very little real estate construction exposure. And our future funding obligations for all of our loans are down almost 45%. So the company is like rock at the moment and we’ll try not to screw that up. But…

Yeah.

…I think that’s a -- we were poised to add loans in all of our business lines because of that. I mean, we did a really good job, I think, of managing through the crisis. And then the other thing is that we are getting -- our biggest problem right now is repayment to the fund. When we ran multiple schedules every quarter through the crisis, extending the maturities of these deals and assuming lenders couldn’t pay us off. And every day I walk in and somebody mentions to me somebody paid us off. So that’s another source of funds. Sadly, I mean, we don’t really want those repayments, but they’re not in our control and we just got to redeploy the capital. So loan repayments are up dramatically.

I would add. You talked about financing, they’re vastly more financing counterparties for us today in Europe than they were five years ago in Europe, when we started making loans there. A lot of our peers in the U.S. rely on the CLO market when they want to get away from bank warehouse markets and that’s really not an option when you go to Europe. We’ve been a significant in serial A note seller throughout our life as a company and in Europe, there are great opportunities to sell A notes, we know how to do that. We’re good at that. And we have banks financing lines, now more of them with more people in Europe than we had before. So I think as the banks continue to move in that direction that makes us more comfortable in our ability to sell A notes there makes us able to distinguish ourselves.

Thanks.

I will now turn the call over to Mr. Sternlicht for closing remarks.

I don’t have anything to add. Thanks everyone for joining us and look forward to talking to you in three months time. Thank you so much.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.