Starwood Property Trust Inc.

Greetings. Welcome to the Starwood Property Trust first quarter 2020 earnings call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Zach Tanenbaum, Director of Investor Relations. 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 March 31, 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 in 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, Jeff DiModica, the company's President, the company's chief financial officer, and Andrew Sossin, 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. Despite a clearly volatile market backdrop resulting from the impacts of COVID-19, our liquidity, core earnings, and portfolio performance were strong this quarter, once again demonstrating the benefits of our diverse platform with multiple business lines. Core earnings for the quarter was $162 million, or 55 cents per share. However, as I will discuss later, our GAAP results were impacted by the current economic environment and our implementation of the new credit loss accounting standard known as CECL. We do not believe the GAAP charges we took against our assets this quarter are reflective of the credit characteristics of these assets. I will divide my comments this morning into three main parts. First, I will discuss our quarterly results across each segment. I will then highlight several items that impacted our GAAP results, including CECL and mark-to-market. And finally, I will conclude with comments on our capitalization, financing facilities, and liquidity. Our performances quarter was led by our largest segment, commercial and residential lending, which contributed core earnings of $148 million to the quarter. On the commercial lending side, despite the increase in our loan loss allowance resulting from the implementation of CECL, we experienced no losses or impairments, and the credit quality of our portfolio remains strong with a weighted average LTV of 61%. In fact, one of the loans we risk-rated a 5 last quarter, which carried a $3 million loan loss allowance, paid off this quarter at par. During the quarter, we originated seven loans totaling $853 million with an average loan size of $120 million. We funded $1.1 billion of loans in the quarter, including $350 million under pre-existing loan commitments. We also received $703 million in loan repayments, bringing our commercial lending portfolio to a record $9.5 billion. Also this quarter, over 90% of our domestic floating rate loans had LIBOR floors. For the month of April, we received over 99% of total interest due on our loans, with all but one borrower making their required payments. On the residential lending side, we continued our expansion of this business by purchasing $386 million of non-QM loans and completing our sixth securitization, totaling $381 million. Our residential loan portfolio ended the quarter with a balance of $1.2 billion, an average LTV of 69%, and an average FICO of 730. Our retained RMBS portfolio grew to $150 million this quarter, consisting entirely of retained securities on our six securitizations. Next, I will discuss our property segment, which contributed $23 million of core earnings to the quarter. The assets in this segment continue to perform very well with blended cash-on-cash yields of 14.6% and weighted average occupancy of 97%. For the month of April, 95% of the total rent due from the tenants in this portfolio was received. The performance of our Florida affordable housing portfolio continues to vastly exceed our expectations. Area median income levels, which govern rents for the over 15,000 units in this portfolio, were recently released. Higher median income for northern and central Florida, where this portfolio is concentrated, resulted in a blended rent increase of just under 5%. These rents create a new floor, which cannot decrease going forward. While the increases were released on April 1st, We will likely defer them until the impacts of COVID-19 to our tenants can be assessed. As of quarter end, the properties we own carried accumulated depreciation of $334 million, or $1.18 per share. As we have said in the past, we continue to believe that these assets have appreciated meaningfully since we acquired them, and the appreciation is not reflected in our GAAP book value. At a minimum, adding back $334 million, or $1.18 per share, to our GAAP book value would arrive at a purchase price for these assets. The gains that we believe exist in this portfolio would be an incremental increase to undepreciated book value. Next is our investing and servicing segment, which contributed core earnings of $35 million to the quarter. In our CMBS portfolio, we continue to opportunistically sell assets. During the quarter, we sold $21 million of securities for a net GAAP gain of $9 million and a net core gain of $11 million. In our conduit, we securitized $336 million of loans in two transactions this quarter at profitability levels consistent with our historical performance. And in our special servicing business, we obtained five new special servicing assignments with a total unpaid principal balance of $4.2 billion bringing our name servicing portfolio to $94.7 billion. Our fees this quarter do not reflect any impact from COVID-related modifications, but we have seen a meaningful increase in activity after quarter end, which Jeff will discuss. Concluding my segment discussion is our infrastructure lending segment, which contributed core earnings of $6 million to the quarter. We acquired loans of $15 million and funded $48 million under pre-existing loan commitments. We also received $78 million from sales and repayments. Our total portfolio stands at $1.6 billion at the end of the quarter, with the loans we acquired from GE representing $687 million of this amount, a 64% decrease since acquisition. We also increased our borrowing capacity by upsizing one of our financing facilities from $500 million to $750 million, bringing our total financing capacity in this segment to $2.5 billion, of which $1.2 billion was drawn. For the month of April, we collected all interest due on the loans in this segment. Next, I would like to walk you through two of the larger items that impacted our GAAP results this quarter, CECL and mark-to-market adjustments. both of which are non-cash and unrealized. Combined, these resulted in a 70-cent decrease to our GAAP earnings, 17 cents for CECL and 53 cents for mark-to-market, and an 87-cent decrease to book value per share, 29 cents for CECL and 58 cents for mark-to-market. As we discussed last quarter, we were required to adopt the new CECL accounting standard on January 1st for assets within our commercial real estate and infrastructure portfolios that are recorded at amortized costs. Because CECL requires you to estimate a life of loan loss, the forecasted macroeconomic environment is a critical component of the resulting reserve estimates. The environment which existed when we adopted CECL on January 1st was very different than the one which existed at March 31st, and that change drove an increase to the reserves. Our adoption on January 1st resulted in a general CECL reserve of $36 million. The net impact of this new reserve and reversal of our prior year general reserve of 4 million was recorded directly against equity. On March 31st, while the credit characteristics of our assets had not changed, the macroeconomic environment had changed drastically. That change resulted in an increase to the reserve by $49 million. of which $40 million related to commercial lending. Unlike the establishment of the reserves at January 1st, these changes went through our GAAP P&L. Next on the topic of mark-to-market, our CMBS and residential lending businesses were most impacted by the significant spread widening that occurred at the end of the quarter. There are a few important items to consider when looking at the mark-to-market effect on these assets. as we have said before, ours is not a short-term business model. To the contrary, we intend to hold the vast majority of these investments long-term and unrealized spread marks are not an indicator of value recovery over time. Second, we were not for sellers of any of these instruments during the quarter and did not realize any losses from the spread widening which occurred in March. Consistent with past practice, Due to the non-cash and unrealized nature of both the CECL and mark-to-market charges we took this quarter, they were not included in core earnings. I will conclude this morning with a few comments about our liquidity, financing facilities, and capitalization. We continue to have ample credit capacity across our business lines. We ended the quarter with undrawn debt capacity of $8.6 billion and an adjusted debt-to-undepreciated equity ratio of 2.1 times. As of Friday, we had $870 million of cash and approved undrawn debt capacity. This amount is after payment of our first quarter dividend and after $253 million of deleveraging across our facilities. The deleveraging includes voluntary paydowns on our warehouse facilities, which contain hotel collateral, where we have secured modifications with 94% of these warehouse lenders. The modifications cover $1.4 billion of the total $1.5 billion in hotel assets that we have financed on warehouse lines and relate to $1 billion of warehouse debt on our balance sheet. In exchange for these voluntary paydowns, we have been provided with a margin call moratorium for a minimum of six months after any hotel loan modification. In addition, we have been afforded a suite of pre-approved Modifications that we can make to the underlying hotel loans without going back to our warehouse lender for approval. This provides us with maximum flexibility to enter into constructive discussions with our borrowers going forward. And finally, I wanted to comment about the alignment and commitment of our manager to our shareholders. During the quarter, our board approved a $400 million repurchase program. Pursuant to this program, in March, we purchased 1.9 million shares of common stock with a weighted average repurchase price of $14.95 per share for a total cost of $29 billion. Also, with regards to our first quarter base management fee, which totals $19 million, our manager has agreed to take this amount in stock. With that, I'll turn the call over to Jeff for his comments.