Starwood Property Trust Inc.

Greetings and welcome to the Starwood Property Trust second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your 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's earnings call. This morning, the company released its financial results for the quarter ended June 30, 2020, filed 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, the company's president, Rina Paniry, 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. For the second quarter, we reported core earnings of $126 million, or 43 cents per share. As we proactively managed the initial market impact from COVID-19, we quickly moved our balance sheet into a more defensive position. When we last spoke in early May, we had already delevered our balance sheet and increased our cash position significantly. Although prudent in the face of unprecedented market volatility, this strategy created over $1 billion of balance sheet inefficiency, which came at a cost to earnings in the quarter and continues to have an impact today. GAAP earnings for the quarter was $140 million, or 49 cents per share. This led to a 3-cent increase in our GAAP book value per share to $15.79 and a 9-cent increase in undepreciated book value per share to $17.03. Our book value per share includes year-to-date declines of 32 cents related to CECL and 38 cents related to mark-to-market adjustments on our assets. These amounts do not reflect a fair value of the assets in our property portfolio, which we continue to believe have appreciated meaningfully since we acquired them. This is demonstrated by our continued refinancing of these assets, which I will touch on later. Despite the macroeconomic headwinds we face this quarter, the power of our diverse platform was evident, with each of our business lines contributing to earnings and liquidity. I will begin with our largest segment, commercial and residential lending, which contributed core earnings of $112 million to the quarter. On the commercial lending side, we selectively originated $198 million of loans with a weighted average LTV of 44%, $156 million of which was funded. We also funded $220 million under pre-existing loan commitments. These cash outflows of $376 million were more than offset by $566 million of cash inflows resulting from sales and repayments. During the quarter, we sold three loans at par, two ANOs for $225 million and one whole loan for $172 million. We also received $169 million in loan repayments, which brought our commercial lending portfolio to $9.4 billion. The ANOTE and whole loan sales, two of which were construction loans, contributed to a 26% reduction in our future funding exposure this quarter. Our quarterly interest collections were strong at 98%, 6% of which were deferred or pending deferral as part of COVID-related loan modifications. We have modified 11 loans to date, representing $6 million of deferred interest in the quarter, and we are working to modify one additional loan. These modifications were short-term, generally permitted only the partial deferral of interest, and were often coupled with additional equity commitments from our sponsors. With respect to our CECL reserve, we had no loans which warranted a loan-specific reserve or a change to non-accrual status. The slight increase of $11 million in our general reserve was primarily the result of macroeconomic conditions in our CECL forecast model, as well as changes in estimated repayment timing. The credit quality of our portfolio remains strong, with a weighted average LPV of 61%. As a reminder, our business continues to be positively correlated to changes in interest rates, with 93% of our commercial portfolio being floating rates. As of quarter end, $6.2 billion of our loans benefited from having a weighted average LIBOR floor of 157 basis points. Turning to the residential lending side of this segment, We completed our seventh and largest non-QM securitization to date, totaling $584 million. In connection with this transaction, we retained $185 million of RMBS, bringing the balance of our RMBS portfolio to $328 million at quarter end. Although we recognized a $5 million securitization loss, we were able to de-risk our balance sheet and improve our liquidity position by selling these loans into an off-balance sheet structure with no recourse and no spread mark risk. As we continue to expand this business, we entered into an agreement early in the quarter to acquire up to $558 million of non-QM loans at a discount. Although none had been purchased by quarter end, we intend to simultaneously acquire and sell approximately $470 million of these loans into our eighth securitization in the coming weeks. Separate from this agreement, we acquired $135 million of non-QM loans during the quarter and $245 million subsequent to quarter end, all at discounts to par. Our residential loan portfolio ended the quarter with a balance of $700 million, a weighted average coupon of 6.2%, an average LTV of 67%, and an average FICO of 730. Last quarter, we spoke about the significant spread widening that these loans experienced in late March. Since then, they have mostly recovered, with $33 million of last quarter's $35 million mark-to-market decrease being reversed through a gap mark-to-market increase this quarter. Next, I will discuss our property segment, which contributed $18 million of core earnings to the quarter. The portfolio continues to perform very well with blended cash on cash yields increasing to 15.7% this quarter. Rent collections were strong at 97% and weighted average occupancy remained steady at 97%. Core earnings included a $2 million loss on extinguishment of debt related to the refinancing of 12 assets in Woodstar One, our first affordable housing portfolio in Florida. We obtained debt of $217 million with a 10-year term at a spread of 271 basis points over LIBOR, which we capped at 1%. This allowed us to return $100 million in proceeds and reduce our basis in this portfolio to just $30 million from $169 million at acquisition. In connection with the refinancing, we obtained appraisals, which valued the assets at a 4.64% cap rate. The fair values in our supplemental reporting package reflected portfolio at a 4.75% cap rate. Our acquisition cap rate was 6.16%. Next, I will discuss our investing and servicing segment, which contributed poor earnings of $37 million to the quarter. This amount includes $10 million related to the partial sale of our minority stake in Citus. the real estate advisory company that we acquired an interest in during 2016 when we disposed of our European servicer. During the quarter, we received cash of $10 million related to the partial sale, which resulted in a realized gap and core gain. We also recognized an unrealized gap gain of $18 million to increase our remaining investment to its implied fair value. In our special servicing business, $2.8 billion of loans transferred into special servicing during the quarter, bringing our active servicing portfolio to $8 billion at June 30th. These transfers contributed to the $5 million increase in the servicing intangible that we recognized this quarter. Despite the large volume of transfers into servicing, we did not receive any significant COVID-related fees. Given the current environment, we expect to see longer resolution times for these assets, which will result in delayed fee recognition. In our conduit, we waited for the securitization markets to recover before attempting to securitize our pre-COVID portfolio. Although we had no securitizations during the quarter, last week we securitized $151 million of loans for a slight loss of 0.6%. We also collected 100% of interest due in the quarter. And finally, regarding our properties in this segment, In April, we sold an office property in North Carolina for gross proceeds of $24 million, resulting in a GAAP gain of $7 million and a core gain of $2 million. Concluding my business segment discussion is our infrastructure lending segment, which contributed core earnings of $5 million to the quarter. The portfolio was relatively flat over last quarter at $1.6 billion, with $51 million of funding under pre-existing loan commitments Slightly outpacing repayments of $36 million. The lower coupon loans we acquired from GE represent $726 million of this amount, a 64% decrease since acquisition. We continue to be pleased with the credit performance of this portfolio, which had no margin calls and 100% interest collections in the quarter. In addition, subsequent to quarter end, We extended a $500 million financing facility by 12 months to February 2022. I will conclude this morning with a few comments about our liquidity and capitalization. We continue to have ample credit capacity across our business lines. We ended the quarter with an undrawn debt capacity of $9.5 billion and an adjusted debt-to-undepreciated equity ratio of two times. We also had $2.9 billion of unencumbered assets. As of Friday, we had $821 million of cash in approved undrawn debt capacity. This amount is after payment of our second quarter dividend and after $347 million of deleveraging across our facilities. The deleveraging includes voluntary paydowns of $173 million on seven of our warehouse lines where we have obtained margin call moratoriums on certain assets. With that, I'll turn the call over to Jeff for his comments.