Starwood Property Trust Inc.

Greetings. Welcome to Starwood Property Trust third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. In question and answer session, we'll follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will 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 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. 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 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. This quarter once again highlighted the power of our diverse platform with core earnings of $149 million, or 50 cents per share, and gap earnings of $152 million, or 52 cents 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 7-cent increase in GAAP book value per share to $15.86 and a 14-cent increase in undepreciated book value per share to $17.17. These book value metrics include 54 cents of decline related to CECL and mark-to-market adjustments on our assets. Both of which are non-cash 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 48 cents 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 two 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 preexisting loan commitments and received $335 million in loan repayments, bringing our commercial loan portfolio to $9.8 billion at quarter end. 7.1 billion dollars of these loans benefited from a weighted average LIBOR floor of 145 basis points. Our interest collections remain strong with 97% of our loans current as of quarter end. Since we last spoke, we executed one new modification bringing our total payment related modifications to 12 loans with a balance of 1.3 billion dollars. As a reminder, these modifications are short term generally permitting only the temporary deferrals of interest and the repurposing of reserves and are often coupled with additional equity commitments from our sponsors. As a testament to the commitment and strength of our borrowers, three of these interest deferrals, all of which were related to hospitality loans, were repaid in the quarter. The credit quality of our loan portfolio remains strong with a weighted average LTV of 61%. Since the onset of the pandemic, Thank you for joining us. I will now turn to our residential portfolio. which represented just over half of our new investment spend in the quarter. In our last earnings call, we discussed a potential transaction which would allow us to acquire a pool of non QM loans at a discount. In the quarter, we executed this transaction with $479 million of loans simultaneously acquired and sold into our eighth non QM securitization. In connection with the securitization, we recognized gross profit of $50 million which you will find in the Changing Fair Value of Mortgage Loans line in our P&L. Net of income taxes and the interest rate hedges that were unwound with the sale, our gain was $28 million. In addition to this transaction, we acquired $336 million of loans at a weighted average 2% discount to par. Our residential loan portfolio ended the quarter with a balance of $1 billion, a weighted average coupon of 6%, Average LTV of 68% and average FICO of 731. Our RMBS portfolio was $374 million. The credit performance of both our on-balance sheet and securitized loans was strong, with over half of the loans that were in forbearance last quarter brought current. In doing so, these borrowers repaid all outstanding balances in full. As we continue expanding this business, We executed two new financing facilities totaling $600 million in the past couple of months, bringing our total funding capacity to $1 billion over three facilities. Along with our proven access to the securitization market, these facilities provide ample financing capacity to replace our Federal Home Loan Bank facility, which had a balance of $620 million at quarter end and matures in February. Next, I will discuss our property segment. which contributed $20 million of core earnings to the quarter. This portfolio continues to perform very well with blended cash on cash yields of 15.4% in the quarter. Rent collections were strong at 96% and weighted average occupancy remained steady at 97%. I will now turn to our investing and servicing segment which contributed core earnings of $17 million to the quarter. Our special servicer continues to see increased activity due to COVID. Since the onset of the pandemic, $4.2 billion of loans have transferred into special servicing, while $800 million have been resolved, bringing our active servicing portfolio to $8.8 billion. Given the current environment, we generally expect to see longer resolution times for these assets, which will result in delayed fee recognition for the assets that are currently in servicing. The activity this quarter contributed to a $5 million increase in servicing fees and a $4 million increase in our servicing intangibles. In our conduit, we patiently waited for the securitization markets to recover before attempting to securitize our pre-COVID portfolio. Our patience paid off and we were able to securitize $151 million of these loans at nearly breakeven. Subsequent to quarter end, We attained record execution levels as we securitized another $232 million of conduit loans. Concluding my business segment discussion is our infrastructure lending segment, which contributed core earnings of $6 million to the quarter. We acquired two new loans totaling $25 million and funded $44 million under pre-existing loan commitments. These fundings were offset by repayments of $28 million leaving the portfolio flat for the last quarter at $1.6 billion. We continue to be pleased with the credit performance of this portfolio, which had 100% interest collections in the quarter. We also recognize a $4 million decrease in our CECL reserve due to improved macroeconomic conditions and increased liquidity in the project finance space. I will conclude this morning with a few comments about our liquidity and capitalization. We continue to have ample credit capacity across our business line. We ended the quarter with undrawn debt capacity of $8.1 billion and an adjusted debt-to-undepreciated equity ratio of 2.1 times. We also had $2.9 billion of unencumbered assets. As I mentioned earlier, demonstrating our proven access to diverse capital sources, we proactively raised debt after quarter end to address our upcoming $500 million debt on secure debt maturity in February. We executed a $250 million upsize to our term loan B due July 2026 at an attractive price of L350 with a 75 basis point floor and 100 basis points of OID. We also completed our first sustainability bond issuance for $300 million with a three-year term and a fixed coupon of 5.5%. With these proceeds, Thanks, Rina.