Starwood Property Trust Inc.

Greetings. Welcome to Starwood Property Trust third quarter 2021 earnings call. At this time, all participants are in a list-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 on your telephone keypad. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Zach Tannenbaum, Head of Investor Relations. Zach, you may now 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 30th, 2021, filed its form 10Q 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 everybody 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 Sternlich, the company's chairman and chief executive officer, Jeff DiMatteca, the company's president, Reena Paneri, 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 Jeff.

Thanks, Zach. We had a very strong quarter, and we have a record pipeline of opportunities across CRE lending, residential lending, and energy infrastructure. We expect to continue to issue CLOs and securitizations in each of those businesses in the coming months, moving significantly more of our liabilities to matched-term, non-recourse, non-mark-to-market facilities. We have the most unencumbered non-cash assets, the largest owned property book providing reliable and long-term cash flow to shareholders, the most unrealized gains, and the most diverse set of complementary business lines in our sector, which allowed us to invest accretively in the first year after COVID-19. We believe that consistency has been a driver of our success, and we are positioned well to do the same in the future. In our CRE lending business, we have already closed over $1 billion of loans in Q4 and expect to close a multiple of that by year-end for what will likely be our biggest quarter to date. We are also borrowing at lower spreads, which is more than offset post-COVID asset spread tightening. Our global loan acquisitions team has done a terrific job, producing optimal levered returns on our CRE loans for the last four quarters of 12.6%, and our pipeline is also above 12%. That compares to 11.2% for the four quarters before COVID. We were busy in capital markets this quarter as well. Rena will speak in detail about our high-yield and term loan B issuances and our upsized revolver. Led by the covenant change in our term loan structure, which allows us to now borrow an incremental $1 billion against the same collateral package, we today, for the first time, have the unique ability to borrow a record $2 billion of new, highly accretive, incremental corporate debt. We intend to continue to run this highly diversified company with low leverage, but should the need arise, we have more accretive firepower than we have ever had. In Reese, Our team has significantly increased our named special servicing while reducing our CMBS portfolio over the last four years. Rena will tell you we added 17 new servicing assignments with a $14.9 billion balance in the quarter. That is more named special servicing than we've ever added in a quarter and increases our named special servicing portfolio by 33% over those four years to over $90 billion today, giving us incremental revenue potential. Now I want to talk about our affordable housing portfolio. Barry has said before on this call that our purchase of 15,057 affordable units in Florida, which we call Wood Star 1 and 2, was one of the best purchases in the 30-year history of Starwood Capital, not just Starwood Property Trust. We paid $1.25 billion in total for the two portfolios, or $83,000 per door. With the completion of another $163 million cash-out refinancing post-quarter end, we now have a negative basis in this portfolio, meaning we have no equity left in the transaction and making our future returns infinite. After quarter end, we established a new fund to hold this portfolio. Last week, we signed a binding subscription agreement and other related agreements with major global third-party institutional investors to sell an aggregate 20.6% interest in the fund for a total subscription price of $216 million. We marketed the fund earlier this year and waited to close the fund until two things happened. First, we realized the 100% reduction in real estate taxes on these assets that was signed into law this summer by the state of Florida, boosting our net income, Second, we received sign-off from the Florida Housing Authority in October, which allowed us to execute another cash-out refinancing, as well as sell a stake in the fund. Rena will tell you more about the refinancing and the accounting treatment of the fund. We sold an interest in the fund as a way to broaden our third-party capital management footprint, and because, as evidenced by the growth we have seen in these assets since our acquisition, we believe there is still considerable growth in the cash flow and capital appreciation to be realized from these assets. We continue to believe the Orlando and Tampa markets will see above-trend income growth in the coming years and that institutional demand for these assets will keep cap rates in check, allowing us to continue to benefit from our majority ownership, management fees, and an incentive fee on the third-party investments. As we have told you in the past, the actual NOI growth and cap rate compression has led to a gain of well over $1 billion incremental to the high team's annual return we have realized and distributed to date. We've always had asset-light fee-earning businesses with high ROEs, our special servicer, our CMBS originations business, and then our CMBS BP's investing business, where we receive management fees, an outsized portion of potential special servicing fees in later years, or both. This new investment fund will allow STWD to earn cash management fees annually off third-party capital, and an incentive fee, which we expect to be valuable. After taking this gain, the remaining gains on our property book across all owned assets still represent nearly $4 per share of distributable earnings, giving us confidence in our unique ability to earn and pay our significant dividend. We may choose to sell more of this fund in future years, and given the fund's eight-year life, we will determine the ideal exit strategy for those assets by the end of 2029. As for the valuation in our sale, cap rates on Florida multifamily have tightened significantly to the low to mid 3% range. Rents, which cannot go down in the affordable segment but go up along with median MSA income, have risen over 20% since acquisition and driven a nearly 40% increase in after-tax NOI since our purchases. Given the minority investors in this portfolio do not have control, that the portfolio is not optimally levered to today's interest rate environment, and that we are receiving management and incentive fees on their investment, we settled earlier this year on a valuation cap rate of 3.75%, or a value just over $2.3 billion, or $153,000 per door. The accounting for the fund results in an increase to our undepreciated book value to approximately $21 per share. If we add in the nearly $1 per share of gains available to us at our marks on the remainder of our owned real estate, our fair value per share of our enterprise is nearly $22 today. At a $26 stock price, we were at 1.18 times price to fair value book, which is below that of peers who don't benefit from our diversification, our unrealized gains, the scale of our unencumbered assets, or our third-party fee streams. I want to spend a few minutes today on the valuation of STWD. We believe with almost $4 per share left in the cash from harvesting our unrealized gains, that our ability to pay our dividend through cycles has never been greater, and we have created a security cushion for our bond-like dividend. STWD trades at a 7.4% dividend yield today, or almost 600 basis points above the 10-year US Treasury. Our company has significantly outperformed since our inception in 2009. earning a 13% annual total return for shareholders. Our core businesses continue to improve, and we are earning our dividend in our core businesses despite a significantly lower LIBOR today. Beyond continued outperformance in our core businesses, there are ways we could increase earnings, and thus the dividend. We could increase leverage, or we could realize embedded gains and redeploy that capital, creating excess earnings. We sleep well knowing how well our lower leverage, predominantly off-balance sheet, match-funded financing model performed in COVID and have no imminent plans to alter the strategy. If we were to realize part or all of the $1.1 billion of unrealized gains remaining after the minority fund interest sale I just spoke about, each $100 million we chose to sell, if reinvested at the 12% ROE we have historically earned, would add $12 million to earnings. and 4 cents per year to our dividend. If we sold 1 billion of our gains and reinvested the capital at 12%, we would add $120 million to earnings and 40 cents per year to our dividend. Adding 40 cents to our $1.92 dividend would be a dividend of $2.32 per year, which implies our dividend yield is actually almost 9% at a $26 stock price at our marks. which over 80% of have now been justified by third-party global investors. To do that math the other way, if we paid a $2.32 dividend and the market still believed our diversified model was at least as good as our peers today and held us at a 7.4% dividend yield, our stock would be over $31 per share today. By monetizing $1 billion worth of our embedded gains and redeploying the equity, At a 7.4% dividend yield, our stock would be over $5 per share or 22% higher than it is today. The option to sell our property book at a large gain is available to us, yet we have opted to continue to stay diversified, keep the above-market return and long-duration nature of these assets, and save these gains to create the most stable earnings power in our sector. I will finish with the things we can control. We have access to more accretive capital than we ever have. We are trending towards record origination levels. The credits in our portfolio continue to perform very well. We are executing on the significant opportunity set in front of us, and we believe our company has never had more distinct ways to outperform regardless of market cycle. We are very excited about the prospects for our company and the potential value in our stock price. With that, I will turn the call to Rina.