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.

Thanks, Jeff, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $155 million, or 52 cents per share. We were again active on both the left and right-hand sides of our balance sheet, deploying $3.8 billion of capital across our diversified platform and completing $580 million of corporate debt issuances, which I will touch on later. I will start this morning with commercial and residential lending. which contributed DE of $142 million to the quarter. In commercial lending, we originated $1.7 billion across 14 loans, nearly half of which were multifamily and industrial. We funded $1.4 billion of these new loans and $172 million of pre-existing loan commitments. We continue to see increasing lending opportunities across Europe and Australia, with international loans representing 21% of our third quarter originations and 26% of our commercial loan book. After $872 million of repayments, our commercial lending portfolio ended the quarter at a record $12.1 billion. On the right-hand side of the balance sheet, we completed a single asset, single borrower securitization for a previously originated $230 million loan on a portfolio of 41 extended stay hotels. This transaction allowed us to increase the advance rate and return on this loan while moving the existing repo financing to a term-matched, non-recourse, non-mark-to-market structure. We continue to see strong credit performance in our loan portfolio, and post-COVID originations now represent 43% of our quarter-end loan balance. Our portfolio has a weighted average LTV of 60% and a weighted average risk rating of 2.7%. both in line with last quarter and reflective of no downgrades. Consistent with this performance, our general CECL reserve remained flat at $48 million. Moving to our residential lending business, we saw record volume this quarter as we completed $1.8 billion of loan acquisitions. Of this amount, $262 million resulted from unwinding one of our 2019 securitizations. which will allow us to significantly reduce the financing cost of these loans upon re-securitization. We also completed our 13th securitization for loans with a UPV of $470 million. Our on-balance sheet residential loan portfolio ended the quarter with a weighted average coupon of 4.4%, average LTV of 67%, and average FICO of 746%. Next, I will discuss our property segment, which contributed $20 million of distributable earnings to the quarter. Weighted average occupancy remained steady at 97%, and blended cash-on-cash yields increased to 18.9% this quarter. Subsequent to quarter end, we upsized the debt of Woodstar One, our first affordable housing portfolio in Florida, by $163 million at a lower cost of funds. In doing so, we replaced $217 million of debt at LIBOR plus 271 with $380 million of debt at LIBOR plus 211. The refinancing returned 100% of our equity basis in this investment and provided an incremental $140 million. As Jeff mentioned, we established the Woodstart Fund subsequent to quarter end. so you will see the accounting impacts I'm about to describe in our year-end 10-K filing. The new fund will be accounted for under ASC 946, Financial Services Investment Companies, with its investments reported on its balance sheet at fair value and changes in value recognized through GAAP earnings each quarter. As managing member of the fund, we will consolidate the accounts of the fund into our consolidated financial statements, thereby retaining the fair value basis of accounting for this investment. We expect the related distributable earnings gain, which will be recorded in the fourth quarter, to be approximately $200 million. This amount reflects the difference between the subscription price of $216 million and 20.6% of our cost basis. We do not expect the special tax distribution to result from either the third-party investments in the fund or the refinancing. Based on our current estimates of taxable income for 2021, including the taxable income resulting from Woodstar, we will meet nearly 100% of our distribution requirement via our carryover dividend from the fourth quarter of last year and a full four quarters of dividends this year. Said differently, our carryforward dividend, which represents the Q4 dividend that was declared last year and paid in January of this year, plus four quarters of consistent declared dividends in 2021 would provide us with 100% dividend coverage. Next, I will turn to our investing and servicing segment, which reported DE of $34 million. In our conduit, Starwood Mortgage Capital, we completed our first single asset, single borrower securitization for a $113 million loan. We also priced one conduit securitization transaction totaling $239 million of loans, which settled after quarter end. Consistent with past practice, this transaction is treated as realized for DE purposes. In special servicing, Jeff mentioned the significant expansion in our named servicing portfolio this quarter, which increased by $12.3 billion to $91.4 billion due to the assignment of 17 CMBS trusts with a UPB of $14.9 billion. In our active portfolio, we resolved 1.5 billion of loans this quarter, bringing this portfolio to a balance of 7.3 billion. Concluding my business segment discussion today is infrastructure lending, which contributed DE of 11 million to the quarter. We acquired 90 million of new loans and funded 16 million under pre-existing loan commitments. Repayments were 113 million, which kept the portfolio at 1.8 billion. On the right-hand side of the balance sheet, we successfully replaced the acquisition facility that we entered into in 2018 when we initially acquired this portfolio. The loans that were still on this line were transferred to one of our existing repo lines, which was temporarily upsized from 500 million to 650 million to accommodate the transfer. I will conclude this morning with a few comments about our liquidity and capitalization. During the quarter, we issued a $400 million unsecured sustainability bond with a five-year term and a fixed coupon of three and five-eighths with no OID. We are able to issue these green bonds given our unique platform, which has investments across the sustainability spectrum, including loans on green buildings and commercial lending, loans to homebuyers within residential lending, affordable housing within our property segment, and renewable energy within our infrastructure segment. The proceeds from the bond issuance were used to retire $400 million of our December $700 million 5% on secured notes when they opened for prepayment at par in September. We also upsized our term loan by $150 million to $790 million and our corporate revolver by $30 million to $150 million. In connection with these upsizes, we amended our asset coverage covenant from five times to two and a half times. allowing for approximately $1 billion of incremental borrowing capacity. In addition to financing capacity available to us via the securitization markets, we continue to have ample credit capacity across our businesses, ending the quarter with $8.1 billion of availability under our existing financing lines, unencumbered assets of $2.5 billion, and an adjusted debt-to-undepreciated equity ratio of 2.5 times. With that, I'll turn the call over to Barry.

There we go. Good morning, everyone. Thank you, Zach. Thank you, Rina. Thank you, Jeff. Jeff went before Rina this time, which is diversity for us at the moment, because he was really excited about talking about the WordStar restructuring. So let's back up and talk about the markets for a second. The most important thing in real estate right now is we're playing catch-up to the rest of the world's asset classes. And what's shocking is yield is still incredibly valuable. So properties, now that the worst is behind us, clearly around the world, property values not only are stabilizing, but they're moving higher rapidly. The one area, probably the strongest market at the moment in all of real estate, besides single family homes for rent, is multifamily. And since we own nearly 100,000 units as an equity player, and control those units, we can tell you how strong those markets are with daily rollovers of leases. And it's an unprecedented strength. I've been doing real estate for 35 years and I have never seen rent increases, not only that are high double digits, but across the entire country. And that goes to kind of the valuation of the Woodstar Trade investment. We created this investment fund earlier in the year to proved to the market that the substantial unrealized gains that we had in our book were real. And so we found two very large offshore investors after a broad marketing effort to come invest in that portfolio. They bought 20% of the equity. And I will tell you that we severely undervalued those assets. Between the time of the investment they made and what we're seeing in the marketplace today as an active equity investor, probably cap rates have fallen more than 50 basis points. And we just sold a large portfolio in our equity funds in the twos. So affordable housing, you could argue, is actually better than market rate housing in the sense that given incomes are rising rapidly at the lower end of the income streams, 38% increases in total income for those age groups and that demographic, sorry, the rents and multifamily are set by the median income in the areas that you are. So whether you're going to essence in Orlando, And wages are rising rapidly. Just an anecdote, I was talking to an operator in South Florida, a hotel, and they've taken their average labor costs from $14 to $22. So as those numbers filter through the economy and the income numbers of these towns, and I'm sure it's true everywhere, as the service workers have been the last to come back to work, and those are probably typically our tenants, we're going to see pretty rapid growth in income in the affordable housing. So we love the portfolio. That's why we didn't sell more. On the other hand, we wanted to make sure that everybody realized that among all of the mortgage REITs, we're the only one with a $3 billion plus property book. The cost on those multis was $1.1 billion. This trade was $2.3 billion valuation. And I'm confident that we're still marking that portfolio significantly below its fair value. And that's true across the board of the other multis that weren't included in the fund. So we think it's unique to Starwood, gives us long duration. One of the reasons the cap rate was a little higher was there was some debt on the portfolio, by the way, that will obviously go away. That was more expensive than it would be if we were able to refinance today. And we didn't... We didn't maximize leverage. The two clients weren't that interested in levering it through the moon and beyond. But that provides a baseline of dependable cash flow in which we believe support our dividend. And also, if we continue to harvest the gains in that portfolio, we can redeploy that trapped equity at higher returns. And I think the other fascinating thing about the quarter is the 12.6% ROE that our investment loan book put out. That's as high as we've had in probably years. And it's pretty surprising given everyone's come back to lend and people are competitive because there are a lot of projects that aren't penciling out right now, particularly on the construction side. So an LTD of 60, 11 years after we started in business, I would have definitely not believed that for a 12-3 ROE. I would have been shocked. And what's so interesting is that replacement costs, obviously inflation has hit the country And inflation in construction prices is giant. You're seeing 2% increases in costs monthly. It's both labor and materials. And some of the materials have softened, but I don't think that's going to last because of the transportation bill will impact steel, concrete, piping, and all the materials that go into constructing anything. And then add that to the fact that the country seems to have lost a million construction workers, and there's vast labor problems. shortages in construction, and now you're going to try to fix bridges, roads, and tunnels all over the country? Good luck finding people to do it. Funny thing is we're probably going to have to import all these workers from some offshore country because they don't exist in the United States today. So a small wrinkle on how we're going to actually execute the $600, $700 billion of physical infrastructure that's planned. It will continue to put pressure on pricing, which means existing LTVs will fall. Like if you have a 63 LTV, it's going to go to 55 just because the cost to replace a competitive building is going to rise. And it will mean that there will be less construction or rents have to rise in order to justify new construction, which will also provide a lower LTV on the existing book. So the fact that we have a business that produces seven, whatever, three dividend yields in a world with no yield at 60% LTV and a whole slew of high ROE businesses attached to that, which no other mortgage company has, And now we're trading at 1.2 times book, and that highlights what we've probably been saying for five to seven years, that we have a gap book of now $20, a $21 fair value book undepreciated, and then $22, if you mark to market, I think conservative estimate of the fair value of the firm, probably closer to $23. I'm guessing. So you have a very cheap company. You're getting all these businesses basically for free because we trade right on top of our nearest competitor, but have all these high ROE businesses alongside the lending book, which is having a record year. So business is, I mean, really good. Our global footprint is helping us. The Europeans are coming through with increasing volumes, and we have a backlog that's significant. So In a world where the 10 years back at 145, I just can't understand how we sit at 600 basis points, higher spread with a 60% LTV. Again, at 60 LTV, if you actually gobbled all our loans together and put them in a trust, you'd probably be rated investment grade through most of the portfolio. And that would be just a, you would get like, I don't know, maybe 2.5% for that coupon on the debt if we aggregated this stuff. So it continues to amaze me. And we thought one of the impediments to a higher stock price was our premium to book, that perhaps some people just were running screens and not really paying attention to our calls and the detail of what, and say, hey, I'm not paying 1.4 times book. And we've been arguing for five years that you're not paying 1.4 times, 1.5 times book because the book isn't real. Obviously, the only investment, the only mortgage company that has this massive depreciation coming through While assets are obviously appreciating, in the case of Woodstar, a billion dollars, we just thought we should highlight it with actual facts. And you can see we're freeing up a couple hundred million dollars we can invest in high returns. It was a creative move for the firm long term. So that was, I think, the highlights of the quarter. We continue, though, to work on the balance sheet. Reena, the team, Andrew have done an amazing job. working with Jeff on term financing our debt. We have the least exposure to repos and bank lines of, I think, any of our peers that I'm aware of, certainly our major peers. And so, you know, it's not only a stable dividend, but it's fairly safe because it really can't be impacted. And that's why, you know, when the stock fell, I said, we can pay the dividend. We can always house the gains in the equity book and pay the dividend for the foreseeable future. which is something no one else can say in the sector, frankly. So now we did think if the world was going to end, should we harvest some cash and go take advantage of amazing opportunities? But it really never was a question we couldn't pay the debt, and it was a question of whether we wanted to. And that would have depended on the trajectory of the world. If we'd gone into a massive depression, we would have thought about what was the best use of our cash. Regardless, I think the firm has established itself as the premier player in the space. Hopefully, with the Woodstar trade, we've alleviated one impediment to a further increase in our stock price. We're pretty excited about some new opportunities we're looking at. Hopefully, you'll see us do a couple really interesting, innovative things in the near future. Thank you for everything. I want to thank the team because the 300 and almost 400 people at Star Property Trust are working really hard across all their verticals to be best in class. There was a question that I'm preempting about infrastructure lending. There just haven't been that many loans to do coming out, and now the pace is picking up. So some of that stuff just froze in place, and there was not a lot of volume. So we're picking that up. But all these businesses are producing target or better than target ROEs. And we're pretty pleased about everything. You can see our volumes in the non-QM lending book. We're very large in the quarter, continue to be large. So the conduit business continues to function perfectly, frankly. And our CMBS book has been lightened tremendously, but we're also picking up servicing. So it's really kudos to the team. They've done a great job. So with that, I think we'll take questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from the line of Tim Hayes with BTIG. Please proceed with your questions.

Hey, good morning, guys. First question, just on the Woodstar portfolio sale. You mentioned some of this in your prepared remarks, but I want to maybe just dive a little bit deeper. Can you give us a little bit of information on the profile of the buyers and what your appetite is like to sell more in the new fund structure and, and if you've had other conversations with other third parties, if that seems to be something we can expect to see, you know, within the next few quarters or, um, or, or if you're kind of set with, with the amount of ownership you have in the portfolio now, then I have a couple of follow-ups. Thanks.

Um, What we can say about the investors is they're giant offshore sovereign wealth funds that have an appetite to increase their positions in these portfolios in the future if we decide to do it. So they're not limited by capital, trust me. But we're not at liberty to tell you who they are. And I think as to harvesting the future gains just in that book or the medical office portfolio or our way above market triple net leases to Dick's, I guess Bass Pro Shops, not Dick's. You know, it's all depending on how to put money out in the other businesses, right? And if we can raise our, what are we going to do this year in originations, do you think, Jeff? I think that we will be eight and change billion, and then you add in CMBS and we're closer to 11. But in the large loan lending book, $8 billion. Could we get those volumes to $14 or $15 billion? We could be $10 billion this year. We would take more gains to invest at 12 ROEs. The one thing about the book is it gives us the stability. The return on equity is nearly infinite. I don't have to worry about early repayments. But as the book gets bigger, and now I think it's the largest balance sheet we've probably ever had, 21 billion, right? We can suffer those repayments without worrying about any disruptions to our EBITDA or earnings potential. So the bigger the book, the better the business. It always was the case because then it's just a question of can we find enough attractive deals Oh, with enough duration? The business is not easy. The duration of our, what are almost necessarily, that's a hard word to say this early in the morning, necessarily transition loans. You know, it's like the faster the borrowers fix their properties, the quicker they want to pay us back. It actually winds up happening. You get a higher ROE because you get a prepayment penalty, and whatever fees we took up front are actually over a smaller time frame. So we might think a loan is a 12, and it's actually a 16. And I think if you go back and look at history, that's actually the case, that people always kind of,

pay us off a little faster when things go well. You're obviously higher than your ICMM, because you have upside to prepayment penalties, and your only downside is credit, where we haven't really taken any meaningful impairment ever.

So the thing is, it's just a lot of work for the team, and I think broadening our ability with additional product lines to put out that capital is, when we cross that Rubicon, you'll see us probably take more gains off the table and redeploy what today is probably a subpar ROE. I mean, we'd be better off taking the gain and reinvesting it, which Dev Damatica wants me to do every two days. So I want to make sure. We've been sitting on so much excess cash for so long, we don't know what to do with ourselves. But that's actually the good news is it's dwindling. And we do have access to the, given the Woodstar trade, we'll have unprecedented access to on unencumbered assets to supply the company with additional corporate debt and still maintain lower leverage levels than our peers. So, you know, we could boost the ROE here. As Jeff pointed out, we could raise the dividend if we levered the company. It just doesn't feel like what we told people we were going to do in the beginning of time, which was safe, consistent, and predictable. And that we thought the market would value, and the stocks rallied. But, you know, a 7-3 dividend 12 years into your existence with a 60% LTV and proven capabilities across multiple business lines seems like a good deal in a market full of crazy stuff going on.

We trended a little higher for a minute, Barry, but we're trending back towards 2.0 times book on our leverage, which would be at the very low end of anyone in our space. So, Tim, we'll take other questions if you have a follow-up.

Yeah, no, so kind of like two follow-ups around that. And you kind of answered one of them is just about where you redeploy that capital. And it sounds to me, and correct me if I'm wrong, it's the best risk-adjusted return right now is still in the large loan CRE book. So just curious if that's where you redeploy the $200 million you're getting back or if it's used to pay down the the notes you have come and do in about a month or so, or if there's anywhere else that you might look to allocate that. And, and then, you know, just part of that question, Jeff, is just the comments around, around the earnings accretion, right? Because you might, I look at dividend coverage right here and you're, you know, pretty well covered 52 cents versus 48. And, you're getting about $0.08 back from this portfolio sale, right? And then that doesn't even include the management and incentive fees you're getting on that capital as well. So that's going to be pretty noticeable when we see it flow through earnings next year. So I'm just curious if that is enough to get you to think about maybe a bump in the dividend or if it just provides nice coverage for you and gives shareholders more confidence in your ability to pay it.

Okay. So on the redeployment, we get the advantage, Tim, of waking up every day when we get a dollar into our ecosystem and deciding among seven different things what do we want to do. I think running this business at this scale would be tremendously hard and often awkward if you had to wake up every morning and make only real estate loans. every morning with every dollar that came back into the system because there are times, and you've seen us pivot. We built this book in 2015 and 16 because we didn't like where lending standards were. We decided it was better to be a borrower. We built this entire book in that pivot. In the middle of COVID, we pivoted and built a massive position in non-QM residential mortgages because it was something we could trade. So we're going to wake up every day and decide where the best place to put our capital is across the seven. I would say you're right today based on what Barry just said. that our fourth quarter will probably be one of our best quarters ever, that we're trending in the mid-12s percent after trending mid-11s percent ROE levered pre-COVID, that the environment is very good for our large lending book. And that's our core business. I think if we could grow one business, that people understand us for that, and it's easier, and we would continue to grow there. But I would say the energy infrastructure business looks really attractive in the fourth quarter. Non-QM continues to look attractive. The whole loan coupons are coming down, but the financing is coming down also. And there are some pretty good opportunities in CMBS and other. The hardest place for us to add today would probably be in the property segment, given what's happened to cap rates on core cash flow type of property. So we feel really good about the fact that we can wake up and look at seven different businesses to put money out. It is a great time today. Probably the best we've seen in a long time as people executed their business plans during COVID, but didn't refinance during COVID. We're now seeing the execution of business plans. So we're seeing a tremendous amount of volume potential coming out on the other side and with LIBOR a lot lower. There's a lot of people who just want to get out of a high floor, and so that's adding a lot of volume. So we and our peers will have a big fourth quarter. We and our peers will probably have a big first quarter, and the levered yields are pretty good because of where our financing markets are. As far as growth of earnings relating to that cash coming back in and the desire to build the dividend, I think That's a longer-term question as we see how we come out of this over the next year or two, but we certainly are in great position earning our core dividend. You know, a lot of people are going to suffer with distributable earnings given the lower LIBOR, and the fact that we're earning our dividend in this lower LIBOR environment is pretty good, and if we can continue to do that coming out on the other side, I think... One thing about our business, you know, we are...

especially on the large lending side, is we are tied to global transaction volumes and the moves in yields, cap rates, and the fact that I think people didn't sell during the pandemic because people, why would you sell unless you had to sell during the pandemic? Or the backlog of deals that are trading now, and there's a lot of capital. We ourselves will have, I think we'll buy $30 billion of real estate this year, I was told. So that is a record for our firm. and in multiple vehicles. So we have a very good view of what's going on. That's producing a lot of lending opportunities. And that's going to continue for a while here as people rejuggle their portfolios. There may be a slowdown, actually, in transaction volumes. In the United States, I think some people tried to get ahead of the capital gains tax increases, particularly families. And if they could sell, they sold. You may see slowdown. I think you'll see a lot of corporate M&A in the next 12 months in the REIT sector, more than we've probably seen in years. So I think there'll be opportunities in that sector for us, too, in the MESs. And oftentimes in these giant deals, we'll work with one of our peers. In one case in the deal we approved just yesterday, we're working with a money center bank and splitting the deal. We competed with them, so we're just doing it straight up with them. It is an interesting time. We have the ability to do very large transactions and small deals. And we're doing both. And we look at whether we should be bigger in middle market lending and looking at opportunities to be in that space. Because really, small investments go in the conduit. Large loans go into the book, the held book. But in the middle, we don't play that much. And That's something we could probably expand. Some of our smaller peers have to be in that space because they can't do the giant deals. So we could organize ourselves and maybe start to go after some of those smaller investments. It's just a turn. It's a lot of work. You make $50 million loans and hold a $10 million piece or $15 million. You've got to do a lot of them to make a difference. But every one of our business lines operates that way. We want to provide them with capital to earn really good rates of return in a world without yield. You know, we're pretty pleased. I mean, it's pretty nice that the whole mortgage sector came through as a whole, the financial, whatever you call that, the pandemic crisis unscathed. I think mortgage REITs of old might have blown up. And these mortgage REITs, for the most part, a few of them went on life support. But most of them came through this. A few of them were put out of their misery. Some of the small guys got gobbled up, but... Obviously, the major players were able to come through pretty well.

Barry, to your first comment, the transaction volume looks like it's going to be over $550 billion this year, and over 200 of it for the first time will be multifamily. We're seeing a lot more multifamily opportunities. The market's seeing a lot more multifamily opportunities, and that's helping drive it. Markets over the last 15 years, pre-GFC, post-GFC, after four or five years, everything but 2020, since 2016, have seen $500 billion of transactions. So we're trending to the high end of what we've seen, and a big part of that being multifamily. What's interesting is A huge part of the lending today is in floating. And if you go back to the GFC or before, there was a lot more fixed-rate lending. What's happened is private equity, the Blackstones and Starwoods of the world's funds have gotten much bigger. There's a tremendous amount of that money on the sideline, and they will more often take floating rates than long-term fixed rates. So the percentage of that $500-plus billion in transactions is more slanted towards floating, which is a great opportunity for our large loan floating books.

One other comment, I will circle back on the dividend. We are probably in the best position we've been in five, seven years to actually look at increasing the dividend. So that's a board discussion, and we haven't made it. But as you pointed out, we're probably one of the best coverages, I think, in the mortgage business. And obviously, we have billions in embedded gains. So could we do it? Sure. Should we do it? Would it really help us? We don't know. So that's kind of what we're thinking about. But we are in a position to feel comfortable doing that if we wanted to do it. So we'll probably bring it up. We'll see.

Thank you. Our next question is from the line of Jade Romani with KBW. Please proceed with your question.

Thank you very much. First question is on the PropTech side. I know Starwood Capital Group has invested in that. Are there any PropTech attributes at L&R, any proprietary technology there, proprietary technology, or is there too much of a dependence on third-party data feeds that would create a hidden source of value?

Well, it's funny you mention that. Actually, there's, I think, a bigger group of technology or IT people at I know at STWD, then there is at SCJ, the parent. I think it's five times the size. One of the reasons they do that is we have this database called LPAM, which is a database of all of the investments that we service and sell and monitor with a service loan book that's, what is it, like $70, $80 billion?

$90 billion name servicing.

Right. We have to be careful about what data we use and for what purpose, but there is a business for us that we talked about getting organized, which is to manage for small institutions and to be their workout department. And basically, we are a workout department. We just do it for CMBS securities. And much like Guggenheim grew to be the investment shop for small insurance companies, we could be the workout department of small banks. We have That's why we have all these people, that most of these people work in those businesses. So it's something we've talked about, and obviously it's a very high ROE business and probably something we should try to execute in the future, but at the moment it's nascent. I'm aware that BlackRock builds a technology called BlackRock Solutions for themselves to help them manage their assets. And then found it so compelling that they went out and created BlackRock Solutions, which today I think last I checked made $500 million for BlackRock. So, you know, could we have an L&R Solutions or what do we call ourselves? What is our subsidiary called? Reese Solutions. You know, that's something I'd love to see us execute. It's obviously all option value doesn't exist today.

Thank you very much. And just on the M&A side, are you more focused on pursuing such asset-light high ROE businesses? Or on the other hand, do you see a consolidation opportunity within the mortgage REIT sector? You could bifurcate the mortgage REITs. The larger cap names trade fairly well. The mid to smaller cap names are sort of unloved. So there could be potentially an opportunity there.

It's almost like a cliche to say we look at everything, but we look at everything, right? And Where they're trading isn't that relevant. It's really a question of where they would do deals. It's very hard to do a hostile on a REIT. As you might have seen, we tried to buy an industrial REIT and management just said no. It's just very hard to do. The index funds won't vote. They're typically the top one, three, four, five shareholders of the REITs. It's very hard, shockingly difficult, and kind of sucks, but it is the way it is. I even called BlackRock specifically to say, in one situation, not the one I was mentioning, management's done a terrible job. I've outlined all the shareholder disasters that they presided over. And they just don't want to vote. They want to stay passive. They don't want to get involved in a takeover, even if it has compelling business and ethical and moral backing. It's kind of complicated. I wish it was easier than it is. Because it's bad. It's actually the regs that allow that to happen. You can't go over 10% ownership. And in some cases, if you do, the draconian... protections come into place. And you can basically say no, just say no. So we'll see. I mean, we'll see what happens in our sector. You know, I think there were a lot of consolidation talks during the pandemic, but not many of them took place. So it actually happened. Anyway, thanks for the question.

Thank you. Our next question comes from the line of Doug Hartner with Credit Suisse. Please proceed with your questions.

Thanks. Can you talk about how the sale of the property assets impacts your kind of journey to a higher credit rating and continuing to lower the cost of debt?

Difficult to say that there is a tremendous amount. Listen, if I were thinking about our ability to repay debt, I certainly love the fact that we have these large gains. I think the agencies likely look at these gains and say, when I need them, they won't be there. I think there's probably a misunderstanding of that. And we think that these are durable and that they will last. In a recession, the interest rates go lower. We've seen cap rates go lower on this stuff in COVID on the largest portion of it. So I think we think they'll be durable. I think any logical person would think you would be higher rated if you have this massive war chest behind you. I think the agencies think that it's not durable and you don't have much of a war chest, so I don't think it matters that much to them, unfortunately. So I don't think anything we're doing here is sort of ratings-driven.

And then can you just talk about the increased opportunity you saw on the residential loan acquisition this quarter and, you know, kind of how you think about the pace of deployment going forward?

Yeah, you know, we collapsed the trust was part of it, and we'll always do that to try to move it into better financing opportunities. We own a preferred equity investment, I guess, in an originator that we expect to become ours in 2022, and we've been really working hard to grow that, and a significant part of that origination comes through that pipeline. I also think that you're seeing a decent amount of agency investor loans come through the pipeline, and that's something where the agency's pulled back, and non-agency originators like us we're able to step in and probably flip those back to the agencies at some point, and that's $500 million plus of that number, so that helps the number look a lot bigger. But, you know, we continue to look at more sectors. We continue to stay the course. We love this sort of low 60s LTV, mid-high 700s FICO credit profile with the HPA we've seen around the country. You know, there's no credit risk in these bonds. It's all about duration and prepay speeds, right? So, As long as we hedge these to a faster prepay speed than we think is likely and we can still earn a double-digit return, we're sort of super happy to lean in. I'll say the gross wax, the coupons are coming down a bit. That's expected as you move later into a cycle as the originators pivot away from doing just agency loans and then try to find non-agency borrowers that they can offer a lower rate to. So we are seeing gross wax come down and speeds run a little bit higher than we thought, but we've been fairly conservative on where we run our speeds the last the last bunch of months and we'll continue to do that and hope that coupons stay around here. If they collapse a lot more, we probably won't be a big investor here, but today it's still very attractive for us.

Thank you. Our next question comes from the line of Steven loss with Raymond James. Please proceed with your questions.

Hi, good morning. It looks like from early last year, international is a little less than 20% of the loan portfolio. Now, you know, above 25 sounds like maybe headed to closer to 30 here. Um, What are the opportunities you're seeing internationally that make that more attractive to deploy capital than the domestic? And as a follow-up to that, it looks like you've got a higher mix of CBD office exposure with the international office assets than maybe what you've taken here in the States. So is that coincidental or is that part of the differences you see internationally versus domestically?

I'll go, and then you go. I mean, the European markets and Australian markets are a little less competitive, and the banks are less competitive. I'd say they're more strict on kind of by-the-book lending on an LTV, less inclined to do transitional deals, totally not inclined to do them. And there's a very wide gap between where banks will lend cheaply, and they'll be really cheap, cheaper than U.S. banks, and where we would lend to fill a gap in the capital structure based on our underwriting skills. So, you know, I think we could be bigger in Europe than we are. We're asset class agnostic. We really don't care much. And, you know, we try to – we have – We've tried to avoid hotels, not because we're not comfortable lending against hotels, but I think it just puts little alarm bells into our... People don't like that as much, so it's perceived to be less resilient. And you are coming out of the pandemic globally, so hotels will stabilize. Obviously, we own over a thousand of them, so I can tell you what they're doing and where they're doing it, since we own them all over the world. We're looking at other asset classes too, like data centers. Any place we can find opportunities to earn our returns, they're all open game. In some cases, maybe it's an office building that's fully leased, and we're making a construction loan. We've done that before on a fully leased office building with long duration and a credit tenant. We'll do that too. Yeah, most of our peers in the space in the U.S. don't do European loans, so they don't have the infrastructure. I can't tell you we have too many people in Europe doing loans. I always think we have too much overhead, but I think there's probably 20 people now in London looking at and servicing. And it's a huge part of what you invest in on the equity side in Europe, so we know the market. Our London office is 70 people, so. that's the benefit of having the parent that we do. So, for the REIT.

You know, I'd throw on top of that, the U.S., you tend to see more brokered deals, the e-deals and JLLs and whatever, bringing deals and And then on a broker deal, you know, three guys in a Bloomberg who call themselves a debt fund can write a loan because somebody brought it to them and they were the guy left standing with the highest proceeds or the lowest price and they're in business. And you see a lot of that here. I think it's harder to be a voyeur in Europe. There's much less in terms of broker deals. I would say more than 80% of our loans have been direct in Europe, which is a significantly higher percentage. You know, one of the reasons on the office percentage, you do see less institutional multifamily in Europe. You have a buy-to-let market that is well-financed in the securitization world, but it's not really an institutional multifamily market historically. We are doing some institutional multifamily deals going forward, but that's a new sector. So your percentage office will look higher there if you're doing large loans just because you're sort of missing this whole multifamily segment that has historically gone to buy-to-let.

Great, thanks for the comments this morning.

Our next question is from the line of Rick Shane with JPMorgan. Please proceed with your questions.

Hey guys, thanks for taking my question. You really just answered my primary question. So one quick thing, you have a couple of large maturities coming up in 22. I'm curious just your comfort level in terms of how those projects are moving through the path and your comfort in terms of them being able to refinance or pay off.

Yeah, thanks, Rick. Sorry to answer your question before. I have a knack for doing that to you, so I apologize. A couple of big loans are one in an office in D.C. and a mixed use in London. Those are Absolute smokers, and they're going to be really easy payoffs. Some of the easiest that we will probably see is my guess in terms of institutional quality stock that's in great shape and comes out. So there are some bigger ones, and I will tell you that specifically we're not worried about anything that I can look at right now in the 2022 maturity bucket. So the credit has continued to perform pretty well. We've been super lucky that COVID turned as quickly as it did, but it was work that we did going in, and we were probably the first one to come out almost a year ago now and tell you guys that we think it'll be okay, and our portfolio will hold in, and to date, we feel really good about that. So as I look at these fully extended payoffs for next year, I'm not really worried about anything.

Hey, Jeff, thank you for the specificity on those two loans. Those were the ones I was looking at, and I try to buzz in as early as I can, but Apparently my peers are even faster than I am.

So we're going to put you first next quarter, Rick. I feel like I'll hear that. Okay. Thanks guys. Take care.

The next question comes from the line of Don Fendetti with Wells Fargo. Please see with your questions.

Jeff, could you talk a little bit on where yields are for non QM? I know there's some noise with some agency acquisitions and you know, where, where do you think that market can go? Can it,

going to get much larger um as you look forward yeah listen there is a lot of room for it to get bigger the part of it getting bigger is going to be its movement to a lower average growth average whack gross whack and you know our wax when we started doing this business we're in the mid sixes and today they're in the low fours uh you're getting to 150 basis points off of agency coupons and so you'll start to feel some turbulence if you try to tighten in from there on that spread so My guess is that you hold in somewhere between this 100 and 150 basis points wide of agency. And at that spread, you potentially bring in a decent amount of people who are able to refi but don't fit the traditional bank origination statement, 43% DTI, et cetera, and so forth. So the market can probably continue to grow. One of the things is, what's the government going to do with the agencies, and are they going to allow, via the patch, them to write more non-QM, or do they want them to be doing more mission-specific stuff, low-income, affordable, et cetera? And depending where they come out on that, that will tell you what's left over for us. But certainly at lower coupons, there'll be more volume. And one of the things driving the lower coupons, I'm giving you a blended coupon. You know, the agency coupons where we did, I told you, over 500 million of investor agency loans, those were sub 4% coupon. And our non-QM loans are still mid and sometimes mid to high 4% coupon. So I'm giving you a blend between when we do both. But reality is the non-QM coupons are still in mid 4% today. Okay. And the leverage is fantastic. We can get 11 turns of leverage if we want it in the securitization market at spreads that are almost as tight as where we were at the very tights, and it's incredibly accretive, and that's why you're seeing a lot of hedge funds come in and be willing to pay 104, 105 for pools of these loans to securitize them, and we've been able to produce them a lot cheaper owning our own originator, so we're happy with that.

Thank you. Our final question comes from the line of Jay Romani with KBW. Pleased to see you with your questions.

Thank you very much for taking the follow-up. Just on the infrastructure side, is there anything in the infrastructure bill that you believe could be a boon for that business? And secondly, would you look at a digital infrastructure credit fund, which another REIT and asset manager I believe you're familiar with is also looking at?

Like DigiBridge? What was the first part of the question?

Anything in the infrastructure bill that was just passed that could be a boon to that business?

A lot of those projects won't start until middle of next year some of them in 23 like for example the ones that are familiar with the tunnel in new york or the investments in amtrak so you know the government will do what it always does which is take a time to run a a foolish process and take a the wrong bid and and do something at twice the cost of what it would cost private enterprise so i look forward to that um the uh But I think in general, yeah, there'll be opportunities for us to lend money, particularly if they're funded. It depends what's happening, you know, or what's the project and who's leading it and how they're going to do the financing. Obviously, the government will finance things they own, I would imagine, so they won't be looking for third-party capital. But if they partner with privates and there's opportunities, it would be great for us. And to the extent... You know, there are other opportunities in the power grid and the green areas. We're really well positioned. We have a business that does equity investing in energy infrastructure. And so it's led by a really talented fellow, and he works with – the rest of our team, Denise and Sean sitting in front of me, so we can cover equity to debt. We have a whole spectrum in-house. So if there's stuff to do, which there should be, it could really be a boondog. Well, hopefully there will be.

Thank you.

We're trending to a really good place for the fourth quarter in that business. It's always fourth quarter-centric, but we feel pretty good about where that is and where the business is heading as we come further and further out of COVID. I think there's a lot to do there.

Thank you. At this time, we've reached the end of our question and answer session, and I'll now turn the call over to Mr. Barry Sternlitz for closing remarks.

Nothing to add. Thank you all for your time today and listening to us and asking your terrific questions, and we look forward to the next quarter, hopefully more exciting things to talk about. Take care. Have a great holiday season.

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.