Greetings. Welcome to Starwood Property Trust, Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. . Please note that this conference is being recorded. At this time, I'll now turn the conference over to Zach Tanenbaum, 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 10-Q with the Securities and Exchange Commission, and posted its earnings supplement to its website. These documents are available on 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 Sternlicht, the Company's Chairman and Chief Executive Officer. Jeff Dimodica, the Company's President, Rina Paniry, the Company's Chief Financial Officer and Andrew Sossen, the Company's Chief Operating Officer. With that, I'm 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 CREE lending, residential lending and energy infrastructure. We expect to continue to issue CLO and securitizations in each of those businesses in the coming months moving significantly more of our liabilities, some 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 acceptably in the first year after COVID. 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 theory lending business, we have already closed over $1 billion of loans in Q4 and expect to close a multiple of that by year-end what will likely be our biggest quarter-to-date. We're also borrowing at lower spread, which has 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 about 12%. That compares to 11.2% for the 4 quarters before COVID. We were busy in capital markets this quarter as well. Rina will speak in detail about our high yield and term loan 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…

Thanks, Jeff, and good morning, everyone. This quarter we reported distributable earnings, or DE, of $155 million or $0.52 per share. We were again active on both the left and right-hand side 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 ribor 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 CLO 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…

Good morning, everyone. Thank you Zach, thank you Rina, thank you Jeff. Jeff was before Rina, which is diversity for us at the moment because he was really excited about talking about Wood star 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 are 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 market is 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 evaluation of the Wood star Trade Investment. We created this investment fund earlier in the year to prove to the market that the substantial unrealized gains that we had in our book are real. And so, we found 2 very large offshore investors after a broad marketing effort, to come invest in our portfolio. They bought 20% of the equity, and I will tell you that we severely underestimated those assets between the time of the investment they made and what we're seeing in the marketplace today is an active equity investor, probably cap rates have fallen more than 50 basis points. And we just sold large portfolio in our equity funds…

Thank you. We'll now be conducting a question and answer session. One moment please so 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 Wood star 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 information on the profile of the buyers and what your appetite is like, to sell more in the new fund structure? And if you've had other conversations, with other third-parties that, seems to be something we could expect to see in the next few quarters or if you're set with the amount of ownership you have in the portfolio now. Then I have a couple of follow-ups. Thanks.

What we can say about the investors is their 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 but . But we're not at liberty to tell you who they are. The -- and I think as to harvesting the future gains just in that book or the medical office portfolio or way above market triple-net leases to Dick's, I guess Bass Pro Shops, not Dick's, it's all depending on what -- how to put money out in the other businesses. And if is -- if we can raise our -- what are we going to do this year in originations, you think Jeff?

I think that we will be $8 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 invested 12 ROE's. The one thing about the book is it gives us the stability, the return on equity is really Internet. And 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.

For sure.

$21 billion, right? We can suffer those repayments without worrying about any disruptions to our short EBITDA, so our earnings potential. So, in the bigger the book to better the business is always the case because then it's just a question of can we find enough attractive deals? With enough duration? The businesses are not easy, the duration of our almost necessity -- necessarily that a hard word to say in this early morning. Necessarily transition loans, is like the faster the borrowers fix their properties, it's really wanted to pay this back. It actually the ones have happy to get a higher ROE, because you get a prepayment penalty and we get whatever fees we took upfront are actually over smaller timeframe. So, we might think alone as 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 pay us off a little faster when things go well. You're obviously higher than your , because you have upside the prepayment penalties and your only downside is credit, where we haven't really taken any meaningful impairment ever. The thing is, it's just a lot of work on for the team and I think broadening our abilities with additional product lines to put out that capital is when we crossed that Rubicon, you'll see us probably take more gains off the table, and redeploy what today is probably a subpar ROE. I mean, on the -- we'd be better off taking the gain and reinvesting it, which to Monica wants me to do every 2 days. If we -- I'm just -- I want to make sure.

It's a question for you, Barry.

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 as it's dwindling. And we do have access to the -- given the Wood star trade, we have -- we'll have unprecedent access to -- on one unencumbered asset to supply the Company with additional corporate debt and still maintain lower leverage levels than our peers. So, we could boost the ROE here. As Jeff pointed out, we could raise the dividend and we lever the Company. Just doesn't feel like what if we told people we're going to do in the beginning of time, which was safe, consistent, and predictable. And that we thought the market would value and stocks rallied, but 73 dividend 12 years into your existence with a 60% LTV and proven capabilities across multiple business lines seems to like a good deal in the 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 should be at the very low-end anywhere in space. Tim, will take other questions if you had a follow-up.

Yes, no. 2 follow-ups around and you answered one of them. It's just about, where you re-deploy 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 loans CRE book. So just curious if that's where you re-deploy the $200 million you're getting back, or if it's used to pay down the notes you have coming due in about a month or so. Or if there's anywhere else that, you might look to allocate that. And then just part of that question Jeff is, just the comments around the earnings accretion, right? Because you might -- I looked at the dividend coverage right here, and you're pretty well covered, $0.52 versus $0.48, and you're getting about $0.08 back from this portfolio sale. And then that doesn't even include the management and incentive fees you are getting on that capital as well. So that's going to be pretty noticeable when we see 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 got 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 2016 because we didn't like where lending standards where. 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. 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 were trending in the mid 12% after trending mid 11% 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 had -- 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 on coupons that coming down, but the financing is coming down also. And there are some pretty good opportunities in CMBS and other. The hardest up place for us to add today would probably…

Thank you. Our next question is from the line of Jade Rahmani with KBW, please proceed with your questions.

Thank you very much. First question is on PropTech side. I know Starwood Capital group has Invested in that. Are there any p PropTech attributes that LNR, any proprietary technology, their 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 mentioned that. Actually, there's I think a bigger group of technology or IT people I know at STWD and there is at CJ, the parent. I think it's 5 times the size. One of the reasons they do those they have -- we have this database called LPM, 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 named 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. I mean, basically, we are workout department, we just do it for CMBS securities. And much like Guggenheim group 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 working 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 . I'm aware that BlackRock build the 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, could we have an LNR solutions or we call ourselves -- what's our subsidiary called That's something that, 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 ROE -- high ROE businesses? Or on the other hand, do you see a consolidation opportunity within the mortgage rate sector? You could bifurcate the mortgage rates, the larger cap names trade fairly well, the mid smaller cap names are 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. And it's very hard to do a hostile on REIT it's some -- I wish you might have seen we tried to buy an industrial REIT and management just said no. And so, it's just very hard to do the funds -- the index funds won't vote, and activity that top 1,3,4,5 shareholders of the REIT. It's very hard, shockingly difficult, and sucks. But it is the way it is like I even called BlackRock specifically to say on one situation, not the one I was mentioning. Management is not terrible job, I outlined all the shareholder disasters that they have presided over. And they just like, don't want to vote. They don't want to, they want to stay passive. They don't want to get involved and takeover. You're going to -- if it has compelling business and ethical and more on packing, it's complicated. I wish it was easier than it is. Because it's like -- it's bad. It's actually the rags that allow that to happen, you can't go over 10% ownership. So, 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. I think there were a lot of consolidation talks during the pandemic, but not many of them took place. So, actually it happened. Anyway, thanks for the question.

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

Thanks. Can you talk about how the sale of the property assets impacts your 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 cap -- 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 ratings driven.

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

Yes, we collapse the trust with part of it, and we will always do that to try to move it into better financing. 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 are seeing a decent amount of agency investor loans come through the pipeline and that's something where the agencies 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 of that number. So that helps the number look a lot bigger. We continue to look at more sectors. We continue to stay the course. We love this low 60 LTV, high -- mid high 700 credit profile. With the HPA we've seen around the country, there's no credit risk in these bonds. It's all about duration and prepaid speed. As long as we head to these -- to a faster prepaid speed, then we think it’s likely and we can still earn a double-digit return. We're so happy to lean in. I'll say the gross 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 the agency loans and then try to find non-agency borrower so they can offer a lower rate to. So, we are seeing gross come down and speeds run a little bit higher than we thought, but we've been fairly conservative on where we are in our speed. So last bunch of months and we'll continue to do that and hope that coupons stay around here. If they collapsed a lot more, we probably won't be a big investor here. But today, it's still really attractive for us.

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

Hi. Good morning. Looks like from early last year international is little less than 20% of the loan portfolio now of above $0.25 and they may be headed to closer to 30 here. What are the opportunities you're seeing internationally that make 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? Is that coincidental or is that part of the differences you see internationally versus domestically?

Yes. I'll go and then you go. The European markets are -- and Australian market are a little less competitive. And the banks are less competitive for I'd say they are stricter on 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, I think we could be bigger in Europe than we are. We're asset class agnostic. We really don't care much. And we try to -- we have tried to avoid hotels just because -- not because we're not comfortable lending hotels but I think it just puts a 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 to like data centers and any place we can find opportunities to earn our returns. They are all open game. And 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 accredited tenant. We'll do that too. I -- 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've too many people doing loans. I think we…

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 answered -- 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. There's a couple of big loans or one in an office in DC and a mixed-use in London. There's our absolute smokers and they are going to be really easy pay offs. 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 buckets. 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, until you guys think it will be okay. And, our portfolio will hold then in and to-date, we feel really good about that. So, they look at the fully extended payoff next year, 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.

We're going to be your first next quarter, Rick, I feel like I owe you that.

Okay. Thanks, guys.

Take care.

The next question comes from the line of Don Fandetti with Wells Fargo, please proceed with your question.

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 where do you think that market can go? Can it get much larger, 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 -- growth whack. And our whack and we started doing this business. We're in the mid-60s and today they are in the low 4s. You're getting 250 basis points off of agency coupons. And so, you'll start to feel some turbulence that you try to tighten in from there on that spreads. My guess is that you hold in somewhere between this 100 and 150 basis points wide of agency. And that -- at that spread, you potentially bring in a decent amount of people who are able to refer but don't fit the traditional bank origination statement, 43% DTI, etc. And 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 past stem to write more non-QM, or do they want them to be doing more missions specific stuff, low income affordable, etc. and depending where they come out on that, that will tell you what's left over for us, but certainly a lower coupon will be more volume. And one of the things driving the lower coupons, I'm giving you a blended coupon, the agency coupons where we did, I told you were $500 million of investor agency loans. Those were sub-4% coupon and our non-QM loans are still mid, in sometimes mid to high 4% coupons. I'm giving you a blend between when we do both, but reality is the non-QM coupons are still in mid-4s percent today.

Okay.

And the leverage is fantastic. Right. We can get 11 turns of leverage if we want it in the securitization market, that 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 104105 with these loans to secure ties with them. And we've been able to produce them a lot cheaper, owning our own originator. We're happy with that.

Thank you. Our final question comes from the line of Q - Jade Rahmani with KBW. Please proceed 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 funds, which another REIT, and asset manager, I believe you're familiar with, is also looking at.

I put it on a mute. What was the first part of the question? Info bill.

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 till middle of next year, some of them in '23. Like for example, the ones that I'm familiar with, the tunnel in New York or the investments in Amtrak's. The government will do what it always does, which is take our time to run a foolish process and take the wrong bid, and do something at twice the cost of what it would cost private enterprise, and I look forward to that. But, I think in general, there'll be opportunities for us to lend money, particularly if they are funded. Depends what's happening, 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, so they won't be looking for third-party capital. But if they partner with privates and those opportunities would be great for us. And to the extent there are other opportunities in power grid and the green areas we're really well-positioned. We have a business that does equity investing in energy infrastructure. And so, led by a really talented foe, and he works with the rest of our team and Janice and Sean, sitting in front of me. So, we can cover equity to debt, we have the whole spectrum in house so that there is up to do which there should be and then it could really be a we're hopefully it 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 felt 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. I will now turn the call over to Mr. Barry Sternlicht 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 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.