Greetings, and welcome to the Starwood Property Trust’s Third Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Tanenbaum, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended September 30, 2022, 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 everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company’s filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for 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 Rina.

Thank you, Zach, and good morning, everyone. Our business continues to produce strong earnings and a stable dividend while maintaining ample liquidity. This quarter, we reported distributable earnings or DE of $163 million or $0.51 per share. GAAP net income was $195 million or $0.61 per share and our GAAP book value grew by $0.14 in the quarter to $20.82 with undepreciated book value increasing $0.18 to $21.69 from prior quarter. Beginning my segment discussion this morning is Commercial and Residential Lending, which contributed DE of $153 million to the quarter or $0.48 per share. In Commercial Lending, we originated $936 million across 10 senior secured first mortgage loans, all of which were floating rate and 76% of which were multifamily and industrial. We funded $657 million of these loans as well as $211 million of pre-existing loan commitments. We also had $588 million of repayments during the quarter resulting in a consistent portfolio size of $16.4 billion, up 36% year-over-year. Of this amount, 92% represents senior secured first mortgage loans and 99% is floating rate. Our earnings continue to be positively correlated to rising interest rates. This is the first quarter where base interest rates have surpassed 100% of our floors, leading to a $14 million increase in net interest income from higher base rates, which was offset by the benefit from our floors last quarter and higher interest expense from the timing of debt draws this quarter. Company-wide, inclusive of floating rate assets and liabilities in all of our business lines, a 100 basis point increase in base rates would increase annual earnings by $42 million or $0.13 per share. Since quarter end, one-month SOFR has already increased 76 basis points. International loans represented 26% of our loan portfolio at quarter end. Despite significant weakening in GBP, euro…

Thanks, Rina. During the quarter, we invested $1.3 billion across our seven cylinders at underwritten returns well in excess of historical levels. To create capital for the outsized opportunities we are seeing continuing in front of us, last week, management and our Board made the decision to access the term loan market, and we priced a $600 million five-year sustainability term loan at SOFR plus 325 basis points. We were able to tighten pricing, upsized the deal by 50% and generate nearly $1 billion of demand in the order book, notwithstanding a sell-off in equities and an increase in base rates during our marketing period. If we invest just 20% of this capital raise and pay down our financing lines with the remainder, this capital raise is earnings neutral, while at the same time creating significant liquidity to both enhance our fortress balance sheet and invest accretively. Needless to say, investing more than 20% of this capital is accretive to DE. In summary, our differentiated asset and liability structure continues to provide us with the most diverse sources of capital in our peer group. So, we deployed $1.3 billion in the quarter and $9.5 billion year-to-date. We’ve recently been more selective. That said, we are seeing great investment opportunities today, not just in CRE lending where we are seeing mid-teens returns on equity, the highest in my term as President, but also in energy infrastructure where LTVs are down, unlevered coupons are up and financing is abundant and stable. This new capital gives us the most liquidity we have ever reported, $1.3 billion of dry powder. Importantly, by issuing a term loan, which is not supported by our $3.9 billion unencumbered asset base, we retained our unique ability to create significant liquidity from our unencumbered assets or from adding leverage…

Thanks, Jeff, Rina, Zach, and good morning, everyone. What fascinating times we were living in. It’s something of a financial hurricane going up in the market as many of you been really negative on what Fed is doing. You really can’t cure this inflation that is driven by mostly excess stimulus and then lack of goods on the shelves with interest rates. And as long as you have 10 million in open jobs, you’re not going to see massive decreases in unemployment without eliminating many of those open jobs and then causing massive layoffs and derivative effects of that would be catastrophic on the country. You’re seeing all these companies missing earnings, and I wish Powell was along the S&P – actually, obviously, after they missed earnings, they have layoffs like this morning, Facebook’s 13,000 people, 11,000 employees [ph]. And the tech companies were really powering growth in many cities. And now they’ll be pulling back. It is obvious to me that the economy was slowing even before the Fed started raising interest rates and that inflation was more transient. And of course, they got it wrong in the beginning and they’re getting it wrong now with indeterminant outcome. So, I would say that the most important thing I would tell you about us is, we’re on defense. We’re not really on offense. We have the record liquidity of $1.3 billion. We raised the $600 million debt deal last week – earlier this week, I guess it was. It was last week, closed this week. And we’re going to be very careful where we deploy the capital. It is – the market opportunity for us is as good as it’s been since we IPO-ed the company in 2009. Not only the banks pulling back on credit given the craziness of…

Thank you. [Operator Instructions] Your first question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks. Can you just talk about how you’re thinking about balancing, kind of holding extra liquidity versus deploying some of that liquidity into the opportunity set that you’re seeing and kind of what you’re looking for to maybe be a little bit more aggressive in taking advantage of the opportunities?

I mean we have a liquidity right now that we would probably do some investing on brain dead grade IRRs [ph], with huge margins of safety. So, I wouldn’t say we’re close now with the completion of the $600 million term loan. I think we’ve given ourselves ample liquidity. But it is going to be spot-by-spot. We’re really going to see as loans repay, we’ll probably redeploy that capital at this point. So, we have like $100 million loan we’re paying in December where my team says they’re 98% sure it will repay. When it repays, we’ll redeploy the $100 million. So it’s really – that’s probably gross loan, that’s the equity. So, we will redeploy that. So, we’ll be back in business and we’ll be writing loans at higher ROEs than the loans that are leaving the book. So our earnings should drag north as this transition takes place. But again, I don’t want you to think we’re going to deploy $1 billion to $1.3 billion, we’re not. We’re going to sit on it. By the way, we earn decent returns. We’re paying off repo lines that are marginally tighter but obviously, a tighter, meaning they’re like 300 over, but we’re borrowed at 3.25. So, we’ll pay off those lines, create capacity. Mr. Bank will never call us, hopefully, and they’ll be focused on some of our peers that probably don’t have the cushion of the balance sheet that we do. So it’s just we’re going to be defensive until we get a better read on what’s happening. I mean there’s a 20% shot that the Fed completely screws this up and the nation goes into a tailspin. And we have to be concerned about that. I mean the government people who talk about poll workers; aggressive moves forget…

Thanks. And then just, I guess, how are you thinking about the relative attractiveness of your move to kind of having unsecured funding versus being a pure secured lender in an environment like this?

Obviously, the more unsecured we have, that helps our ratios with the rating agencies. They want to see our leverage low and they’d like to see us have more unsecured for to get to investment grade. Obviously, that’s very important to us. In this case, we didn’t issue unsecured. We issued a term loan, which is off of a different collateral base. We save the unencumbered assets that support the unsecured debt because we think that’s the most liquid, if we were ever to need capital quickly in the future. We can either encumber the specific assets or we could do an unsecured bond deal. So, we definitely look at that mix very closely. We would love to have more unsecured over time. We think we’re miss rated. We think we should trade at a much tighter spread than we do today. And when we do trade to a much tighter spread, I think you should look for us to issue significantly more unsecured, take asset leverage down and make it very difficult for the rating agencies, not to look at the company the way that we look at the company.

Thank you. Next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning. Appreciate the color around office, Barry. I wanted to follow up there. It looks like you’ve got more CBD exposure internationally than really in the U.S., at least on a percentage basis from the disclosures on 13. Can you talk a little bit about the differences you see overseas versus here in CBD office?

Yes. I’m not aware of any issues on our international office book at the moment. I actually asked a question of our Chief Credit Officer right before the call on this because some of this is net lease to office. And if I – give me a second, Jeff is pulling the loans, so I can actually look at them, but we don’t have them. Why don’t I come – I’ll interrupt the future question as we pull this information for you.

Okay. The other one was just an update on, I believe, Houston office asset is foreclosed in May.

Yes, you want to talk about it, Jeff?

Yes, listen, we’ve gone down a few strategies. We...

To give you a little background here, one of the smartest investors in the world, a hedge fund based in Boston, household name in real estate. I think putting a $100 million and we had like $120 million or $130 million loan. So, we never really expected them to walk. I think it’s like $100 something a foot, which I laugh with our team is like we took the steel down and sold it, we’d probably get $80 a foot back from just scrap metal costs. We had an opportunity to lease the building to a significant extent, not – but it would have leased the top of a building and left us to lease the bottom. And if we do a lease as an office structure, we have to put up a mountain of TI for the tenant today. And I opted not to do that. And we have an opportunity, hopefully to convert it to resi, sell it to somebody who’s going to do that. And we’ll see whether or not it takes place, but it’s not material in our book value, and hopefully, we’ll work it out.

And I would say going back to the last piece, we’re now looking at the CBD versus the non-CBD in our international lending book. Our largest loan in office in Europe is in the UK. It’s in London. It’s a 46 LTV, very well sponsored, getting good leasing. Our second best is – our second largest in Berlin. Barry I know you have a strong opinion on Berlin, let’s say.

It’s the best office market in the world, probably with the anywhere between a 2% and 4% vacancy rate today.

And then the only other loan over $100 million is also downtown in London, 48% LTV as our origination about nine months ago. So, I feel really comfortable with the...

Let me give you the maturity dates of the three loans, 12/2024 the biggest one. The next one is 12/2028 and the third one is 12/2025. So, we don’t have any near-term exposure at all in these buildings in Europe. And they are very good lenders – borrowers, sorry, household names. So actually that we don’t see any credit issues in our European portfolio in its entirety at the moment.

And Stephen, you mentioned from that, that 70% is CBD and 30% is non-CBD. But I’ll note that, that 30% is only $200 million on an $18 billion loan book. So these are relatively small sample sizes for office in Europe.

Next question comes from Rick Shane with JPMorgan. Please go ahead.

Hey guys. Thanks for taking the question. Look, the question was asked when in terms of starting to reenter the market and obviously, a lot of uncertainty there. I think the other part of that question is how or when you do reenter the market, what that will look like. Jeff, you talked about opportunities on the equity side as opposed to necessarily on the lending side. I’m curious if you think that, that will be where you first reenter the market and you’ll see a portfolio that’s got a little bit less leverage and a little bit more focused on owning properties yet.

Yes. Thanks, Rick. Let me start by saying we put out $1.3 billion this quarter. I don’t think anybody put out close in. I think if you added up all of our competitors, they might have just got there. So, we’re still putting out money where it’s smart to put our money. We’re not completely...

To be fair, it was front end of the quarter.

It was front-end – it’s worth though. And then as far as sort of reentering the market, I don’t think you’ll see Rick, I hope that I didn’t say something that alluded to equity as in real estate equity. When we accumulated our portfolio in 2015 and the first quarter of 2016, we were getting cash returns of close to 10% on core real estate properties. We had cap rates that we thought were very attractive. We thought it was a better time to be a borrower than a lender and we pivoted from having our biggest year ever in 2014 as a lender to being a bigger borrower and amassing a portfolio that’s created $1.6 billion of gains. So, we will time those things when it makes sense. I don’t think that as I look at the equity opportunities today, where cap rates are and where borrowing rates are for us, if we were to be a buyer, that we could get cash returns anywhere near 10% on any core asset. The reality is, in a lot of cases, you’ll have negative leverage. And buying new core real estate is going to have very low cash yields today. We could obviously play for rent increases or other ways that we’re going to have income that will offset that for an IRR. But we’re a mortgage REIT, and we pay our income out every quarter, and we do not like to drink our own blood by paying out something that we didn’t earn. So unlikely in my mind, that would add a lot of core property portfolio at this point.

I’ll give you an example of what’s going on in the market, two examples because as you know, we have $125 billion book of real estate around the world. So domestically, we went – this is started [indiscernible] on the equity side, I went out to get a loan, a construction loan in the life science project. And we had just built and sold the building next door, closed this summer achieved like north of a 50 IRR and three times return on our capital and the building leased, and we sold it I think, in 18 months to 24 months start to finish. So us, being equity guys, we bought the land next door, which we quickly assembled. And our – went to market to build a new building, have multiple inquiries into leasing it. And we went out to get a loan. We got, I think, one lender, as an insurance company. Normally, we have 20 people bidding on this. The loan is S4-50, that’s a 9% first mortgage. It’s 65% of cost on a brand-new building, fully guaranteed by a $10 million fund for completion and TI. And with the points upfront and other costs, it’s north of 9.5% [ph] cost of funds and the equity funds first. So if you foreclose on this thing, you’re going to get all of our money quickly. It is a ridiculous environment right now. That is ridiculous. And I asked them, if I could put my kids’ trust in that loan. And that’s the way I feel about lending today and opportunities. So, we have those kinds of opportunities. In Europe, we took to market a property in London and we didn’t like the bids. The bids were, let’s say $350 million, and we thought we could get $375 million,…

Next question is Jade Rahmani with KBW. Please go ahead.

Thank you very much. Commercial mortgage REITs, mortgage REITs as a sector have always had issues with the liability side of the balance sheet. The term loan pricing looks like a strong move, but would you look at some alternatives such as buying a bank? Would that make sense at some point for the company?

I’d love to buy a bank. There’s a lot of things we’d like to do. Yes. I mean I don’t – I’m not an expert on bank regulations. We have invested from time to time as a minority shareholder in the banks coming out of the GFC. I think we had Pacific Premier Bank. We own 25% of equity fund. I don’t know how that would work for us. More interesting is sort of the insurance wrapper, insurance company probably. But we can produce a lot of product for liability management of an insurance company when people have come to us to manage separate accounts for them in this space. That’s something that we probably should look at to leverage our skill set, but I’m pretty excited. We’re also working – I hate having to use the word, but we have some activities in the blockchain. We’ve invested exactly $0 so don’t get nervous. But it’s funny, the technology is real. The tokens are – who knows? But the technology, the blockchain technology is fabulous, and it will revolutionize finance. Who wins is a coin and exchanges, I don’t know, but there will be somebody who will do well here. And it does have a interesting applications to the real estate world, and we’re watching it.

And Jade, I think the other discussion that’s happening, we are hopeful that the Federal Home Loan Bank reopens the discussion on insurance captives. As you’ll remember, four years ago or so, we were – we did have a captive insurance and we’re able to use the Federal Home Loan Bank window, and there has been some discussion about whether that gets renewed in the future and opens up to well-capitalized companies like ours on the mortgage REIT side. I think that’s the more likely of the better financing tools away from term loans and high yield and everything else that we do.

Thank you very much. Follow-up on just the commercial mortgage REIT space. Many of the companies taking very large write-downs on office exposure and some of the stocks trading at very almost distressed price to book value multiples. Do you think that would be an attractive area to deploy capital, acquiring a company or a portfolio at a discount to par? Or you weary of – everyone else’s problems.

It’s obviously all about their boards. They can’t raise capital, both debt and equity, so they’re sort of zombie little companies right now. But nobody’s wanted to give up ship. And if they can write it out, they tend to want to write it out. We’ve tried, by the way, so hard multiple times. But we also sometimes in our due diligence, have disagreements on book value. And maybe we think they’re optimistic in some cases, on some of the larger troubled loans. And so they have a stated book. Maybe even if the Board thinks the book is soft, they’re not willing to sell the company at levels we think it’s warranted. If it ever was going to happen, it would happen now, because of the crisis we’re in and the pressure they’re under and the funding lack of equity. I mean if you – some of these guys try to issue equity, I mean, I assume the market will have a heart attack. By the way, we would – as you know, we don’t like to issue equity. And we would, at some point, but we also have always been a steward of our book value, and we continue to be a steward of our book value. So – and we think – it’s a fascinating thing. I mean, you can see in our numbers, we took a big hit temporarily, not credit but to market on our resi book, and that has not worked. That has been a problem. And having said that, because of the machine that we have, we’re able to get through that. And again, we’re going to get our money back. We just – we have to wait for the securitization markets to reopen, so we can move that capital to higher and…

Looking across all ratings, Jade, I’m looking at a spread chart from the year-to-date minimum to where we are today, and we’re basically two times or higher the spreads from where we were at one point this year. So obviously, at some point where people think that things are going to start turning the other way, this tremendous yield that needs, as Barry said. I’ll go back to the comment on M&A on CRE mortgage REITs and other REITs. And the hard thing is today, with a lot of them trading at 50% or 60% of book value, nobody’s giving up their book for significantly less than book value because they believe in it. I actually think the M&A opportunities tend to be when you’re in the 75% to 85% of book value because you might go and get somewhere closer to book value and a deal gets done. So I would note at the significantly depressed levels where some of them are that you see anything happen in M&A.

The last question comes from Don Fandetti with Wells Fargo. Please go ahead.

Hi, certainly good to see you playing defense and hoarding cash. I guess my question would be if we did have a hard landing, how would you expect infrastructure to perform on a credit perspective versus your commercial real estate loan portfolio?

Sean Murdock can answer this question.

Sure. I think in this...

Roughly had co-run that infrastructure book.

Sorry. I think we’re in this environment, positives with respect to energy infrastructure trends in the narrative. The world has seen this cost of lacking energy infrastructure in places like California and Europe. And so there’s a strong narrative behind the space right now that I think sort of overcomes cycles and crashes around the economy. Clearly, it lose access to the debt markets in terms of refinancing and all the discussions we’ve had around spread this morning. But in terms of asset performance and cash flows, we’re optimistic about how energy infrastructure does in declining economy.

Would you – do you think it will perform better than commercial real estate? Or just trying to think how you sort of sensitize that?

Sean’s biased, but I can tell you, we’re looking at deals every day across all of them. And right now, what we’re seeing in the energy infrastructure world is the highest deals that we can probably generate anywhere else with a combination of LTVs as low or lower than we’re seeing anywhere else. So I would say that today, if I add an incremental dollar to put out, I think it’s the most interesting, given that.

The highest returns for sure, and especially if you can hedge out all the commodity risk of the loan, which you – in some cases, you can do. So it’s not power, and it’s something else, the power stuff you can’t hedge really.

You could actually could hedge energy production costs.

You could?

I guess my question was, is it more defensive than commercial real estate lending? Or is it sort of on par downturn?

I think it’s – I wouldn’t say it’s more defensive. I think the commodity complex will have a beta tied to the economy. So I think – look, I don’t expect one of the other things when I talk about inflation, there’s no chance energy prices can stay high in the United States. We have the ability to pump a lot of oil and gas and don’t have to worry about we can consume everything. On the margin, gas and oil price on the margin, extra million barrels of oil or gas of BCFs produced, we’ll hit – we’ll the lower prices dramatically in the U.S. And that’s nothing to do with Russia. That has to do with global prices and which do have something to do with Russia. But it really is – the U.S. can knock energy prices down at any time. And I don’t think people understand maybe this how energy ex all the other components of CPI. For example, food. Food actually has to be harvested with a tractor or something that uses oil. Then it’s to shift to the processing plant in a car or a truck that uses oil, then they turn the turbines on and process the stuff using gas probably or electricity. And then it shipped back out to the market in a truck or a car on a train that uses electricity, gas or oil. And all of those components are part of food inflation. And it’s not food. It’s actually the transportation component of the food cost. So everything is tied to these crazy runaway energy prices, which are now subsided. But again, that seems to be beyond the tale of the Fed’s to understand.

And I would say half or more of our book is on power plants and the spark spreads, which is the difference between where we acquire the commodity power and where we sell the power have gone, Sean, from mid-single digits to higher single digits. And our LTVs have actually gone down here, whereas on the commercial real estate side, I think most people would say a lot of commercial real estate assets are worth less today than they were yesterday. So your LTV have modestly gone up. The problem in this business is, obviously, you need to take out and the capital markets need to be there, and the banks and others have pulled back for ESG reasons, et cetera. And so you have to be very convinced that you have a take out to – in the capital markets, and that’s the risk on the other side. But I think the LTVs have performed extremely well, and we certainly believe that these IRRs are achievable at low LTVs. And I think that probably – if that’s the end of your question, Don, we’re – I think that the end, we don’t have anyone else in the queue

Thank you. I will now turn the call over to Mr. Sternlicht for closing remarks.

Thank you for your time today and wish you luck and happy holidays with you, your families and only positive returns in the equity markets from here on. So thanks again. We are optimistic about our position, but we certainly like the country to continue to prosper. Thank you so much. Have a great day.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.