Starwood Property Trust(US:STWD)2020-08-05 21:30Financial Data and Key Metrics Changes - The company reported core earnings of $126 million or $0.43 per share for Q2 2020, with GAAP earnings at $140 million or $0.49 per share, leading to a $0.03 increase in GAAP book value per share to $15.79 and a $0.09 increase in underappreciated book value per share to $17.03 [10][11] - The balance sheet was moved into a more defensive position, resulting in over $1 billion of balance sheet inefficiency, impacting earnings for the quarter [10][11] Business Line Data and Key Metrics Changes - The Commercial and Residential Lending segment contributed core earnings of $112 million, with $198 million in new loans originated at a weighted average LTV of 44% [12] - The residential lending side completed a $584 million non-QM securitization, retaining $185 million of RMBS, and the residential loan portfolio ended the quarter at $700 million with a weighted average coupon of 6.2% [15][17] - The Property segment contributed $18 million of core earnings, with rent collections at 97% and blended cash-on-cash yields increasing to 15.7% [18] - The Investing and Servicing segment contributed $37 million of core earnings, including a $10 million gain from the partial sale of a minority stake in Situs [21] Market Data and Key Metrics Changes - The company ended the quarter with an undrawn debt capacity of $9.5 billion and an adjusted debt to underappreciated equity ratio of two times [25] - The liquidity position included $821 million of cash and approved undrawn debt capacity after de-leveraging [26] Company Strategy and Development Direction - The company plans to cautiously pursue new investments, focusing on high-quality, low loan-to-value residential mortgage loans at discounts to par [30][41] - The strategy includes maintaining ample liquidity to weather future market fluctuations while selectively writing commercial real estate loans [31][34] - The company aims to reduce future funding requirements and has actively managed construction exposure to minimize risk [36][37] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of the business model despite macroeconomic challenges, highlighting strong credit quality and interest collections [14][52] - The outlook remains cautious, with a focus on stabilizing assets and sectors expected to outperform post-COVID [34][54] - Management acknowledged the potential impact of the upcoming presidential election on real estate investing, particularly regarding proposed tax changes [68][70] Other Important Information - The company has seen significant equity contributions from sponsors since COVID began, totaling over $300 million [39] - The energy infrastructure portfolio has maintained strong credit performance with 100% interest collections [43] Q&A Session Summary Question: Outlook for Energy Infrastructure Lending - Management noted that spreads have widened, but they expect to generate attractive levered yields moving forward, with ongoing efforts to create a CLO for nonrecourse financing [62][64] Question: Impact of Presidential Election on Real Estate - Management discussed the potential implications of tax changes proposed by a Biden administration, emphasizing the importance of micro-level investment strategies and the resilience of real estate yields [68][70] Question: Economic Contribution of New Investments - Management confirmed that securitizations of newly purchased loans are expected to generate significant taxable gains, with strong pricing anticipated in the market [75][78] Question: Characteristics of the CRE Pipeline - Management indicated a focus on higher quality, stabilized assets with less future funding obligations, while avoiding retail and volatile sectors [81][84]