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Starwood Property Trust Investor Presentation | November 2014
STWD Today
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Leading publicly traded non-bank real estate finance company
Largest commercial mortgage REIT in the United States with a market capitalization of $5.0 billion (1)
Total capital deployed since inception of $15.5 billion (1); current portfolio of over $7.3 billion (2)
Focused on providing a secure dividend for investors; current in-place yield of 8.5%+ (1)
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Highly diversified and scalable investment platform with proven track record
Broad wholesale asset origination, acquisition and servicing model
Flexibility and expertise to invest across the real estate finance sector to generate attractive returns
Total annualized shareholder returns of 14.5% and total return of 102.9% since IPO (3)
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Unparalleled access to global transaction sourcing, underwriting, and asset management
Over 450 employees dedicated to Starwood Property Trust globally
Ability to leverage Starwood Capital Group’s 550+ employees and 23 years of transaction experience
Position as largest commercial special servicer provides a unique window into the CRE finance markets
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(1) Data as of October 31, 2014 (2) Includes Starwood lending segment assets and LNR net investments as of September 30, 2014 (3) Source: Bloomberg. Period between 8/11/2009 and 10/31/2014, includes reinvestment of dividends
Starwood Property Trust Today
Company Overview
• First Mortgages • Construction Loans
• Mezzanine Loans
• Preferred Equity
• RMBS
• CMBS
• CMBS B-pieces
• Conduit Loans
• Value-Add Real Estate Equity
•?
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Evolution of STWD’s Business Lines
STWD’s has diversified its business over time in order to find the best risk adjusted returns for shareholders while continuing to leverage its expertise and infrastructure
Note: Figures as of September 30, 2014 unless otherwise noted
•First Mortgages
•Mezzanine Loans
•RMBS
•CMBS
Target Investments - IPO Target Investments – Today and beyond
First Mortgages
Mezzanine Loans
RMBS
CMBS
First Mortgages
Mezzanine Loans
RMBS
CMBS
CMBS B-pieces
Conduit Loans
Construction Loans
Preferred Equity
Value-Add Real Estate
?
STWD’s Manager – Starwood Capital Group
Founded in 1991 by Barry Sternlicht, Starwood Capital Group is one of the world’s leading privately held alternative investment firms with a focus on global real estate
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Outstanding Performance
Acquired over $55 billion of assets over the past 23 years; current assets under management in excess of $37 billion
Experienced Executive Team
Distinctive Corporate Transactions Expertise
Worldwide Insight and Access
Investing Discipline
Extensive Asset Class Experience
Seasoned executive team that has been together for over 14 years with an average of 28 years of industry experience
A leader in public-private/private-public market executions including the creation of five NYSE-listed companies
Twelve offices globally provide transaction flow and insight into economic and local market trends
Significantly decreased acquisition activity when the market became overheated in 2006/2007
STWD’s Manager – Starwood Capital Group
Type Multifamily/Condos
Office Retail Hotels Land
Experience 70,000 units 44 million sf 39 million sf 2,200 hotels 46,000 lots
Note: Figures as of September 30, 2014 unless otherwise noted
STWD’s Manager – Starwood Capital Group
STWD affiliates provide information and expertise which give the Company an edge in sourcing, underwriting, and executing transactions across various geographies and asset classes
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Starwood’s Synergistic Business Lines
Starwood Retail Partners (SRP)
Manages one of the largest regional mall operating platforms
in the U.S., with a portfolio of 28
properties totaling more than 26.8
million square feet of gross leasable area
and $5 billion of gross asset value.
Note: Figures as of September 30, 2014 unless otherwise noted
Starwood Waypoint Real Estate Group
(NYSE: SWAY)
One of the largest publicly traded
owners and operators of single-family residential
rental homes in the U.S. The company
also invests in NPLs to supplement its
growth.
Starwood Land Ventures (SLV)
Focused on land
acquisition, development, and financing. SLV has
acquired over 17,000 lots in over 60
communities in 3 states and is a
leading provider of sites to the
homebuilding industry.
SH Group
Hotel management
team brings operational expertise in areas of revenue
management, marketing, food & beverage, systems,
and cost management.
Currently manage two brands: 1Hotels and Baccarat Hotels
& Resorts.
Starwood Energy Group
Specialized in energy
infrastructure investments, with a focus on the natural gas and renewable power generation, and transmission sectors. Starwood
Energy Group manages total equity commitments of over
$2 billion.
STWD’s Value Proposition
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Proven Business Model
Disciplined approach to investing across the real estate capital structure Floating rate business model and position as leading special servicer
provide protection against higher interest rates
Balance Sheet
Advantage
Diversified Real Estate
Platform
Broad Access to Capital Markets
Focused on Risk
Mitigation
Scale enables ability to lead entire large loan transactions Flexibility to offer loan structures “outside the box” Expertise in structuring complex transactions
Special servicing business in US and Europe provides unique visibility Ability to leverage Starwood Capital Group’s international presence,
experience across real estate asset classes, and terabytes of real estate data compiled over the past 23 years
Proven access to multiple sources of debt and equity capital $4.8 billion in credit capacity across 12 facilities and two convertible
senior note issuances
Culture of approaching real estate lending from an owner’s perspective Committed to creating shareholder value through deliberate approach to
investing across the real estate finance sector
Note: Figures as of September 30, 2014 unless otherwise noted
STWD’s Value Proposition
CRE Transaction Volumes & Expected Debt Maturities Regulatory Items Potentially Impacting CRE
Lending Segment – Underwriting Metrics
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Compelling Market Opportunity
The changing regulatory environment, coupled with increasing real estate transaction activity, can lead to lending opportunities for a flexible and well capitalized non-bank finance company like STWD
Compelling Market Backdrop
Reform Key Dates Impact
Basel III – Risk Based Capital Ratios
• Phase-in 2015-2019
• Risk weightings for commercial real estate assets require banks to maintain higher capital levels
The Volcker Rule
• Finalized December 2013
• Implementation July 2017
• Prohibits banks from sponsoring a hedge fund or private equity fund; limits banks’ fund ownership interests
Risk Retention Rules
• Finalized October 2014
• Implementation Fall 2016
• Requirement for sponsors of securitization transactions to retain a certain level of risk in those transactions, that must be retained for a period of 5 years
Source: CRE Transaction Volumes: Real Capital Analytics, includes all property types. CRE Debt Maturities: Trepp as of 4Q13. Includes bank, life company, CMBS, and other non-residential mortgage debt. CMBS Debt Maturities: Trepp as of 9/30/2014
($ billions)
$68
$146
$234
$297
$361 $360 $356
$335
$357
$16
$80
$111 $112
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
CRE Transaction Volume CRE Debt Maturities CMBS Maturities
Lending Segment – Underwriting Metrics
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Compelling Market Opportunity Portfolio Overview
STWD has built a diverse $7.3 billion portfolio across its Lending and LNR segments
Lending Segment Portfolio Overview LNR Segment Portfolio Overview
Lending Segment
83% LNR
Segment 17%
$6.1 billion carrying value
55% First mortgages
24% Mezzanine loans
6% Subordinate mortgages
5% Preferred equity
10% CMBS, RMBS, Unconsolidated investments
Fully extended weighted average life of 4.0 years
$1.2 billion carrying value
57% CMBS
20% Conduit loans
17% Special servicing intangibles
6% Unconsolidated investments
Note: Figures as of September 30, 2014 unless otherwise noted
Lending Segment Strategy
Stabilized Transitional
Asset Stabilization
Loan
Du
ration
Lon
g Term
(7-1
0 years)
Sho
rt Term
(3-5
years)
STWD focuses primarily on assets with some degree of transition, which could include: lease-up, redevelopment, or construction
Traditional lenders such as banks, life insurance companies, and CMBS conduits focus on stabilized assets and typically offer long term fixed rate loans
Lending Segment Strategy
Lending Segment Business Model
Originate floating rate loans with an average duration of 3-5 years
Flexibility and creativity to structure
loans to align both borrower and lender needs
Significant balance sheet and access
to capital allow for focus on large loans
Ability to underwrite and close loan transactions quickly and efficiently
Optionality to sell-off an A-note or finance a whole loan on a secured credit facility
9 Note: Figures as of September 30, 2014 unless otherwise noted
Asset Yield
(L+)
4.75%
Cost of
Financing
(L+)
(2.00%)
Net Interest
Margin (L+)
2.75%
Leverage 2.0x
Gross ROE of
Junior (L+) (1)
10.25%
Loan Origination and Structuring Process
1. Originate Whole Loan 2. Split Loan into Senior and Junior Tranches
3. Sell or Finance Senior Portion of Loan 4. Retain Junior Portion of Loan
Originate a 75% LTV first mortgage at a rate of L + 4.75%
$75mm
$100mm
Building First Mtg.
$75mm
First Mtg.
$50mm
Senior
$25mm
Junior
Senior tranche has a 50% LTV while the junior tranche remains at 75% LTV
$50mm
Senior
Optionality to sell or finance the 0% - 50% LTV senior loan tranche
o Sell 100% of Senior Loan
o Finance 100% of Senior Loan
o Sell Participation in Senior Loan
Assume that STWD can sell or finance 100% of the senior loan at a cost of L + 2.00%
STWD benefits from the lower cost of financing on the senior portion of the mortgage
STWD’s investment
represents 50%-75% LTV
A
B
C
A
B
C
Loan Origination and Structuring Process
Junior
Note: Asset yield equates to $3.56M of interest income, cost of financing equates to $1.0M of expenses and STWD earns $2.56M on its retained investment of $25M or a 10.25% return 10
$75mm
First Mtg.
$25mm Equity
$25mm
Junior
$75mm
First Mtg.
$50mm
Senior $25mm
Junior
Lending Segment Portfolio Overview
Total Portfolio Size(1) vs. Weighted Average LTV (2)
STWD has maintained its LTV discipline as it has grown its lending portfolio to over $6.0 billion
(1) In millions, includes all lending segment assets as of 9/30/2014. (2) As of 9/30/2014. Underlying property values are determined by STWD’s management based on its ongoing asset assessments, and loan balances that are the face value of a loan regardless of whether STWD
has purchased the loan at a discount or premium to par. For any loans collateralized by ground-up construction projects without significant leasing or units with executed sales contracts, the fully funded loan balance is included in the numerator and the fully budgeted construction cost including costs of acquisition of the property is included in the denominator. For ground up construction loans which have significant leasing or units under contract for sale the fully funded loan balance is included in the numerator with an estimate of the stabilized value upon completion of construction included in the denominator
Lending Segment Portfolio Overview
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$2,136
$2,513 $2,383
$2,834
$3,072 $3,201
$3,609
$4,087 $4,099 $4,147
$4,455
$5,375
$5,603
$5,819
$6,094
64.7%
67.8%
65.7%
66.5%
64.1%
64.9%
62.8%
63.1%
64.0% 64.0%
65.1% 65.5% 65.6%
64.5% 64.2%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Lending Segment Portfolio Overview
Loan Balance by Property Type Loan Balance by Region
STWD’s lending portfolio is diversified by geographic location and property type
Lending Segment Portfolio Diversification
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$0.0
Office, 37%
Hospitality, 27%
Multi-family, 13%
Retail, 7%
Mixed Use, 7%
Residential, 5%
Industrial, 3%
West, 30%
North East, 23% International, 13%
South East, 11%
Mid Atlantic, 10%
Midwest, 8%
South West, 5%
Note: Data as of September 30, 2014 unless otherwise noted
Lending Segment Portfolio Overview
STWD has funded over $10.3 billion across 155 loans since inception and has $0 of realized loan losses to date
Lending Segment Credit Performance
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$0.0
Cumulative Lending Segment Loan Funding Realized Loan Losses to Date
Note: Data as of September 30, 2014 unless otherwise noted
$0.0
($ millions)
* As of 10/31/2014
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2009 2010 2011 2012 2013 2014*
Expected CMBS Maturities
Lending Segment – Underwriting Metrics
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Compelling Market Opportunity
Special servicing revenues provide a hedge against higher interest rates and credit deterioration; the upcoming wave of CMBS maturities will potentially result in higher volumes of assets in special servicing
Value Embedded in LNR’s Special Servicing Portfolio
($ billions)
Source: Trepp LLC
Note: Data as of 9/30/2014 2014 Maturities represent maturities from 9/30/2014-12/31/2014
Key LNR Statistics
STWD’s subsidiary LNR is one of the largest and most experienced special servicers in the US
LNR manages an active CMBS portfolio
with $698 million of carrying value and is named special servicer on over $15.0 billion of loans
LNR is the named special servicer on $102 billion or 32% of all CMBS maturities through 2017
LNR won special servicing assignments on 21.7% of CMBS issuances year-to-date, ranked #1 in the league table
LNR’s subsidiary Hatfield Phillips is a
leading primary and special servicer in Europe
$15.5
$80.3
$111.4 $112.1
$157.9
$6.3
$29.9 $28.7 $37.5
$28.8
2014 2015 2016 2017 2018+
Total LNR Share
0.6x 0.6x
0.5x
0.8x
1.1x
0.9x
1.0x
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Equity Market Capitalization
$5.0
Total Debt Outstanding
$3.8
Historical Debt-to-Equity Ratio (2)
STWD Key Credit Metrics
Lending Segment – Underwriting Metrics Compelling Market Opportunity
As part of STWD’s approach to risk, the Company has maintained a very conservative balance sheet, consisting of both secured asset-level and corporate-level debt
Total capitalization of $8.8B
As of September 30, 2014, $3.8B aggregate outstanding balance. A maximum borrowing capacity of $4.8B under 12 financing facilities, which are with 8 leading financial institutions, and two convertible notes
Subsequent to quarter end, maximum borrowing capacity increased to $5.4B as a result of a convertible note issuance of $0.4B and an upsize of a revolving repo facility by $0.3B
Interest coverage ratio of 4.37x
Fixed charge coverage ratio of 4.13x
Issuer rating of Ba3/BB; Outlook Stable
Capitalization
($ billions)
Starwood Waypoint (NYSE:SWAY) Spin Off
Note: As of September 30, 2014, unless otherwise indicated (1) Based on outstanding shares as of September 30 of 222.4 million and closing stock price on October 31 of $22.56 (2) Debt is comprised of secured financing agreements and convertible senior notes. Equity is STWD equity
(1)
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Conservative Capitalization
Lending Segment – Underwriting Metrics Compelling Market Opportunity
The Company estimates that a 100 basis point increase in LIBOR would result in an increase to income of $17.5M
3.0% 2.5% 2.0% 1.5% 1.0%
Income / (Expense): Increase Increase Increase Increase Increase
Investment Income 4,283.7 132.9 109.5 86.2 62.9 39.9
Interest Expense (2,580.0) (74.0) (61.0) (48.2) (35.3) (22.4)
Net Investment Income 1,703.7$ 58.9$ 48.5$ 38.0$ 27.6$ 17.5$
Variable Rate
Investments &
Indebtedness
The numbers in the above table do not include any benefit that would be realized by LNR, whose special servicing revenues would likely benefit from a rising rate environment due to an expected increase in the number of loans that would enter special servicing
The following table summarizes the impact to annual net income from a specified hypothetical change in LIBOR (amounts in millions):
Interest Rate Risk Management
16 Note: Data as of September 30, 2014 unless otherwise noted
STWD should benefit from a rising interest rate environment given its high volume of LIBOR-based floating rate loans
Portfolio Statistics
78% of the Lending Segment loan portfolio is indexed to LIBOR
87% of the floating rate loan portfolio in the Lending Segment benefits from having a LIBOR floor at an average rate of 0.36%, which is above the current LIBOR rate
The fixed rate loan portfolio carries an attractive weighted average coupon of 8.7%
The Lending Segment’s fixed rate loan portfolio is financed using floating rate liabilities, the Company hedges 100% of the floating rate exposure back to fixed
Lending Segment Assets
Lending Segment – Underwriting Metrics Compelling Market Opportunity
Fixed Rate Loans 22%
Floating Rate Loans 78%
Lending Segment Liabilities
Secured Financings Swapped to Fixed
Rate 3%
Fixed Rate Convertible Notes
28%
Floating Rate Secured Financings 69%
Interest Rate Risk Management, continued
17 Note: Data as of September 30, 2014 unless otherwise noted
Historic Dividend Yield (1) Comparable Yields (2)
Lending Segment – Underwriting Metrics
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Compelling Market Opportunity
STWD focuses on providing a secure dividend through prudent capital deployment and in-depth risk management
Attractive Dividend Yield
(1) Source Bloomberg. Data as of 10/31/2014; excludes Starwood Waypoint (NYSE: SWAY) from stock price historically (2) As of 10/31/2014; CRE mREITs includes : CLNY, BXMT, ARI, and ACRE
8.5%
7.0%
3.7%
2.4% 1.9%
STWD CRE mREITs MSCI US REITIndex
US 10-YearTreasury
S&P 5006.00%
8.00%
10.00%
12.00%
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14
Lending Segment – Underwriting Metrics Compelling Market Opportunity
Future growth opportunities will come from a combination of leveraging STWD’s existing platform as well as pursuing new investments with meaningful synergies with STWD’s core lending business
Future Avenues for STWD’s Growth
(1)
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Scaling Existing Businesses
Developing New Businesses Internally
Exploring New Asset Classes
Geographic Expansion
Strategic Acquisitions &
Alliances
Building the premiere multi-cylinder finance
company primarily
focused on the real estate
industry
Note: Data as of September 30, 2014 unless otherwise noted
Key Takeaways
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Starwood Property Trust (NYSE: STWD)
Unmatched Expertise
• Combination of debt origination, underwriting, and asset management teams is unmatched in expertise and success in completing complex transactions
Global Organization
• Global real estate platform provides unique access to investment opportunities creating a robust pipeline for STWD
Access to Data & Information
• Servicing platform provides unprecedented access to terabytes of CRE data, providing critical intelligence for making investment decisions
Proven Business Model
• Demonstrated execution of core business of originating floating rate loans on transitional assets while maintaining a conservative overall capitalization
Unique Platform • LNR diversifies STWD’s business model and enhances transaction underwriting and asset management capabilities
Premiere Franchise
• STWD continues to secure its position as one of the premiere global finance companies focused on opportunities with attractive risk/reward attributes
Key Takeaways
Note: Data as of September 30, 2014 unless otherwise noted
This presentation contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial
condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,”
“anticipate,” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or
implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.
These forward-looking statements are based largely on our current beliefs, assumptions and expectations of our future performance taking into account all information currently
available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control,
and which could materially affect actual results, performance or achievements. Factors that may cause actual results to vary from our forward-looking statements include, but
are not limited to:
• factors described in our Annual Report on Form 10-K for the year ended December 31, 2013, and our Quarterly Reports on Form 10-Q for the quarters ended March
31, 2014, June 30, 2014, and September 30, 2014 including those set forth under the captions “Risk Factors” and “Business”;
• defaults by borrowers in paying debt service on outstanding indebtedness;
• impairment in the value of real estate property securing our loans;
• availability of mortgage origination and acquisition opportunities acceptable to us;
• our ability to integrate the segments of LNR Property LLC, a Delaware limited liability company (“LNR”), which were acquired on April 19, 2013, into our business and
achieve the benefits that the we anticipate from this acquisition;
• potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;
• national and local economic and business conditions;
• general and local commercial real estate and residential property conditions;
• changes in federal government policies;
• changes in federal, state and local governmental laws and regulations;
• increased competition from entities engaged in mortgage lending;
• the timing, terms, structure or completion of our contemplated spin-off transaction;
• changes in interest rates; and
• the availability of and costs associated with sources of liquidity.
Additional risk factors are identified in our filings with the U.S. Securities Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended
December 31, 2013 and our Forms 10-Q for the quarters ended March 31, 2014, June 30, 2014, and September 30, 2014 which are available on our website at
http://www.starwoodpropertytrust.com and the SEC’s website at http://www.sec.gov.
If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. As a result,
our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the
events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this
cautionary note in mind as you assess the information given in this presentation.
Forward Looking Statements
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