Starwood Property Trust Inc.

Greetings. Welcome to the Starwood Property Trust first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A 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 this conference is being recorded. I will now turn the conference over to your host, Zach Tannenbaum, Head of Investor Strategy. You may 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 March 31st, 2022, 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 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 gap 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 gap. Reconciliation of these non gap financial measures to the most comparable measures prepared in accordance with gap can be accessed through our filings with the SEC. at www.fcc.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 Reena.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $240 million, or 76 cents per share. This includes an $85 million, or 27 cents per share, gain related to the sale of an industrial asset in Orlando that was previously acquired through foreclosure, which we will discuss later. Gap earnings for the quarter were $325 million, or $1.02 per share, and include the Orlando gain as well as a 55 cent per share increase, in the fair value of our Woodstar Fund. Our GAAP book value grew by 54 cents in the quarter to $20.46 with undepreciated book value increasing to $21.26. We were active on both the left and right-hand sides of our balance sheet with 4.4 billion of new investments across businesses funded by diverse capital sources, including $500 million of corporate sustainability notes, two CLOs totaling $1.5 billion, and an increase in funding capacity of $1.7 billion. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $231 million to the quarter, or 73 cents per share. In commercial lending, we originated $1.9 billion across 22 new loans, 100% of which were floating rate first mortgages. We funded $1.1 billion of these loans as well as $241 million of pre-existing loan commitments, with most of our funding back-ended to the last half of the quarter. As we continue to transform our collateral mix, 49% of the quarter's originations were multifamily and 22% were residential, while 83% of the $716 million in loan repayments were hotel and office. Our loan portfolio ended the quarter at a record $14.8 billion, up 33% year over year. Of this amount, 92% represents senior secured first mortgage loans and 98% is floating rate. Given the steepness of the forward curve, we expect earnings to increase once we move past our above market LIBOR floors, which have a weighted average of 57 basis points. Company-wide, inclusive of floating rate assets and liabilities in all of our businesses, a 200 basis point increase in base rates would increase annual earnings by $34 million or 11 cents per share. The credit performance of our portfolio continues to be strong with a first quarter origination LTV of 57%, a weighted average LTV of our overall portfolio of 61%, and a weighted average risk rating of 2.6. On the CECL front, our general reserve declined by $3 million from last quarter to a balance of 51 million. In looking at credit performance and the adequacy of our Cecil Reserve, one of the key indicators of future loss is historical experience. As Jeff will discuss with you, our historical loss experience in 13 years is actually a net DE gain of $78 million. Based on this, our Cecil Reserve could arguably be zero, if not for the FASB saying that no one can have a zero reserve. In cases where we have to take back an asset, we utilize our decades of experience and Starwood's broader expertise to control our destiny, a strategy which has proven to be very successful for our shareholders. Also in the quarter, we completed our third CRE CLO, which totaled $1 billion and consisted of a diverse mix of property types, including 29% office. The CLO is actively managed with an initial spread of SOFR plus 164 basis points, and an initial advance rate of 84%. Next, I will walk through our residential business, which had an active quarter with purchases of $1.8 billion and sales and securitizations of $1.9 billion. Despite repricing in the securitization markets and significant spread widening in the residential loan space, we securitized $1.1 billion of loans in our 16th and 17th securitizations and sold $836 million of loans all at breakeven as a result of our effective hedging strategy. Our loan portfolio ended the quarter at a balance of $2.4 billion, including $400 million of agency loans, average LTV of 68%, and average FICO of $745. Although we recorded an $83 million unrealized negative mark-to-market adjustment on our loans for GAAP purposes at quarter end, we recorded an offsetting $69 million unrealized positive mark-to-market on the related interest rate hedges. Our retained RMBS portfolio ended the quarter at $311 million after retaining $84 million of bonds in our Q1 securitizations. In addition to our hedging strategy, we continue to expand our non-mark-to-market facilities in order to further insulate this book for market volatility. This quarter, we upsized one such facility from $250 million to $500 million. The margin call provisions under this facility do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks. Given the LTV and FICO of this portfolio, with no charge-offs to date, credit is much less of a factor. Inclusive of our securitized loans, 73% of our residential financing at quarter end was non-mark-to-market. Next, I will discuss our property segment, which contributed $22 million of DE, or 7 cents per share, to the quarter. The performance of our Florida affordable housing portfolio continues to vastly exceed our expectations. For gap purposes, we recognized an unrealized fair value increase in the Woodstart Fund this quarter of $218 million, or $173 million net of non-controlling interest. There are three components to this increase. The first is property, which represents $137 million of the increase. For the first quarter, we utilized the direct cap rate method to determine value. In-place NOI increased due mainly to higher rents, and the cap rate was left consistent with last quarter. As a reminder, that cap rate was based on the third-party fund transaction price, which was supported by an independent appraisal. The second component is the favorable debt on the portfolio. which represents $65 million of the increase. This is because market interest rates exceed the 3.5% blended fixed and floating rate debt we currently have in place on the portfolio. And the third component relates to the 1% LIBOR cap we have in place on this portfolio's floating rate debt, which increased in value by $16 million in the quarter due to rising rates. Subsequent to quarter end, Area median income levels which govern rents for the over 15,000 units in this portfolio were released for 2022. Higher median income for northern and central Florida where this portfolio is concentrated resulted in a blended rent increase of 9.1% for 2022. These rents create a new floor from which they cannot decline going forward. We expect to implement these increases between June and December with the newly released rents to be reflected in our valuation metrics next quarter. Next, I will discuss our investing and servicing segment, which contributed DE of $30 million, or 9 cents per share, to the quarter. In our conduit, Starwood Mortgage Capital, we completed two securitizations and priced an additional two securitizations, totaling $668 million in the quarter. Consistent with past practice, The two transactions which priced in March but settle in April are treated as realized for DE purposes. In our special servicer, we obtained six new servicing assignments totaling $6 billion during the quarter, bringing our named servicing portfolio to $98 billion, its highest level since 2016. And finally, on this segment's property portfolio, during the quarter, we sold an asset with a depreciated basis of $23 million for its original cost basis of $35 million, resulting in a gap gain of $12 million and no impact to DE. At quarter end, the undepreciated balance of this portfolio was $200 million across 13 investments. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $13 million, or 4 cents per share, to the quarter. We executed $231 million of new loan commitments, of which $211 million was funded. These fundings outpaid three payments of $93 million, increasing the portfolio to $2.2 billion from $2.1 billion last quarter. We also completed our second $500 million infrastructure CLO, which is actively managed with an initial spread of SOFR plus 189 basis points and an initial advance rate of 82%. Nearly half of the financing for this segment now consists of these term-matched, non-recourse, non-mark-to-market CLO structures. I will conclude this morning with a few comments about our liquidity and capitalization. During the quarter, we completed our fourth sustainability bond issuance, a five-year, $500 million issue with a fixed coupon of four and three-eighths. We are able to issue these bonds given our unique platform which has investments across the ESG spectrum, including loans on green certified buildings and commercial lending, loans to homebuyers within residential lending, affordable housing within our property segment, and renewable energy within our infrastructure segment. In addition to financing capacity available to us via the corporate debt and securitization market, we continue to have ample credit capacity across our business lines, ending the quarter with $9.6 billion of availability under our existing financing lines, unencumbered assets of $3.8 billion, and an adjusted debt-to-undepreciated equity ratio of 2.1 times, which is down from 2.3 times last quarter. With that, I'll turn the call over to Jeff.