Starwood Property Trust Inc.

Greetings and welcome to the Starwood Property Trust fourth quarter and full year 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Zach Tannenbaum, Head of Investor Relations for Starwood Property Trust. Thank you. 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 December 31st, 2022, filed its form 10K 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 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 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'm now going to turn the call over to Reena.

Thank you, Zach, and good morning, everyone. Our unique multi-cylinder platform once again demonstrated consistent performance with distributable earnings or DE of 161 million or 50 cents per share for the quarter and 726 million or $2.28 for the year. Undepreciated book value ended the year at $21.70, up 26% from two years ago and up 5% over last year, driven by NOI growth in our 15,000 plus unit Florida affordable housing portfolio, which I will touch on later. In 2022, We completed $10.7 billion of new investments across businesses with initial fundings of $9.3 billion and follow-on fundings of $1.1 billion. Against that, we had repayments and sales of $3.7 billion, including $1.9 billion from commercial lending, securitization proceeds of $3 billion, and newly issued corporate debt of $1.1 billion. We continue to have significant liquidity with $1.1 billion of cash today, $250 million of which we will use to repay our convertible notes maturing on April 1st. We also benefit from excess unencumbered assets and gains within our property portfolio, both of which can be utilized to create additional liquidity. I will start my segment discussion this morning with commercial and residential lending, which contributed DE of $172 million to the quarter. In commercial lending, we originated $266 million of loans including a $112 million loan on an industrial build-to-suit that is pre-leased to an investment-grade tenant. This brings our full-year originations to $5.3 billion, of which 56% was multifamily and industrial. At quarter end, our aggregate multifamily and industrial exposure is 39%, which is nearly three times the pre-COVID level. Our predominantly Class A office exposure continues to be just 23% of our commercial loan book, which is down from 29% a year ago and 38% pre-COVID. In 2022, we received $362 million of office repayments, and subsequent to quarter end, a $92 million office loan in Canary Wharf, London, repaid early, further reducing our office exposure today. During the quarter, we funded $84 million of new loans and $395 million of pre-existing loan commitments, which were partially offset by $301 million of loan repayments. This brought our loan portfolio to a record $16.8 billion, up 18% year over year, with 99% positively correlated to rising interest rates. Company-wide, inclusive of floating rate assets and liabilities in all of our business lines, A further 50 basis point increase in base rates would increase annual earnings by $19 million, or 6 cents per share. On the CECL front, we increased our general reserve by $27 million in the quarter to a balance of $94 million, or just over half a percent of our commercial lending portfolio. In looking at credit performance and the adequacy of our CECL reserve, one of the key indicators of future loss is historical experience. Unlike our peers, our model focuses more on this actual historical loss experience, as well as property type and LTV, while placing no emphasis on the more subjective internal risk ratings. To that end, we had no new specific reserves in the quarter. However, we downgraded four office loans totaling $724 million from a three to a four in the quarter, which Jeff will discuss, and won $42 million retail loans from a 4 to a 5, bringing our total 4-rated loans to $872 million and 5-rated loans to $287 million. We are confident in the underlying real estate and ultimately believe these assets are fully recoverable. During the quarter, we foreclosed on a 5-rated $245 million first mortgage loan related to an office building in LA, which Jeff will discuss in more detail. The property was recognized at the carryover basis of our loan, and we have in-place financing on the asset totaling $117 million. In our residential business, we acquired $745 million of loans, including $713 million of agency investor loans that we discussed last quarter, bringing our on-balance sheet portfolio to $2.8 billion. As prepayments have slowed, we recognized a $17 million gap mark-to-market increase in our retained RMBS portfolio this quarter, bringing the balance to $423 million. We've previously discussed our equity interest in a residential mortgage originator. During the quarter, we exited this investment, resulting in an $11 million gap and DE loss. Next, I will discuss our property segment, which contributed $17 million of DE to the quarter. Of this amount, $9 million came from our Florida affordable housing portfolio. For gap purposes, we recorded an unrealized fair value increase related to this portfolio of $68 million in the quarter or $555 million for the year, net of non-controlling interest. The value was determined by an independent appraisal, which we are required to obtain annually. The implied cap rate is consistent with our prior valuations. In our master lease portfolio, we recognized a 10.6% increase in rents effective October 1st as part of the five-year contractual rent bumps in this portfolio. This will result in $2.8 million of higher rental income annually. Next, I will discuss our investing and servicing segment, which contributed DE of $31 million to the quarter. Our conduit, Starwood Mortgage Capital, completed one securitization totaling $93 million in the quarter, bringing our total volume for the year to $1.2 billion across nine securitizations. In our special servicer, we obtained four new special servicing assignments totaling $4 billion during the quarter and 27 assignments totaling $24 billion during the year, bringing our named servicing portfolio to $109 billion, the highest level since 2017. our active servicing portfolio declined slightly to $5.4 billion, as $700 million of resolutions were offset by transfers into servicing of $300 million. And on this segment's property portfolio, this quarter we sold one asset for proceeds of $37 million, resulting in a net gap gain of $25 million and a net DE gain of $23 million, once again demonstrating the embedded value of this portfolio which has been a source of consistent and recurring gains across cycles. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $18 million to the quarter. We acquired 76 million of loans in the quarter, bringing our total volume for the year to $726 million. Funding totaled $68 million, with repayments and sales totaling $75 million. keeping the balance of the portfolio consistent with last quarter at $2.4 billion, which was 97% floating rate. I will conclude this morning with a few comments about our capital markets activity and capitalization. We continue to focus on non-recourse and non-mark-to-market financing, with 88% of our outstanding financing not containing spread marks, which are solely based on market events. During the quarter, we issued a five-year $600 million sustainability term loan B at SOFR plus $325. This is in addition to our ATM capital raises early in the quarter, where we issued 750,000 shares of common stock for gross proceeds of $16 million at an average share price of $21.17, bringing our full-year ATM issuance to 2.2 million shares for $49 million at an average share price of $22.72. We continue to have ample credit capacity across our businesses, ending the year with $8 billion of availability under our existing financing lines, unencumbered assets of $3.9 billion, and an adjusted debt-to-undepreciated equity ratio of 2.5 times. With that, I will turn the call over to Jeff.