Starwood Property Trust Inc.

Greetings and welcome to the Starwood Property Trust first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Zach Pannenbaum, Director of Investor Relations. Thank you, Zach. You may begin.

Thank you, Operator. Good morning and welcome to Starwood Property Trust's earnings call. This morning, the company released its financial results for the quarter ended March 31st, 2023, filed its Form 10 key 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-GAAP financial measures will be discussed on this conference call. A 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, and Rena Paneri, the company's chief financial officer. With that, I'm now going to turn the call over to Rena.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $157 million, or 49 cents per share. GAAP net income was 52 million, or 16 cents per share. One of the primary differences between GAAP and DE is a $43 million increase in our CECL reserve, which I will discuss later. GAAP book value per share ended the quarter at $20.44, with undepreciated book value at $21.37. These book value metrics include an accumulated CECL reserve balance of $153 million, or 49 cents. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $192 million to the quarter, or 60 cents per share. In commercial lending, we funded $260 million, including $222 million of preexisting loan commitments and a new $59 million loan, of which $38 million was funded. These were offset by $257 million of repayments during the quarter, more than half of which were office loans. Our portfolio ended the quarter at $16.9 billion with a weighted average risk rating of 2.8, of which 93% represents senior secured first mortgage loans and 99% of which is floating rates. On the CECL front, we increased our general reserve by $31 million in the quarter due to worsening macroeconomic conditions in our model, particularly in the U.S. office sector. bringing our general CECL reserve for commercial lending to $125 million. As a reminder, CECL requires you to estimate a life of loan loss with the forecasted macroeconomic environment being a critical component of the resulting reserve estimate. It is not a current market conditions only number like it used to be under the pre-CECL incurred loss methodology when we reserved a certain percentage of our four and five risk-graded loans. we use a third-party software to model these losses which in turn utilizes macroeconomic advisors for purposes of determining the economic outlook if we have specific information related to a particular loan which would suggest a loss we would remove the loan out of the modeled general reserve category and into an asset specific reserve we currently have no specific reserves other than one legacy $5 million reserve on the entire balance of a retail asset in Chicago. Regarding our risk ratings, we downgraded five loans this quarter into the four and five categories, of which three were U.S. office, and upgraded one previously four-rated loan. Jeff will speak more about these loans shortly. We also placed two of our five-rated loans on non-accrual status, a $121 million senior secured loan on an office complex in Washington, D.C., and a $42 million senior secured loan on a two-story retail in downtown Chicago, both of which we expect to foreclose upon in the near term. We continue to actively work towards a path of full repayment of our non-accrual loans and REO. Once we are able to resolve them and reinvest the funds, the related equity would significantly contribute to our earnings power. Next, I will discuss our residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.7 billion, including $1.7 billion of non-QM and $994 million of agency loans. We fully hedged the fixed rate interest rate exposure in this portfolio, with our hedges having a positive mark of $107 million at quarter end, after $15 million of cash receipts in the quarter. Because of our hedge strategy, the spread mark to market from our lenders during the quarter actually resulted in an $18 million net cash inflow. Lower projected prepayment speeds benefited our retained RMBF portfolio, which increased in fair value by $15 million, ending the quarter at $428 million. Next, I will discuss our property segment, which contributed $21 million of DE, or six cents per share, to the quarter. Of this amount, $11 million came from our Florida Affordable Housing Fund, with $5 million from each of our master lease and medical office portfolios. For the Woodstar Fund, our GAAP valuations were relatively consistent with last quarter. We are still awaiting HUD, which governs the max rents for the over 15,000 units in this portfolio, to release the rent increases for 2023. We expect their announcement later this month, with the increased rents taking effect in July. Turning to investing and servicing. This segment contributed DE of $13 million or $0.04 per share to the quarter. In our conduit Starwood Mortgage Capital, we originated $74 million of loans for securitization next quarter. We typically see lower securitization volume in Q1 and expect to see volumes increase over the remainder of the year. In our Special Servicer, we obtained two new servicing assignments totaling $1.5 billion with our named servicing portfolio ending the quarter at $107 billion, amongst the highest levels we have seen since 2016. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $20 million or $0.06 per share to the quarter. We funded $160 million of new loan commitments and $15 million of pre-existing ones, which was offset by repayments totaling $204 million. The balance of the portfolio remained consistent with last quarter at 2.4 billion, which was 100% floating rate. During the quarter, we increased our CECL reserve by $12 million, principally for two small legacy investments from our GE acquisition in 2018. Their combined DE basis was 29 million, and both assets were placed on non-accrual. I will conclude this morning with a few comments about our liquidity and capitalization. As a reminder, 87% of our total outstanding on and off balance sheet debt is non-mark to market, as is 92% of our commercial lending debt, with the majority having no capital markets margin call provisions at all. After repaying our April $250 million convertible notes and our first quarter dividend in cash, we had $620 million of liquidity as of last week. This includes $449 million of approved undrawn borrowings under our repo facilities, all of which are with global banks, represent immediately available funds, and are not subject to further credit approval with the lender. In addition to $1.5 billion of harvestable DE gains in our property portfolio, we have $4.2 billion of unencumbered assets that together with our Term Loan B capacity can be fully levered to generate additional liquidity. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.5 times consistent with last quarter. With that, I'll turn the call over to Jeff.