Starwood Property Trust Inc.

Ladies and gentlemen, good morning and welcome to the Starwood Property Trust second quarter 2023 earnings conference 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Tannenbaum, Head of Investor Relations. Please go ahead.

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 June 30th, 2023, filed its Form 10-Q 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 in 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, and Rena Paneri, the company's Chief Financial Officer. With that, I am 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 $158 million, or 49 cents per share. Gap net income was $169 million, or 54 cents per share. Gap book value per share increased 7 cents to $20.51, with undepreciated book value increasing 9 cents to $21.46. These book value metrics include an accumulated CECL reserve balance of $260 million, or $0.83 per share. Since our last earnings call, we significantly enhanced our liquidity position with the July issuance of $381 million in convertible notes and commercial and infrastructure loan repayments of $1.3 billion during the quarter and $472 million subsequent to quarter end. Net of $787 million in fundings across businesses, our current liquidity increased to $1.2 billion. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $182 million to the quarter, or 56 cents per share. In commercial lending, our pace of repayments picked up, with $1 billion during the quarter and another $386 million in July alone, well in excess of last quarter's $257 million. More than half of these repayments were on mixed-use and hotel loans. These were offset by fundings of $272 million on a refinanced loan and another $235 million of pre-existing loan commitments. Our portfolio, 93% of which represents senior secured first mortgage loans, ended the quarter at $16.4 billion with a weighted average risk rating of 2.9. On the CECL front, we increased our general reserve by $104 million due to our third-party model indicating a worsened macroeconomic outlook. We also applied more negative macroeconomic assumptions to our office loans in addition to loans with four or five risk rating. This brought our general CECL reserve to $228 million. Of this amount, $136 million, or 60%, relates to office. As a reminder, CECL reduces our book value and gap earnings, but does not impact DE. In addition to our general reserve, we recorded a specific reserve of $15 million related to a five-rated mixed-use loan in Phoenix, which was originated in 2015. The original loan was $115 million and was recently paid down to $40 million. The reserve was driven by the current quarter retrade of previously executed purchase and sale agreements relating to the remaining underlying collateral, of which half has been sold and half remains under contract. For GAAP purposes, we charged off the portion of the loan above the current negotiated price of the remaining collateral, which resulted in a corresponding DE loss. Our only specific reserve at quarter end continues to be $5 million related to the entire balance of a retail asset in Chicago. As discussed in our remarks last quarter, in May, we foreclosed on a five-rated $42 million first mortgage loan related to a two-story retail in downtown Chicago. We obtained an appraisal in connection with the foreclosure, which valued the asset at $42 million. As a result, the property was recognized at the carryover basis of our loan with no resulting impairment. As we have successfully done in the past, our intent is to lease up the space, stabilize the asset, and ultimately sell it. We expect to fully recover our basis. For our remaining REO assets, we continue to actively work toward the path of full repayment. During the quarter, we recorded a $24 million gap impairment against a building in LA that we foreclosed on six months ago. We began evaluating alternate paths for this asset during the quarter, some of which were at our basis and others which were not. Given the range of potential outcomes, we determined that a reserve was appropriate. The reserve was determined by reference to an appraisal we obtained in connection with the foreclosure. Next, I will discuss a residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.6 billion, including $1.6 billion of non-QM and $994 million of agency-eligible loans. We fully hedged the fixed-rate interest rate exposure in this portfolio. with our hedges having a positive mark of $170 million at quarter end after $21 million of cash receipts in the quarter. Lower projected prepayment speeds continue to benefit our retained RMBS portfolio, which increased in fair value by $26 million, ending the quarter at $443 million. Next, I will discuss our property segment, which contributed $21 million of DE, or $0.07 per share, to the quarter. Of this amount, $12 million came from our Florida Affordable Housing Fund, which continues to perform exceedingly well. For gap purposes, we recorded an unrealized fair value increase in the fund this quarter of $209 million, or $166 million, net of non-controlling interest. The increase resulted from the impact of HUD's recently released maximum rent levels, which were 7.5% higher than last year. our valuation only factored in these rent increases. Because the new rents will be rolled out beginning in July, there is no positive impact to earnings this quarter. One unique aspect of this year's maximum rent levels is that certain properties were in geographies where the rents were capped by HUD. This cap resulted in 3.5% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula next year and will be included in our valuation at that time. Turning to investing and servicing, this segment contributed DE of $22 million or $0.07 per share to the quarter. In our special servicer, our active servicing portfolio increased from $5.2 billion to $5.7 billion. This is the result of $738 million of loans transferring into servicing during the quarter, nearly 70% of which were office. Our named servicing portfolio declined to 102 billion in the quarter, driven by 4 billion of maturities. As maturities continue through the rest of this year and into next year, we expect to see a continuation of this trend, with active servicing increasing and named servicing decreasing. In our conduit, Starwood Mortgage Capital, despite lower market volumes through this rate cycle, our securitization profits are similar to historic levels. During the quarter, we completed three securitizations and priced an additional securitization totaling $218 million. And on this segment's property portfolio, we sold two assets in the quarter, one classified as property on our balance sheet and the other as a 50% equity method investment. Our share of the proceeds totaled $32 million resulting in a net gap gain of $11 million and a net DE gain of $5 million. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $20 million or $0.06 per share to the quarter. Repayments of $254 million outpaced funding of $78 million on new loans and $11 million on pre-existing loan commitments, bringing the portfolio down slightly from last quarter to $2.3 billion. On the CECL front, we took an incremental $4 million specific reserve on a small legacy GE investment that we discussed last quarter. I will conclude this morning with a few comments about liquidity and capitalization. During the quarter, we repaid the entirety of our April $250 million converts at maturity with cash on hand. Our next corporate debt maturity is in November, which we likewise intend to settle with cash on hand, including the net proceeds from our four-year $381,006.75% convert issuance in July. After that, we have no corporate debt maturities until December 31, 2024. Earlier in my remarks, I mentioned our current liquidity of $1.2 billion. This does not include $1.5 billion of liquidity that could be generated through sales of assets in our property segment. It also does not include over $2 billion of debt capacity that we have via our unencumbered assets and term loan B. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.4 times down from 2.5 times last quarter. And finally, I wanted to mention that this quarter our credit ratings were affirmed by all three rating agencies. Despite challenging conditions in the CRE space, they collectively recognized our diversity, low leverage, liquidity position, stable earnings profile, and credit track record as key elements supporting our rating. With that, I'll turn the call over to Jeff.