Starwood Property Trust Inc.

Greetings. Welcome to Starwood Property Trust's third quarter 2023 earnings call. At this time, all participants will be in 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 from your telephone keypad. Please note, this conference is being recorded. At this time, I'll hand the conference over to Zach Tannenbaum, Director of Investor Relations. Zach, you may now begin.

Thank you, operator. Good morning and welcome to the Starwood Property Trust earnings call. This morning, the company released its financial results for the quarter ended September 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 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. 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 DeModica, the company's president, and Reena Paneri, the company's chief financial officer. With that, I'm 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 $158 million, or 49 cents per share. Gap net income was $47 million, or 15 cents per share. Gap book value per share ended the quarter at $20.18 per share. with undepreciated book value at $21.15. These book value metrics include $404 million, or $1.29 per share, of reserves related to our CRE and infrastructure lending businesses, including 15.8 billion of commercial loans, 2.3 billion of infrastructure loans, and 535 million of combined REO. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $207 million to the quarter, or 64 cents per share. In commercial lending, we had $762 million of repayments during the quarter, which outpaced fundings of $263 million. Subsequent to quarter end, we collected another $331 million in repayments. This includes $52 million from a non-accrual loan on a retail and entertainment asset in New Jersey, which represents 90% of the retail exposure in our loan portfolio. Because the loan is on cost recovery, any cash received is used to reduce basis. Our portfolio of predominantly senior secured first mortgage loans ended the quarter at 15.8 billion with a weighted average risk rating of 2.9. Of the 600 million balance decline from prior quarter, 160 million was due to foreign currency fluctuations. This was offset by the FX impact of our foreign-denominated debt, as well as our FX hedges, which together had unrealized gains totaling $153 million. As a reminder, we hedge 100% of our expected cash flow exposure on non-USD loans, including both projected principal and interest. Turning to CECL, we have previously discussed the third-party software we use to model our CECL reserves. That model, in turn, utilizes macroeconomic advisors for purposes of determining the economic outlook. In running our third-party model this quarter, we selected a more pessimistic outlook for our office loans, which increased our general reserve by $51 million, bringing our total reserve to $280 million, of which $177 million relates to U.S. office. When looking at our loan reserves, it is important to look beyond just our CECL reserve. Some of our loans have been moved to REO, while some loans that are still on balance sheet have reported charge-offs. Neither of these appear in our GAAP CECL Reserve, although both have already been reflected as a reduction to book value. When we include these components, our commercial lending reserves are 2.24% of our lending portfolio, which is at the median of our peers despite our low office exposure. During the quarter, we placed one new loan on non-accrual, a $61 million mortgage and mezzanine loan on a multifamily property in Portland, Oregon, which Jeff will discuss. As of quarter end, our non-accrual loans and REO represented less than 4% of our total assets. Next, I will discuss our residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.5 billion, including $873 million of agency loans. We continue to be patient while the loans in this held-in maturity portfolio repay. Despite our gap mark, these loans continue to prepay at par. We received 66 million of par repayments during the quarter and 180 million year-to-date. Lower prepay speeds continue to benefit our retained RMBS portfolio, which ended the quarter at 451 million. As a reminder, we fully hedged the interest rate exposure in this portfolio, with our hedges having a positive mark of $196 million at quarter end, after $25 million of cash receipts in the quarter. Next, I will discuss our property segment, which contributed $23 million of DE, or 7 cents per share, to the quarter. Of this amount, $14 million came from our Florida Affordable Housing Fund, where we rolled out the HUD maximum allowed rent levels discussed last quarter. A change in HUD's max rent calculation this year resulted in 3.8% of rent growth being deferred to 2024. This portfolio's 3.7% blended fixed and floating rate debt with just under four years of average remaining duration continues to be an asset and gives us ample time to wait for an opportune time to extend the debt in the coming years. Turning to investing and servicing. This segment contributed DE of 16 million, or 5 cents per share, to the quarter. In our special servicer, our active servicing portfolio increased from 5.7 billion to 6.1 billion. We continue to see loans transfer into servicing, with 700 million of new loan transfers this quarter, nearly two-thirds of which were office. Our named servicing portfolio declined to 101 billion in the quarter, with new assignments of 2.4 billion offset by $3 billion in maturity. In our conduit, Starwood Mortgage Capital, we completed two securitizations totaling 63 million at profits consistent with historic levels. We expect to see higher volumes from this business in the fourth quarter and into 2024 as loan maturities pick up. And on this segment's property portfolio, we sold two assets in the quarter for a total of $35 million in proceeds resulting in a net GAAP gain of $11 million and a net DE gain of $6 million. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $9 million or 3 cents per share to the quarter. The majority of our investing this quarter was in this segment, where we entered into $444 million of new loan commitments. Fundings on these new loans of $351 million outpaced repayments of $265 million, bringing the portfolio up slightly from last quarter to $2.3 billion. On the CECL front, we charged off $11 million of our specific reserve related to a legacy GE investment that we discussed last quarter, which resulted in a corresponding DE loss. I will conclude this morning with a few comments about our liquidity and capitalization. Our liquidity position remains strong at $1.1 billion after the $300 million repayment of our unsecured notes at maturity on November 1st. This does not include liquidity that could be generated through sales of our assets in our property segment or debt capacity that we have via our unencumbered assets and term loan fee. As a reminder, 83% of our total outstanding on and off balance sheet debt is non-mark-to-market, as is 91% of our commercial lending debt. With the repayment of our unsecured notes last week, we now have no corporate debt maturities until December 31st, 2024. Our leverage remains low with an adjusted debt to undepreciated equity ratio of just 2.42 times at quarter end or 2.37 times after the repayment of our unsecured notes. With that, I'll turn the call over to Jeff.