Starwood Property Trust Inc.

Greetings. Welcome to Starwood Property Trust's fourth quarter and full year 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. Please note this conference is being recorded. At this time, I'll hand the conference over to Zach Tannenbaum, Head of Investor Relations. Zach, you may now 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 and year ended December 31st, 2023, 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 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 DeModica, 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. Starting with our results. We reported distributable earnings, or DE, of $189 million, or 58 cents per share for the quarter, and $663 million, or $2.05 for the year. The strong quarter was highlighted by contributions across our businesses, although it likely does not constitute a run rate. We had outsized performance from our conduit this quarter after a slow start to the year, and also had $0.04 of earnings related to commercial lending repayments including prepaid penalties and foreign currency hedge unwinds. GAAP net income was $71 million, or $0.22 per share for the quarter, and $339 million, or $1.07 per share for the year. GAAP book value per share ended the year at $19.95, with underappreciated book value at $20.93. These metrics were impacted by an increase in our commercial lending reserves, including increases in our general CECL reserve, charge-offs, and impairments related to REO properties, totaling $129 million and $351 million for the quarter and year. I will begin my segment discussion with commercial and residential lending, which contributed DE of $205 million to the quarter, or 63 cents per share. In commercial lending, we originated $707 million of loans, which brings our full-year originations to $1.1 billion. repayments of $815 million in the quarter and $2.9 billion in a year, outpaced fundings of $664 million and $1.7 billion. Our portfolio of predominantly senior secured first mortgage loans ended the year at $15.9 billion with a weighted average risk rating of 2.9. This is consistent with last quarter, despite downgrades of four loans totaling $502 million to a four risk rating, of which $450 million were U.S. office. Offsetting this were upgrades from a four to a three risk rating, totaling $197 million, including a $159 million formerly vacant office loan in Brooklyn that was converted to multifamily and brought current by the sponsor. In the quarter, we had one new foreclosure on a $61 million multifamily loan and one new non-accrual related to a $124 million office loan. Both loans were five-rated and will be covered in Jeff's remark. Last quarter, I mentioned that our CECL balance doesn't tell the whole story of our asset reserves because some of our loans have been moved to REO and some loans that are still on our balance sheet have reported charge-offs. Although these have already been taken out of GAAP book value, neither of these appear in our CECL reserve. However, they are really no different than a specific reserve, just on another financial statement line. In the quarter, our general CECL reserve increased by $28 million to a balance of $307 million, of which 74% relates to U.S. office, while REO impairments increased by $101 million to a balance of $172 million. Together, these reserves represent 3% of our lending portfolio. To clarify the REO component of this, I want to briefly discuss the GAAP accounting model. Once an asset is transferred into REO, it follows property accounting. This means it is held at amortized cost unless events or changes in circumstances indicate that its carrying amount may not be recoverable. We encountered these indicators on two previously foreclosed assets, which were either under written agreement or active discussion to be sold at our basis to unrelated third parties. Both transactions failed to materialize. The first asset is our vacant building in downtown LA that has a DE basis of $245 million. Because our current quarter negotiations to sell this asset were ultimately unsuccessful, we commissioned an updated appraisal which resulted in an incremental $71 million gap impairment. The second asset is our office building in Houston that has a DE basis of $126 million. After an LOI at our basis was terminated last quarter, we engaged an updated appraisal. Shortly thereafter, we entered into an LOI with another unrelated third party to sell the property at a price lower than our basis. That transaction was also unsuccessful. Although the appraisal indicated full recovery of our basis, we conservatively utilized the value implied by the most recent LOI to determine our gap impairment of $30 million. You will find these impairments presented in the other loss comma net line in our gap P&L and reflected as a reduction of the properties comma net line in our balance sheet. Next, I will discuss our residential lending business. Our on balance sheet loan portfolio ended the year at 2.6 billion, including 916 million of agency loans. The loans in this portfolio continue to repay at par with 60 million of repayments during the quarter and $239 million year-to-date. Given tighter spreads and a decline in longer rates, the mark-to-market on our portfolio improved by $152 million this quarter, partially offset by a negative hedge mark of $99 million. And our $450 million retained RMBF portfolio, lower prepay speeds continued to benefit this book, with tighter spreads contributing to a positive $6 million mark-to-market. Next, I will discuss our property segment, which contributed 22 million of DE, or seven cents per share, to the quarter. Of this amount, 13 million came from a Florida affordable housing fund. For GAAP purposes, we recorded an unrealized fair value increase related to this portfolio of 18 million in the quarter, net of non-controlling interest. The value was determined by an independent appraisal, which we are required to obtain annually. Turning to investing and servicing, This segment contributed DE of $33 million or 10 cents per share to the quarter. Our conduit, Starwood Mortgage Capital, helped drive our outperformance in the quarter, completing five securitizations totaling $467 million, which represented 61% of their securitization volume for the year. We expect to continue seeing higher volumes from this business in 2024 as loan maturities and originations pick up. The year is off to a good start with two securitizations totaling $118 million of loans completed in January. In our special servicer, fees increased to $14 million in the quarter due to $500 million of loan resolutions. These resolutions were offset by $1 billion of new transfers into active servicing, nearly two-thirds of which were office or contained an office component. Our named servicing portfolio ended the year at $98.7 billion, driven by $1.8 billion of new servicing assignments in the quarter and $6.7 billion during the year. And on this segment's property portfolio, we sold one asset in the quarter for $32 million. Since inception of this portfolio, we have sold 30 assets totaling $412 million for DE gains of $144 million. demonstrating our ability to successfully acquire and reposition transitional real estate. Concluding my business segment discussion is our infrastructure lending segment, which contributed DE of $23 million or seven cents per share to the quarter. We continue to see strong investing this quarter with $425 million of new loan commitments, bringing our total for the year to 1.1 billion, its highest level since we acquired this business in 2018. Repayments totaled $182 million for the quarter and $905 million for the year, with the portfolio ending the year at a balance of $2.6 billion. And finally this morning, I will address our liquidity and capitalization. Our leverage continues to remain low, with an adjusted debt to undepreciated equity ratio of just 2.47 times. This reflects the fourth quarter repayment of our $300 million unsecured notes which leaves us with no corporate debt maturities until December 31st, 2024, when our 400 million unsecured notes mature. In addition to low leverage, our liquidity position remains strong today at $1.2 billion. This does not include liquidity that could be generated through sales of assets in our property segment or debt capacity that we have via the unsecured and term loan B market. With that, I'll turn the call over to Jeff.