Starwood Property Trust Inc.

Greetings. Welcome to Starwood Property Trust's first quarter 2024 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 ended March 31st, 2024, 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 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. We reported a strong quarter with distributable earnings, or DE, of $191.6 million, or $0.59 per share. Our results were highlighted by contributions across all of our businesses with outsized performance in property from the sale of our master lease portfolio and in commercial lending from prepayment fees, which was partially offset by underperformance in our CMBS book. In all, DE includes an $0.08 net gain from these items. They also contributed to higher gap net income, which was $154 million, or $0.48 per share. Undepreciated book value ended the quarter at $20.69, with gap book value at $19.85. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $205 million to the quarter, or $0.63 per share. In commercial lending, repayments of $909 million outpaced fundings of $128 million on preexisting loan commitments. Our portfolio of predominantly senior secured first mortgage loans ended the quarter with a funded balance of $15.1 billion and a weighted average risk rating of 2.9. Jeff will cover our risk rating changes in greater detail. Turning to CECL, we had no new specific reserves in the quarter, and no new loan or REO impairment. Our general CECL reserve increased by $35 million to a balance of $342 million, of which 70% relates to office. This increase was driven by our selecting the most pessimistic economic outlook of seven scenarios available to us in our third-party model for our office loan. Together with our previously taken REO impairments of $172 million, These reserves represent 3.4% of our lending and REO portfolios and translate to $1.64 per share of book value. Next, I will discuss our residential lending business. Our on-balance sheet loan portfolio ended the quarter at $2.5 billion, including $880 million of agency loans. We had $45 million of par repayments during the quarter and recorded a $2 million net negative mark-to-market adjustment for gap purposes. This mark includes a $38 million negative mark on our loans, offset by a $36 million positive mark on our hedges, which provided $25 million of cash during the quarter. In our $435 million retained RMBS portfolio, a change in market call price assumptions contributed to a $7 million negative mark in the quarter. Next, I will discuss our property segment, which contributed $59 million of DE, or 18 cents per share, to the quarter. During the quarter, we sold our master lease portfolio for $387 million. The transaction resulted in net proceeds of $188 million, a net DE gain of $37 million, and a net gap gain of $91 million. Because the sale was completed in late February, our Q1 results include two months of income or one cent of DE from these assets. Our Florida Affordable Housing Fund generated $14 million of DE in the quarter. Subsequent to quarter end, HUD released the new maximum rent levels, which were set 7.9% higher than last year. Certain properties were in geographies where the rent increases were capped by HUD, which resulted in 3.8% of incremental rent growth being deferred to next year. This would be in addition to any increase determined by the HUD formula in 2025. And finally, in our medical office portfolio, subsequent to quarter end, we refinanced the $600 million of outstanding debt on these assets, which was scheduled to mature in November. We entered into new CMBS debt of $450 million and a mezzanine loan of $40 million, both with a five-year term at a blended coupon of SOFR plus 252 basis points. Turning to investing and servicing, this segment produced break-even results in the quarter with the positive contributions from our conduit and special servicing businesses offset by a negative contribution in CMBS. In our conduit Starwood Mortgage Capital, we completed four securitizations totaling $212 million at profits consistent with historic levels. In our special servicer, L&R, our active servicing portfolio increased from $6.6 billion to $7.2 billion, primarily due to $1.1 billion of transfers in, more than half of which were office or contained in office components. Our named servicing portfolio ended the quarter at $96.1 billion, driven by $3.7 billion in maturities, offset by new assignments of $1.1 billion. Finally, in our CMBS portfolio, As is typical for the first quarter, we receive annual financial statement reporting on the assets underlying our bondholding. One securitization in particular had three nonperforming assets out of the remaining 73 in the pool. Due to lower than anticipated NOI and a lower than anticipated appraisal for these assets, we recorded a $17 million DE impairment on the bond. 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 committed to $120 million of new loans, of which we funded $96 million and an additional $42 million on pre-existing loan commitments. Repayments totaled $210 million, bringing the portfolio to a balance of $2.5 billion at quarter end. Subsequent to quarter end, we completed our third infrastructure CLO for $400 million at a weighted average coupon of SOFR plus 218, which Jeff will discuss. And finally this morning, I will address our liquidity and capitalization. We continue to have ample credit capacity across our business lines, ending the quarter with $9.7 billion of availability under our existing financing lines and unencumbered assets of $4.6 billion. Our adjusted debt-to-undepreciated equity ratio ended the quarter at 2.3 times, a decrease from 2.5 times last quarter. In addition to low leverage, our current liquidity position has increased to a record $1.5 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 fee markets. With that, I'll turn the call over to Jeff.