Starwood Property Trust Inc.

Greetings and welcome to the Starwood Property Trust second 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'd like to hand the conference call over to Zach Pannenbaum, head of investor relations. 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 June 30th, 2024, 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 in 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 will now 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 48 cents per share. Gap net income was $78 million, or 24 cents per share. Across businesses, we committed to 925 million of new investments this quarter. As a testament to the diversity of our platform, 62% of our investing was in businesses other than commercial lending, which now makes up just 57% of our assets. I will begin this morning with commercial and residential lending, which contributed DE of 189 million to the quarter, or 58 cents per share. In commercial lending, we originated 353 million of loans, of which we funded 284 million, and an additional $113 million on pre-existing loan commitments. Repayments for the quarter totaled $606 million, nearly half of which were office. We had another $624 million of repayments in July for a year-to-date total of $2.1 billion. On the subject of credit, our $14.7 billion loan book ended the quarter with a weighted average risk rating of 3.0, up from 2.9 last quarter. The vast majority of our borrowers continue to support their assets, investing nearly $2 billion of fresh equity since the beginning of last year. In addition, 97% of our performing loans have some form of rate protection in place, either via rate caps, which have an average base rate of 3.2%, interest reserves, guarantees, or a fixed rate of interest. Jeff will cover our risk rating changes in greater detail. including two loans placed on non-accrual in the quarter. One was a $46 million multifamily loan in Phoenix that we downgraded from a 4 to a 5, and the other was a $57 million multifamily loan in Fort Worth, which was downgraded from a 3 to a 4. As we signaled last quarter, we foreclosed on two previously 5-rated loans. The first was a $124 million senior mortgage loan on a vacant office building in Washington, D.C. that we are converting to multifamily. Although the appraisal resulted in a specific CECL reserve of $9.8 million, we expect to recover in excess of our basis once the conversion is complete. Because we have begun the redevelopment process for this asset, we transferred it to our property segment for financial reporting purposes. The second was a $53 million first mortgage and mezzanine loan on a multifamily property in Nashville. we obtained an appraisal in connection with the foreclosure, which valued the asset at our basis. As a result, the property was recognized at the carryover basis of our loan with no resulting impairment. On the topic of CECL, our reserve increased by $33 million to a balance of $380 million, of which 70% relates to office. Together with our previously taken REO impairments of $183 million, these reserves represent 3.6% of our lending and REO portfolios and translate to $1.78 per share of book value. Next, I will discuss residential lending, where our on-balance sheet loan portfolio ended the quarter at $2.5 billion. Pre-payment speeds increased this quarter and spreads tightened, leading to $62 million of par repayments and a $34 million net positive mark-to-market for gap purposes. This mark includes a $49 million positive mark on our loans offset by a $15 million negative mark on our hedges, which provided $25 million of cash during the quarter. Our retained RMBS portfolio ended the quarter at $427 million, with a slight decrease from last quarter driven by cash repayments. Next, I will discuss our property segment, which contributed $14 million of DE, or four cents per share, to the quarter, which primarily came from our Florida Affordable Housing Fund, where we began rolling out the HUD maximum allowed rent levels discussed last quarter, excluding the 3.8% holdback we expect to implement next year. The majority of these rent increases were implemented in June, so you will see just a partial impact to earnings this quarter. This portfolio's 3.7% blended fixed and floating rate debt with three years of average remaining duration continues to be an asset. Turning to investing and servicing. This segment contributed DE of $37 million or 11 cents per share to the quarter. In our conduit, Starwood Mortgage Capital, we completed or priced four securitizations totaling $363 million at profit margins above historic levels due to spread tightening in the quarter. Consistent with past practice, the two transactions that priced in June but settled in July are treated as realized for DE purposes. In our special servicer, L&R, our active servicing portfolio increased just over 30% to $9.4 billion, its highest level since COVID. The increase was primarily due to $2.5 billion of transfers into servicing, which will contribute to earnings in the future. Our named servicing portfolio also increased in the quarter to 98 billion, driven by new assignments of 5.1 billion. And on this segment's property portfolio, we foreclosed on a $10.1 million hospitality asset that we acquired as a non-performing loan out of a CMBS trust. Consistent with our original investment thesis and a recently obtained appraisal, we expect to sell this asset in the interest of our basis in the near future. Concluding my business segment discussion is infrastructure lending, which contributed DE of $24 million, or 7 cents per share, to the quarter. We committed to 237 million of new loans, of which we funded 226 million and an additional 34 million of pre-existing loan commitments. Repayments and sales totaled 313 million, bringing the portfolio to a balance of 2.4 billion. During the quarter, we completed our third infrastructure CLO for $400 million with a weighted average coupon of SOFR plus 218 and an 82.5% advance rate, which Jeff will discuss in more detail. And finally, this morning, I will address our liquidity and capitalization. This quarter, we successfully repriced our 2027 $591 million term loan B facility, reducing the spread by 50 basis points to SOFR plus 275. We continue to have significant credit capacity across our business line with $9.9 billion of availability under our existing financing lines and unencumbered assets of $4.5 billion. Our adjusted debt-to-undepreciated equity ratio ended the quarter at 2.29 times, a decrease from 2.33 times last quarter, its lowest level in over two years. Our current liquidity position is $1.2 billion. This does not include liquidity that could be generated through sales of assets in our property segment, leveraging unencumbered assets, or debt capacity that we have via the unsecured internal V market. I also wanted to mention that this quarter our credit ratings were once again affirmed by all three rating agencies. Despite challenging conditions in the CRE space, they collectively recognized our diversity, leverage profile, liquidity position, stable earnings, and credit track record as key elements supporting our rating. And finally, I would like to share that we were just awarded the 2024 NARIC Gold Investor Care Award, which recognizes communications and reporting excellence in the mortgage rate category. This is our eighth time receiving the award in the last 10 years, exemplifying our long-term commitment to both our stakeholders and transparent financial reporting. We are honored to once again be recognized by NARIC for this award. With that, I'll turn the call over to Jeff.