Starwood Property Trust Inc.

Ladies and gentlemen, we apologize for the technical difficulties. Welcome to the Starwood Property Trust second quarter 2026 earnings conference call. At this time, all participants are in a 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 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to send the floor over to Starwood Property Trust to begin the event.

Thank you, operator. Good morning and welcome to Starwood Property Trust Earnings Call. This morning we filed our 10Q and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward-looking statements, which do not guarantee future events or performance. Please refer to our 10Q and press release for cautionary factors related to these statements. Additionally, certain non-GAAP financial measures will be discussed on this call. For reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, please refer to our press release filed this morning. Joining me on the call today are Barry Sternlicht, the company's chairman and chief executive officer, Jeff DiModica, the company's president, and Rina Paniry, the company's chief financial officer. With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. Our distributable earnings were $152 million, or $0.40 per share, in the second quarter. Our results continue to reflect the carry on our non-accrual and REO assets and elevated cash balances, the two items which are creating the gap between our reported earnings and the true underlying earnings power of this company. I will start my remarks by addressing both. Regarding our non-accrual and REO, we had no new non-accrual or new five-rated loans in the quarter or the year. We also had no new REO in the quarter. As our new non-accrual and REO loans have slowed, we have gained momentum in resolutions. To clarify, our definition of resolution means disposition of the asset in the case of an REO or returning to accrual in the case of a non-accrual loan. It is not the transfer of a loan to REO. We have a total of $706 million of reserves against our non-accrual and REO assets. Thank you for joining us. We are currently under contract or in discussions to sell three REO assets and multiple units in our New York City residential project. In aggregate, these sales are expected to generate cash proceeds of $148 million and resolve $195 million of assets on a DE basis and $160 million on a GAAP basis in the third quarter, comprising 10% of our current non-accrual and REO balance. One of the three assets was retraded recently due to rate increases, resulting in a $12 million divergence from our GAAP marks. Absent that, our GAAP reserves were in line with the anticipated sales price, demonstrating our ability to fully resolve these assets consistent with our estimates. The realized loss will flow through DE upon sale in Q3 and totals approximately $47 million for these assets. As a reminder, when assets are resolved at our carrying values, their reserves naturally progress to DE, but the reserve is already accounted for in our book value. Reinvesting these proceeds would add approximately $0.03 to annual DE as we continue on our path to earning our dividend in our core businesses. Our total non-accrual NREO portfolio stands at approximately $1.9 billion on a DE basis at quarter end, not including the $706 million of reserves that are already reflected in book value. Subject to market conditions, we are on track to revolve approximately $800 million or 40% of our current non-accrual and REO by year-end. Regarding elevated cash balances, we were especially active in the capital markets this quarter, issuing $1.1 billion of unsecured senior notes, and upsizing our term loan fee by $275 million. Offsetting this elevated cash was our accelerated investing pace as we deployed capital of $2.5 billion across our businesses and another $1.7 billion in July, bringing year-to-date investments to $6.7 billion. I will now take you through our individual segment results, beginning with commercial and residential lending, which contributed DE of $186 million to the quarter, or 49 cents per share. In commercial lending, we originated $1.4 billion, of which we funded $754 million, and another $250 million of pre-existing loan commitment, for a total of over $1 billion funded in the quarter. After factoring in repayments of $447 million, Our funded loan portfolio grew to a record $17.3 billion. We received another $554 million of repayments in July, approximately $170 million of which were office. I previously mentioned the absence of any new REO, non-accrual, or five-rated loans this quarter. Our four-rated loans increased $212 million to $2 billion, reflecting the downgrade of three multifamily loans that Jeff will speak to. Turning to residential lending, our on-balance sheet loan portfolio ended the quarter at $2.4 billion, up $164 million, driven primarily by our decision to exercise the call option on one of our securitizations, moving the majority of the financing to more attractively priced repo at SOFR plus $150. As a result, our retained R&DF portfolio declined to $313 million at quarter end. Turning to our property segment, we recognize $34 million of DE, or nine cents per share, across our legacy and net lease portfolios. I will start with Woodstar, our Florida affordable multifamily portfolio. On July 1st, we began rolling out the new authorized HUD rent increases of 8.4% that we mentioned to you on our last call. The related earnings impact will appear in our results starting next quarter. The discount to market rate rents across the portfolio is 38% on average, which should ensure continued high occupancy and allow us to push through most of these rent increases. Also in Woodstar, we have $416 million of Woodstar debt maturing over the next six months that we are currently working to refinance. Given the appreciation and NOI growth in this portfolio, we are anticipating an upside of approximately $140 million at attractive spreads. are 110 million share of which can be reinvested to increase future earnings. In net lease, where DE increased to 5 cents from 3 cents last quarter, we closed 179 million of purchases in the quarter at a blended cap rate of 7.39%, bringing our total post-acquisition purchases to 532 million at a blended 7.45% cap rate. The portfolio now stands at $2.7 billion, comprising 527 properties across 44 states, a weighted average lease term of 16.8 years, average annual rent escalations at 2.3%, and 100% occupancy with zero defaults. Included in our balance at June 30th are $91 million of built-to-suit projects still under construction, with $65 million of incremental costs to complete. All of these projects are subject to executed leases. Upon completion of construction, these leases will add $9.9 million of annual base rent to revenue. We continue to optimize this platform's capital structure, completing another ABS transaction after quarter end, our third securitization since acquiring the platform a year ago. The ABS financing totaled $321 million at a weighted average fixed rate of 5.47%. With our continued optimization of the capital structure, our first year of rent escalations in place, and our investing pace, we continue to build toward the earnings power embedded in this platform. Concluding my business segment discussion is our investing and servicing segment, which contributed VE of $42 million, or 11 cents per share, to the quarter. Special servicing fees were $20 million this quarter with the decline from last quarter due to timing of resolutions. Our conduit, Starwood Mortgage Capital, securitized $320 million of loans, more than double last quarter's volume, at profit margins that were in line with historic levels. I will conclude with a comment on this segment's REO equity portfolio, which now has just five assets remaining. We sold one asset during the quarter for a DE gain of $2 million. Turning to liquidity and capitalization. Our current liquidity stands at $1.2 billion. This does not include liquidity that could be generated from cash-out refinancing, sales of assets in our property segment, direct leveraging, or expected proceeds from REO sales, which, as I've mentioned, could be relatively material. Jeff will discuss the capital markets transactions we completed in the quarter. There is one item I would like to highlight regarding the early redemption of our $500 million January 2027 unsecured debt, which was subject to an interest rate hedge. In order to minimize interest rate risk, our policy is to hedge floating rate assets with floating rate liabilities and fixed rate assets with fixed rate liabilities. When we issued these notes in 2022 to a fixed coupon, we entered into a received fixed pay floating interest rate hedge to lock in SOFR plus 295 as a financing cost. In connection with the early redemption, we unwound the hedge. Due to higher interest rates today, this resulted in the loss on early extinguishment of debt of $6.3 million, which will be reflected in both GAAP and DE in the third quarter. The amount represents the present value of receiving the below-market fixed rate through maturity. It is the one-time cost of retiring an above-current market SOFR plus 295 obligation and replacing it with 5-7-8 paper, which if issued today would be 6.5% to 6.75%, saving us over $15 million over the next five years. We continue to operate at conservative leverage levels, ending the quarter at a debt-to-undepreciated equity ratio of 2.74 times. Our unencumbered asset pool, stands at $6.9 billion against $4.5 billion of unsecured debt, a coverage ratio of 1.5 times. And finally this morning, I wanted to conclude with a few remarks on the recognition we received this quarter by the rating agencies and NAIREIT. During the quarter, both Fitch and Moody affirmed our rating as BB Plus and BAQ respectively, collectively recognizing our diversity, leverage profile, liquidity position, We were also once again awarded the Mabry Gold Investor Care Award, an award given to one company in each industry which recognizes communications and reporting excellence. This is our 10th time receiving the award in the mortgage rate category in the last 12 years, exemplifying our long-term commitment to both our stakeholders and our investors. and Transparent Financial Reporting. We are honored to once again be recognized by NAIRI for this award. With that, I will now turn the call over to Jeff.