Greetings. Welcome to the Starwood Property Trust Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . And please note that this conference is being recorded. I would now like to turn the conference over to Zach Tanenbaum, Head of Investor Relations. Thank you. You may 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 December 31, 2021, filed its Form 10-K 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 on 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. Reconciliation 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 Sternlicht, the company's Chairman and Chief Executive Officer; Jeff DiModica, the company's President; Rina Paniry, the company's Chief Financial Officer; and Andrew Sossen, the company's Chief Operating Officer. With that, I am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. The fourth quarter capped off a record year for us with distributable earnings or DE of $335 million or $1.10 per share for the quarter and $794 million or $2.63 for the year. DE in both periods includes a $191 million or $0.62 per share gain related to the sale of an interest in our newly established WoodStar Affordable Housing Investment Fund, which I will walk you through later. Throughout 2021, we were active on both the left and right-hand sides of our balance sheet with a record $16.7 billion of new investments across businesses funded by multiple capital sources, including an equity issuance, corporate debt and CLOs. I will start my segment discussion this morning with Commercial and Residential Lending, which contributed DE of $126 million to the quarter. In commercial lending, we originated $4.4 billion across 33 loans in the quarter, bringing our full year volume to $10 billion across 72 loans, the highest origination quarter and year in our 13-year history. Of the full year amount, 42% was multifamily and 15% industrial, contributing to the transformation of our collateral mix, which is now 27% multifamily versus 16% a year ago. During the quarter, we funded $2.6 billion of new loans and $244 million of pre-existing loan commitments with most of our fundings back ended to the last 35 days of the quarter. We continue to see increasing lending opportunities across Europe and Australia, with international loans representing 33% of our fourth quarter originations and 28% of the full year. The $10 billion of loans we originated this year were 100% floating rate and 98% of our $14 billion year-end balance is likewise floating rate. We maintain LIBOR floors on nearly all of our domestic loans as rates were rising. Our…

Thanks, Rina. 2021 was an incredible year for Starwood Property Trust, and we deployed record amounts of capital. All of our businesses performed extremely well, and we were able to take advantage of investment opportunities globally across business lines. Our seven investing cylinders deployed a record $7.1 billion in Q4 and $16.7 billion for the year, the most among our peers. And we believe the current environment gives us unique opportunities to deploy accretive capital globally. Our undepreciated book value was up over 20% this quarter to $20.74, the highest level since our SWAY Spin in 2013. Our resulting price to book multiple is 1.12x, significantly below the 1.4x we ended 2019 at. The vast majority of our previous fair value marks were validated by the WoodStar transaction, lending credibility to our internal valuation process for marking these assets. On a fair value basis, at our marks on our property portfolio, our price to book multiple is just over one time. We have been patient with our capital raises and have raised equity at an average price to undepreciated book value multiple of 1.24 time since inception. We have done so in part to keep our leverage low in order to derisk our balance sheet. This lower leverage and lower risk should imply a lower dividend yield. We continue to believe our uniquely diversified company with only 2.3 times leverage in highly accretive businesses should and will again trade to a higher premium to book value in the future, thus a lower dividend yield. The business environment continues to be attractive for us, and we have a large opportunity set of investments to choose from, particularly in Europe and Australia, where we have continued to expand our footprint with 28% of 2021 investments being in Europe and Australia. We accretively…

Thanks, Jeff. Thanks, Rina. Thanks, Zach, and good morning, everyone. I'll start again by reiterating what Jeff said that it was an incredible an unbelievable year for the firm, $16.7 billion of investments across all our business lines. And then unlocking the -- what we told you about the book value of the WoodStar portfolio, moving our book value of undepreciated book almost to $21. And then quickly following on that, as Jeff mentioned, the equity assets, this WoodStar portfolio is the gift that keeps on giving. That portfolio of affordable housing is 50% located in Orlando to remind you and 30% in Tampa, and 10% in West Palm Beach. And what we're seeing in those markets and market rate apartments today are 20% increases in rents. And as Jeff mentioned, the AMI or the rent that is set in affordable housing is on a trailing basis and it's based on both average incomes as well as inflation. And obviously, 2019, what we've seen recently is not will get in 2019 and to give you an idea of the order of the magnitude of what that could look like, the portfolio makes roughly around $90 million, every $10 million increase would be a couple of $100 million increase in our book value, and we would expect to see $10 million in compounding more than $10 million gains in that income for the next several years. So -- and it's pretty much locked in because you know what wage inflation is and you know what CPI is. So it could be an extraordinary gift that keeps on giving a tune of maybe $400 million or $500 million. And that is with no change in the cap rate. We have seen recent trades well below the cap rate that we executed that…

Our first question comes from the line of Rick Shane with JPMorgan. You may proceed with your question.

Good morning everybody and thanks for taking my question. Look, I think the only thing that really surprised us in the fourth quarter was the decision to issue equity and in my mind, there are really three reasons you would do that. It's either you like your stock price, which given your commentary about price to book and dividend yield, clearly not the case. For liquidity given your access to the debt markets and everything that happened during the quarter, that's clearly not the case or a leverage issue, and that doesn't appear to be the case. So I'm really curious, given your discipline around raising equity over the last 10 years, what drove that decision?

We've chosen to run our business like a 2.2 debt level, right? And we are not at the 3.75% of our largest peer. And we kind of like the security and safety of that leverage level. We've been chatting whether we should take our leverage up a bunch. I mean, it would drive earnings growth and yes, but it would create inherently a riskier book. And so we've we have a pipeline. We look into the future and we see when we need to raise equity. And as you point out, we've never raised equity below book and never, and we won't. So the stock we really needed equity at that time because of the forecast of our activities. And we did have to also retire the $500 million deadline, which we did with the smaller debt issuance, too. Jeff, you want to add something?

No, not really. At the pace we're running at today, if we do another $10 billion in CRE lending, which I think the first quarter, we're off to a type of number and a little bit more elsewhere, we're going to have to we're going to have to need a significant amount of capital over time if we keep running at this very fast pace. And so as we look at it, and we care a lot about our ratings and our -- the way the rating agencies look at us for our corporate bond levels. And we like running our leverage low to down to 2.3%, 2.4%. And we're below that today. If we were to do it all with that, we would run that ratio higher and its sort of a self-fulfilling thing where we wouldn't get on that path to investment grade that we ultimately want to get to. So mixing in one unit of equity for every 2.4 units of debt as we grow the company and have a high pace, ultimately we think we win by having a better credit rating and lower cost of funds.

Got it. That’s helpful. And then I guess related to that, is the other consideration that as you have less opportunity to retain gains as you've sort of worked through all of the deferrals, is that the other consideration as well?

Well, we have a problem. We won't be able to shelter future gains the way we could. So we either we have to figure that out. It's actually come up given our forecast for this year. So just to clarify for anyone who's listening we used up the last of our ability to shelter from the spin of say a long time ago from spin. We created almost $1 billion of shelter. I think it was.

And we can carry a full quarter's worth of dividends. So it was about $150 million of shelter that came into this quarter.

Right. They came into this quarter, but now it's all gone. So yes, our -- we would have to -- if we earn much above the dividend, I assume we'd have to pay a special dividend if we don't do something about that. So -- and we'd have to raise the dividend, obviously. So we're thinking and talking about that. And hopefully, that's a good problem for us.

Yes, Barry. I'm guessing investors would rather see a special dividend then you create additional shelters.

We would -- yes, I mean we would love -- it'd be lovely to increase, it's not my decision, that's the Board's decision, but we'll look at our run rate. I mean, I think our equity book affords us a very interesting opportunity, obviously, and its multiple years of harvesting if we want to. It's just hard to want to sell something that you'd want to buy in your kids' trust funds. So this is the bedrock of a company. And we just -- we -- I didn't want to sell 20% necessarily, but that was our little ham sandwich is for Jeff and Rina that we talked about showing you that the gains that we talked about were absolutely real, and that allowed us to book the 2017 book value, which is more reflective of the enterprise book value than the prior one you saw before. Obviously, we can talk about undepreciated book all we want. But most of the press releases pick up gap. And they don't adjust for all the management's estimates of value, which is -- I can understand why, in our case, I don't agree, but it's okay. And if you go along the path, as Barry said out earlier, that there are hundreds of millions of dollars of upside potentially in our WoodStar portfolio alone. You could take cash out refinancing as you go. They have the same consequence for the problem we just talked about, but we could hold on to these properties and create more equity that we can then invest that will help us grow earnings. So there are a lot of ways we can do this while keeping Barry's generational trust fund assets. It's not mine, though I do want to lose the shareholders' asset. Thank you, Jeff. I'll take -- do you want to give it.

Our next question comes from Jade Ramani with KBW. You may proceed with your question.

Thank you very much. I wanted to get your thoughts on what's driving the surge in nonbank originations that took place in 2021 and seems to be continuing so far this year? And is there anything in that trend that might concern you?

Thanks, Jade. I think if you remember last quarter and the quarter before, I think I told you that we are going to continue to see elevated volumes and it's going to be rather significant. And I think it played out how we thought it would. You had a bunch of things happen here. Obviously, a lower LIBOR means that anybody who had a LIBOR floor, and we have a lot of our floors as high as 2.52% in 2019 off of one of our largest loans. If you have a LIBOR floor that was sitting at 2.50% and today, you can get a LIBOR floor at 10 basis points, your spread could be 240 basis points wider and you're still two basis points better of refinancing. So the desire for people to get out of those is important. We had a year in 2020, where business plans were getting executed behind the scenes, but refinancings aren't happening. So in 2021, a lot of these business plans and ultimately, we are investing into business plan execution. A lot of them got executed and they are in a position to refinance at lower rates. So we certainly saw that. We saw transaction volume in CRE in the United States, almost $600 billion last year. To level set that, we had about $500 billion of transactions in 2007. We had $500 billion to $550 million between 2015 and 2019 and this year I think it was a record at about $580 billion about $245 billion of that was multifamily, which was also a record. So you have a transaction volume and a tremendous weight of capital, there's a significant amount of equity on the sidelines looking to be deployed. So we expect transaction volume to continue to be elevated, but that certainly…

Thank you. My second question would be the mortgage REIT space has some cohort of some scale companies trading below book value, not really creating shareholder value at this point. Lots of reasons for that could be corporate structure. It could be lack of scale. But I guess, what are your thoughts on that cohort of companies and might that represent potential picking ground for Starwood in order to grow the scale of the overall platform?

Okay. I'll start going to hint to Barry, but I'll start by saying if you take our fair market value gains and you think Barry, is right on where we're going with the valuation of something like WoodStar, I could argue on a forward basis at our stock price today, it looks like we trade below book value. So a lot of people trade well below us, but the market is not treating us very well either, but Barry, I'll turn it to you on the .

I think Boards won't sell any of those companies unless you pay book or close to book and then you wind up with social issues. Does the management team want to get retired or not? And so -- or -- and then what is really additive for all of us that are in the debt world, whether it's the BDCs or the private debt funds or the public mortgage REITs, we're all looking for product. So taking a competitor on my -- I mean the market is too fragmented, it wouldn't give us additional cloud in the marketplace. You just it might raise the need to deploy capital. We ever increasing volumes. And so I don't know in our business exactly like we run our conduit business pretty much the same way for the last 10 years. And we're doing like 1 -- $2 billion to $1.5 billions of loans. They don't actually do $1 billion to $2 billion, $3 billion or $4 billion. So we would need a new business line, which we've looked at, things we could diversify into. But again, usually, in those few experiences that we've had, which is probably 3 or 4, we have approached other people in the space. It's usually the social issues that keep us from getting done. And maybe in the past, some disagreement on whether their book values are actually real. So -- and that would apply at least to 2 of our peers. So we did not believe that the books were accurate, reflecting the risk of the loan book.

Our next question comes from Doug Harter with Credit Suisse. You may proceed with your question.

Thanks. Jeff, you talked about the backup with regards to CRE CLO spreads. Can you talk about the same impact on the non-QM financing markets and how that might influence the book you held at year-end and also kind of pricing and appetite for that business as we go through 2022?

Yes, it's really interesting. It's kind of the same phenomenon. And when buyers of bonds, sit back and think that there's going to be a lot of issuance. Those buyers of bonds will tend to wait for the later issuance and they'll get stuff cheaper. So you're seeing a little bit of a virus strike today on the end-to-end securitization. It’s small. I think there are definitely people out there who originate loans and have to get them off their balance sheet very quickly, and we'll punch them and we've seen some lower-priced whole loan sales recently because of that. We're a long-term holder, we have great non-mark-to-market financing line. We can sit and wait for the market. We're going to opportunistically securitize. And I think a lot of other people are unable to opportunistically securitize. So we've been backing pricing up daily as we've seen what you've seen, which is dollar prices are coming down slightly in this market. But being a long-term player, it's not a huge deal. I'll put some context to it. I think the sort of low 4s gross WAC pool today are probably securitizing to about 102 exit in the low five gross back pools are probably securitizing about 104 exit. We've been buying paper between 101 and 102.5 for a long period of time here. We're getting carry along the way while we wait to ultimately securitize at the right moment. I think ultimately, we'll securitize when it makes sense and we're in the market today. We can't really talk about that because we're in the market. And based on that, we'll make money on that. We hedge our interest rates. We actually over hedge versus almost anyone I see on the street. We're always worried about rates going higher and prepayment spiking and our hedge balances, our hedge gains are very significant versus the small markdown that we probably have first where we are. But ultimately this paper have to clear the CRE CLO market has a lot paper that would have to clear because they're a weekend. We're dependent on it. We're just never going to be one of those and it's the beauty of our business model and it's the beauty of our balance sheet and our ability to finance ourselves in other ways that we will never go to the market at the wrong time. And if you look at how we've opportunistically done our securitizations and our CLOs over time, we're almost always pricing well inside of where the market is because we wait for the opportunistic time to do so, and we'll continue to do that.

Great. Do you envision there being kind of opportunistic or purchase opportunities like you've seen at other points of volatility? Or are we not kind of to that point yet?

I am hearing of some tools that are trading. I think ultimately, there's an insurance company backstop. Insurance companies are looking for NIM any way they can get it if an insurance company can get six rates over 3.5%, they're going to be awfully excited. If they can buy a 5% gross WAC pool at close to par or 1.01% or 1.015% or whatever that is, they're not going to underperform very much if rates go down because you're not getting hurt by prepayments when you have such a small premium. But that's to a faster speed. That's probably a 4.5% yield 100 basis points, let's say, above where the insurance company needs to be. So I would expect that they'll be coming in who bring up bonds. One of the other things that happens in this market is all securitizations get run to 25 CPR. So if buyers think that the pool is going to come at 5 CPR like a mid-4s growth WAC. They think it's going to actually come at 5%. The bonds are going to be a lot longer. And what's happened here with the curve, making it move and rates going higher is that obviously running to a longer part of the curve isn't a very good story. But the reality is you're going to have very low prepayments and we have this book that's a large book that we built up through 15 securitizations now that's going to significantly outperform against these lower prepay speeds. So having a hedge owning a portfolio is certainly super helpful.

Let me just don't get too lost on this sort of bogged down in this. The business is like 8% of our earnings. So it's sort of ice cream. It's the lip cream on the ice car. It's not the ice cream. So it's a nice business, another cylinder. It's what it's advertised to be. But it is massively hedged, and I'm actually looking forward to outperforming or underwriting because we have underperformed actually in the past because of rates crashed and prepayments picked up and higher than we underwrote. It wasn't a catastrophe, it's just -- we didn't rate ROEs. We think this business is non-GAAP, is the 17% to 18% ROE business gap doesn't allow us to look at. So we book it sort of at the 10% to 11% currently. And it's driven by a refinancing assumption of the trust a couple of years out as the loans mature, it's complicated. It's what we think we're going to earn but we can't actually give you that number because it hasn't happened. The refinance hasn't happened. So GAAP requires us to sort of just look what's there and not use the assumption. But if we were doing this in the private equity funds, we'll be looking to be earning 17, 18 IRRs in this paper, the way we run the business. And the backup in the market is actually good for us. We're a very strong player, we'll slow volumes, probably slow volumes next quarter. Some origination shops don't want to sell their loans where we want to buy them right now. So they'll slow originations. And in general, obviously, the single-family mortgage market is volumes are slowing as rates rise. So it’ll just be fine. It’ll just fit in alongside our other cylinders. And that is the…

Our next question comes from Tim Hayes with BTIG. You may proceed with your question.

Good morning guys. Look, a lot of kind of moving parts in the quarter, some onetime items with associated with the capital market issuance and extinguishment costs and the charge-off and it sounds like originations are back-end loaded, and you still have some capital deployed from WoodStar. So putting that all together, can you just maybe try to frame what run rate earnings looks like going forward, especially given the strong outlook for growth in the first half of the year?

And do we have to go ahead

I love it, if you will.

There's another problem that we have or an opportunity that you have now it's in the things that didn't work as they fix themselves to the pandemic. We are nonaccrual on a bunch of loans. We can't wait to bring them back online. The biggest one is American Dream. So that asset is doing pretty well. And at some point, that will get restructured, and we'll kick it back and it will earn -- we have some capital tied up and non-accruing assets that its material to our earnings. So material. To me, it's material. It's not -- it's not overall anyway. It's a number. So yes, you're right. We sat with cash, and then we did the WoodStar, we can't deploy the capital that quickly. And then we had some noise because we raised the money from the equity deal and the debt revision, you just say with cash so. But the earnings potential the company's higher than it has been in the past. And we're feeling pretty good about things right now I'd say I don't see any real pockets. My big worry is just sales volume transaction that the people slow down sales. Again, it's real estate I mentioned all the asset classes in my comments, but as an asset class as a whole, the volatility in the equity markets is good for real estate. Capital flows into real estate because it looks like a safe haven. And it does in private real estate and monitored REITs of which we have on. They don't mark to market like the equity market. So the vol in the equity markets is good capital flows into this asset class, which also keeps cap rates down. So because you're going for safety and security and for something that you think is going to behave pro-cyclical with inflation that will go with inflation. So again, if rates rise, we're floating rate book. We make more money. And our borrowers, the coverage ratios are good because rents are good. So it's not going to get squeezed by rising rates, their incomes are going up. So our coverage ratios will stay pretty much, I think, intact, if not benefit from the rising rents in many of the asset classes we lend against.

Tim, you did a great job of talking about the nonrecurring losses in some of the small bits. And it's a difficult business we run, right? We missed by pennies you guys hold it against us, but we're creating dollars of value on the other side. I often think that people on the other side missed the forest in the tree - looking at the trees and we're running a diversified base low-levered company with a massive amount of gains. And there are going to be nonrecurring things that happen over time. But hopefully, we can refocus them on the gains embedded gains. The gains are in unrealized gains. I asked our guys about this revenue number. I saw this morning, and they looked to me like Medusa had 17 heads because that's something we never look at is that revenue number. There's so much noise in those numbers. GAAP revenue, we do not everything we've ever looked at. I didn't know we missed one until I read it this morning. So it's not something that we pay much attention to.

Got it. Well thanks for the comments and for entertaining my question and appreciate all the color this morning.

Thank you. At this point, we have reached the end of the question-and-answer session. And I will now turn the call back over to Mr. Sternlicht for closing remarks.

Just want to say thank you, everyone, for giving us your morning and hope you stay safe. Good luck. Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.