Greetings, welcome to the Starwood Property Trust Second Quarter 2022 Earnings Call. . And please note that this conference is being recorded. I will now turn the conference over to your host, Zach Tanenbaum, Director of Investor Relations. Thank you, sir. 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 June 30, 2022, filed its Form 10-Q with the Securities and Exchange Commission and posted its earnings supplement to its website. These documents are available on 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 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 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'm now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. This quarter, we reported distributable earnings, or DE, of $162 million or $0.51 per share. GAAP net income was $212 million or $0.67 per share. Our GAAP book value grew by $0.22 in the quarter to $20.68 with undepreciated book value increasing $0.25 to $21.51, an increase of 26% from a year ago. We had an active quarter with $3.8 billion of new investments across our businesses and funding of the same amount. The investments were funded by available cash and loan repayments as well as existing and expanded asset-specific debt capacity, which I will discuss later. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $153 million to the quarter or $0.48 per share. In Commercial Lending, we originated $2.2 billion across 15 new senior loans, all of which were floating rate. We funded $2 billion of these loans as well as $239 million of pre-existing loan commitments with most of our funding back ended to the last month of the quarter. Given decreased and delayed market transaction volume, repayments were lower than our typical run rate at $319 million this quarter. While levels will still likely be lower than normal for the remainder of the year, we expect them to exceed what we had in the second quarter. To that end, for the month of July, we have received $283 million in repayments. Our loan portfolio ended the quarter at a record $16.5 billion, up 43% year-over-year. Of this amount, 92% represents senior secured first mortgage loans and 99% is floating rate. Although we did not see a meaningful impact this quarter from rising interest rates due in part to some of our higher LIBOR floors, we expect to benefit more going forward. Company-wide inclusive…

Thanks, Rina. As Rina said, we once again used market volatility to our advantage, adding nearly $4 billion of investments in the quarter, bringing our portfolio to a record $27 billion today. We have already closed $1 billion of CRE loans in Q3, which will bring our total for 2022 floating rate CRE lending to over $5 billion year-to-date. That said, we reduced our investment pace in recent months, recognizing that there would be a great opportunity to invest at higher returns later in the year. In early COVID, we have the unique ability to create significant liquidity from our unencumbered assets and own CRE portfolio, and we have the option to do that again today should loan repayments decline. Reduced investment pace does not mean reduced distributable earnings and lower volume period, we have a sharp shoot of mentality to laser focused on only the most accretive deals and that is our second half plan. Executing our plan is less dependent on volume of investments and is more dependent on timing sector rotation, the performance of our credit and staying optimally invested, therefore, not sitting on too much or too little capital. Finally, interest rate sensitivities continue to move in our favor. Rina mentioned our interest rate floors and SOFR is now over 150 basis points above our average floor so we will continue to make more money as rates drive. And importantly, our new loans will have floors at today's SOFR levels, which will have a big benefit should SOFR decline in the future faster than the forward curve. Our $3 billion owned property portfolio continues to be our best performing investment, and as Rina mentioned, we wrote up our Florida multifamily valuation, not on cap rate, but based on experienced rent growth, which we expect to continue…

Thank you, Zach, Rina and Jeff, and thank you for joining us again this morning. I thought I'd start my comments in the big picture, which is probably the most important thing, our strategy to navigate the turbulence we see in front of us. First, I think you all agree that the Fed was way behind raising rates and let the society move too far too fast and induce really unusual consumer behavior reflecting the stock market and the tech sector and on disciplined investing. Having said that, they're now trying to make up for being so far behind by using a sledgehammer, increasing interest rates at a pace we've hardly ever seen to try to get in the way of inflation, which is really being driven by the commodity complex, particularly in oil and gas, and it affects everything oil and gas. It affects transportation costs, which affects food costs. It effect oil prices, it effects airline wage and air fares, which are sky high. And in fact, the consumer significantly -- and obviously, using a tool like interest rates to dampen oil demand is really really crush the economy. So I'd be very surprised if the Fed didn't go forward and just kept rates here, the economy didn't soften materially coming out of the summer months, which are somewhat of a party from the extended period that people found this in COVID. There's no question that Europe is going to have a very tough winter and it's already in recession. German industrial production has to be cut back. China is growing very slowly. So there will be no way to pull the global economy forward, and as you know, global growth rates have been reduced -- all the estimates have been reduced. So I wouldn't be surprised if…

Thanks, Barry. Operator, with that, let's turn it over to questions.

. Our first question comes from the line of Stephen Laws with Raymond James.

Jeff, I wanted to start with Woodstar and the positive valuation gains there, much larger than I think I expected. Can you talk about a little more detail in the assumptions? I know, I think Rina provided up 9 -- I think it was 7% on the NOI. Is all of that factored into this new valuation estimate or only the rents that rolled up in June? How do we think about how the rent increases over the balance of the year may impact the fair value estimate would store?

Thanks, Stephen. It's an annual reset, as we talked about before. Rina, do you want to take it on or do you want me to?

Sure. Sure. I'll take it. So Stephen, the 9.7% is just the rent increase and the valuation adjustment faces in the entire amount. So it's the NOI effectively that's in place at June 30, cap. So it's fully affected in the fair value that you see. The other thing I would mention though is NOI is not 9.7%, NOI is actually higher. It's about 12%, and that's because your cost didn't go up by 9.7%, right? So your overall NOI goes up by more than your growth rate.

I appreciate the color on that, Rina. Looking at the loans held for...

Hold on. It's Barry. One other thing is, the debt is fixed, and it's 3, 6-year something like that. So there's no impact to rising rates on the portfolio. And one other comment, of course, is the rents can only go up in affordable housing that cannot go down. So -- and we think we're using a cap rate that is wide on the market as well. So we're being conservative, and we know where the market is because the equity group has been selling some multi and almost all the market rate sales have been actually inside of the cap rate materially and the affordable effect just caught us because of defensiveness, obviously.

And Stephen, as I said in my prepared remarks, they are driven by median income and inflation in the median income numbers. We have most of the inputs for the next couple of years, the 3-year look back, and we do expect a couple more years of pretty significant increases.

Fantastic. I appreciate the details from everyone. As a follow-up, maybe touching on relative attractiveness of kind of new CRE loans in the U.S. versus Europe. I know that's -- I think as Rina mentioned, almost 1/3 of your portfolio. But what's the relative -- from a new dollar standpoint, kind of how do they compare today?

Barry, do you want to start?

Sure. happened a better return to a large deal in Australia. So that kind of tilted the book that a little more normally would be. Historically, we kind of preferred in spread to be probably wind up in Europe because of the lack of price on rates. I don't think rate will rise anywhere on the treasure in the U.S., but -- and the difficulty to early supply. At the moment, I said that markets like the office market, people are turning to office in Europe pretty much prepandemic. It's not the case in U.S. So it's a little bit asset class shift in the U.S. as well, but spreads are effective in both places, and we're now pumping our what do we want to -- what exactly you would want to lend to get and that were being careful.

I will add. We didn't give much detail on the Australia asset, but Barry brought it up, and you may have heard about it on the Blackstone call. It is the Crown casinos. There's $3.5 billion of new cash equity in front of us. We believe it's about 51% LTV and 44% of replacement cost. It's probably the highest quality casinos in Australia, and we feel super comfortable with that asset, but that definitely drove the international number this quarter, Stephen.

Our next question comes from the line of Rick Shane with JPMorgan.

Look, for a really long time -- and I don't think this has changed, a big part of your is the disconnect between value and stock price. For a long time, this was actually reflected in you guys not issuing acquire levels that your peers or multiples that your peers certainly would have taken advantage of. If we think about what's evolved, you guys did an equity issuance at the end of last year. You have an ATM program program in the market today. I'm curious what's changed? Is it just that you see the marginal opportunity in terms of deploying capital to be so attractive? Or is it relative value versus your peers that sort of driven the shift?

Barry, if you don't mind, I'll start. In December, when we issued equity, I think the stock was at 25 75, and we issued debt multiple times previous to our last regular way equity transaction in December 2016. Makes its way towards investment grade at some point. That's been our holy grail. We've spoken about that. To do that, one of the most important inputs is that our debt-to-equity ratio stays low. We were 2.1x last quarter and we're 2.3x this quarter without reciting all of our peers. We are significantly lower than our peers, as Barry talked about. The only way if you're going to continue to grow the book with good opportunities to make loans to keep it down is to have some amount of equity go along with that. So for every billion dollars of debt, you would need $400 million of equity plus/minus, and we had gone with a few billion dollars of debt without any equity. So December was really more about balancing our debt-to-equity ratio as we hope to improve our credit rating across the board to BB+ for others to join our one BB+ rating, and then hopefully, eventually get to BBB-. So I think we looked at equity not as equity was cheap at that dollar price, but we looked at equity as a way to balance our debt-to-equity ratio and our goal to get to investment grade. This quarter was interesting. This quarter, we saw high-yield bond markets and credit markets widen much more significantly than the stock market early on in the quarter. And early on in the quarter before our stock ended up getting down to, I think, 1970 at a low in the high 23s, we decided that high-yield bond issuance would be very expensive in the run that we had had in the second quarter. And we decided that it made sense if we were going to choose to have a little bit more liquidity. If loan repayments slowed, raising million we raised in the ATM, I felt like a decent spot vis-a-vis our debt. Our debt had moved into being sort of within 100 basis points or so of our dividend yield. And historically, that's been closer to 400. We thought that, that raising debt was too expensive. So we took a little bit of equity at a time we thought we might need a little bit of capital later in the year. The high-yield markets have repaired massively, and we are probably 200 basis points inside where we were at the worst if we came with a high-yield bond deal now. So we feel a lot better about that mix, but there are different reasons at different times where I was chosen equity.

Okay. Jeff, that's a really interesting answer. So to some extent, it is relative value, but I wasn't thinking about it in the context of the relative value across your balance sheet. Just it kind of feels like it is going to be a -- and I guess this is programs, an on-demand source of capital as you said you need it, if you continue to deploy at the rate you are?

Yes, I think that's right. I don't think we looked at 25 75 as the price that we wanted to necessarily sell stock, but we think if we get to investment grade, it's a $30-plus stock. And we have to balance that, and we have to have some equity to go along with debt in order to get to that investment-grade goal.

And our next question comes from the line of Doug Harter with Crédit Suisse.

You mentioned the significant percentage of your portfolio that is kind of a post-COVID vintage. I guess how are you thinking about the ultimate maturity of those loans given that rates are higher and some of your other commentary around kind of the the cash flows of higher coupon debt and kind of how that ultimately play out when those loans reach maturity?

Yes. Barry, why don't I -- go ahead, Barry. You go ahead.

protection from risk rollover risk in any loan. I think they probably will stay out longer. expect repayment in this quarter and when we had early. So it was kind of around the second quarter where we had no actual maturities of loans to speak of. And don't make it hard looking at our expectations of the repayment whether as most of our assets are traditional. So if they have a tender that can be , and we're doing the work and figure out and obviously, the an attractive ROE, but it has been a lot less cash investment new opportunities. So I think people comfort lender. We're not finding multiyear of 6.5x is where loan leverage or something like that. We will make more every asset we've ever foreclosed on. So we don't look forward to that, but for us, given that they run the national service users with almost 300 people involved in that business, and the number that probably in doing more outside of . We're happy to win the lot happen in our you want to add.

Yes. I'll just add that we run a ton of debt yield sensitivities when we write a new loan. And given rents are up over this period over the last 2 years, significantly more than we underwrote, we underwrite these loans to maybe 1% rent growth to offset expense growth, but we don't expect rent growth. We've had massive rent growth. So our debt yields are up significantly higher than what we thought they would be on our post-COVID originations today. So those higher debt yields will support a takeout at a higher interest rate level, and I think our LTV has actually gone down in this period and not up. And so as Barry said, the 60 LTV is super important, but given business plans are executing at a faster pace than we would have expected, I think that more than offsets the higher rate environment for the takeouts. And I would expect these loans to repay at a similar time line because of these rent increases and people wanting to take some of that cash out on their executed business plans.

Great. And if you could just a little more detail on the newly foreclosed Houston office. Just what type of timeline should we expect a resolution? And kind of how are you thinking about the options there?

Yes. I went down and toured it. Our whole team toured it a number of times. It's a fantastic building in the Galleria District. There's some -- Houston is definitely starting to benefit a bit from some of the change in the energy policies that people are looking forward to, and certainly, commodity prices have changed. So the outlook is better today for Houston than it was a year ago. This is a fantastic building. There's a lot of tenants circling. We feel really strong that this is a building that we're going to have a much like what we've done when we've taken back assets, as Barry said, whether it's in Orlando or Montgomery, Alabama, the assets that we've taken back, we've made more money on the assets we've taken back than not putting Starwood in front is what created that leasing momentum at the other assets. We believe that our expertise in office market is something that's going to play out and some of that we'll be able to execute significant leasing. We're a little over $100 a foot on this asset. So it's something that I think we owned a really good basis to be able to bring in large tenants. Barry, do you have any...

Commodity prices rising the way they are . We'll take it down and build a camp. It's an iconic asset in its neighborhood by some way. And I go to Houston for longer than I want to say. So everyone knows the Galleria hotels -- Western Galeria Hotels at the Galeria Malls right next to that. And we're trying to figure out what we ought to do with that .

Barry, I'm sorry. I think he a bit there, but -- yes, I think Barry said, we'll probably have resolved in the next 6 months. We'll be able to report back to you in the next 3 to 6 months.

And the next question comes from the line of Eric Hagen with BTIG.

Just a quick follow-up on the Woodstar asset. Are you able to borrow against the appreciated value in the asset? In other words, can you -- is it a source of fungibility or liquidity on the balance sheet having appreciated?

Yes, we can take -- go ahead, Barry.

Consumer can do that or we can sell additional interest in it. Those are 2 options. Yes, there is availability to increase the leverage on the portfolio.

Yes, we can probably increase the leverage by a couple of hundred million dollars today if we chose to. So that's something that we look at.

Got you. That's really helpful. And then just looking at the market...

One nuance -- I was just going to say, one nuance of that is the 2 agencies are wide open for business, and so they will save affordable housing. So this is not -- you're not getting caught in CLO execution on multifamily that somebody bought it. after they got, it will make 6%. This is a sustainable asset so that the financing tends to be more attractive and it's available.

Right. That's helpful. And then just looking at the market overall, there's this wall of maturities that are coming up in the CMBS market at a point in a cycle where obviously it could be tough for those sponsors to refi in the capital markets. Can you talk about the relative attractiveness you think they might be able to refi some of those loans? And just what it could mean for the market overall if those folks are having trouble rolling over?

We can -- we can't be happier. You should have good cycle for lending as you had probably at the end here. I think -- and particularly because once again, we feel the competitors has narrowed dramatically. And the banks are definitely clear the senior officers as some of the lending banks and , Starwood Capital just domestically, I think, borrowed $34 billion last year. So these are year end-to-year relationships, and obviously, we're in the market all the time. And I guess they're all pointing to regulatory is that the regulators are on them, and that's why the banks are pulling back. So for some situations based alternative lenders, which we're the largest, you should have a pretty good opportunity. And we're always now expecting our spread, we're doing in the property trust against what we're getting and buyers on assets on the other side. So I probably never had such coordination between our borrowing group that the capital group and the lending group start property trust because the markets are fluid and the spreads are in and out. The markets are capping out capping in. As the treasury is, that seems to be where spreads are in the number of participants. It's interesting. There are a lot of banks that are looking, but not a lot of banks that are doing deals. And sometimes now they're offering spreads that are more to what we would tower. There are 300 over 400 over and over some of a real number now, it's not over 0. So it's going to be incentive for an interesting cycle. That's not well capitalized and build the opportunities to deploy more capital, certainly on both the equity and debt side as people going to refinance these assets.

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to management for any closing remarks.

Barry, any closing remarks?

No, but thanks, team and thank you for listening today. Enjoy the rest of the date of August. Thank you.

Thanks. Thanks, operator.

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