Greetings and welcome to the Starwood Property Trust Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Zach Tanenbaum, Head of Investor Relations for Starwood Property Trust. 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, 2022; filed its Form 10-K 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 in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that maybe 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 am now going to turn the call over to Rina.

Thank you, Zach, and good morning, everyone. Our unique multi-cylinder platform once again demonstrated consistent performance with distributable earnings or DE of $161 million or $0.50 per share for the quarter and $726 million or $2.28 for the year. Undepreciated book value ended the year at $21.70, up 26% from 2 years ago and up 5% over last year driven by NOI growth in our 15,000 plus unit Florida affordable housing portfolio, which I will touch on later. In 2022, we completed $10.7 billion of new investments across businesses with initial fundings of $9.3 billion and follow-on fundings of $1.1 billion. Against that, we had repayments and sales of $3.7 billion, including $1.9 billion from commercial lending, securitization proceeds of $3 billion and newly issued corporate debt of $1.1 billion. We continue to have significant liquidity with $1.1 billion of cash today, $250 million of which we will use to repay our convertible notes maturing on April 1. We also benefit from excess unencumbered assets and gains within our property portfolio, both of which can be utilized to create additional liquidity. I will start my segment discussion this morning with Commercial and Residential Lending, which contributed DE of $172 million for the quarter. In commercial lending, we originated $266 million of loans, including a $112 million loan on an industrial build-to-suit that is pre-leased to an investment grade tenant. This brings our full year originations to $5.3 billion, of which 56% was multifamily and industrial. At quarter end, our aggregate multifamily and industrial exposure is 39% which is nearly 3x the pre-COVID level. Our predominantly Class A office exposure continues to be just 23% of our commercial loan book, which is down from 29% a year ago and 38% pre-COVID. In 2022, we received $362 million of office repayments. And…

Thanks, Rina. We strategically built our business over the last 14 years to perform well in normal markets and outperform in volatile one. Higher leverage would have created a higher earnings in normal markets, but our focus has always been on tail risk and dividend sustainability. We have held the line on very low leverage, diversified both sides of our balance sheet and added a special servicer that makes more money in time of distress. This model has proven itself through cycles with $1.5 billion or $5 per share in harvestable gains in our owned property portfolio, we have significantly grown book value, yet our stock has lagged with our sector. On average, our stock has traded at 123% of book value since inception. And today, we trade below 90% of book value. Given the significant rise in base rate this year, the market’s focus is clearly on credit and specifically on office credit. Rina said, we have reduced our exposure to office loans from 38% to 23% of our CRE lending portfolio since COVID, but since we have other investment cylinders on our balance sheet, Lending segment loans on office make up only 13.6% of our assets, which is by far the smallest percentage of our peers and a fraction of most of them. One would expect lower office exposure to require lower reserves in the current environment and that is the case again this quarter. Other than our previously disclosed $4.9 million reserve on the entire balance of a retail loan in Chicago, we have no asset-specific CECL reserves today. With $1.5 billion in harvestable property gain over 15x our cumulative model-driven CECL reserve, we are the only mortgage REIT with multiples of cushion to cover potential losses should CRE markets weaken from here. We have re-underwritten our…

Thank you, Zach. Thank you, Rina and thank you, Jeff and good morning, everyone. Welcome to our earnings call. Thanks for being with us. I usually start with the economy and those of you who have seen me on TV, I’ve been fairly aggressively trying to get the Fed to stop raising rates and let the impact of what they have done, the largest increase in rates, the fastest increase in rates in the history of the country, coupled with the balance sheet reduction, coupled with the OCC telling most of the banks to cut back lending and shrink their balance sheets, has created incredibly tight conditions. And I saw a report this morning that construction in the U.S. has dropped 27%, that’s commercial construction. Obviously, single-family homes have fallen off a cliff. And when we complete this wave of construction, I would expect many projects to get tabled. When we look back at the great financial crisis and where job losses were they were really in two categories: manufacturing and construction. And if you look at manufacturing, which is about to go negative, you will get some of the job losses in manufacturing. Construction will be a tug of war between commercial projects ending for private developers and whatever it is the government gets their act together to spend their $1 billion infrastructure budget. So that can be a little harder, which is one of the reasons I wonder where the Fed is going to be effective, knocking jobs off without actually destroying real wages and real jobs across the service economy. During ‘07, ‘08, ‘09, actually education and healthcare went up. So you can’t change that with interest rates. So the only place that really hurt the economies in the service sector which would be retail, travel, airlines…

Thank you. [Operator Instructions] Our first question comes from the line of Doug Harter with Credit Suisse. Please proceed with your question.

Thanks. I’m hoping you could touch on – you talked about not being interested in selling down Woodstar. But I guess just curious, given your comments that this is a sort of a lending opportunity kind of your appetite or willingness to sell down Woodstar to raise additional funds for – or capital for lending opportunities?

Yes. We could do it. I mean, actually, you were talking about it yesterday in a different situation. One of our clients has come to us for a separate account to buy affordable housing. And of course, we want to go to the two institutions that took the interest first. It hasn’t been – we don’t need a ton of excess liquidity, but we’d love to have it to deploy. I think my number one source would be taking the condos and Chatsworth forgetting about the book value. We probably are right around realizing prices consistent with where our marks are. But there are other assets that we’d like to move on and just redeploy the capital first. And Woodstar is like selling gold. Don’t forget, in affordable housing rents can’t go down. So – and all this building, none of it’s affordable. So there is no risk of not being 100% full or virtually full. And the only question is what rents are going to be and they can’t go down. And we have attractive debt in place. So it’s always something you can sell. But when we bought those, I took the – I literally said this is what I want to own in my kids’ trust accounts. And as you know, I’ve never sold a share of stock in 13 years of Starwood Property Trust. So, I would love to own that stuff. If we – should we sell another 20% and raise a couple of hundred million bucks, yes, maybe we will do that. I mean we will look at other things. We can move some of our resi assets that aren’t yielding that double-digit return of everything else. We are hedged on interest rates, but the market has gotten a little better in the non-QM…

Great. Thanks.

Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Hi. Good morning. Kind of a follow-up on the Woodstar and Rina, you touched on this a little bit, but can you talk about – I think you mentioned the rent increases. I am not sure if that was trailing or as we look forward. But when you think about AMI and CPI, when do those numbers come out? I believe it might have been last year in May that drives the forward increases that roll through. And how should we think about that given really continue to see strength in Florida, as you guys mentioned about the red states in your prepared remarks?

Yes. Hey Stephen. Thanks for the question. They will come out again in April. As usual, they will have a 3-year look on CPI and on maybe the income. We know those inputs for the next couple of years look really good. So, for the next few years, we feel really comfortable that we are going to continue to see rent increases, but the new data will come actually in April.

We actually expect that number to be north of 10%, if the government changed their calculating this. And as they would notice, the number can exceed 10%, which is unbelievable. So, that will be the strongest sector in multifamily office will get affordable that’s driven.

I think it could be higher depending on the portion that’s coming from the local income growth. So, it’s like I said, it gives a keeps on giving.

So, it’s a strong market there. One quick follow-up, Jeff, could you talk a little bit about the Washington, D.C. office asset, it looks like the maturity in early Q4. I know you guys, I think have 4-rated, but correct me if I am wrong there. But can you give us a little more detail and update on that conversations and how you expect the resolution or pay-off together?

Yes. So, there was one that I spoke about earlier, which is not the other asset that we touched there. So, there is one that you see in our deck that’s a 2023 maturity. We are working with the sponsor right now to potentially extend that asset into late ‘23, early ‘24 and get a pay-down. There is another asset that I spoke today about that is a 4-rated loan, if that was your question. And that’s a downtown asset. How did GSA tenant, it’s 370,000 square feet office asset. The good news is it’s completely vacant with that GSA tenant leaving, and we think it’s a really good candidate for residential conversion. We haven’t taken the asset back yet. The sponsor is still touring some potential GSA tenants. But if they strike out and we take it back, we think there will be a lot of interest to convert this asset to resi, and we have – we are in significant discussions already at our basis to do exactly that. One of the difficult things sometimes is emptying these buildings out for resi. You obviously have to have the right floor plan. You have to have the right center – core. You have to have the right size, floor plate. You have to be an area that’s desirable for resi that this one sort of checks all of those boxes. And along with our Houston asset that we are working on a resi conversion we think these are two really prime examples of what can happen in the office space when the office market pulls back and resi is a better play. So, we are optimistic that there is a better play on that one to move forward if they don’t clip a GSA tenant before the maturity this year.

Great. Appreciate the color there Jeff. Thank you.

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Thank you very much. Just in terms of the outlook on commercial real estate credit overall, trying to understand how nervous or worried you are about the environment and also the Starwood portfolio and hoping you can comment on each separately?

I mean the fundamentals of real estate, as you can see from all the equity REITs are okay. It’s the issue of spreads rising and rates rising and what the impact is on cap rates. Different asset classes, cap rates are expanding at different levels, different amounts. And a lot of – as you may know, there is a lot of stuff isn’t being sold because people expect if they don’t have to sell, they won’t sell. It’s a little like even though it’s not the GFC, it mirrors that in the sense that there is a big bid ask spread between buyers and sellers. And everybody doesn’t want to have to sell today isn’t going to sell. And if there is a sale, it’s pretty much a distressed sale. A loan is coming due. You are going to give the building back to the lender, which in this case is to us. To see an institution, a household name institution hand us back a building in D.C. that had a third of it was equity is kind of shocking actually. But I think in the office sector, it is really tricky. Loans are almost 10% today, probably SOFR plus 400 to 500, 600. It depends on what the building is. If you have a cash flowing hotel, you can get a loan. Maybe it’s 400 over, which is 8.5% close to 9%. But if you don’t have a cash flowing hotel, you are going to see – but you think can turnaround, it’s going to be significantly wider than that. So, lending – lenders are scarce. They are not looking to put out capital. Now that makes the environment tricky. I mean bigger quality borrowers are able to borrow. Many banks are shutting down credit to smaller players. The…

Hey Jade, I want to jump back to Stephen’s question for a second because now I am realizing what you guys are seeing on Page 13 that’s up, but on Page 13, the first asset, the largest asset in our office exposure, which is what I think you were talking about. That’s a tremendously well leased, 93% leased 10-year weighted average life of lease term, excuse me, $313 million loan, and that will pay off in October of this year. That is a very strong asset, I think probably a risk rated too for us. The ones I spoke about were the North Carolina and Virginia, where we think that there will be a material pay-down or potentially a short extension. And again, I talked about the 4-rated loan when I was talking about the conversion to resi. But I don’t want anyone to think that largest loan in that bucket is in anything, but really good shape.

Okay. Thanks for taking that clarification. And it’s good to know that, because I did get some questions on it. On the LNR side, I wanted to ask about if there is an opportunity to broaden the scope of business to do special servicing loan workouts, portfolio consultations to others away from the CMBS market because the fixed rate nature of that business means you probably won’t see an uptick in special servicing fees until probably 2024 and beyond. So, in the meantime, there is all these capabilities, why not put them to work?

I thought I saw something in the bushes outside our Board meeting two weeks ago, Jade, it must have been you. It’s something Barry has been pushing us on for a significant amount of time. We actually have an active search out there for the right person to lead that. We have a deck all put together on all the different services that we can do out of LNR. And as you said, we have tremendous capabilities there from valuation on down. And we will be out with a business plan on that, and there will be an employee of ours knocking on doors that insurance companies and banks and others to create fee-based revenue from our capabilities in LNR in the next six months, I promise you.

I am smiling. We have been talking about this for 3 years, so maybe longer. But there is no reason we can’t be a fighters [ph] in the service to people. I am not sure anyone being the largest in the nation. I don’t know if anyone has the credit that we do in the space. And we are the highest rated servicer by multiple agencies. So, if you are picking the best and an experienced group, and we only do it for ourselves, which seems like a mistake. So, we will hopefully have an opportunity to make some serious money. It goes to our book value. We are not unlike everyone else in the industry. We are not just a collection of loans. Like we have a team of 300 people that run six different cylinders for us. We are really a company in the form of a REIT. We are a lender. We could be a bank. But – so it’s really an interesting thing. We are different than everyone else in the sector on the purpose, and we can deploy capital to any one of these leads, as you know. So, the idea was not to have to force one and there was nothing to do. It is interesting in overriding that we will earn the dividend, we think. We are confident we can probably earn the dividend and making no new – virtually no new investments, which is something that I find is surprising and good news. So, we have to work the balance sheet. We get paid to do that. So, we are going to do that. That’s really the right side of the balance sheet, that the side where the assets are liabilities, which is – we decide where the assets are. I wasn’t it very good at accounting, but I can’t add.

Thank you. Our next question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.

Hi. Can you talk a little bit about how you are balancing a willingness to work with a borrower as their rate cap expires or whatever the other event is versus just kind of playing hardball and saying, you know what, we wouldn’t mind owning this asset because we think this is temporary, the Fed will cut outside of office. Like how are you thinking about that sort of those two scenarios?

I will turn it to Barry, but it depends a lot on how we have it financed and how our senior partner, whether it’s a bank or a CLO, what they want us to do or require us to do, whether they are forcing us to have a new rate cap bought in, what strike that new rate capacity brought in, they are very expensive, as you know, or whether they will allow us to take interest reserves or other guarantees towards that. So, with our premier borrowers, we are certainly open to talking about the different potential solutions in a very difficult rate cap environment. But a lot of times, it’s set by where our senior lender requires us to do, and we will hold the line to what the senior lenders do. Our senior lenders are tremendously important to the success of the business. Barry, anything to add to that?

Not really.

Yes. And I guess my follow-up is on the infrastructure portfolio, are the caps – the interest rate cap similar where almost all the loans have them and they are protected. Can you talk a little bit about that relative to CRE loans?

Yes. These are probably syndicated loans that some – that do and don’t. But for the most part, they do have very similar – I will get you the exact numbers on after this on exactly what percentage do have them. But broadly speaking, it is more protected than not, but I will come back with the exact numbers on rate caps there.

Okay. Thanks.

[Operator Instructions] Our next question comes from the line of Rick Shane with JPMorgan. Please proceed with your question.

Hey. This is A.J. on for Rick Shane. First, just on the loans that were downgraded, I know there are no specific reserves on those assets today. But if any of those loans don’t work out, would we see additional reserve build or is that already included in your December 31st reserves, and we would just see kind of a shift from general to specifics?

So, they are part, A.J., of the general reserve currently. So, it would probably be two-fold. So, if there was further deterioration in the asset, you would have a transfer from a general reserve to a specific reserve and it would be increased at that point.

Okay, great. That’s helpful. Thank you. And then you said there were sponsor fund-related reasons for the office downgrades. I mean is there anything you can share with us what are the reasons sponsors going to want to support the assets?

It’s a fully invested fund in a few cases. And in a case, there is a large fund that is leaving commercial real estate, and they are not putting more money in. So, it’s different in each one. But I think you are seeing a similar trend where a lot of people either don’t have the cash available today or unwilling to. These are more scenarios where they don’t have the cash available in the specific funds that the assets are owned in to be able to continue to support the project. So, those are opportunities where if we do step in, tend to be more accretive to us where we do have the capital to be able to continue.

Great. Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. Mr. Sternlicht, I will turn the floor back to you for any final comments.

Thank you, operator. Thank you everyone. Thanks for your questions and we obviously are here to be transparent and welcome your questions and the team is available. So, thank you and have a great first quarter. Stay warm. Bye.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.