Greetings. Welcome to Starwood Property Trust's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I'll hand the conference over to Zach Tanenbaum, Director of Investor Relations. Zach you may now begin.

Thank you, operator. Good morning and welcome to the Starwood Property Trust Earnings Call. This morning the company released its financial results for the quarter ended September 30, 2023 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 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. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and 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; and Rina Paniry, the company's Chief Financial 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 $158 million or $0.49 per share. GAAP net income was $47 million or $0.15 per share. GAAP book value per share ended the quarter at $20.18 with undepreciated book value at $21.15. These book value metrics include $404 million or $1.29 per share of reserves related to our CRE and infrastructure lending businesses, including $15.8 billion of commercial loans, $2.3 billion of infrastructure loans and $535 million of combined REO. Beginning my segment discussion this morning is commercial and residential lending, which contributed DE of $207 million to the quarter or $0.64 per share. In commercial lending, we had $762 million of repayments during the quarter, which outpaced fundings of $263 million. Subsequent to quarter end, we collected another $331 million in repayments. This includes $52 million from a non-accrual loan on a retail and entertainment asset in New Jersey, which represents 90% of the retail exposure in our loan portfolio. Because the loan is on cost recovery, any cash received is used to reduce basis. Our portfolio of predominantly senior secured first mortgage loans ended the quarter at $15.8 billion with a weighted average risk rating of 2.9. Of the $600 million balance decline from prior quarter, $160 million was due to foreign currency fluctuations. This was offset by the FX impact of our foreign denominated debt as well as our FX hedges, which together had unrealized gains totaling $153 million. As a reminder, we hedged 100% of our expected cash flow exposure on non-USD loans including both projected principal and interest. Turning to CECL. We have previously discussed the third-party software we use to model our CECL reserves. That model in turn utilizes macroeconomic advisers, for purposes of determining the economic outlook.…

Thanks Rina. We've maintained very low leverage at just 2.4 turns today and invested in every quarter since our inception including $650 million this quarter and $2.7 billion in the last 12 months. This quarter's originations were across business segments but primarily in our very accretive low loan-to-value energy infrastructure lending segment with expected returns in the high teens. Despite higher interest rates today many of our borrowers continue to execute their business plans and loan repayments have continued to outpace our conservative expectations this year, giving us significant capital to accelerate our investing pace and/or continue to build our liquidity. Rina mentioned, we are sitting on near record cash today. Due to the accordion nature of our bank warehouse lines we are able to delever our balance sheet with excess cash by paying these lines down reducing our interest expense by an average of -- 260 basis points today. This means for the first time in our history we are saving and thus earning 8% on cash balances. When LIBOR was 25 basis points we earned less than 3% on our cash which created significant earnings drag, if we didn't reinvest excess liquidity immediately. Earning an incremental 5% on our cash allows us to conservatively bolster our balance sheet with more cash in today's volatile interest rate environment while creating very little earnings drag. We have $1.6 billion in loans financed today on bank lines at throughput for plus 275 basis points or higher. And as I've explained in the past this relatively expensive bank debt is potentially an asset of the firm. As it sets us up to opportunistically replace that secured debt with unsecured debt in the future should our unsecured borrowing spreads normalize to historic averages. We would then replace secured debt with unsecured bonds at…

Thank you, Jeffrey and Zach and good morning everyone. Thanks for being with us. If I sound like I'm under the weather. I am home with COVID. So I might not be -- I'm not sure anyone would call me go here before, but I might be less going on that might normally be. I have just some quick comments on the real estate markets. The as you many of you know I've been very critical of the fed for a number of reasons, but the key one was the economy was slowing on its own and the COVID stimulus package was being spent, and the sales were being restocked so there was no longer so too much money chasing too few goods. Now you had less money and the shelves were full, and you can see that by retail sales. What we missed in my forecast was the scale of the dynamics of spending packages of infrastructure bill, which has kept construction jobs flat even though rates have risen 500 basis points, the delay in the travel business that supported the economy while other sectors kind of weakened the CHIPS Act, Inflation Reduction Act and of course even the remaining money from the American Recovery Act have been enough to keep the public economy stronger, while the private economy began to build. And I do think as I've been very vocal about that inflation is coming down. I think I've been saying that for months on TV, following one-third of inflation comes through rents and rents were trending down particularly in the apartment segment, which we have a front row seat too. So rents are still positive, but they're not running 10% and 20%, which they were running when the fed missed it. But they're up at 3% or…

Thank you. [Operator Instructions] Thank you. Our first question is from the line of Stephen Laws with Raymond James. Please proceed with your question.

Hi. Good morning. First off Barry I hope you feel better soon. I hate to hear about the -- under the weather. To follow-up on your last comment, can you touch base on office I thought a follow-up more detail on office. I thought it was notable no exposure now to Manhattan office and no exposure at all to San Francisco. Are there certain marquee assets or Class A assets that you would look to do loans with an office? Or you feel other opportunities better to put capital to work? And sort of along that front how is office potentially going to be disrupted around the WeWork filing for bankruptcy?

Barry, I will hand..

I'll do rework then to do the rest of it. We work at a profitable business underneath the business. They just have too many sites and they need to -- I mean they were hit with a 1-2 punch, right? The space and then the pandemic hit and that kind of really hurt them. And they didn't have they never had the right capital structure and SoftBank was very reluctant to support the company and increasing the cost of debt and interest rates rise of course they were the only lender to save the company and they kind of, not just kind of wanted to wash the hands of the thing. But there is a real viable business that a shared office space business is a real business and we work as a global brand. So my guess is they will reorganize and they will come out as a profitable entity much smaller than they went in. They're just getting rid of unprofitable leases and -- but -- so the impact on the office markets like New York will not be good. I think I've read they're giving back 30 or 40 spots. But we work well I guess survive certainly without debt they can in a profitable company and they'll have to figure out the right overhead levels for a company that's not in hypergrowth because even though they cut them hard they probably have to cut them even harder. So that's WeWork. And on office, Jeff do you want to give your thoughts and then I'll see if I have any different thoughts obviously not next year.

Absolutely. Let me touch on WeWork a little bit more for a second. We don't know which leases will be given back yet of the 20 million square feet. There are articles would say that it won't affect leases outside the US, obviously we're not sure how that plays out. We do have four assets that have exposure. WeWork represents 1.2% of our total office square footage and less than 1% if you exclude a Dublin lease that's 100% occupied by Tiktok. That number becomes less than 0.5% if you take out a Southern California asset where we have a $4 million letter of credit that covers rent through exploration. And of that 0.5% -- more than half of that is a Berlin asset that they brought current just this week. So them bringing the current just this week tells us they likely plan to stay leaving us one asset in D.C. where 9% of the building is WeWork. So we feel really good about what our exposure looks like here. We never really leaned in on lending to WeWork occupied buildings. So we feel pretty good about that. As far as office you guys know there has been a massive bifurcation between Class A and Class B. The best buildings are leasing. They're leasing at incredible rents and the weaker buildings are not going to see that kind of rental growth going forward. So we will look at high-quality Class A office buildings, Class B lease up. As I mentioned, we got out of two Class B office buildings. That won't be the case for a lot of Midtown Manhattan Class B office buildings with the tenant improvements and leasing commissions and money you have to put in on these assets the net effect of rents after free rent just do not cover you in a lot of different scenarios and a lot are not able to be converted. So Barry, I'll hand it to you if you have anything different to say on the office side.

Well, the office market reminds you of the retail market when malls were all going bankrupt, and obviously, they didn't all go bankrupt and Simon recently reported with real same-store sales growth. So the capital markets dry up for an asset class. And obviously office is a four-letter word much like a mall or retail was a couple of years ago. So it is unbelievable opportunity set loans on office buildings today are problems if you're borrowing at 9%, 10%, 11%. What's the cap rate on the office even a good one? So if you have a trophy building and it's well leased it's really about the stability of the cash flow stream the rollover schedule. You probably would want to do anything that was full today and had an opportunity to roll with low leverage on some trophy office buildings in major markets that had great credit profiles because we're going to get probably the best returns of any loan we can make. And we'll just use our equity real estate underwriting skills to make sure we feel comfortable about that real estate in that market. And -- it's interesting what you see in our book. I mean, we've had sort of great assets with I'd say not overly well-capitalized borrowers then we have great assets with great borrowers. Household names the largest -- we're the -- I think the third largest real estate player in the opportunity set that we compete in. And all of us are getting back buildings. And why are we doing that to lenders. We're doing that because if you're in San Francisco which we're not you have a 30% going to be then you actually lease but you also don't know what the TI package is. And if you're the borrower now you're…

Thanks, Stephen.

Our next question come from the line of Sarah Barcomb with BTIG. Please proceed with your question. Q – Sarah Barcomb: Hey, everyone. Thanks for taking the question. Maybe to just pivot from office to multifamily for a second. On last quarter's call, you spoke to a sort of breakeven cap rate on the multifamily book of about 6.5% and a willingness to take over those assets at say $0.65 on the dollar where sponsors walk away. I was curious, if you could provide some updated thoughts there just given the forward curve has come up since then we've heard Powell reiterate that he's not thinking about rate cuts yet. Also just curious, where the debt yields are looking on for those assets. Thank you.

Barry, do you want to start?

Yes. There's probably no -- it's interesting as you think about 30 years of doing this, capital flows sometimes are overwhelmed fundamentals. And the rent growth is slowing and in some markets like Austin, they're negative. For apartments, the asset class is definitely going to be a favorite for institutional investors going forward. You can't take a $3 trillion office class -- asset class like office. Shut it off from an investment, and the real estate capital is going to have to go somewhere. And hotels are kind of bought for voting [ph] for a lot of institutions. So retail, maybe -- I mean nobody is rushing to do tons of retail deals today, even though the markets are relatively healthy. Industrial, possibly it's a bond and the economy was slow. So rents will come down and the pace of rent increases are coming down, also in industrial. So I think multi-benefit and that was why the comment was we'd be happy to take assets back and we are taking one back and selling it immediately it, looks like someone in Portland, on one of our troubled multis. I think in general, what we said before is true, we will make more money in my view, if we can take these assets back and we will just staying as a lender, though we will stay as a lender that's our primary job. So if we're in fact at 65% of value or 65% of construction costs or 65% of the renovation totally renovation cost city-by-city, I look at that as sort of an opportunity and not a bad thing. They are -- they're not going to be empty. We took back an office building in DC. It's an interesting building. We have it on our books. It was bought by a household name. They emptied the building, reskin the building and then realize that the amount of capital they have to put into retenant the building, justify them walking away from $100 million of equity. That deal is empty. So, that's a drag. Any multis, we get back are partially full and probably yielding 5.75% or 6%. So, not terrible. And if we like the assets which hopefully we do we lent against them this should be good opportunities for us going forward.

Yes Barry I don't have much to add. I did make those comments about our breakeven cap rate being around 6.5%. As I look at our portfolio our in-place debt yields are mid-6s today and we expect they'll stabilize significantly higher than that. But obviously as Sarah, as you mentioned the forward curve it's gone up. So, a lot of this is going to depend on what does the forward curve look like a year out in a year if people are faced with the refinance. Will they make the decision to hold on or not? And I think that decision to hold on will be mostly about liquidity. I think that people will think that they're going to have an opportunity at a lower cap rate in the future to be able to sell it. And will they be able to hold on? Will they have the cash flow available to buy a cap and wait it out. We obviously do. We will support the assets. As Barry said the have debt yields that almost that would almost cover today even on the lowest debt yield assets it would not cost us a lot to stay in those assets and for the right to own them at 65% of cost. And wait for a better environment to either refinance them or to sell them. I think that's something that would be a great investment for us and we would do that in defense.

Thanks for the comment.

Our next questions come from the line of Don Fandetti with Wells Fargo. Please proceed with your question. Mr. Fandetti, your line is live for question, perhaps you're mute.

Yes, Jeff, should we expect continued growth in infrastructure lending relative to CRE? And also can you talk about the competitive dynamic in infrastructure and how those assets would perform if we did go into a recession?

Sean's [ph] sitting next to me. We do expect to have continued growth here. We think it's tremendously attractive as I was saying before. Where I started was to say that our asset spreads what we're earning have gone up commensurate with what our asset spreads have gone up in other asset classes like CRE lending. The liability side hasn't increased by as much. The banks aren't retrenching the way that they're retrenching in CRE. So, we're able to earn sort of the highest yields that we've had in a while. A couple of other headwinds -- tailwinds excuse me, global power demand is going up massively and it could double or triple in the next 15 years or the estimates that you see. So, the power plants that we have that start off with a low loan to value generally deleverage over the life of the loan they're going to be worth more not less. I think the transition to more ESG, solar, wind, royalties is going to take a lot longer last quarter I talked about the fact that even if it doubles every year it still will get to low 20% of total energy demand in the next 10 or 12 years. So, the rest has to be done somewhere. The traditional markets are not there in depth to finance the power plant assets in mid midstream storage and transmission assets. We believe that this transition is going to take a lot longer. It's going to be a great opportunity. And the structural nature of these assets where we get significant amount of deleveraging over the life end up at $1 per kilowatt that feels really cheap on the role makes this a super-attractive asset class for us. Sean Murdock is sitting to me. Sean anything to add to that?

Not really Jeff. The only thing I'd add is just the Jeff's view of the energy transition it's going to take longer. Banks have decided with their lending strategies that's going to come sooner if it hasn't already come. So, I think that's where we get the tailwinds in this sort of market for putting new loans out. Most banks have decided the transitions happened and they've reduced their lending to traditional energy assets.

Thank you, guys.

Thanks. Just I want to go backwards just on one thing. I talk about multi -- the key is that the wave of construction will be over next year and construction starts from multis have dropped to 250 from $600,000 or so. So that should bode really well for rental growth going forward. So we -- real estate is a long-term game. Also construction is in the downtown. It's not in the Cyber so much. So it's pretty concentrated. You understand a lot of these deals were built for a different rate environment. So there will be a lot of opportunity I think to take advantage of that if you're a long-term player and you have the capital to do so. I think we have both. And then on infrastructure, yes, I mean infrastructure has been our highest returning asset class. So yes, we will continue 90% of our book as mentioned is post acquisition of the GE business. So the team is intact and finding great stuff to do and a lot of our investments are behind that platform right now. Safer -- a safer place to be.

Thanks Don. Next question, operator?

Next question is from the line of Jade Rahmani with KBW.

Thank you very much. Good to hear the comments around Starwood Solutions. I was worrying that Star might miss this moment. So the banks we estimate their season reserves and NPL ratios are 1.5% to 2.5%. And which on their balances of CRE loans is massive and are still increasing up 25 to 90 basis points per quarter. Do you see working with the banks to special service assets as the biggest opportunity in front of the Starwood Solutions initiative?

Yes, Jade. We would love to have the banks come to us. We're super fortunate to have this L&R business. As I mentioned on the prepared remarks, we have over 200 people who have done this for over 30 years and worked out $88 billion of assets. It could be the banks. Hopefully the FDIC is listening and they give us a call. There are certainly lots of property owners, pensions, insurance, other investors, large players who could use our health, the broker network that we use every day at Starwood Capital and have relationships with all the biggest brokers. They get asked to do reviews and portfolio valuations every day. They are not experts at working out assets. They are experts at buying and selling and financing assets and we want to go to them and have them bring us the opportunities that they're seeing to both evaluate and help in work out. We -- this is what we do, dealing with workouts between bespoke, interactions between banks and clients or securitizations. We have experience in doing it all. And you're one of the people who pushed us over the last few years. So we appreciate that. We've now hired a team. And we think it's an extremely exciting opportunity. And hope that, people listening. Who are wondering about their portfolio valuations or asset valuations or what to do in a difficult time want to come to a shop that has done this 88 billion times over the last 30 years. So we think we have a lot of expertise to offer here. And we're really hopeful that we can grow this into something you are right. The time is now.

Just a quick -- not everyone in our group has been at 30 years. The head of the group is 30 years.

But the group all together is 30 years.

Yeah. And we've been doing this, 30 years. But -- and the guy who runs it with us is actually 31 or two years. It is much like Guggenheim surge as the front-end and for small insurance companies we should be the back-end for many regional banks and maybe some of the larger players like the FDIC, but we do have an incredible ability to do this. I think they'll work in tandem, Jade. I think the increase in the name or the actual book that we have $101 billion or $102 billion in servicing -- named servicer, that number is what's actually being REO or serviced by us, I think it's seven or eight today or six to eight something like that that number should go back up. I mean you can see we're going to get a lot of business. It won't be as profitable as it was before, because the CMBS securities, the loan documents have changed. They'll still be profitable. This could be bigger and could that. So we'll get to work and get the shot.

And do you see as a follow-up M&A as an interesting deployment opportunity within this segment. There's many financials in the non-bac space that are under duress due to their capital structure and there could be fee income services businesses within that. We've seen others in my coverage such as Newmark, grow in the servicing sector. And there’s also the private broker and maybe brokers cover the rigs that are faced in track.

Send us their names.

Anyone listening please call us. We got a difficult time. The premium book value to our peers obviously it's accretive, if we are able to consolidate the industry. We would love to consolidate the industry. We think we're well positioned to consolidate the industry. Boards of directors who own a book value that they believe in more strongly than the market believes in or have been unwilling to-date, to date us, but we would love to go on a lot of dates, if you have anyone listening to this call that would like to become part of Starwood.

Thank you. At this time, we have reached the end of the question-and-answer session. Now I'll hand the floor back to Mr. Sternlicht, for closing remarks.

Thank you everyone for being with us and good luck navigating these choppy waters. So hopefully Powell. Powell will get a vacation and the markets will get a bid. Thanks for being with us today. And hope none of you get COVID. Take care.

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